The South Carolina Supreme Court recently held that extensions of loan modifications without attorney involvement did not constitute the "unauthorized practice of law." In reaching this conclusion, the Court distinguished a loan modification from a refinancing or purchase loan, which the Court determined was the issuance of an entirely new loan and thus required attorney oversight and review.
A copy of the opinion is available at: http://www.judicial.state.sc.us/opinions/HTMLFiles/SC/27273.pdf
In two consolidated cases, borrowers ("Petitioners") had either a residential mortgage loan or a commercial loan, each of which was extended and closed under the supervision of a licensed attorney. After having fallen behind on their respective payments, Petitioners sought loan modifications.
In one case, the borrower eventually obtained two loan modifications, obtaining attorney advice and review on the first modification, but not on the subsequent loan modification. Rather, in the second loan modification, the servicer prepared the loan modification agreement and the borrower simply signed a document, acknowledging receipt of the notice informing the borrower that she could hire an attorney for advice about the loan modification and its consequences, including changes in interest rate, monthly payments, and principal balance.
In the second case, which involved a commercial loan, the borrower received three successive loan modifications, the agreements for which were prepared using standard modification forms containing blanks to fill in with information supplied by loan officers. The borrower received no legal advice during the loan modification process.
The borrowers re-defaulted, and the loan owners filed foreclosure actions against the Petitioners. Petitioners in turn petitioned the South Carolina Supreme Court, seeking a ruling that the loan modification agreements – and thus the mortgages -- were void because the loan owners supposedly had engaged in the unauthorized practice of law in preparing the agreements without attorney supervision or review.
Recognizing that the practice of law includes "the preparation of pleadings, and other papers incident to actions and special proceedings, and the management of such actions and proceedings on behalf of clients before judges and courts," as well as other fields requiring specialized legal knowledge, the South Carolina Supreme Court refused to adopt a hard rule as to what constitutes the practice of law.
Nevertheless, in discussing the four steps involved in a real estate closing (title search; preparation of loan documents; closing; and recording), the Court stressed that such transactions require attorney supervision because they involve the disbursement of funds in connection with the sale of real estate. The Court also noted that attorney supervision is required for the refinancing of mortgages, because such refinancing entails the same four steps involved in purchasing a property.
Emphasizing that its unauthorized practice of law rules are grounded in consumer-protection concerns, the South Carolina Supreme Court distinguished the loan modification situation, which, as the Court explained, adjusts an existing loan to accommodate borrowers who have defaulted, from a refinancing or purchase loan situation where a lender issues an entirely new loan. In so doing, the Court stated that "the same public policy that requires attorney supervision for home purchases and refinancing does not apply to loan modifications."
Citing cost to the consumer, a system of regulatory checks, and "competent non-attorney professionals" as means of guarding against abuses, the South Carolina Supreme Court concluded that attorney supervision was not required in the context of loan modifications.
Accordingly, having ruled that the preparation of loan modification agreements and recording the documents did not constitute the unauthorized practice of law, the Court did not address whether Petitioners' mortgages were void.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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