Opinion #12. Mortgage Loan Transactions

Issued by the Professional Ethics Commission

Date Issued: April 2, 1980

Question

Mortgage financing provides the occasion and the stimulus for most title examination in Maine. Typically, a prospective borrower (the owner of land to be mortgaged or the prospective buyer of the land) applies for a mortgage loan to buy the property or to build on it and is told that title must be certified.

In some cases the title opinion has been supplied by an attorney already representing the borrower in connection with the transaction or otherwise selected by the borrower without restriction. In other cases, before 9‑B M.R.S.A. § 439 recently became effective, the borrower chose from a list of attorneys approved by the lender, or the title was certified by counsel chosen by the bank. In all cases the cost of title examination has been and continues to be borne by the borrower, either directly or by reimbursing the bank. Section 439 of Title 9‑B, enacted by the First Session of the 109th Legislature, may have changed the rights of the parties to this transaction to choose an attorney, to be separately represented, or both. The relationship of bank, borrower, and attorney raises the following questions:

  1. Who is the attorney’s client for purposes of the title search?

  2. In light of 9‑B M.R.S.A. § 439, may an attorney chosen by the borrower to examine title stipulate that only the bank is the client; may the bank insist that the attorney represent only the bank; may the borrower insist that the attorney represent only the borrower?

  3. May both borrower and lender be clients of the attorney without a disabling conflict of interest if the attorney’s only task is a title examination?

  4. May both be clients of the attorney without a disabling conflict of interest if the attorney’s duties include preparation of documents: using forms supplied by the bank; prepared from scratch?

  5. Does the attorney have a professional obligation to prevent unrepresented parties to a mortgage loan transaction from believing he or she is protecting their interests?

Opinion

  1. Before enactment of Section 439 of Title 9‑B, which will be considered below, the identity of the attorney’s client, for purposes of the title search and for other purposes, would have been settled by the parties, bank, borrower, and attorney. Neither the bank nor the borrower needs to be represented by counsel if it chooses not to be so represented. Aside from Section 439, the bank would have been at liberty to have a title examined, and to take any other precautions it saw fit in connection with a loan, using counsel of its choice or its own employees, or anyone it chose, to assist it for those purposes. It would also have been free to impose the cost of these precautions upon borrowers, either separately itemized or as a combined loan placement fee of some kind. Consequently, before enactment of Section 439, if an attorney accepted employment by a bank in connection with a mortgage loan, and it was the understanding of the parties that the attorney represented the bank and only the bank, that agreement would have identified the client for purposes of that transaction. The attorney could, however, have voluntarily assumed liability to the borrower for the accuracy of his title examination. Although this Commission does not pass on questions of law, we note that historically the liability of an attorney seems to have been limited to the client, in the absence of an additional undertaking [e.g., National Savings Bank v. Ward, 100 U.S. 195 (1878)], but in a few jurisdictions there has been a recent tendency to extend liability to other persons on a third party beneficiary theory or on the theory that injury to third parties is a foreseeable consequence of negligence (45 A.L.R. 3rd. 1181, 1195).

The identity of the client is not affected by the borrower’s payment of the fee for legal services in connection with a mortgage loan. This is obvious when the borrower merely reimburses the bank its cost of legal services. In that case, the bank pays the attorney and recovers its cost from the borrower. Even when the borrower pays the attorney directly, the agreement among the parties may still be that the attorney is rendering legal services to the bank, not to the borrower, and that the bank is the client. Rule 3.6(h) of the Maine Bar Rules acknowledges implicitly that an attorney may be paid by someone other than the client without changing the attorney‑client relationship.[1]

Enactment of Chapter 531 of Public Laws, 1979, complicated this scheme of things and may have altered the conclusions expressed above in ways that are not entirely clear. Ordinarily the Commission would not express its opinion on the interpretation of a statute. It has no authority to respond to questions of law. In the present situation, however, an adequate response to the questions posed is not possible without some comment on the possible effects of Chapter 531. This enactment added a Section 439 to Title 9‑B, M.R.S.A., providing as follows:

Every financial institution which accepts an application for a residential mortgage loan for one to 4 residential units and which requires that an attorney search the title of the subject real estate shall first permit the prospective mortgagor to select a qualified attorney of his own choice to search the title of the subject real estate, provided the financial institution may require the prospective mortgagor to provide it with adequate liability insurance or such other written policy requirements as the bank may deem necessary to protect its interests.

This statute raises the question who is the client of the attorney thus chosen, the borrower, the bank, or both. The language of the statute does not provide any satisfactory answers. If the client is, or may be, the bank, the statute seems to require that the borrower be allowed to choose the bank’s attorney, a result that is wholly incompatible with the normal consensual relationship between attorney and client.

If the client of the attorney chosen by the borrower is the borrower, the statute might, on the one hand, imply that the bank may not have title counsel in the transaction and must accept the opinion of the borrower’s counsel. Aside from Constitutional and other overriding legal issues, this would be a major change in the rights of the bank without benefit of the express language normally required to bring about such a result.

On the other hand, the statute might leave the bank free to obtain a separate opinion from its own counsel, and perhaps to charge the cost to the borrower. The statute does not expressly bar the bank from obtaining a separate opinion, and does not address the question of who pays the costs. This interpretation would, however, mean that the statute accomplished exactly nothing, since bank and borrower have always been free to make separate and duplicating arrangements for the legal services required in a mortgage loan transaction. Statutes are not normally given an interpretation that renders them utterly meaningless.

We think the most plausible interpretation of 9‑B M.R.S.A. § 439 is that the attorney chosen by the borrower represents both the bank and the borrower for purposes of the title examination and opinion. This interpretation is not free from difficulty, but it gives some meaning to the statute and produces a less bizarre result than denying the bank counsel altogether or having one party choose counsel who will represent only the other party. The statute says nothing about legal services other than the title examination and presumably does not affect the freedom of the bank and the borrower to make such arrangements as they wish for those other services. These may include an understanding that the attorney searching title also prepare documents but that in doing so he represents only the bank, or only the borrower, or both, subject to the conditions discussed in part 3 below.

In many cases the borrower may not accept the bank’s invitation to choose the attorney who will search title and may agree to using the bank’s attorney for the title search. The language of Section 439 seems to allow such a waiver by the borrower. In this case we see nothing in the statute that would preclude an understanding among the parties that the attorney searching title will represent only the bank. In part 5 below, we discuss the attorney’s obligation to insure that the borrower is aware of any limitations upon his representation.

  1. Assuming the validity of 9‑B M.R.S.A. § 439, it follows from what we have said that neither the attorney chosen by the borrower (pursuant to § 439) nor the bank may insist that the attorney represents only the bank for purposes of the title search. Section 439 seems to have the effect of requiring the bank to accept dual representation for this limited purpose. The attorney may, of course, decline employment, but he is not free to accept it and change the condition of dual representation apparently required by § 439. If the borrower declines to exercise the option given by Section 439 and agrees to a title search by the bank’s attorney, it would seem that either the bank or the attorney may insist that the attorney represent only the bank. The complications this scheme of things creates should be evident. In any case, the bank may insist that an attorney may take the position that employment to prepare documents will only be accepted upon the understanding that the only client is the bank, or the borrower.

Section 439 does not appear to be a restriction on the borrower. Consequently, we think the borrower may choose an attorney to search the title and insist that the attorney thus chosen represent only the borrower. This could amount to a waiver of the statute, leaving the bank free to choose its own attorney to search the title and demand reimbursement of the cost from the borrower.

  1. Both the borrower and the lender may be clients of the attorney at the same time without a disabling conflict of interest if, in the transaction in question, “it is obvious that [the lawyer] . . . can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of the lawyer’s independent professional judgment on behalf of each.”[2] This rule is substantially the same as DR 5‑105 (C) of the ABA Code of Professional Responsibility. According to the Reporter’s Notes to Maine Bar Rule 3.4(b):

The first condition of Rule 3.4(d) requires more than a judgment by the lawyer that he can perform adequately. It must be obvious that he can do so; and if his capability requires substantial explanation the condition cannot be met.

The adequate representation that must be obvious is not merely capable representation. It is representation in which the lawyer’s independent professional judgment in behalf of one client is not adversely affected by representation of another client. The counterweight to Rule 3.4(d) is Rule 3.4(c), which forbids multiple representation if the lawyer’s independent professional judgment is “likely to be adversely affected.” We believe that Rule 3.4(c) refers to a likely effect at the time representation would be undertaken, in which case multiple representation is forbidden, while Rule 3.4(d) refers to a future possibility that the lawyer’s judgment could be affected, in which case multiple representation is possible if it is obvious that there is no present divergence of interest and if there is full disclosure of the future possibility and consent.

DR 5‑105 (c) of the ABA Code of Professional Responsibility was given a similar interpretation. Addressing DR 5‑105 (c), EC 5‑15 explained:

[T]here are many instances in which a lawyer may properly serve multiple clients having potentially differing interests in matters not involving litigation. If the interests vary only slightly, it is generally likely that the lawyer will not be subjected to an adverse influence and that he can retain his independent judgment on behalf of each client; and if the interests become differing, withdrawal is less likely to have a disruptive effect upon the causes of his clients.

The phrase “differing interests” as used in EC 5‑15 means a difference such that representation of one client will adversely affect the exercise of the lawyer’s independent professional judgment in behalf of the other. (See the Definitions in the Code.) Whether it is obvious that adequate representation of each party is possible will necessarily depend on the circumstances of the transaction.

In a great many mortgage loan transactions it may be obvious that the interests of bank and borrower do not and probably will not differ as to any relevant aspect of the transaction and that the lawyer can adequately represent the interests of each. This is very likely to be the case when the attorney’s only task is a title examination, and in many instances, also when the attorney’s duties include preparation of closing documents. If the attorney’s only task is a title examination, bank and borrower may expect or agree that the title examination will include an explanation of all title problems, without regard to whether a particular problem has a material effect upon the bank’s security or could be accepted as a reasonable business risk for the bank. We see no reason why bank and borrower should not be able to consent to dual representation under these circumstances.

  1. Even if the attorney’s duties include preparation of loan documents, in nearly all residential mortgage transactions the note and mortgage will be prepared upon standard forms supplied by the bank. Although theoretically there is a possibility that the attorney might exact more favorable terms for the borrower if only the borrower were the client, this is seldom actually done. Given a reasonable explanation, the borrower should be capable of deciding whether to forego representation that includes an attempt to strip away the bank’s boilerplate.[3]

If the documents used to complete the transaction are to be prepared entirely by an attorney especially for that transaction, and particularly if the transaction is not the typical residential mortgage loan but a commercial loan, the situation could be quite different. In such cases, it may not be at all obvious that a lawyer can adequately represent the interests of both lender and borrower, and multiple employment consequently may be impossible. Of course, either borrower or bank may still choose to forego representation and accept documents prepared by counsel for the other. In all cases the attorney is obliged to make every effort to insure that each party knows who he or she represents.

Essentially the same considerations suggest that the attorney may be able to represent both the bank and borrower when the legal services include preparation of a deed. It is, however, doubtful that the seller could be added to the roster of clients in such circumstances. Representation of the seller introduces responsibilities that go beyond preparation of a deed and harbors the distinct possibility of conflict of interest in connection with the title examination.[4] At the same time, there is no reason why the deed need be prepared by an attorney representing the seller, even though the seller ultimately pays the cost of preparation of the deed.

The attorney-client relationship between borrower and attorney would not be altered by an agreement that the seller reimburse borrower the cost of having the deed prepared. Deed preparation may also be accomplished by the attorney for the bank, and the bank may look to the seller for reimbursement of its expenses, without altering the attorney-client relationship.

  1. In all of the cases discussed in this opinion, Rule 3.6(m) requires the attorney to “take reasonable steps” to prevent unrepresented parties to a mortgage loan transaction from believing that the attorney represents their interests. Thus, an attorney preparing a note and mortgage, whose only client is the bank, must take reasonable steps to prevent the borrower from believing that the documents were prepared with a view to protecting the borrower’s interest, because paraphrasing the language of Rule 3.6(m), the lawyer knows or should know that these documents will be presented to the borrower. Similarly, an attorney representing the buyer‑borrower, who prepares a deed, knows that the deed will be presented to the seller. Ignoring Section 439 for the moment, an attorney searching title with the bank as the only client would also have to take reasonable steps to prevent the borrower from believing the attorney represents the borrower’s interest, since the title opinion may be communicated to the borrower.

What will be “reasonable steps” will depend on the risk that an unrepresented party will think the attorney is representing his or her interest. The arrangement by which the attorney’s title fee is passed through to the borrower by the bank creates special problems because the borrower is likely to assume that he is entitled to rely upon the title opinion. In most transactions, after all, the one who pays ordinarily gets something for his money. It is undoubtedly because the borrower may believe that the attorney is working for him even though the lawyer may regard the bank as his client that some lawyers have voluntarily assumed a responsibility to the borrower for any title flaws that may later be revealed. A lawyer who wishes to absolve himself of such responsibility is obligated to take reasonable steps to bring home to the borrower that he will receive no direct benefit from the legal services for which he will be charged.

Attached to this opinion are sample disclosure letters concerning a variety of situations. We believe they are sufficient for purposes of disclosure, but do not suggest that other forms of disclosure would not also be sufficient.

Draft Letter to Borrower When Attorney Intends to Represent Only the Bank and to Warn Borrower Against Reliance on Title Opinions

Dear:__________________________(Borrower)

This firm has been retained by the First National Bank of Insolvency to examine the title of property you intend to purchase from_______________ ______________ (Seller)and mortgage to the Bank. We have also been asked to prepare the closing documents. The Bank intends to require that you reimburse it the cost of the legal services we will perform in connection with this transaction as a condition of the mortgage financing made available to you.

You should understand that, even though you will be paying the cost of our work, we will not be acting as your attorney but only as counsel for the Bank. Our title examination and title certificate and the closing documents will be solely for the benefit of the Bank.

This firm does not assume any liability to you arising out of any of the legal services it has performed or will perform for the Bank, including its title certificate. Any legal advice or legal representation you need in connection with this transaction should be sought from counsel of your own choice, retained by you.

Yours very truly,

Letter to Borrower and Bank When Attorney Proposes to Represent Both

Dear_______________________:(Borrower)

This firm has been retained by the First Benevolent Bank of Far Tottering to perform certain legal services required in connection with a mortgage loan it proposes to make to you to finance your purchase of certain real estate from __________________________ .(Seller)

The Bank will charge the cost of these services to you when the purchase is closed. You have asked us to represent and advise you, as well as the Bank, in connection with this purchase.

The legal services we have been asked to perform include examination of the seller’s title and preparation of the closing documents. Our title examination will undertake to identify all potential title problems, if any, without regard to whether a problem affects primarily the interest of you as purchaser or the Bank as lender.

In preparing the closing documents we will use pre-printed forms supplied by the Bank. Because we are acting for the Bank as well as for you, we will be unable to undertake any negotiations with the Bank on your behalf seeking modification of these forms. Should you desire significant modification of the terms of your loan or any part of the Bank’s mortgage and note forms, you should obtain separate counsel responsible only to you as borrower or undertake any discussions required for that purpose without the assistance of counsel.

Yours very truly,

The following paragraph may be used in a title opinion when the attorney represents the bank alone but wishes to assume liability to the borrowers for the title opinion.

The foregoing title opinion has been prepared at the request of ______ _________________ (Bank). In preparing this opinion and any accompanying documents, we have acted as counsel to the Bank and to no other party to this transaction. We assume liability, however, for any statements made in the foregoing opinion and for the adequacy and accuracy of the title examination it reflects, in accordance with the title standards of the Maine State Bar Association in effect as of the date hereof, to all parties named as addressees of this opinion.

Letter to Seller When Attorney for Borrower or Bank or Both Has Been Asked to Prepare a Deed

Dear:_______________________(Seller)

This firm has been retained by the 13th Savings and Loan Association of West Catastrophe to perform certain legal services required in connection with the purchase of certain real estate from you by__________________.(Buyer)

We have been asked to represent (both the purchaser and) the bank for the purpose of examining your title and preparing the closing documents.

Among other documents, we have been asked to prepare a deed from you to the buyer. Because we will be representing the bank (and the borrower), the deed will be prepared so as to protect their interests in the transaction. Although you may be required to assume the cost of preparation of this deed as part of the closing settlement, you should not assume that the deed has been prepared with a view toward your interest in the transaction.

If you desire legal advice or an opinion with respect to the adequacy of any deed we may prepare to protect your interest, such advice and opinion should be sought from independent counsel of your own choosing. You may, if you so desire, choose to have your own attorney prepare the deed in this transaction. If you wish to do this, please advise us to that effect and ask your attorney to submit a copy of the proposed deed to us five business days in advance of the proposed closing date.

Yours very truly,


Footnotes

[1] It may be argued that if 19 M.R.S.A. ' 722 is a statute expressly providing “the method of determination of attorneys” fees, “then an attorney may not charge any fee greater than or in addition to the fee authorized by the court; otherwise the court does not actually determine the fee. Section 722 could, however, be regarded merely as authority to shift liability for attorneys” fees from one party to the other, in whole or in part. If this is the case, it would not be the method for the determination of the fee, and it follows that attorneys could charge more than the fee awarded by the court and could enter into contingent fee agreements in post‑decree proceedings

[2] Rule 3.4 (d), Maine Bar Rules.

[3] The ABA Committee on Professional Ethics seems to have approved such dual representation, given full disclosure and consent. See Informal Opinions 643 and 837.

[4] The ABA Committee on Professional Ethics seems to have approved such dual representation of seller and buyer at least when the attorney's duties were limited to supervising the closing and perhaps preparing closing documents.

See Informal Opinions 1170, 923, 886, and 472.


Enduring Ethics Opinion