Daily Development for Friday, October 26, 2001

Daily Development for Friday, October 19, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

LENDER LIABILITY; FEES; PROFESSIONAL LICENSING:

When a lender charges a separate fee for preparation of legal documents in its own loan transaction, the preparation of such documents constitutes the unlicensed practice of law and the fee is unlawful for that reason, even if state law authorizes "such fees as the parties agree."

Dressel v. Ameribank, 2001 WL 877574 (Mich. App. 8/01/01)

This important case, which almost certainly is on its way to the Michigan Supreme Court, is a class action lawsuit involving the relatively common lending practice of tacking on an additional loan fee attributable to the preparation of the loan documents.

The court here reverses the trial court and concludes that, because of the fee, the preparation of the loan documents themselves by the lenders constitutes the unauthorized practice of law. Consequently, even though Michigan law expressly provides that a lender can charge "all fees and charges that are agreed to or accepted by the borrower," these particular fees are unlawful.

The court provides a summary of the approaches to the "lender's unlicensed practice of law" issue nationwide, and concludes that its opinion is consistent with the majority view.

The court noted that, although the view is not universal, most jurisdictions permit lenders and others to prepare legal documents that are incidental their basic business, even when engaged in consumer practices. But the court concluded that the situation is different when the lender imposes a fee for such document preparation. This makes the service more than simply "incidental." In the words of a Minnesota court quoted in this opinion:

"If a charge is made for the services, it is likely that both the actor and the recipient, as reasonably intelligent nonlawyers who are reasonably familiar with similar transactions, understand the legal question to be difficult or doubtful. An uncompensated service is much more likely to involve only uncomplicated questions.

Hence, whether the service was performed for or with a fee is relavant to and a factor in, even though not determinative of, the decision whether the service constituted the unlawful practice of law."

The Michigan court appears to go one step better than Minnesota, and views the fact that a fee is charged for drafting mortgage documents to be "the key issue" in determining whether there is an unlawful practice of law. It concludes that the existence of the fee demonstrates that the lender is not simply drafting documents for its own benefit, but is drafting in order to provide a service for compensation.

Comment 1: As indicated, this case certainly will be appealed. If ultimately this opinion controls, however, it may provide a foundation for class actions suits nationwide, right on the heels of a massive refinancing activity in which, no doubt, tens of millions of dollars in document preparation fees were collected in tiny increments from each transaction.

Comment 2: The first natural response is to ask whether it would matter if the documents in question were prepared by the lender's inhouse lawyers. The short answer, of course, is that they are not. The forms may be prepared by counsel, but the actual documents are written up by nonlawyers in virtually every instance. And it is the nonlawyers who make the individual, case bycase determination as to what documents are appropriate. Further, in most, if not all jurisdictions, business entities other than professional corporations cannot practice law, even through employee lawyers. Thus, we may be getting to tangle with our good friends, the "consumer advocates" very soon.

Comment 3: Want to dream up something really scary? Combine this case with the recently decided Beneficial Hawaii, Inc. v. Kida , 30 P.3d 895 (Ha. 2001), the DIRT Daily Development for 10/15/01, which held that a mortgage loan negotiated by an unlicensed mortgage banker was void and unenforceable. This Michigan case does not go that far, and probably won't, but thoughts like that will keep a lender's lawyer awake nights. Happy Halloween!!

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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