The Issue The issues in this case are whether Petitioner was overpaid certain wages by the Respondent, and, if so, whether repayment is warranted.
Findings Of Fact Petitioner was an employee of the Department until December 13, 2005. She was employed as a corrections officer and, as such, was eligible for criminal justice incentive pay. Criminal justice incentive pay is paid separately and apart from regular salary payments through a separate payment system used by the Department. A person whose employment with the Department is terminated would not be terminated automatically from the incentive pay payment system. Upon her termination from employment with the Department, Petitioner continued to receive incentive pay by direct deposit to her bank account. This occurred on five occasions following her termination. The total amount of the overpayments to Petitioner after taxes was $111.13. The Department asked Petitioner to return the money that had been overpaid, but Petitioner did not comply with the request. In her request for a formal hearing, Petitioner alleged some error in the amount of overpayments being claimed, but no evidence was presented to support that allegation at the final hearing. The Department presented evidence as to each of the incentive pay payments to Petitioner following her termination from employment. Respondent averred that all taxes withheld from the incentive payments would be credited to Petitioner upon return of the overpayment amount.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a final order be entered by the Department of Corrections requiring repayment of the incentive payments made to Petitioner in the sum of $111.13. DONE AND ENTERED this 9th day of October, 2006, in Tallahassee, Leon County, Florida. S R. BRUCE MCKIBBEN Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 9th day of October, 2006. COPIES FURNISHED: Jennifer Sullivan 38618 Kapok Avenue Zephyrhills, Florida 33542 Matthew M. Deleo, Esquire Department of Corrections 2601 Blair Stone Road Tallahassee, Florida 32399 James R. McDonough, Secretary Department of Corrections 2601 Blair Stone Road Tallahassee, Florida 32399-2500 Rosa Carson, General Counsel Department of Corrections 2601 Blair Stone Road Tallahassee, Florida 32399-6563
Findings Of Fact Petitioner is the administrative agency charged with responsibility for administering and enforcing the provisions of Chapter 493, Florida Statutes. Respondent, Mortgage Refunds Research and Consulting ("Mortgage"), is a Florida corporation that is wholely owned by Respondent, Richard Vidair. Respondent has sole responsibility for the direction, control, operation, and management of Mortgage. Respondent is not licensed as a private investigator and Mortgage is not a licensed private investigative agency. Respondent is considered by the United States Department of Housing and Urban Development to be a third party tracer. Respondent and his agency locate persons who may be owed refunds for mortgage insurance premiums. From sometime in August, 1990, through May 2, 1991, Respondent contacted individuals who may be owed mortgage insurance refunds by the federal government. Respondent solicited a fee contingent upon actual receipt of the mortgage refund from the federal government. Respondent obtained from the United States government a list of persons owed mortgage refunds. Such lists are available to anyone for a nominal processing fee. Respondent determined the whereabouts of persons named on the list. Respondent either telephoned or mailed a letter to the person named on the list and informed that person of the service offered by Respondent. Respondent included in the letter sent to the person a finder's fee agreement to be signed by the person on the list. Once the contract was signed and returned to Respondent, Respondent provided the person on the list with additional documents to be filled out for the purpose of filing a claim with the federal government. Government refunds were mailed directly to the person on the list. The terms of the finder's fee agreement required the person on the list to pay Respondent's fee within three days of the date the person received his or her money from the government. The agreement further provided that if Respondent's fee was not paid within 30 days, Respondent was entitled to a fee equal to 50 percent of the government refund. Finally, the agreement provided that all collection and legal expenses incurred by Respondent in collecting the finder's fee must be paid by the other party. Respondent received a letter in March, 1991, from the Division of Licensing notifying Respondent that his activities required licensure. After conferring with his attorney, Respondent terminated his activities in Florida but continued his activities outside the state. On October 14, 1987, an attorney for the Division of Licensing issued an internal legal opinion to then Division Director Dave Register. The opinion concluded that persons who engage in the business of locating individuals to whom mortgage insurance premium refunds are due from the federal government are not required to be licensed pursuant to Chapter 493, Florida Statutes. On October 30, 1987, Ken Rouse, General Counsel, Department of State, issued a legal opinion which rescinded the prior internal opinion and concluded that such activities must be licensed.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Petitioner enter a Final Order finding Respondent guilty of violating Section 493.6118(1)(g), Florida Statutes, and Florida Administrative Code Rule 1C-3.122(1), imposing an administrative fine of $500 pursuant to Florida Administrative Code Rule 1C-3.113(1)(a)2, imposing an administrative fine of $150 pursuant to Florida Administrative Code Rule 1C- 3.113(1)(b)2, and ordering Respondent to cease all investigative activities until Respondent is properly licensed in accordance with Chapter 493. DONE AND ENTERED in Tallahassee, Leon County, Florida, this 23 day of January 1992. DANIEL MANRY Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 23th day of January 1992.
The Issue The issue for determination is whether Respondent's intended decision to award low-income housing tax credits in Miami-Dade County through Request for Applications 2013-003 to HTG Miami-Dade 5, LLC, and Allapattah Trace Apartments, Ltd., is contrary to governing statutes, the corporation’s rules or policies, or the solicitation specifications.
Findings Of Fact Overview FHFC is a public corporation created pursuant to section 420.504, Florida Statutes (2013).1/ Its purpose is to promote the public welfare by administering the governmental function of financing affordable housing in Florida. Pursuant to section 420.5099, FHFC is designated as the housing credit agency for Florida within the meaning of section 42(h)(7)(A) of the Internal Revenue Code and has the responsibility and authority to establish procedures for allocating and distributing low-income housing tax credits. The low-income housing tax credit program was enacted by Congress in 1986 to incentivize the private market to invest in affordable rental housing. Tax credits are competitively awarded to housing developers in Florida for qualified rental housing projects. Developers then sell these credits to investors to raise capital (or equity) for their projects, which reduces the debt that the developer would otherwise have to borrow. Because the debt is lower, a tax credit property can offer lower, more affordable rents. Provided the property maintains compliance with the program requirements, investors receive a dollar-for-dollar credit against their federal tax liability each year over a period of 10 years. The amount of the annual credit is based on the amount invested in the affordable housing. These are tax credits and not tax deductions. For example, a $1,000 deduction in a 15 percent tax bracket reduces taxable income by $1,000 and reduces tax liability by $150. However, a $1,000 tax credit reduces tax liability by $1,000. Developers that are awarded tax credits can use them directly. However, most sell them to raise equity capital for their projects.2/ Developers sell these credits for up-front cash. A developer typically sets up a limited partnership or limited liability company to own the apartment complex. The developer maintains a small interest but is responsible for building the project and managing (or arranging for the management) of the project. The investors have the largest ownership interest but are typically passive investors with regard to development and management.3/ Because the tax credits can be used by the investors that provide the equity for 10 years, they are very valuable. When sold to the investors, they provide equity which reduces the debt associated with the project. With lower debt, the affordable housing tax credit property can (and must) offer lower, more affordable rent. The demand for tax credits provided by the federal government far exceeds the supply. FHFC has adopted Florida Administrative Code Rule chapter 67-60, to govern the competitive solicitation process for several different programs, including the one for tax credits. Chapter 67-60 was newly enacted on August 20, 2013. It replaced prior procedures used by FHFC for the competitive process for allocating tax credits. FHFC has now adopted the bid protest provisions of section 120.57(3), Florida Statutes, as its process for allocating tax credits.4/ The Competitive Application Process Tax credits are made available annually. FHFC begins the competitive application process through the issuance of a Request for Applications.5/ In this case, that document is Request for Applications 2013-003. A copy of the RFA, including its Questions & Answers, is Joint Exhibit 1. The RFA was issued September 19, 2013 and responses were due November 12, 2013. According to the RFA, FHFC expected to award up to approximately $10,052,825 in tax credits for qualified affordable housing projects in Miami-Dade, Broward, and Palm Beach Counties. Knowing that there would be far more applications than available credits, FHFC established an order for funding in the three counties: The Applications will be considered for funding in the following funding order: first the highest scoring eligible Application located in Miami-Dade County that can meet the Funding Test, then the highest scoring eligible Application located in Broward County that can meet the Funding Test, then the highest scoring eligible Application located in Palm Beach County that can meet the Funding Test, then the highest scoring eligible unfunded Application located in Miami-Dade County that can meet the Funding Test and then the highest scoring eligible unfunded Application located in Broward County regardless of the Funding Test. If there is not enough funding available to fully fund this last Broward County Application, the Application will be entitled to receive a Binding Commitment for the unfunded balance. No further Applications will be considered for funding and any remaining funding will be distributed as approved by the Board. RFA at page 36. Applications were scored using a 27-point scale based on criteria in the RFA. RFA at page 37. This process was described in the RFA as follows: The highest scoring Applications will be determined by first sorting all eligible Applications from highest score to lowest score, with any scores that are tied separated first by the Application’s eligibility for the Development Category Funding Preference which is outlined in Section Four A.4.c.(1)(a) of the RFA (with Applications that qualify for the preference listed above Applications that do not qualify for the preference), then by the Application’s eligibility for the Per Unit Construction Funding Preference which is outlined in Section Four A.9.e. of the RFA, (with Applications that qualify for the preference listed above Applications to [sic] do not qualify for the preference), then by the Application’s Leveraging Classification (applying the multipliers outlined in Exhibit C below and having the Classification of A be the top priority), then by the Application’s eligibility for the Florida Job Creation Preference which is outlined in Exhibit C below (with Applications that qualify for the preference listed above Applications that do not qualify for the preference), and then by lottery number, resulting in the lowest lottery number receiving preference. RFA at page 36 (emphasis added). The way this process works in reality is that the developers know that they must first submit a project that meets all the eligibility criteria and does not have any significant omissions or errors.6/ Developers also strive to submit projects structured to receive all 27 points. The tiebreaker is then the luck-of-the-draw. At the time each application is filed, it is randomly assigned a lottery number7/ used to break the ties. The role of the lottery numbers is demonstrated by the following facts. One hundred and nineteen applications were filed in response to the RFA. All but six received the maximum score of 27 points. Seventy of the 119 were deemed eligible. Of those 70, 69 received the maximum score of 27 points. A copy of the RFA Sorting Order is Joint Exhibit 2.8/ As such, the lottery numbers are a big factor in deciding the winners and, concomitantly, the challengers are (1) the projects with high lottery numbers that were deemed ineligible; and (2) those with lottery numbers outside the funding range that are trying to displace those with lower lottery numbers. A copy of the final Review Committee Recommendations is Joint Exhibit 3. This document shows the developers selected, the county and the lottery number. The two Miami-Dade projects selected for funding are: HTG Miami-Dade 5, LLC d/b/a Wagner Creek - lottery number 3 Allapattah Trace Apartments, Ltd. - lottery number 6 The Petitioners/Intervenors in these consolidated proceedings are: Town Center Phase Two, LLC - lottery number 7 Pinnacle Rio, LLC - lottery number 9 APC Four Forty Four, Ltd. - deemed ineligible and with a lottery number of 10 The protests here center upon whether various applicants were correctly deemed eligible or ineligible. Applications are competitively reviewed, and so determinations as to one applicant affect other applicants’ positions. Each application, and the allegations against it, will be considered in turn. HTG’s Application APC argues that HTG should be found ineligible for allocation of tax credits because HTG failed to disclose its principals and those of its developer, as required by the RFA. The RFA at Section Four A.2.d. provides, in part, that each applicant will submit an application that identifies: d. Principals for the Applicant and for each Developer. All Applicants must provide a list, as Attachment 3 to Exhibit A, identifying the Principals for the Applicant and for each Developer, as follows: * * * (2) For a Limited Liability Company, provide a list identifying the following: (i) the Principals of the Applicant as of the Application Deadline and (ii) the Principals for each Developer as of the Application Deadline. This list must include warrant holders and/or option holders of the proposed Development. * * * This eligibility requirement may be met by providing a copy of the list of Principals that was reviewed and approved by the Corporation during the advance-review process. To assist the Applicant in compiling the listing, the Corporation has included additional information at Item 3 of Exhibit C. RFA at page 5. The RFA goes on to provide in Exhibit C 3.: 3. Principal Disclosures for Applicants and Each Developer The Corporation is providing the following charts and examples to assist the Applicant in providing the required list identifying the Principals for the Applicant and for each Developer. The term Principals is defined in Section 67-48.002, F.A.C. a. Charts: (1) For the Applicant: * * * (b) If the Applicant is a Limited Liability Company: Identify All Managers and Identify All Members and For each Manager that is a Limited Partnership: For each Manager that is a Limited Liability Company: For each Manager that is a Corporation: Identify each General Partner Identify each Manager Identify each Officer and and and Identify each Limited Partner Identify each Member Identify each Director and Identify each Shareholder and For each Member that is a Limited Partnership: For each Member that is a Limited Liability Company: For each Member that is a Corporation: Identify each General Partner Identify each Manager Identify each Officer and and and Identify each Limited Partner Identify each Member Identify each Director and Identify each Shareholder For any Manager and/or Member that is a natural person (i.e., Samuel S. Smith), no further disclosure is required. RFA at page 61. The RFA at Section Three F.3. Provides: 3. Requirements. Proposed Developments funded with Housing Credits will be subject to the requirements of the RFA, the Application requirements outlined in Rule Chapter 67-60, F.A.C., the credit underwriting and HC Program requirements outlined in Rule Chapter 67-48, F.A.C., and the Compliance requirements of Rule Chapter 67-53, F.A.C. RFA at page 3. The term “principal” is defined by rule 67-48.002(89)9/, as follows: (89) “Principal” means: (a) Any general partner of an Applicant or Developer, any limited partner of an Applicant or Developer, any manager or member of an Applicant or Developer, any officer, director or shareholder of an Applicant or Developer, * * * (c) Any officer, director, shareholder, manager, member, general partner or limited partner of any manager or member of an Applicant or Developer, and . . . . HTG received an “advance review” approval of its designation of principals on October 8, 2013. HTG submitted this stamped and approved list of principals with its application. Applicant HTG is a limited liability company, as is its developer, HTG Miami-Dade 5 Developer, LLC. In its submission of principals, HTG disclosed the names of the manager and member of the applicant and the manager and member of the developer, all of which were also LLCs. HTG also disclosed the names of the managers and members of these component LLCs. HTG did not disclose any officers of the applicant, the developer, or any of the component LLCs. Other documents submitted as part of the application indicate that Mr. Matthew Rieger is a Vice President of the applicant, HTG Miami-Dade 5, LLC, and that the component LLCs also have officers. APC contends that the rule’s definition of principal requires HTG to disclose not only the managers and members of the applicant and developer, and those of their component LLCs, but also the officers of any of these entities, if they also have officers. FHFC asserts that such disclosure is not required, arguing that the term “officer” as found in the rule’s definition of “principal” only applies to corporations. FHFC argues that there is no inconsistency between the rule and the charts of the RFA with respect to disclosure of principals. FHFC contends that the charts in the RFA, read in conjunction with the rule, indicate that officers must be disclosed only when the entity is a corporation, and that members and managers must be disclosed when the entity is a LLC. FHFC interprets rule 67-48.002(89) in a manner consistent with the charts. It does not interpret the rule to require that an LLC disclose its officers, even if it has them, but only that an LLC disclose its managers and members. Both Ms. O’Neill and Ms. Thorp testified to that effect. The examples provided in the RFA are also consistent with this interpretation. The rule certainly might have been drafted with more precision to expressly indicate that a principal is any officer, director, or shareholder if the entity is a corporation; any manager or member if the entity is an LLC; and any general partner or limited partner if the entity is a Limited Partnership. It cannot be said, however, that the Corporation’s interpretation of the RFA and its rule is impermissible. ATA’s Application Mr. Kenneth Reecy, Director of Multifamily Programs, testified that FHFC revised the “Universal Application Cycle” process that had been conducted in the past. Under the old universal cycle, most of the criteria were incorporated into the rule, and then there was a “cure” process that provided an opportunity to correct errors that didn’t necessarily have a bearing on whether a project was good enough to be funded. Under the newer process, several issues were moved out of the eligibility and scoring phase and into the credit underwriting phase.10/ Specifically relevant here, site plan issues and the availability of infrastructure, such as sewer service, were no longer examined as part of the eligibility and scoring phase set forth in the RFA. Mr. Reecy testified that these issues were complex and had been intentionally pushed to the “rigorous review” that takes place during the credit underwriting phase. In signing and submitting Exhibit A of the RFA, each applicant acknowledges and certifies that certain information will be provided to FHFC by various dates in the future. RFA at page 46. Section Four 10.b.(2)(b) provides in part that the following will be provided: Within 21 Calendar Days of the date of the invitation to enter credit underwriting: Certification of the status of site plan approval as of Application Deadline and certification that as of Application Deadline the site is appropriately zoned for the proposed Development, as outlined in Item 13 of Exhibit C of the RFA; Certification confirming the availability of the following for the entire Development site, including confirmation that these items were in place as of the Application Deadline: electricity, water, sewer service, and roads for the proposed Development, as outlined in Item 13 of Exhibit C of the RFA; Item 13 of Exhibit C goes on to provide: 13. Certification of Ability to Proceed: Within 21 Calendar Days of the date of the invitation to enter credit underwriting, the following information must be provided to the Corporation: a. Submission of the completed and executed 2013 Florida Housing Finance Corporation Local Government Verification of Status of Site Plan approval for Multifamily Developments form. * * * c. Evidence from the Local Government or service provider, as applicable, of the availability of infrastructure as of Application Deadline, as follows: * * * Sewer: Submission of the completed and executed 2013 Florida Housing Finance Corporation Verification of Availability of Infrastructure — Sewer Capacity, Package Treatment, or Septic Tank form or a letter from the service provider which is dated within 12 months of the Application Deadline, is Development specific, and specifically states that sewer service is available to the proposed Development as of the Application Deadline. The 2013 Florida Housing Finance Corporation Local Government Verification of Status of Site Plan Approval for Multifamily Developments Form (Site Plan Approval Form) and the 2013 Florida Housing Finance Corporation Verification of Availability of Infrastructure — Sewer Capacity, Package Treatment, or Septic Tank Form (Certification of Sewer Capacity Form) are incorporated by reference in the RFA. The Site Plan Approval Form requires (in the case of Miami-Dade County which does not have a preliminary or conceptual site plan approval process) that the local government confirm that the site plan was reviewed as of the application deadline. Pinnacle and APC assert that the site plan that ATA submitted to the City of Miami for review included a strip of land that is not legally owned by the current owner and will not be conveyed to ATA under the Purchase and Sale Agreement. As a result, they contend, the site plan review which was required on or before the application deadline did not occur. Pinnacle argues that ATA’s certification in its application was incorrect, that this was a mandatory requirement that was not met, and that it will be impossible for ATA to provide the Site Plan Approval Form in credit underwriting. TC similarly maintains that ATA could not “acknowledge and certify” as part of its application that it would later certify that it had “ability to proceed” because the RFA (at Section Four 10.b.(2)(b) quoted above) requires that “sewer service” be “in place” for ATA’s proposed development as of the application deadline. TC also asserts that the Certification of Sewer Capacity Form explicitly states (and that any service provider letter must, too) that no moratorium is applicable to a proposed development. ATA did not submit a Certification of Sewer Capacity Form. Miami-Dade County will not complete such forms. The “letter of availability” option was created to accommodate Miami-Dade County. The November 12, 2013, letter from Miami-Dade Water and Sewer regarding ATA’s development does not state that there is no applicable moratorium in effect. In fact, the letter affirmatively acknowledges that flow to the gravity system already connected to the property cannot be increased because there is a moratorium in effect as to the pumping station serving the abutting gravity sewer basin. The letter from the County states that, if the pumping station is still in Moratorium Status “at the time this project is ready for construction,” that a private pump station is acceptable. It is logical to conclude that this means sewer service would be available at that time and that sewer service was similarly available at the time of application deadline. The letter, therefore, implies, but does not specifically state, that “sewer service is available to the proposed development as of the application deadline.” The moratorium in effect at the application deadline was not a “general” moratorium. It applied only to the pump station serving the abutting gravity sewer basin, but it was applicable to the proposed development and precluded any increase in the flow to the gravity system connected to the property. A moratorium pertaining to sewer service applicable to ATA’s proposed development was in effect at the time that ATA’s application was submitted. Sewer capacity was otherwise available for the proposed development through use of a private pump station. ATA asserts, first, that ATA has not yet filed certification of ability to proceed or the required forms or letter, that it is not to do so until after it is invited to enter credit underwriting, that FHFC has consequently yet to make a determination as to ATA’s ability to proceed, and that therefore any issues as to site plan or sewer service are not yet ripe for consideration. As to the site plan, ATA further maintains that even if it had been required to provide evidence of ability to proceed as part of its application, the site plan submitted to the City of Miami did not represent that the alley was part of the ATA site. ATA, therefore, asserts that the site plan that was reviewed was the correct one, and that its application certification was correct. The plan of the site of ATA’s development project indicates that the site is bifurcated by a private alley, which is not dedicated as a street, avenue, or boulevard. The legal description of the development project, as submitted to the Department of Planning and Zoning of the City of Miami, included lots 2 through 7 and lots 19 and 20. It did not include the strip of land that lies between these lots (lots 2 through 7 lie to the West of the alley and lots 19 and 20 lie to the East of it.) As to sewer availability, ATA asserts that the 2011 Universal Cycle and the RFA are significantly different. ATA maintains that while the former provided that the existence of a moratorium pertaining to sewer service meant that infrastructure was unavailable, this language was removed from the RFA. ATA contends that a letter of availability need not “mimic” the Certification of Sewer Capacity Form and that the RFA allows a development to certify sewer availability by other means when a moratorium is in effect. Mr. Reecy testified that FHFC takes the certified application at face value, regardless of what other information the Corporation might have at hand. As to the site plan, he testified that even had site plan approval been a part of the scoring process, FHFC would not have found ATA’s application ineligible on that ground. He testified that the alley would not be a problem unless it was a “road” or something similar. He testified that it also could have been a problem if the measurement point to measure the distance to nearby amenities was not on the property, but he was not aware that that was the case in ATA’s application. As for sewer service, Mr. Reecy testified that a letter from the service provider does not have to say “exactly” what is on the form, but stated that it does have to give “the relevant information” to let FHFC know if sewer is “possible.” He testified that the only guidance as to what constituted sewer “availability” was contained in the criteria found on the Certification of Sewer Capacity Form. One of the four numbered requirements on the Certification of Sewer Capacity Form is that there are no moratoriums pertaining to sewer service that are applicable to the proposed development. Under the RFA, the Certification of Sewer Capacity Form could not be completed for a proposed development for which a moratorium pertaining to sewer service was in effect at the time the application was submitted. The form could not be certified by the service provider even if it was possible for such a development to obtain sewer service by other means. The text on the 2013 form is substantively identical to that on the form used during the 2011 Universal Cycle, that wording was specifically drafted to require that any moratorium on sewer infrastructure would be a disqualifying criterion, and the 2013 Certification of Sewer Capacity Form still has that effect. No challenge to the use of the form in the RFA was filed. Even though the language of the 2011 Universal Cycle which paralleled the text on the form does not appear in the RFA, that criterion remains as part of the RFA because of the incorporated Certification of Sewer Capacity Form. In any event, the site plan and sewer availability issues must await at least initial resolution by FHFC during the credit underwriting phase. The testimony of Mr. Reecy clearly indicated that FHFC interprets the RFA specifications and its rules to move consideration of site plan issues and infrastructure availability to the credit underwriting phase. It has not been shown that this is an impermissible interpretation. Town Center’s Application Pinnacle alleges that TC’s application fails to demonstrate site control, because the applicant, Town Center Phase Two, LLC, is not the buyer of the site it intends to develop. The RFA requires at Section Four A.7. that an applicant must provide a copy of a contract, deed, or lease to demonstrate site control: 7. Site Control: The Applicant must demonstrate site control by providing, as Attachment 7 to Exhibit A, the documentation required in Items a., b., and/or c., as indicated below. If the proposed Development consists of Scattered Sites, site control must be demonstrated for all of the Scattered Sites. a. Eligible Contract - For purposes of the RFA . . . the buyer MUST be the Applicant unless an assignment of the eligible contract which assigns all of the buyer's rights, title and interests in the eligible contract to the Applicant, is provided. If the owner of the subject property is not a party to the eligible contract, all documents evidencing intermediate contracts, agreements, assignments, options, or conveyances of any kind between or among the owner, the Applicant, or other parties, must be provided . . . . RFA at page 23. The Contract for Purchase and Sale of Real Property submitted as Attachment 7 to TC’s application is signed by Mr. Milo, who is identified as Vice President. The Buyer on the signature page is incorrectly listed as RUDG, LLC. No other assignment, intermediate contract, agreement, option, or conveyance was included with TC’s application to indicate that TC otherwise had site control of the property. The applicant entity, Town Center Phase Two, LLC, is correctly listed in the opening paragraph of the Contract for Purchase and Sale of Real Property as the “Buyer.” RUDG, LLC, is the 99.99 percent Member of Town Center Phase Two, LLC, and is also the sole Member and Manager of Town Center Phase Two Manager, LLC, which is the .01 percent Managing Member of Town Center Phase Two, LLC. Mr. Milo is a Vice President of RUDG, LLC, a Vice President of Town Center Phase Two Manager, LLC, and a Vice President of the applicant, Town Center Phase Two, LLC. Florida Administrative Code Rule 67-60.008, provides that the Corporation may waive minor irregularities in an otherwise valid application. The term “Minor Irregularity” is defined by rule 67- 60.002(6), as follows: (6) “Minor Irregularity” means a variation in a term or condition of an Application pursuant to this rule chapter that does not provide a competitive advantage or benefit not enjoyed by other Applicants, and does not adversely impact the interests of the Corporation or the public. Mr. Reecy testified that FHFC interpreted the rule to mean that if information requested by the RFA is reasonably available within the Application, even if it was not provided exactly in the place where it was requested, the failure to have it in the particular place it was requested is a minor irregularity. Although the information on the signature page of the Contract for Purchase and Sale of Real Property identifying the Buyer as RUDG, LLC, was a discrepancy in the application, the contract elsewhere identified Town Center Phase Two, LLC, as the Buyer, and Mr. Milo was, in fact, authorized to sign for the true Buyer. Ms. Amy Garmon’s deposition testimony indicated that because she was able to determine from other places in the application that the Buyer was the applicant, and that Mr. Milo was authorized to sign for the Buyer, she found this portion of TC’s application to be compliant, and she didn’t see that there was a “minor irregularity” that needed to be waived. However, it is determined that FHFC actually did finally determine that the error in identification constituted a minor irregularity that was waived, in accordance with Mr. Reecy’s testimony. Although it was Ms. Garmon who called attention to the irregularity, Mr. Reecy is in a position of higher authority within the FHFC and is better able to address the Corporation’s actions with respect to TC’s application. Pinnacle also asserts that TC’s finance documents fail, based upon the same signature issue. TC submitted equity proposals detailing its construction funding sources that were addressed to Mr. Milo and endorsed by him as “Vice President.” FHFC similarly concluded that Mr. Milo had authority to endorse the finance letters on behalf of TC. There is evidence to support FHFC’s findings that TC was the actual Buyer, that Mr. Milo had authority to sign the contract and the equity documents, and that the discrepancies in the documents were minor irregularities. Pinnacle’s Application The equity commitment letter from Wells Fargo Bank regarding Pinnacle’s development, as submitted to FHFC, contained only pages numbered one, two, and four of a four-page letter. It is clear that page three is actually missing and the letter was not simply incorrectly numbered, because of discontinuity in the text and in the numbering of portions of the letter. APC contends that Pinnacle’s application should have been deemed ineligible for award because of the missing page. Mr. Reecy testified that even though a page of Pinnacle’s equity commitment letter was missing, all of the RFA requirements were set forth in the remaining pages. He acknowledged that the missing page might have included unacceptable conditions for closing or information that was inconsistent with the other things in the application, but stated that FHFC determined that the missing page from Pinnacle’s equity letter was a minor irregularity. There is evidence to support FHFC’s finding that the missing page was a minor irregularity. APC’s Application The RFA provides at Section Four, A.3.c., at page 5: c. Experienced Developer(s) At least one Principal of the Developer entity, or if more than one Developer entity, at least one Principal of at least one of the Developer entities, must meet the General Developer Experience requirements in (1) and (2) below. (1) General Developer Experience: A Principal of each experienced Developer entity must have, since January 1, 1991, completed at least three (3) affordable rental housing developments, at least one (1) of which was a Housing Credit development completed since January 1, 2001. At least one (1) of the three (3) completed developments must consist of a total number of units no less than 50 percent of the total number of units in the proposed Development. For purposes of this provision, completed for each of the three (3) developments means (i) that the temporary or final certificate of occupancy has been issued for at least one (1) unit in one of the residential apartment buildings within the development, or (ii) that at least one (1) IRS Form 8609 has been issued for one of the residential apartment buildings within the development. As used in this section, an affordable rental housing development, including a Housing Credit development that contains multiple buildings, is a single development regardless of the number of buildings within the development for which an IRS Form 8609 has been issued. If the experience of a Principal for a Developer entity listed in this Application was acquired from a previous affordable housing Developer entity, the Principal must have also been a Principal of that previous Developer entity. (2) Prior General Development Experience Chart: The Applicant must provide, as Attachment 4 to Exhibit A, a prior experience chart for each Principal intending to meet the minimum general development experience reflecting the required information for the three (3) completed affordable rental housing developments, one (1) of which must be a Housing Credit development. Each prior experience chart must include the following information: Prior General Development Experience Chart Name of Principal with the Required Experience Name of Developer Entity (for the proposed Development) for which the above Party is a Principal: ___ ___________ ___ Name of Development Location (City & State) Affordable Housing Program that Provided Financing Total Number Of Units Year Completed RFA at pages 5, 6. Exhibit A to the RFA, at 3.c., further provides: General Developer Experience For each experienced Developer entity, the Applicant must provide, as Attachment 4, a prior experience chart for at least one (1) experienced Principal of that entity. The prior experience chart for the Principal must reflect the required information for the three (3) completed affordable rental housing developments, one (1) of which must be a Housing Credit development. RFA at page 41. Ms. O’Neill, a Senior Policy Analyst at FHFC and member of the Review Committee responsible for scoring the applications’ developer information section, testified at hearing. When FHFC first started scoring applications, Ms. O’Neill was not taking any action to confirm principal developer experience, but rather was taking the information provided by applicants at face value, as it had been submitted on the chart. A colleague of Ms. O’Neill’s, not serving on the Review Committee, called her attention to the fact that a development that was then going through credit underwriting (following an award during the 2011 funding cycle) had recently requested that FHFC approve a change to the developer entity. Ms. O’Neill testified that this request raised a question at FHFC as to whether Ms. Wong, listed by APC as the principal with the required experience, met the requirements. FHFC decided to confirm that Ms. Wong had the required experience for the developments listed in the RFA. Ms. O’Neill stated that she did not make any inquiry to Ms. Wong or to Atlantic Pacific Communities as to whether Ms. Wong was, in fact, a principal of St. Luke’s Development, LLC, developer of St. Luke’s Life Center, because “we’re not really supposed to do that.” Ms. O’Neill instead looked at portions of a credit underwriting report on the St. Luke’s Life Center project that were researched and shown to her by a colleague. Ms. O’Neill did not see Ms. Wong listed in that report as a principal. She did find information in FHFC files that Ms. Wong was a principal on the other two listed developments. Ms. Thorp testified that she researched several documents in FHFC’s possession and found no information indicating that Ms. Wong was a principal for the St. Luke’s development. She testified that Ms. Wong or another representative of APC was not contacted about the issue because that would have given them an unfair advantage over other applicants. Based upon the information in its files, FHFC determined that Ms. Wong did not meet the requirements for principal developer experience. FHFC then similarly reviewed the files of other applicants who had listed in-state developments as their experience, but was unable to review out-of-state experience, so out-of-state experience continued to be accepted at face value. Ms. Wong was not originally a principal in the St. Luke’s development. However, it was demonstrated at hearing through documentary evidence that Ms. Wong was later appointed an officer of St. Luke’s Development, LLC, effective March 2007. That change was submitted to the credit underwriter, and Ms. Wong was a principal for the developer entity before it completed credit underwriting. Both Ms. O’Neill and Ms. Thorp testified that if the documents provided at hearing by APC had been in FHFC’s possession at the time APC’s application was scored, FHFC would have found that Ms. Wong was a principal of the St. Luke’s development and that her experience met principal developer experience requirements. In light of the evidence presented at hearing, it is clear that FHFC’s conclusion was wrong. The prior experience chart submitted by APC as part of its application provided all of the information requested by the RFA, and all of that information was accurate. The information available to FHFC in the application correctly indicated that Ms. Wong was a principle for the developer of the St. Luke’s Life Center development. APC’s application met all requirements of the RFA with respect to prior developer experience. The Corporation’s preliminary determinations that Ms. Wong was not a principal in the St. Luke’s development, and that the APC application did not, therefore, meet principal experience requirements to the contrary, made in good faith based upon incomplete information contained in its files, was clearly erroneous. FHFC’s contention that APC should have submitted explanations or further documentation of Ms. Wong’s developer experience at the time it submitted its application is untenable. APC submitted all of information requested of it. FHFC asked for a chart to be completed, which APC did, completely and accurately. An applicant cannot be found ineligible for failing to do more than was required by the RFA. Credit Underwriting A comparison of the RFA and rules with the 2011 Universal Cycle process shows that the Corporation has moved many requirements formerly required as part of the eligibility and scoring phase into a second review in the credit underwriting phase, as noted earlier. Rule 67-48.0072 provides in part: Credit underwriting is a de novo review of all information supplied, received or discovered during or after any competitive solicitation scoring and funding preference process, prior to the closing on funding, including the issuance of IRS Forms 8609 for Housing Credits. The success of an Applicant in being selected for funding is not an indication that the Applicant will receive a positive recommendation from the Credit Underwriter or that the Development team’s experience, past performance or financial capacity is satisfactory. The rule goes on to provide that this de novo review in the credit underwriting phase includes not only economic feasibility, but other factors statutorily required for allocation of tax credits, such as evidence of need for affordable housing and ability to proceed. These factors might cause an application to fail and never receive funding, even though it was nominally “awarded” the credits earlier. In that event, the RFA provides: Funding that becomes available after the Board takes action on the Committee’s recommendation(s), due to an Applicant declining its invitation to enter credit underwriting or the Applicant’s inability to satisfy a requirement outlined in this RFA, and/or Rule Chapter 67-48, F.A.C., will be distributed to the highest scoring eligible unfunded Application located in the same county as the Development that returned the funding regardless of the Funding Test. If there is not enough funding available to fully fund this Application, it will be entitled to receive a Binding Commitment for the unfunded balance. If an applicant nominally “awarded” funding in the eligibility and scoring phase fails credit underwriting, the next applicant in the queue of eligible applicants may still be granted funding, and so, is substantially affected by FHFC’s decisions in the credit underwriting phase.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Florida Housing Finance Corporation enter a final order finding that APC Four Forty Four, Ltd., is eligible for funding, adjusting the Sorting Order accordingly, and otherwise dismissing the formal written protests of all Petitioners. DONE AND ENTERED this 4th day of June, 2014, in Tallahassee, Leon County, Florida. S F. SCOTT BOYD Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 4th day of June, 2014.
The Issue The Respondents have been charged with multiple violations of Chapter 494, (1987), the Florida Mortgage Brokerage Act, and administrative rules promulgated pursuant to the act. The violations, described in an amended administrative complaint dated April 16, 1990, are as follows: Rule 3D-40.006(5), F.A.C.: Respondents failed to issue a statement signed by both parties, when receiving a deposit on a mortgage loan, regarding disposition of the deposit and other matters. Section 494.08(10), F.S. and Rule 3D-40.091(2), F.A.C.: Respondents failed to provide a written statement with a summary of limits and conditions for recovery from the Mortgage Broker Guaranty Fund. Section 494.055(1)(b), F.S. and Rule 3D-40.008(1), F.A.C.: Respondents assessed fees for credit reports, phone calls, appraisals and courier services, which fees were not supported by the files. Section 494.055(1)(0), F.S. and Rule 3D-40.006(4), F.A.C.: The department had to issue a subpoena for compensation records. Section 494.055(1)(g) and (p), and Section 494.08(5), F.S.: Borrowers were required to pay higher closing costs than were disclosed on the good faith estimate form. Section 494.08(5), F.S.: Respondents failed to secure executed modified mortgage loan applications from the borrowers or to return excess monies to the borrowers. Section 494.08(5), F.S. and Rule 3D-40.091(1), F.A.C.: Respondents accepted deposits from loan applicants but failed to obtain executed mortgage broker agreements which would disclose the cost of the loans. Sections 494.055(1)(b) and (g), and Sections 494.093(3)(a), (b), (c), and (4), F.S.: Respondents failed to disclose that they would retain both origination fees and discount points as their compensation, and failed to disclose compensation received from the lender in addition to brokerage fees assessed the borrowers on the closing statements. Section 494.055(1)(b), F.S., Section 494.08(5), F.S. and Sections 494.093(3)(a), (b), (c) and (4), F.S.: Respondents collected a servicing release fee from the borrowers when the Respondents were not the lender, and failed to disclose the collection. Section 494.055(1)(e), F.S. and Rule 3D-40.006(b)(a), F.A.C.: Respondents failed to maintain an escrow account.
Findings Of Fact Inlet Mortgage Company, Ltd. ("IMC") is a mortgage brokerage business operating under license #HB65002147500. Its place of business is 700 Virginia Avenue, Suite 105, Ft. Pierce, Florida 34982. John Davis is the principal mortgage broker of Respondent IMC, operating under license #HA246700273. He has been licensed in Florida since approximately 1987, and opened his business in February 1988. As authorized by Section 494.065(1), F.S. (1987), the Department of Banking and Finance ("department") conducted an examination of the affairs of the Respondents for the time period February 1988 through June 1, 1988. The examination was completed on July 5, 1988, with a written report. At the time of the examination Respondents had closed only four loans and had another six in progress. The audit was conducted because a loan processor working for IMC had applied for her mortgage broker license, and her application seemed to imply that she was already practicing mortgage brokering. The audit cleared up this question and the processor was not found to be operating improperly. However, Timothy Wheaton, the department examiner, found other violations by IMC. When an audit or review is conducted by the department, the agency staff first interviews the person in charge to explain the review and to learn about the company. The staff then looks at the licenses, reviews files of closed and active loans, and examines books and accounts, payroll records, and the like. Generally, a sampling of loan files is selected from the broker's loan log, but in this first review all loans were reviewed, as so few existed. The staff writes a preliminary report and conducts an exit interview to let the broker know its findings. Later, a formal report is completed and provided to the broker, who has thirty days to respond. Timothy Wheaton conducted his review of IMC and John Davis at the company office in Ft. Pierce on June 3, 1988 and June 7, 1988. At some point on June 3rd, Wheaton was reviewing compensation records to determine how the broker, his partner and the loan processor were paid. Davis had checkbooks available, but the accountant had not prepared his books as the office had just opened. Wheaton had questions as to whether the checkbooks were all that was available; when he asked for the payroll records, Davis told him he would have to subpoena them. Wheaton returned on Monday with a subpoena and was given the same records as before. Davis admits that he made the demand for the subpoena. He was piqued because he was very busy when the audit staff arrived, and when he suggested they return later, he felt they wrongfully impugned his motives and accused him of hiding something. Respondent Davis has admitted to several "technical" violations or oversights in the loan files at the time of the first review. A summary of the limits and conditions of recovery from the Mortgage Brokerage Guaranty Fund was not being provided, but has been provided since the first audit. Deposits for credit report, appraisal fees and other costs were collected from the borrowers, but the files did not include a statement, signed by the borrowers, describing disposition of the funds in the event that the loan was not consummated, or the term of the agreement. After the first audit Davis has provided such a form statement and has included it in each file. On three closed loans, and one that was still pending, the files did not include documentation to support minimal (i.e., $25.00, $10.00, $6.56) fees for phone calls and courier fees, or fees were collected which exceeded the documentation in the file. Davis explained that these are charges made by the closing attorney, and the files now document those expenses. The difference between what was collected for a credit report and what was spent was returned to the borrower. (For example, $20.30 was returned to borrower, G. Stewart). In three loans closed at the time of the first audit, Davis and IMC received as compensation both the origination fee and a portion of the discount points. In the McCurdy loan, IMC received its 1 percent origination fee ($600.00), plus one half of the 1 percent discount fee ($300.00). In the Alexander loan, IMC received its 1 percent origination fee ($469.00), plus a .75 percent discount fee ($351.75). In the Stewart loan, IMC received its 1 percent origination fee ($612.00), plus 1/2 percent discount fee ($306.00). In each case, the Good Faith Estimate form provided to the borrowers disclosed the fees separately and did not break out which portion of the loan discount would be paid to the lender and which portion would be paid to IMC. The origination fee is sometimes called the broker's fee, although some banks also collect the fee when a mortgage broker is not involved. Discount points are a one-time payment to a lender to increase its yield on the loan. They are a percentage of the loan, paid up front, to reduce the interest rate over the term of the loan. These are distinctly different forms of charges to the borrower. Davis claims that he explained orally to each borrower how much compensation he would receive. The borrowers do not remember the specifics of that explanation, but rather consider the total origination fee and discount fee as their cost of the loan. They knew that the broker was going to be compensated for his services and understood that compensation would come from those fees in some unspecified manner. Davis claims that he checked with some lenders who told him that it was standard practice for part of the broker's compensation to be called a "discount" fee. He considered it a tax advantage to the borrower, as discount fees could be deductible, just as interest is deductible. During the audit, Davis discussed his compensation practice with the agency staff, who explained that, whatever it is called, the broker's compensation had to be fully disclosed to the borrower at the time of application on the Good Faith Estimate form. Between June 3rd and June 7th, Davis attempted to redisclose his compensation to the borrowers, but this resulted in unsigned disclosure forms in the file when the agency review staff returned on June 7th to complete the audit. At the time of the first audit, Davis and IMC maintained an escrow account for the deposits received from applicant/borrowers for audit reports, appraisal fees and other costs. Davis later closed his escrow account because he felt it was costing him money and because he did not consider the funds he received at the time of application to be escrow deposits. In most cases, the credit report and appraisal and other relevant services were ordered the same day as the loan application. Whether the loan was eventually consummated, the customer was still responsible for paying the charge if the services were provided. This is disclosed in a statement at the bottom of the Good Faith Estimate form and in a separate "Notice to Borrower", signed by the applicant which, since the first audit, is maintained in the loan file. According to the Notice to Borrower, if the loan is cancelled or denied, and the services have not been performed, the funds will be returned to the customer, less any cancellation charge by the appraisal or credit firm. These funds are deposits. When the escrow account was closed, Davis deposited the money for appraisals and credit report in his operating account. After services were rendered and an invoice received, he would pay the bill. Barbara Janet (Jan) Hutchersien, conducted the department's second audit of IMC in January 1990. This review covered the period from July 1, 1988 through December 31, 1989. John Davis provided the boxes of loans and bank records and loan log. The auditor used the logs to review a sample of loans from each lender with whom IMC works. The bank records were used to trace funds reflected in the loan files. Ms. Hutchersien found, and noted in her examination report, that no escrow account was maintained, although deposits were received in a sample of loan applications. In the Fishman loan, which closed on 4/11/89, closing costs were disclosed by IMC as $1,822.00 on the Good Faith Estimate form dated 1/12/89, yet those costs actually amounted to $2,075.00, disclosed at closing on the U.S. Housing and Urban Development (HUD) Settlement form, for a difference of $253.00. In determining consistency between a good faith estimate and actual closing costs, the agency staff looks at items which are predeterminable costs. In the Fishman case, the estimate for survey was $225.00, but the actual cost was $400.00, due, according to John Davis, to an oddly-shaped lot. In two loans financed by Greentree Mortgage Corporation, IMC received a substantial fee from the lender, which fee was not disclosed on the Good Faith Estimate form, on the HUD Settlement form, or anywhere in writing to the borrower. File documents call these fees "discount for pricing". In the Meslin loan, closed on 8/11/89, the fee from the lender to broker was $432.00; in the Krueger loan, closed on 7/21/89, the payment was $820.00. These paybacks are called "par plus pricing", a relatively new (within the last five years) form of loan pricing. Par plus pricing allows a borrower who does not wish to pay cash at closing, but who would qualify for a higher interest rate in terms of monthly payments, to avoid paying discount points fee at closing. Instead, the lender pays the points to the broker, and the borrower gets a higher interest rate. This is contrasted with the discount point system where the borrower pays cash points at closing in return for a lower interest rate. Par plus pricing can work to the advantage to all parties: The borrower avoids a large cash outlay at closing, the lender enjoys a higher interest rate over the term of the loan, and the broker receives his money from the lender. The borrower, however, should understand his options, including the option to pay cash at closing for a lower interest rate. Davis did not disclose the payback from the lender in writing because that is the way he says he was told to handle the loan by Greentree's representative. Davis told the borrowers that he was getting his money from the lender. He did not, however, explain that the borrower would be paying a higher interest rate in return, and Roger Krueger did not understand why his loan was at 10 1/4 percent, rather than 9 3/4 percent, which he thought was the going rate at the time of closing. IMC also received funds from the lender in the Barnes loan, closed on 12/30/88. Cobb Financial Partners was the original lender, yet they paid IMC a service release fee ordinarily paid by one lender to another for release of servicing a loan. Although the fee from Cobb to IMC was not disclosed in writing to the borrowers, the Barnes' were told that the fee for IMC's services would come from the lender, rather from them. They were told, and it is disclosed on the Good Faith Estimate form, and on the HUD Settlement Form, that Cobb Partners Financial was paid $900.00 (1.25 percent loan discount) by the borrowers. Of this, $810.00 was returned by Cobb to IMC. John Davis concedes that Cobb, not IMC, was the lender and was not "comfortable" with how Cobb told him to handle his fee. He has not done business with Cobb since this loan and was simply trying to avoid having to charge his fee to Barnes, who had just arrived in town to become the newspaper editor. The borrowers who were the subject of the files in which the agency found violations generally did business with Davis and IMC because they thought he would get the best deal for them. They were financially unsophisticated and trusted him to represent them. They understood that he was being paid for his services and felt that he should be paid. Except for Mr. Krueger, they were generally satisfied with their mortgage rates. The mortgage broker's fiduciary responsibility is to the borrower, rather than the lender, although he must deal fairly and honestly with the lender. The service that the broker provides to the borrower is his knowledge and his ability to shop for the best product. Par plus pricing and other mechanisms by which the broker receives his fee in whole or part from the lender are not considered by the department to be a violation of standards governing the practice of mortgage brokerage, so long as the customer is fully apprised of his options and is informed of the role of those payments in the product or service they are receiving. The Barnes' and Kruegers clearly were not so apprised, nor does the record establish that the Meslins were informed, although they did not testify. Categorizing brokerage fees or compensation as "discount points" is patently misleading, as discount points are used to buy down an interest rate. When the points are diverted instead to the broker, the consumer does not receive the loan for which he has paid. John Davis admits certain technical violations, but unequivocally denies that he wilfully misled his customers or committed fraud. Since the second audit, he has restored his escrow account. He now discloses his compensation as brokers fees rather than discount points, and has learned how to disclose in writing the par plus pricing loans. In considering certain violations as "technical", and in recommending a penalty in this case, the undersigned has considered Respondents' willingness to correct the errors addressed by the department and Respondents' inexperience at the time of the first audit. Although he was involved in banking, insurance, and accounting, John Davis had not practiced mortgage brokering before moving to Florida and starting his business. In his early practice, as evidenced by his own testimony, he was willing to rely on the advice of lenders, rather than to seek guidance from his licensing authority. He misconceived his role as being jointly responsible to the borrowers and lenders with whom he worked, rather than a primary fiduciary duty to the borrowers, his clients. Although the concealment of compensation as discount points was a willful misrepresentation, the record establishes a pattern of ignorance, albeit inexcusable, rather than fraud.
Recommendation Based on the foregoing, it is hereby, RECOMMENDED That a Final Order be entered, finding that Respondents violated Sections 494.055(1)(e), (o), and (q), F.S. (1987); Sections 494.08(5) and (10), F.S. (1987); and Section 494.093(4), F.S. (1987), and imposing a penalty of $1,000.00 fine, and one year probation, with the conditions that Respondent Davis successfully complete a specified amount and type of professional short course work and undergo periodic review and supervision by the agency. DONE AND RECOMMENDED this 30th day of July, 1990, in Tallahassee, Leon County, Florida. MARY CLARK, Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904)488-9675 Filed with the Clerk of the Division of Administrative Hearings this 30th day of July, 1990. APPENDIX The following constitute specific rulings on the findings of fact proposed by the parties. Petitioner's Proposed Findings of Facts Rejected as unnecessary. Adopted in paragraphs 3 and 6. Adopted in paragraphs 5 and 6. Rejected as redundant. - 8. Rejected as unsupported by the weight of evidence except as found in paragraph 6. The department was required to obtain a subpoena due to Respondents' feigned or real refusal to produce certain records. Rejected as unnecessary. Adopted in substance in paragraph 13. Adopted in substance in paragraph 7. Adopted in substance in paragraph 7. - 18. Rejected as unnecessary. Adopted in summary in paragraph 8. Rejected as immaterial. The telephone charges were incurred by the closing agent, not Respondents. Rejected as unnecessary. Rejected as contrary to the weight of evidence. Rejected as unnecessary. Adopted in summary in paragraph 7. and Rejected as unnecessary and - 48. Adopted in summary in paragraph 8. 49. - 52. Adopted in summary in paragraph 14. Adopted in paragraph 15. Rejected as unnecessary. Adopted in paragraph 13. and Rejected as unnecessary. Adopted in paragraphs 16 and 20. 59 - 74. Adopted in summary in paragraphs 16-19. Rejected as unnecessary. The conclusion that the handling of "par plus pricing" was fraudulent is rejected as contrary to the weight of evidence. 77. - 81. Adopted in summary in paragraphs 20 and 21. 82. Rejected as contrary to the weight of evidence. 83. Adopted in paragraphs 10 and 12. 84. Adopted in paragraph 10. 85. - 89. Rejected as unnecessary. 90. Adopted in paragraph 22. 91. - 93. Rejected as unnecessary. 94. Adopted in part in paragraph 26. Respondent's Proposed Findings of Fact Adopted in paragraphs 1 and 2. Rejected as unnecessary. Adopted in paragraph 6. Rejected as contrary to the weight of evidence. Adopted in paragraph 3. Adopted in paragraph 13. - 9. Adopted in summary in paragraph 7. Rejected as contrary to the evidence. Liability for payment occurs when the service is rendered, as reflected in Respondent's "Notice to Borrower". Rejected as unnecessary. Adopted in paragraph 12. Rejected as unnecessary and immaterial. Rejected as unnecessary. - 19. Adopted in summary in paragraph 8. 20. - 22. Rejected as unnecessary. Adopted in paragraph 14. Adopted in substance in paragraph 13. Adopted in substance in paragraph 16. Adopted in substance in paragraph 19. Rejected as unnecessary. - 29. Rejected as contrary to the weight of evidence. Included in conclusion of law number 9. Rejected as immaterial. - 33. Rejected as contrary to the evidence. The terms implied that the loans would be at a discounted rate, but were not, because the "discount" (partial) went to the broker. Adopted in paragraphs 19 and 20. Rejected as immaterial. COPIES FURNISHED: Elise M. Greenbaum, Esquire Office of the Comptroller 400 W. Robinson St., Suite 501 Orlando, FL 32801 John O. Williams, Esquire Renaissance Square 1343 East Tennessee St. Tallahassee, FL 32308 Hon. Gerald Lewis Comptroller, State of Florida The Capitol Tallahassee, FL 32399-0350 William G. Reeves General Counsel Dept. of Banking & Finance The Capitol Plaza Level, Rm. 1302 Tallahassee, FL 32399-0350 =================================================================
Findings Of Fact Upon consideration of the pleadings and the evidence adduced at the hearings in this cause, the following pertinent facts are found: On November 25, 1974, H. M. Harmes, then Director of the School Service Center, notified respondent by letter of his appointment to teach ED 598, "Crucial Issues in Education", during Quarter II, 1975. The letter of appointment explained respondent's salary and the materials and consultants available to him. The letter further stated: "This is a credit bearing contract short course; therefore all college and university regulations pertaining to credit courses must be observed. In addition, you should read the enclosed description of instructor's procedures and follow them carefully." The letter noted that it had an enclosure. It was the practice of the Division of Continuing education to include a copy of a document entitled "Credit Institute Instructor's Procedures" with each letter of appointment. Respondent accepted the appointment on November 26, 1974, by signing the letter and returning it to the Division of Continuing Education. The course in question was a continuing education offering for teachers and administrators. The course was to begin on February 7, 1975 and meet for ten hours (three hours on Friday evening and seven hours on Saturday) on each of five weekends, the student earning five quarter credit hours upon successful completion. The "Credit Institute Instructor's Procedures" contains several provisions regarding the registration of students. It provides that: "For programs which will meet fewer than ten times, this (registration) must be done at the first meeting. If the program will have ten or more meetings, registration may continue to the second meeting, but no later." Other provisions are "under no circumstances are you to accept or handle money from students. . . for payment of fees . . ." and "students may register only during the open registration period. Therefore, all students will appear on the first class roll. None will be added." A flyer prepared by respondent to advertise the course provided for preregistration and stated that checks were to be made payable to Florida Atlantic University. On or before the date the class first met on February 7, 1975, twenty students were properly registered. On the third class meeting (Friday, February 14, 1976), three additional students appeared and inquired of respondent if they could register at that time. These three persons had wives or friends already registered in the class, and it was convenient for them to travel to and from class with those already registered. Respondent allowed these three persons to register and instructed them to date their application February 7, 1975; and to make their checks payable to respondent. Respondent informed them that he would register them for the course if possible. If not, he would register them for the same course to be offered by respondent the following quarter. This arrangement was agreeable to the three students. At that time, respondent had not been appointed to teach the course for the following quarter. He was subsequently appointed to teach the same course for Quarters III and IV. On February 14, 1975, the three late students filled out the application forms, dated them February 7th, and wrote checks payable to respondent. On February 18, 1975, respondent deposited the three checks in his personal checking account. He did not feel that the administration would permit the late applicants to register and therefore, without making inquiry, he did not register the three students for the winter quarter and the students did not receive credit for completing the course. Respondent misplaced somewhere in his office the application forms completed by the three students in question. Although requests were received by respondent from each of the three students as to their receipt of credit for the course, respondent took no steps to register these students during the following two quarters in which he taught the course. Sometime during the summer of 1975, respondent found the applications in his office. However, it was not until the University intervened on behalf of one of the three students - in September of 1975 - that respondent turned in the applications and paid the University $300.00 for their registration fees. The three students were then given credit and grades for the course. By a complaint dated October 2, 1975, petitioner charged respondent with misconduct and sought to terminate his employment contract for cause. Respondent requested a hearing on the compliant and petitioner's President requested the Division of Administrative Hearings to conduct the hearing. The undersigned was assigned as the Hearing Officer.
Recommendation Based upon the findings of fact and conclusions of law recited above, it is recommended that respondent's contract of employment be immediately terminated for cause. DONE AND ORDERED in Tallahassee, Leon County, Florida, this 10th day of March, 1976. DIANE D. TREMOR Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 10th day of March, 1976. COPIES FURNISHED: Mr. Glenwood L. Creech President Florida Atlantic University Boca Raton, Florida 33432 Leonard H. Klatt, Esquire University Attorney Florida Atlantic University Boca Raton, Florida 33432 Frank A. Kriedler, Esquire Attorney for Respondent 141 S.E. Avenue C P. O. Box 881 Belle Glade, Florida 33430
Findings Of Fact In the United States in the twentieth century credit unions were conceived as cooperative societies incorporated for the two-fold purpose of promoting thrift among their members and creating a source of credit for their members at legitimate rates of interest for provident purposes. This has remained the raison d'etre of credit unions since their proliferation which began in the first third of this century. As such cooperative lending associations they have allowed people with limited means a way of pooling their savings to make a source of funds available for low interest loans. In Florida there have been several methods of withdrawal traditionally used by members of credit unions to withdraw funds from their deposit or share accounts. The first of these methods has been a direct personal visit by the member to the credit union to execute the withdrawal. Over the years however it has become common for many withdrawals by members to be made pursuant to telephone instructions by the member to the credit union, by letter from the member to the credit union, or by continuing instructions from the member to the credit union ordering the withdrawal of certain sums periodically. Frequently the recipient of these withdrawals has been the member himself or herself. However it is common for these withdrawals to be paid to third parties such as the member's creditors, family members, insurance companies or other financial institutions, at the member's direction. These withdrawals have usually been paid by a check from the credit union drawn on the credit union's local bank account or in cash. However, credit unions have also utilized methods of payment such as drafts, electronic funds transfer or other internal or external accounting transactions between and among institutions where the credit union may have established accounts. The Florida Statutes and the Florida Administrative Code are silent with regard to the manner in which a credit union member may withdraw his or her shares or deposits or a part thereof. Over their years of development credit unions have instituted many programs for their members which have been accepted as furthering the purpose of the credit union as a thrift institution. These programs presently include debt proration and automatic payment of bills, financial counsel inn, traveler's checks, money orders, share and deposit accounts, and certificates of deposit. A share draft is a negotiable or non-negotiable draft which directs a credit union to pay funds from a member's share or deposit account to either the member or a third party designated by the member. The four credit union Petitioners have share draft programs which function in essentially the same manner, their distinctions being slight. A share draft is payable through a bank and is similar to other forms of payable through drafts drawn against other non-bank institutions such as money order companies and insurance companies. A member of one of the four Petitioner credit unions who desires to use share drafts must first establish a separate share or deposit account with the credit union. The member contracts with the credit union for participation in the program. All share drafts are paid out of that account. The member receives a book of drafts with the member's name pre- printed on each draft. To the layman these drafts look like checks. However, they are not checks. A share draft can be made payable to cash or any payee in any amount, provided the draft does not exceed the available balance in the member's share draft account. A share draft may be presented directly to the credit union by a member to withdraw cash from the member's share draft account, or, a payee who has received a share draft from a member may bring it to the credit union for payment from the member's share draft account. Ordinarily, however, a payee who has received a share draft from a member will deposit the draft in the payee's own bank account. The draft will then be delivered to the credit union's payable through bank through the normal bank clearing channels used also for checks. The information on the draft is extracted by the payable through bank and converted either to an electronic medium or some other form of communication medium which is then used to deliver a request to the credit union for payment of the draft. Three of the credit union Petitioners in this cause, Pinellas County Teachers' Credit Union, Duval County Teachers' Credit Union, and Publix Employees' Credit Union participate in the share draft program originated and sponsored by ICU Service Corporation, and use the Chase Manhattan Bank as the payable through bank. The fourth credit union Petitioner, Leon County Teachers' Credit Union, is not a part of the ICU Service Program, and utilizes the Capital City First National Bank of Tallahassee as its payable through bank. One of the differences between the ICU program and that utilized by the Leon County Teachers' Credit Union is the manner in which the payable through banks collect from the credit unions the money they paid out each day on drafts delivered to them. In the ICU program, the payable through bank (Chase) collects by the issuance of a pre-authorized draft drawn on the involved credit union's regular bank. In the Leon County Teachers' Credit Union there is no such draft and the collection is effected by debit entries on the credit union's account at the payable through bank (Capital City). Unlike the other three credit union Petitioners, Leon County Teachers' Credit Union, Petitioner herein, refers to its program as a "thrift account program" and refers to the instruments used by the members as "withdrawal checks", as opposed to share drafts. However, these are differences of form and not substance. The programs of all four credit union Petitioners are herein referred to as "share draft programs" and the payment instruments used in those programs are referred to as "share drafts". The instruments are, in their design, drafts and not checks. Drafts are a common instrument of commerce and are drawn on, and paid by, a wide variety of organizations other than banks. The share draft programs of the credit union Petitioners were instituted to allow credit unions to provide a contemporary means of withdrawing funds maintained in a member's share or deposit account and to offer a transaction account, i.e. an account into which funds could be deposited and on which a payment instrument could be drawn for the depositor to pay his obligations to third parties. Without regard to the share draft programs many members of credit unions, at least in recent years, have deposited a substantial portion of their pay check in their credit union accounts with the apparent intention of quickly withdrawing the bulk of the deposit to meet their current expenses. Thus, members of credit unions who have so acted have in effect used their share and deposit accounts for transaction purposes on a regular basis. A program very important to a credit union's performance of its responsibilities is the payroll deduction system whereby a member may authorize his or her employer to deduct from his or her pay check an amount which will automatically be deposited in the credit union each pay day. This payroll deduction system enables members to establish regular patterns of thrift and savings. It further enables members who have previously borrowed money from the credit union to liquidate their debts in a financially prudent and systematic manner. The payroll deduction system also provides a regular and steady flow of funds into members' accounts thus giving credit unions relatively stable assets with which to meet the loan needs of their members. Various governmental agencies have recently attempted to establish for the beneficiaries or employees of their programs direct deposit systems for the transfer of government benefits such as social security, retirement, payroll, and disability compensation into an account at the beneficiary's or employee's chosen financial institution. To maintain the economy of these direct deposit programs, the governmental agencies who disburse the funds have mandated or may reasonably be expected to mandate in the future, that the entire check must go to one financial institution, thus eliminating the possibility that the recipient would direct a portion of the check to his or her credit union with the remainder going to another financial institution. The expansion of this direct deposit concept, with its limitation on dividing the check, to include payroll checks, is a possibility in the near future. The Petitioners herein are seriously concerned that without the ease of withdrawal promoted by the share draft programs, the members who are now depositing a portion of their check in a payroll deduction system will, with the advent of limitations on dividing checks, choose to deposit their funds elsewhere than a credit union, thus depriving the credit union of funds presently available for the meeting of their statutory responsibilities. The share draft programs offer a transaction account which provides a convenient vehicle for the withdrawal of funds by members from their credit union, thereby making the credit union an attractive repository for the entire pay check of its members in a payroll deduction system or other benefits deduction system wherein it is required that the entire check be deposited in one institution. As noted above the concept of a share or deposit account being used as a transaction account by credit union members predates share draft programs. Thus, while the share draft programs provide a more convenient method of withdrawal to credit union members, the share draft programs themselves do not introduce the concept of using credit union accounts as transaction accounts. This concept already exists. The share draft programs do, however, offer the opportunity for extensive expansion of this concept. To the extent that the business world readily accepts share drafts as payment of debt in lieu of a check or cash, share draft programs, in their practical effect, are essentially identical to the checking account system of this country which traditionally has been a unique function of commercial banks. Prior to the commencement of their share draft programs, each of the Petitioner credit unions sought and received the permission of the Office of the Comptroller, State of Florida, for the conduct of the programs. In each case this permission was received, by letter, from Daniel T. Burnette, Director, State Credit Unions, Office of the Comptroller, State of Florida. Beginning prior to the commencement of the share draft programs and continuing to the date of hearing, the Office of the Comptroller has been kept fully informed by the Petitioner credit unions of the institution and conduct of their share draft programs. The Petitioner credit unions have had no reason to believe that the Director of State Credit Unions for the Office of Comptroller did not speak with the authority of that office. By letter dated November 1, 1976, the Comptroller of the State of Florida notified the Petitioner credit unions of his intent to terminate their share draft programs, which termination led to this proceeding. The By-laws of the Publix Employees' Credit Union, in Article X, Section 5, state that "[a]ll payments or withdrawals of money for any purpose may be made by cash or check." The By-laws of the Pinellas County Teachers' Credit Union, in Article X, Section 5, state that "[a]ll payments or withdrawals of money for any purpose shall be made by check." The By-laws of the Leon County Teachers' Credit Union, in Article X, Section 5, state that "[a]ll payments or withdrawals of money for any purpose shall be made by check, excepting share and deposit withdrawals and loan advances which may be made in cash in accordance with policies set forth by the Board of Directors." The By- laws of the Duval County Teachers' Credit Union do not contain any restrictions or prohibitions on the manner in which payments or withdrawals may be made or allowed by the credit union.
The Issue Whether or not Petitioner's application for registration as an associated person of Brauer & Associates, Inc., and as an investment adviser of G.G. Brauer & Associates, Inc. should be approved.
Findings Of Fact Respondent, Department of Banking and Finance, is the state agency charged with the administration and enforcement of Chapter 517, Florida Statutes, The Florida Securities and Investor Protection Act and the administrative rules promulgated thereunder. On or about October 30, 1990, Petitioner submitted a Form U-4, Uniform Application for Securities Industry Registration or Transfer, seeking transfer as an associated person of Brauer & Associates, Inc., and as an investment adviser of G.G. Brauer, Inc. On or about January 25, 1991, Respondent denied Petitioner's application for registration based upon its determination that Petitioner had filed a form U-4, which contained material misstatements and had demonstrated prima facie evidence of unworthiness by engaging in prohibited business practices. Petitioner was previously registered as an associated person with the St. Petersburg, Florida branch office of Smith Barney from March 1987 until July 25, 1990, when he was permitted to resign from the firm for ordering securities from the "over the counter" desk without prior client orders. Petitioner was also registered with the NASD and is charged with knowledge of their Rules of Fair Practice. On or about May 9 1990, Ronald Padgett filed a written complaint with Respondent alleging that Petitioner was engaging in unauthorized trading in his account and that the account was trading on margin without a signed margin agreement. Mr. Padgett also alleged that the signed margin agreement on file with Smith Barney was a forgery. After receiving Mr. Padgett's complaint, Respondent commenced its investigation in Petitioner's activities and requested that Smith Barney provide it with information regarding Padgett's complaint. Respondent also requested and was provided with copies of all other customer complaints that had been filed against Petitioner with Smith Barney. Smith Barney provided Respondent with copies of customer complaints that had been filed against Petitioner by Dorothy Juranko, Wayne Schmidt, Mark Madison, Michael Russo, Gloria Fallon, Patricia Schoenberg and William & Verna Bankhead. All of these individuals were investor clients of Petitioner. Prior to his employment with Smith Barney, Petitioner had not been the subject of a customer complaint or industry disciplinary proceeding or licensure revocation, suspension, or denial. Wayne Schmidt Sr. the owner of Suncoast Chrysler-Plymouth (Suncoast) opened his account at Smith Barney in 1985. Initially, the account executive assigned to Schmidt's account at Smith Barney was Steve Ellis. Schmidt maintained two accounts with Smith Barney and Steve Ellis, namely, a profit- sharing account for Suncoast Chrysler-Plymouth and a joint account with his wife. Schmidt exercised no control of the Suncoast account, but rather allowed his associate, Gloria Fallon to initially monitor the transactions in that account. Afterwards, Schmidt started overseeing the trading activities in the Suncoast account. Schmidt had no knowledge of any unauthorized transactions in the Suncoast account after he began monitoring it. Gloria Fallon did not testify at the proceeding. In connection with the maintenance of his joint account at Smith Barney, Schmidt executed a "Securities Account Agreement." During the time Schmidt maintained his account at Smith Barney, the Securities Account Agreement was utilized by Smith Barney as a margin contract. The Securities Account Agreement qualifies as a margin account agreement/margin contract as to form, and is consistent with industry standards, custom and usage. Although Florida Statutes proscribes certain procedures relative to margin agreements, neither the Florida Securities Act nor the rules promulgated thereunder require a broker/dealer to characterize a margin contract as a "margin agreement." The gravamen of Schmidt's complaint against Petitioner was that certain shares of stock were not liquidated from the joint account maintained by him in contravention of his directions to Petitioner. There was no proof submitted to support any conclusion that Petitioner failed to place an order for the liquidation of such securities for Schmidt's account. Likewise, there was no evidence of any unauthorized trading in the Schmidt's joint account. While Petitioner was assigned as account executive to the Schmidts joint account, a profit of approximately $10,000.00 was generated for that account in 1988 and in 1989, a net gain of approximately $15,000.00 was generated. Schmidt conceded at hearing that Petitioner probably did a better job handling his account than his prior broker, Steve Ellis. During the year 1988, Smith Barney generated and sent to Schmidt, monthly statements and confirmation statements regarding every transaction in his joint account. The monthly statements sent to Schmidt for the joint account contained entries regarding margin interest being charged to the account. For the year 1989, Smith Barney also generated and sent to Schmidt, monthly statements and confirms regarding every transaction in his joint account. The 1989 monthly statements sent to Schmidt also showed margin interest. For the years 1988 and 1989, Schmidt deducted from his individual tax returns, the margin interest charged to his account. Also, during 1988 and 1989, Schmidt did not complain to Petitioner or Smith Barney that the use of margin account was unauthorized. During his tenure at Smith Barney, Petitioner was the account executive assigned to the account of Michael Russo (Russo). Petitioner was assigned to the Russo account in approximately May of 1990, an account which was formerly serviced by an account executive whose last name is Dudenhaver. Michael Russo matriculated at City College of New York where he received a Bachelor of Business Administration degree and was a certified public accountant for approximately 30 years. Russo has been in the accounting business for approximately 40 years and during this time period, he operated his own accounting practice. Russo maintained three (3) accounts at Smith Barney which included an account with his wife, an individual account and an IRA account. Russo opened his first brokerage account in the early 1980s with Merrill Lynch, Pierce, Fenner & Smith. Russo has a history is investing in real estate and by mid 1990, he had accumulated a net worth of approximately $750,000.00. On or about July 13, 1990, Russo presented Petitioner a check in the amount of $26,000.00 which was to be deposited into Russo's accounts. The $26,000.00 check was deposited by Petitioner into Russo's accounts but were returned for non-sufficient funds (NSF). Russo then replaced the NSF check with a $22,000.00 check. The funds derived from the $26,000.00 of Russo originated from an interest-bearing money market account from the Fidelity- Spartan Mutual Funds Family. During the period July 13-20, 1990, Russo was on vacation and was away from his home visiting relatives in the Melbourne, Florida area. During that week, Russo spoke by telephone with Petitioner regarding his account on more than one occasion. Russo specifically recalls speaking with Petitioner on July 15, 1990, regarding his account. During that week, Russo spoke with Respondent about selling certain shares of stock in his account and his specific recall is that one of those conversations occurred on July 15, 1990. The shares were to be sold "at market." Russo again spoke with Petitioner on July 21, 1990, regarding transactions in his account. On July 24, 1990, Russo told Larry Youhn, the branch manager at Smith Barney, that he was very happy with Petitioner as his broker. The July 1990 month-end statement for the Russo account indicate that funds were deposited into the Russo accounts in an amount sufficient to satisfy security purchases made in his account during July 1990. Although these transactions appear at month-end in a type-2 margin account, a review of such statements indicate that the transactions initially occurred in a cash account and were mistakenly journaled to the margin account by Smith Barney as a result of an NSF check presented by Russo as payment for the purchase transactions. The individual account of Russo reflects the purchase of 500 shares of Wiley Laboratories on July 16, 1990, for $7,702.00. On that same day, $10,500.00 from the $26,000.00 NSF check was received into the account. The July 1990 monthly statement for Russo's individual account reflected that there would have been a $2,800.00 net credit in the account if Russo had not presented the NSF check. During his tenure at Smith Barney, Petitioner also served as the registered representative for an account maintained by Nicholas and Dorothy Juranko (Juranko). The Jurankos have a substantial history of business experience, having currently owned a service station in the Ohio area and Mrs. Juranko currently owns her own drapery shop and manages eight (8) apartment/rental units that they jointly own. The Jurankos opened their first securities brokerage account in approximately 1962. They have held accounts at several brokerage firms including Merrill Lynch, Blinder-Robinson and First Jersey Securities prior to opening their account at Smith Barney. At Blinder-Robinson, the Jurankos engaged in the purchase of several "Penny" stocks and fully realized that they were speculating. The Blinder- Robinson account was opened by the Jurankos so that Mr. Juranko would "have something to do." The Jurankos maintained a securities brokerage account at First Jersey Securities prior to Petitioner's employment with First Jersey. Petitioner was assigned as account executive for the Juranko account at First Jersey in approximately 1985. When the Jurankos opened their account at Smith Barney, their net worth was approximately $220,250.00. Although Mrs. Juranko maintains that unauthorized trades occurred in her account during the month of December 1987, when asked to identify which trade which unauthorized, she could not do so. This was so, despite an effort to refresh her recollection by presenting her the December 1987 monthly account statement which depicted all securities holdings and transactions generated in their account. Mrs. Juranko also alleged that she was losing money and did not want to deposit any additional funds into her account. However, Mrs. Juranko wanted to have profits generated from the funds that were then existing into her account as of year-end December, 1987. Respecting the December 1987 trades, the Jurankos received confirms for every transaction that occurred during the month. Through December 1987, while Petitioner was assigned to manage the Juranko account, the account generated a net profit. Also, continuing through January 1988, Petitioner had effected trades which produced a net profit for the Juranko account. As testified by Mrs. Juranko, "All I could see...greed, all I could see was $14,200.00 some dollars and $9,900.00 some dollars, and I thought, wow... I thought "wow", he's making me money." Although Mrs. Juranko complained that she was losing money, an analysis of the account revealed that during the two years that Petitioner was assigned her account, it made a net profit. Notwithstanding the documentary evidence to the contrary, Mrs. Juranko admitted that she was upset and complained to Smith Barney's compliance officer, a Mr. Singer, because of her unfounded belief that she had lost money. Mrs. Juranko identified anger as the basis for her inability to understand a letter which was sent by Larry Youhn, Smith Barney's branch manager, which show the activity that had been generated into her account. Notwithstanding the clear language of that letter, Mrs. Juranko maintained that she did not understand it. This is so, despite the fact that Mrs. Juranko did not telephone Smith Barney to complain because she "didn't want to get [Petitioner] in trouble." 1/ The use of margin in the Jurankos account was discussed because Mrs. Juranko believed the account was losing money; she wanted to do whatever was necessary over a period of time to make up for the losses and she refused to deposit additional funds into the account to generate profits in trading the account. In connection with the maintenance of the Juranko account at Smith Barney, Petitioner instructed his sales assistant to send a margin agreement to Mr. and Mrs. Juranko for execution. The use of margin was discussed with the Jurankos in approximately November 1987. Petitioner relied upon the Smith Barney infrastructure to maintain the necessary paperwork for margin accounts, including the Jurankos. This is a customary practice in the securities industry and is utilized by most large brokerage houses. Juranko first complained to Petitioner about the use of margin in January 1988, when she received her monthly account statement which contained an entry for margin interest. Mrs. Juranko explained that she thought the margin charges were too much and that she wanted to reduce the margin charges by liquidating securities from the account. Mrs. Juranko thereafter became uncooperative and it became difficult for Petitioner to transact business in the account consistent with Mrs. Juranko's desired objectives. As a result, in March 1988, Petitioner determined that the only thing he could do for the account was to liquidate positions at or near break-even points. Thereafter, Petitioner never made any other purchase recommendations to the Jurankos. Petitioner also serviced the account of Mark D. Madison while employed at Smith Barney. Madison is a marketing, advertising and management consultant who owns his own business. Madison maintained two (2) accounts at Smith Barney's St. Petersburg branch office, including an individual account and an account in the name of his mother, Mary Jean Madison. Mark Madison was a fiduciary for and conducted all transactions in his mother's account. Prior to Petitioner's assignment as broker to Madison's fiduciary account, it was assigned to broker Steve Ellis. The fiduciary account was maintained as a margin account since its opening in 1984. Commencing on February 13, 1986, broker Ellis and Madison executed several margin transactions in the fiduciary account. Through the period ending October 31, 1987, roughly 95% of the transactions in the fiduciary account were executed on margin. As of year-end 1987, the Madison fiduciary account and Mark Madison's personal account historically traded over-the-counter securities. During this period while Ellis was the broker, margin transactions were executed in both Madison accounts. During this period, broker Ellis actively traded both accounts and generated both profits and losses in the accounts. Mark Madison was familiar with the active trading in both accounts as well as the profit/loss picture. Madison estimated losses in the fiduciary account to be over $20,000.00 while the account was handled by Ellis. These losses all occurred while he was the fiduciary on the account and was in charge of approving trading in the account. When the fiduciary account was transferred from Ellis to Petitioner, Madison expressed his concern about the losses that his mother's fiduciary account had sustained as well as his responsibility for such losses. During his initial conversations with Petitioner, Madison explained his mother's displeasure at the approximately $30,000.00 in losses that had been generated while Ellis was assigned as broker. Madison also explained to Petitioner that his brother had made references to conversations with his mother about suing him as the fiduciary because of the losses generated. During the time that the fiduciary account was handled by Ellis, there were differences in the execution prices of transactions in the same securities which occurred in both the fiduciary account and his (Mark Madison's) personal account. When Petitioner was assigned the account, it became apparent to him that Madison consistently obtained higher prices on liquidating transactions than his mother was obtaining in the fiduciary account for the same securities. Petitioner was concerned with the type of trading in which Madison wanted to engage in for the fiduciary account and brought this trading strategy to the attention of branch manager, Youhn, who explained to Petitioner that it was the fiduciary who had ultimate responsibility for trading the account. In addition to discussing the trading strategy with Youhn, a review of the account history was conducted by Petitioner. Petitioner's review revealed that the account had lost approximately 40% in equity during the time it was handled by account executive Ellis and Mark Madison as fiduciary. As a result of the losses generated, Madison expressed his desire to Petitioner to recoup losses in the account by taking advantage of 2-3 point swings in certain over-the-counter securities. During the months of January through March 1988, Madison, despite his allegations to the contrary, authorized the purchase of a specified number of shares of certain securities and later maintained that certain additional shares of those securities were purchased without his authorization. Throughout this period, Madison maintained continuous telephone conversations with Petitioner regarding such securities. Throughout the period, Madison did not instruct Petitioner to cancel the trades, but rather instructed him that he wanted out of those positions as near as possible to "break even." The Department conducted an investigation of the allegations made by Petitioner's former clients in connection with the denial of his registrations as an associated person an investment advisor. In connection with the investigation, the Department, through its investigative employee, Carol Irizarry (Irizarry), spoke with individuals who had submitted written complaints against Petitioner. In furtherance of her investigation, Irizarry visited the office of William Lyman, Esquire, who represented several of the former customer/complainants, and reviewed the information that Lyman had relative to such complaints. Ms. Irizarry did not testify during the formal hearing herein. Dennis Farrar (Farrar), area financial manager, Division of Securities, Department of Banking and Finance, supervised the writing of the report completed by Irizarry. Farrar's first direct contact with the investors/complainants in this case occurred approximately one (1) week prior to the commencement of the hearing herein. Following Ellis' separation from employment with Smith Barney, several Smith Barney brokers and clients of Petitioner advised him that broker Ellis was out to get him and urged them to file complaints against Petitioner. Specifically, Petitioner received a telephone call from Gloria Fallon, an associate of Wayne Schmidt, who warned Petitioner that Ellis was "trying to stir up trouble for him." In connection with the initial customer complaint received by the Department, a request for information responsive to the complaint was sent to Smith Barney. Among the documents received by the Department was a securities account agreement which contained language normally contained in a margin contract. The securities account agreement is the document utilized by Smith Barney as its margin contract at all time material hereto. A Form U-4, Uniform Application for Securities Industry Registration for Transfer, is a document generated by the National Association of Securities Dealers (NASD) and the North American Securities Administrators Association (NASAA). The Form U-5, Uniform Termination Notice, also is generated by the above entities. The disclosure section of a Form U-4 requires an applicant to respond to the best of his ability. An intentional falsification of information on a Form U-4 will give rise to a violation of Section 517.161, Florida Statutes. It is customary in the securities industry for a registered representative to rely upon his current broker/dealer employer to determine which complaints, if any, are disclosable on the Form U-4. It is customary in the industry for a representative to rely on the Form U-5, termination notice for completion of his U-4 and usually the information on both forms track each other. Also, the prospective applicant filling out his U-4 usually consults with the firm that he separated from to ensure that both Forms U-4 and U-5 are consistent. Petitioner's completion of the Form U-4 on August 30, 1990 in connection with his employment at Brauer & Associates contained a disclosure of customer complaints consistent with the disclosures made by Smith Barney on its amended Form U-5 Termination Notice dated August 17, 1990. Petitioner's reliance on the information contained in his files and that provided by his employers was reasonable and there was no evidence that Petitioner intentionally falsified his Form U-4 application.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is recommended that Respondent enter a Final Order granting Petitioner's application for registrations as an associated person or broker/dealer of Brauer & Associates, Inc. and investment adviser to G.G. Brauer, Inc. RECOMMENDED this 13TH day of August, 1991, in Tallahassee, Leon County, Florida. JAMES E. BRADWELL Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904)488-9675 Filed with the Clerk of the Division of Administrative Hearings this 13th day of August, 1991.
The Issue At issue in this proceeding is whether proposed Florida Administrative Code Rule 69O-125.005 is an invalid exercise of delegated legislative authority.
Findings Of Fact Petitioners AIA is a trade association made up of 40 groups of insurance companies. AIA member companies annually write $6 billion in property, casualty, and automobile insurance in Florida. AIA's primary purpose is to represent the interests of its member insurance groups in regulatory and legislative matters throughout the United States, including Florida. NAMIC is a trade association consisting of 1,430 members, mostly mutual insurance companies. NAMIC member companies annually write $10 billion in property, casualty, and automobile insurance in Florida. NAMIC represents the interests of its member insurance companies in regulatory and legislative matters throughout the United States, including Florida. PCI is a national trade association of property and casualty insurance companies consisting of 1,055 members. PCI members include mutual insurance companies, stock insurance companies, and reciprocal insurers that write property and casualty insurance in Florida. PCI members annually write approximately $15 billion in premiums in Florida. PCI participated in the OIR's workshops on the Proposed Rule. PCI's assistant vice president and regional manager, William Stander, testified that if the Proposed Rule is adopted, PCI's member companies would be required either to withdraw from the Florida market or drastically reorganize their business model. FIC is an insurance trade association made up of 39 insurance groups that represent approximately 250 insurance companies writing all lines of insurance. All of FIC's members are licensed in Florida and write approximately $27 billion in premiums in Florida. FIC has participated in rule challenges in the past, and participated in the workshop and public hearing process conducted by OIR for this Proposed Rule. FIC President Guy Marvin testified that FIC's property and casualty members use credit scoring and would be affected by the Proposed Rule. A substantial number of Petitioners' members are insurers writing property and casualty insurance and/or motor vehicle insurance coverage in Florida. These members use credit-based insurance scoring in their underwriting and rating processes. They would be directly regulated by the Proposed Rule in their underwriting and rating methods and in the rate filing processes set forth in Sections 627.062 and 627.0651, Florida Statutes. Fair Isaac originated credit-based insurance scoring and is a leading provider of credit-based insurance scoring information in the United States and Canada. Fair Isaac has invested millions of dollars in the development and maintenance of its credit-based insurance models. Fair Isaac concedes that it is not an insurer and, thus, would not be directly regulated by the Proposed Rule. However, Fair Isaac would be directly affected by any negative impact that the Proposed Rule would have in setting limits on the use of credit-based insurance score models in Florida. Lamont Boyd, a manager in Fair Isaac's global scoring division, testified that if the Proposed Rule goes into effect Fair Isaac would, at a minimum, lose all of the revenue it currently generates from insurance companies that use its scores in the State of Florida, because Fair Isaac's credit-based insurance scoring model cannot meet the requirements of the Proposed Rule regarding racial, ethnic, and religious categorization. Mr. Boyd also testified that enactment of the Proposed Rule could cause a "ripple effect" of similar regulations in other states, further impairing Fair Isaac's business. The Statute and Proposed Rule During the 1990s, insurance companies' use of consumer credit information for underwriting and rating automobile and residential property insurance policies greatly increased. Insurance regulators expressed concern that the use of consumer credit reports, credit histories and credit-based insurance scoring models could have a negative effect on consumers' ability to obtain and keep insurance at appropriate rates. Of particular concern was the possibility that the use of credit scoring would particularly hurt minorities, people with low incomes, and young people, because those persons would be more likely to have poor credit scores. On September 19, 2001, Insurance Commissioner Tom Gallagher appointed a task force to examine the use of credit reports and develop recommendations for the Legislature or for the promulgation of rules regarding the use of credit scoring by the insurance industry. The task force met on four separate occasions throughout the state in 2001, and issued its report on January 23, 2002. The task force report conceded that the evidence supporting the negative impact of the use of credit reports on specific groups is "primarily anecdotal," and that the insurance industry had submitted anecdotal evidence to the contrary. Among its nine recommendations, the task force recommended the following: A comprehensive and independent investigation of the relationship between insurers' use of consumer credit information and risk of loss including the impact by race, income, geographic location and age. A prohibition against the use of credit reports as the sole basis for making underwriting or rating decisions. That insurers using credit as an underwriting or rating factor be required to provide regulators with sufficient information to independently verify that use. That insurers be required to send a copy of the credit report to those consumers whose adverse insurance decision is a result of their consumer credit information and a simple explanation of the specific credit characteristics that caused the adverse decision. That insurers not be permitted to draw a negative inference from a bad credit score that is due to medical bills, little or no credit information, or other special circumstances that are clearly not related to an applicant's or policyholder's insurability. That the impact of credit reports be mitigated by imposing limits on the weight that insurers can give to them in the decision to write a policy and limits on the amount the premium can be increased due to credit information. No evidence was presented that the "comprehensive and independent investigation" of insurers' use of credit information was undertaken by the Legislature. However, the other recommendations of the task force were addressed in Senate Bills 40A and 42A, enacted by the Legislature and signed by the governor on June 26, 2003. These companion bills, each with an effective date of January 1, 2004, were codified as Sections 626.9741 and 626.97411, Florida Statutes, respectively. Chapters 2003-407 and 2003-408, Laws of Florida. Section 626.9741, Florida Statutes, provides: The purpose of this section is to regulate and limit the use of credit reports and credit scores by insurers for underwriting and rating purposes. This section applies only to personal lines motor vehicle insurance and personal lines residential insurance, which includes homeowners, mobile home owners' dwelling, tenants, condominium unit owners, cooperative unit owners, and similar types of insurance. As used in this section, the term: "Adverse decision" means a decision to refuse to issue or renew a policy of insurance; to issue a policy with exclusions or restrictions; to increase the rates or premium charged for a policy of insurance; to place an insured or applicant in a rating tier that does not have the lowest available rates for which that insured or applicant is otherwise eligible; or to place an applicant or insured with a company operating under common management, control, or ownership which does not offer the lowest rates available, within the affiliate group of insurance companies, for which that insured or applicant is otherwise eligible. "Credit report" means any written, oral, or other communication of any information by a consumer reporting agency, as defined in the federal Fair Credit Reporting Act, 15 U.S.C. ss. 1681 et seq., bearing on a consumer's credit worthiness, credit standing, or credit capacity, which is used or expected to be used or collected as a factor to establish a person's eligibility for credit or insurance, or any other purpose authorized pursuant to the applicable provision of such federal act. A credit score alone, as calculated by a credit reporting agency or by or for the insurer, may not be considered a credit report. "Credit score" means a score, grade, or value that is derived by using any or all data from a credit report in any type of model, method, or program, whether electronically, in an algorithm, computer software or program, or any other process, for the purpose of grading or ranking credit report data. "Tier" means a category within a single insurer into which insureds with substantially similar risk, exposure, or expense factors are placed for purposes of determining rate or premium. An insurer must inform an applicant or insured, in the same medium as the application is taken, that a credit report or score is being requested for underwriting or rating purposes. An insurer that makes an adverse decision based, in whole or in part, upon a credit report must provide at no charge, a copy of the credit report to the applicant or insured or provide the applicant or insured with the name, address, and telephone number of the consumer reporting agency from which the insured or applicant may obtain the credit report. The insurer must provide notification to the consumer explaining the reasons for the adverse decision. The reasons must be provided in sufficiently clear and specific language so that a person can identify the basis for the insurer's adverse decision. Such notification shall include a description of the four primary reasons, or such fewer number as existed, which were the primary influences of the adverse decision. The use of generalized terms such as "poor credit history," "poor credit rating," or "poor insurance score" does not meet the explanation requirements of this subsection. A credit score may not be used in underwriting or rating insurance unless the scoring process produces information in sufficient detail to permit compliance with the requirements of this subsection. It shall not be deemed an adverse decision if, due to the insured's credit report or credit score, the insured continues to receive a less favorable rate or placement in a less favorable tier or company at the time of renewal except for renewals or reunderwriting required by this section. (4)(a) An insurer may not request a credit report or score based upon the race, color, religion, marital status, age, gender, income, national origin, or place of residence of the applicant or insured. An insurer may not make an adverse decision solely because of information contained in a credit report or score without consideration of any other underwriting or rating factor. An insurer may not make an adverse decision or use a credit score that could lead to such a decision if based, in whole or in part, on: The absence of, or an insufficient, credit history, in which instance the insurer shall: Treat the consumer as otherwise approved by the Office of Insurance Regulation if the insurer presents information that such an absence or inability is related to the risk for the insurer; Treat the consumer as if the applicant or insured had neutral credit information, as defined by the insurer; Exclude the use of credit information as a factor and use only other underwriting criteria; Collection accounts with a medical industry code, if so identified on the consumer's credit report; Place of residence; or Any other circumstance that the Financial Services Commission determines, by rule, lacks sufficient statistical correlation and actuarial justification as a predictor of insurance risk. An insurer may use the number of credit inquiries requested or made regarding the applicant or insured except for: Credit inquiries not initiated by the consumer or inquiries requested by the consumer for his or her own credit information. Inquiries relating to insurance coverage, if so identified on a consumer's credit report. Collection accounts with a medical industry code, if so identified on the consumer's credit report Multiple lender inquiries, if coded by the consumer reporting agency on the consumer's credit report as being from the home mortgage industry and made within 30 days of one another, unless only one inquiry is considered. Multiple lender inquiries, if coded by the consumer reporting agency on the consumer's credit report as being from the automobile lending industry and made within 30 days of one another, unless only one inquiry is considered. An insurer must, upon the request of an applicant or insured, provide a means of appeal for an applicant or insured whose credit report or credit score is unduly influenced by a dissolution of marriage, the death of a spouse, or temporary loss of employment. The insurer must complete its review within 10 business days after the request by the applicant or insured and receipt of reasonable documentation requested by the insurer, and, if the insurer determines that the credit report or credit score was unduly influenced by any of such factors, the insurer shall treat the applicant or insured as if the applicant or insured had neutral credit information or shall exclude the credit information, as defined by the insurer, whichever is more favorable to the applicant or insured. An insurer shall not be considered out of compliance with its underwriting rules or rates or forms filed with the Office of Insurance Regulation or out of compliance with any other state law or rule as a result of granting any exceptions pursuant to this subsection. A rate filing that uses credit reports or credit scores must comply with the requirements of s. 627.062 or s. 627.0651 to ensure that rates are not excessive, inadequate, or unfairly discriminatory. An insurer that requests or uses credit reports and credit scoring in its underwriting and rating methods shall maintain and adhere to established written procedures that reflect the restrictions set forth in the federal Fair Credit Reporting Act, this section, and all rules related thereto. (7)(a) An insurer shall establish procedures to review the credit history of an insured who was adversely affected by the use of the insured's credit history at the initial rating of the policy, or at a subsequent renewal thereof. This review must be performed at a minimum of once every 2 years or at the request of the insured, whichever is sooner, and the insurer shall adjust the premium of the insured to reflect any improvement in the credit history. The procedures must provide that, with respect to existing policyholders, the review of a credit report will not be used by the insurer to cancel, refuse to renew, or require a change in the method of payment or payment plan. (b) However, as an alternative to the requirements of paragraph (a), an insurer that used a credit report or credit score for an insured upon inception of a policy, who will not use a credit report or score for reunderwriting, shall reevaluate the insured within the first 3 years after inception, based on other allowable underwriting or rating factors, excluding credit information if the insurer does not increase the rates or premium charged to the insured based on the exclusion of credit reports or credit scores. The commission may adopt rules to administer this section. The rules may include, but need not be limited to: Information that must be included in filings to demonstrate compliance with subsection (3). Statistical detail that insurers using credit reports or scores under subsection (5) must retain and report annually to the Office of Insurance Regulation. Standards that ensure that rates or premiums associated with the use of a credit report or score are not unfairly discriminatory, based upon race, color, religion, marital status, age, gender, income, national origin, or place of residence. Standards for review of models, methods, programs, or any other process by which to grade or rank credit report data and which may produce credit scores in order to ensure that the insurer demonstrates that such grading, ranking, or scoring is valid in predicting insurance risk of an applicant or insured. Section 626.97411, Florida Statutes, provides: Credit scoring methodologies and related data and information that are trade secrets as defined in s. 688.002 and that are filed with the Office of Insurance Regulation pursuant to a rate filing or other filing required by law are confidential and exempt from the provisions of s. 119.07(1) and s. 24(a), Art. I of the State Constitution.3 Following extensive rule development workshops and industry comment, proposed Florida Administrative Code Rule 69O-125.005 was initially published in the Florida Administrative Weekly, on February 11, 2005.4 The Proposed Rule states, as follows: 69O-125.005 Use of Credit Reports and Credit Scores by Insurers. For the purpose of this rule, the following definitions apply: "Applicant", for purposes of Section 626.9741, F.S., means an individual whose credit report or score is requested for underwriting or rating purposes relating to personal lines motor vehicle or personal lines residential insurance and shall not include individuals who have merely requested a quote. "Credit scoring methodology" means any methodology that uses credit reports or credit scores, in whole or in part, for underwriting or rating purposes. "Data cleansing" means the correction or enhancement of presumed incomplete, incorrect, missing, or improperly formatted information. "Personal lines motor vehicle" insurance means insurance against loss or damage to any motorized land vehicle or any loss, liability, or expense resulting from or incidental to ownership, maintenance or use of such vehicle if the contract of insurance shows one or more natural persons as named insureds. The following are not included in this definition: Vehicles used as public livery or conveyance; Vehicles rented to others; Vehicles with more than four wheels; Vehicles used primarily for commercial purposes; and Vehicles with a net vehicle weight of more than 5,000 pounds designed or used for the carriage of goods (other than the personal effects of passengers) or drawing a trailer designed or used for the carriage of such goods. The following are specifically included, inter alia, in this definition: Motorcycles; Motor homes; Antique or classic automobiles; and Recreational vehicles. "Unfairly discriminatory" means that adverse decisions resulting from the use of a credit scoring methodology disproportionately affects persons belonging to any of the classes set forth in Section 626.9741(8)(c), F.S. Insurers may not use any credit scoring methodology that is unfairly discriminatory. The burden of demonstrating that the credit scoring methodology is not unfairly discriminatory is upon the insurer. An insurer may not request or use a credit report or credit score in its underwriting or rating method unless it maintains and adheres to established written procedures that reflect the restrictions set forth in the federal Fair Credit Reporting Act, Section 626.9741, F.S., and these rules. Upon initial use or any change in that use, insurers using credit reports or credit scores for underwriting or rating personal lines residential or personal lines motor vehicle insurance shall include the following information in filings submitted pursuant to Section 627.062 or 627.0651, F.S. A listing of the types of individuals whose credit reports or scores the company will use or attempt to use to underwrite or rate a given policy. For example: Person signing application; Named insured or spouse; and All listed operators. How those individual reports or scores will be combined if more than one is used. For example: Average score used; Highest score used. The name(s) of the consumer reporting agencies or any other third party vendors from which the company will obtain or attempt to obtain credit reports or scores. Precise identifying information specifying or describing the credit scoring methodology, if any, the company will use including: Common or trade name; Version, subtype, or intended segment of business the system was designed for; and Any other information needed to distinguish a particular credit scoring methodology from other similar ones, whether developed by the company or by a third party vendor. The effect of particular scores or ranges of scores (or, for companies not using scores, the effect of particular items appearing on a credit report) on any of the following as applicable: Rate or premium charged for a policy of insurance; Placement of an insured or applicant in a rating tier; Placement of an applicant or insured in a company within an affiliated group of insurance companies; Decision to refuse to issue or renew a policy of insurance or to issue a policy with exclusions or restrictions or limitations in payment plans. The effect of the absence or insufficiency of credit history (as referenced in Section 626.9741(4)(c)1., F.S.) on any items listed in paragraph (e) above. The manner in which collection accounts identified with a medical industry code (as referenced in Section 626.9741(4)(c)2., F.S.) on a consumer's credit report will be treated in the underwriting or rating process or within any credit scoring methodology used. The manner in which collection accounts that are not identified with a medical industry code, but which an applicant or insured demonstrates are the direct result of significant and extraordinary medical expenses, will be treated in the underwriting or rating process or within any credit scoring methodology used. The manner in which the following will be treated in the underwriting or rating process, or within any credit scoring methodology used: Credit inquiries not initiated by the consumer; Requests by the consumer for the consumer's own credit information; Multiple lender inquiries, if coded by the consumer reporting agency on the consumer's credit report as being from the automobile lending industry or the home mortgage industry and made within 30 days of one another; Multiple lender inquiries that are not coded by the consumer reporting agency on the consumer's credit report as being from the automobile lending industry or the home mortgage industry and made within 30 days of one another, but that an applicant or insured demonstrates are the direct result of such inquiries; Inquiries relating to insurance coverage, if so identified on a consumer's credit report; and Inquiries relating to insurance coverage that are not so identified on a consumer's credit report, but which an applicant or insured demonstrates are the direct result of such inquiries. The list of all clear and specific primary reasons that may be cited to the consumer as the basis or explanation for an adverse decision under Section 626.9741(3), F.S. and the criteria determining when each of those reasons will be so cited. A description of the process that the insurer will use to correct any error in premium charged the insured, or in underwriting decision made concerning the insured, if the basis of the premium charged or the decision made is a disputed item that is later removed from the credit report or corrected, provided that the insured first notifies the insurer that the item has been removed or corrected. A certification that no use of credit reports or scores in rating insurance will apply to any component of a rate or premium attributed to hurricane coverage for residential properties as separately identified in accordance with Section 627.0629, F.S. Insurers desiring to make adverse decisions for personal lines motor vehicle policies or personal lines residential policies based on the absence or insufficiency of credit history shall either: Treat such consumers or applicants as otherwise approved by the Office of Insurance Regulation if the insurer presents information that such an absence or inability is related to the risk for the insurer and does not result in a disparate impact on persons belonging to any of the classes set forth in Section 626.9741(8)(c), This information will be held as confidential if properly so identified by the insurer and eligible under Section 626.9711, F.S. The information shall include: Data comparing experience for each category of those with absent or insufficient credit history to each category of insureds separately treated with respect to credit and having sufficient credit history; A statistically credible method of analysis that concludes that the relationship between absence or insufficiency and the risk assumed is not due to chance; A statistically credible method of analysis that concludes that absence or insufficiency of credit history does not disparately impact persons belonging to any of the classes set forth in Section 626.9741(8)(c), F.S.; A statistically credible method of analysis that confirms that the treatment proposed by the insurer is quantitatively appropriate; and Statistical tests establishing that the treatment proposed by the insurer is warranted for the total of all consumers with absence or insufficiency of credit history and for at least two subsets of such consumers. Treat such consumers as if the applicant or insured had neutral credit information, as defined by the insurer. Should an insurer fail to specify a definition, neutral is defined as the average score that a stratified random sample of consumers or applicants having sufficient credit history would attain using the insurer's credit scoring methodology; or Exclude credit as a factor and use other criteria. These other criteria must be specified by the insurer and must not result in average treatment for the totality of consumers with an absence of or insufficiency of credit history any less favorable than the treatment of average consumers or applicants having sufficient credit history. Insurers desiring to make adverse decisions for personal lines motor vehicle or personal lines residential insurance based on information contained in a credit report or score shall file with the Office information establishing that the results of such decisions do not correlate so closely with the zip code of residence of the insured as to constitute a decision based on place of residence of the insured in violation of Section 626.9741(4)(c)(3), F.S. (7)(a) Insurers using credit reports or credit scores for underwriting or rating personal lines residential or personal lines motor vehicle insurance shall develop, maintain, and adhere to written procedures consistent with Section 626.9741(4)(e), F.S. providing appeals for applicants or insureds whose credit reports or scores are unduly influenced by dissolution of marriage, death of a spouse, or temporary loss of employment. (b) These procedures shall be subject to examination by the Office at any time. (8)(a)1. Insurers using credit reports or credit scoring in rating personal lines motor vehicle or personal lines residential insurance shall develop, maintain, and adhere to written procedures to review the credit history of an insured who was adversely affected by such use at initial rating of the policy or subsequent renewal thereof. These procedures shall be subject to examination by the Office at any time. The procedures shall comply with the following: A review shall be conducted: No later than 2 years following the date of any adverse decision, or Any time, at the request of the insured, but no more than once per policy period without insurer assent. The insurer shall notify the named insureds annually of their right to request the review in (II) above. Renewal notices issued 120 days or less after the effective date of this rule are not included in this requirement. The insurer shall adjust the premium to reflect any improvement in credit history no later than the first renewal date that follows a review of credit history. The renewal premium shall be subject to other rating factors lawfully used by the insurer. The review shall not be used by the insurer to cancel, refuse to renew, or require a change in the method of payment or payment plan based on credit history. (b)1. As an alternative to the requirements in paragraph (8)(a), insurers using credit reports or scores at the inception of a policy but not for re-underwriting shall develop, maintain, and adhere to written procedures. These procedures shall be subject to examination by the Office at any time. The procedures shall comply with the following: Insureds shall be reevaluated no later than 3 years following policy inception based on allowable underwriting or rating factors, excluding credit information. The rate or premium charged to an insured shall not be greater, solely as a result of the reevaluation, than the rate or premium charged for the immediately preceding policy term. This shall not be construed to prohibit an insurer from applying regular underwriting criteria (which may result in a greater premium) or general rate increases to the premium charged. For insureds that received an adverse decision notification at policy inception, no residual effects of that adverse decision shall survive the reevaluation. This means that the reevaluation must be complete enough to make it possible for insureds adversely impacted at inception to attain the lowest available rate for which comparable insureds are eligible, considering only allowable underwriting or rating factors (excluding credit information) at the time of the reevaluation. No credit scoring methodology shall be used for personal lines motor vehicle or personal lines residential property insurance unless that methodology has been demonstrated to be a valid predictor of the insurance risk to be assumed by an insurer for the applicable type of insurance. The demonstration of validity detailed below need only be provided with the first rate, rule, or underwriting guidelines filing following the effective date of this rule and at any time a change is made in the credit scoring methodology. Other such filings may instead refer to the most recent prior filing containing a demonstration. Information supplied in the context of a demonstration of validity will be held as confidential if properly so identified by the insurer and eligible under Section 626.9711, F.S. A demonstration of validity shall include: A listing of the persons that contributed substantially to the development of the most current version of the method, including resumes of the persons, if obtainable, indicating their qualifications and experience in similar endeavors. An enumeration of all data cleansing techniques that have been used in the development of the method, which shall include: The nature of each technique; Any biases the technique might introduce; and The prevalence of each type of invalid information prior to correction or enhancement. All data that was used by the model developers in the derivation and calibration of the model parameters. Data shall be in sufficient detail to permit the Office to conduct multiple regression testing for validation of the credit scoring methodology. Data, including field definitions, shall be supplied in electronic format compatible with the software used by the Office. Statistical results showing that the model and parameters are predictive and not overlapping or duplicative of any other variables used to rate an applicant to such a degree as to render their combined use actuarially unsound. Such results shall include the period of time for which each element from a credit report is used. A precise listing of all elements from a credit report that are used in scoring, and the formula used to compute the score, including the time period during which each element is used. Such listing is confidential if properly so identified by the insurer. An assessment by a qualified actuary, economist, or statistician (whether or not employed by the insurer) other than persons who contributed substantially to the development of the credit scoring methodology, concluding that there is a significant statistical correlation between the scores and frequency or severity of claims. The assessment shall: Identify the person performing the assessment and show his or her educational and professional experience qualifications; and Include a test of robustness of the model, showing that it performs well on a credible validation data set. The validation data set may not be the one from which the model was developed. Documentation consisting of statistical testing of the application of the credit scoring model to determine whether it results in a disproportionate impact on the classes set forth in Section 626.9741(8)(c), A model that disproportionately affects any such class of persons is presumed to have a disparate impact and is presumed to be unfairly discriminatory. Statistical analysis shall be performed on the current insureds of the insurer using the proposed credit scoring model, and shall include the raw data and detailed results on each classification set forth in Section 626.9741(8)(c), F.S. In lieu of such analysis insurers may use the alternative in 2. below. Alternatively, insurers may submit statistical studies and analyses that have been performed by educational institutions, independent professional associations, or other reputable entities recognized in the field, that indicate that there is no disproportionate impact on any of the classes set forth in Section 626.9741(8)(c), F.S. attributable to the use of credit reports or scores. Any such studies or analyses shall have been done concerning the specific credit scoring model proposed by the insurer. The Office will utilize generally accepted statistical analysis principles in reviewing studies submitted which support the insurer's analysis that the credit scoring model does not disproportionately impact any class based upon race, color, religion, marital status, age, gender, income, national origin, or place of residence. The Office will permit reliance on such studies only to the extent that they permit independent verification of the results. The testing or validation results obtained in the course of the assessment in paragraphs (d) and (f) above. Internal Insurer data that validates the premium differentials proposed based on the scores or ranges of scores. Industry or countrywide data may be used to the extent that the Florida insurer data lacks credibility based upon generally accepted actuarial standards. Insurers using industry or countrywide data for validation shall supply Florida insurer data and demonstrate that generally accepted actuarial standards would allow reliance on each set of data to the extent the insurer has done so. Validation data including claims on personal lines residential insurance policies that are the result of acts of God shall not be used unless such acts occurred prior to January 1, 2004. The mere copying of another company's system will not fulfill the requirement to validate proposed premium differentials unless the filer has used a method or system for less than 3 years and demonstrates that it is not cost effective to retrospectively analyze its own data. Companies under common ownership, management, and control may copy to fulfill the requirement to validate proposed premium differentials if they demonstrate that the characteristics of the business to be written by the affiliate doing the copying are sufficiently similar to the affiliate being copied to presume common differentials will be accurate. The credibility standards and any judgmental adjustments, including limitations on effects, that have been used in the process of deriving premium differentials proposed and validated in paragraph (i) above. An explanation of how the credit scoring methodology treats discrepancies in the information that could have been obtained from different consumer reporting agencies: Equifax, Experian, or TransUnion. This shall not be construed to require insurers to obtain multiple reports for each insured or applicant. 1. The date that each of the analyses, tests, and validations required in paragraphs (d) through (j) above was most recently performed, and a certification that the results continue to be applicable. 2. Any item not reviewed in the previous 5 years is unacceptable. Specific Authority 624.308(1), 626.9741(8) FS. Law Implemented 624.307(1), 626.9741 FS. History-- New . The Petition 1. Statutory Definitions of "Unfairly Discriminatory" The main issue raised by Petitioners is that the Proposed Rule's definition of "unfairly discriminatory," and those portions of the Proposed Rule that rely on this definition, are invalid because they are vague, and enlarge, modify, and contravene the provisions of the law implemented and other provisions of the insurance code. Section 626.9741, Florida Statutes, does not define "unfairly discriminatory." Subsection 626.9741(5), Florida Statutes, provides that a rate filing using credit reports or scores "must comply with the requirements of s. 627.062 or s. 627.0651 to ensure that rates are not excessive, inadequate, or unfairly discriminatory." Subsection 626.9741(8)(c), Florida Statutes, provides that the FSC may adopt rules, including standards to ensure that rates or premiums "associated with the use of a credit report or score are not unfairly discriminatory, based upon race, color, religion, marital status, age, gender, income, national origin, or place of residence." Chapter 627, Part I, Florida Statutes, is referred to as the "Rating Law." § 627.011, Fla. Stat. The purpose of the Rating Law is to "promote the public welfare by regulating insurance rates . . . to the end that they shall not be excessive, inadequate, or unfairly discriminatory." § 627.031(1)(a), Fla. Stat. The Rating Law provisions referenced by Subsection 626.9741(5), Florida Statutes, in relation to ensuring that rates are not "unfairly discriminatory" are Sections 627.062 and 627.0651, Florida Statutes. Section 627.062, Florida Statutes, titled "Rate standards," provides that "[t]he rates for all classes of insurance to which the provisions of this part are applicable shall not be excessive, inadequate, or unfairly discriminatory." § 627.062(1), Fla. Stat. Subsection 627.062(2)(e)6., Florida Statutes, provides: A rate shall be deemed unfairly discriminatory as to a risk or group of risks if the application of premium discounts, credits, or surcharges among such risks does not bear a reasonable relationship to the expected loss and expense experience among the various risks. Section 627.0651, Florida Statutes, titled "Making and use of rates for motor vehicle insurance," provides, in relevant part: One rate shall be deemed unfairly discriminatory in relation to another in the same class if it clearly fails to reflect equitably the difference in expected losses and expenses. Rates are not unfairly discriminatory because different premiums result for policyholders with like loss exposures but different expense factors, or like expense factors but different loss exposures, so long as rates reflect the differences with reasonable accuracy. Rates are not unfairly discriminatory if averaged broadly among members of a group; nor are rates unfairly discriminatory even though they are lower than rates for nonmembers of the group. However, such rates are unfairly discriminatory if they are not actuarially measurable and credible and sufficiently related to actual or expected loss and expense experience of the group so as to assure that nonmembers of the group are not unfairly discriminated against. Use of a single United States Postal Service zip code as a rating territory shall be deemed unfairly discriminatory. Petitioners point out that each of these statutory examples describing "unfairly discriminatory" rates has an actuarial basis, i.e., rates must be related to the actual or expected loss and expense factors for a given group or class, rather than any extraneous factors. If two risks have the same expected losses and expenses, the insurer must charge them the same rate. If the risks have different expected losses and expenses, the insurer must charge them different rates. Michael Miller, Petitioners' expert actuary, testified that the term "unfairly discriminatory" has been used in the insurance industry for well over 100 years and has always had this cost-based definition. Mr. Miller is a fellow of the Casualty Actuarial Society ("CAS"), a professional organization whose purpose is the advancement of the body of knowledge of actuarial science, including the promulgation of industry standards and a code of professional conduct. Mr. Miller was chair of the CAS ratemaking committee when it developed the CAS "Statement of Principles Regarding Property and Casualty Insurance Ratemaking," a guide for actuaries to follow when establishing rates.5 Principle 4 of the Statement of Principles provides: "A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk." In layman's terms, Mr. Miller explained that different types of risks are reflected in a rate calculation. To calculate the expected cost of a given risk, and thus the rate to be charged, the insurer must determine the expected losses for that risk during the policy period. The loss portion reflects the risk associated with an occurrence and the severity of a claim. While the loss portion does not account for the entirety of the rate charged, it is the most important in terms of magnitude. Mr. Miller cautioned that the calculation of risk is a quantification of expected loss, but not an attempt to predict who is going to have an accident or make a claim. There is some likelihood that every insured will make a claim, though most never do, and this uncertainty is built into the incurred loss portion of the rate. No single risk factor is a complete measure of a person's likelihood of having an accident or of the severity of the ensuing claim. The prediction of losses is determined through a risk classification plan that take into consideration many risk factors (also called rating factors) to determine the likelihood of an accident and the extent of the claim. As to automobile insurance, Mr. Miller listed such risk factors as the age, gender, and marital status of the driver, the type, model and age of the car, the liability limits of the coverage, and the geographical location where the car is garaged. As to homeowners insurance, Mr. Miller listed such risk factors as the location of the home, its value and type of construction, the age of the utilities and electrical wiring, and the amount of insurance to be carried. 2. Credit Scoring as a Rating Factor In the current market, the credit score of the applicant or insured is a rating factor common to automobile and homeowners insurance. Subsection 626.9741(2)(c), Florida Statutes, defines "credit score" as follows: a score, grade, or value that is derived by using any or all data from a credit report in any type of model, method, or program, whether electronically, in an algorithm, computer software or program, or any other process, for the purpose of grading or ranking credit report data. "Credit scores" (more accurately termed "credit-based insurance scores") are derived from credit data that have been found to be predictive of a loss. Lamont Boyd, Fair Isaac's insurance market manager, explained the manner in which Fair Isaac produced its credit scoring model. The company obtained information from various insurance companies on millions of customers. This information included the customers' names, addresses, and the premiums earned by the companies on those policies as well as the losses incurred. Fair Isaac next requested the credit reporting agencies to review their archived files for the credit information on those insurance company customers. The credit agencies matched the credit files with the insurance customers, then "depersonalized" the files so that there was no way for Fair Isaac to know the identity of any particular customer. According to Mr. Lamont, the data were "color blind" and "income blind." Fair Isaac's analysts took these files from the credit reporting agencies and studied the data in an effort to find the most predictive characteristics of future loss propensity. The model was developed to account for all the predictive characteristics identified by Fair Isaac's analysts, and to give weight to those characteristics in accordance to their relative accuracy as predictors of loss. Fair Isaac does not directly sell its credit scores to insurance companies. Rather, Fair Isaac's models are implemented by the credit reporting agencies. When an insurance company wants Fair Isaac's credit score, it purchases access to the model's results from the credit reporting agency. Other vendors offer similar credit scoring models to insurance companies, and in recent years, some insurance companies have developed their own scoring models. Several academic studies of credit scoring were admitted and discussed at the final hearing in these cases. There appears to be no serious debate that credit scoring is a valid and important predictor of losses. The controversy over the use of credit scoring arises over its possible "unfairly discriminatory" impact "based upon race, color, religion, marital status, age, gender, income, national origin, or place of residence." § 626.9741(8)(c), Fla. Stat. Mr. Miller was one of two principal authors of a June 2003 study titled, "The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity." This study was commissioned by several insurance industry trade organizations, including AIA and NAMIC. The study addressed three questions: whether credit-based insurance scores are related to the propensity for loss; whether credit- based insurance scores measure risk that is already measured by other risk factors; and what is the relative importance to accurate risk assessment of the use of credit-based insurance scores. The study was based on a nationwide random sample of private passenger automobile policy and claim records. Records from all 50 states were included in roughly the same proportion as each state's registered motor vehicles bear to total registered vehicles in the United States. The data samples were provided by seven insurers, and represented approximately 2.7 million automobiles, each insured for 12 months.6 The study examined all major automobile coverages: bodily injury liability, property damage liability, medical payments coverage, personal injury protection coverage, comprehensive coverage, and collision coverage. The study concluded that credit-based insurance scores were correlated with loss propensity. The study found that insurance scores overlap to some degree with other risk factors, but that after fully accounting for the overlaps, insurance scores significantly increase the accuracy of the risk assessment process. The study found that, for each of the six automobile coverages examined, insurance scores are among the three most important risk factors.7 Mr. Miller's study did not examine the question of causality, i.e., why credit-based insurance scores are predictive of loss propensity. Dr. Patrick Brockett testified for Petitioners as an expert in actuarial science, risk management and insurance, and statistics. Dr. Brockett is a professor in the departments of management science and information systems, finance, and mathematics at the University of Texas at Austin. He occupies the Gus S. Wortham Memorial Chair in Risk Management and Insurance, and is the director of the university's risk management and insurance program. Dr. Brockett is the former director of the University of Texas' actuarial science program and continues to direct the study of students seeking their doctoral degrees in actuarial science. His areas of academic research are actuarial science, risk management and insurance, statistics, and general quantitative methods in business. Dr. Brockett has written more than 130 publications, most of which relate to actuarial science and insurance. He has spent his entire career in academia, and has never been employed by an insurance company. In 2002, Lieutenant Governor Bill Ratliff of Texas asked the Bureau of Business Research ("BBR") of the University of Texas' McCombs School of Business to provide an independent, nonpartisan study to examine the relationship between credit history and insurance losses in automobile insurance. Dr. Brockett was one of four named authors of this BBR study, issued in March 2003 and titled, "A Statistical Analysis of the Relationship between Credit History and Insurance Losses." The BBR research team solicited data from insurance companies representing the top 70 percent of the automobile insurers in Texas, and compiled a database of more than 173,000 automobile insurance policies from the first quarter of 1998 that included the following 12 months' premium and loss history. ChoicePoint was then retained to match the named insureds with their credit histories and to supply a credit score for each insured person. The BBR research team then examined the credit score and its relationship with prospective losses for the insurance policy. The results were summarized in the study as follows: Using logistic and multiple regression analyses, the research team tested whether the credit score for the named insured on a policy was significantly related to incurred losses for that policy. It was determined that there was a significant relationship. In general, lower credit scores were associated with larger incurred losses. Next, logistic and multiple regression analyses examined whether the revealed relationship between credit score and incurred losses was explainable by existing underwriting variables, or whether the credit score added new information about losses not contained in the existing underwriting variables. It was determined that credit score did yield new information not contained in the existing underwriting variables. What the study does not attempt to explain is why credit scoring adds significantly to the insurer's ability to predict insurance losses. In other words, causality was not investigated. In addition, the research team did not examine such variables as race, ethnicity, and income in the study, and therefore this report does not speculate about the possible effects that credit scoring may have in raising or lowering premiums for specific groups of people. Such an assessment would require a different study and different data. At the hearing, Dr. Brockett testified that the BBR study demonstrated a "strong and significant relationship between credit scoring and incurred losses," and that credit scoring retained its predictive power even after the other risk variables were accounted for. Dr. Brockett further testified that credit scoring has a disproportionate effect on the classifications of age and marital status, because the very young tend to have credit scores that are lower than those of older people. If the question is simply whether the use of credit scores will have a greater impact on the young and the single, the answer would be in the affirmative. However, Dr. Brockett also noted that young, single people will also have higher losses than older, married people, and, thus, the use of credit scores is not "unfairly discriminatory" in the sense that term is employed in the insurance industry.8 Mr. Miller testified that nothing in the actuarial standards of practice requires that a risk factor be causally related to a loss. The Actuarial Standards Board's Standard of Practice 12,9 dealing with risk classification, states that a risk factor is appropriate for use if there is a demonstrated relationship between the risk factor and the insurance losses, and that this relationship may be established by statistical or other mathematical analysis of data. If the risk characteristic is shown to be related to an expected outcome, the actuary need not establish a cause-and-effect relationship between the risk characteristic and the expected outcome. As an example, Mr. Miller offered the fact that past automobile accidents do not cause future accidents, although past accidents are predictive of future risk. Past traffic violations, the age of the driver, the gender of the driver, and the geographical location are all risk factors in automobile insurance, though none of these factors can be said to cause future accidents. They help insurers predict the probability of a loss, but do not predict who will have an accident or why the accident will occur. Mr. Miller opined that credit scoring is a similar risk factor. It is demonstrably significant as a predictor of risk, though there is no causal relationship between credit scores and losses and only an incomplete understanding of why credit scoring works as a predictor of loss. At the hearing, Dr. Brockett discussed a study that he has co-authored with Linda Golden, a business professor at the University of Texas at Austin. Titled "Biological and Psychobehavioral Correlates of Risk Taking, Credit Scores, and Automobile Insurance Losses: Toward an Explication of Why Credit Scoring Works," the study has been peer-reviewed and at the time of the hearing had been accepted for publication in the Journal of Risk and Insurance. In this study, the authors conducted a detailed review of existing scientific literature concerning the biological, psychological, and behavioral attributes of risky automobile drivers and insured losses, and a similar review of literature concerning the biological, psychological, and behavioral attributes of financial risk takers. The study found that basic chemical and psychobehavioral characteristics, such as a sensation-seeking personality type, are common to individuals exhibiting both higher insured automobile losses and poorer credit scores. Dr. Brockett testified that this study provides a direction for future research into the reasons why credit scoring works as an insurance risk characteristic. 3. The Proposed Rule's Definition of "Unfairly Discriminatory" Petitioners contend that the Proposed Rule's definition of the term "unfairly discriminatory" expands upon and is contrary to the statutory definition of the term discussed in section C.1. supra, and that this expanded definition operates to impose a ban on the use of credit scoring by insurance companies. As noted above, Section 626.9741, Florida Statutes, does not define the term "unfairly discriminatory." The provisions of the Rating Law10 define the term as it is generally understood by the insurance industry: a rate is deemed "unfairly discriminatory" if the premium charged does not equitably reflect the differences in expected losses and expenses between policyholders. Two provisions of Section 626.9741, Florida Statutes, employ the term "unfairly discriminatory": (5) A rate filing that uses credit reports or credit scores must comply with the requirements of s. 627.062 or s. 627.0651 to ensure that rates are not excessive, inadequate, or unfairly discriminatory. * * * (8) The commission may adopt rules to administer this section. The rules may include, but need not be limited to: * * * (c) Standards that ensure that rates or premiums associated with the use of a credit report or score are not unfairly discriminatory, based upon race, color, religion, marital status, age, gender, income, national origin, or place of residence. Petitioners contend that the statute's use of the term "unfairly discriminatory" is unexceptionable, that the Legislature simply intended the term to be used and understood in the traditional sense of actuarial soundness alone. Respondents agree that Subsection 626.9741(5), Florida Statutes, calls for the agency to apply the traditional definition of "unfairly discriminatory" as that term is employed in the statutes directly referenced, Sections 627.062 and 627.0651, Florida Statutes, the relevant texts of which are set forth in Findings of Fact 18 and 19 above. However, Respondents contend that Subsection 626.9741(8)(c), Florida Statutes, calls for more than the application of the Rating Law's definition of the term. Respondents assert that in the context of this provision, "unfairly discriminatory" contemplates not only the predictive function, but also "discrimination" in its more common sense, as the term is employed in state and federal civil rights law regarding race, color, religion, marital status, age, gender, income, national origin, or place of residence. At the hearing, OIR General Counsel Steven Parton testified as to the reasons why the agency chose the federal body of law using the term "disparate impact" as the test for unfair discrimination in the Proposed Rule: Well, first of all, what we were looking for is a workable definition that people would have some understanding as to what it meant when we talked about unfair discrimination. We were also looking for a test that did not require any willfulness, because it was not our concern that, in fact, insurance companies were engaging willfully in unfair discrimination. What we believed is going on, and we think all of the studies that are out there suggest, is that credit scoring is having a disparate impact upon various people, whether it be income, whether it be race. . . . Respondents' position is that Subsection 626.9741(8)(c), Florida Statutes, requires that a proposed rate or premium be rejected if it has a "disproportionately" negative effect on one of the named classes of persons, even though the rate or premium equitably reflects the differences in expected losses and expenses between policyholders. In the words of Mr. Parton, "This is not an actuarial rule." Mr. Parton explained the agency's rationale for employing a definition of "unfairly discriminatory" that is different from the actuarial usage employed in the Rating Law. Subsection 626.9741(5), Florida Statutes, already provides that an insurer's rate filings may not be "excessive, inadequate, or unfairly discriminatory" in the actuarial sense. To read Subsection 626.9741(8)(c), Florida Statutes, as simply a reiteration of the actuarial "unfair discrimination" rule would render the provision, "a nullity. There would be no force and effect with regards to that." Thus, the Proposed Rule defines "unfairly discriminatory" to mean "that adverse decisions resulting from the use of a credit scoring methodology disproportionately affects persons belonging to any of the classes set forth in Section 626.9741(8)(c), F.S." Proposed Florida Administrative Code Rule 69O-125.005(1)(e). OIR's actuary, Howard Eagelfeld, explained that "disproportionate effect" means "having a different effect on one group . . . causing it to pay more or less premium than its proportionate share in the general population or than it would have to pay based upon all other known considerations." Mr. Eagelfeld's explanation is not incorporated into the language of the Proposed Rule. Consistent with the actuarial definition of "unfairly discriminatory," the Proposed Rule requires that any credit scoring methodology must be "demonstrated to be a valid predictor of the insurance risk to be assumed by an insurer for the applicable type of insurance," and sets forth detailed criteria through which the insurer can make the required demonstration. Proposed Florida Administrative Code Rule 69O-125.005(9)(a)-(f) and (h)-(l). Proposed Florida Administrative Code Rule 69O-125.005(9)(g) sets forth Respondents' "civil rights" usage of the term "unfairly discriminatory." The insurer's demonstration of the validity of its credit scoring methodology must include: [d]ocumentation consisting of statistical testing of the application of the credit scoring model to determine whether it results in a disproportionate impact on the classes set forth in Section 626.9741(8)(c), F.S. A model that disproportionately affects any such class of persons is presumed to have a disparate impact and is presumed to be unfairly discriminatory.11 Mr. Parton, who testified in defense of the Proposed Rule as one of its chief draftsmen, stated that the agency was concerned that the use of credit scoring may be having a disproportionate effect on minorities. Respondents believe that credit scoring may simply be a surrogate measure for income, and that using income as a basis for setting rates would have an obviously disparate impact on lower-income persons, including the young and the elderly. Mr. Parton testified that "neither the insurance industry nor anyone else" has researched the theory that credit scoring may be a surrogate for income. Mr. Miller referenced a 1998 analysis performed by AIA indicating that the average credit scores do not vary significantly according to the income group. In fact, the lowest income group (persons making less than $15,000 per year) had the highest average credit score, and the average credit scores actually dropped as income levels rose until the income range reached $50,000 to $74,000 per year, when the credit scores began to rise. Mr. Miller testified that a credit score is no more predictive of income level than a coin flip. However, Respondents introduced a January 2003 report to the Washington State Legislature prepared by the Social & Economic Sciences Research Center of Washington State University, titled "Effect of Credit Scoring on Auto Insurance Underwriting and Pricing." The purpose of the study was to determine whether credit scoring has unequal impacts on specific demographic groups. For this study, the researchers received data from three insurance companies on several thousand randomly chosen customers, including the customers' age, gender, residential zip code, and their credit scores and/or rate classifications. The researchers contacted about 1,000 of each insurance company's customers and obtained information about their ethnicity, marital status, and income levels. The study's findings were summarized as follows: The demographic patterns discerned by the study are: Age is the most significant factor. In almost every analysis, older drivers have, on average, higher credit scores, lower credit-based rate assignments, and less likelihood of lacking a valid credit score. Income is also a significant factor. Credit scores and premium costs improve as income rises. People in the lowest income categories-- less than $20,000 per year and between $20,000 and $35,000 per year-- often experienced higher premiums and lower credit scores. More people in lower income categories also lacked sufficient credit history to have a credit score. Ethnicity was found to be significant in some cases, but because of differences among the three firms studied and the small number of ethnic minorities in the samples, the data are not broadly conclusive. In general, Asian/Pacific Islanders had credit scores more similar to whites than to other minorities. When other minority groups had significant differences from whites, the differences were in the direction of higher premiums. In the sample of cases where insurance was cancelled based on credit score, minorities who were not Asian/Pacific Islanders had greater difficulty finding replacement insurance, and were more likely to experience a lapse in insurance while they searched for a new policy. The analysis also considered gender, marital status and location, but for these factors, significant unequal effects were far less frequent. (emphasis added) The evidence appears equivocal on the question of whether credit scoring is a surrogate for income. The Washington study seems to indicate that ethnicity may be a significant factor in credit scoring, but that significant unequal effects are infrequent regarding gender and marital status. The evidence demonstrates that the use of credit scores by insurers would tend to have a negative impact on young people. Mr. Miller testified that persons between ages 25 and 30 have lower credit scores than older people. Petitioners argue that by defining "unfairly discriminatory" to mean "disproportionate effect," the Proposed Rule effectively prohibits insurers from using credit scores, if only because all the parties recognize that credit scores have a "disproportionate effect" on young people. Petitioners contend that this prohibition is in contravention of Section 626.9741(1), Florida Statutes, which states that the purpose of the statute is to "regulate and limit" the use of credit scores, not to ban them outright. Respondents counter that if the use of credit scores is "unfairly discriminatory" toward one of the listed classes of persons in contravention of Subsection 626.9741(8)(c), Florida Statutes, then the "limitation" allowed by the statute must include prohibition. This point is obviously true but sidesteps the real issues: whether the statute's undefined prohibition on "unfair discrimination" authorizes the agency to employ a "disparate impact" or "disproportionate effect" definition in the Proposed Rule, and, if so, whether the Proposed Rule sufficiently defines any of those terms to permit an insurer to comply with the rule's requirements. Proposed Florida Administrative Code Rule 69O-125.005(2) provides that the insurer bears the burden of demonstrating that its credit scoring methodology does not disproportionately affect persons based upon their race, color, religion, marital status, age, gender, income, national origin, or place of residence. Petitioners state that no insurer can demonstrate, consistent with the Proposed Rule, that its credit scoring methodology does not have a disproportionate effect on persons based upon their age. Therefore, no insurer will ever be permitted to use credit scores under the terms of the Proposed Rule. As discussed more fully in Findings of Fact 73 through 76 below, Petitioners also contend that the Proposed Rule provides no guidance as to what "disproportionate effect" and "disparate impact" mean, and that this lack of definitional guidance will permit the agency to reject any rate filing that uses credit scoring, based upon an arbitrary determination that it has a "disproportionate effect" on one of the classes named in Subsection 626.9741(8)(c), Florida Statutes. Petitioners also presented evidence that no insurer collects data on race, color, religion, or national origin from applicants or insureds. Mr. Miller testified that there is no reliable independent source for race, color, religious affiliation, or national origin data. Mr. Eagelfeld agreed that there is no independent source from which insurers can obtain credible data on race or religious affiliation. Mr. Parton testified that this lack of data can be remedied by the insurance companies commencing to request race, color, religion, and national origin information from their customers, because there is no legal impediment to their doing so. Mr. Miller testified that he would question the reliability of the method suggested by Mr. Parton because many persons will refuse to answer such sensitive questions or may not answer them correctly. Mr. Miller stated that, as an actuary, he would not certify the results of a study based on demographic data obtained in this manner and would qualify any resulting actuarial opinion due to the unreliability of the database. Petitioners also object to the vagueness of the broad categories of "race, color, religion and national origin." Mr. Miller testified that the Proposed Rule lacks "operational definitions" for those terms that would enable insurers to perform the required calculations. The Proposed Rule places the burden on the insurer to demonstrate no disproportionate effect on persons based on these categories, but offers no guidance as to how these demographic classes should be categorized by an insurer seeking to make such a demonstration. Petitioners point out that even if the insurer is able to ascertain the categories sought by the regulators, the Proposed Rule gives no guidance as to whether the "disproportionate effect" criterion mandates perfect proportionality among all races, colors, religions, and national origins, or whether some degree of difference is tolerable. Petitioners contend that this lack of guidance provides unbridled discretion to the regulator to reject any disproportionate effect study submitted by an insurer. At his deposition, Mr. Parton was asked how an insurer should break down racial classifications in order to show that there is no disproportionate effect on race. His answer was as follows: There is African-American, Cuban-American, Spanish-American, African-American, Haitian- American. Are you-- you know, whatever the make-up of your book of business is-- you're the one in control of it. You can ask these folks what their ethnic background is. At his deposition, Mr. Parton frankly admitted that he had no idea what "color" classifications an insurer should use, yet he also stated that an insurer must demonstrate no disproportionate effect on each and every listed category, including "color." At the final hearing, when asked to list the categories of "color," Mr. Parton responded, "I suppose Indian, African-American, Chinese, Japanese, all of those."12 At the final hearing, Mr. Parton was asked whether the Proposed Rule contemplates requiring insurers to demonstrate distinctions between such groups as "Latvian-Americans" and "Czech-Americans." Mr. Parton's reply was as follows: No. And I don't think it was contemplated by the Legislature. . . . The question is race by any other name, whether it be national origin, ethnicity, color, is something that they're concerned about in terms of an impact. What we would anticipate, and what we have always anticipated, is the industry would demonstrate whether or not there is an adverse effect against those folks who have traditionally in Florida been discriminated against, and that would be African-Americans and certain Hispanic groups. In our opinion, at least, if you could demonstrate that the credit scoring was not adversely impacting it, it may very well answer the questions to any other subgroup that you may want to name. At the hearing, Mr. Parton was also questioned as to distinctions between religions and testified as follows: The impact of credit scoring on religion is going to be in the area of what we call thin files, or no files. That is to say people who do not have enough credit history from which credit scores can be done, or they're going to be treated somehow differently because of that lack of history. A simple question that needs to be asked by the insurance company is: "Do you, as a result of your religious belief or whatever [sect] you are in, are you forbidden as a precept of your religious belief from engaging in the use of credit?" When cross-examined on the subject, Mr. Parton could not confidently identify any religious group that forbids the use of credit. He thought that Muslims and Quakers may be such groups. Mr. Parton concluded by stating, "I don't think it is necessary to identify those groups. The question is whether or not you have a religious group that you prescribe to that forbids it." Petitioners contend that, in addition to failing to define the statutory terms of race, color, religion, and national origin in a manner that permits insurer compliance, the Proposed Rule fails to provide an operational definition of "disproportionate effect." The following is a hypothetical question put to Mr. Parton at his deposition, and Mr. Parton's answer: Q: Let's assume that African-Americans make up 10 percent of the population. Let's just use two groups for the sake of clarity. Caucasians make up 90 percent. If the application of credit scoring in underwriting results in African-Americans paying 11 percent of the premium and Caucasians paying 89 percent of the premium, is that, in your mind, a disproportionate affect [sic]? A: It may be. I think it would give rise under this rule that perhaps there is a presumption that it is, but that presumption is not [an irrebuttable] one.[13] For instance, if you then had testimony that a 1 percent difference between the two was statistically insignificant, then I would suggest that that presumption would be overridden. This answer led to a lengthy discussion regarding a second hypothetical in which African-Americans made up 29 percent of the population, and also made up 35 percent of the lowest, or most unfavorable, tier of an insurance company's risk classifications. Mr. Parton ultimately opined that if the difference in the two numbers was found to be "statistically significant" and attributable only to the credit score, then he would conclude that the use of credit scoring unfairly discriminated against African-Americans. As to whether his answer would be the same if the hypothetical were adjusted to state that African-Americans made up 33 percent of the lowest tier, Mr. Parton responded: "That would be up to expert testimony to be provided on it. That's what trials are all about."14 Aside from expert testimony to demonstrate that the difference was "statistically insignificant," Mr. Parton could think of no way that an insurer could rebut the presumption that the difference was unfairly discriminatory under the "disproportionate effect" definition set forth in the proposed rule. He stated that, "I can't anticipate, nor does the rule propose to anticipate, doing the job of the insurer of demonstrating that its rates are not unfairly discriminatory." Mr. Parton testified that an insurer's showing that the credit score was a valid and important predictor of risk would not be sufficient to rebut the presumption of disproportionate effect. Summary Findings Credit-based insurance scoring is a valid and important predictor of risk, significantly increasing the accuracy of the risk assessment process. The evidence is still inconclusive as to why credit scoring is an effective predictor of risk, though a study co-authored by Dr. Brockett has found that basic chemical and psychobehavioral characteristics, such as a sensation-seeking personality type, are common to individuals exhibiting both higher insured automobile losses and poorer credit scores. Though the evidence was equivocal on the question of whether credit scoring is simply a surrogate for income, the evidence clearly demonstrated that the use of credit scores by insurance companies has a greater negative overall effect on young people, who tend to have lower credit scores than older people. Petitioners and Fair Isaac emphasized their contention that compliance with the Proposed Rule would be impossible, and thus the Proposed Rule in fact would operate as a prohibition on the use of credit scoring by insurance companies. At best, Petitioners demonstrated that compliance with the Proposed Rule would be impracticable at first, given the current business practices in the industry regarding the collection of customer data regarding race and religion. The evidence indicated no legal barriers to the collection of such data by the insurance companies. Questions as to the reliability of the data are speculative until a methodology for the collection of the data is devised. Subsection 626.9741(8)(c), Florida Statutes, authorizes the FSC to adopt rules that may include: Standards that ensure that rates or premiums associated with the use of a credit report or score are not unfairly discriminatory, based upon race, color, religion, marital status, age, gender, income, national origin, or place of residence. Petitioners' contention that the statute's use of "unfairly discriminatory" contemplates nothing more than the actuarial definition of the term as employed by the Rating Law is rejected. As Respondents pointed out, Subsection 626.9741(5), Florida Statutes, provides that a rate filing using credit scores must comply with the Rating Law's requirements that the rates not be "unfairly discriminatory" in the actuarial sense. If Subsection 626.9741(8)(c), Florida Statutes, merely reiterates the actuarial requirement, then it is, in Mr. Parton's words, "a nullity."15 Thus, it is found that the Legislature contemplated some level of scrutiny beyond actuarial soundness to determine whether the use of credit scores "unfairly discriminates" in the case of the classes listed in Subsection 626.9741(8)(c), Florida Statutes. It is found that the Legislature empowered FSC to adopt rules establishing standards to ensure that an insurer's rates or premiums associated with the use of credit scores meet this added level of scrutiny. However, it must be found that the term "unfairly discriminatory" as employed in the Proposed Rule is essentially undefined. FSC has not adopted a "standard" by which insurers can measure their rates and premiums, and the statutory term "unfairly discriminatory" is thus subject to arbitrary enforcement by the regulating agency. Proposed Florida Administrative Code Rule 69O-125.005(1)(e) defines "unfairly discriminatory" in terms of adverse decisions that "disproportionately affect" persons in the classes set forth in Subsection 626.9741(8)(c), Florida Statutes, but does not define what is a "disproportionate effect." At Subsection (9)(g), the Proposed Rule requires "statistical testing" of the credit scoring model to determine whether it results in a "disproportionate impact" on the listed classes. This subsection attempts to define its terms as follows: A model that disproportionately affects any such class of persons is presumed to have a disparate impact and is presumed to be unfairly discriminatory. Thus, the Proposed Rule provides that a "disproportionate effect" equals a "disparate impact" equals "unfairly discriminatory," without defining any of these terms in such a way that an insurer could have any clear notion, prior to the regulator's pronouncement on its rate filing, whether its credit scoring methodology was in compliance with the rule. Indeed, Mr. Parton's testimony evinced a disinclination on the part of the agency to offer guidance to insurers who attempt to understand this circular definition. The tenor of his testimony indicated that the agency itself is unsure of exactly what an insurer could submit to satisfy the "disproportionate effect" test, aside from perfect proportionality, which all parties concede is not possible at least as to young people, or a showing that any lack of perfect proportionality is "statistically insignificant," whatever that means. Mr. Parton seemed to say that OIR will know a valid use of credit scoring when it sees one, though it cannot describe such a use beforehand. Mr. Eagelfeld offered what might be a workable definition of "disproportionate effect," but his definition is not incorporated into the Proposed Rule. Mr. Parton attempted to assure the Petitioners that OIR would take a reasonable view of the endless racial and ethnic categories that could be subsumed under the literal language of the Proposed Rule, but again, Mr. Parton's assurances are not part of the Proposed Rule. Mr. Parton's testimony referenced federal and state civil rights laws as the source for the term "disparate impact." Federal case law under Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e-2, has defined a "disparate impact" claim as "one that 'involves employment practices that are facially neutral in their treatment of different groups, but that in fact fall more harshly on one group than another and cannot be justified by business necessity.'" Adams v. Florida Power Corporation, 255 F.3d 1322, 1324 n.4 (11th Cir. 2001), quoting Hazen Paper Co. v. Biggins, 507 U.S. 604, 609, 113 S. Ct. 1701, 1705, 123 L. Ed. 2d 338 (1993). The Proposed Rule does not reference this definition, nor did Mr. Parton detail how OIR proposes to apply or modify this definition in enforcing the Proposed Rule. Without further definition, all three of the terms employed in this circular definition are conclusions, not "standards" that the insurer and the regulator can agree upon at the outset of the statistical and analytical process leading to approval or rejection of the insurer's rates. Absent some definitional guidance, a conclusory term such as "disparate impact" can mean anything the regulator wishes it to mean in a specific case. The confusion is compounded by the Proposed Rule's failure to refine the broad terms "race," "color," and "religion" in a manner that would allow an insurer to prepare a meaningful rate submission utilizing credit scoring. In his testimony, Mr. Parton attempted to limit the Proposed Rule's impact to those groups "who have traditionally in Florida been discriminated against," but the actual language of the Proposed Rule makes no such distinction. Mr. Parton also attempted to limit the reach of "religion" to groups whose beliefs forbid them from engaging in the use of credit, but the language of the Proposed Rule does not support Mr. Parton's distinction.
The Issue Whether Petitioner's responses to the mortgage brokers examination administered in April 1995 were properly graded and, if not, whether Petitioner passed the examination? Whether Petitioner's responses to the mortgage brokers examination administered in May 1995 were properly graded and, if not, whether Petitioner passed the examination?
Findings Of Fact Respondent is the agency of the State of Florida responsible for the licensure of mortgage brokers pursuant to Part II of Chapter 494, Florida Statutes. Pursuant to Section 494.0033(2)(b), Florida Statutes, individuals who apply for licensure as a mortgage broker are required to pass a licensure examination. To pass the examination, a candidate must receive a minimum score of 75. National Assessment Institute is the company employed by Respondent to administer the licensure examination. Petitioner applied for licensure as a mortgage broker. On April 25, 1995, Petitioner took the mortgage broker examination. Petitioner was advised that she had achieved a score of only 64. Petitioner was afforded an opportunity to review the examination questions and her answers thereto, and she did so on May 12, 1995. She questioned her failure to receive credit for fourteen of her answers on that examination and provided written explanations why she believed her answers to those questions were correct. Petitioner's written challenges and explanations regarding her answers to those fourteen questions were reviewed by staff of National Assessment Institute. The individual who reviewed Petitioner's responses did not testify in this proceeding. This individual determined that Petitioner's answers to those fourteen questions were incorrect and that her explanations were without merit. Petitioner was advised that she was not entitled to additional credit for her answers on the April 1995 examination. At the final hearing in this cause, Petitioner failed to present any evidence that her April 1995 examination was improperly graded or that she was otherwise entitled to additional credit for her responses to the challenged questions on the examination. Petitioner also sat for the licensure examination administered May 23, 1995. Petitioner received a score of 74 on this examination. On June 9, 1995, Petitioner reviewed the grading of answers to the May 1995 examination. Petitioner asserts that the reviewer gave her the wrong question book so that the answer key would make her answers appear incorrect. For her review on June 9, 1995, Petitioner was provided a correct copy of her examination book, a photo copy of her answer sheet, her original scratch paper, and two challenge sheets. The information provided Petitioner reflected the response to each question the Respondent considered to be the correct response. At the final hearing in this cause, Petitioner failed to present any evidence that her May 1995 examination was improperly graded or that she was otherwise entitled to additional credit for her response to any question on the examination. Petitioner failed to establish that the April or May examination was improperly administered. She likewise failed to establish that the opportunity to review the scoring of these two examinations was compromised by fraud or mistake. The Respondent has promulgated Rule 3D-40.031(2), Florida Administrative Code, which authorizes it to request additional information in conjunction with a licensure application, which information may include the applicant providing evidence of a passing score on the mortgage broker examination. That Rule requires that additional information requested must be received by the Respondent within 90 days. The Respondent requested that Petitioner provide evidence that she had received a passing score on the examination. Petitioner has been unable to provide that information.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Respondent enter a Final Order that adopts the findings of fact and conclusions of law contained herein. It is FURTHER RECOMMENDED that Petitioner's challenges to the scoring of the April and May 1995 licensure examinations be dismissed and, consequently, that Petitioner's application for licensure as a mortgage broker be denied. DONE AND ENTERED this 16th day of May, 1996 in Tallahassee, Leon County, Florida. CLAUDE B. ARRINGTON, Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 16th day of May, 1996. APPENDIX TO RECOMMENDED ORDER, CASE NO. 95-5132 The proposed findings of fact submitted by Petitioner are rejected as they are not supported by the record. While Petitioner purports to explain her answers to certain questions on the April 1995 examination, this evidence was not presented at the formal hearing. The following rulings are made as to the proposed findings of fact submitted by Respondent. The proposed findings of fact in paragraphs 1, 2, 3, 4, and 5 are adopted in material part by the Recommended Order. The proposed findings of fact in paragraphs 6 are adopted in part by the Recommended Order. The fact that Petitioner challenged ten question as a result of her review on June 9, 1995, was not established. Since there was no dispute that the request for formal hearing was timely and this is a de novo proceeding, the proposed findings of fact in paragraph 7 are unnecessary to the conclusions reached. The proposed findings of fact in paragraphs 8, 9,10, 11, 13, and 14 are subordinate to the findings made. The proposed findings of fact in paragraphs 12 and 15 are rejected as being unnecessary to the conclusions reached. COPIES FURNISHED: Ms. Nasrin Y. Niknam 53 Castle Harbour Isle Drive Fort Lauderdale, Florida 33308 Deborah Guller, Esquire Office of the Comptroller Department of Banking and Finance 201 West Broward Boulevard, Suite 302 Fort Lauderdale, Florida 33301 Honorable Robert F. Milligan Comptroller, State of Florida The Capitol, Plaza Level Tallahassee, Florida 32399-0350 Harry Hooper, General Counsel Department of Banking and Finance The Capitol, Room 1302 Tallahassee, Florida 32399-0350
