Is a Mortgage Service Company a “Supplier” of “Consumer Transactions” pursuant to the Ohio Consumer Sales Practices Act?

The Federal District Court for the Northern District of Ohio in Sondra Anderson v. Barclays Capital Real Estate Inc. dba Home EqServicing, 2011-0908 certifies the question to the Ohio Supreme Court who heard oral arguments on February 26, 2013.

The facts of the case are simple enough (the law, not so much). In 2005, Sondra Anderson of Norwalk, Ohio took out a mortgage to buy a house. As is often the case with mortgages, the lender then sold the mortgage note to an investment pool that contracted with Home EqServicing (“Home Eq”) to “service” the loan (i.e. collect the payments, enforce the mortgage, handle questions, disputes…). After some time, Anderson missed and/or made late payments which triggered late charges and interest. She eventually caught up, and then continued to make her regularly scheduled payments. According to Anderson, Home Eq applied Anderson’s regular payments first to the late charges and interest, and then to the regular payments of principal and interest due under the note. Anderson claimed that such collection procedure was contrary to her mortgage that stated funds from her payments would be applied to late charges and penalties, only after currently due interest, principal and escrow items (taxes and insurance) had been covered.

After failing to get a proper accounting of the payments made, Anderson sued HomeEq for conversion, unjust enrichment, and violations of the Federal Real Estate Settlement Procedures Act (“RESPA”) and the Ohio Consumer Sales Practices Act. (“Consumer Act”.) Home Eq then filed a motion to dismiss all claims and the Federal District Court for the Northern District of Ohio denied the motion with regard to everything but the Consumer Act. With regard to the Consumer Act, the District Court concluded that there was no controlling precedent on whether the Consumer Act applied to mortgage servicers, so it basically asked the Ohio Supreme Court to answer that question for it.

We won’t know the answer until the Supreme Court of Ohio issues its opinion, though some analysts are giving the edge to HomeEq because when the Consumer Act was amended in 2007 to add dealings between consumers and loan officers, non-bank mortgage lenders and mortgage brokers as “Consumer Transactions” governed by such Act, dealings with mortgage services did not make the list.

Section 1345.01 of the Ohio Revised Code is the pertinent statute (within the Consumer Act) defining “Consumer Transaction” (1345.01 (A)) and “Supplier” (1345.01 (C)). Consumer Transactions are defined to include “a sale, lease, assignment…or other transfer of an item of goods, a service or an intangible…to an individual for purposes that are primarily personal, family, or household…” but also, per the 2007 amendment to include “transactions in connection with residential mortgages between loan officers, mortgage brokers, or non-bank mortgage lenders and their customers”. Section 1345.01 (C) defines “Supplier” 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”.

HomeEq’s principal argument is that the plain language of the statute does not include mortgage servicers. They acknowledge that mortgage servicing is a service, but to lenders, not to consumers (homeowners). They claim to “service” the lender by collecting payments… for the lender according to the express terms of a mortgage, a document agreed to by the lender and the homeowner, not the servicer.

Anderson, supported by the Ohio Attorney General’s office (who filed an amicus curiae [friend of the court] brief) argued that there is no exclusion of mortgage servicers under the Consumer Act and that the wording is general enough to include them. Further, they emphasize that since lenders often disappear once they sell their loans, and the homeowner is left to deal with the servicer exclusively, mortgage servicers are exactly the type of entity intended to be regulated, and in effect, are “effecting consumer transactions” every month when payments are made.

Perhaps the ultimate decision will turn on Chief Justice O’Connor’s question during oral arguments as to whether the mortgage servicer just “facilitates” a mortgage transaction after it is completed between lender and borrower, or whether it “effects” a series of payment transactions between the borrower and servicer until the loan is paid off. Stay tuned.