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Issue  140  Article  232
Published:  3/1/2007

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Two Consumer Protection Bills that Need Your Support
Chris Burti, Vice President and Legal Counsel

This spring the North Carolina General Assembly will consider two bills to protect consumers’ rights in residential real estate transactions:  one, backed by the NC Bar Association, is proposed Chapter 45A, “Consumer Real Estate Settlement Protection Act.” The other is going to be introduced by the NC Attorney General and is proposed Article 20A, “Residential Mortgage Fraud Act.”  Both bills will need the support of as many constituents as possible in order to be passed, and we encourage you to call or write your local legislators to tell them your opinion of the bills.  We also encourage you to be active in reviewing the drafts as they go through the sausage-grinder in order to ensure that no unacceptable alterations are made that would strip the bills of their key elements.

Residential Mortgage Fraud Act

Mortgage fraud has no doubt been around as long as there have been underwriting guidelines for lending institutions, but it has become particularly insidious over the last few years.  More people are dreaming of becoming homeowners, leading the way for a large sub-prime lending market that targets economically disadvantaged mortgage applicants as well as minorities.  The Mortgage Lending Act of 2001 reduced a significant number of abuses through its licensure requirements for mortgage brokers, lenders and loan officers, but every profession has some bad actors.  Added to the mix are unscrupulous builders looking to take advantage of the population boom in North Carolina, low interest rates, and the ever-increasing manner in which identity thieves operate. The end result:  a perfect storm for opportunities to engage in mortgage fraud.  According to the Financial Crimes Enforcement Network, North Carolina ranks 9th in the nation in the number of reported mortgage fraud cases, with 2,500 new reports each year.  (On the positive side, North Carolina has dropped from 4th worst to only 33rd since the enactment of the Mortgage Lending Act.)   Most mortgage fraud investigations have involved large numbers of complainants against a single person or entity.   The Attorney General’s office is asking for the support of the bar in passing a bill that would provide some clear authority and guidance to local district attorneys so that individual instances could be successfully prosecuted.

The bill defines mortgage fraud as a misstatement, misrepresentation, or omission that the actor intends to be relied upon in the mortgage lending process.  It specifically states that it is not necessary for the statements to be relied upon, only that the person making them intended them to be relied upon.  It also presumes damages rather than requiring proof of actual monetary loss, and permits the court to order restitution to the injured party in addition to the possible forfeiture of property used in the course of or derived from the fraud.  

Some relevant portions of the bill are below:

§14-118.8.  Residential Mortgage Fraud.

(a) A person is guilty of residential mortgage fraud when, with the intent to defraud, such person:

(1) Knowingly makes or attempts to make any deliberate misstatement, misrepresentation, or omission during the mortgage lending process with the intention that it be relied on by a mortgage lender, mortgage broker, borrower, or any other person or entity involved in the mortgage lending process; or

(2) Knowingly uses or facilitates or attempts to use or facilitate the use of any deliberate misstatement, misrepresentation, or omission, during the mortgage lending process with the intention that it be relied on by a mortgage lender, borrower, or any other person or entity involved in the mortgage lending process; or

(3) Receives or attempts to receive any proceeds or any other funds in connection with a residential mortgage closing that such person knew resulted from a violation of paragraph (1) or (2) of this section; or

(4) Conspires or endeavors to violate any of the provisions of paragraphs (1), (2), or (3) of this section.

(b)  It shall be sufficient in any prosecution under this Article for residential mortgage fraud to show that the party accused did the act with the intent to deceive or defraud.  It shall be unnecessary to show that any particular person or entity was harmed in the transaction, or that the person(s) or entity to whom the deliberate misstatement, misrepresentation, or omission was made relied upon the misstatement, misrepresentation, or omission.

§14-118.9 .  Venue.

For purposes of venue under this Article, any violation of this Article shall be construed to have been committed:

(1) In the county in which the residential real property for which a mortgage loan is being sought is located; or

(2) In any county in which any act was performed in furtherance of the violation; or

(3) In any county in which any person alleged to have violated this Article had control or possession of any proceeds of the violation; or

(4) If a closing occurred, in any county in which the closing occurred; or

(5) In any county in which a document containing a deliberate misstatement, misrepresentation, or omission is filed with the official registrar of deeds.

§14-118.10.  Authority to Investigate and Prosecute.

Upon its own investigation or upon the referral of such evidence by the Office of the Commissioner of Banks, Real Estate Commission, the Attorney General or other parties as is available concerning violations of this Article, the proper district attorney may institute the appropriate criminal proceedings under this Article.

§14-118.11.  Penalty for Violation of Article.

(a) A violation of this Article involving a single mortgage loan is a Class H felony. 

(b) A violation of this Article involving a pattern of residential mortgage fraud is a Class C felony.

(c) Each residential loan and property transaction subject to a violation of this Article shall constitute a separate offense and shall not merge with any other crimes set forth in this Chapter.

§14-118.12.  Forfeiture.

(a) All real and personal property of every kind used or intended for use in the course of, derived from, or realized through a violation of this Article shall be subject to forfeiture to the State as set forth in G.S. 14-2.3 and 14-7.20; provided, however, such forfeiture of any real or personal property shall be subordinate to any security interest in such property taken by a lender in good faith as collateral for the extension of credit and recorded as provided by law, and no real or personal property shall be forfeited under this section against an owner who made a bona fide purchase of such property without knowledge of a violation of this Article.

(b) In addition, courts may order restitution to any person that has suffered a financial loss due to violation of this Article.

Consumer Real Estate Settlement Protection Act

This bill is a critical piece of consumer-protection legislation, but unfortunately we can probably expect it to be a lightening rod for use by those from other states who would like to change the North Carolina business model.  We at Statewide continue to believe that the approved attorney system is the best system of closings for consumers because it provides the services of a highly-trained, highly-regulated professional for a total cost far below that which is charged by lay closers in other states (and North Carolina as well).

Please note:  This bill has undergone and continues to undergo revisions.  We have included the language from the most current draft as of press time.  Please remember to check the progress of this bill in any available public forum, such as the North Carolina Bar Association website ( or the NC General Assembly website ( once this bill has been formally introduced.

The proposed act begins with a statement of purpose that is clearly and succinctly written:

§45A-2. A residential real estate transaction is the most significant transaction in which many consumers are ever involved.  It is in the best interest of consumers involved in residential real estate transactions to be informed about the legal consequences inherent in residential real estate transactions and protected from potential risks of harm from illegal or injurious practices.  A residential real estate transaction is a process which involves several inseparable steps which necessarily involve the exercise of legal judgment, the giving of legal advice or opinions and other activities, all of which steps require the involvement of an attorney.  In order to protect consumers involved in real estate transactions, only attorneys shall be permitted to provide loan closing or settlement services except as otherwise provided in this Act. (emphasis added)

The Act (CRESPA) will apply to only those real estate transactions involving residential property that is intended to become the borrower or purchaser’s dwelling.  This includes vacant land that is zoned residential upon which the borrower or buyer intends to construct a dwelling, as well as individual units in a townhouse or condominium.  CRESPA defines “attorney” as one who is licensed under Chapter 84 of the North Carolina General Statutes, thereby eliminating the possibility that persons licensed to practice in another state but unfamiliar with North Carolina law would qualify as a settlement agent.

Selected provisions under proposed §45A are as follows:

§45A-4.  Definitions

(18) “Settlement” means (i) the time when the settlement agent has received the duly executed deed, deed of trust or mortgage, and other loan documents and funds to accomplish closing and to carry out the terms of the residential real estate transaction between the parties and (ii) all acts necessary to consummate the residential real estate transaction contemplated by the parties.

(19) “Settlement agent” means the person or persons who provide settlement services in connection with a residential real estate transaction in this State whether or not listed as the settlement agent on the settlement statement for such transaction.

(20) “Settlement services” means all services, including, without limitation, the administrative, clerical or other services, required to accomplish a settlement including, without limitation, the (i) presentation and identification of the documents necessary to complete a residential real estate transaction, directing the parties where to sign the documents or ensuring that the parties have properly signed the documents, and (ii) receiving or handling the disbursement of settlement proceeds, but expressly excluding services for the (i) listing and sale of residential property, (ii) inspection, analysis and reporting on the physical condition of the residential property and improvements thereon, (iii) the preparation, review, analysis and reporting on the financial credit of any party to a residential real estate transaction, (iv) the performance, preparation, issuance, analysis review and reporting on the value of the residential property and improvements, (v) providing title opinions, and (vi) underwriting and issuance of insurance policies.

(23) “Title opinion” means abstracting or passing upon titles or any other expression or confirmation of the existence or non-existence of any fact related to the status of title to any real property including, without limitation (i) current or past ownership, or (ii) current or past exceptions to title such as, without limitation, liens, judgments, financing documents, easements and restrictions or (iii) any other matter that addresses the scope, quality or nature of an interest in real property.

§45A-5. Licensing requirements, standards, and financial responsibility.

(1) A person or entity shall not act in the capacity of a settlement agent or provide settlement services, and a lender, seller, purchaser or borrower may not contract with any person or entity to act in the capacity of a settlement agent or for the provision of settlement services with respect to a residential real estate transaction in this State, unless the settlement agent is an attorney and is, among other parties involved in the residential real estate transaction, at least representing the purchaser or borrower involved in the residential real estate transaction.

(2) A settlement agent who is an attorney shall (i) provide any party represented by such attorney with a reasonable opportunity to request and receive legal advice from the attorney concerning the settlement and the documents required to accomplish the settlement; (ii) maintain at all times a malpractice insurance policy providing a minimum limits of liability of $250,000 for any individual claim, and $250,000 in the aggregate for all claims and damages; and (iii) satisfy the requirement to be considered an attorney under the Rules Governing the Administration of the Client Security Fund of the North Carolina State Bar promulgated by the North Carolina State Bar.

(3) Notwithstanding any rule of court or any authorized practice advisory opinion of the North Carolina State Bar to the contrary, only a settlement agent operating in compliance with the requirements of this Act may provide settlement services or receive compensation for such services.  The requirements of this Act regulating the provision of settlement services by a settlement agent shall be in addition to any other laws, rules or regulations of this State regulating the particular settlement service being provided including, without limitation, licensure requirements and standards of conduct.

(4) A settlement agent shall exercise reasonable care in providing settlement services.

(5) This Act shall not prohibit any party from representing himself, herself or itself in a residential real estate transaction to the extent otherwise permitted by applicable law.

§45A-6.  Bank as settlement agent.

(a) As used in this section, the following definitions apply:

(1) “Bank means a bank, savings and loan association, savings bank, or credit union chartered under the laws of North Carolina or the United States.  However, the term “bank” does not include any subsidiary or affiliate of a bank, savings and loan association, savings bank, or credit union chartered under the laws of North Carolina or the United States.

(b) Notwithstanding any other provision of this Act, a bank may act as a settlement agent and provide settlement services in connection with the closing of a loan to the extent otherwise permitted by applicable State law.

(c) A bank which acts as a settlement agent and provides settlement services shall, prior to the closing, provide the borrower with a written disclosure which contains the following statement:

Pursuant to the North Carolina Real Estate Settlement Protection Act, we, as your lender, are acting as your settlement agent, but we cannot provide you with any legal advice or legal services relating to the closing of your loan.

§45A-10. Direct payments to non-attorneys prohibited

In order to protect consumers against the risk of substantial harm occurring from unqualified parties performing settlement services or providing title opinions in connection with residential real estate transactions, unless otherwise provided in this section, no settlement agent in any residential real estate transaction shall pay any party other than an attorney or such attorney’s law firm for any settlement service or title opinion on any residential property located in this State.  … An attorney who provides settlement services or a title opinion in connection with a residential real estate transaction for which the attorney is also the settlement agent may pay a fee to a non-attorney who is trained, directed and supervised by such attorney in accordance with the standards established by the North Carolina State Bar.

§45A-11. Penalty

Any party violating any provision of this Act is liable to any other party suffering a loss due to that violation for that other party’s actual damages plus reasonable attorneys’ fees.  In addition, any party violating any provision of this Act shall forfeit to the payor all fees for any settlement services or title opinion collected, received or charged in violation of this Act, and shall pay to the party or parties suffering a loss an amount equal to one thousand dollars ($1,000) or double the amount of interest payable on any loan for the first 60 days after the loan closing, whichever amount is greater.

§45A-13. Compliance.

A settlement agent operating in this State prior to _______ , 2007, shall have ninety days after _______, 2007, to comply with the applicable requirements of G.S. 45A-5(2)(ii) and G.S. 45A-6(c).

As you will notice from the above text, the already-existing carve-out for banks to conduct their own closings as approved by the Supreme Court in the Pledger decision remains in effect.  It is our hope that this carve-out will allow North Carolina banks to support the passage of CRESPA for the benefit of all North Carolina consumers.   It is our sincere belief that despite assertions to the contrary, this bill is not merely a blanket protection for attorneys in North Carolina but rather true consumer protection legislation.  Settlement shops that have opened their doors in the wake of Authorized Practice Advisory Opinion 2002-1 (which advised attorneys on which portions of closings could safely and ethically be delegated to non-attorneys under their supervision) are subject to no licensing, training, or bonding requirements.  It is a completely unregulated industry that has grown as a result of a misunderstanding of the scope of the advisory opinion.  The advisory opinion did not change the definition of the practice of law as found in the NC General Statutes, but it is nonetheless a common refrain that “the law has changed and attorneys no longer have to do closings.”  Consumers have been harmed by this misunderstanding, and in most instances, have paid more for those closings than for those conducted by attorneys.  This legislation, if passed, would protect consumers from falling prey to such unscrupulous and illegal practices.  

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