(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. Theres no reason why North Carolina shouldnt 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 arent 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 dont 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 bars 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 Bars 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 thats hardly playing fair.