In the recent Ohio Supreme Court decision of Anderson v. Barclays, 136 Ohio St.3d 31 (2013), the Court determined that a mortgage servicer does not engage in a consumer transaction as defined by the Ohio Consumer Sales Practices Act, and that the servicer was not a supplier as defined by the Act. This decision limits the liability of mortgage servicers for violations of the Ohio Consumer Sales Practices Act.
In Anderson, one of the Defendants was HomEq, an entity engaged in the business of servicing residential mortgages. Based upon the services provided, the Plaintiff sought to impose liability on HomEq under the Ohio Consumer Sales Practices Act. Before the Ohio Supreme Court were two certified questions from the Federal Court. The first question was, does the servicing of a borrower’s residential mortgage loan constitute a consumer transaction as defined by the Act? The second question was, are entities that service residential mortgage loans suppliers engaged in the business of effecting or soliciting consumer transactions within the meaning of the Act? Before analyzing the law, the Court went into great detail concerning the services that HomEq provided and relationship between HomEq and the borrowers.
The Court noted that HomEq was not a bank or financial institution that would otherwise be exempt from the Act. HomEq accepted, applied, and distributed mortgage loan payments and other fees, penalties, and in connection with so doing exercised its discretion regarding the fees charged or applied to mortgage loan accounts. HomEq was paid for its loan administration and other services from the payment stream generated by consumers’ residential mortgages. HomEq maintained customer service departments and call centers to which Ohio residents with loans being serviced by HomEq were directed to call with questions or concerns about their mortgage loans. HomEq directed customers who were in default or danger of default to contact it for options concerning loss mitigation or loan modifications. HomEq had authority to make substantive decisions regarding which customers, if any, would receive loan modification agreements or loss mitigation assistance. HomEq handled customer disputes regarding their mortgage loans, negotiated and executed loan modifications, forbearance and other agreements directly with customers. HomEq also purchased homeowners’ insurance on behalf of, and at the expense of, homeowners whom HomEq believed to not have purchased insurance required by the underlying promissory notes and mortgages.
When analyzing whether the servicing of a borrower’s residential mortgage loan constituted a consumer transaction, the Court noted that there was no sale, lease, assignment, award by chance, or other transfer of a service to a consumer. The Court noted that sometimes the mortgage servicer may assist the borrower in modifying the terms of the note, but that the mortgage servicer undertook the negotiation not for itself, but on behalf of the financial institution who owned the note and mortgage. The Court stated that mortgage servicing was similar to appraisal services and title services which are both “collateral service” associated with pure real estate transactions, to which the Ohio Consumer Sales Practices Act does not apply.
The Court held that the transactions between mortgage-service providers and homeowners are not “consumer transactions” within the meaning of the Act because there is no “transfer of any item of goods, a service, a franchise, or any intangible, to an individual.” While a financial institution may contract with a mortgage servicer to service the loan, the mortgage servicer does not transfer a service to the borrower, which is an element required to trigger liability under the Ohio Consumer Sales Practices Act. Therefore, the Court concluded that mortgage servicing was not a consumer transaction.
The Court also held that mortgage servicers were not “suppliers” as defined by the Ohio Consumer Sales Practices Act. The mortgage service would need to meet the definition of a supplier for it to be found liable under the Act. The Court determined that the mortgage servicers were not suppliers because the mortgage servicer does not cause a consumer transaction to happen. Rather, the transaction between the borrower and the lender happened prior to the mortgage servicer becoming involved. The Court thus concluded that mortgage servicers were not suppliers, because it was not “engaged in the business of effecting or soliciting consumer transactions” within the meaning of the Act.
The Anderson decision is important because it provides a clear answer that mortgage servicers are generally not liable under the Ohio Consumer Sales Practices Act for services they provide. This case will serve as a solid defense to the Ohio Consumer Sales Practices Act claims which have been routinely raised against mortgage servicers.
If you would like a copy of the Court’s decision, or have any other questions regarding liability of financial services providers and lenders, please call a member of our Finance / Creditor Rights and Liabilities Practice Group members.
