Oregon Advisory Opinions August 30, 1977: OAG 77-101 (August 30, 1977)
Collection: Oregon Attorney General Opinions
Docket: OAG 77-101
Date: Aug. 30, 1977
Advisory Opinion Text
OAG 77-101.
The 1977 legislature adopted HB 2449, Oregon Laws 1977, ch 676, increasing the maximum amounts available for veterans' home and farm loans, limiting loan eligibility to a maximum of three loans or assumptions, providing an interest penalty if property acquired under a farm loan is not used exclusively for farming, making some changes in the provisions for setting of interest, and other changes. The changes in the law will be effective on October 4, 1977, and a number of questions have been raised concerning them.
We note initially that section 6 of the Act provides:
"Except for the amendments to ORS 407.040 that increase the limits of home and farm loans . . ., section 2 of this Act and the amendments to ORS 407.040, 407.070 and 407.073 made by sections 3 to 5 of this Act apply only to loans executed after the effective date of this Act ." (Emphasis added).
Thus, if a veteran's farm loan is executed before October 4, 1977, no interest penalty becomes applicable if the property ceases to be used for farm purposes. Loans received or assumed
before October 4, 1977 will not be counted against the three-loan limit, although a loan received before October 4, 1977 is of course counted against the loan maximum (now $42,500 for a home, $150,000 for a farm), unless the property is disposed of for a reason permitting "restoration" of the loan entitlement under ORS 407.040. Furthermore, assumption even after October 4, 1977 of a veteran's loan originally executed before that date does not count against the three-loan limit. ORS 407.070(2) is amended to deprive a veteran's parent of the right to assume a loan without interest penalty; again, this will apply only to loans made on or after October 4, 1977. The same is true with respect to all other changes made by the Act. Those changes do not apply except to loans made on or after October 4, 1977.
The first question is whether Enrolled House Bill 2449, which adds a requirement that a farm acquired by a veterans' loan be used "exclusively for farm use," changes the present requirement that the farm be used as the veteran's principal residence.
Since the adoption in the mid-1940's of art XI-A of the Oregon Constitution, which sets up a fund for loans to veterans for home and farm purchases, the article has been construed to require that a farm purchased with a V.A. loan include the veteran's principal place of residence. Neither the language
of the article nor the accepted definition of "farm" would require that a farm include a residence. However, an early Attorney General's opinion held that "farm" in art XI-A means farmland with a residence on it. 23 Op Atty Gen 348 (1947).
The reasoning of that opinion was based upon a finding that the purpose of art XI-A was to aid veterans in becoming "home-owning" citizens. "Home" is defined in ORS 407.010(2) (3) for purposes of ORS 407.010 to 407.210 as a residential structure "established, maintained, and used primarily as a principal place of residence by the veteran." "Home-owning" was expressly seen as the goal. The provision for providing loans for farms might be seen as an aid in setting the returning veteran up in business, but such an interpretation should be rejected since nonfarming veterans were not aided in establishing businesses. The loan for the farm was instead seen as a necessity for these veterans who wished to establish their home in the country.
More than 20 years passed without any legislative attempt to broaden the definition of "farm" set out in that opinion, or to amend the constitution to override the 1947 Attorney General's opinion. However, section 2 of HB 2449 states:
"An applicant who receives a loan under ORS 407.010 to 407.210 for the acquisition of a farm shall use the property acquired exclusively for farm use as defined in subsection (2) of ORS 215.203." (Emphasis added).
The problem arises because ORS 215.203, a farm use zoning
statute, states:
". . . 'farm use' means the current employment of land including that portion of such lands under buildings supporting accepted farm practices. . . . "Farm use" . . . does not include . . . the construction and use of dwellings customarily provided in conjunction with the farm use." ORS 215.203(2) (g). (Emphasis added).
If the literal language of this statute were adopted then not only would the requirement of acquiring and using a residence in connection with property acquired under a farm loan be abolished, but any residence would be excluded from consideration as part of the farm for purposes of the loan. The $150,000 loan could not include any money for a residence. Such a result would be absurd and unworkable, contrary to the specific intent of art XI-A to provide homes for veterans, and could not have been the intent of the legislature. It has been held that if a literal application of the language of a statute would produce an absurd or unreasonable result the statute must be construed so that it is "a reasonable and workable law and not inconsistent with the general policy of the legislature." Pacific P. & L. Co. v. State Tax Com. , 249 Or 103, 110, 437 P2d 473 (1968); State Highway Com. v. Rawson , 210 Or 593, 312 P2d 849 (1957).
The legislative intent of enacting section 2 of the Act was
to insure that veterans' farm loans were used for farms,
and not merely for extensive country estates, recreational
sites, or for investment properties. "Exclusively for
farm use," means:
". . . raising, harvesting and selling crops or feeding, breeding, management and sale of, or the produce of, livestock, poultry, furbearing animals or honybees or . . . dairying and the sale of dairy products or any other agricultural or horticultural use or animal husbandry . . . ." ORS 215.203(2) (a).
A residence occupied by the veteran as an integral part of the farmstead would not be inconsistent with but would aid such use. The intent was not to redefine "farm" so to exclude the veteran from living on the acquired farm, or to permit him to buy farm property without residing on it. If such were the intent it would have been more clearly manifested in the wording of the bill.
We note that ORS 215.203 is a tax statute as well as a zoning statute. The intent of the exclusion of residences was to insure that farm residences would be assessed for tax purposes at their actual value, and not merely at their value for farm purposes. ORS 215.213 goes on to provide that "dwellings and other buildings customarily provided in conjunction with farm use" may be established on land zoned exclusively for farming under ORS 215.203.
The law permits a loan for a veteran's residence even when no farm is involved. It also permits a loan (for a greater amount) for a farm. Reading the entire law (as amended by HB 2449) it is evident that a veteran may obtain a loan for a home, or he may obtain a loan for a home and farm for a larger amount, but in that case the "farm" portion of
the acquisition must be used exclusively for the purposes described in ORS 215.203. This is the clear purpose of section 2 of HB 2449.(fn1)
Therefore, the definition of "farm" in art XI-A as farmland with a home on it as set out in 23 Op Atty Gen 348 stands. The veteran must still retain a home upon the farm as his principal place of residence. Perhaps the legislature may constitutionally eliminate this requirement since it is not specifically set forth by the constitution, but it has not done so in HB 2449.
House Bill 2449 contains a number of provisions relating to interest on farm and home veterans loans.
Section 2 of the Act provides:
"If an applicant does not use the property for which the farm loan was made exclusively for farm use, the interest on the loan from the date on which the director determines that the property is not being used exclusively for farm use shall be at an annual rate that is three percent above the basic rate set by the director under ORS 407.072."
The question arises whether this increased rate is to permanently remain in effect. Presumably the land could be returned to use qualifying under ORS 215.203(2). In that case the penalty would appear to be serving no purpose. However, the legislature included no provision whereby the interest could once again be reduced to its original rate. There is no indication by the legislature that there was any intent for the penalty to be removed, and we are unable to read such intent into the statute. The 3 percent penalty would remain in effect against the veteran landowner once it has been imposed.
Another problem arises when a transferee assumes a farm loan on which a 3 percent penalty has already been imposed. ORS 407.070(2) provides for the interest rate on the loan to be changed to the rate set by the director under ORS 407.073 when the property is transferred to an individual not exempted by that subsection (i.e., spouses, unremarried former spouses, children and stepchildren of the original borrower).(fn2) Under the revisions made by HB 2449 to ORS 407.073 the interest rate paid by a nonexempt transferee will be "within one-half of one
percent of the rate prevailing in the conventional mortgage market in the state for loans on residential property." ORS 407.073(1) (a). The statute is silent, however, as to what would happen if the property is transferred to one of the nonexempt individuals after the interest rate for the initial borrower has been raised by the 3 percent penalty. Is the transferee to take the loan at the interest rate set by ORS 407.073 or at 3 percent above that set by ORS 407.072? In all likelihood the rate set by ORS 407.073 will be the higher of the two, but that may not always be the case.
What the statute does say is that nonexempt transferees are to take the property at the interest rate set under ORS 407.073. Absent any language stating that the transferee is to take at a different rate when the farm has not been used exclusively for farm use, that wording will continue to control. A transferee qualified under ORS 407.070(2), however, would assume the loan at the same rate as the transferor is paying, that is the original rate plus the 3 percent penalty.
Our decision is also influenced by the fact that the penalty would serve no purpose against the noneligible transferee. The reason for the penalty seems to be to insure that the loan's specific purpose to establish veterans in "homes" and "farms" is carried out. It is not meant to prevent the transferee from using the farm in any particular manner.
Similarly the 3 percent penalty provision should not be
applied against a transferee who has the property transferred to him while it is still under farm use, but who later uses it in a manner not considered "farm use." The transferee should not have to pay the additional 3 percent penalty. He is already paying what is approximately the regular market interest rate under ORS 407.073(1) (a) and should not be charged more. Also, section 2 of the Act refers specifically to the "applicant," and not to any future transferee.
However, for those individuals exempted in ORS 407.072(2) from taking the transfer at the higher interest rate set under ORS 407.073, who are allowed to continue the loan at the rate set under ORS 407.072 (i.e. spouses, children, etc.), the penalty provisions should remain in effect. These individuals are treated as though they were the original borrower in matters of interest, transfers, etc. Therefore, it appears to be reasonable to hold them subject to the same 3 percent penalty where it would not be reasonable to hold other transferees subject to it. The legislative intent, however, is not entirely clear on this point, and our conclusion may not be correct. The director should nevertheless apply the penalty in such a situation unless a court holds to the contrary.
A transferee who is also a veteran would be treated the same as any other nonexempt transferee, whether such a veteran would be eligible for a reduced interest loan or not. "Eligible veterans" are not included in those listed in ORS 407.070(2)
as eligible to accept the transfer of loans at the original rate. The loan interest will be changed to the rate set under ORS 407.073 and will not be the rate for eligible veterans as established under ORS 407.072. This is the current practice and is not changed by the Act. Regardless of the type of transfer, the rate will still change from the date of the initial transfer of property to the rate set under ORS 407.073.
The third question asked is whether under HB 2449 a veteran is precluded from receiving or assuming any additional loans after receiving or assuming a total of three loans under ORS 407.010 to 407.210.
Under section 3 of the bill, ORS 407.040 is amended to read:
"Except for additional loans made for the improvement of the farm or home acquired with an initial loan for the acquisition of that property, an eligible individual shall not receive or assume more than three loans under ORS 407.010 to 407.210."
A better interpretation of the statute, which we adopt, is that since this section reads that an eligible veteran shall not receive or assume more than three loans, the individual will be considered a noneligible individual once this three loan limit is reached. This noneligible individual will then be treated as a nonveteran and will have no limit as to the number of future loans that can be assumed, but the interest rate on them will be set under ORS 407.073.
It is interesting that the legislature chose to include both initial loans and assumptions when setting the limit on the eligible veteran, especially since the eligible veteran takes an assumption at the same interest rate as the nonveteran. It is conceivable that an eligible veteran would assume three loans, and pay approximately the market interest rate on all three, getting no special considerations for his eligible veteran status, and use up his eligibility for a V.A. loan. Although this seems inequitable and unfair upon its face the wording of the Act is clear and unambiguous. Assumptions are to be counted the same as a loan and nowhere in the statute are veterans given special consideration for an assumption.
It has been asked whether the legislature has the constitutional power to limit the veteran to three loans. Such a limitation is really no different than the present practice of limiting the veteran to a maximum amount which can be borrowed.
It should be remembered that the primary purpose of the loan program is to enable veterans to obtain homes when they might not otherwise be able to do so. An eligible veteran can if he so chooses borrow enough on his own eligibility to purchase the property instead of assuming the former loan. But if the veteran is able to assume the loan at the higher rate he apparently is not in need of V.A. assistance. Since the veteran will be tying up V.A. loan money, making it unavailable for loans to other veterans, whether he is assuming the loan or borrowing himself, the three-loan maximum is a reasonable means of making the fund more widely available for loans to other veterans who may have greater need.
Since an assumption can be just as costly to the eligible veteran as a loan in terms of using up his loan eligibility, the question is asked what is considered an "assumption" in order to be counted as one of the three allowable loans.
When the purchaser of real estate upon which a mortgage is held makes an "assumption" he adopts that debt as his own and is then held personally liable for its payment. If the purchaser were to take the property "subject to the mortgage" there is no express or implied agreement to be personally liable for the payment of the debt, even though he agrees to pay it. Brichett v. Raney , 76 Cal App 232, 245 P 235 (1926). Therefore, whether a transfer is to be considered an assumption or otherwise depends upon the transferee's intent and the manifestation of this intent to take the obligation of the mortgage upon himself. Taking property "subject to" a mortgage is not an "assumption." It is not important whether the lender excuses the original borrower from his liability or not; what does matter is that the transferee is taking the debt upon himself.
The fifth question asks how the Act affects the manner in which the director is to set the interest rate on a loan when
the property is transferred. ORS 407.073 is amended by the Act to more narrowly define the director's duties in setting the interest rate for transfers of property to someone other than those exempt individuals specified in ORS 407.070(2).
One of the changes provides for the director to set the interest rate annually. "Annually" means "year by year" or "yearly." Black's Law Dictionary 116 (Rev 4th ed 1968). And "year" has been held to mean the calendar year when used in statutes or in the constitution, "but the meaning in all cases is dependent on the subject matter and the connection in which used, and it may mean a political year, or the period between two elections." State ex rel Stadter v. Patterson , 197 Or 1, 18, 251 P2d 123 (1952). Ordinarily, then, the director would have to reset the interest rate every calendar year. But amended ORS 407.073(2) states:
"When the director considers it necessary to change the rate of interest because of changes in the conventional mortgage rate prevailing in this state, the director, after 30 days' notice to the public, may fix a new rate under this section notwithstanding that a rate had been fixed less than 12 months previously ." (Emphasis added).
The setting of a new rate under this revision must take
place as soon as possible after the effective date of the statute. This is necessary especially because the interest rate will almost surely be different, since under the Act, the rate must be based on the rate prevailing in the conventional mortgage market, and not on the rate set for eligible veterans under ORS 407.072. It will not matter for this initial setting how long it has been since the rate was last changed.
Under this revision it will be necessary to "fix" the rate annually, but not necessary to "change" the rate annually. This can be accomplished by a redetermination of the "rate prevailing in the conventional mortgage market" within every 12 month period. If the rate set by the director is still within one-half percent of the prevailing rate the rate would not have to be changed, and the redetermination would be sufficient.
The method of determining the "rate prevailing in the conventional mortgage market" should be similar to that used in determining a "prevailing rate of wages." In cases dealing with a "prevailing rate of wages" it was held that the most general, most frequent, common, predominant, or current wages were deemed "prevailing" and not necessarily the average or median wage. Roland Elec. Co. v. Mayor and City Council of Baltimore , 210 Md 396, 124 A2d 783 (1956); Bradley v. Casey , 415 Ill 576, 114 NE2d 681 (1953). Therefore, the "rate prevailing in the conventional mortgage market," should be the
current rate or the common rate at the time that the director decides to reset the transfer rate.
It is noted that rates in the mortgage market vary tremendously according to whether the loan is insured, the amount of the down payment, the term of the loan, whether it is a FHA loan, etc. The "rate prevailing in the conventional mortgage market" should be based upon rates for uninsured loans with similar down payments and similar terms.
As amended by the Act ORS 407.073(1) (6) states that the interest rate for transfers "[f]or other than real property is one percent higher than the rate established under paragraph (a) of this subsection." We are asked whether leaseholds are to be considered real property or personal property for purposes of this provision.
"Leaseholds" are sometimes treated as real property. Black's Law Dictionary 1036 (Rev 4th ed 1968); State Savings & Loan Ass'n. v. Bryant , 159 Or 601, 81 P2d 116 (1938). And they are sometimes treated as personal property. See 13 Op Atty Gen 159 (1927). However, it has become increasingly accepted that real property includes leaseholds, especially when the term is used in statutes, and for the purposes of this statute leaseholds must also be considered as real property under ORS 407.073. The interest rate on the loan when the property is a leasehold will, therefore, be set "within one-half of one percent of the rate prevailing in the mortgage market in the state for loans on residential property."
A 30-day notice to the public is provided for in subsection (2) of amended ORS 407.073, before the interest rate of transfers can be reset. This provision is presumably to provide interested persons with a reasonable opportunity to be notified of the agency's proposed action and with a chance to make their opinion known before a decision is made. ORS 183.335 sets out the rules by which any state agency is to give notice when any adoption, amendment or repeal of its rules occur. If the director's procedure under his rules satisfies the requirements of ORS 183.335 it will also qualify under ORS 407.073(2). The only further stipulation is that notice be given at least 30 days prior to the date any change is to take place.
The sixth question is whether the $42,500 for a home or $150,000 for a farm are maximum amounts for each loan the veteran may receive or are maximum total amounts the veteran may ever receive through V.A. loans.
ORS 407.040 as amended by the Act eliminated the sentence stating that the total aggregate amount of funds received could not exceed the stated maximum, which as amended by the Act is now $42,500 for a home or $150,000 for a farm. Still remaining in ORS 407.040 is this language:
"No applicant is entitled to borrow more than the maximum amount allowed under this section, except
that where a loan is made on property which is destroyed by fire or other natural hazard, taken through condemnation or lost or disposed of for a compelling reason devoid of fault on the part of the applicant and where the loan is repaid or the property is transfereed by deed or otherwise, such loan may be excluded from consideration in computing the maximum loan allowable."
This indicates that the individual will still only be able to obtain loans totaling a maximum of $42,500 for homes or $150,000 for farms, and will not be able to obtain loans in that amount for each of the allowable three loans. The retention within the statute of a list of exceptions permitting "renewal" of loan rights is indicative of the apparent intent to retain this rule.
Accordingly, the maximum aggregate of all loans is $42,500 for one or more home loans, $150,000 for one or more farm loans; subject to exclusion of amounts of any loans on property ". . . lost or disposed of for a compelling reason devoid of fault on the part of the applicant. . . . "
Thus if a veteran borrows $35,000 to purchase a home, and later disposes of the home, his remaining loan entitlement for a future home purchase is only $7,500, although he has used only one of his three permissable loans. If, however, the original home is disposed of for ". . . a compelling reason devoid of fault," his loan right is "restored" and his entitlement is the full $42,500 for a second loan.
Amended ORS 407.040 states in part:
"Except for additional loans made for the improvement of the farm or home acquired with an initial loan for the acquisition of that property, an eligible individual shall not receive or assume more than three loans under ORS 407.010 to 407.210."
There is a possibility that a greater debt may have been incurred at the time of the initial purchase than was covered by the V.A. loan. Often this debt would be for improvements. The evident purpose of the three-loan limitation is to limit veterans to use of the fund to purchase three homes or farms. It would not be violated by allowing a noncounting loan to retire a previous indebtedness relating to the same home. However, the statutory language is clear, and a loan to retire a previous indebtedness is not a loan for an improvement. Such a loan must accordingly be counted against the three-loan limit.
This opinion does not attempt to answer all questions which may arise under the new law. However, we believe that any additional questions would best be answered individually on the basis of the particular facts giving rise to such questioning.
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