H.B. 3 contains several provisions which raise constitutional questions. Surely this could not have gone unnoticed by the sponsors, and cosponsors of the bill; of the 26 of them, 6 hold law degrees. They must surely be aware of the Contracts Clauses of the U.S. and Ohio Constitutions.
The U.S. Constitution Contracts Clause states that "No State shall... pass any... Law impairing the Obligation of Contracts." The Supreme Court, however, has construed this clause in a manner which makes it much less effective than our founders intended. Still, the Ohio Contracts Clause has been applied in a more strict manner by the Ohio Supreme Court. The Ohio Contracts Clause provides:
The General Assembly shall have no power to pass retroactive laws, or laws impairing the obligation of contracts; but may, by general laws, authorize courts to carry into effect, upon such terms as shall be just and equitable, the manifest intention of the parties, and officers, by curing omissions, defects, and errors, in instruments and proceedings, arising out their want of conformity with the laws of this state.
Before I get into the constitutional analysis, let me explain the most egregious provisions in the bill.
Under Section 2308.03, there is declared a six-month moratorium on mortgage foreclosure actions on occupied residential properties. No court shall hear a complaint for foreclosure or issue a judgment on such property. No clerk of court shall issue a writ of execution on such property. No foreclosed property shall be sold at auction. No court shall confirm the sale at auction. Basically, all foreclosures on occupied residential property is stopped for six-months.
Under Section 2308.04, for a period of three years after the bill becomes effective, a judge in a residential foreclosure action may reduce the principal amount and the interest rate of the loan. As I have mentioned in previous blogs, this is something that even the bankruptcy courts are prohibited from doing. In the context of bankruptcy, I believe this should be permitted. However, the constitutional prohibition on states passing laws impairing the obligation of contracts, and the Bankruptcy Clause, which empowers Congress to establish "uniform laws on the subject of bankruptcies throughout the United States," is a clear indication that our founders intended this type of law to be enacted at the federal level.
Under Section 1323.05, a foreclosed homeowner is entitled to remain in possession of the property until the property is sold or required for personal use and occupancy, in return for fair market rent to be determined by the court. This basically creates a right-to-rent for the homeowner. It forces a new obligation, to become a landlord, on the mortgagee following a foreclosure. Potentially, it could mean that the bank could be forced to make repairs that the tenant neglected when he was the owner of the property. And, unlike most month-to-month tenancies that can be terminated with one month's notice, it appears that the mortgagee could not evict the tenant until the property is sold.
Under Section 1323.11, a mortgagee must pay a state-wide filing fee of $1,500 that it may not pass on to the homeowner. Despite language in most mortgage contracts that allow the lender to recoup the fees associated with enforcing its rights, this provision would not allow the lender to do so.
The U.S. Constitution
The Supreme Court has upheld state laws against Contracts Clause challenges in the past, generally finding that the state sometimes has the authority to impair the obligation of contracts through its inherent police powers. The most famous case was Home Building & Loan v. Blaisdell, 290 U.S. 398 (1934).
Blaisdell was a case that arose out of legislation from the era of the Great Depression. The Minnesota Mortgage Moratorium Law extended the redemption period available to homeowners following a foreclosure. During the redemption period, homeowners were permitted to remain in their homes for reasonable rent. The Court held that this was a valid exercise of the police power because of the emergency that existed at the time. The legislation was found to be appropriately tailored to the emergency that existed, and it was temporary in nature.
Despite the comparisons that are drawn today between our current crisis and the Great Depression, things today are not nearly as bad as they were in the 1930's. During the Great Depression, more than 50% of families with mortgages were in default and unemployment rose to about 30%. Today, about 10% of mortgages are in arrears or in foreclosure and unemployment is 8.1%.
Since Blaisdell, the Court has indicated that the public purpose justifying the use of the state's police power need not be addressed to an emergency or temporary situation. In Energy Reserves Group v. Kansas Power & Light, 459 U.S. 400 (1983), the Court held that even if legislation substantially impairs the obligation of contracts, it will not violate the Contracts Clause if the state has a significant and legitimate public purpose and the legislation is reasonably related to that goal. Because the courts defer to legislative judgment on economic and social regulation, this extremely low standard would practically eviscerate the Contracts Clause. Although this is widely believed to be the Court's current approach to the Contracts Clause analysis, I do not believe that the Court intended to apply it in all circumstances.
The Court stated that "the severity of the impairment measures the height of the hurdle the state legislation must clear." It found it significant in Energy Reserves that the parties were operating in a "heavily regulated industry," (the natural gas industry) where state "supervision of the industry [was] extensive and intrusive." This level of regulation basically meant that the parties should have expected further legislation regulating the industry and the impairment was less substantial. I believe that the impairment created by H.B. 3 is much more substantial and the Court would apply the more strict scrutiny outlined by Blaisdell.
The Supreme Court has definitely left the door open for arguments on both sides of the issue and although I believe that H.B. 3 would violate the Contracts Clause of the U.S. Constitution, that issue is less clear than it appears under the Ohio Contracts Clause.
The Ohio Constitution
In addition to a prohibition on laws impairing the obligation of contracts, the Ohio Constitution also prohibits retroactive laws. This prohibition does not exist in the federal constitution. Although Art. I, Sec. 9 of the U.S. Constitution provides that "No... ex post facto Law shall be passed," this only applies to criminal laws. (see Calder v. Bull, 3 U.S. 386 (1798)).
The Supreme Court of Ohio has held that the Contracts Clause of the Ohio Constitution "is a bar against the state's imposing new duties and obligations upon a person's past conduct and transactions, and it is a protection for the individual who is assured that he may rely upon the law as it is written and not later be subject to new obligations thereby... The General Assembly is prohibited, estopped, from passing new laws to reach back and create new burdens, new duties, new obligations, or new liabilities not existing at the time." Aetna Life Ins. v. Shilling, 67 Ohio 3d 164 (Ohio 1993).
However, not all laws are subject to such restrictions. The Contracts Clause "does not preclude within certain limits the alteration or modification of remedies. It merely means that the alteration cannot go to the extent of impairing the obligation of contracts." Flory v. Cripps, 132 Ohio St. 487 (Ohio 1937). Thus, some would like to argue that H.B. 3 merely affects the remedies, and not the substance of the mortgage contracts it affects. This is clearly not the case. "Any change [to the law] which impairs the rights of either party, or amounts to a denial or obstruction of the rights accruing by contract, is obnoxious to this constitutional provision." Aetna Life Ins.
The six-month moratorium could be merely remedial. However, it appears to me that a lender cannot even file a foreclosure and there is no provision requiring the homeowner make any payments until they are in foreclosure, or post confirmation. Though it is temporary, is does "deny or obstruct" the rights of the mortgagee.
Allowing a county judge to "cram-down" the mortgage debt and interest rate is clearly substantive. The primary obligation under a mortgage contract is the repayment of the principal at the agreed interest rate. I can see no chance that this provision would survive a constitutional challenge.
The requirement that the lender pay a $1,500 state-wide filing fee is clearly remedial. However, the prohibition on passing that along to the borrower, as is required under the mortgage contract, is a denial of the lender's "rights accruing by a contract."
And, the right-to-rent provision may create several new obligations for the mortgagee. The mortgagee could be subject to O.R.C. Sec. 5321.04, Obligations of the landlord. The question here would be does this provision constitute a "rental agreement?"
5321.04. Obligations of landlord
(A) A landlord who is a party to a rental agreement shall do all of the following:
(1) Comply with the requirements of all applicable building, housing, health, and safety codes that materially affect health and safety;
(2) Make all repairs and do whatever is reasonably necessary to put and keep the premises in a fit and habitable condition;
(3) Keep all common areas of the premises in a safe and sanitary condition;
(4) Maintain in good and safe working order and condition all electrical, plumbing, sanitary, heating, ventilating, and air conditioning fixtures and appliances, and elevators, supplied or required to be supplied by him;
(5) When he is a party to any rental agreements that cover four or more dwelling units in the same structure, provide and maintain appropriate receptacles for the removal of ashes, garbage, rubbish, and other waste incidental to the occupancy of a dwelling unit, and arrange for their removal;
(6) Supply running water, reasonable amounts of hot water and reasonable heat at all times, except where the building that includes the dwelling unit is not required by law to be equipped for that purpose, or the dwelling unit is so constructed that heat or hot water is generated by an installation within the exclusive control of the tenant and supplied by a direct public utility connection;
. . .
Clearly, by forcing a mortgagee to become a landlord, a whole host of new obligations could be created. Thus, violating the Ohio Constitution.
So, what affect would H.B. 3 have if these provisions are ruled to violate the Ohio Constitution? Well, the Ohio Constitution only prohibits these provisions from being retroactively applied to existing mortgages. The Ohio Revised Code provides that "a statute is presumed to be prospective in its operation unless expressly made retrospective." (O.R.C. Sec. 1.48). This would mean that all of these provisions would become a binding part of any new mortgages in Ohio after the bill becomes effective.
Because these provisions would all make foreclosures much more costly for mortgagees in Ohio, the cost of borrowing for all Ohioans would increase. The up-front fees may be increased, or the interest rates would be higher for everyone, not just those who are facing foreclosure. At a time when Ohioans need affordable home financing, the legislature seeks to make borrowing more expensive.
I am not blind to the troubling issues that foreclosures are causing in our state. We do need to do something to address this concern and help struggling borrowers and those who are seeing their home values negatively impacted by foreclosures in their neighborhoods. However, we must be mindful of the Constitution and we must be wary of the unintended consequences any legislation may create.
I am in favor of tightening up the regulation on predatory lending, requiring additional notices to those facing foreclosure to let them know about their rights (which H.B. 3 does provide), court ordered mediation, and even more state-funding to provide homeowners with legal and mortgage modification services.
Despite all of the problems with H.B. 3, it seems that the House is determined to pass it in some form. It will likely see many amendments before it gets to the Senate and even more when it arrives there. Most likely, if it passes, it will face a constitutional challenge in the courts, which at best will delay its implementation significantly making it less likely that it will help those who are facing foreclosure now.
With all this in mind, I believe the House Democrats are using this as a political stunt to garner votes, knowing full well that they just can't do what they are proposing. This is not the time to be grandstanding - the legislature needs to focus on what they can do to really provide help to those in need. Why is it so hard for politicians to put aside their partisan issues and work together to do something good for their constituents?
Robert A. Franco
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