FREQUENTLY ASKED QUESTIONS ABOUT CRESPA
by James M. McCauley
*
On June 19, 1997, the Council of the Virginia State Bar approved the regulations under which attorneys must operate if they intend to provide residential real estate escrow, settlement, and closing services in Virginia after July 1, 1997. Council also approved guidelines designed to assist non-lawyer settlement agents in avoiding the unauthorized practice of law. Many attorneys are aware of the requirements imposed by the Consumer Real Estate Settlement Protection Act (CRESPA) which went into effect July 1, 1997. See VA. CODE ANN. §§ 6.1-2.19 - 6.1-2.29. Questions about the Act's requirements as well as its scope and application still remain. Here are some of the frequently asked questions our staff has addressed recently concerning the Act.
1. What does CRESPA require an attorney to do if he or she wants to handle residential real estate closings in Virginia?
a. All lawyers who were handling residential real estate closings prior to July 1, 1997, and intend to continue to do so in the future must register with the Virginia State Bar and certify their compliance with the Act by September 29, 1997. Lawyers beginning to do such work on or after July 1 must be in compliance prior to closing residential real estate transactions.
b. Lawyers who close residential real estate transactions as settlement agents will be required to carry malpractice insurance providing coverage of at least $250,000 per claim, file a surety bond with a penalty of at least $100,000 and, unless exempted, carry a blanket fidelity bond or employee dishonesty insurance policy providing limits of at least $100,000. An exemption may be claimed only by an attorney settlement agent with no other employees.
c. Each individual attorney settlement agent must pay a fee of $20.00 payable to the Treasurer of Virginia to accompany the Registration Form, Certification, and Surety Bond filed with the Virginia State Bar.
d. An attorney settlement agent must maintain a separate and distinct fiduciary trust account used solely for the purpose of handling funds received in connection with real estate escrow, closing and settlement services provided by the attorney or any other attorneys in the firm acting as settlement agents.
2. How do I get the required forms and information necessary to register as an attorney settlement agent with the Virginia State Bar?
Cynthia Williams of the Membership Department will be primarily responsible for the registration of all settlement agents (lawyers and non-lawyers). If you have specific questions about registration or compliance with CRESPA, you should contact her at 804-775-0530.
The Virginia State Bar has established a "Fax on Demand" system that should accommodate the large volume of inquiries from attorneys, title agents, real estate brokers, and financial institutions interested in providing real estate escrow, settlement, and closing services. Callers who need copies of the registration forms, attorney certification forms, bond forms, regulations, or UPL Guidelines may call 804-775-0545. The CRESPA regulations and UPL Guidelines will also be published in the August/ September 1997 issue of the Virginia Lawyer Register.
Copies of Bar-approved surety bond forms have been made available to companies that plan to serve as a corporate surety on bonds given by attorney settlement agents under CRESPA.
Questions concerning the unauthorized practice of law (UPL) or the UPL Guidelines issued by the Bar in consultation with the State Corporation Commission (SCC) and the Virginia Board of Realtors should be addressed to Jim McCauley at 804-775-0565.
3. Do I really have to comply with all of these requirements if I am a licensed Virginia attorney and have been closing real estate transactions for years?
Yes, the General Assembly made no provision in the Act exempting or "grandfathering" attorneys licensed prior to its effective date. Therefore, all Virginia licensed attorneys must comply with CRESPA if they intend to close residential real estate transactions covered under CRESPA.
4. May a law firm organized as a partnership, professional corporation, limited liability company, or registered limited liability partnership register as a settlement agent with the Virginia State Bar?
No. Business entities under which attorneys practice law may not register as settlement agents since they are not "licensed" by the Bar. Each licensed attorney in the firm who functions as a settlement agent must register individually with the Bar. Some lawyers disagree with this requirement and believe that they should be able to register corporately as opposed to being required to register individually as settlement agents. The Bar studied this issue carefully before promulgating its regulations. As a practical matter, there are probably few law firms that have registered more than five attorney settlement agents, and the corporate registration fee is currently $100. Thus, five settlement agents per firm is the "break-even point" since the individual registration is only $20.
5. If I or my law firm is already covered under a malpractice insurance policy
with limits of at least $250,000 per claim, do I need additional or separate
coverage under CRESPA to serve as a settlement agent?
No, if your existing malpractice policy provides coverage for you of at least $250,000 per claim, this particular requirement is met. The policy may also cover other attorneys practicing in the same firm or legal entity; all attorneys in the same firm may share the policy limits.
6. Since each attorney must register individually as a settlement agent, must each lawyer in the same law firm who provides real estate escrow, settlement, or closing services provide a separate surety bond?
No, the firm or legal entity may be the principal on the bond covering all attorney settlement agents in the same firm or legal entity. The Bar has approved bond forms for both individual attorney settlement agents and legal entities.
7. May a letter of credit or property bond be substituted for the surety bond required by the Act?
No. The regulations require a bond on which there is a corporate surety authorized to do business in Virginia. This was a matter which the Bar explored at some length as it developed the CRESPA regulations. The General Counsel for the SCC, who have dealt with surety bonds on a regular basis, advised the Bar that they have experienced a great deal of difficulty with letters of credit and property bonds. The Act would require amendment to allow these types of vehicles to suffice, and criteria would be required to determine what would be acceptable.
8. If I am properly registered as an attorney settlement agent, may my secretary or paralegal conduct the closing?
Yes. The attorney settlement
agent is legally and ethically responsible for the work product of non-lawyer
staff working under his or her supervision in the law office. CRESPA does not
require that the registered settlement agent actually conduct the real estate
closing. Moreover, CRESPA specifically states that the provision of real estate
escrow, settlement, and closing services involves "clerical" and "administrative"
tasks and does not involve the practice of law. Therefore, by passing CRESPA,
the General Assembly has declared that certain non-lawyers are capable of lawfully
handling real estate closings. A registered attorney settlement agent may provide
real estate escrow, settlement, and closing services through his or her non-lawyer
staff under CRESPA, provided that such non-lawyer staff comply with the UPL
Guidelines issued by the Bar. A non-lawyer may not give legal advice or prepare
legal instruments (other than "form" documents) and may not perform
any task that requires the exercise of legal judgment.
9. I only handle commercial real estate closings. Am I required to register
as a settlement agent?
No. CRESPA applies only to transactions involving the purchase or financing of real estate containing not more than four residential dwelling units. VA. CODE ANN. § 6.1-2.19(C). Attorneys who close only transactions which involve commercial property do not have to register under CRESPA. However, if the lender requires the borrower to give a deed of trust on the borrower's personal residence as security for the commercial loan, the settlement agent handling the closing must be registered under CRESPA.
10. I am not a real estate lawyer and do not handle real estate closings. As a family lawyer, I prepare deeds under which one spouse conveys their interest in marital property to the other spouse, but I do not close the transaction. Do I have to register as a settlement agent?
No. The Bar has received numerous inquiries similar to this question. If an attorney performs a task such as drafting a deed, note, contract, or deed of trust, but does not handle the closing or settlement, he or she is not required to register with the Bar as a settlement agent. Only if such tasks are performed by the attorney in his or her capacity as the settlement agent must he or she register.
11. I am a County Attorney and have occasion to provide real estate escrow, settlement, or closing services solely for public bodies. Do I need to register as a settlement agent under CRESPA?
No, the Bar's regulations exempt licensed attorneys who provide services solely for public bodies as defined in Section 11-37 of the Code of Virginia.
12. Does CRESPA also apply to equity, refinancing, and home improvement loans?
Yes, to the extent that such loans involve real estate containing not more than four residential dwelling units as security. Thus, an attorney closing on such loans needs to register.
13. If the contract to purchase a home was executed prior to July 1, 1997, must the settlement agent conducting the closing be registered and in compliance with the Act if the settlement date is after CRESPA goes into effect?
Although the Act went into
effect July 1, 1997, all persons qualified to register as settlement agents
under CRESPA have a 90-day grace period until September 29, 1997 to comply with
the Act's requirements. If the settlement occurs before September 29, 1997,
the settlement agent need not be in compliance with the Act; if it occurs after
that date he or she would need to be in compliance.
14. Can the separate and distinct fiduciary account for real estate closings
under CRESPA be designated as an IOLTA account?
Yes. Under the Act, attorney settlement agents shall maintain escrow accounts for handling real estate closings in accordance with the applicable rules of the Virginia State Bar and the Supreme Court. This means that the same rules applicable to attorney trust accounts generally shall likewise apply to escrow accounts maintained to handle real estate closing funds under CRESPA. The Act prohibits any settlement agent (lawyer or non-lawyer) from retaining personally any interest earned on funds held in the account. However, if an attorney settlement agent uses an interest bearing escrow account for CRESPA transactions, the account is presumptively an IOLTA account unless the attorney settlement agent "opts out," i.e., notifies the Legal Services Corporation of Virginia of his or her election not to participate in the IOLTA Program. See Rules of the Supreme Court of Virginia, Pt. 6, § IV, ¶ 20.
15. May an attorney employed by a title company or agency give legal advice to the parties to a real estate transaction covered under CRESPA?
No. No settlement agent can provide legal advice to any party to the transaction except a settlement agent who is engaged in the private practice of law and who has been retained or engaged by a party to the transaction for the purpose of providing legal advice. VA. CODE ANN. § 6.1-2.22.
16. If a financial institution conducts the closing on their own loan, is the financial institution required to be a registered settlement agent?
No. If the financial institution is the lender in the transaction, CRESPA treats such entity as a party to the transaction which is entitled to close the loan without registering with the Bar as a settlement agent.
17. Who enforces CRESPA as it applies to non-lawyers acting as settlement agents?
The answer depends upon
the nature of the activity performed by the non-lawyer and the capacity in which
he or she is acting. The Bar will initially receive all complaints alleging
non-compliance with the Act. If the non-lawyer is giving legal advice or otherwise
engaging in the unauthorized practice of law, the Virginia State Bar will continue
to investigate and prosecute the matter. If the complaint is that the non-lawyer
has failed to register with the Bar as required under CRESPA, the Bar will conduct
an informal investigation, attempt to secure compliance, and, if necessary,
refer such matters to the appropriate licensing authority (i.e., State Corporation
Commission or Board of Realtors). If the complaint alleges noncompliance in
other respects by the non-lawyer settlement agent, but does not allege UPL,
the Bar will refer such matters to the appropriate licensing authority.
18. If I handle a closing on a real estate transaction involving unimproved
lots, must I register as a settlement agent under CRESPA?
No. CRESPA applies only to transactions involving the purchase or financing of real estate containing not more than four residential dwelling units. VA. CODE ANN. § 6.1-2.19 (C).
19. If I already use a separate and distinct real estate escrow account solely for handling funds in connection with real estate closings, do I need yet another separate fiduciary account for real estate closings under CRESPA?
No. If you or your law firm maintain an escrow account solely for handling funds in connection with real estate closings, this account will comply with CRESPA. It is not necessary to open a second real estate fiduciary account for just those settlements to which CRESPA applies.
20. My malpractice insurance requires payment of a deductible of $5,000. Does this comply with CRESPA's requirements?
No. The Act does not specifically authorize malpractice insurance policies wherein a deductible or self-retention provision is employed. Both the SCC and the Bar have concluded that the policy must provide "first dollar" coverage by the insurance carrier. If a deductible is employed, the insurance carrier must use its funds first, seeking reimbursement from the attorney settlement agent. The Executive Committee has determined that the Act requires first dollar coverage for payment of claims, and the VSB's regulations require amendment to reflect that decision.
21. How does the Bar propose to handle re-registration and what fee will be required?
Once the Bar has arrived at the final number of registered settlement agents, an appropriate re-registration fee and cycle needs to be established. The Bar's regulations will require amendment to reflect the revised registration fee (currently estimated at $35.00 for a two-year fee) and establish a re-registration process.
22. May I use my general trust account as my separate fiduciary account under CRESPA?
No. The Act requires the
settlement agent to deposit and disburse funds from "a separate fiduciary
trust account" which the Bar has interpreted to mean a separate account
for real estate transactions only. A number of lawyers have complained about
the requirement that they maintain a separate and distinct trust account for
the purpose of handling real estate settlement proceeds. The Bar stands by its
interpretation of the Act's requirement of a separate account.
23. If I or my staff perform any of the enumerated tasks defined by CRESPA
as 'escrow, closing or settlement services," must I or my staff be registered?
In regard to title agents who are subject to the SCC's control, the SCC has taken the position that a person who does any one of the various activities described in the Act (VA. CODE ANN. § 6.1-2.20) as an "escrow, closing or settlement service" should register with the Bar. As to the lawyers, the Bar has taken what it believes is the more reasonable construction, that purely administrative tasks undertaken in advance of and in preparation for a real estate settlement can be performed by non-lawyer staff. This was the law before CRESPA, and the Bar believes that the legislature did not change that aspect of the unauthorized practice rules. See, e.g., Va.. S. Ct. R., Pt. 6, § I, UPC 6-7 (enumerating administrative tasks that may be performed by non-lawyer support staff). The opinion the Bar has consistently given is that only the person actually conducting the closing of the transaction and handling the receipt and disbursement of the settlement proceeds needs to be registered.
The literal language of the Act would seem to support the SCC's position, as it defines a settlement agent as any person, other than a party to the transaction, who provides "any escrow, closing or settlement service . . . ." A literal interpretation would be too restrictive.
24. Do I need a fidelity bond or dishonesty insurance for employees in my office even if such employees have no responsibility for real estate transactions, do not have check-singing authority, or are part-time or uncompensated?
Yes. The Bar's Executive Committee has concluded that the Act requires group fidelity bond or dishonesty insurance for employees of settlement agents. If there are any other persons present in the office when the settlement work occurs, they must be covered unless they are other licensed owners or partners of the enterprise. This is true even if they have no direct responsibility for the closing work, no check-signing authority, or are part-time or uncompensated. The Bar has had some 100 lawyers claim an exemption from this employee coverage requirement on the basis that they meet this test.
25. Must an attorney who closes "time share" transactions register as a settlement agent under CRESPA?
No. The Bar believes that a "time share" closing does not meet the CRESPA's definition of a real estate transaction involving not more than four residential dwelling units. Such property is typically for vacation use and is not treated as "residential."
26. How many attorneys, real estate brokers, title agents, and title companies have registered as settlement agents with the Bar?
Here is the breakdown as of Friday, October 31, 1997:
Licensed Attorney: 2575
Licensed Broker: 30
Title Insurance Company: 27
Title Insurance Agent: 264
Financial Institution: 3
27. As an attorney in private practice, I am employed as an independent contractor by a title company to attend the settlement conference where I go over the documents to be executed by the parties and answer any questions. I do not prepare any of the documents, nor do I handle any of the settlement funds. The title company is registered under CRESPA and is listed as the settlement agent on the HUD-1. Must I also register under CRESPA to perform this activity?
No. Although the Act could be interpreted to require registration for the activity you have described (see supra Question #23), the Bar believes that the purpose of the Act was to provide certain consumer protections for the parties to a real estate closing by requiring those persons or entities primarily responsible for the closing activities to meet certain financial responsibility and accountability requirements. Although you are performing a function in the closing process, it does not appear that you are serving as the "settlement agent" such that you would be required to register with the Bar under CRESPA.
28. Is a real estate transaction involving only land with a mobile home on it covered by CRESPA, since we know that the mobile home is technically considered personal property and has its own DMV certificate of title?
Even though the mobile home is considered personal property, if it is situated on a parcel of land, it could be regarded as a "dwelling unit" and therefore subject to CRESPA. The closing should be handled by a CRESPA settlement agent.
29. What about residential rental property? Is that CRESPA regulated?
The word "dwelling unit" should be interpreted expansively as the purpose of CRESPA is to protect consumers; therefore, a transaction involving the purchase of a rental unit does not change the conclusion. It is still a "dwelling unit" as opposed to real estate used for commercial purposes and should be subject to CRESPA.
30. If attorney represents Seller, prepares the deed, reviews the closing statement prepared by Buyer's counsel (HUD-1), receives settlement proceeds due Seller, deposits into attorney's trust account, and disburses to Seller, does that require CRESPA? (Buyer's counsel is clearly listed as the settlement agent on the HUD-1, etc.)
The person listed on the HUD-1 is the settlement agent and is responsible for making the payoff and do post-settlement follow up to ensure that the lienholder has surrendered the Note and executed and recorded a Certificate of Satisfaction. The mere handling of funds due the Seller alone will not make the Seller's attorney subject to CRESPA.
* James M. McCauley is the Ethics Counsel for the Virginia State Bar and is a Central Virginia Area Representative of the Real Property Section of the Virginia State Bar.