It did not take long after the Silicon Valley Bank failure for politicians in Washington to rush to the next available microphone and lament the “loosening of bank regulations”. Instinctively the finger pointing began, and in many quarters ended up in the direction of the prior administration’s policy to generally roll back stringent business regulations and allow free market decisions to govern various industries. Chief among the complainants (no pun intended) was Sen Elizabeth Warren, who emerged out of the 2008 crisis as an architect and advocate for the Wall Street Reform Act and the creation of the vaunted Consumer Financial Protection Bureau ( CFPB), which she briefly directed. Just yesterday in DC’s The Hill publication, Sen Warren was reported as blaming the the collapse of Silicon Valley Bank on Republicans in Congress, which in 2018 helped pass a law to ease bank regulations put in place following the 2008 financial crisis. “No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Warren is quoted as saying. According to The Hill piece, Warren, who voted against the 2018 bank deregulation bill, said that the crises would have been avoided if the banks were required to hold more liquid assets because the bill exempted banks with less than $250 billion in assets from rigorous Fed stress tests. Warren and other Democrats say the old rules could have caught the issues at SVB sooner. Given that politicians generally “never let a crisis go to waste,” many now suspect that the banking industry is about to be slammed with heightened regulatory scrutiny, tighter operational rules, more audits and exams, and larger and very public fines, penalties and consent orders. What does this mean for independent mortgage bankers (IMBs)? It means that they have to get back to the compliance mindset they were frightened into adopting between 2008 and 2018, and before the bottoming out of interest rates led everyone to believe that easy money was here to stay and that self-regulation meant hiring more loan officers. Keep those risk management officers and compliance directors close by folks, we are all in for a bumpy ride on the regulatory

Sometimes the line between services provided by non-attorney title and settlement professionals and those by lawyers becomes blurred.  This happens in states where it is common practice for a title agent representative to appear at a mortgage closing and in the course of managing the title and disbursement side of things, fill in on a review and supervised execution of the bank documents as well.  In some cases this is to fill a void where a seller or buyer show up without legal representation (by choice), but in other cases it may be that no attorney is traditionally involved (a refinance closing).

Reviewing loan documents, answering questions about contract and mortgage agreement details often can be seen by some as merely elements within the broader “title and settlement” functions often performed by non-lawyers. However title and settlement agents who are not lawyers need to be very careful about crossing the line and creating liability for themselves and their companies, as well as possible civil or criminal penalties if the activity is reported.

Recently the Rhode Island Supreme Court Unauthorized Practice of Law Committee heard a complaint filed by an attorney against a title and settlement firm in that state where a non-layer owner of that firm appeared and gave advice to the seller in a sale transaction.  The advice, which went above and beyond title searches, title insurance and document recording, caused a legal issue that impacted the transaction.

The company appeared at a hearing to defend itself asserting that the services were “common practice” in the state and that the owner asserted throughout that he was “not a lawyer.”

The Committee took a different view, and although acknowledging that the State had carved out an exception in civil and criminal statutes for title agents for the “unauthorized practice of law” the carve out was not a blanket safe harbor for the performance of traditional attorney-client services.  After all, conducting property title transfer searches, public records searches, and issuing insurance is not the same thing as drafting and reviewing contracts, explaining legal documents, answering questions about legal issues, and negotiating the resolution of business and legal disputes (including short sales).

While not sanctioning the company (it had no power to do so) the Committee did unanimously agree that the actions of the title agent constituted “unauthorized practice of law” and referred the matter to the state legislature to strengthen existing statutes to close any real or perceived loopholes.

In its conclusion, the Supreme Court Committee stated:

“[T]he following acts constitute the practice of law and can only be performed by a
lawyer: (a) conducting a title examination to determine the marketability of title,
(b) conducting a real estate closing, (c) drafting a deed on behalf of a party to a real
estate transaction, (d) drafting a residency affidavit on behalf of a party to a real
estate transaction, and (e) drafting a power of attorney on behalf of a party to a real
estate transaction.

The Committee further recommends that the aforementioned services, as the practice of law, can only be performed by lawyers in either an unincorporated law firm or as a law firm licensed by the Supreme Court….”

As a result all settlement professionals not licensed to practice law (title agents, escrow officers, notaries and real estate agents) take heed.  Crossing the fine line between your regulated role and the traditional role played by attorneys in the real estate transaction may create legal liability for your and your company.