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Cedar Band of Paiutes v. U.S. Department of Housing and Urban Development

United States District Court, D. Utah

July 23, 2019

CEDAR BAND OF PAIUTES; CEDAR BAND CORPORATION; and CBC MORTGAGE AGENCY, Plaintiffs,
v.
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; DR. BENJAMIN S. CARSON, SR., in his official capacity as Secretary of the U.S. Department of Housing and Urban Development; FEDERAL HOUSING ADMINISTRATION; and BRIAN D. MONTGOMERY, in his official capacity as Acting Deputy Assistant Secretary and Assistant Secretary of Housing and Urban Development for Housing-Federal Housing Commissioner, Defendants.

          MEMORANDUM DECISION AND ORDER GRANTING [6] MOTION FOR PRELIMINARY INJUNCTION

          David Nuffer, United States District Judge.

         On April 22, 2019, Plaintiffs Cedar Band of Paiutes (the “Cedar Band”), Cedar Band Corporation (“CBC”), and CBC Mortgage Agency (“CBCMA”) (collectively, “Plaintiffs”) filed a Complaint[1] against Defendants U.S. Department of Housing and Urban Development (“HUD”), Dr. Benjamin S. Carson, Sr. in his official capacity as Secretary of HUD, the Federal Housing Administration (“FHA”), and Brian D. Montgomery in his official capacity as Acting Deputy Assistant Secretary and Assistant Secretary of HUD for Housing-Federal Housing Commissioner (collectively “Defendants”). The central aim of Plaintiffs' Complaint is to have the Mortgagee Letter 19-06 (the “2019 Mortgagee Letter”)[2] that Defendants issued on April 18, 2019, set aside under the Administrative Procedures Act (“APA”).[3]

         On the same day Plaintiffs filed their Complaint, Plaintiffs also filed the Motion For Ex Parte Temporary Restraining Order and Preliminary Injunction (“Motion”).[4] In their Motion, Plaintiffs sought a preliminary injunction enjoining Defendants from enforcing the 2019 Mortgagee Letter during the pendency of this litigation.[5]

         A hearing on the Motion was scheduled for April 25, 2019. However, on April 24, 2019, the parties jointly moved to strike the hearing[6] because Defendants agreed they would stay enforcement of the 2019 Mortgagee Letter for a period of 90 days after the motion to strike the hearing was granted. The parties' motion to strike the hearing was granted the same day it was filed, and the 90 day stay of the enforcement was set to expire July 23, 2019.[7]

         Defendants responded to the Motion on June 7, 2019, [8] and Plaintiffs filed their reply on June 26, 2019.[9] Amici were also permitted to file briefs in support of, and in opposition to, the Motion.[10] The parties presented oral argument at a hearing held on July 16, 2019.[11] At the conclusion of that hearing, a decision was announced granting the Motion.[12] The following memorandum decision and order memorializes that decision.

         Contents

         BACKGROUND ............................................................................................................................ 3

         DISCUSSION ................................................................................................................................. 7

         1. Plaintiffs Have Demonstrated a Likelihood of Success on the Merits. . ................. 8

         A. Issuing the 2019 Mortgagee Letter Without Notice and Comment Likely Violated Provisions of the APA Adopted by HUD Because the Letter is a Legislative, Rather Than an Interpretive Rule. . .......................................... 9

         B. The 2019 Mortgagee Letter is Likely Arbitrary and Capricious Under the APA ........................................................................................................... 13

         2. Plaintiffs Have Demonstrated That They Are Suffering Irreparable Harm .......... 16

         3. Plaintiffs Have Demonstrated That the Balance of Harms and Public Interest Weigh in Their Favor. . .......................................................................................... 16

         ORDER AND PRELIMINARY INJUNCTION .......................................................................... 17

         BACKGROUND

         The Cedar Band is a federally recognized American Indian Tribe.[13] The Cedar Band is comprised of 380 enrolled members[14] and its reservation encompasses approximately 2, 200 acres-roughly three and a half square miles-located near Cedar City, Utah.[15] CBC is a tribal corporation of the Cedar Band which has chartered CBCMA.[16] CBCMA's charter allows it to do business nationwide.[17] The Cedar Band relies on income derived from CBC and CMCMA to fund services for its members, including housing, education, and security.[18]

         CBCMA is registered as a Governmental Mortgagee with HUD.[19] Through its program, the Chenoa Fund, CBCMA provides downpayment assistance (“DPA”) for mortgage loans insured by the FHA that are originated by other lenders, as well as a small number of conventional loans.[20] The FHA insures the vast majority of loans for which CBCMA provides DPA.[21] CBCMA then purchases the first mortgages and sells them on a secondary market.[22]

         Provisions related to FHA insurance, including provisions related to the minimum required investment (“MRI”) for FHA insured loans, are codified at 12 U.S.C § 1709. In 2007, HUD published a final rule (the “2007 Rule”) that prohibited “sellers” from providing DPA “in their own home sales transactions” through an arrangement where “a so-called charitable organization provides a so-called gift to a homebuyer from funds that it receives, directly or indirectly, from the seller.”[23] The 2007 Rule exempted governmental entities from this prohibition. The rule expressly specified that DPA “is permitted . . . from . . . governments.”[24]The 2007 Rule also specifically provided “that a tribal government . . . is a permissible source of downpayment assistance.”[25]

         In 2008, two separate district courts held that the 2007 Rule's prohibition of seller-funded DPA violated the APA.[26] Both courts vacated the 2007 Rule.[27] Later that year, Congress enacted changes to 12 U.S.C § 1709, formally incorporating some of the guidance of the 2007 Rule into statute.[28] Specifically, 12 U.S.C. § 1709 was amended to provide that the MRI for a FHA insured loan could not

consist, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale: (i) The seller or any other person or entity that financially benefits from the transaction. (ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i).[29]

         Notably, the 2008 amendments did not address the provision of DPA towards FHA insured loans by governmental entities.

         In 2012, HUD addressed that issue in an interpretive rule published in the Federal Register (the “2012 Rule”).[30] According to the 2012 Rule, it was HUD's interpretation that 12 U.S.C. § 1709 “did not prohibit FHA from insuring mortgages originated as part of the homeownership programs of Federal, State, or local governments or their agencies or instrumentalities when such agencies or instrumentalities also directly provide funds toward the required minimum cash investment.”[31]

         Current HUD policy, set forth in HUD Handbook 4000.1, [32] continues to provide that governmental entities can provide DPA in connection with originating a first mortgage, [33] as a gift, [34] and as secondary financing.[35] HUD Handbook 4000.1 defines “Governmental Entity” as “any state, federal, or local government agency or instrumentality.”[36]

         HUD issued the 2019 Mortgagee Letter on April 18, 2019.[37] In explaining why the letter was necessary, Defendants offered:

It has come to FHA's attention that certain Governmental Entities may be acting beyond the scope of any inherent or granted governmental authority in providing funds towards the Borrower's MRI in circumstances that would violate Handbook 4000.1, the National Housing Act, and is contrary to established law. In reviewing its current documentation requirements for Mortgagees, FHA has determined that those requirements should be clarified to provide Mortgagees with specific guidance regarding documentation that will give greater assurances that the standards for providing the MRI have been satisfied by the Governmental Entity.
The 2019 Mortgagee Letter's stated purpose was to clarify documentation requirements that FHA-approved Mortgagees must satisfy when originating a mortgage for a Borrower using funds from another person or entity to satisfy a portion or all of the Minimum Required Investment (MRI), including specific documentation that adequately demonstrates the existing requirement that Governmental Entities are operating in their governmental capacity when providing downpayment assistance pursuant to the December 5, 2012 Interpretive Rule.[38]

         The documentation requirements announced in the 2019 Mortgagee Letter included the requirement that a Mortgagee must obtain

a legal opinion signed and dated within two years of closing of the transaction by attorneys for the Governmental Entity stating [that]: the attorney has reviewed the Governmental Entity's downpayment assistance program; and either the Governmental Entity is considered within the jurisdiction in which the Property is located to be either a federal, state (as defined in Section 201(d) of the National Housing Act (12 U.S.C. §1707(d)), or local government or agency or instrumentality thereof, as provided in Section 528 of the National Housing Act (12 U.S.C §1735f-6), and 24 CFR 203.32(b) and further clarified in the SF Handbook.; the Governmental Entity is a federally recognized Indian Tribe operating on tribal land in which the Property is located or to enrolled members of the tribe . . . .[39]

         According to Plaintiffs, because the 2019 Mortgagee Letter prohibited CBCMA from operating anywhere but on its reservation and serving anyone but one of the Cedar Band's enrolled members, the effect on CBCMA's operations was immediate.[40] By the close of business on April 19, 2019, almost every lender had stopped doing business with CBCMA.[41] And even after CBCMA's relationships with lenders resumed following HUD's agreement to stay the effect of the 2019 Mortgagee Letter until July 23, 2019, Plaintiffs represented that CBCMA's business is down 30 percent.[42]

         DISCUSSION

         To obtain a preliminary injunction, a movant “must show: (1) a substantial likelihood of success on the merits; (2) irreparable harm to the movant if the injunction is denied; (3) the threatened injury outweighs the harm that the preliminary injunction may cause the opposing party; and (4) the injunction, if issued, will not adversely affect the public interest.”[43]

         Plaintiffs have made the required showing under each element. Defendants will be enjoined from enforcing the 2019 Mortgage Letter during the pendency of this litigation.

         1. Plaintiffs Have Demonstrated a Likelihood of Success on the Merits.

         Plaintiffs argue that the 2019 Mortgagee Letter is likely contrary to law for several reasons. These include that: (1) issuing the 2019 Mortgagee Letter without notice and comment violated the APA;[44] (2) the 2019 Mortgagee Letter itself is an arbitrary and capricious action under the APA;[45] (3) Defendants do not have the statutory authority for the sort of action outlined in the 2019 Mortgagee Letter;[46] (4) issuing the 2019 Mortgagee Letter violated Plaintiffs' due process rights and amounts to an unconstitutional taking.[47]

         After reviewing Plaintiffs' arguments, Defendants' responses, and the provided case law, Plaintiffs are most likely to succeed on the merits of their APA and public rulemaking related arguments. The remaining merits-based arguments will not be analyzed because, in contrast to the well-developed APA and public rulemaking arguments, Plaintiffs have only provided limited legal authority in support of their constitutional and statutory arguments. Defendants respond to these arguments either by asserting that Plaintiffs have cited to inapplicable and distinguishable law (an assertion to which Plaintiffs offer no meaningful response) or by reiterating variants of the same arguments they offer against Plaintiffs' APA and public rulemaking arguments. The state of the briefing on Plaintiffs' constitutional and statutory arguments does not permit a determination on the likelihood of success element for those arguments.

         A. Issuing the 2019 Mortgagee Letter Without Notice and Comment Likely Violated Provisions of the APA Adopted by HUD Because the Letter is a Legislative, Rather Than an Interpretive Rule.

         Plaintiffs argue that the 2019 Mortgagee Letter violated notice and comment requirements set forth in the APA at 5 U.S.C. § 553.[48] Plaintiffs contend (1) that public notice and comment was required before the 2019 Mortgagee Letter was issued because the letter is a legislative rule with the force and effect of law;[49] (2) that because notice and comment procedures were previously used to promulgate rules regarding governmental entities and DPA, the APA mandates that notice and comment procedures should have been used again;[50] and (3) that HUD violated its own internal policy to participate in public rulemaking.[51]

         Plaintiffs' second argument fails because Defense Counsel clarified at the hearing that HUD did not seek public comment in advance of issuing the 2012 Interpretive Rule, the rule that preceded the 2019 Mortgagee Letter.[52] At the publication of the 2012 Interpretive Rule, HUD invited public comments after that rule took effect.[53] Plaintiffs cannot argue that Defendants were mandated to use notice and comment procedures in advance of issuing the 2019 Mortgagee Letter because those procedures were not used to prior to issuing the 2012 Interpretative Rule. However, despite the failure of Plaintiffs' second argument, Plaintiffs have still shown a likelihood of success on their first and third arguments regarding notice and comment. These arguments are the focus of this section.

         Under the APA, government agencies are required to publish “general notice of proposed rule making” in the Federal Register and provide “interested persons an opportunity to participate in the rule making” by submitting comments on the proposed agency rule.[54]However, notice, and therefore public comment, is not required if the rule being issued is an interpretive rule or a general statement of policy.[55] Furthermore, the rule making provisions of the APA do not apply to matters relating to “public property[] [or] loans, ” meaning that most of HUD's agency actions are exempt from the APA's requirements.

         Despite these identified exemptions, HUD has enacted a policy, codified at 24 C.F.R. § 10.1, that adopts the public rulemaking provisions of the APA in order “to provide for public participation in rulemaking with respect to all HUD programs and functions, including matters that relate to public property, loans, grants, benefits, or contracts even though such matters would not otherwise be subject to rulemaking by law or Executive policy.[56] This policy is not all encompassing because 24 C.F.R. § 10.1 also contains an interpretive rule exemption: “Notice and public procedure may . . . be omitted with respect to statements of policy, interpretative rules, rules governing the Department's organization or its own internal practices or procedures, or if a statute expressly so authorizes.”[57]

         Because other courts have recognized that HUD has “voluntarily . . . adopted requirements for notice and comment rulemaking”[58] and held HUD accountable when it sought to avoid compliance with 24 C.F.R. § 10.1, [59] the determinative question here is whether the 2019 Mortgagee Letter is an interpretative rule exempt from the public rulemaking provisions HUD has adopted from the APA.

         The Tenth Circuit Court of Appeals recognizes that “legislative rules can be issued only following notice and comment procedures.”[60] “Interpretative rules, by contrast” do not require notice and comment because these rules “advise the public of the agency's construction of the statutes and rules which it administers.”[61] Because “[a]n agency's own label for its action is not dispositive[, ]”[62] the 2019 Mortgagee Letter must be scrutinized to determine whether it is a legislative rule or an interpretive rule.

         A rule is legislative when it “has the force of law and creates new law or imposes new rights or duties.”[63] The United States Court of Appeals for the District of Columbia Circuit has offered criteria for evaluating whether a rule has the force of law, and is therefore legislative:

(1) whether in the absence of the rule there would not be an adequate legislative basis for enforcement action or other agency action to confer benefits or ensure the performance of duties, (2) whether the agency has published the rule in the Code of Federal Regulations, (3) whether the agency has explicitly invoked its general legislative authority, or (4) whether the rule effectively amends a prior legislative rule.[64]

         “If the answer to any one of these questions is affirmative” the rule is “legislative not an interpretive rule . . . .”[65] And, as the Tenth Circuit Court of Appeals has clarified, to be an interpretive rule, “[t]here must be a path that runs from the statute to rule” that shows how the agency has arrived at its interpretation “rather than mere[] consistency between the statute and rule.”[66]

         Defendants argue that the 2019 Mortgagee Letter is interpretive because it merely reiterated the jurisdictional limitations on the provision of DPA by governmental entities that were already present in the 2012 Interpretative Rule and HUD's Handbook.[67] Notably, however, the 2012 Interpretive Rule does not contain the term “governmental capacity” which is contained in the 2019 Mortgagee Letter. The 2012 Interpretive Rule does not refer to a geographic limitation on a governmental jurisdiction, and instead uses the word “jurisdiction” in a different sense, to describe the actions of some HFAs, not in a regulatory sense. The only reference in the 2012 Interpretive Rule to “jurisdiction” is in its background section: “In many cases, a local agency may be the local government itself. HFAs provide various services to assist ...


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