By Drew Walker
Note: This article was originally published in the Summer 2012 Issue of Palmetto Banker, published by the South Carolina Bankers Association.
Don’t Give It Away: Avoiding New Unauthorized Practice of Law Consequences
Banks lend money – they don’t give it away. However, recent rulings from South Carolina appellate courts may close the courtroom door to a bank seeking mortgage foreclosure and a money judgment. Without relief from the courts for bad loans, the bank has essentially given their money away.
South Carolina law requires an attorney to perform or supervise certain steps in a real estate closing. Lenders and lawyers have known this for 25 years. The 1987 Buyers Service case and its progeny (State v. Buyers Service Co., Inc., 292 S.C. 426, 357 S.E.2d 15 (1987); Doe v.McMaster; and Doe Law Firm v.Richardson) served notice on lenders that an attorney must supervise the following aspects of a real estate closing: preparing the loan documents, abstracting the title, closing the loan, recording the loan documents and disbursing the loan proceeds. These five steps constitute the practice of law. If any of these steps are performed by a non-attorney (i.e. lender, closing service company, broker, paralegal) without attorney supervision, then the non-attorney has committed the unauthorized practice of law (“UPL”).
The recent rulings in Wachovia v. Coffey and Matrix v. Frazer establish a drastic consequence for lenders committing UPL – a loss of legal and equitable remedies. In essence, the decision in Matrix means that a bank has no ability to foreclose its mortgage when a lender closes a loan without attorney supervision. Some argue that the Coffey ruling provides that legal relief under the terms of promissory notes and other loan documents will also be barred, regardless of the borrower’s obvious intent to enter the transaction. And if you thought the only thing you needed to worry about was your borrower, think again. Third-parties (i.e. junior mortgagee or lienholder), who are strangers to the loan transaction, may challenge the enforceability of a mortgage through accusations of UPL.
While a substituted, re-filed Matrix decision attempts to only apply UPL consequences to “filings” after August 8, 2011, the meaning of the prospective application of the decision is open to argument. See Id., J. Pleicones dissenting (“I am unsure what filing date the majority is referring to in this passage”). Moreover, the May 2010 Coffey decision, which is still good law, may apply retroactively.
The new UPL consequences create potential windfalls for borrowers and junior creditors. Expect increased UPL litigation throughout the banking industry. These recent decisions have caused attorneys representing borrowers and junior creditors to scrutinize loan documents for the smallest UPL threads to pull to unravel the transaction and allow their clients to secure better positions at the lender’s expense.
These new UPL consequences are not great news for banks. How do you avoid the UPL Courtroom?
- Know Your Lawyer
- Know the Place of Your Closing
- Know What’s in Your Settlement Statement
- Know What’s in Your Mortgage
The benefits of dealing with these details on the front-end of a closing transaction greatly outweigh the expense of a costly UPL defense on the back-end. Here’s how to prevent accusations of UPL.
Know Your Lawyer
Banks cannot choose their lawyer in a residential real estate closing. Borrowers possess the statutory right to select their own counsel. In fact, this choice must be presented to the borrower by the lender.
Banks should ensure that borrowers choose their own counsel in order to avoid later accusations that an attorney was forced upon them. While a bank is always entitled to separate counsel in addition to the borrower’s counsel, multiparty representation is allowed in South Carolina (subject to the S.C. Rules of Professional Conduct) and is usually cost-effective for the bank in residential closings. When your borrower has selected a lawyer, get to know that person and his or her closing practices.
Call the lawyer on the phone and ask him or her where the closing is going to be held. Banks should prefer and encourage the use of a conference room at the attorney’s office. An in-home closing at the borrower’s residence is an immediate red flag for parties that accuse lenders of UPL. In litigation, borrowers often accuse lenders of hiring an attorney to merely show up at the home to witness the borrower’s signature and make an appearance of propriety. Borrowers have become prone to argue that the lender or a closing service company prepared the loan documents that were not reviewed or explained by the attorney. The in-home closing feeds this argument. For this reason, it’s best to have the borrower take the proactive step of going to the attorney’s office to have the loan closed.
Is one lawyer handling all aspects of the closing that require attorney supervision? It’s commonplace for lawyers to hire non-attorney abstractors to research title for review by the attorney; however, when one lawyer certifies title and another lawyer attends the closing, more red flags go up. Closing service companies often spread closing responsibilities among several lawyers in an attempt to comply with South Carolina’s unique UPL rules. This may lead to other problems, such as failure to update title before recordation that leaves a gap for intervening liens and judgments between title certification and mortgage recording. Involving too many lawyers can create an appearance of impropriety. Ensure that your residential closing attorney is handling all five aspects of the real estate closing that constitute the practice of law in South Carolina.
Know Your Forms
Improperly prepared settlement statements are an Achilles’ heel for lenders engaged in UPL litigation. Failure to review a final HUD-1 settlement statement prepared by a third party can result in serious heartburn for banks.
A settlement statement should list the “Settlement Agent” as the South Carolina attorney or firm that closed the loan. The settlement statement should also list the “Place of Settlement” as the physical location in South Carolina where the closing took place. In recent UPL litigation, settlement statements often list the settlement agent as a closing service company and that company’s national headquarters (TX, CA, CO, etc.) as the place of settlement. This prompts assumptions as to who is running the closing show – the closing service company or the lender -- and not the borrower’s attorney.
Also, the “Title Charges” section of the settlement statement can pique the interest of a UPL accuser. Quite often, the “Attorney’s Fee” line does not have a charge next to it. Rather, the lines for closing and notary fees show charges for the use of non-attorneys. Even if an attorney supervised all of the necessary aspects of the closing, this glaring mistake on the settlement statement can give rise to accusations of UPL. It’s important for the bank to review the final HUD statement prior to the date of closing.
Mortgages and Recording
Attorneys usually do not walk mortgages down to the recording office. Nevertheless, the recording must still be performed under attorney supervision. The top left-hand corner of a mortgage often has a stamp stating “Recorded by ABC Closing Service Company” or “Return to ABC Closing Service Company, Dollywood, California, after recording.” This is a UPL red flag. Placing the name of the closing attorney or omitting the return information altogether avoids the appearance of UPL. Encourage your lawyer and underwriters to pay attention to the recording instructions on the mortgage, which becomes part of the public record.
The Irony of It All
If a bank cannot practice law, then why is it charged with looking behind the closing attorney to ensure compliance with UPL rules? The drastic consequences for UPL in recent case law have made it necessary for banks to become mindful of the attorney’s role in the closing. While both Matrix and Coffey involve disputes where an attorney was completely absent from the closing, recent accusations of UPL in the wake of these cases involve situations where an attorney was present for part of the transaction. Matrix and Coffey blur the line between bad lawyering (professional negligence) and the absence of a lawyer (UPL). Negligent supervision by an attorney in a real estate closing is distinct from the absence of an attorney; however, when the UPL accuser can challenge whether the attorney was calling the shots at all, the lender could have UPL exposure.
By knowing its lawyer and loan documents, banks can avoid the obvious missteps that lead to accusations of UPL. Stay in the business of lending money and avoid giving it away.
 The UPL line of cases since 1987 has dealt with facts that only include residential real estate closings, both purchase and non-purchase transactions. However, the Courts have not specifically stated that the legal holdings are limited to the residential setting. The S.C. Real Estate Bar continues to debate the reach of the Buyers Service line of cases, including Matrix and Coffey.
 The Court in Doe Law Firm, supra, may limit its holding in the opinion’s first paragraph concerning loan disbursements as the practice of law to residential refinancing or credit line transactions.
 The Supreme Court’s ruling in Matrix never directly overrules Coffey and specifically affirms part of it. Some argue that Coffey’s application is limited if the Matrix court’s intent was for the ruling to only apply prospectively.