Am. Financial Servs. Assn. v. Cleveland

Decision Date20 November 2006
Docket NumberNo. 2005-0161.,No. 2005-0160.,2005-0160.,2005-0161.
CourtOhio Supreme Court
PartiesAMERICAN FINANCIAL SERVICES ASSOCIATION at al., Appellants, v. CITY OF CLEVELAND, Appellee.

Vorys, Sater, Seymour & Pease, L.L.P., John Winship Read, and John J. Kulewicz, Columbus, for appellant American Financial Services Association.

Jim Petro, Attorney General, Douglas R. Cole, State Solicitor, and Sharon A. Jennings and Holly J. Hunt, Assistant Attorneys General, for appellant Attorney General of Ohio.

Teresa M. Beasley, Cleveland Director of Law, Thomas J. Kaiser, Chief Trial Counsel, and Joseph G. Hajjar, Assistant Director of Law, for appellee.

Bricker & Eckler, L.L.P., and Luther Liggett Jr., Columbus, urging reversal for amicus curiae Ohio Mortgage Bankers Association.

The Brunner Firm Co., L.P.A., Rick L. Brunner, Michael S. Kolman, and Rebecca L. Egelhoff, Columbus, urging reversal for amicus curiae Ohio Association of Mortgage Brokers.

Jeffrey D. Quayle; Thompson Hine, L.L.P., Jeffery E. Smith, John T. Sunderland, and Craig A. Calcaterra, Columbus, urging reversal for amicus curiae Ohio Bankers League.

Legal Aid Society of Cleveland, Julie K. Roble, Harold L. Williams, and Andrea X. Price, Jefferson, urging affirmance for amicus curiae East Side Organizing Project.

Advocates for Basic Legal Equality and Stanley A. Hirtle, Dayton, urging affirmance for amicus curiae Edgemont Neighborhood Coalition.

Byron & Byron Co., L.P.A., Barry M. Byron, and Stephen L. Byron, Willoughby; and John E. Gotherman, Cleveland, urging affirmance for amici curiae Ohio Municipal League and International Municipal Lawyers Association.

O'DONNELL, J.

{¶ 1} We are called upon again to consider the Home Rule Amendment to the Ohio Constitution—this time in connection with predatory lending, the subject of legislation enacted by the Ohio General Assembly commonly known as Sub.H.B. No. 386 and of local ordinances in the cities of Dayton and Cleveland.

{¶ 2} This case has been certified to us as a conflict between the Second District Court of Appeals, which determined, in its comprehensive review of the law in this field, that predatory lending was not a proper subject for regulation by local ordinance, and the Eighth District Court of Appeals in the instant case, which held that the Cleveland ordinances regulating lending were within Cleveland's home-rule power.

Substitute House Bill No. 386

{¶ 3} In February 2002, the Ohio General Assembly enacted Sub.H.B. No. 386, 149 Ohio Laws, Part IV, 6938, including new sections R.C. 1.63 and 1349.25 through 1349.37, which incorporated much of the substance of the federal Home Ownership and Equity Protection Act ("HOEPA") of 1994 into Ohio law, requiring lenders to make certain disclosures to mortgagors on certain loans. That legislation defines covered loans as consumer credit mortgage loans that involve Ohio property and are considered "mortgages" as defined in HOEPA, i.e., those having an interest rate that exceeds by more than ten percentage points the yield on Treasury securities or having points and fees that exceed eight percent of the loan or exceed $400.

{¶ 4} Specifically, R.C. 1349.25(D) defines "covered loan," which is the subject of the predatory-lending regulation, as "a consumer credit mortgage loan transaction that meets both of the following criteria:

{¶ 5} "(1) The loan involves property located within this state.

{¶ 6} "(2) The loan is considered a mortgage under section 152(a) of the 'Home Ownership and Equity Protection Act of 1994,' 108 Stat. 2190, 15 U.S.C.A. 1602(aa), as amended, and the regulations adopted thereunder by the federal reserve board, as amended."

{¶ 7} The federal statute referred to, Section 1602(aa), Title 15, U.S.Code, states:

{¶ 8} "(1) A mortgage referred to in this subsection means a consumer credit transaction that is secured by the consumer's principal dwelling, other than a residential mortgage transaction, a reverse mortgage transaction, or a transaction under an open end credit plan, if—

{¶ 9} "(A) the annual percentage rate at consummation of the transaction will exceed by more than 10 percentage points the yield on Treasury securities having comparable periods of maturity on the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor; or

{¶ 10} "(B) the total points and fees payable by the consumer at or before closing will exceed the greater of—

{¶ 11} "(i) 8 percent of the total loan amount; or

{¶ 12} "(ii) $400."

{¶ 13} The Ohio statutes impose numerous limitations on the terms and conditions of covered loans, including the amount of a loan payment that can be collected up front from loan proceeds and a prohibition of balloon payments for loans with terms of fewer than five years. R.C. 1349.27.

{¶ 14} Following enactment of Sub.H.B. No. 386, the city of Cleveland promulgated Cleveland Codified Ordinance 659.02, prohibiting any "predatory loan," defined by 659.01(f) as a loan secured by a first mortgage and having an interest rate between four and a half and eight percentage points above the yield on certain Treasury securities or secured by a junior mortgage and having an interest rate between six and a half and ten percentage points above that Treasury yield and that were made under certain enumerated circumstances, i.e., flipping (refinancing under specified conditions), requiring balloon payments, excessive financing of points and fees, and increasing interest rates upon default.

{¶ 15} As a result of the enactment of the Cleveland ordinances, American Financial Services Association, a national trade association representing various financial institutions, filed a complaint in the Cuyahoga County Common Pleas Court seeking declaratory and injunctive relief, asserting that the city's ordinances conflicted with the state statutes involving predatory lending. The trial court granted summary judgment, invalidated the city's predatorylending ordinances, and found that the state statutes constituted general laws in conflict with the local ordinances.

{¶ 16} Cleveland appealed that determination to the court of appeals, which reversed the trial court and held that the city's predatory-lending ordinances did not conflict with the state statutes, 159 Ohio App.3d 489, 2004-Ohio-6416, 824 N.E.2d 553, at ¶ 37, that the General Assembly could not extinguish the legislative power of a municipal corporation granted by the Constitution, and that R.C. 1.63 was not a general law. Id. at ¶ 30. After determining that its decision conflicted with a decision of the Second District Court of Appeals in Dayton v. State, 157 Ohio App.3d 736, 2004-Ohio-3141, 813 N.E.2d 707, the Eighth District certified the following two questions for review:

{¶ 17} "I: Whether R.C. 1.63 is a general law for purposes of Ohio's home rule amendment.

{¶ 18} "II: Under a home rule analysis, whether local predatory lending ordinances that impose stricter requirements on lending transactions conflict with the state's predatory lending statutes."

{¶ 19} In the conflict case, Dayton v. State, 157 Ohio App.3d 736, 2004-Ohio-3141, 813 N.E.2d 707, the Second District Court of Appeals reviewed dozens of Ohio Supreme Court home-rule cases and described what it regarded as inconsistent forms of analysis used to decide them. In resolving its case, the Second District followed the conflict analysis outlined in Fondessy Ents., Inc. v. Oregon (1986), 23 Ohio St.3d 213, 23 OBR 372, 492 N.E.2d 797, instead of a preemption analysis, and pointed, out that the Eighth District Court of Appeals had also used the same conflict analysis in an earlier home-rule case, Fairview Park v. Barefoot Grass Lawn Serv., Inc. (1996), 115 Ohio App.3d 306, 311-312, 685 N.E.2d 300. Dayton, 157 Ohio App.3d 736, 2004-Ohio-3141, 813 N.E.2d 707, at ¶ 81. The court in Dayton determined that the regulation of predatory lending involved the use of police power, that the state had enacted general laws on the same subject, that Dayton's local predatory-lending ordinances conflicted with state legislation by regulating loans that were otherwise lawful in Ohio, and that R.C. 1.63, considered in context as part of a comprehensive statutory enactment, constituted a general law. Id. at ¶ 86, 92, 101, 97, and 110.

{¶ 20} We accepted both certified questions and also granted discretionary review to consider the matter and resolve the conflict between the appellate jurisdictions. 105 Ohio St.3d 1496, 2005-Ohio-1666, 825 N.E.2d 620.

{¶ 21} On appeal to this court, American Financial presents two major contentions: (1) R.C. 1.63, considered in context as part of Sub.H.B. No. 386, constitutes a general law of the state, and (2) the Cleveland ordinances conflict with state statutes by prohibiting loans permitted by state law. Cleveland contends that R.C. 1.63 is an invalid limitation on its legislative authority and that the city can regulate lending because the statute is not a general law. We will address these arguments separately.

Article XVIII—The Home Rule Amendment

{¶ 22} Section 3, Article XVIII, the Home Rule Amendment to the Ohio Constitution, authorizes municipalities "to exercise all powers of local self-government and to adopt and enforce within their limits such local police, sanitary and other similar regulations, as are not in conflict with general laws."

{¶ 23} The first step in a home-rule analysis is to determine "whether the matter in question involves an exercise of local self-government or an exercise of local police power." Twinsburg v. State Emp. Relations Bd. (1988), 39 Ohio St.3d 226, 228, 530 N.E.2d 26, overruled on other grounds, Rocky River v. State Emp. Relations Bd. (1989), 43 Ohio St.3d 1, 20, 539 N.E.2d 103. If an allegedly conflicting city ordinance relates solely to self-government, the...

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