According to a June 19, 2013 opinion by the South Carolina Supreme Court, lawyers are not required to be involved in modifying South Carolina mortgage loans in default. See Crawford v. Central Mortgage Co. & Warrington v. The Bank of South Carolina, Shearouse Adv. Sheets Op. No. 27273 (Jul. 19, 2013), available at http://www.sccourts.org/opinions/HTMLFiles/SC/27273.pdf
Background on South Carolina’s rules regarding unauthorized practice of law and mortgage loans
As explained in State v. Buyers Service Co., 292 S.C. 426, 357 S.E.2d 15 (1987), South Carolina law requires that a lawyer perform or supervise certain steps of residential purchase-money loan closings. Specifically, a South Carolina-licensed lawyer must perform or supervise the following steps: (1) preparing “deeds, mortgages, notes and other legal instruments related to mortgage loans and transfers of real property”; (2) conducting title exams and preparing abstracts; (3) closing the loan, including instructions in the execution of legal instruments and advice as to the instruments’ effects; (4) recording the mortgage; and (5) disbursing funds. Buyers Service, 292 S.C. at 422-34, 357 S.E.2d at 18-20 (items 1-3); Doe Law Firm v. Richardson, 371 S.C. 14, 18, 636 S.E.2d 866, 868 (2006) (item 5). These rules apply not only to purchase-money loans but also to refinances. Doe v. McMaster, 355 S.C. 306, 585 S.E.2d 773 (2003).
While it has long been established that UPL violations do not give rise to a private right of action, in 2011 the Supreme Court held that if a lender engaged in UPL when closing a loan it could not avail itself of equitable remedies with respect to the mortgage. Matrix Financial Services Corp. v. Frazer, 394 S.C. 134, 136, 714 S.E.2d 532, 533 (2011) (borrower granted a mortgage to secure the refinance of a prior loan); In 2012, the South Carolina Supreme Court explained that UPL in a mortgage transaction bars “equitable remedies” (of which foreclosure is one) only when the transaction occurred after August 8, 2011, the date of the Matrix decision. See BAC Home Loan Servicing LP v. Kinder, 298 S.C. 619, 731 S.E.2d 547 (2012).
Background on the Crawford and Warrington cases
The Court’s decision applied to two cases—one involving a residential mortgage loan and the other a commercial mortgage loan. See Crawford v. Central Mortgage Co. & Warrington v. The Bank of South Carolina, Shearouse Adv. Sheets Op. No. 27273 (Jul. 19, 2013), available at http://www.sccourts.org/opinions/HTMLFiles/SC/27273.pdf.
Crawford borrowed $290,000 in 2005 for a residential mortgage from Central Mortgage Company, and a licensed lawyer closed the transaction. In 2008, after Crawford failed to make timely payments, Central modified her loan with a lower interest rate, an extended maturity date, and capitalized arrearage. Crawford had the modification documents witnessed and notarized at the law firm that had closed her loan originally. Central recorded the modification. In 2010, Central again modified Crawford’s loan, keeping the same maturity date and reducing the interest rate. These modification documents were notarized, and Crawford signed a form labeled “Attorney Selection Notice,” indicating that “[b]y signing below, it is understood and agreed that you may hire a lawyer or attorney to advise you regarding this transaction and its consequences.” Crawford did not hire a lawyer, and Central recorded the modification. Later in July 2010, Central filed a foreclosure action, and Crawford petitioned the S.C. Supreme Court for a declaratory judgment that the entire mortgage loan had been voided by the unauthorized practice of law in the loan modifications.
In the second case, Warrington, a real estate investor, bought land that he intended to develop and financed the purchase with a commercial loan from The Bank of South Carolina (“BSC”). A licensed lawyer closed that transaction. When the note matured in 2008, Warrington requested and received 3 loan modifications to extend the maturity date, first to March 2009, then to October 2009, and then to March 2010. The interest rate increased over that time period. BSC used standard modification forms that employees completed with loan officers’ input. Those forms were signed at the BSC office and recorded by BSC. No lawyer was involved. The Court noted that the BSC employee “primarily responsible for executing the modification agreement testified he did not give any legal advice to Warrington during this process.” After Warrington defaulted, BSC foreclosed, and like Crawford, he petitioned the S.C. Supreme Court for declaratory relief based on the alleged unauthorized practice of law.
The S.C. Bankers Association, represented by Nelson Mullins, filed an amicus curiae (“friend of the court”) brief in the Warrington case.
The Court’s decision
The Court held “that lenders do not engage in the unauthorized practice of law by preparing and mailing loan modification to borrowers and recording the executed documents without participation of a licensed attorney.” The Court noted that “[a] loan modification is an adjustment to an existing loan to accommodate borrowers who have defaulted.” (Emphasis added.)
The Court recognized that the reasons for requiring lawyers to supervise mortgage loan and mortgage refinance closings did not apply to loan modifications. The Court said in prior cases that its UPL rules were intended to protect consumers. However, lawyers are not required to supervise loan modifications because such involvement would cost consumers more than it would benefit them. Further, the Court pointed to the “robust regulatory regime” and the competence of “non-attorney professionals” as militating against lawyer supervision of loan modifications. The Court’s recognition of the balance between consumer protection and practical considerations is consistent with its approach in other UPL decisions, and in this instance, the balance struck serves both lenders and borrowers by facilitating and reducing the expense of loan modifications.