The Ohio Supreme Court ruled this week that mortgage servicers are not “suppliers” of consumer services, and mortgage servicing does not constitute a “consumer transaction” under Ohio’s Consumer Sales Practice Act (essentially a UDAP statute).
The issue first arose in late 2009 when Ohio’s then-Attorney General, Richard Cordray (now CFPB Director) filed suit against Barclays Capital Real Estate Inc., alleging unfair loan modification practices and poor customer service toward borrowers seeking modifications. Ohio also filed a similar suit against AHMSI. In addition to filing its own suits, Ohio also joined as an Amicus Curiae in an individual suit brought by a borrower against Barclays alleging misapplication of payments (No. 3:09-cv-02335-JGC, N.D. Ohio). The federal court in the individual suit certified to the Ohio Supreme Court two questions: (1) whether a mortgage servicer is engaged in a “consumer transaction” with borrowers under Ohio’s CSPA; and (2) whether a mortgage servicer is a “supplier” as defined under the CSPA. AHMSI settled with Ohio, but several similar cases were on hold pending the Ohio Supreme Court’s resolution of this question of law.
Notwithstanding three amicus briefs supporting liability, including from the current Ohio Attorney General Mike DeWine (Republican who narrowly defeated Cordray for election 2010), the Court answered both questions in the negative based on the plain language of the CSPA which simply does not apply to what mortgage servicers traditionally do. After noting as much, the Court supported its textual analysis by explaining that, historically, the CSPA does not govern most aspects of a real estate transaction, and this differs from other states. See Slip Opinion at 8. The legislature had also amended the CSPA several times, as recently as 2007, to bring within its ambit particular entities in the mortgage real estate market, including loan officers, mortgage brokers, and nonbank lenders; but the legislature had rejected a proposed amendment to cover mortgage servicers specifically. Based on this, the Court’s majority concluded that “[i]f the General Assembly is dissatisfied with our interpretation, it may amend the Revised Code.” Slip Opinion at 9.
As much as the majority relied on textual analysis and strict construction, the dissent relied on public policy arguments. “We owe it to the public to curb the activities of unregulated entities when it is the consumers, and only the
consumers, who are left homeless and in dire financial straits as a result of the entities’ unscrupulous and/or negligent activities. To do otherwise shirks our duty…” Slip Opinion (Dissent) at 16. The dissent also pointed to “[t]he fact that mortgage-loan servicing is not so regulated” as an additional reason the CSPA ought to apply. Slip Opinion (Dissent) at 15.
The ruling inoculates mortgage services, for now, from one of the most lethal weapons in the consumer attorney’s toolbox. State UDAP statues, like Ohio’s CSPA, are notoriously vague, making it difficult for defendants to seek quick dismissals. They also tend to allow recovery of attorneys’ fees and punitive damages not available in suits on other theories popular with litigious consumers, such as breach of contract or common law misrepresentation. Unless the legislature amends the CSPA, mortgage servicers will have a quick out. Note, though, that the original lender to the transaction would likely be covered under CSPA, notwithstanding that it is also servicing the loan.