There is a general perception that real property practice in North Carolina is approaching a crossroads. Large state lenders are becoming title insurance agents. With numerous offices across the state they are ideally positioned to undertake title abstracting and closing services, if a future change in the law permits, while presently utilizing controlled business aspects to supplant the attorneys traditional role of providing an independent, experienced and knowledgeable recommendation of which insurer meets the clients needs. Out of state lenders and title companies are reportedly utilizing independent non-attorney abstractors to establish title for loan collateral. Many are realistically concerned as to whether the practice as we know it will continue to exist in the foreseeable future or whether we will join the majority of states where attorney participation in the real estate transaction is nominal at best.
What are the factors that are driving Real Estate practice in the direction it is currently heading ? First, lenders are centralizing mortgage loan processing in order to reduce cost, improve efficiency and increase speed. Competitive pressures, created by consumer and investor demand, to speed up and simplify the loan process are behind the shift toward "one size fits all" loan origination procedures. As standardization increases the loan process requires less skilled personnel to turn more paperwork in ever shortening time periods. Additionally as investor demand for standardization increases there has been a tremendous corresponding increase in the required loan documentation. Second, as housing prices spiral upward and personal savings decrease it becomes increasingly difficult for home buyers to qualify for conventional loans. This economic reality causes lenders and realtors to strive to reduce outside closing costs of the borrowers in order to qualify them for the most home possible.
This has resulted in attorneys fees, in most areas of the state, being either reduced or fixed and not increasing with inflation. Most attorneys today are charging the same or less for a typical residential closing as was charged fifteen years ago. This is an economic fact; not just a general perception. The Residential Real Estate Task Force of the Real Property Section of the North Carolina Bar Association in its Final Report delivered this year reveals that North Carolina stands next to last in the nation in combined attorneys fee and title insurance premium for a typical residential real estate transaction. As a further reflection of this trend, East Carolina School of Business reports that the mean starting salary for its 1996 MBA graduates is $39,700.00 while The North Carolina Bar Association 1996 Economic Survey reflects that figure to be approximately $33,500.00 for 1996 Law graduates.
North Carolina also enjoys one of the lowest title insurance claims rates in the nation. The logical and probably correct inference is that this is due to the fact that attorneys are responsible for the title examination, closing and disbursement of the transaction and the title insurance function is kept separate by statute. While at first glance it would appear that this situation places the consumer in an enviable position now, such may not continue to be the case.
The economic pressures cited above are forcing many attorneys to undertake ever increasing numbers of closings in order to generate increased revenue under tighter time constraints. Simultaneously they are forced to increase efficiency in order to slow the rate of increase in overhead costs. Again this would appear to be beneficial, and it is, unless carried too far. Some of the methods that are being implemented to improve efficiency involve the increased use of paraprofessionals, computers, telefacsimiles and curtailment of traditional title examination procedures. The benefits of technology have been well established and further discussion here would not be productive.
Paraprofessionals are now recognized as essential in the high volume real estate practice. But well trained, properly supervised legal assistants are increasingly being used to improve the efficiency of more traditional offices as well. When an offices volume increases to the point that supervision and training begin to become inadequate, not only are ethical obligations not being met but the rate of errors increases. Some evidence of this occurring is reflected in the fact that Lawyers Mutual Liability Insurance Company of North Carolina reports that Real Estate produced the second highest rate of claims in 1993, Lawyers Mutual presents Practical Risk Management (1995). Increasingly these claims are resulting from improper supervision of paralegals. Real estate is arguably one of the most complex areas of law. The real property attorney must have a capable knowledge of not only Real Property law but Bankruptcy, Estate Administration, Domestic, Corporation, Partnership, Wills, Environmental, Land Use Regulation and Tax law (to name a few) in order to render a competent opinion on title. The paraprofessional cannot be expected to have this knowledge without intensive training and extensive experience. When too much responsibility is turned over to the legal assistant, without this training and experience, title problems go undiscovered and errors in judgment occur giving rise to claims.
Traditionally title examinations covered a period of fifty to sixty years, today forty years is generally considered the norm. Title insures are now being requested to accept thirty year searches. While this may be sufficient in well developed metropolitan areas (because most title problems have probably been discovered and corrected after repeated searches) it probably increases exposure elsewhere. It should be noted that the vast majority of road and rural cooperative utility easements were procured and recorded during the Depression of the 1930s and there was another surge of utility expansion during the early 1950s. Additionally the post World War II building boom witnessed the creation of a multitude of subdivisions with their ever present restrictive covenants (often containing easements). A forty year title examination simply will not reveal these encumbrances unless they are specifically referenced in an instrument within the search period. Due to competitive pressures and as a result of risk analysis, title insurers are providing survey coverage to lenders without a current survey. As a result many transactions are now being closed without a survey (and leaving the owner unprotected) merely to save money. Often a current survey will provide the title examiner with important clues as to the existence of a title problem otherwise unrevealed by the records in the courthouse. These trends give rise to the potential for an explosion in claims for unreported title defects.
In summary, attorneys are assuming more responsibility and more work for less money and less time to accomplish it. Economic, market and competitive pressures are beginning to erode the traditional professional standards. This has occurred in other states and has resulted in non-attorneys undertaking parts or even all of the process reserved to attorneys here. A possible explanation for the increased costs associated with real estate closings in those states lies in the economic necessity of covering the cost of increased claims arising presumably from the reduced involvement of experienced, highly educated and knowledgeable professionals in one of the most complex areas of law. As a result it would appear that the consumer is being forced to pay more for an inferior service. It would seem that inappropriate reaction to economic pressures may be leading us down the same road in North Carolina. What then can be done to avoid a wring turning at the crossroads ? First, attorneys must become more proactive in informing the public (especially legislators) of the benefits to the consumer inherent in the present system and the risks and costs associated in the process in non lawyer systems. Second, attorneys must insure the economic viability of their practices. It should be observed that lenders have been charging one percent or more of the loan as an origination fee for decades in order to help cover operating costs associated with the loan as well as charging interest to cover risk and profit. Currently are added various processing and service fees. Realtors have likewise been charging six percent commission on almost all sales. These practices are almost rigidly consistent in both industries. The 1972 eighth printing of the North Carolina Bar Association Advisory Handbook on Office Management & Fees provides that "[i]n fixing fees it should never be forgotten that the legal profession is a branch of the administration of justice and not a mere money-getting trade.
Nevertheless, fees are the life-blood of every law office and the thoughtful and conscientious lawyer must recognize position of [the lawyers] importance in a complex society and must be business-like enough to obtain sufficient income from [the lawyers] services to maintain [the lawyers] position and to provide [the lawyer] with the tools necessary for the performance of [the lawyers] services in an efficient and competent manner. ...Among a lawyers best assets are: (1) the respect of [the lawyers] clients and the public. (2) The good opinion of the Courts. (3) The good opinion of [the lawyers] fellow lawyers. These are all diminished if it is known that the lawyer does not consider [the lawyers] own services worth as much as those of other lawyers. The lay public expects the lawyer to be able to fairly judge the worth of [the lawyers] services. The respect, good opinion and confidence of the public and of the Bar are lessened or destroyed when it becomes known that a particular lawyer is lowering or endangering the standards of the profession by evading or violating the considered principles of established Fee Schedules.
Cutting fees usually results in the lawyer: (1) Incurring the temptation to slight [the lawyers] work and thus fail to discharge [the lawyers] duty to [the lawyers] client, thus injuring [the lawyers] own reputation and bringing the profession into disrepute. (2) Inviting danger, and perhaps disaster, to [the lawyer] and the profession by encouraging the bargain hunting type of client whose primary consideration is price but who, having obtained the price, will then expect and demand the utmost in time, effort, quality, performance and results as well; all of which the client has a right to expect and demand regardless of price. The prudent and conscientious lawyer will, therefore, guard [the lawyer] and the profession against entanglements with this type of client and will not become involved unless the compensation agreed upon is fair, reasonable and equitable to both client and lawyer."
We recognize the mandatory fee schedules have been determined by the courts to be illegal price fixing. To the extent that the quoted principles address charging less than a reasonable fee, as defined by the Rules of Professional Conduct, they are as valid today as they were when they were first promulgated. It is questionable as to whether, in a state as progressive and prosperous as North Carolina, attorneys can take pride in being on the last rungs of the national fee ladder. Attorneys in some areas of the State still charge the one percent fee that was prevalent decades ago. This type of fee structure recognizes that as housing costs go up so do attorneys overhead costs and that as the size of the transaction increases so does the attorneys responsibility and risk. These are some of the reasons that lenders and realtors structure their fees in the manner in which they do and are no less applicable to attorneys. If Attorneys would consistently charge a reasonable fee for their services, they would be required to undertake fewer matters in order to maintain profitability and would therefore be able to devote the time and attention to those matters that would ensure that North Carolina will continue to protect the consumer in the future as in the present and past.