On June 19, 2013, the South Carolina Supreme Court issued its long-awaited opinion in Crawford v. Central Mortgage Co., determining that mortgage lenders and servicers may continue modifying mortgage loans without requiring supervision by a South Carolina-licensed attorney.
Under this ruling, a loan modification conducted by a non-attorney does not constitute the unauthorized practice of law.
This petition was filed as a result of the South Carolina Supreme Court’s original and subsequent substitute opinion in Matrix Financial Services Corporation v. Frazer.
In Matrix, the court held that any mortgage transaction unsupervised by a South Carolina-licensed attorney constitutes the unauthorized practice of law and may bar a mortgage holder from obtaining equitable relief, including foreclosure. Subsequently, in BAC Home Loan Servicing, L.P. v. Kinder, the court clarified that the holding in Matrix would be prospective only and applies for all mortgages filed after August 8, 2011.
On March 8, 2012, the court in its original jurisdiction agreed to hear oral arguments in Crawford as to whether modifying a mortgage loan without the participation of an attorney constitutes the unauthorized practice of law.
Crawford involved two cases consolidated for review.
In the first case, Cassandra Crawford purchased a home, subject to a mortgage loan from Central Mortgage Company. When Crawford became delinquent on payments, she received a loan modification, which reduced the interest rate and extended the time for repayment.
Subsequently, Crawford received a second loan modification, further reducing the interest rate in the short term.
Crawford executed the second loan modification in the presence of a notary with no attorney present. In the second case, James Warrington, a real estate investor, purchased property, subject to a commercial loan with the Bank of South Carolina. Warrington subsequently received three loan modifications to extend the time to repay the loan. The bank prepared each modification, using standard forms, without attorney participation.
In both cases, the borrowers defaulted and foreclosure actions were filed. Both borrowers sought to prevent foreclosure and to have their loan modifications and the mortgages they modified declared void, arguing that the lenders engaged in the unauthorized practice of law by modifying the loans – the crux of the argument being that the loan modifications had a “legal effect” and changed the legal rights of the parties by altering the interest rate and repayment terms.
The Supreme Court, however, rejected this argument, holding that mortgage lenders and servicers may modify mortgage loans absent supervision from a South Carolina-licensed attorney. The Court distinguished from two previous cases that addressed the unauthorized practice of law in real estate mortgage loan closing transactions: State v. Buyers Service Co., Inc. and Doe v. McMaster.
Buyers Service established that a South Carolina-licensed attorney must supervise four stages of residential real estate closings: (1) title search, (2) preparation of the loan documents, (3) closing, and (4) recording of title and mortgage. McMaster extended this holding to include mortgage loan refinances. In this case, however, the Court drew a distinction, stating:
A loan modification is an adjustment to an existing loan to accommodate borrowers who have defaulted. In contrast, refinancing is the issuance of an entirely new loan, often used by home owners to take advantage of lower interest rates. Thus, the same public policy that requires attorney supervision for home purchases and refinancing does not apply to loan modifications.
The court also cited increased costs to the consumer, the existence of a robust regulatory regime, and the presence of competent non-attorney professionals as additional reasons for not requiring attorney supervision in the preparing, mailing to borrowers, and recording of executed loan modifications.