In a decision handed down June 19, 2013, the South Carolina Supreme Court held that, in at least some instances, completing a loan modification without the supervision of a licensed attorney is not the unauthorized practice of law. Crawford v. Central Mortgage Company; Warrington v. The Bank of South Carolina, Op. No. 27273 (S.C. Sup. Ct. filed June 19, 2013).
The South Carolina Supreme Court is charged with regulating the practice of law in the state. See S.C. Const. art. V., §: 4; In re Unauthorized Practice of Law Rules, 309 S.C. 304, 422 S.E.2d 123 (1992). The goal of the Supreme Court’s jurisprudence in this area is to protect the public, and the court has developed various rules prohibiting the unauthorized practice of law (“UPL”).
In residential real estate transactions, attorney supervision is required for the five key steps in the purchase money mortgage loan process (i.e., title search, preparation of loan documents, closing, recording, disbursement). State v. Buyers Serv. Co., 292 S.C. 426, 357 S.E.2d 15 (1987); Doe Law Firm v.Richardson, 371 S.C. 14, 636 S.E.2d 866 (2006). Attorney supervision is similarly required to refinance a residential real estate mortgage loan. See Doe v. McMaster, 355 S.C. 306, 585 S.E.2d 773 (2003).
A lender who performs these acts without attorney supervision engages in UPL and can be barred from the equitable remedy of foreclosing the subject mortgage upon default. See Wachovia Bank, N.A. v. Coffey, 389 S.C. 68, 698 S.E.2d 244 (2010); Matrix Fin. Serv. Corp. v. Frazer, 394 S.C. 134, 714 S.E.2d 532 (2011).
After the Supreme Court’s decisions in Coffey and Matrix, borrowers whose loans had been modified would frequently assert in subsequent foreclosure actions that the lenders had engaged in UPL and were barred from foreclosing their mortgages.
Although lenders and consumers regularly modify their legal rights and responsibilities in loan transactions without the supervision of an attorney (e.g., card credit agreements), the Supreme Court had previously used broad language to describe why the public was at risk without attorney supervision of refinances: “[R]efinancing affects identical legal rights of the buyer and Lender as initial financing and protection of these rights is the crux of the practice of law.” McMaster, 355 S.C. at 312, 585 S.E.2d at 776.
In Crawford, the borrower financed the purchase of a home with a mortgage loan from Central Mortgage Company (“Central”). Crawford defaulted on her loan payment obligations and requested that Central modify her loan. Central agreed and prepared modification documents which extended the maturity date, decreased the interest rate, and capitalized certain legal fees, delinquent interest, and escrow shortage. Although Crawford signed the modification documents at her attorney’s office, there was a dispute about whether her attorney reviewed the modification documents. Crawford’s loan was subsequently modified again. The second modification was not supervised by an attorney.
In Warrington, the borrower financed the purchase of real estate intended for development with a commercial loan from The Bank of South Carolina (“Bank”). At the borrower’s request, Bank prepared three modification agreements using standard modification forms containing blanks to successively extend the maturity date and modify the interest rate of the borrower’s loan. None of the modifications were supervised by an attorney.
The borrowers ultimately defaulted under their respective, modified obligations. Central and Bank commenced foreclosure actions, and the borrowers petitioned the South Carolina Supreme Court in its original jurisdiction for declaratory judgment that the subject, unsupervised modifications were UPL. The court granted the borrowers’ petitions and the Crawford and Warrington cases were consolidated for review.
South Carolina Supreme Court’s Legal Analysis
The issues before the Court were stated as follows:
- Whether lenders engage in UPL by preparing and mailing loan modification documents to borrowers and recording the executed documents without the participation of a licensed attorney?
- Whether the Court should deem the subject mortgages void if the Court finds a loan modification completed without the involvement of a licensed attorney constitutes UPL?
The borrowers argued that, like refinances, “loan modifications ‘change the existing terms of the legal rights of the parties’ by altering interest rates and repayment terms.” Thus, the borrowers reasoned, the modification agreements have a “legal effect” and must constitute UPL.
The Court rejected this analysis, holding that “lenders do not engage in the unauthorized practice of law by preparing and mailing loan modifications to borrowers and recording the executed documents without participation of a licensed attorney.”
The Court distinguished loan modifications from refinances: “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 home owners to take advantage of lower interest rates.” Accordingly, the Court held that “the same public policy that requires attorney supervision for home purchases and refinancing does not apply to loan modifications.”
The Court also noted the following factors supporting this position: (1) the costs to the consumer of requiring attorney supervision for loan modifications would outweigh the benefit; (2) lenders are subject to “robust” regulation; and (3) lenders have competent non-attorney professionals to perform these tasks.
Having held that unsupervised loan modifications did not constitute UPL, it was unnecessary for the Court to analyze whether the borrowers’ mortgages would have been void.
- Is attorney supervision required for modification of mortgage loans that are not in default? In contrasting the policies related to loan modifications and refinances, the Court appeared to place importance on the idea that a loan modification adjusts “an existing loan to accommodate borrowers who have defaulted.” Although the Court’s ultimate holding does not mention default, the Court’s analysis appears to leave open the question of whether the parties can modify a mortgage loan without attorney supervision for reasons unrelated to default.
- What is the line between a loan modification and refinance? For instance, does an unsupervised “renewal note” with a recorded mortgage amendment constitute UPL? In Doe v. McMaster, the Court held that a refinance requires attorney supervision because it entails the same designated steps involved in completing a purchase money mortgage loan transaction—title search, preparation of loan documents, closing, recording. If a lender chooses to document a modification with a new negotiable instrument and corresponding recorded mortgage amendment, then all of the magic steps may be implicated, even if the parties’ intent is to adjust “an existing loan to accommodate borrowers who have defaulted.” Thus, although it may appear to be form over substance, lenders should carefully consider how they structure such modification transactions.