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                                         123 N.J.L.J. 1368
                                        June 1, 1989

ADVISORY COMMITTEE ON PROFESSIONAL ETHICS

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:

        Gentlemen:

        A situation has recently arisen in which we foresee the possibility of an ethics question being involved.

        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:
         Opinion 608
        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 Conduct.

            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 it.

    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 counsel.

        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 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 commercial purposes.

        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 relationships.

    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 institutions."
        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 clients.
        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 closing.
    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 borrower protection.
    15. The first universal complaint is that the opinion is too far reaching.
    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 borrower's attorney.
    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 of abuse.
    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 transactions.
    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 borrower?
    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 question.
    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 borrower?
    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).
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    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 the statute.
    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:
STATEMENT

        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 finally adopted.
    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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