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April 11, 1997

PATRIOT, INC. et al., Plaintiffs,

HAROLD H. GREENE, United States District Judge

The opinion of the court was delivered by: GREENE

Before the Court is plaintiffs' motion for a preliminary injunction, defendants' opposition, plaintiffs' reply thereto, and a motion to dismiss filed by the Federal National Mortgage Association ("Fannie Mae").

 Patriot, Inc., and America's Trust, two estate and financial planning services from California, challenge certain actions of officials at the Department of Housing and Urban Development ("HUD") and at Fannie Mae. More specifically, they challenge the March 17, 1997 announcement by Assistant Secretary of HUD Nicholas Retsinas that the Federal Housing Administration ("FHA") will no longer insure Home Equity Conversion Mortgages ("reverse mortgages") obtained with the assistance of services such as plaintiffs'.


 The reverse mortgage program was established by Congress in 1988 to enable elderly homeowners to convert equity in their homes into a supplemental income stream. 12 U.S.C. § 1715z-20(a). A reverse mortgage is aptly named; instead of the mortgagor (homeowner) making payments to the mortgagee (lender), the mortgagee makes payments to the mortgagor.

 Patriot provides information on and assistance in obtaining reverse mortgages, and refers clients to an FHA-approved lender to apply for such a loan. When the processing of the loan is completed, Patriot collects a fee for its services, typically 8.5% of the amount of the loan. HUD's role is insuring the reverse mortgage transactions of FHA-approved lenders. After being processed by a lender, the loans are funded by a private company, either TransAmerica HomeFirst, Inc., or Wendover Funding, Inc. Fannie Mae then repurchases the loans from TransAmerica or Wendover.

 From September 1, 1996, until the March 17 announcement, HUD issued, and Fannie Mae repurchased, approximately 115 reverse mortgage loans per month which were obtained through referrals by plaintiffs. At least in part to respond to concerns raised by the American Association of Retired Persons ("AARP") (a recent entrant in the business of marketing variable annuities to seniors through a joint venture with Hartford Life), HUD came to the conclusion that the fees charged by Patriot were too high. The HUD announcement, issued in the form of a press release and "Mortgagee Letter," effectively blocked 279 pending loans referred by Patriot, and denied plaintiffs the ability to be reimbursed for their services on the pending loans. The Mortgagee Letter was not addressed to Fannie Mae, nor did it order Fannie Mae to cease purchasing reverse mortgages procured by Patriot.

 Plaintiffs argue that the Mortgagee Letter constitutes administrative rulemaking for which HUD has not undertaken the notice and comment procedures required under the Administrative Procedure Act ("APA"), 5 U.S.C. § 551 et seq., and that, in refusing to repurchase the loans referred by plaintiffs, Fannie Mae violated an implied contract with plaintiffs and breached its obligation of dealing in good faith with the public.

 On March 26, 1997, after a hearing on plaintiffs' motion for a temporary restraining order and upon consideration of plaintiffs' motion, *fn1" the Court granted the motion, temporarily enjoined HUD from implementing or enforcing the terms of the March 17 Mortgagee Letter, and enjoined Fannie Mae from refusing to repurchase reverse mortgage loans issued by HUD and obtained through the assistance of plaintiffs.


 A preliminary injunction will be granted if the plaintiffs demonstrate: (1) a substantial likelihood of success on the merits; (2) that they would suffer irreparable injury if the injunction is not granted; (3) that an injunction would not substantially injure other parties; and (4) that the public interest favors entry of a preliminary injunction. CityFed Financial Corp. v. Office of Thrift Supervision, 313 U.S. App. D.C. 178, 58 F.3d 738, 746 (D.C. Cir. 1995). The Court finds that plaintiffs have satisfied this rigorous test as to defendant HUD, but not as to defendant Fannie Mae.

 As a preliminary matter, the Court addresses HUD's challenge to the plaintiffs' standing. HUD argues that plaintiffs are outside the zone of interest sought to be protected by the relevant statute, 12 U.S.C. § 1715z. As an entity which brings together lenders and elderly homeowners with limited income, plaintiffs' services fall within the purpose of this statute, which is to encourage elderly homeowners to obtain such reverse mortgages where necessary and to encourage mortgagees to participate in the program. In the alternative, HUD argues that the actions of HUD were not directed at Patriot, but at HUD's insured lenders. In reality, the Letter could not be more directly aimed at plaintiffs; it specifically identifies both Patriot, Inc., and America's Trust as companies which the lenders must "bar . . . from further participation in the [reverse mortgage] program."


 The plaintiffs appear to be likely to succeed on their claim that HUD's March 17, 1997 letter constitutes a rule requiring notice and comment procedures pursuant to the APA. HUD argues that the Mortgagee Letter is not a substantive rule, but either a policy statement or an interpretive rule, both of which Congress has exempted from the notice and comment requirement. 5 U.S.C. § 553(b)(A). Two criteria distinguish policy statements or interpretive rules from substantive rules. First, an agency action is not a substantive rule if it does not have a present binding effect, that is, if "it does not impose any rights and obligations." American Bus Ass'n v. United States, 201 U.S. ...

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