Update: On May 14, 2013 the Supreme Court handed down a merit decision in this case. Read the analysis here.
On February 26, 2013, the Supreme Court heard oral argument in the case of Sondra Anderson v. Barclays Capital Real Estate Inc., d.b.a. Home EqServicing, 2011-0908. The issue is whether mortgage servicers are covered under the Ohio Consumer Sales Practices Act, R.C. 1345.01. (CSPA.) This case comes to the Supreme Court by certified question from the Federal District Court for the Northern District of Ohio. The questions are whether the servicing of a borrower’s residential loan constitutes a consumer transaction and whether the entities servicing such loans are suppliers for the purposes of the Ohio CSPA.
At some point after Sondra Anderson financed the purchase of her home through a note and mortgage, Barclays Capital Real Estate, doing business as HomEq, began acting as the servicer of her loan. Anderson raised allegations of misconduct against HomEq, including a failure to apply her payments in the manner required by her note and mortgage, failure to account for some of her payments, and failure to accurately respond to repeated inquiries about her mortgage loan. The federal judge in the case concluded that there was no controlling precedent on whether the Ohio Consumer Sales Practices Act applies to stand-alone “mortgage servicers” such as HomEq and certified the questions to the Supreme Court of Ohio to resolve the issue. Read the oral argument preview of this case here.
Key Statutory Definitions Under the CSPA
(A) “Consumer transaction” means a sale, lease, assignment, award by chance, 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.
In 2007 the statute was amended to add the following to the definition of a consumer transaction:
[t]ransactions in connection with residential mortgages between loan officers, mortgage brokers, or nonbank mortgage lenders and their customers. (note—these are only non-regulated lenders).
(C) “Supplier” means 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.
Mortgage servicers are not covered by the CSPA because under the plain language of the statute, they are not suppliers, nor are they engaged in consumer transactions. Mortgage servicing is a service, but to the note holders, not to homeowners. Mortgage servicers are not in the business of selling services to consumers. They sell their services to those that own the mortgages—the note holders—pursuant to commercial contracts with them. Their job is to see to it that the note is completely and timely repaid. They are not suppliers because a supplier is in the business of effecting, meaning bringing about, a consumer transaction. Mortgage servicers don’t do that. Their services come into play after the fact—after the residential mortgage has already been effectuated and is in place. There is of course interaction between the servicer and the homeowner, but it is strictly for the benefit of the note holder.
When the CSPA was amended in 2007, because of problems perceived by the legislature, loan officers, non-bank mortgage lenders and mortgage brokers were added to the ambit of the statute, but mortgage servicers were not. While some states do cover real estate transactions in their consumer protection laws, in Ohio, the General Assembly chose not to do so. There is more than adequate protection for consumers at the federal level, particularly with the Real Estate Settlement Procedures Act (RESPRA). There is no reason for the Court to extend the state law protections beyond what the General Assembly has already done. Both certified questions should be answered in the negative.
Anderson shared time with the Ohio Attorney General’s office.
Anderson’s counsel argued these services got farmed out in the first place to avoid federal regulation. A mortgage servicer’s services run to the consumer as well as to the note holder, in a number of ways. And they are definitionally suppliers, because they are in the business of effecting (pointedly noting that the word “effectuate” is not in the statute), meaning putting into action, an entire set of consumer transactions each month. They are putting into effect the terms of the note and mortgage. The servicer owes a duty to the homeowner—in this case, Ms. Anderson– to see to it that her funds are properly applied to the note and mortgage. And when a servicer doesn’t do that, that servicer is violating the CSPA.
The assistant attorney general argued there was no reason for the Court to read federal law as squeezing out the state attorney general’s role in protecting consumers. There is no categorical exclusion of mortgage servicers under the CSPA, and the Court should not write one in. Each of the services detailed in the second amended complaint in this case are covered under the CSPA. Acts that benefit the note holder can also benefit the homeowner—it doesn’t need to be an either/or proposition. What a servicer does fits within the core definition of a supplier of a consumer transaction—effecting (i.e., bringing about) a transfer of services to the homeowner.
The certified questions should be answered in the affirmative.
What Was on Their Minds
For Whose Benefit Are these Services?
The homeowners, asked Justice O’Neill? And is the original contract between the homeowner and the bank a consumer transaction? Who pays the servicer? (Anderson’s counsel insisted it was the consumer, causing the Chief to comment that the consumer doesn’t care how much the servicer gets paid out of the monthly payment to the Bank or other mortgage holder.)
Could the homeowners be considered third party beneficiaries of the contract between the servicers and the note holders, asked Justice Lanzinger?
Did Anderson ever contract with the servicing company, asked Chief Justice O’Connor? Was getting her mortgage in any way contingent on using a particular servicer? Or a part of any of the terms of the original note and mortgage? Did the servicer ever solicit her business? Anderson’s lawyer answered no to all these questions.
Doesn’t mortgage servicing include an array of services, some of which might be included, and others not, asked Justice French? Must they all be lumped together?
Is this an either/or proposition, asked Justice Lanzinger—must the services be either for the benefit of the note holder or the consumer?
Effecting, Effectuating, Affecting
Isn’t a mortgage servicer a supplier because it is effecting a consumer transaction, asked Justice French? Then she switched to effectuating, and asked, if the servicer isn’t effectuating the transaction, who is?
Chief Justice O’Connor asked if the servicer was just facilitating the transaction after it had been completed between the borrower and the lender? If the servicer fit under the term “effecting”, what exactly was it effecting? (answer from Anderson’s counsel—the entire set of consumer transactions that happen every month).
How exactly does a servicer get covered under this statute, asked Justice O’Donnell, when this was just a transaction between the lender and the servicer and the individual homeowner had nothing to do with it?
Which Way Goeth the Nation?
Justice Lanzinger wanted to know whether other states have taken the position that these transactions are regulated by their consumer laws. Is this matter covered under RESPA or other federal law? Is federal law insufficient to protect Ohio consumers?
How it Looks from the Bleachers
To Professor Bettman
The Court heard a similar case just about a year ago, in which GMAC was the mortgage servicer, but because of a bankruptcy filing, that case has been stayed since June 20, 2012. I called that case for the servicer, and I’m going to do so again, although this could be a split decision. Chief Justice O’Connor was most antagonistic to the homeowner’s position. Justice O’Donnell seemed less so than he was in the earlier case, but I still think at least four justices, and maybe more will find it too big a statutory construction stretch to shoehorn mortgage servicers into the CSPA. This could be easily corrected, though, by another amendment specifically including mortgage servicers, if that is what the legislature wanted to do. And I confess I don’t know enough about this to know if the federal laws really help here.
Even though I am a softie for protecting plaintiffs, a kudo to counsel for HomeEq—she delivered pretty much a perfect oral argument—for those of you who teach, or want to help younger lawyers learn the art of advocacy, watch this one.
To Student Contributor Elizabeth Chesnut
While members of the court seemed to give push-back to each side, it seems likely after oral argument that Chief Justice O’Connor favors HomEq’s argument. She made it clear that the court’s role in the matter is limited to the certified question at hand and is not willing to consider questions that are properly before the federal court. I think it likely that the court will find for HomEq, finding that the mortgage servicing company is not subject to the Ohio Consumer Sales Practices Act.