United States Court of Appeals Fifth Circuit F I L E D IN THE UNITED STATES COURT OF APPEALS January 20, 2006 FOR THE FIFTH CIRCUIT Charles R. Fulbruge III Clerk ____________________

No. 05-60366

Summary Calendar ____________________

SOUTH TEXAS MORTGAGE CORPORATION, doing business as Independent Mortgage

Petitioner

v.

UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Respondent

_________________________________________________________________

Petition for Review: United States Department of Housing and Urban Development No. 04-003-MR _________________________________________________________________

Before KING, BARKSDALE and BENAVIDES, Circuit Judges.

PER CURIAM:*

Petitioner South Texas Mortgage Corporation seeks review of

an administrative action. For the reasons provided below, this

petition for review is DENIED.

I. Background

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4. Pursuant to Title II of the National Housing Act,

et seq., the Federal Housing Administration (“FHA”), an

entity within the Department of Housing and Urban Development

(“HUD”), administers a program to insure private lenders

(“mortgagees”) against loss on single-family home mortgage loans.

To qualify for FHA insurance, all mortgagees must be approved by

HUD--even those mortgagees whose principal activity is the

origination of mortgages for transfer to a third-party

underwriter sponsor, such as the petitioner-appellant in this

case. See

(b); 24 C.F.R. Part 202, § 202.8;

MORTGAGEE APPROVAL HANDBOOK 4060.1 REV-1, U.S. DEP’T OF HOUS. & URBAN DEV.

§§ 2-14, 2-24, 6-3 [hereinafter HUD HANDBOOK].

In 1984, Rick Adams (“Adams”) and Peter Velasco (“Velasco”)

began working together in the San Antonio mortgage industry. In

1992, the two incorporated InterAmericorp, Inc., d/b/a

Independent Mortgage (“IA”). Each initially owned fifty percent

of IA’s stock. IA obtained approval from HUD to issue FHA-backed

loans soon after its incorporation, but in September of 1998,

IA’s FHA approval was withdrawn due to its failure to submit

required annual audited financial statements and to pay the

required annual recertification fee. IA did not recover FHA

approval at any point relevant to this case. In 1994, Adams

moved to Corpus Christi and opened a satellite office of IA under

the name Independent Mortgage Services (“IMS”).

2 Two years later in Corpus Christi, Adams, acting alone,

incorporated the South Texas Mortgage Corporation, d/b/a

Independent Mortgage (“STMC”). Adams, the sole officer and

shareholder of STMC, transferred his shares of IA to STMC. In

early 1997, petitioner STMC gained HUD approval to originate FHA-

insured mortgages.

Sometime in 1998 STMC and IA entered into a “loan

origination agreement” in which IA employees originated FHA-

insured loans for STMC. Under the agreement, IA employees took

applications from borrowers, performed various other loan

origination functions, and submitted the loans to STMC’s sponsors

for underwriting, all using STMC’s HUD-approved identification

number. In exchange, IA retained all fees generated by these

loan originations.

This loan origination agreement enabled IA to remain

profitable and build up net worth so that IA could reapply for

FHA approval. At the time, Adams and Velasco were good friends

with a close personal and business relationship. More

importantly, perhaps, Velasco owed Adams a sizable amount of

money--although Adams attempted to disavow the existence of this

debt at the administrative hearing2--and the profits generated

2 Velasco’s debt to Adams was caused by his default on a complicated conditional purchase agreement for IA stock. At the administrative hearing Adams stated that once he reclaimed his IA stock in June 1996, Velasco’s obligation to make further payments to him under the stock purchase agreement was nullified. However, Adams continued to accept payments from Velasco on the

3 for IA by this agreement may have been intended to settle this

debt. All of the loans at issue in this case originated under

this agreement.

Beginning in July 2001, HUD’s Quality Assurance Division

conducted an investigation of STMC’s FHA-insured loan origination

activity. In addition to the loan origination agreement outlined

above, this investigation also uncovered STMC’s failure to

develop a Quality Control Plan. On July 25, 2002, HUD’s

Mortgagee Review Board informed STMC that it was considering

imposing civil money penalties based on the results of this

investigation. HUD issued its complaint to STMC detailing these

alleged violations on August 26, 2003.

After discovery, an administrative hearing was conducted on

March 4-5, 2004, in San Antonio. The administrative law judge

(“ALJ”) issued his Decision and Order on September 3, 2004,

ruling in favor of HUD on all counts and imposing over $104,000

in penalties on STMC.3 On October 1, 2004, STMC petitioned the

Secretary of HUD for review of the ALJ’s decision. On April 12,

stock purchase agreement after June 1996. 3 Specifically, the ALJ held that by permitting 330 FHA- insured loans to be originated by persons employed elsewhere, STMC knowingly and materially violated: 12 U.S.C. § 1735f- 14(b)(1)(G), (H);

(a)(1); HUD HANDBOOK 4060.1 Rev-1; and Mortgagee Letters 95-36 and 00-15. In addition, the ALJ held that by failing to maintain and implement a Quality Control Plan, STMC knowingly and materially violated: 12 U.S.C. § 1735f-14(b)(1)(C);

(h); and HUD HANDBOOK 4060.1 Rev-1.

4 2005, the Secretary’s Designee, Camille T. Pierce (“Designee

Pierce”), issued an Order on Secretarial Review, amending the

order by decreasing the penalty to just over $33,000. STMC

petitions this Court for review of these orders.

II. Discussion

This court has jurisdiction under 12 U.S.C. § 1735f-

14(d)(1), which gives mortgagees such as STMC the right, “[a]fter

exhausting all administrative remedies,” to file “a written

petition” with this court “praying that the Secretary’s

determination or order be modified or set aside in whole or in

part.” The scope of our review of such a petition is defined by

the general provisions of

. See 12 U.S.C. § 1735f-

14(d)(3) (stating that “[t]he decisions, findings, and

determinations of the Secretary shall be reviewed pursuant to

section 706 of Title 5”).

STMC believes that this court should review the previous

administrative decisions de novo. For a variety of reasons, de

novo review is inappropriate: the ALJ’s decision was

interpretative; it does not significantly revise HUD’s previous

interpretations of any relevant regulation; nor does it amount to

a new, substantive rule; nor does it amount to a rulemaking

decision. See, e.g., ShellOffshore Inc. v. Babbit,

(5th Cir. 2001) (discussing the appropriate context for de

novo appellate review of agency adjudicative decisions).

5 Therefore, this court must examine the previous administrative

decisions and uphold them if they were supported by “substantial

evidence,” unless it finds that they were “arbitrary, capricious,

[or] an abuse of discretion,” as set forth under

(2). See, e.g., Citizens To Preserve Overton Park v. Volpe,

(1971) (discussing the appropriate

situations for de novo, substantial evidence, and arbitrary and

capricious review).

HUD’s argument, upheld by both the ALJ and Designee Pierce,

is that the loan origination agreement between IA and STMC

violated 24 C.F.R. Part 202, HUD HANDBOOK 4060.1 Rev-1, and HUD’s

general Mortgagee Letters 95-36 and 00-15 (“ML 95-36” and “ML 00-

15”). The ALJ also found that STMC violated

(h)

and Chapter 6 of HUD Handbook 4060.1 Rev-1 by failing to

implement a proper quality control plan. Designee Pierce

decreased the penalty based on STMC’s inability to pay the amount

assessed by the ALJ, but this adjustment did not represent a

modification of the ALJ’s essential findings.

STMC argues that the ALJ’s decision was based on an

incorrect interpretation of ML 95-36. STMC believes that the ALJ

incorrectly relied upon ML 95-36 to find that taking a loan

application was a “critical core function” of a full-time “loan

officer” and to further find that IA was a “third party loan

originator.” According to STMC, in using and defining these

terms, the ALJ departed from settled law and created conflict

6 with pre-existing HUD regulations. Specifically, STMC argues

that ML 95-36 is imprecise, full of ambiguities, and rife with

undefined terms. STMC implies that this ambiguity and

imprecision was deliberate--that ML 95-36 was deliberately

drafted in an ambiguous and imprecise fashion in order to fulfill

its purpose and permit mortgagees flexibility. Therefore, STMC

argues that the ALJ ignored the plain--albeit imprecisely plain--

meaning and deliberately ambiguous intent of ML 95-36 when he

determined that the IA/STMC loan origination arrangement was

prohibited.

STMC’s argument ignores all other governing regulations and

statutes, focusing solely upon a single HUD general regulatory

letter. Even on its own terms, the argument is implausible.

Contrary to STMC’s conclusions, the taking of a loan application

does seem to be a critical core function of a loan officer, and

STMC presents no persuasive legal or practical justification to

conclude otherwise. In fact, this is quite arguably the

paramount function of a loan officer; as the ALJ noted, the

initial intake of the loan application may substantially affect

the nature and quality of the information that will ultimately be

relied upon by the underwriter. STMC’s argument that ML 95-36

represents a deliberate agency choice for ambiguity and

unrestrained mortgagee flexibility is similarly implausible; the

ALJ’s interpretation and the plain language of the regulatory

7 letter are much more persuasive and dictate the contrary

conclusion.

The greatest weakness of STMC’s position, however, is the

evidence in the record which demonstrates that Adams and Velasco

knew the loan origination agreement was illegal well before it

was uncovered by HUD. In fact, Adams and Velasco appear to have

known that this arrangement was illegal from the outset. Worst

of all, Adams appears to have lied about his knowledge and

actions during the administrative hearing.

In conclusion, STMC has presented no reason to overturn the

conclusions of the ALJ as affirmed by Designee Pierce. The

record is indisputable: STMC circumvented FHA requirements

specifying that properly trained, supervised, and accountable

personnel originate loans. This misconduct circumvented FHA

requirements intended to ensure that personnel engaged in the

critical core function of taking loan applications are competent,

properly trained, and supervised by the approved mortgagee. In

so doing, STMC exposed the FHA insurance fund to a high risk of

loss, placing the risk of loss of bad loans squarely on the

taxpayer. The existence of these serious violations is supported

by substantial evidence, and the modified penalty imposed by

Designee Pierce is appropriate.

III. Conclusion

8 For the reasons stated above, the petition for review is

DENIED.

9