Link to original WordPerfect Document
101 N.J.L.J. 578
June 8, 1978
ADVISORY COMMITTEE ON PROFESSIONAL ETHICS
Appointed by the New Jersey Supreme Court
In the Matter of the Application of the New
Jersey State Bar Association for Advice
Concerning Ethical Practices in Mortgage Transactions
In July 1976 the New Jersey State Bar Association, through
articles which were published both in the New Jersey Law Journal
and the Advocate, the Bar Association's monthly newspaper,
solicited comments from members of the Bar relating to conflict of
interest situations and other problems related to real estate
On May 16, 1977 the New Jersey State Bar Association filed
with the New Jersey Supreme Court a petition and brief - In the
Matter of the Application of the New Jersey State Bar Association
for Instructions as to Identical Practices of Lawyers in
Lender-Borrower Transactions Involving the "Closed Shop" Statute
and Otherwise - Docket No. M-891 September Term 1976. The Supreme
Court by order dated June 6, 1977 dismissed the petition without
prejudice and advised the New Jersey State Bar Association that it
could "restate all of the issues projected and discussed in its
petition, brief and appendix in the form of questions addressed to"
this Committee with a request for an opinion in respect thereto and
further, that upon receipt of an opinion it could file with the
Court a petition for review, pursuant to R. 1:19.
Thereafter the Bar Association submitted to this Committee a
petition requesting advice with respect to the questions
Thereinafter set forth supported by the same brief and exhibits
which had been filed with the Supreme Court. The questions as to
which advice is sought follow:
A) May an attorney represent both lender and borrower in a
B) May an attorney participate in a plan under which a lender
affords preferential treatment to a select group of attorneys?
C) How is the "closed shop" statute to be interpreted? What is
its effect upon attorneys involved in mortgage transactions?
D) What is "full disclosure" under DR 5-105(C)?
E) Is an attorney, who regularly represents a lending
institution, barred from representing a borrower from that
institution because he lacks impartiality?
F) Is an attorney, who is a director or an officer of a
lending institution, barred from representing a borrower from that
institution because he lacks impartiality?
G) May a lending institution refer borrowers to a particular
attorney on a systematic basis?
H) Do the letters employed by lending institutions under the
closed shop statute constitute improper publicity for the attorneys
I) Do the approaches employed by lending institutions, as
disclosed by the record in this matter, constitute improper
J) Are the review fees reflected in this record reasonable?
K) What courtesies does one attorney owe to another in
connection with loan transactions which amount to ethical
L) Is there any difference insofar as the Disciplinary Rules
are concerned, between one, two, three and four family residence
transactions and other mortgage transactions?
M) In closed shop situations is it ever proper for the
lender's attorney to communicate directly with a borrower who is
represented by other counsel?
N) Do attorneys representing federal institutions operating
under federal statutes have any different ethical obligations from
those imposed upon attorneys dealing with, or representing, state
institutions in connection with lending practices?
By notice published in the September 8, 1977 issue of the New
Jersey Law Journal, the Bar was advised of the pendency of this
inquiry and suggestions, comments and views of the Bar were
solicited. Many letters have been received from attorneys, whose
concerns were within the areas referred to above.
The primary areas of concern appear to be:
1) The issue of whether an attorney may represent both the
lender and the borrower in a mortgage transaction.
2) The practice which prevails in this State where some
lending institutions, as a part of their mortgage commitment
procedure, notify the prospective borrower of the name and address
of the attorney who will represent the lending institution and of
the borrower's right to secure independent counsel but impose more
stringent or costly loan commitment conditions, such as the
requirement that a title insurance policy be furnished if the
lender's attorney does not handle the transaction.
3) The reasonableness of the review fees charged by the
institution's designated attorneys when independent counsel is
employed by the borrower.
4) The situation where the lender's employees verbally advise
prospective mortgagors of the lender's preference that its attorney
handle the complete mortgage transaction and if the mortgagor
employed independent counsel, there would be a review fee to be
paid to the bank's attorney which could otherwise be avoided.
5) Whether the same standards apply to attorneys who represent
institutions chartered and regulated by the federal government. In
our consideration of the problems, we do not find it necessary to
provide a specific response to each of the questions presented by
the New Jersey State Bar Association. Some of the questions have
been considered heretofore. For instance, the Association's
questions E and F have been dealt with in our Opinion 229, 9
N.J.L.J. 81 (1972), which we reaffirm. Therefore, we propose to
treat with the issues presented as we have analyzed them. Our
Legislature has passed the "closed shop" law, P.L. 1975 c145,
N.J.S.A. 46:10A-3 et seq. That statute prohibits a lender, in the
case where a loan is to be secured by a mortgage on a one to four
family residence, from requiring that the individual borrower shall
employ the services of the lender's attorney and gives the borrower
the right to be represented by an attorney of his own selection.
The provisions of the statute do not preclude a lender from
requiring that documents prepared in connection with a mortgage
loan transaction by a borrower's attorney be submitted to the
lender's attorney for examination and review, or from requiring the
borrower to pay a reasonable fee for such service by the lender's
The mortgage loan transaction situation has been further
complicated by the passage by Congress of the Real Estate
Settlement Procedures Act of 1974. P.L. 93-533 (RESPA) and the
amendments of 1975 P.L. 94-205; 12 U.S.C.A. 2601 et seq., which
imposes certain restrictions and procedures with respect to
"federally related mortgage loans" on residential real property.
The regulations issued by the Department of Housing and Urban
Development under RESPA appear in the Federal Register, Vol. 41,
No. 109, June 4, 1976.
A lender within the coverage of RESPA is an institution the
deposits of which are insured by the Federal Savings and Loan
Corporation (FSLC), the Federal Deposit Insurance Corporation
(FDIC), or any other agency of the Federal government, or which is
regulated by the Federal Home Loan Bank Board, or any other agency
of the Federal Government. It appears to this Committee that a vast
majority of the residential mortgage loans now made in this State
are controlled by the provisions of RESPA.
The concern of Congress expressed in RESPA was to insure that
consumers were provided with timely information on the nature and
costs of the real estate settlement process and were protected from
unnecessarily high settlement charges. RESPA requires that when a
borrower makes an application for a mortgage loan, the lender must
give him an information booklet entitled "Settlement Cost." This
booklet has been prepared by the Office of Consumer Affairs
Regulartory Functions, U.S. Department of Housing and Urban
Development (HUD). The lender must also provide a good faith
estimate of the closing costs.
HUD Regulations (Title 24, Chapter XX, Para. 3500, 3500.7 (c))
provide that where the lender requires that a particular attorney
be used to provide legal services and requires that the borrower
pay all or a portion of the cost of such services, regardless of
the interest to be represented by the provider (attorney), the
lender is required to include in the good faith estimate a
statement which clearly designates the corresponding estimated
charges, states the name and address of the provider (attorney)
designated by the lender, the services which will be rendered by
the provider (attorney), the fact that the lender's estimate is
based upon the charges of the designated provider (attorney) and a
statement whether or not the provider (attorney) has a business
relationship with the lender.
The booklet "Settlement Costs," at page 7, contains sections
entitled "Selecting An Attorney" and "Selecting a Lender."
Significantly, at page 12, the booklet audiences "Where legal
services are involved, it is wise to employ your own attorney to
insure that your interests are properly protected. It is wise for
you to contact other firms to determine whether their costs are
competitive and their services are comparable."
1) Dual Representation
We have heretofore considered the propriety of an attorney
representing both the lender and the borrower in a mortgage
transaction. Opinion 243, 95 N.J.L.J. 1145 (1972). While the
"Closed Shop" statute now prohibits a lender from requiring that an
individual borrower employ the services of the lender's attorney,
we do not discern any statutory, regulatory or ethical prohibition
which prevents an attorney, with full disclosure to and with the
informed consent of the borrower, from representing both lender and
borrower in a mortgage transaction, should the borrower so elect.
Every member of the Bar should carefully consider the
pronouncements of our Supreme Court in In the Matter of Edward J.
Dolan, Attorney-At-Law, 76 N.J. 1 (1978), with respect to that
representation, conflict of interest, full disclosure and informed
consent as they relate to situations here under consideration. We
confirm our Opinion 243, subject to the requirement of strict
compliance with the Dolan Case.
2) Commitment Letter Practices
The statutes above referred to are directed to lenders and
impose certain obligations on them, whether they be state or
federally chartered institutions. We can find no fault with a
commitment letter issued by a lending institution advising the
borrower of his right to secure services of independent counsel.
RESPA requires the lender to notify the borrower of the name and
address of the attorney who will represent the lender in the
settlement, and what the fee for services will be. In this regard
we see no problem with respect to so called "improper publicity" or
However, there is an obligation on the members of the Bar to
observe both the letter and the spirit of the law and not to
participate in any conduct which will subvert them. We allude to
what appears to be the practice of certain lending institutions to
discourage independent legal representation by advising the
borrower in the commitment letter that if the institution's
attorneys are used, title insurance will not be required while the
contrary will be the case if independent counsel are employed or by
imposing other requirements designed to make settlement through
independent counsel more difficult or tedious, or by failing to
recognize independent counsel in the transaction.
We recognize that there are differences in the experience and
expertise of attorneys who specialize in real estate and those who
do not. The same situation exists among attorneys who profess to
specialize in the real estate area. We do not intend to interfere
in any way with the selection of attorneys by any lending
institution. However, we regard as unethical from the standpoint of
the protection of the borrower, any attorney's participation in a
plan which deprives the borrower of uniformity of treatment in the
handling of a mortgage transaction. If title insurance is to be
required when independent counsel handle the settlement, the
borrower should not be deprived of the benefit of this protection
as an inducement, through lower settlement costs, to have him use
the attorney representing the institution. Indeed the obligation to
make full disclosure would impose on the attorney for the
institution, whether it be state or federal, the obligation to
advise the borrower of the problems which might arise if his title
were not insured. Our concern is not related to preferential
treatment among attorneys, but rather to the protection of the
borrower. We regard any device which is employed to defeat the
purposes of the "Closed Shop" statute as unethical, and lawyers
should therefore not participate in it.
3) Reasonableness of Review Fees
Our Supreme Court has said: "While the Disciplinary Rules
enjoin that a lawyer's fee should be 'reasonable' and not
'excessive', DR 2-106(A), discipline is called for only if the fee
charge is 'so excessive as to evidence an intent to overreach
[the] client....'" In re Loring, 62 N.J. 336, 340 (1973).
Regulations issued by the Federal Home Loan Bank Board provide
that an insured institution may require a borrower to reimburse it
for legal services rendered by its attorney, or directly to pay
such attorney for such services only if (1) such attorney's fee is
limited to legal services attributable to processing and closing
such loan (as distinguished from unrelated services performed by
the attorney for the institution), (2) if such attorney's fee is in
excess of $100, it must be supplemented by a statement provided to
the borrower at or prior to the settlement which describes the
legal services being performed, set forth the time being spent and
the hourly rate or other basis for determining the fee, state that
the services are being performed for the institution and that they
are being paid for by the borrower, (3) such attorney's fee does
not exceed that which is reasonable and commensurate with the legal
services being performed and (4) such attorney's fee is separately
itemized and identified on the settlement statement. 12 C.F.R.
It would appear from the foregoing that the Federal Home Loan
Bank Board has impliedly approved charging borrowers with
attorney's fees for legal services rendered to the lender in the
processing and closing of mortgage loans up to $100, that if the
fee exceeds $100, certain additional itemization is required
Once a fee amount is so designated, it quickly tends to become
the minimum fee. Thus the Government has established a standard,
which if approved by this Committee, might be challenged as being
in contravention of the decision of the United States Supreme Court
in Goldfarb v. Virginia State Bar, 421 U.S. 773, 95 Supreme Court
Reporter, Ct. 2004, 44 L. Ed. 2d. 572 (1977).
This Committee does not intend to indicate what amount it
deems to be a reasonable fee to be charged to a borrower for
services rendered on behalf of a lending institution for work
related to the closing of a residential mortgage loan. Charges made
by different attorneys for the same services may extend over a
fairly wide spectrum depending upon such variables as office rent,
secretarial salaries, library expenses and, not the least, the
knowledge and expertise of the attorney involved. The borrower is
notified in advance of settlement what his settlement charges will
be. If he takes exception to the fee to be charged by the lender's
attorney, he need not accept the mortgage commitment. Were we to
suggest that such a fee be $50, $100, or $150, or any other sum, it
would be challenged as being in contravention of the Goldfarb
decision for recommendation of professional employment.
4) Advising as to Lender's Attorney Preference
Obviously, this Committee cannot control the actions of
employees of lending institutions who advise prospective mortgagors
of the lender's preference that its attorney handle the complete
mortgage transaction to the exclusion of independent counsel.
However, an attorney who participates in such an arrangement or
knowingly permits an employee of the lender to pursue such conduct
would be in clear violation of DR 2-103(C) as well as DR
5) Application of Standards to Attorneys Representing
Federally Charted or Regulated Institutions
This Committee has been advised that some federal savings and
loan associations have taken the position that the "Closed Shop"
statute does not apply to them and that they continue to insist
that their attorneys represent their borrowers in connection with
mortgage transactions and refuse to recognize attorneys
independently employed by the borrowers.
The legislators, in their wisdom, have seen fit to impose
certain statutory and regulatory requirements on financial
institutions engaged in the business of making loans secured by
mortgages on one to four family residences. Alleged notations of
statutes and in particular the "Closed-Shop" statute are not within
the jurisdiction of this Committee but rather are for the courts to
handle through appropriate legal proceedings.
Our Legislature has determined that where a loan is to be
secured by a mortgage on a one to four family residence to be
resided in by the individual borrower or a member of his family,
the borrower shall have the right to be represented in the mortgage
transaction by an attorney-at-law of New Jersey of his own
selection. While this Committee has no jurisdiction over a lending
institution which may choose to disregard the provisions of the
law, it is our opinion that any attorney who aids or participates
in a course of conduct which is designed to subvert the provisions
of the "Closed Shop" statute to the end that borrowers are deprived
of their right to independent counsel in residential mortgage
transactions of the type above referred to is guilty of unethical
* * *
This archive is a service of
Rutgers University School of Law - Camden