Even as the Consumer Financial Protection Bureau (CFPB) is under fire for overstepping its authority to regulate the financial services industry, the bureau and other federal regulators received more muscle this week from a U.S. Supreme Court decision that grants federal agencies the power to issue interpretive rules about regulations without first making them public or following formal legislative rulemaking processes.

Even as the Consumer Financial Protection Bureau (CFPB) is under fire for overstepping its authority to regulate the financial services industry, the bureau and other federal regulators received more muscle this week from a U.S. Supreme Court decision that grants federal agencies the power to issue interpretive rules about regulations without first making them public or following formal legislative rule-making processes.

The case, “Thomas E. Perez, et al., v. Mortgage Bankers Association (MBA), et al.,” asked the Supreme Court to resolve the long-standing question of whether a federal agency seeking to propose new rules or significantly amend existing ones must engage in the notice-and-comment procedure prescribed by the Administrative Procedures Act (APA). The APA requires agencies to publish a notice of proposed rule-making in the “Federal Register” and entertain comments from interested parties before promulgating new rules or significantly altering existing rules.

But the APA also provides that this notice-and-comment requirement does not apply to “interpretive rules,” or general statements of policy or rules of an agency organization, procedure or practice. Still, the question of what happens when an agency makes substantive changes to a rule, effectively changing the rule’s original intent, has dogged courts for years.

For almost two decades, courts asked to weigh in on the subject have relied on a 1997 D.C. Circuit Court case, “Paralyzed Veterans of America v. D.C. Arena LP” — or what has come to be known as the Paralyzed Veterans doctrine — which upheld the APA’s mandate that any substantive rule changes go through notice-and-comment rule-making.

In this case, the Mortgage Bankers Association (MBA) sued the Department of Labor (DOL) after the department reversed its interpretation of an overtime pay regulation it established in 2004 through proper APA procedure. The regulation established overtime-pay requirements for “any employee whose primary duty is selling financial products,” but a 2006 interpretive rule stated that because the “primary duty” of mortgage loan officers was not selling financial products, they were exempt from the overtime requirement. Then, in 2010, the DOL — without notice or comment — did an about-face and issued a new interpretation stating that loan officers were, in fact, not exempt and entitled to overtime pay after all.

With the 2006 DOL opinion letter withdrawn, three former loan officers sued their previous employers for overtime pay. The MBA filed suit, calling the DOL’s 2010 interpretation a “legislative rule in interpretive clothing” and the department’s actions “arbitrary, capricious, an abuse of discretion and otherwise not in accordance with law.” The government, noting that the APA exempts interpretive rules from notice-and-comment rule-making, granted summary judgment to the government. The MBA appealed, invoking the Paralyzed Veterans doctrine.

After hearing oral arguments in the case in December, the Supreme Court on March 9 took a red pen to the Paralyzed Veterans doctrine, calling it “contrary to the clear text of the APA’s rule-making provisions” and ruling that it “improperly imposes on agencies an obligation beyond the APA’s maximum procedural requirements.”

“The straightforward reading of the APA we now adopt harmonizes with long-standing principles of our administrative law jurisprudence,” Associate Justice Sonia Sotomayor wrote in the court’s opinion. “Time and again, we have reiterated that the APA ‘sets forth the full extent of judicial authority to review executive agency action for procedural correctness.’ Beyond the APA’s minimum requirements, courts lack authority ‘to impose upon [an] agency its own notion of which procedures are best or most likely to further some vague, undefined public good.'”

The Paralyzed Veterans doctrine creates the right to notice-and-comment when an agency changes its interpretation of one of the regulations it enforces, the court noted, and “that requirement may be wise policy. Or it may not,” Sotomayor conceded.

“Regardless, imposing such an obligation is the responsibility of Congress or the administrative agencies, not the courts,” she wrote. “We trust that Congress weighed the costs and benefits of placing more rigorous procedural restrictions on the issuance of interpretive rules. In the end, Congress decided to adopt standards that permit agencies to promulgate freely such rules, whether or not they are consistent with earlier interpretations. That the D.C. Circuit would have struck the balance differently does not permit that court or this one to overturn Congress’ contrary judgment.”

Joining Sotomayor in the opinion were Chief Justice John Roberts and Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen G. Breyer and Elena Kagan.

“MBA hoped that the court would uphold the lower court decision in our favor, so obviously we are disappointed with the final outcome,” an MBA spokesperson told Inman. “We will now work with our members to develop approaches to this issue that hopefully do not unduly increase borrower costs or compromise customer service.”

Aside from the larger procedural law issues, the immediate effect of the decision is that courts must adopt the view that some loan officers are not exempt from the overtime requirements of the Fair Labor Standards Act, and should be paid overtime compensation. But the decision presents larger implications for companies that operate under the thumb of federal agencies.

Allyson Ho, co-chair of the appellate practice of Dallas-based law firm Morgan, Lewis & Bockius LLP, who argued on behalf of the MBA, said, “While rejecting the D.C. Circuit’s Paralyzed Veterans rule, the court recognized the seriousness of the legitimate concerns that animated the rule — with three justices even writing separately to indicate their willingness to reconsider Supreme Court precedent on the deference owed to agency interpretations of their own rules.”

Justice Samuel A. Alito joined except for one part, and filed an opinion in part and concurring in the judgment. Justices Antonin Scalia and Clarence Thomas also filed opinions concurring in the judgment. Alito’s opinion echoed concerns of many in the financial services industry that the ruling could set troubling precedents in bolstering the authority of federal agencies like the CFPB, which is already deemed by many to be exceeding the authority envisioned by the Dodd-Frank Act and “regulating by enforcement” via strongly worded enforcement actions and consent orders, instead of issuing guidance on compliance questions raised by the companies it regulates.

“The creation of that doctrine may have been prompted by an understandable concern about the aggrandizement of the power of administrative agencies as a result of the combined effect of the effective delegation to agencies by Congress of huge swaths of lawmaking authority, the exploitation by agencies of the uncertain boundary between legislative and interpretive rules and this court’s cases holding that courts must ordinarily defer to an agency’s interpretation of its own ambiguous regulations,” Alito wrote.

Chicago attorney Douglas A. Hass, an associate in the law firm Franczek Radelet PC, who had called the case “one to watch” this term, said in a post on his firm’s “Wage and Hour Insights” blog that while the decision was not entirely unexpected, it is “nonetheless a disappointment for employers (and employees) who continue to get whipsawed by ever-changing administrative interpretations at the DOL, NLRB and other agencies.

“With the ability to issue interpretations without engaging the formal rule-making process, agencies are likely to continue to issue such guidance and interpretations. In other words, while you still may be subject to the whims of whatever administration is currently in power, you are at least likely to understand those whims more fully,” Hass added.

Email Amy Swinderman.

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