Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—OhioSupCt: Consumer Protection Law Does Not Apply to Residential Mortgage Loans, (May 17, 2013)

By Jody Coultas, J.D.

The Ohio Supreme Court held that the Ohio Consumer Sales Practice Act (CSPA) did not apply to the servicing of residential mortgage loans (Anderson v. Barclay’s Capital Real Estate, Inc., May 14, 2013, O’Connor, C.).

The United States District Court for the Northern District of Ohio certified questions of state law, asking whether the servicing of a borrower’s residential mortgage loan constituted a consumer transaction under the CSPA and whether entities that service residential mortgage loan suppliers engaged in the business of effecting or soliciting consumer transactions within the meaning of the CSPA.

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. Real estate transactions are excluded from the statute’s definition of consumer transaction.

Because servicing of a real estate mortgage does not involve a sale, lease, assignment, award by chance, or other transfer of a service to a consumer, the court held that it was not a consumer transaction under the CSPA. A mortgage servicer generally contracts with a financial institution that owns both the note and mortgage, and mortgage servicing is carried out without a contract with the borrower. Mortgage servicing was, therefore, a “collateral service” associated with a pure real estate transaction. Also, mortgage servicing does not involve a transfer of an item of goods, a service, a franchise, or an intangible, to an individual. The mortgage servicer does not give or sell its services to the borrower; rather, it provides a service to the financial institution.

Entities that service residential mortgage loans are not suppliers engaged in the business of effecting or soliciting consumer transactions within the meaning of the CSPA, according to the court. A residential mortgage transaction is a transaction that occurs between the financial institution and the borrower. Mortgage servicers are not part of this transaction and do not sell their services to borrowers.

Dissent. The dissent would have applied the CPSA to mortgage loan services. Subsequent to executing the note and mortgage for a property, the lender enters into an agreement with a mortgage servicer and pays the servicer with a portion of the borrower’s mortgage payments. The dissent noted that because mortgage servicers do not fit within any exceptions enumerated under the CSPA, they should fall under the statute as liberally construed in favor of consumers. Also, the dissent noted that nature of the underlying transaction does not matter as much as the identity of the commercial entity involved in the transaction. Thus, the majority erred in focusing on the contractual nature of the relationship between the mortgage servicer and the borrower.

The case is No. 2013-OHIO-1933.

Attorneys: John T. Murray (Murray & Murray Co., L.P.A.) for Sondra Anderson. James D. Curphey (Porter, Wright, Morris & Arthur, L.L.P.) for Barclay’s Capital Real Estate, Inc.

Cases: StateUnfairTradePractices OhioNews