Judge.” For the Court - By Direction /s/ Patricia S. Connor Clerk -- 2 of 12 --… v. ANDREW M. CUOMO, Secretary, United States Department of Housing

Filed: August 2, 2000
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 00-1036
(CA-99-2907-MJG)
Capitol Mortgage Bankers, Incorporated,
Plaintiff - Appellee,
versus
Andrew M. Cuomo, etc., et al.,
Defendants - Appellants.
O R D E R
The court amends its opinion filed July 12, 2000, as follows:
On the cover sheet, section 1 -- the status is changed from
“UNPUBLISHED” to “PUBLISHED.”
On page 2, section 3 -- the section is corrected to read
“Reversed by published opinion. Judge Murnaghan wrote the opinion,
in which Judge Wilkins and Judge Williams joined.”
On page 2, section 5 -- the reference to use of unpublished
opinions as precedent is deleted.

-- 1 of 12 --

- 2 -
On page 2, first line of opinion -- “PER CURIAM” is corrected
to read “MURNAGHAN, Circuit Judge.”
For the Court - By Direction
/s/ Patricia S. Connor
Clerk

-- 2 of 12 --

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
CAPITOL MORTGAGE BANKERS,
INCORPORATED,
Plaintiff-Appellee,
v.
ANDREW M. CUOMO, Secretary,
United States Department of
Housing and Urban Development;
U.S. DEPARTMENTOF HOUSING &
URBAN DEVELOPMENT,
Defendants-Appellants,
and
MORTGAGE LENDING OF AMERICA,
INCORPORATED; CAMERON MORTGAGE
No. 00-1036
COMPANY; FOUR STAR MORTGAGE,
LTD.; RLS, INCORPORATED, d/b/a
Trinity Mortgage Company;
PROGRESSIVE LOAN FUNDING;
MORTGAGE CAPITAL RESOURCE
CORPORATION,
Movants.
NATIONAL TRAINING AND INFORMATION
CENTER; SOUTH EAST COMMUNITY
ORGANIZATION; PARK REIST CORRIDOR
COALITION; ST. AMBROSE HOUSING
AID CENTER; ASSOCIATED
COMMUNITIES ORGANIZED FOR
REFORM NOW,
Amici Curiae.
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
Marvin J. Garbis, District Judge.
(CA-99-2907-MJG)

-- 3 of 12 --

Argued: May 1, 2000
Decided: July 12, 2000
Before MURNAGHAN, WILKINS, and WILLIAMS,
Circuit Judges.
_________________________________________________________________
Reversed by published opinion. Judge Murnaghan wrote
the opinion, in which Judge Wilkins and Judge Williams
joined.
_________________________________________________________________
COUNSEL
ARGUED: Howard Stanley Scher, Appellate Staff, Civil Division,
UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C., for Appellants. Mitchel Howard Kider, WEINER, BRODSKY,
SIDMAN & KIDER, P.C., Washington, D.C., for Appellee. ON
BRIEF: David W. Ogden, Acting Assistant Attorney General, Lynne
A. Battaglia, United States Attorney, Michael Jay Singer, Appellate
Staff, Civil Division, UNITED STATES DEPARTMENT OF JUS-
TICE, Washington, D.C.; Carole Wilson, Angelo W. Aiosa, Clare
Harrigan, Office of General Counsel, U.S. DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT, Washington, D.C., for
Appellants. Denis J. Murphy, CIVIL JUSTICE, INC., Baltimore,
Maryland, for Amici Curiae.
_________________________________________________________________
_________________________________________________________________
OPINION
MURNAGHAN, Circuit Judge:
Capitol Mortgage Bankers, Inc. ("Capitol") filed an action chal-
lenging the termination of its authority to originate single family
2

-- 4 of 12 --

home mortgages insured by the Federal Housing Administration
("FHA"). The Department of Housing and Urban Development
("HUD"), which oversees the FHA home mortgage program, termi-
nated Capitol's authority to originate FHA-insured mortgages because
of an unacceptably high default and claim rate, pursuant to the agen-
cy's termination regulation, 24 C.F.R. § 202.3(c)(2). We must decide
whether HUD exceeded its statutory authority by enacting the termi-
nation regulation, and whether HUD denied Capitol due process of
law by relying on informal procedures in the termination action.
Because we answer both questions in the negative, we reverse the dis-
trict court's order granting summary judgment in favor of Capitol.
I.
The National Housing Act, 12 U.S.C. § 1701 et seq. ("the Act")
was passed by Congress to promote the availability of low and mod-
erate income housing. Under the Act, Congress created the Federal
Housing Administration, which operates a program to insure private
lenders against loss on home mortgage loans, thereby making those
loans more widely available to a greater portion of the population.
Private lenders are authorized by HUD to originate FHA-insured
home mortgage loans with a document called an Origination
Approval Agreement (OAA). Since the FHA program loses money
when too many loans default, and as a result too many lenders submit
claims to cover those losses, the Secretary of HUD is directed by
Congress to "take appropriate actions to reduce losses" under the Act.
See 12 U.S.C. § 1709(r).
In 1987, Congress enacted the Housing and Community Develop-
ment Act, Public Law No. 100-242, which included specific direc-
tives as to the appropriate actions which should be taken to reduce
losses in the FHA program. One provision of the law, codified at 12
U.S.C. § 1735f-11, directed the HUD Secretary to review annually the
rates of "early serious defaults and claims" involving lenders under
the Act, and to require lenders experiencing a rate of early defaults
and claims that was higher than normal to submit a report that would
explain the reasons for the high rate and, "if applicable," set forth a
plan for corrective action. Specifically, 12 U.S.C. § 1735f-11 pro-
vided:
3

-- 5 of 12 --

Direction to Secretary to require mortgagees with above
normal rates of early, serious defaults and claims to submit
reports and take corrective action
(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 notifica-
tion, the Secretary shall require each mortgagee to submit a
report, within a time determined by the Secretary, contain-
ing the mortgagee's (1) explanation for the above normal
rate of early serious defaults and claims; (2) plan for correc-
tive action, if applicable, both with regard to (A) mortgages
in default; and (B) its mortgage-processing system in gen-
eral; 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 Sec-
retary 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 partici-
pation in programs under this Act.
In 1990, HUD promulgated a regulation to comply with the statu-
tory directive contained in § 1735f-11. The regulation was codified at
24 C.F.R. § 202.12(c), and required lenders with a high default rate
who are so notified by the HUD Secretary to submit a report with an
explanation for the high default rate and, "if required by the Secre-
tary," a plan for corrective action.
Two years later, in 1992, HUD promulgated another regulation tar-
geting FHA lenders with high default rates, which we will refer to as
4

-- 6 of 12 --

the "termination regulation." Codified at 24 C.F.R. § 202.3(c)(2), the
termination regulation authorized HUD to terminate a lender's OAA
if the lender's default rate is found by the Secretary to be more than
200% of the normal rate. Specifically, the termination regulation
stated:
(2) Termination of the origination approval agreement -
(ii) Effect of default and claim rate determination.
(A) The Secretary may notify a mortgagee that its
origination approval agreement will terminate 60
days after notice is given, if the mortgagee had a
rate of defaults and claims on insured mortgages
originated in an area which exceeded 200 percent
of the normal rate, and exceeded the national
default and claim rate for insured mortgages. . . .
(B) Before the Secretary sends the termination
notice, the Secretary shall review the census tract
area concentrations of the defaults and claims. If
the Secretary determines that the excessive rate is
the result of mortgage lending in under-served
areas, the Secretary may determine not to termi-
nate the origination approval agreement.
(C) Prior to termination the mortgagee may
request an informal conference with the Deputy
Assistant Secretary for Single Family Housing or
that official's designee. After considering relevant
reasons and factors beyond the mortgagee's con-
trol that contributed to the excessive default and
claim rates, the Deputy Assistant Secretary for
Single Family Housing or designee may withdraw
the termination notice and notify the mortgagee
that it is being placed on credit watch status.
24 C.F.R. § 202.3(c)(2).
5

-- 7 of 12 --

Thus, under the termination regulation, which is being challenged
in this case, the Secretary can terminate a lender's authority to origi-
nate FHA loans based only on a high default rate and an informal
conference, and without any proposal or consideration of a corrective
action plan.
II.
Capitol Mortgage Bankers, Inc. is a mortgage company established
in 1989 and headquartered in Maryland. Capitol provided residential
mortgage loans to first-time home buyers and low to moderate income
and minority home buyers. HUD approved Capitol to originate FHA-
insured home mortgage loans, and the majority of Capitol's business
involved origination of FHA-insured loans.
In May of 1999, HUD sent a letter to all approved lenders indicat-
ing HUD's intent to terminate OAA's in areas where the lender had
a high rate of early default and claims. HUD cited its authority to do
so under the termination regulation, 24 C.F.R. § 202.3(c).
By letter dated June 4, 1999, HUD notified Capitol of its intent to
terminate Capitol's OAA for all Capitol branch offices located within
HUD's Baltimore, Washington, DC, and Richmond field office juris-
dictions. In accordance with the termination regulation, Capitol
requested an informal conference to include both written and oral sub-
missions. Capitol then proceeded to compile a voluminous submis-
sion documenting the reasons why HUD should not terminate
Capitol's participation in the FHA program. In response, HUD sched-
uled a conference.
At the conference, Capitol made its oral submissions and answered
some questions from the HUD officials present. HUD did not present
any support for its termination decision; it merely allowed Capitol to
present its reasons for opposing the termination.
In September of 1999, the Deputy Assistant Secretary for Single
Family Housing notified Capitol that he was sustaining the termina-
tion of Capitol's OAA in the three identified jurisdictions. Capitol
immediately filed this action under the Administrative Procedure Act,
6

-- 8 of 12 --

5 U.S.C. § 702, to review the final action by HUD terminating Capi-
tol's loan origination approval authority. Capitol has claimed that
HUD exceeded its statutory authority under the Act, 12 U.S.C.
§ 1735f-11, by enacting the termination regulation, and that HUD
denied Capitol due process of law by using an informal conference as
the basis for the termination action. HUD has claimed that the termi-
nation regulation is consistent with the Act and that Capitol was
afforded adequate safeguards in the procedures used during the termi-
nation action. The District Court considered cross-motions for sum-
mary judgment, and after the parties agreed that there were no issues
of fact, considered the case for a decision on the record. After a hear-
ing, the District Court found in favor of Capitol on both grounds and
set aside the termination. The government now appeals.
III.
Our review of the District Court's order invalidating HUD's termi-
nation regulation is de novo. Henson v. Liggett Group, Inc., 61 F.3d
270, 274 (4th Cir. 1995). We must determine whether HUD, in its ter-
mination regulation, has adopted a permissible interpretation of 12
U.S.C. § 1735f-11, or more precisely, whether HUD's interpretation
is "a reasonable construction of the statutory language and is consis-
tent with legislative intent." Doolin Sec. Sav. Bank, F.S.B. v. F.D.I.C.,
53 F.3d 1395, 1400 (4th Cir. 1995) (quoting Securities Indus. Ass'n.
v. Board of Governors of the Fed. Reserve Sys., 486 U.S. 207, 217
(1984)).
The Supreme Court has developed a test for determining whether
an agency regulation exceeds the agency's statutory authority. In the
now well-known passage from Chevron U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984), the
Court stated that
[W]hen a court reviews an agency's construction of the stat-
ute 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 Con-
gress 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
7

-- 9 of 12 --

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.
(footnotes omitted). Thus, the first question is whether Congress has
directly spoken to the precise question at issue - namely, whether
HUD is required to consider a corrective action plan before terminat-
ing a lender's OAA, where the lender's default rate exceeds 200% of
the normal default rate.
Section 533 of the Act, 12 U.S.C. § 1735f-11, states that the HUD
Secretary "shall require each mortgagee to submit a report . . . con-
taining the mortgagee's (1) explanation for [the high default rate]; (2)
plan for corrective action, if applicable, both with regard to (A) mort-
gages in default; and (B) its mortgage processing system in general;
and (3) a timeframe within which this corrective action plan will be
begun and completed."
Use of the word "shall" is not ambiguous - the HUD Secretary is
required to take the steps outlined above when dealing with a lender
who has an abnormally high default rate. However, those steps must
include a corrective action plan only "if applicable." Congress did not
indicate under which circumstances a corrective action plan would be
applicable. Thus, there is silence on the relevant matter and Congres-
sional intent is not clear. We must therefore proceed to the second
step of the Chevron analysis and consider, with deference to HUD's
expertise in this area, whether the agency's interpretation of the stat-
ute, as embodied in the termination regulation, is based on a permissi-
ble construction of the statute.
HUD interprets the statute to mean that if a lender's default rate
exceeds 200% of the normal rate, a corrective action plan is not appli-
cable. Because a default rate in excess of 200% of the normal rate
suggests a serious threat to the long term health of the FHA insurance
program, we do not think HUD's interpretation is unreasonable. HUD
needs to quickly and efficiently root out poor performing lenders. Its
consideration of this need in determining when a corrective action
plan is applicable is consistent with Congress' mandate that HUD
"take appropriate actions to reduce losses" under the Act. See 12
U.S.C. § 1709(r). We therefore hold that HUD's interpretation of Sec-
8

-- 10 of 12 --

tion 533 of the National Housing Act, 12 U.S.C.§ 1735f-11, is per-
missible, and the termination regulation is valid.
IV.
Capitol next argues that the informal procedures used by HUD in
the termination action violate its due process rights. "The fundamental
requirement of due process is the opportunity to be heard `at a mean-
ingful time and in a meaningful manner.'" Mathews v. Eldridge, 424
U.S. 319, 333 (1976) (quoting Armstrong v. Manzo, 380 U.S. 545,
552 (1965)). "Due process is flexible and calls for such procedural
protections as the particular situation demands." Id. at 334 (quoting
Morrissey v. Brewer, 408 U.S. 471, 481 (1972)).
Based on these principles, the Supreme Court has developed a
three factor balancing test to determine what type of process is due
before the government can deprive a person or entity of a protected
interest:
[I]dentification of the specific dictates of due process gener-
ally requires consideration of three distinct factors: First, the
private interest that will be affected by the official action;
second, the risk of an erroneous deprivation of such interest
through the procedures used, and the probable value, if any,
of additional or substitute procedural safeguards; and
finally, the Government's interest, including the function
involved and the fiscal and administrative burdens that the
additional or substitute procedural requirement would entail.
Id. at 335.
In this case, the private interest affected by HUD's action is signifi-
cant. Capitol's business relied primarily on origination of FHA-
insured home mortgage loans. The risk of error in the termination
action, however, is minimal. Although HUD relied upon an informal
hearing, it also considered detailed, expert evaluations of objective
data, as well as Capitol's own voluminous submission, in rendering
its termination decision. Capitol was given notice of the pending ter-
mination proceedings and an opportunity to be heard, which, as the
9

-- 11 of 12 --

Supreme Court has stated, form the "essence of due process."
Eldridge, 424 U.S. at 348. Finally, the government's interest in
prompt termination of lenders who threaten the FHA insurance pro-
gram is considerable. HUD is responsible for protecting the overall
health of the FHA insurance program, so that the benefits of that pro-
gram will remain available to home buyers in the future. The addi-
tional time and costs associated with a formal hearing would
substantially burden HUD's ability to discharge its duties efficiently.
Upon consideration of the Eldridge factors, we find that the infor-
mal procedures used by HUD in its termination proceedings provided
adequate procedural safeguards and do not constitute a denial of due
process of law. Our conclusion finds support in Doolin Sec. Sav.
Bank, F.S.B. v. FDIC, 53 F.3d 1395 (4th Cir. 1995). In Doolin, the
FDIC terminated the Doolin Security Savings Bank's participation in
the FDIC insurance program. The bank challenged the agency's
action and claimed that the informal procedures relied upon by the
FDIC violated the bank's due process rights. Those procedures
involved advance notice of the action proposed by the agency and an
opportunity to present a written submission opposing the proposed
action. After considering the Eldridge factors, this court held that the
informal procedures used by the FDIC satisfied due process. Because
the private and governmental interests at stake in Doolin are similar
to those in the instant case, and the procedures challenged in this case
are in fact more extensive than those upheld in Doolin, we find that
Capitol's due process challenge must fail.
HUD's treatment of Capitol was fair and reasonable. We therefore
hold that HUD did not deny Capitol due process of law by relying on
informal procedures in the termination action.
V.
For the foregoing reasons, the District Court's order granting sum-
mary judgment in favor of Capitol Mortgage and invalidating HUD's
termination regulation is
REVERSED.
10

-- 12 of 12 --