Banking and Finance Law Report : Banking & Finance Lawyer & Attorney : Porter Wright Morris & Arthur Law Firm : Bankruptcy, Commercial Lending

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. 

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House Bill 138, effective September 11, 2008, makes sweeping and widespread changes to the substantive and procedural aspects of foreclosures in Ohio.  Although the actual implementation of these new standards may vary and each county's procedures must be verified for all current and future foreclosure cases, those currently in progress as of September 11, 2008 should be subject to the former statutes as to substantive matters but will be subject to the procedural changes in the new legislation.  Highlights are as follows:

• The court may require mediation of any foreclosure at any point during the proceeding and may require the personal attendance of both the mortgagor and mortgagee.
• The lis pendens date is changed from the date service is perfected on the principal defendant(s) to the date the complaint is actually filed.  Although this change doesn't eliminate the requirement that service be obtained on the defendant at some point in the case, it does create some certainty about the point at which subsequent liens are barred.
• In residential foreclosures a Preliminary Judicial Report (PJR) obtained from a title company must be filed within 14 days of the complaint and updated by a Final Judicial Report prior to the court issuing an order of sale.  Commercial foreclosures have the option of using a PJR or a standard title commitment. 
• The officer making the sale is required to collect certain purchaser information, such as contact information, the name of the purchaser and the name to which title should be conveyed, and other information.  This requirement applies to the foreclosing lender as well, should that lender be the successful bidder at the sale. 
• An obligation is placed on the parties to have the sale confirmed within thirty days of the sale, and the purchaser must pay the balance due within that time.  Failure to do so may be treated as a contempt of court and may result in forfeiture of the deposit.  The court is also granted broad authority to stay confirmation to give the defaulting borrower time to redeem the property or "for any other reason the court deems appropriate."
• The deed must now be prepared by the lender's attorney and submitted to the sheriff, who now handles recording.  Because taxes, conveyance fees and other charges must be paid prior to recording, lenders are being asked to submit a certain amount of money (varying by county) to cover these costs. 

Some of the foregoing changes, such as the revised lis pendens date, will speed the foreclosure process along and make title examination much easier.  Other changes will benefit consumers and title agents, such as the residential PJR requirements.  Lenders should note, however, that there are a number of pitfalls in this legislation that have the potential to extent foreclosure proceedings.  First, the possibility of mediation could result in delay, particularly when the borrower gives at least the appearance of being able to bring the loan current.  In addition, the court now has the discretion to stay a sale confirmation to give the defaulting borrower additional time to redeem the property or for any other reason the court deems appropriate.  How courts will use this apparently unfettered discretion remains to be seen.  In all events lenders will be saddled with additional costs and delays in what is already a time-consuming process. 

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