Oral Argument Preview: Does the Ohio Consumer Sales Practices Act Cover Mortgage Servicers? State of Ohio ex. Rel. Michael DeWine, Attorney General of Ohio, et al. v. GMAC Mortgage, LLC, et al.

Final update: On March 15, 2016, this case was dismissed as improvidently accepted.

Further Update: On May 14, 2012 GMAC Mortgage, LLC filed for bankruptcy in the Southern District of New York.  On June 20, 2012, the Supreme Court of Ohio granted an automatic stay of further proceedings in this case, pending resolution of the bankruptcy case.

Update: Two days before the oral argument in this case, the Attorney General filed a notice informing the Court of a potential settlement. According to the notice, several of the large mortgage servicing companies proposed settlement offers to the attorneys general of all 50 States. Under the terms of the proposed settlement, the state attorneys general would agree to dismiss certain civil claims against the servicers, including the claims raised in this case.

The settlement has now been approved by a federal district court in the District of Columbia. On April 25, The Ohio Attorney General filed a motion in this case, informing the Court that he has settled and dismissed his pending claims against GMAC. But he is asking the Supreme Court of Ohio not to dismiss the case, and to answer the certified questions sent from federal court, because a group of private homeowners who are still parties to this case have the same issues against GMAC as he had raised.  He has asked the Court to change his status from “Petitioner” to “Amicus Curiae” in the case, in support of the homeowners, and to re-caption the case as Lois Blank, et al. v. GMAC Mortgage, LLC, et al.

Oral Argument Preview

On February 8, the Supreme Court of Ohio will hear oral argument in the case of State of Ohio ex rel. Michael DeWine, Attorney General of Ohio, et al. v. GMAC Mortgage, LLC, et al. # 2011- 0890. The issue in this case is does the Ohio Consumer Sales Practices Act (CSPA) covers mortgage servicers, in this case GMAC Mortgage. This is an open question under Ohio law. The Court accepted this case on certification from the federal district court in the northern district of Ohio, and has agreed to answer the following questions:

1. “Does the servicing of a borrower’s residential mortgage loan constitute a`consumer transaction’ as defined in the Ohio Consumer Sales Practices Act, R.C. § 1345.01(A)?”

2. “Does the prosecution of a foreclosure action by a mortgage servicer constitute a`consumer transaction’ as defined in the Ohio Consumer Sales Practices Act, R.C. §1345.01(A)?”

3. “Is an entity that services a residential mortgage loan, and prosecutes a foreclosureaction, a supplier…engaged in the business of effecting or soliciting consumertransactions’ as defined in the Ohio Consumer Sales Practices Act, R.C. § 1345.01(C)?”

The Court has also accepted certification in a related case, Anderson v. Barclay’s Capital Real Estate, 2011-0908, which has been stayed pending the outcome of this one.

Here’s the background of the GMAC case.

GMAC services residential mortgage loans in Ohio and other states.  By “servicing” mortgages, this means that GMAC collects payments from consumer borrowers, communicates with them about insurance, and negotiates fees with the borrowers.  It also means that GMAC, on behalf of mortgage lenders, initiates foreclosures against consumer borrowers who default on their mortgages, and sells foreclosed properties.  GMAC has prepared affidavits and brought foreclosure actions in courts against consumer borrowers all over the country.

When a consumer borrower defaults on a mortgage, it is a morgage servicer that initiates the court proceedings and provides the evidence, primarily through affidavits and other documents, that the borrower is in fact in default.

Ohio Attorney General Mike DeWine brought suit against GMAC alleging that it prosecuted foreclosure actions in Ohio with false and improper affidavits.  Jeffrey Stephan worked for GMAC as a “limited signing officer”, and prepared affidavits for many of these court proceedings.  Stephan was legally obligated to sign the affidavits “on the basis of his personal knowledge” in front of a registered notary.

In 2009 and 2010, in depositions and court cases in Florida and Maine, Stephan testified that he signed as many as 10,000 affidavits a month, without any personal knowledge of the particular mortgage and even without knowing of who the mortgage holder was in many cases.  He also testified that he signed many of these affidavits outside the presence of a notary.

In light of this testimony, and because Stephen had executed similar affidavits in a number of Ohio courts, Attorney General DeWine had reasonable cause to believe the same fraudulent practices were occuring in Ohio, and brought suit against GMAC under the CSPA. The suit was originally brought in state court, but as has been common practice, GMAC removed the case to federal court.

Pertinent sections of the CSPA, 1345.02, 1345.03, and 1345.031, essentially hold that suppliers violate the Act when they commit unfair, deceptive, and unconscionable acts against Ohio consumers.

The Attorney General sets forth three propositions of law in this appeal:

1. The servicing of a residential mortgage loan is a “consumer transaction” under theOhioConsumer Sales Practices Act .

2. A company that offers mortgage servicing to homeowners is a “supplier” under the Ohio Consumer Sales Practices Act.

3. The prosecution of a foreclosure action is an “act or practice in connection with aconsumer transaction ” under the Ohio Consumer Sales Practices Act .

In order to violate the CSPA, a consumer transaction must be involved.  A “consumer transaction” is defined as a sale or transfer of service to an individual for personal or household use.

Is servicing a residential mortgage a consumer transaction?

The State argues mortgage servicing is clearly a service (work done for others), because mortgage servicers collect payments, communicate with homeowners on a variety of matters, work with them on loan modifications, and initiate foreclosure proceedings.  The state also points to (1) a Federal Trade Commission report classifying mortgage servicers as working for consumers and (2) GMAC’s own website, which calls its clients “customers” as evidence of its consumer transactions.  Finally, while acknowledging that the CSPA does not apply to a pure real estate transaction, the state argues that servicing mortgages is not a pure real estate transaction, and that none of the statutory exemptions under the CSPA apply to mortgage servicing.

GMAC argues that the servicing of a residential mortgage is not a consumer transaction as that term is defined under the CSPA. The Act is designed to protected consumers from unfair sales practices.  The sale or transfer of mortgage servicing rights is not “a sale or other transfer of a service to an individual primarily for consumer purposes.” It is a commercial agreement between the owner and the loan servicer, for which the servicer is compensated by the owner for servicing the loans on the owner’s behalf. Further, GMAC argues that real estate actions are specifically excluded from the CSPA as non-consumer transactions and therefore, GMAC’s actions are exempt because mortgage servicing is part of the underlying real estate transaction.

2. Is  a company that offers mortgage servicing  to consumers a supplier under the CSPA?

The CSPA defines “supplier” as a person engaged in the business of effecting or soliciting consumer transactions, whether or not the person deals directly with the consumer.

The state argues that this language clearly includes mortgage servicers. Further, the state contends that because the CSPA specifically exempted certain real estate participants and mortgage participants but did not exempt mortgage servicers, the legislative intent was to include them as part of the Act.

GMAC takes a much narrower approach to who is a supplier under the CSPA.  It argues that in order to effect or solicit a consumer transaction, a supplier must be far more directly involved in the consumer transaction than the incidental contact mortgage servicers have.  It also looks at the legislative intent differently from Attorney General DeWine – because other states include those who enforce consumer transactions (like mortgage servicers) in their definition of a supplier in consumer protection acts and because Ohio chose not to do so, GMAC argues Ohio never intended to reach entities like mortgage servicers who interact with consumers in such an indirect fashion.

3. Is prosecuting a foreclosure action by a mortgage servicer a consumer transaction?

The state argues that because these prosecutions are “in connection with” a consumer transaction, and because it has already demonstrated GMAC deals in consumer transactions and is a “supplier,” it is liable under the CSPA for its unfair and deceptive practices.  Again reiterating evidence over the fraudulent and misleading affidavits filed by GMAC and the unconscionable practices of bringing foreclosure actions against Ohioans who often had no way of defending themselves, the State concludes that these foreclosure actions are clearly covered by the Act in connection with consumer transactions.

GMAC argues that the prosecution of a foreclosure action is clearly not a consumer transaction.  The CSPA defines consumer transactions as goods or services being sold or transferred to an individual for primarily personal or household use, GMAC argues that the filing of a lawsuit plainly does not satisfy the definition.  These proceedings are adversarial in nature and one side is surely not transferring anything to the other side.   Finally, GMAC rejects the Attorney General’s argument that prosecution can be “in connection with” a consumer transaction and says there is no statutory support for such a broad construction.

 Amicus Briefs

Ohio Legal Services Programs filed an amicus brief in support of the State’s first proposition of law, that mortgage servicing is a consumer transaction under the CSPA.  The brief describes how mortgage servicing works from the homeowner’s perspective. Mortgage servicers have direct and frequent contact with those whose loans they are servicing.  Homeowner borrowers are their customers. They fall under the CSPA even if they do not directly initiate a consumer transaction.   Because mortgage servicers were not specifically exempted under the CSPA, the legislature must have meant to include them. Given the current mortgage and foreclosure crisis in Ohio, the Court should construe the definition of a consumer transaction liberally to give homeowners a much needed remedy against the servicing industry.

 Barclay’s Capital (which is the defendant in a case being held for the answers to the certified questions in this case; see above) filed an amicus in support of GMAC’s position that mortgage servicers are not covered under the CSPA. Mortgage servicing is collateral to the actual real estate transaction and is not in itself a transaction covered by the Act. The legislature never intended to cover mortgage servicing under the CSPA. Further, Barclay contends that mortgage servicers do not perform any transactions with consumers to begin with –they work with mortgage lenders and noteholders, which the CSPA was not designed to protect.  Barclay likens mortgage servicers to escrow servicers and closing brokers, both of whom courts have held are not covered by the CSPA.  Finally, Barclay’s argues that GMAC is not a supplier under the CSPA because a supplier must be in the business of “effecting” consumer transactions and mortgage servicers merely enforce and do not effect transactions.

Student Contributor: Sarah Topy

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2 Responses to Oral Argument Preview: Does the Ohio Consumer Sales Practices Act Cover Mortgage Servicers? State of Ohio ex. Rel. Michael DeWine, Attorney General of Ohio, et al. v. GMAC Mortgage, LLC, et al.

  1. Pingback: Oral Argument Preview: Does the Ohio Consumer Sales Practices … | Krispy Hut

  2. James Clark says:

    I would like to add that there is several businesses in Ohio that dont sell to the consumer but are still liable under the CSPA, such as Mortgage brokers, etc. Under OHIO CSPA Law only banks, insurance companies & Utility Companies and their agents are exempt from the law, not outside brokers. When you have an effect on consumer transactions your liable under the CSPA as well as the FDCPA (Fair Debt Collection Practices Act) and many other acts as well as FTC, etc. Since mortgage servicers are dealing with an ongoing transaction of your Mortgage, they are liable.

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