Consumer Protection v. Morgan

• Decision Date: 13 May 2005
• Docket Number: No. 4,4
• Citation: 874 A.2d 919,387 Md. 125
• Parties: CONSUMER PROTECTION DIVISION v. John MORGAN, Michael Almony and Lee M. Shpritz, et al.
• Court: Maryland Court of Appeals

874 A.2d 919

387 Md. 125

CONSUMER PROTECTION DIVISION v. John MORGAN, Michael Almony and Lee M. Shpritz, et al.

No. 4, September Term, 2004.

Court of Appeals of Maryland.

May 13, 2005.

Vernon Scott Bailey, Asst. Atty. Gen. (J. Joseph Curran, Jr., Atty. Gen. of Maryland, and William D. Gruhn, Asst. Atty. Gen., Baltimore), on brief, for appellant/cross-appellee.

J. Michael Conroy (Pasternak & Fidis, P.C., Bethesda), on brief; John A. Bourgeois (Andrew Jay Graham of Kramon & Graham, P.A., Baltimore), on brief; Gerald M. Richman (Gerald M. Richman, P.A.; C. William Michaels, Baltimore), on brief, for appellees/cross-appellants.

Argued before BELL, C.J., RAKER, WILNER, CATHELL, HARRELL, BATTAGLIA and GREENE, JJ.

RAKER, J.

This case began as an enforcement action brought by appellant, Consumer Protection Division of the Office of the Maryland Attorney General ("Division"), under the Maryland Consumer Protection Act, Md.Code (1975, 2000 Repl.Vol., 2004 Cum. Supp.), ?? 13-101 through 13-501 of the Commercial Law Article.¹ The Division charged a property-investor, a mortgage lender, and two appraisers with using unfair and deceptive practices to take advantage of unsophisticated, first-time home buyers in Baltimore City.² The action concerns forty-eight properties in the Bel Air/Edison area sold in 1998 and 1999. The Administrative Law Judge ("ALJ") issued a Proposed Order, and, following a hearing on exceptions, the Division issued a Final Order.

Appellees Lee M. Shpritz, L & R Properties, Inc., West Star Properties, Inc., West Star Company, LLC, Michael Almony, Almony Appraisal Services, LLC, and John M. Morgan, Jr., filed an action for judicial review in the Circuit Court for Baltimore County. The Circuit Court affirmed in part and reversed in part, remanding the matter to the agency. The Circuit Court ordered the three cases against Shpritz, Morgan, and Almony, respectively, consolidated and its opinion considered as governing all three cases.

The Consumer Protection Division appealed to the Court of Special Appeals, and Morgan cross-appealed. We issued a writ of certiorari on our own initiative before that court considered the issues. 380 Md. 617, 846 A.2d 401 (2004).

I.

A. Federal Housing Administration-Insured Mortgages

At its core, this case is about a property seller's efforts to procure Federal Housing Administration ("FHA") insured mortgages for his customers, two appraisers' appraisals of property values, and a lender's approval of the mortgages. We begin with a description of FHA loans and the process for their approval.

The Federal Housing Administration of the Department of Housing and Urban Development's ("HUD") Office of Housing provides mortgage insurance on loans made by FHA-approved lenders. The insurance protects lenders against losses from homeowner defaults. As a result, FHA-insured mortgages require significantly smaller cash investments by the mortgagor to close a loan. The cost of the insurance is passed to the homeowner, enabling the program to be self-sustaining. U.S. Dep't of Hous. and Urban Dev., The Federal Housing Administration, at http:/ /www.hud.gov /offices/hsg/fhahist ory.cfm (last modified May 10, 2004).

The FHA requires, with a few exceptions, that all FHA-insured single family mortgages originate through its Direct Endorsement program. 24 C.F.R. ? 203.5(b) (2004). Under the program, an approved lender serves in the FHA's place to review an application and determine whether the proposed mortgage is eligible for FHA insurance. Id. at ? 203.5(a). To be approved as a Direct Endorsement lender, the lender must have five years of experience in the origination of single family mortgages, employ an underwriter authorized to bind the lender, and submit initial mortgages for review. Id. at ? 203.3.

A Direct Endorsement lender is bound to exercise the same level of care it would exercise for mortgages not insured by the FHA. Id. at ? 203.5(c). HUD publishes a handbook delineating the minimum standards of care for Direct Endorsement lenders. Id.; see U.S. Dep't of Hous. and Urban Dev., No. 4000.4, Single Family Direct Endorsement (1994) [hereinafter "No. 4000.4"]. Specifically, the lender is instructed to evaluate the mortgagor's "credit characteristics, adequacy and stability of income to meet the periodic payments under the mortgage and all other obligations, and the adequacy of the mortgagor's available assets to close the transaction." 24 C.F.R. ? 203.5(d) (2004). A seller who is an employee of the lender cannot be involved in processing the mortgage application. No. 4000.4 at 1-14.

The lender plays an important role in ensuring that the purchaser will be able to pay the mortgage. Lenders look to the purchaser's credit history, income, stability of income, and other factors to determine the purchaser's capacity to repay the mortgage. 24 C.F.R. ? 203.33 (2004); 24 C.F.R. ? 203.34 (2004); U.S. Dep't of Hous. and Urban Dev., No. 4155.1, Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties 2-3, 2-6 (2003) [hereinafter "No. 4155.1"]. The FHA requires the purchaser to pay at least three percent of the purchase price before the mortgage is insured. 24 C.F.R. ? 203.19 (2004). The lender is responsible for ensuring that the purchaser makes this payment. No. 4155.1 at 2-10. If a permissible donor, such as a relative or close friend, gives funds to the purchaser for the closing costs, the lender must document the transfer. Such documentation includes a gift letter, providing details about the gift and the donor. Id.

FHA regulations also require that lenders prevent a seller from making large payments to a purchaser that would enable the purchaser to pay closing costs and prior debts, while hiding the purchaser's inability to pay the mortgage. The seller may contribute up to six percent of the sales price towards closing costs and other expenses, but any contribution above six percent is deducted from the sales price in determining the mortgage. Id. at 1-7. The seller may not funnel money to the purchaser by giving money to a "donor" to transfer to the purchaser. Id. at 2-10.

A crucial element of the endorsement process is the appraisal. The Direct Endorsement lender must have the property appraised to determine the maximum mortgage permitted for that property. U.S. Dep't of Hous. and Urban Dev., No. 4150.1, Valuation Analysis for Home Mortgage Insurance 1-1 (1990) [hereinafter "No. 4150.1"]; see 24 C.F.R. ? 203.5(e) (2004); 24 C.F.R. ? 203.18 (2004). The appraiser is required to complete a Uniform Residential Appraisal Report (URAR), which is the standard form used in the appraisal industry. No. 4150.1 at 8-1. Before completing this report, the appraiser must make a thorough personal inspection of the subject property and all comparable properties referenced in his or her report, inspecting the exterior and interior of the subject property. Id. at 8-2. After completing the appraisal, the appraiser sends one copy to the lender and one to the HUD Field Office. No. 4000.4 at 3-3. The underwriter then reviews the appraisal and can seek clarifications and further information from the appraiser. Id. The seller or another party must sign an agreement to deliver a written statement of the appraised value of the property to the purchaser before the sale. 24 C.F.R. ? 203.15 (2004). The purchaser signs a "Statement of Appraised Value" form acknowledging that the lender disclosed the appraised value and alerting the purchaser that he or she may elect to cancel or renegotiate the sales contract if the underwriter determines the property value to be lower than the sale price. U.S. Dep't of Hous. and Urban Dev., Form HUD-91322.3, Statement of Appraised Value for a Mortgage to be Insured Under the National Housing Act (2003) [hereinafter "HUD-91322.3"]. While the lender hires and pays the appraiser, the lender may charge the mortgagor for the appraiser fees. Id. at ? 203.27(a)(3)(v). An FHA-qualified appraiser must adhere to an extensive set of standards. HUD publishes an Appraiser Handbook: U.S. Dep't of Hous. and Urban Dev., No. 4150.2, Valuation Analysis for Single Family One- to Four-Unit Dwellings (1999) [hereinafter "No. 4150.2"]. An FHA-qualified appraiser is required to obtain, read, and comply with this handbook and to comply with any other HUD instruction and standard. 24 C.F.R. ? 200.206 (2004). In addition, an appraiser must conform to the Uniform Standards of Professional Appraisal Practice, issued by the Appraisal Standards Board. U.S. Dep't of Hous. and Urban Dev., Mortgagee Letter 96-26 (1996). The appraiser's reports must contain sufficient documentation of all information reported so that the underwriter can assess the appraiser's logic, reasoning, judgment, and analysis. Id.

The FHA requires that an appraiser employ the sales comparison appraisal method when evaluating one or two family houses. No. 4150.1 at 6-1. Utilizing this approach, the appraiser searches for comparable properties ("comparables") sold within the previous year and uses the sale prices of those properties to ascertain the value of the subject property. Under No. 4150.1, comparable sales should not be over six months old, because older sales might reflect a different market. If the appraiser does select comparables over six months old, the appraiser should explain why he or she did not choose more recent sales. No. 4150.1 at 9-2; see also No. 4150.2 at 4-6 (directing that comparable sales "should not exceed six months" and "must not exceed twelve months"). The method for selecting comparables is "bracketing." No. 4150.1 at 8-3. Bracketing involves narrowing the range of values for the subject property. An appraiser brackets by establishing a value range for the neighborhood where the property is located and then selecting comparables of slightly higher and lower value to the subject value. Id. at 2-18. The aim is to select comparables that are as similar to the subject...