STATE OF FLORIDA DIVISION OF ADMINISTRATIVE HEARINGS

DAVE TAYLOR, Petitioner, vs. DEPARTMENT OF BANKING AND FINANCE, OFFICE OF THE COMPTROLLER, Respondent.

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Case No. 02-2135RU

FINAL ORDER

The parties having been provided proper notice,

Administrative Law Judge John G. Van Laningham of the Division

of Administrative Hearings convened a formal hearing of this

matter in Tallahassee, Florida, on June 27, 2002, which hearing

was adjourned on June 28, 2002.

APPEARANCES

For Petitioner: H. Richard Bisbee, Esquire Law Office of H. Richard Bisbee 124 Salem Court, Suite A Tallahassee, Florida 32301-2810 For Respondent: Cynthia K. Maynard, Esquire James H. Harris, Esquire Department of Banking and Finance Fletcher Building, Suite 526 101 East Gaines Street Tallahassee, Florida 32399-0350

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STATEMENT OF THE ISSUE In this proceeding pursuant to Section 120.56(4), Florida

Statutes, Petitioner Dave Taylor (“Taylor) alleges that various

purported “statements” which he attributes to Respondent

Department of Banking and Finance (the “Department”) constitute

rules-by-definition that were not adopted under, and therefore

violate, Section 120.54(1)(a), Florida Statutes.

PRELIMINARY STATEMENT

Procedural History

On May 22, 2002, Taylor filed his Petition to Determine the

Invalidity of Agency Statements (“Petition”) with the Division

of Administrative Hearings pursuant to Section 120.56(4),

Florida Statutes. Taylor alleged that the Department had

developed, and was using, various statements (including policies

and forms) in violation of Section 120.54(1)(a), which statute

requires that each “agency statement defined as a rule” must be

“adopted by the rulemaking procedure . . . a soon as feasible

and practicable.”1 The challenged statements are all part of the

Department’s attempts to regulate the appointment of “principal

representatives” by mortgage lenders in accordance with recently

enacted legislation.

The case was called up for final hearing on June 27 and

28, 2002, as scheduled. At the hearing, Taylor testified in his

own behalf and presented the following additional witnesses:

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James Richard Morgan, Financial Control Analyst for the

Department; Robert Pursell, Financial Analyst Examiner

Supervisor for the Department; Margaret Karniewicz, counsel for

the Department; and Robert Arthur Tedcastle, II, Financial

Administrator for the Department. He also offered the

deposition testimony of Donald B. Saxon, Director of the

Department’s Division of Securities and Finance; Mark A.

McDougald, president of Firstrust Mortgage; and David C. Harder,

president of Mountain Pacific Mortgage.2 Taylor introduced 25

exhibits, numbered 17; 22-A through 22-R inclusive; 25; 26-A;

26-B; 29-A; 29-B; and 30, each of which was admitted.

The Department’s witnesses were: Kathy Dunn Culpepper,

Financial Examiner Analyst II; Donald B. Saxon; Sandra Green,

Financial Examiner Analyst I; and Karen Wordell-Smith, Executive

Director of the Florida Association of Mortgage Brokers (whose

testimony on legislative intent, having been ruled inadmissible,

was received as a proffer). The Department successfully moved

four exhibits into evidence, numbered 1, 2, 4, and 5.3

The four-volume final hearing transcript was filed on

July 9, 2002. Each party timely filed a Proposed Final Order,

and the undersigned considered these papers in the preparation

of this Final Order.

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A Word on Terminology

To facilitate the discussion and avoid needless repetition

of frequently used terms and phrases, the following

abbreviations will be used in this Final Order, except when the

context requires (or the author prefers) the full expression.

“PR” will stand for “principal representative.” A

principal representative-designee——that is, an individual who

has been designated by a licensee or applicant for licensure to

serve as its PR——will be referred to as a “PRD.” A person who

is already serving as a PR for another licensee will be called

an “XPR” (for “existing PR”). An individual who is nominated

for PR by more than one licensee or applicant at a time will

sometimes be referred to as a “dual designee.”

“Licensee” will be used to refer to an entity currently

holding a license under Part III of Chapter 494, Florida

Statutes; the term is intended, therefore, to encompass all

Florida-licensed mortgage lenders, correspondent lenders, and

“saving clause” mortgage lenders. “Applicant” shall mean any

entity that has applied for licensure under Part III of Chapter

494. Similarly, the term “application” will refer exclusively

to an application filed by such an applicant. The general term

“lender” will be used to refer collectively to licensees and

applicants, when a distinction between them is unnecessary. The

term “Designation,” when capitalized, means the form that

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applicants and licensees must file with the Department for the

purpose of naming a PR.

FINDINGS OF FACT

The evidence adduced at final hearing established the facts

that follow.

1. The Department of Banking and Finance is the state

agency charged with the administration of Chapter 494, Florida

Statutes, titled “Mortgage Brokerage and Mortgage Lending.” As

such, it is responsible for regulating all persons, including

mortgage brokers and lenders, licensed under that chapter.

2. Taylor is licensed under Chapter 494 as a mortgage

broker and as a “continuing education school.” His firm,

Florida Compliance Specialists, Inc., provides consulting

services to Chapter 494 licensees.

3. The present dispute stems from amendments to Chapter

494 that the legislature enacted during the 2001 regular

session. See Ch. 2001-228, Laws of Florida. These amendments

were contained in a bill (CS/HB 455) approved by the governor on

June 13, 2001, and became effective on October 1, 2001; they

created a new position called “principal representative.”

4. As defined by the legislature, the term “principal

representative” means “an individual who operates the business

operations of a licensee under part III.” Section 494.001(29),

Florida Statutes (2001) (emphasis added).4 This statutory

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definition is amplified in a mandate that requires all licensees

(and applicants) to designate a “principal representative who

exercises control of the licensee’s business[.]” Sections

494.0061(8) and 494.0062(11), Florida Statutes. (Emphasis

added). Notably, the terms “operates” and “exercises control

of” are not defined.

5. As mentioned, the statute requires all licensees and

applicants to designate a PR. Although PRs do not engage in a

licensed occupation (i.e. there is no PR license), an individual

appointed to the post of PR after October 1, 2001, must satisfy

certain educational and testing requirements (the details of

which are not important here), and the designating lender must

submit documents showing that its PRD has complied with those

requirements.5

6. After the governor signed CS/HB 455 into law but before

the amended statutes took effect, the Department began making

rules to implement the new provisions. Before long, proposed

rules were published in the August 31, 2001, issue of Florida

Administrative Weekly. One provision of these proposed rules

instructed that “[a]n individual can only be a principal

representative for one [lender].” This “one lender to a PR”

proposal did not implement an explicit statutory directive but

arose from the Department’s then-prevailing interpretation of

the statutory description of a PR as one who “operates” and

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“exercises control of” the lender’s business. Further

illuminating the Department’s understanding of these terms were

the Designation forms that it proposed to adopt, wherein the PRD

was required to acknowledge that he or she would be “in full

charge, control, and supervision of the [lender’s] business.” A

person, the Department reasoned, could be “in full charge,”

etc., of but one company at a time.

7. In the course of rulemaking, however, the Department

receded from its original interpretation. As a result, revised

proposed rules——from which the bright line, “one lender to a PR”

directive had been deleted——were published in the October 5,

2001, Florida Administrative Weekly.6 An amended Designation,

which unlike earlier versions lacked language requiring a PRD to

confirm (with his or her signature) having “full charge,

control, and supervision” of the applicant’s or licensee’s

business, was proposed as well.7 By the end of January 2002, the

Department’s proposed rules relating to PRs had been adopted

and, at the time of this Final Order, were among the agency’s

duly promulgated, existing rules. See Rule 3D-40.242, Florida

Administrative Code.

8. Although the Department does not presently have a

bright line rule or policy that flatly forbids an individual

from serving simultaneously as PR to more than one licensee, the

Department continues to be skeptical that a dual designee can

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effectively perform, for more than one lender at a time, the

responsibilities that it believes inhere in the office of PR.

Accordingly, whenever a lender or applicant nominates an XPR for

PR, the Department without exception subjects that lender’s

Designation to stricter scrutiny than would be given if its PRD

were not an XPR. (Indeed, if the PRD is not an XPR, then the

Department presumes that he or she will be able to carry out the

duties of a PR and hence makes no inquiry as to how the PRD will

function as PR.)

9. The first outward manifestations of the Department’s

internal decision to scrutinize any Designation in which an

applicant’s PRD is an XPR emerged in late November 2001 after

the agency had received four separate applications naming Taylor

as PR.8 As the Department had discovered upon review of these

four applications, Taylor was already serving as PR to an

existing licensee. This situation had given rise to a dilemma

for which the Department was not fully prepared, as evidenced by

a November 26, 2001, e-mail message from an agency attorney to

the responsible policy makers in which she (the attorney) had

advised that:

There are two pending applications in which there are no deficiencies and we need to decide how will [sic] we will proceed since we took out the language in the rule that specifically stated an individual could only be a PR for one company at a time. Let me

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know what times you would be available [for a meeting to decide what to do].

10. The Department quickly decided what to do. Between

November 27 and November 29, 2001, the Department issued four

nearly identical letters, one sent by certified mail to each

applicant who had chosen Taylor as its PR, which provided, in

pertinent part:

We are in receipt of your company’s application to become licensed as a mortgage lender in the State of Florida. A review of the application materials indicates that [applicant’s name] has designated Dave Taylor at [address] as the company’s Principal Representative. [The next four paragraphs quote Sections 494.001(29); 494.0062(11); 494.0062(1)(f); and 494.0062(12), Florida Statutes, which pertain to PRs.] Sections 494.0072(1) and (2)(c), Florida Statutes, provide as follows:

(1) Whenever the department finds a person in violation of an act specified in subsection (2), it may enter an order imposing one or more of the following penalties against that person: (a) Revocation of a license or registration. (b) Suspension of a license or registration, subject to reinstatement upon satisfying all reasonable conditions that the department specifies. (c) Placement of the licensee or applicant on probation for a period of time and subject to all reasonable

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conditions that the department specifies. (d) Issuance of a reprimand. (e) Imposition of a fine in an amount not exceeding $5,000 for each count or separate offense. (f) Denial of a license or registration. (2) Each of the following acts constitutes a ground for which the disciplinary actions specified in subsection (1) may be taken: (c) A material misstatement of fact on an initial or renewal application.[9]

Dave Taylor has already been designated as a principal representative for another licensed lender under part III of Chapter 494, Florida Statutes. Please advise in detail how Mr. Taylor will operate and exercise control over your business.[10] We request that your response be submitted to the Department within 10 days of the date of this letter. If you have any questions regarding this matter, please call me at [phone number].

11. On or about November 30, 2001, the Department created

a new deficiency code, DF 416, the description of which is

“principal representative is designated to more than one

entity.” This is an active deficiency code and is used

consistently as a “red flag” on all applications to which it

applies. When an application is tagged with a DF 416, the

applicant is sent a letter in the form of the letters quoted in

the preceding paragraph. This letter will hereafter be referred

to as the “DF 416 Inquiry Letter.”11 It is important to

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emphasize that all applicants whose PRD is an XPR are sent the

DF 416 Inquiry Letter, without exception.12

12. It is undisputed that Taylor has met all of the

educational and testing requirements necessary to serve as a PR,

and that the Department has no objection, based on facts and

circumstances unique to Taylor, to Taylor’s being a lender’s PR.

(In fact, he is presently a PR to one lender,13 under a

designation to which the Department, consistent with its policy

and practice of making no inquiry concerning PRDs who are not

XPRs, raised no objection.) The Department’s concern about

Taylor’s having been designated a PR by more than one company is

indistinguishable from the concern that it expresses regarding

all dual designees. This is why, although the contents of the

DF 416 Inquiry Letter were developed to resolve a problem that

specifically involved Taylor and his clients, the Department

decided (and was able) to implement its Taylor-made solution on

a generally applicable basis by sending the DF 416 Inquiry

Letter to all applicants whose PRD is a dual designee.

13. Each of the four applicants that had designated Taylor

as its PR declined the Department’s November 2001 invitation to

submit detailed information regarding the manner in which Taylor

would operate and control the licensed business. Each applicant

chose, instead, to designate someone else as PR. Thus, whatever

advantages or considerations Taylor expected to receive in

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exchange for serving as these lenders’ PR were lost; the

Department’s letters (the letters that became the form for the

DF 416 Inquiry Letter) were the proximate cause of that loss, in

that but for the letters, the lenders would not summarily have

severed their respective business relationships with Taylor.

14. After deciding how to deal with applicants whose PRDs

are XPRs, the Department turned its attention to the dual

designees of existing licensees. This was, in a sense, a bigger

problem because, in their respective Designations, more than 50

licensees had selected an individual for PR who was a dual

designee. Beginning around December 12, 2001, the Department

sent all these lenders a letter similar to the DF 416 Inquiry

Letter. This letter stated:

We are in receipt of the principal representative designation forms for the following companies: [lender’s names]. A review of the principal representative forms indicates that [PRD’s name and address] has been designated the Principal Representative for both companies. [The next two paragraphs quote statutory provisions pertaining to PRs.] Sections 494.0072(1) and (2)(p) state as follows:

(1) Whenever the department finds a person in violation of an act specified in subsection (2), it may enter an order imposing one or more of the following penalties against that person:

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(a) Revocation of a license or registration. (b) Suspension of a license or registration, subject to reinstatement upon satisfying all reasonable conditions that the department specifies. (c) Placement of the licensee or applicant on probation for a period of time and subject to all reasonable conditions that the department specifies. (d) Issuance of a reprimand. (e) Imposition of a fine in an amount not exceeding $5,000 for each count or separate offense. (f) Denial of a license or registration. (2) Each of the following acts constitutes a ground for which the disciplinary actions specified in subsection (1) may be taken: (p) Failure to comply with, or violations of, any other provision of ss. 494.001-494.0077.

Please advise in detail how you will operate and exercise control over both of the above-mentioned businesses. We request that your response be submitted to the Department within 14 days of the date of this letter. If you have any questions regarding this matter, please call me at [phone number].

This form letter will be referred to as the “Compliance Inquiry

Letter.”

15. The evidence is unequivocal that the Department has

sent, and plans to send, the Compliance Inquiry Letter to all

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licensees whose Designation names a person determined to be a

dual designee, without exception.14

Taylor’s Description of the Alleged Rules-by-Definition

16. In his petition, as required by Section 120.56(4)(a),

Florida Statutes, Taylor described the alleged rules-by-

definition. Here, in his words, are the Department’s alleged

statements:

a) Only one person can realistically “operate the business operations” of a licensee and “exercise control over the licensee’s business.” Therefore, only one (1) individual shall prima facie be designated as principal representative for only one mortgage lender.

b) The above rule shall not apply, however, to mortgage lenders which the Department deems to be “grand-fathered” i.e., such companies who designated their principal representative on or prior to October 1, 2001, the effective date of the statutory amendments. In such instances, an individual will be permitted multiple designations without further departmental scrutiny or inquiry as to how that individual will “operate” or “exercise control over each business.”[Footnote omitted].

c) Except for “grand-fathered” companies, if an individual once designated principal representative by a mortgage lender is similarly designated principal representative by a separate mortgage lender, the Department based upon the agency statement recited in (a) above, will require the subsequent mortgage lender(s) (i.e., the lender(s) other than the one first designating that individual) to provide in writing a detailed explanation to the

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Department, subject to potential sanctions, describing how that individual will operate and exercise control over that second mortgage lender.

d) The Department considers as a “licensing deficiency” any mortgage lender application or principal representative designation submitted to the Department where the individual designated as the mortgage lender’s principal representative has previously been and continues to be designated principal representative by another mortgage lender. The Department, based upon this “deficiency,” shall not deem the application(s) “complete” for purposes of section 120.60, Florida Statutes. Such application(s) shall be subjected to the licensing procedures set forth in paragraphs (e) and (f) hereafter. In conformity with the agency statement set forth in (a) above, the Department will not undertake an inquiry of the principal representative designation submitted by the mortgage lender who first designated the individual as its’ principal representative.

e) The Department will require mortgage

lenders to provide the information referred to in section c above, through the use of a form, [i.e., the form letters attached as EXHIBITS “14”, “15”, & “16”, to this Petition]. Further, this form created for the purpose of soliciting information [not specifically required by statute or an existing rule] will require mortgage lenders to provide a response, specifically subject to announced sanctions, of details not otherwise required under the applicable statutes or rules.

f) The Department, though requiring

mortgage lenders to comply with the agency statements through the threat of announced sanctions, shall not provide to mortgage lenders or their designated principal representatives any clarifying or defining

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circumstances or criteria the Department will deem as acceptable——contractual or otherwise——for a person to be designated as principal representative for more than one mortgage lender. Any responses provided by such mortgage lenders in response to the Department’s written form shall be submitted by the applicant “at their peril.”

Ultimate Factual Determinations

17. In his just-quoted statements “a,” “c,” “d,” and “e,”

Taylor described, with reasonable particularity, the essence of

policies that, in fact, fall within the statutory definition of

the term “rule.” Statement “a” describes (albeit somewhat

imprecisely) a Departmental mindset, the view that a person is

likely to have difficulty simultaneously serving more than one

master as a PR; the last sentence of statement “d” accurately

describes the Department’s related policy of not inquiring as to

how a PRD who is not a dual designee will operate and control

the lender’s business (because the agency presumes that a person

will probably have no difficulty serving as PR to one lender at

a time). Taken together, these views, in fact, constitute the

Department’s interpretation of the PR statutes.15

18. Taylor’s statement “c” and the third sentence of “d”

(all of which, of course, he attributes to the Department)

correctly describe, for the most part,16 the Department’s policy

of requiring additional information from all licensees and

applicants whose Designations nominate an XPR for the position

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of PR. This policy is plainly driven by the Department’s

interpretation of the PR statutes, and it leads, in turn,

directly to statement “e.” Restated to conform to the evidence,

statement “e” holds that the Department will send either the DF

416 Inquiry Letter or the Compliance Inquiry Letter, whichever

is applicable, to any lender whose PRD is an XPR.

19. It is the form letters——the DF 416 Inquiry Letter and

the Compliance Inquiry Letter——that have emerged as the most

visible, most readily identifiable unadopted rules of the

Department, for they solicit information not specifically

required by statute or by an existing rule.

20. By the end of December 2001 at the latest, rulemaking

was both feasible and practicable with regard to the above-

described statements, but no effort was made to adopt them as

rules. Thus, the Department failed timely to commence

rulemaking with regard to these statements in accordance with

Section 120.54(1)(a), Florida Statutes.17

CONCLUSIONS OF LAW

21. The Division of Administrative Hearings has personal

and subject matter jurisdiction in this proceeding pursuant to

Sections 120.56, 120.569, and 120.57(1), Florida Statutes.

22. The Department contends that Taylor lacks standing to

maintain this proceeding because, according to the Department,

he has failed to prove that he is “substantially affected” by

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the challenged agency statements. See Section 120.56(4)(a),

Florida Statutes (“Any person substantially affected by an

agency statement may seek an administrative determination that

the statement violates s. 120.54(1)(a).”). In particular, the

Department argues that Taylor has failed to demonstrate, first,

a “causal connection” between his alleged injury and the DF 416

Inquiry Letters that were sent to his clients in November 2001;

and, second, that he “factually qualifies” to be a PR by making

a “showing” that he would operate and control a lender’s

business.

23. When standing is resisted, the burden is on the rule

challenger to demonstrate his right to proceed. See Department

of Health and Rehabilitative Services v. Alice P., 367 So. 2d

1045, 1052 (Fla. 1st DCA 1979). As the Department correctly

maintains, Taylor must show, one, that the alleged rules-by-

definition cause him a real and immediate injury-in-fact; and,

two, that the interest invaded is arguably within the zone of

interests to be protected or regulated. E.g. Lanoue v. Florida

Department of Law Enforcement, 751 So. 2d 94, 96 (Fla. 1st DCA

1999).

24. To satisfy the injury-in-fact element, “the injury

must not be based on pure speculation or conjecture.” Ward v.

Board of Trustees of the Internal Improvement Trust Fund, 651

So. 2d 1236, 1237 (Fla. 4th DCA 1995). On the zone of interests

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element, the test is met when a party shows that a statute or

rule "encroaches upon an interest protected by a statute or the

constitution." Id. at 1238. "In the context of a rule

challenge, the protected zone of interest need not be found in

the enabling statute of the challenged rule itself[,]" but may

arise from the operation of other statutes. Id.

25. Here, a painstaking analysis of standing is not needed

because the challenged statements regulate Taylor’s business——if

not directly then at least through collateral effect——which is a

sufficient basis for concluding that he is substantially

affected by them. See, e.g., Florida Board of Medicine v.

Florida Academy of Cosmetic Surgery, 808 So. 2d 243, 251 (Fla.

1st DCA 2002).

26. Further, the Department’s contention that Taylor has

failed to prove an injury is unpersuasive. First, Taylor did

establish a causal link between the inquiry letters and the

termination of his relationships with several clients; in fact,

the former led directly to the latter. Second, and more

important, Taylor is “injured,” for purposes of standing, simply

by virtue of the fact that the challenged statements are a

barrier to his business plan of serving as PR to more than one

lender.18

27. The Department’s argument that, to establish his

standing under the “interests-zone” prong, Taylor must show that

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he is qualified “factually” to be a PR by proving that he is

operating and exercising control over a licensee’s business also

misses the mark. First, Taylor meets all of the educational and

testing requirements prescribed for PRs; he is, in fact, serving

as PR to Gulf Coast Mortgage Solutions (and has served two other

lenders in that same capacity) without objection from the

Department, which is fully aware of his service. Second,

whether the Department would be justified in disapproving of

Taylor’s serving as PR to another lender while continuing to

serve as Gulf Coast Mortgage Solutions’ PR——which would be a

pertinent question in a proceeding under Sections 120.569 and

120.57 to determine Taylor’s substantial interests——is

irrelevant in this Section 120.56(4) case. For present standing

purposes, it is enough that Taylor has a business plan, which is

not merely a pipe dream but an immediately realizable goal (as

shown by his success in lining up clients), to serve multiple

lenders as a PR, and that the challenged statements exert a

regulatory effect on that planned business.

28. For the above reasons, Taylor has met his burden to

demonstrate standing.

29. Turning to the merits, the burden of proof is on the

party seeking to prove the affirmative of an issue unless a

statute provides otherwise. Florida Department of

Transportation v. J.W.C. Company, Inc., 396 So. 2d 778, 786-87

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(Fla. 1st DCA 1981). In a proceeding under Section 120.56(4) to

determine a violation of Section 120.54(1)(a), Florida Statutes,

therefore, the burden is on the petitioner to establish by a

preponderance of evidence: (1) the substance of the agency

statement; (2) facts sufficient to show that the statement

constitutes a rule-by-definition; and (3) the agency’s failure

to adopt the statement as soon as feasible and practicable

according to the rulemaking procedures. See Section

120.56(4)(a), Florida Statutes. Because the petitioner is

entitled to the benefit of a rebuttable presumption that

rulemaking is feasible and practicable, see Section

120.54(1)(a), Florida Statutes, he makes a prima facie showing

on prong (3) merely by establishing that the challenged

statement is not a duly promulgated rule, which will typically,

if not always, be undisputed.

30. If the petitioner meets his burden, then the agency

must carry the burden of proving that rulemaking is infeasible

or impracticable as provided in Section 120.54(1)(a). See

Section 120.56(4)(b), Florida Statutes.19

31. Section 120.52(15), Florida Statutes, defines the term

“rule” to mean

each agency statement of general applicability that implements, interprets, or prescribes law or policy or describes the procedure or practice requirements of an agency and includes any form which imposes

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any requirement or solicits any information not specifically required by statute or by an existing rule.

The statutory definition excludes three classes of agency

statements from its operation, but none of these exclusions is

applicable here.

32. A statement is a rule if it has the effect of a rule

regardless whether the agency calls it a rule. In determining

whether a statement meets the statutory definition of a rule,

the important question is: What consequences does this

statement cause within its field of operation? As the Court of

Appeal, First District, explained, the

breadth of the definition in Section 120.52(1[5]) indicates that the legislature intended the term to cover a great variety of agency statements regardless of how the agency designates them. Any agency statement is a rule if it "purports in and of itself to create certain rights and adversely affect others," [State Department of Administration v.] Stevens, 344 So. 2d [290,] 296 [(Fla. 1st DCA 1977)], or serves "by (its) own effect to create rights, or to require compliance, or otherwise to have the direct and consistent effect of law." McDonald v. Dep't of Banking & Fin., 346 So. 2d 569, 581 (Fla. 1st DCA 1977).

State Department of Administration v. Harvey, 356 So. 2d 323,

325 (Fla. 1st DCA 1977); see also Amos v. Department of Health

and Rehabilitative Services, 444 So. 2d 43, 46 (Fla. 1st DCA

1983). Because the focus is on effect rather than form, a

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statement need not be in writing to be a rule-by-definition.

See Department of Highway Safety and Motor Vehicles v. Schluter,

705 So. 2d 81, 84 (Fla. 1st DCA 1997).

33. Given the circumstances of this case, it is

instructive that the definition of “rule” expressly includes

“any form which imposes any requirement or solicits any

information not specifically required by statute or by an

existing rule.” In pausing to consider this provision, it will

be seen that the definition does not say “specifically

authorized” but “specifically required.” Thus, generally

applicable forms are not exempt from rulemaking merely because

they request information that the agency is authorized to

collect; such forms are outside the definition of “rule” only

when a statute or existing rule requires the agency to obtain

(or affected parties to provide) the specific information

solicited.20

34. Also of importance here is that the definition of the

term “rule” specifically includes statements of general

applicability that implement or interpret law. An agency’s

interpretation of a statute that gives the statute a meaning not

readily apparent from its literal reading and purports to create

rights, to require compliance, or otherwise to have the direct

and consistent effect of law, is a rule. See Beverly

Enterprises-Florida, Inc. v. Department of Health and

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Rehabilitative Services, 573 So. 2d 19, 22 (Fla. 1st DCA 1990);

St. Francis Hospital, Inc. v. Department of Health and

Rehabilitative Services, 553 So. 2d 1351, 1354 (Fla. 1st DCA

1989).

35. The Department’s DF 416 Inquiry Letter and its

Compliance Inquiry Letter are forms that solicit detailed

information concerning how a PRD will operate and exercise

control over a lender’s business. This is not information that

the Department is specifically required, either by statute or

existing rule, to collect. The only information that the

statutes specifically require a lender to provide regarding a

PRD is the person’s name, address, and proof that he or she has

completed the prescribed educational and testing requirements.

See Section 494.0061(1)(f), (8), (10); and Section

494.0062(1)(f), (12), (13).21 (In addition, a PR must, by rule,

notify the Department of his termination as PR within 30 days of

such termination. See Rule 3D-40.242(5), Florida Administrative

Code.) Thus, the DF 416 Inquiry Letter and the Compliance

Inquiry Letter are rules-by-definition.

36. The Department’s interpretation of the PR statutes, as

described in paragraph 17, supra, gives the statutes a meaning

that is not readily apparent on the face thereof and has the

direct and consistent effect of law. Thus, it is a rule-by-

definition.

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37. Finally, the Department’s policy and implementing

practices, as described in paragraph 18, supra, operate to carry

out the Department’s statutory interpretation. Having the

direct and consistent effect of law, they, too, are rules-by-

definition.

38. Consideration has been given to the Department’s

argument that the challenged statements are not “generally

applicable” because they do not affect an entire “statutory

class” of regulated entities (all licensees) but only a subset

thereof (those who designate an XPR as PR). In support of this

proposition, the Department relies upon Florida League of

Cities, Inc. v. Administration Commission, 586 So. 2d 397 (Fla.

1st DCA 1991), and Department of Highway Safety and Motor

Vehicles v. Schluter, 705 So. 2d 81 (Fla. 1st DCA 1997). This

argument is rejected for reasons that follow.

39. In Florida League, the court did indeed hold that a

sanctions policy under which economic penalties could be imposed

against a municipality that failed timely to submit its growth

management plan to the state for review was not a generally

applicable “rule” because, while all municipalities were

potentially subject to the sanctions policy, the policy would be

applied only to those whose plans were late. Id. at 406. This

decision, however, is the product of a different era of

administrative law, a time when courts adhered to the view that

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“[r]ulemaking cannot be forced upon an agency[.]” Id. Much

legislative water has flowed under the APA bridge since Florida

League was decided in 1991. As the first district observed

seven years later, in Schluter,

the 1991 legislature expressed, in no uncertain terms, its selection of rulemaking over adjudication as the primary means of policy development. By enacting section 120.535, Florida Statutes, [the pertinent language of which was subsequently transferred to present-day Section 130.54(1)(a)], the legislature clearly disapproved of the judiciary’s interpretation of the [Administrative Procedure] Act, which had indicated that rulemaking was primarily a matter of agency discretion. The statute required each agency statement that met the definition of rule to be adopted as soon as feasible and practicable. [Footnote omitted.] As a result of these recent legislative amendments, it clearly appears that it was the legislature’s intention to remove from agencies the discretion whether or not to adopt rules.

Schluter, 705 So. 2d at 86. While the narrow vision of “general

applicability” expressed in Florida League is explicable in

light of the deference that courts were then giving agencies in

the area of rulemaking, such reasoning is out-of-step with

current law.

40. That Florida League is no longer good law on this

particular point is shown by Schluter. There, the court

reviewed six policies——each of which applied only to law

enforcement officers under investigation——to determine if some

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or all were rules-by-definition. It concluded that three were

and three were not. The three that were deemed not rules-by-

definition were distinguished from the others on the ground that

they applied only “in certain circumstances,” at a supervisor’s

discretion, and hence were not generally applicable. Schluter,

705 So. 2d at 82. The Department here does not contend,

however, that the challenged statements apply only in certain

circumstances at the discretion of a supervisor, and the facts

are otherwise; thus, this aspect of Schluter is inapposite.

41. The relevant decision in Schluter is that which found

the three generally applicable policies to be rules-by-

definition. Significantly, the three unlawful policies affected

but a subset of all law enforcement officers (i.e. those under

investigation); yet, they were determined to be generally

applicable because each policy operated consistently upon all

members of this subset regardless of the particular

circumstances surrounding any individual officer.22 Id. at 83.

Similarly, the challenged policies in this case operate

consistently upon all lenders in the affected subset (namely,

applicants and licensees that designate an XPR as their PR)

regardless of the particular circumstances surrounding any

individual lender.

42. At bottom, the key to “general applicability” is not

that a policy applies always to all persons who might

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potentially be affected by it, but rather that the policy

applies always to all similarly situated persons upon whom, by

its terms, it intends to operate. (If by its terms a statement

is intended to apply to one person only, or to some but not all

similarly situated persons, depending on the particular

circumstances, then it should ordinarily be regarded as a case-

specific adjudication rather than a policy of general

applicability. Naturally, as a policy’s field of operation

expands and become more inclusive, the likelihood that it will

be found generally applicable increases.)

43. The challenged statements here meet the test of

general applicability.

44. As announced in the Findings of Fact above, the

Department failed to prove that rulemaking was either infeasible

or impracticable. See Section 120.56(4)(b), Florida Statutes.

Further, in any event, Taylor carried the ultimate burden of

persuasion, establishing by the greater weight of the evidence

that the Department failed to adopt the challenged statements as

soon as feasible and practicable.

45. Accordingly, the Department has violated Section

120.54(1)(a), Florida Statutes, in connection with the agency

statements that have been determined herein to constitute rules-

by-definition.

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46. Section 120.595(4)(a), Florida Statutes, provides that

“[u]pon entry of a final order that all or part of an agency

statement violates s. 120.54(1)(a), the administrative law judge

shall award reasonable costs and reasonable attorneys' fees to

the petitioner, unless the agency demonstrates that the

statement is required by the Federal Government to implement or

retain a delegated or approved program or to meet a condition to

receipt of federal funds."

47. The Department has not proved the applicability of an

exception to the mandate that attorneys’ fees and costs be

awarded to the successful petitioner in a Section 120.56(4)

proceeding. Therefore, it is hereby determined that Taylor is

entitled to recover a reasonable sum for the attorneys’ fees and

costs it has incurred in the prosecution of this action. The

amount of the award shall be determined by separate order.

CONCLUSION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is ORDERED that the challenged statements of the

Department, as described in paragraphs 17 through 19, supra, are

rules-by-definition that have not been adopted under, and

therefore violate, Section 120.54, Florida Statutes.

Jurisdiction is retained to conduct further proceedings as

necessary to award attorneys' fees and costs pursuant to

Section 120.595(4)(a), Florida Statutes.

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DONE AND ORDERED this 6th day of August, 2002, in

Tallahassee, Leon County, Florida.

___________________________________ JOHN G. VAN LANINGHAM 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 6th day of August, 2002.

ENDNOTES 1/ The Petition also sought a determination that the alleged statements were invalid exercises of delegated legislative authority for reasons forth in Section 120.52(8), Florida Statutes. Following briefing by the parties, however, the Administrative Law Judge narrowed the issues for final hearing, ruling that:

It is not necessary or permissible in a Section 120.56(4) proceeding that has not been consolidated with a proceeding pursuant to 120.57(1)(e) to determine whether a rule-by-definition is “substantively” invalid for reasons set forth 120.52(8)(b)–(g), Florida Statutes.

Order on Pending Motions, June 25, 2002. 2/ The depositions of McDougald and Harder were introduced subject to all objections made in the respective records. Those objections are hereby overruled. (While the trier reviewed and considered the depositions, none was determinative in resolving any dispute of material fact. The outcome of this case would have been exactly the same in their absence.)

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3/ Additionally, on June 21, 2002, the Department filed a request for official notice of Parts I and III of Chapter 494, Florida Statutes. On June 25, 2002, Taylor filed a motion for official recognition of Chapter 494, Florida Statutes; Chapter 2001-228, Laws of Florida; certain rules proposed by the Department as published in Volume 27, Number 35 of the Florida Administrative Weekly, August 31, 2001; certain revised proposed rules as published in Volume 27, Number 40 of the Florida Administrative Weekly, October 5, 2001; and present Chapter 3D-40, Florida Administrative Code. At the final hearing both the Department’s request for official notice and Petitioner’s motion for official recognition were granted. 4/ Unless otherwise indicated, all statutory citations are to the 2001 Florida Statutes. 5/ Licensees who made their designations before the new law’s October 1, 2001, effective date were not required to prove that their respective PRDs had completed 24 hours of classroom instruction and passed a prescribed test. In his Petition, Taylor labeled these licensees “grand-fathered companies” and alleged that the Department “apparently” had not applied the alleged rules-by-definition to them——at least not until after Taylor had complained, in December 2001, about what he perceived as disparate treatment. Based on the evidence presented at final hearing, however, the undersigned has concluded that the term “grand-fathered company” draws a distinction that need not be made in disposing of this case; hence, that particular term will be avoided. 6/ Notwithstanding this change in the proposed rules, the Department proceeded internally to create a “deficiency code”——namely DF 410, which meant “principal representative can only be assigned to one lender at a time”——for use in its automated license processing system. Deficiency codes are used by the Department’s analysts as a means of attaching a computerized “red flag” to license application files that are deemed incomplete because of errors or omissions, as well as to those raising questions for which additional information is needed. See generally Section 120.60, Florida Statutes. When the analyst inputs a deficiency code, the Department’s computer system automatically generates an appropriate “deficiency letter” for delivery to the applicant, the purpose of which is to apprise the applicant of the problem and provide an opportunity to correct such problem. An application that has

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been tagged with a deficiency code is ordinarily considered incomplete for purposes of Section 120.60, Florida Statutes. The evidence is conflicting as to whether the Department actually used DF 410, which code, though obsolete even before it was created, still exists in the Department’s computer system. Whether or not the Department used DF 410 makes no material difference, however, because a successor deficiency code (DF 416) was finally created about two months after the Department revised its proposed rules to delete the “one lender to a PR” mandate, see infra at paragraph 11, and DF 416——which is very similar to DF 410——is an active code that has been, and will continue to be, used by the Department. 7/ Like its predecessors, the Designation, as revised and adopted, does not require the licensee or applicant (or the PRD) to explain in detail how the PRD will operate and exercise control over the designating lender’s business. 8/ The four applicants were European-American Mortgage Corp. (“European-American”); Mountain Pacific Mortgage Company; Mortgage Bankers Service Corp.; and Firstrust Mortgage, Inc. At or around the time European-American applied, this lender became the subject of a Departmental investigation as the result of a complaint unrelated to Taylor or to any issues associated with the designation of a principal representative. During this investigation, the Department obtained a letter which described Taylor’s proposed business relationship with European-American. At hearing, the Department claimed that this letter fueled its suspicions that Taylor either could not or would not carry out the duties of a PR for that company. The Department’s concern about Taylor’s relationship with European-American apparently was a factor in shaping the Department’s subsequent actions. The fact remains (as will be seen), however, that, in dealing with Taylor’s situation, the Department developed policies of general applicability. Further, it is clear that the Department’s dim view of dual designees was (and is) the product of its interpretation of the relevant statutes——not a response to factual circumstances unique to any particular lender or PRD.

9/ The Department’s quotation of these disciplinary and penalty provisions in a letter requesting additional information from an applicant is unusual, and Taylor has complained about it, calling the Department’s motives into question. Based on the evidence presented, it is reasonable to infer that one purpose of quoting the statutory penalty language is to “persuade” the applicant to name another PRD——someone who is not

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an XPR. While this might be considered a heavy-handed tactic, an agency’s quoting of a statute in a letter to an applicant (or licensee) does not, at least without more, violate Section 120.54(1)(a), Florida Statutes.

10/ The letter to European-American uniquely included the following sentences here: “Please note that we are in receipt of a letter from Mr. Taylor addressed to you, indicating that for a fee. [sic] Mr. Taylor will temporarily let your company use his license in an attempt to comply with the principal representative requirement. Chapter 494, Florida Statutes requires more than perfunctory compliance.” The Department offered some testimony at hearing, and has argued, that the purpose of the four letters of November 2001 was to determine whether Taylor’s proposed PR relationship with European-American was the model for all of his PR relationships and, if so, whether this arrangement would pass statutory muster. It is no doubt true that the letters were motivated, at least in part, by such a desire. The greater weight of the evidence shows (and it is hereby found), however, that the letters would have been sent even if the European-American situation had not arisen——and, more important, that the same form letter has been, and will be, sent to any applicant who has named, or later names, an XPR as PR. 11/ Unlike other so-called “deficiency letters,” the DF 416 Inquiry Letter is not automatically computer generated upon entry of the deficiency code but, rather, exists as a document in a word processing program; thus, it must be manually prepared for each use. 12 / The evidence is in conflict concerning whether an application tagged with a DF 416 is considered complete or incomplete for purposes of Section 120.60, Florida Statutes. In the final analysis, however, this turns out to be an interesting non-issue. As will be further discussed in the text infra, the DF 416 Inquiry Letter clearly solicits information not specifically required by statute or by an existing rule and thus falls within the definition of the term “rule” whether or not the DF 416 tag makes an application incomplete.

On a related point, the Department says that no application has been or could be denied on the basis of a DF 416 “red flag”——which means that responding to the DF 416 Inquiry Letter is purely voluntary——although it admits that no applicant has been informed of this. (Additionally, no application has been

34

approved with an outstanding DF 416, which also weakens the Department’s attempt to play down the significance of the DF 416 Inquiry Letter.) These facts, however, prove nothing of moment. For one thing, the first four recipients of a DF 416 Inquiry Letter (the applicants that had named Taylor as their PR) responded by designating other persons for the post; consequently, the Department did not need to deny their applications due to, or approve them in spite of, the DF 416. As for the three additional DF 416 Inquiry Letters that had been sent as of the final hearing, none of the recipients had yet responded, so the Department had not been required to approve or deny their applications. (Indeed, the Department was unable at hearing to articulate objective criteria for deciding whether the degree of control that a PRD would exercise is sufficient to satisfy the agency’s interpretation of the statutory description of the PR’s role. It appears, therefore, that the Department plans to decide what to do with the information it acquires in response to DF 416 Inquiry Letters on a case-by-case basis.)

In any event, even if the Department, as it claims it would, were to approve one or more of these pending applications despite an applicant’s non-response to the DF 416 Inquiry Letter or its submission of a response that the Department considered unsatisfactory, that would not change the fact that the DF 416 Inquiry Letter is a form which solicits information not specifically required by statute or by an existing rule——and thus is a rule-by-definition. 13/ Taylor is the PR of Gulf Coast Mortgage Solutions. At one time he was the PR of Surety Mortgage and at another time that of Winterwood Mortgage. He was not, however, a dual designee of any of these lenders. 14/ The Department draws attention to the fact that although there were some 55 licensees whose PRD was a dual designee, only approximately 25 Compliance Inquiry Letters were sent, the implication being that the form letter was not consistently used in the situation for which it was prepared. This argument is unconvincing because (a) all similarly situated licensees were sent the letter, and (b) the reason there were fewer letters than licensees was simply that in many situations one letter served notice on multiple lenders, the addressee being an officer or employee of each.

The Department makes a related argument concerning the relatively small number of licensees——only 55 out of a total

35

licensee population of approximately 2,450——and applicants (seven to date) affected by the policies about which Taylor complains. These numbers are so small, contends the Department, that the actions taken towards the affected parties cannot be considered generally applicable. As will be discussed in the Conclusions of Law below, however, general applicability is not measured by the size of the known affected class; rather, it is determined by consistency of use under categorical conditions. Thus, a policy that has been applied to seven persons will be generally applicable if by its terms it is intended to operate 100 percent of the time on all persons whose situation is categorically similar to that of the seven.

In addition, some rules are designed to discourage conduct

of which an agency disapproves or wants less of——by, for example, entangling such activity in regulatory “red tape”——or to deter misconduct, which is one purpose of administrative sanctions. Such rules can exert a powerful prophylactic (negative) effect; thus, the number of persons who comply with (or are punished under) such rules may be far less significant, in terms of measuring their impact, than the number who are dissuaded from engaging in the conduct that would require compliance or subject the actor to discipline. This is surely true with regard to disciplinary rules; the number of licensees punished thereunder, it is hoped, will be but a small percentage of the number deterred from engaging in sanctionable misconduct. It is probably true in the instant case as well. Because the challenged policies are of the “red tape” variety, it is reasonable to expect that, as awareness of the DF 416 Inquiry Letter and the Compliance Inquiry Letter increases in the regulated community, the number of dual designees will decrease, as applicants and licensees, having a lower cost alternative, act to avoid the burden of providing the Department with additional, detailed information.

15/ The reasonableness of the Department’s statutory interpretation is not at issue, and no opinion on that subject is expressed herein. 16/ The proviso in statement “c” that excludes “grand-fathered companies” is incorrect. 17/ The Department’s policies that require inquiry about dual designees——and the forms for doing so——are not “evolving” or “exploratory” but, in fact, had solidified by the close of year 2001. To the extent Mr. Saxon suggested otherwise, his

36

testimony was undercut by an admission that he did not know whether inquiry letters were being sent to all applicants whose PDR is an XPR (as, in fact, they have been) and, in any event, is overwhelmed by the greater weight of contrary evidence. Not overlooked, either, is Mr. Tedcastle’s opinion that the policies are “evolving.” He based this opinion on a prediction that inquiry about dual designees might not be necessary in the future. However, even a duly promulgated rule may be repealed; thus, the fact that a policy might someday be rescinded cannot be a basis for deeming such policy “evolving.” Mr. Tedcastle’s testimony in this regard was unpersuasive and, ultimately, is also against the greater weight of contrary evidence. What is evolving is the Department’s policy concerning what to do with the information it acquires in response to its inquiry letters. The trier has determined, however, that this matter, though related to the challenged policies, is not a barrier to promulgating rules concerning the Department’s decision to solicit information on dual designees. For one thing, the two matters——the solicitation of information, on the one hand, and the manner of acting upon such information, on the other——are logically distinct and separable; and, the latter need not be settled to firmly resolve the handling of the former. For another, it is conceivable that the Department will not be able to formulate rules regarding the treatment of such information but instead will find it necessary to take subsequent action based on individual circumstances. 18/ Note that the issue in this case is not whether the regulatory barrier erected by the Department is necessary, wise, or authorized by the statutes; it may be some, all, or none of these, but it is a barrier nonetheless. 19/ If the agency proves that it has commenced rulemaking and is proceeding therewith expeditiously in good faith, then the presumption of feasibility is rebutted. See Section 120.54(1)(a)1.c., Florida Statutes. In that event, if the petitioner were relying solely on the presumption, then the agency would carry its burden with such proof, defeating the petition; if, however, there were other evidence that the agency had failed to timely commence rulemaking (“as soon as feasible and practicable”), then the disputed issue would need to be decided, as a matter of fact, as if the presumption did not exist. Although the statute is a bit unclear as to which party, in such situation, has the burden proof regarding the timeliness of the agency’s rulemaking efforts, it has been held that the

37

petitioner, as the party seeking relief, has the ultimate burden of persuasion on this point. See Broward County, etc. v. Department of Agriculture and Consumer Services, Fla. DOAH Case No. 00-4520RX, at 59-64 & n. 27, n. 28 (F.O. July 31, 2001), aff’d per curiam, Florida Department of Agriculture and Consumer Services v. Broward County, 816 So. 2d 609 (Fla. 1st DCA 2002).

It is not the case that an agency can avoid liability

altogether under Section 120.56(4) simply by commencing to adopt the challenged statement as a rule, no matter when the rulemaking process begins. That is, current rulemaking is not a complete defense to a proceeding under Section 120.56(4). Id. (Agency’s rulemaking efforts, which were ongoing at time of final hearing, were insufficient to avoid liability under Section 120.56(4)). The point is raised here because the Department filed a post-hearing Motion to Dismiss, to which was attached a Notice of Proposed Rulemaking respecting newly-proposed rules that purportedly address the statements Taylor has challenged, wherein current (meaning, in this case, post-hearing) rulemaking was put forward as an absolute defense. The motion, being untimely, based on matters outside the four corners of the petition, and legally insufficient on the merits, was promptly denied.

(No findings of fact have been made in this Final Order concerning the Department’s putative rulemaking efforts because, the Department having never moved to reopen the record to offer proof of its post-hearing rulemaking activities, there is no evidence in the evidentiary record upon which to make such findings.)

20/ If an agency adopts or seeks to adopt as a rule a form which solicits information that the agency is not specifically authorized to collect, then the form should be invalidated for that reason, if challenged. See, e.g., Southwest Florida Water Management District v. Save the Manatee Club, Inc., 773 So. 2d 594, 599 (Fla. 1st DCA 2000). 21/ The Department is authorized to “require each applicant . . . to provide any information reasonably necessary to make a determination of the applicant’s eligibility for licensure.” See Sections 494.0061(1), Florida Statutes. This grant of authority arguably empowers the Department to ask for detailed information concerning how a PRD will operate and exercise control over an applicant’s business (though the question need not be decided here). It does not, however, specifically

38

require the Department to request, or the applicant to submit, such information. 22/ While the court wrote that the three rules-by-definition applied “uniformly to all law enforcement officers . . . without exception,” id., what it plainly meant by this observation was that all officers were potentially subject to the policies; none of the policies, it was clear, applied directly to officers who were not under investigation. In the same sense, the policies under consideration here apply uniformly to all applicants and licensees without exception, because all lenders are potentially subject to them; the policies will be applied directly to any lender who designates an XPR as PR. COPIES FURNISHED: H. Richard Bisbee, Esquire Law Office of H. Richard Bisbee 124 Salem Court, Suite A Tallahassee, Florida 32301-2810 Cynthia K. Maynard, Esquire James H. Harris, Esquire Department of Banking and Finance Fletcher Building, Suite 526 101 East Gaines Street Tallahassee, Florida 32399-0350 Honorable Robert F. Milligan Office of the Comptroller Department of Banking and Finance The Capitol, Plaza Level 09 Tallahassee, Florida 32399-0350 Robert Beitler, General Counsel Department of Banking and Finance Fletcher Building, Suite 526 101 East Gaines Street Tallahassee, Florida 32399-0350

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Carroll Webb Executive Director and General Counsel Joint Administrative Procedures Committee Holland Building, Room 120 Tallahassee, Florida 32399-1300

NOTICE OF RIGHT TO JUDICIAL REVIEW

A party who is adversely affected by this Final Order is entitled to judicial review pursuant to Section 120.68, Florida Statutes. Review proceedings are governed by the Florida Rules of Appellate Procedure. Such proceedings are commenced by filing the original notice of appeal with the Clerk of the Division of Administrative Hearings and a copy, accompanied by filing fees prescribed by law, with the District Court of Appeal, First District, or with the District Court of Appeal in the Appellate District where the party resides. The notice of appeal must be filed within 30 days of rendition of the order to be reviewed.