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123 N.J.L.J. 1368 ADVISORY COMMITTEE ON PROFESSIONAL ETHICS
June 1, 1989
Appointed by the Supreme Court of New Jersey
SUPPLEMENT TO OPINION 608
Attorney for Mortgage Lender
Performing Services for Borrower
Our Committee received the following inquiry:
A situation has recently arisen in which we
foresee the possibility of an ethics question
It is clear according to ethics Opinion No.
243, that an attorney may represent a lender
and a borrower upon certain conditions:
l) Upon full disclosure that the
attorney is representing the
lender and borrower;
2) Informed consent of borrower;
3) The borrower must be made aware
that the borrower has the right
to seek independent counsel.
According to the "closed shop" statute,
N.J.S.A. 46:lOA-6, it is also clear that the
lending financial institutions may not require
the borrower to use the lender's counsel.
The specific issue I would like to address,
includes the following scenario. As the
lender's attorney, we will perform the title
search, provide for insuring title, etc., and
we will bill the lender. The lender, in turn,
will then bill the borrower for that work. The
lender will also advise the borrower that we
will close the mortgage for the lender at our
office and borrower may get their own counsel
to represent them if they so choose. Is this
procedure in violation of ethics rules? I
hereby certify that a response to this inquiry
will not affect the interests of any parties,
since no pending litigation exists.
After due consideration, Opinion 608 was issued and published
December 10, 1987 in 120 N.J.L.J. 1112 as follows:
Attorney for Mortgage Lender Performing
Services for Borrower
The inquirer, as attorney for a lending
institution representing it in a mortgage loan
transaction, proposes to perform the title
search, provide for insuring the title and
presumably prepare the note, mortgage, and
other closing papers. The attorney will bill
the lender for such services. The lender, in
turn, will bill the borrower for the work and
advise the borrower that the attorney will
close the mortgage loan at the attorney's
offices and that the borrower may secure his
own attorney to represent him if he chooses.
The inquirer asks whether this procedure is in
violation of the Rules of Professional
Our answer is a clear "yes." We regard
the proposed plan as a scheme to avoid the
provisions of N.J.S.A. 46:10A-6, which
prohibits a lending institution from requiring
a borrower of a loan to be secured by a
mortgage to employ the services of the
lender's counsel or an attorney specified by
the lender. The statute provides that:
No banking institution or other financial
institution authorized to engage in the
business of making loans secured by
mortgage, hereinafter referred to as a
"lender," shall require a borrower of a
loan to be secured by a mortgage on real
estate, to employ the services of the
lender's counsel or an attorney specified
by the lender, but the borrower shall
have the right to be represented in the
transaction by an attorney at law of New
Jersey of his own selection.
We refer the inquirer to Opinion 398, 101
N.J.L.J. 578 (1978), in which we said that we
regard any advice which is employed to defeat
the purposes of the statute as unethical and
lawyers should, therefore, not participate in
The reference in the Opinion to N.J.S.A. 46:10A-6 was
incomplete and, for the convenience of the Bar, is hereinafter set
forth in full.
46:10A-6 Mortgages: employment of counsel by
borrower; payment of review fee for lender's
No banking institution or other financial
institution authorized to engage in the
business of making loans secured by mortgage,
hereinafter referred to as a "lender," shall
an individual a borrower of a loan to
be secured by a mortgage on a one, two, three
or four family residence resided in or to be
resided in by the borrower mortgagor or a
member of his immediate family real estate, to
employ the services of the lender's counsel or
an attorney specified by the lender but the
borrower shall have the right to be
represented in the transaction by an attorney
at law of New Jersey of his own selection. The
provisions of this act shall not preclude a
lender from requiring that documents prepared
in connection with a mortgage loan transaction
prepared by a borrower's attorney to be
submitted to the lender's attorney for
examination and review and to require the
borrower to pay a reasonable fee as defined by
the Disciplinary Rules of the Code of
Professional Responsibility adopted by the New
Jersey Supreme Court for such service by the
lender's attorney, provided, however, that the
lender shall provide the borrower, at the time
a loan commitment is made, a written statement
covering the basis of this review fee.
The provisions of this act shall not be
applicable to a mortgage loan made for
L. 1975, c. 145, 1. Amended by L.1978, c. 65,
§2, eff. July 3, 1978.
Immediately following the publication of this Opinion, the
Committee received numerous requests for reconsideration. As a
result of these requests, we caused the following Notice to be
published for several weeks in the New Jersey Law Journal:
RECONSIDERATION OF OPINION 608
The Advisory Committee on Professional Ethics has
received requests from attorneys to reconsider Opinion
608, 120 N.J.L.J. 1112 (December 10, 1987). That Opinion
held, inter alia, that it is improper for an attorney
representing a lending institution to prepare papers
incident to a mortgage loan transaction and bill the
lender for such services, where the lender will pass the
costs on to the borrower for the work.
In light of various concerns raised by these
requests, the Committee has decided to formally
reconsider the Opinion. During this period of
reconsideration, Opinion 608 will be held in abeyance so
that attorneys who might otherwise be adversely affected
by the Opinion need not alter their existing practices or
The following excerpts from the correspondence which has been
delivered to us are illustrative of the comments and concerns which
interested parties have voiced with respect to the opinion:
1. To which entities does the opinion apply?
2. There is no statutory definition of "financial
3. Does the Opinion apply to "non-New Jersey entities?"
4. Does the Opinion cover transactions between non-New
Jersey entities, those outside of New Jersey in which the
collateral is New Jersey real estate?
5. The Opinion fails to discuss the second sentence of
the statute which permits the reimbursement of a "reasonable fee"
for lender's counsel's "examination and review of the documents."
6. Our principal concern is that strict adherence to the
letter of the opinion would force mortgage lenders to alter the way
in which they traditionally have done business, and consequently
result in gross and possibly irrevocable disruption of a
long-standing relationship with a substantial number of our
7. Opinion 608 creates an ambiguity with respect to the
proper procedure for closing loans secured by mortgages, as well as
the ethical and statutory responsibilities of attorneys
participating in such transactions.
8. There is an ambiguity in the third sentence of the
Opinion. It does not clearly identify whether the "advice" from the
"lender" to the effect "that the attorney will close the loan at
the attorney's office" means that the attorney will be representing
the borrower when he or she "will close the loan."
9. We do not know whether the hypothetical presented to
the Committee presumed that the attorney would be closing the loan
as counsel for the borrower or the lender.
10. The statute merely prohibits a lender from requiring
a borrower to employ the lender's attorney in the transaction.
Nothing in the statute prohibits an agreement by the parties that
the expense incurred by the lender in employing its own attorney
(whether or not that attorney prepares any of the closing
documentation) be assumed by the borrower as a condition of the
ll. Opinion 608 should be revised so that it cannot read to
apply to all loans in general, but only those loans referred to by
Opinion 398 where dual representation is a possibility.
12. We believe that the apparent conclusion that the legal
services referred to in Opinion 608, though normally performed by
the lender, are in substance performed by an attorney for the
borrower, is a wholly unwarranted and improper conclusion. The
services are performed by the lender's attorney for the lender, and
the reasonable cost is passed on to the borrower pursuant to the
long established and ethical practice. Any abuses of lender's
practice are prevented by the conditions of the ethics opinions
permitting the lender to pass on its charges to the borrower and by
the limitation that only those services which truly are for the
benefit of the lender may be passed on.
13. If the legislature meant to prohibit a lender from passing
on its legal costs to a borrower they could have said so directly.
14. In my experience, it is common practice for commercial
banks to require commercial loan borrowers to pay the legal charges
incurred by the bank with its counsel involved in the transaction.
The vast majority of commercial borrowers are sophisticated and
knowledgeable about the mechanics of borrowing money for business
or investment purposes. They are not the typical consumer requiring
15. The first universal complaint is that the opinion is too
16. The Opinion impairs normal working practice of banks to
charge their costs, including reasonable attorney's fees, to a
borrower, whether a commercial, consumer or residential borrower.
17. It is my opinion that the statute N.J.S.A. 46:10A-6 does
not prohibit a lender from having its attorney prepare documents in
connection with a loan and charging a reasonable fee therefor. What
is precluded, in my opinion, is a requirement whereby a lender
appoints or designates a lawyer to exclusively handle a loan
transaction, or that the loan documentation must be prepared solely
by lender's counsel.
18. In my experience, a great many transactions in which real
estate is the primary security, are too complicated for the use of
printed forms. As a result, it is more efficient as to both cost
and timing for both the borrower and the bank to have the loan
documents prepared by the bank's attorney and reviewed by the
19. While there is no doubt that the "Closed Shop Act" is
applicable to real estate secured by a commercial loan, the
language of the "Closed Shop Act" is not so specific as to mandate
that a lender may not require its borrower to pay the fees and
expenses of lender's counsel.
20. If the Advisory Committee believes that there are abuses
of the "Closed Shop Act" in connection with commercial mortgage
transactions, the Advisory Committee has not articulated the areas
21. Lenders cannot be expected to assume additional expenses
without somehow charging the customer. Total borrowing costs must
reflect all the lender's expenses of doing business.
22. I do not believe that either the Statutes or Advisory
Opinion 608 intended to prohibit a lender from passing on its legal
review fee to a borrower. There may be a difference of opinion on
this issue that requires some clarification on the part of the
Advisory Committee, and perhaps the legislature.
23. Request that Opinion 608 be clarified so that a logical
distinction may be drawn concerning participation by lender's
counsel in construction and commercial loan transactions (without
regard to the nature of security given for the loan) and
participation by lender's counsel in routine consumer loan
24. I fail to understand why, under the terms of Opinion 608,
when a commercial loan is to be secured by a lien on real property,
an ethical question may arise whereas the advisory opinion does not
indicate any ethical question when a commercial loan is not secured
by a mortgage.
25. In a business loan transaction in which the loan security
includes a mortgage or real estate, is it permissible for a lender
to require a borrower to pay the lender's closing expenses,
including legal fees and disbursements incurred by the lender in
connection with the loan transaction when such fees are for
services rendered solely to the lender and the lender's counsel
neither represents nor performs any legal services for the
26. It is the lender's practice to require reimbursement of
counsel fees whether or not the loan is secured by a mortgage or
real estate. Yet N.J.S.A. 46:10A-6 applies only to loans which are
secured by a mortgage or real estate. Therefore, a lender is not
prohibited from requiring reimbursement for counsel fees and
disbursements in connection with an unsecured loan or a loan
secured by non-realty assets. This result does not make sense.
27. A law firm representing a financial institution is
regularly called upon to protect the institution's interest in
commercial loan transactions. In certain instances due to the
amount or complexity of the loan, the bank in its commitment
letter, requires that its law firm prepare the documents. The law
firm prepares the mortgage, affidavit of title, general security
agreement, financing statement, guaranty, assignment of rents, etc.
and bills the borrower for those services, but the loan proceeds
check is issued to the borrower's attorney who conducts the
settlement at his office and this raises the question as to whether
this procedure is violative of N.J.S.A. 46:10A-6.
28. An attorney represents a licensed mortgage lender which
loans money secured by first mortgage. He prepares all the
documents for the lending company. He suggests that borrowers
secure the services of an attorney to represent them but does not
insist they do so. He handles the loan closing at his office and
charges the borrower for his services. He has never considered this
practice to be violative of the Rules of Professional Conduct but
Opinion 608 has raised a question in his mind in this regard.
29. The statute, which many of us refer to as the "Closed Shop
Statute" was amended in 1978 to remove the exceptions for mortgage
loans made for commercial purposes. After reading Opinion 608, it
occurs to us that the standard practice of many lending
institutions and their counsel throughout the state is called into
30. The statute, by eliminating the previous exception for
commercial transactions, would seem to require that the borrower's
attorney prepare the mortgage documents for review by lender's
counsel. In many complicated loan transactions such as revolving
construction loans, this would not be practical nor preferable to
the lender. These loans often require the lender's counsel to
modify the basic form that may be used by the bank to cover the
particular aspects of this transaction. Is it ethical for a
lender's attorney in a complicated loan transaction involving a
mortgage to prepare the mortgage documents and where the borrower
has been advised in the commitment letter of its obligation to pay
the lender's attorney fees to issue a bill directly to the
31. I think we need to take action to assure that:
(a) Reasonable charges for the bank's
mortgage review attorney can be
charged to borrowers.
(b) Commercial mortgage loan
documentation by the bank's counsel
can be charged to borrowers.
32. A number of years ago the Banking Law Section of the New
Jersey State Bar Association considered the applicability of
N.J.S.A. 46:10A-6 to commercial lending transactions. That section
as well as an opinion of the Advisory Committee on Professional
Ethics determined that a bank must allow borrower's counsel to
prepare loan documentation where a loan is to be secured by a
mortgage on real estate. Although our section took no action at
that time, we did agree informally that we believed the section
(statute) as well as the Advisory Opinion, applied only to
residential mortgage transactions and certainly not to commercial
transactions which happen to be secured by real estate .... It is
critical for us as a section to take a position with respect to
this issue, either by requesting the Advisory Committee to limit
the opinion to residential transactions or by seeking an amendment
to the legislation itself.
33. As you know, many Jersey lending institutions are now
following the "New York" practice of having review attorneys review
the documents and, in many cases, close the loan at such attorney's
office. The attorney charges the borrower for the fees for such
attorney representing the lender. It would seem that this practice
may be in conflict with the aforementioned Opinion (608).
As set forth in R. 1:19-2, the jurisdiction of our Committee
extends to inquiries "... concerning proper conduct for a member of
the legal profession under the Rules of Professional Conduct ...."
Matters relating to the interpretation of N.J.S.A. 46:10A-6, such
as the definition of the term "financial institutions" or the
application of the statute to non-New Jersey entities lie solely
within the jurisdiction of our courts.
Our responsibility in this matter is to advise members of our
bar as to their proper conduct in compliance with the provisions of
This statute, which was first adopted by the Legislature on
July 7, 1975 as Chapter 145 of the Laws of 1975 and which is
commonly referred to as the "Closed Shop Statute", was entitled "An
Act with respect to the rights of a borrower to select his own
attorney in certain mortgage loan transactions."
As set forth in the statute, it related to "an individual
borrower" - "a one, two, three or four family residence resided in
or to be resided in by the borrower mortgagor or a member of his
immediate family" and "the Provisions of this act were not to be
applicable to a mortgage loan for commercial purposes."
The New Jersey State Bar Association presented this Committee
with a series of questions relating to the 1975 "Closed Shop
Statute" and other issues. On June 8, 1978, we issued our Opinion
398, lot N.J.L.J. 578 (1978) in response to these questions.
However, on July 3, 1978, the Legislature amended the "Closed
Shop Statute" when it adopted Chapter 68 of the Laws of 1978 - the
present N.J.S.A. 46:10A-6. By this amendment, the Legislature
deleted the references in the initial statute to:
(a) "an individual borrower" and extended the
act to "a borrower"-presumably every borrower;
(b) "a one, two, three or four family
residence resided in or to resided in by the
borrower mortgagor or a member of his
immediate family" and substituted therefor the
words "real estate"-presumably all real
estate; and most significantly
(c) the sentence indicating "The provisions of
this Act shall not be applicable to a mortgage
loan made for commercial purposes."
The Legislature also amended the last sentence of the original
act by requiring that the reasonable fee for examination and review
of documentation prepared by borrower's attorney be "as defined by
the Disciplinary Rules of the Code of Professional Responsibility
adopted by the New Jersey Supreme Court."
The legislative history with respect to the 1978 amendment is
sparse. It appears that Senate Bill No. 35 was profiled by Senators
Russo, Greenberg, Bedell and Merlino for introduction in the 1978
session of the Legislature. Assembly Bill No. 104 dealing with the
same subject was also profiled by Assemblymen Flynn and Kozloski.
The statement annexed to Assembly Bill No. 104 is as follows:
This bill amends a law passed in 1975 which is
designed to permit a borrower in a home mortgage loan
transaction to be represented by an attorney of his own
choice. Prior thereto it was common practice for banks to
insist that a borrower utilize and pay for the services
of the bank's attorney.
Since the enactment of the 1975 law, however, it has
become common for banks and their attorneys to circumvent
the intent of the law by requiring borrowers to pay a
fee, sometimes exorbitant, for the bank's attorney to
review papers prepared by the borrower's attorney. The
law requires that a borrower must submit such documents
for review by the bank's attorney, if the bank desires.
A lender should have the right to engage an attorney
of its choosing and to have him review documents prepared
by the borrower's attorney. This right, however, should
be contingent upon the lender, not the borrower, paying
for such legal advice.
This bill clearly states that a borrower has no
obligation to pay for such services.
There are two statements with respect to Senate Bill No. 35 -
the first dated January l9, 1978 and the second dated March 2,
1978. They are as follows:
STATEMENT TO SENATE, NO. 35
DATED: JANUARY l9, 1978
Pursuant to legislation enacted in 1975 (N.J.S.A.
46:10A-6), an individual borrowing a loan which is
secured by a mortgage on a one to four-family residence
may not be required by the lender to use the lender's
attorney. The law is specifically inapplicable, however,
to mortgage loans made for commercial purposes.
This bill would extend the concept of the 1975 act
to cover any borrower whose loan is secured by any real
estate, not just one to four-family dwellings. It also
specifically makes the act applicable to commercial loans
secured by such property.
STATEMENT TO SENATE, NO. 35
DATED: MARCH 2, 1978
This legislation requires that lenders may not
require a borrower in a real estate transaction to employ
the services of the lender's attorney, but may retain
their own attorney. The lender may charge a reasonable
fee for the services of its attorney. The Committee has
amended the legislation to make its provisions correspond
to the provisions of Assembly Bill No. 104, which limits
the review fee which may be charged in a transaction
involving a one to six-family dwelling to $100.00.
The official reprint copy of Senate No. 35 was the statute as
It appears abundantly clear that N.J.S.A. 46:10A-6 applies to
all transactions on which a loan by a bank or financial institution
is secured by a mortgage on New Jersey real estate and this
includes commercial transactions. The legislation specifically
states that lenders may not require a borrower to employ the
services of lender's attorney. The lender may require that
documents prepared by the borrower's attorney be submitted to the
lender's attorney for examination and require the borrower to pay
the lender's attorney a reasonable fee for such services.
As set forth in Opinion 608 as originally published, the
procedure proposed in the initial inquiry is in violation of the
Rules of Professional Conduct.
The comments and questions listed in numbered paragraphs l
through 33 above make it abundantly clear that lending institutions
and counsel who represent them regard the amended "Closed Shop
Statute" as disruptive of their established lending procedures in
commercial transactions. The position of our Committee is that any
dissatisfaction with the statute will have to be resolved by resort
to the Legislature and any questions regarding its interpretation
by resort to our Supreme Court.
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