Myrtle Beach article points to current fraud cases

Standard

The Myrtle Beach Sun News published an article on September 5 entitled, “They were conned out of their dream beach home, lawsuit says. These are common SC scams.”  You can read the article here.

Those of us who have worked in the real estate industry for years have heard of (or been bitten by) various iterations of real estate fraud schemes. These schemes change routinely as the fraudsters become more sophisticated. Thankfully, we are becoming more informed and therefore more sophisticated ourselves. But this article is an excellent reminder.

The article recounts the tale of a North Carolina couple, Jeremy and Candice Pedley, who spent years saving before finally acting on their dream of owning a family vacation home in North Myrtle Beach. The Pedleys entered into a contract last November to purchase a condo in in a gated community for $380,000. Unfortunately, a third party hacked into the real estate agent’s emails, impersonated their closing attorney, and convinced he Pedleys so wire their funds to a bank account in Rock Hill.

The hacking effort requested the exact number the Pedleys were expecting to wire, $86,183.81. This fact convinced the Pedleys that the fraudulent instructions were legitimate. According to the article, they have been able to recover about $36,000 of the lost funds. They were unable to complete the purchase of their dream condominium.

Columbia attorney Dave Maxfield is representing the Pedleys in a lawsuit attempting to recover their funds. According to the article, Maxfield told the Sun News that banks should do a better job stopping fraudulent accounts from being used, and real estate agents and attorneys need to warn clients about the pitfalls of wiring funds.

The article then details a few other common scams outlined by The S.C. Department of Consumer Affairs.

One such scheme creates fake rental listings promising low rent, immediate availability, and great amenities. The goal is to trick renters into transferring funds before they are tipped off that the listings don’t exist.

Another scheme notifies consumers that they have won the lottery, requesting, of course, some sort of fee or tax to receive the alleged winnings. Pressure is applied to “act now”.

Finally, the article discussed fake debt collectors. Fraudsters impersonate government authorities and attempt to convince consumers to pay off debt. These schemes typically request the target to pay a fraction of the amount they owe in return for full debt forgiveness. Threats of arrest are often used to apply pressure.

Please keep yourself and your staff members educated about all the current schemes. Your title insurance company should be a great source of current information. And please give your staff members permission to slow down and use the time they need to think through the facts of your transactions. I believe time is the key. The very smart individuals you employ, if properly armed with the necessary information and education, should be able to thwart most of these schemes, if they are given sufficient time to analyze the communications that hit their inboxes daily.

Chicago Title identifies earnest money fraud scheme

Standard

Chicago Title’s South Carolina state office sent a memorandum to its agents on July 26, entitled “Checks Drawn on Foreign Banks.”  I wanted to share this valuable information with all South Carolina practitioners even though this particular fraud scheme has not been reported in any South Carolina transactions. Knowledge is power! Let’s stop this scheme at our borders.

The memo points to buyers who tender counterfeit cashier’s checks from Canadian banks as earnest money deposits. The fraudster quickly backs out of the transaction and requests a refund. Because foreign checks can take more than thirty days to process, the refund requests are made before the checks can be negotiated.

The scheme has been used in at least nine Midwestern states. The common facts are:

  • The offer to purchase provides for an all-cash transaction.
  • The selling broker has never met the buyer.
  • The buyer has not physically viewed the property.
  • The buyer is located outside the United States.
  • The initial deposit exceeds the required earnest money deposit.
  • The deposit is in the form of a check drawn on a Canadian bank.
  • The buyer requests that the funds be returned by a wire to their account.

Chicago Title advises that its agents should not accept foreign checks at all. Instead, agents are advised to insist on wired funds. This is great advice which will assist you in working within our ethics rules and in protecting your trust accounts. You don’t want to be in the position of having to replace lost funds! Be careful out there!

EAO Opinion 22-04 gives real estate lawyers guidance on non-negotiated checks

Standard
How we did it back in the day

Ethics Advisory Opinion 22-04 addresses a trust accounting question from a real estate practitioner.

The underlying facts are: “Due to the nature of a residential real estate practice, Lawyer frequently issues relatively small dollar amount checks from Lawyer’s trust account to both clients and third parties. A number of these checks are not timely negotiated, resulting in ongoing trust accounting maintenance costs, including labor costs, stop-payment fees and mailing fees for uncashed trust account checks that require stop payments and/or reissuance and re-mailing to the payee.”

This is an age-old concern. When I was in private practice (150 years ago or so), our law firm’s excellent bookkeeper chastised me monthly about the $5.00 check issued for mortgage satisfactions that never seemed to get cashed.

The lawyer poses the following question to the Ethics Advisory Committee: “May Lawyer charge an amount to cover administrative costs associated with stop-payment fees and trust account check reissuance and re-mailing fees for checks that remain outstanding for more than thirty (30) days after issuance?”

Thankfully, the Committee responded affirmatively.

The opinion states that a lawyer may charge a check recipient an amount to cover administrative measures undertaken to resolve the outstanding check, which includes expenses incurred such as stop payment fees and postage fees, provided the amount charged is not unreasonable.

Comment 1 to Rule 1.5 provides, “A lawyer may seek reimbursement for the cost of services performed in-house…by charging an amount that reasonably reflects the cost incurred by the lawyer.” The Committee opined that the lawyer may charge an amount against the recipient’s check to obtain reimbursement for the same, provided the amount charged is not unreasonable. To collect on the amount charged, Lawyer may deduct the amount to be charged from funds that remain in trust after adequate steps have been taken to cancel, void, or otherwise nullify the previously issued check…”

The Committee imposed one limitation by stating that the amount to be charged is limited to the total amount of funds that were paid by the outstanding check.

This opinion may provide a small amount of assistance, but the administrative nightmare remains. Small checks that fail to be negotiated will remain a monthly quagmire. But this opinion may allow law firms to at least recoup a portion of the cost.

Can mortgage lenders force arbitration on consumers?

Standard

Fourth Circuit says no in a published opinion

In Lyons v. PNC Bank*, a consumer, William Lyons, Jr., filed suit against his home equity line of credit lender alleging violations of the Truth in Lending Act (TILA). The lender, PNC Bank, had set-off funds from two of Mr. Lyons’ deposit accounts to pay the outstanding balance on his HELOC.

PNC moved to compel arbitration of the dispute based on an arbitration provision in the parties’ agreements relating to the deposit accounts. The case contains some discussion about jurisdiction, and one judges dissented on that basis. But the important holding in the case relates to pre-dispute arbitration provisions in consumer mortgages and related documents.

The Court found the relevant legislation to be 15 U.S.C. §1639c(e)(1) and §1639c(e)(3) from the Dodd-Frank Act, which had amended TILA. The first provision states:

“No residential mortgage loan and no extension of credit under and open end consumer credit plan secured by the principal dwelling of the consumer may include terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.”

The second provision states:

“No provision of any residential mortgage loan or any extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer, and no other agreement between the consumer and the creditor relating to the residential mortgage loan…shall be applied or interpreted so as to bar a consumer from bringing an action in an appropriate district court of the United States…”

The Court held that the plain language of the legislation is clear and unambiguous that a consumer cannot be prevented from bringing a TILA action in federal district court by a provision in any agreement related to a residential mortgage loan. The Court’s holding indicates its opinion that Congress clearly intended consumers to have the right to litigate mortgage disputes.

* United States Court of Appeals for the Fourth Circuit Opinion No. 21-1058 (February 15, 2022)

Borrower sues mortgage lender for violation of attorney preference statute

Standard

Court of Appeals holds lender’s foreclosure action is not a compulsory counterclaim

South Carolina’s Court of Appeals ruled on a noteworthy foreclosure case* in August.

The facts are interesting. In 1998, the borrowers signed a fixed-rate note in the amount of $60,400 at a 9.99% interest rate secured by a mortgage on property in Gaston. The note contained a balloon provision requiring payment in full on July 1, 2013.

On June 27, 2013, days before the note matured, the borrowers brought an action against the lender alleging a violation of South Carolina Code §37-10-102, the Attorney Preference Statute. The complaint alleged that no attorney supervised the closing, that the loan was unconscionable, and that the borrowers were entitled to damages, attorney’s fees and penalties as provided in the Consumer Protection Code. In addition, the complaint asserted a claim under the Unfair Trade Practices Act. All the allegations were premised on the same alleged violation of the Attorney Preference Statute.

The borrowers immediately defaulted on the note, and the lender filed an answer asserting no counterclaims. At trial, the jury found for the lender. About a year later, the borrowers sent a letter by certified mail to the lender requesting that it satisfy the mortgage. The letter included a $40 check to pay the recording fee for the mortgage satisfaction. The lender refused to satisfy the mortgage and returned the check.

The lender brought the present action for foreclosure in October of 2016. The borrowers asserted defenses of res judicata, laches, unclean hands, waiver, and setoff, but admitted no payments had been made on the loan after July 1, 2013. The borrowers then sought a declaratory judgment that the lender held no mortgage on the property, or, alternatively, that the mortgage was unenforceable. They alleged that the lender was liable for failing to satisfy the mortgage and for noncompliance with the Attorney Preference Statute. The lender denied the allegations and argued that the claims under the Attorney Preference Statute were time-barred.

Both parties sought partial summary judgments before the master-in-equity. The master granter the borrower’s motion and denied the lender’s motion. He ruled that the mortgage was satisfied and instructed the lender to file a satisfaction.

On appeal, the lender argued the master erred by finding its foreclosure action was a compulsory counterclaim in the 2013 action. The Court of Appeals agreed, holding that the two claims arose out of separate transactions. The Attorney Preference claim arose from the closing, while the foreclosure arose from the borrower’s default, according to the Court. The Court reversed the master’s award of partial summary judgment to the borrower and remanded the case for further proceedings. Because of its decision on this issue, the Court determined that it did not need to address the remaining issues.

*Deutsche Bank National Trust Company v. Estate of Houck, South Carolina Court of Appeals Opinion 5844, August 11, 2021.

Wire fraud advice from industry insiders

Standard

Dirt Lawyers: educate your clients!

Please take a look at this article by Bill Svoboda of CloseSimple entitled “Wire Fraud in the Wake of COVID-19”. The article quotes some industry insiders, including Rick Diamond of our company. Rick was one of our speakers for our recent seminar and often advises real estate lawyers on issues including how to protect client funds.

The article also quotes Tom Conkright of CertifID, one of our office’s solution partners. CertifID has a proven success rate on protecting client funds, including returning client funds that go missing. We highly recommend that you take a look at what CertifID has to offer. Reach out to your agency representative to ask for a demonstration.

But the main purpose of this blog is to remind you to continually educate your clients about wire fraud. Like the victim in this article, many of your clients are pulling up roots and moving to sunny South Carolina. Many of your clients are retirees. The earlier you can give new clients advice about protecting themselves against fraud, the better. Give them advice in bright red, bold print in your engagement letters. Add bright red, bold print warnings under your email signature lines. If you protect one aging consumer by these methods, the effort will be worth it!

Speaking of aging consumers, many of you have heard that I’m retiring in February. One thing that concerns me about retirement is not being able to keep current on industry advice about fraud. If you hear something next year that I should know, give me a call!

Eighth Circuit Court ruling makes loans disappear

Standard

The decision could make significant changes in the secondary market

foreclosure

I refer you to this article from Bloomberg that led me to read the Eighth Circuit Court of Appeals case decided last month, CityMortgage, Inc. v. Equity Bank, N.A.*.

In South Carolina and most other states, the bank has the power to pursue the borrower personally if it can’t sell the property that is subject to a mortgage for the full amount of the loan after a foreclosure. There are a handful of “non-recourse” states where it is not possible to pursue the borrower personally. But this case was decided under Missouri law, and Missouri is not one of those unusual states.

The article makes a point that’s news to me: non-recourse mortgages are standard in most countries other than the United States.

The case involved a repurchase demand under an agreement between CityMortgage and Equity Bank. Twelve loans were involved, six that had been foreclosed and six that had not. The surprising ruling relates to the six mortgage foreclosures. The Eighth Circuit affirmed the lower court, which had held that the six loans that had been foreclosed no longer existed.

The dissent got it right, however, by stating that the loans were not “liquidated” or “extinguished” by the mortgage foreclosures. The dissent states the obvious: a mortgage is a security interest in real property that serves as collateral for the borrower’s loan. When the mortgage is foreclosed, the underlying promissory note survives and the borrower continues to be liable for the resulting deficiency (absent further action such as a new agreement or a discharge in bankruptcy.)

The article correctly states that the Eighth Circuit transformed recourse loans into non-recourse loans by its ruling. The article also states that non-recourse loans may lead to higher interest rates and larger swings in housing prices.  Purchasers on the secondary market won’t pay as much for non-recourse loans, and, for that reason, this case could have a significant impact on the secondary market if other circuits follow the lead of the Eighth Circuit.

* No. 18-1312 (8th Cir. 2019)

A sign of the times?

Standard

Zillow begins to market title and escrow services

welcome to the future sign

A November 12 article in the “Title Report” states that Zillow has begun testing its own title and escrow services in a handful of markets.

After making significant strides in revenues in the third quarter, Zillow is testing the waters in our arena. But, thankfully, we aren’t yet seeing these activities in South Carolina. Zillow had previously used third party title and escrow agents for its transactions. It continues to use third parties in most markets.

A Zillow spokesman told the “Title Report”, “We are also building title and escrow services in-house as a part of our long-term goal of delivering a true, seamless, end-to-end transaction experience for consumers.”

Zillow told the Title Report that more than 80,000 homeowners requested offers in the third quarter. It purchased nearly 2,300 homes and sold more than 1,200 homes in the same time frame. The spokesman said the company believes these results demonstrate that the business model to mechanize real estate transactions is gaining traction as consumer demand reveals people want an easier way to buy, sell, rent and finance homes.

stay tuned

This blog has previously suggested that the role of the local real estate agent may change to assisting sellers in analyzing the various offers they receive from iBuyers plus managing inspections and other steps in the real estate closing channel. As long as closings remain the practice of law in this state, our local dirt lawyers will remain involved in the closing process.

We promise to keep you informed of developments! Watch this space.

SC Supreme Court rule change affects every lawyer with a trust account

Standard

Make one simple change to stay in compliance

change ahead sign

On October 23, our Supreme Court implemented several changes to the South Carolina Appellate Court Rules dealing with lawyer and judicial disciplinary rules enforcement procedures. If things go well in our respective practices, most of us will never have to study the rule changes.

But one change affects every lawyer with a trust account.

Rule 1.15(h) of the Rules of Professional Conduct has been amended to state that every lawyer maintaining a trust account must file a written directive requiring his or her financial institution to report to the Office of Disciplinary Counsel, rather than to the Commission on Lawyer Conduct, when any properly payable instrument is presented for payment against insufficient funds.

In other words, NSF checks must now be reported by your bank to the ODC.

The Court recognized in a footnote that these written directives will take time to update and that lawyers whose written directives currently require reporting to the Commission on Lawyer Conduct are not in violation of the rule. The Court stated that lawyers should update these directives at their earliest convenience.

Most dirt lawyers pay close attention to detail, and I would recommend paying attention to this one sooner rather than later.

Thirty-year fixed-rate mortgages

Standard

Are they still the most logical choice for all buyers?

Is the mortgage industry due for a facelift?

facelift

I recently saw an interesting article from MReport via American Land Title’s Newsletter dated February 26, entitled, “A Mortgage Best Fit; Lenders are bypassing the 30-year fixed-rate mortgage in favor of loans that are tailored to specific borrower niches”. I recommend that all dirt lawyers read this article to understand that the mortgages you may be closing in the future may not be the same as the mortgages you closed in the past. You can read the article in its entirety here.

My husband and I built a house and closed a mortgage loan in 2011, and, although we told the lender and real estate agent we intended to pay the loan off quickly, both insisted on the old-fashioned 30-year fixed rate mortgage with a twenty-percent down payment. The lender didn’t even offer alternatives. In 2011, the housing market was just returning from the financial debacle that began in 2007, so everyone was being extremely careful. (I remember being questioned about why our income tax picture had changed in the years leading up to 2011 and having to write a letter explaining that children grow up and leave home.) I’m not sure we would be approached in the same way today, based on this article.

First-time buyers often choose 30-year mortgages because no one explains other options and because it’s the product their parents understand and recommend. The traditional mortgage is generally the safest option because of its reliable, consistent monthly payment. Interest rates have been low for many years now, and this fact also supports the wide-spread use of the traditional mortgage. Why risk a variable rate when the fixed rate is low?

This article suggests, however, that millennials and other first-time buyers may now be more inclined to select shorter-term and adjustable-rate options. Someone who is just entering into the housing market may envision living in their starter home for only a few years and may prefer an adjustable rate mortgage to take advantage of the low interest rate up front. This article suggests that millennials may be saddled with student debt and may be a more transient group, so they don’t want to commit to anything that lasts thirty years. Few envision themselves working for a single company for any length of time. They believe they must change jobs to increase their incomes. This article also suggests that millennials may not be loyal to a geographic area.

In addition to variable rate mortgages, this article suggests the concept of the equity-sharing mortgage, where an investor shares in the appreciation in the home value in exchange for down payment assistance or lower payments. These new-fangled products may enable low- and moderate- income borrowers to enter the housing market.

Some lenders are recognizing that these trends mean that the entire underwriting process needs to be reexamined to accommodate the millennial market. And they also recognize that veterans may have difficulty getting the service and products they need to buy homes because VA loans are a little more expensive for lenders to close. More education for veterans and training for loan officers may be needed to accommodate the veteran population. Online and mobile-friendly mortgages are also likely to change the face of the mortgage industry in the future.