STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF BANKING AND )

FINANCE, )

)

Petitioner, )

)

vs. ) CASE NO. 83-924

)

DAVIDE & ASSOCIATES, INC., )

and SALVATORE G. DAVIDE, )

)

Respondent. )

)

RECOMMENDED ORDER

For Petitioner: Walter W. Wood, Esquire

Office of the Comptroller The Capitol, Suite 1302 Tallahassee, Florida 32301

For Respondent: Herman T. Isis, Esquire

Post Office Box 144567 Coral Gables, Florida 33114

A final hearing was held in this case on January 24, 1984, in Miami, Florida. The issue is whether Respondents, Davide & Associates, Inc. (Davide, Inc.), a corporate mortgage broker, and Salvatore G. Davide (Davide), its president and principal mortgage broker at the times in question, should refund portions of mortgage broker fees and commissions which Petitioner, Department of Banking and Finance (Department), alleges exceed the maximum allowed by Section 494.08(3), Florida Statutes (1983). Specifically, the Department takes the position that the maximum fees or commissions must be computed only on the amount of "new money" actually advanced to the borrower out of the wrap around second mortgagee's pocket; Respondents take the position that maximum fees or commissions must be computed on the total of (1) the "new money" loaned by the wraparound mortgagee, plus (2) the principal balance o the first mortgage which the wraparound mortgagee agreed to pay during the life of the wraparound mortgage.

FINDINGS OF FACT

1. The facts which the Department asked Respondents to admit by Petitioner's Second Request for Admissions (Pet. Ex. 3) and Paragraphs 1-32 and each odd-numbered paragraph from 33-117, inclusive, of Petitioner's First Request for Admissions (Pet. Ex. 2) are conclusively established. Rather than recite all of those undisputed facts as findings, this Recommended Order will summarize those facts as necessary and make additional findings on the relatively few disputed issues of fact which were raised during the final hearing.

   
   

   1. The Financial Transactions

2. Between February 1, 1980, and October 31, 1982, Davide, Inc., brokered

   43 real estate mortgage loans which consisted of a wraparound second mortgage securing a promissory note in an amount equal to (1) the amount of "new money actually advanced to the borrower out of the wraparound mortgagee's pocket, plus

   1. the amount of the principal balance remaining on the first mortgage. There was no evidence how the interest rate on any of the 43 wraparound mortgage loans compared to the interest rate on the corresponding first mortgage loan.

      
      

3. All 43 loans included, as an addendum to the wrap- around mortgage, the following agreements between the wrap- around mortgagee and the borrower:

1. Mortgagor shall pay the taxes and insurance deposits required by Senior Mortgagee. The Mortgagor shall comply with all of the terms and provisions of the Senior Mortgage other than with respect

   to the payments of the principal and interest due. If the Mortgagor shall fail to so comply with all of the terms, provisions and conditions of the Senior Mortgage so as to result in a default under it (other than with respect to pay ments due upon the note secured by the Senior Mortgage) that failure on the part

   of the Mortgagor shall constitute a default under this mortgage and shall entitle the Mortgagee, at its option, to exercise any and all rights and remedies given the Mortgagee in the event of a default under this Mortgage.

2. The Mortgagee agrees to pay to the holder of the Senior Mortgage the unpaid principal balance of the mortgage together with all interest accruing under it as and when required by the terms of the Senior Mortgage; therefore, by paying the constant monthly installments each provided to be paid from the date of funding this

   mortgage to and including the date the Note secured hereby becomes due at which time the Mortgagee's payment obligation shall terminate. At such time of termina tlon of the Mortgagee's obligation, the balloon balance due upon [sic] the Note secured hereby shall be credited for an amount aggregating the principal then owing upon the Senior Mortgage plus all sums which were paid as principal to the Senior Mortgage by the Mortgagee.

3. All those payments provided to be paid by the Mortgagee pursuant to the provisions of paragraph 3 above shall be made by the Mortgagee before the expira tion of the applicable grace periods provided for those payments as contained in the Senior Mortgage. The Mortgagee

   does not assume any of the obligations of the Mortgagor under the Senior Mortgage except as provided above with respect to principal and interest payments due after this mortgage has been funded.

4. If the Mortgagee shall default in making any required payment of principal or interest under the Senior Mortgage, the Mortgagor shall have the right to advance the funds necessary to cure that default

   and all funds so advanced by the Mortgagor, together with interest at the rate of 18 percent per annum shall be credited against the

   next installment(s) of interest and prin

   cipal due under the Note secured by the mortgage.

5. The Mortgagor and the Mortgagee covenant and agree not to enter into any agreement with the holder of the Senior Mortgage modifying or amending any of the provisions dealing with payment of princi pal or interest under the Senior Mortgage

without the prior written consent of the other.

1. All 43 loans are short-term loans which are designed, by their terms, to become due before the first mortgages were, by their payment terms, to be paid in full.

   
   

2. The loan application statements and closing statements related to each of the 43 wraparound mortgage loans show the first mortgage balance as, respectively, part of the amount of the loan and part of the disbursements to the borrowers. But both make clear that those items which refer to the amount of the balance on the first mortgage which the wraparound mortgagee agreed, in the addendum, to pay during the life of the wraparound mortgage. The first mortgage balances were not paid off by the wraparound mortgagee, nor was cash in the amount of the first mortgage balance disbursed to the borrower out of the wraparound mortgagee s pocket.

   
   

3. In each of the 43 wraparound mortgage loans, the mortgage brokerage fee or commission would exceed the maximum allowable by law if computed only on the "new money," but would not exceed the maximum allowable by law if computed on the total face amount of the promissory note secured by the wraparound mortgage. If they were excessive fees, the total amount of the excess would be $22,508.29, and the Department's report of examination (Pet. Ex. 1) would identify the amount of the excess that should be refunded to each borrower.

   
   

4. Finally, the mortgage brokerage fee actually charged on each of the 43 loans much more closely approximates what would be the maximum fee if computed on "new money" than what would be the maximum fee if computed on the face amount of the promissory note secured by the wraparound mortgage.

   
   

   B. The Department's Actions

   
   

5. The Department apparently has not had the occasion to apply the law, which is now codified as Section 494.08(3), Florida Statutes (1983), and the Department's rules promulgated under it, to precisely the financial transactions shown by the evidence in this case. But since at least 1973, the Department consistently has interpreted the law and rules in various cases involving

   wraparound mortgages as requiring the maximum mortgage brokerage commission or fee to be computed on the new money" rather than on the total amount of the promissory note secured by the wraparound mortgage.

   
   

6. In 1979, the Department considered two similar financial transactions: One was a specific refinancing wraparound second mortgage in which the wraparound mortgagee was obligated to make payments due on the first mortgage "out of sums paid hereunder"; the other was the generic purchase money wraparound second mortgage transaction in which the seller/wraparound mortgagee remains liable on the first mortgage. The Department concluded that, in both cases, the maximum fee should be computed on the "new money."

   
   

7. The conclusion in the latter case was based upon the complete absence of any assumption by the wraparound mortgagee of a preexisting indebtedness of the borrower on the first mortgage. In the case of a purchase money wrap- round second mortgage, the wraparound mortgagee always was and simply remains liable on the first mortgage.

   
   

8. The conclusion in the former case is based upon a determination: (1) that the wraparound mortgagee's assumption of the obligation to pay the first mortgage was not unconditional, but rather was conditioned upon the wrap- around mortgagee's receipt of payments on the wraparound mortgage; and (2) that the first mortgagee acquired no cause of action against the wraparound mortgagee. The Department acknowledged at the time that its interpretation was based upon the two sets of facts under consideration and that the Department was not foreclosing the possibility of reaching the opposite conclusion on other sets of facts.

   
   

9. In recent years, Department personnel consistently have advised mortgage brokers of its position regarding computation of maximum fees on wraparound mortgage loans, as summarized above. Department personnel have on occasion attended meetings of Florida mortgage brokers in Miami and elsewhere in which the subject has been discussed and the Department's position publicly stated. There is no evidence whether Davide or any representative of Davide, Inc., attended any of those meetings or became aware of the Department's position before June, 1982. Although Davide attended the final hearing, he did not testify.

   
   

10. In June, 1982, the Department and Respondents began communications regarding the maximum brokerage commission or fee on wraparound mortgage loans. The Department advised Respondents that it believed the maximum fee should be computed on the "new money."

    
    

    C. Respondents' Response

    
    

11. Since approximately May 5, 1981, Respondent had relied on advice of counsel that the maximum mortgage brokerage commission or fee should be computed on the entire face amount of a wraparound mortgage. Counsel qualified his opinion, acknowledging that there was no judicial construction of the statute and that his interpretation could be wrong. Counsel's opinion did not mention, and apparently did not even consider, any Department rule interpreting the statute. Rather, the opinion was based primarily upon counsel's assessment that any other interpretation of the statute would render it unconstitutionally vague and ambiguous.

12. On or about September 27, 1982, Respondents' counsel wrote a letter to the Department and seemed to agree that Respondents would conduct an audit and refund any excess fees charged on the wraparound mortgages.

    
    

13. The Department completed its audit on December 3, 1982, and sent Respondents a copy on December 13, 1982. The audit specified alleged excess fees charged on the 43 wrap- around mortgages and on seven straight" mortgages. (Pet. Ex. 1)

    
    

14. Respondents' counsel responded by January 10, 1983, letter, again seeming to indicate that Respondents agreed to refund excess fees "as applicable." But by January 20, 1983, letter, Respondents' counsel again wrote the Department to advise that Respondents would refund excess fees on the seven "straight" mortgages, but not on the 43 wraparound mortgages.

    
    

15. Based on the above facts, I find that the Department did not mislead Respondents concerning the Department's position. Specifically, Respondents were not misled by the erroneous reference in Rule 3D-40.00(3), Florida Administrative Code, to Section 494.08(4), instead of Section 484.08(3), Florida Statutes.

    
    

    CONCLUSIONS OF LAW

    
    

16. Section 494.08(3), Florida Statutes (1983), which sets maximum mortgage broker fees or commissions, also states:

    
    

    For the purpose of determining maximum fees or commissions, the amount of the mortgage loan shall be based on the proceeds of said mortgage loan exclusive of the authorized maximum fees or commis sions.

    
    

17. Since at least 1973, the Department has, by duly promulgated rule, now codified as Rule 3D-40.08(3), Florida Administrative Code, interpreted the above statutory language as follows:

    
    

    1. Maximum fees. The maximum fees or commissions as provided in subsection 494.08(4)[sic], F.S., must be based on the net proceeds of the loan.

    
    

    The erroneous reference to Section 494.08(4) is an inadvertent oversight. After the court in Income Development Corp. v. Lewis, 336 So.2d 440 (Fla. 2d DCA 1976), invalidated part of Section 494.08(3) as unconstitutionally vague, the 1977 Legislature amended the statute to renumber Section 494.08(4) as 494.08(3) and combine it with the portions of 494.08(3) that were not invalidated by the Second District. The reference in the rule was never changed to conform to the legislative amendments.

    
    

18. There is no legal requirement that the Department promulgate a rule referring either to wraparound mortgages in general or to the particular type of wraparound mortgages shown by the evidence of this case. The Department may refine a rule on a case-by-case basis in the context of formal proceedings under Section 120.57(1), Florida Statutes (1983), if the refinement makes sense in light of the competent, substantial evidence in the record and is not inconsistent with its interpretation of the statute in other cases. See Bowling

    v. Department of Insurance, 394 So.2d 165 (Fla. 1st DCA 1981); McDonald v. Department of Banking and Finance, 346 So.2d 569 (Fla. 1st DCA 1977).

    
    

19. The wraparound mortgages in this case do include an agreement between the wraparound mortgagee and the borrower that the wraparound mortgagee will assume the responsibility during the life of the wraparound mortgage to make payments on the first mortgage as they become due. The wraparound mortgagee's agreement to pay the first mortgage is not conditioned on receipt of the borrower's payments on the wraparound mortgage. There was no evidence whether borrower's failure to pay under the wraparound mortgage would be an event of default which would entitle the wraparound mortgagee to accelerate and foreclose the wraparound mortgage. But the wraparound mortgagee's assumption of payments does not bind the first mortgagee and therefore does not insulate the borrower from primary liability on the first mortgage. And, under paragraph 5 of the addendum to each of these wrap- around mortgages, borrower's only remedy on the wraparound mortgagee's default is to pay the first mortgage and apply those payments towards the wraparound mortgage. The "unconditional obligation" is therefore not really any different from an obligation conditioned upon payment by the borrower under the first mortgage.

    
    

20. In addition, the borrowers under the wraparound mortgages in this case receive no additional benefit (beyond the "new money") from the wraparound mortgagee's agreement to assume payments under the first mortgage, even if it were an unconditional obligation. Because the wraparound mortgagee has neither paid off the first mortgage nor agreed to assume payments on the first mortgage beyond the life of the wraparound mortgage, the wraparound mortgage, regardless how structured, is the analytical equivalent of a straight second mortgage. As with a straight second mortgage, the only benefit given by the wraparound mortgagee to the borrower is the loan of "new money" for the life of the wrap- around mortgage. The interest rate charged for this loan of "new money" can be deduced from the effective payments on it--i.e., the difference between the payments under the wrap-around mortgage and the payments under the first mortgage.

    
    

21. The term "net proceeds," as used in Rule 3D-40.08(3), Florida Administrative Code (and therefore also the term "proceeds," as used in the statute), necessarily includes the concept of "benefit" to the borrower. In these wraparound mortgages, there is no benefit to the borrower other than the loan of the "new money" for a certain time at a certain interest rate.

    
    

22. For the foregoing reasons, the maximum mortgage brokerage fee on the wraparound mortgage loans in this case must be computed on the "new money," not on the total amount of the promissory note secured by the wraparound mortgage. This conclusion of law is consistent with Attorney General Opinion 059-189, September 24, 1959. In that Opinion the Attorney General reasoned that the maximum mortgage brokerage fee on a mortgage loan consisting of a new mortgage securing both the extension of an existing loan and a new loan should be computed on the new loan only.

    
    

23. In addition, this conclusion of law is not reached without having given due consideration to Respondents' contention that Section 494.08(3), Florida Statutes (1983), so interpreted, would be unconstitutional. While a recommended order cannot rule on the constitutionality of a statute, it generally must give due consideration to the rule of statutory interpretation that a statute should be interpreted, if possible, so as to be constitutional. In this case, that rule of statutory interpretation has been no impediment to the conclusion of law in this Recommended Order because there does not appear to

be any constitutional infirmity in the statute when so interpreted. Defining "proceeds" of a wrap- around mortgage as the "new money does not lead the mortgage broker to guess the maximum mortgage brokerage fee. Therefore, the rationale in Income Development Corp. v. Lewis, suora, has no application in this case.

RECOMMENDATION

Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED THAT:

Petitioner, Department of Banking and Finance, enter a final order requiring Respondents, Davide & Associates, Inc., and Salvatore G. Davide, to refund to each of the first 43 borrowers identified in the report of examination (Pet. Ex. 1) as "Mortgagor(s)" the amounts identified therein as "Overcharge" to the borrower.

RECOMMENDED this 5th day of March, 1984, in Tallahassee, Florida.

COPIES FURNISHED:

Walter W. Wood, Esquire Office of the Comptroller The Capitol, Suite 1302 Tallahassee, Florida 32301

Herman T. Isis, Esquire Post Office Box 144567

Coral Gables, Florida 33114

The Honorable Gerald Lewis Comptroller, State of Florida The Capitol

Tallahassee, Florida 32301

J. LAWRENCE JOHNSTON Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 5th day of March, 1984.

Docket for Case No: 83-000924

Orders for Case No: 83-000924