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COURT FINDS PUBLIC NUISANCE CLAIM RELATING TO FORECLOSURES AND SUBPRIME LENDING PREEMPTED BY OHIO LAW

The United States District Court for the Northern District of Ohio had held that the City of Cleveland’s claim regarding mortgage lending is preempted by Ohio Revised Code Section 1.63. City of Cleveland v. Ameriquest Mortgage Servicing, Inc., Case No. 1:08 CV 139 (N.D. Ohio, May 15, 2009).

The City of Cleveland brought a claim of public nuisance against Ameriquest Mortgage Securities, Inc., Bank of American, N.A., Bear Sterns & Co., Inc., Citibank, N.A., Citigroup Global Markets, Inc., Countrywide Securities Corporation, Credit Suisse First Boston LLC, Credit Suisse (USA), Inc., Deutsche Bank Securities, Inc., GMAC-RFC Holding Company, Goldman Sachs & Co., Greenwich Capital Markets, Inc., HSBC Securities (USA), Inc., JP Morgan acquisition Corp., Chase Bank USA, N.A., Merrill Lynch, Pierce, Fenner & Smith Inc., Morgan Stanley & Co., Inc., Novastar Mortgage, Inc., Option One Mortgage Corporation, Washington Mutual Bank, Wells Fargo Bank, N.A., and Wells Fargo Asset Securities Corporation. The City claimed that subprime lending was categorically inappropriate for Cleveland due to its "unique" economic situation, characterized by a high poverty rate, sluggish economy, limited employment opportunities, and stable but not booming property values. The City sued defendants for their alleged role in securitizing subprime loans into mortgage-backed securities.

In motions to dismiss, the defendants argued that the City’s claim was preempted by Ohio law, specifically, Ohio Revised Code § 1.63, which states:

The state solely shall regulate the business of originating, granting, servicing, and collecting loans and the forms of credit in the state and the manner in which any such business is conducted, and this regulation shall be in lieu of all other regulation of such activities by any municipal corporation or other political subdivision. Any ordinance, resolution, or other action by a municipal corporation or political subdivision to regulate, directly or indirectly, the origination, granting, servicing, or collection of loans or other forms of credit constitutes a conflict with the revised Code, including, but not limited to, Titles XI, XIII, XVII, and XLVII, and with the uniform operation throughout the state of lending and other credit provisions, and is preempted.

The court agreed that the City’s complaint constitutes a form of municipal regulatory "action" within the meaning of Section 1.63 and that the City sought to regulate, direct or indirectly, the origination, granting, servicing or collection of loans or other forms of credit through the action. The court held that the City’s allegations supporting its claim, along with the arguments the City raised in opposition to the motions to dismiss, confirmed the purpose of the City’s suit as a governmental action. Accordingly, the court found the suit was a regulatory action by a municipal corporation that Ohio Revised Code Section 1.63 preempts.

The case is significant for establishing the broad preemption by the law of the State of Ohio over the actions of local municipalities in attempting to regulate the business of lending. This language in Section 1.63 was drafted and enacted in 2002 at the request of several banking and financial services trade associations to preclude the efforts of various municipalities in Ohio from regulating the business of lending in ways that would balkanize the lending business. Other states should consider enacting similar legislation.

  • Elizabeth Anstaett and Darrell Dreher