OHIO HOUSE CONSIDERS SWEEPING FORECLOSURE MEASURES RESTRICTING LENDERS’ RIGHTS UNDER EXISTING MORTGAGE LOAN CONTRACTS
The Ohio House of Representatives’ Housing and Urban Revitalization Committee is considering a bill to declare a six month moratorium on residential mortgage foreclosures, among other aggressive new provisions. The bill would substantially hinder the ability of lenders to collect mortgage loans and create an incentive for borrowers not to pay on their mortgage loans.
The bill requires that complaints to initiate residential mortgage foreclosure actions be accompanied by (i) a mortgage information statement, (ii) an appraisal, (iii) a certification that all notice requirements have been met and (iv) a $1,500 fee. The mortgage information statement must include the name of the note holder, a statement as to whether the note is securitized and if so the security that holds the loan and the name of the trustee, a statement that plaintiff’s counsel is the designated representative of the true party in interest and a statement as to whether the residential property is occupied.
The bill gives judges discretion to modify loans subject to a foreclosure action by reducing the principal or interest if the judge determines that the modification is just and equitable and would benefit both parties.
The bill requires servicers to provide borrowers with notice 60 days prior to filing a complaint to initiate a foreclosure action of resources available to assist borrowers and the borrowers’ right to remain in the property following foreclosure under certain circumstances. The bill establishes conditions under which a borrower may remain in property as a tenant following a foreclosure sale.
The bill creates a state Foreclosure Prevention Project and database under the Ohio Department of Commerce.
The bill enacts the Residential Mortgage Services Registration Act that requires mortgage servicers to register and establishes standards for mortgage servicers.
The bill directs the Ohio Department of Commerce to implement a comprehensive loan modification program consistent with the guidelines in the bill, including reduction of interest rates and principal.
Testimony was presented before the House Committee that provisions of the bill may be unconstitutional under the Ohio Constitution. In particular, the provisions of the bill permitting a judge to reduce the principal balance on an existing mortgage and prohibiting lenders from passing on the new foreclosure filing fee to borrowers could be deemed unconstitutional.
In 1934 the United States Supreme Court upheld against a constitutional contract clause challenge a state law authorizing courts to extend mortgage redemption periods. Home Building and Loan Association v. Blaisdell, 290 U.S. 398 (1934). In Blaisdell, the Supreme Court said “[the Contract Clause] prohibition is not an absolute one and is not to be read with literal exactness like a mathematical formula. . . . The economic interests of the state may justify the exercise of its continuing and dominant protective power notwithstanding interference with contracts.” Id. at 428. The Court subsequently explained that in Blaisdell Minnesota’s statutory moratorium against home foreclosures was upheld, in part, because the legislation was addressed to the legitimate end of protecting a basic interest of society and not just for the advantage of some favored group. Keystone Coal Ass’n v. DeBenedictis, 480 U.S. 470, 502-503 (1987). In Blaisdell the Court identified as an emergency the severe financial and economic depression and the Court found that the relief afforded by the legislature was appropriately tailored to that emergency and limited to its duration.
The first inquiry under a constitutional contract clause challenge is whether the state regulation constitutes a substantial impairment of a contract right. If the answer is yes, the state must have a significant and legitimate public purpose behind the regulation. If a legitimate public purpose is identified, the reviewing court must determine whether the adjustment of the rights and responsibilities of contracting parties is based upon reasonable conditions and is of a character appropriate to the public purpose justifying the legislation’s adoption. Whether the Ohio bill, if enacted, would survive such an analysis is uncertain at best. Clearly the proposed Ohio law imposes a greater impairment than the law addressed by the United States Supreme Court in Blaisdell, in which the state law extended the redemption period. We believe that giving a court the power to reduce principal or interest on an existing mortgage loan is not of a character appropriate to the public purpose of addressing the current foreclosure situation such as to justify the adoption of the proposed legislation.
The Ohio Constitution contains a similar contract clause and a prohibition on retroactive laws. Ohio Const. Art. 11, § 28. As the Ohio Supreme Court has not addressed a similar contract clause challenge, the Ohio Supreme Court would likely apply a similar analysis to that used by the United States Supreme Court in Blaisdell.
Please contact us if you would like a copy of the current version of the bill or other information.
- Elizabeth Anstaett and Darrell Dreher