A recent South Carolina Supreme Court ruling confirmed what some mortgage professionals in the state had hoped: They do not need a lawyer to handle loan modifications. The June 19 ruling in Crawford v. Central Mortgage Co. determined that although the state requires a licensed attorney to supervise and be present for closings and other mortgage-related tasks, non-lawyers may handle loan modifications.
The decision was good news for lenders and servicers, says attorney Reginald P. Corley, a shareholder and default services department head at the law firm Rogers Townsend & Thomas P.C. in Columbia, S.C. ‘There was a sigh of relief among a lot of mortgage companies,’ he says.
According to the South Carolina Bar Association's website, ‘Preparation of deeds, mortgages and other legal instruments related to transfers of real estate falls within the practice of law.’ Corley notes that in previous cases, the South Carolina Supreme Court had ruled that a South Carolina-licensed attorney must supervise the title search, preparation of the loan documents, closing, and recording of title and mortgage. The court also ruled the same for mortgage loan refinances.
Corley, who was among a group of lawyers who wrote an amicus curiae on behalf of the Mortgage Bankers Association of the Carolinas, says the question in the Crawford case was, ‘What about loan modifications?’
The answer, Chief Justice Jean H. Toal wrote in the decision, was that modifying a loan without participation by an attorney does not constitute the unauthorized practice of law. ‘A loan modification is an adjustment to an existing loan to accommodate borrowers who have defaulted. In contrast, refinancing is the issuance of an entirely new loan, often used by homeowners to take advantage of lower interest rates. Thus, the same public policy that requires attorney supervision for home purchases and refinancing does not apply to loan modifications.’
The case involved two appellate cases that were combined for the Supreme Court to review. In the first case, Crawford v. Central Mortgage Co., Cassandra Crawford bought a home in Mount Pleasant, S.C., in 2005 with a mortgage loan from Central Mortgage. The 30-year loan of $290,000 had an interest rate of 7.875% and monthly payments of $1,903. A licensed attorney supervised the closing of the original note and mortgage.
Crawford was unable to make the payments, and in 2008 and 2010, she received loan modifications from Central Mortgage. The bank used standard forms, and no lawyers were involved. She defaulted on the loan in 2010, and Central Mortgage filed an action in circuit court, seeking foreclosure.
In the second case, Warrington v. The Bank of South Carolina, Warrington, a real estate investor, purchased land in Charleston County, S.C. The commercial loan was overseen by a licensed attorney. Warrington could not make the payment when the original note was due in 2008 and received three loan modifications, extending the maturity date until March 2010. He was unable to pay the principal plus interest at that date.
In both cases, the petitioners, Crawford and Warrington, maintained that Central Mortgage and Bank of South Carolina, the respondents, engaged in the unlawful practice of law by modifying a loan without the participation of a licensed attorney. They had hoped the court would deem the mortgages void. The court rejected the allegation.
The ruling clarified an important issue, says Clint Yarborough, an attorney with WFG National Title Insurance Co. ‘There has always been some question about whether a loan modification is unauthorized practice of law,’ says Yarborough, who is also chair of the South Carolina Bar's Unauthorized Practice of Law Committee. ‘Now we have the answer.’
Yarborough adds that other states also have rules about attorneys being involved in mortgages. Attorney states tend to be states east of the Mississippi, he says, and escrow states are generally western states. There have been court cases recently in other attorney states too. Courts in Georgia and Massachusetts, for example, examined which parts of the mortgage attorneys must participate in and whether ‘witness only’ closings, or closings that involved non-lawyers, violated rules about unauthorized practice of law.
The rulings are complex. ‘The question is, you still have other parts of the mortgage process,’ Yarborough says. ‘Do you need an attorney for every part?’
Nora Caley is a Denver-based freelance writer.