Note: PowerPoint and audio for the April 16, 2015, Current TDI Issues webinar is now available on our website.

Note: PowerPoint and audio for the April 16, 2015, Current TDI Issues webinar is now available on our website. For Escrow Officer Credit please e-mail one time only to CEcertificate@stewart.com for certificates, include: The Password Attendees names TDI License number Webinar Title For this webinar, please include Ethics Course in the subject line of your email. Attorneys e-mail bar card number to the same e-mail for CLE credit. Send to your training administrator if applicable. 1

ADDITIONAL HOUSEKEEPING INFORMATION Because of opinions expressed by the Texas Insurance Department concerning rebates, legal credit is available only to: Attorneys who own title agencies that are Stewart Title Guaranty Agents Attorneys employed by a title insurance agent licensed with Stewart Title Guaranty or Stewart entities Fee attorneys who have an Escrow Officer license through a Stewart Title Agent or Stewart entity If you are claiming legal credit for this web conference, please provide in your email which category you are in. 2

We welcome any other lawyers to listen, but cannot provide continuing education credit to you. We regret any inconvenience but we must take reasonable steps to protect us and you from enforcement actions by the Texas Department of Insurance. 3

Ethics 2015 Stewart Title Guaranty Company Charlie Craig Associate General Counsel & Texas Underwriter Heidi Junge Texas Underwriting Counsel April 30, 2105

The Unauthorized Practice of Law Legal Documents on Real Property Transactions Basic Principles: Legal instruments affecting title to real property must be prepared by Licensed Texas attorneys (with few exceptions). Only licensed Texas attorneys can prepare and charge for such instruments as deeds, mortgages, deeds of trust, promissory notes, transfers and releases of liens. HEJ

Legal Instruments and Practice of Law Preparing legal instruments of all sorts involves the practice of law. Making the decision of even which form of instrument is proper affects legal rights and therefore the practice of law. Palmer v. Unauthorized Practice of Law Committee, 438 S.W. 2d (Tex. App. Houston no writ) Stewart Abstract Co. v. Judicial Commission, 131 S.W. 2d (Tex. App. Beaumount 1939, no writ) HEJ

John Doe in our office knows real estate and has been in the industry for years, why can t he draft these real estate documents? Is a licensed Texas attorney really needed? HEJ

YES, a Licensed Texas attorney really is needed! Texas public policy wants to protect consumers with their dealings with creditors especially when it comes to their homestead! Texas Constitutional homestead rights are the most protective in the nation! HEJ

So Texas law says only attorneys have authority to prepare documents affecting real estate. Texas wants not only persons with sufficient legal knowledge and training BUT also accountability! HEJ

What exactly constitutes sufficient legal knowledge? To prepare legally sufficient instruments of conveyance and encumbrance, there must be an expert understanding of: Marital and community property laws SPECIFIC to TEXAS; Texas extra special homestead laws (which includes our Texas Constitution); Our state statutes, especially the Property Code, Estates Code, and Family Code; and A whole host of judicial decisions and unique to Texas regulatory rules. HEJ

Okay but many of us in the Title Biz know this stuff like the back of our hand AND we can get it done faster than some attorney. Why can t we just prepare the documents? Attorneys are held accountable to a high standard of care and ethical conduct Attorneys are officers of the legal system when performing these services = Accountability HEJ

Chapter 83 of the Texas Government Code Section 83.001 PROHIBITED ACTS a)a person, other than a person described in Subsection (b), may not charge or receive, either directly or indirectly, any compensation for all or any part of the preparation of a legal instrument affecting title to real property, including a deed, deed of trust, note, mortgage, and transfers or release of lien. b)this section does not apply to: 1. An attorney licensed in this state; 2. A licensed real estate broker or salesperson performing the acts of a real estate broker pursuant to Chapter 1101, Occupations Code; or 3. A person performing acts relating to a transaction for the lease, sale, or transfer of any mineral or mining interest in real property. c)this section does not prevent a person from seeking reimbursement for costs incurred by the person to retain a licensed attorney to prepare an instrument. HEJ

A mortgage lender s own attorneys may prepare mortgage, promissory note and related legal instruments evidencing and securing a loan. The attorneys fees can thereafter be charge to and paid by the borrower at closing. BUT, either the mortgage lender or the attorney must advise the borrower that lender s attorney does not represent borrower and that borrower should seek advice and representation from another attorney. Comm. On Professional Ethics, op. 228, 18 Baylor L. Rev. 258 (1966) May, 1957 HEJ

Can our in-house staff attorney at the title company or law firm affiliated with the title company prepare legal instruments for our customers? NO! Their loyalty is to the corporation and even though the corporation acts through an attorney, it is nevertheless practicing law. Performing services constitutes a part of the total service for which customer pays so it doesn t matter if the attorney doesn t specifically charge for the service. Hexter Title & Abstract., Inc. v. Grievance Committee, 179 S.W.2d 946 (Tex. 1944) Commingling law firm attorneys/employees and title company directors/employees could be a recipe for the unauthorized practice of law. Rattikin Title Company v. Grievance Committee of the State Bar of Texas, 272 S.W. 2d 948 (Tex. App. Forth Worth, 1954 no writ) HEJ

Take Aways: Only licensed Texas attorneys can prepare legal instruments affecting title to real property. Others doing so violate Chapter 83 of the Texas Gov t Code regulating the unauthorized practice of law. Even if the person is or purports to be a party to the transaction. Corporations are prohibited from practicing law (can t act through licensed Texas attorneys working as staff attorneys). HEJ

Take Aways: Licensed real estate brokers and sale agents can complete standardized forms of sales contracts (documents prepared by attorneys and adopted by the Texas Real Estate Commission). Petroleum landmen can prepare instruments to lease, transfer and sell mineral and mining interests. Landlords and their agents can complete lease or rental forms that have been previously prepared by an attorney and approved for that kind of transaction. HEJ

Unless you are a licensed Texas attorney don t: Come to legal conclusions or provide anything that could be construed as legal advice. Draft legal documents. You don t need the liability!! HEJ

Title Agents acting as Escrow Agents = Fiduciaries EA is a neutral third party who owes a fiduciary duty to all parties to the escrow agreement. As fiduciary, you must act with utmost good faith In Texas, EA is not the agent of the title insurer on escrow matters you re on your own Fiduciary Duties are imposed on the Escrow Agent = Escrow Holder and Trustee CMC

1. Duty of Impartiality - Avoiding Conflicts of Interest Avoid self dealing - Avoid any act that places your personal interest in conflict with your obligations to all of the parties to the transaction Attorneys, see DRPC 1.06, 1.07 (intermediary) if the lawyer represents two or more parties with potentially conflicting interests = any escrow situation What does it mean for an Escrow Agent? Means faithful compliance with the instructions of all of the parties to the transaction and no more the EA has no discretionary power to choose what is best for one party at the closing any decision could favor one party over the other and violate your duty of impartiality CMC

1. Duty of Impartiality - Avoiding Conflicts of Interest Importance of clear, unambiguous instructions to follow: Should clearly set forth the terms and conditions of the closing and settlement of the transaction and escrow proceeds in one document the stranger rule Should tell the EA what to do in the event the transaction is completed, and also what to do in the event the transaction for any reason fails to close. If any ambiguity, EA must notify the parties and get better instructions approved by all parties Should avoid taking instructions from just one party - ignores half the closing! get all parties to agree on instructions in advance, and to any changes. CMC

1. Duty of Impartiality - Avoiding Conflicts of Interest Paid to follow the instructions not paid to think do not make decisions for any party to the transaction Avoid instructions that call on you to make any judgments on sufficiency, quality or enforceability of any documents, actions taken, decisions between parties, or to interpret an agreement to decide who gets what money when without complete instructions agreed to by all parties; Avoid instructions that rely on or refer to any other agreements to complete or interpret the transaction Faithfully following instructions does not always assure immunity, but it goes a long way! CMC

2. Duty of Full Disclosure First look to the terms of the escrow agreement, closing instructions on disclosure requirements. Must disclose to all parties any ambiguities in instructions, changes to documents / terms of sale, terms of the loan made by one of the parties and ask for mutual instructions to clarify Disclosure only not to give legal advice! Ex. Changes in terms, documents Changes in interest rate by lender New Survey showing significantly less land to be sold CMC

2. Duty of Full Disclosure Fraud - If have actual knowledge of facts that present substantial evidence of fraud, you must disclose. You have no duty to go looking for fraud, but if you know or strongly suspect a fraud is being committed, you need to disclose Double edge your failure to disclose may assist in accomplishing the fraud and bring liability; BUT your disclosure may also bring litigation from the suspected party CMC

2. Duty of Full Disclosure Flip Transactions - no general duty to disclose unless disbursement instructions require, BUT - fraud by silence? Maybe, but will your disclosure also result in liability? - read the disbursement instructions carefully 2nd lender may require disclosure of prior purchase by seller if done within last 6 months - get authority from all parties up front to fully disclose if necessary CMC

3. Duty of Confidentiality Some things should not be disclosed Attorneys: Texas Rule 1.05 of DRPC: required to protect client info, whether in physical or electronic form Gramm-Leach-Bliley Act: Personally Identifiable Non-Public Information (NPI) of consumers in non-commercial transactions Review closing instructions for definitions on confidentiality as to that particular closing NPI a Hot topic: Except as needed to process the transaction, do not share NPI with 3 rd parties CMC

3. Duty of Confidentiality NPI = Any information given by consumer, used to get financial products or services or obtained about or related to the consumer, including: Typically: first name, first initial and last name, date of birth, SSN, driver s license number, state issued ID number, credit / debit card numbers, user names, passwords, any financial account numbers, loan applications, bank routing numbers, HUD Stmts/Closing Disclosure stmts, tax returns, 1099s, loan payment history, balance info, retirement account info, consumer credit reports ALTA Best Practices - Security program for NPI protection required CMC

3. Duty of Confidentiality NPI can be in physical and electronic forms, and found in physical, electronic places Physical paper, file cabinets, desktops, closing table, etc. Diligent safeguarding in the age of smart phone photography disposal of paper records; physical access to computers, servers; clean desk policy; separation of work offices and closing rooms audit vendors, service providers CMC

3. Duty of Confidentiality NPI can be in physical and electronic forms, and found in physical, electronic locations Electronic laptops, ipads, smart phones, thumb drives, office network servers, backup tapes/cloud Access to servers, electronic info, Use of secure encrypted e-mails, Trusted/certified quality service providers; trusted vendors; Back up plans, natural disaster plan; Background check employees at hiring Train yourselves, your employees, self-audit CMC

4. Duty of Care of Escrowed Moneys Duty to exercise a high degree of care to conserve earnest money and pay only to those entitled as instructed. Attorneys: Texas DRPC 1.14 safekeeping property separate accounts, appropriately safeguarded, complete record keeping, prompt notice, delivery to correct party TDI Minimum Escrow Accounting Procedures and Internal Controls - Section V of the Basic Manual: read it, learn it, know it! - Separate accounts for trust funds and operating funds, each identified clearly as such - Deposits in interest earning accounts and investments CMC

4. Duty of Care of Escrowed Moneys Good Funds P-27 B, Tex. Ins. Code Sec. 2651.202 - Good Funds in amount equal to all disbursements must be received, recorded and deposited BEFORE any disbursement may be made. Partial disbursements, prior to receipt and deposit of good funds, however small, are NOT permitted. What are Good Funds? P-27 A (1) (a-k) Cash Cashier s Check Certified Check Teller s Check Uncertified funds less than $1500 Uncertified funds $1500 or more if collected by the financial institution State of Texas Warrants, Checks by city and local governments in Texas U.S. Treasury Checks Checks as per T-37 Immediately Available Funds Agreement with proper code assignments CMC

4. Duty of Care of Escrowed Moneys P-27 A (2) = Received, Recorded and Deposited Good Funds are in the possession of the trustee; and Record of actual date of receipt entered on the books of trustee; and Funds are actually delivered to financial institution in a timely manner, no more than 3 business days; or For wire transfers, when the financial institution notifies trustee that the funds are received. ALTA Procedures and Controls for Escrow Trust Accounts allowing for Electronic verification of reconciliation IT S ALL ABOUT SAFEGUARDING CUSTOMER FUNDS CMC

5. Prohibited Rebates, Discounts and Inducements A hot topic again - at federal and state levels CFPB active on this at federal level see recent consent orders showing fines imposed Sec. 2502.051. REBATES AND DISCOUNTS PROHIBITED. A commission, rebate, discount, portion of a title insurance premium, or other thing of value may not be directly or indirectly paid, allowed, or permitted by a person engaged in the business of title insurance or received or accepted by a person for engaging in the business of title insurance or for soliciting or referring title insurance business. P-53 Summary: An Authorized Person giving anything to a Producer, customer or proposed customer (directly or indirectly) in return for referral of specific title insurance transaction(s) is absolutely prohibited. i.e. Quid Pro Quo: giving a Producer something to get title insurance business on the next deal(s) is NOT allowed CMC

5. Prohibited Rebates, Discounts and Inducements Prohibits paying for most things you could possibly imagine Promo: Printing brochures, newsletters, business cards, property reports, farming reports or brochures, listing packages or any advertising or joint advertising media for the Producer; Open houses Gifts: trips, dinners, sporting or music events, recreational activities, Christmas or other gifts Education, sort of Offering prizes, food, beverages, decorations, entertainment, gifts at educational or promotional events Business Expenses: Covering producers business expenses, office space, equipment, furniture, supplies, any media, documents, staff, personnel/ professional/services CMC

5. Prohibited Rebates, Discounts and Inducements Under P-53 Authorized Persons are: title insurers, title agents, direct operations, all escrow officers, AND their officers, directors, agents, employees, members of their immediate families of the above (affiliates) CMC

5. Prohibited Rebates, Discounts and Inducements Under P-53 Producers of title insurance business are: Real estate brokers and agents Lenders, mortgage companies and mortgage brokers Builders, developers, architects and attorneys AND their officers, directors, agents, employees, members of their immediate families of the above, and those who own or control, or are owned or controlled by any of the above (affiliates). CMC

5. Prohibited Rebates, Discounts and Inducements Direct or Indirect Directly: by the people/entities listed above as Authorized Persons Indirectly: by giving money to a third party for them to pay or supply the Producer CMC

5. Prohibited Rebates, Discounts and Inducements What can an Authorized Person do? (1) promotional and educational activities that are not conditioned on the referral of title insurance business; (2) purchasing advertising promoting the title insurance company or the title insurance agent at market rates from any person in any publication, event, or media; (3) delivering to a party in the transaction or the party's representative legal documents or funds which are directly or indirectly related to a transaction closed by the title insurance company or title insurance agent; (4) participating in an association of attorneys, builders, developers, realtors, or other real estate practitioners provided that the level of such participation does not exceed normal participation of a volunteer member of the association and is not activity that would ordinarily be performed by paid staff of an association; or (5) providing continuing education courses at market rates, regardless of whether participants receive credit hours. CMC

5. Prohibited Rebates, Discounts and Inducements Penalties $10,000 fine per violation and for each day of the violation, loss of license, certificate of authority for more/repeated violations; also 3 times the value of the inducement given. Check out the Market Conduct Questionnaire on TDI website CMC

ALTA Best Practices HEJ

What are the ALTA Best Practices? Voluntary guidelines to help the industry illustrate to consumers and clients the best practices to ensure a positive and compliant real estate settlement experience. HEJ

ALTA Best Practices Best Practice 1: Establish and maintain current License(s) as required to conduct the business of title insurance and settlement services. Purpose: Maintaining state mandated insurance licenses and corporate registrations (as applicable) helps ensure the Company remains in good standing with the state. HEJ

Best Practice 2: ALTA Best Practices Adopt and maintain appropriate written procedures and controls for Escrow Trust Accounts allowing for electronic verification of reconciliation. Purpose: Appropriate and effective escrow controls and staff training help title and settlement companies meet client and legal requirements for the safeguarding of client funds. These procedures help ensure accuracy and minimize the exposure to loss of client funds. Settlement companies may engage outside contractors to conduct segregation of trust accounting duties. HEJ

Best Practice 3: ALTA Best Practices Adopt and maintain a written privacy and information security program to protect Non-public Personal Information as required by local, state and federal law. Purpose: Federal and state laws (including the Gramm- Leach-Bliley Act) require title companies to develop a written information security program that describes the procedures they employ to protect Non-public Personal Information. HEJ

Best Practice 4: ALTA Best Practices Adopt standard real estate settlement procedures and policies that help ensure compliance with Federal and State Consumer Financial Laws as applicable to the Settlement process. Purpose: Adopting appropriate policies and conducting ongoing employee training helps ensure the Company can meet state, federal, and contractual obligations governing the Settlement. HEJ

ALTA Best Practices Best Practice 5: Adopt and maintain written procedures related to title policy production, delivery, reporting and premium remittance. Purpose: Adopting appropriate procedures for the production, delivery, and remittance of title insurance policies helps ensure title companies can meet their legal and contractual obligations. HEJ

Best Practice 6: ALTA Best Practices Maintain appropriate professional liability insurance and fidelity coverage. Purpose: Appropriate levels of professional liability insurance or errors and omissions insurance help ensure title agencies and settlement companies maintain the financial capacity to stand behind their professional services. In addition, state law and title insurance underwriting agreements may require a company to maintain professional liability insurance or errors and omissions insurance, fidelity coverage or surety bonds. HEJ

Best Practice 7: ALTA Best Practices Adopt and maintain written procedures for resolving consumer complaints. Purpose: A process for receiving and addressing consumer complaints helps ensure reported instances of poor service or noncompliance do not go undiscovered. HEJ

Be Careful Out There Charlie Craig Associate General Counsel Texas Underwriter Stewart Title Guaranty Company Austin, Texas (512) 236-0405 ccraig@stewart.com Heidi Junge Texas Underwriting Counsel Stewart Title Guaranty Company San Antonio, Texas (210) 590-1981 heidi.junge@stewart.com

This course has been approved for 1 hour of Ethics by the State Bar and 1 hour of Ethics by the TDI* *Escrow Officers and Agents if you already received credit for the Title Company Ethics 2014 course, it is effective through the TDI until February 19, 2016. The 2015 Ethics Course is effective until April 30, 2017 and can be used for the 2016 license renewal. 49

Here s how to get credit! E-mail your certificate request to: CEcertificate@stewart.com Please include following information in your e-mail request: Name of Participant This Presentation Name Ethics Course Presentation PASSWORD TDI Number (one) For Attorney Credit also include: Texas State Bar Number How Affiliated with Stewart Note: CLE credit for attorneys is limited to Texas license and employment by a Stewart Title Guaranty Company title insurance agent or a Stewart entity.

If you haven t received your certificate within 2 weeks please contact: CEcertificate@stewart.com You can access materials 10 business days after webinar at: www.stewart.com/texas Under Texas TIPS tab 51

Next Month s Texas TIPS Online presentation is May 21, 2015 Funky Liens presented by: Bill Pratt For Questions/Comments Email john.rothermel@stewart.com or heidi.junge@stewart.com 52