OAH 48-1005-21222-2
STATE OF
OFFICE OF ADMINISTRATIVE HEARINGS
FOR THE DEPARTMENT OF COMMERCE
|
ORDER DENYING SUMMARY DISPOSITION |
This matter came before Administrative Law Judge Steve M. Mihalchick on August 24, 2010, at the Office of Administrative Hearings on the Respondents’ Motion for Summary Disposition. The record on the motion closed upon the conclusion of the hearing on August 24, 2010.
James A. Webster, Esq., MN Law Group, P.C., 971 Sibley Memorial Highway, Suite 106, Lilydale, MN 55118 appeared on behalf of County Loan Modification, LLC, a/k/a Mortgage Auditors of America (CLM), and Take The Land Nonprofit Housing Corporation, a/k/a TTL Nonprofit Processing Service (TTL)(collectively “Respondents”). Christopher M. Kaisershot, Assistant Attorney General, appeared on behalf of the Minnesota Department of Labor and Industry (Department).
Based upon all of the files,
records, and proceedings in this matter, and for the reasons detailed in the Memorandum
below,
IT IS
HEREBY ORDERED THAT Respondent’s Motion for Summary
Disposition is DENIED.
Dated: September 13, 2010
|
/s/
Steve M. Mihalchick |
STEVE
M. MIHALCHICK
Administrative
Law Judge
MEMORANDUM
I. Factual and Regulatory Background
In 1998, the Legislature enacted the Minnesota
Residential Originator and Servicer Licensing Act (“the Act”), a measure that
regulates the practice of originating residential mortgages.[1] Under the
Act, residential mortgage originators must either be directly licensed by the
Department or covered by a specific statutory exemption.
The Act defines a number of terms used in the practice
of mortgage origination including the following:
Subd. 13. Mortgage
broker; broker. "Mortgage broker" or "broker" means a
person who performs the activities described in subdivisions 14 and 23.
Subd. 14. Mortgage
brokering; brokering. "Mortgage brokering" or "brokering"
means helping to obtain from another person, for a borrower, a residential
mortgage loan or assisting a borrower in obtaining a residential mortgage loan
in return for consideration to be paid by the borrower or lender or both. Mortgage
brokering or brokering includes, but is not limited to, soliciting, placing, or
negotiating a residential mortgage loan.
* * *
Subd. 23. Soliciting,
placing, or negotiating a residential mortgage loan. "Soliciting, placing,
or negotiating a residential mortgage loan" means for compensation or gain
or expectation of compensation or gain, whether directly or indirectly,
accepting or offering to accept an application for a residential mortgage loan,
assisting, or offering to assist a borrower in applying for a residential
mortgage loan, or negotiating or offering to negotiate the terms or conditions
of a residential mortgage loan with a lender on behalf of a borrower.[2]
In early-October 2009, the Department became aware
that Respondents were offering services in
The Department examined the Respondents’ marketing
materials, which included the following in a brochure entitled What is a Forensic Audit?:
Mortgage Loan
Forensics is a comprehensive examination of a mortgage loan file to identify
regulatory violations and resulting remedies available to the borrower
including the right to rescission (effectively a right to cancel the loan),
interest payment refunds, defenses to foreclosure and civil damages.
Mortgage Loan
Forensics assists Mortgage Auditors of America in negotiating affordable
workout solutions or modifications so borrowers can keep their home and lenders
can mitigate their losses.[3]
Another
marketing item, entitled Are You A Victim
of Mortgage Fraud?, includes the following statement:
Once the due diligence
is completed, Mortgage Auditors of America and its in-house auditors, who are
experienced in this type of law, will then attempt to negotiate with your
lender on your behalf using the audit findings as leverage in order to achieve
a favorable settlement.[4]
The Department obtained the Respondents’
… as a free service,
[County Loan Modification, LLC, a/k/a Mortgage Auditors of
* * *
The loan modification/loss
mitigation process can be resolved in as little as a few days. Typically, they are resolved in four (4) to
eight (8) weeks. Due to the current demand on lending services and the high
number of foreclosures nationally, this process may take as long as six (6)
months. Client agrees to inform Company
of any and all notices, communications, and/or offers from Client’s lender(s). Client understands that if contacted by
lender(s), they should inform lender(s) that they are working with Company.[5]
The
Department identified agreements between at least 12 Minnesotans and Respondents
using the July language.[6] The Department identified other documents, entitled
Payment Agreement and General Authorization Form that included
the following language:
I (we) have entered
into an agreement with County Loan Modification LLC (CLM) to provide forensic
audit reports as well as the modification of my loan. I have agreed that the
fee to CLM is $_________________[7]
The Department noted that the Respondents’ form
entitled Refund Agreement recited the
scope of agreed-to services and confirmed that any refund to the homeowner was
dependent on Respondents’ ability to modify the homeowner’s mortgage stating:
A. Client has entered
into an agreement with Company to modify Client’s loan on property located at
______________________
B. Company has
informed Client that a modification is not possible under their current
situation with their lender.
C. Company and Client
wishes [sic] to terminate the Client’s agreement and refund any money due to
Client.[8]
Through the Department’s investigation, the
Respondents identified seven other transactions in which refunds were provided
to clients after an inability to modify each client’s home mortgage. The Department noted that each of the seven
transactions had a nearly identical amount paid by and refunded to the clients. From this, the Department concluded that the
clients had, in fact, paid for a mortgage modification and not a forensic
audit. This conclusion was buttressed
through interviews conducted by Department investigators, where the clients
indicated that they believed they were purchasing mortgage loan modification
services from Respondents.[9]
Respondents solicited homeowners to contract for
services by airing at least 70 radio advertisements on KTTB 96.3 FM (known as B96),
maintaining an Internet website, sending postcard solicitations directly to
homeowners, and canvassing neighborhoods with salespersons using pre-determined
scripts.[10] The Department noted that the sales scripts
used by the Respondents focused on the potential for losing one’s home through
mortgage foreclosure and suggesting that the Respondents’ services could avoid
that outcome.[11] The radio advertising script reads as
follows:
Based on its investigation, the Department concluded
that the Respondents were offering residential mortgage origination services
without a license and in violation of
At the prehearing conference held in this matter, the
parties agreed to a deadline of August 6, 2010, for dispositive motions. On August 6, 2010, the Respondents filed
their Motion for Summary Disposition.
The Department replied to the motion.
Oral argument on the motion was conducted on August 24, 2010.
II. Standards for Summary Disposition
Summary disposition is the administrative equivalent of summary judgment. Summary disposition is appropriate where there is no genuine issue as to any material fact and one party is entitled to judgment as a matter of law.[15] The Office of Administrative Hearings has generally followed the summary judgment standards developed by state and federal courts when considering motions for summary disposition.[16] A genuine issue is one that is not sham or frivolous. A material fact is a fact whose resolution will affect the result or outcome of the case.[17]
The moving party has the initial burden of showing
the absence of a genuine issue concerning any material fact. To successfully resist a motion for summary
judgment, the non-moving party must show that there are specific facts in
dispute which have a bearing on the outcome of the case.[18] The nonmoving party must establish the
existence of a genuine issue of material fact by substantial evidence; general
averments are not enough to meet the nonmoving party’s burden under Minn. R.
Civ. P. 56.05.[19] The evidence presented to defeat a summary
judgment motion, however, need not be in a form that would be admissible at
trial.[20]
When considering a motion for summary judgment, the
Court must view the facts in the light most favorable to the non-moving party.[21] All doubts and factual inferences must be
resolved against the moving party.[22] If reasonable minds could differ as to the
import of the evidence, judgment as a matter of law should not be granted.[23]
III. Argument and Analysis
Statutory Authority
The Respondents contend that the
provisions of Minn. Stat. Chapter 58 regarding mortgage brokers do not apply to
assisting in the modification of a loan that the consumer already has. The Respondent urges that the language in
Minn. Stat. § 58.02, subd. 23, which states “negotiating or offering to
negotiate the terms or conditions of a residential mortgage loan with a lender
on behalf of a borrower” be read to mean only at the initial application for
such a mortgage. The Respondents maintain
that the Department’s claimed of a violation in this proceeding constitutes “an
improper attempt to administratively expand the scope of the statute’s intended
application to encompass activities that have nothing to do with the
origination or brokering of residential mortgage loans, i.e., with helping a
consumer obtain a loan.”[24]
The
Department responded that the plain language of the statute covered the
Respondents’ activities. Further, the
Department noted that the Respondents’ interpretation of the rule would render superfluous
the second sentence of Minn. Stat. § 58.02, subd. 14 (“Mortgage brokering or
brokering includes, but is not limited to, soliciting, placing, or negotiating
a residential mortgage loan.”) The
Department contends that the second sentence incorporates by reference the phrase
“soliciting, placing, or negotiating a residential mortgage loan,” defined in
subdivision 23 to include “negotiating or offering to negotiate the terms or
conditions of a residential mortgage loan with a lender on behalf of a
borrower.”[25]
At
no point do any of these definitions limit activities to mortgage
applications. There is no exclusion in
subdivision 23 for negotiating terms to existing mortgages. The plain language of Minn. Stat. § 58.02, subds.
14 and 23, includes the activity of negotiating with a lender for a
modification of terms of an existing mortgage.
There is no interpretation of the statute needed to conclude that the
Department has the authority to pursue the investigation and initiate the complaint
against the Respondents. Summary disposition
in favor of the Respondents on this issue is inappropriate.
Compensation or Gain
The
Respondents note that under Minn. Stat. § 58.02, subd. 23, negotiating the
terms or conditions of a residential mortgage loan with a lender on behalf of a
borrower must be done for “for compensation or gain or expectation of
compensation or gain” for the activity to fall under the ambit of the
statute. The Respondents contend that “substantial
evidence establishes that Respondents did not perform loan modification
services for compensation or gain.”[26]
In
support of this contention, the Respondents rely on the terms of a version of
the Agreement for Services that some
of their clients signed prior to receiving services from Respondents.[27] The
Respondents point to the language that states, “as a free service, Company will
assist Client in obtaining a loan modification.”[28] On the second page of the Agreement for
Services, there is a space for the client’s initials beside a statement that the
client “is receiving a loan modification at no cost to Client and all fees paid
are strictly for services in performing a forensic audit of Client’s loan.”[29] The Respondents contend that the terms of the
contract demonstrate conclusively that no negotiations were conducted “for
compensation or gain or expectation of compensation or gain” as required by
Minn. Stat. § 58.02, subd. 23, for the licensing requirements to be triggered
for negotiating the terms or conditions of a residential mortgage loan with a
lender on behalf of a borrower.
The
Department disputes the Respondents’ contention on this issue, noting that no homeowner
could obtain any modification “unless he or she paid for Respondents’ services.” The Department also noted that the Respondents’
Refund Agreement and subsequent actions demonstrated a direct connection
between the services paid for by the homeowners and mortgage modification
services, not the forensic audits as claimed by the Respondents. The homeowner’s right to a refund was
contingent only on whether Respondents were able to modify the underlying
mortgage loan. The Department noted that
the Respondents represented to potential clients that a refund would be
forthcoming if Respondents were unable to modify the loan and the Respondents
actually provided such refunds in such instances.[30] There is no connection between forensic
mortgage audit activity and the clients’ right to a refund under the
Respondents’ contracts. In addition, the
other contract documents (Payment Agreement, Refund Agreement, and General Authorization Form) have
explicit language describing CLM’s services as loan modification.[31]
In
essence, the Respondents are asserting that the terms of their contracts with
their clients are severable to avoid triggering the licensing requirements of
Minn. Stat. Chapter 58. As noted by the
Minnesota Court of Appeals:
The mere fact that a
contract is organized by numbered provisions and may be divided does not make a
contract severable. See e.g., Bentley v.
Edwards, 125
The contract between the Respondents and their clients
is a single agreement that, by its terms, binds Mortgage Auditors (operating as
CLM) to perform services in exchange for consideration from the client. The assertion that some service is described
as “free” does not change the fact that consideration is received to render the
contract binding on the parties. The services
described in the contract are part of the whole and cannot be severed by
Respondents in order to achieve a goal not identified in the contract. That goal is to avoid the statutory
requirement of licensure by CLM.
Even if the contract provisions were deemed
severable, the relevant language of the statute states, “compensation or gain
or expectation of compensation or gain, whether directly or indirectly ….”[33] The Department asserts that the latter phrase
would include the mechanism used by Respondents in obtaining compensation from
clients.
On summary disposition, all inferences must be taken
in favor of the non-moving party, on this motion, the Department. The Agreement
for Services contract provisions contain a simple statement regarding CLM
providing forensic audit reports, followed by a long list of “free” services to
be provided to the client. The inference
most favorable to the Department from these facts is that CLM is, either
directly or indirectly, obtaining compensation or gain from services to be
provided through the transaction.[34] There are genuine issues of material fact to
be determined regarding the operation of the forensic audit/mortgage
modification system offered by the Respondents.[35] Summary disposition on Count I is
inappropriate.
Deceptive Practices
Count
II of the Department’s complaint alleges violations of the statutes prohibiting
deceptive business practices. The allegation
in the Notice of and Order for Prehearing Conference stated:
Respondents solicited
mortgage modification services under the guise of providing “forensic audits”
to distressed homeowners for an advance fee. Even though Respondents represented that the
fee would be refunded if they could not modify the homeowner’s loan,
Respondents collected and failed to remit approximately $25,000 in up-front
fees. Respondents engaged in fraudulent,
deceptive, or dishonest practices, demonstrated untrustworthiness, and
otherwise made false and misleading statements and representations in
connection with loan modification activities. Minn. Stat. §§ 45.027, subd.
7(a)(2) and (4), 58.12, subd. 1(2)(iv) and (v), and 58.13, subd. 1(a)(9) (2008
and Supp. 2009); see also Minn. Stat. §* 58.13, subd. 1(a)(8), 325N.01,
325N.04(1), and 325N.06(d) (2008 and Supp. 2009).[36]
Subsequently, the Department described the basis for
Count II as two-fold: 1) the Respondents were engaged in a dishonest attempt to
evade the licensure requirement, and 2) the Respondents did not provide refunds
to each customer after Respondents failed to modify the homeowner’s mortgage
loan.[37] The ALJ relies on the language in the Notice
and Order to analyze the issues for this motion.
Respondents disputed whether the refund terms or the
advertising script constituted deceptive practices, arguing:
The Department alleges
that Respondents represented that they would refund the forensic audit fee if
Respondents could not modify the homeowner’s mortgage loan. (Stmt. of Charges,
p.3 ¶5, p.6). The only factual assertion in the Statement of Charges that could
conceivably form the basis for the Department’s allegations is its recitation
of the statement in the radio script that “there is no risk to call and no
charge if they can’t help.” (Stmt. of Charges, pp. 4-5 ¶8). However, this
statement falls far short of the explicit representation that the Department
alleges Respondents made. As already demonstrated, the advertisement was not an
offer to provide loan modification services for a fee—it is an offer to provide
forensic audit services. The question,
then, is whether Respondents’ representation that there is “no charge if they
can’t help” can reasonably be construed as promising to refund the fee that
would be charged for the offered forensic audit services if Respondents were
unable to assist the consumer in modifying their loan with their lender. Given that the solicitation is clearly for
forensic audit services and not loan modification services, Respondents submit
that such an inference is unreasonable, as there is no representation that loan
modification services are being offered at all.[38]
A close examination of the radio advertising script
reveals seven references to foreclosure, negotiation, or mortgage loan
modification.[39] That which the Respondents treat as a
“given,” that the ad is clearly for forensic audit service and not for mortgage
modification, is plainly not apparent in the script. The script strongly implies that clients will
receive assistance in dealing with the mortgage lender.
The Respondents maintain that their position is
supported by the script language that “there is no risk to call and no charge
if they can’t help.” But, as the
Department points out, “the homeowner’s right to a refund hinged on whether
Respondents were able to modify the underlying mortgage loan.”[40] There is never an occasion where the
Respondents could not have performed a forensic mortgage audit for a homeowner
who is a mortgagor. The “if they can’t
help” language strongly implies that the Respondents are offering services to modify
the loan, not merely conduct a forensic audit.
Taking the facts in the light most favorable to the Department, summary
disposition is inappropriate on the representations allegation in Count II.
The second allegation in Count II is that Respondents
have not made good on the refund guarantee.
The Department has identified clients who maintain that they have not
received a refund from the Respondents when entitled to such a refund.[41] This is a genuine issue of material
fact. Summary disposition is
inappropriate on the refund policy allegation in Count II.
IV. Summary
Summary disposition is appropriate in circumstances
where there are no genuine issues of material fact. In this matter, there are disputed facts regarding
both the application of the standards of Minn. Stat. Chapter 58 and whether the
Respondents engaged in deceptive practices regarding its services offered to
homeowners. For these reasons, denying
the Respondents’ motion is appropriate.
S.M.M.
[1] See, Minn. Stat. §§ 58.01 – 58.18 (2006).
[2] See, Minn. Stat. § 58.02 (2006).
[3] Kosmalski
Aff., Ex. 6 at DOC000050.
[4] Id. at
DOC000049.
[5] Kosmalski
Aff., Ex. 19, at DOC00l025-26.
[6] Kosmalski
Aff., Exs. 8, 10, 13, 16, 17, 20, 25, 27, 30, 33, 34, and 35.
[7]Kosmalski
Aff., Ex. 26 at DOC001282 (8/25/09 version).
The Department also noted that the September 23, 2009 version of the
form changed the company name to “Mortgage Auditors of America” and left all
other terms the same. Kosmalski Aff.,
Ex. 36 at DOC001653.
[8] Kosmalski
Aff, Ex. 14 at DOC000818 (“Company” is identified as CLM earlier in the
document).
[9] Kosmalski
Aff., Ex. 25 at DOC00002I and Ex. 26 at DOC0021 54; Timothy Knautz Aff.
(“Knautz Aff.”), Ex. 4; Affidavit of Adrienne Lance-Lucas at RES0001 - RES
0010.
[10] Knautz
Aff., Ex. 5; Kosmalski Aff, Ex. 38; see also Kosmalski Aff., Ex. 25 at
DOC001188; Kosmalski Aff., Ex. 41 at D0C001957; Kosmalski Aff., Ex. 44-45.
[11] Kosmalski
Aff., Ex. 46.
[12]
Respondents’ Brief, Attachment DOC 001701.
[13] Kosmalski
Aff., Ex. 3.
[14] Notice of
and Order for Prehearing Conference, at 5-6.
[15] Sauter v.
Sauter, 70 N.W.2d 351, 353 (Minn. 1955); Minn. R. 1400.5500K; Minn. R. Civ. P.
56.03.
[16] See Minn.
R. 1400.6600.
[17] Illinois
Farmers Insurance Co. v. Tapemark Co., 273 N.W.2d 630, 634 (Minn. 1978);
Highland Chateau v. Minnesota Department of Public Welfare, 356 N.W.2d 804, 808
(Minn. App. 1984).
[18] Thiele v.
Stich, 425 N.W.2d 580, 583 (Minn. 1988); Hunt v. IBM Mid-America Employees
Federal, 384 N.W.2d 853, 855 (Minn. 1986).
[19] Id.; Murphy
v. Country House, Inc., 307 Minn. 344, 351-52, 240 N.W.2d 507, 512 (Minn.
1976); Carlisle v. City of Minneapolis, 437 N.W.2d 712, 75 (Minn. App.
1988).
[20] Carlisle,
437 N.W.2d at 715 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986)).
[21] Ostendorf
v. Kenyon, 347 N.W.2d 834 (Minn. App. 1984).
[22] See, e.g.,
Celotex, 477 U.S. at 325; Thiele v. Stich, 425 N.W.2d 580, 583 (Minn. 1988);
Greaton v. Enich, 185 N.W.2d 876, 878 (Minn. 1971); Thompson v. Campbell, 845
F. Supp. 665, 672 (D. Minn. 1994).
[23] Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 250-51 (1986).
[24]
Respondents’ Brief, at 4.
[25] Department
Brief, at 10-11.
[26]
Respondents’ Brief, at 5.
[27]
Respondents’ Brief, at 5, Attachment DOC 000308-10.
[28] Id.,
Attachment DOC 000308.
[29] Id.,
Attachment DOC 000309.
[30] Department
Brief, at 11-13.
[31]See Kosmalski Aff, Ex. 14 at DOC000818 and Ex. 26
at DOC001282.
[32] Jerome
Cheese Company v. Equinox Enterprises, Inc., A04-1960 (Minn.App. June 28,
2005).
[33] Minn. Stat.
§ 58.02, subd. 23.
[34] Depending
on the specific language of the Agreement for Services executed by the parties,
those services were to be provided by either CLM or TTL. Under either approach, taking the evidence in
the light most favorable to the Department, a genuine issue of material fact
regarding the provision of services remains for hearing.
[35] The
Respondents criticized the quality of the evidence provided regarding
interviews with clients conducted by the Department. This is not a valid issue when pursuing
summary disposition, as the offered facts are taken in the light most favorable
to the Department’s position as the nonmoving party.
[36] Notice and
Order for Prehearing Conference, at 6.
[37] Department
Brief, at 13-14.
[38]
Respondents’ Brief, at 9-10.
[39]
Respondents’ Brief, Attachment DOC 001701.
The seven references are: 1) KICKED OUT OF THE PLACE THAT WE CALL HOME;
2) FIGHTING TO SAVE YOUR HOME; 3) LOAN MODIFICATION; 4) LEGAL LEVERAGE TO
NEGOTIATE; 5) BEGGING FOR RELIEF; 6) SAVE YOUR HOME; and 7) STOP A
FORECLOSURE. By contrast, there are two
references to mortgage audits in the script.
[40] Department
Brief, at 12.
[41] Kosmalski
Aff., Ex. 3.