A Cleveland homeowner and other borrowers cannot recover a $250 payment from Fannie Mae for the late recording of their paid-off mortgages while Fannie Mae is under federal conservatorship, the Ohio Supreme Court ruled.

In a lead opinion, Justice Judith L. French wrote Congress established the Federal Housing Finance Agency (FHFA) in 2008 to oversee and provide stability to Fannie Mae, and Fannie Mae is immune from state-imposed penalties, such as the $250 fine for late recording of a paid-off mortgage, while it is under FHFA’s conservatorship.

Homeowners Sought Damages
In August 2003, Rebekah R. Radatz initiated a class action lawsuit in Cuyahoga County Common Pleas Court against the Federal National Mortgage Association (Fannie Mae) under R.C. 5301.36(C). Radatz and the others alleged Fannie Mae failed to follow the law’s requirements that a lender must record a satisfied mortgage within 90 days of the payoff. The statute instructs that if the lender fails to comply, the borrower “may recover, in a civil action, damages of” $250.

In December 2006, the trial court certified a class of all persons since 1997 who paid off a mortgage where Fannie Mae failed to record the satisfaction of their mortgages within the 90-day period.

Congress Creates the FHFA to Oversee Federally Backed Lenders
As the case was proceeding, Congress enacted the Housing and Economic Recovery Act of 2008 (HERA) in response to the national decline in house prices, increased foreclosures, and heightened concern that Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) would not be able to financially sustain themselves.

The law allowed the FHFA to be both the regulator and conservator of Fannie Mae and Freddie Mac. Congress gave the FHFA the authority to issue cease-and-desist orders if either entity engaged in “unsafe or unsound practices.” The FHFA was granted the power to take any action “necessary to put the regulated entity in a sound and solvent condition,” and to preserve and conserve its assets.

Fannie Mae sought to have the class-action lawsuit moved to federal court, but the request was rejected and the case returned to common pleas court in March 2010. In March 2013, the FHFA issued a cease-and-desist order against Fannie Mae that prohibited it from “paying, for any reason, directly or indirectly, any fines or penalties imposed by any state mortgage satisfaction law” on it for noncompliance. The order also specifically prevented any payment of a judgment against it in Radatz’s lawsuit.

Fannie Mae moved to dismiss the case, arguing the court no longer had jurisdiction and the FHFA’s order shielded the lender from any liability in the nature of penalties or fines. The trial court agreed, and Radatz appealed to the Eighth District Court of Appeals. The Eighth District reversed the trial court’s decision, ruling the FHFA order did not block the trial court’s jurisdiction, and that the $250 payment in R.C. 5301.36(C) is compensation for damages, not a penalty or fine. Fannie Mae appealed to the Supreme Court.

State Court Has Jurisdiction, but Payment Is a Penalty
The federal statute affecting judicial review of FHFA is 12 U.S.C. 4635(b). Justice French noted it is nearly identical to 12 U.S.C. 1818(i)(1), which governs judicial review of cease-and-desist orders issued by other federal agencies, including the Office of Comptroller of the Currency.

Citing federal district court rulings, Justice French wrote that 1818(i)(1) will allow a court to decide state-law claims against a federally regulated lender subject to a consent order as long as the court’s action does not conflict with or contradict the terms of the consent order.

Justice French concluded the FHFA order does not divest the common pleas court from having jurisdiction of the Radatz class-action lawsuit against Fannie Mae. The trial court could take such action as certifying the class or determining for each class member if Fannie Mae actually violated the recording law. However, the Court found another provision of federal law, 12 U.S.C. 4617(j)(4) prevents the homeowners from recovering money damages from Fannie Mae.

Justice French wrote that 4617(j)(4) states that while FHFA is acting as Fannie Mae’s conservator, FHFA cannot be liable for any amounts “in the nature of penalties or fines” including those that arise from state recording fee deadlines. Radatz claimed the law only meant FHFA is not subject to the payment, but Fannie Mae still is. Justice French explained that FHFA as the conservator, takes on all the rights, powers, and privileges of Fannie Mae, and courts have found no distinction between FHFA and Fannie Mae during conservatorship, so neither can be made to pay a penalty.

The Court then determined the payment in R.C. 5301.36(C) was a penalty, and not compensation.

“When considered as a whole, R.C. 5301.36 is intended to promote efficiency and certainty in real-estate transactions and to penalize the untimely recording of satisfied mortgages rather than to compensate borrowers in full for actual losses,” she wrote. “While recovery of $250 accrues to the current owner of affected property and not to the state or a third party, recovery of that amount is not tied to any actual losses suffered by an aggrieved individual.”

Justice French noted the law does allow a borrower who suffers actual harm from a mortgage recording error or delay to pursue a claim for damages.

The Court reversed the decision of the Eighth District and remanded the case to the trial court, which cannot issue the $250 penalty against Fannie Mae while under FHFA’s conservatorship, but can decide other issues.

Justices Terrence O’Donnell and Sharon L. Kennedy joined Justice French’s opinion.

Justices Paul E. Pfeifer concurred in judgment only in which Justice William M. O’Neill joined. Justice Pfeifer wrote he would affirm the Eighth District’s entire ruling, finding the trial court had jurisdiction and the payment in the state law is for damages that Fannie Mae can be found responsible for paying.

Dissenting Justices Find Trial Court Has No Jurisdiction
In a dissenting opinion, Justice Judith Ann Lanzinger maintained the trial court correctly dismissed the case because it did not have jurisdiction to consider it. In addition, Justice Lanzinger cited her dissent in the Supreme Court’s 2005 Rosette v. Countrywide Home Loans Inc. decision where she concluded the payment for noncompliance with the mortgage recording law was a penalty rather than compensation.

“The majority refuses to hold that the trial court lacked jurisdiction though it determines that the class cannot recover under R.C. 5301.36 because the award is a penalty under federal law. It is difficult to say what is left for the trial court to do upon remand, when it cannot order payment of $250 to each class member,” she wrote.

Chief Justice Maureen O’Connor joined Justice Lanzinger’s dissent.

2014-1126. Radatz v. Fed. Natl. Mtge. Assn., Slip Opinion No. 2016-Ohio-1137.

View oral argument video of this case.

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