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23 June 2021 / Larry R. Rothenberg

Relief for Loan Servicers of Ohio Second Mortgages: Substitute H.B. 133

Topics: Real Estate

Loan servicers are welcoming Ohio’s enactment of Substitute H.B. 133, which among other things, cleans up some poorly drafted provisions of Ohio Revised Code §1349.72 enacted in 2019.

ORC §1349.72 previously required servicers of second mortgages or junior liens, on residential real property, to mail a written notice to the debtor's residential address prior to collecting or attempting to collect any part of the debt. The statute imposed civil liability for noncompliance.

Unfortunately, the former statute left loan servicers with many questions regarding the statute’s requirement.  For example, did the statute require the mailing of a notice before sending a late notice or a courtesy reminder notice? Before making a collection call? Before responding to a borrower’s call? Before applying a payment to a delinquent loan? After all, these actions could easily be defined as collecting or attempting to collect the debt, which might trigger the statute’s requirement.

The former statute required those creditors to include in the notice:
  • The name and contact information of the person collecting the debt
  • The amount of the debt
  • A statement that the debtor has a right to an attorney
  • A statement that the debtor may qualify for debt relief under Chapter 7 or 13 of the Bankruptcy Code
  • A statement that a debtor that qualifies under Chapter 13 of the Bankruptcy Code may be able to protect the residential real property from foreclosure
The newly-amended statute brings some clarity and relief to holders of junior liens on residential property, as it now only applies if both of the following apply:
  1. The debt is secured by a mortgager lien on the debtor’s residential real property that is not in the first mortgage position.
  2. The debt has either been accelerated or is in default in accordance with the terms set forth in the promissory note.
This means a creditor who cautiously sent the notice is now assured that the requirement does not apply prior to acceleration. Similarly, a creditor whose debt is secured by a judgment lien rather than a mortgage is no longer required to send the statutory notice.

However, the amended statute adds a new ambiguity by stating that it applies only if the debt secured by a junior mortgage has either been accelerated or is in default according to the promissory note’s terms. Is the legislature using the term promissory note loosely to reference other debt instruments as well? What if the loan is based on a home equity line of credit agreement rather than a promissory note?

Promissory note is generally defined as a signed document containing a written promise to pay a stated sum. This general definition would not seem to include a line of credit agreement.  However, creditors under lines of credit may desire to exercise “defensive medicine” by fulfilling the amended statute’s requirements.  Doing so would avoid an opening for the debtor to raise noncompliance with the statute as a claim for a civil liability on the creditor’s part, or to allege such a defense in litigation.  Most mortgages require a notice prior to acceleration, so the creditor can easily comply with the statute’s requirements by combining the information required by the mortgage and that required by the statute in a single notice.

The amended statute requires the notice to be sent at least 30 days prior to filing a foreclosure action. Therefore, even if the mortgage requires a notice say, only 10 days prior to acceleration, a combined notice should be sent at least 30 days prior to filing a foreclosure. The amended statute does not require the creditor to send a notice unless the creditor plans to file a foreclosure on the mortgage.

The notice may be included on, or accompany, any other communication. Similar to the prior statute’s requirements, the notice must be in at least 12-point type, and include:
  • The name and contact information of the person collecting the debt
  • A statement of the amount of the debt
  • A statement that the debtor has a right to engage an attorney
  • 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
  • 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
Upon written request of the debtor, the owner of the debt must provide a copy of the note and the loan history.

The amended statute becomes effective September 1, 2021, and will provide significant relief to those creditors burdened by what seemed to be unintended consequences of the prior statute.

For a complete copy of Sub. H.B. 133, click here.

This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.

Related Publications

Insights / 24 April 2019

Best Practices for Compliance with Ohios New Disclosure Requirements for Debts Secured by Second Mortgages or Junior Liens

Ohios new Revised Code 1349.72 which became effective in March - requires that prior to collecting or attempting to collect any part of the debt, the creditor must send a notice to the debtor if the debt is a second mortgage or junior lien on the debtors residential real property and the debt is in default.
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Larry R. Rothenberg

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