The Florida Bar

October 18, 1965

A lawyer who closes mortgage loans in behalf of a mortgage lender should disclose to a purchaser-borrower title defects or clouds known to the lawyer (and to the title insurer), even though the lender is protected by title insurance, when the purchaser-borrower is not represented by an attorney and has direct dealings with the closing attorney.

Canon: 9

Chairman Kittleson stated the opinion of the committee:

A member of The Florida Bar has requested the Committee's advice on the situation discussed below. His firm regularly closes FHA-insured mortgage loans in behalf of a statewide mortgage company, and in connection therewith examines land titles and approves issuance of title insurance binders and policies. In some instances, the title to the property is held by the Federal Housing Commissioner as a result of foreclosure or conveyance in lieu of foreclosure of an earlier FHA-insured mortgage. From time to time in the title examinations, title defects or clouds appear, often as a result of errors and inadequacies in the foreclosure proceedings through which the Federal Housing Commissioner derived title. In each instance of this kind, the title insurer has accepted an agreement from the attorney who made the error, indemnifying the title insurer against loss by reason of the error, and the title insurer has issued a mortgagee title insurance policy to the lender without pertinent exception. The lawyer receives his fees from the lender, and not (at least not directly) from the purchaser-borrower. Usually the seller bears this cost, but sometimes arrangements among the seller, purchaser, and lender may shift all or some of the cost to the purchaser-borrower. It is made clear to the purchaser-borrower that the lawyer represents not him but the mortgage lender. The question is: should the lawyer, as closing attorney acting in behalf of the mortgage lender, disclose the title irregularity to the purchaser-borrower? He is concerned that disclosure of title defects to a purchaser-borrower could cause him to withdraw from the proposed transaction, to the displeasure of the lawyer's client, the lender.

A majority of the Committee believes that the lawyer should disclose the title irregularity to the purchaser-borrower, because to conceal the problem may mislead him in violation of Canon 9. As a practical matter, where the purchaser-borrower is not represented by an attorney, he is likely to rely upon the closing attorney to disclose any adverse title matters, especially if he is directly or indirectly paying the attorney's fees, and especially if he has direct communication and dealings with the attorney. The Committee's position could be different with respect to a lender's attorney who advises the lender on title matters but does not communicate or deal with the borrower.

A minority of the Committee believes that the lawyer would not be obligated to make the disclosure, where the purchaser-borrower clearly understands that he does not represent him but only the lender and clearly understands that the title insurance policy does not insure him but only the lender. Perhaps this view is even more justified where the title irregularity is not a major one and will be cured by the passage of time.

[Revised: 08-24-2011]