Many states have adopted specific rules about the use of licensed attorneys in residential real estate transactions. One state that has adopted strict requirements regarding the use of licensed attorneys in such transactions is South Carolina. The Palmetto State recently has had a great deal of activity in this area.
The South Carolina Consumer Protection Code, the main body of law that currently regulates residential real estate transactions, requires creditors to ascertain and comply with the consumer’s preference as to the legal counsel the consumer wants to hire to conduct the transaction. The creditor may determine this information by (i) including the preference information on or with the credit application or (ii) providing written notice to the consumer of the preference information with the notice being delivered or mailed no later than three business days after the creditor receives or prepares the application. The South Carolina Department of Consumer Affairs has developed a suggested form to determine the consumer’s preference.
In a recent decision—King v. American General Finance Inc.—addressing the timeliness of a creditor’s notification to borrowers of their attorney preference rights, the South Carolina Supreme Court emphasized the importance of providing this attorney preference form before the closing. The court specifically characterized the provision of the form by which the borrower chooses an attorney to close the loan only at closing as “nonsensical,” noting that “sanctioning the lender’s furnishing of the attorney preference disclosure at the closing would render the manifest legislative purpose a nullity.” Accordingly, creditors should review their procedures to ensure that they ascertain the consumer’s preference prior to closing. To document compliance with this requirement, creditors should ensure that the consumer signs and dates the suggested form before the closing, at such an interval so that the borrower has a meaningful opportunity to select and utilize chosen counsel. Note, also, that this requirement remains intact even though the South Carolina Legislature recently enacted a new Mortgage Lending Act to replace the substantive and licensing regulation of mortgage lenders under the Consumer Protection Code. This means that although the Consumer Protection Code will no longer generally regulate transactions secured by real property, the attorney preference requirement remains intact.
In addition to ensuring that creditors ascertain the consumer’s choice of lawyer, South Carolina has strict unauthorized practice of law rules that require an attorney’s involvement in a real estate transaction from document preparation through closing. The South Carolina Supreme Court recently released Guidelines for Attorneys Conducting Residential Real Estate Closings that make clear that a South Carolina-licensed attorney must participate in all aspects of residential real estate transactions. The attorney must supervise the title work and document preparation, as well as the recording and disbursement of funds. Additionally, the attorney must physically appear at the closing to conduct the closing; the attorney cannot appear by telephone. The Guidelines capture many of the activities discussed over the years in South Carolina Supreme Court case law as activities that constitute the practice of law. In Doe Law Firm v. Henry B. Richardson, Jr., Disciplinary Counsel, and Henry Dargan McMaster, Attorney General, the state high court held that disbursement constitutes an integral step in the closing of a residential refinancing or credit line transaction that occur under the supervision of an attorney. In State v. Despain, the South Carolina Supreme Court indicated that the generally understood definition of the practice of law “embraces the preparation of pleadings, and other papers incident to actions and special proceedings, and the management of such actions and proceedings on behalf of clients before judges and courts.” Applying this definition, the Despain Court affirmed its prior holdings in In re Easler and State v. Buyers Service Company, Inc., that (1) the preparation of a deed for another individual, having the deed executed, and filing the deed, without the approval of a licensed attorney and (2) the preparation of deeds, mortgages, notes, and other legal instruments related to mortgage loans and transfers of real property by a commercial title company constitute the unauthorized practice of law. In Buyers Service, the Court specifically ruled that “real estate and mortgage loan closings should be conducted only under the supervision of attorneys.” The Court noted that the fact that Buyers Service had retained attorneys to review the closing documents “does not save its activities from constituting the unauthorized practice of law.” In Doe v. McMaster, the South Carolina Supreme Court dealt with various situations involving a lawyer’s business association with a lender bank and title insurance company. The McMaster Court recognized that, for purposes of the unauthorized practice of law rules, a lender may prepare legal documents for use in refinancing a loan for real property as long as an independent attorney reviews and corrects, if needed, the documents to ensure their compliance with law. Although McMaster dealt with a refinance, it applies by analogy to other types of real estate transactions. Additionally, the Guidelines make very clear that attorneys must also close transactions for home equity lines of credit, a departure from the rule in many states that permit the origination of HELOCs without the involvement of an attorney.
Because of South Carolina’s strict unauthorized practice of law rules, for both first and junior lien closed-end and open-end loans, a South Carolina lawyer must review all forms used in the transaction, ensure that they comply with South Carolina law, and perform the closing. Creditors would be wise to review their procedures to ensure that they mirror the requirements set out in South Carolina case law and court guidance for such residential real estate transactions.
Catherine Brennan is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Cathy at 410-865-5405 or cbrennan@hudco.com.