STATE OF MINNESOTA OFFICE OF ADMINISTRATIVE HEARINGS FOR THE DEPARTMENT OF COMMERCE

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1 OAH STATE OF MINNESOTA OFFICE OF ADMINISTRATIVE HEARINGS FOR THE DEPARTMENT OF COMMERCE In the Matter of Modify My Loan US, LLC; Philip Domek; Mark Abdel; Maria Domek; and Richard Steele FINDINGS OF FACT, CONCLUSIONS OF LAW AND RECOMMENDATION AS TO RESPONDENT RICHARD STEELE This matter came on for telephonic conference before Administrative Law Judge Manuel J. Cervantes on Tuesday, January 31, Michael J Tostengard, Assistant Attorney General, 445 Minnesota Street, Suite 1200, St Paul, MN , appeared for the Department of Commerce. Richard Steele appeared on his own behalf. STATEMENT OF ISSUE Should the Commissioner take disciplinary action against Respondent Richard Steele pursuant to Minn. Stat (2010)? Based on the proceedings herein, the Administrative Law Judge makes the following: FINDINGS OF FACT 1. On August 3, 2011, the Commissioner issued a Notice of and Order for Hearing, Order for Prehearing Conference, Order to Show Cause, and Statement of Charges in this matter. The Notice of and Order for Hearing scheduled a prehearing conference to take place on October 5, The Respondent appeared for the prehearing conference on his own behalf. 2. On January 31, 2012, Respondent Steele reached a stipulation by telephone with Assistant Attorney General Tostengard and the Department of Commerce that he would not contest the allegations made in the Statement of Charges, without admitting them. Respondent Steele further reserved the right to make argument to the Commissioner regarding the appropriate sanction to be imposed against him. 3. The following factual allegations in the Statement of Charges are not contested.

2 MODIFY MY LANS US, LLC (MML) 4. Modify My Loan US, LLC ( MML ) is a limited liability corporation, incorporated in the State of Minnesota on December 29, 2008, MML obtained a Minnesota Mortgage Originator License (no ) on April 16, The license was voluntarily surrendered on May 24, 2010 and is no longer active. As of February 1, 2010, MML ceased operations. The below-listed individuals are listed in MML s license application as owners and governor-members of the limited liability corporation. RICHARD STEELE 5. Respondent Richard Steele is not licensed in any capacity by the State of Minnesota. Upon information and belief, he uses an assumed name and social security number. Steele failed to complete the BCA portion of the MML mortgage originator license application. MML S BUSINESS 6. MML s was in the business of residential mortgage loan modification services. Customers signed a contract with MML and paid a fee ranging from $2,000 to $2,950. MML advertised that it had experts in home mortgage lending with insider knowledge, and claimed it would collect required documents and perform an extensive analysis of customers financial situation, compare these results to the major lenders guidelines, and determine the likelihood that the loan might be modified. MML s advertisement further claimed that it accepted no upfront fees for these services. Customers first submitted their loan and financial records. Using a computer auto-fill program, MML put the information into the proper format and then, if the customer prequalified, MML would have the customer sign a contract, would take payment from the customer, and then would submit their loan modification package to the lender in the proper format and proceed to negotiate on behalf of the customer for a loan modification. 7. Pursuant to the representations, customers did not sign a contract with MML and pay the required fee until MML had prequalified them for loan modification services. Initially, the claim was that the fee was the prequalification services only. Later, MML changed the terms of its contract so that the fee was admittedly for negotiation services as well -- meaning the customers were paying advance fees. Any customer who read the contract and paid the fee would likely have believed the fee was to cover all of the services MML offered to customers. Between March 12, 2009 and February 10, 2010, MML accepted payment from approximately 200 customers and took in a total of $362,203. MML took advance payment from customers prior to performing any loan negotiation services. FRAUD LANGUAGE IN CUSTOMER CONTRACTS 2

3 8. In reviewing the MML Mortgage Loan Modification Services Agreements submitted by five Minnesota complainants, the Department found there were three versions of its contract. V.S., W.Y. AND R.McC. COMPLAINTS 9. This first version of MML s contract stated that MLL would provide initial services consisting of analysis of the customer s financial data to determine whether a loan modification would be feasible. At that point, the customer would pay MML a full and final payment of $2,750. Additional negotiating services would take place after that. The contract also stated that MML utilizes the services of unrelated third party affiliates to perform many of the initial services. The contract also provided a money back guarantee that if the provider failed to provide an action plan that improved the borrower s current situation or offered the borrower a viable option to stop or avoid foreclosure, the provider would refund the payment specified less a $495 administrative fee. The request for such a refund was required to be in writing and made within 15 days of receipt of the action plan. The contract contained a notice that read as follows: NOTICE REQUIRED BY MINNESOTA LAW -- Modify My Loan U.S., LLC, its affiliates, assigns or anyone working for him or her CANNOT: (1) Take any money from you or ask you for money until Modify My Loan U.S., LLC, its affiliates or assigns has completely finished doing everything he or she said he or she would do... [Sic] 10. This notice and the money back guarantee contradict the prior requirement that the customer pay prior to obtaining loan negotiation services and a loan modification. MML s contract is therefore misleading, contradictory, and an attempt to avoid the appearance of an up- front fee. The customers were actually paying in advance for loan modification services. None of the three received loan modifications, and despite written requests none were able to obtain a refund. J.D. COMPLAINT 11. J.D. signed a second version of the MML contract which provided that all services would be completed in a maximum of 365 days from execution of the agreement: Upon completion of the initial services (the pre-qualification analysis), the Borrower shall make payment in the amount of $2,750 to MML for initial services rendered and for additional services to be provided. In this version of the contract, the notice paragraph that stated that MML could not take any money from customers until all services had been provided had been removed and also contained a money back guarantee if MML failed to succeed in obtaining a loan modification within a year, but allowed MML to deduct an $895 administrative fee. The rest of the contract s terms remained unchanged. There were no disclosures relating to any trust account or payment of commissions. Both versions 1 and 2 of the contract stated that MML agreed 3

4 to communicate with the customer regarding the nature and progress of Loan Modification negotiations. Version 2 of the contract also contained a paragraph stating that the customer acknowledged that the payment was not subject to deposit in or disbursement from a trust or escrow account. 12. J.D. paid for a loan modification in May Despite frequent attempts to obtain information as to the status of negotiations on her loan, J.D. could not get satisfactory updates from MML. In October, 2009, she received a notice of sheriff s sale set for December 15, On December 7, 2009, MML notified her that her file had been reassigned and that it was aware of the scheduled sheriff s sale. J.D. did not receive any further communications and learned in January that MML had closed its doors. She has never received a refund. L.N. COMPLAINT 13. L.N. signed a contract with MML on September 1, On this third version of the contract, the money back guarantee had been removed. MML demanded an upfront payment for its services, whether or not it succeeded in negotiating a loan modification for L.N. By the time she contracted with MML, the fact that MML was in serious financial trouble was not disclosed to customers. 14. L.N. paid an upfront fee of $2,750 over four months. She did not receive a loan modification from MML nor did she receive a refund. UNLICENSED ACTIVITY 15. MML contracted with, and deposited checks from, at least 40 customers prior to issuance of its Minnesota mortgage originator s license on April 16, MML S FINANCIAL CONDITION 16. From its inception, MML was inadequately capitalized. Each of the owner/principals claimed to have contributed large sums of money to the business but no evidence to that effect was produced. According to MML s bank records, the initial capital investment of $15,000 was made in January of 2009 and $7,000 in February From the outset, MML was dependent upon receiving continuous infusions of money from customers in order to remain in business. Checks written on MML accounts often bounced. This unstable financial situation was not disclosed to customers. 17. Out of every $2,750 fee paid by a customer to MML, a portion was immediately paid to the salesperson or entity who brought the customer to MML. These parties were referred to as affiliates. Two affiliates received $1,750 out of each $2,750 customer fee brought to MML, leaving MML with $1000. These two affiliates were bringing in virtually all of MML s business over the first few months. The amount of commission paid out of each customer fee was not disclosed to the customers. 18. The principals and owners of MML also commingled MML s funds with those of other businesses and with their own personal funds. Trust accounts were never 4

5 established or maintained for funds received from customers, even though those monies might have been subject to refund, pursuant to MML s contractual obligations. MML also failed to provide customers with monthly statements accounting for the use of their payments. Respondents Maria and Philip Domek and Richard Steele routinely took money out of MML s business accounts to use for their own purposes. 19. In July of 2009, Respondents Steele and Abdel accused the Domeks of embezzling money from MML. Steele allegedly made threats of violence against the Domeks and forced them to sign a document relinquishing all ownership and control of MML to Steele and Abdel. Respondents Steele and Abdel also took all the books and records and moved the business. From that point on, the Domeks had no access to MML, its records or its customers. 20. Respondent Steele withdrew funds from MML s bank accounts on a routine basis although he refused to contribute any money to MML. Thus, MML was unable to meet its financial obligations. Even though Steele was the responsible party, he claims he does not know what happened to all the company records or computers when MML closed business. FAILURE TO CREATE, MAINTAIN AND PRESERVE ADEQUATE BOOKS AND RECORDS 21. The owners and principals of MML failed to establish trust accounts; failed to segregate customer funds which should have been held in escrow; failed to provide accountings to customers; and failed to maintain and preserve the company s business records. The Respondents also permitted commingling of MML s and customers funds with their own monies and that of Tradex. Based on the Findings of Fact, the Administrative Law Judge makes the following: CONCLUSIONS 1. The Administrative Law Judge and the Commissioner of Commerce have jurisdiction herein pursuant to Minn. Stat ; , subd. 7; and (2010). 2. The Notice of Hearing was proper, and the Department has fulfilled all procedural requirements. 3. If a license lapses, is surrendered, withdrawn, terminated, or otherwise becomes ineffective, the commissioner may institute a proceeding within two years after the license was last effective and enter a revocation or suspension order as of the last date on which the license was in effect, or impose a civil penalty not to exceed $10,000 per violation, unless a different penalty is specified. 4. The commissioner may deny, suspend, or revoke the authority or license of a person subject to the duties and responsibilities entrusted to the commissioner, or 5

6 censure that person, the commissioner finds that the order is in the public interest and the person has engaged in an act or practice, whether or not the act or practice directly involves the business for which the person is licensed or authorized, which demonstrates that the applicant or licensee is untrustworthy, financially irresponsible, or otherwise incompetent or unqualified to act under the authority or license granted by the commissioner. 5. The commissioner may bar a person from engaging in residential mortgage origination or servicing If the action is in the public interest and the person has violated a standard of conduct or engaged in a fraudulent, coercive, deceptive, or dishonest act or practice, whether or not the act or practice involves the residential mortgage lending business; or engaged in an act or practice, whether or not the act or practice involves the business of making a residential mortgage loan, that demonstrates untrustworthiness, financial irresponsibility, or incompetence. 6. The commissioner may restrict, censure, suspend, revoke, or refuse to issue or renew an insurance producer s license or may levy a civil penalty for any one or more of the following causes: using fraudulent, coercive, or dishonest practices, or demonstrating incompetence, untrustworthiness, or financial irresponsibility, whether or not involving the business of insurance in this state or elsewhere. 7. The commissioner may deny, suspend or revoke any license or may censure a licensee if the commissioner finds (1) that the order is in the public interest, and (2) that the applicant or licensee, or, in the case of a broker, any officer, director, partner, employee or agent or any person occupying a similar status or performing similar functions, or any person directly or indirectly controlling the broker or closing agent or controlled by the broker or closing agent, has engaged in a fraudulent, deceptive, or dishonest practice or has, in the conduct of the licensee s affairs under the license, been shown to be incompetent, untrustworthy, or financially irresponsible. It is a fraudulent, deceptive, or dishonest practice to make any material misrepresentation or permit or allow another to make any material misrepresentation. 8. As alleged in Count I, by offering to negotiate the terms of borrowers residential mortgage loans with lenders on behalf of the borrower, Respondent committed unlicensed mortgage originator activities in violation of Minn. Stat , subds. 19 and 23 and 58.04, subd. 1 (2010). 9. As alleged in Count II, by failing to establish trust accounts for each customer s advance payment; by failing to conform to MML s written agreement to refund fees to customers who did not obtain loan modifications; by failing to disclose the amount paid to MML s affiliates as commissions; by charging customers a fee for loan modification services which were not provided and by misrepresenting to consumers that no advance fees were required, Respondent engaged in a fraudulent, deceptive or dishonest practices, violating Minn. Stat , subds. 1(b)(1) and (2)(iv) and (v) and (2010). 6

7 10. As alleged in Count III, by falsely advertising that it did not require advance fees and by requiring customers to pay advance fees; by failing in its obligation to refund fees of customers who did not receive a loan modification; Respondent violated Minn. Stat , subds. 1(b)( 1) and (2)(iv) and (v) and (2010). 11. As alleged in Count IV, by deceiving customers as to the financial condition of MML and failing to disclose to customers that over half of their fees were paid to sales affiliates and were not escrowed so as to be available in case the funds were required to be refunded, Respondent violated Minn. Stat , subds. 1(b)(1) and (2)(iv) and (v) and (2010). 12. As alleged in Count V, by failing to preserve business records and maintain trust accounts, Respondent violated Minn. Stat (2010). 13. As alleged in Count VI, by failing to provide customers with a written contract containing statutorily required disclosure information at the time the fee was accepted, Respondents violated Minn. Stat (2010). 14. As alleged in Count VII, prior to issuance of a mortgage originator license, Respondents were acting as foreclosure consultants and taking compensation from customers prior to performing the loan negotiations they had promised to perform, in violation of Minn. Stat. 325N.04 (2010). 15. As alleged in Count VIII, by failing to preserve business records and maintain trust accounts, Respondent violated Minn. Stat (2010). 16. Discipline of Respondent Richard Steele is in the public interest. Based on the Conclusions, the Administrative Law Judge makes the following: RECOMMENDATION IT IS RECOMMENDED that appropriate disciplinary action be taken against Richard Steele. Dated: February _24th_, 2012 /s/ Manuel J. Cervantes MANUEL J. CERVANTES Administrative Law Judge Reported: Digitally recorded No transcript prepared 7

8 NOTICE This report is a recommendation, not a final decision. The Commissioner of Commerce will make the final decision after a review of the record. The Commissioner may adopt, reject or modify the Findings of Fact, Conclusions, and Recommendation. Under Minn. Stat , the final decision of the Commissioner shall not be made until this Report has been made available to the parties to the proceeding for at least ten days. An opportunity must be afforded to each party adversely affected by this Report to file exceptions and present argument to the Commissioner. Parties should contact Michael Rothman, Commissioner, Minnesota Department of Commerce, 85 Seventh Place East, Suite 500, St. Paul, MN 55101, to learn the procedure for filing exceptions or presenting argument. If the Commissioner fails to issue a final decision within 90 days of the close of the record, this report will constitute the final agency decision under Minn. Stat , subd. 2a, in order to comply with this statute, the Commissioner must then return the record to the Administrative Law Judge within ten working days to allow the Judge to determine the discipline to be imposed. The record closes upon the filing of exceptions to the report and the presentation of argument to the Commissioner, or upon the expiration of the deadline for doing so. The Commissioner must notify the parties and the Administrative Law Judge of the date on which the record closes. Under Minn. Stat , subd. 1, the agency is required to serve its final decision upon each party and the Administrative Law Judge by first class mail or as otherwise provided by law. 8