Set the Record Straight
Chris Burti, Vice President and Legal Counsel

George Leef’s article, The state and lawyers close ranks, The N&O, November 24, 1999 (which follows) is so full of half truths, misstatements of fact and erroneous assumptions that it would amount to misrepresentation if he were selling something (or is he?). Such unsubstantiated charges can not go unanswered. The consumer is entitled to the truth. The system of title assurance in North Carolina benefits the consumer more than almost any other state.

There are over 17,000 attorneys practicing law in North Carolina many of whom work in the area of real property law and vigorously compete for business. This competition is very real and as a result attorneys’ fees, calculated as a percentage of loan amount, have steadily decreased since 1980 as land values have increased. This is a real consumers’ bargain compared to lenders’ origination fees and real estate brokers’ fees which have generally stayed a constant one percent and six percent respectively. This hardly describes monopolistic enterprise.

The costs quoted in the article are extremely misleading because they do not include the cost of the title insurance premium, which is the other half of the title assurance equation. In North Carolina the premium for a $150,000 purchase with a $120,000 loan would be $275. In Michigan the typical premium, for the same coverage would be $931 resulting in a combined cost to the consumer that is over sixty percent higher than in North Carolina. The New Jersey situation, where attorneys no longer examine the titles, is instructive also. Search, settlement and premium typically total over $1400 now for the same type of transaction.

North Carolina enjoys the second lowest closing cost in the nation to the consumer for search, document preparation, settlement and title premium. Arizona, cited in the article has the eighth highest cost. States where the attorney is involved in the title examination predominate the lower half of a survey of average closing costs nationwide. North Carolina also enjoys one of the lowest rates of title insurance claims in the nation. Title insurance premiums reflect the cost of doing business. In other states, these costs include the costs of plant, personnel and marketing needed to search title and close transactions as well as to cover losses. As a result, North Carolina also enjoys the lowest premium rates in the nation.

It should be noted that title insurance premiums are consistently lower in the states where attorneys do the title examinations. Real property title examination requires the broadest knowledge of the law of any area of practice. Real estate is arguably one of the most complex areas of law. The real property attorney must have a proficient knowledge of Real Property, Bankruptcy, Wills, Estate Administration, Domestic, Corporation, Partnership, Environmental, Criminal, Land Use Regulation and Tax law (to name a few) in order to render a competent opinion on title. A lay person cannot be expected to have this knowledge and can not adequately examine titles without intensive training, extensive experience and adequate supervision by an attorney. When too much responsibility is turned over to a lay abstractor, without this training, experience and supervision, title problems go undiscovered and errors in judgment occur giving rise to claims. More claims result in higher title insurance premium costs to the consumer. There are additional costs and harms to the consumer. The consumer may have created a title problem that should be discovered and cured during a refinance. Title insurance would not cover the owner in such a case, but if there was actionable negligence on the attorney’s part, malpractice coverage would. Non-attorneys do not have the same professional obligations to the consumer as attorneys do, leaving the consumer unprotected when attorneys are not in the process.

The article makes one valid point. There is nothing an attorney does that a lay person can not learn to do. This obviously begs the question of who determines if and when they are qualified. The North Carolina State Bar is the agency responsible for licensing, regulating and disciplining attorneys. Nurses, physicians, teachers, engineers, surveyors, morticians, certified public accountants, veterinarians, pharmacists, opticians, electricians, truck drivers, barbers and beauticians all have licensing requirements and few would dispute the benefit to the consumer in the resulting protection from incompetent and unscrupulous practitioners. In the real world, we recognize that competition comes between members of a regulated profession as long as admittance is not unreasonably restricted.

We regularly receive calls from title examiners reporting uncanceled liens, improperly drafted instruments, improperly executed conveyances and similar problems where it is clear that out of state lenders have circumvented North Carolina’s unauthorized practice of law statutes. In such cases, the consumers must clear up the mess at their own expense. Attorneys in North Carolina actually certify the title to real property as opposed to furnishing a mere report or abstract. In doing so, they assume liability to the consumer for errors or omissions as part of their professional responsibility. Generally, abstracter liability is to the insurer. The insurer’s liability is generally limited to the contract, which often leaves the consumer without effective recourse.

It can not be stated too forcibly, or too frequently, that title insurance is no substitute for good title! While title insurance may protect an insured from certain defects caused or missed by examiners, it must be remembered that the choice of remedy belongs to the insurer, not the insured. Title insurance is not usually responsible for consequential damages either. In addition, title insurers will often provide coverage to a lender but not the owner due to the lower risk involved. An attorney who doesn’t receive a part of the title insurance premium may be more likely to give a meaningful explanation to a prospective purchaser of the risks involved in relying on insurance rather than relying on good title.

These stated costs and harms to the consumer are not hypothetical. Our files are full of real life examples of title problems caused by non-professionals. If the New Jersey Supreme Court or the U.S. Attorney General had access to the information replete in title insurers files they would not have made the speculative assumptions cited in the article. Competition between professionals and lay persons is not a real factor in the cost of closing to the consumer. Expertise and accountability is the primary factor. Real property attorneys must do a better job of educating the public of the real benefits and reduced costs associated in having licensed professionals undertake responsibility in what is the largest financial investment for most consumers.

Acknowledgment is gratefully made to The Title Company of North Carolina and Old Republic Title Insurance Company for the information cited from their Residential Closing Survey (October 11,1996) which was prepared for the N.C. Residential Real Property Task Force.

The State and Lawyers Close Ranks
George Leef

(George Leef, J.D., is Vice President of the John Locke Foundation)

This article appeared in the Raleigh News and Observer on November 24, 1999. It is reprinted here with permission from the John Locke Foundation.

Raleigh – In the game of Monopoly, the objective is to obtain the most money possible by establishing real estate monopolies that prevent the other players from competing with you. In the real estate game in North Carolina, attorneys have actually established such a monopoly. Attorneys are the only people North Carolina allows to perform real estate closings.

Other states allow nonlawyers to handle real estate closings, and the competition for the provision of this service has brought down costs. There’s no reason why North Carolina shouldn’t follow the lead of those states.

The source of the lawyers’ costly monopoly on real estate closings is a little-known statute called the Unauthorized Practice of Law (UPL) statute (NC General Statutes, Section 84), which says that persons other than members of the State Bar are prohibited from practicing law. The "practice of law" is defined to include "performing any legal service for any other person… or by assisting in any legal work."

There aren’t any reported cases specifically holding that the work involved in a real estate closing constitutes legal practice, but no nonlawyers do real estate closings, probably out of fear of the State Bar and the penalty for unauthorized practice of law: imprisonment for up to two years and/or a fine at the discretion of the court.

Should the state confer this monopoly upon lawyers?

It is instructive to note that there are other states that don’t do so and that consumers there have not suffered. In Michigan, for example, closings may be done by title companies, banks and real estate agents as well as lawyers. The same is true in Arizona, which not only allows nonlawyers to do real estate closings, but has completely jettisoned its UPL Statute.

In Virginia and New Jersey as well, competition prevails in real estate closings. What makes those states especially interesting is that in recent years their state bar associations have attempted – and failed – to force everyone else out of the market. In New Jersey in 1994, the State Bar sought a ruling from the state Supreme Court that henceforth only lawyers would be allowed to do closings. The New Jersey court refused to go along, finding that although the bar had conjured up some hypothetical harms that might befall individuals if a closing were badly done, there was no actual evidence of any consumer suffering harm from a closing done by a nonlawyer. Furthermore, the court noted, competition lowered closing costs.

The same battle was fought in Virginia in 1996. There, the bar’s efforts to eliminate competition drew criticism from the usually lawyer-friendly Clinton administration. In a letter to the Virginia State Bar, Anne Bingaman, head of the antitrust division, wrote, "By ending competition from lay settlement services, the Opinion would likely increase the cost of real estate closings for consumers…The restriction would adversely affect all consumers who might prefer the combination of price, quality and services that a lay settlement service offers."

In Raleigh, the quoted price for a closing hovers around $425. In Michigan, where competition prevails, title insurance companies typically charge between $200 and $350, depending on the amount of work to be done.

Lawyers who benefit from the prohibition against "unauthorized" settlement services will claim that the State Bar’s monopoly is really for the good of the consumer. Supposedly, only professionals who have graduated from law school and passed the bar exam can be counted on to provide competent service. But there is nothing so difficult or mysterious about the work involved in a real estate closing that requires three years of law school to do it competently.

In fact, one can become a member of the bar and therefore "authorized" to do real estate closings without the slightest idea of how to search title, prepare escrows or anything else. Like lawyers who specialize in any field (virtually all lawyers), real estate attorneys learn most of their specialized skills on the job. Nothing prevents laymen from learning the same things in the same way. And both have exactly the same motivation to do careful, quality work – namely the potentially high cost of doing shoddy work.

In real life, as in the game, monopolies hurt consumers by raising prices. When a player achieves a monopoly, he charges more for his services than he would if he faced unrestricted competition. In the North Carolina real estate game, the state tips the scales in favor of attorneys and against consumers. And that’s hardly playing fair.