CFPB issues a factsheet on title insurance disclosures

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Also updates disclosure FAQs

cfpb-logoThe Consumer Financial Protection Bureau (CFPB) has recently issued two documents that may help closing attorneys.

The first document is a factsheet on TRID title insurance disclosures. This document addresses differences between state disclosures and TRID disclosures for simultaneous issue rates. It also addresses the situation where the seller pays for title insurance.

The second document is an updated list of frequently asked questions (FAQs) on the TILA-RESPA Integrated Disclosures. The additions address seller paid costs, total payments on the closing disclosure, accounting for negative prepaid interest and whether a lender may require the consumer to sign and return the Loan Estimate and Closing Disclosure.

U. S. Supreme Court rules CFPB structure is unconstitutional

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The Supreme Court issued an order on Monday, June 29 holding that the structure of the Consumer Financial Protection Bureau is unconstitutional. But the agency has not been abolished.

In a 5-4 decision authored by Chief Justice John Roberts, the Court held that the agency run by a single director who can be fired by the President only for cause violates the separation of powers doctrine. The agency can be saved simply by striking the for-cause termination provision of the Dodd Frank Act.

There will be no immediate effect because the agency is currently being run by an acting director who has not been confirmed by the Senate. For this reason, the director can be fired by the President without case.

In the case, a California law firm alleged that an investigative demand issued by the CFPB is invalid on the grounds that the CFPB’s structure is unconstitutional.

The Episcopal Church property saga continues

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We have a new circuit court order

This is my third blog about the controversy surrounding the properties of various Episcopal churches in South Carolina. I previously said I am thankful to be a real estate lawyer as I attempt to decipher these issues.

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St. Philip’s and St. Michael’s Episcopal Churches, Downtown Charleston, SC 

In August of 2017, the South Carolina Supreme Court issued a 77-page opinion in this litigation. We now have a new circuit court order, and I am confident we will hear more at a later date.

I don’t have to solve the mystery of the rights of gays in churches. I don’t have to ascertain whether the “liberal mainline” members or the “ultra-conservative breakaway” members make up the real Episcopal Church.  I don’t have to delve into the depths of neutral principles of law vs. ecclesiastical law. I don’t have to figure out who will own the name “Episcopal Diocese of South Carolina.”

The real estate issues are sufficiently thorny to occupy our collective real estate lawyer brains. The South Carolina Supreme Court seemed to indicate that the 29 breakaway churches had to return their properties to the national church under the “Dennis Canon”. But the Supreme Court left open the possibility that the lower court might clarify the position, and clarify Circuit Court Judge Edgar Dickson did.

He wrote that state law, not church law, requires the transfer of real property by deed. He said that no parish expressly acceded to the Dennis Canon. He said, “This is a property case. A decision on property ownership is usually governed by the title to real estate—the deed. In this case, all the plaintiff parishes hold title to their property in fee simple absolute.”

News articles refer to the properties as being valued at hundreds of millions of dollars. The historic value of the properties, including St. Michael’s and St. Philip’s of Charleston, is also quite significant. Future appeals are almost guaranteed. Nothing is settled at this point. Let’s not try to insure these titles anytime soon.

The controversy began more than five years ago when local parishes in eastern South Carolina left the Episcopal Church over, among other issues, the rights of gays in church. Since then, the two sides have been involved in a battle over the church’s name, leadership and real estate.

Interestingly, the national church had offered a settlement to the breakaway parishes that would have allowed them to retain their properties if they gave up the name and leadership issues. That settlement offer was apparently summarily rejected.

The South Carolina Supreme Court’s ruling upheld the Episcopal Church’s position that it is a hierarchal church rather than a congregational church in which the vote of church membership can determine the fate of real property. The new circuit court order begs to differ.

I continue to be thankful that I am a real estate lawyer!

*The Protestant Episcopal Church in the Diocese of South Carolina v. The Episcopal Church, South Carolina Supreme Court Opinion 27731, August 2, 2017.

SC lawyers connected to Hardwick receive admonitions

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Nat HardwickIn additional fallout from the Nat Hardwick fiasco in Atlanta, the South Carolina Supreme Court has anonymously admonished two bar members for failing to restrict access to South Carolina-based trust accounts containing client funds and failing to ensure proper monthly reconciliations of those accounts*.

This blog has discussed Nat Hardwick, a name familiar to many South Carolina real estate lawyers three times. He was convicted in 2018 of embezzling more than $25 million from his former companies, including his former law firm, Morris Hardwick Schneider. In February of 2019, he was sentenced to 15 years in prison. His co-conspirator and controller, Asha Maurya, was sentenced to seven years after she cooperated with the government. In May of 2019 Hardwick and Maura were ordered to pay $40 million in restitution.

Nathan E. Hardwick IV, described himself as the face of Morris Hardwick Schneider, an Atlanta residential real estate and foreclosure firm that grew into sixteen states, including South Carolina. The firm once had more than 800 employees and boasted of offices in Charleston, Hilton Head, Columbia and Greenville.

This story hits close to home. My company was one of the victims of the crimes and one of the parties awarded restitution because it funded the firm’s escrow accounts when the losses were discovered.

The prosecutor described an extravagant lifestyle that Hardwick enjoyed at the expense of others. The case was said to be particularly troubling because the illegal activity was orchestrated by a lawyer who swore an oath to uphold the law and represent his clients with integrity. The U.S. Attorney said he hoped the case sent the message that the FBI and the U.S. Attorney’s office will not tolerate this type of white-collar crime.

According to the evidence, from January 2011 through August 2014, Hardwick stole more than $26 million from his law firm’s accounts, including its trust accounts, to pay his personal debts and expenses. The firm’s audited financial statements showed that the firm’s net income from 2011 through 2013 was approximately $10 million. During that time, according to the evidence, Hardwick took more than $20 million from firm accounts.

Asha Maurya, who managed the firm’s accounting operations, reached an agreement last May with the U.S. Attorney’s office and pled guilty. She was expected to testify at the trial, but was unexpectedly not called as a witness. Her lawyer argued at the restitution hearing that she should be liable for only $900,000, the amount she admitted taking from the firm for her own benefit. She had agreed to pay restitution in that amount as a part of her plea bargain.

During the trial, Hardwick did take the stand in his defense and attempted to blame Maurya with the theft. He said that he trusted her to his detriment, that he was entitled to the funds, and that he was unaware that the funds were wired from trust accounts. Hardwick testified for more than a day and explained that he believed Maurya followed proper law firm procedures.

On the stand, Hardwick, described as the consummate salesman, said that he gave his cellphone number to almost everyone. He said he returned calls and messages within a few hours and instructed his employees to do the same. He apparently believed himself to be a master in marketing and customer service and prided himself in focusing on the firm’s expansion strategy. He hoped to expand to all fifty states and make money through a public stock offering.

With his ill-gotten gains, Hardwick bought expensive property, made a $186,000 deposit for a party on a private island, spent $635,000 to take his golfing friends to attend the British Open in 2014, paid off bookies, alimony obligations, and sent more than $5.9 million to various casinos, all according to trial evidence. Hardwick’s activities lead to the loss of his law license and the bankruptcy of his firm.

Hardwick’s former partners, Mark Wittstadt and his brother, Gerald Wittstadt, were each awarded $6 million in restitution, and Art Morris, a retired member of the firm, was awarded $5 million.  All claim damage to their reputations in addition to substantial monetary losses.

These two South Carolina disciplinary cases began in May of 2014 when SunTrust Bank reported it paid three wires that were presented against insufficient funds on one of the firm’s South Carolina IOLTA accounts, leaving the account overdrawn by more than $65,000. Approximately a month later, the bank reported the same account was overdrawn by more than $18,000. The ODC began its investigation about the same time the law firm and my company began investigating the problems in Atlanta.

In South Carolina, the misappropriations occurred primarily through online transfers between firm trust accounts. More than $9 million in transfers in and out of the South Carolina trust accounts occurred during 2014 alone. As a result of the investigations and the subsequent funding of the shortage by my company, no South Carolinians lost funds.

*In re Anonymous Member of the South Carolina Bar, SC Supreme Court case 27937 (May 27, 2020) and In re Anonymous Member of the South Carolina Bar, SC Supreme Court case 27974 (May 27, 2020).

Homeowners’ Association information at your fingertips

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The South Carolina Department of Consumer Affairs announced on May 12 the availability of its website containing a wealth of information about homeowners’ associations. Check out the website here.

The site includes frequently asked questions about homeowners’ associations as well as an outline of South Carolina law, contact information of individuals who may be able to help and other resources.

If you represent homeowners’ associations, you probably have this information at your fingertips, but if you are a dirt lawyer who infrequently gets asked questions like, “Can my homeowners’ association impose a fine or file a lien if my renter….

  • Drives a motorcycle into the neighborhood;
  • Hangs towels to dry on the deck;
  • Parks an RV in the driveway;
  • Let’s too many kids use the pool?”

Or, “can I withhold the payment of assessments to my homeowners’ association because it refuses to enforce the prohibition against the chickens my neighbor maintains?”

Or, “I want to paint my front door fuchsia. There are a variety of crazy colors in the neighborhood, but the homeowners’ association guidelines say only a set of approved colors can be used on the exterior of residences. Can they enforce that rule?”

Have you heard questions like this? I certainly have.

Use this website to be able to communicate the answers to your clients in a succinct way, without a lot of legal research.

Court of Appeals case lets us talk dirt

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In the midst of COVID-19, it’s a pleasure to return to a simple discussion of South Carolina dirt law. A case decided by our Court of Appeals last week* surrounds the rights of a condominium project’s owner’s association and a successor developer.

The Edgewater on Broad Creek is a luxury condominium project in Hilton Head developed beginning in 2002. The developer, Broad Creek Edgewater, L.P. planned to develop the project on 23.65 acres in multiple phases. Phase 1, located on 7.64 acres of the property, consisted of a building containing 23 units and a clubhouse. The developer recorded a master deed in Beaufort County on December 31, 2002. In the master deed, the developer reserved the right to incorporate the remaining 16.01 acres into future phases.

The developer failed in the great recession. Its creditors placed Broad Creek Edgewater, L.P. into involuntary Chapter 7 bankruptcy in May of 2007. The bankruptcy court approved a sale of the additional property to Bear Properties, LLC on May 28, 2008. In addition to the property, the successor developer was given all of the developer’s reserved rights by a quitclaim deed and a bill of sale. Later, Bear Properties assigned all its rights and interests to Appian Visions, LLC, which subsequently assigned its rights and interests to Ephesian Ventures, LLC, the appellant in this case.

While the parties are involved in other litigation, this case involves the attempted construction of a pool and tabby walk by the owner’s association on Phase 1. In March of 2010, the association sought a development permit from the Town of Hilton Head to construct a swimming pool. Following a hearing, the permit was granted and the association began construction. Later, the association began constructing a tabby walk leading from the residential building to the swimming pool. Construction was halted when the Town notified the association that an additional permit was required for the tabby walk.

Ephesian administratively opposed the permit to construct the tabby walk, alleging the master deed required its approval for any construction. The Town rescinded approval for the development permits, stating that it planned to hold the matters in abeyance until the covenant issue was resolved. In 2011, the association brought suit in circuit court seeking a declaratory judgment as to Ephesian’s reserved rights in Phase 1. The association sought an order that it had a right to construct a swimming pool and other amenities on Phase 1, subject only to the land use requirements of the Town, free of any interference by Ephesian.

Although the developer argued that other language created an ambiguity,  language focused on by the Master in Equity and Court of Appeals reads:

“The Declarant expressly reserves the right to improve the aforementioned property by clearing, tree pruning, constructing additional parking and common facilities, including, but not necessarily limited to recreational facilities, draining facilities, lagoons, and the like, pertaining to The Edgewater on Broad Creek Horizontal Property Regime.”

The Master in Equity found, and the Court of Appeals agreed, viewing the facts and inferences in the light most favorable to the successor developer, as is required in considering summary judgment, that the successor developer maintains the right to construct additional amenities in Phase 1, but that this right is not exclusive.

The Court held that the master deed was unambiguous in its reservation of a non-exclusive right in the developer. Litigation between the parties is likely to continue, so we may be able to discuss further developments later.

Talking dirt law is so refreshing!

 

*The Edgewater on Broad Creek Owners Association, Inc. v. Ephesian Ventures, LLC, Opinion 5724, South Carolina Court of Appeals (May 6, 2020).

 

Are RON closings now allowed in South Carolina?

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After a tease from our Supreme Court on Friday, the answer is still “no”

For about 15 minutes on Friday afternoon, May 1, those of us involved in real estate transactions in South Carolina got excited. An Order* from the South Carolina Supreme Court hit our in-boxes. The order was entitled “RE: Participation in Closings of Real Estate Transactions”. We collectively thought South Carolina may have moved into the 21st Century with an authorization for Remote Online Notarization (RON) closings.

Then we read the order.

You can read it here.

By way of preamble, the Court said, “we find that the public health emergency created by COVID-19 requires changes in the usual operation of the Rules of Professional Conduct in terms of the normal functioning of real estate transactions.”

Then the order stated that until August 1, lawyers may “participate in and supervise the closing of a real estate transaction by way of a video conference.”

Fair enough, but I think most South Carolina transactional lawyers believed they could already ethically handle closings via video conference.

Most lawyers definitely believed they can ethically handle “mail away closings.” Were we wrong? Ethics Advisory Opinion 05-16 states that an attorney may ethically conduct real estate closings by mail as long as it is done in a way that: (1) ensures that the attorney is providing competent representation to the client; (2) all aspects of the closing remain under the supervision of an attorney; and (3) the attorney complies with the duty to communicate with the client so as to maintain the attorney-client relationship and be in a position to explain and answer any questions about the documents sent to the client for signature.

To meet this test, according to the EAO, clients must have reasonable means to be in contact with the attorney, by telephone, facsimile, or electronic transmission. The EAO further states that there is no legal requirement that a client attend the closing, but that it must be the client’s decision not to attend the closing.

Ethics Advisory Opinions are, of course, not binding on the South Carolina Supreme Court. But if we rely on the EAO and handle mail-away closings, why can we not also handle closings via video conference, as long as we comply with all of our ethical obligations to properly represent our clients? Technology has changed since 2005!

Setting that issue aside, let’s look at the real problem. The primary obstacle to any closing that is not conducted strictly in the presence of the lawyer is the proper notarization of the recordable documents. According to South Carolina Code §26-1-5, the notary must be in the physical presence of the signatory. For this reason, clients and their lawyers must employ notaries in the client’s location when the client and the lawyer are not in the same location.

Did the May 1 Supreme Court order fix the notary problem at least temporarily? Lawyers who have spent the last four days debating this question via listserv and Facebook have decided that it does not. But did the Court try to help? Maybe.

The Order goes on to say, “necessary persons to a real estate transaction may, under the direction of the supervising attorney, similarly participate in the real estate closing by way of a video conference, provided any necessary person so consents; further, the supervising attorney shall ensure that the attestation of a recordable instrument is accomplished, which may be satisfied by use of real-time audio-visual communication technology, provided the identity of the necessary person is confirmed and a notary attests the signature of any necessary person.” (Emphasis added.)

Giving the Court the benefit of the doubt, perhaps the Justices did not attempt to fix the notary problem but, instead, believed they must address the professional responsibility aspects of the closing process to allow the legislature and governor address the statutory notary issue.

I think I am going to go with that interpretation. Otherwise the Order is useless.

And, I have another concern. Anyone of us who has read and struggled with the facts in the notorious Quicken** case knows that the Court by implication blessed dividing the various aspects of the closing that must be handled by an attorney among many attorneys. But the final sentence of this Order reads, “This order does not suspend any other provisions of the Rules of Professional Conduct, and nothing in this order is intended to relieve an attorney of his or her obligation to assume the full professional and direct responsibility for the entire transaction.” (Emphasis added.)

I am so confused!

 

*Order 2020-05-01-01, South Carolina Supreme Court.

**Boone v. Quicken Loans, Inc., 420 S.C. 452, 803 S.E.2d707 (2017).

Can non-citizens receive the owner-occupied tax ratio?

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Interesting question discussed on SC Bar’s Real Estate Law Listservundefined

The South Carolina Bar maintains a great listserv for members of the Real Estate Practices Section through which lawyers can ask questions and share information via email. I recommend that South Carolina real estate practitioners join the section and the list. Both provide opportunities for staying in touch with fellow practitioners and keeping up with news and trends.

Last week, a practitioner from the Fort Mill area was advised that the county would not allow the 4% owner-occupied assessment ratio for his clients who had Hispanic names but who presented South Carolina driver’s licenses and vehicle registrations as evidence of their permanent addresses. He asked other practitioners how to appeal.

Several lawyers, mostly from the Charleston area, responded that they were well aware of this issue. Apparently, Charleston County takes a hardline approach on the issue and requires that persons who are not United States citizens be resident aliens/permanent residents to obtain the 4% ratio.

My friend and excellent Charleston real estate practitioner, Beth Settle, pointed us to this Attorney General’s opinion on the topic.

The opinion is dated June 21, 2019 and is addressed to Jerry N. Govan, Jr., a member of the South Carolina House of Representatives. Mr. Govan’s question noted that some county offices are requiring individuals to present proof of U.S. citizenship as a requisite of receiving the special ratio and asked whether South Carolina law, specifically §12-37-10 et seq., requires proof of citizenship. The legislator then asked whether counties are authorized to use investigative methods to determine citizenship.

The opinion agreed with the questioner that South Carolina law provides no “bright line” rule to determine whether a non-citizen is or is not a domiciliary for the purposes of the special ratio and pointed to court decisions from multiple jurisdictions with varying results on this issue. Some courts have held that illegal aliens cannot form the requisite intent to achieve domicile in the United States. Other courts have indicated the determination must be made on a case-by-case basis. Some aliens, according to an opinion from Alaska, are allowed in the country only if they do not intend to abandon their foreign residence. Those restricted aliens would jeopardize their legal presence in the United States if they seek to establish domicile here. Others are not so restricted and may be able to form the intent to remain here without jeopardizing their legal alien status.

No decisions from South Carolina appellate courts have addressed this issue, but the Administrative Law Court considered the question* and concluded that establishing domicile is ultimately a question of fact and largely one of intent. A distinction was drawn between “actual residence” and “legal residence”, and the court stated that an individual remaining in the United Stated without documentation cannot form the requisite intent to make property in South Carolina the domicile for the purposes of the discount.

The burden of proof on this issue falls on the taxpayer. The Attorney General’s opinion concluded that in order to receive the four-percent special assessment ratio, the property in question must be the legal residence of the taxpayer. The determination must be made on a case-by-case basis after investigation by the county officials and ultimately the courts. Generally speaking, the opinion continued, those aliens who are here illegally are deemed unable to establish domicile in the United States. Where the alien is in the United States as a result of DACA, that person cannot qualify. And a tourist without a permanent visa cannot be a permanent resident.

*Richland County Assessor v. Herrera, 2018 WL 5114185 (18-ALJ-17-0006-cc)(October 9, 2018).

Disrupted Disrupters

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COVID-19 is causing the iBuyers’ business model to stall

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With COVID-19 spreading, the iBuying frenzy seems to be fading fast. Commerce is slowing and even closing in some locations, especially major cities, making it difficult for iBuyers to determine fair prices for homes. Zillow, Redfin, Opendoor and Offerpad have all withdrawn from the iBuying market for the time being.

The only company not putting on the brakes seems to be HomeVestors, the “We Buy Ugly Houses” company that was in the iBuying space before that term became cool. The companies recently occupying this space never made it to South Carolina, but we saw “We Buy Ugly Houses” signs on telephone poles throughout the state, even in the most rural areas.

Some economists are speculating that COVID-19 may put a nail in the coffin of the “institutional fix-and flip” business model of those companies recently entering the market. The model was considered risky in the best of times. In times of economic uncertainty, it becomes even riskier. Safely buying a home at 95% of the market value requires confidence that the market won’t drop substantially.

HomeVestors, on the other hand, is attempting to grow by selling franchises and advertising that it remains in the market that others are leaving.

Other economists and some of the companies themselves are arguing that iBuying is a viable alternative in a market where it’s difficult to show homes and hold open houses. At this point, the correct answer is anybody’s guess.

The retreat of Zillow, Redfin, Opendoor and Offerpad before they even reach South Carolina is good news to South Carolina closing attorneys and real estate agents who view the iBuying phenomenon as another disruption to our business model as well as another possible means of dilution of control over residential closings by attorneys.

It sounds as if, for now, truly ugly houses may be the only ones subject to iBuying in South Carolina. The disrupters have been disrupted by economic uncertainty.

What’s going on with iBuying during the COVID-19 chaos?

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This blog has discussed the spread of iBuyers, entities that make offers over the Internet to home sellers in certain residential markets. These sales take place with much less fuss and inconvenience than sales in the normal real estate market. What’s the catch? The sales price may be lower than the price that would have been obtained in the normal selling process. Sellers had to weigh convenience and price.

While we’ve seen the reach of the iBuyers (Opendoor, Offerpad, Zillow Offers and Redfin) spread to our neighboring states of Georgia and North Carolina, we have not yet seen the phenomenon reach into South Carolina.

I refer you to the April 3 article from Forbes that reports Opendoor, Offerpad, Zillow Offers and Redfin have all put their online buying on hold since the first COVID-19 shelter-in-place orders.

Interestingly, though, another company may be stepping up to fill this space. We’ve all seen the sign “We Buy Ugly Houses” posted on light poles, even in very small towns in South Carolina, for many years.

The Forbes article reports that the company behind those signs, HomeVestors, is transitioning to a virtual process and is continuing to buy houses across the nation. The article also reports that HomeVestors is opening new franchises to expand business further.

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This expansion may be good news to homeowners who are losing their jobs during this crisis and may need to sell their homes to remain financially solvent.

The article quotes the president of HomeVestors who said that nearly half of home sales traditionally occur between March and June, but the safety measures in place to prevent the spread of the virus may have significant impact on that market this year. HomeVestors is attempting to step into that market. The company hopes to provide some peace and continuity in this uncharted territory, according to the article.