Why Legal Review Still Matters in an Automated Mortgage Workflow

By Peter Idziak, Partner-in-Charge, Sandler Law Group

In an era of automated loan origination systems and increasingly standardized documents, a requirement that an independent law firm prepare or review mortgage loan documents might appear to be a procedural throwback. So why is a law firm like Sandler Law Group (SLG) still needed to prepare or review closing documents and what value does the law firm provide to the lender?

Unauthorized Practice of Law in Attorney States

Historically, the drafting of notes, security instruments, and deeds was considered the practice of law and restricted to licensed attorneys.  However, the standardization of such documents and technological improvements allowing for the completion of form templates have led some jurisdictions to carve out such document preparation from the practice of law.

Today, the role attorneys must play in the preparation of mortgage loan documents varies by state. Some states generally allow non-lawyers to prepare loan documents.  Other states still consider such document preparation to be the practice of law.  Among this second category, some states have a “pro se” exception that allows the parties to the transaction to prepare their own documents.  Others, however, continue to require a licensed attorney prepare the documents.

Texas is one of the clearest examples of this last category. Under Texas Government Code § 83.001, a person generally may not charge or receive compensation for the preparation of an instrument affecting title to real property (like a deed of trust), unless that person is an independent Texas-licensed attorney.  “Compensation” is defined broadly to include indirect compensation—such as origination fees or interest earned on the note—which makes preparation by a lender a UPL violation even when a document preparation fee is not charged to the borrower.

If mortgage loan documents are prepared through a process that does not satisfy a state’s unauthorized practice of law (UPL) requirements, the preparer risks not only civil enforcement by the state bar association, but also potential criminal exposure.  Several states treat the unauthorized practice of law as a misdemeanor, with a few even classifying repeat violations or those involving fraud as a low-level felony. 

Investor Representations and Warranties

Lenders also face repurchase risk from investors if they fail to meet a state’s UPL requirements.  Almost all investors, including Fannie Mae and Freddie Mac, require that lenders represent and warrant that they have complied with all federal, state, and local laws in originating the loans sold to the investor. 

If an investor discovers a loan was prepared in violation of a state's practice-of-law requirements, that can constitute a breach of those representations and warranties and potentially trigger a repurchase demand. Investors have not historically demanded repurchase solely for UPL violations, but the buyback risk is real and systemic, even if remote.  In a risk-off environment, an investor may scrutinize systemic deficiencies, including UPL violations, more closely.

The Review Is More Than a Rubber Stamp

Because attorney review is required by a state or investor, the review is sometimes viewed as simply a box that must be checked before closing. That view misses much of the substantial practical value an independent third-party attorney review can bring to lenders.

State laws governing consumer lending, secured transactions, and real property are notoriously quirky. Texas, for example, has a multitude of laws surrounding property ownership and secured lending that can interact in complicated ways.  A home equity loan affected by homestead protections, community property nuances, and additional collateral issues presents a complex web of interconnected issues that an automated underwriting system may not catch. 

As part of our work, SLG may review the title commitment, survey, and other information provided for the closing, in addition to the loan documents themselves. It is not uncommon for us to catch issues that may not be apparent from the loan data alone.  Issues we often flag include a title exception that needs attention, a vesting inconsistency, a missing spousal signature, or documents that do not match the way the transaction is actually structured.

Our review also helps lenders assess loan documents and transaction structures against applicable requirements of Fannie Mae and Freddie Mac (the GSEs), as well as government loan programs such as FHA, VA, and USDA. Depending on the program and scope of our review, this may include requirements for title coverage, lien priority, powers of attorney, and program-specific documents or provisions. A transaction may satisfy state law yet present an issue under an investor’s or agency’s requirements. Identifying those issues before closing can help protect the loan’s eligibility for sale, insurance, or guaranty.

These issues are often easier to address before closing. Catching a problem early may prevent a funding delay, avoid the time and expense of recording a corrective document, or prevent a lender from originating an unsellable loan.

Helping Lenders Manage Risk

Attorney review also helps lenders minimize risk by providing an additional layer of protection that supplements the lender’s own compliance and quality control functions.

That protection reflects an important distinction between the lender’s attorney and a title company. The title insurer is the lender’s contractual counterparty, providing coverage subject to the policy’s terms, exclusions, and exceptions. Its interests may differ from the lender’s when questions arise about coverage or responsibility for a defect.

When SLG prepares or reviews a loan package for a lender, we represent the lender alone and focus on protecting its interests. As the lender’s counsel, we owe professional duties of loyalty and independent judgment to the lender.

A title company’s willingness to close or insure a transaction does not necessarily resolve every legal risk to the lender. As part of our review, we can help the lender evaluate title exceptions, document issues, and proposed closing conditions from the lender’s perspective, including issues that may fall outside title insurance coverage.

The Takeaway

Ultimately, SLG does much more for our clients than just check a box.  We help lenders navigate the legal requirements that apply to mortgage documents and real property. We also help lenders address applicable GSE and government program requirements that can affect loan eligibility. We review the details of individual transactions, identify problems that may not be obvious from the face of the documents, and help resolve those problems before the loan closes.

In a mortgage process increasingly built around automation and standardization, that legal judgment still matters and can provide significant value to our clients.

To learn more about Sandler Law Group’s residential mortgage document preparation, legal review, and closing support services, contact our team.

This article is provided for informational purposes only and does not constitute legal advice. The application of law may vary based on the jurisdiction and the facts and circumstances of a particular transaction.