News of guilty pleas from principals of Charlotte’s Settlement Source who admitted to embezzling $2.4 million from clients in real estate transactions between 2005 and 2007 may not have come as a surprise to attorneys familiar with the growing problem of unregulated settlement shops.
In fact it may only be the tip of the iceberg, and N.C.’s attorney closing system is the Titanic fated for what Thomas Hardy called “the convergence of the twain.”
If that is the case, N.C. attorneys and consumers alike might as well be passengers.
“This is a big problem for closing attorneys now, and most attorneys do not recognize it,” said Fayetteville-based real estate lawyer L. Holden Reaves. “It is like a slow train coming down the tracks. Most smart attorneys will get out of the way.”
Reaves said so-called “closing mills” are closing hundreds if not thousands of transactions in the state per month.
“Who knows if anyone is really looking at title, or if some attorney is sitting somewhere just signing off on title opinions,” Reaves said.
Asheville attorney David E. Matney III has detected a drop-off in the volume of his firm’s residential real estate business.
“We’ve noticed that there is less and less for us to do,” he said. “We presumed other lawyers were getting the business.”
But that’s not the case.
Matney said his staff determined that in Buncombe County during a two-week period in May, over half of recorded deeds of trust showed that national lenders were closing loans with out-of-state agencies such as Custom Recording Solutions of California, MDA Lending Solutions of Delaware, Network Funding of Texas and Fisery Lending of Illinois.
“There was no evidence of local attorney involvement,” Matney said. “It is going on a lot more than I thought it was.”
Reaves said the irony is that a 2002 advisory opinion authored by the State Bar “has allowed non-attorney settlement agencies to get into the game on more advantageous terms than attorneys.”
According to Greensboro attorney Jerry Weston, that is driving real estate attorneys out of the practice. Weston said he began practicing in the area in 1966. A few years ago partly as a result of the pressure exerted by settlement shops he shut down his real estate practice.
“It got to the point where it wasn’t worth it anymore,” he said.
Attorney closing system
By law the drafting of deeds and legal documents associated with a real estate closing in N.C. constitutes the practice of law, as does giving legal advice on matters related to a closing. Those functions are limited to N.C. attorneys.
The 2002 advisory opinion titled “On the Role of Laypersons in the Consummation of Residential Real Estate Transactions,” however, provides that a non-lawyer can “present and identify the documents necessary to complete a North Carolina residential real estate closing, direct the parties where to sign the documents, ensure that the parties have properly executed the documents; and receive and disburse the closing funds.”
Said Weston, “A non-attorney can point to a page and tell you where to sign, but that’s about it.”
Some settlement shops work around the rule by employing or contracting with N.C. attorneys who sign off on large volumes of title opinions without, presumably, reviewing each of the files.
“The attorney is the real sucker in my opinion,” Reaves said. “He is signing off on a huge volume of transactions. There is no way on earth he is looking at every title opinion.”
Lawyers in that situation take on significant liability and face sanctions if things go wrong.
“He is playing Russian roulette with his law license,” Reaves said.
Wilmington attorney Melissa Gott worked in other states that use the escrow closing system one in which non-attorneys are permitted to draft documents and conduct closing conferences before coming to North Carolina.
“I’ve seen several ways of how to do it,” Gott said. “Closings are less expensive in N.C. Title insurance premiums are significantly less.”
That is because attorneys make fewer mistakes, which in turn results in fewer claims against title insurance policies, she said.
“The records are so much neater. When banks and out-of-state attorneys get into closings here, it turns the public records inventory into a mess,” Gott said. “Hands down, I believe our system is the best.”
Matney said banks should be wary of settlement shops and in-house closings with non-attorneys because they don’t know how to cross-check for consistency.
Matney said he knew of an instance where a bank provided the correct loan amount on the HUD settlement statement, but had a different figure on the promissory note. The loan amount was higher on the note, and the borrower signed the note.
“I can say that the bank would have been happy if someone would have caught that,” Matney said.
Matney said consumers need someone to represent their interests at the closing table.
“Brokers and settlement shops are salesmen,” he said. “Their only job is to get it closed. An attorney’s job is to close the transaction if that’s what the buyer wants. If not, the transaction should not close. It is a different point of view.”
Weston said lay settlement agents don’t understand the intricacies of N.C. real estate law and related issues, such as inheritance, divorce, bankruptcy and liens.
“Closing is not just a matter of ‘sign here, sign there,’ get money and disburse it,” he said.
Although attorneys can make mistakes too, there are avenues for redress when they do, said Raleigh attorney Benjamin R. Kuhn. Those include title insurance, an attorney’s malpractice coverage or the client security fund.
“With a settlement shop, the consumer has no redress because they are not regulated. There is no comparable consumer protection because settlement shops are not subject to any regulatory oversight as exists with licensed attorneys and the State Bar,” Kuhn explained.
No enforcement of rules
Kuhn said the State Bar has deemed it the unauthorized practice of law and therefore illegal for anyone other than an N.C.-licensed attorney to coordinate and handle a residential real estate transaction in N.C on behalf of a consumer but it is still happening every day.
The problem is enforcement, according to Gott.
“Laws are on the books that are being violated, but no one is enforcing them,” she said.
The State Bar doesn’t have enough resources to fully enforce the rules on the unauthorized practice of law, according to Weston.
He said the Bar should undertake tougher enforcement, but that would come with a price.
“The Bar doesn’t have the funding to enforce its own ethics,” Weston said.
In addition to Bar sanctions, Kuhn said G.S. Sect. 84-7 makes the unauthorized practice of law a criminal misdemeanor offense.
“G.S. Sect. 84-9 allows any member of the Bar or bar association to make an application to the local district attorney setting forth and alleging the unauthorized practice of law,” he said.
“By law, the district attorney has a duty to enjoin the person from engaging in the unauthorized practice of law. Upon further information that a person committed the unauthorized practice of law, the district attorney is legally obligated to indict the person for a Class 1 misdemeanor.”
Matney said the bottom line is that if what settlement shops are doing in N.C. is illegal, action should be taken to shut them down; if what they are doing is legal, “we should all stop whining.”
E-mails show misperceptions about lawyers’ role at closing
The following comes from a June 9 exchange of e-mail communications between Atkinson lawyer Renee M. Williamson, a closing attorney, and Secured Lending Services, an out-of-state settlement agency.
Williamson: I have to work out what to do with the deed yet (it is improperly drafted by a non attorney or out of state attorney) and I am sure we will have that issue resolved tomorrow.
Settlement agent: Are you questioning the deed I sent? If so we have been using the same deed in the entire state of NC.
Williamson: Yes I am. The deed must be drafted by a licensed NC Attorney. This deed was prepared by a company in NJ. I cannot record that deed. Let the seller know I can draft the deed or any NC Attorney.
Settlement manager: Actually per the NC general statue section 84-2.1 if you review this section it clearly defines how a deed needs to be prepared if prepared by an out of state of attorney. We have complied with this statue and this deed is completely legal as is. Once you review the statue and feel that you still have questions please let me know as I will continue to work with our attorney to provide you with any answers that you may need from us. I think once you take a look at this it is actually clear that we have complied.
Williamson: There is no provision for an out of state lawyer or non lawyer to draft a deed >for another person. The statute plainly says this. There is no part of that deed that is in compliance with this statute.