What’s On Their Minds? 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.

And another further update: Because of the bankruptcy stay in this case, the Court allowed the case of Sondra Anderson v. Barclays Capital Real Estate Inc., d.b.a. Home
EqServicing,
2011-0908 to proceed. This case raised similar issues to the GMAC case. The Court heard oral argument in the HomeEq case February 27, 2013. Read the analysis of the HomeEq case here.

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.

What’s on Their Minds

On Feb 8 the Supreme Court of Ohio heard oral argument in State of Ohio ex rel. Michael DeWine, Attorney General of Ohio, et al. v. GMAC Mortgage, LLC, et al. # 2011-0890.

The issue in the case is whether mortgage servicers are covered under the Ohio Consumer Sales Practices Act so as to be held liable for civil penalties under the Act for engaging in unfair or deceptive practices in the litigation of foreclosure actions. The case got to the Supreme Court by certified questions from federal court. The certified questions are

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 foreclosure action, a supplier…engaged in the business of effecting or soliciting consumer transactions’ as defined in the Ohio Consumer Sales Practices Act, R.C. § 1345.01(C)?”

Read the oral argument preview of the case here.

The Attorney General’s office (AG in this post) argues that mortgage servicers (GMAC, in this case) are covered under the Act.  Over the term of a loan, from the first payment until the last, the homeowner interacts with the servicer. Servicers are involved with homeowners over account management, payment processing, legal notices, property tax assessments, customer disputes, loan modification requests, and late fees. The AG described the relationship as an “ongoing involuntary marriage with GMAC.” If the Court were to find in favor of the servicers, it will vitiate the Attorney General’s ability to police this industry. The AG tried to analogize to the debt collection line of cases in arguing servicers are covered under the Act.

Counsel for GMAC argued that all three certified questions can be answered in the negative by finding that there is no consumer transaction with respect to the servicing relationship.  That should be the end of this case. The CSPA regulates sales conduct. It was designed to cover transactions involving the transfer of a good or a service.  There was no such transfer in this case. The servicing relationship is a commercial agreement between the loan owner and the servicing agent, who acts on the owner’s behalf and in the owner’s interest. The CSPA is simply inapplicable.

It was heavy sledding right out of the box for the AG, with skepticism fired at him from all sides.

Where is the Benefit to the Homeowner in its Relationship with the Servicer?

None of the justices appeared the slightest bit persuaded by the AG’s attempt to argue the servicing relationship was a benefit to the homeowner.

Justice O’Donnell particularly bored relentlessly into the AG on how anything that occurs during the servicing could possibly be of benefit to anyone but the owner of the loan?  Surely it wasn’t just paying real estate taxes out of the monthly check for the homeowner, or making other required distributions from the monthly check? How is that a service to the homeowner rather than to the bank? Did it make a whit of difference to the homeowner where the check got sent?

Chief Justice O’Connor asked for whose benefit the assignment of servicing is, the bank or the homeowner? The AG insisted the benefit was to the homeowner. Justice O’Donnell went at it again, noting that not having to dirty itself with collection had to benefit the lender.

Justice Stratton asked, probably sarcastically, how the homeowner benefits when the servicer files a foreclosure action.  Even if that obviously isn’t a benefit does the AG still insist it is a service?

Justice Lanzinger suggested that the AG was trying to broaden the definition of a consumer transaction to anything in which services will affect the consumer.

Does the Consumer Have Any Choice Here?

Chief Justice O’Conner wanted to know what would happen if a homeowner told the bank it wanted to pay the bank directly and not use GMAC  (no choice; at closing borrower is told who the servicer is).

Why Treat the Servicer Differently From the Lender?

Justice Stratton persisted with a line of questions about why a bank which keeps loan servicing in-house should be exempt from the CSPA while a servicer doing exactly the same thing should not.  Shouldn’t the AG just go back to the legislature and get the statute amended to include servicers?

Justice McGee Brown also asked why a servicer which is simply stepping into the shoes of the bank shouldn’t have the same immunity as the bank

And Yet, We Surely Don’t Want to Countenance the Kind of Conduct Alleged in the Complaint in this Case.  Are there Other Remedies for this kind of Conduct?

Justice Stratton commented that clearly the AG was after the treble damages and attorney fees under the act. Were there remedies for false affidavits and robo-signing other than the CSPA?  (Counsel for GMAC supplied a number of possibilities) Could this be common law fraud, she asked, with the possibility of punitive damages and attorney fees?

Chief Justice O’Connor asked counsel for GMAC if he had examples of cases in which remedies were provided under some of the acts he suggested (he did not).

Justice Pfeifer asked about the responsibility of the lawyer who files a case.  Isn’t it that lawyer’s duty to ensure that all affidavits are correct? And shouldn’t judges be able to rely on lawyers’ representations to that effect?

Is This Really Analogous to Debt Collection?

Justice Lanzinger wanted to know this.  Counsel for GMAC drew a distinction—in those cases, which are covered under the act, the debt collectors buy the debt and become owners.  Here the services do not own the debt.

What Authority Does a Servicer Have?

Justice McGee Brown asked if GMAC had the authority to do a loan modification or a deed in lieu of foreclosure, or did it always have to go back to the bank? Was it just contracting to perform administrative services?

Chief Justice O’Conner asked whether servicers ever acted as advocates for the consumers with the bank?

Where is the Sale or Transfer here as Required under the Act?

Is it in the Prosecution of a Foreclosure Action? Or the servicing of the loan? Justice O’Donnell wanted to know bringing the questioning around to the specifics of the second certified question. (GMAC: no sale or transfer)

How it Looks from the Bleachers

This looks like a clear loss for the AG.  The language of the CSPA just doesn’t fit here, and no one seemed to be buying the AG’s arguments in the case. The Court is likely to answer all three certified questions in the negative.  Still, the Court is likely to signal its disapproval of the kind of behavior alleged in the federal cases, and suggest other possible remedies that could cover the actions if proven to be true. It may also suggest that the legislature consider amending the statute to include servicers specifically.

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