FROM BARNS TO BIG BOXES REDUX 2012 NEW LAWS, NEW ECONOMY Admin Schedule today Turn off cellphones Partial Credit forms available at registration table If you checked in at registration table, attendance will be reported to State Bar though unsure how quickly they will be able to post Location of restrooms Speaker introductions
RESOURCES & FORMS!!! www.northcarolina.ctt.com Resources www.northcarolina.ctt.com Bulls, Bulletins, Articles and Forms Law is constantly changing New forms are needed New articles and manuscripts Ntiweb.com Overview of all states Topics, statutes Recording details Title Insurance info
Changed Economic and Legal Environment Advice needed & provided to clients Changed Risks Changed Environment Foreclosures & Deeds in lieu Failed developments Values decreasing rather than appreciating Borrowers & tenants failing, losing jobs Tight financing & stiff requirements Market, led by FHA/VA, demanding perfect title rejecting insuring over and other patches Everything parsed, contested & litigated Everyone blaming everyone else Everyone looking for another pocket to pay, for any trivial issue New endorsements for affirmative coverages
BUTTERNUT HEMLOCK CFPB: Know Before You Owe www.consumerfinance.gov UPL (revisions to Chapter 84) New UPL issues under revisions to NCGS Chapter 84 & ethics opinions (2009 FEO 2, 2002 FEO 9, 2001 FEO 4 & 99 FEO 13); updated APAO, if available by time of seminar
Drafter & Drafting Preparer s name must be shown on face of the deed or deed of trust, no matter where prepared. GS 47-17.1 Abstracting title, drafting legal documents & giving legal advice is practice of law. Unauthorized practice of law (aiding & abetting): Civil Liability GS 84-10.1 Disallowance of fees GS 84-8(b) Criminal Liability (Class 1 Misdemeanor) -- GS 84-8(a) EXC: State vs. Pledger (bank counsel drafting docs to which it is a party) Deed or Deed of Trust Prepared?? (GS 47-17.1) Register of Deeds can refuse to record at all!!!
2009 FEO 2 A closing lawyer who reasonably believes that a title company engaged in the unauthorized practice of law when preparing a deed must report the lawyer who assisted the title company but may close the transaction if client consents and doing so is in the client's interest. The Closing Process & Specific issues
APAO 2002-1 Proposed Revisions to Authorized Practice Advisory Opinion 2002-1 On the Role of Laypersons in the Consummation of Residential Real Estate Transactions Adopted January 24, 2003 Revised January 26, 2012 CLOSING PROTECTION LETTERS CPL vs. commitment, Good Funds, updating/recording/disbursing, trust accounting
Closing Process Package Contract Deed/LW Affidavits Title Exam Payoff Request Letters HELOC freeze Closing Advising Notarizing Funds in Update/record Disburse Payoff letters Policies Satisfactions Prelim / Commitment Problem Areas Short sales conditional payoff statements HUD-1 indicates different agency or company? CPL but no commitment CPL requested post-closing (so ineffective) On-line ( unofficial ) searches Index searches (totally inadequate) Updating and recording in person (not on-line) Closing instructions usually say final title policy due within 30-60 days
Deed stamps on deeds It is professional misconduct for a lawyer to engage in conduct involving dishonesty, fraud, deceit, or misrepresentation. Rule 8.4(c). Members of the public regularly rely upon the information about the price of real property that can be derived from tax stamps on recorded instruments. Therefore, a lawyer may not counsel or help a client to put excess tax stamps on an instrument when it is recorded with the register of deeds because such conduct involves dishonesty and misrepresentation. 2001 FEO 12 RPC 210 - Representing Multiple Parties Can t we all just get along?
RPC 210 - Representing Multiple Parties RPC 210 Lawyer may represent the buyer, the seller, and the lender in the closing of a residential real estate transaction. Interests of parties aligned, not fundamentally antagonistic Basic terms of contract already agreed Not adverse interests he or she will be able to act impartially; there is little likelihood that an actual conflict will arise out of the common representation; and, should a conflict arise, the potential prejudice to the parties will be minimal. best interests of both the buyer and the seller Consent of buyer and seller after full disclosure of lawyer s role & right to separate counsel It is not generally assumed that the buyer's lawyer will represent the seller. Therefore, if the closing lawyer does not intend to prepare the deed or perform other legal services for the seller, the lawyer does not have to give notice to the seller. If a conflict or controversy relating to the transaction arises between any of the parties being represented by the closing lawyer, the lawyer must withdraw from the representation of all of the clients and is ethically barred from representing any of the clients in the transaction or any dispute arising out of the transaction. 2004 FEO 10 - Representing Multiple Parties 2004 FEO 10 -- lawyer for the buyer of residential real estate may prepare the deed without creating a client-lawyer relationship with the seller provided the lawyer makes specific disclosures to the seller and clarifies her role for the seller. Accommodation to Buyer-client. explain to Seller that her client is Buyer, that she does not represent Seller, and that she cannot give legal advice to Seller other than the advice to secure legal counsel If the lawyer prepares deed.. But does not represent seller give full disclosure of scope of representation
97 FEO 8 -- Representing Multiple Parties The Developer s Lawyer 97 FEO 8: Lawyer may represent purchaser and Seller-developer who is a regular client so long as Attorney reasonably believes common representation will not be adverse to the interests of either client. Loyalty to the seller will not interfere with lawyer's responsibilities to the buyer Reasonably believes that there is little likelihood that an actual conflict will arise and should a conflict arise, potential prejudice to the parties will be minimal. Full disclosure of the advantages and risks of common representation and the consent of both parties. Fully disclose the lawyer's prior and existing professional relationship with the seller. Explanation of the scope of the lawyer's representation. Completion of the construction of the house, the escrow of funds for the completion of the construction, problems with title to the property, and enforcement of the warranty on new construction. Areas of potential conflict should be outlined for both parties prior to obtaining their separate consents to the common representation. As a result of his representation of Seller on matters relating to the development of the subdivision, Attorney is aware that Seller is having financial difficulties and may be unable to complete the promised amenities in the subdivision, including a swimming pool and tennis courts. Seller has instructed Attorney not to disclose this information. NO, CONFIDENTIAL Attorney may agree to pre-agreed fee to close transactions in the subdivision & this can be in the contracts Lender-client requests title file After a residential real estate transaction is completed, the client is entitled to originals or copies of the documents which were generated solely in connection with the client's closing, including the following: the deed to the property, plats, title opinion, title insurance policy, all closing documents, all documents prepared for the lender and other third parties, correspondence, memoranda regarding the client's transaction only, and documents referenced in the client's deed or title opinion. The client is not entitled to the lawyer's title notes, abstracts, or copies of documents not prepared solely for the client's transaction regardless of whether such information is stored in the client's file. RPS 227 & RPC 169
Buyer/Client Instructs Attorney Not to Complete Transaction If deed has not recorded: Unless the real estate contract provides otherwise, or it is otherwise agreed between the parties, closing is presumed to be complete at the date and time of recording. So Lawyer should return the funds to lender and buyer, return the deed to seller, and retain the other closing documents in his file. The lawyer should hold any escrowed funds he received representing the earnest money deposit made at the time of the offer to purchase. If the earnest money was not initially deposited with the lawyer at the time of the offer to purchase, the lawyer shall have the right to return the deposit to the escrow account of the person, firm, or company that initially received the deposit. If the deed has been recorded: Because title has passed to the buyer, the lawyer must satisfy the conditions of the transfer of the property by disbursing the sale proceeds. Lawyer must notify the buyer and the buyer can then take appropriate legal action to seek to have the sale rescinded. This opinion is applicable to closings on property used or developed for residential purposes. 2008 FEO 7 Trust Accounting- 3-way Reconciliation Trust Account Balance Bank Statement Balance Amounts For Each Client Proposed Opinion 2011 FEO 7: Law firm may use on-line banking but only if managing lawyers are regularly educated on security risks and actively maintain end-user security. Positive Pay Rynoh Live www.rynoh.com
2011 Lawyer s Trust Account Handbook www.ncbar.gov Good Funds Settlement Act GS 45A & RPC 191 Lawyer May Disburse on Provisional Credit Lawyer must reasonably believed that the underlying deposited instrument is virtually certain to be honored when presented for collection. If dishonored, Lawyer must: immediately act to protect other clients property personally pay or secure payment from other sources for the amount of any failed deposit Lawyer s personal assets or credit must be sufficient to cover any provisionally credited item if dishonored.
What Do We Do About This? Do Not be an easy target!
DO NOT BE BULLIED Or Nagged
Into Taking Foolish Risks! KEEP YOUR EYES WIDE OPEN!!!
BE FAMILIAR WITH 47G & 47H!!
Proposed 2011 FEO 7 - Using Online Banking to Manage a Trust Account (October 20, 2011) Proposed opinion rules that a law firm may use online banking to manage its trust accounts provided the firm s managing lawyers are regularly educated on the security risks and actively maintain end-user security. End user (in the law office) security Recordkeeping requirements remaining educated as to the dynamic risks involved in online banking and insuring that the law firm invests in proper protection and multiple layers of security to address those risks A lawyer who is managing a trust account has affirmative duties: to regularly educate himself as to the security risks of online banking; to actively maintain end-user security at the law firm through safety practices such as strong password policies and procedures, the use of encryption, and security software, and the hiring of an information technology consultant; and to insure that all staff members who assist with the management of the trust account receive training on and abide by the security measures adopted by the firm. Understanding the contract with the depository bank and the use of the resources and expertise available from the bank are good first steps toward fulfilling the lawyer s fiduciary obligations. Payoffs and Satisfactions of Prior Liens The lawyer's engagement letter, the lender's loan closing instructions, and the lawyer's representations to the clients establish the expectations of the clients. To avoid any misunderstanding, the lawyer must explain any limitations on her representation. Specifically, if she does not intend to obtain the cancellation of record of the paid deed of trust, she must so advise her clients. Explanation must sufficiently to allow the borrowers to make reasonably informed decisions about the representation 99 FEO 5
Tacking RPC 99 Lawyer rendering the opinion fully discloses to client the precise nature of the service being rendered. The client should be advised that he or she should rely on the title insurance policy as to matters of title and not upon the attorney's examination of the public records. If the Title Insurance Company is willing to base its underwriting decision upon the fact that it or another title insurance company has previously issued a title insurance policy and Lawyer B's limited title opinion, that does not offend the Rules of Professional Conduct. Since title insurers frequently omit exceptions in mortgagee s policies that would appear in owner s policies, tacking should be limited to tacking onto owners' policies. RPC 99 Tacking 2009 FEO 17 This issue of the appropriate standard of care for rendering a title opinion is outside the purview of the Ethics Committee. To the extent that RPC 99 appeared to opine on the standard of care relative to tacking to an owner s policy versus a mortgagee s (lender s) policy for the purpose of rendering a title opinion, that part of the opinion is withdrawn. Whether tacking to an owner s policy or a mortgagee s policy, a lawyer s duty is to provide competent representation to his client, consistent with Rule 1.1, and to reasonably consult with the client about the means used to accomplish the client s objectives. Rule 1.4(a)(2). The lawyer must consult with the client before using a method of rendering a title opinion that might present additional risk for the client. 2009 FEO 17
Tacking RPC 99 Owner s policy only Loan policies on limited (single owner) searches Affirmative coverages for non-$ things that would matter to owner Generic exceptions in loan policies Only as good as the prior policy Advise client of risk Client planning changes / improvements? Judgment searches All owners within 20 years For the full 20-year period (not just to prior policy date) Tacking: Risk Cases Prior policy has errors Prior attorney(s) did not do buyer judgment or adequate search Prior policy on different property Inadequate search period Tacking to loan policy rather than owner s policy (coverage disappears) Tacking without full disclosure to and permission of client Insufficient owner s coverage Inadequate review of prior policy and its exceptions Endorsement requirements not met Problems not addressed prior to closing
Malpractice vs. Negligent Misrepresentation (BB&T vs. CTIC case) Malpractice GS 1-15(c) Except where otherwise provided by statute, a cause of action for malpractice arising out of the performance of or failure to perform professional services shall be deemed to accrue at the time of the occurrence of the last act of the defendant giving rise to the cause of action: Provided: Within one year of discovery, if economic or monetary loss, or a defect in or damage to property not readily apparent at last act No less than three years. No more than four years from last act Negligent Misrepresentation GS 1-52(9) Within 3 years (9) For relief on the ground of fraud or mistake; the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud or mistake. Branch Banking & Trust Co vs Chicago Title, NC COA 10-196 (6/7/11) FRAUD #1: Unauthorized wires to mule #2: Fraudulent Checks & Foreign investors #3 Short Sale specialists
Your Fraud Vaccine At a minimum have a fax confirmation required for every wire that is reviewed immediately. NOTE: If you use the phone to make the wires, you should be safe. Contact your bank immediately if there is ANY discrepancy; Contact the bank that issued the check if there is any question of its authenticity or validity; Disburse funds from check deposits only after cleared if unfamiliar or foreign source; Use one designated computer for your online banking, and NEVER go to any other website on this computer. Fraud Preventives Always stay current on all banking security software downloads; Meet in person with the bank often to keep a close relationship; Of course, keep all banking log ins and passwords secret. Research banks and move escrow accounts to the one with the highest security measures, for example: separate log ins for wires multiple security tokens or passwords and a two-step process where one person initiates the wire but another person has to confirm it and release it.
What Can You Do? Recognize that the buck literally stops with you, so take control. When necessary, cut back quickly on personal and professional expenses. Have difficult conversations. Use a service like Rynoh Live that does daily reconciliation and alerts of any wire activity. Use positive pay and three-way reconciliation methods (Check out www.rynoh.com for escrow management software that bridges your accounting software and your bank site), have checks and balances in place, review your process frequently. Trust but verify. DO NOT treat reconciling your accounts as a clerical function, DO understand the reconciling process yourself, do not rely on an internal staffer or an outside company to handle it all. If you do use an outside bookkeeping company as support, use one knowledgeable of escrow reconciliations, not necessarily a CPA. What Can You Do? Partner closely with your reconciliation staff, submit the required escrow reconciliations promptly, prepare diligently for audits, view the audit process as a way to improve your methods. We see problems that start as mere bank errors and spiral out of control. Keep a good personal credit report. If you are having serious personal and business financial problems seek help from your business partners, church or synagogue, Bar Assistance group, mental health professional, family/friends, seek loans to reimburse your account while cleaning it up if it is out of balance. Ask your Chicago Title contact for copies of Fidelity s newsletter Fraud Insights reporting escrow fraud experiences.
What Can You Do? Do due diligence background checks on anyone who is handling trust account funds, wiring in and out, signatories, preparing checks. Manage their reputation, publicize their great track record handling funds and documents.
Preventing Short Sale Fraud Conduct an online search of the names of all parties to the transaction to see if anything unusual pops up In the BOA scheme, the buyer had a prior recent arrest for fraud Contact the lender or the foreclosing attorney to verify that the short sale approval letter is legitimate If the lender won t provide the information directly to you or the title company, insist that the borrower/seller consents to allow the lender to provide the verification Disburse payoff funds directly to the lender be very skeptical of any funds going to the borrower/seller or other third parties Get the executed mortgage satisfaction and record it as soon as possible after closing Freddie Mac now requires all parties in any short sale to sign an affidavit, attesting that it is a true arms-length transaction. Your Fraud Vaccine Verify that the short sale mitigation company represents the prior lender, contact the prior lender directly. Contact the foreclosing law firm to verify have all funds included in pay off. Follow up to get get the executed mortgage satisfaction and record it as soon as possible after closing. Disbursement: Wire needs to go into the account of the actual lender unless you have written proof from that lender that there is a servicing agreement in place and they consent to that payment. Do not pay an investor directly. Conduct an online search of everyone s name to see if anything pops up. This foreclosure rescuer realtor was reportedly arrested last December for some sort of rent fraud and his name came up on complaint boards before this closing. Listen to your gut.
Fraud Vaccines Settlement Statement must show EVERY disbursement & ACCURATE payee. NEVER reflect monies going into and out of your account unless they actually do. ALWAYS disclose to the lender if they are aware of any monies (or benefit of a forgiveness of a debt to the seller) going back to the borrower or his relative. ALWAYS make sure that the commitment accurately reflects the status of the vesting of title with the accurate number of deed transactions. Remember: You Are The Survivors!
Brief overview of the State Bar Ethics Opinion Process Inquiry submission Staff review / recommendation Chair appoints subcommittee Review/discussion Recommendation to full Ethics Committee Ethics Committee approval State Bar Council approval Published for Comment Practitioner input invaluable Reconsider or Adopt or Withdraw Chicken (Client): Let's start a restaurant! Pig (Lawyer): What would we call it? Chicken (Client): Ham n' Eggs! Pig: No thanks. I'd be committed, but you'd only be involved!