Bankers, Real Estate Loans, and the Unauthorized Practice of Law: A Refresher

Back in 1968, the Kentucky Bar Association (“KBA”) released Unauthorized Practice of Law Opinion KBA U-6 (“U-6”), opining that bank officers and lending institutions could not draft loan documents such as mortgages, security agreements or financing statements without violating the provisions of Kentucky law that prohibit the unauthorized practice of law. It is entirely within the province of attorneys in the Commonwealth of Kentucky to draft legal documents, and this KBA opinion merely reinforced that idea. So far, so good, right? Opinion U-6 was not the last word on where the role of the lender can dovetail with the practice of law, however, and all lenders should take heed of where potential landmines of the unauthorized practice of law in violation of KRS §524.130 still exist.

Business - meeting in an office; lawyers or attorneys (only hands) discussing a document or contract agreement

The KBA subsequently narrowed the scope of U-6 with Unauthorized Practice of Law Opinion KBA U-31 (“U-31”) in March of 1981. This opinion answered the question of whether a mortgage lender or title insurance company operating on behalf of a lender would commit the unauthorized practice of law by performing “ministerial acts” in the closing of a real estate loan with…a qualified no. Although U-31 did not exactly provide a straight answer, it did suggest that purely ministerial matters, such as a lay person conducting a real estate closing, would not violate Kentucky law so long as the non-lawyer did not give any legal advice at the closing.

In September of 1999, the KBA issued Unauthorized Practice of Law Opinion U-58 (“U-58”), which nakedly prohibited title agencies, title companies or any non-lawyer that is not a real party in interest to the real estate transaction from conducting a closing without the direct supervision of a licensed attorney. U-58 explained that an attorney’s presence is not mandatory, but the loan closing must be conducted under an attorney’s supervision and control – the “responsible attorney” must be familiar with the loan documents and be readily available should one of the real parties in interest seek legal advice during the closing. U-58 also clarified that a lender’s employee may still prepare, select or complete “form” loan documents so long as no fee is charged to the borrower.

It would be an understatement to suggest that U-58 upset the real estate, title and banking industries. The response from all sides was immediate and visceral, and in 2003 led to the holding in Countrywide Home Loans, Inc. v. Kentucky Bar Association. We won’t hold you in suspense –in Countrywide the Kentucky Supreme Court vacated U-58, adopted the reasoning of U-31, and held that it is not the unauthorized practice of law for non-lawyers to conduct real estate closings. The Court also affirmed its prior rulings declaring that drafting real estate mortgages constitutes the unauthorized practice of law. As the court noted from the evidence, closings have become increasingly standardized, with more and more documents taking nearly identical forms. In fact, one of the witnesses in that case testified that as much as 95 percent of all documents are the same at closings. Closings are now mostly ministerial, and thus U-31 carries more weight in the realistic conduct of a loan closing. This is not necessarily the end of this debate, however. In March of 2006, the KBA issued the Unauthorized Practice of Law Opinion U-63 (“U-63”), and further clarified U-6 and U-31 relating to “ministerial” acts. As illuminated by the Court in the Countrywide case, it is very common for lenders to use “form” or preprinted loan documents. This is not only a cost-savings benefit for lenders, but as provided in U-63, the “purely ministerial” acts of filling in the “blanks” on commercially available preprinted forms does not constitute the unauthorized practice of law. Yet, still, there are circumstances where lenders may fall into the trap of the unauthorized practice of law, and they should still avoid drafting mortgages or title opinions, or giving legal advice at a loan closing. When questions of legal importance or ramification arise, lenders and title agencies should still pause and defer to the guidance of a competent attorney.

E. CowlesEmily H. Cowles is a Member of McBrayer, McGinnis, Leslie & Kirkland, PLLC. She joined McBrayer in 2015 after practicing for more than a decade for Morgan & Pottinger, P.S.C. Her law practice primarily focuses in all areas of creditor’s rights, the equine business in general, real estate, large and community banks, and businesses throughout Kentucky. Ms. Cowles also represents several Lexington based businesses in various capacities, including, but not limited to, the acquisition and sale of real property, litigation, transactions, leases, collections, and in their day-to-day operations. She can be reached at ecowles@mmlk.com or (859) 231-8780, ext. 216.

This article is intended as a summary of state and federal law and does not constitute legal advice.

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The New TILA-RESPA Integrated Disclosure Requirements

Farewell, HUD-1, we hardly knew ye. As of October 3rd, 2015, lenders will provide two integrated forms at specified intervals surrounding the closing date to comply with the provisions of both the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act of 1974 (“RESPA”). The new forms are the result of provisions from Sections 1098 and 1100A of the Dodd-Frank Act meant to combine and simplify existing documents to make them easier for mortgagors to understand.

Family meeting real-estate agent for house investmentTILA (implemented through Regulation Z) and RESPA (implemented through Regulation X) both require specific disclosures to be made at the closing of a mortgage loan. RESPA requires that consumers receive a Good Faith Estimate (“GFE”) within three business days of applying for a mortgage loan. Within one business day before the settlement of the loan, the consumer has the right to request the Settlement Statement (HUD-1), with the document provided at closing. TILA also requires that mortgage lenders provide a disclosure of lending terms within three business days of receiving a mortgage loan application. These requirements have been fulfilled through separate disclosure forms created by two different agencies, thus leading to confusion between lenders and consumers at closing time, as the forms used inconsistent language. The HUD-1 is a settlement statement created by the Department of Housing and Urban Development to satisfy the requirements of RESPA when it was administered by that agency. The Federal Reserve Board enforced TILA.

Dodd-Frank changed these requirements by creating the Consumer Financial Protection Bureau (“CFPB”) and charging it with enforcing the provisions of both TILA and RESPA as well as creating integrated disclosures that effectuate the disclosure provisions of both laws through one set of forms, rather than two. To that end, the CFPB issued the Final Rule for the integrated disclosure requirements on November 20, 2013 and amendments to the Final Rule on February 19, 2015. This new TILA-RESPA Integrated Disclosure rule, otherwise also known as “Know Before You Owe,” created two required documents to replace the TILA and RESPA disclosures – a Loan Estimate that replaces the GFE and TILA disclosures at the time of application, and a Closing Disclosure that supplants the HUD-1 Settlement Statement.

As with the GFE and TILA disclosures, the Loan Estimate must be provided to consumers no later than three business days after they submit an application for a loan. The Loan Estimate form requires the loan amount and terms, projected payments, closing costs, the estimated cash needed to close and other considerations, such as whether the lender intends to transfer the servicing of the loan. The Closing Disclosure includes similar provisions, although it also includes details of the escrow account, a summary of the transaction and the contact information of the lender, the settlement agent, the mortgage broker, and the real estate brokers for both buyer and seller.

Possibly the biggest change for lenders and mortgage brokers is that the Closing Disclosure must be provided to the consumer at least three business days prior to the consummation of the transaction – the point where the consumer becomes contractually obligated to the creditor on the loan. This may be different than the actual closing date. This is a much more stringent requirement than the one-day prior to closing on consumer request requirement of the HUD-1, and can potentially delay closing, as last-minute changes the transaction may trigger a need for a revised Closing Disclosure with a new three-day waiting period. This can happen when there are increases in the APR, any additions of a prepayment penalty or the change of a loan product will trigger the need for a revised closing disclosure

MHagginMary Estes Haggin is a Member of McBrayer, McGinnis, Leslie & Kirkland, PLLC.  Ms. Haggin practices in virtually every aspect of real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, lease negotiation and preparation, and any and all other needs related to residential and commercial real estate matters.  She is located in the firm’s Lexington office and can be reached at  mehaggin@mmlk.com or at (859) 231-8780.

This article is intended as a summary of  federal and state law and does not constitute legal advice.

Mortgage Prequalification versus Preapproval

First time home-buyers are often under the impression that mortgage prequalification and preapproval are interchangeable terms, but they are actually two separate steps in the financial process and it is important to understand the difference between them.

Prequalification is a lender’s estimate of how much you could be eligible to borrow based on information you supply. In a prequalification, a credit report is not pulled, which means that the lender is depending on incomplete (and sometimes inaccurate) information. Prequalification does not mean a loan will be given, but is meant to serve only as an estimate for the mortgage process. Prequalifications help sellers determine a potential buyer’s general creditworthiness and give buyers a better understanding of their future financial responsibilities, but are not binding in any way.

Preapproval, however, is more concrete and does involve a credit report check. Lenders will contact employer, banks and others to verify a potential loan recipient’s income, assets, debts and credit history in this step. A preapproval from a lender will say how much you are eligible for, how long the approval is valid, and may contain some additional conditions for the loan. Note that a lender may not require the payment of any fees, except the cost of a credit report, at the time of a preapproval. Just because one obtains a preapproval does not mean that the loan is final – the funding will only be given when the property appraisal, title search, and other verifications have been confirmed.

There is no harm in getting prequalified, but to seal the deal preapproval is necessary. Buying a home is a complex process – make sure you know the industry lingo before getting involved in buying and selling negotiations to ensure that all parties are on the same page.

J. Markham

Joshua J. Markham is a member at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Lexington, KY office. Mr. Markham practices in virtually every aspect of real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, lease negotiation and preparation, and any and all other needs related to residential and commercial real estate matters.He can be reached at jmarkham@mmlk.com or (859) 231-8780, ext. 149.

This article is intended as a summary of federal and state law activities and does not constitute legal advice.

Lenders Take Note: CFPB Issues Guide to Forms

Big changes are in store for real estate closings in 2015 (we first wrote about it here). Now, lenders have some guidance from the Consumer Financial Protection Bureau (“CFPB”) as to how complete forms that will become mandatory in August 2015.

For over thirty years, federal law has required lenders to provide two different disclosure forms (the Truth in Lending Statement and Good Faith Estimate) to consumers applying for a mortgage. The law also has generally required two different forms (a final Truth in Lending Statement and a HUD-1 settlement statement) at or shortly before closing on the loan. The forms were developed separately by two different federal agencies, pursuant to two separate acts: the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act of 1974 (“RESPA”).

In an effort to simplify the closing process and help consumers become more informed of their options and obligations, the Consumer Financial Protection Bureau has launched the “Know Before You Owe” campaign – an initiative aimed at reforming the mortgage market. Beginning in August 2015, the two sets of forms issued to consumers will be reduced and replaced with a Loan Estimate Form and Closing Disclosure. These new forms use clear language and are designed to make it easier for the consumer to understand key information, such as the interest rate, monthly payments, and closing costs of the loan.

CFPB’s recently-issued Guide to Forms (available here) provides originators with step-by-step instructions for completing the Loan Estimate and the Closing Disclosure and addresses situations that are expected to arise frequently. The 96-page guide should be reviewed by anyone who routinely participates in the mortgage closing process. The guide specifically states that it may be helpful for settlement service providers, software providers, secondary market participants, and other firms that serve as business partners to creditors.

The Know Before You Owe rules bring about numerous technical and substantive changes to the mortgage closing process. Now is the time for lenders to prepare for the new era of closings by participating in training, reviewing their internal processes, and speaking with an attorney about their new compliance responsibilities.

J. Markham

Joshua J. Markham is a member at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Lexington, KY office. Mr. Markham practices in virtually every aspect of real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, lease negotiation and preparation, and any and all other needs related to residential and commercial real estate matters.He can be reached at jmarkham@mmlk.com or (859) 231-8780, ext. 149.

This article is intended as a summary of federal and state law activities and does not constitute legal advice.

 

Lenders: Are You Using Electronic Signatures?

Earlier this year, the Federal Housing Administration (“FHA”) announced that they would begin accepting electronic signatures on documents associated with mortgage loans. FHA already allows e-signatures on some third party documents, outside of the lender’s control. The announcement, which became effective immediately, expanded the documents for which e-signatures are acceptable and now includes:

(1)    Any documents associated with servicing or loss mitigation;

(2)    Any documents associated with the filing of a claim for FHA insurance benefits;

(3)    The HUD Real Estate Owned Sales Contract and related addenda; and,

(4)    All documents included in the case binder for mortgage insurance except the Note.

Starting December 31, 2014, FHA will also accept e-signatures on the Note for forward mortgages, but not Home Equity Conversion Mortgages.

Lenders who have decided to rely on e-signatures must be sure that they are in compliance with the Electronic Signature in Global and National Commerce Act (“ESIGN”). In addition, authentication systems should be in place that can confirm that a signature may be attributed to the purported signer and lenders should take steps to confirm the signer’s identity as a party to the transaction. There must also be record retention controls in place that are consistent with the retention policies of ink-signed documentation.

Hopefully, the acceptance of e-signatures will reduce mortgage origination costs and streamline document submission processes for both lenders and borrowers. The move is just a part of the overall initiative to make the home buying process easier for consumers (see what the Consumer Financial Protection Bureau is doing here).

By now, lenders should have had time to review their technological capabilities and update their policies and procedures on e-signatures. If you are a lender and have not done so, consider how accepting e-signatures can improve your processes and efficiency. If you have questions about FHA’s announcement or about regulations to which you must adhere, such as ESIGN, contact a McBrayer real estate attorney today.

CRichardson

Christopher A. Richardson is an associate at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Louisville, KY office. Mr. Richardson concentrates primarily in real estate, where he is experienced in residential and commercial closing transactions, landlord/tenant relations, and mortgage lien enforcement/foreclosure. Mr. Richardson has closed innumerable secondary market and portfolio residential real estate transactions and his commercial practice ranges from short-term collateralized financing and construction lending to development revolving lines of credit. He can be reached at 502-327-5400 or crichardson@mmlk.com.

This article is intended as a summary of  federal and state law and does not constitute legal advice.

Fraud Risks High for Multi-Unit Property Mortgages

A recent report, published by Interthinx, an anti-fraud vendor for the financial services industry, revealed that loans associated with multi-unit properties have a much higher fraud risk than loans associated with other property types. Mortgage fraud occurs when an individual makes a material misstatement, misrepresentation, or omission which is relied upon by an underwriter or lender to fund, purchase, or insure a loan.

According to Interthinx, the fraud risk for multi-unit properties is more than double the risk associated with single-family residences, condos, or planned unit developments. The report should prompt lenders to screen these kinds of mortgage loan applications with increased diligence.

Multi-unit property loans tend to carry with them a higher propensity for occupancy and employment/income fraud. To keep financial risks low, lenders and servicers must constantly be on the lookout for fraudulent applications. There are many technological tools on the market to detect fraud. The best line of defense, however, is often a strict lending policy and thorough screening of loan documentation.

The real estate team at McBrayer represents numerous lending institutions, in addition to counseling clients on the ownership and management of multi-unit properties. We are dedicated to eliminating fraud in the mortgage industry and providing positive closing experiences for all involved parties.

J. Markham

Joshua J. Markham is a member at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Lexington, KY office. Mr. Markham practices in virtually every aspect of real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, lease negotiation and preparation, and any and all other needs related to residential and commercial real estate matters.He can be reached at jmarkham@mmlk.com or (859) 231-8780, ext. 149.

This article is intended as a summary of  federal and state law and does not constitute legal advice.

A New Beginning for Closings

Currently, under federal law, within three business days after receiving an application, mortgage lenders must deliver two different disclosures to the applicants: an early Truth in Lending Statement and a Good Faith Estimate. At closing, two more disclosures are required: a final Truth in Lending Statement and a HUD-1 settlement statement. Starting Aug. 1, 2015, that long-established process will change. The forms will be reduced to two and simplified so that consumers will be able to mortgage shop more easily and understand their mortgage terms and costs more thoroughly.

The mortgage crisis that began in 2008 was precipitated by many consumers taking on loans they could not afford. Though the industry has rebounded from the crisis, the dire situation highlighted the need for consumers to better understand the true costs and risks of a mortgage. Under the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) received the power to create new rules for the Real Estate Settlement Procedures Act (RESPA) and for most of the Truth in Lending Act (TILA), which are the laws that require the existing disclosure forms. After two years of research and testing, the CFPB decided that the simplified, so-called “Know Before You Owe” mortgage forms are the best way to educate consumers.

Beginning in August 2015, consumers will be provided with The Loan Estimate form  within three days after submitting a loan application. It replaces the first Truth in Lending statement (long-considered ironically named for the confusion and lack of clarity it gave to consumers) and the Good Faith Estimate. Consumers can use this form to compare costs and features of various loan options. Three business days before the loan closing, consumers will receive a Closing Disclosure. This replaces the final Truth in Lending statement and HUD-1 settlement statement. For the first time, consumers can review the final loan terms and costs before they take a seat at the loan closing table.

This upcoming change is just a part of CFPB’s initiative to reform the mortgage markets. Hopefully, consumers will not be the only ones to benefit from the future modifications. Lenders and real estate attorneys should be optimistic about the potential to cut down on administrative costs and lessen the “surprises” that can ruin a closing. Those in the mortgage industry should review the forms carefully and take necessary implementation steps in the year ahead.

CRichardson

Christopher A. Richardson is an associate at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Louisville, KY office. Mr. Richardson concentrates primarily in real estate, where he is experienced in residential and commercial closing transactions, landlord/tenant relations, and mortgage lien enforcement/foreclosure. Mr. Richardson has closed innumerable secondary market and portfolio residential real estate transactions and his commercial practice ranges from short-term collateralized financing and construction lending to development revolving lines of credit. He can be reached at 502-327-5400 or crichardson@mmlk.com.

This article is intended as a summary of  federal and state law and does not constitute legal advice.