COMMONWEALTH OF VIRGINIA

STATE CORPORATION COMMISSION

COMMONWEALTH OF VIRGINIA, ex reL SCC-CLERK'S OFFICE DOCUMENT CONTROL CENTER

STATE CORPORATION COMMISSION

V.

SECURITY TRUST MORTGAGE, L.L .C ., Defendant

APPLICATION OF DANIEL MCDONALD

For a mortgage loan originator license

2015 FED 2 0 1 P 4: 5 2 CASE NO. BFI-2012-00067

CASE NO. BFI-2013-00069

COMMENTS OF THE STAFF OF THE STATE CORPORATION COMMISSION IN RESPONSE TO THE REPORT OF THE HEARING EXAMINER

On January 30, 2015, the State Corporation Commission's ("Commission") Chief Hearing

Examiner issued her Report in these two separate but interrelated matters. These matters

concern the revocation of the mortgage broker license of Security Trust Mortgage, L.L.C .

("Security Tnist") and the denial of a mortgage loan originator ("N/11,0") license for Daniel

McDonald ("McDonald") - who is the sole owner, officer, and member of Security Trust. As

discussed below, the Bureau of Financial Institutions ("Bureau") agrees with much of the Report,

but urges the Commission to revoke Security Trust's license for failure to meet the qualifications

for maintaining such a license .

In the first matter the Bureau seeks an order from the Commission revoking the license of

Security Trust . In the second matter McDonald filed a Petition challenging the Commissioner of

Financial Institutions E. J. Face, Jr .'s ("Commissioner") decision to deny his third application for

a MLO license . In the Report, the Chief Hearing Examiner found that the Commissioner did not

abuse his discretion when he denied McDonald's application for a MLO license.' Importantly,

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' Report at 24 .

I-a 41

the Chief Hearing Examiner found that McDonald's recent and significant delinquencies on

numerous accounts, combined with his actions of incurring more debt to pay off existing debt

showed that lie did not possess the financial responsibility to warrant the belief that he will act as

a MLO efficiently and fairly, in the public interest, and in accordance with law . 2 Equally

important, the Chief Hearing Examiner found that McDonald offered no evidence to prove that

his character and general fitness had sufficiently changed since July 2012, when the Commission

previously found that he lacked the character and general fitness required to act as a MLO in

Virginia . 34 Despite these findings, however, the Chief Hearing Examiner did not recommend

revocation of Security Trust's mortgage broker license.

The Bureau agrees with the Chief Hearing Examiner's finding that Commissioner Face

did not abuse his discretion when he denied McDonald's application for a MLO license . The

Bureau further aorees with the Chief Hearing Examiner's findings that McDonald lacks the . LI

requisite financial responsibility, character, and general fitness to be licensed as a MLO. The

factual review set forth in the Report supports those findings,

The Bureau, however, disagrees with the Chief Hearing Examiner's failure to recommend

revocation of Security Trust's mortgage broker license, and her basis for that recommendation

that McDonald has made strides towards rebuilding his financial position'and may qualify for a

MLO license in the future . It is the Bureau's view that :

Security Trust's mortgage broker license should be revoked because McDonald and Security Trust do not currently meet the financial responsibility, character, and general fitness qualifications for licensure as a mortgage broker . Such qualifications ZD

' Id. at 22 .

' Id. at 23 .

4 January 13, 201 1, application, Petition ofDaniel McDonaldfor approval of mortgage loan originator license, Case No . BFI-2012-00003 2012 S.C.C . Ann. Rep. 22 ("McDonaldl").

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are required by § 6.2-1606 of the Code and there is no legal basis for maintaining a license when the qualifications are not met;

The Chief Hearing Examiner's failure to recommend revocation of Security Trust's mortgage broker license conflicts with the longstanding Bureau position that a mortgage broker licensee must maintain the requirements and qualifications for licensure, and creates uncertainty for the Bureau going forward in interpreting Chapters 16 and 17 of Title 6 .2 of the Code, as well as other chapters in Title 6.2 that have comparable qualification and licensing requirements ; and, C)

The recommendations of the Commissioner and the Bureau should be upheld since the Chief Hearina Examiner did not find that the Commissioner abused his discretion 0 when he denied McDonald's application for a MLO license .

A. Mortgage Industry Background .

Before addressing the Bureau's comments, a short overview of significant changes in the

regulation of the mortgage industry is helpfW . Following the financial crisis of 2008, vast Z:I Z) t~

changes in federal and state regulation have raised the bar for licensure as a mortgage broker and

created MLO licensure in order to prevent the types of abuses that resulted in excessive

mortgage loan defaults and foreclosures that contributed to the economy's financial meltdown 1.

and recession . Mortgage brokers and MLOs are now highly regulated under federal and state

law. Such regulation is essential for consumer protection, due to the high dollar amounts of

residential mortgage loans, varying levels of borrower sophistication, and the consequences of Z11

default . Mortgage brokers also are subject to federal consumer protection laws and regulations

pertaining to mortgage loans . C~

Although many states have regulated mortgage brokers for decades, individual MLOs ID 1.1

generally did not receive the same scrutiny in Virginia until recently . Following the subprime

mortgage crisis in the last decade, the federal government found that significant reforms were

needed to ensure that borrowers obtain their mortgages through qualified individuals, and to

protect consurners from abusive practices . Congress enacted the Secure and Fair Enforcement

for Mortgage Licensing Act of 2008 (12U.S.C . §§ 5101 etseq .) ("SAFE Act"), which required

states to create licensing and enforcement mechanisms for the regulation of MLOs. Following

passage of the SAFE Act, Virginia enacted Chapter 17 of Title 6 .2 of the Code to govern MLOs,

and the Commission issued MLO Rules at 10 VAC 5-161 -1 0 et seq . Among other things,

Chapter 17 requires licensing for MLOs and registration, and imposes educational and testing

requirements, credit and criminal background checks, reporting obligations, and fees .

B . McDonald and Security Trust .

The current proceedings concerning McDonald and Security Trust follow the significant

changes in the mortgage industry regulation . On January 2' ), 2012, McDonald filed his first

Petition with the Commission contesting the denial of his mortgage loan originator application

("McDonald T') .5 A hearing was held on the matter on March 22, 2012, and Hearing Examiner

6 Michael D . Thomas issued his Report ("Thomas Report") on April 27,2012 . IntheThomas

Report, the Hearing Examiner made findings about McDonald and Security Trust, He found that

the evidence supported the Commissioner's decision to deny the application, including that :

(i) McDonald and Security Trust failed to provide disclosures required by

Virginia and federal law in all loans brokered ; 7

(ii) McDonald and Security Trust issued a false and misleading mortgage pre-

approval letter on May 21, 2010, that was a "complete fabrication" ; 8

Id.

6 Report of Michael D. Thomas, Hearing Examiner, Petition of Daniel McDonald, Case No . BFI-2012-00003 .

'Idat 10 .

' Id at 9 .

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(iii) McDonald: (a) lied on his application ; (b) willfully failed to disclose two

outstanding judgments and a federal tax lien ; (c) willfully failed to disclose his employment

history for the previous ten years; (d) was evasive or misleading in his responses to the Bureau's

inquiries ; and, (e) with one exception, he had taken no affirmative steps to satisfy his numerous

outstanding debts . 9

In conclusion, Hearing Examiner Thomas found that the Commissioner did not abuse his

discretion when he denied McDonald's application for a MLO license . 10 He further found that

each of the reasons cited in the License Denial Order were true, supported by credible evidence,

and applied directly to McDonald's financial responsibility, character, and general fitness to hold

a N4LO license." Hearina Examiner Thomas recommended that the Commission affin-n the

Commissioner's decision to deny McDonald a MLO license . 12 In its July 6, 2012 Final Order,

the Commission adopted Hearing Examiner Thomas'findings of fact and recommendations. 13

In the matters at hand, Chief Hearing Examiner Ellenberg found that McDonald had

similar failings, including that he : failed to cooperate with the Bureau as it investigated his

application; failed to provide information requested through discovery; failed to appear at a

deposition in contradiction of a Commission subpoena; made material misrepresentations and

omissions on his third application for a MLO license; and resisted providing information that

might have facilitated the evaluation of his MLO application . 14 She further found that

Id at 14-15 .

Id at 15 .

Id at 16 .

12 1d.

13 Final Order, Petition of Daniel McDonald, Case No . BFI-2012-00003 at p . 5 .

14 Report at 22 - 25 .

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McDonald lacks the financial responsibility, character, and general fitness for licensure as a

MLO, and that the same qualifications must be met by Security Trust and its sole owner and

officer to qualify for a mortgage broker license . 15 She failed to recommend that Security Trust's

mortgage broker license be revoked .

C. Security Trust's Mortgage Broker License Should Be Revoked Because the Qualifications for Licensure as a Mortgage Broker are Required by § 6.2-1606 of the Code.

In order to grant either a mortgage broker license or a MLO license, the Commission

must find, amongst other things, that the applicant's financial responsibility, character, and tD

general fitness are such as to warrant belief that the applicant will conduct business efficiently

and fairly, in the public interest, and in accordance with law. In the case of mortgage broker

applicants, the same finding must be made by the Bureau regarding the qualifications of the Z:)

mortgage broker's senior officers, directors, and principals . If the Commission is unable to make

the finding for all three qualifications, the Commission is prohibited from issuing a license . 16 z:1

The Chief Hearing Examiner addresses these three qualifications in her Report . 17

Importantly, she found that the Code clearly imposes the same findings regarding financial

responsibility, character, and general fitness for MLOs, and mortgage brokers and their members

andofficers.18 In regard to financial responsibility, she found that McDonald possessed recent

and significant delinquencies on numerous accounts, and that he incurred more debt by

Id. at 25 .

§§ 6.2-1606 and 6.2-1706 of the Code .

17 Report at 22 - 24 .

" Id. at 25 .

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borrowing $25,000 to pay off his current debt . 19 The Chief Hearing Examiner concluded that

20 McDonald lacked the required financial responsibility to be licensed as a MLO .

The Chief Hearing Examiner further found that McDonald presented no evidence at the-

hearing that his character and general fitness had improved since McDonald 1, in which Hearing

Examiner Michael Thomas found (and the Commission affirmed) that McDonald lacked the

requisite character and general fitness for licensure . She found that McDonald failed to disclose

unsatisfied debts and judgments in his most current application for a license, failed to cooperate

with the Bureau in its investigation of his application, and failed to appear for a deposition

despite a Commission subpoena directing his appearance . 2 1 The Chief Hearing Examiner

concluded that McDonald lacked the character and general fitness required for licensure as a

22 MLO

.

Despite this finding, and her conclusion in her Report that Security Trust's sole owner, C

member, and senior officer McDonald does not possess the requisite financial responsibility,

character, and general fitness to warrant belief that he can operate as an MLO efficiently and

fairly, in the public interest, and in accordance with law, the Chief Hearing Examiner does not

recommend that Security Trust's mortgage broker license be revoked. Instead, she recommends

that Security Trust maintain its mortgage broker license in order to give McDonald the

opportunity to improve his qualifications .

'9 Id, at 22 .

20 id.

" Id. at 23,

22 id.

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When the qualifications imposed by § 6.2-1606 of the Code are not met by a mortgage

broker applicant or its senior officers, directors, or principals, the Code prohibits the Commission

from issuing the applicant a license . Thus, the qualifications are not aspirational, they are

required . No probationary license can be issued giving the applicant or its senior officers,

directors, or principals the opportunity to improve their financial responsibility, character, and

general fitness. Section 6.2-1619 of the Code permits the Commission to revoke a mortgage

broker license at such time that a licensee fails to meet the qualifications for licensure . The

Chief Hearing Examiner's recommendation that Security Trust maintain its mortgage broker

license in order to give McDonald the opportunity to improve so that he can meet the required

financial responsibility, character, and general fitness at some future date ignores the intent of the

licensing statute . A company whose senior officers, directors, or principals do not meet the

qualifications for licensure cannot obtain mortgage a broker license, and should not be permitted 0 I'D

to maintain one.

D. The Chief Hearing Examiner's Recommendation is in Conflict with Longstanding Bureau Position and Practice, and Creates Uncer-tainly,.

(1) Allowing Security Trust to Maintain its License Conflicts with Longstanding Bureau Position and Practice .

The Hearing Examiner's recommendation that Security Trust maintain its mortgage 0

broker license is contrary to the Bureau's longstanding position that a mortgage broker licensee

must maintain the requirements and qualifications for licensure . In addition, it has been the

Bureau's longstanding practice to seek license revocation pursuant to § 6.2-1619 A I of the Code

when it finds that a licensee or the licensee's senior officers, directors, or principals no longer

satisfies the license requirements . This position is based on the close relationship between

mortgage brokers and mortgage loan originators . "Mortgage broker" is defined in § 6.2-1600 of tD

Wn

the Code of Virginia ("Code") as any person who directly or indirectly negotiates, places or finds

mortgage loans for others, or offers to negotiate, place or. find mortgage loans for others . A

11mortgage loan originator" is defined in § 6 .2-1700 of the Code as an individual who takes an

application for or offers or negotiates the terms of a residential mortgage loan in which the 0

dwelling is or will be located in the Commonwealth . 0

The two roles are closely intertwined . Mortgage brokers employ mortgage loan Z:1

originators to offer and negotiate the terms of residential mortgage loans with consumers . Thus,

mortgage brokers are responsible for overseeing the conduct of MLOs, and ensuring that MLOs

comply with all laws and regulations applicable to mortgage loan negotiation and origination . t> ID

In addition to being well supported, the Bureau's position is consistent with the

Commission's Bureau of Insurance, which has dealt with this same issue it the insurance arena .

For many years, the Bureau of Insurance encountered criminal activity and regulatory problems

with a number of Virginia insurance agencies that were owned and/or run by formerly licensed

agents . At that time, an agent whose license had been revoked or surrendered in lieu of 0

revocation was not prevented from owning, managing or being employed with an insurance

agency . As a result, the Bureau of Insurance sought legislation in 2013 that would prohibit

this."

If the Commission were to adopt the Chief Hearing Examiner's recommendation

regarding Security Trust, it would directly conflict with the approach taken by the Bureau of

Insurance concerning the activities of individuals who the Commission deems unqualified.

21 See § 38.2-1822 B of the Code, which provides that no individual shall act as an agent on behalf of a business entity in the transaction of insurance unless he is licensed as an agent and appointed, if appointment is required by statute . No individual whose license has been revoked by the Conunission, or voluntarily surrendered in lieu of a hearing before the Commission, shall directly or indirectly own and operate, control, or be employed in any manner by an insurance agent or agency during the time period in which the individual is unlicensed unless otherwise authorized by the Commission .

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Likewise, an unqualified person in a control position of a mortgage broker licensee has great

power to inflict harm through the mortgage broker entity and its subordinate employees . The

Bureau believes that the increased risk of regulatory issues resulting from unqualified individuals

owning, managing or being employed with a mortgage broker warrants a similar approach . 0 C,

(2) The Chief Hearing Examiner's Recommendation Creates Uncertainty.

The Chief Hearing Examiner's recommendation that Security Trust maintain its mortgage

broker license departs from the Bureau's longstanding position that a mortgage broker licensee

must maintain the requirements and qualifications for licensure, without providing a sufficient

basis for why this is being done . If the Commission follows the Chief Hearing Examiner's

recommendation to allow Security Trust to remain licensed as a mortgage broker despite the fact

that it and its sole owner and officer do not meet the qualifications for licensure, it will create

confusion and uncertainty for the Bureau going forward when it is faced with a similar set of

facts . Additionally, the Chief Hearing Examiner's recommendation creates uncertainty for the

Bureau going, forward, not just in interpreting Chapters 16 and 17 of Title 6.2 of the Code, but

also for interpreting all other chapters in Title 6.2 that have comparable qualification and

licensing requirements .

E. The Recommendations of the Commissioner and the Bureau Should be Upheld .

In her Report, the Chief Hearing Examiner found that the Commissioner did not abuse

24 his discretion when he denied McDonald's application for a MLO license . She found that the

denial was supported by credible evidence, which applied directly to McDonald's financial

responsibility, character, and general fitness to hold a MLO license, The Chief Hearing

Examiner recommended that the Commission affirm the Commissioner's denial of McDonald's

24 Report at 24 .

to

MLO application . 25 It is the hope of the Commissioner and Bureau, that since the Chief Hearing

Examiner found no abuse of discretion in the Cornmissioner's denial of McDonald's NELO

application, that the Commission also adopt the recommendation of the Commissioner and

Bureau, which is backed by significant experience and expertise, that Security Trust's mortgage

broker license be revoked .

With the exception of the recommendation for the mortgage broker license of Security

Trust, the Bureau agrees with the Findings and Recommendations made by the Chief Hearing

Examiner in this case . The Bureau urges the Commission to adopt the Report except for the

recommendation for Security Trust, as to which the Bureau requests that the Commission revoke

the mortgage broker license issued to Security Trust. As a practical matter, Security Trust can t:~ C)

reapply for a mortgage broker license if and when McDonald meets the qualifications for

licensure as the sole owner and officer of Security Trust.

" Id. at 25 .

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Respectfully submitted,

STATE CORPORATION COMMISSION ~a 0)

BUREAU OF FINANCIAL INSTITUTIONS W

By:

DeMarion P. Johnston, Associate General Counsel Office of General Counsel State Corporation Commission P .O. Box 1197 Richmond, Virginia 23218 (804) 371-9671 (804) 371-9240 (FAX) DeMarion.Johnston@sce .virginia.gov

Dated: February 20, 2015

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CERTIFICATE OF SERVICE

I certify that on February 20, 2015, a copy of the above-referenced Comments of the

Staff of the State Corporation Commission in Response to the Report of the Chief Hearing

Examiner was mailed by first class mail and via e-mail to : William R. Baldwin, III, Esquire,

Thorsen, Honey, Baldwin & Meyer, LLP, 5600 Grove Avenue, Richmond, Virginia 23226 .

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