9/1/1998 Newsletter and Legal Memorandum (print version)

While this topic continues to generate a wide variety of lively discussion, we seem to have found some common ground on which these transactions can be accommodated within the parameters of North Carolina state law and ethical considerations. By providing a forum for discussion of this issue, Statewide has taken some criticism. However, it is our opinion that collectively we must address this issue and work with the lenders to find a way to provide the services required without the circumvention of the attorney state process. We stand firmly behind our attorneys and the North Carolina attorney state system.

Both at our seminars and through direct feedback, it seems that the number one concern from North Carolina attorneys on this issue regarding witness closings is the erosion of the attorney process. In this case, primarily pertaining to equity line transactions. We have all seen or heard of lenders and others who are attempting to use abstractors, paralegals and legal secretaries to prepare title opinions. These opinions are then used to prepare the closing documents. At this point, lenders without a physical presence in North Carolina are forced to find a local attorney to perform the witness closing. This is the wrong way to accept a witness closing order. Anyone having knowledge or even suspicion that the title opinion and associated loan documents were prepared by a non-attorney (or a person not under the direct supervision of a North Carolina attorney) should contact either Statewide or the NC Real Property Bar for investigation.

On the other hand, there can be a right way for these transactions to work. Both Statewide Title and it’s subsidiary, Statewide Mortgage Services, Inc. (SMSI), have been working with members of the Real Property Bar and lenders to educate lenders on the way our legal process works. Many out of state lenders, particularly the smaller lenders, simply are ignorant of our state real property laws. The attorney state system is very foreign to them and it takes a lot of explanation (and patience at times) to make them aware of the way these transactions must be conducted to satisfy the law. Their number one goal is to get the loan closed as quickly and inexpensively as possible. It is our challenge to provide them with the legal assistance they need, while at the same time satisfying our professional responsibility and reasonable fee structures.

There are well over 100 out of state lenders who are licensed to do business in our state who do not have a physical presence here. That number continues to grow. A large majority of their lending is for equity line purposes. Statewide has taken the position that this is a substantial business opportunity for North Carolina attorneys. However, we must be willing to stand by our system and to accept the national fee schedules associated with these limited transactions. As a result, we have established the following guidelines by which we will accept the placement of witness closings with our StateNet™ attorneys.

The preliminary title opinion must have been prepared by a licensed North Carolina attorney. SMSI was created to take these orders and distribute them to North Carolina attorneys participating in StateNet™.
In the vast majority of cases, the witness closing will be performed by the same attorney who prepared the preliminary opinion of title. We will make every effort possible to have the same attorney conduct both sides of the transaction. In some circumstances, such as a vacation or timing problem with the certifying attorney, we may be forced to place the closing with a different attorney in the same area. In any case, however, the closing attorney will be assured that the title examination was prepared legally and ethically.
Lender clients will be instructed to notify the borrowers in advance that the attorney is performing in a limited professional capacity and does not represent them. With your feedback and that of some members of the Real Property Bar, we have developed a disclosure form to further clarify your position with the borrower.
Your function will be strictly to witness execution of the loan documents. With the relatively low fee structures associated with these types of transactions it is important that this is clearly understood by the lenders and borrowers. Any additional duties will require increased fees.
Work performed is work paid. Due to the high number of cancellations on these transactions, a number of attorneys have had bad experiences attempting to collect payment for services rendered. While we have every intention of placing both the title examination and closing with our StateNet™ attorneys, the reality is that a large number of them will never make it to closing. SMSI contractually obligates it’s lender clients to pay for work performed by our attorneys whether it cancels or not. We will guarantee payment to our attorneys.

We hope that this statement of our position will clarify the issue and help you to determine whether your firm can accommodate these types of transactions. As stated before, Statewide has chosen to address this issue and take a stand to both support and clarify our attorney state system while at the same time accommodate the transaction needs of lending institutions from around the country.

I mentioned in last month’s issue of this publication that I recently attended a conference in Chicago entitled "Title Agents’ Seminar on Strategic Alliances", sponsored by the American Land Title Association. While very exciting and informative, it was also very sobering. The focus of the seminar was to educate those of us in the title industry on the monumental changes occurring in the national lending industry and in technology. The overriding theme, and not just for our industry, was that in order to survive and prosper in the coming years we must develop successful business alliances.

The keynote speaker was Robert Porter Lynch, President of The Warren Company. He and his company focus their efforts on helping businesses to build alliances that will increase their ability to deliver value to the customer, to maximize profitable growth and to create real competitive advantages. As a consultant, he has worked closely with domestic and international alliance teams with companies such as AT&T, General Electric, IBM, Lockheed, Scott Paper, Xerox, Rockwell and Prudential.

Traditionally, business in the title industry has been derived from Banks, Real Estate Agencies, Attorneys and Builders. Title companies have had little control over the real estate transaction process. In fact, title companies are many times considered to be a necessary evil that slows down the transaction process. Interaction has been tactical and transactional. Those driving the business desire relationship control, want the title product delivered yesterday, and want service at a discount. This relationship at times can be very adversarial.

As the nature of the business is changing, however, some major shifts will occur. Alliances and joint ventures will transform the financial services industry and will be used extensively to create a networked enterprise. The key driving forces will be Systems (integration, innovation & information), Speed (faster cycle times, service breakthroughs & coordination), and Alliances (cooperation, strategic relationships & bundled services). The financial services industry is currently networking faster than all other industries. As these networks develop, it will take fewer networks to provide national coverage. As put by Mr. Lynch, we are beginning the age of "Coopertition".

Breakthroughs in technology are the mechanism by which this networking can take place. Connectivity is currently the key buzzword. Electronic systems can enable us to have both local and national integration. As this integration occurs, a transformation will take place from Tactical – Transactional relationships to Strategic – Relational. In other words, the component system will be replaced by synergy. Rather than deriving profit through our ability to compete with our rivals, it will come through speed of innovation and response, coordination and leverage of systems, and the migrating value of core competencies.

It is estimated that in the near future 50% of all sales in the banking industry will come from strategic alliances. A side result of these alliances and better technology is a highly diminished cost but higher profit margins. It is hard to imagine going faster, having lower fee structures, and making higher profit margins. However, it is estimated that our industry will realize a 35% increase in profitability through the efficiencies created by alliances and technological advances. What does this mean for us in North Carolina? Should we resist the change and fight for status quo? How do we become a part of these value chains and national alliances? What kind of hardware and software are required? I will address these questions and offer a summary of what we have seen developing nationally over the past 2 years.

A little over 2 years ago, an emerging trend began to develop among the larger lenders, both regional and national. There was a desire to "outsource" many of the ancillary services typically handled "in-house" by these lenders. In response, the national title companies created "bundled service" subsidiaries. These bundled service subsidiaries were created to accommodate the transaction requirements of the lenders who wanted "one stop shopping", regardless of which states in which they were conducting real estate transactions. Some of the services offered include appraisals, flood certifications, title reports, title insurance, document preparation, centralized funding, lead based paint testing, imaging, automation, etc.

You may have heard of or had the opportunity to have worked with some of them. LandAmerica (formed through the merger of Lawyers Title and Commonwealth) has One-Stop. Stewart Title has Stewart Mortgage Information. Chicago Title has CastleLink. Each has a centralized national order center that can receive orders from around the country and route the service components accordingly. They are developing nationally standardized fee structures and required product turnaround times. They provide order placement, statusing and coordination of the transactions. Essentially, the lender can place the order and sit back and wait until the product is returned in bundled form, ready to make the loan.

A number of mechanisms are being used to communicate the orders between the lender and the bundled service companies. Some have developed software that a lender can install and order the necessary service products accordingly. Stewart Mortgage has SureClose LenderPak. Others have developed, or are in the process of developing Internet based products that can be accessed through dial in connections. Still others are simply using the fax machine or the more secure dial in #800 connection. Security remains an issue in the transformation of transaction data, but breakthroughs in this area are occurring every day. It is the consensus of opinion among the industry leaders that eventually most of these types of transactions will be Internet based.

To focus more specifically on how this relates to title agents and real property attorneys in North Carolina, I will recap what Statewide Title has done to create a value niche that will make us and our client attorneys attractive in regional and national strategic alliances. We created Statewide Mortgage Services, Inc. (SMSI), to serve as the "one stop" title services organization for the state of North Carolina. With your help, SMSI has come a long way in determining acceptable fee structures and turnaround times that are pertinent to real estate transactions throughout the 100 North Carolina counties. We created StateNet™, which is a network of reputable real estate attorneys across the state who recognize this emerging trend and desire to remain competitive and profitable as the industry evolves.

SMSI has been approached be lenders from around the country who desire one stop title representation in North Carolina. Many are unfamiliar with the attorney state system and how it functions in relation to the rest of the country. The first step is to educate them on our process, particularly the legal requirement that only licensed North Carolina attorneys are able to certify title and conduct closings. The next step is to route their orders to our StateNet™ attorneys in the appropriate counties. We represent Stewart Mortgage Information and LandAmerica OneStop, both of whom are regularly developing relationships with lenders from around the country who do business in our state.

By working with these companies, SMSI is developing the ability to educate North Carolina real property attorneys on changes occurring in the industry and how best to prepare and adapt to them. We have an in-house Systems Manager who works daily on communication integration and solutions to the seamless transformation of data on our title transactions. It is our goal to help our attorneys send and receive their title opinions and other transaction information electronically, thereby reducing the duplication of data input, chance for error, and faxing. We will also distribute software as it is received from our bundled service vendors that will enable our StateNet™ attorneys to receive their title order instructions and closing packages electronically. Some of these systems now allow the attorney to remote print closing documents in their offices. In the event of an error, the lender can make the necessary changes and the documents can be re-drawn in a matter minutes, thereby saving the closing.

These efficiencies are an example of the decrease in transaction costs and the increase in accuracy and turnaround time mentioned above. While it is impractical for individual law offices to attempt to develop the software necessary to achieve national connectivity, it is also unnecessary. Other components of our system are also changing. We were invited to attend a presentation recently at the Randolph County Register of Deeds office. Landata, a division of Stewart Title, had helped them to automate the registry process. There were many other Registers there from around the state with a desire to do the same thing. The net result will ultimately be the ability for attorneys to search titles via computer right from their offices. This is not a local trend, but a national trend.

By partnering with a company such as SMSI, you can position yourself to become part of a value network. You can reap the benefits of being part of the developing alliances now being formulated. The value chain goes from the lender to the national title company / bundled service subsidiary to SMSI / StateNet™ North Carolina real property attorneys. The synergy is created by working in cooperation and utilizing the technological advances provided by the top of the chain. Essentially, all the law office will need in order to participate will be a relatively up to date computer (486 or above), a modem, an Internet dial in connection through a local Internet Service Provider, and a comprehensive understanding of the changes taking place that are being driven by the lending industry.

These changes will not take place overnight, but we have been assured that they will happen. It can be somewhat scary when evaluating the total transformation that is taking place in the "information age". It can also be very exciting. Our challenge, and yours, is to take advantage of the opportunities for involvement in these developing value networks as they arise. The attorney state system works very well for North Carolina consumers and in comparison offers one of the best values available around the country. We must look at our system, the national trends, and ask ourselves this question… What will my business need to look like in order to be profitable 5 years from now?

The Newsletter and Legal Memorandum - Statewide Title, Inc.