The Statewide Title Newsletter and Legal Memorandum

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Issue  85  Article  159
Published:  8/1/2002

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Where do You Stand
Chris Burti, Vice President and Legal Counsel

Where do you stand? This phrase has echoed from time immemorial whenever a crisis arises. In such times, all must take a stand. For, against or on the fence, we all take a position. At present, the Federal Trade Commission and the U. S. Justice Department have taken a position against a North Carolina State Bar ethics opinion that rules that it is unethical for lawyers in this State to conduct real estate closings in their offices without being present. Does this amount to a crisis? If the issues were about money and who will make it, no, it would not be a crisis. However, the issues are larger than those and must be considered objectively, without blinders on.

The position of these federal agencies is that Formal Ethics Opinions 99-13, 2001-4 and 2001-8 prevent lay closers from operating in North Carolina under the prohibition against the unauthorized practice of law. It should be noted that these opinions only dictate the conduct of attorneys who are engaged by clients to close transactions. They do not directly address the unauthorized practice of law by independent non-attorneys. The federal agencies allege that the prohibitions in the ethics opinions are anti-competitive, likely to reduce consumer choice and increase the consumer cost of closing residential real estate transactions. In response to this objection, the North Carolina State Bar has proposed withdrawing these opinions and issuing an advisory opinion that many feel would deregulate closings and authorize lay closers to operate in North Carolina without restriction. This proposal has raised a tremendous outcry in opposition by attorneys, consumer advocates and title companies and action has been postponed until October.

The most cogent comments in opposition to the Bar’s proposal address the issue of consumer protection. It is very clear to those who understand the process, that if unregulated lay closers are permitted to operate in North Carolina we may as well declare open season on the consumer here. North Carolina was the first state in the Nation to adopt a predatory lending act. Pressure for adoption of such legislation came heavily from the Bar. Attorneys closing residential transactions recognized the need for such legislation as a restraint upon unregulated lenders operating in the North Carolina and preying on unsuspecting consumers. The attorneys’ professional obligations to their clients required them to advise the clients that such loans were predatory. They also recognized a need for legislation making such activities clearly illegal in order to resolve any potential conflicts in their obligations toward lenders arising from closing. If unregulated lay closers are employed by such lenders, there will be no one involved with the transaction with a duty to counsel the consumer against such abuses.

One of the most frustrating issues in this controversy is the easy and unquestioning acceptance by the public and media of the arguments made in justification of the objection. We know of no objective data that supports the agencies’ position. They allege that freedom of choice will be restricted. Who will be competing? Obviously, lenders and signing companies, not the hundreds of lay closers employed by them and operating without regulation. There are currently almost 18000 attorneys licensed to practice law in North Carolina. Of these over 1700 are members of the North Carolina Bar Association’s Real Property Section. Countless others represent clients in residential real property closings without ever joining this voluntary association. The number of attorneys licensed to practice here has been increasing each year for over four decades.

Yet, the lending industry’s history over the last two decades has been one of consolidation. A CEO of a major bank has been heard to observe that the next decade will see the number of banks in this country fall to about 100. Interestingly, this prediction was offered in contrast to the widely touted prognostication of an industry consisting of ten "Super Banks". It seems clear that the number of choices offered consumers is not likely to increase by changing the definition of the practice of law. It seems more likely that the number of attorneys licensed in this State will increase more than the number of lenders who will operate here without counsel.

The argument that the ethics opinions will likely lead to increased cost to the consumer is specious. The system has been operating in this regulated manner for generations. Nevertheless, attorney’s fees for residential closings have generally remained the same or decreased over the last twenty years. Consider that property values have increased by 300% in the last twenty years. Attorney’s fees that have remained the same have reduced, in effect, by two-thirds in real dollars compared to Realtor’s commissions and loan origination fees based on a percentage of the transaction.

Even more frustrating is the ready assumption that non-attorneys will conduct closings cheaper. Moreover, the premise that fees will go down when lay closers are permitted is belied by the data available from other states. Most of the cost data used by those urging change is either flawed or deceptive in that it does not include all relevant fees. One tactic is to cite "settlement fees" or "closing fees" without specifying what is, or is not, included in the charge. If the issue is to be discussed objectively and in candor, all title assurance charges should be considered as part of the closing fee. Title assurance is the purpose of a closing. The process exists in order to accomplish reasonable certainty that a buyer receives good title, a lender receives the security it requires and that the seller’s encumbrances are satisfied and payment of proceeds made. All services charged for in accomplishing title assurance are interrelated and should be considered if one is to make a fair comparison.

In most cases, the figures offered for comparison by proponents of deregulation, only represents the fee for the closing itself. It typically does not include other title charges normally included in a single attorney’s fee charged in North Carolina. Often where lay closers are utilized, the HUD-1 settlement statement will reveal numerous additional title charges. These settlement statements will often include additional fees for; title abstract, title examination, document review, processing, courier, payoff verification, overnight courier, title commitment and walk through recordation or update/down date. With exception for charges incurred for third party service providers, such as express mail for sending the loan package to the lender and payoff letter fees by the prior lender, these services are normally included in the single fee charged by the North Carolina attorney.

Proponents of deregulation seem unwilling discuss title insurance premiums as being part of, or relevant to, the title assurance process. They also seem unwilling to account for the impact of deregulation on these premiums. Title premiums are function of competition and loss history. Losses drive premiums up. Judith Wegner, Professor of Law, University of North Carolina prepared a memorandum for the State Bar special committee considering this issue. In her memorandum, Professor Wegner observes that "it is important to recognize that (1) the agencies have ignored the most recent and substantial empirical evidence about North Carolina, and (2) provided an incomplete and inaccurate picture of the experience and judgments of other states in these regards." She discusses the empirical study of costs conducted by title insurance expert, Professor Joyce Palomar of the University of Oklahoma College of Law. "In contrast to the Virginia survey data referenced by the federal agencies, Professor Palomar undertook a much more well-defined, executed and careful study using data from 1992-1996. See Palomar, J., The War Between Attorneys and Lay Conveyancers—Empirical Evidence Says "Cease Fire!" 31 Conn. L. Rev. 423 (1999). Professor Palomar compared five "attorney"-closing and five "title company"-closing states, and reached a broad conclusion that performance by title companies appeared generally comparable but lower in cost. What is more interesting, however, is the data she presents about the special experience of North Carolina". Professor Wegner observes the following.

"These data seem to me to suggest the following important conclusions:

North Carolina attorneys’ involvement in real estate "closings" appears to have benefited their clients significantly, particularly insofar as they secured special title insurance coverage where they had identified the need for added protection. North Carolina claims asserting rights to recover on special waivers is much higher than either lay closing states or other attorney-closing states. This difference may reflect greater reluctance to extend such coverage in instances in which attorneys owned title companies (as is the case in Virginia) and may hesitate to take on risks or compete for business with others.

Despite this greater incidence of claims in North Carolina, title insurance premiums (reflecting the level of risk insured against) remain among the lowest in the country. See, which indicated, using set assumptions, a North Carolina premium of $250 compared, for example, to a Virginia premium of $556). Moreover, North Carolina law requires title insurers to charge a single unified premium for both lenders and homeowners if homeowners elect coverage. Several sorts of benefits are thus apparent under the current system. Expert title insurers have suggested that attorneys’ roles in closing keep premiums down because of their duty to their clients includes finding a reputable title insurer at a competitive price. Unlike other states where the closing attorney or agent receives a commission for writing the title insurance, in North Carolina closing attorneys do not share in the title insurance premium. Thus, their duty to their clients is unimpaired. Lay closers in other states are often title agents who do not have the same inclination to keep premiums down. They often want higher commissions and lack a fiduciary relationship with the consumer to impede their desire for larger commissions through higher premiums.

North Carolina data also reflects a better record of pulling information from land and tax records in order to perform title examinations, perhaps because attorneys are obliged to supervise lay personnel closely during this procedure consistent with existing ethics requirements.

North Carolina attorneys also had less than half the errors of judgment in interpreting land records than was the case where lay closers were used, as well as a better record than attorneys in other attorney-closing states, North Carolina’s experience with other types of errors that are beyond the control of professionals is comparable to that in other attorney-closing and lay-closing states.

Complaints against attorneys as evidenced by malpractice claims data were substantially fewer in number than those against realtors as evidenced by complaints with state regulatory authorities in North Carolina. Moreover, malpractice claims against North Carolina attorneys in connection with real estate transactions were the third lowest among the 10 states included in the Palomar study.

Based on this carefully-compiled evidence, there thus appears to be a significant basis for concluding that attorney involvement in the closing process (particularly in providing independent title opinions as is legislatively mandated here) makes good policy sense and protects consumers. The data suggest that attorney oversight of the title review process brings to bear greater care in pulling records and assures a much lower proportion of judgment errors than in other states."

These are the elements that determine loss history and ultimately affect title premiums. It is logical that in a comparison of closing costs, one must consider all charges influenced by the quality of services provided. Competition between insurers also affects premium in that more competition holds down the cost. It has been convincingly alleged that the end result of this push for deregulation is to bring the entire process into a bundled services package provided by the lender. If true, there is little that could be more anti-competitive. In today’s market, attorneys typically determine which title company will provide coverage. The attorney has the ethical obligation to the client to determine which combination of price, service and claims response best serves the interest of the client. This has led to intense competition among title companies operating in North Carolina to provide the best rates, coverage, claims administration and service in order to obtain customers and remain profitable. This competition has resulted in an actual decrease in certain filed premium rates over the last two decades. Currently, the average premium collected in North Carolina has been reported to be less than $1.20/thousand dollars. This represents the average rate for a single premium providing simultaneous issue of lender and owner policies. In addition, with lenders, realtors and mortgage brokers currently privy to the costs involved in a North Carolina closing, there exists pressure from several sources to keep costs down. It is well to observe that in some states, title premiums are paid by the seller. The comparisons from these states should include that cost also. Fundamental economic theory holds that this type of cost is usually passed on to the buyer.

"Bundled Services" is merely a euphemism for controlled business arrangements. The lender, in such arrangements, controls the provision of closing service from the time of the loan application at the beginning. The logical ultimate objective is to bring all services in-house along with the relevant charges. With bundled services, there does not exist any ethical or legal obligation to reduce premium charges. Worse, once the business is ‘captured’, the borrower has little exposure to any information outside of the ‘network’ and as a result, there is no competitive pressure or external pressure to lower costs. The only real limitation on the charges made in such controlled transactions is the amount of the monthly payment.

Professor Wegner concluded that "the best and most relevant evidence available does not support the position of the federal agencies, but instead demonstrates that the role of North Carolina attorneys in real estate transactions provides significant consumer benefits, as part of a real estate transaction system whose costs and benefits need to be evaluated as a whole rather than piecemeal. There is evidence that unbridled marketing of settlement services has lead to unregulated consumer price increases, and can create risks of predatory lending. Additional research could develop more comprehensive qualitative data on a systematic basis. The federal agencies’ reliance on dated survey research from Virginia is unfounded, and their recommendations that the North Carolina State Bar issue an abbreviated unlicensed practice opinion as a means of following Virginia’s example is inconsistent with experience there."

So, if it is so much cheaper for attorneys to be responsible for title assurance, why this intense effort to deregulate closings and let any notary close loans? When enough of the elements are revealed, we can solve the riddle. It has all the appearances of a money grab. What was true over four hundred years ago remains true today. Those conspirators plotting to overthrow the government in Shakespeare’s Henry VI knew that their only chance for success was to eliminate the defenders of the law and the public. Hence, the famous quotation, "The first thing we do let's kill all the lawyers." (William Shakespeare, Henry VI, Part 11, Act IV, scene 2). If we permit unregulated closings in this State, the result will be the elimination of the one party in the process with an obligation to tell the consumer that they are paying too much. The process is a simple one. You start off by charging a low ‘closing fee’ and price attorneys out of that market in short order. Next, you succeed in eliminating the requirement for an independent attorney’s opinion on title in order to issue a title policy. Then start charging for the services formerly provided by attorneys as separate line items. As unregulated lay closers swarm to enter the market the ‘closing fee’ will remain the same or even drop lower. After claims and losses increase, title premiums will soon rise geometrically. Rates will dramatically increase and coverage for the owner will dramatically decrease. Separate charges for abstracting and title examination will dramatically increase as competition dries up and errors and omissions coverage for abstractors and examiners becomes necessary and expensive. When the consumer is paying three times the original cost for title assurance, you move on to South Carolina. You tell all the newspapers that attorneys there charge too much and closing costs will go down if lay closers are permitted to operate. After all, ‘closing fees’ are only $100 in North Carolina now.

Where do we stand? Statewide Title, Inc. is unwavering in its commitment to serve our customers. We believe that the consumer in North Carolina is best served by maintaining one of the highest levels of title assurance at one of the lowest costs to the consumer in the Nation. We are convinced that the regulation of real estate closings as the practice of law by the North Carolina State Bar under the oversight of the North Carolina Supreme Court, as it has traditionally been defined in statute and law is the primary source of this consumer benefit. We are committed to being active in maintaining the current level of consumer protection while reducing cost without reducing safeguards.

Where do you stand?

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