Bank Fees Wcco

Should the HVCC settlement be treated as an agency rulemaking?

On March 3, 2008, the New York Attorney General’s office
(“NY AG”) announced that an important settlement deal had been
reached with the two giants of the secondary mortgage market, the
Federal National Mortgage Association (“Fannie Mae” or
“Fannie”) and the Federal Home Loan Mortgage Corporation
(“Freddie Mac” or “Freddie”), and Fannie and
Freddie’s primary regulator, the Office of Federal Housing
Enterprise Oversight (“OFHEO”). (448) The NY AG agreed to
cease its investigation of whether the two corporations were complicit
with other financial institutions in illegally inflating home values.
(449) In return, Fannie and Freddie agreed to a new policy of only
purchasing mortgages from banks that would abide by a new set of
appraisal standards, the Housing Valuation Code of Conduct
(“HVCC”). (450) Due to Fannie and Freddie’s substantial
market share (451) in the secondary mortgage industry, observers
immediately recognized that the impact of the agreement would be
widespread, effectively requiring every mortgage lender in America to
abide by the terms of the HVCC. (452)

However, the HVCC soon received hefty criticism from a variety of
other interested parties. Very few supporters of the HVCC emerged;
appraisers’ groups, mortgage bankers’ groups, and even other
government agencies all began to clamor about the code’s
insufficiencies. (453) Though the HVCC’s goal of creating an
appraisal process truly independent from the loan generation process was
generally supported, the critics alleged that the HVCC imposed
significant changes on the mortgage industry but still would not result
in increased appraiser independence. (454) A number of the HVCC critics
further expressed frustration that their opinions on the agreement were
not sought out before the agreeing parties entered the deal. (455)

These complaints raise a unique and interesting legal issue: Should
the settlement entered into by the OFHEO be subject to the rulemaking
requirements of the Administrative Procedures Act (“APA”)? Or,
put more broadly, if an agency enters into a settlement agreement to
resolve a pending judicial matter, is the agreement always an
adjudicatory action, or are there instances where the settlement should
be required to allow for notice and comment pursuant the APA? This note
will argue that, at least in this circumstance, the Cuomo settlement
agreement should be thought of as an agency rulemaking, and therefore
should have been subjected to notice and comment procedures.

This article begins by providing a complete background to the HVCC,
including a discussion of how it came about, why the OFHEO was involved,
and what the HVCC’s provisions actually entail. Then it discusses
the statutory procedures set forth by the APA for each type of agency
action–formal adjudication, formal rulemaking, informal adjudication
and informal rulemaking, and when those procedures are triggered.
Lastly, this article argues that the settlement entered into by the
OFHEO is best thought of as a rulemaking, not adjudication, and
therefore should be required to abide by notice and comment requirements
set forth by the APA.


It’s no secret: we are in the midst of a housing crisis. Since
late 2006, the frequency of home foreclosures has dramatically risen
even as home prices continue to fall. (456) At the same time, it has
become more difficult for prospective home owners to obtain mortgages.
(457) Home values, which saw outstanding growth in the earlier part of
the past decade, (458) have seen significant declines in a variety of
communities across the country. (459) And, of course, the effect of the
housing market collapse continues to be felt across the broader economy
as well; mortgage-backed securities have proven to be risky investments,
implicated by many experts as a primary cause of the “credit
crunch,” and ongoing economic downturn. (460)

But what created the housing market bubble in the first place?
Observers have identified several causes of the housing market collapse,
including the structure of subprime loans, a failure of government
oversight of the lending process, ignorant (or overly optimistic) home
buyers, and the inflation of home values in the early twentieth century.
(461) Addressing the various causes of the housing market fall was a top
priority for numerous elected officials in the 2008 legislative session,
and a variety of bills were introduced to confront both the sources and
ramifications of the housing market collapse. (462) These efforts
culminated with the passage of the Housing and Economic Recovery Act of
2008 and the creation of the Federal Housing Finance Agency
(“FHFA”).463 The legislation “strengthens and modernizes
the regulation” of Fannie and Freddie and “expands the[ir]
housing mission” while also “providing for new … loans after
lenders take deep discounts.” (464)

A. the CUOMO approach

For his part, New York Attorney General (and former Secretary of
Housing and Urban Development under President Clinton, from 1997 to
2001) Andrew Cuomo looked to address one source of the problem from a
judicial, rather than legislative, approach. In 2007, he began
investigating whether lenders had been asserting influence on real
estate appraisers to encourage the inflation of home values. (465) Cuomo
believed that there may have been prosecutable collusion between lenders
and appraisers, done in the interest of garnering lenders more debt.
(466) In late 2007, Cuomo expanded his investigation to include Fannie
Mae and Freddie Mac, questioning whether these mortgage purchasers’
due diligence procedures systematically failed to examine whether home
values had been inflated. (467)

Fannie and Freddie never admitted to any wrongdoing but nonetheless
agreed to a settlement agreement with Cuomo and the New York Attorney
General’s Office, in early 2008.468 The agreement is simple: it
restricts Freddie and Fannie to purchasing mortgages only from lenders
that demonstrably uphold the Home Valuation Code of Conduct. (469) This
means that the HVCC is voluntary, at least in principle. A lender is
only required to abide by the HVCC if it wishes to sell any of its
mortgages to Freddie or Fannie. However, in reality, Freddie and Fannie
purchase a majority of the mortgages sold on the secondary market,
purchasing some mortgages from every mortgage originator in America.
(470) Accordingly, the practical impact of the Cuomo settlement
agreement was that every mortgage originator would have to adopt the
HVCC or find some way to avoid dealing with Freddie and Fannie.

One intriguing but essential detail about the Cuomo settlement
agreement is the parties involved. Obviously, the NY AG’s office
and Fannie Mae and Freddie Mac were parties to the accord. But, the NY
AG also brought the OFHEO in on the discussion process, getting the
agency’s input when drafting the HVCC and, ultimately, getting the
agency’s approval on the settlement agreement. (471) The OFHEO,
though it was never implicated or investigated for any wrongdoing, was
made a party to the final settlement. (472)


The reason for bringing the OFHEO on board for the settlement
discussion has to do with the unique nature of Government Sponsored
Enterprises. Freddie and Fannie are both GSEs. This means that they are
private corporations, but that they were originally chartered by the
federal government. Fannie Mae was chartered in 1968, primarily in order
to purchase mortgages to increase availability of lending funds and to
provide assistance those unable to obtain adequate housing. (473)
Similarly, Freddie Mac was chartered in 1970, to create a competitive
market with Fannie Mae. (474) In this way, both charters entrust the
corporations with important public policy goals.

Because of their public policy function, the corporations have
historically been tightly regulated, and have been the recipients of
certain special privileges. For example, Freddie and Fannie enjoy
special tax breaks, exemptions from some Securities and Exchange
Commission (“SEC”) regulations, and special lines of credit at
the U.S. Treasury. (475) However, Fannie and Freddie have always been
private corporations. Though closely regulated by the OFHEO, the GSEs
are independently owned and operated.

Accordingly, the GSEs are not administrative agencies. The OFHEO,
however, is a federal agency. The OFHEO’s responsibilities include
consistently monitoring the fiscal health of Fannie and Freddie,
developing capital standards for the GSEs, simulating the impact of
various interest rate and credit scenarios; making quarterly findings of
capital adequacy at the GSE s, and enforcing its regulations where
appropriate. (476) With respect to the Cuomo settlement, the OFHEO was
brought into the settlement discussions, and helped created the HVCC
before signing off on the official settlement agreement. (477)

C. the home valuation CODE OF conduct

As mentioned above, the settlement agreement itself is rather
minimal. Simply put, Freddie and Fannie agreed to only buy mortgages
from lenders upholding the new HVCC appraisal standards. (478) The HVCC
is a somewhat more substantial document, which would impose significant
restrictions on any lenders choosing to adopt it. To understand why so
many industry groups were unhappy with the HVCC, it is necessary to
understand those restrictions.

It should be noted that the overarching goal of the HVCC is clear:
appraisals truly independent from the lending process. Generally
speaking, this goal is a worthwhile one. Surveys of appraisers
throughout the past decade have consistently indicated that there is
widespread and increasing pressure from lenders to inflate home values.
(479) Why would lenders want to inflate the value of the homes? For the
individual mortgage broker, a more expensive loan results in a bigger
commission. (480) Appraisers are willing to similarly inflate the home
value in order to appease brokers and, hopefully, get repeat business.
(481) For lending institutions, a high appraisal value means that the
collateral backing the loan is worth more, reducing the lender’s
risk. (482)

To accomplish its goal, the HVCC included several provisions that
became controversial. Most importantly, the code stated that “[n]o
employee, director, officer, or agent of the lender … shall …
influence the development, reporting, result, or review of an appraisal
through coercion … or in any other manner.” (483) To that end,
the HVCC prohibited mortgage lenders from getting appraisals from
in-house appraisers, affiliates of the lenders, or entities owned by or
owning the lender. (484) Additionally, the HVCC mandated separation
between the lender’s staff that is ordering the appraisals and the
staff that is producing the mortgage loans. (485) To enforce these
restrictions, the HVCC also provided for the creation of the Independent
Valuation Protection Institute. (486) The institute would be an
independent organization, funded by the GSEs that would monitor
compliance with the HVCC rules and investigate any complaints of
improper influence being asserted on appraisers. (487)


The design of the HVCC was met with wide disdain by the lending
industry, appraisal groups, and a variety of other governmental groups.
Due to this response, the parties to the Cuomo settlement permitted
interested parties and affected groups to make written comments on the
HVCC for a period of 45 days, even though the code had been created and
agreed to without any opportunity for public comment. (488) Generally,
these written comments contained wide approval of the goal of the
agreement, but institutions expressed a variety of concerns about the
impact of the agreement. The Appraisal Foundation, for example, noted
that there was little evidence that the only appraisers feeling pressure
to inflate values were those working directly for lenders. (489) In
fact, the appraisers’ group contended that independent appraisers
were just as likely to be encouraged to inflate values and the HVCC
would therefore be ineffective. (490) The Appraisal Institute agreed,
and further noted that the HVCC would destroy “well-established
business relationships between honest appraisers and reputable mortgage
professionals.” (491)

The Office of Thrift Supervision stated that “[i]mposing a
requirement that all lenders must outsource appraisals will not ensure
appraiser independence and may make regulatory enforcement more
difficult.” (492) The Office of the Comptroller of

Currency noted that “the organizational placement of the
function that provides an appraisal is not determinative of the
appraisal’s quality.” (493) These government agencies both
agreed that existing laws may be sufficient to protect the independence
of the appraisal process and that the best way to achieve the goal of
independent appraisals was not “by dictating the corporate and
internal organizational structures of lenders.” (494)

The Mortgage Bankers Association, National Association of Mortgage
Bankers, and other lender groups had similar complaints. (495) Consensus
in the industry seemed to be that the HVCC would likely result in job
losses for appraisers, the proliferation of automated valuation models
(which are not covered by the HVCC), and more expensive mortgage costs
for consumers. Worst of all, few of the interested parties seemed to
believe that the new code would, in fact, ensure independence between
appraisers and lenders. (496)


Both the HVCC itself and the regulatory structure of mortgage
industry oversight changed substantially between the creation of the
Code and its scheduled implementation. First, on July 24, 2008, the
Housing and Economic Recovery Act of 2008 was passed. (497) This
legislation created the FHFA, a combination of the OFHEO and the Federal
Housing Finance Board. (498) Accordingly, as a matter of institutional
organization, the OFHEO became a subpart of the FHFA. However, this
transfer had no impact on the substance or applicability of the Cuomo
agreement. Pursuant the Housing and Economic Recovery Act, all existing
decisions made by the OFHEO were to remain effective until and unless
modified by the FHFA. (499)

On September 7, 2008, the federal government went a step further to
prop up Fannie and Freddie, when it bought out the two companies. (500)
The two GSEs had been suffering through mounting losses after the
housing bubble burst. (501) Rather than allow the companies to shut
down, the government seized control; top executives were removed, and
the U.S. Treasury took an immediate $1 billion equity in each
company’s stock. (502) The conservatorship agreement additionally
meant that the FHFA would operate Freddie and Fannie, and that the U.S.
Treasury would extend additional funding to the companies. (503) This
action undoubtedly caused some major changes at the GSEs and
fundamentally shifted the relationship between government agencies and
Freddie and Fannie. However, the Cuomo agreement was unaffected. The
conservatorship did not effect any of the existing contracts to which
the GSEs were a party, (504) and the OFHEO maintained that the agreement
imposing the HVCC on lenders wishing to sell mortgages to the GSEs would
go forward as planned. (505)

As for the HVCC itself, in late December, the FHFA announced that
it was rescheduling the effective date for May 1, 2009.506 The delay to
the agreement’s effective date was imposed largely because the FHFA
made substantial changes to the HVCC based on comments received from
interested parties after the agreement was first announced. (507) The
FHFA maintained that the revised HVCC would “increase the
reliability of appraisals … and help assure that borrowers, homebuyers
and secondary mortgage market investors receive fair and independent
property valuations.” (508) Most significantly, the revised HVCC
included several exceptions to the original rule that lenders could not
use appraisals generated by the lender or its affiliates. (509)

More specifically, the revised version of the HVCC only applies to
appraisals used for single-family mortgage loans sold to the GSEs; it
does not impose restrictions on other loans. (510) It allows lenders to
use reports prepared by in-house appraisers and affiliates as long as
certain conditions are met. First, an appraiser cannot report directly
to a sales or loan production department. (511) Second, sales or loan
production employees cannot select, retain, recommend, or influence the
selection of appraisers. (512) Third, nor can the sales or production
employees have substantive communications with an appraisers relating to
or having an impact on valuations. (513) Fourth, the lender or its
agents cannot provide the appraiser any estimated or target value of the
property or the loan. (514) Fifth, an appraiser’s compensation
cannot depend on the value arrived at in an appraisal or upon the
closing of a loan. (515) Sixth, the lender must have written policies
implementing HVCC, including procedures for training and discipline.
(516) Seventh, a lender’s appraisal functions must be annually and
independently audited, with reports to the GSEs of irregular findings.
(517) Additionally, the revised HVCC allows lenders, to accept an
appraisal prepared for a different lender that has adopted the Code.


Undoubtedly, the FHFA must have hoped that the substantive changes
to the HVCC would garner the code more support amongst the mortgage
industry. This has not been the case. Appraisers continue to warn that
the HVCC does not apply to appraisal management companies, although the
Director of the FHFA disagrees. (519) More recently, the National
Association of Mortgage Bankers (“NAMB”) filed a lawsuit over
the HVCC in the U.S. District Court for the District of Columbia. (520)
The NAMB maintains that the HVCC will result in “unavoidable
increase in costs to consumers.” (521) Additionally and more
intriguingly, the NAMB lawsuit argues that the HVCC is a de facto
informal agency rulemaking and should therefore be subject to the notice
and comment requirements of the APA. (522) The implementation of the
HVCC may now be put on hold until this lawsuit is resolved, or, if the
NAMB argument is persuasive, the HVCC may be abandoned all together.

The second portion of this article will discuss the different types
of agency action as well as the procedural requirements imposed by the
APA for each. Then in the third part, the article discusses whether the
Cuomo agreement should, as the NAMB believes, be thought of as an
informal rulemaking.


Before assessing whether the Cuomo Agreement is, as the NAMB
lawsuit contends, an informal rulemaking subject to notice and comment
requirements, one must first understand the differences between the four
categories of agency action as well as the procedural requirements that
exist for each.


   First and foremost, it bears noting that the APA divides the
   universe of agency actions into two broad categories: rulemakings
   and adjudications. The APA defines a rule as the whole or a part of
   an agency statement of general or particular applicability and
   future effect designed to implement, interpret, or prescribe law or
   policy or describing the organization, procedure, or practice
   requirements of an agency and includes the approval or prescription
   for the future of rates, wages, corporate or financial structures
   or reorganizations thereof, prices, facilities, appliances,
   services or allowances therefore or of valuations, costs, or
   accounting, or practices bearing on any of the foregoing. (523)

A rulemaking includes formulating, amending, or repealing a rule.
(524) Adjudication, on the other hand, is the “agency process for
the formulation of an order.” (525) ‘Order’ is defined as
“the whole or a part of a final disposition, whether affirmative,
negative, injunctive, or declaratory in form, of an agency in a matter
other than rulemaking.” (526) In other words, the APA broadly
defines what a rule is, and then defines adjudication in the negative:
adjudications are agency actions that are not rules.

The APA also distinguishes between formal and informal rules and
adjudications. Formality is not a term specifically defined by the APA;
however, additional procedural steps are outlined for rulemakings that
are “required by statute to be made on the record after opportunity
for an agency hearing.” (527) In today’s world, these
“formal” rulemakings are rare. (528) Similarly, formal
adjudications are those adjudications that are required by statute to be
determined on the record and with an opportunity for a hearing. (529)
All other rules and adjudications are informal.

There can be little doubt whether the Cuomo agreement is a formal
agency action. It is not. The APA establishes similar, extensive
procedural requirements for both formal rulemakings and formal
adjudications. These requirements are triggered when the agency action
is required by statute to be made on the record and after an opportunity
for a hearing. (530) But, in the case at hand, the Cuomo agreement was
not made pursuant to a statute at all. The agreement settled a judicial
suit; there is no statutory requirement requiring that an agency make
such determinations on the record or with an opportunity for a hearing.
Accordingly, the agreement is either an informal rulemaking or an
informal adjudication.

Unlike the procedural requirements for formal agency actions,
however, the procedural rules for informal rulemaking and adjudication
are quite different. First, the informal rulemaking process laid out by
the APA requires, first, that the agency creating the rule supply
“notice of [the] proposed rule … in the Federal Register, unless
persons subject thereto are … personally served or … have actual
notice.” (531) This notice must include the time, place, and nature
of the rulemaking proceedings, a statement of legal authority to make
the rule, and the terms of the rule or at least a description thereof.
(532) After providing notice, an agency engaging in rulemaking must
provide an avenue for interested parties “to participate in the
rulemaking through submission of written data, views, or
arguments.” (533) On the other end of the spectrum, informal agency
adjudications have no specific procedural requirements set forth by the


These different procedural requirements bring into sharp the relief
the importance of determining whether an informal agency action is a
rulemaking or an adjudication. Though the APA clearly defines both
rulemakings and adjudications, however, distinguishing between the two
can be challenging at the margins. To reiterate, the APA defines a rule,
in pertinent part, as “the whole or a part of an agency statement
of general or particular applicability and future effect designed to
implement, interpret, or prescribe law or policy.” (534) Courts
have gone so far as to hold that this definition “includes
‘virtually every statement an agency may make.'” (535)
However, the APA definition of “order” implicitly acknowledges
that some informal agency actions fall outside the realm of rulemakings
and should be considered informal adjudications. (536) The clearest
long-standing distinction between rulemakings and adjudications actually
comes from two cases that preceded the APA Londoner v. City and County
of Denver, and Bi-Metallic Investment Co. v. State Board of


Both Londoner and Bi-Metallic concerned Colorado tax provisions,
and established that Constitutional due process rights apply to agency
adjudications, but not agency rulemakings. First, in Londoner, the City
of Denver, via its Board of Public Works, levied a tax on only a limited
number of properties in the city. (537) The assessment of the tax was
clearly permitted by the city charter, but the individuals being
assessed were only permitted to challenge the tax via a filed complaint,
without an opportunity for a hearing. (538) The Supreme Court held that
the individuals had a due process right to be heard in person and to
present evidence to the tax board, because the tax constituted an
adjudicative, rather than rulemaking, action. (539) The Londoner Court
justified its holding, first and foremost, by noting that the tax was
assessed on a limited number of individuals, based on particularized
individual facts and circumstances for each individual. (540) Because
the tax was not generally applicable, the Court held it was more likely
to be adjudicatory in nature. (541)

But, conversely, the Supreme Court in Bi-Metallic held that a
different Colorado tax was a rulemaking, and not an adjudication, in
nature. In that case, the State Board of Equalization and the Colorado
Tax Commission assessed an increased property tax on all property in the
city of Denver. (542) Bi-Metallic argued that, following the
Court’s reasoning in Londoner, due process had been violated
because individuals affected by the decision of the Board were not given
an opportunity to individually comment on and present evidence
concerning the tax increase. (543) The Supreme Court reiterated the
Londoner rule that adjudicative agency actions require due process
whereas rulemakings do not. (544) However, the Court distinguished the
tax assessed in Londoner from the tax assessed in Bi-Metallic, and
determined that the Bi-Metallic tax was a rulemaking, not an
adjudication. (545) The primary distinction offered by the Supreme Court
concerned the impact of the tax. (546) The Court reasoned that broad
policies and principles of general application were legislative in
nature and therefore more likely to be rulemakings, not adjudications.

2. additional distinguishing factors

This Londoner/Bi-Metallic distinction provides a basic framework
for analyzing whether an agency action is adjudicatory, but it does not
provide a clear test for determining whether a particular action is a
rulemaking or adjudication. Two factors that can further explain the
distinction are whether the agency action is individualized in nature
and whether the action will have a future effect.


The first factor to consider when determining whether an agency
action is a rulemaking or adjudication is what class of individuals the
action will impact. Professor Lawrence Tribe contends that the measure
of adjudication may be whether the action singles out identifiable
individuals; an action that does should be considered adjudicatory in
nature. (548) This reasoning gets support from the Bimetallic Court,
which noted that it would be unfeasible to allow every citizen of Denver
to have an individualized hearing concerning their tax. (549) The Court
stated that if it would be infeasible to provide hearings to each party
affected by an action, the action was more likely to be a rulemaking.
(550) A similar approach distinguishes adjudication and rulemaking based
on the type of facts in question, noting that “adjudicative facts
usually answer the questions of who did what, here, when, how,
why,” whereas legislative facts are “facts … of law and
policy and discretion.” (551) The distinction relies on the idea
that legislative facts “transcend individual disputes;”
accordingly, actions involving legislative facts are more likely to be
rulemakings. (552)


The second important factor in determining whether an agency action
is a rulemaking or adjudication comes from the APA definition itself.
The APA specifically states that rulemakings have “future effect
designed to implement, interpret, or prescribe law or policy.”
(553) The District of Columbia Appeals Court recognized the importance
of the term “future effect” in Sugar Cane Growers Cooperative
of Florida v. Venetian. (554) At issue in that case was a Department of
Agriculture renewal of a sugar price support program. (555) The agency
argued that the renewal should not have to abide by the APA’s
notice and comment requirements because it was an informal adjudication,
not a rulemaking. (556) The court firmly disagreed; in finding that the
renewal was a rulemaking, the Court relied substantially on the fact
that “the sanctions … [would] be imposed on participants … in
future years.” (557) The court concluded that “[i]t is simply
absurd to call this anything but a rule by any other name.” (558)

As Sugar Cane Growers shows, an agency’s determination that it
is undertaking a rulemaking or adjudication is not dispositive. Where an
agency incorrectly attempts to frame its action as something other than
a substantive rulemaking, courts will enforce the APA notice and comment
requirements for informal rulemakings. For example, in National Treasury
Employees Union v. Reagan, the Eastern District of Louisiana held that
an agency guidance letter was subject to the APA’s notice and
comment requirements. (559) Though guidance letters are usually
considered interpretative rules, and therefore exempted from notice and
comment, because the letter’s guidelines “contain[ed]
mandatory instructions” which were not imposed by law, the letter
was considered an informal rulemaking, subject to notice and comment.

In the next part, this article will use these factors and existing
case law to determine whether the Cuomo Agreement is best thought of as
a rulemaking or adjudication.


Though it is technically a litigation decision, a strong argument
can be made that as a matter of law and policy, the Cuomo agreement may
be best thought of as an informal rulemaking, not an informal


Generally speaking, “a litigation decision to enter into a
settlement agreement does not require notice and comment.” (561)
This follows the Londoner/Bi-Metallic reasoning. An agency’s
litigation decisions generally involve a discrete number of parties: the
parties to the lawsuit. If the Environmental Protection Agency
(“EPA”) brings an individual facility to court for persistent
permit violations and later determines that it wants to settle the case
with the facility, the decision to settle is clearly an informal
adjudication. The EPA’s litigation decision affects only the one
facility. Additionally, the decision to settle has no “future
effect designed to implement, interpret, or prescribe law or
policy.” (562)

That being said, agreements between agencies and individual private
parties can be rulemakings as opposed to adjudications. For example, in
Chem Service v. Environmental Monitoring Systems Laboratory–Cincinnati
of United States Environmental Protection Agency, the Third Circuit
Court of Appeals held that a memorandum of understanding between a
single chemical accrediting association and the E PA was an agency
rulemaking. (563) The memorandum in question established technical
specifications that a manufacturer had to meet in order to label its
products as ‘certified.’ (564) Under the agreement, the EPA
and the accrediting institution “develop[ed] equivalent technical
specifications and requirements for reference materials.” (565) The
court held that the memorandum was a rule because it was “a
statement of general applicability and future effect designed to
implement” a particular policy; though the agreement was between
just the agency and the accrediting group, the standards set forth by
the agreement applied more broadly to all manufacturers. (566)

The District Court of Colorado made a similar determination in
National Association of Psychiatric Treatment Centers for Children v.
Weinberger. (567) In that case, the Office of Civilian Health and
Medical Program of the Uniformed Services, a government agency,
published a notice in the Federal Register indicating that each of the
“Residential Treatment Centers” under its auspices would need
to enter a new participation agreement with the agency. (568) The agency
further defined the contents of its future participation agreements.
(569) The plaintiffs contended that this constituted a rulemaking; the
agency defended itself by arguing that the proposals only applied to
treatment centers that chose to enter into a participation agreement,
and that the implementation of a single participation agreement was an
adjudication, not a rulemaking. (570) The court, however, disagreed,
finding that the agency action had “the characteristics of a
rule;” (571) the notice created “a new standard or policy to
apply to future facts” and “impose[d] obligations on …
groups, not only isolated persons.” (572) Accordingly, the court
held that the notice was a rulemaking and was subject to the notice and
comment requirements of the APA. (573)


In determining whether the Cuomo agreement is an adjudication or
rulemaking, one should first understand that neither the NY AG nor the
OFHEO has the power to impose regulations upon the entire mortgage
industry. The NY AG, obviously, has no legislative power; attorneys
general are part of the executive branch of government, giving legal
advice to executive governmental administrations and overseeing the
prosecution of violators of the law. (574) The OFHEO, though an
administrative agency, is constrained in the scope of its regulatory
powers by its authorizing statute. That statute granted the OFHEO,
through the Department of Housing and Urban Development, “general
regulatory power over each enterprise [Fannie and Freddie].” (575)
Accordingly, the OFHEO’s mission is “to promote housing and a
strong national housing finance system by ensuring the safety and
soundness of [Fannie and Freddie].” (576) Thus, the OFHEO may
regulate the GSEs but has no more authority to directly regulate
mortgage lenders than the NY AG.

The settlement agreement appears to be a way for the NY AG and the
OFHEO to get around this obvious constraint on their legislative powers.
The practical impact of the agreement most directly imposes rules on
mortgage lenders, which neither the NYAG nor the OFHEO may regulate.
But, because the agreement only applies affirmative duties to the GSEs
(leaving lenders free to choose whether they wish to abide by the HVCC
or to cease selling mortgages to Fannie and Freddie) the OFHEO may argue
that the agreement’s regulative components are within the scope of
the agency’s authorization.

Of course, even operating under the assumption that the
agreement’s provisions only regulate the GSEs, the OFHEO may not
engage in rulemaking without fulfilling the procedural requirements of
the APA. Were the HVCC requirements simply a new rulemaking imposed by
the OFHE O without any notice and comment period, then, the analysis
would be simple: that would be a clear violation of the APA. But,
because the NY AG was investigating the GSE s in relation to a criminal
prosecution, the NY AG and OFHEO may argue that they were only making
strategic trial decisions. Accordingly, the OFHEO can argue that its
participation in creating and imposing the HVCC requirement was not a
rulemaking, but an acceptable informal adjudicatory action to resolve a

On its face, this argument that the agreement is adjudicatory in
nature is appealing. The Cuomo agreement does only apply to two parties:
Freddie and Fannie. (577) And, ostensibly, the agreement only applies to
the two GSEs; lenders are given the option of complying with the HVCC or
no longer doing business with the GSE s. Following that conclusion, the
Londoner/Bimetallic rule would seem to suggest that the agreement should
be thought of as an adjudication because it has a very discrete impact.


However, in reality, the Cuomo agreement is in many ways more
similar to the agreement in Chem Service and the notice in Psychiatric
Treatment Centers than to a typical settlement rising out of a
litigation decision. When one considers who will be impacted by the
agreement as well as its future effect, it becomes clear that the
agreement is best thought of as a rulemaking. Therefore, it should be
forced to abide by the notice and comment requirements set forth by the


First, the impact of the agreement is very broad. In this instance,
the brunt of the agreement’s effect actually falls upon third
parties. Though the agreement itself only applies to the GSEs, the
impact on lenders will, in a practical sense, be severe. Of course,
broad impact was the intent behind the agreement. Cuomo stated when
announcing the settlement that the “agreement with Fannie Mae and
Freddie Mac begins to set right what had gone so horribly wrong in the
mortgage industry–rampant appraisal fraud.” (578) Clearly, the
settlement was intended to implement a new policy standard on the
mortgage industry as a whole.

Looking at the broad scope of who is impacted by the agreement in
this way is supported by the courts in Chem Service and Psychiatric
Treatment Centers. In Chem Service, an agency action that directly
applied only to one institution was held to be a rulemaking because the
institution was an accreditor, and the true impact of the agency action
was to impose new requirements on all the institutions seeking
accreditation. (579) In Psychiatric Treatment Centers, the court noted
that although the new conditions of the agreements between the agency
and treatment centers only directly impacted the individual treatment
centers, the practical impact would be felt by numerous individual
patients; accordingly, there was broad applicability. (580) The Cuomo
agreement is extremely similar to these situations. The agreement only
applies to the GSEs directly, but as a practical matter, every mortgage
lender will be impacted.

Furthermore, the argument that the lenders are not required to
follow the HVCC if they don’t want to do business with the GSEs is
insufficient under a Chem Service or Psychiatric Treatment Centers
analysis. In Chem Service, the manufacturers could have similarly chosen
to ‘opt-out’ and not seek accreditation, simply not labeling
their products as certified. (581) Nevertheless, the court maintained
that the agency had created a rule by imposing the new standards; the
impact, for purposes of a Londoner/Bi-Metallic analysis, was not limited
to the single accrediting institution. (582) Likewise, in Psychiatric
Treatment Centers, the court expressly rejected the argument that
“the proposals apply only to [treatment centers] which choose to
sign a participation agreement.” (583)

Similarly, then, the HVCC still should be considered a rulemaking
even though it technically only applies to lenders that choose to deal
with the GSEs; because the practical impacts will be felt broadly. There
are thousands of mortgage lenders and appraisers in the U.S., each which
may be impacted by the newly imposed appraisal standards. The HVCC does
not single out any individuals; it applies broadly to any lender wishing
to deal with the GSEs.


The conclusion that the Cuomo agreement is a rulemaking is reached
if one considers its future impact, too. It may be argued that the only
direct effect the agreement itself has is to end the NY AG investigation
into the GSEs. But, as discussed above, the agreement does, practically,
force lenders to change their business practices, by creating numerous
rules as to who is permitted to conduct an appraisal and how appraisals
are ordered. This type of required change in how lenders will operate in
the future is precisely what is meant by the language of the APA where
is defines a rule as a statement of “future effect designed to …
prescribe law or policy” (584) Though the agreement is between only
the NY AG, the GSEs, and the OFHEO, the intended and actual future
effect of the agreement is to impact the future practices of mortgage
lenders and appraisers whom are removed from the agency action itself.

In Sugar Cane Growers, the court recognized that where it was
impossible to deny that an agency action would impose future
requirements on a broad group of institutions and individuals, “is
simply absurd to call [that] anything but a rule by any other
name.” (585) The Cuomo agreement will have a future effect, both on
lending institutions and individual appraisers, because of the
imposition of the HVCC. The effect will not be limited to just a few
individuals, but across the board to all participants in the mortgage
industry. Accordingly, the Cuomo settlement ought to be thought of as an
informal agency rulemaking, not adjudication, and should be subject to
the rulemaking procedures of the APA. (586)


If the reasonable conclusion is that the Cuomo agreement should be
thought of as an agency rulemaking, what is the practical implication?
First and foremost, the NAMB lawsuit appears to at least have a solid
footing. As a final defense, the OFHEO may attempt to argue something
akin to “no harm no foul.” After all, after announcing the
agreement and receiving nearly immediate criticism, the OFHEO and NY AG
permitted written comments from interested parties. (587) These comments
were taken into consideration and the FHFA made substantive changes to
the HVCC to address some concerns. (588) However, recent precedent
suggests that this argument will fall on deaf ears. For example, in
Sierra Club v. E.P.A., the Supreme Court recognized that the Sierra Club
had standing to challenge an EPA rulemaking that failed to comply with
the notice and comment procedures of the APA, even where the Club had
actual notice of the rulemaking and could not prove that any interested
parties lacked notice. (589) In other words, the requirements set forth
by the APA must be followed, even if there’s no evidence that the
agency failure did no harm.

Accordingly, as discussed above, the most appropriate conclusion
concerning the appropriateness of the Cuomo agreement is that “[i]t
is simply absurd to call this anything but a rule by any other
name.” (590) Based on this reasoning, the NAMB suit should be
successful. The Cuomo settlement should be rejected as an impermissibly
promulgated agency rulemaking. This result not only follows logical
interpretation of the APA and case law, but would additionally establish
important precedent to avoid potential future efforts by agencies and
attorneys general to get around rulemaking procedures by entering into
settlement agreements.

This does not necessarily mean that the HVCC couldn’t or
shouldn’t become the policy of the future, though. In fact, the
wide-spread support for the goal of the HVCC–appraiser independence
from lender influence–suggests that a regulation similar to the HVCC
may be able to garner support industry-wide. But in order to create such
a restriction, the OFHEO must go through the appropriate rulemaking
processes to require the GSEs to impose appraisal standards on the
mortgages it purchases. This would require compliance with the APA,
including the receipt of comments from appraisal and lender groups. In
cannot be denied that these processes are time consuming and expensive.
But they also ensure that interested parties have an opportunity to
speak out, that suggestions regarding efficacy and efficiency are heard,
and that the agency is acting within its bounds.

(448) Press Release, N.Y. Attorney Gen., New York Attorney General
Cuomo announces agreement with Fannie Mae, Freddie Mac, and OFHEO (Mar.
3, 2008), http: //www.

(449) Id.

(450) Id.

(451) Freddie and Fannie’s market share reached 80 % of all
new mortgages in the US in 2008. Press Release, Fed. Hous. Fin. Agency,
Statement of FHFA Director James B. Lockhart (Sept. 7, 2008),

(452) See Karen Freifeld and Sharon L. Lynch. Fannie, Freddie to
Overhaul Appraisals in Cuomo Deal, Bloomberg, Mar. 3, 2008,
20601087&sid=aTR0_ZkyGHfs&refer=home; Pad Jackson, Fannie Mae,
Freddie Mac Reach Landmark Agreement on Appraisal Practices, Mar. 3,

(453) See, eg., Comment Letter from the Appraisal Foundation to
Freddie Mac Senior Vice President of Credit Risk Oversight, (Apr. 29,
2008) DID=1165&DOC=FILE.PDF; Comment Letter from the Mortgage Bankers
Association to James B. Lockhart, Director of OFHEO (Apr. 30, 2008)
OFHEO_FRE_FNM_Appraisal_Letter.pdf; Comment Letter from the Office of
the Comptroller of the Currency to James B. Lockhart, Director of OFHEO
(May 27, 2008)

(454) See, e.g., Id.

(455) See, e.g., Id.

(456) See Carolyn Said, Report Finds U.S. Mortgage Problems
Increasing, SAN FRANCISCO CHRONICLE, Apr. 3, 2009,
2009/04/03/BUU716RR4Q.DTL; Mark Trumbull, Record Tumble for Home Prices,

(457) See Mortgage Rates Again at Record Lows, Bloomberg, Apr. 3,
2009, Carolyn Said, Report Finds U.S. Mortgage Problems Increasing, SAN

(458) See Strong Economies Balance Increasing Risk of Home Price
Declines, According to PM Mortgage Insurance Co.’s Spring U.S.
Market Risk Index; New PM Research Demonstrates the Historical Value of
Homeownership, Business Wire, Apr. 4, 2006.

(459) See Dan Levy, Home Prices in U.S. to Decline Through 2010, PM
Says, Bloomberg, Apr. 1, 2009,

(460) See John Dunbar, Unregulated Swaps Hastened Wall Street
Collapse, USA Today, Oct. 7, 2008,;
Stephen Foley, Fed Offers Credit Markets Another $800bn Bailout, The
Independent, Nov. 26, 2008,
fed-offers-credit-markets-another-800bnbailout-1035328.html; Daniel
Indiviglio, Another Shot at the Credit Crunch, Forbes, Apr. 3, 2009,

(461) See, e.g., Daniel Gross, The Mark-to Market Melee, NEWSWEEK,
Apr. 1, 2008,; Jason DeRusha, Good
Question: What Caused the Financial Crisis?, WCCO, Sept. 18, 2008,

(462) Dozens of bills were introduced with the purpose of
supporting the housing market; see, e.g., Responsible Investment for
Home Ownership Act of 2008, H.R.6373.IH, 110th Cong. (2008); FHA Housing
Stabilization and Homeownership Retention Act of 2008, H.R.5830.RH,
110th Cong. (2008); Homeownership protection and Housing Market
Stabilization Act of 2008, H.R.5857.IH, 110th Cong. (2008).

(463) Pub. L. No. 110-289, 122 Stat. 2654.

(464) Senate Committee on Housing Finance and Urban Affairs,
Summary of the “Housing and Economic Recovery Act of 2008”
(June 20, 2008) RecoveryActSummary.pdf

(465) Press Release, N.Y. Attorney Gen., New York Attorney General
Sues First American and Its Subsidiary for Conspiring with Washington
Mutual to Inflate Real Estate Appraisals (Nov. 1, 2007)

(466) See, Id.

(467) Press Release, N.Y. Attorney Gen., New York Attorney General
Cuomo Sends Letters of Notice and Demand to Freddie Mac and Fannie Mae
(Nov. 7, 2007)

(468) See David S. Hilzenrath, Fannie, Freddie Agree to Tighten
Appraisal Rules, WASHINGTON POST, Mar. 4, 2008, at D01; Press Release,
Office of Fed. Hous. Enter. Oversight, OFHEO, NY Attorney General,
Fannie Mae and Freddie Mac Sign Agreement to Combat Appraisal Fraud,
(Mar. 3, 2008)

(469) Id.

(470) See Press Release, Fed. Hous. Fin. Agency, Statement of FHFA
Director James B. Lockhart (Sept. 7, 2008), FHFAStatement9708final.pdf

(471) See Home Value Protection Program and Cooperation Agreement
(Mar. 3, 2008)

(472) Id. at *8.

(473) Federal National Mortgage Association Charter Act, 12 U.S.C.
[section] 1716 (2007).

(474) Federal Home Loan Mortgage Corporation Act, 12 U.S.C.
[section] 1451 (2005).

(475) See 12 U.S.C. [section] 1723(a) (2009).

(476) See 12 U.S.C. [section] 4511 et. seq. (2007).

(477) Press Release, Office of Fed. Hous. Enter. Oversight, OFHEO,
NY Attorney General, Fannie Mae and Freddie Mac Sign Agreement to Combat
Appraisal Fraud, (Mar. 3, 2008)


(479) See Edwin McDowell, Appraisers and the Pressure to Inflate
Valuations, THE NEW YORK TIMES, Sept. 2, 2001,
appraisers-and-the-pressure-toinflate-valuations.html; Most Appraisers
Asked to Inflate Home Values, May 19, 2008,

(480) Michael D. Larson, Appraisers Can Burst Your Bubble by
Inflating the Value of Your Home, BANKRATE.COM, Nov. 14, 2002, newvs/mtg/20000525.asp

(481) Id.

(482) Les Christie, Taming Inflated Home Appraisals,,
Jan. 14, 2009, index.htm

(483) Home Valuation Code of Conduct, available at:

(484) Id.

(485) Id.

(486) Id.

(487) Id.

(488) For unknown reasons, the original 90-day comment period was
cut in half by the OFHEO: “[a]fter first announcing that there
would be 90 days to comment on the proposed new rule, OFHEO reduced the
time period to 45 days, ending April 30th.” Dave Biggers, The Five
Fronts of the HVCC War, Appraisal Press, 2008,

(489) Letter from David S. Bunton, President, The Appraisal
Foundation, to Senior Vice President, Credit Risk Oversight, Freddie Mac
(Apr. 29, 2008) TAFCommentLetter.pdf

(490) Id.

(491) Letter from The Appraisal Institute, The American Society of
Appraisers, The American Society of Farm Managers and Rural Appraisers,
and The National Association of Independent Fee Appraisers to Fannie Mae
and Freddie Mac (April 30, 2008)

(492) Letter from Timothy T. Ward, Deputy Director, Examinations,
Supervision, and Consumer Protection, Office of Thrift Supervision, to
Senior Vice President, Credit Risk Oversight, Freddie Mac (Apr. 30,

(493) Letter from John C. Dugan, Comptroller, The Office of the
Comptroller of the Currency to James B. Lockhart III, Director, Office
of Federal Housing Enterprise Oversight (June 19, 2008)

(494) Id.

(495) Letter from The Mortgage Bankers Association to James B.
Lockhart III, Director, Office of Federal Housing Enterprise Oversight
(Apr. 30, 2008) _(4-30-08).pdf; see also, Letter from The National
Association of Mortgage Bankers to Fannie Mae (Apr. 30, 2008)
%20Letter%20o n%20Appraisal%20Agreement.Final%20(April%2030,%202008).pdf

(496) The negative response to the Cuomo agreement attracted
legislative notice. Republicans in the Senate Committee on Banking,
Housing, and Urban Affairs briefly considered proposing legislation that
would mandate that all appraisal standards be set by federal
legislation. Most notably, Elizabeth Dole (R–N. Carolina) introduced an
amendment to the Housing and Economic Recovery Act of 2008 to include a
provision which would have made the HVCC unenforceable, but ultimately
withdrew her amendment. See Update: Dole Amendment, HVCC Movement,
Appraisal Press, 2008,

(497) Pub. L. No. 110-289, 122 Stat. 2654.

(498) Id.

(499) Id.

(500) Glenn Somerville, U.S. seizes Fannie, Freddie, Aims to Calm
Markets, Reuters, Sept. 7, 2008,

(501) Id.

(502) Press Release, Henry M. Paulson, Jr., Secretary of the
Treasury, Statement by Secretary Henry M Paulson, Jr. on Treasury and
Federal Housing Finance Agency Action to Protect Financial Markets and
Taxpayers (Sept. 7, 2008)

(503) Id.

(504) Statement of Federal Housing Finance Agency Regarding
Contracts of Enterprises in Conservatorship (Sept. 7, 2008) newvsroom.aspx?ID=459&q1=0&q2=4

(505) FHFA Statement of Support for Multifamily Housing Finance
Activities of the Enterprises while in Conservatorship (Sept. 12, 2008) 21/FHFASTMTMultifamily.pdf

(506) The previous effective date had been scheduled for Jan. 1,
2009. Press Release, Fed. Hous. Fin. Agency, FHFA Announces Home
Valuation Code of Conduct, (Dec. 23, 2008)

(507) Id.

(508) Id

(509) Home Valuation Code of Conduct, December 2008, available at:

(510) Id.

(511) Id.

(512) Id.

(513) Id.

(514) Id.

(515) Id.

(516) Id.

(517) Id.

(518) Id.

(519) See Chad Terhune, Housing Appraisals: Still Blowing Bubbles?,
Business Week, Feb, 5, 2009,
?chan=top+news_top+ news+ index+-+temp_news+%2B+analysis

(520) Press Release, National Association of Mortgage Bankers, NAMB
Files Lawsuit Over Controversial HVCC (Feb. 23, 2009)

(521) Id.

(522) See NAMB Complaint at 2. Available at:

(523) 5 U.S.C. [section] 551(4).

(524) 5 U.S.C. [section] 551(5).

(525) 5 U.S.C. [section] 555(7) (emphasis added).

(526) 5 U.S.C. [section] 555(6) (emphasis added).

(527) 5 U.S.C. [section] 553(c)

(528) In fact statutory language only authorizing agency action
“after hearing” was been held to create only an informal
rulemaking equivalent because it did not require that the rule be made
“on the record after opportunity for an agency hearing.” U.S.
v. Florida East Coast Ry. Co., 410 U.S. 224, 234-235 (1973).

(529) 5 U.S.C. [section] 553(a)

(530) 5 U.S.C. [section] 553(a); 5 U.S.C. [section] 553(c)

(531) 5 U.S.C. [section] 553(b)

(532) 5 U.S.C. [section] 553(b)(1-3)

(533) 5 U.S.C. [section] 553(c)

(534) 5 U.S.C. [section] 551 (4)

(535) National Treasury Employees Union v. Reagan 685 F. Supp.
1346, 1356 (E.D. La., 1988) (quoting Avoyelles Sportsmen’s League,
Inc. v. Marsh, 715 F.2d 897 (5th Cir. 1983))

(536) See 5 U.S.C. [section] 551 (6)

(537) Londoner v. City and County of Denver, 210 U.S. 373, 378

(538) Id. at 380.

(539) Id. at 385-386.

(540) Id.

(541) Id. at 386.

(542) Bi-Metallic Inv. Co. v. State Bd. of Equalization, 239 U.S.
441, 443 (1915).

(543) Id. at 444.

(544) Id. at 445.

(545) Id. at 446.

(546) Id at 445-446.

(547) Id.

(548) See Tribe, Lawrence, American Constitutional Law [section]
10-6, at 657, [section] 10-7, at 663-77 (2d ed. 1988).

(549) Id. at 445.

(550) Id.

(551) Kenneth Culp Davis, Administrative Law Text, [section] 7.03
at 160 (3d ed., 1972).

(552) David L. Faigman, Constitutional Fictions: a Unified Theory
of Constitutional FACTS 44 (2008).

(553) 5 U.S.C. [section] 551(4)

(554) 289 F.3d 89 (D.C. Cir. 2002).

(555) Id. at 91-92.

(556) Id. at 96.

(557) Id. (Emphasis original).

(558) Id. (Internal quotations omitted).

(559) 685 F. Supp. 1346. 1356 (E.D. La. 1988).

(560) Id.

(561) Mkccosukee Tribe v. U.S. 6 F.Supp.2d 1346, 1350 (S.D. Fla.

(562) 5 U.S.C. [section] 551(4) (emphasis added).

(563) 1 2 F.3d 1256, 1267 (3d Cir. 1993)

(564) Id.

(565) Id. at 1260.

(566) Id. at 1267.

(567) 658 F.Supp. 48 (D. Co. 1987)

(568) Id. at 50.

(569) Id. at 53.

(570) Id. at 53-54.

(571) Id. at 54.

(572) Id. at 53.

(573) Id. at 55.

(574) See Black’s Law Dictionary (8th ed. 2004).

(575) 1 2 U.S.C. [section] 4541

(576) Mission Statement of the Office of Fed. Hous. Enter.
Oversight (June 6, 2007)

(577) In fact, the two GSEs actually each signed a separate but
identical agreement, along with the OFHEO and the NY AG.

(578) Press Release, N.Y. Attorney Gen., New York Attorney General
Cuomo announces agreement with Fannie Mae, Freddie Mac, and OFHEO (Mar.
3, 2008), http: //www.

(579) 12 F.3d at 1267.

(580) 658 F.Supp. at 54.

(581) 12 F.3d at 1260.

(582) Id. at 1267

(583) 658 F.Supp. at 53.

(584) 5 U.S.C. [section] 551(4).

(585) 289 F.3d at 96 (Internal quotations omitted).

(586) The APA does list a variety of exceptions to the general
procedural requirements for informal rulemakings, including, but not
limited to: interpretive rules, rules pertaining to agency organization
or procedure, and general policy statements. See 5 U.S.C. [section] 553.
To examine each exception is beyond the scope of this article, however,
it should be noted that these exceptions are generally construed
narrowly. See Committee For Fairness v. Kemp, 791 F.Supp. 888 (D.D.C.
1992). It is highly unlikely that any of the exceptions would apply to
the Cuomo agreement.

(587) See Biggers, supra note 41.

(588) Press Release, Fed. Hous. Fin. Agency, FHFA Announces Home
Valuation Code of Conduct, (Dec. 23, 2008)

(589) See 551 F.3d 1019 (2008).

(590) 289 F.3d at 96 (Internal quotations omitted).

Ted C. Koshiol

Chicago-Kent College of Law