I have written in the past about real estate closings and the practice of law as defined in Georgia. The nutshell version is that in the state of Georgia, the practice of law includes real estate closings. Why? Because the Georgia Supreme Court says so. I have also lectured at continuing education courses on legal ethics for real estate attorneys. One of my favorite themes is whether closing attorneys owe a duty to anyone other than their client at the closing. For many and varied reasons, including because the Georgia Supreme Court says so, I believe that they do.
Now that we have the perspective of the last few years of hundreds of thousands of people being foreclosed because they borrowed money on terms they did not fully understand, the importance of the closing ceremony should be understood to be a critical event in the purchase or refinance of a home.
Parties to commercial real estate transactions certainly view it that way. Buyers, sellers, developers, investors, banks and insurance companies all spend a lot of money to retain their own counsel to make sure that their legal interests are protected at the closing and that they obtain the bargain they spent so much time negotiating in the contract.
Why then, is the purchaser of residential real estate, or the borrower in refinancing their residential real estate, hesitant to pay for meaningful legal services at their closing? The lender often charges between one half and one percent (sometimes more) of the loan amount as a fee to provide the loan - in addition to other fees for underwriting, document production and third party fees for tax and flood services. Real estate agents (I know that there many different models now for how an agent is compensated for brokering the deal) can make up to three and one half percent of the sales price as a commission (each agent - listing and selling).
Title, escrow and closing services generally compose less than .75% of the loan amount (and this includes lenders and owners title insurance in Georgia). For those fees, the closing attorney provides a neutral site for the closing (usually complete with chocolate, coffee and soft drinks), searches and clears the sellers' title, makes sure that the seller can provide the buyer marketable title, prepares the deed of conveyance, prepares forms for the buyer and seller to comply with state and federal capital gains and income tax laws, makes sure that the parties to the closing are not prohibited under federal law from engaging in the transaction, and underwrites the title insurance policy for the lender and the buyer.
Most importantly, the closing attorney is available as a resource at closing to the parties if they have questions concerning the transaction. This cannot be overstated. Can a notary really tell a borrower with any certainty whether the loan instrument contains a prepayment penalty? Can they explain the different ways to hold title to real property? Can they explain the Truth in Lending, Escrow, or Servicing Transfer Disclosures required in every consumer mortgage loan transaction? What about how costs are apportioned to the parties on the HUD-1 settlement statement? Probably not, unless that notary also happens to be an attorney licensed and in good standing in the jurisdiction where the property is located.
Closing attorneys in Georgia are available to the parties, and while generally representing the lender, have duties to the unrepresented parties at the closing under the Georgia Rules of Professional Conduct. In addition, lenders are consumer service businesses. While representing that lender, doesn't the closing attorney do their lender client a disservice if they fail to adequately explain the loan documents to the borrower? To the extent that the lender hires the closing attorney to make sure it has senior lien priority for its security instrument, the borrower has a commonality of interest with the lender in that the buyer wants to obtain title free of encumbrances with the exception of the lender's mortgage. The borrower also needs to be certain that the terms of the loan are what they negotiated with the lender.
This brings me back to my original point. All of this service costs money to provide. How many borrowers would be in the midst of foreclosure if someone had explained the effect of a "pick a payment" loan instrument, or how interest rates rising on an adjustable loan affect their payment? No one can really say (my crystal ball is still in the shop this week). Are we better served to just, "sign the papers" and move on to the next transaction, or take a little time to understand what we are really doing when we buy or refinance a house?
In my opinion, this is part of why the foreclosure numbers are so high. Has anyone seen what the numbers are on title claims? I would not be surprised to see that curve track the foreclosure numbers.
Anyway, the next time you are tempted to skimp on title services, title insurance or escrow and closing costs, just remember that you do get what you pay for at closing, and for years beyond. It is just like car insurance - you wonder why you pay for it until you have that accident.
Brian M. Dubuc, Esq.
Commercial and Residential Real Estate Closings
Builder/Developer Representation
Construction Litigation
Business Entity Formation and Representation
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