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4th Circuit Sides with HUD

Holding that the Department of Housing and Urban Development’s treatment of Capitol Mortgage Bankers was “fair and reasonable,” the 4th U.S. Circuit Court of Appeals reversed a lower court decision, thereby upholding the agency’s ability to terminate the lender’s right to issue new FHA-insured mortgages in the region. “[W]e find that the informal procedures used by HUD in its termination proceedings provided adequate procedural safeguards and do not constitute a denial of due process of law,” the court said in a per curiam decision.“It makes practical sense,” said Denis J. Murphy, director of Civil Justice Inc. who, along with two students from the clinical program at the University of Maryland School of Law filed an amicus curiae brief on HUD’s behalf. “It will permit HUD to move more swiftly to cut off lenders who have a high rate of default.”While not the main focus of HUD’s dispute with Capitol Mortgage, Murphy’s brief addressed the related predatory trend of real estate mortgage “flipping” — buying an inner-city home at low-cost, making a few improvements to it, and then selling it at an inflated price.While the fact that a lender has a high default rate does not automatically mean it is involved in flipping, Murphy believes it is often a result of something other than proper real estate practices. “I think HUD ought to have the authority to suspend a delinquent lender,” he said, adding that flipping often has an adverse affect on economically disadvantaged neighborhoods by increasing the number of vacant houses.In 1987, Congress enacted the Housing and Community Development Act which required lenders experiencing a higher-than-average rate of early defaults to submit a report explaining the reasons and a plan of action. In 1992, HUD added the “termination regulation,” authorizing HUD to terminate a lender’s Origination Approval Agreement, or OAA, if its default rate exceeded 200 percent of the normal rate.In May 1999, HUD sent a letter to all approved lenders to notify them of this provision.The following month HUD informed Capitol of its decision to terminate the OAA for its branch offices located within HUD’s Baltimore; Washington, D.C.; and Richmond, Va., jurisdictions.Capitol compiled a document listing reasons why HUD should not revoke its participation. HUD scheduled a conference, in accordance with the termination regulation.The deputy assistant secretary for single-family housing notified Capitol in September 1999 that he was sustaining HUD’s decision, whereupon Capitol filed a lawsuit claiming HUD had exceeded its statutory authority and violated Capitol’s right to due process.The U.S. District Court found in favor of Capitol, saying HUD had denied Capitol due process of law by holding an informal hearing as the basis of its termination. HUD appealed.The 4th Circuit, however, said that HUD’s interpretation of the statute was “a reasonable construction of the statutory language and is consistent with legislative intent.”“Because a default rate in excess of 200 percent 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,” the court noted. “HUD needs to quickly and efficiently root out poor performing lenders.” Andrew Lluberes, a spokesman for HUD, said the agency was pleased with the decision, noting that it is “absolutely crucial” that HUD be able to terminate negligent lenders. “It upholds our authority under the law,” he said. “The public is always served when the law is upheld.”