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Neighborhood Assistance Corp. of America v. Consumer Financial Protection Bureau

United States District Court, District of Columbia

December 3, 2012

NEIGHBORHOOD ASSISTANCE CORPORATION OF AMERICA, Plaintiff,
v.
CONSUMER FINANCIAL PROTECTION BUREAU, Defendant.

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Andre M. Gregorian, Douglas Edan Fierberg, Bode & Grenier, LLP, Washington, DC, Ethan R. Horowitz, George K. Weber, Jamaica Place, MA, for Plaintiff.

Peter G. Wilson, Consumer Financial Protection Bureau, Washington, DC, for Defendant.

MEMORANDUM OPINION

ROBERT L. WILKINS, District Judge.

Plaintiff Neighborhood Assistance Corporation of America (" NACA" ) claims that the U.S. Department of Housing and Urban Development (" HUD" ) announced a rule specifically designed to punish NACA for advocacy that has seen the organization at odds with the government.[1] NACA has asserted Fifth Amendment and Administrative Procedure Act (" APA" ) claims. The Bureau moved to dismiss for lack of jurisdiction under Federal Rule of Civil Procedure 12(b)(1) or, in the alternative, for summary judgment on the merits. (Dkt. No. 25). NACA cross-moved for summary judgment (Dkt. No. 31), and the case is now ripe for a decision. After careful consideration of the parties' submissions and the administrative record, for the reasons stated below the Court finds that the Bureau's Motion to Dismiss or, in the Alternative, for Summary Judgment (Dkt. No. 25) is denied in part and granted in part, and NACA's Cross-Motion for Summary Judgment (Dkt. No. 31) is denied.

I. Background

A. The Secure and Fair Enforcement for Mortgage Licensing Act

The Housing and Economic Recovery Act was enacted in 2008, primarily to address the subprime mortgage crisis. See Pub.L. 110-289, 122 Stat. 2654. As part of that Act, Congress passed the Secure and Fair Enforcement for Mortgage Licensing Act (" SAFE Act" ), which encourages States to establish " minimum standards" for residential mortgage loan originators with the goal " to increase uniformity, reduce regulatory burden, enhance

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consumer protection, and reduce fraud." 12 U.S.C. §§ 5101, 5104(b). The SAFE Act defines loan originators as those who " take[ ] a residential mortgage loan application" and " offer[ ] or negotiate[ ] terms of a residential mortgage loan for compensation or gain." See id. § 5102(4)(A). Congress designed the SAFE Act so that mortgage loan originators " would, to the greatest extent possible, be required to act in the best interests of the consumer." Id. § 5101(8). In addition to setting minimum standards for loan originators, the SAFE Act also encourages States, through the through the Conference of State Bank Supervisors (" CSBS" ) and the American Association of Residential Mortgage Regulators (" AARMR" ), to establish a nationwide mortgage licensing system and registry. Id. § 5101. Under the SAFE Act, if HUD determined that States failed to implement adequate licensing standards, or if the national registry was not meeting the SAFE Act's requirements, HUD must act as " backup authority" and take action to implement proper procedures. Id. §§ 5107 & 5108.

The SAFE Act encourages States to participate in the national registry and implement a system for registering and licensing loan originators, and charged HUD with oversight. In turn, CSBS and AARMR developed model legislation to help the States comply with the SAFE Act, and they requested that HUD review a draft. HUD reviewed the draft legislation and offered comments. 74 Fed.Reg. 312 (Jan. 5, 2009). Then in December 2009, HUD proposed a set of rules to provide " the procedure that HUD will use to determine whether a State's licensing and registration system is SAFE Act compliant; the actions that HUD will take if HUD determines that a State has not established a SAFE Act-compliant licensing and registration system or that the [national registry] established by CSBS and AARMR is not SAFE Act compliant; the minimum requirements for the administration of the [national registry]; and HUD's enforcement authority if it operates a State licensing system." (Dkt. No. 27, Administrative Record (" AR" ) at 7).

B. HUD Develops Final Rule on Minimum Licensing Standards Under SAFE Act

The December 2009 proposed rule presents the minimum requirements for a State to comply with the SAFE Act, in part building upon and clarifying its comments from January 2009 regarding the draft legislation from CSBS and AARMR. The proposed rule states:

Among the important clarifications that this rule proposes to make are definitions of what activities are included in " tak[ing] a residential mortgage loan application" and " offer[ing] or negotiat[ing] terms of a residential mortgage loan," and what it means to do so " for compensation or gain." The meanings of these terms largely determine whether or not a particular individual is subject to licensing requirements. HUD is aware of the great variety of business models that are utilized in the housing finance industry and proposes to provide definitions based on functions, rather than on job titles or labels, to further clarify whether an individual is subject to licensing requirements. HUD specifically seeks comment on whether the proposed definitions, which are further discussed below, are adequate and appropriate.

( Id. at 9). In the section " Individuals Not Subject to Licensing Requirements," HUD stated " there are some limited contexts where offering or negotiating residential mortgage loan terms would not make an individual a loan originator." ( Id. at 10). The proposed rule itself lists seven categories of individuals who would be exempted

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from the requirement to obtain a loan originator license; it is not in dispute that, in the proposed rule, there is no discussion in this section of an exemption for employees of nonprofits. ( See id. at 16-17 (proposed 24 C.F.R. § 3400.103(e))). One other part of the proposed rule is particularly relevant here: HUD noted it views the SAFE Act's phrase " offers or negotiates" broadly, and sought to clarify that the term included " actions by an individual that make a prospective borrower more likely to accept a particular set of loan terms or an offer from a particular lender, where the individual may be influenced by a duty to or incentive from any party other than the borrower." ( Id. at 10). HUD set February 16, 2010 as the deadline to submit comments on the rule, which it later extended to March 5, 2010. 75 Fed.Reg. 7149 (Feb. 17, 2010).

The day after HUD published the proposed rule in the Federal Register, members of the U.S. House of Representatives introduced a bill to clarify that, under the SAFE Act, States could exempt loan originator employees of 501(c)(3) organizations under certain conditions. See Nonprofit Mortgage Licensing Clarification Act of 2009, H.R. 4400, 111th Cong. (2009). The bill garnered 92 co-sponsors, but never passed. Members of the U.S. Senate introduced the same bill in March 2010, where it eventually garnered nine co-sponsors, but the bill never passed. See Nonprofit Mortgage Licensing Clarification Act of 2010, S. 3106, 111th Cong. (2010).

HUD received 5,132 comments on the proposed rule regarding the SAFE Act. (AR at 26). " An overwhelming majority of the comments received were from individuals, companies, or organizations seeking blanket exemptions from the SAFE Act's licensing requirements." (Dkt. No. 26, Ex. B at 6). CSBS and AARMR, the state regulatory groups that drafted the model legislation analyzed by HUD and that were tasked with developing the national registry, commented on whether housing counseling activities of nonprofit organizations should require licensing. (AR at 60-78). While unwilling to support a blanket exemption for all nonprofits because of the potential for the abuse of nonprofit status, CSBS and AARMR encouraged HUD to amend the rule to " allow states the discretion to determine when individuals who work for bona fide non-profit community organizations ... meet the commercial context connotations of the compensation and gain requirement for licensure." ( Id. at 67). Some of the criteria suggested by CSBS and AARMR to be considered included " whether the organization has a tax exempt status as a charitable organization, such as under Section 501(c)(3)," and whether the organization's compensation structure has commissions or other mechanisms " that incentivizes the employees to steer consumers into certain types of loans or whether employees are compensated on a salary basis." ( Id. ).

Many individuals and groups echoed the suggestions of CSBS and AARMR with respect to exempting individuals working for certain nonprofits. Some, like the New York State Banking Department, did so by explicitly referencing their comments. ( Id. at 83) (" [W]e agree with CSBS and AARMR that states should retain the right to exempt bona fide nonprofit housing counselors from the requirements of the S.A.F.E. Act." ). Others did so by discussing 501(c)(3) groups explicitly or nonprofits more generally. For example, Habitat for Humanity and its supporters wrote in to " ask that HUD recognize the legitimate distinction between mortgage transactions entered into by for-profit ...


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