Yes, kids, we're back.  I took MLK Day off, but we'll resume the DD's with this one, dated for next Tuesday.  I trust that it's controversial enough to start us off with a bang.

 

Daily Development for Tuesday, January 21, 2003

 

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

 

ATTORNEY/CLIENT; UNAUTHORIZED PRACTICE; DEFINITION OF "PRACTICE OF Law:"  Justice Department and FTC Warn ABA on Proposed Document Preparation Limits for Non-Lawyers:

 

http://www.usdoj.gov/atr/public/comments/200604.htm

 

The US Department of Justice and the Federal Trade Commission have  issued a joint letter warning the American Bar Association not to promulgate model rules that would restrict non-lawyers from preparing common documents used in residential real estate transactions.

 

The Michigan Supreme Court is about to address this issue in Dressel v. Ameribank, 2001 WL 877574,  http://www.michbar.org/opinions/home.html?/opinions/appeals/2001/080301/11093.pdf (Mich. App. 8/01/01) (the DIRT DD for 10/19/01), which held that a lender violated the unauthorized  practice rules when it drafted loan documents and charged the borrower separately for such preparation.  Therefore,  this letter could not be more timely.

 

The letter states:

 

"Together, the DOJ and the FTC have become increasingly concerned about efforts to prevent nonlawyers from competing with attorneys in the provision of certain services through the adoption of Unauthorized Practice of Law opinions and laws by state bar agencies, courts, and legislatures. . . . 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. . . the DOJ and the FTC are unconvinced that the adoption of such a broad definition of the practice of law would serve the public interest."

 

The Justice Department and the FTC cited specific areas where nonlawyers should be allowed to compete with attorneys, most notably in the area of residential transactions:  Lay real estate closings are an area with which the DOJ and the FTC have much recent experience, and they provide a specific and fertile example of how the proposed Model Definition would result in significant consumer harm.  The proposed Model Definition has the potential to prohibit or to limit the lay provision of real estate closing services.  Under section (c)(2) of the Definition, lay persons apparently would be practicing law if they selected, drafted, or completed certain closing documents.  Likewise, Section (c)(1) does not clearly define what is meant by "giving advice or counsel" as opposed, for example, to providing information.  Under the proposed Model Definition, lay persons may not be permitted to answer certain questions about a purchaser s mortgage obligations and other related matters (or sim ply may be chilled from doing so, when faced with the possibility of civil or criminal sanctions).

 

"Similarly, real estate agents routinely fill out and explain purchase and sale agreements, the basic agreements into which buyers enter as the first steps toward buying a home.  They may explain to consumers the ramifications of failing to have the home inspection done on time, the meaning of the mortgage contingency clause, and other portions of the agreement.  They may also negotiate these clauses during the purchase process.  Realtors often explain what is required by state law to obtain a smoke detector certificate, a termite certificate, and other certificates required by law for the purchase and sale of a home.  Under Section (c) of the proposed Model Definition, all of these activities could be considered giving people advice about their legal rights and responsibilities (Section (c)(1)), negotiating legal rights on behalf of people (Section (c)(4)), or selecting, drafting or completing legal documents or agreements affecting people's rights (Section (c)(2)).

 

When nonlawyers compete with lawyers to provide services that do not require formal legal training, consumers may consider all relevant factors in selecting a service provider, such as cost, convenience, and the degree of assurance that the necessary documents and commitments are sufficient.  The use of lay services also can reduce costs to consumers.  Evidence suggests that the use of lay real estate closers provides a lower cost alternative for consumers.  Additionally, although accountants and tax preparers do not typically itemize the legal-related services included in their services, it is probable that the cost of retaining an attorney for those same services would often be higher.  Advice and information about the laws from tenants associations and other advocacy organizations is often free.  Will writing and other legal form fill software packages can be significantly less expensive than hiring an attorney to draft the will or other legal document.  These services plainly benefit consumers."

 

The FTC cited several specific reasons of why the rules are designed to hinder competition and will drive up consumer costs:

 

"By limiting the ability of lay persons to provide such services in competition with lawyers, the proposed Model Definition would eliminate or reduce many of these benefits, potentially harming consumers in several ways.  First, the proposed Model Definition would force consumers who would not otherwise choose to hire a lawyer to do so.  For example, in the real estate context, under the proposed Model Definition, home buyers could be required to retain attorneys to write and interpret real estate purchase and sale agreements and provide other information and advice normally provided by real estate agents.  Likewise, borrowers would have to employ lawyers to provide certain real estate closing services that nonlawyers currently provide without charge.  These additional costs would be incurred by home purchasers, as well as consumers refinancing their existing loans or obtaining home equity loans or second mortgages.

 

Second, the proposed Model Definition, by eliminating competition from lay persons, would likely increase the price of lawyers services, because the availability of alternative, lower-cost lay service providers typically restrains the fees that lawyers can charge.  Consequently, even consumers who would otherwise choose an attorney over a lay service would likely pay higher prices.  That was the conclusion that the New Jersey Supreme Court reached before ultimately rejecting an opinion that would have had the effect of eliminating lay real estate closings.  Evidence gathered in that proceeding indicated that in parts of New Jersey where lay closings are prevalent, buyers represented by counsel paid on average $350 less for closings and sellers represented by counsel paid $400 less.

 

Third, the proposed Model Definition may hurt consumers by denying them the right to choose a lay service provider that offers a combination of services or form of service that better meets individual consumer needs.  For example, consumers may choose to use willmaking software because it is relatively easy and convenient to use.  Consumers who cannot afford lawyers may instead seek out the assistance of tenants associations or other advocacy organizations for legal information.  In real estate closings, some non-lawyer services also compete with attorneys on the basis of convenience to close loans at nontraditional times (such as evenings or weekends) and locations (such as the consumer s home).  Moreover, closing loans by mail or the Internet utilizing lay services is a common practice for consumers buying property or refinancing loans in some states.  For these consumers, an overly broad definition of the practice of law, prohibiting lay closings, could raise costs and erect si gnificant barriers to electronic commerce if enacted in these states.

 

Fourth, the Model Definition could reduce competition from out-of-state service providers.  In the real estate mortgage market, for example, out-of-state lenders may compete by offering lower interest rates or more attractive loan packages than similar in-state institutions.  These lenders may not have a significant in-state presence and may instead contract with in-state lay providers to close loans.  Some of these lenders conduct their entire loan application and approval process via the Internet, simultaneously reducing costs and increasing customer convenience.  The Model Definition, if it requires attorneys (or their lay employees) to close loans, has the potential to impair substantially this competition between lenders."

 

The letter also cites the rules as a potential bar to e-commerce.

 

The letter concludes that there is no evidence that the anticipated increase in consumer costs will create a concurrent benefit for consumers.

 

"Costs that the proposed Model Definition likely would impose on consumers should not be imposed without a convincing showing that lay services have not only injured consumers, but also that less drastic measures cannot remedy the perceived problem. . . . until demonstrated otherwise, accountants, bankers, real estate brokers and others skilled in business should remain able to provide advice and legal information related to their particular practices without harming the public.  This already occurs every day in multiple jurisdictions with little or no evidence that consumers would benefit by the same advice instead being provided by an attorney."

 

Comment 1: As a lawyer who has spent his entire practice life in areas in which lawyers do not commonly do residential real estate closing, the editor concurs that the additional benefit to consumers that would be provided by requiring the presence of lawyers in every deal does not seem justified.  A skilled lawyer would prevent some difficulties in some cases, but some lawyers are unskilled and actually do more harm than good.  More importantly the vast majority of those providing closing services have the necessary skills to do the relatively routine work using form documents that commonly are involved in most such closings.

 

The opinion appears to stop short of concluding that laypersons ought to be permitted actually to draft legal documents, even those in residential transactions.  This is a good place to draw the line.  Although, of course, some errors will result when the wrong forms are used or blanks are filled in inappropriately, the risk of error is much lower when the parties use form documents than when a nonlawyer actually attempts to draft legal language.  The editor believes that the cost/benefit ratio for consumer interests clearly tilts the other way when actual legal drafting is involved.

 

Of course, the interpretation of form documents by nonlawyers and their providing  advice with respect to real estate transactions and other consumer transactions present some risks   But the it is almost impossible to differentiate in the abstract what advice is appropriate and what is not.  Nonlawyers continue to be exposed to a high risk of liability in the giving of such advice, and consumers may be protected by this hard reality.

 

Comment 2: In order for the bar to continue to enjoy acceptance for the requirement that only professionals draft legal documents, the profession ought to be working hard to develop a class of specialists in each key consumer service area who can provide satisfactory service at reasonable cost.  The editor has long believed that certificate programs for specialists make a lot of sense, especially in areas where the market for particular specialties is strong enough to justify lawyers committing to these specialties.  The complexities of the modern regulatory framework for consumer transactions makes it impossible for a non-specialist really to provide effective legal services to real estate consumers at a reasonable price.  A once a year dip into the RESPA pool is not enough to keep one sharp on compliance with that incredibly complex set of requirements.  And it is only one of many that routinely figure into residential closings.

 

Given a choice between a reputable experienced broker and "my brother in law the tort lawyer" to represent me in carrying out the purchase and sale of a home, I'll take the broker every time.  Until the bar recognizes that it is no longer practical, in developed areas, to expect lawyers to be competent to perform every conceivable legal service, the bar runs the risk of continue erosion of its professional monopoly.