The state defines “predatory loans” as loans that involve Ohio property and in which either (a) the annual interest rate at consummation exceeds the yield on comparable Treasury securities by eight percent for first mortgage loans or ten percent for second mortgage loans or (b) the total points or fees exceed the greater of eight percent of the loan amount or at least $400. R.C. (D). “
Although the state statutes impose restrictions and disclosure requirements on these covered loans and provide a rescission remedy and creditor penalties, they do not impose mandatory counseling for the borrower as a prerequisite to issuing the loan. R.C. , , , and . The state statutes also generally permit lenders to make payments directly to home-improvement contractors, while imposing some conditions, but not absolutely precluding such payments, in covered loan transactions. R.C. (E). R.C. . Also, the state statutes do not require a “certification of compliance” title loan repossession laws Oregon detailing factual information about a covered loan when recording a mortgage.
Lastly, R.C. 1.63 states that “[t]he state solely shall regulate the business of originating, granting, servicing, and collecting loans” and preempts municipal ordinances attempting to regulate the business.
AFSA’s complaint arose from the city’s enactment of a series of predatory-lending laws. The ordinances at issue in this lawsuit are Nos. 737-02 and 45-03, as well as Sections through , , , , and of the Codified Ordinances of the City of Cleveland.
“Predatory loan” in Cleveland is defined as any residential loan bearing interest at an annual rate that exceeds the yield on comparable Treasury securities by either four and one-half to eight percentage points for first mortgage loans or six and one-half to ten percentage points for junior mortgages. C.C.O. Sections and . In addition, loans are considered predatory if they were made under circumstances involving the following practices or include the following terms: loan flipping, balloon payments, negative amortization, points and fees in excess of four percent of the loan amount or in excess of $800 on loans below $16,000, an increased interest rate on default, advance payments, mandatory arbitration, prepayment penalties, financing of credit insurance, lending without home counseling, lending without due regard to repayment, or certain payments to home-improvement contractors under certain circumstances. C.C.O. Sections and .
The city also requires a certification of compliance to be recorded in the Cuyahoga County Recorder’s Office and charges the director of consumer affairs with enforcement of the ordinances. C.C.O. Sections and . A violation of a prohibited act under the ordinances constitutes a misdemeanor of the first degree, while a violation of a disclosure or recording requirement is a misdemeanor of the fourth degree. Section (a) and (b). The ordinances further provide that the city will not do business with predatory lenders. Section C.C.O. (C).
First, AFSA maintains that the city transcends the state limits on interest rates by regulating loans that are up to three and one-half percent below the threshold limit of eight percent on first mortgages and ten percent on junior mortgages. Second, the city ordinances apply to loans with points and fees in excess of four percent of the loan amount (or in excess of $800 for loans below $16,000), a standard that is set below the state threshold. C.C.O. Sections (a)(2) and (a).
Fourth, unlike state law, which only imposes certain conditions, the city prohibits any direct payments to home-improvement contractors of the proceeds of any residential loan meeting the city’s definition of a predatory loan. R.C. (E) and C.C.O. Section (a)(3). Fifth, the city requires that a specified loan-disclosure notice be given to borrowers three days prior to closing on any home-improvement loan made in Cleveland, including those defined as predatory loans under both the city ordinances and state law. C.C.O. Section (a). The state, although requiring certain disclosures on home improvement loans, does not require the notice required by the city ordinances. Further, under the city’s ordinances, failure to comply subjects the lender to possible criminal penalties. C.C.O. Section (b).