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Court Rules Commercial Real Estate Broker Can't Collect Commission Because Of Involvement Of Unlicensed Salesperson
Last month, the U.S. District Court for the Eastern District of Virginia held that a state-licensed real estate company was unable to collect its commission on a real estate lease transaction because a key employee involved in the lease transaction was not licensed as a real estate sales person. The real estate company, which is appealing the decision, sued a property owner last year for breach of contract after the property owner refused to pay a $6.6 million commission on a transaction the real estate company negotiated as the exclusive leasing agent for the property owner. The property owner originally asserted that the total commission owed was substantially lower, based on what it claimed were oral agreements that were reflected in the written submissions made to the tenant. However, during discovery in the case, the property owner learned at least one of the real estate companys employees involved in the leasing transaction was not licensed as real estate salesperson or broker and asserted that as such, the real estate company is not entitled to receive any commission. As the court explained, Virginia law requires that every employee or independent contractor who acts as a salesperson for a brokerage firm, such as [the real estate company in this case], holds a license as a real estate salesperson or broker[] and that [n]o individual shall act as a broker without a real estate broker's license from the Board. The company did not contest that the employee at issue was unlicensed, but rather argued that the employee did not engage in activities that required licensing. In the companys view, state law requires a license only to make an offer to lease or to negotiate or enter into a lease, and that in this case the formal lease offers were made by and in the name of the property owner, not the real estate company or any of its employees. The court rejected the companys interpretation of the statute, explaining that such a narrow, hyper-formalistic reading of the licensing requirements would effectively eliminate the need for a license by most persons centrally involved in a leasing transaction on behalf of an owner. The court reasoned that the statutes definitions, as reflected in the range of activities a licensee is authorized to perform and the limited scope of services an unlicensed person can provide, are clearly intended to capture the realities and breadth of activities that make up the leasing process, not the specific, more formal events necessary to consummate a transaction. The court held that even though the company was licensed as a real estate broker, it was prohibited from receiving any commission it otherwise would be entitled to receive under its agreement with the property owner because the individual employee lacked the required license. The court acknowledged that there is no explicit statute or judicial decision that imposes such a prohibition under Virginia law, but concluded easily based on public policy that an individuals failure to have a license precludes the company from receiving any commission in this case. The court explained that (i) the companys license did not cover the individual; (ii) the company certified that its covered employees would hold the required license, and (iii) the company had a statutory duty to ensure that its services were carried out in accordance with the state licensing requirements. The company recently filed a notice that it is appealing the case to the Fourth Circuit; briefing has not yet commenced.
Maryland Adds Training, Disclosure Requirements For Money Transmitters
On May 5, Maryland Governor Martin O’Malley signed HB 723, which requires state licensed money transmitters to (i) provide on transmittal forms a clear, concise, and conspicuous fraud warning that includes a toll-free telephone number for individuals to call to report fraud or suspected fraud; (ii) provide annual training to agents related to financial abuse and financial exploitation of elders; and (iii) allow an individual to voluntarily be disqualified from sending or receiving money transmissions in the state for a specified period of time. The changes, which take effect October 1, 2014, do not apply to a licensee or an agent that engages (i) in selling or issuing stored value devices, traveler’s checks, or money orders, or providing bill payer services, as long as the licensee or agent does not engage in any other business regulated under the money transmission law; or (ii) in the business of money transmission solely through the Internet.
Missouri Division Of Finance Transitions Mortgage Company Licensing To NMLS
Recently, the Missouri Division of Finance announced that all mortgage company and branch licenses issued through the Division will transition to the Nationwide Mortgage Licensing System (NMLS). All currently licensed companies must transition their licenses to the NMLS by October 1, 2014, and effective June 2, 2014, new company license applicants must request licensure through the NMLS. The NMLS will host a transition training webinar on June 5, 2014 for all currently licensed mortgage companies.
New York AG Action Targets Out-Of-State Retail Installment Obligation Finance Companies
On April 30, New York Attorney General (AG) Eric Schneiderman announced that four out-of-state companies alleged to have financed retail installment obligations (RIOs) at rates in excess of the state’s usury cap agreed to recast the RIOs at a rate of not more than 16% and provide repayment or credits to impacted New York consumers. The settlements are the latest in a series of actions in New York targeting out-of-state or online lenders and finance companies that make loans in New York without obtaining a license to operate in that state.
The companies financed elective medical and surgical procedures through RIOs offered by medical providers to patients, an activity the AG believes required the companies to obtain a state license to operate as sales finance companies or lenders. The AG’s Health Care Bureau initiated the investigation after it received complaints about an online lead generation site. As described in the AG’s release, that lead generator requested information regarding a consumer’s employment and credit history, automatically set the APR and RIO repayment terms, and submitted the completed application to sales finance companies. The AG explains that once a finance company agreed to purchase the RIO, the medical provider and the patient both signed a financing agreement that the medical provider immediately assigned to the finance company. The finance company then transferred the funds to the medical provider who agreed to accept less than their usual and customary fees in exchange for upfront payments from the finance company. The patient, however, would be required to repay to the financier full fees plus interest, which in this case allegedly exceeded the statutory usury cap, up to 55% in some instances. State law restricts unlicensed lenders to charging an APR of up to 16%, and establishes criminal penalties for unlicensed lenders that charge interest at a rate exceeding 25% APR.
In addition to revising existing loans and providing approximately $230,000 in remediation to 317 consumers, the agreements require the companies to (i) collectively pay $35,000 in penalties; (ii) cease all conduct as unlicensed sales finance companies in New York; and (iii) notify any consumer reporting agencies to which they gave consumer information to delete all references to the transactions from customers’ credit records. The agreements do not include any criminal penalties.
In addition to extending the state’s licensing enforcement focus, this is at least the second financial services case initiated in recent months by the AG’s Health Care Bureau. In June 2013, the AG announced a settlement with a credit card issuer related to alleged illegal deferred interest products offered through medical provider offices.
New York DFS Obtains Substantial Settlement In Licensing Enforcement Action
On March 31, in an enforcement action with potential implications for a range of financial service providers, the New York State Department of Financial Services (DFS) announced that an insurance holding company agreed to pay a $50 million civil fine to resolve allegations that two of its subsidiaries conducted unlicensed insurance business in the state, and that one of the subsidiaries made false representations about those activities. The Manhattan District Attorney’s Office (DA) announced that the company agreed to resolve a parallel criminal investigation by entering into a deferred prosecution agreement and disgorging $10 million in profits.
The DFS and the DA claim that their coordinated investigations revealed that the subsidiaries used New York-based sales representatives to solicit insurance business for the companies and their affiliates, and to directly sell insurance products in New York to multinational companies, notwithstanding representations to the contrary from the companies. However, the authorities allege, neither company was licensed to conduct business in the state, and both companies used sales representatives who were not licensed as insurance brokers or agents in New York.
In addition, the DFS and the DA assert that one of the subsidiaries, while operating under the control of a different parent company, intentionally misrepresented to the New York State Insurance Department (one of the DFS’s predecessor agencies) that the subsidiary did not solicit business in New York and that its New York staff did not engage in such activities. At the time, in seeking an opinion as to whether it was required to obtain a license, the company asserted that its New York operations were limited to “back office” operations not subject to licensing requirements.
The civil fine in this action is substantially larger than fines typically imposed with regard to state licensing violations in other financial services industries. Notably, the large fine was imposed even after the companies agreed to cooperate in an ongoing investigation of the two subsidiaries’ former parent company. Also significant, the disgorgement order equates to two years’ worth of profits earned in connection with the alleged unlicensed activity. The holding company also agreed to certain restrictions on its business and that of the two subsidiaries pending full compliance with state law.
The DFS is the principal financial industry regulator in the state of New York, with jurisdiction over banks; mortgage lenders, brokers and servicers; consumer lenders; money transfer businesses; insurance companies; and others.
Virginia Enacts Transitional Mortgage Licensing Bill
On March 24, Virginia Governor Terry McAuliffe signed SB 118, which, effective July 1, 2014, will permit transitional licensing of mortgage loan originators (MLO). The bill grants the State Corporation Commission (SCC) authority to issue temporary MLO licenses to certain MLOs licensed in other states. The SCC will only issue a transitional MLO license to applicants it determines (i) have never had a mortgage loan originator license revoked by any governmental authority; (ii) have not been convicted of, or pled guilty or nolo contendere to a felony during a defined period prior to the date of the application; (iii) have become registered through, and obtained a unique identifier from, the Nationwide Mortgage Licensing System and Registry; and (iv) are employed by a person licensed by the SCC as a mortgage lender or mortgage broker. Further, any transitional MLO license issued by the SCC will expire on the earlier of (i) the date the SCC issues or denies a Virginia MLO license for the applicant; or (ii) 120 days from the date the transitional MLO license was issued. Also notable, is that the bill allows the SCC to issue transitional licenses to MLOs from federally regulated institutions who transition employment to a Virginia mortgage bank, but only after federal law is changed to allow such transitional licenses. The CFPB has interpreted federal law to prohibit such transitional licenses.
California Proposes Rule To Clarify Scope Of Licensing Exemption
Earlier this month, the California Department of Business Oversight (DBO) issued a notice and request for comment on a proposed amendment to regulations that implement the California Finance Lenders Law (CFLL) and the California Residential Mortgage Lending Act (CRMLA). The proposed amendment would clarify that non-depository operating subsidiaries, affiliates, and agents of federal banks and other financial institutions do not fall within the licensure exemption for a bank or savings association under the CFLL and the CRMLA. The DBO views the proposed amendment as required in light of the Dodd-Frank Act’s elimination of federal preemption over such entities by the OCC. Comments on the proposal are due by May 7, 2014.
Hawaii Notifies Collection Agencies Of Change In Reciprocal States
On March 18, the Hawaii Department of Commerce and Consumer Affairs published a notice advising collection agencies that due to changes in state licensing laws in Indiana, Nevada, and North Dakota, those states no longer qualify as “reciprocal states” such that licensure in those states can be used to obtain or renew a Hawaii collection agency designation. Hawaii law allows an out-of-state collection agency to obtain a state collection agency designation by demonstrating the company is licensed under the laws of a state (i) whose requirements to be licensed, permitted, or registered as a collection agency are substantially similar to Hawaii’s requirements; and (ii) that allows similar reciprocal arrangements for Hawaii-licensed agencies. The Department advises that any agency currently using one of the three states identified as the basis for its Hawaii collection agency designation must identify a new reciprocal state on its renewal application. Colorado, Illinois, Michigan, Minnesota, Nebraska, New Mexico, and Wisconsin are identified by the Department as states that meet its definition of a reciprocal state. Because the renewal constitutes a change to the current information on file, the Department will not accept an “online” license verification in lieu of a completed original “Verification of License” form.
California Eliminates Passive Investor Self-Certification From Finance Lenders Law License Application
Recently, the California Department of Business Oversight (DBO) made a number of changes to the application for a California Finance Lenders Law (CFLL) license that is completed by persons engaged in non-residential lending or brokering. The changes were made following a 45-day notice and comment period. (Presumably, these changes also apply, where applicable, to persons engaged in residential lending or brokering and who are thus required to submit applications via the Nationwide Mortgage Licensing System.)
One of the most significant changes to the application relates to which individuals associated with the owners of an applicant are required to submit a Statement of Identity and Questionnaire and fingerprints to the DBO for investigative purposes. Since 2007, the application specified as follows:
If an entity owns or controls 10% or more of the applicant, a Statement of Identity and Questionnaire and fingerprints must be submitted for each officer, director, general partner, or managing member, as applicable, unless the applicant or entity can make the following representation in a separate cover letter that is incorporated by reference into the CFLL application:
1. [(Name of entity)] is a passive investor and is not responsible in any way for the conduct of the applicant’s lending activities in California. Therefore, it is unnecessary to investigate any individuals managing or controlling [(name of entity)].
2. Describe whether the entity has engaged in any act that would constitute a reason for the California Corporations Commissioner to deny a license under Financial Code Section 22109 and if so, fully disclose the acts.
A public company may submit fingerprints only for persons not included on the public company’s Form 10-K, Form 10-Q or other similar document filed with the Securities and Exchange Commission. The applicant must submit a copy of Form 10-K, Form 10-Q, or other similar document that includes the name of the individuals not submitting fingerprints. Statement of Identity and Questionnaires must still be completed for all individuals. For purposes of this paragraph, “public company” means a company whose securities are listed or designated on a national securities exchange certified by the California Corporations Commissioner under Subdivision (o) of Section 25100 of the California Corporations Code.
But now the application no longer provides an option for the applicant to include a self-certification for passive investors concerning investigations. Instead, the application now specifies as follows:
If an entity owns or controls 10% or more of the applicant, a Statement of Identity and Questionnaire and fingerprints must be submitted for each officer, director, general partner, or managing member, as applicable. The Commissioner may waive this requirement if it is determined that further investigation is not necessary for public protection.
A public company may submit fingerprints only for persons not included on the public company’s Form 10-K, Form 10-Q or other similar document filed with the Securities and Exchange Commission. The applicant must submit a copy of Form 10-K, Form 10-Q, or other similar document that includes the name of the individuals not submitting fingerprints. Statement of Identity and Questionnaires must still be completed for all individuals. For purposes of this paragraph, “public company” means a company whose securities are listed or designated on a national securities exchange certified by the Commissioner of Business Oversight under subdivision (o) of Section 25100 of the California Corporations Code.
In its Final Statement of Reasons for the Adoption of Rules, the DBO acknowledged that not all owners of an applicant may be responsible for the applicant’s lending activities (e.g., pension plans) and that investigating such owners may be burdensome, costly, and unnecessary. But the DBO explained that it chose to remove the self-certification for passive investors because it “has been subject to abuse by some applicants attempting to use it to evade background investigations or to hide the true identity of the owner(s).” At the same time, the DBO emphasized that it still retains authority to forego the investigation of passive investors when doing so is consistent with the CFLL.
As a result of this change, CFLL license applicants (and CFLL licensees whose ownership may change as a result of, for example, an acquisition or internal restructuring) should be prepared for the principal officers, directors, general partners, and managing members, as applicable, of their 10% owners and control affiliates to submit Statements of Identity and Questionnaires and fingerprints, unless they are able to persuade the DBO that investigation of these individuals is not necessary for public protection. It is our understanding from DBO personnel that one way that this may be accomplished is by providing sufficient evidence that these individuals have been investigated and vetted by another governmental or regulatory agency.