real estate closings

History repeats itself

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Fraudulent mortgage satisfaction schemes are back

We have heard recently that a group is engaging in a scheme to fraudulent satisfy mortgages (or deeds of trust) in California and Florida. We all know that trends in California and Florida eventually make it to South Carolina, so I wanted to make sure South Carolina dirt lawyers are aware of this scheme. This is not a new scheme, but we thought it had died down until we got this news last month.

Here are some good rules of thumb to assist you in avoiding losses and protect clients in this area:

  • Have your title examiners provide you with copies of mortgage satisfactions and releases. Two sets of eyes reviewing the documents should help with spotting issues.
  • Pay particular attention to satisfactions and releases within a year of your closings. The normal schemes involve satisfying mortgages in order to collect funds at subsequent closings.
  • Pay particular attention to satisfactions and releases that are not connected with a sale or refinance. Contact the lender for confirmation that the loan has been paid in full.
  • Don’t accept a satisfaction or release directly from a seller, buyer or third party without contacting the lender for confirmation that the loan has been paid in full.
  • Many of the fraudulent documents are being executed by an unauthorized party on behalf of MERS. Compare MERS satisfactions with others you have seen in connection with your closings.
  • Check spellings and compare signatures against those of genuine instruments.
  • Be wary of hand-written documents, unorthodox documents, cross-outs, insertions and multiple fonts.

The perpetrators of this fraud are sophisticated and will change aspects of the scheme as needed, so remain vigilant and discuss any suspected fraudulent documents with your title insurance underwriter.

CFPB rules have been revised

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Are we now free to share Closing Disclosures with real estate agents?

cfpb-logoThe CFPB recently issued amendments to its rules governing residential loan closings, but it did not settle the debate about whether Closing Disclosures can be shared with real estate agents. Traditionally, real estate agents were provided settlement statements both before closings, to give them the opportunity to explain the numbers to their buyer and seller clients, and after closings, to enable them to close MLS listings.

Since we have been operating under the CFPB rules and generating Closing Disclosures, we have struggled with the insistence on the part of real estate agents to receive those documents and the reluctance on the part of lenders to share them.  Most of us have resolved this conflict by providing real estate agents with separate settlement statements, such as ALTA’s Settlement Statements, which are similar to our prior HUD-1 Settlement Statements. It took us awhile to figure out that Closing Disclosures are not traditional closing statements and do not facilitate disbursement. Once we realized separate settlement statements are actually needed to fully inform borrowers, sellers and real estate agents, this issue became less important.

The CFPB has indicated it has received many questions about sharing Closing Disclosures with third parties. The amendment says:

“(T)the Bureau notes that such sharing of the Closing Disclosure may be permissible currently to the extent that it is consistent with (the Gramm-Leach-Bliley Act) and Regulation P and is not barred by applicable State law. However, the Bureau does not believe that expansion of the scope of such permissible sharing would, in this rulemaking, be germane to the purposes of Regulation Z.”

Lenders will likely continue to refuse to allow sharing of Closing Disclosures in light of this clear-as-mud directive. Most lenders currently state that the consumer may provide the Closing Disclosure to real estate agents if he or she chooses to do so. That rule is not likely to change.

The Quicken decision is out

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It’s not what dirt lawyers wanted or expected

The South Carolina Supreme Court never ceases to amaze when it decides real estate cases. Dirt lawyers seldom know what to expect. We read the precedents. We attend the hearings. We listen to the Justices’ questions. We believe we get a glimpse of what they may be thinking. But we miss the mark. Last week, the South Carolina Supreme Court decided the much anticipated Quicken case*, and if I had predicted the top five possible outcomes, I would not have come close to the actual decision.

I fully expected a 3-2 decision in either direction. But it is a 5-0 strongly written decision. It is a decision that was written to dispose of the controversy. It is a decision that was written to deny the possibility of reconsideration.

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This is an unauthorized practice of law case brought in the Court’s original jurisdiction. The case was assigned to Circuit Court Judge Diane Goodstein as Special Referee to take evidence and issue a report. Judge Goodstein held a two-week trial and issued a report finding, essentially, that no South Carolina licensed lawyer quarterbacked (my word) the mostly Internet-based residential refinance closings. In the facts recited in Judge Goodstein’s report, lawyers were peripherally involved in all of the steps required by State v. Buyers Service Co.** and its progeny, but no lawyer was actually involved in a way that the interest of the borrower was protected.

(Summarizing the prior decisions, the steps requiring lawyers are: (1) document preparation; (2) title search; (3) closing; (4) recording; and (5) disbursement.)

The Supreme Court somehow reviewed the same record and found that lawyers were involved and used their professional judgment in each step. The facts recited in the Court’s decision were not recognizable from the facts recited by Judge Goodstein’s report. The Court completely rejected the report and apparently decided that a finding of UPL under the circumstances would “mark an unwise and unnecessary intrusion into the marketplace”. “Simply put,” the Court stated, “we believe requiring more attorney involvement in cases such as this would belie the Court’s oft-stated assertion that UPL rules exist to protect the public, not lawyers.”

Most South Carolina dirt lawyers were hoping the Court would find a South Carolina licensed lawyer must be at the center of each closing, overseeing each step, and insuring that the consumer client’s interests were protected in each step. That is definitely not what we got.

There is, however, some good news in this decision. The Court made the clearest implication to date (without an explicit holding) that Buyers Service and its progeny may not apply in the commercial arena. The Court repeatedly stated that the context of this case is the residential refinance arena. I have discussed this case with several commercial lawyers to ascertain whether they are now comfortable to forego certifications that other South Carolina licensed lawyers are involved in the closing steps that are not under their control. They seem to feel slightly more comfortable, but not comfortable enough to let go of that step. Perhaps the passage of time will help.

Other good news is that, despite the facts recited by Judge Goodstein to the contrary, the Court clearly stated that lawyers were involved and used their professional judgment in each required step. The out-of-state entities who do business here should make sure their processes include this professional judgment in each step of the closing.

After reading this case a dozen times, I’ve decided that no law has changed. Nothing will change in our local processes. Nothing will likely change dramatically in the processes of the out-of-state entities who do business here. If I had not read Judge Goodstein’s report and if I had not attended the Supreme Court’s hearing, I would probably not be shocked with this result.

I would love hear what you think.

*Boone v. Quicken Loans, Inc., South Carolina Supreme Court Opinion 27727, July 19, 2017

** State v. Buyers Serv. Co., 292 S.C. 426, 357 S.E.2d 15 (1987)

With great power comes great responsibility

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Six sensational ways to stop cyber villains

Cybersecurity is job #1 for dirt lawyers. Even in our close-knit state, we hear of attacks every week. A lawyer’s office could easily be forced out of business by one of these evil attacks. In our office, we read everything printed on the topic, and I offer you the six best, simplest tips I’ve seen. The first five are from American Land Title Association, developed with the help of the FBI, and the sixth is from the South Carolina Bar.

  1. Call, don’t e-mail: Confirm all wiring instructions by phone before transferring funds. Use the phone number from the recipient’s website or business card.
  2. Be suspicious: It’s not common for the companies involved in real estate transactions to change wiring instructions and payment information. Use common sense, stay alert to things that don’t look or feel quite right in a transaction and use your “Spidey senses”!
  3. Confirm it all: Ask your bank to confirm not just the account number but also the name on the account before sending a wire.
  4. Verify immediately: Call the recipient to validate that the funds were received. Detecting that you sent the money to the wrong account within 24 hours gives you the best chance of recovering your money.
  5. Forward, don’t reply: When responding to an email, hit forward instead of reply, then start typing with a known email address. Criminals use email addresses that are similar to real ones. By typing email addresses you will make it easier to discover if a fraudster is after you.

Thank you, ALTA and FBI, for those great tips!

The best tip, by far, that I have seen comes from the South Carolina Bar.  This tip is not only excellent for avoiding cyber fraud, it’s a great way of avoiding mistakes of all kinds in real estate practices. Here it is:

  1. Give yourself and your staff permission to slow down! We know things are hot out there not only in terms of the weather but also in terms of the speed of closings. Many of us who weathered the financial downturn remember what it was like when things were hot in 2005 – 2007. Closing speed can be increased only so much without causing error after error. Remember illegal flips prior to the financial downturn?  How many of them could have been prevented if someone had stopped long enough to think or long enough to bounce the scenario off of a friendly title insurance company underwriter? The same is true of protecting your clients’ money. Stop and think and allow your staff members to spend the time to stop and think.

Thank you, South Carolina Bar, for this great tip.

And, finally, I strongly recommend insurance against cyber fraud. Check with your E&O carrier to see what it offers. If it does not offer insurance to protect against this danger, find a company that does!  Call your title insurance company for suggestions!

Sometimes the sky isn’t so blue in Malibu

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California case might spell trouble for real estate agents and brokers across the country

The California Supreme Court decided a case in late 2016 that may have wide-ranging effect for real estate companies in that state.* The case involves a Chinese millionaire’s 2007 purchase of a mansion in Malibu for $12.25 million.

The seller, a trust, engaged Chris Cortazzo, a salesman in Coldwell Banker’s Malibu West office to sell the property.  As Cortazzo prepared to list the property, he obtained information from the tax assessor’s office that indicated the property’s living area was 9,434 square feet. The building permit described a single-family residence of 9,224 square feet, a guest house of 746 square feet, a garage of 1,080 square feet and a basement of unspecified area. The MLS listing stated that the property “offers approximately 15,000 square feet of living area”. Cortazzo also prepared and distributed a flyer making the same square footage representation.house measuring tape

In 2007, a couple made an offer to purchase the property. By handwritten note, Cortazzo informed them that Coldwell Banker did not “guarantee or warrant” the square footage, and advised them to “hire a qualified specialist to verify the square footage”. When the couple requested documentation of the square footage, Cortazzo gave them a letter from the property’s architect stating the “size of the house, as defined by the current Malibu building department ordinance is approximately 15,000 square feet.”  In a cover note, Cortazzo again cautioned them to hire a specialist. This sale fell through.

Horishi Horiike had been working for several years with Chizuko Namba, a sales person in Coldwell Banker’s Beverly Hills office, to find a residential property to buy. Namba showed Horiike the residence in question. Cortazzo gave Horiike the marketing flyer advertising approximately 15,000 square feet and an MLS printout that did not specify the square footage and contained note in small print that “Broker/Agent does not guarantee the accuracy of the square footage.” Horiike and the selling trust entered into a contract.

Before the closing, Horiike signed three disclosure forms confirming that Coldwell Banker represented both the buyer and the seller in the transaction. Under California law, a real estate broker may act as a dual agent for both parties, provided both parties consent to the arrangement after full disclosure.  The broker may act through one or more “associate licensees”, typically the salespeople who operate under the broker’s license and supervision. The governing statute provides that when an associate licensee owes a duty to any party in a real estate transaction, that duty is equivalent to the duty owed to that party by the broker.

Cortazzo did not state in writing to Horiike that there may be a discrepancy in the square footage, as he had done with the previous potential buyer. He also did not advise Horiike to retain an expert to verify the square footage. After the closing, Horiike learned that the property had less than 12,000 square feet of living area (although Coldwell Banker experts testified at trial that the living area was 14,186 square feet.)

In 2010, Horiike filed suit against Cortazzo and Coldwell Banker for intentional and negligent misrepresentation, breach of fiduciary duty, unfair business practices and false advertising. He did not sue the selling agent, Namba.

In a unanimous decision, California’s Supreme Court stated that the case presented a single, narrow question:  whether the associate licensee who represented the seller owed a duty to learn and disclose all information materially affecting the property, including the discrepancy in the square footage. The Court held that Coldwell Banker, as broker, owed a fiduciary duty to both parties and that Cortazzo, as associate licensee, had the responsibility to properly investigate and disclose all important information related to the transaction. The Court concluded Cortazzo owed a duty to Horiike equivalent to the duty owed to him by Coldwell Banker.

Several trade associations filed amicus briefs in the case. One concern is that an agent working with a buyer has no idea what property that buyer will ultimately purchase. Whether the same broker will represent the seller can’t be predicted. Another concern is that this decision may also reach commercial transactions. It is also possible that this case may open selling agents open to lawsuits from their clients for over-disclosure.

Could this happen in South Carolina? A provision in our statutory scheme may save brokers from the fate set out in this case, at least where different branch offices of a real estate firm are involved. Here, each branch office must be managed by a broker-in-charge. South Carolina Code §40-57-350 (I)(2) states that a broker-in-charge and associated licensees in one office of a real estate brokerage firm may conduct business with a client of another office of the real estate brokerage firm without creating a dual agency relationship, so long as the branch offices each have separate brokers-in-charge and do not share the same associated licensees.

I can’t find similar protection for listing and selling agents who work in the same branch office, nor for companies with listing and selling agents in the same location.  And, as we all know, there is no predicting what our court might say in connection with real estate matters. We will have to pay attention to see whether other courts, and particularly South Carolina courts, follow the lead of the California Supreme Court.

*Horiike v. Coldwell Banker Residential Brokerage Co., 1 C5th 1024 (2016)

News from Wells Fargo

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Lender issues settlement communication on June 1

Wells Fargo continues to update its settlement agents on a quarterly basis. South Carolina closing attorneys should pay close attention to these newsletters, which may highlight changes in closing processes and documentation. You can read the latest version here.

Significantly, the latest newsletter provides the following updated information:

  • Closing Insight™ training has been completed within Wells Fargo internally, and use of this portal method for communicating about closing files will continue to expand in all geographic areas. Closing attorneys should expect to receive requests to use Closing Insight™.
  • The numbers of “findings” are being reduced by RealEC, meaning some technicalities that were previously reported as closing file irregularities will now be eliminated. This change is good news for closing agents and applies not only to Wells Fargo, but to other lenders as well. An example is that file numbers will no longer trigger a “data mismatch” for dashes (-) if the rest of the file number matches. Another example is that differences in capitalization, formatting, common abbreviations and punctuation will no longer trigger findings.
  • The Service Provider Verification of Identity (SPVI) form has been updated and will now allow all document signers to use one form. Also, the revised form no longer requires details on the method of identification, such as drivers’ license numbers of borrowers.
  • The SPVI form for FHA loans must be send to the lender prior to disbursement. For all other loans, this form may be provided to the lender with the other executed loan documents.
  • Settlement agents are not authorized to sign any documents on Wells Fargo’s behalf. Any documents requiring the lender’s signature should be sent to the loan processor or closer.
  • Wells Fargo Tax Services will no longer provide services as an affiliate. Instead, the tax services will be provided by Wells Fargo Bank, N.A. The tax service fees previously disclosed in Section B or C of the Closing Disclosure will now be disclosed in Section A.

This blog will continue to attempt to keep closing attorneys updated on lender communications as they are distributed.

Wells Fargo distributes new settlement agent communication

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Note: Settlement agents are scheduled to be re-evaluated

Wells Fargo delivered a memo entitled “News for Wells Fargo Settlement Agents” on March 23. The first paragraph cryptically announced that future communications will detail the Uniform Closing Dataset (UCD) that will become effective for lenders in 2018.

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For insight into the UCD, review Fannie Mae’s or Freddie Mac’s websites. Briefly, the UCD is going to be a common industry dataset to allow information on the Closing Disclosure to be communicated electronically. Fannie Mae and Freddie Mac have developed the UCD at the direction of the Federal Housing Finance Agency in an effort to enhance loan quality and consistency through uniform loan date standards. Stay tuned for more information on this topic and lenders gear up to comply.

The Wells Fargo memo also touted continued expansion of settlement agents who are using Closing Insight™.  Settlement agents who are just getting started were asked to take advantage of the support available at RealEC’s Closing Insight Resource Center at http://www.closinginsightresourcecenter.com or to contact the company at CISupport@realec.com or 800.893.3241. I encourage all South Carolina closing attorneys to get up to speed on this system as soon as possible.

The serious news from Wells Fargo, however, relates to a new effort to evaluate settlement agents.

The memo warned that Wells Fargo will evaluate the population of settlement agents who have closed loans within the past twelve months for problems such as missing documents, execution errors and other frequent problems that require curative work. As a result, settlement agents may receive letters indicating they are being removed from Wells’ list of approved settlement agents.

Processes are in place, however, to accommodate the customer’s choice for a settlement agent who is not on the approved list. Apparently, a new approval process will be instituted, but no detail on this process is provided.

house made of cashThe memo further indicates that attorneys’ ability to act as counsel for customers will not be impacted.  I don’t read this last directive to mean that attorneys who are not on the approved list will be in a position to close loans. They will only be in a position to dispense legal advice, if I am interpreting this correctly.

Settlement agents with questions are encouraged to communicate with Wells at WellsFargoSEttlementAgentCommunicatons@wellsfargo.com. I urge anyone who is interested in continuing to close Wells Fargo loans to hang onto this information.

Finally, the memo is requesting acknowledgement of Master Closing Instructions from all active and approved settlement agencies. Requests for this acknowledgement are coming from Wells Fargo in the form of e-mails to settlement agents. Please respond!

All lenders are beginning to hold settlement agents to higher standards. South Carolina closing attorneys are encouraged to stay abreast of changes and train, train, train staff members.

And, as always, contact your title insurance companies for insight into these matters.

Hot off the presses UPL case!

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(But it only affects real estate peripherally)

The South Carolina Supreme Court handed down a UPL decision in a declaratory judgment action in its original jurisdiction on February 22.*

The Court accepted the action to determine whether Community Management Group, LLC and its employees engaged in the unauthorized practice of law while managing homeowners’ associations. The Court found that the respondents did, in fact, engage in UPL. At the outset of the case, the Court had issued a temporary injunction halting the offending activities.

Community Management Group, without the involvement of an attorney, prepared and recorded notices of liens and related documents; brought actions in magistrates’ courts to collect debts; and filed the resulting judgments in circuit courts. The entity also advertised that it would perform these services “in house”.

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In a 1992 administrative order entitled In re Unauthorized Practice of Law Rules Proposed by South Carolina Bar**,  the Court had modified prior case law to allow a business to be represented by a non-lawyer officer, agent or employee. The Court had also promulgated South Carolina Magistrate Court Rule 21, which provides, “A business…may be represented in a civil magistrates’ court by a non-lawyer officer, agent or employee…”

The central question in the action at hand was whether the word “agent” in these authorities includes third party entities and individuals like Community Management Group and its employees. The Court held it does not and was never intended to.

The Court had earlier held that filing claims in probate courts does not amount to UPL, but stated in the present case that it is the character of the services rendered that determines whether the services constitute the practice of law. Filing claims in Probate Court, according to the Court, does not require the professional judgment, specialized knowledge or ability of an attorney. The Court found that the services required to represent a business in magistrates’ courts are not comparable to filing claims in probate courts.

Community Management Group conceded that it prepared a lien document for the purpose of putting a cloud on title so property could not be sold unless the homeowner paid overdue assessments. This stated purpose demonstrated to the Court that the lien documents were “instruments”, that is, written legal documents that define rights, duties, entitlements or liabilities.

Citing a 1987 case near and dear to the hearts of all South Carolina dirt lawyers, State v. Buyers Service***, the Court reminded us that preparing and recording legal documents is the practice of law.

This current case is a Per Curiam decision, but acting Justice Pleicones did not participate. We are holding our collective breath to learn the results of a Quicken Loan case pending in the original jurisdiction of the Court, and the present case may give us at least a small hint.

stay tunedWe have already received an underwriting question about this case in our office. We were asked whether our attorney agents can ignore the liens filed in contravention of this case. The answer is that we can discuss the specifics on a case-by-case basis, but it appears that although the liens may be invalidated by a court, dirt lawyers and title companies should not generally take this risk without the involvement of a court. If you run into this issue in connection with your closings, call your title insurance underwriter to discuss your options!

*Rogers Townsend & Thomas, PC v. Peck, South Carolina Supreme Court Opinion 27707 (February 22, 2017)

**309 S.C. 304, 422 S.E.2d 123 (1992)

***292 S.C. 286, 468 S.E.2d 290 (1987)

Good News for Condo Financing (and King Tut)

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Obtaining loans for SC’s coastal condominiums will become easier

The Housing Opportunity through Modernization Act (H.R. 3700) was signed into law by President Obama on July 29. This law will act to ease restrictions on mortgage financing for condominiums. The law reforms the process used by the Federal Housing Administration (FHA) to determine if condominium unit owners will be in a position to qualify for FHA insurance.

In 2009, FHA changed the rules for qualifying for insurance, leaving most condominium home buyers without the opportunity for FHA insured mortgages. The new law will result in some improvements for home buyers who view condominiums as an affordable housing option.

Under the new law, the FHA must issue guidance regarding the percentage of units that must be occupied by owners in order for the condominium project to be eligible for FHA mortgage insurance. The current requirement is 50 percent owner occupancy. In the event the FHA fails to issue guidance within ninety days of the effective date of the legislation, the required percentage for owner occupancy automatically becomes 35 percent.

Steve Martin King Tut
“Got a condo made of stone-a”

 

The new law amends the National Housing Act to modify certification requirements for condominium mortgage insurance to make recertifications of condominium projects substantially less burdensome than original certifications. The FHA is required to consider lengthening the time between certifications for approved properties and allowing information to be updated rather than resubmitted.

It will be interesting to see how the FHA implements the new law. Changes to FHA regulations and existing agency guidelines should be expected soon.

The National Association of Realtors has been a proponent of the new law and praised its passage in a press release as a victory for real estate agents and home buyers.

This law affects housing in other ways. It modifies HUD’s rental assistance programs, including Section 8 low-income (voucher) and public housing programs. In addition, it modifies the Department of Agriculture’s single family housing guaranteed loan program.

The expectation is that the new law will make home ownership for first-time buyers (and old King Tut in his “condo made of stone-a”) a little easier in the current economic environment.

Upscale Mt. Pleasant Condo Project Subject of Arbitration Clause Dispute

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Court of Appeals sides with roofing supplier

The South Carolina Court of Appeals handed down a decision on June 1 that will delight the drafters of corporate contracts who imbed arbitration clauses within their warranty provisions.  Whether the South Carolina Supreme Court will approve remains to be seen.

The dispute arises over the construction of One Belle Hall, an upscale condominium community in Mt. Pleasant. Tamko Building Products, Inc. was the supplier of the asphalt shingles for the community’s four buildings, and placed a mandatory binding arbitration clause within its warranty provision. The warranty purported to exclude all express and implied warranties and to disclaim liability for all incidental and consequential damages.

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At some point after construction was completed, the owners’ association determined that the buildings were affected by moisture damage, water intrusion and termite damage, all resulting from various alleged construction defects. The developer contacted Tamko to report a warranty claim on the roof shingles, contending they were blistering and defective.  Tamko sent the developer a “warranty kit”, requiring the claimant to provide proof of purchase, samples of the allegedly defective shingles and photographs. The developer failed to respond.

Two years later, the owners’ association filed a proposed class action lawsuit on behalf of all owners, alleging defective construction against the community’s various developers and contractors. Tamko filed for a motion to dismiss and compel arbitration.

Circuit Court Judge J. C. Nicholson, Jr. denied the motion and ruled that Tamko’s sale of shingles was based on a contract of adhesion and that the condominium owners lacked any meaningful choice in negotiating the warranty and arbitration terms. The trial court held the arbitration clause to be unconscionable and unenforceable because of the cumulative effect of several oppressive and one-sided terms in the warranty.

The Court of Appeals begged to differ. It held that the circuit court erred in finding the arbitration clause in the warranty was unconscionable. It stated that our supreme court has made it clear that adhesion contracts are not per se unconscionable. The underlying sale of Tamko’s shingles was stated to be a typical modern transaction for goods in which the buyer never has direct contact with the manufacturer to negotiate warranty terms.

The court found it significant that the packaging contained a notation: “Important: Read Carefully Before Opening” providing that if the purchaser is not satisfied with the terms of the warranty, then all unopened boxes should be returned. The court pointed to the standard warranty in the marketplace that gives buyers the choice of keeping the goods or rejecting them by returning them for a refund.

The appellate court also found it significant that the arbitration clause did facilitate an unbiased decision by a neutral decision maker and that the arbitration clause was separable from the warranty.

Consider the exact opposite approach of the CFPB’s recently-announced proposed rule that would ban financial companies from using mandatory pre-dispute arbitration clauses to deny consumers the right to join class action lawsuits. That proposed rule can be read here and is the subject of a May 12 blog entitled “CFPB’s proposed rule would allow consumers to sue banks”.

It’s interesting to see such different approaches by two authorities on an issue affecting consumers in the housing arena. I wouldn’t be surprised to see more to come from either ruling.

* One Belle Hall Property Owners Association, Inc. vs. Trammell Crow Residential Company, S.C. Ct. App. Opinion 5407 (June 1,2016)