The Supreme Court of Ohio ruled today that the servicing of a borrower’s residential mortgage is not a “consumer transaction,” and a business entity that services residential mortgages is not a “supplier” as those terms are defined in the Ohio Consumer Sales Practices Act (CSPA). 

The court’s 5-2 majority decision, authored by Chief Justice Maureen O’Connor, was issued in response to two certified questions of state law the justices were asked to address by the U.S. District Court for the Northern District of Ohio. The state law questions arose during the litigation of a civil lawsuit brought by an Ohio homeowner against a mortgage servicing company in federal court.  That suit remains pending.

According to a description of the case provided by the district court, Ohio homeowner Sondra Anderson filed suit against Barclay’s Capital Real Estate Inc., d.b.a. HomEq (“HomEq”), alleging that HomEq had engaged in  unfair or unconscionable business practices in its dealings with her while acting as servicing agent for the financial institution that held Anderson’s home mortgage. 

The federal court determined that the interpretation of two sections of the Ohio CSPA, R.C. 1345.01(A) and (C), might determine the outcome of the litigation. It found, however, that there were no definitive state court decisions that provided clear guidance on whether the statute applied to the relationship between a residential mortgage borrower and a third-party business entity like HomEq, which is not itself a lending institution but acts as an agent of the lender by collecting monthly mortgage payments, late fees and other assessments, and handling other day-to-day interactions between the lender and its residential mortgage customers. Rather than deciding that state law question itself, the federal court asked the Ohio Supreme Court to do so.  That practice is common, and allows the highest state courts to give guidance to federal courts faced with state law questions. 

In today’s decision, Chief Justice O’Connor wrote: “The CSPA prohibits unfair or deceptive acts and unconscionable acts or practices by suppliers in consumer transactions whether they occur before, during, or after the transaction. ...  The CSPA defines a ‘consumer transaction’ to be ‘a sale, lease, assignment, award by chance, or other transfer of an item of goods, a service, a franchise, or an intangible, to an individual for purposes that are primarily personal, family, or household, or solicitation to supply any of these things. ’”

“The first question asks whether the servicing of a borrower’s residential mortgage loan constitutes a ‘consumer transaction’ as defined in the Ohio Consumer Sales Practices Act, R.C. 1345.01(A)?  It does not.  In the servicing of a real estate mortgage, one essential element of R.C. 1345.01(A) is not met:  there is no sale, lease, assignment, award by chance, or other transfer of a service to a consumer. Mortgage servicing is a contractual agreement between the mortgage servicer and the financial institution that owns both the note and mortgage.  Mortgage servicing is carried out in the absence of a contract between the borrower and the mortgage servicer.”

“We recognize that the mortgage servicer’s duties may involve direct and indirect interactions with borrowers on behalf of the financial institution. Sometimes the mortgage servicer may even assist the borrower in modifying the terms of the note, but the mortgage servicer undertakes the negotiation not for itself but on behalf of the financial institution. These interactions do not satisfy the language found in R.C. 1345.01(A). Instead, mortgage servicing, similar to appraisal services and title services, is a ‘collateral service’ associated with a pure real estate transaction.”

“Moreover, transactions between mortgage service providers and homeowners are not ‘consumer transactions’ within the meaning of the CSPA because there is no ‘transfer of an item of goods, a service, a franchise, or an intangible, to an individual.’ ...  (T)he mortgage servicer neither sells nor gives the borrower the services it provides to the owner of the mortgage and note. A mortgage servicer provides a service to a financial institution, but providing such a service to a financial institution is neither analogous to transferring a service to a borrower nor sufficient to impose liability under the CSPA. ... (U)nder a plain reading of the statute, the servicing of a borrower’s residential mortgage loan is not a ‘consumer transaction’ as defined in R.C. 1345.01(A).  The statute simply cannot be read to cover instances in which a financial institution contracts with an entity to service its loans and mortgages.”

The Chief Justice also pointed out that the General Assembly amended the CSPA in 2007 by extending its provisions to cover three types of entities involved in mortgage transactions: loan officers, mortgage brokers, and nonbank mortgage lenders.  She noted, however, that a subsequent bill that would have expressly brought mortgage servicers within the ambit of the CSBA was not adopted by the legislature.  “We conclude that the General Assembly’s rejection of the proposed amendment supports our conclusion that mortgage servicers are not covered by the current language of R.C. Chapter 1345,” wrote Chief Justice O’Connor. “If the General Assembly is dissatisfied with our interpretation, it may amend the Revised Code.”

With regard to the second certified question regarding whether mortgage servicers are subject to the CSBA as “suppliers ... engaged in the business of effecting or soliciting consumer transactions,” The Chief Justice again found the role played by entities such as HomeEq does not place them within the statutory definition.  

She wrote: “‘Supplier’ means 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.’  ...  (U)nder the CSPA, ‘suppliers’ are those that cause a consumer transaction to happen or that seek to enter into a consumer transaction.  Here, HomEq does not engage in the business of effecting or soliciting consumer transactions. The residential mortgage transaction is a transaction that occurs between the financial institution and the borrower. Mortgage servicers are not part of this transaction. And simply servicing the mortgage is not causing a consumer transaction to happen. Similarly, mortgage servicers do not seek to enter into consumer transactions with borrowers.  We therefore have little trouble concluding that an entity that services a residential mortgage loan is not a ‘supplier’ as defined in R.C. 1345.01(C).” 

Chief Justice O’Connor’s opinion was joined by Justices Terrence O’Donnell, Judith Ann Lanzinger, and Sharon L. Kennedy.  Justice Judith L. French concurred in judgment only.  Justice Paul E. Pfeifer dissented without opinion.

Justice William M. O’Neill entered a dissenting opinion in which he noted that, while the majority decision focuses on the lack of direct involvement by a mortgage servicing company in the mortgage loan transaction between a lender and homeowner, the exclusions from coverage set forth in the CSPA are based primarily on the identity or type of a commercial enterprise that interacts with consumers rather than on the nature of its transactions.

Justice O’Neill wrote that, in his view, because the CSPA is a remedial law that must be liberally construed in favor of consumers, and mortgage servicing entitles like HomEq do not fit within any of the categories of businesses that are expressly excluded from the act’s provisions, he would hold that they are not exempt from the law’s requirements, and their services therefore constitute consumer transactions that are covered by the CSPA.

Please note: Opinion summaries are prepared by the Office of Public Information for the general public and news media. Opinion summaries are not prepared for every opinion, but only for noteworthy cases. Opinion summaries are not to be considered as official headnotes or syllabi of court opinions. The full text of this and other court opinions are available online.

2011-0908. Anderson v. Barclay’s Capital Real Estate, Inc., Slip Opinion No. 2013-Ohio-1933.
Certified Questions of State Law, United States District Court, Northern District of Ohio, Western Division, No. 3:09-cv-02335-JGC.  The certified questions of state law are answered in the negative.
O’Connor, C.J., and O’Donnell, Lanzinger, and Kennedy, JJ., concur.
French, J., concurs in judgment only.
Pfeifer and O’Neill, JJ., dissent.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2013/2013-Ohio-1933.pdf

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