Cleveland’s attempts to curb predatory mortgage lending through local ordinances infringes on powers reserved for the state, the Ohio Supreme Court has ruled in a decision that could discourage other cities from attempting similar measures.
In a 5-2 decision this month, Ohio’s highest court invalidated three Cleveland city ordinances aimed at curbing predatory lending, saying they conflict with state laws and are unconstitutional. Lenders are seeking a similar decision from the state Supreme Court in a challenge of a similar ordinance in Toledo.
In the Cleveland case, the state Supreme Court held that state statutes governing residential mortgage lenders are general laws intended to establish a uniform regulatory scheme, and that cities are barred from passing their own conflicting rules for mortgage lenders. Provisions of Cleveland’s ordinances also prohibited lending practices implicitly allowed under state law, the court found.
In 2002, Ohio legislators incorporated much of the federal Home Ownership and Equity Protection Act of 1994 (HOEPA) into state law, including requirements that lenders make more comprehensive disclosures to borrowers taking out mortgage loans in which interest rates are more than 10 percentage points greater than the yield on Treasury securities, or which have points and fees exceeding 8 percent of the loan or $400.
The state statutes also imposed limitations on the terms and conditions of those loans, including the amount of a loan payment that could be collected up front from loan proceeds and a prohibition of balloon payments for loans with terms of less than five years. In incorporating parts of HOEPA into Ohio law, the legislature stated its intent to “preempt” local governments from enacting their own mortgage lending regulations, reserving that power for the state.
Cleveland’s ordinances, adopted the same year, sought to prohibit predatory loans altogether. The city defined loans secured by a first mortgage as predatory if they carried an interest rate between 4.5 percent and 8 percent above the yield of Treasury securities with a comparable date of maturity. Loans secured by a junior mortgage were defined as predatory if they carried interest rates between 6.5 and 10 percentage points above Treasury yields and required balloon payments, excessive financing of points and fees, increasing interest rates on default, or were to be used to “flip” a home.
The ordinances also required mandatory loan counseling for borrowers, a loan-disclosure notice three days prior to closing on any home-improvement loan, and the filing of certification of compliance when recording a mortgage.
The American Financial Services Association, a trade association representing financial institutions, challenged Cleveland’s ordinances. The association argued that Cleveland’s ordinances violated Ohio’s “home rule amendment,” a 1912 change to the state’s constitution, which says municipalities are allowed to exercise powers of local self-government only to the extent that they do not conflict with general laws passed by the state.
Cleveland argued that the state’s laws governing high-cost mortgage loans were not general laws, and that a lack of regulation by the state in a particular area allows municipalities to adopt regulations more stringent than the state’s.
Although a lower court invalidated Cleveland’s ordinances, the city took its case to the Eighth District Court of Appeals, which ruled in its favor. Because Ohio’s Second District Court of Appeals had ruled in 2004 against predatory lending ordinances adopted by the city of Dayton — a case also argued by the American Financial Services Association — the stage was set for the state’s Supreme Court to weigh in on the issue.
In a decision announced Nov. 20, the Supreme Court reversed the Eighth District Court of Appeals decision, holding that Cleveland’s ordinances were unenforceable under Ohio’s home rule amendment, and affirmed the decision in the Dayton case.
Writing for the majority, Justice Terrence O’Donnell said that Cleveland’s ordinance would bar loans with interest rates 3.5 percent lower than those regulated by the state, imposed stricter standards and additional requirements on lenders through mandatory loan counseling, and prohibited direct payments to home-improvement contractors using the proceeds of residential loans with high interest rates.
“Any local ordinances that seek to prohibit conduct that the state has authorized are in conflict with the state statutes and are therefore unconstitutional,” O’Donnell wrote.
Justice Maureen O’Conner concurred in the judgment, but wrote a separate opinion urging the court to clearly establish the legislature’s authority to preempt local municipalities on all matters of statewide concern — not just mortgage lending.
O’Conner said that instead of “enacting a patchwork of differing regulations at the municipal level,” local officials “should present their concerns to the public officials in Columbus who are charged with addressing matters of statewide concern.”
Local ordinances like Cleveland’s “might unintentionally harm the persons that they were designed to protect by restricting the infusion of loan capital into selected local housing markets in the state,” O’Conner wrote. “Statewide regulation of predatory lending practices provides greater predictability and consistency in the mortgage lending field for consumers and lenders alike in all parts of the state.”
In a dissenting opinion, Justice Paul E. Pfeifer said municipalities should not be barred from passing their own rules governing mortgage lenders. Economic conditions can vary in cities and rural areas, he said, and Ohio is “ill-suited” to a “one-size-fits-all” rule governing mortgage rates. According to U.S. Census data, Pfeifer said, Cleveland is the poorest big city in the U.S.
“Predatory lenders prey on the poor, and Cleveland is thus especially prone to predatory lending and its inevitable aftermath,” Pfeifer said in his opinion. The Ohio legislature “has essentially created a minimum standard with statewide breadth, for application from Ada to Zanesville. There is no reason, however, why municipalities afflicted more greatly by the problem of predatory lending cannot create greater protections for their citizens.”
The American Financial Services Association is also challenging a predatory lending ordinance enacted by Toledo, which targets excessive fees, inflated home valuations, and concealed balloon payments.
Although Ohio’s Sixth District Court of Appeals upheld Toledo’s ordinance last year, the association has appealed that decision to the Supreme Court, using the arguments that proved successful in overturning Cleveland’s ordinance.
“The logic that underlies the briefings we did in the Cleveland and the Dayton cases underlies our arguments in Toledo,” said John Winship Read, a Cleveland-based attorney representing the American Financial Services Association. “I would hope that it is persuasive.”
The Supreme Court agreed to review the Sixth District Court’s decision on Toledo’s lending law, but the case was put on hold while the court ruled on Cleveland’s ordinances. With that case decided, the Supreme Court could now either make a ruling in the Toledo case, ask both sides to submit briefs, or send the case back down to a lower court, Read said. Until then, Toledo’s predatory lending law remains in effect.
Asked if the Supreme Courts decision in the Cleveland case would discourage other cities in Ohio from passing similar laws, Read said, “That’s what we hope, and our client hopes.”