Ohio Supreme Court Confirms Legality of Attorney Fees Provisions Related to Defaulted Residential Mortgage Loans
In Wilborn v. Bank One Corporation (Slip Opinion No. 2009-Ohio-306), the Supreme Court of Ohio upheld a provision in a residential mortgage contract that required a defaulting borrower to pay a lender's reasonable attorney fees as a condition for reinstating a defaulted loan and terminating foreclosure proceedings. Although this decision merely upholds a common practice among lenders, there should be little doubt now that Ohio lenders may require the payment of attorney fees to reinstate a mortgage in foreclosure, particularly if the mortgage was a standardized Fannie Mae or Freddie Mac document.
The crux of the Wilbon matter centered on the apparent conflict between the mortgage document (which required payment of attorney fees as a condition of loan reinstatement after default) and Ohio public policy and common law dating back to 1893 (prohibiting the recovery of attorney fees resulting from a default upon a consumer or residential debt obligation).
The Court walked a twisting and very narrow path to arrive at its conclusion, first finding that the current statutory scheme under R.C. 1301.21 authorizing the payment of attorney fees was merely illustrative and did not prohibit recovery in all other circumstances. Next, the Court distinguished between the borrower's contractual right to reinstatement of the loan from its legal right to redeem the property. Holding that while attorney fees may not be recovered as a condition to redemption, the payment of such fees was a reasonable bargin for the lender to agree to terminate foreclosure proceedings and voluntarily re-enter the loan arrangement with the consumer. Finally, the Court found that the Fannie Mae/Freddie Mac documents were not contracts of adhesion because industry groups and consumer advocate groups were heavily involved in the negotiation and implementation of these form documents. So while the individual borrower may have little power to alter the terms and conditions of the mortgage, the process by which the template for these forms came about was sufficient to protect the borrower's interests in this regard.
The takeaway from this case is that borrowers can likely be required to pay their lenders' attorney fees as a condition to loan reinstatement, and lenders can erase any doubt as to the enforcibility of these provisions by using Fannie/Freddie standardized loan documents rather than their own customized loan documents.
