Am. Fin. Services Assn. v. Toledo

• Decision Date: 10 June 2005
• Docket Number: No. L-04-1214.,L-04-1214.
• Parties: AMERICAN FINANCIAL SERVICES ASSOCIATION et al., Appellees, v. CITY OF TOLEDO, Appellant.
• Court: Ohio Supreme Court

Page 1233

830 N.E.2d 1233

161 Ohio App.3d 477

2005 Ohio 2943

AMERICAN FINANCIAL SERVICES ASSOCIATION et al., Appellees, v. CITY OF TOLEDO, Appellant.

No. L-04-1214.

Court of Appeals of Ohio, Sixth District, Lucas County.

Decided June 10, 2005.

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John Winship Read, Cleveland, and John J. Kulewicz, Columbus, for appellee American Financial Services Association.

Jim Petro, Attorney General, Sharon A. Jennings, and Holly J. Hunter, Assistant Attorneys General, for appellee state of Ohio.

Barbara E. Herring, Toledo Director of Law, John T. Madigan, General Counsel, and Adam Loukx, Senior Attorney, for appellant.

SKOW, Judge.

{¶ 1} Appellant, the city of Toledo, appeals from a judgment by the Lucas County Court of Common Pleas granting summary judgment in favor of appellee American Financial Services Association ("AFSA") and appellee intervenor, the state of Ohio. For the reasons that follow, we reverse.

{¶ 2} The instant appeal arises from a complaint filed by AFSA seeking injunctive relief and declaratory judgment in connection with a series of ordinances enacted by the city to regulate predatory lending practices in Toledo. The ordinances were issued after extensive investigation by the city revealed that predatory mortgage lending had become a significant problem in the city and that legislation was needed to address it.

{¶ 3} The city's multisource investigation brought to light the following facts regarding predatory lending. In general, predatory loans are loans made to consumers that are unsuitable to the consumers' particular financial situation. Although there is no single, narrow definition of predatory lending, it characteristically involves the use of fraud or deception, manipulation of the borrower through aggressive sales tactics, or taking unfair advantage of a borrower's lack of understanding of loan terms. It is almost certainly no coincidence that another characteristic of predatory lending is that it occurs most frequently in the subprime market, which is subject to less stringent regulation than the prime market. Of greatest concern to those attempting to stem these offensive practices is the fact that predatory lenders selectively target and victimize society's most vulnerable populations, including the elderly, disabled, and poor.

{¶ 4} A report on predatory lending by the Housing and Urban Development Department and the United States Treasury Department identifies four broad categories of frequent subprime market abuses and describes them as follows:

{¶ 5} (1) Loan Flipping — Loan flipping occurs when a mortgage originator repeatedly refinances a borrower's loan in a short period of time. With each refinancing, the originator charges high fees, including, sometimes, prepayment penalties, that strip the borrower's equity in his home.

{¶ 6} (2) Excessive Fees and "Packing" — Excessive fees are fees that far exceed what would be expected or justified based on economic grounds. "Packing" refers to packing fees into the loan amount without the borrower's understanding.

{¶ 7} (3) Lending without Regard to the Borrowers' Ability to Repay — This practice involves lending based on a borrower's equity in his home, when the borrower clearly does not have the capacity to repay the loan. In particularly egregious cases, elderly people living on fixed incomes end up with monthly payments that equal or exceed their monthly incomes. Such loans quickly lead borrowers into default and foreclosure.

{¶ 8} (4) Outright Fraud and Abuse — As indicated above, unscrupulous lenders commit fraud and abuse against certain vulnerable groups, including the elderly, disabled, and individuals with lower incomes and less education, by using deceptive or high-pressure sales tactics.

{¶ 9} Existing consumer protection laws have been largely unsuccessful in curbing the abusive practices. In fact, predatory lending has been allowed to flourish, even after the passage of the federal Home Ownership and Equity Protection Act of 1994 ("HOEPA"), as evidenced by a dramatic increase in foreclosures in Lucas County. The negative effects of predatory lending affect more than just the victimized borrowers. Homes that have been foreclosed upon can depress property values and lead to neighborhood deterioration and disinvestment and loss of taxes. According to the Coalition for Responsible Lending, predatory lending has cost borrowers in the United States approximately $9.1 billion annually.

{¶ 10} In response to these problems, the Toledo City Council passed the first of three ordinances addressing the subject of predatory lending on November 5, 2002. The legislative intent of the law, as set forth in the ordinance itself, is as follows:

{¶ 11} "Abusive and unfair lending practices adversely affect the City of Toledo and its residents, especially the poor and the elderly. Such practices may include aggressive and targeted marketing technologies, the making of loans exceeding a person's ability to pay, the changing [sic] of inflated fees and interest and the use of inflated appraisals. The purpose of this ordinance is to address such abusive lending practices not covered completed [sic] by state or federal law."

{¶ 12} The city's predatory-lending legislation specifically targets high-cost residential mortgage loans and seeks to eliminate deceptive practices frequently associated with these transactions. Primarily, the law requires that borrowers be provided with certain disclosures regarding the terms of their loan agreements. In addition, the law contains prohibitions against certain dishonest and unethical acts or practices on the part of lenders.

{¶ 13} The first predatory-lending ordinance to be enacted by the city was Ordinance No. 291-02, which was passed in November 2002. Subsequent versions of the predatory-lending ordinance, Ordinance Nos. 271-03 and 765-03, were enacted in July 2003 and October 2003, respectively. The first amended ordinance limited the law's application to lenders who originate home loans and clarified that the law applied only to mortgage loans on residential property located in Toledo. The second amended ordinance limited the applicability of the various disclosure requirements to mortgage loans having certain features, as listed in the ordinance.

{¶ 14} On February 4, 2003, AFSA filed its initial complaint stating that Ordinance No. 291-02 was a violation of Ohio Home Rule Law. On April 2, 2003, the state of Ohio filed a motion to intervene claiming that the city was challenging the constitutionality of the state's predatory-lending statute.

{¶ 15} On August 5, 2003, soon after the enactment of the first amended city ordinance, AFSA filed its first amended complaint. The state's motion to intervene was granted on August 6.

{¶ 16} On November 6, 2003, soon after the enactment of the second amended city ordinance, AFSA filed its second amended complaint.

{¶ 17} The state filed a motion for summary judgment on November 20, 2003, and AFSA filed a motion for summary judgment on November 21, 2003. On July 21, 2004, the trial court issued a judgment entry granting both motions for summary judgment on the grounds that the state's predatory-lending law, set forth in 2002 Am.Sub.H.B. No. 386, preempted the city predatory-lending ordinances.

{¶ 18} The city timely filed an appeal of the trial court's judgment.

{¶ 19} The city raises the following assignments of error:

{¶ 20} Assignment of Error I: "Trial court erred when it granted summary judgment on behalf of the appellees by determining that H.B. 386 preempted Toledo's predatory lending ordinances."

{¶ 21} Assignment of Error II: "The trial court erred in finding the [sic] Toledo's predatory lending ordinances were not severable if only certain provisions were invalid."

FIRST ASSIGNMENT OF ERROR

{¶ 22} The city argues in its first assignment of error that the trial court erred in granting summary judgment in favor of appellees.

Summary-Judgment Standard

{¶ 23} An appellate court reviewing a trial court's granting of summary judgment does so de novo, applying the same standard used by the trial court. Grafton v. Ohio Edison Co. (1996), 77 Ohio St.3d 102, 105, 671 N.E.2d 241. Civ.R. 56(C) provides:

{¶ 24} "Summary judgment shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, written admissions, affidavits, transcripts of evidence, and written stipulations of fact, if any, timely filed in the action, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. No evidence or stipulation may be considered except as considered in this rule."

{¶ 25} Summary judgment is proper when (1) no genuine issue of material fact remains to be litigated, (2) the moving party is entitled to judgment as a matter of law, and (3) when the evidence is viewed most strongly in favor of the nonmoving party, reasonable minds can come to but one conclusion, a conclusion adverse to the nonmoving party. Ryberg v. Allstate Ins. Co. (July 12, 2001), 10th Dist. No. 00AP-1243, 2001 WL 777121, citing Tokles & Son, Inc. v. Midwestern Indemn. Co. (1992), 65 Ohio St.3d 621, 629, 605 N.E.2d 936.

{¶ 26} The moving party bears the initial burden of informing the trial court of the basis for the motion and identifying those portions of the record that demonstrate the absence of a genuine issue of fact as to an essential element of one or more of the nonmoving party's claims. Dresher v. Burt (1996), 75 Ohio St.3d 280, 292, 662 N.E.2d 264. Once this burden has been satisfied, the nonmoving party has the burden, as set forth at Civ.R. 56(E), to offer specific facts showing a genuine issue for trial. Id.

H.B. No. 386

{¶ 27} In challenging the summary judgment entry, the city specifically disputes the trial court's conclusion that H.B No. 386, which enacted the state...