Capitol Mortg. Bankers, Inc. v. Cuomo, MJG-99-2907.

CourtUnited States District Courts. 4th Circuit. United States District Court (Maryland)
Writing for the CourtGarbis
Citation77 F.Supp.2d 690
PartiesCAPITOL MORTGAGE BANKERS, INC., Plaintiff, v. Andrew M. CUOMO, et al., Defendants.
Docket NumberNo. MJG-99-2907.,MJG-99-2907.
Decision Date25 October 1999
77 F.Supp.2d 690
Andrew M. CUOMO, et al., Defendants.
No. MJG-99-2907.
United States District Court, D. Maryland.
October 25, 1999.

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Joseph F. Yenouskas, Weiner, Brodsky, Sidman & Kider, P.C., Washington, DC, for Plaintiff.

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Charles J. Peters, Assistant United States Attorney, Baltimore, MD, Sylvia Kaser, United States Department of Justice, Washington, DC, for Defendants.

GARBIS, District Judge.

This case was submitted to the Court for decision upon an agreed record.1 The Court has reviewed the exhibits, considered the materials submitted by the parties, and had the benefit of the arguments of counsel. The Court now issues this Memorandum of Decision as its findings of fact and conclusions of law in compliance with Rule 52(a) of the Federal Rules of Civil Procedure.

As discussed herein, Plaintiff Capitol Mortgage Bankers, Inc. ("Plaintiff" or "Capitol") brought this action under the Administrative Procedure Act, 5 U.S.C. § 701 et seq. (the "APA"), to review a final action by the United States Department of Housing and Urban Development ("HUD") terminating Capitol's loan-origination approval authority. For the reasons stated herein, the Court concludes that HUD's action was taken pursuant to a regulation promulgated contrary to statutory authority. The Court further concludes that even if there had been authority to issue a termination regulation of the type at issue, the regulation would deny Capitol its right to due process. Accordingly, the Court shall set aside the termination of Capitol's loan-origination approval authority.2 Of course, this judicial action does not affirmatively require HUD to maintain Capitol's approval. Therefore, it is possible that HUD could, on proper grounds and pursuant to proper procedures, terminate Capitol's authority in the future.


At all times relevant hereto, Capitol has been engaged in the business of providing residential mortgage loans to home buyers and home owners. Capitol originated mortgages insured by the Federal Housing Administration ("FHA") of HUD from various branch offices.

On May 12, 1999, by Mortgagee Letter 99-15, HUD notified all approved mortgagees that it would "be using its regulatory authority to terminate lenders' authorization to originate single family loans ... in geographic areas where the lender has a high rate of early defaults and claims." Admin. Record at 4. In a letter dated June 4, 1999 (the "June 4 letter"), HUD informed Capitol that the company had an early default-claim3 rate that was 362% to 628% higher than the default-claim rate for other lenders in the relevant geographic areas on FHA loans originated in the twenty-four months ending on March 1, 1999. Id. at 1-2. That is, Capitol's default-claim rate exceeded the HUD field-office rate and the national rate. The June 4 letter notified Capitol that HUD intended to terminate Capitol's authorization to originate HUD-insured loans for all of Capitol's branch offices within three field-office jurisdictions of HUD, namely, Washington, D.C., Baltimore, Maryland, and Richmond, Virginia. Id.

Further, the June 4 letter stated that Capitol had thirty days to submit a written explanation of its default-claim rate and to request an informal conference. Id. at 2. In response, Capitol submitted a written explanation and met with HUD representatives in an informal conference on July 29, 1999. Id. at 219. Ultimately, HUD officials concluded that Capitol had not

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demonstrated that it should be permitted to originate loans. Id. Accordingly, on September 15, 1999, HUD terminated Capitol's loan-origination approval authority for Capitol offices4 pursuant to 24 C.F.R. § 202.3 (the "Termination Regulation").5 Id. at 220.

Capitol brought the instant lawsuit on September 24, 1999 to seek relief under the APA. On October 6, 1999, Capitol filed the First Amended Complaint challenging HUD's action on the following grounds:

• HUD exceeded its authority under Section 533 of the National Housing Act ("NHA"), 12 U.S.C. § 1735f-11, in issuing the Termination Regulation.

• HUD's Termination Regulation violates Section 1708 of NHA, which established the Mortgage Review Board.

• HUD deprived Capitol of due process of law by the manner in which it terminated Capitol's origination approval agreement.

• HUD's action was arbitrary and capricious.

On October 12, 1999, both sides filed Motions for Summary Judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Upon being briefed, the court heard oral arguments on the motions on October 21, 1999. At the hearing, the parties agreed that there were no issues of fact and submitted the case for decision on the record. Accordingly, the Court shall deny the parties' Motions for Summary Judgment as moot and issue a ruling on the submitted case as a stipulated bench trial.


The Supreme Court has developed a two-part test for determining whether agency action exceeded its statutory authority and, therefore, should be set aside under APA:

When a court review an agency's construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.... [I]f the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.

Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Thus, an administrative agency's interpretation of a statute is not entitled to deference where it is contrary to the unambiguously expressed intent of Congress. MCI Telecommunications Corp. v. AT & T, 512 U.S. 218, 229, 114 S.Ct. 2223, 129 L.Ed.2d 182 (1994); Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 476, 112 S.Ct. 2589, 120 L.Ed.2d 379 (1992).


The Court shall discuss two principal issues6 in this case. First, whether HUD

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exceeded its statutory authority in promulgating the Termination Regulation upon which the agency based its decision to terminate Capitol's loan-origination authority. Second, if HUD had acted within its statutory authority, whether Capitol received due process in accordance with the Fifth Amendment to the United states Constitution. The Court shall address each issue in turn.

A. Scope of HUD's Statutory Authority

The Court's discussion begins with the fundamental principle that "[w]hen Congress passes an Act empowering administrative agencies to carry on governmental activities, the power of those agencies is circumscribed by the authority granted." Stark v. Wickard, 321 U.S. 288, 309, 64 S.Ct. 559, 88 L.Ed. 733 (1944); see also Lyng v. Payne, 476 U.S. 926, 937, 106 S.Ct. 2333, 90 L.Ed.2d 921 (1986) ("[A]n agency's power is no greater than that delegated to it by Congress."). Moreover, "there is no place in our constitutional system for the exercise of arbitrary power, and, if [an agency] has exceeded the authority conferred upon [it] by law, then there is power in the courts to restore the status of the parties aggrieved by such unwarranted action." Garfield v. United States, 211 U.S. 249, 262, 29 S.Ct. 62, 53 L.Ed. 168 (1908).

The Fourth Circuit stated in Adams v. Dole that "in every case which turns on statutory construction," the Court shall "begin with the language of the statute." 927 F.2d 771, 774 (4th Cir.1991) (citation omitted). In this case, the boundaries limiting HUD's authority appear in Section 533 of the NHA, 12 U.S.C. § 1735f-11 ("Section 533" or "Section 1735f-11"). Section 1735f-11, captioned "Direction to Secretary to require mortgagees with above normal rates of early, serious defaults and claims to submit reports and take corrective action," provides a specific, mandatory procedure for HUD to reduce losses under the FHA loan insurance program caused by an excessive rate of early serious defaults and claims. Specifically, subsections 1735f-11(a) and (b) provide:

(a) To reduce losses in connection with mortgage insurance programs under this Act, the Secretary shall review, at least once a year, the rate of early serious defaults and claims involving mortgagees approved under this Act. On the basis of this review, the Secretary shall notify each mortgagee which, as determined by the Secretary, had a rate of early serious defaults and claims during the preceding year which was higher than the normal rate for the geographic area or areas in which that mortgagee does business. In the notification, the Secretary shall require each mortgagee to submit a report, within a time determined by the Secretary, containing the mortgagee's (1) explanation for the above normal rate of early serious default and claims; (2) plan for corrective action, if applicable, both with regard to (A) mortgages in default; and (B) its mortgage-processing system in general; and (3) a timeframe within which this corrective action will be begun and completed. If the Secretary does not agree with this timeframe or plan, a mutually agreeable timeframe and plan will be determined.

(b) Failure of the mortgagee to submit a report required under subsection (a) within the time determined by the Secretary or to commence or complete the plan for corrective action within the timeframe agreed upon by the Secretary may be cause for suspension of the mortgagee from participation in programs under this Act.

12 U.S.C. § 1735f-11(a) — (b) (emphases added). The steps mandated by the foregoing statutory language provide a basis for measuring HUD's actions for conformity to the agency's legislative grant.

The first step required by Section 1735f-11 is for HUD to conduct...

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