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.

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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)

It’s suitable to be a Lincoln Lawyer in SC

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…at least when it comes to using a PO Box address in lawyer advertising

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Ethics Advisory Opinion 17-07 fielded a question from a solo practitioner with a virtual law office. He practices wherever his smart phone and laptop are, which, at any given moment, may be his home, a coffee shop, a park, his car or his vacation spot. His practice generates very little paper, and he keeps that paper at his home. He meets with clients at their places of business or at third-party meeting spaces. He uses a post office box address for all business mail.

He does not actively advertise his practice beyond a single online directory listing, but he is considering increasing his web presence for advertising purposes, and he doesn’t want to disclose his home address. His question was whether the use of a post office box address in advertising materials satisfies the requirement in Rule 7.2 that advertising communications must include the office address of at least one lawyer responsible for its content.

The Ethics Advisory Committee looked North for authority and cited an opinion from North Carolina* which stated: “…(R)equiring a street address in all legal advertising has proved problematic, particularly as the number of lawyers working from home offices or operation in virtual law practices has increased. The requirement is no longer practical or necessary to avoid misleading the public or to insure that a lawyer responsible for the advertisement can be located by the State Bar.”

The Committee also noted that the Bar accepts post office addresses as lawyers’ addresses and the Supreme Court accepts post office addresses in its Attorney Information System (AIS) as a part of the “official contact information”.

The Committee stated that use of a post office address qualifies as an “office address” for the purposes of Rule 7.2(d) provided the post office address is on file at the lawyer’s current mailing address in the lawyer’s listing in the AIS.

Interestingly, though, the Committee noted that Rule 7.2(h) also imposes a geographic location disclosure requirement, which was not addressed by this opinion.  Here is the text of that portion of the Rule:

“(h) All advertisements shall disclose the geographic location, by city or town, of the office in which the lawyer or lawyers who will actually perform the services advertised principally practice law. If the office location is outside a city or town, the county in which the office is located must be disclosed. A lawyer referral service shall disclose the geographic area in which the lawyer practices when a referral is made.”

This Lincoln Lawyer may have to come back to obtain an answer to that issue!

*2012 N.C. Formal Eth. Adv. Op. 6 at 2.

Despicable Acts: Absentee property owners can be targets of fraud

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Despicable acts

And real estate lawyers may be the best minions to prevent these crimes!

Imagine this scenario: Lucy Wilde’s family owns a farm in rural Orangeburg County, South Carolina. Since the sudden death of Lucy’s husband, Felonius Gru in 2007, no one has farmed the property. The fields are sitting fallow awaiting the opening of the estate and the division of the property among and Felonius’ heirs, including Lucy. The relatives have all fled small-town living to join the Anti-Villain League, so no one is available to literally mind the farm, and no one is in a hurry to settle the estate.

Enter Balthazar Bratt, a fraudster from Miami who sees the vacant property, searches the public records and learns the property is owned by the late Felonius Gru. Bratt also learns the property is ripe for development because it is located near the prime corridor between Charleston and Columbia, and very near Interstate access.

How can Bratt take advantage of this scenario while the Anti-Villain League employed family members are not paying attention? Absentee owners of real property are often the targets of criminals who pose as true owners offering the property for sale or as collateral for a new loan. These fraudsters may sell or refinance the property and abscond with the sale proceeds or strip any equity in the property with a new loan. The true owner has no idea the property is the subject of a real estate transaction.

In our fictional account, if Bratt was able to ascertain through the public records that Felonius Gru was deceased, a good title examiner should be able to use the same sleuthing methods.  If rural Orangeburg County is not your stomping grounds, as we say in the South, you might hire a title examiner who does have experience in the locale. In small towns in South Carolina, people know each other!

Another tip to fight criminals like Bratt is to compare the mailing address provided by the seller or borrower to the tax bill. While this step may not help in an estate situation, it may very well reveal an absentee owner located in a different address than the one provided by the fraudster.  If the address is different from the address provided to you or the lender, send a letter to the address shown on the tax bill. Your letter might simply suggest that you are happy to be of service to the buyer in the transaction and that if the seller is unaware of the situation, he should have his attorney contact you. That letter should get the attention of an absentee and clueless property owner.

Another tip is to compare signatures of the seller or borrower against documents in the public records. While we are not expected to be handwriting experts, we can spot obvious forgeries. I remember a war story from long ago where one person signed in seven spots in a deed, for the five owners and the two witnesses. The alert closing attorney called an immediate halt to the potentially disastrous real estate transaction!

A well-known and well-used technique that often works is to obtain and carefully review picture identifications for everyone who signs documents in your office. Also, do not accept an assignment of proceeds. Make sure proceeds are paid to the seller or borrower of record only.

And finally, give yourself and your staff members permission to carefully and slowly consider every aspect of your closings. Staff members should be encouraged to be cautious and suspicious and to discuss their concerns with each other or with an attorney in the office.  If the closing attorney needs a sounding board, she should call her friendly title insurance company lawyer.  I can’t count the number of times someone has called me, explained a situation, and before I could even respond, said, “oh, that’s a problem, isn’t it?”

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Sometimes just explaining the situation out loud to another person makes the problems crystal clear!

Be careful out there!

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)

The hazards of drafting survivorship deeds for consumers

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Pay attention to tricky South Carolina law!

More than a decade has elapsed since our Supreme Court surprised dirt lawyers with Smith v. Cutler,* the case that told us there were already in place two survivorship forms of ownership in South Carolina. We apparently missed that day in law school! The two forms of ownership are joint tenancy (which we knew and loved) and tenancy in common with an indestructible right of survivorship (which slipped by us somehow). This is a mini-history lesson about how we got to this state of the law and a reminder for dirt lawyers to carefully draft deeds.

Under the common law in South Carolina, tenancy in common is the favored form of ownership. A deed to George Clooney and Amal Clooney (whether George and Amal are married or not) will result in a tenancy in common. At the death of George or Amal, the deceased’s fifty percent interest in the property will pass by will or intestacy laws. Joint tenancy was not favored in South Carolina, and there was no tenancy by the entirety that would have saved the property from probate (and creditors) for a married couple.

A rather convoluted 1953 case** interpreted a deed that intended to create a tenancy by the entirety as creating a shared interest in property between husband and wife referred to as a tenancy in common with an indestructible right of ownership. This is the case that the Smith v. Cutler Court referred to as creating the form of ownership we missed.

It’s not technically true that all of us missed this form of ownership. Some practitioners did use the language from the 1953 case to create a survivorship form of ownership. The magic language is “to George Clooney and Amal Clooney for and during their joint lives and upon the death of either of them, then to the survivor of them, his or her heirs and assigns forever in fee simple.”  Other practitioners routinely used the common law language: “to George Clooney and Amal Clooney as joint tenants with rights of survivorship and not as tenants in common.”

Conveying title from a person to himself and another person establishing survivorship was not possible in South Carolina prior to 1996 because the old common law requirement of unities of title could not be met. To create a survivorship form of ownership, the property owner conveyed to a straw party, who would then convey to the husband and wife, complying with the unities of title requirement and establishing survivorship.

A 1996 statutory amendment to §62-2-804 rectified this problem by providing that a deed can create a right of survivorship where one party conveys to himself and another person. The straw party is no longer needed. This statute was given retroactive effect.

In 2000, our legislature added §27-7-40, which provides that a joint tenancy may be created, “in addition to any other method which may exist by law” by the familiar words “as joint tenants with rights of survivorship and not as tenants in common”.  The statute addresses methods for severing joint tenancies which typically results in a tenancy in common. For example, unless the family court decides otherwise, a divorce severs a joint tenancy held by husband and wife, vesting title in them as tenants in common.  A deed from a joint tenant to another severs the joint tenancy. A conveyance of the interest of a joint tenant by a court severs the joint tenancy.

Following the enactment of §27-7-40, most practitioners used the language set out in the statute to create a joint tenancy, “as joint tenants with rights of survivorship and not as tenants in common.” Five years later, Smith v. Cutler required us to examine our drafting practices with fresh eyes. The court held that a joint tenancy with a right of survivorship is capable of being defeated by the unilateral act of one tenant, but a tenancy in common with an indestructible right of survivorship is not capable of being severed by a unilateral act and is also not subject to partition.

Real estate lawyers in the resort areas in our state are often asked to draft survivorship deeds because couples from other states as accustomed to tenancy by the entirety. Until Smith v. Cutler, most practitioners did not believe different estates were created by the different language commonly in use. We believed joint tenancy was created in both cases.

Now, clients should be advised about the different estates and should choose the form of ownership they prefer. I’ve discussed this issue with many lawyers who advise married couples to create the indestructible form of ownership. Others who seek survivorship are often advised to create joint tenancy under the statute.  I see many deeds from the midlands and upstate that use the traditional tenancy in common form of ownership. I’ve heard estate planners prefer tenancy in common so the distribution at death can be directed by will. Lawyers who draft deeds for consumers need to be aware of and need to address the various forms of ownership with their clients.

One final thought on the survivorship issue in South Carolina. Do we now have a form of ownership that protects property from creditors of one of the owners? If a tenancy in common with an indestructible right of survivorship is not subject to partition, then it may not be reachable by the creditors of one of the owners. Let me know if you see a case that makes such a determination. It would be an interesting development.

 

366 S.C. 546, 623 S.E.2d 644 (2005)

** Davis v. Davis, 223 S.C. 182, 75 S.E.2d 45 (1953)