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 96-04
A practicing attorney is also the sole officer, owner, and shareholder of a licensed South Carolina mortgage broker corporation. In such capacity, the mortgage broker obtains loans for customers from mortgage corporations and other lending institutions. The mortgage broker receives a fee for his services, which is paid by the borrower. The mortgage broker proposes acting not only as mortgage broker, but also as the attorney for the borrower for the purposes of closing the loan.
Question:
May a mortgage broker also act as the attorney for the borrower in the loan closing?
Summary:
Rule 7.3 of the Rules of Professional Conduct would prohibit an attorney from establishing a business relationship with a customer through a mortgage broker business and then directly soliciting such customer for legal representation. If the customer seeks legal representation without solicitation by the attorney, the attorney may provide such representation, subject to compliance with Rules 1.6, 1.7, 1.8 and 2.1 and any other applicable Rules of Professional Conduct.
Opinion:
The practice of an attorney providing legal and non-legal services to his client raises a number of potential ethical concerns as well as substantive legal issues. The Committee has addressed the ethical issues on several occasions. See SC Bar Adv. Op. 95-30, concerning whether an attorney may operate a telephone long distance dialing company under the law firm's name; SC Bar Adv. Op. 95-04, concerning whether an attorney may act a real estate broker and attorney in the same transaction; SC Bar Adv. Ops. 92-03, 82-20 and 75-03, concerning whether an attorney may act as title agent at a client's closing; SC Bar Adv. Op. 83-13, concerning whether an attorney may own a court reporting service; and SC Bar Adv. Op. 78-14, concerning whether an attorney may own a life insurance agency to which clients are referred. (A) Substantive Legal Issues Questions of substantive law are outside the purview of this Committee. The Committee emphasizes, however, that there are numerous federal and state statutes, including the Federal Truth in Lending Act, the Federal Real Estate Settlement Procedures Act, the South Carolina Registration Requirements Act of Certain Loan Brokers of Mortgages of Residential Real Property and the South Carolina Consumer Protection Code, as well as regulations issued pursuant thereto, which may impact the attorney's conduct. For example, the mortgage broker's referral of legal representation to himself as attorney may be prohibited under such laws, may require certain disclosures under such laws, or may impact upon how prepaid finance charges are disclosed in the context of Truth in Lending requirements. Also, SC Code Ann. § 37-10-102(a) (1976) requires, in the context of a residential mortgage loan, that a lender provide the borrower with notice and right to choose an attorney. If the mortgage broker undertakes, or is implied by law to have undertaken, responsibility for such disclosure on behalf of the lender, there may be some question as to whether the mortgage broker can comply with such law while offering his own services as the closing attorney. The Committee therefore urges that any applicable laws and regulations be carefully reviewed before an attorney considers undertaking the dual role of mortgage broker and closing attorney. (B) Advertising and Solicitation The proposed business structure is different from those discussed in the Committee opinions cited above. In the title insurance context, for example, the attorney first represents the client in his capacity as attorney, and then also seeks to provide title insurance for the client. In the present situation, the first relationship will be between the attorney in his capacity as mortgage broker and the customer/borrower. 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. (C) Conflicts of Interest and Confidentiality Rule 1.7(b) prohibits an attorney from representing a client if representation may be materially limited by the attorney's responsibilities to another client or to a third person, unless the attorney reasonably believes representation will not be affected adversely and the client consents after consultation. It is unclear from the facts presented whether the mortgage broker also would be the agent of the lender or otherwise would owe some duty to the lender. If so, the attorney in his capacity as mortgage broker may owe certain duties to the lender that are potentially adverse to the attorney's obligations to his client. The attorney must determine whether, under rule 1.7(b), the attorney can serve in such dual capacity. For a more complete discussion of Rule 1.7(b), see SC Bar Adv. Op. 92-03. The attorney also should note that Rule 1.8 prohibits an attorney from entering into a business relationship with a client unless the terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client. The client must be given a reasonable opportunity to seek the advice of independent counsel in the transaction and the client must thereafter consent in writing to the business relationship. The attorney in his capacity as mortgage broker will be receiving a fee paid by the client, and thus must comply with the provisions of Rule 1.8. We also note that Rule 1.6 prohibits an attorney from revealing information relating to representation of a client unless a client consents after consultation, with certain exceptions. The attorney must determine whether any duties he may owe the lender would conflict with the attorney's duty of confidentiality toward his client. In addition, under Rule 2.1 an attorney must exercise independent professional judgment and render candid advice in representing a client. An attorney must determine that his conflicting role as a mortgage broker will not affect the attorney's ability to judge independently and render candid advice. Although beyond the scope of the question presented to this Committee, the Rules of Professional Conduct may prohibit the attorney from operating a law practice and a mortgage broker's practice out of the same office.