motion for permanent injunction with respect to the Interim Rule.
On May 2, 1990, defendants filed an emergency motion for clarification of the Court's April 25, 1990 Memorandum Opinion, seeking to determine the precise steps they would be required to take to fully satisfy the notice and comment requirements of the Administrative Procedure Act ("APA"), 5 U.S.C. § 553, and 42 U.S.C. § 3535(o), which the Court had determined they had previously failed to do.
In addition, on May 2, 1990, HUD placed several approved coinsuring lenders on probation and suspended others from further participation in the coinsurance program. Among those placed on probation were plaintiffs ABG Financial Services, Inc. ("ABG") and Centennial Mortgage, Inc. ("Centennial"). As a result of these notices of probation, ABG and Centennial, although permitted to continue to originate and process applications for mortgage insurance, were required to receive HUD approval before the issuance of firm commitments.
On May 4, 1990 plaintiffs filed a third motion for temporary restraining order and preliminary injunction, requesting the Court to enjoin HUD from giving effect to the notices of probation sent to ABG and Centennial.
Consideration has been given to the parties' multiple submissions, the argument of counsel, and the entire record.
A. Coinsuring Lender Letters
In its April 25 Memorandum Opinion, the Court found that plaintiffs had shown a likelihood of success on the merits of their claim that the coinsuring lender letters were substantive rules requiring full notice and comment rulemaking pursuant to 5 U.S.C. § 553 and 42 U.S.C. § 3535(o). Defendants had argued, and continue to argue, that the Coinsuring Lender Letters are "procedural rules" exempt from notice and comment pursuant to 5 U.S.C. § 553(b)(A).
In support of this argument, defendants relied and continue to rely almost exclusively on American Hospital Association v. Bowen, 266 U.S. App. D.C. 190, 834 F.2d 1037 (D.C. Cir. 1987).
None of the submissions presented since the issuance of the April 25 Memorandum Opinion have persuaded the Court that its original analysis, which shall not be repeated here, was in error. The Lender Letters, if given effect, would substantially alter the rights and interests of approved coinsuring lenders who had previously enjoyed autonomy in issuing firm commitments. They are substantive rules which require full notice and comment rulemaking. Because these procedures were not followed, plaintiffs are entitled to permanent injunctive relief prohibiting HUD from giving force and effect to those Letters until such time as HUD complies with the full notice and comment requirements of the APA and HUD's enabling legislation.
B. HUD's Interim Rule
Concerned that they might receive an unfavorable ruling with respect to the Coinsuring Lender Letters, by publishing an Interim Rule in the Federal Register on March 6, 1990, defendants began the administrative process necessary for establishing the identical precommitment review procedures that the Lender Letters would have established. However, HUD abbreviated the normal period for accepting public comment after publication in the Federal Register from 60 to 30 days,
claiming that the abbreviation was justified by the alarming rate of increase in defaults by approved coinsuring lenders and the danger of future losses to the FHA General Insurance Fund. In their second motion for a temporary restraining order, plaintiffs argued that defendants had not demonstrated the "good cause" required by the APA for dispensing with full notice and comment.
In issuing a temporary restraining order enjoining enforcement of the Interim Rule, the Court agreed with plaintiffs and found that defendants had not met their burden of establishing "good cause." That analysis need not be repeated here.
Once again, none of the submissions presented to the Court since that ruling provide a basis for the Court to alter its original conclusion.
Accordingly, defendants shall be enjoined from giving force and effect to the Interim Rule until the procedures outlined below have been satisfied.
Having decided that full notice and comment is required, the Court must determine whether defendants must start the entire rulemaking process anew. In their emergency motion for clarification, defendants ask the Court to clarify its previous ruling and specify that HUD can satisfy the "full notice and comment" that the Court found was required by publishing a new notice, as a proposed rule, that extends the public comment period by 30 days (for a total of 60 days), thereafter considering all comments received during both periods, then publishing the rule in final form to take effect 30 days thereafter, in accordance with 42 U.S.C. § 3535(o). Defendants' motion shall be granted.
Although the parties disagree over the amount of actual losses to the FHA General Insurance Fund as a result of defaults in the coinsurance program, HUD has known about problems in the industry for over a year and a half. HUD now seeks to justify the abbreviated public comment period as an emergency measure that is desperately needed because of defaults in the coinsurance program in the past few months that are increasing at an alarming rate, especially among previously unsanctioned lenders.
Although plaintiffs vigorously dispute this assertion, the purposes of § 553 of the APA and the notice and comment requirements of HUD's own regulations will best be served by permitting HUD to extend the public comment period by 30 days, as they request, rather than requiring them to begin the rulemaking process ab initio, provided that HUD consider all comments made during both thirty day periods prior to issuing its proposed rule.
C. Notices of Probation to ABG and Centennial
On May 2, 1990, HUD sent notices to both ABG and Centennial, informing them that upon receipt of the notices, each was being placed on probation for a period of six months. One of the effects of probation was that these lenders would be prohibited from issuing firm commitments without HUD's prior written approval. Plaintiffs subsequently moved for a temporary restraining order to enjoin defendants from giving force and effect to these notices of probation. Plaintiffs advance three arguments in support of their motion. First, they maintain that HUD violated the due process clause of the Fifth Amendment by placing ABG and Centennial on probation without prior notice and opportunity for a hearing. Second, plaintiffs challenge the bases for the suspension, contending that the improprieties asserted are not current but are stale matters which are mere pretexts for HUD's retaliation against ABG and Centennial for instituting the instant lawsuit. Third, plaintiffs argue that the matters upon which the probations were based do not provide permissible bases for adverse action under the coinsurance regulations, even assuming that the regulations are constitutional. Defendants' principal argument in opposition to plaintiffs' motion is that plaintiffs must exhaust their administrative remedies with HUD prior to seeking judicial review. Arguing in the alternative, defendants contend that HUD's regulations pass constitutional muster and comport with the procedural due process requirements of the Fifth Amendment.
As previously stated in the Court's first two opinions, a temporary restraining order may be granted only when the plaintiff demonstrates (1) a substantial likelihood of success on the merits; (2) that irreparable injury will result in the absence of the requested relief; (3) that no other parties will be harmed if temporary relief is granted; and (4) that the public interest favors entry of a temporary restraining order. Washington Metropolitan Area Transit Commission v. Holiday Tours, Inc., 182 U.S. App. D.C. 220, 559 F.2d 841, 843 (D.C. Cir. 1977); accord, Virginia Petroleum Jobbers Ass'n v. Federal Power Commission, 104 U.S. App. D.C. 106, 259 F.2d 921, 925 (D.C. Cir. 1958). Because, as reflected below, plaintiffs have failed to show a likelihood of success on the merits, their motion shall be denied.
The Court agrees with defendants that plaintiffs must first exhaust their administrative remedies before seeking judicial review. HUD's regulations provide plaintiffs with an administrative remedy:
Coinsuring lenders will be notified in writing by the [Federal Housing] Commissioner, or designee, when a probation, suspension or withdrawal action is taken. The notice will specifically state the cause, effect, and duration of the action. Lenders must comply with the conditions of the notice immediately, but may request an informal hearing on the action within 10 working days of the receipt of the notice. The hearing shall be held by the Commissioner or designee. The lender shall be given the opportunity to be heard within 10 days of the receipt of the request and may be represented by counsel. The Commissioner or designee will notify the lender in writing of the results of the hearing within 10 working days of the hearing and receipt of any materials. A decision to withdraw, suspend, or continue probation following a hearing constitutes final agency action.