In Freeman v. Quicken Loans, Inc., October Term, 2011 No. 10-1042, May 24, 2012, the Supreme Court, in a unanimous opinion written by Justice Antonin Scalia, held that Real Estate Settlement Procedures Act Section 8b does not cover a settlement service provider’s assessment of an unearned fee where the fee is not split with another party: “[RESPA § 8(b)] unambiguously covers only a settlement-service provider’s splitting of a fee with one or more other persons; it cannot be understood to reach a single provider’s retention of an unearned fee” (emphasis added). Justice Scalia rejected application of the Chevron doctrine (Chevron USA Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)), under which the court grants deference to administrative agency positions (so-called “Chevron deference”). The Department of Housing and Urban Development (“HUD”) had provided both by regulation and a 2001 Policy Statement that an unearned settlement fee, regardless whether it was “split” between two parties, was prohibited by Real Estate Settlement Procedures Act Section 8(b). Notwithstanding this longstanding agency position, the court held that Chevron does not apply where the statute, as here, was unambiguous.

The parties had furiously debated the proper application of Chevron, the Petitioner allocating nineteen plus pages in its briefs, and the Respondent fifteen plus pages in its brief. Petitioner argued that Chevron required deference to HUD’s regulations as construed by HUD. HUD’s regulation seemed very clear:

“A charge . . . for which no . . . services are performed . . . is an unearned fee and violates this section.”

HUD had consistently interpreted its regulation as prohibiting unearned fees, whether split or not. Petitioners argued that deference was also due to HUD’s unambiguous 2001 Policy Statement, which interpreted RESPA Section 8(b) to prohibit unearned fees, split or not: 

“Section [8(b)] forbids [unearned fees] . . . whether the entire charge is divided or split among more than one person or entity or is retained by a single person" (emphasis added). 2001 Policy Statement.

The Fifth Circuit panel had rejected Chevron deference because it found that the statute was unambiguous, requiring two parties – a giver and receiver; i.e., a “split.” In addition, HUD’s Policy Statement did not merit Chevron deference because it did not follow the rule-making guidelines of the Administrative Procedures Act.

At the Supreme Court the Petitioner emphasized prior language of the court focusing on Congressional intent: “[T] he ultimate question is whether Congress would have intended, and expected, courts to treat an agency’s rule, regulation, application of a statute, or other agency action as within, or outside, its delegation to the agency of ‘gap-filling’ authority.” Petitioner pointed to Congressional acquiescence by silence, RESPA’s delegation to HUD referencing both “regulations” and “interpretations,” and RESPA’s civil liability shield for “actions done in conformity with any rule, regulation, or interpretation.”

Respondent in Quicken argued that RESPA Section 8(b) unambiguously did not reach unsplit fees. It also argued the rule of lenity: where a statute provides for potential criminal liability any ambiguity should be resolved in favor of the narrower reading. As to the application of Chevron deference, Respondent argued that Chevron only applies to “gap-filling,” and in Section 8(b) the Congress “left no gap to fill: it spoke directly to the issue of what practices are prohibited. . .” Whatever conceivable ambiguity existed was “not the type of ambiguity that invites agencies to fill the statutory interstices with their own expert policy judgments.” Respondent went on to argue that RESPA Regulation X was both procedurally defective and arbitrary and capricious, because the rule as proposed to the public did not deal with the “undivided fee” issue and because HUD did not provide a reasoned explanation for its action in the rulemaking.

Finally, Respondent argued that HUD’s 2001 Policy Statement was not entitled to Chevron deference because it was labeled as “guidance” and because it was issued without notice and comment. Respondent asserted that such an interpretive ruling does not “carry the force of law,” citing Mead (533 U.S. at 232) for the proposition that “interpretive rules … enjoy no Chevron status as a class.”

In oral argument, the Justices spent most of their time on the wording of the statute, and the question whether there was any ambiguity. Justice Scalia steered Quicken’s counsel on the deference question: 

“We don’t give deference to interpretations that are beyond the limits of what the language will bear, do we?”

When it came to the question whether a Policy Statement like HUD’s 2001 pronouncement on unearned fees was entitled to deference, the Justices seemed favorably disposed to grant deference, were they to have found an ambiguity in the statute, especially because RESPA gave HUD specific authority to promulgate regulations and interpretations. Justice Scalia remarked “we give deference to legal opinions all the time.”

The unanimous decision of the Court reflected the conclusion evident from oral argument that the statute was unambiguous: it contemplates two distinct exchanges, i.e., one person making or receiving a charge and another person accepting a “portion, split, or percentage” of that charge. Ergo, no need to apply Chevron.

Thus the Court did not reach the question of whether a Policy Statement like HUD’s 2001 Policy Statement should be accorded Chevron deference – and if Chevron did apply, whether that deference would be eliminated by, as the Court put it, “the Policy Statement’s palpable overreach.” The statute was unambiguous and the Policy Statement “goes beyond the meaning that the statute can bear.”

And thus the debate over policy statements (and other regulatory pronouncements, opinions, etc. that do not bear all that goes with the APA Notice and Comment rigor) is left for another day.

Next up may be HUD’s proposed rule on fair lending (disparate impact), the Consumer Financial Services Bureau’s disparate impact bulletin 2012-04 (Fair Lending) and the 1994 Interagency Task Force on Fair Lending Policy Statement on Discrimination in Lending, all of which stake out the position that a violation of the fair lending laws may be proven by, among other methods, “evidence of disparate impact,” also known as the “effects test”: 

When a lender applies a policy or practice equally to credit applicants, but the policy or practice has a disproportionate adverse impact on applicants from a group protected against discrimination, the policy or practice is described as having a “disparate impact.” Policies and practices that are neutral on their face and that are applied equally may still, on a prohibited basis, disproportionately and adversely affect a person’s access to credit…. Evidence of discriminatory intent is not necessary to establish that a policy or practice adopted or implemented by a lender that has a disparate impact is in violation of the FH Act or ECOA. (From the Interagency Policy Statement on Discrimination in Lending)

The creditor industry has questioned whether fair lending liability can be based upon conduct that is “neutral on its face” where there is no intent to discriminate; i.e. whether the regulations, as applied through Policy Statements, are contrary to the statutes. The HUD proposed rule is no doubt part of an agency strategy to secure Chevron deference, should the litigation need arise. By employing the APA notice and comment process, HUD is maximizing the likelihood that the Supreme Court will defer to HUD’s interpretation. The creditor industry may be forced to litigate the final rule when it is issued in order to avoid that deference.

As for the CFPB Guidance and the 1994 Interagency Guidance, query whether the absence of notice and comment will prove fatal when and if enforcement action based upon disparate impact is challenged. And of course, as we learned from Quicken, all may hinge on whether the Justices determine that the fair lending statutes, like RESPA, are unambiguous, and reach only intentional discrimination.