Simon PLC Attorneys & Counselors – July 2020 Memorandum
UPDATE ON OHIO DEBTOR COLLECTION PRACTICES – REQUIRED NOTICE TO DEBTORS FOR COLLECTION OF DEBTS INVOLVING RESIDENTIAL REAL ESTATE AS COLLATERAL
Bloomfield Hills, Michigan – In March 2019 the state of Ohio enacted new statutory provisions requiring certain notices be given to debtors before the collection of any debt that is secured by a junior lien against residential real property can be undertaken. Ohio Revised Code §1349.72 requires that a person collecting a debt that is in default, and that is secured by a junior lien on residential property, send written notice to the debtor via U.S. mail, to the debtor’s residential address prior to attempting to collect the debt, in whole or in part. Unlike the FDCPA, this statutory notice section appears to apply to first party (i.e., the lender) as well as third party debt collectors (i.e., collection companies and attorneys). This statute also appears to apply to all residential property, including those used as rentals, and is not expressly limited to owner-occupied property.
Due to its very recent enactment court review of R.C. §1349.72 has yet to fully evolve. In fact, there are not any published or unpublished opinions out of Ohio appeals or trial courts dealing with R.C. §1349.72 as of the time of this writing. The statute does not contain a sunset provision and so has become a permanent part of the Ohio collections landscape; a body of case law interpreting it will undoubtedly arise over time.
Perhaps one reason for the present lack of judicial opinions on R.C. §1349.72 is that its relatively straightforward and clearly enumerated requirements simply will not tend to precipitate much litigation. According to R.C. §1349.72, the written notice to the debtor must be in as least 12 point font, and provide the following minimum information:
(1) The name and contact information of the person collecting the debt;
(2) The amount of the debt;
(3) A statement that the debtor has a right to an attorney;
(4) A statement that the debtor may qualify for debt relief under Chapter 7 or 13 of the United States Bankruptcy Code, 11 U.S.C. Chapter 7 or 13, as amended;
(5) A statement that a debtor that qualifies under Chapter 13 of the United States Bankruptcy Code may be able to protect their residential real property from foreclosure.
In addition, if requested by the debtor in writing, the lender must provide the debtor with a copy of the note and loan history. Note the affirmative requirement on the part of the debtor to make the request in writing before the lender becomes obligated to furnish any documentation.
One aspect that may very likely lead to litigation is the lack of a specific time requirement for either the lender to give the required notice or for any action on the part of the debtor. R.C. §1349.72 merely states the notice described above must be given by the lender (or collector) “before” attempting to collect a debt that secured by a junior lien on residential real property. Likewise, no deadline is specified for the debtor to make a request for a copy of the note and history.
R.C. §1349.72 also does not explicitly limit its effectiveness only to foreclosure actions. Subsection (A) provides that the required notice must be given prior to attempting to collect any part of the debt that is secured by residential real property. This could potentially encompass situations where a lender may elect to seek a money judgment only, and reserve the exercise of any rights it may have with respect to its security interest in the property. Likewise, the statute does not define what constitutes “secured,” i.e., is a lender holding a debt which is secured by a mortgage that is “underwater” to senior liens and is, for all practical purposes, unsecured, and still subject to the requirements of R.C. §1349.72?
Looking to the law of other states provides limited guidance for Ohio. For example, California requires, with few exceptions, lenders to foreclose where the debt to be collected is secured by residential real property. The so-called “foreclose first” provisions of California Code of Civil Procedure §726(a) have been interpreted to include any cognizable security interest regardless of equity position or whether foreclosure is in fact an economically viable remedy. Walker v. Community Bank, 10 Cal. 3d 729 (1974).
As with any undefined statutory term, reasonableness would almost certainly be implied by a reviewing court. It may be prudent to give the required notice in any situation where a junior mortgage or other security interest is in play, at least 30 days in advance of undertaking any collection action, whether it be foreclosure or suit on the note only, perhaps sending it along with the initial demand letter so that the R.C. §1349.72 notice period can run concurrently with the FDCPA 30 day notice.
Perhaps more significantly, R.C. §1349.72 actually imposes civil liability for non-compliance with its requirements. Civil liability can be avoided if the lender can avail itself of the following safe harbor provisions:
(a) The owner of the debt shows by a preponderance of evidence that the compliance failure was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.
(b) Within sixty days after discovering the error, and prior to the initiation of any action, the owner of the debt notifies the debtor of the error and the manner in which the owner of the debt intends to make full restitution to the debtor.
(c) The owner of the debt promptly makes reasonable restitution to the debtor.
If, in the event of a compliance failure, the lender does not meet the conditions set forth above, a debtor “injured” by the error may have a cause of action to recover damages from the lender. The action cannot, however, proceed as a class action.
New York and Pennsylvania have similar pre-foreclosure or pre-collection notice requirements featuring statutorily prescribed warnings and advisements that must be given to the debtor prior to collecting debt secured by residential real property: See, e..g., New York Real Property Actions & Proceedings §1304; Pennsylvania Act. No. 6 of 1974, 41 P.S. § 403.
Unlike R.C. §1349.72, however, neither of the New York nor Pennsylvania statues provide for penalties for a lender’s non-compliance, or authorize a separate right of action to recover same. Instead, these statutes operate merely as a condition precedent to maintaining the collection action. CitiMortgage, Inc. v. Pappas, 147 A.D.3d 900 (2017). While they may provide the debtor with an expedited path to summary disposition, they do not provide for recovery of damages or even attorney fees. Bayview Loan Servicing, LLC v. Lindsay, 185 A.3d 307 (2018).
When collecting a debt that is secured by a junior lien against residential real property within Ohio, secured parties should proceed with extreme caution. The requirements of R.C. §1349.72 should be observed, and notice to the debtor drawn-up in conformity with its dictates should be provided and sent in the manner required, prior to undertaking any collection action whether it be judicial foreclosure or a lawsuit for money damages. We at Simon PLC Attorneys & Counselors are always ready to answer your questions and can ensure your debts are always collected in harmony with R.C. §1349.72 and all other applicable state and federal statutes.
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