ORDERS:
ORDER
STATEMENT
OF THE CASE
This
matter is before the Administrative Law Court (“ALC”) for a final order and
decision following a contested case hearing pursuant to S.C. Code Ann. §
1-23-600(A) (as amended 2008), § 1-23-600
(E) (Supp. 2007), and § 37-6-104 (2002). On November 7, 2007, Petitioner South
Carolina Department of Consumer Affairs (“Department”) filed a Petition with
this court seeking, among other relief, an order from this court requiring Foreclosure
Specialists, Inc., and Judson G. Decell (“Respondents”) to cease and desist
from engaging in consumer credit counseling services in South Carolina in
violation of the Consumer Credit Counseling Act (“Act”), S.C. Code Ann. §
37-7-101 et seq. (Supp. 2007). After notice to the parties, the court
held a hearing on this matter on May 15 and 20, 2008. After carefully weighing
all of the evidence, the court finds that the Department’s request for relief
should be granted.
ISSUES
1. Do the Respondents’ business activities from December 2005 through the
present constitute a “credit counseling organization” pursuant to S.C. Code
Ann. § 37-7-101(2), and were the Respondents providing “credit counseling
services” pursuant to S.C. Code Ann. § 37-7-101(3)?
2. If so, is Respondent Decell exempt from application of the Act pursuant
to S.C. Code § 37-7-101(2)(b)(viii)?
3. If not, does the Department have the authority to seek a refund of all
monies collected under the contracts the Respondents entered into with South
Carolina consumers from December 2005 to the present?
4. Does the Department have the authority to seek injunctive relief in the
instant matter?
FINDINGS
OF FACT
Having
observed the witness and exhibits presented at the hearing and closely passed
upon their credibility, the court makes the following Findings of Fact by a
preponderance of the evidence.
1. Background
Judson
G. Decell is a licensed loan originator. He and his business partner, Mike
Middleton, formed a partnership called the Judson-Mike Partnership d/b/a The
Middleton Group. The Middleton Group has been a licensed mortgage broker business
for more than ten years. In addition to the loan origination services Decell
provides to consumers through The Middleton Group, Decell also assists
homeowners who are delinquent in their mortgage payments and facing
foreclosure. Decell operates this service through a separate entity, Foreclosure
Specialists, Inc. Decell is the sole shareholder and registered agent of
Foreclosure Specialists. Foreclosure Specialists operates two offices in South
Carolina, one in Columbia and one in Greenville. Decell manages the Columbia
office, and Decell’s employee, Ken Braden, operates the Greenville office.
Braden is not a licensed loan originator or mortgage broker.
The
Respondents’ primary service to consumers consists of completing a set of forms
provided by the consumer’s (or homeowner’s) mortgage company, known as a “workout
package,” in an attempt to prevent foreclosure of the homeowner’s home. This
service involves (1) an initial phone screening with the homeowner to determine
if the homeowner is eligible; (2) an appointment with the homeowner so that the
Respondents can assist the homeowner in completing the workout package; (3)
submittal of the workout package to the mortgage company; and (4) follow-up
phone calls by the Respondents to the mortgage company to ensure that the
workout package was received and is being processed. There is no charge for
the initial phone conversation, and if the Respondents determine during the
initial phone screening that the homeowner is not eligible, the Respondents
provide no further services to the homeowner. If the homeowner is eligible,
the Respondents then arrange a meeting with the homeowner. The homeowner is
requested to bring financial documentation to the meeting to be included in the
workout package.
During
the meeting, the Respondents complete the pre-printed workout package with
information provided by the homeowner. Once the workout package is complete,
the Respondents transmit it to the homeowner’s mortgage company. It is then the
mortgage company’s decision whether to accept the workout package (and thus
halt the foreclosure); the Respondents have no control over this decision. The
Respondents occasionally receive a call from the mortgage company once the
workout package has been received, but often the mortgage company communicates
with the homeowner directly.
The
timeline for this service ranges from one month to several months, and the
Respondents charge a fee of approximately one thousand dollars. Three hundred
to five hundred dollars of that fee is required at the time of the appointment,
with the balance to be paid only if the mortgage company accepts the homeowner’s
workout package and ends the foreclosure. The Respondents do not handle any
other client funds; the client remits his mortgage payments directly to the
mortgage company if the workout package is accepted.
2. Procedural
History
On
May 4, 2007, the Department notified the Respondents of the Act’s applicability
to the Respondents’ business. On June 13, 2007, the Department met with the Respondents
regarding the Act, and requested additional information from the Respondents.
The Department never received the additional information from the Respondents,
even after sending three written requests to the Respondents. The Respondents
had not, as of the date of the filing of the Department’s Petition, responded
to the Department’s letters. In its Petition, the Department contends that the
Respondents have offered, and continue to offer, credit counseling services
described in § 37-7-101(3) to South Carolina consumers without the license
required by the Act. See Department’s Petition ¶¶ 4, 5. Further, the
Department asserts that the Respondents have charged fees for credit counseling
services in excess of those allowed by the Act. See Department’s
Petition ¶ 12.
Based
upon these alleged violations of the Act, and pursuant to S.C. Code Ann. §
37-7-108 (Supp. 2007), the Department requests that this court issue an order:
(1) requiring the Respondents to cease and desist from
offering or engaging in credit counseling services in violation of the Act;
(2) requiring the Respondents to refund all monies collected
under contracts entered into with South Carolina consumers after December 1,
2005;
(3) assessing an administrative fine of five hundred dollars
against the Respondents for each violation of the Act;
(4) restraining the Respondents from further violations of
the Act;
(5) that this Order take effect immediately; and
(6) granting such other relief as may be necessary, just, and
appropriate.
See Department’s Petition at 2-3.
LAW
1.
Jurisdiction
Jurisdiction
over this case is vested with the South Carolina Administrative Law Court
pursuant to S.C. Code Ann. § 37-6-104 (2002) and S.C. Code Ann. § 1-23-600(A) (as
amended 2008) and § 1-23-600(E) (Supp. 2007). The weight and credibility
assigned to evidence presented at the hearing of a matter is within the
province of the trier of fact. See S.C. Cable Television Ass’n v. S.
Bell Tel. & Tel. Co., 308 S.C. 216, 222, 417 S.E.2d 586, 589 (1992).
Furthermore, a trial judge who observes a witness is in the best position to
judge the witness’s demeanor and veracity and to evaluate the credibility of
his testimony. See, e.g., Woodall v. Woodall, 322 S.C. 7,
10, 471 S.E.2d 154, 157 (1996); Wallace v. Milliken & Co., 300 S.C.
553, 556, 389 S.E.2d 448, 450 (Ct. App. 1990).
In
presiding over this contested case, the court serves as the finder of fact and
makes a de novo determination regarding the licensing matters at issue. See S.C. Code Ann. § 1-23-600(A) and (E); Marlboro Park Hosp. v. S.C. Dep’t of
Health & Envtl. Control, 358 S.C. 573, 577-79, 595 S.E.2d 851, 853-54
(Ct. App. 2004); Brown v. S.C. Dep’t of Health & Envtl. Control, 348
S.C. 507, 512, 560 S.E.2d 410, 413 (2002).
2. Credit
Counseling Act
The
South Carolina Credit Counseling Act (“Act”) delegates to the Department the authority
to regulate persons who provide credit counseling services to South Carolina
consumers. S.C. Code Ann. § 37-7-101 et seq. Under the Act, a person
is required to obtain a license from the Department prior to engaging in
consumer credit counseling services. S.C. Code Ann. § 37-7-102 (Supp. 2007).
As defined in § 37-7-101(3), credit counseling services consist of:
(a) receiving or offering to receive funds from a consumer
for the purpose of distributing the funds among the consumer’s creditors in full
or partial payment of the consumer’s debts;
(b) improving or offering
to improve a consumer’s credit record, history, or rating;
(c) negotiating or
offering to negotiate to defer or reduce a consumer’s obligations with respect
to credit extended by others.
S.C. Code Ann. §
37-7-101(3) (Supp. 2007). It is undisputed that the Respondents do not receive
funds from consumers for the purpose of remitting those funds to the consumer’s
mortgage company. Thus, the applicable provisions are § 37-7-101(3)(b) and
(c).
Section
37-7-101(3)(b) states that “improving or offering to
improve a consumer’s credit record, history, or rating” constitutes credit
counseling services. During the hearing, the Department entered into
evidence a copy of a flyer sent out by the Respondents that clearly states, “[W]e
have credit repair available.” (Petr.’s Ex. 10). The flyer is signed by Ken Braden,
an employee of Foreclosure Specialists. Braden testified during the hearing
that neither he nor Foreclosure Specialists handles credit repair; rather, they
refer consumers to another business if the consumer wishes to use credit repair
services. However, under § 37-7-101(3)(b), the mere offer to repair credit
constitutes credit counseling services. Accordingly, the court finds that, in
offering credit repair, Respondent Foreclosure Specialists violated the Act.
Under
§ 37-7-101(3)(c), a person also engages in credit counseling services by “negotiating or offering to negotiate to defer or reduce a
consumer’s obligations with respect to credit extended by others.” The
Respondents contend that, although they assist the homeowners in completing the
forms for the workout application and follow up with the lenders to ensure the
application is being processed, they do not “negotiate” with the mortgage
companies, as the terms of the workout packages are pre-established by each
lender and are non-negotiable. Thus, whether the Respondent’s actions fall
within § 37-7-101(3)(b) turns largely on the construction of the word
“negotiate.”
Although “negotiate” is not defined in the Act, according
to Black’s Law Dictionary “negotiate” means “[t]o communicate
with another party for the purpose of reaching an understanding . . . [or t]o
bring about by discussion or bargaining.” Black’s Law Dict. 1059
(7th ed. 1999) (emphasis added). Moreover, an opinion
issued by the South Carolina Attorney General’s Office provides an analysis of
the term “negotiate”:
To negotiate is to
“communicate or confer with another so as to arrive at the settlement of some
matter: meet with another so as to arrive through discussion at some kind of
agreement or compromise about something; come to terms esp. in state matters by
meeting and discussions.” King v. Dean, 15 Ohio App.2d 15, 238 N.E.2d
828, 831 (Ohio Ct. App. 1968). Indeed, the “act of negotiating is
not a single act but a process. It involves a dialogue or back and forth
communication with a purpose. . . .” Id. Negotiation is defined as a
“deliberation which takes place between the parties touching a proposed
agreement; the deliberation, discussion, or conference on the terms of a
proposed agreement; ... a treating with another with a view to coming to terms.
. . . Negotiations look to the future, and are preliminary discussions; the
preliminaries of a business transaction.” International Plastics
Development, Inc. v. Monsanto Co., 433 S.W.2d 291, 296 (Mo. 1968).
1992 S.C. Op.
Att’y Gen. 19 (1992).
Moreover, as the Department points out, the lenders
themselves have described the process of applying for a foreclosure workout as
“negotiation.” For example, Chase Manhattan Mortgage Company’s workout package
states that “any negotiations regarding this loan shall not obligate
[Chase] until approved in writing by [Chase].” (Respt.’s Ex. 13) (emphasis
added). Homecomings Financial’s workout package refers to “[n]egotiations for
a possible foreclosure alternative. . . .” (Respt.’s Ex. 17) (emphasis
added). Washington Mutual’s workout package refers to “discussion and negotiations of a possible foreclosure alternative. . . . ” (Respt.’s Ex. 19) (emphasis
added).
Accordingly, the court finds that the ability to bargain effectively
is not essential to negotiation. Mere communication, as a means to reach an
agreement or resolve a dispute, constitutes “negotiation.” Because the
Respondents are communicating with lenders with the objective of resolving a
disputed foreclosure, they are engaging in negotiation on behalf of the
consumers.
To constitute consumer credit counseling services under the Act, the
object of the negotiation must be “to defer or reduce a consumer’s
obligations with respect to credit extended by others.” S.C.
Code Ann. § 37-7-101(3)(c) (emphasis added). Both Decell and Braden testified
that a consumer’s debt is not typically reduced by utilizing the
Respondents’ services; rather, many homeowners will owe more to the mortgage
company because they previously defaulted and owe additional penalties and
interest. However, the homeowner’s debt is unquestionably deferred by
utilizing the Respondents’ services: pursuant to the workout plan, the
homeowner’s immediately due, accelerated debt that resulted in the foreclosure
proceedings will be replaced by a payment plan or other financial arrangement
that does not hold the homeowner immediately responsible for the entire debt. Therefore,
because the Respondents’ activities include communicating with the mortgage
companies for the purpose of deferring the homeowner’s obligation to
immediately satisfy the entire debt via foreclosure on the collateral, the
court finds that the Respondents’ activities fall within the definition of “consumer
credit counseling” under the Act.
The
Respondents rely on several other provisions of the Act and the regulations in
support of their argument that their activities do not fall within its ambit.
First, they contend that its provisions regarding fees show that it was not
intended to apply to the Respondents’ activities. Section 37-7-101(2) provides
that “the business of credit counseling is conducted in this state if the credit
counseling organization, its employees, or its agents are located in this State
or if a credit counseling organization solicits or contracts with debtors
located in this State.” The Act also prescribes the fees that may be charged
by credit counseling organizations. S.C. Code Ann. § 37-7-112 (Supp. 2007)
provides that “[a] licensee may not charge a consumer a fee except as
established by the department by regulation.” Regulation 28-700(B)(1) (Supp.
2007) sets forth the fees a credit counseling organization may charge:
(1)
A licensee may not charge or receive from a consumer, directly or indirectly, a
fee except the following:
(a)
an initial consultation fee, not to exceed fifty dollars for each consumer;
(b)
if the consumer enrolls in a DMP [debt management plan], a set-up fee, not to
exceed thirty dollars;
(c)
additional maintenance fees, not to exceed forty dollars for each month;
(d) a reinstatement
fee, not to exceed twenty-five dollars[.]
The
Respondents argue that the initial consultation fee charged is not a sufficient
fee to enable them to continue operating. Although the Respondents charge no
fee for the initial phone call, they charge between three hundred and five
hundred dollars for the first in-person meeting, during which the Respondents
assist the homeowner in completing the workout package. The Respondents also
claim that subsections (b)-(d) of Regulation 28-700 cannot be construed to
apply to their business activities because they do not provide debt management
plans—because they do not maintain or manage consumer funds, there is nothing
to maintain and there is nothing to reinstate. The court finds that, because
the Respondents’ activities fall within the definition of credit counseling
services, as discussed above, the regulation prohibits the Respondents, if they
were properly licensed, from charging more than the amount found in Regulation
28-700(B)(1). Any argument that such fees are inadequate must be addressed to
the legislature, not this court.
Second,
the Respondents contend that the Act’s provision regarding a surety bond cannot
be interpreted to apply to the activities at issue. By contrast, the Department
argues that the Respondents are required by law to obtain a surety bond. S.C.
Code Ann. § 37-7-103 (“A credit counseling organization may not offer or agree
to offer credit counseling services in this State without first filing a surety
bond with the department.”). Based on the court’s conclusion that the
Respondents’ activities fall within those governed by the Act, the Respondents,
if they were properly licensed, would be required to obtain a surety bond,
pursuant to § 37-7-103.
3. Mortgage
Loan Originator Exemption
Next
the Respondents contend that, even if their activities otherwise fell within
the purview of the Act, the Act specifically exempts certain professions from
licensure by the Department. All “mortgage brokers” are exempt “when acting in the regular course of their professions.”
S.C. Code Ann. § 37-7-101(2)(b)(viii). During the hearing, Charles
Knight, a staff attorney with the Department, testified that the Department
only licenses businesses as mortgage brokers, and not individuals. According
to Knight, individuals may obtain a loan originator’s license, but not a
mortgage broker’s license. For that reason, the Department argues that
Decell cannot be exempt from licensure under the Act because he is not a
licensed mortgage broker; rather, The Middleton Group is the licensed mortgage
broker.
The South Carolina Code section pertaining to mortgage
brokers states that a “‘mortgage loan broker’ means a person or
organization . . .” S.C. Code Ann. § 40-58-20 (3) (Supp. 2007) (emphasis
added). A “person” is defined as “an individual, partnership, or
corporation.” S.C. Code Ann. § 40-1-20 (8) (2001) (emphasis added). Thus, the
statutory language indicates that an individual is eligible for licensure as a
mortgage broker under the laws of this state. However, because Decell provided
no evidence of his individual licensure—or Foreclosure Specialists, Inc.’s
licensure—as a mortgage broker, he cannot avail himself of the statutory
exemption. The only licensed mortgage broker is the Judson-Mike Partnership
d/b/a The Middleton Group. Moreover, even if Decell could rely on the license
of The Middleton Group, the court finds that the activities at issue are not
being conducted in the regular course of the profession of a mortgage broker
and therefore do not fall within the statutory exemption.
4.
Department’s Authority to Seek Refund of Excess Fees Paid by Consumers
Section
37-6-113(A) allows the Department to bring a civil action to recover “excess
charges paid by . . . consumers.” Under that section, any amounts recovered
are paid directly to the consumer, not the Department. Id.
The court finds that excess fees paid by consumers cannot be
recovered in the instant contested case. Section 37-6-113(A), which authorizes
the Administrator of the Department to seek excess charges paid by consumers, applies
to “civil actions.” Generally, an administrative proceeding would fall within
the term “civil action.” See Black’s Law Dictionary 30 (7th ed.
1999) (defining “civil action” as “noncriminal litigation”); McDowell v.
S.C. Dep’t of Soc. Servs., 304 S.C. 539, 405 S.E.2d 830 (1991) (holding
that an action pursuant to the Administrative Procedures Act is a civil
action); Ross v. Med. Univ. of S.C., 312 S.C. 532, 534 n.2, 435 S.E.2d
877, 878 n.2 (Ct. App. 1993) (same), rev’d on other grounds, 317 S.C.
377, 453 S.E.2d 880 (1994). However, where the words of a statute show a legislative
intent to use a term more restrictively than its general or ordinary sense, the
narrower meaning must be applied. See 42A Norman J. Singer & J.D.
Shambie Singer, Statutes and Statutory Construction § 47:27 at 443 (7th
ed. 2007); see also Johnson v. Collins Enter. Co., 333
S.C. 96, 101, 508 S.E.2d 575, 578 (1998) (interpreting the term “lottery” in a
narrower sense because the framers of the constitution separately stated the
terms “game of chance” and “lottery”); S. Bank & Trust Co. v. Brown,
271 S.C. 260, 268, 246 S.E.2d 598, 602 (1978) (“The word ‘approximately’ is an
indefinite word and is given a narrow or broad meaning depending upon the
circumstances.”); State v. Cobb, 355 S.C. 98, 584 S.E.2d 371 (2003) (Burnett, J., dissenting) (“[A]n
attempt to strictly define ‘profit’ in this statute subverts the Legislature’s intent to differentiate
between the two types of distributors of illegal drugs.”); State v. Ramsey, 311 S.C. 555, 430 S.E.2d 511 (1993) (Toal,
J., dissenting) (“[M]ore narrow
definitions [of the term ‘incendiary’] provided
in other statutes suggest that the legislature recognized
a limiting definition was needed to prevent the term incendiary from being applied consistent with its ordinary
and plain meaning as cited above and applicable to other
statutes which do not include a more narrow definition.”).
Here, § 37-6-113 distinguishes between “civil actions” and
“administrative actions.” Compare § 37-6-113(A) (Supp. 2007)
(authorizing the administrator to bring a civil action to recover actual
damages or excess charges paid by consumers) and § 37-6-113(B) (Supp.
2007) (authorizing the administrator to bring a civil action to recover
a civil penalty) with § 37-1-6-113(C) (authorizing the administrator to
bring a civil action or administrative action as provided in §
37-6-108 for violations of particular sections of the Act). Notably, the
language in subsection (C) of § 37-6-113 referring to administrative actions
pursuant to § 37-6-108 appears to have been added via a 2005 amendment, lending
support to the conclusion that the General Assembly intended to differentiate
between civil actions in circuit court and administrative actions brought before
the ALC pursuant to § 37-6-108. Accordingly, the court concludes that the General
Assembly intended to limit jurisdiction over actions for the recovery of excess
fees paid by consumers to the circuit court and not the ALC.
5. Department’s
Authority to Seek Injunctive Relief
Although
S.C. Code Ann. § 37-6-110 authorizes the Department to bring a civil action for
injunctive relief, § 37-6-104(6) prohibits the Department from seeking
injunctive relief “without prior approval of a majority of the Commission on
Consumer Affairs.” The Department did not provide any evidence of its receiving
this approval prior to filing its Petition requesting injunctive relief.
However, the Department’s Petition appears to seek relief from this court
pursuant to the specific authority of § 37-7-119 governing consumer credit
counseling. As stated above, § 37-6-104(6)’s requirement that the Department
obtain approval from the Commission before seeking injunctive relief appears to
apply to civil actions brought pursuant to § 37-6-110, not to actions resulting
from the Department’s regulatory authority under § 37-7-119. Accordingly, the
court finds that § 37-6-104(6) is not applicable to the case at bar.
6. Conclusions
After
carefully weighing the evidence and applying the law as discussed above, the
court finds that the Department’s Petition should be granted. The court finds
that the services that the Respondents provide to consumers fall within the definition
of credit counseling services found in the Act, and the Respondents are not
exempt from licensure or the other requirements of the Consumer Credit
Counseling Act, S.C. Code Ann. §§ 37-7-101 to -122 (Supp. 2007).
The
Department also requested that the Respondents be assessed an administrative
fine of five hundred ($500.00) dollars for each violation of the Act. Upon
review of the evidence presented, the court finds it appropriate to impose a fine
of $100 for the Respondents’ violation of § 37-7-101(3)(b) (offering consumer
credit repair). Although the court concludes that the other activities
conducted by Respondents are subject to the Act, because the question of
whether such activities required licensure under the Act was previously
unclear, the court finds that no further fines for the Respondents’ activities
prior to the issuance of the Department’s letter of May 4, 2007 are warranted.
ORDER
Based
on the Findings of Fact and Conclusions of Law stated above, it is hereby
ORDERED that the Department’s Petition is granted in part. It is further
ORDERED that Respondents Foreclosure Specialists, Inc., and Judson G. Decell, and their
agents or assigns, SHALL CEASE AND DESIST from offering consumer credit
counseling services to, or engaging in consumer credit counseling services
with, South Carolina consumers, including but not limited to those that were
specifically the subject of this contested case, unless and until it receives a
license from the Department to provide such services and is otherwise operating
in compliance with the Act. It is further
ORDERED that Respondents Foreclosure Specialists, Inc. and Judson G. Decell, and their
agents or assigns, shall, within thirty-five (35) days of the date of this
Order, pay a fine of $100 to the Department.
IT
IS SO ORDERED.
_________________________________
PAIGE
J. GOSSETT
Administrative
Law Judge
September 18, 2008
Columbia, South Carolina
|
