Mass. real estate lawyers must disclose pay from title insurance to homebuyers

There’s a new ethics guideline for real estate lawyers in Massachusetts that will affect anyone buying a home.

Attorneys who sell title insurance must disclose that they earn a large portion of the associated fees charged to clients. And they must get written consent from clients on those fees — well before closing day, when homebuyers are facing a thick stack of mortgage papers.

The Massachusetts Real Estate Bar Association this month began urging members to follow this guidance, in the wake of a state Board of Bar Overseers ethics advisory on the subject. In a notice to members, the Real Estate Bar cited the board’s warning, saying, “Whether it’s the sale of title insurance or any other business transaction with a client, lawyers who fail to comply with the disclosure and consent provisions … risk disciplinary action.”

The new ethics advisory followed a WBUR investigation last year on title insurance, a product that is almost entirely unregulated in Massachusetts and can be sold only by lawyers in this state. The reporting detailed the lack of fee disclosure by lawyers, a practice members of the Real Estate Bar had previously defended, in part because federal mortgage forms changed in 2016 and dropped the line where title fees were listed.

Title insurance costs thousands of dollars, even though claims paid by the insurers are infrequent. Home buyers generally purchase two policies – one for the bank and one for themselves. Banks require a policy, and real estate lawyers typically urge clients to buy a second policy, to protect themselves in case anything goes wrong with the property title – the legal record showing the right to own a particular property.

What typically gets lost in these transactions is that the lawyer is making, on average, 80% of those insurance fees. Some earn as much as 90%. The industry rationale is that the lawyer is doing the work for the insurer and the bank to make sure the title is clear. But the home buyer pays for it all, and generally has no idea the lawyer is earning thousands of dollars from it, on top of all the other charges at the closing.

The Board of Bar Overseers appears to have rattled the Real Estate Bar in saying this ethics advisory is not a new rule, but rather a clarification of ethical standards long in existence.

A homeowner who told WBUR about his title insurance experience sparked an inquiry by the board. That homeowner’s lawyer, Sonja Selami, in an interview last week said she welcomes the new guidance and has no qualms about disclosing title fees to clients.

But other real estate lawyers, also called conveyancers within the industry, are now concerned they could be at risk for having long failed to disclose their title fees. In a webinar the Real Estate Bar recently held to explain the new guidance, one lawyer asked, “Would they not have to discipline all conveyancers?”

Conrad Bletzer Jr., one of the Real Estate Bar attorneys hosting the webinar, told the group there is reason to suspect the Board of Bar Overseers may look at the title sales practices of other lawyers, and that those reviews could be retroactive.

“We are fearful," Bletzer said, that "they could be coming after more and more attorneys as a result of this title insurance issue."

The Office of Bar Counsel investigates all types of complaints of unethical conduct by lawyers. The bar counsel's findings then go before the Board of Bar Overseers. Depending on the infraction, discipline can range from a warning to suspension or disbarment.

The Board of Bar Overseers’ advisory, authored by Assistant Bar Counsel Robert Daniszewski, said title insurance sales can muddle the relationship between lawyers and clients. He wrote that any business dealings outside traditional legal services can be “destabilizing to the attorney-client relationship by making it more difficult for the client to perceive the lawyer as a completely loyal and disinterested protector of the client’s interests.”

When selling title insurance, a lawyer is wearing multiple hats, representing both the bank and the home buyer. The lawyer recommends the insurance company they do business with and gets the best commission from; in practice, few home buyers try to shop for a better deal or challenge the lawyer’s advice.

The ethics advisory said lawyers must disclose the cost of the insurance policies to the client, and advise clients that they can seek independent legal advice on whether to buy the policies. The advisory also urges lawyers to clearly inform the client of the lawyer’s role in selling the insurance, including what percent of the cost they are earning, and to secure the client’s written consent to the terms.

The ethics guidance went on to say that clients should get a “reasonable opportunity” to seek outside counsel, and should learn about all of this with some advance notice.

“It is not sufficient to secure the client’s written consent to the purchase of owner’s title insurance coverage for the first time at or shortly before the closing, by presenting the client with a form to be signed along with the other purchase and mortgage documents,” the guidance says. “To do so invites discipline. Seller beware.”