On May 14, 2013, the Ohio Supreme Court in Anderson v. Barclay’s Real Estate, Inc., Slip Opinion No. 2013-Ohio-1933 answered the above question posed to it by the Federal District Court for the Northern District of Ohio by holding that “the servicing of a borrower’s residential mortgage loan is not a ‘consumer transaction’ as defined in O.R.C. 1345.01(a); and “an entity that services a residential mortgage loan is not a ‘supplier’ as defined in O.R.C. 1345.01(C).
A complete background and fact summary of the case can be found in this author’s earlier blog posting of March 4, 2013 appropriately titled: “Is a Mortgage Service Company a Supplier of Consumer Transactions pursuant to the Ohio Consumer Sales Practices Act (“CSPA”)? Basically, the Anderson case originated in the Federal District Court for the Northern District of Ohio, who concluded (with regard to the CSPA claims) that there was no controlling precedent in Ohio on whether the CSPA applied to mortgage services, so the Federal Court asked the Ohio Supreme Court to answer the following two 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, O.R.C. 1345.01(a)? The Plaintiff, Mrs. Anderson argued that the answer to this first question should be “yes” because mortgage servicers provide a number of services to borrowers, including accepting their payments and working with borrowers to obtain loan modifications. The servicer, Barclay’s Real Estate, Inc. dba HomEq Servicing (“HomEq”) argued that mortgage servicers perform their services for financial institutions, not for borrowers/consumers, and that therefore the transactions were commercial and not covered by the CSPA.
The Supreme Court of Ohio agreed with HomEq, holding that the servicing of a borrower’s residential mortgage loan is not a “consumer transaction.” To justify its holding, the court first recognized that one essential element of O.R.C. Section 1345.01(a) was not met: that there was no “sale, lease, assignment, award by chance, or other transfer of a service [by the servicer]to a consumer”. Rather, the court reasoned that mortgage servicing is a contractual agreement between the mortgage servicer and financial institution, with no direct contract between the borrower and the mortgage servicer. While the court acknowledged that the servicer’s duties might involve interaction with borrowers, it reasoned that those interactions are always on behalf of the financial institution.
The court further reasoned that service provider transactions are not consumer transactions because there is no “transfer of an item of goods, a service, a franchise or an intangible” as required by the statute. The court explained that while a financial institution may contract with a mortgage servicer to service a loan, the mortgage servicer does not transfer a service to the borrower. The court’s decision was also influenced by: (1) the CSPA 2007 amendment which added dealings between consumers and loan officers, non-bank mortgage lenders and mortgage brokers as being covered by the CSPA but did not include dealings between consumers and mortgage servicers; (2) Uniform Consumer Sales Practices Act commentary which noted that land transactions should be specifically excluded from Consumer Sales Practices Acts; (3) Ohio court decisions holding that the CSPA does not apply to “collateral services” that are solely associated with the sale of real estate; and (4) other states that wanted real estate transactions and loan servicing covered by their consumer protection statutes specifically defined consumer transactions to include them.
2) Is a mortgage servicer a “supplier”? Mrs. Anderson argued that servicers are “suppliers” within the CSPA because they essentially function as collection agencies. The court disagreed, concluding that in order to be a supplier, the servicer would have to be engaged in the business of “effecting” or “soliciting” consumer transactions as provided in O.R.C. 1345.01(c). The terms “effecting” and “soliciting” are not defined in the CSPA, so the court went to Black’s Law Dictionary and found “effect” to mean “to bring about or to make happen”; and “solicit” to mean “requesting or seeking to obtain something”. Since servicing a mortgage does not cause a consumer transaction to happen, and mortgage servicers do not seek or request borrowers, the court handily dismissed the plaintiff’s argument and held that servicers are not “suppliers” under the CSPA.
In spite of the Supreme Court of Ohio’s ruling, many believe that since lenders often disappear once they sell their loans, and the homeowners are left to deal with a servicer exclusively, mortgage servicers are exactly the type of entity intended to be regulated by the CSPA. Since the court has spoken, however, the only recourse for those who disagree with its decision is to lobby the Ohio Legislature to specifically amend the CSPA to include dealings between consumers and mortgage servicers.