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                                         101 N.J.L.J. 578
                                        June 8, 1978


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 closings.
    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 mortgage transaction?
    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 involved?
    I) Do the approaches employed by lending institutions, as disclosed by the record in this matter, constitute improper solicitations?
    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 requirements?
    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 attorney.
    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 "improper solicitation."
    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. 563.35(a).
    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 1-102(A)(2).
    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 conduct.

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