Accession Law LLC


Oct 22, 2014

What is "legal advice" and why can't brokers give it?

In Wisconsin, as in many jurisdictions in the United States, it is illegal for a person to practice law without a license.  The practice of law includes, but is not limited to, giving legal advice to someone in exchange for some type of consideration.

Wisconsin Supreme Court Rules chapter 23.01 contains the definition of the practice of law in Wisconsin.
SCR 23.01 Definition of practice of law.
The practice of law in Wisconsin is the application of legal principles and judgment with regard to the circumstances or objectives of another entity or person(s) where there is a client relationship of trust or reliance and which require the knowledge, judgment, and skill of a person trained as a lawyer.  The practice of law includes but is not limited to:(1) Giving advice or counsel to others as to their legal rights or the legal rights or responsibilities of others for fees or other consideration.(2) Selection, drafting, or completion for another entity or person of legal documents or agreements which affect the legal rights of the other entity or person(s).(3) Representation of another entity or person(s) in a court, or in a formal administrative adjudicative proceeding or other formal dispute resolution process or in an administrative adjudicative proceeding in which legal pleadings are filed or a record is established as the basis for judicial review.(4) Negotiation of legal rights or responsibilities on behalf of another entity or person(s).(5) Any other activity determined to be the practice of law by the Wisconsin Supreme Court.
So what does this mean?  Every time one person gives another advice clearly does not always implicate the practice of law.  Barbershops and taverns would be out of business.  The advice has to relate to "legal rights or responsibilities." The idea of "legal rights and responsibilities" also implicates the portion of the definition which includes "the knowledge, judgment, and skill of a person trained as a lawyer."

Isn't this definition somewhat circular?  "Legal advice" seems to mean advice given by lawyers.

The definition also indicates that the practice of law is "for fees or other consideration."  So, if a person doesn't collect a fee, they aren't practicing law, right?  Wrong.  The consideration could be the commission earned on a sale, a profit realized in conjunction with the advice, or any number of other possibilities.

The definition indicates that the practice of law involves "a client relationship of trust or reliance."  When does a "client relationship" begin?  Elsewhere in the attorney rules of professional conduct, it is clear that the client relationship can begin without the "attorney" necessarily agreeing to represent the "client."  Trust and reliance are examined from the perspective of the client or potential client.  Attorneys must consider "inadvertent clients" to whom they owe duties.

People not licensed as lawyers are not permitted to engage in the practice of law.  If a person wants to practice law, they must complete law school, meet the Wisconsin Board of Bar Examiners standards, subscribe to the code of professional conduct stated in the Supreme Court Rules and then get admitted.  These requirements set a minimum threshold of competency and create a strict code of professional conduct with attendant enforcement provisions.  Lawyers also typically carry malpractice insurance to insure against liability arising in the event they make a mistake.

Unlicensed people have not proven the minimum level of competency.  They do not generally know, let alone agree to be bound by, the attorney's code of professional responsibility.  Further, they almost certainly do not carry legal malpractice insurance.

Real estate brokers are exempt from the law license requirement when they are practicing within the scope of practice authorized by Chapter 452, Stats.  Among the duties of a real estate broker to a client is the "duty to provide, when requested by the client, information and advice to the client on matters that are material to the client's transaction and that are within the scope of the knowledge, skills, and training required under (Chapter 452, Stats.).  

A real estate broker has a duty to provide advice within the scope of the knowledge, skills and training required of real estate brokers, and a broker does not need a law license to give such advice.  However, a broker would need a law license to give advice of the type typically given by lawyers which is outside of the scope of knowledge, skills and training required of real estate brokers. (Incidentally, although most brokers are insured for errors and omissions, many E&O policies exclude coverage for legal malpractice claims).

Whether a broker has crossed the line in giving legal advice not exempted by the broker's scope of training clearly is a fact-specific question.  Client Question: What can I write in this State approved form contract?  A licensed broker's clearly is excluded from needing a law license to give this advice.  Client Question: What are my options if I want to cancel this contract?  A broker answering this question almost certainly would be practicing law.

 A client who wants or needs advice as to their legal rights and responsibilities is seeking legal advice.  A person who wants to give such advice should be licensed to practice law. 

Sep 10, 2014

Lease can be regulated financial product

We have received numerous inquiries for clarification (or to argue with the conclusion) that the Dodd/Frank legislation implicates lease/option transactions.

If interested, please see:
4) A transaction which includes a "lease" in which, at the inception of the lease, the intention is to transfer ownership of the property to the tenant is a "financial product or service."

This does not mean that all leases are financial products or that lease/option deals are impossible.  This does mean that lease/option deals may involve a regulated financial product or service in some circumstances.  In those cases, the lease/option deal would need to comply with the applicable regulations.

Aug 14, 2014

Lease-options and Land Contract Sales of Homes?

"That can't be right!  The government can't restrict my right to sell my real estate over time by land contract!  The government can't stop me from granting my tenant an option to purchase my property!"

I regret to inform you that the landscape regarding seller financing of homes has changed drastically.  I have been contacted by numerous people over the past two years who insist that they are able to use lease and option contracts to sell homes.  I also have argued with potential clients who insist that they can take a seller carry-back mortgage when selling a home.  Many times, the people tell me about how they have done it in the past.

I remind them that now isn't the past.  "The past" was before the SAFE act and Dodd/Frank.  For reasons that are not clear, those two pieces of legislation included regulation of seller-carry financing.

Land contracts are clearly implicated by the SAFE Act as I have noted previously.
/seller-financing-of-homes-requires.html   In many cases, a person selling a home cannot lawfully use a land contract or even a seller mortgage note.  Whether and when these tools can be used depends entirely on the facts.  One cannot assume that one of these techniques is permissible simply because it was permitted in the past.

Likewise, lease/option contracts for homes may be impermissible in many cases by virtue of the Dodd/Frank Act. The text of the Dodd/Frank act can be located at: /PLAW-111publ203/html/PLAW-111publ203.htm

Note the following definition:

A) In general.--The term ``financial product or service'' means--
            (i) extending credit and servicing loans, including acquiring, purchasing, selling, brokering, or other extensions of credit (other than solely extending commercial credit to a  person who originates consumer credit transactions);
(ii) extending or brokering leases of personal or real property that are the functional  equivalent of purchase finance arrangements, if—
(I) the lease is on a non-operating basis;
                        (II) the initial term of the lease is at least 90 days; and
                        (III) in the case of a lease involving real property, at the inception of the initial lease, the transaction is intended to result in ownership of the leased property to be transferred to the lessee, subject to standards prescribed by the Bureau;

The implications of offering a financial product of service are substantial.  The financial service provider must comply with a myriad of regulations set by the consumer financial protection bureau.  Compliance costs alone are prohibitive.  Further, many commonly used elements of a lease option may be prohibited.  

For example, a typical lease and option arrangement provides that a potential buyer will have an option to purchase a home for a period of 3 years for a stipulated price.  The potential buyer also will have the right to occupy the home by virtue of a lease.  If this arrangement is determined to be a financial product regulated by CFPB, it is conceivable that these two transactions in concert could be construed as non-amortizing financing in violation of the Dodd/Frank Act. 
Until litigation establishes the parameters of these regulations, it is unclear whether a landlord can safely grant an option to purchase (or perhaps even an offer to purchase) to a residential tenant. 

Aug 7, 2014

Investors involved in alternative financing must exercise caution

2010 Mortgage Fraud Report of FBI

  • Interthinx reports that property owners are fraudulently decreasing their income and property values to get their debt reduced for their loan modifications.29 They are fabricating hardships and filing false tax returns to this end. Also, individuals who first perpetrated fraud in loan origination are now attempting to defraud again during their loan modification.
  • Freddie Mac reports that 2010 loan modification fraud trends include strategic defaults, which are accompanied by false statements about income, assets, or the homeowner’s inability to pay.30  Loan modification perpetrators are misrepresenting occupancy and income (by stating it is lower), altering pay stubs, and seeking modifications without an actual financial hardship.31
  •  HUD reported 2010 loan modification scams in the form of principal reduction scams, rent-to-own-leaseback, bankruptcy fraud, and false reconveyance.32 In addition, HUD reported that fraudsters are trolling unemployment offices, churches, and public foreclosure rescue fairs targeting vulnerable homeowners. 

Feb 1, 2014

Seventh Circuit Court of Appeals Rejects First Weber's Claim

First Weber Group, Inc.'s claim against one of its former agents arising from a 2002 transaction was rejected on appeal by the United States Court of Appeals for the Seventh Circuit.
First Weber v. Horsfall

Some facts from the opinion that may be of interest to consumers:

First Weber had a listing contract with the Seller.  A Buyer submitted an offer to purchase using a First Weber agent, but the transaction was never completed.  After the listing contract expired, and after the agent had left First Weber, the Buyer submitted a new offer which was accepted and which closed without involving First Weber.

Six years later, First Weber sued the Seller and its former agent.  Both the Seller and the agent eventually declared bankruptcy.  First Weber obtained a judgment against the former agent.  It then pursued its claim through the bankruptcy proceeding, US District Court, and ultimately the Seventh Circuit Court of Appeals. 

Over a claim for less than $11,000.00 arising from a transaction which occurred over 10 years ago, First Weber has been litigating for almost 5 years losing at the Bankruptcy Court, the US District Court, and now the Seventh Circuit Court of Appeals!?!

Note for consumers:  Many sellers do not realize that the standard form listing contract default language includes a 1 year "tail" for protected buyers.  This means that the listing company may have a claim for commission even when the buyer submits an offer after the listing agreement has expired.

Further, unbeknownst to many "flat fee MLS" sellers, a broker may have a claim to commission even in cases where the buyer appears to be unrepresented. 

Dec 4, 2013

Congratulations to the Graaskamp Program and the UW BSchool

The University of Wisconsin real estate program was rated as the best in the country.  Congratulations and keep up the fine work.

Jun 7, 2013

Seller Financing, Dodd/Frank and the SAFE Act

The regulatory landscape relating to seller financing of residential purchases (including land contracts and lease/options) has changed significantly in the past two years.

The NAR has published a helpful summary relating to some of the issues: 
Impact of Loan Originator Final Rule on Seller Financing

As usual with legislation, especially that adopted at the federal level to address an "emergency" or "crisis," people are well-advised to avoid using reasonableness as a guide to compliance.  "How could the solution to the financing crisis possibly involve removing all alternatives to conventional large bank financing," I have been asked.   

In my opinion, the SAFE Act and Dodd/Frank included fixes to largely imaginary problems  - ie consumers getting seller financing through fraudulent means or on unfair terms.  I can offer no explanation for the restrictions on seller financing except that the legislation to "fix" the financial turmoil caused by large financial institutions was drafted by the lobbies for those same large financial institutions.  Asking Dodd and Frank to guard the large bank henhouse probably makes less sense than asking Bernie Madoff to serve this function.  At least his story would make enough sense to fool the public.  There is no factual basis of which I am aware upon which to conclude that seller financing had anything to do with the financial meltdown.

To the contrary, general consensus concludes that the collaboration between the Wall Street investment banks and the mortgage lending syndicates created the home mortgage "crisis."  The financial bail-out, with which I have strenuously disagreed, covered the bets of these firms because they were "too big to fail."

Then, to add insult to our injury, these same firms drafted the legislation that is supposed to cure the problem they created.  Their cure restricts seller financing as an alternative means of purchasing a home.  They even include lease/options in the definition of a "financial product or service" under Dodd/Frank.

I have been working with clients including home builders, landlords who sell to tenants, and property rehab companies to work through this problem.  If you are considering selling or buying a home using seller financing such as a seller mortgage, a land contract, or an option to purchase concurrently with a lease, please contact me to discuss the implications of your particular facts.

NOTE:  This post, as always, is not intended as legal advice.  Further, this area of the law is in flux, and the author makes no representation or promise to update this information.

Attorney James N. Graham
Accession Law LLC