Mortgage lenders scored a victory at the Ohio Supreme Court in the recently decided Wilborn v. Bank One Corporation, 2009 Ohio 306 (2009). In Wilborn, eleven borrowers brought suit against their lenders. Ten of the eleven cases (the eleventh did not
involve a reinstatement provision and was decided differently) went like this: Lender brought foreclosure action against borrower. Borrower sought to reinstate the loan by paying the full amount due prior to judgment. Under the mortgage, borrower was required to pay lender’s foreclosure related attorney fees to receive reinstatement.
The borrowers objected to paying the attorney fees based on Ohio statutory and case law that precludes the collection of fees in actions enforcing a debt obligation, including foreclosure proceedings. They further argued that the attorney fee provisions of their mortgages were void because the contracts were not the product of free, bilateral negotiation. The oral arguments articulated the public policy concerns on each side.
In rejecting their claims and allowing the lenders to collect the foreclosure-related fees, the Court made a couple significant points. First, the contractual right to loan reinstatement is not the enforcement of a debt obligation but, rather, is a private contractual right. Second, even though the individual mortgages were not negotiated between borrower and lender, the Fannie Mae and Freddie Mac forms used were the products of extensive negotiation. The Court went into great detail on the creation of these forms and the inclusion of all parties’ interests in the drafting process. This precluded the borrowers’ claim that the mortgages were “adhesion” contracts.
The case attracted the attention of both the banking industry and consumer advocates, with coalitions of both groups filing amicus briefs in the case. Although the decision immediately benefits lenders, in the long run it likely aids borrowers. If a lender could not collect these fees, it would be fearful of filing a foreclosure action only to see the borrower reinstate and thereby lose the hundreds or thousands of dollars it spent in foreclosure. Lenders would, then, be very reluctant to insert reinstatement provisions in mortgage forms and borrowers would lose a valuable foreclosure alternative. Moreover, federally-backed loans are required to contain a reinstatement provision, so a contrary decision here would have made Ohio law inconsistent with federal policy and put borrowers who do not qualify for the federal loans at a distinct disadvantage.
With this decision in mind, lenders should take a moment to review current mortgage forms to make sure they require reimbursement of all attorney fees as a condition to reinstatement. The Fannie Mae form, for example, requires payment of “all expenses incurred in enforcing this Security Instrument, including, but not limited to, reasonable attorneys’ fees.”