On May 14, 2013, the Supreme Court handed down a merit decision in Anderson v. Barclay’s Capital Real Estate, Inc., 2013-Ohio-1933. By a vote of 5-2 (Justice French concurred in judgment only, but wrote nothing separately) the Court held that mortgage servicing is not covered under the Ohio Consumer Sales Practice Act. (CSPA). Chief Justice O’Connor wrote the majority decision. Justice O’Neill wrote the dissent for himself and Justice Pfeifer. The case was argued February 26, 2013. Read the oral argument preview of the case here and the analysis of the argument here.
The Certified Questions
The case came to the Court by way of certified question from the federal district court in Toledo.
These were the certified 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. Are entities that service residential mortgage loans “suppliers * * * engaged in the business of effecting or soliciting consumer transactions” within the meaning of the Ohio Consumer Sales Practices Act, R.C. § 1345.01(C)?
The majority answered both questions in the negative. The dissent would answer both in the affirmative. The case is one of statutory interpretation.
Mortgage servicing is a consumer transaction because the servicer provides a number of services to the borrowers, including accepting and applying payments and working with borrowers to obtain loan modifications.
Mortgage servicers perform their services for the lenders, not the borrowers, therefore, the transactions are commercial, not consumer transactions, and are not covered under the CSPA.
Some Basics about Ohio’s CSPA
The CSPA prohibits unfair, deceptive, and unconscionable acts and practices by suppliers in consumer transactions. Thus, the definitions of “consumer transactions” and “suppliers” are critical to the outcome of the case. Ohio’s CSPA does not apply to “pure” real estate transactions. The majority cited the Uniform Consumer Sales Practices Act, on which the Ohio act is modeled, for its commentary that land transactions are frequently excluded from such laws and the types of services provided by mortgage servicers don’t remove them from being part of land transactions just because they didn’t originate the loan.
First Key Majority Holding: The Servicing of a Borrowers’ Residential Mortgage Loan is not a Consumer Transaction.
R.C. 1345.01 (A) defines a consumer transaction as a sale, lease, assignment, award by chance, or other transfer of a service to a consumer. The majority found that mortgage servicing is none of those things. It is a contractual arrangement between the servicer and the financial institution that owns the note and mortgage. No such contract exists between the servicer and the borrower. Noting that pure real estate transactions are exempt from the CSPA, the majority found mortgage servicing to be a collateral service associated with pure real estate transactions. While a financial institution contracts with a mortgage servicer to service the loan, the servicer does not “transfer a service” to the borrower, which would be required to trigger the protections under the CSPA.
The majority noted that some states (like Kansas) chose to include real estate transactions in their consumer sales practices act, but Ohio did not. And the Court noted that the General Assembly has amended the CSPA on a number of occasions to include specific mortgage industry transactions not previously covered, but has never included mortgage servicers in any of those amendments. The majority even noted that one such bill, which would have, was not passed.
“If the General Assembly is dissatisfied with our interpretation, it may amend the Revised Code,” wrote O’Connor.
And A Bone to the Consumer Amici:
The Chief wrote this the only footnote in the case:
“Amici, including legal-aid organizations that are concerned about the number of foreclosures that continue to take place in Ohio, raise some thought-provoking arguments. And we accept for the sake of argument that regulation may be warranted. But it is the legislature’s role, not ours, to bring mortgage servicers within the CSPA’s scope. ”
Second Key Majority Holding—A Mortgage Servicer is not a Supplier
R.C. 1345.01(C) defines a supplier under the CSPA 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.”
Much was made at oral argument of the word “effecting.” The Court gave the words “effect” and “solicit” their ordinary meanings. Effect means to bring about. Solicitation means seeking to obtain something. Thus, suppliers are those who “cause a consumer transaction to happen or that seek to enter into a consumer transaction.” By the time the servicers get involved, the loan has already been effected. So mortgage servicers are not suppliers under the CSPA.
The dissent stressed the involuntary nature of the relationship between the consumer and the servicer. They have no contractual relationship, which meant that in this case the plaintiff had no recourse against HomEq for its alleged neglect in a number of aspects, which are detailed in her complaint. And the plaintiff doesn’t choose the servicer. The cost of the mortgage services ultimately comes out of the consumer’s pocket even though the lender is contractually responsible for paying that fee.
The dissent would find that mortgage servicing does fall under the definition of a consumer transaction. Mortgage servicing involves the transfer of services (necessary to meet the definition) both because the services are separate from the original real estate loan transaction, and because R.C. 1345.01(A) does not provide any exceptions for mortgage services. If it’s not specifically excluded, it must be included, because the CSPA is to be strictly construed to protect consumers. Justice O’Neill criticized the majority in its interpretation for focusing on the transactions rather than on the parties to the transactions.
The dissent also agrees with a number of federal decisions which have analogized mortgage servicers to consumer debt-collectors. It is settled law that entities engaging in the collection of consumer debts are suppliers. The way federal law on this issue evolved was originally to determine that debt collecting did not involve consumer transactions under the CSPA if the original lender was a financial institution, but to later come to the view that the assignee of a debt who is not a financial institution has no right to the financial institution exemption to the CSPA.
Finally, for the dissent, O’Neill noted that the other exceptions to the CSPA are heavily regulated by other statutory schemes, but mortgage servicing is not. He would find that the servicing of a residential mortgage loan is a consumer transaction, and that a mortgage-loan servicer is a supplier. He criticized the majority for failing to construe the CSPA liberally in favor of the consumer.
1. The servicing of a borrower’s residential mortgage loan is not a “consumer transaction” as defined in R.C. 1345.01(A).
2. An entity that services a residential mortgage loan is not a “supplier” as defined in R.C. 1345.01(C).
As I indicated after argument, HomEq’s lawyer gave the Court a perfect roadmap for why mortgage servicers do not fit under the CSPA. She had Chief Justice O’Connor with her all the way, and the Chief’s opinion pretty much mirrored HomEq’s argument.
This is also one of the first instances of Justice O’Neill articulating his pro-plaintiff side. It will be interesting to see how often he and Justice Pfeifer team up on these things, but they’ll have to win over some more votes to effect (bring about) the result.