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The Ins and Outs of Signing Services

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September/October, 2003 - Volume 82 Number 5

by James L. Gosdin

The use of signing services has become more evident in recent years. This outsourcing is a result of attempts to cut costs incurred by full service companies or in-house employees and of trends in the use of alternative title products by lenders, who are also looking to reduce expenses and decrease delays. Here are a few of the common questions associated with signing services.

What is a signing service? Signing services consist of the use of third parties—either witnesses or notaries—to verify execution of documents, completion of acknowledgements, and return of the documents. Those documents, delivered to the witness or delivered directly to the borrower's home, most typically are loan documents, including mortgages, notes, disclosures, affidavits, and settlement statements prepared by the lender or other persons. The witness does not handle funds, search or examine title, or prepare or retain documents until the conditions of delivery are met. The witness may, however, at the direction of the closing agent, request any amount due from the borrower as shown on the settlement statement. The witnessing often occurs in the home of the mortgagors, further evidencing identity of parties and likely land ownership and providing convenience to the parties. In a few transactions, execution at the home of borrower is illegal.

Who performs the signing service? The signing services are generally provided by a notary public, who may be, but generally is not, an attorney.

Who contracts for the signing service? The witness may contract with a variety of service providers—notary service companies (a wide array of which are available on the Internet), lenders, providers of alternative title products, title insurers, vendor management companies, and other title companies.

What is the nature and content of a witness contract? The witness may not have a formal written contract. Some have written contracts and some simply receive written instructions for particular transactions after completing an application and certification. A witness contract generally provides that the witness is an independent contractor, not an employee or agent. It is possible to view the witness as a person whose services are secured on behalf of the lender, much like the arrangement between the title company and a surveyor, whose services may be requested by the lender or other party and secured by the title company on behalf of that lender or other party.

The witness may be obligated to maintain comprehensive general liability, bonding, and vehicle liability insurance. The may be paid a flat fee, or by the amount of time or mileage, with possible additional compensation if the mortgagors fail to appear at an appointed time. Responsibility for failure to secure correct execution of the documents will typically be borne by the witness. The witness will be required to secure evidence of identity of the parties but not to determine whether a party is a suspected terrorist on the list of Specially Designated Nationals and Blocked Persons. (A link to this SDN list is available from the ALTA® home page.) The witness is generally required to maintain confidentiality of nonpublic personal financial information of the parties. The witness is required to verify that any additional witnesses required by state law will be available at the signing.

Does the witness act solely as a notary? Many states regulate the charge that may be made by a notary for an acknowledgment. In some states, the notary also may charge for mileage. ( See State Laws at National Notary Association site www.nationalnotary.org). Those laws are not determinative of the total fee paid to the witness, however. The services of the witness are primarily those of taking acknowledgements but also include any additional witnessing of documents required by state law, witnessing (whether or not the witness signs as witness) other documents that do not contain acknowledgements, witnessing documents required to have a witness under state law, and forwarding of documents to a lender, or third party. The witness will generally be prohibited from explaining documents to or acting as attorney for the parties, who are instructed to call their own counsel, the lender or a designated person to discuss any questions.

Is the witness performing escrow or closing services? Some states regulate escrow services, either by specific regulation of escrow or closing services or by separate regulation of title insurance.

Witness signings would not appear to be such escrow or closing under most state laws. According to American Jurisprudence: “To create an escrow, there must be a depositary with instructions from the parties as to their agreement concerning the delivery and taking effect of the escrow instrument, who agrees to accept the custody of the instrument upon the terms specified in the agreement of the parties .

One cannot be held liable as escrow agent or trustee unless he has expressly, or by necessary implication, agreed to act as such and is aware of the terms under which the deposit is made and the conditions upon which it may be released.” The witness services do not manifest the characteristics of a depositary any more than do messenger or other delivery services; the witness will not maintain possession of documents until performance of any conditions or events. Typically, the witness will drop the documents at a specified overnight courier location after execution.

However, the Department of Financial Institutions of the State of Illinois has asserted that signing/notary companies advertising and operating in Illinois must be certified as Independent Escrowees, although at recent date, there were no such Independent Escrowees licensed in Illinois . An Independent Escrowee is defined as a person, other than a title insurer or title insurance agent, which receives deposits in trust of funds or documents for effecting a transfer or encumbrance of real property “to be held by such escrowee until title to the real property that is the subject of the escrow is in prescribed condition.” Several cease and desist orders had been issued against signing companies based on the Department's interpretation of the applicability of the requirements for an Independent Escrowee.

To the extent that escrow or closing is regulated as one element of the conduct of title insurance, the witness services also appear to be outside the scope of regulation. Regulation as a title insurance agent typically requires determination of insurability and issuance of title insurance forms, which the witness does not do, and the definition of escrow or closing generally does not encompass witness services. For example, the statutory definition (in Colorado) provides that “closing and settlement services means providing services for the benefit of all necessary parties in connection with the sale, leasing, encumbering, mortgaging, creating a secured interest in and to real property, and the receipt and disbursement of money in connection with any sale, lease, encumbrance, mortgage, or deed of trust.”

Do requirements for licensing title insurance personnel apply to witnesses? In some jurisdictions, key or significant full-time employees with discretionary authority, such as escrow, search, or marketing personnel, or personnel otherwise countersigning title insurance policies, must be licensed or appear on the title company license. Given that the typical witness performs none of these services, has no discretionary authority, and is not employed by a title company, licensing of that witness is not required.

Does a real estate closing conducted by a non-attorney constitute the unauthorized practice of law (UPL)?

There have been several opinions in eastern states concluding that “real estate closings” are the practice of law.

For example, the West Virginia State Bar Committee on Unauthorized Practice of Law Opinion No. 2003-01 (approved—4/16/2003) states that: “While some ministerial and clerical functions occur as part of a real estate closing, i.e. preparation of the HUD settlement statements, simple execution of documents, and disbursement of proceeds, in general, legal principles are applied to the factual situation to determine if and how the transaction should be concluded. For example, there is a determination that the lender can obtain a valid first lien; that the legal description of the land conforms to the survey; that the title insurance requirements have been met; that evidence of hazard insurance is sufficient; that easements and other restrictions have been noted and have not been violated or encroached upon; and that legal instruments have been properly signed to constitute binding documents to achieve their legal purposes. Most importantly, however, it is inherent at the closing itself that buyers and sellers will have questions about the transaction and the documents, which answers necessarily go to their respective legal rights and obligations. Such answers are advising on legal matters. Thus, in West Virginia , generally, real estate closings constitute the practice of law.”

In Massachusetts in Mass. Conveyancers Assn., Inc. v. Colonial Title & Escrow, Inc., the court concluded that the title company had engaged in the unauthorized practice of law. The court noted that the title company reviewed the lender's closing documents for accuracy and consistency, it evaluated the title for defects and cleared those defects, it generated several documents, including the settlement statement, and it answered questions at closing about legal documents.

In North Carolina , Formal Ethics Opinion No. 4 indicates that a non-lawyer may not conduct a refinance transaction, although that opinion did not infringe on the right of a lender to represent itself.

In State of South Carolina v. Buyers Service Company, Inc., the Supreme Court of South Carolina concluded that “real estate and mortgage loan closings should be conducted only under the supervision of attorneys, who have the ability to furnish their clients legal advice should the need arise and fall under the regulatory rules of this court "[W]hen [the physical transportation or mailing of documents to the courthouse] takes place as part of the real estate transfer, it falls under the practice of law ".The appropriate sequence of recording is critical in order to protect a purchaser's title to property.”

The U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) have been active in encouraging non-lawyer competition in real estate closings. On March 20, 2003 , they issued a joint letter to the Standing Committee on the Unauthorized Practice of Law of the State Bar of Georgia urging that the preparation of a deed or the facilitation of its execution not constitute the unauthorized practice of law. They also suggested that, “less restrictive alternatives are available to protect consumers with regard to deed-related services. For example, the New Jersey Supreme Court requires written notice to consumers of the possible risks involved in proceeding with a real estate closing without an attorney. This measure permits consumers to make an informed choice about whether to use lay closing services. Virginia , confronted with similar issues, adopted the Consumer Real Estate Protection Act in 1997. This statute permits consumers to choose lay closers but requires the state to regulate them, providing safeguards through licensure, registration, and the imposition of financial responsibility and rules for handling settlement funds. Though more regulatory than the New Jersey approach, the Virginia approach is clearly a more pro-competitive alternative than an outright ban on lay closings.”

In a December 20, 2002 , letter to the American Bar Association, the DOJ and the FTC also commented on the ABA Proposed Model Definition of the Practice of Law. “The DOJ and the FTC have been concerned particularly about attempts to restrict nonlawyer competition in real estate closings and have urged the states of Kentucky , Virginia , Rhode Island , and North Carolina to reject such restrictions, through letters to their State Bars (state agencies) and legislatures and through an amicus curiae brief filed with the Kentucky Supreme Court in 2000. In addition, the DOJ has challenged in court attempts by bar associations to restrain competition from nonlawyers, and the FTC has challenged anticompetitive restrictions on certain business practices of lawyers .The proposed Model Definition is overly broad because it would prohibit nonlawyers from offering a number of services that they currently provide in competition with lawyers to the benefit of consumers. These services arguably would include those that relate to real estate closings and related matters.”

Most states do not conclude that closing is the practice of law. Making the UPL issue regarding witness signings more complicated in some states is that the witness will not act as an escrow agent, does not disburse funds, and often is instructed not to answer questions by the parties. Many in the lending community also believe that any UPL limits on closing services will be preempted by federal law with respect to depository institutions and their operating subsidiaries.

Does the witness signing constitute doing business in a state by lender or other person? Many states, like Pennsylvania, provide as exemptions from doing business by a foreign corporation “creating as borrower or lender, acquiring or incurring, obligations or mortgages or other security interests in real or personal property, securing or collecting debts or enforcing any rights in property securing them, transacting any business in interstate or foreign commerce ¼ , inspecting, appraising and acquiring real estate and mortgages and other liens thereon and personal property and security interests therein, and holding, leasing, conveying and transferring them, as fiduciary or otherwise.” To the extent that the witness services are conducted on behalf of the lender in a mortgage transaction, those services may not, without additional conduct, constitute doing business within the state. Otherwise, whether a signing service is doing business in and is subject to jurisdiction and possible specific regulation of a state may depend on the adequacy of the minimum contacts sufficient to meet the requirements of due process, as evidence by the significance of activities taking place in the state. (See International Shoe Co. v. Washington .) That, of course, is an issue that can be argued based on the express terms of the state law, the activities of the witness, the location of contacts between the witness and the signing company, and any other activities of the signing company within the state.

Are Signing Services the Future?

While some issues remain in particular states concerning the unauthorized practice of law and regulation, it appears that the demands for lower costs will continue to drive the expanded use of signing services, particularly on refinances and other existing ownership residential mortgage transactions. We also can expect the U.S. Department of Justice and the Federal Trade Commission to make efforts that encourage this form of outsourcing.


James L. Gosdin is senior vice president and senior underwriting counsel for Stewart Title Guaranty Company, Houston, TX. He is chair of the ALTA® Liaison Committee with the National Association of Insurance Commissioners, and he is co-chair of the ALTA® Reinsurance Committee. He is also a member of the ALTA® Forms Committee, Bylaws Committee, and State Legislative and Regulatory Action Committee. He can be reached at jgosdin@stewart.com .


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