Lender Preparing & Mailing Loan Modifications Not Engaging in Unauthorized Practice of Law

The increase in foreclosures after the 2008 financial crisis led to an increased response from lenders to assist borrowers. The most common form of aid provided to borrowers since that time has been the use of a loan modification. A large number of loan modifications have been entered into between lenders and borrowers in states across the county and South Carolina is no different.

But what if those loan modifications with borrowers living in the state of South Carolina were void and unenforceable? This was the possibility being faced by lenders when the South Carolina Supreme Court issued its opinion in the case of Crawford v. Central Mortgage Company,  404 S.C. 39, 744 S.E.2d 538,(2013).   The Crawford case involved two foreclosure actions that were consolidated for review by the Court.  In its decision, the Court held that modifying a loan without the participation of an attorney does not constitute the unauthorized practice of law or “UPL” in South Carolina. So, how then does UPL play into the issue of whether a loan modification is unenforceable?   

To understand the importance of the Crawford opinion, we need a quick review of the South Carolina history of cases on the unauthorized practice of law. In a line of cases dating back to 1987, the South Carolina Supreme Court has determined the practice of law in connection with a residential real estate closing includes:

• Searching the Title and Reviewing the Results
• Preparing the Loan Documents
• Conducting the Loan Closing
• Recording the Title Deed and Mortgage 
• Disbursing the Closing Proceeds  

With this framework in place, the Court issued its landmark opinion in the case of Matrix Financial Services Corp. v. Frazer, 394 S.C. 134, 714 S.E.2d 532, 534 (2011) holding that closing a residential loan closing on South Carolina property without the supervision of a licensed South Carolina attorney constitutes the unauthorized practice of law, and, more importantly, may prevent a mortgage holder from foreclosing on the mortgage in the future. This ruling was made prospective from the date of the filing of the opinion on August 8, 2011.This is why the issue of UPL in South Carolina is so vitally important to lenders conducting business in the state. 

With this landscape before us, what would happen if the Matrix decision were to be applied to the thousands of loan modifications created in South Carolina since the recession of 2008, most, if not all, of which were not supervised by an attorney and completed in-house by most lenders? In the Crawford cases, the borrowers were facing foreclosures filed after they had defaulted on the terms of their loan modifications. The borrowers claimed that as the loan modifications were not supervised by an attorney, the lender should not be allowed to enforce the obligations created by the loan modifications pursuant to the Court’s previous holding in Matrix. 

Fortunately for lenders, the Court disagreed with the borrowers’ contentions and held that the lender’s modification of an existing loan without the participation of a licensed South Carolina attorney did not constitute the unauthorized practice of law. The S.C. Supreme Court has previously found conducting a refinance of a residential real estate mortgage without the supervision of a licensed attorney to constitute the unauthorized practice of law. It could be easy to see why many in the legal community thought that the Court would extend its reasoning to the loan modification arena as well. However, the Court distinguished the facts in some of its previous decisions from those in the Crawford case and found that the same public policy that requires attorney supervision for real estate loan closings and mortgage refinancing does not apply to loan modifications. 

While it is clear that loan modifications do not have to be supervised by a licensed attorney in South Carolina, lenders need to be mindful of the unauthorized practice of law decisions in the state when determining processes for completing loan modifications. As the legal requirements are developed through case decisions rather than through legislation, lenders need to keep informed on a regular basis with local counsel to stay abreast of any changes in the landscape.