The Ohio Supreme Court unanimously upheld the ability of financial institutions to enforce an attorney’s fees provision when reinstating a defaulted residential mortgage contract.

The Court addressed this issue in the context of a class action that presented two types of residential borrowers. Most of the borrowers at issue fell into the category of having defaulted on loans that included a specific provision for how the loan might be reinstated. That required the borrower to bring its payments current, pay the lender’s costs and attorney’s fees incurred in any foreclosure litigation, and then having the loan reinstated and the litigation dismissed. However, one plaintiff had requested a loan payoff statement after her lender initiated foreclosure proceedings. She paid that amount in its entirety rather than having the loan reinstated, but her lender still insisted on payment of its foreclosure litigation attorney’s fees prior to dismissing that action.

The Court summarized long-standing Ohio law that voids attorney’s fee provisions upon enforcement of a debt obligation. The Court noted that such attorney’s fee provisions operate as a penalty to the defaulting party and encourage litigation. When a residential borrower pays off the debt entirely, that debtor is entitled to dismissal of foreclosure proceedings. And that dismissal cannot be conditioned on payment of the lender’s attorney’s fees.

However, according to the Court, reinstatement of a mortgage loan is a different circumstance that does not implicate the same public policy concerns. The uniform Fannie Mae and Freddie Mac mortgage forms contain the borrowers’ right to reinstatement. The Court stated that “reinstatement is not the enforcement of a debt obligation, and the public-policy concerns regarding the imposition of a penalty against a debtor upon default have no relevance.”

Ultimately, the Court held that “a provision in a residential mortgage contract requiring a defaulting borrower to pay a lender’s reasonable attorney fees as a condition of terminating pending lender-initiated foreclosure proceedings on a defaulted loan and reinstating the loan is not contrary to Ohio statutory or decisional law or against Ohio public policy.”