Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—W.Va. Sup. Ct.: Dodd-Frank Act not applicable to mortgage loan; arbitration agreement not unconscionable, (Nov 15, 2013)

By Thomas G. Wolfe, J.D.

In an action under the West Virginia Consumer Credit and Protection Act over a mortgage loan transaction between two borrowers and a lender, the Supreme Court of Appeals of West Virginia not only decided that the Dodd-Frank Act provision generally prohibiting arbitration of residential mortgage loans did not apply, but also determined that the arbitration agreement was neither procedurally nor substantively unconscionable under West Virginia law (West Virginia ex rel. Ocwen Loan Servicing, LLC v. Webster, Nov. 13, 2013, Per Curiam).

In ruling that the state trial court erred in finding the mortgage loan’s arbitration agreement to be unenforceable, the West Virginia high court granted the loan servicer’s request for a writ of prohibition to prevent the West Virginia trial court in Kanawha County from enforcing its order that previously denied the loan servicer’s motion to compel the individual borrowers to arbitrate their dispute; moreover, the lower court was directed to enter an order compelling arbitration of the matter.

Background. In 2006, the borrowers obtained an adjustable rate mortgage loan from Saxon Mortgage, Inc. As part of the mortgage loan transaction with the lender, the borrowers executed a deed of trust on the real property being purchased and separately executed an arbitration rider. Among other things, the arbitration rider stated that it was “incorporated into and shall be deemed to amend and supplement the Mortgage, Deed of Trust, or Security Deed.”

Later, Ocwen Loan Servicing, LLC (Ocwen) began servicing the borrowers’ home mortgage loan. After the borrowers apparently defaulted on the loan, Ocwen charged the borrowers several fees, including: (1) a “statutory mailings” fee of $210.94; (2) a “skip trace/search” charge of $50.00; (3) an “FC thru service” charge of $550.00; and (4) a “title report fee” of $300.00.

Disputing these fees, the borrowers filed a proposed class action against the mortgage loan servicer in November 2011 in Kanawha County circuit court, alleging violations of the West Virginia Consumer Credit and Protection Act (CCPA). In response, Ocwen filed a “Motion to Compel Individual Arbitration and Dismiss, or Alternatively, Stay Matter.”

State trial court. The West Virginia trial court denied Ocwen’s motion. The lower court concluded that the arbitration agreement associated with the mortgage loan was unenforceable under a provision of the Dodd-Frank Act that “proscribes the inclusion of arbitration agreements in connection with residential mortgage loans.” In addition, the state trial court found the arbitration agreement to be “both procedurally and substantively unconscionable” on various grounds. The mortgage loan servicer appealed to the Supreme Court of Appeals of West Virginia on those rulings.

Dodd-Frank Act. Under the pertinent provision of the Dodd-Frank Act (15 U.S.C. § 1639c(e)(1)), “No residential mortgage loan and no extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer may include terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.”

The appellate court framed the threshold issue as “whether the Dodd-Frank Act applies to invalidate an arbitration agreement executed in 2006, when the general effective date of the Act was July 22, 2010, and some provisions did not become effective until a later date.” While the borrowers contended that the trial court correctly applied the Dodd-Frank Act to find the arbitration agreement unenforceable, Ocwen argued that the Dodd-Frank Act’s provision did not prevent enforcement of an arbitration agreement entered into prior to its enactment.

Ultimately, the court determined that it was not necessary for it to decide the specific effective date of the Dodd-Frank Act’s provision (15 U.S.C. § 1639c) because the main consideration was whether the federal law could be applied retroactively to the 2006 mortgage loan transaction’s arbitration rider. The court maintained that it could not find anything within the Dodd-Frank Act expressly or impliedly stating that the provision (15 U.S.C. § 1639c) was to be given retroactive application. The court further concluded that retroactive application of the Dodd-Frank Act to the arbitration agreement at issue would “improperly impair the parties’ fundamental right to contract.” Consequently, the court decided that the Dodd-Frank Act did not apply to the particular mortgage loan transaction—and the arbitration agreement’s execution—before the law’s enactment.

Enforceability, unconscionability. In addressing whether the arbitration agreement was enforceable under West Virginia law in general and the CCPA in particular, the court declared, “A contract term is unenforceable if it is both procedurally and substantively unconscionable. However, both need not be present to the same degree. Courts should apply a ‘sliding scale’ in making this determination: the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the clause is unenforceable, and vice versa.”

In ruling that the arbitration agreement was not procedurally unconscionable, the court found, among other things, that: (i) the arbitration agreement contained a plainly worded statement, placed conspicuously above the signature line in all caps, advising the borrowers that they could reject the arbitration agreement and the lender would not refuse to complete their loan based on that refusal; (ii) the borrowers failed to point to evidence in the court record supporting the trial court’s finding that they lacked sophistication and financial knowledge to a degree that would render the contract unenforceable; and (iii) the borrowers did not cite any legal authority in support of the “proposition that a consumer executing an arbitration agreement in connection with a mortgage loan must be represented by a lawyer for the contract to be enforceable.”

Similarly, in also ruling that the arbitration agreement was not substantively unconscionable, the court determined that: (i) the lower court erred in concluding that a class-action waiver in the arbitration agreement rendered it substantively unconscionable; (ii) an attorney’s fees provision, requiring each party to be responsible for its own attorney’s fees, was not unduly restrictive toward the borrowers and was not a “contract of adhesion”; (iii) the lower court erred in significantly relying upon an “Exclusion from Arbitration” provision in the arbitration agreement as grounds for finding it to be substantively unconscionable, based on a lack of mutuality; and (iv) the limitation on discovery in the arbitration agreement did not give rise to a finding of substantive unconscionability.

The case is No. 13-0151.

Attorneys: Mychal Sommer Schulz and Arie M. Spitz (Dinsmore & Shohl LLP) for Ocwen Loan Servicing, LLC. John W. Barrett, Jonathan Marshall, and Michael B. Hissam (Bailey & Glasser LLP) for the respondents.

Companies: Ocwen Loan Servicing, LLC; Saxon Mortgage, Inc.

Cases: StateUnfairTradePractices WestVirginiaNews