Title and Settlement Procedures in Connecticut
Disclaimer
This memorandum is not intended as legal advice. The intention is to provide general information regarding the status of Connecticut law as it relates to title and settlement practices.
FOR LEGAL ADVICE YOU SHOULD CONTACT AN ATTORNEY LICENSED TO PRACTICE IN THE STATE OF CONNECTICUT.
Table of Contents
Executive Summary .……………………………………………………………….…… 3
Disclaimer .……………………………………………………………………………….2
Introduction .……………………………………………………………………….……. 6
I. Who may be a title agent in Connecticut? .……………………………………….….. 6
II. Can a non-lawyer perform a loan signing? .………………………………………......6
III. Can a non-lawyer prepare legal documents?.………………….…………………...10
IV. Can a non-lawyer act as settlement agent? ..………………………………………..11
V. Can a non-lawyer disburse loan proceeds? …..……………………………………...14
VI. Can an attorney work with a vendor management company? ..…………………….16
VII. What should a lender do? ………………………………………………………….18
VIII. Whom to call? …………………………………………………………………….18
Executive Summary
Who may be a title agent in Connecticut?
Only an attorney admitted to practice in the State of Connecticut or an individual who held a valid title insurance license prior to June 12, 1984 may be a title agent, and Connecticut law does not sanction title agencies. The practice by which a Connecticut attorney is hired on to the staff of a title agency and signs the policy on behalf of the agency, where the agency solicits title business, determines the insurability of risks and collects and retains any portion of the title premium is a violation of Connecticut law. Furthermore, the practice by which a Connecticut attorney signs the title policies of an agency for a flat fee is also a violation of Connecticut law and RESPA.
Can a non-lawyer conduct a loan signing?
A non-lawyer may conduct a loan signing provided he does not purport to represent any party to the transaction, does not provide any evaluation or interpretation of the documents or the procedures and provided he does not prepare any documents for the signing.
Can a non-lawyer prepare legal documents?
Only a Connecticut attorney or a party to the transaction may prepare legal documents such as deeds, mortgages, notes, easements, satisfactions and powers of attorney.
Can a non-lawyer be a settlement agent?
A non-lawyer may be a settlement agent in that he may arrange the signing of loan documents with the lender, borrower and loan closer; prepare non-legal documents such as the HUD-1 settlement statement, IRS Form 1099, and other like forms; review the signed loan documents for signatures; and arrange for the recording of the loan documents.
Can a non-lawyer disburse loan proceeds?
The ministerial act of disbursing loan proceeds is not the practice of law in Connecticut, and a non-lawyer may perform this function. However, title insurance companies may not issue closing protection letters to non-attorneys. If a lender requires a closing protection letter, then only an attorney can disburse the loan proceeds.
What should a lender do?
Lender’s have three options for Connecticut transactions: first a lender can use a Connecticut attorney to handle its closings from start to finish. Second a lender can utilize the direct operations of an underwriter. Finally, a lender can use a vendor management company that uses a Connecticut attorney who acts as the title agent and provides disbursement services.
Title and Settlement Procedures in Connecticut
Connecticut has a peculiar legal structure for title and settlement practices. While neither title insurance, nor closings themselves are considered the practice of law, the Connecticut Title Insurance Act prohibits non-lawyers from acting as title agents, and the Act prevents title underwriters from issuing closing protection letter to non-lawyers.
The Law in Connecticut
I. Who may be a title agent?
The Connecticut Title Insurance Act C.G.S. §38a-400 et seq., regulates title insurers and agents. While Connecticut does not have title agent licensing, the term title agent is defined in C.G.S. §38a-402 (13):
“"Title agent" or "agent" means any person authorized in writing by a title insurer to (A) solicit title insurance business, (B) collect premiums, (C) determine the insurability of a risk in accordance with underwriting rules and standards prescribed by the title insurer or (D) issue policies of the title insurer. Title agent does not include officers or employees of a title insurer. No person may act as a title agent unless he is a commissioner of the Superior Court in good standing, except any individual who held a valid title insurance license on or before June 12, 1984.”
C.G.S. §51-85 states that “Each attorney-at-law admitted to practice within the state, while in good standing, shall be a commissioner of the Superior Court…” The Title Insurance Act does not have any licensing for, or definition of a “Title Agency” or similar term. Therefore, pursuant to statute, only an attorney in good standing admitted to practice within Connecticut, or an individual who held a valid title insurance license on or before June 12, 1984, may be a title agent, and there can be no title agencies.
II. Who can perform a loan signing?
The rules for signing are less clear than the rules for title agents, but some guidelines can be outlined. First, the negative implications of the Commerce Clause of the United States Constitution, Article I, §8, Clause 3, referred to as the “dormant commerce clause,” prevents a state from placing an undue burden on interstate commerce. Second, the definition of the practice of law in Connecticut is focused primarily on representation and the application of legal principals and judgment to the circumstances of the client. The specific definition as it relates to real estate closings is focused on giving advice and counsel. Thus if a non-lawyer attends a closing and merely instructs the borrower where to sign and takes the borrower’s acknowledgement as a notary, the lay closer will not be practicing law.
With regard to the limitations placed upon state regulation by the negative implications of the Commerce Clause, the Supreme Court in Johnson v Avery, 393 U.S. 483, 490 n. 11 (1969), held that “The power of the states to control the practice of law cannot be exercised so as to abrogate federally protected rights.” Arguably, any attempt by a state to define the practice of law to include performing a witness only closing would unconstitutionally burden interstate commerce.
In National Revenue Corp. v Violet, 807 F.2d 285 (1st Cir. 1986), the Court of Appeals for the First Circuit held that Rhode Island’s definition of debt collection as the practice of law placed an impermissible burden on interstate commerce. The Court stated that barring out-of-state debt collectors placed a substantial burden on commerce and as such, the State had to demonstrate that the rule served a legitimate local purpose and that this purpose could not be served as well by other non-discriminatory means. By limiting debt collection to a class consisting exclusively of Rhode Island attorneys, the rule conferred the right to reap an economic benefit on a class made up primarily of citizens of Rhode Island. Were Connecticut to seek to limit the right to perform closings to Connecticut attorneys, the same reasoning could be applied to overturn such a rule.
Recently the United States District Court for the District of Massachusetts applied such reasoning to strike down an attempt by the Real Estate Bar Association of Massachusetts (REBA) to define the practice of law to encompass all aspects of a real estate closing. The Real Estate Bar Association For Massachusetts, Inc. v. National Real Estate Information Services, Civil Action 07-10224-JLT, (United States District Court for Massachusetts 2009). The court made a distinction between those aspects of a real estate transaction which constitute the practice of law in Massachusetts, i.e. presiding at the signing of loan documents, and those aspects which are not the practice of law, including the title search, the preparation of the HUD-1, and the disbursement of loan proceeds. The court held that REBA’s attempt to label these functions as the practice of law would place an undue burden on inter-state commerce in violation of NREIS’ constitutional rights.
In accordance with this same reasoning, the Federal Trade Commission warned Connecticut against interpreting its definition of the practice of law to prohibit lay closings. In its letter to the Rules Committee of the Superior Court, dated May 17, 2007, the FTC stated that “non-attorneys should be permitted to compete with attorneys in areas where no specialized legal knowledge and training is demonstrably necessary to protect the interests of consumers.” The FTC went on to encourage the Connecticut Rules Committee to provide additional comments and guidance to clarify the definition of the practice of law and specifically authorize non-lawyers to perform tasks that do not require legal training. As of this writing, the Rules Committee has not provided any further guidance.
The general definition of the practice of law is contained in Connecticut Practice Book Section 2-44A (a): “The practice of law is ministering to the legal needs of another person and applying legal principals and judgment to the circumstances or objectives of that person.” The Connecticut rule is primarily focused on the giving of advice, the exercising of judgment in applying legal principals, and the acting in a representative capacity. Section 2-44A (a)(5) clarifies the definition as it relates to real estate closings:
“Giving advise or counsel to any person, or representing or purporting to represent the interest of any person, in a transaction in which an interest in property is transferred where the advice or counsel, or the representation or purported representation, involves (a) the preparation, evaluation, or interpretation of documents related to such transaction or to implement such transaction or (b) the evaluation or interpretation of procedures to implement such transaction, where such transaction, documents, or procedures affect the legal rights, obligation, liabilities or interest of such person…”
As in the general definition the rule is focused on giving advice or counsel or representing a client.
The Practice Book lists functions which are not considered to be the practice of law. §2-44A (b)(3) specifically allows a non-lawyer to “serv[e] in a neutral capacity as a mediator, arbitrator, conciliator or facilitator.” Webster’s dictionary defines facilitator as: “one that helps to bring about an outcome (as learning, productivity, or communication) by providing indirect or unobtrusive assistance, guidance, or supervision.” There are several Connecticut statutes that define facilitator, although none in the context of a real estate closing. As such, a non-lawyer that facilitates the closing, i.e. helps bring about the closing by providing unobtrusive assistance, can rely on this Practice Book carve-out and is not engaging in the unauthorized practice of law.
Furthermore, in Informal Ethics Opinion 96-16, the Committee on Professional Ethics of the Connecticut Bar approved of a ministerial role for non-lawyers at signings when it opined that the act of delivering documents to and from a closing does not constitute the unauthorized practice of law, but:
“…the [paralegal] should not compromise his or her function as a messenger by providing information regarding the legal implications of a document. It is expected that the [paralegal] will contact an attorney in the firm during the closing for instructions, if any questions are raised about the execution of the documents, changes in adjustments or price, or other matters involving the documents or funds.”
Given the limitations imposed by the dormant commerce clause, the authorization found in Informal Ethics Opinion 96-16, the carve-out for neutral facilitators in subsection (b)(3), and Practice Book §2-44A’s general emphasis on providing representation, advice and judgment, it seems clear that a non-lawyer can perform witness only closings where he or she facilitates the closing by ensuring the proper execution of closing documents and delivers the documents to and from the closing. However, the non-attorney closer must be careful not to advise, interpret, evaluate or prepare any of the closing documents.
II. Can a non-lawyer prepare legal documents?
In this instance, Connecticut law is clear: pursuant to Practice Book §2-44A (a) (3), drafting of legal documents is considered the practice of law. The section defines documents as follows: it “… includes, but [is] not limited to contracts, deeds, easements, mortgages, notes, releases, satisfactions, leases, options … powers of attorney, notes and other similar instruments.” Id. Furthermore, in Statewide Grievance Committee v. Patton, 239 Conn. 251 (1996), the Connecticut Supreme Court held that the preparation of legal documents involves “difficult or doubtful legal questions … which, to safeguard the public, reasonably demand the application of a trained legal mind.” Id, p. 255. However, §2-44A authorizes non-lawyers to sell legal document forms previously approved by a Connecticut lawyer in any format. For a discussion of preparation of a HUD-1 settlement statement see below.
IV. Can a non-lawyer act as settlement agent?
The commonly understood functions of a settlement agent are: arranging the signing of loan documents with the lender, borrower and loan closer; preparing non-legal documents such as the HUD-1 settlement statement, IRS Form 1099, and other like forms; disbursing the loan proceeds post-closing; reviewing the signed loan documents; and arranging for the recording of the loan documents. While the rules in Connecticut are not precise, with all of these services, Connecticut’s rules are constrained by the dormant commerce clause (See the discussion above as it relates to non-attorney closing agents).
As for scheduling the closing, reviewing the signed loan documents for signatures, and coordinating the recording of the original documents, none of these services involve providing representation, giving advice, or applying legal principals. These functions are a form of facilitating the closing and should fall within the carve-out of Practice Book §2-44A (b) (3). Even if Connecticut attempted to define these services as the practice of law, these actions, often performed by interstate real estate information service companies, would most likely be protected by the dormant commerce clause.
Another issue related to non-attorney settlement agents is preparation of so-called non-legal documents, such as the HUD-1 Settlement Statement and IRS Form 1099. The relevant Practice Book definition lists a series of documents which a non-lawyer cannot draft. (See the discussion regarding drafting legal documents above). Neither the HUD-1, nor Form 1099 is included in this list, which would seem to imply that a lay person can fill in these forms. Nonetheless, the Practice Book definition says that legal “documents” includes, but is not limited to, the types listed in the section, so again we are left to the general definition of the practice of law, as limited by the dormant commerce clause.
The closest case in Connecticut is State Bar Ass'n v. Conn. Bank & Trust, 145 Conn. 222 (1958), where the Court stated that the dispositive question was whether or not the actions taken by the Bank’s lay trust officers are “commonly understood to be the practice of law.” Id., p. 236. The court authorized the bank’s trust officers to prepare tax returns for the estates that they administered. In determining the legality of non-attorney preparation of HUD-1 and other forms for closing, the questions then is whether such action would commonly be understood to be the practice of law.
Other state courts that have addressed the issue have split. In In Re First Escrow, Inc., 840 S.W.2d 839 (Mo.banc 1992), the Missouri Supreme Court approved of the filling in of such forms because the lay closing service “discern[s] the information needed to complete these forms from the written real estate contract and from communications with the parties…” Id., p. 841. Central to that Court’s decision was that the closing service prepared the forms as an agent of an entity that had a personal interest in the transaction—in this case the title insurer. In footnote 10 to the decision, the Court collected the holdings of other states.
While other courts have emphasized the importance of the person preparing the form having a financial interest in its contents, Connecticut’s definition of the practice of law is more focused on the application of legal principals and judgment. Preparation of the HUD-1 for refinance transactions is based strictly on following the instructions of the lender as to fees and costs and the title agent as to payoffs related to title. When a Connecticut attorney acts as the title agent, and the lender prepares its own instructions, the person preparing the HUD-1 is not practicing law.
Overall it appears that a strong argument can be made that a non-lawyer can prepare a HUD-1 settlement statement for the closing if following the instructions of the lender, an attorney title agent and or the borrower. Given the constraints of the dormant commerce clause, the lack of representation, advice and application of legal principals, the omission of HUD-1 and other closing documents from the list in Practice Book §2-44A, and the fact that in many states such action is not considered the practice of law, Connecticut law likely does not prohibit lay persons from performing this settlement function.
V. Can a non-lawyer handle the disbursement of loan proceeds?
A. Is the disbursement of loan proceeds the practice of law?
Regarding the issue of disbursements, which also does not involve representation, advice or the application of legal principals, two state statutes deal with the issue indirectly, and both seem to contemplate non-lawyer settlement agents. C.G.S. §36a-758 as amended by P.A. 07-91, requires lenders to deliver good funds in a timely manner to: “the mortgagor, to the mortgagor’s attorney, to the mortgagee’s attorney or to any other person specified in any settlement statement….” Emphasis Added. Also P.A. 05-261, AN ACT CONCERNING THE INTEREST EARNED ON LAWYERS' CLIENTS' FUNDS ACCOUNTS PROGRAM, requires that “each entity, other than a borrower, having an account established to receive loan proceeds from a mortgage lender … shall participate in the program.” Emphasis added. The act adds further:
“Under the program, funds in accounts established to receive such loan proceeds, regardless of the amount or period held, and clients' funds that are less than ten thousand dollars in amount or expected to be held for a period of not more than sixty business days, shall be deposited by participating lawyers, law firms and entities in interest-bearing accounts specifically established pursuant to the program.” Emphasis added
Both statutes specifically mention entities that are not lawyers or law firms and regulate the way they hold mortgage proceeds for Connecticut properties. These statutes provide a basis to argue that Connecticut law authorizes disbursements by non-lawyers.
There is a carve-out in the Practice Book definition of the practice of law that authorizes a non-lawyer to perform any act “authorized by statute.” Practice Book §2-44A (b)(2)(B). However, under the Connecticut Constitution, the authority to define the practice of law is vested in the Judiciary, not the Legislature, State Bar Assn. v Connecticut Bank & Trust Co., 145 Conn. 222 (1958), so, without defining precedent, one is left to fall back on the emphasis on representation, advice and the application of legal principals in the Practice Book definition and the dormant commerce clause protection to be certain that disbursing loan proceeds is not the practice of law.
B. Can a title insurance company issue a closing protection letter to a non-lawyer?
Under Connecticut law, title insurance companies must be mono-line insurers. C.G.S. §38a-45 states that “…No corporation doing title insurance business may do any other line of insurance business.” C.G.S. §38a-404 provides a carve-out of the mono-line restriction. Title insurers “… may guarantee the obligations of their agents in the normal course of business by issuing closing protection letters.” [emphasis added] The question then is who can be an agent for purposes of C.G.S. §38a-404? The definition section of the Connecticut Title Insurance Act, C.G.S. §402, provides that as used in the act, “… the following terms shall have the following meanings, unless the context shall otherwise require:
… (13) "Title agent" or "agent" means any person authorized in writing by a title insurer to (A) solicit title insurance business, (B) collect premiums, (C) determine the insurability of a risk in accordance with underwriting rules and standards prescribed by the title insurer or (D) issue policies of the title insurer…”
This is the same section that restricts the persons who can be title agents to Connecticut attorneys (see the discussion above regarding who can be a title agent). Since the Title Insurance Act declares “title agent” and “agent” as synonymous, it follows that only a Connecticut attorney can be an “agent” for purposes of C.G.S. §38a-404. Therefore title insurers can only issue closing protection letters to Connecticut attorneys.
VI. Can an attorney work with a vendor management company?
An attorney can work with a vendor management company (VMC) to service the needs of a lender. The attorney must perform the title agent functions and disburse the funds if the lender needs a closing protection letter. The VMC can perform all the other functions necessary to complete the transaction. To fulfill his ethical obligations, the lawyer must serve in the role of a third-party neutral and must not represent the lender or the borrower as their attorney.
A. What is the role of the Vendor Management Company in Connecticut?
The above analysis suggests that a VMC cannot act as a title agent nor disburse loan proceeds where the lender requires a closing protection letter. However, the VMC can perform all the other functions necessary to complete refinance transactions: communicating with the lender, attorney title agent and borrower; arranging for a title search; obtaining mortgage and other payoff statements; coordinating the signing of documents; hiring and supervising the notary closer; preparing the HUD-1, reviewing and returning the signed documents, and arranging for the recording of the mortgage on the land records. For these services, the VMC can rightfully earn a closing fee. Most importantly to the lender, the VMC can be the lender’s sole point of contact for Connecticut transactions with the attorney title agent providing back office services like title review and check cutting.
B. What is the role of the Connecticut attorney?
The Connecticut attorney must perform the core title services to be the title agent. Under the Real Estate Settlement Procedures Act, R.E.S.P.A. 12 U.S.C. §2600 et seq. in order to earn a title commission:
“…the attorney must perform core title agent services (for which liability arises) separate from attorney services, including the evaluation of the title search to determine the insurability of the title, the clearance of underwriting objections, the actual issuance of the policy or policies on behalf of the title insurance company…”
12 U.S.C. §3500.14 (g)(3). Once the VMC provides the title abstract, the attorney must review the abstract and prepare the title commitment. While the VMC can obtain curative items, the attorney must determine whether or not those items satisfy the conditions of the title commitment. The attorney must also issue the title policy.
If the lender requires a closing protection letter for the transaction, the attorney must receive the closing proceeds and disburse according to the lenders instructions. Connecticut law also requires that the proceeds be deposited into a Connecticut IOLTA account. P.A. 05-261. (See the discussion above regarding disbursement).
C. Can an attorney perform services which are not the practice of law?
Rule 2.4 of the Connecticut Rules of Professional Conduct authorizes an attorney to serve in the role of a third-party neutral. Subsection (a) states that a lawyer is a third party neutral when “the lawyer assists two or more persons who are not clients of the lawyer to reach a resolution of a … matter that has arisen between them.” “Service as a third-party neutral may include service … in such … capacity as will enable the lawyer to assist the parties to resolve the matter.” Rule 2.4 (b) requires the attorney to provide notice to each party describing the difference between legal representation and service as a third party neutral.
VII. What to do?
Lender’s have three options for Connecticut transactions: first a lender can use a Connecticut attorney to handle all aspects of its closings. The disadvantages of using local attorneys are obvious: a lack of technological integration; quality assurance issues, and excessive costs. Second a lender can utilize the direct operations of an underwriter. The requirement that a title agent be a Connecticut attorney does not apply in the case of an underwriter because the underwriter is not an agent. However, an underwriter cannot issue a closing protection letter for its direct operations division since only attorney agents can get closing protection letters. Furthermore, a centralized direct operation cannot provide the sort of specialized knowledge that a local agent can offer.
Finally, a lender can use a vendor management company or multi-state title and settlement agency that works with a Connecticut attorney. In this scenario, the attorney acts as the title agent and handles disbursement, and the vendor manager handles all other aspects of the transaction. This arrangement avoids the disadvantages of using local attorneys entirely, offers the expertise of a local agent for difficult title issues, and allows the lender to get a closing protection letter for the transaction.
VII. Whom to call?
The attorneys of the Holler Law Firm, LLC have been some of the largest title agents in the State of Connecticut over the last twelve years. They have handled over 10,000 closings in Connecticut. With a focus on service to the lender, the vendor manager and the borrower, and the resources of a large firm, Holler Law Firm can service the most demanding of clients. Call us today to begin a dialogue!
George T. Holler, Esquire.
Direct Phone: (203) 314-0502
Email: GeorgeH@hollerlawfirm.com
Or visit us on the web at www.hollerlawfirm.com
About the Author
Attorney George T. Holler is licensed to practice law in the State of Connecticut. Since 1997 he has handled over 10,000 real estate transactions, and written articles on title and settlement procedures. A speaker at the National Settlement Services Summit, he has been published in the Connecticut Law Tribune. He currently resides in Milford, Connecticut with his wife and three sons.
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