Chicago Title Insurance Company

Attorney Fakes Title Insurance Documents and Gets Disbarred

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Think you’ve heard it all? Listen to this!

The South Carolina Supreme Court disbarred a lawyer last month for fraudulently producing title insurance commitments and policies.*

By way of background, the vast majority of real disciplinary actionestate lawyers in South Carolina are also licensed as title insurance company agents.  In other parts of the country, lenders receive title insurance documents directly from title companies’ direct operations.  In South Carolina, title companies run agency operations, supporting their networks of agents, almost all of whom are South Carolina licensed attorneys.

Lenders require closing protection letters for closings involving agents.  Stated simply, these letters inform lenders that the insurer may be responsible in the event a closing is handled improperly by the closing attorney.

Title insurance company agents also produce title insurance policies and commitments, following the guidelines of their insurance underwriters, and using software programs designed to support the production of these documents.

Some closing attorneys are not agents but instead act as approved attorneys for title insurance companies. Approved attorneys can obtain closing protection letters from their title companies, but they are not able to issue their own title insurance documents. Instead, they certify title to a title insurance company or to a title company’s agent.

If an attorney cannot provide lenders with closing protection letters, that attorney generally cannot close mortgage loans in South Carolina.

 red card - suitIn 2007, Mr. Davis was canceled as an agent by his title insurance company.**  After that cancelation, he was able to legitimately obtain title insurance commitments and policies through an agent. In 2011, however, Mr. Davis was canceled as an approved attorney.  He didn’t let that fact stop him though. He began to fraudulently produce title insurance documents, making it appear that the title insurance company was issuing closing protection letters, commitments and policies for his closings.  He also collected funds designated as title insurance premiums, but he never paid those premiums to the title insurance company.  He continued to handle closings using fraudulent title insurance documents until his actions were discovered and he was suspended from the practice of law by the South Carolina Supreme Court in 2013. In 2015, Mr. Davis was disbarred.

I suppose I should close by saying don’t do this!  Please!

* In the Matter of Davis, S.C. Supreme Court Opinion 27480 (January 21, 2015)

** In the interest of full disclosure, I work for that company.

Closing Attorneys and Paralegals: Want to toss and turn at night?

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Read about this costly law firm mistake.

(This case makes my stomach hurt because a developer client of mine once declared bankruptcy. Everything I had done for that client for the prior three years was scrutinized, and I spent some sleepless nights!)

On January 21, 2015, the Second Circuit Court of Appeals Pepto in Manhattan decided a direct appeal from a U.S. Bankruptcy Court involving a mistaken UCC-3 termination statement.* This case involves the General Motors bankruptcy.

The facts concern a 2008 payoff by GM to JP Morgan Chase of a $300 million synthetic lease. GM contacted its outside counsel to prepare the necessary documents. A partner assigned the work to an associate and instructed him to prepare a closing checklist and drafts of the necessary documents. The associate asked a paralegal who was unfamiliar with the transaction to perform a UCC search that search identified three UCC-1s. Two of the UCC-1s related to the subject loan. The third, however, was related to a term loan between the same parties. The law firm prepared UCC-3 terminations for all three financing statements.

No one at GM, its law firm, JP Morgan or its law firm noticed the error. When the loan was paid, all three
UCC-3s were filed.

The mistake was not noticed until GM filed bankruptcy in 2009.

In litigation with the unsecured creditors, JP Morgan argued that the third UCC-3 was unauthorized and ineffective because it intended to terminate only the liens that related to the synthetic lease. The Bankruptcy Court agreed on the grounds that no one at JP Morgan or its law firm intended to terminate the third UCC-1.

The Second Circuit certified a question to the Delawarecourt money 4 Supreme Court, asking, basically, whether a termination is effective when a lender reviews and knowingly approves a termination statement for filing or whether the lender must intend to terminate the particular security interest. The Delaware Court replied that intent is not necessary, stating, “If parties could be relieved from the legal consequences of their mistaken filings, they would have little incentive to ensure the accuracy of the information contained in their UCC filings.”

The Second Circuit agreed, indicating JP Morgan authorized the termination even though it never intended to.

Lawyers and paralegals: be careful, be careful, be careful! And now try to get a good night’s sleep!

* Official Committee of Unsecured Creditors of Motors Liquidation Company v. JP Morgan Chase Bank, N.A.,U.S. Court of Appeals for the Second Circuit,  Docket No. 13-2187, January 21, 2015.

Good News for Small Lenders

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changes comingCFPB proposed rule change may also benefit South Carolina closing attorneys.

On January 29, the CFPB proposed its ability to repay and qualified mortgage rules to facilitate additional mortgage lending by credit unions and community banks. South Carolina closing attorneys who handle transactions for small lenders could benefit from these proposed rule changes because the business coming from these lenders would increase in volume.

Comments are due on the proposals by March 30. South Carolina closing attorneys should consider commenting positively on this proposal.

“Responsible lending by community banks and credit unions did not cause the financial crisis, and our mortgage rules reflect the fact that small institutions play a vital role in many communities,” said CFPB Director Richard Cordray.

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Credit unions and other small lenders have been lobbying for flexibility under the new rules, and this development is considered to be a victory for them.

The proposed rules would expand the definition of “small creditor” by raising the limit on first lien-mortgages from 500 to 2,000, excluding the mortgages held in the portfolios of the creditor and their affiliates. The CFPB said that this change would increase the approximate number of small lenders from 9,700 to 10,400.

Small lender status allows these lenders to make loans where the homeowner’s total debt payments exceed 43 percent of pretax income.

The proposal would also extend the ability of small creditors in rural or underserved areas to issue loans with balloon payments and still have them qualify as qualified mortgage loans. The definition of “rural” was extended to any census block that is not in an urban area as defined by the Census Bureau.stay tuned

A copy of the proposal can be found at the Consumer Financial Protection Bureau’s  website, or by clicking here.

Need to Foreclose a Mortgage Securing an eNote?

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Indiana case may provide guidance

South Carolina has no reported opinions concerning mortgage foreclosures involving eNotes, and little authority exists elsewhere on what a holder must prove to successfully foreclose a mortgage secured by an electronic note in a judicial state. Until we see opinions closer to home, an Indiana case may provide the best guidance. Solid evidence of control of the note seems to be the key factor, according to this case.

In Good v. Wells Fargo Bank, 18 N.E.3d 618court money 4 (Ind. App. 2014), Wells Fargo acted as servicer for Fannie Mae, the owner of an eNote that was registered with MERS. The original lender had been Synergy Mortgage Group, Inc.  MERS, as nominee for Synergy, had assigned the mortgage to Wells Fargo.

An officer of Wells Fargo executed an affidavit in support of summary  judgment stating that Wells was the servicer, that it maintained a copy of the note, that its systems provided controls to assure that each note was maintained accurately and protected against alteration, and that the paper copy of the note attached to the affidavit was a true and correct copy.

The affidavit was bolstered by testimony at the bench trial that Wells Fargo controlled the note and was entitled to enforce it as the holder pursuant to 15 U.S.C §7021 (a section of the eSign legislation).  Wells’ underlying position appeared to be that the normal requirements of the UCC-3 governing negotiable instruments (delivery, possession and an endorsement), were not required in the case of an electronic note.

15 U.S.C. §7021 creates the concept of a note as a “transferable record”, a single authoritative copy, which is unique, identifiable, and unalterable. The legislation establishes that the holder must have control of the note in the sense that the system for tracking it must reliably establish that the person seeking to enforce it is the person to whom the record was transferred. Also, the authoritative copy of the record itself must indicate the identity of the most recent transferee.

The Indiana appellate court found Wells’ affidavit insufficient to support a grant of summary judgment on the issue of Wells’ holder status and its evidence on the matter at trial “conclusory”. 

The court said it was unclear from the affidavit whether Wells was claiming to have possession of an endorsed paper copy or the electronic note itself. The affidavit was also found lacking because it did not assert that Wells had control of the record (the eNote), either by maintaining the single authoritative copy in its own system, or by being identified as having control of the single authoritative copy in the MERS system.

The court indicated the eSign statutes require the party enforcing the note to provide reasonable proof of its control of the note through detailed evidence, not merely “conclusory statement”. The court specifically pointed to the lack of evidence in the Wells’ affidavit as it related to a transfer or assignment to Wells Fargo or Fannie Mae of the note from the original lender.

We are likely to see similar cases from other jurisdictions, including South Carolina, with the increasing use of eNotes. Stay tuned!stay tuned

Homeowners Win U.S. Supreme Court Mortgage Rescission Case

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money puzzleThe Court holds borrowers must only notify the lender, not sue, within three years

Larry and Cheryle Jesinoski refinanced their home in Eagan, Minnesota on February 23, 2007, by borrowing $611,000 from Countrywide Home Loans, Inc. The borrowers received a Truth-in-Lending Act (“TILA”) disclosure and a Notice of Right to Cancel at the closing.

TILA allows a borrower to rescind a refinance loan on the borrower’s home within three days of the transaction, or until the lender has delivered the required number of disclosures. But there is a three-year time limit even if the lender still hasn’t provided the necessary loan disclosure documents.

Exactly three years after the closing, the Jesinoskis sent theright to cancel lender written notice that they wanted to rescind, saying they hadn’t received the required number of copies of the notice. The property was underwater at the time. The lender refused to cancel the mortgage, and the Jesinoskis sued.

On January 13, 2015, the Court ruled unanimously in an opinion written by Justice Antonin Scalia, that the borrowers need only notify the lender of the intent to rescind. The Court rejected the lender’s position that the borrower must take the additional step of filing suit within three years.

This issue is one that has arisen frequently in recent years with borrowers who are in default and facing foreclosure, and this case settles a split in lower courts over steps borrowers must take within the time limit.

house parachuteThe lending industry had supported the lender in this case, indicating the Jesinoskis’ position could cloud titles to properties and require lenders to sue borrowers instead of trying to work with them. Consumer groups had supported the Minnesota couple, indicating the right to rescind is an important protection for consumers against abusive lending practices.

The case was remanded to the Eighth Circuit for further proceedings. The ruling does not mean the borrowers will escape paying their mortgage, but this lawsuit has delayed the inevitable for many years. It is possible that the property is no longer underwater and that the borrowers may be able to refinance in this improving economy.

SC’s Mortgage Satisfaction Law Was Amended in 2014

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South Carolina’s mortgage satisfaction law changed last year, mostly for the better, but with a few snags. Effective June 2, 2014, Section 29-3-330 of the South Carolina Code was amended to remove the requirement for a “lost mortgage affidavit”, a document that mostly mystified out-of-state lenders and practitioners.

While most states allow a mortgage to be satisfied by a simple document stating, in effect, that the loan is paid in full and the mortgage is satisfied, our statute required either satisfaction by writing on the face of the original mortgage, satisfaction by affidavit of a closing attorney who paid off the mortgage, or satisfaction by a document accompanied by an affidavit from the lender stating that the mortgage was lost.

In most commercial closings, the lender being paid off did not want to deface the original mortgage for fear that the new transaction might fall apart. The attorney handling the closing did not want to sign an affidavit. And nobody wanted to swear that a mortgage in hand was lost.  Closing attorneys and title companies were asked to take mortgage satisfaction documents that clearly did not comply with our statute, but clearly made more sense than our law.

After the amendment, mortgages in South Carolina can be satisfied by four methods:

  1. On the face of the original mortgage in the  presence of the ROD. This is one of the snags. Mortgagees are finding it cumbersome to actually appear before the ROD to satisfy their mortgages.
  2. Onsignature 2 the face of the original mortgage in the presence of two witnesses. This is another snag. The number of witnesses has been increased from one to two, a requirement that some are finding difficult;
  3. By a document in “substantially” the form set out in the statute (that does not require an affidavit that the mortgage is lost); or
  4. By affidavit of a South Carolina licensed attorney who can provide proof of payment and (under penalty of perjury) certifies that he or she was given written payoff information, made the payoff and is in possession of the canceled check or wire confirmation.

Another concern is the mention of the term “deed of trust” in the statute, despite the fact that South Carolina is clearly a mortgage state.

Palmetto Land Title Association is working on some technical amendments. But, generally, the fact that a lost mortgage affidavit is no longer required has made transactions across state lines easier.

Don’t Expect Uniform Closing Procedures in 2015

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And … Bank of America makes a big announcement.

changes comingLenders will not collaborate on a standard and consistent process for closings under the new CFPB rules effective August 1, 2015, at least not according to Wells Fargo.

Wells Fargo’s December 10, 2014 Settlement Agent Communication answered nine FAQs from settlement agents, the first of which sought confirmation on whether to expect standard closing procedures from lenders. Wells responded with a “no,” and stated that each lender is accountable and must determine its own method for achieving compliance.

This mega lender had announced on September 24 that it will control the generation and delivery of the buyer/borrower Closing Disclosure (“CD”), the form that will replace the HUD-1 Settlement Statement. The stated rationale was that the new CD is governed by the Truth-in-Lending Act (“TILA”), not the Real Estate Settlement Procedures Act (RESPA), and the risks and penalties for lenders are more severe under TILA.

Bank of America announced on December 17 that it will follow suit by generating and delivering the buyer/borrower CD.  Both banks have indicated settlement agents will generate the seller’s CD. Other lenders have not announced whether they will follow this procedure. It is entirely possible that settlement agents (closing attorneys in South Carolina) will prepare the CDs for other lenders.

The December 10 memo did state that Wells will work closely with settlement agents to determine fees, prorations, and other content required for the CD and, importantly, Wells will not assume the responsibility for disbursing loans. This quote from the Communication provides some comfort with regard to Wells’ attitude about keeping local settlement agents involved in the closing process:

“The settlement agent is critical and continues to be responsible for executing the closing including document signing, notarization, disbursement of funds, document recordation and delivery of final documents post-closing.”

Also comforting was the promise of training plans for settlement agents in collaboration with American Land Title Association, title underwriters and other service providers. The plans are said to include many educational communications and an information guide.

Bank of America stated that it will use Closing Insight™, an industry tool developed by Real EC Technologies®. All documents, date and information will be exchanged through Closing Insight™, discontinuing the use of e-mail, fax and other document delivery methods.

Bank of America also indicated that the requirement for the buyer/borrower to receive the CD three business days prior to closing will intensify the need for the bank to work very closely with the settlement agent to schedule the details of the closing.

stay tunedFor more information about Real EC ® Technologies and Closing Insight™, Bank of America invited settlement agents to visit their website at www.bkfs.com/realec.  The December 17 memo indicated that many title and escrow production systems are working with RealEC® Technologies to enhance current integrations in support of Closing Insight™. The bank suggested that settlement agents reach out to their title and escrow production system provider directly.

Stay tuned!

Mobile Home Claims Continue

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What do a hurricane, a tornado and a redneck divorce have in common?
Somebody’s fixin’ to lose a mobile home!

Trailer Park Treehouse

That joke may be attributable to Jeff Foxworthy, Lewis Grizzard or some other Southern comedian.  Regardless, a large number of South Carolinians lost mobile homes during the economic downturn, most often as a result of foreclosures rather than the disasters in the joke. Foreclosures uncover title issues that lead to title insurance policy claims. Because our office continues to see mobile home claims on almost a weekly basis, this reminder might be in order for residential real estate practitioners.

When sales and mortgages of real estate including mobile homes are closed, titles to the mobile homes should be retired, and ALTA 7 series endorsements should be issued.

If a title examination reveals a recorded Manufactured Home Affidavit for Retirement of Title Certificate, it is advisable to request from the Department of Motor Vehicles a letter confirming that the title has been placed on the DMV’s list of retired vehicles.

If no Manufactured Home Affidavit has been filed locally, then follow our statutory process to retire the title. The Affidavit requires the owner to:

  • install the home on the real property;
  • remove the wheels, axles and towing hitch;
  • attach proof of ownership (the deed);
  • attach a copy of the certificate of occupancy; and
  • pay the recording fee.

Surrendering the certificate of title to the DMV requires:

  • a filed copy of the Manufactured Home Affidavit from the ROD;trailer duck
  • the original certificate of title with either releases of liens or consents of secured parties;
  • a copy of the most recent tax receipt for the manufactured home; and
  • payment of the DMV fee.

When the title is retired, it is safe to issue an ALTA 7 series endorsement. Your title company will appreciate compliance with these guidelines.

And here’s a practice tip. Our former boss, Nancy Booco, always said, “If it looks like a mobile home, it probably is one.”

The Keys to the Parsonage

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Ever handled a church closing? Oy vey! Never assume church properties make for simple closings. I grew up Baptist, where the congregation votes on real estate matters, but happily married a Methodist preacher’s kid and attend churches where real estate matters are usually handled more methodically.

churchMany transactional lawyers across the country were asked to handle closings of the Episcopal Church while those properties were in dispute, beginning in 2006 when Anglicans left the fold and sought title to church properties. The resulting litigation brought global attention and wound its way through the courts, until the Supreme Court ended the controversy in March of 2014 by declining to take up an appeal by the last remaining plaintiff. We had a dramatic case of our own in South Carolina involving All Saints Parish, Waccamaw in Georgetown County.* And I understand from talking to some lawyers in Myrtle Beach this week, that at least one of these cases is pending in lower court in South Carolina.

When handling church transactions in South Carolina, the first step is to determine the church’s form of governance. South Carolina has cases on point* which discuss two general forms of religious organization. The congregational church is an independent organization, governed solely within itself, either by a majority of members or by another local organism. The hierarchical church is organized as a body with other churches having similar faith and doctrine with a common ruling convocation or ecclesiastical head. The Baptist churches of my youth are congregational churches. The Methodist churches of my adult life are hierarchical.

Sales and mortgages of church properties must be properly authorized. A congregational church authorizes its own transactions, following its own formalities. The level of formality varies greatly. Some churches are incorporated and governed like a business corporation. The closing attorney will typically request a resolution passed in a business meeting, held pursuant to the bylaws of the corporation, authorizing the transaction and designating the appropriate church officers to sign the documents. Congregational churches may have other governing organizations. The closing attorney should pay careful attention to the governing documents and obtain written authorization.

If an independent church has no documented form of government, the closing attorney should assume the entire congregation must act. The typical title insurance old sheldoncommitment will require a resolution by the congregation passed at a special meeting convened after reasonable notice from the pulpit, authorizing the sale or mortgage. The documents will typically be signed by the trustees and the pastor pursuant to the resolution.

A transaction involving a hierarchical church will require written authorization from the ruling convocation. The United Methodist church must receive consent from the District Superintendent and the Conference.

Title insurance companies are familiar with most churches and will be able to assist in these transactions.

Be skeptical of anyone (pastor included) who says he or she can act alone in any church transaction. We have seen numerous claims where church transactions are not properly authorized.

*I’ll be glad to e-mail the citations to anyone who asks.

Lions, and Tigers and Seller Financing, Oh My!

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If you are closing seller financed transactions on primary residences including contracts for deed (hereafter referred to as seller financing), or if you have clients who are accepting seller financing, you should take the time to educate yourself and your clients on the current pitfalls.  Please refer to Martha McConnell’s excellent article entitled “Seller Financing – the New ‘Jabberwocky’!” in the Summer 2014 issue of Chicago Record Title for a detailed report on what has led to this serious concern.

lions1 Because it is a complicated issue, I am not sure I can express a bottom line in any kind of succinct manner, but I will attempt to do so here.

The CFPB has been given the power to supervise and regulate laws that impact seller financing, including the SAFE Act, TILA, the Ability to Repay and Qualified Mortgage Rule, HOEPA and the Loan Originator Rule.

Under the applicable federal rules, it is possible that sellers engaging in seller financing may have to become licensed as “loan originators” or “mortgage brokers”.  The loans may have to be fully amortized, and it is possible that these seller/lenders may have to make determinations and disclosures that have not previously been required. Certain exclusions are available, but the rules are complex and detailed, and should be handled with care.

Inconsistencies between the federal and state versions of the SAFE Act, both of which require licensing and registration of loan originators, is another area of concern.

Clients who fail to become licensed or to fall into an exclusion may find they are unable to foreclose, and may, along with the attorneys who closed the transactions and the title policies that insured them, be subject to claims and litigation. In addition, the CFPB has broad enforcement powers including the power to impose civil monetary penalties ranging from $5,000 to $1 million per day.

This is an area of the law that is going to require monitoring and thought in the coming months. Legislation in South Carolina to address the inconsistencies in our version of the SAFE Act may be one avenue for improvement. In the meantime, please take great care if you or your clients venture into seller financing.