Supreme Court Grants Federal Agencies Wide Discretion in Interpreting Regulations

U.S. Supreme Court

On March 9, the Supreme Court unanimously ruled that the Administrative Procedure Act (APA) does not require federal agencies to go through the formal rulemaking process when making changes to rules interpreting regulations, or “interpretive rules,” even if those changes are significant. This decision, Perez v. Mortgage Bankers Association, is of impactful significance to federal agencies and regulated entities alike because it overrules long-standing precedent—known as the D.C. Circuit’s Paralyzed Veterans doctrine—that required agencies to engage the public in the formal notice-and-comment period before issuing new interpretations of previously promulgated regulations. Here, the Court held that the Paralyzed Veterans doctrine is contrary to the APA’s rulemaking previsions and imposes unwarranted procedural obligations on federal agencies.

In this case, the Mortgage Bankers Association (MBA) challenged a 2010 Department of Labor (DOL) interpretative rule declaring that mortgage loan originators were no longer exempt from the Fair Labor Standard Act’s requirement that employees working more than forty hours per week are to be paid overtime. The DOL had previously taken the opposite position on this issue in a 2006 interpretative rule stating that mortgage loan officers were exempt from the overtime pay requirement. In challenging the DOL’s withdrawal of their 2006 interpretation, the MBA relied on the Paralyzed Veterans doctrine and argued that the 2010 interpretation was invalid because it was a “substantive change” that did not comply with the public notice-and-comment period. While the D.C. Circuit agreed with the MBA, the Supreme Court reversed, holding that the clear text of the APA’s procedural requirements does not apply to interpretive rules even though courts had long held this was not necessarily the case.

For highly-regulated entities, such as banks and other financial institutions, the Court’s decision in Perez will compromise the ability of such entities to maintain compliance with the regulations that govern their industries—especially when these regulations become the basis for enforcement actions. The deference the Court imparts to agencies allows them to informally change their positions on rules at any given time and has the potential to create an unstable and unpredictable regulatory environment.