Board of Contract Appeals General Services Administration Washington, D.C. 20405 _______________________________________________ March 5, 1999 _______________________________________________ GSBCA 14825-RELO In the Matter of DOROTHY A. SUTTON Dorothy A. Sutton, Willmar, MN, Claimant. Sandra S. Williams, National Finance Center, Department of Agriculture, New Orleans, LA, appearing for Department of Agriculture. BORWICK, Board Judge. The Department of Agriculture (agency) requests a decision pursuant to 31 U.S.C. 3529 (section 3529 decision) in the matter of Dorothy A. Sutton, claimant, an employee who sold her residence because of a permanent change of station (PCS). Claimant had obtained a government-subsidized mortgage for that residence. The agency asks whether under the Federal Travel Regulation (FTR), it may include as an allowable residence transaction expense, reimbursement for the mortgage subsidy capture payment due upon the sale of the residence. The agency has concluded that it may not reimburse claimant for that payment because it is an unallowable finance charge under the FTR. For the reasons below, we agree that claimant is not entitled to reimbursement of subsidy recapture payment. Since the facts concern implementation of a housing assistance program for the claimant, we briefly describe the statutory basis and regulatory implementation of that program. The Housing Act of 1949 authorizes the Secretary of Agriculture to make housing loans not exceeding thirty-three years in length to eligible applicants. 41 U.S.C. 1472a (Supp. II 1996). Statute also provides that the loan shall bear interest as determined by the Secretary of the Treasury, but that from the interest rate so determined, the Secretary of Agriculture may provide the borrower with assistance in the form of credits so as to reduce the effective rate of interest to a rate not less than one percent per year for such periods of time as the Secretary of Agriculture may determine. 42 U.S.C. 1490a(a)(1)(A)-(B). The Act provides that with respect to such borrowers receiving assistance, the Secretary of Agriculture shall provide for recapture of all or a portion of such assistance rendered upon the disposition or non-occupancy of the property by the borrower. Any such assistance shall be considered a debt secured by the security instruments given by the borrower to the Secretary to the extent that the Secretary may provide for recapture of such assistance. 42 U.S.C. 1490a(a)(1)(D)(i). The Rural Housing Service (RHS) of the Department of Agriculture implements this portion of the Housing Act. RHS provides for payment subsidies through payment assistance and interest credit, both of which are subject to recapture when the borrower transfers title or ceases to occupy the property. 7 CFR 3550.68 (1998). Calculation of payment assistance and interest credit is by formula as set forth in regulation. 7 CFR 3550.68(c), (d). The maximum amount to be recaptured is the amount of principal reduction attributed to the subsidy and the lesser of (1) the amount of the subsidy received or (2) fifty percent of the value appreciation. 7 CFR 3550.162. Borrowers under the direct loan program are required to obtain private credit when the RHS determines they are financially able to do so. The RHS may subordinate its interest in any deferred recapture amount to allow a borrower to refinance with private credit. 7 CFR 3550.160. On August 26, 1983, claimant secured a thirty-three year mortgage on her residence from the Farmers Home Administration (FmHA). The mortgage provided that it "secure[d] the recapture of any interest credit or subsidy which may be granted to the Borrower by the Government pursuant to 42 U.S.C. 1490a." Claimant signed a recapture agreement several years later, having forgotten to sign it when she first obtained the loan in 1983. Claimant explains that she does not have the recapture agreement and that the file was destroyed at the office where she received the loan. On or about December 1, 1992, claimant obtained private financing and although the Government loan was paid-off, the Government's interest in recapture was subordinated to the rights of the private lender. In September 1995, the agency authorized claimant's PCS from Detroit Lakes, Minnesota to Alexandria, Minnesota, and payment of relocation expenses including real-estate transaction expenses. On or about May 10, 1996, claimant sold her house in Detroit Lakes that had been secured by the subsidized mortgage. Claimant owed subsidy recapture of $5266.51--$1847.96 in interest and $3418.55 of principal--and the total amount was deducted from the payment due claimant at settlement. Claimant submitted a travel voucher claiming the $5266.51 as "other incidental expenses," stating that "this is subsidy recapture I would not have had to repay as long as I lived in the house. It did not accrue interest as long as I lived in the house." The FTR requires agencies to "reimburse an employee for expenses required to be paid by him/her in connection with the sale of one residence at his/her old official station." 41 CFR 302-6.1. Under the FTR, mortgage interest is a non-reimbursable item. 41 CFR 302-6.2(d)(2)(ii). The subsidy recapture of interest is nothing more than claimant's payment of interest due as required by the mortgage after the Government's temporary subsidy comes to an end. Under the recapture formula set forth in regulation, the total interest subsidy might not be subject to recapture, but that fact does not change the nature of the payment. As for the repayment of the principal portion of the subsidy, that payment is a return of principal to the lender, and is not, therefore, an expense in connection with the sale of a residence. The GAO took a slightly different position, that principal payments are not an expense because such payments are a contribution to the seller's equity which accrues to his/her benefit at the time of settlement. James L. Nelligan, B-174692 (Feb. 14, 1972). Regardless, the result is the same. The agency is not authorized under the FTR to reimburse claimant for that portion of the subsidy recapture which represents return of principal to the lender. __________________________ ANTHONY S. BORWICK Board Judge