FARMERS HOME ADMINISTRATION OBLIGATIONS UNDER THE CONSOLIDATED FARMERS HOME ADMINISTRATION ACT AND THE HOUSING ACT

Agreements of the Farmers Home Administration insuring payment of notes sold to investors by the Administration pursuant to the Consolidated Farmers Home Administration Act of 1961 (7 U.S.C. 1929) and the Housing Act of 1949, as amended (42 U.S.C. 1487), constitute general obligations of the United States and are backed by its full faith and credit.

THE SECRETARY OF AGRICULTURE.

DECEMBER 29, 1969.

MY DEAR MR. SECRETARY: This is in response to your letter of December 11, 1969, forwarding two opinions of the former General Counsel of your Department concerning the authority of the Farmers Home Administration (herein called the "Administration"), by contract of insurance covering notes sold to investors from the insurance funds established by the Consolidated Farmers Home Administration Act of 1961 (August 8, 1961, P.L. 87-128, 75 Stat. 309-10; 7 U.S.C. 1929) and the Housing Act of 1949, as amended (August 10, 1965, P.L. 89-117, 79 Stat. 499; 42 U.S.C. (Supp. IV) 1487), to agree to make supplementary payments to such investors in amounts sufficient to make the notes marketable at par value. The former General Counsel concluded that the Administration is authorized to agree to make such supplementary payments, and that such an agreement would constitute a general obligation of the United States backed by its full faith and credit. I understand that your present General Counsel concurs in this conclusion.

The Administration is proposing to offer for sale, through a group of underwriters, large blocks of insured notes held by these insurance funds. Because of the increase in interest rates generally during the past several years, the maximum

statutory interest rate on insured loans paid by borrowers is below the prevailing market rate. In order to sell these loans to investors, it is therefore necessary to offer them in one of three ways: (1) at a discount reflecting the prevailing market rate, (2) at par value with an agreement to make supplementary payments to investors in amounts which, when added to the rate borne by the notes, would give the investors a total yield equal to the yield they would receive if they purchased the notes at a discount, or (3) by a combination of these methods, with the same net financial result to the Government and investors. In order to further insure marketability of the notes, the Administration would agree to repurchase the notes after a specified period of time. Contracts of insurance to be executed by the Administration in connection with these sales will provide that the Administration's insurance obligation with respect to payment of principal and interest, as well as its obligations to make supplementary payments and to repurchase the notes on a specified date, are supported by the full faith and credit of the United States. You asked whether these provisions of the proposed contracts of insurance would be valid.

The relevant statutory provisions expressly authorize the Administration to insure loans purchased from it by lenders and further provide that such contracts of insurance are to constitute obligations supported by the full faith and credit of the United States. 7 U.S.C. 1928; 42 U.S.C. 1487 (d). The statutes also expressly authorize the Administration to agree to repurchase on a specified date notes sold to investors. The statutory scheme contemplates that such an agreement to repurchase would form an integral part of the contract of insurance. Thus, with respect to loans under the Consolidated Farmers Home Administration Act of 1961, 7 U.S.C. 1928 provides that repurchase agreements may be made "in connection with insurance of loans." Similarly, with respect to loans under the Housing Act of 1949, as amended, the Administration has broad authority to agree to repurchase insured loans "on such terms and conditions as [it] may prescribe." 42 U.S.C. 1487 (g). There is not the slightest doubt, therefore, that agreements to insure payment of prin

cipal and interest to investors and to repurchase insured notes from such investors on a specified date would be valid and would constitute general obligations of the United States backed by its full faith and credit.

The relevant statutes do not in terms authorize the Administration to agree to make supplementary payments to investors in amounts sufficient to make the notes marketable at par value, as the Administration proposes to do in this case. However, I believe that such authority is inferable from the Administration's broad authority to sell notes held in the respective insurance funds to investors. Under the Consolidated Farmers Home Administration Act of 1961 (7 U.S.C. 1929 (d)) —

"Notes may be held in the fund and collected in accordance with their terms or may be sold by the [Administration] with or without agreements for insurance thereof at the balance due thereon, or on such other basis as the [Administration] may determine from time to time.” (Italics added.)

This same act, 7 U.S.C. 1929 (f), also authorizes the Administration to utilize the insurance fund to make loans "and *** sell and insure such loans." Thus, the Administration is clearly authorized to sell insured notes under this act at other than par value, i.e., at a premium or discount. Since the statute contemplates sales of notes to investors, this broad and flexible authority to sell means that notes are to be sold at market value, as determined by prevailing interest rates and other factors in the money market. Similar general authority to sell notes held in the insurance fund is contained in the Housing Act of 1949, as amended. 42 U.S.C. 1487 (c), (g).

In my opinion, the broad authority to sell the notes would include authority to sell them through any of the alternative methods of sale described above. I understand that in connection with the proposed block sales of notes, the Administration plans to sell them to the underwriters at a slight discount and to make supplementary payments to investors which, when added to the rate borne by the notes, would give investors a total yield sufficient to make the notes marketable at par value. Under these circumstances, I conclude that the Administration is authorized to make the proposed supple

mentary payments, and that the obligation to make such payments would constitute a general obligation of the United States backed by its full faith and credit.

Sincerely,

JOHN N. MITCHELL.

RESCHEDULING OF INDONESIAN DEBT TO THE

UNITED STATES

The United States can reschedule certain debts owed to it by Indonesia. The power to reschedule loans made under the Foreign Assistance Act of 1961 is limited by § 620 (r) of that Act, which provides that no recipient of a loan made under the Act outstanding after September 19, 1966, shall be relieved of liability for the repayment of any part of the principal of or interest on such loan. 80 Stat. 807, 22 U.S.C. 2370 (r).

By its plain language, § 620 (r) of the Foreign Assistance Act of 1961 does not apply to loans made under the Economic Cooperation Act. The authority to carry out a provision in a loan agreement made under the Economic Cooperation Act allowing for the postponement or modification of payments of principal or interest has been preserved by subsequent acts which state that agreements entered into under repealed acts shall continue in full force until modified by appropriate authority. Mutual Security Act of 1954, § 543 (a), 68 Stat. 861; Foreign Assistance Act of 1961, § 643 (a), 75 Stat. 460, 22 U.S.C. 2402 (a).

Pursuant to the Federal Property and Administrative Services Act of 1949, § 401 (63 Stat. 397, 40 U.S.C. 511) the Secretary of State is authorized to amend and modify agreements made under the Surplus Property Act of 1944, 58 Stat. 765.

The Export-Import Bank is authorized to reschedule loans where such rescheduling will maximize repayment.

Neither § 403 (73 Stat. 610, as amended by 78 Stat. 1037) nor its successor, § 106(a), (80 Stat. 1532, 7 U.S.C. 1706(a)) of the Agricultural Trade Development and Assistance Act of 1954 (P.L. 480), which provides terms for dollar credit agreements made under that Act, restricts the authority to reschedule debts incurred under those agreements where the debtor nation faces imminent default and repayment will be maximized.

THE SECRETARY OF THE TREASURY.

DECEMBER 24, 1970.

MY DEAR MR. SECRETARY: Your letter of July 16, 1970, asks for an opinion on a number of legal issues which have arisen. in connection with a proposed rescheduling of Indonesia's