Mortgage lendingReal estateReal Estate Law

Borrower-paid attorney fees in foreclosure? Unlawful

Many promissory notes and mortgages contain a provision awarding attorney’s fees for foreclosing on the borrower. This even includes Fannie Mae’s uniform mortgage for Ohio.

Many lenders can and do successfully collect attorney’s fees on collection and foreclosure judgments.

However, as we know elsewhere in real estate law, just because the contract says you can do it, doesn’t mean that the law allows it.

The Ohio Supreme Court laid out the rule in no uncertain terms in Wilborn v. Bank One, 2009-Ohio-306.

{¶ 10} [C]ontracts for the payment of attorney fees upon the default of a debt obligation are void and unenforceable. In the context of foreclosure actions, we stated in Leavans v. Ohio Natl. Bank (1893) . . . :

{¶ 11} “A stipulation in a mortgage to the effect that, in case an action should be brought to foreclose it, a reasonable attorney fee, to be fixed by the court, for the services of the plaintiff’s attorney in the foreclosure action, should be included in the decree, and paid out of the proceeds arising from the sale of mortgaged property, is against public policy and void.”

{¶ 12} The rule in Leavans was affirmed several years later in Miller v. Kyle (1911) . . . which held:

{¶ 13} “It is the settled law of this state that stipulations incorporated in promissory notes for the payment of attorney fees, if the principal and interest be not paid at maturity, are contrary to public policy and void.”

There are some exceptions to be aware of, however:

  1. A borrower can agree to pay the lender’s attorney fees in exchange for dismissing a foreclosure lawsuit. This is the scenario that the court in Wilborn was analyzing.
  2. A homeowner’s association can collect attorney fees for foreclosing on an HOA lien. Nottingdale Homeowner’s Assoc. v. Darby (1987), 33 Ohio St.3d 32.
  3. An agreement for the sale of accounts receivable can contain an attorney-fee provision when the parties have equal bargaining power. First Capital Corp. v. G & J Indus., Inc. (1999) 131 Ohio App.3d 106.
  4. Franchise agreements can contain attorney-fee provisions for nonpayment. Goldfarb v. Robb Report, Inc. (1995), 101 Ohio App.3d 134.
  5. Loan guaranties can contain attorney-fee provisions. Gaul v. Olympia Fitness Ctr., Inc. (1993), 88 Ohio App.3d 310.

The first exception to the rule introduces some important nuance which allows the lender to collect attorney’s fees in a reinstatement, but not on redemption. To clarify, let’s discuss the timeline for a mortgage default and foreclosure.

  1. The borrower defaults on the loan.
  2. The mortgagee sends notice of default, and several other notices, some of which may ask for payment of attorney’s fees.
  3. The mortgagee files a foreclosure lawsuit.
  4. The court issues a Decree of Foreclosure, which determines how much the lender is owed (in terms of principal, interest and fees, but not attorney fees).
  5. A sheriff sale is ordered and the property is sold.
  6. The court confirms the sale and the sheriff records a deed.

After step 4 but before step 6, Ohio Rev. Code sec. 2923.33 allows a borrower to deposit the outstanding balance with the court to dismiss the foreclosure lawsuit and save the property. If this procedure is followed, the borrower does not have to pay attorney’s fees. This is called redemption.

It’s important to note that at no time after #1 is the lender required to accept any payments from the borrower to reinstate the loan. If they’re tired of the borrower’s shenanigans, they can call the whole thing off and demand that the loan be paid in full.

The loan might contain provisions allowing the borrower to reinstate the loan, which would require the borrower to pay the past due balance in order to make the loan current again. Or the lender might voluntarily agree to reinstate the loan in exchange for a payment. It is in this scenario only that the lender can ask for their attorney fees to be paid.

The law basically requires the lender to continue its lending relationship with the borrower if it wants its attorney fees to be paid.

In companion litigation to Wilborn in Federal court, FDCPA liability was imposed upon the lender for attempting to collect attorney’s fees associated with the loan.  See Kline v. Mortgage Elec. Sec. Sys., S.D. Ohio (2013).

If you’ve had to pay attorney’s fees as a part of a mortgage payoff, you may be entitled to the recovery of those fees plus a penalty from the lender. Reach out to us today and mention this blog article for a free consultation.

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