UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.
Ethics Advisory Opinion 02-06
A lawyer wants to open a mortgage brokerage business. The company would be managed by a loan originator who is not a lawyer. The lawyer and manager each would own a portion of the business. The lawyer would own at least 50 % of the corporation, but would not be involved in the day to day operation of the business. The specific business arrangements are designed to secure compliance with various state laws regarding the ownership and operation of a mortgage brokerage. The lawyer would continue to practice law separately. The lawyer anticipates that the mortgage brokerage business may refer customers to lawyer's law firm to close loans when the customer has not indicated a preference for another law firm.
Question
1. Can a lawyer ethically own 50% or more of a mortgage brokerage business, while continuing to also practice law, if the lawyer is not engaged in loan origination and does not close loans for the business?
2. Can the lawyer close loans for customers of the business under these circumstances?
3. If the lawyer is not at the business on a daily basis and is not engaged in the business of originating or closing loans, may the lawyer serve as licensed broker in charge of the business under state law?
Summary
There is no per se prohibition against a lawyer having an ownership interest in other commercial ventures while practicing law. The lawyer, however, must be careful to make all necessary disclosures to clients regarding any potential conflicts of interest created by the lawyer's interests in a separate business and to avoid improper solicitation of clients through the business.
In S.C. Bar Ethics Adv. Op. 96-04, this committee opined that a lawyer who owns a separate mortgage brokerage business may close loans for customers of the business, provided that the lawyer complies with all conflict of interest rules and does not solicit the legal business of the customer. In that opinion, we stressed that the lawyer should close loans only where the legal representation was unsolicited. The active referral of potential clients to the law firm by the a mortgage brokerage business owned by the lawyer would not appear to satisfy that condition.
As for the final issue, the inquiry raises questions of substantive state law beyond the purview of this Committee, and the Committee offers no opinion as to whether the business or operating arrangements described would comply with any applicable substantive laws.
Opinion
There is no per se ethical prohibition against a lawyer owning all or part of another commercial venture while also practicing law. In S.C. Bar Ethics Adv. Op. 96-04, we identified a number of earlier advisory opinions recognizing that a lawyer may own interests in a variety of enterprises. In that opinion, we discussed specifically a lawyer's ownership of a mortgage brokerage business. Although, ownership of this type of business may create a number of potential ethical concerns, especially with regard to potential conflicts between the interests of the client and of the lawyer and with regard to solicitation of clients, we reiterate that nothing in the Rules of Professional Conduct creates a blanket prohibition on ownership of a mortgage brokerage business by a lawyer who is also in private practice.
However, when customers of the mortgage brokerage business also become clients of the law firm, additional ethical issues are raised. Specifically, the financial interests of the lawyer may conflict with the best interests of the client. The lawyer must disclose fully to the client the lawyer's interest in the business and any potential conflicts that may arise under Rules of Professional Conduct 1.7 or 1.8. Also, the lawyer may not use the brokerage business as a means of avoiding the requirements of Rules 7.2 and 7.3 applicable to the solicitation of clients by the law firm. We noted this issue in some detail in our earlier Opinion 96-04:
The mortgage broker presumably will obtain this relationship with the customer through advertising not restricted by the Rules of Professional Conduct. The attorney then presumably will offer his services as closing attorney to the customer. Thus, the operation of the mortgage brokerage company may in practical terms become a "business originator" with respect to the attorney's law practice. Rule 7.3 prohibits an attorney from making any personal or live telephone contact solicitations for professional employment from a prospective client with whom the attorney has no family or prior professional relationship when a significant motive for the attorney's doing so is the attorney's pecuniary gain. Rule 7.3 also contains specific limitations on written solicitation materials for legal services. In the Committee's opinion, an attorney's practice of forming relationships with customers through a mortgage broker business and then making direct solicitations to such customers for provision of legal services would violate Rule 7.3. We note in this regard that should the attorney engage in the mortgage broker business without the intention of soliciting work for his legal practice, acceptance of an unsolicited request for legal representation by a borrower probably would not violate Rule 7.3. If the attorney were to obtain professional employment in such manner on more than an infrequent basis, however, it would be difficult to establish that such employment was not based on solicitation in violation of Rule 7.3.
The inquirer has stated that the mortgage brokerage business would likely refer to the law firm any customers who had not indicated a preference for a different lawyer. This referral of potential clients to the law firm by the lawyer's own business would appear to be the type of solicitation, albeit somewhat indirect, that was viewed unfavorably by the Committee in Opinion 96-04.
Although the Committee offers no opinion as to applicable substantive law, we did further note in Opinion 96-04 that a number of applicable laws might also affect the ability of the lawyer to refer customers of the lawyer's mortgage brokerage company to the lawyer's own firm. We reiterate the advisability of again reviewing those substantive laws.
As to whether the lawyer may serve as broker in charge, that is an issue of substantive state law that is beyond the purview of this Committee, and we offer no opinion as to whether the business or operating arrangements described would comply with any applicable substantive laws.