Enforcing Junior Liens: Complying with Ohio’s Newest Notice Requirement

A new compliance requirement has arisen for Ohio’s banks and credit unions.[i] That is, lenders must start to send notices to their borrowers before collecting a debt in default if the borrower’s residential real property secures that debt through a junior lien.[ii] For example, second-mortgage lenders (among others) must send this new notice in addition to other notices like those that loan documents and other laws require.

The Notice

Beginning on March 20, 2019, Ohio lenders, among others, must send a notice before collecting an applicable debt (i.e., default/residential real property/junior lien). That notice must contain information about (1) the creditor, (2) the debt, (3) the right to an attorney, and (4) protection provided by bankruptcy law.[iii] If it doesn’t, or if the notice isn’t sent, a borrower can sue its lender for damages.[iv]

The (Useless) Bona Fide Error Defense

Lenders aren’t liable for violating Ohio’s new notice law in all cases. When the following are true, borrowers can’t successfully sue their lenders for notice violations:

  1. The lender unintentionally violated the notice law because of a clerical, computer, or printing error despite preventative measures in place.
  2. The lender hasn’t initiated “any action” against the borrower or its property;
  3. The lender writes to the borrower within 60 days after discovering the violation and promises “to make full restitution” for the error; and
  4. The lender pays “reasonable restitution” to the borrower.[v]

Short of avoiding litigation fees, this defense is useless: it still requires a lender to pay damages to a borrower (i.e., “reasonable restitution”). And how should a lender calculate “reasonable restitution” concerning a noncompliant notice? What harm can a noncompliant notice cause? It’s unclear. As a result, it’s unlikely that Ohio’s lenders can successfully rely on the new law’s bona fide error defense.

Information Requests

Ohio’s new notice law also allows a borrower to write to its creditor and ask for information about the debt at issue.[vi] In response, the creditor must send a copy of the debt’s promissory note and loan history to the borrower.

Final Thoughts

It’s clear that Ohio’s new notice law requires banks and credit unions to send notices before collecting applicable debts. But that law has also created ambiguity. For instance, it may require a financial institution’s vendors to send a notice as well. It may necessitate notice before making a collection call concerning an applicable debt. And it may apply to judgments in addition to debts in default.

Much of the new law is unclear because of its broad phrasing and lack of specific definitions. As a result, we strongly recommend that Ohio’s creditors consult experienced legal counsel to develop and implement forms and policies that will comply with Ohio’s new notice law.

[i] R.C. 1349.72. That law becomes effective on March 20, 2019.

[ii] See R.C. 1349.72(A).

[iii] R.C. 1349.72(B). You should consult an attorney about the exact wording needed to comply with the new law.

[iv] See R.C. 1349.72(D)(3).

[v] See R.C. 1349.72(D).

[vi] See R.C. 1349.72(C).