The Supreme Court of South Carolina is considering adopting guidelines or "best practices" for attorneys conducting residential or commercial real estate closings in South Carolina. The guidelines were developed by the South Carolina Bar Task Force on Closing Responsibilities.  While I do firmly believe that more attorney involvement in the real estate closing process would be a good thing for consumers and our industry, South Carolina may be going overboard with their proposed guidelines.

First, let me start by quoting one of my favorite court cases of all time, Bonior v. Citibank, N.A., 2006 N.Y. Slip Op 26525 (N.Y. Misc. 2006).  Judge Straniere, a New York City judge, wrote the opinion which, in my opinion, places him up there with likes of Cardozo, Learned Hand, and Posner.

Apparently someone has taken the advice of Dick the Butcher in Shakespeare's Henry VI, Part II and "kill(ed) all the lawyers." Nowhere in this transaction does there appear to be the participation of any lawyers... At one time a real estate transaction consisted of a deed, a note and a mortgage; took about fifteen minutes to complete; and had the participation of an attorney for all parties to the transaction. The last time the Court checked, we were still in the City of New York where people do not even verify the score of the Yankee game without consulting counsel, and yet, lawyers have effectively been eliminated from real estate closings involving the refinance of mortgages and secondary loans, including home equity lines of credit. One could conclude therefore that these transactions have no legal implications. That, however, would be far from the truth. The borrowing of money secured by a mortgage is often a complex transaction with serious legal implications for all of the parties involved, especially the borrowers who are pledging their home as security.

The case really points the changes in the way real estate transactions are handled.  Closings have gotten more complicated and where there used to be several attorneys involved, there are (virtually) none.  Today, the states that still require attorney's to be involved are considered "anti-consumer."  But, one would have to admit that there seemed to be substantially fewer consumer problems and complaints when more attorneys were involved.

Here are a couple of things that are on the proposed guidelines in South Carolina that I would agree may constitute the unauthorized practice of law. Only an attorney may:

1. certify title to the property
2. prepare deeds

I think this is relatively simple and probably widely accepted as the practice of law.  Though in some states, I understand that a title agent is permitted to prepare deed.  I find that odd, but not particularly egregious. 

Now, here is a list of things that are included in the proposed rules that I think are way overboard.  These items should not constitute the practice of law.  Only an attorney may:

1. order a survey
2. review the survey
3. obtain payoffs
4. ascertain the hazard insurance carrier for the owner
5. review the hazard insurance to ensure it is satisfactory to the lender
6. collect the closing funds, verify they are properly deposited, and disburse them in accordance with the settlement statement
7. collect any letters or inspection reports
8. transmit the document to all parties

Honestly, is there any "legal" service here?  What particular legal training does an attorney have that uniquely qualifies him to order a survey or obtain a payoff?  These are rather simple administrative tasks that don't really require a three-year degree to perform.  As for the hazard insurance, shouldn't that be up to the lender to review and decide if it is acceptable to them?  I'm quite confident an owner can call his insurance agent and arrange for the appropriate insurance and forward a copy of the declarations page to the lender before the loan is approved for closing.  And, handling the funds and making proper disbursements, while perhaps a little more complicated, is really a bookkeeping function. If the total of incoming funds matches the total of outgoing funds - you are probably okay to disburse.  So long as everything is on the settlement statement and all of the parties have given their blessing, there shouldn't be any need for the services of an attorney in this part of the process.

Finally, there are some items included in the propose guidelines that I think a strong argument could be made that they should fall within the meaning of the unauthorized practice of law.  I am not totally convinced that a non-attorney would be unable to do a very competent job with the following tasks, but I could see that requiring an attorney to be involved in the process may provide a substantial benefit to consumers, as well as the real estate and title industries.  Only an attorney may:

1. either draft, oversee the drafting, or review and approve loan closing documents
2. be responsible for the actual closing to include the explanation of the pertinent issues related to the transaction and review all documents for proper signatures, witnesses, notarization and authorizations
3. review and approve the form and execution of any power of attorney
4. either prepare or review and approve the loan documents, settlement statement, and title insurance documents.
5. supervise the proper execution of the closing documents
6. supervise the recording of the recordable closing documents
7. verify the documents were properly recorded with the correct priority and properly indexed
8. verify that all liens that were paid are satisfied of record
9. issue the final title policy

For a vast majority of real estate transactions, title insurance has replaced traditional title abstracts and attorney title opinions.  That is not a bad thing - title insurance adds a valuable protection that the alternatives may have been lacking.  The problem is that we have ended up with a watered down version of the "thorough process" that was employed in traditional abstracts and attorney title opinions to issue title insurance.  Quite arguably, the traditional title standards that were strictly adhered to before, have been replaced by underwriter sanctioned shortcuts. 

It seems the South Carolina proposed guidelines are aimed at making all of the title agent's functions the practice of law - exclusively the realm of attorneys.  While this would theoretically offer the best of both worlds, the thorough process of traditional alternatives with the strong protections of title insurance, it doesn't seem to be necessary.  Many of these functions can be handled by non-attorneys without any detriment to the consumers, but the title insurance industry doesn't require the same high standards. Perhaps if the underwriters were a bit more insistent in requiring that the process of issuing title insurance adhere to traditional title standards, this wouldn't be such a big issue.  We could focus on those functions that are core legal services and leave the rest to a capable non-attorney title agent.

That would, however, leave one problem... and that is ensuring adequate protection for the consumers during the actual closing process.   I firmly believe that consumers need better advice before they sign their closing documents.  They are obviously not understanding the terms of their loans and the potential consequences of singing all of those important documents at the closing.  Left to their own discretion, consumers would obviously prefer a cheaper closing to getting attorney representation.  But, that may not be in their best interest or the interest of the nations mortgage and housing markets.  While non-attorneys have proven that they are capable of handling real estate closings, in a technical sense, they are prohibited from giving legal advice.  Non-attorney title agents must walk a fine line between thoroughly explaining closing documents and giving legal advice.  For that reason alone, there is a strong justification for a system that requires an attorney present for the closing.  Maybe it makes sense to require the "closer" be a licensed attorney who can freely advise the clients.  Of course, then the attorney has a fine line to walk in representing multiple clients that might present a conflict of interest.

There is no perfect solution.  But it is obvious that there are problems that need to be addressed.  I think it is great that South Carolina is holding open discussions on the issue and I hope there findings will be influential on the rest of the country.  However, they seem to have gone a bit overboard with their proposed guidelines.  Somewhere between the model in the majority of other states and South Carolina lies a happy medium that we need to find.

There have been many comments submitted to the South Carolina Supreme Court.  Many of them raise some very good points that deserve exploration... next week, I'll take a closer look at them.

Robert A. Franco
SOURCE OF TITLE