Saturday, June 1, 2013

FYI: Ohio Sup Ct Rules Mortgage Servicer Not Subject to Ohio's UDAP Statute

The Ohio Supreme Court recently held that the servicing of residential mortgage loans is not  a "consumer transaction" under Ohio's Consumer Sales Practices Act, and that a mortgage servicer is not a "supplier" subject to the statute.



Defendant residential mortgage loan servicer ("Servicer") was the loan servicer for plaintiff's residential mortgage loan and, as such, received and distributed the mortgage loan payments and other fees, penalties and assessments charged to plaintiff's mortgage loan account.  Among other things, Servicer purchased homeowner's insurance on behalf of customers who Servicer believed did not purchase insurance as required by their notes and mortgages, and made the decisions as to which customers received loan modifications or other loss mitigation assistance and which customers would not.  


Finding no controlling Ohio precedent in Ohio case law and determining that the interpretation of subsections 1345.01(A) and (C) of the Ohio Consumer Sales Practices Act ("OCSPA") may be determinative of the case pending before it, the U.S. District Court, Northern District of Ohio, certified two questions of state law for the Ohio Supreme Court to answer:  (1) whether the Act applies to the servicing of residential mortgage loans; and (2) whether a mortgage servicer is a "supplier" under the OCSPA. 


Reasoning in part that Servicer performed services for financial institutions, not for mortgage borrowers, the Ohio Supreme Court concluded that the OCSPA does not apply to the servicing of residential mortgage loans and that mortgage servicers are not "suppliers" under the OCSPA.


As you may recall, the OCSPA prohibits unfair or deceptive acts and unconscionable acts or practices by "suppliers" in "consumer transactions" before, during or after the transaction.  R.C. 1345.02(A) and 1345.03(A).  The OCSPA defines in pertinent part a "consumer transaction" as "a sale, lease, assignment . . . or other transfer of an item of goods, a service, a franchise, or an intangible, to an individual for purposes that are primarily personal, family, or household, or solicitation to supply any of these things."  R.C. 1345.01.(A).  The OCSPA, however, does not apply to real estate transactions, as such transactions are expressly excluded from the OCSPA's definition of "consumer transaction."  See Id.


In addition, the OCSPA defines a "supplier" as "a seller, lessor, assignor, franchisor, or other person engaged in the business of effecting or soliciting consumer transactions, whether or not the person deals directly with the consumer."  R.C. 1345.01(C).


In concluding that under a plain reading of the OCSPA, the servicing of a residential mortgage loan did not constitute a "consumer transaction" under subsection 1345.01(A),  the Ohio Supreme Court noted that such servicing was not a "sale, lease, assignment . . . or other transfer of a service to a consumer."  


Rather, as the Court pointed out, Servicer had a contractual agreement with the owner of the note and mortgage that did not involve the plaintiff borrower, even though Servicer may have had direct interaction with the plaintiff on behalf of the loan owner, such as when modifying the terms of the loan on behalf of the owner of the loan.  


Comparing Servicer's services to those of appraisers and title companies associated with so-called "pure" real estate transactions, the Ohio Supreme Court determined that the OCSPA did not apply to such "collateral services that are solely associated with the sale of real estate and are necessary to effectuate a 'pure' real estate transaction."  See U.S. Bank v. Amir, 8th Dist. No. 97438, 2012 Ohio 2772 ¶ 42-43 (holding that the Act did not apply to escrow services).


Moreover, the Ohio Supreme Court explained that the OCSPA did not apply to transactions between servicers and homeowners because there was no "transfer of an item of goods, a service, a franchise, or an intangible, to an individual"  to trigger application of the OCSPA.    Noting that  mortgage servicers provide services to financial institutions rather than "transfer" a service to borrowers, the Court refused to extend the OCSPA to apply to instances in which financial institutions contract with servicers to administer their loans and mortgages. 


To support its conclusion that transactions that are part of land transactions are excluded from the OCSPA, the Court turned to the Uniform Consumer Sales Practices Act, on which the OCSPA was modeled, and the commentary to which essentially states that because land transactions are regulated by specialized legislation, they are excluded from the Uniform Consumer Sales Practices Act.   


The Ohio Supreme Court also found notable the fact that the Ohio legislature omitted real property transactions and mortgage servicing from the OCSPA's coverage despite numerous opportunities to amend the OCSPA to extend its applicability to them. 


Thus, reasoning that Servicer's acceptance and application of mortgage payments and management of loans in default continue to be part of the original land transaction, the Court determined that such transactions are excluded from the OCSPA and thus do not "transfer a service" to a borrower or impose liability on Servicer under the OCSPA. 


Finally, rejecting the plaintiff borrower's argument that Servicer functioned as a collection agency and was thus a "supplier" under the OCSPA, the Ohio Supreme Court noted that the OCSPA's definition of "supplier" did not include a mortgage servicer and, further, that under the OCSPA, "'suppliers' are those that cause a consumer transaction to happen or that seek to enter into a consumer transaction," neither of which pertained to mortgage servicing. 


Accordingly, the Court answered the certified questions in the negative, concluding that, under the OCSPA, mortgage servicing is not a "consumer transaction" and a mortgage servicer is not a "supplier."




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874


Admitted to practice law in Illinois


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