[Link to
GHM-0087](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0087LOPS.doc)

[GHM-0091](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0091LOPS.doc)

Section 232\--Eligibility of Psychiatric Hospital

Legal Opinion: GHM-0012

Index: 3.145

Subject: Section 232\--Eligibility of Psychiatric Hospital

November 25, 1991

MEMORANDUM FOR: Linda D. Cheatham, Acting Director, Office

of Insured Multifamily Housing

Development, HMI

FROM: David R. Cooper, Assistant General Counsel,

Multifamily Mortgage Division, GHM

SUBJECT: Hato Rey Psychiatric Hospital, Inc

This is in response to your memorandum of October 10, 1991,

regarding the eligibility of Hato Rey Psychiatric Hospital

(\"Hato Rey\") for mortgage insurance under section 232 of the

National Housing Act (\"Act\"). As you indicated in your

memorandum, on March 18, 1981, the Office of Multifamily Housing

Development (\"Office of Housing\") approved the development of

Hato Rey under section 232 of the Act. However, the Atlanta

Regional Office and the Office of Inspector General now question

its eligibility for mortgage insurance as a section 232 project.

We understand that at the time of the original eligibility

determination, the proposal for Hato Rey envisioned a 450 bed

facility designed to serve the needs of psychiatric patients.

The facility was to include a 50 bed general hospital equipped to

treat the surgical and medical problems of Hato Rey\'s long-term

psychiatric patients.

There is an outstanding legal opinion on this facility. On

February 10, 1981, we counseled that Hato Rey could not be

insured pursuant to section 232 because it appeared to be a

hospital. (See attachment A, legal opinion by John P. Kennedy

dated February 10, 1981). We have attempted to ascertain whether

additional facts may have arisen to explain, in view of our

February 10, 1981 opinion, the Office of Housing\'s subsequent

decision to approve Hato Rey as a section 232 project. However,

the Office of Housing could not locate additional documentation

on this matter. This may be explained by the fact that the

transaction occurred over ten years ago. Nonetheless, we note

that the Office of Housing\'s approval was contingent on the

facility\'s obtaining an appropriate Certificate of Need, and

otherwise complying with the statutory requirements of section

232\. Therefore, we presume that Hato Rey obtained a Certificate

of Need that described the types of beds and services that are

acceptable under section 232.

2

In addition, upon review of the February 10, 1981 opinion,

we find its analysis problematic. First, the opinion does not

clearly set forth its basis for concluding that Hato Rey was a

hospital. The opinion at page 2 appears to focus on two factors:

\(1\) the fifty bed surgical hospital; and (2) the label,

i.e. \"hospital,\" used in describing the project. It provides

that they \"would have no problem in determining this proposal to

be eligible except that they Hato Rey propose a fifty bed

general hospital,\" and that the Office of Housing\'s and the

Caribbean Area Office\'s incoming memoranda refer to the facility

as a \"hospital.\" The conclusion in the opinion, however, that

insurance under section 232 is improper, is reached without

consideration of the fifty bed issue (i.e., \"we think it

unnecessary to reach the question of whether the facility\'s

eligibility under 232 is impaired by reason of its having a

fifty-bed general hospital.\") The only issue that appears to

leave is the use of the label \"hospital\" in the incoming

memoranda. In that regard, the opinion acknowledges that the

decisive factor for eligibility under section 232 is not the

label that is ascribed to a facility, but rather the actual use

to which it is put, and the kinds of services it provides.

However, the opinion does not analyze the nature and level of

services provided by Hato Rey, and seems to accept the label

\"hospital\" as determinative of the issue. The basis for the

conclusion reached is, therefore, puzzling.

Furthermore, after this office issued its opinion on Hato

Rey, we concurred in a determination that a section 232

project may contain ancillary uses that are compatible with

residential care facilities. (See attachment B, letter from

Linda D. Cheatham to Joseph B. Lynch dated August 23, 1990).

That case involved the approval of a nursing home as a section

232 project even though it contained an ambulatory surgery and

provided clinical, diagnostic and treatment-type services. The

Office of Housing emphasized that ancillary facilities, such as

those just described, may be included in a section 232 project so

long as their use is compatible with the residential care

facility.1 Accordingly, the Hato Rey hospital facility may not

create a problem for section 232 eligibility because it could be

an ancillary use that is compatible with the nursing home

operations of Hato Rey. In this regard, it is important to note

that we understand that Hato Rey\'s hospital beds and operating

1 This appears to follow the approach taken in connection

with commercial space in section 232 nursing homes where, in

accordance with an OGC opinion, the Department permitted

commercial facilities in a nursing home \"provided they are

compatible with the character of the home or care facility.\"

(See attachment C, legal opinion by Charles J. Bartlett dated

March 9, 1982).

3

room were financed with UDAG funds, and not with money that was

insured under section 232.

In any event, regardless as to whether the original decision

to insure Hato Rey\'s mortgage under section 232 was proper, it is

not necessary to make such a determination at this time. Since

the mortgage for Hato Rey has already been endorsed for insurance

under section 232, its eligibility cannot now be challenged.

Section 203(e) of the Act states:

\(e\) Any contract of insurance heretofore or hereafter

executed by the Secretary under this title shall be

conclusive evidence of the eligibility of the loan or

mortgage for insurance, and the validity of any contract of

insurance so executed shall be incontestable in the hands of

an approved financial institution or approved mortgagee from

the date of the execution of such contract, except for fraud

or misrepresentation on the part of such approved financial

institution or approved mortgagee.

Thus, Congress decided that it would be unfair to set aside the

insurance contract where a mortgagee that relied upon the

Department\'s commitment to insure the mortgage had committed no

wrongdoing. Therefore, even if Hato Rey\'s mortgage was

improperly endorsed for insurance, the Department must honor the

mortgage insurance contract because there is no allegation of

fraud or misrepresentation on the part of the mortgagee.

The foregoing is consistent with the precedent of this

office. In a previous legal opinion we determined that even if a

mortgage were wrongfully endorsed for insurance under section

232, absent fraud or material misrepresentation by the mortgagee,

the incontestability provision of section 203(e) prohibits the

Department from setting aside the mortgage insurance contract.

(See attachment D, legal opinion by John P. Kennedy dated

October 30, 1981).

Finally, it is crucial to emphasize that Congress, in

providing for the incontestability of the insurance contract, was

not inviting the Department to ignore statutory requirements.

Obviously, if program officials purposely do not follow the law,

and endorse a mortgage where there does not exist requisite

statutory authority, the Department would no doubt have a

responsibility to take disciplinary action.