Rev. Rul. 58-259

Advice has been requested as to the extent that property improvement and modernization loans made by banks under Title I of the National Housing Act, 48 Stat. 1246, as amended, 12 U.S.C. 1703, known as Title I F.H.A. loans, are Government insured or guaranteed and therefore excludable in computing additions to a reserve for bad debts maintained by banks under Mimeograph 6209, C.B. 1947-2, 26, and Revenue Ruling 54-148, C.B. 1954-1, 60.

Revenue Ruling 57-210, C.B. 1957-1, 94, holds, inter alia , that the term `Government insured loans,' as used in paragraph 4 of Mimeograph 6209, supra , applies to Government insured or guaranteed loans to the extent or percent insured or guaranteed.

Regulations of the Federal Housing Administration applicable to Title I F.H.A. loans provide for the establishment of an insurance reserve for each participating lending institution. For each eligible loan reported by an insured lender and accepted for insurance registry by the Federal Housing Administration, an amount equal to ten percent of the net proceeds of the loan is credited to the lender's insurance reserve. The cumulative credits to the insurance reserve for each lender will equal ten percent of the net amount advanced by it on all eligible loans. The lending institution is thus insured against losses on its overall lending operations. From the credits to the insurance reserve accumulated for each lender, the amount of each eligible claim paid to the lender is deductible. For loans made on and subsequent to October 1, 1954, the amount of any claim is limited to 90 percent of the calculated principal loss sustained by the lender, plus other allowances permitted by the regulations. The amount of claim cannot exceed the credit balance in the lender's insurance reserve.

On July 1 next following the expiration of a period of 30 months after the issuance of the contract of insurance to a lending institution, the amount of insurance reserve to the credit of such insured is adjusted by carrying forward into the next annual period 85 percent of the unused reserves outstanding on such date. The insurance reserve of each insured is adjusted in like manner on each subsequent July 1. The amount of unused reserves to be carried forward at the beginning of each annual period is determined according to the records of the Federal Housing Administration, and a statement showing the amount of such unused reserve is furnished each insured as promptly as possible after the close of each annual period.

A lender's entire Title I portfolio is not 90 percent (or 100 percent prior to October 1, 1954) insured at any one time, unless the balance in its reserve account sufficiently equals 90 percent of the amount of the whole portfolio. This could occur if a lender's outstanding Title I loans are declining faster than the balance in its reserve.

Accordingly, it is held that, for the purpose of computing additions to a reserve for bad debts under Mimeograph 6209, supra , and Revenue Ruling 54-148, supra , loans made by banks under Title I of the National Housing Act, as amended, supra , known as Title I F.H.A. loans, are considered to be Government insured to the extent of either 90 percent of the amount of such loans outstanding (100 percent on loans made prior to October 1, 1954) or the balance in the bank's insurance reserve account maintained by the Federal Housing Administration, whichever is the lesser.