The Ins and Outs of Signing Services
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 .
