Lending, Documents: May Bankers Prepare Loan Documents on Real Estate Secured Loans? Unauthorized Practice of Law?

Question

It has come to our attention that Chapter 83 of the Texas Government Code requires Texas attorneys to prepare the documents on real estate transactions within the State of Texas.

  1. If we do not charge a fee for document preparation, are we exempt from Chapter 83 requirements?
  2. By having a Texas attorney on staff, who has approved the documentation we utilize for residential borrowers, are we absolved from utilizing a Texas attorney for each single-family transaction that we close?

Answer

Chapter 83 of the Texas Government Code provides that only a Texas attorney shall prepare documents for a real estate transaction.  Said preparation by any other individuals constitutes an unauthorized practice of the law.  Chapter 83 is a codification of the Texas Supreme Court decision in Hexter Title & Abstract Co., Inc. v. Grievance Committee, Fifth Congressional District, State Bar of Texas (179 S.W. 2d 946).  In Hexter, Hexter Title contended it had not “practiced” law because it did not charge clients for the preparation services.  The Texas Supreme court rejected that position.  It held that while a separate charge was not set out and described as legal fees, the legal services performed by the title company “constitute[d] a part of the total service for which the customer pa[id].”

“The defendant apparently advertises and holds itself out as furnishing this legal service without charge.  However, it is not true in fact that such services are furnished free of cost to the customer.  This legal service is advertised as a leader to induce prospective customers to come in and transact other business in which there is greater profit.  It is offered as an inducement to contract for an abstract of title, for which a direct charge is made, or to allow the defendant’s principal to insure the title to the property involved, for which the defendant receives a commission.  The furnishing of such legal services constitutes a part of the cost of obtaining the business transacted by the defendant.  Evidently it pays, or the practice would be discontinued.  It constitutes a part of the total service for which the customers pay.  There is therefore “a consideration, reward or pecuniary benefit” flowing to the defendant for the legal services so rendered.”

Hexter Title offered two additional defenses.  First, the corporation argued that it was merely preparing legal documents for transactions related to “its own business” and was therefore exempt.  Second, the Hexter employees that prepared the documents were licensed attorneys.  Both of these defenses were rejected by the Court.  The Court held that Hexter’s reasoning would allow any corporation to make similar exemption claims to the unauthorized practice of law by merely alleging the action was part of its business. Specifically, the Court stated that “[l]oan companies and banks could make similar propositions on condition that they be permitted to place a loan on the property.”

“The fact that the corporation has several licensed lawyers in its employment to prepare the instruments in question does not alter the case. . . . His [the corporate attorney’s] acts are the acts of the corporation, and even though the corporation acts through an attorney, it is nevertheless practicing law.”  Id. at 953–54. 

The Court’s reasoning was more recently upheld in Ray Crain and Credit Management Consulting Co. v. Unauthorized Practice of law Committee of the Supreme Court of Texas and Jeff Lehmann. 11 S.W. 3d 328 (1999).  In Ray Crain, the non-attorney defendant and credit management company were permanently enjoined from preparing and filing mechanics liens, lien affidavits, claims, and releases of liens affecting title to real property.

The Texas Supreme Court has summarily dismissed the defenses of (1) not charging for legal documents, (2) preparing legal documents as necessary to protect the interests of the corporation in individual transactions, or (3) using staff attorneys to prepare documents.     Chapter 83  codified the decision of Hexter Title.  As such, the Texas Government Code prohibits corporations from practicing law in the State of Texas through the preparation of documents related to real estate transactions.


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