On September 17, 2015, the Division of Banks (Division) filed a Temporary Order to Cease and Desist and Notice of Administrative Penalty (Order) against Direct Finance Corporation (Direct Finance), a mortgage broker licensed by the Division. The Division alleges that by distributing a flyer and website offering a “Lifestyle Improvement Loan”, Direct Finance engaged in misleading and deceptive advertising practices, in violation of G.L. c. 93A, §2(a), 940 CMR 8.04(1) and 209 CMR 42.12A(9). The Division alleges that the flyer failed to make reference to the type and license number held by Direct Finance in violation of 209 CMR 42.15, 209 CMR 42.12A(13) and 209 CMR 42.12A(14). The Division alleges that Direct Finance failed to provide adequate employee oversight under 209 CMR 42.06(2)(d). In addition, the Division alleges that Direct Finance failed to demonstrate and maintain the character, reputation, integrity, and general fitness that would warrant the belief that the mortgage broker business will be operated honestly, fairly and soundly in the public interest in violation of G.L. c. 255E, §4 and 209 CMR 42.06(2)(c). The Division contends that the allegations in the Order support the imposition of a $25,000 administrative penalty against Direct Finance pursuant to G.L. c. 255E, §11.[1]
On September 22, 2015, Direct Finance, through counsel, made a timely request for administrative hearing. The following is a summary of the many filings made by the parties in this case:
After the parties exchanged discovery requests, each filed Motions to Compel Discovery and their respective oppositions. Once the discovery motions were resolved, the Division filed a Motion for Summary Decision. Direct Finance responded with an Opposition, a Cross-Motion to Strike and an affidavit from Direct Finance’s president, Alain Valles. The Division filed its Reply to Direct Finance’s Opposition and Opposition to Direct Finance’s Motion to Strike.
Oral arguments on the Motion for Summary Decision were heard in person on July 20, 2016. Direct Finance objected to the recording of the motion hearing. I made an oral order prohibiting the recording of the July 20, 2016 motion hearing. Both the Division’s Motion for Summary Decision and Direct Finance’s Motion to Strike were denied.
Prior to the Evidentiary Hearing, Direct Finance filed nine motions in limine. The Division filed corresponding oppositions. Oral arguments were heard in person on November 4, 2016. All motions in limine were denied except for one regarding 209 CMR 42.06(2)(c) and (d), which was allowed.
The Evidentiary Hearing was held in person on November 9, 2016. The Division called Regional Field Managers Kimberly Wood-Grazulis and Harkeem Dixon as witnesses. Direct Finance called its president, Alain Valles. The Division sought to introduce two letters from Direct Finance’s attorney, Mark O’Connor, to the Division. Their admission was initially taken under advisement and they were later admitted into evidence as Exhibits 22 and 23 respectively. The Division filed a formal exception to the allowance of the motion in limine and a motion to ensure the confidentiality of the sections of the Evidentiary Hearing transcript where confidential documents are discussed.
[1] The Order also calls for Direct Finance to cease and desist using the flyer, the website and any advertisements which have the tendency or capacity to mislead. Without any admission of wrongdoing, Direct Finance had voluntarily agreed that it will no longer use either the flyer, the website or the term “Lifestyle Improvement Loan”. See e.g., Valles Direct Tr. 215, 225. As this portion of the order is moot, it warrants no further discussion.
The Order imposes an administrative penalty of $25,000 under G.L. c. 255E, §11. In light of the violations and the underlying circumstances, the penalty imposed is reasonable.
The $25,000 administrative penalty is expressly authorized by statute. G.L. c. 255E, §11 authorizes the Division to assess a penalty of up to $5,000 against a licensee for each violation of any law applicable to the conduct of the business of making or brokering mortgage loans on residential property. See Fall River Motor Sales, Inc., 409 Mass. 302, 313-314 (1991). See e.g. United States v. Reader's Digest Ass'n, Inc., 662 F.2d 955, 967 (3d Cir. 1981), cert. denied, 455 U.S. 908 (1982) (bulk mailing of 17,940,521 letters equaled as many violations of cease and desist order, warranting penalty of $ 1,750,000); United States v. Golden Fifty Pharmaceutical Co., 421 F. Supp. 1199, 1207 (N.D. Ill. 1976) (fourteen mass mailings and two individual mailings were sixteen violations, but each individual letter of the mass mailings could have been construed as a separate violation); Piuma v. United States, 126 F.2d 601, 603 (9th Cir. 1942) (one newspaper advertisement published thirteen times in substantially the same form constituted thirteen violations).
The promotional materials in this matter were misleading or had a capacity to mislead. Also, the original Secret Angel flyer wrongfully failed to include Direct’s license type and license number in violation of 209 CMR 42.15, 209 CMR 42.12A(13), and 209 CMR 42.12A(14) as a matter of law. The Original Secret Angel Flyer was distributed to six (6) senior citizens who attended a luncheon at for the Andover – North Andover New Comers and Empty Nesters and that the amended flyer was also made available to those consumers. Exhibit 22. The Original Secret Angel Flyer was also emailed to over 1,600 business contacts, and was given to the Stoneham Senior Center Director in an effort to convince her to allow a presentation on reverse mortgages. The Amended Flyer was also emailed out to over 1,600 business contacts and was offered to the public at a separate Senior Center. As each of these distributions is a violation, the penalty is permitted by statute.
In determining the appropriateness of the penalty, I also considered the product that Direct Finance was advertising: reverse mortgages. In issuing a penalty, an agency can consider its need to vindicate its authority when issuing its administrative penalty, and issue a penalty with the aim of “deterring future violations by this defendant and others.” Fall River Motor Sales, Inc., 409 Mass. 302, 313 (1991). Reverse mortgages are only available to seniors 62 and over, target most consumer’s largest asset, and put seniors at risk for foreclosure. As such, the Division is entitled to issue more severe penalties in cases involving reverse mortgages to serve as a deterrent.
I also took into consideration Direct’s prior regulatory history when determining the appropriateness of the penalty.[3] Direct’s regulatory history demonstrates not only repeated problems, but also repeated failures to correct those problems.
Direct’s regulatory history includes prior advertising violations which Direct Finance has continued to repeat. In 2010 Direct and the Division entered into a Memorandum of Understanding (MOU)[4] whereby Direct agreed to, among other things, “immediately undertake a review of Direct Finance’s website and all direct mail pieces and advertising materials and hereafter: (i) eliminate any representations or statements that could be considered false, misleading or have tendency to be misleading, including but not limited to any representations that Direct Finance, a licensed mortgage broker is approving or funding the loan…” Exhibit 11. Despite agreeing to remove all claims that Direct was also a mortgage lender, the 2012 Examination revealed that Direct’s website was replete with references to it being the lender. Exhibits 12, 10 and Dixon Direct Tr. 114-116. At least three times Direct claims to have both a Mortgage Broker and Mortgage Lender License (“Massachusetts Mortgage Lender and Broker License #MB5212). Exhibit 12. Direct did not, in fact, have a Mortgage Lender license at this time, nor was the mortgage broker license number listed accurate. Dixon Direct Tr. 96-97, 99. Direct went on to describe itself as “an FHA-Approved Reverse Mortgage lender”. Id. The 2012 Examination Report notes this and other failures of Direct to comply with the MOU. Exhibit 10.
As a result of the 2012 Examination Report, the Division entered into the 2012 Consent Order with Direct superseding the MOU. Exhibit 3. The 2012 Consent Order was superseded by the 2015 Consent Order after the Division issued its 2014 Examination Report. Despite previously agreeing not to refer to itself as a lender, and despite being cited for such a violation, the Lifestyle Improvement Loan website again refers to Direct as a mortgage lender. (“We (the lender) will begin to process your paperwork.”) Exhibit 3. The penalty is reasonable in light of these prior advertising violations.
The 2012 Examination revealed that Direct Finance failed to comply with other aspects of the MOU, including management’s continued failure to adequately supervise its mortgage loan originators, failure to accurately date consumer disclosures which prevented the examiners from determining compliance with the delivery timelines, failure to implement a compliance program and adequately train personnel to prevent repeated violations, continued distribution of particular disclosures to consumers which only the lender or creditor is permitted to provide, and its failure to submit quarterly progress reports as it had agreed. Exhibit 10, see also Dixon Direct Tr. 111-112.
The 2012 Examination also revealed that Direct Finance had employed unlicensed mortgage loan originators, as well as an originator who was improperly sponsored by another mortgage entity. Direct Finance also gave some consumers noncompliant Loan Origination and Compensation Agreements, and failed to properly disclose its license number. Exhibit 12.
On November 30, 2012 the Division entered into a Consent Order with Direct Finance. During its 2014 Examination, the Division found that Direct Finance was not in compliance with the 2012 Consent Order. It found that Direct Finance violated the 2012 consent order by failing to ensure adequate supervision and monitoring of its employees, failed to maintain adequate records, provided consumers with disclosures that only the lender or creditor may provide and failed to timely submit quarterly progress reports.
In addition to the violations of the 2012 Consent Order, the 2014 Examination revealed that Direct Finance’s Anti-Money Laundering Program was insufficient, that Direct Finance did not have the proper escrow account. Because of Direct’s long history of violations, the imposed penalty is reasonable.
Mr. Valles claims that he relied upon the Division’s prior examination report and the Division is therefore estopped from bringing this action. However, there is no support for Mr. Valles claimed reliance. The Division’s Bulletin makes clear that a licensee is responsible for its advertising, and Mr. Valles was aware of the Bulletin. Exhibit 8, Valles Cross Tr. at 232. The record does not reflect any affirmative approval of this line of advertising. In fact, Direct Finance received no feedback from the Division regarding the prior advertisement. Valles Direct Tr. 204-205. Furthermore, the prohibition against applying estoppel against a government agency is deeply rooted. See, e.g. LaBarge v. Chief Admin. Justice of the Trial Court, 402 Mass. 462, 468 (1988), quoting Gamache v. Mayor of N. Adams, 17 Mass. App. Ct. 291, 294 (1983); Ridgeley Mgmt. Corp. v. Planning Bd. of Gosnold, 82 Mass. App. Ct. 793, 801 (2012). A licensee cannot reasonably rely on the Division’s not citing a violation in a previous examination, nor did the Division waive the right to later take action.
Mr. Valles also submitted an affidavit claiming that “Direct Finance cannot afford a penalty of $25,000.” See Affidavit of Alain Valles submitted in Opposition to the Division’s Motion for Summary Decision. At the hearing, Direct Finance offered no evidence in support of this statement. After reviewing Direct Finance’s financial statement filing (Exhibit 9) and testimony regarding Mr. Valles’ compensation (Valles Cross Tr. 234), I find that Direct Finance can afford the penalty imposed in the Order, and that said penalty is reasonable.
[3] Despite Direct Finance’s arguments to the contrary, its regulatory history can be considered even though it did not admit to any of the prior alleged violations. See Anusavice v. Board of Registration in Dentistry, 451 Mass. 786, 801 (2008). In Anusavice v. Board of Registration in Dentistry, the Supreme Judicial Court held that the Board could discipline a licensee based on an out-of-state consent order. 451 Mass. 786, 801 (2008). It did not matter that the licensee “neither admit[ed] nor denie[d] the… allegations” in the consent order. Id at 788. The Court specifically rejected the argument that the allegations had to be proven or admitted by the licensee to be taken into account. Using the consent order in that way did “not suffer from any constitutional defect or statutory bar”. Id at 795. In fact, the Court found the Board could issue a more severe penalty than the out-of-state jurisdiction, since it could take into consideration not only the Rhode Island consent order, but also the licensee’s “history of discipline and regulatory noncompliance in Massachusetts”. Id at 801. The fact that Direct Finance did not admit to those prior findings is no bar to considering its history of noncompliance (as exhibited by its prior Examination Reports) and history of discipline (as exhibited by its prior Memorandum of Understanding and Consent Orders).
[4] Direct may contest the findings in the 2009 Examination Report, but it agreed to make changes to its policies and procedures in the MOU. The MOU was superseded by the 2012 Consent Order because of failures to comply with the MOU. Similarly, the 2012 Consent Order was superseded by the 2015 Consent Order because the 2014 Examination Report exposed further uncorrected issues with the company.
- Direct Finance is hereby ordered to pay an Administrative Penalty in the amount of $25,000 [5] for engaging in deceptive and prohibited advertising, pursuant to the provisions of General Laws chapter 255E, section 11.
- This Final Decision and Order may be appealed by filing a written petition for judicial review within thirty (30) days after entry of this Final Order and Decision, pursuant to Massachusetts General Laws chapter 30A, sections 14 and 15.
Dated this 17th day of February, 2017.
By:
The Honorable Elizabeth Butler (Ret.)
Administrative Hearing Officer
[5]If the Hearing Officer were to decide that there were violations but that the $25,000 penalty is too high, the Hearing Officer must provide the Commissioner with a proposed determination as to what the appropriate penalty would be.
By order and direction of the Commissioner of Banks the above proposed Order is made final.
Dated at Boston, Massachusetts, this 24th day of February, 2017.
By:
Terence A. McGinnis
Commissioner of Banks
Commonwealth of Massachusetts
