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.

Advertisements

Is An Interest-Only Mortgage Right For You?

There are a number of financing options to consider when purchasing a home, one of which is the interest-only mortgage. This type of mortgage requires a homeowner to pay only the interest that accrues on the loan each month. None of the principal is paid off until the interest-only period expires. The length of the interest-only periods can vary, but payments are relatively low during this time. After expiration of the interest-only term, the buyer is then required to make monthly payments for the principal.

Traditionally, interest-only mortgages were used when home prices were so high that a conventional mortgage payment was out of a borrower’s range. They gave homeowners more bang…or, specifically more house…for their buck. Many saw interest-only loans as one of the many contributing factors to the foreclosure crisis. Freddie Mac stopped backing the loans in 2010; as a result, fewer lenders now offer interest-only mortgages and those that do utilize strict qualifying standards.

This kind of mortgage still presents some advantages. The extra cash that an interest-only mortgage payment leaves a homebuyer with can be used for other purposes, such as to pay off school loans or to upgrade the home. The key, as I see it, is to invest the saved money wisely or put it into other appreciating assets. Ideal candidates for this type of mortgage are those who are certain that they will sell the house before the interest-only period ends or individuals who may have unpredictable income or earnings with a large variable component. For example, brokers who work on a commission structure and whose incomes can fluctuate dramatically can certainly benefit from the flexibility, if they commit to paying the principal when the income is available.

Perhaps the most significant disadvantage to interest-only mortgages is the potential for “payment shock” at the conclusion of the interest-only period. This can be a devastating situation for borrowers who fail to plan properly. There is always the risk that the value of the home will fall during the interest-only period, leaving a homeowner owing more on the home than it is worth.

Borrowers using this particular financing plan should assess their abilities to stay within a financial plan and determine upfront how the cost savings will be used. An interest-only mortgage is not for everybody, but for some, it can be a helpful tool in an ever-changing financial landscape. If you have questions about buying a home, contact the real estate attorneys at McBrayer 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

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.

 

Considerations before Co-Signing

When I was looking for my first apartment, I was a student, had little money and was far from an ideal tenant. Luckily, my parents co-signed on the lease and I was handed the keys to my new place. At the time, I had no idea what risks my parents were taking by putting their signature next to mine on that lease agreement. Now, as a real estate attorney, I often see people co-signing on mortgages – generally a much bigger financial obligation than an apartment – and I wonder if they have considered the hazards associated with signing their name on the dotted line. Not every co-signing situation ends badly, and some work out with no problems at all, but there are times when a co-signor bites off more than they can chew and, as a result, are left with a very bad taste in their mouth from the whole closing process. If you are thinking about serving as a co-signor, I urge you to consider the following:

1)      It will affect your credit report.

If someone has asked you to co-sign on a mortgage it is generally because you have good (or at least sufficient) credit. A co-signed mortgage, like any other loan, will be factored into your credit report, even if you are not making payments. It becomes part of the equation in your debt-to-income ratio. If you apply for a personal loan in the future, it is possible that you could be denied the loan based on the mortgage’s outstanding debt.

2)      You are 100%, not half, liable.

Just because there are two names on the mortgage does not mean that you are only signing up for 50% of the loan liability. If the mortgagor fails to make his or her payments, the lender can look to you for the entire outstanding loan amount. If the lender only sues you for the outstanding amount (which is legally permissible) and you want the mortgagor to also be responsible for the debt, then you will have to sue him or her in order to bring them into the lawsuit.

3)      It is difficult to undo

Co-signing for a loan can be undone, but will require effort from both parties to the mortgage. The only ways to have your name removed as a co-signor are to refinance the mortgage or sell the property. If the mortgagor falls on hard times or your relationship with them sours, it is less likely they will agree to refinance the loan to remove you from the mortgage, or that the bank will permit a refinance to remove you as co-signor in light of the other parties’ financial situation.

Co-signing for a mortgage can be risky and it is important to make an informed decision. For many, when faced with the request from a loved one, saying no can be difficult. If you find yourself in this hard spot, consider contacting a McBrayer real estate attorney about your options. In some cases, there might be other ways to help the individual obtain the loan, such as gifting a part of the down payment on the property. We can work with all parties to achieve the best possible outcome.

BMacGregor

Brittany C. MacGregor is an associate attorney practicing in the Lexington office of McBrayer, McGinnis, Leslie & Kirkland, PLLC. She is a graduate of Transylvania University and the University of Kentucky College of Law. Ms. MacGregor’s practice focuses on real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, and lease negotiation and preparation. She may be reached at bmacgregor@mmlk.com or at (859) 231-8780.

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.