Financial Regulatory Reform Act
Agency Action Awareness
Here, Congress has passed legislation ("Financial Regulatory Reform Act") creating a new federal agency ("Consumer and Investor Protection Agency") and the agency, pursuant to its authority ("to adopt after public hearing any standard it believes necessary to guard against excessive risk-taking by companies involved in the provision of financial services") is proposing to adopt several (3) standards.
Rule-Making
In each of the 3 instances (mortgage loan standard, overdraft standard, insurance-pay standard), this is RULE-MAKING. First, under the Constitution, (Londoner/Bimetallic), the government is NOT singling out and individual, and this is NOT retroactive. Instead, here, the government is acting generically and treating all of the group the same.
This is similar to Bimetallic. In Bimetallic, the Colorado Tax Commission increased valuation of property by 40% in the City of Denver and applied this to every landowner in Denver.
Here, the (3) rules are proposed to affect certain "financial services" companies in the United States. In 1) mortgage loan standard, the proposed rule would apply to "any institution offering residential or commerical mortgages." In 2) overdraft standard, the proposed rule would apply to (any) "providers of debit cards." In 3) the proposed rule would apply to (any) "insurance companies."
Under the APA, section 551(5) defines "rulemaking" as an "agency process for formulating, amending, or repealing a rule," which is defined in section 551(4) as "the whole or a part of any agency statement of general. . . applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency. . . ."
As to 1) the mortgage loan standard, APA section 551(4) defines "approval or prescription for the future of rates" as a "rule".
As to 2) the overdraft standard, a "prohibiting providers of debit cards" sounds like a 501(10) "'sanction' which include the whole or a part of an agency - (A) prohibition"
As to 3) the insurance pay standard "prohibition" on "excessive compensation to executives in insurance companies" also sounds like a APA 501(1) sanction.
553 Analysis: (Informal Rulemaking)
Because these are rule-makings we go to APA section 553. General notice of the proposed rule is required under 553(b), and an opportunity to comment must be provided per subsection 553(c). Generally, oral hearings are NOT required. However, if the outside statute requires that rules be made "on the record" (or similar formality language), then the formal hearing procedures of APA section 556-557 would apply.
Here, the outside statute gives authority "after public hearing." This is similar to Florida East Coast Railway. In Florida East Coast, "after hearing" did not trigger the formal hearings. Language such as "after full hearing" and "after full public hearing" is also NOT sufficient to trigger formal hearing requirements for a rulemaking. Here, "after public hearing" seems similar (and perhaps a bit less powerful than) "after full public hearing". Since "after full public hearing" does NOT trigger formal hearings, here, "after public hearing" also does NOT trigger formal hearings. Thus, this is an INFORMAL RULE-MAKING.
Due Process Does NOT Apply To Rule-Makings
Also NOTE that Due Process does NOT apply to rule-making. See, e.g., Bi-Metallic. So, Due Process is NOT implicated here.
Agency Correctly Denies A Formal Hearing (Re: Mortgage Loan Standard)
Because this is an informal rulemaking, the Agency correctly denies HAA's demand (in its written comments regarding the mortgage loan standard) to have a hearing at which the Harvard Business School professors can testify formally in person.
Initial Comments On Substantive Review
A reviewing court will review the "whole record." Universal Camera. The agency will be reversed if its decision is "arbitrary, capricious, or abuse of discretion" or "NOT in accordance with the law" APA 706(2)(A). (Note that the 706(2)(e) requirement has withered away in caselaw; thus, we do not apply it here).
Substantive Review:
1a) Substantive criticisms of "mortgage loan standard"
HAA criticizes that the 25% rule would "cripple the ability of ... homebuyers to obtain a mortgage". HAA offers an alternative proposal, to restrict the 25% rule only to commercial mortgages, and to apply a 10% down payment for residential mortgages. HAA offers a report form Harvard Business School professors "indicating that excessive risk in home-mortgage-lending could be completely contained by increasing borrowers' downpayments from their current level of 5 percent to a new, 10 percent level"
A reviewing court will review the "whole record." Universal Camera. The agency will be reversed if its decision is "arbitrary, capricious, or abuse of discretion" or "NOT in accordance with the law" APA 706(2)(A). (Note that the 706(2)(e) requirement has withered away in caselaw; thus, we do not apply it here).
Here, the agency's response (that the report authors have a conflict of interest detracting from the pesuasiveness of the report's conclusions) is non-responsive (to the substantive assertions of the report). We thus analyze whether the agency's action is arbitrary/capricious/abuse of discretion.
Under State Farm, courts take a 'hard look' substative review. Under State Farm, the agency has entirely failed to consider "important aspects of the problem;" thus, (because the agency has not effectively responded to the Harvard 10% level proposal, a court would likely find that the agency's decision IS arbitrary/capricious/abuse of discretion. (This is the same problem the agency in State Farm itself ran afoul of).
1b) Criticisms of "overdraft standard":
Citibank objects to the "overdraft standard" by indicating that the proposal "has nothing to do with the 'excessive risk taking' that Congress authorized the Agency to regulate. If true, this would be a "not in accordance with law" problem.
"NOT in accordance with law" issues are analyzed under the modern Chevron analysis. Step 0 asks whether the agency interpreation of the statute so fundamentally at odds with the statute it interprets (i.e. a radical change)? Here, Citibank cites the Senate Committee Report as supporting its argument (Senate Committee Report: the Act is concerned only with the problem of excessive risk-taking by financial services firms and does not authorize the Agency to regulate anything it pleases involving such firms.")
Addressing Citibank's concerns, the Agency argues that financial services firms which charge unduly high overdraft penalties incent persons to overspend and default on their debit card balances which thus exposes banks to excessive risk of financial loss. Thus, the agency relates the overdraft standard to reducing excessive risk of loss of financial services companies.
Thus, under the Agency's argument, the agency's interpretation (though taking several steps to explain) appears rational. Thus, we continue to Step 1. Step 1 asks: Has Congress directly (unambiguously) addressed the precise issue?" Here, The senate report speaks generally that the Act is concerned with "excessive risk-taking by financial servies firms". Since the agency has linked its argument to "excessive risk-taking" by financial services firms (here, debit card issurers), then to the extent that Congress has spoken on this issue the Agency meets it. To the extent that Congress has NOT spoken directly on this issue (here, it hasn't) we continue to Step 2. Step 2: Has the Agency adopted a "permissible interpretation?". Here, the agency DOES appear to have adopted a permissible interpretation. Thus, a court would likely affirm the Agency's action in response to Citibank's criticims.
1c) AAI criticizes the "insurance pay standard" with two criticisms.
First, the AAI alleges that Congress has exempted insurance regulation from federal oversight for 100 years and instead left such regulation entirely to the states. Agencies are allowed to interpret statutory language DIFFERENTLY from the interpretation at common law.
However, the argument that this regulation has been left to states may be an effective one under an evolving third execption to Chevron. See, e.g. Gonzales; Rapanos.
Delegation:
Second, AAI alleges that the statute could NOT have delegated the Agency the power it exercises, alleging that executive pay has nothing to do with firm risk-taking.
In response, the Agency's argument that insurers accepting large pay make unduly risky decisions seems irrational.
As to delegation, under Benezene, Congress CAN define health and safety standards (here, financial safety might arguably be a safety standard) as whatever is reasonably necessary or appropriate for the stated purpose. Here, Congress DOES state a purpose (guarding against excessive risk-taking by financial services companies) and the Agency does attempts to relate its response to exessive risk taking. Thus, this does NOT appear to be a delegation problem.
However, there is a substantive concern that the Agency's decision is arbitrary, capricious, abuse of discretion because the Agency's argument (about the motivations of executives) seem too implausible to be ascribed to agency expertise, under State Farm. Thus, the agency might be reversed under arbitrary, capricious, abuse of discretion.
1) Is this Constitutional?
Adjudication
The arbitration action is an ADJUDICATION.
Londoner/Bimetallic: Under Londoner/Bimetallic, an arbitration (here a mandatory arbitration) is an adjudication because it is a retrospective decision relying on individualized facts (alleged Triple Z dogs killing two cattle of Flying Dutch Ranch) involvin a small number of people (the two ranches). Under APA 551, this appears to be an adjudication as it involves an "order" (see 551(6) (which also includes licensing)).
Thus, We Proceed Under APA 554.
Informal Adjudication:
Under Seacoast (still followed by 9th Cir.), in an adjudication, any mention of a "hearing" would trigger requirement for formal hearing. But, under Chemical Waste Mgmt. (followed by other jurisdictions) an adjudication of an engineering/technical issue mentioning "hearing" would NOT invoke formal procedures of 556/557. Here, the outside statute does NOT even mention the word "hearing," so an informal hearing would appear to be allowable.
The the extent that the outside statute mentions "arbitration" that still isn't the magic word "hearing", so 556/557 doesn't appear to be invoked.
Due Process
However, Due Process is implicated in informal adjudication.
Due Process analysis: (under Roth, Mathews, Ingraham):
a) whether?
b) how much?
Under the "whether?" prong (Roth), is a liberty or property interest implicated? Here, there is a property interest in the two cattle. This is a property interest arising from positive law (cattle as chattel).
So, we proceed to the "how much" prong? (Mathews)
Here, the reviewing court will weigh: a) private interests, b) government interests, and c) risk of error. Here the private interest (two cattle) does appears small. The government interest (mandating arbitration) also appears small. The middle prong (risk of error) seems slight. Thus, the decision of an arbitration seems likely to be upheld.
However, the court would likely look with disfavor on the fact that this is a non-Article III court (arbitration) that is NOT voluntary (mandatory arbitrartion) and is without Article III court review. Thus, a court could STRIKE down the statute on that ground.
Also, a reviewing court may declare the statute as an UNCONSTITUTIONAL delegation of adjudicatory power because a) the central issue is a tort (a state power, and central to adjudication), and b) the arbitration is MANDATORY (i.e. involuntary) and c) without judicial review by an Article III court.
(If a follow-on statute made the arbitration voluntary and reviewable by an Article III court, a future such arbitration decision by the USFS would likely be upheld.
2) Letter
The letter announces an adjudication (because this is effectively an adjudication among two parties with competing interests). Under Londoner/Bimetallic, it's an adjudication because this is affects a small number of individuals (two competing cattle grazing companies). Though the decision is tenative (prospective), its based on retrospective facts. Under APA 551, this is an adjudication because this is a decision to revoke a permit (which is like a license). See APA 551(8),551(9) (defining a license). See also APA 551 defining an "order" to include a ("license"). Thus, under the APA, this is an adjudication.
This is an informal adjudication. (written comments)
Hwoever, this is a summary deprivation of a liberty or property interest.
liberty interest = permit to graze cattle. if cattle can't graze, the cattle don't have enough to eat, and the Triple Z Ranch business would die.
property interest = permit to graze cattle.
Under Roth/Mathews/Ingraham, Triple Z could argue that MORE PROCESS IS NEEDED, because this is a liberty interest being deprived (the livilihood of the Triple Z Ranch) as well as a property interest being deprived (grazing permit)...
Policy Change
Here, the agency concedes that "Although we have held in past Section 2 determinations that destruction of non-endangered flowers cannot be a basis for revocation of grazing permits, we have decided to change this policy and now believe that such conduct is grounds for revocation". This is an admitted change in POLICY. Although agencies MAY adopt policies (including changing policy) during adjudications (Chenery), under Bell Aerospace an agency (here USFS) may NOT penalize an individual or group (here, Triple Z Ranch) retroactively when it makes a policy flip-flop, as the USFS has done here.
To the extent that the revocation of the grazing permit is interpreted as a penalty (arguably it IS a penalty), a reviewing court would likely strike down then permit revocation action of the letter from the USFS, under Bell Aerospace.
Insufficient Notice
Here, the Triple Z Ranch receives a letter with only 10 days to respond. The Triple Z Ranch could argue that 10 days is NOT LONG ENOUGH to be effective notice. (Thus, this is another reason the letter (announcing the informal adjudciation) isn't sufficient Due Process (opportunity to be heard + notice).
Legal Advice
In response to the requested "legal advice" to Triple Z Ranch, no matter what it also claims under the Due Process clause (regarding getting more process than just an opportunity to respond in writing), the Triple Z Ranch should DEFINITELY take advantage of the opportunity to submit in writing to the Agency (USFS) all evidence that either a) its cattle didn't trample the buttercup flowers (if that's true) and b) trampling buttercup flowers is NOT inconsistent with sustainable land use, since buttercup flowers are "not endangered," thus ("the Senate committed Report note that "the destruction of endangered species by cattle shall constitute grounds for revocation of grazing permits" does NOT apply) AND argue that buttercup flowers are NOT "important forest resorces" (such as endangered species). Thus, the House Committee Report comment that "grazing permits may be revoked whenever the permit-holder is found to have destroyed important forest resources" ALSO does NOT apply.
Triple Z Ranch might also want to compile and submit to the agency a voluminious report that indicates that having both herds graze on the Gallatin National Forest IS sustainable. (If would be helpful if the report is complied by nationally recognized experts). In the event the Agency did NOT respond to the report, the agency's decision could be reversed as arbitrary/capricious.
Third Party Interference
Under Sangamon Valley, when two citizens are competing for a valuable governmental privilege in an informal adjudicatory setting that one cannot have unequal access to the decisionmaker. Here, the dispute (between the two ranches) is effectively an informal adjudication (as explained above). Thus, here, there may be a separate constitutional (Due Process) problem with the cowboys from the Flying Dutch Ranch communicating with the USFS ex parte. Depending on the facts, if the cowboys or other agents/officers of the Flying Dutch Ranch participated in the decisinomaking (as opposed to simply knowing about it), a reviewing court may find this ex parte contact and thus require that the Flying Dutch Ranch explain why the issue should NOT be decided against it.
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