Unauthorized Practice Of Law
By Lisa A. Tyler
National Escrow Administrator
This Fraud Insights newsletter focuses on the fraudulent activity plaguing our industry, but sometimes there are other illegal acts our employees are asked to perform, such as the unauthorized practice of law, which can come with a heavy price. The unauthorized practice of law is defined as the act of practicing law or providing legal advice without a license. Almost every state has an unauthorized practice of law statute that makes it illegal for anyone who does not meet the state bar requirements to render legal services. Prohibiting unauthorized practice of law helps protect the public from fraudulent practices by persons not qualified to give legal counsel. An individual accused of engaging in the unauthorized practice of law faces a variety of consequences, ranging from a cease-and-desist letter to criminal prosecution.
Our employees are regularly asked to provide legal advice, legal opinions or even prepare documents not related to the consummation of a real estate transaction. This month's edition provides two very good examples where our employees were asked to cross the line and provide services for which they were not qualified. To see how they handled these situations read the two "Unauthorized Practice Of Law" stories.
Our Company has continued to grow though acquisition. As part of the acquisition process we immediately begin to train and audit the settlement agents in order to drive adoption to our Company policies and procedures. During our audit of a company we recently acquired, we discovered settlement agents using funds from one transaction to fund the expenses of other transactions. As a result, we were forced to shut down the entire operation for misconduct and all of the employees lost their livelihoods. The co-mingling of funds is completely against the premise of a trust account and violates one of the most basic securities a trust account provides. Neither our regulators, nor the Company, take this type of misconduct lightly. Find out more about what happened in the article entitled "The Unsuspecting Customer."
Are you looking for something new to discuss at your next office meeting? Consider sharing stories from this and previous editions of Fraud Insights! The stories in Fraud Insights serve as great conversation starters and ultimately improve our processes and procedures. Don't waste another meeting talking about the market and the economy. Instead, focus on heroes and zeroes by sharing stories from Fraud Insights.
Unauthorized Practice Of Law – Deeds Of Distribution
A Company attorney received a referral from another attorney. The referring attorney was settling an estate for one of her clients who had passed away and the estate owned a piece of property. The attorney wanted to ensure title was transferred properly and the ultimate owner would receive a new title policy. The heirs had all agreed one of the siblings would receive this property as his/her inheritance from the estate, so when it was all said and done, there would be only one person in title. Since our employee was an attorney he gladly accepted in the order, prepared the deeds and required the heir ship affidavits. Then he left the Company.
Korrina Osborn, an escrow officer with Ticor Title in Salem, Ore. inherited an order from her manager who was leaving the Company. Her manager was a Company attorney and had taken an order from another attorney that he was passing on the order for Korrina to close. Before leaving he instructed her to open a file, have the deeds and affidavits signed, prepare a closing statement and issue a title policy. Since this Company attorney was in a management position, the escrow officer did as told.
Korrina contacted all the heirs to coordinate the signing of the documents. Several of the heirs were located in different states. Korrina made signing appointments for each and every one of them in their respective states with our sister companies and, in a couple of instances, took signatures herself. As the transaction approached closing she questioned how, exactly, to file the 1099-S. Was she supposed to report the sale under the estate's U.S. Taxpayer Identification Number, was she to report each individual heir since they were all signing a deed or was she supposed to report the sale under the personal representative's taxpayer identification number? Korrina had excellent questions, but her most brilliant conclusion was that she might be overstepping her bounds as a settlement agent.
Korrina contacted her escrow administrators at email@example.com for guidance and soon discovered this "order" should have never been opened. This was really only the estate's distribution of the assets. The deeds were simply Deeds of Distribution, whereas settling an estate falls under a completely separate category for tax reporting purposes. What Korrina was really facilitating was the execution and recordation of the Deeds of Distribution by the estate – not a sale – which is something an escrow officer is not licensed to do.
Since settlement agents only assist in the consummation of real estate transactions and loans, a "title only" order should have been opened – not an escrow and title order. When a transfer of title occurs the settlement agent has an obligation to file a 1099-S under the Internal Revenue Code. This particular transfer, however, was the settlement of the estate. Korrina contacted the parties and told them she was going to resign as the escrow agent and her closing statements were revoked, which she then followed up in writing. Had she gone through with the closing, she would have had no choice but to file the 1099-S which could have caused a huge tax liability to the heirs.
Moral of the Story: br>
Do not overstep your duties and know your state-specific rules and regulations. In some states settlement employees cannot prepare legal documents in any way, shape or form. In other states they have to be licensed and can only fill in pertinent information on approved documents prepared by an attorney. The unauthorized practice of law is considered a felony in certain areas. Additionally, handling a transaction that is not the consummation of a real estate transaction could cause serious tax liabilities. Korrina recognized this and, as a result, has been rewarded $1,000 for not participating in an illegal activity she was not licensed to handle.
Unauthorized Practice Of Law - Consummation Deed
Our settlement agents regularly receive requests from consumers, customers and sometimes friends and family to assist in preparing documents unrelated to the consummation of a real estate transaction or even an active file. There are even some financial planners who tell their clients to simply contact a title company in order to transfer title into their newly formed family trust. Those types of transfers of title are for estate planning purposes and outside of the scope of transactions settlement agents handle.
Settlement agents often receive requests for transfer of title during, or as a result of, legitimate real estate transactions. For example, a seller fails to properly plan his/her tax liabilities with his/her newly formed LLC. The seller asks his/her settlement agent to quickly prepare and record a deed from him/her – as an individual – to the LLC, before he/she sells a particular piece of property. Unless such a transfer is a sale from the individual to the entity, settlement agents are not licensed to handle such a transfer.
Other times settlement agents receive inquiries from individuals asking them to handle the payoff of a private loan or Contract for Deed. This requires the agent to receipt in, send the funds for payoff and prepare the release of lien or consummation deed. These requests come from borrowers who do not have the loan serviced through a loan servicing company. Sometimes even friends or family members ask settlement agents for their assistance, which is exactly what happened in this story.
A settlement agent we will call Susie knew a married couple we will call Bob and Jane. This was Bob and Jane's second marriage. Years before Bob met Jane, he entered into a Contract for Deed (a.k.a. Land Contract, Contract for Sale, etc.) to purchase a piece of property. One day Bob approached his friend Susie to ask for her advice and assistance because he had paid off the Contract for Deed and wanted to know what to do next. Susie explained he needed to have the seller sign a Consummation Deed and have it recorded to transfer the fee title for the property to him. Bob wanted title to be in his and Jane's name as joint tenants, and Susie offered to help.
Susie drew up the Consummation Deed showing Bob and Jane in title as Joint Tenants and told them to have the seller/vendor execute it in front of a notary and send it back to them. Upon receipt, Bob and Jane were to sign it and have it notarized, then go down to the recorder's office and record it. They did as instructed.
Shortly after the Consummation Deed was recorded, Bob and Jane received notice from the assessor's office there was a break in the chain of title and they were only recognizing Bob as the record title holder based on the recorded Contract for Deed which established Bob's vendee's interest in title. (Remember, Bob didn't even know Jane when he entered into the Contract for Deed.) The Consummation Deed, which is not a taxable event, should have only named Bob as the grantee (rather than Bob and Jane) since Jane was not a principal in the Contract for Deed. Then Bob should have conveyed the interest to him and his wife, which would be a transfer of title for estate planning purposes. Keep in mind the actual sale occurred when the Contract for Deed was entered into. This is the time when the 1099-S must be filed, NOT upon recordation of the Consummation Deed.
Susie offered to help clear title up so her friends would ultimately hold title as joint tenants. Bob and Jane appreciated Susie's offer but were in no big hurry. Guess what happened next? Sadly, Bob became ill and passed away. Title was never cleared up. Now what was Susie to do?
Susie retained an attorney at $250 per hour to review the situation and obtain proper legal advice as to what her potential liability was and what she should do now. Susie's attorney advised her she faced the following risks:
- She would most likely have to pay for probate and a quiet title action to clear the title to the property
- Pay for herself and Jane's attorney fees
- Face charges brought against her for the unauthorized practice of law, which are felony charges in Susie's state
In retrospect, the escrow officer realized she had put all this on the line for people she referred to as friends. Favors for friends or even good customers can backfire. We are not a document preparation company. If the state does allow settlement agents to fill in pertinent information on pre-approved documents, it is only in relation to the consummation of a real estate transaction, not for estate or financial planning purposes. Settlement agents should not lose sight of the limitations of their role and participate in the unauthorized practice of law.
The Unsuspecting Customer
Post-closing refunds on REO transactions have become a real problem for settlement agents, since most REO banks close their loan files and reject refunds after close of escrow. In an audit of a recently acquired company, the settlement agents found new and creative ways of disbursing funds to the detriment of the unsuspecting customer.
Part of the escrow audit process of a newly acquired company requires the review of undisbursed funds left in each file along with all outstanding checks. The process usually starts by matching the settlement statement from each file with the files status ledger or final disbursement register.
In this particular audit our team found three different instances in which a settlement agent had issued a check and even amended the settlement statement to reflect the post-closing disbursement, yet the check's payee was not a party to the transaction! It appeared, in all instances, this practice was being proliferated in order to avoid filing an escrow loss.
First Scenario: br>
A check is issued at closing to pay property taxes. The check is returned because the taxes have already been paid. The settlement agent voids the check, making the funds available for disbursement again. A new check for a portion of the money is generated to a homeowners association for delinquent assessments. However, the homeowners association is not a part of the current transaction.
A copy of the paid check to the homeowners association discloses it was for payment on another property. The invoice for the assessment is in the current file but constitutes a billing for an entirely different property and entirely different buyer and seller. The parties to the initial escrow are not expecting a refund, so their money is diverted to pay shortages in other escrows.
Second Scenario: br>
A check is received for overpayment on a title invoice to an outside title company. The funds are receipted into the file and a check is issued to Chase Home Loans. A copy of the paid check to Chase reveals the funds were to be credited to another escrow number. The impound set-up charges for the new Chase loan were not deducted at closing and the borrower demanded we correct the error. Again, these were two entirely unrelated transactions.
Third Scenario: br>
A refund is receipted in for a duplicate appraisal fee of $150.00. A check is then issued to a third party notary for $150.00. A review of the file shows the notaries who performed the signings in the transaction had been paid. The check to the third notary referenced another escrow for entirely different parties.
The common theme in these scenarios is the "unsuspecting customer." The principal, our customer, never expected a return of the funds; as a result, this enabled the settlement to easily transfer the funds to another file to cover a shortage.
As a result of our audit findings, the disbursements had to be reversed from the unrelated transactions; proper escrow losses were filed and the principals were made whole. The tragic ending is that we ultimately had to shut down the operation and terminate the staff who perpetuated bad practices.