The Consumer Real Estate Settlement Protection Act (CRESPA or the Act) authorizes licensed Virginia attorneys, title insurance companies and agents, real estate brokers and financial institutions (or a subsidiary or affiliate thereof), to serve as Settlement Agents and provide "escrow, closing or settlement services" if they register with the Virginia State Bar and meet other conditions of their regulatory agencies. CRESPA goes into effect July 1, 1997, and can be found at Virginia Code Sections 6.1-2.19 through 6.1-2.29. The purpose of the Act is to provide consumer protection safeguards and to define who can lawfully provide real estate settlement services in Virginia. Real estate transactions can create legal issues for buyers, sellers and borrowers, as well as other interested parties. These CRESPA guidelines are promulgated by the Virginia State Bar, in consultation and cooperation with the Virginia State Corporation Commission and the Virginia Real Estate Board, to assist Settlement Agents in avoiding and preventing the unauthorized practice of law while providing "escrow, closing or settlement services" in the purchase or financing of real estate containing not more than four residential dwelling units, and to advise the parties to such a transaction what duties a settlement agent may lawfully perform.
A Settlement Agent means any person, other than a "party to the real estate transaction," who provides "escrow, closing or settlement services" in Virginia in connection with a transaction involving real estate containing not more than four residential units. Only the following persons can legally provide "escrow, closing or settlement services" for such transactions in Virginia:
a. An attorney who is licensed by the Virginia Supreme Court and is an active member in good standing of the Virginia State Bar;
b. A title insurance company or title insurance agent (which may be a business entity) licensed by the State Corporation Commission;
c. A real estate broker licensed by the Virginia Real Estate Board;
d. A financial institution (or a subsidiary or affiliate thereof) authorized to do business in Virginia under Title 6.1 of the Code of Virginia, or under federal law, including state and national banks, state and federal savings institutions, trust companies, credit unions, state consumer finance companies and state industrial loan associations;
e. A party to the real estate transaction (i.e., buyer, seller, lender or borrower).
No other person can lawfully act as a Settlement Agent or provide such "escrow, closing or settlement services." In addition, no party to a real estate transaction may contract with a person not authorized under CRESPA to act as a Settlement Agent to provide such "escrow, closing or settlement services." All business entities or employers authorized under CRESPA to serve as a Settlement Agent using employees to provide "escrow, closing or settlement services" are responsible for such employees' compliance with all applicable provisions of the Act.
As a matter of public policy, a party to a covered real estate transaction is better protected by selecting only a Settlement Agent authorized to provide "escrow, closing or settlement services" under CRESPA. Persons not subject to CRESPA and these guidelines have not established that they have the required knowledge and skill to handle such transactions, and they have not successfully met requirements of examination, licensure, insurance, continuing education and fiduciary responsibility deemed necessary to provide "escrow, closing or settlement services" in a diligent and competent manner. In addition, unauthorized Settlement Agents are not subject to CRESPA's consumer protection standards, including a standard of care, fiduciary obligations and audit requirements.
To protect a consumer, CRESPA requires a Settlement Agent (other than a financial institution or title insurance underwriter) to maintain:
(i) an errors and omissions policy or malpractice insurance policy with a minimum of $250,000 coverage per claim;
(ii) a blanket fidelity bond or employee dishonesty policy with a minimum of $100,000 coverage (unless the Settlement Agent satisfies the Act's waiver requirements); and
(iii) a surety bond of not less than $100,000.
In other words, if your Settlement Agent is an attorney, title agent or real estate broker, they must demonstrate to the satisfaction of their appropriate licensing authority that they have met these financial responsibility requirements. All funds deposited with a Settlement Agent in connection with a closing must be handled in a fiduciary capacity and must be deposited by the next business day in a separate trust or escrow account and disbursed in accordance with the written instructions of the parties. A Settlement Agent (other than an attorney) under CRESPA must undergo an annual audit of its escrow accounts and file a report. Attorneys who serve as Settlement Agents must maintain their escrow accounts in compliance with the rules issued by the Virginia State Bar, with whom overdraft notification reports must be filed whenever a financial institution discovers that an attorney's escrow account is overdrawn.
"Escrow, closing or settlement services" occur after the buyer and seller have executed a contract for the sale of real estate or after a lender has agreed to refinance or provide to a borrower a loan secured by real estate. "Escrow, closing or settlement services" are those administrative and clerical services required to carry out the terms of contracts affecting real estate. The Act defines these services to include, but are not limited to:
placing orders for title insurance;
receiving and issuing receipts for money received from the parties;
ordering loan checks and payoffs;
ordering surveys and inspections;
preparing settlement statements;
determining that all closing documents conform to the parties' contract requirements;
setting the closing appointment;
following up with the parties to ensure that the transaction progresses to closing;
ascertaining that the lender's instructions have been satisfied;
conducting a closing conference at which the documents are executed;
receiving and disbursing funds;
completing form documents and instruments selected by and in accordance with the instructions of the parties to the transaction;
handling or arranging for the recordation of documents;
sending recorded documents to the lender;
sending the recorded deed and the title policy to the buyer;
reporting federal income tax information for the real estate sale to the Internal Revenue Service.
All Settlement Agents must register with the Virginia State Bar and must be licensed by their appropriate licensing authority. Before contracting with a Settlement Agent or before closing on your real estate transaction, you may call the Virginia State Bar at 1-804-775-0500 to verify that your Settlement Agent is registered. You may also ask the Settlement Agent to disclose his or her regulatory authority (i.e., Virginia State Bar, Virginia Real Estate Board or State Corporation Commission), and you may determine with the appropriate authority that the Settlement Agent has met the authority's insurance, bonding and fiduciary escrow account requirements.
Consumers may contact the State Corporation Commission at (800) 552-7945 to confirm whether title insurance agents, title insurance agencies, financial institutions, subsidiaries or affiliates of financial institutions that act as settlement agents in Virginia have complied with the Commission's regulations to provide such services in Virginia.
In closing your transaction, the Settlement Agent coordinates the numerous administrative and clerical functions relating to the collection of documents and the collection and disbursement of funds required to carry out the terms of the contract between the parties. If a lender is involved in the transaction, the lender will instruct the Settlement Agent as to the signing and recording of documents and the disbursement of loan proceeds. A Settlement Agent must follow the written instructions of the parties with regard to the disbursement of funds. The HUD-1 or other Settlement Statement is the typical document used to direct the Settlement Agent in the disbursement of funds.
In connection with a real estate closing, the Virginia State Bar in its rules prohibiting the unauthorized practice of law, has stated that the following tasks, among others, may be performed by a non-lawyer Settlement Agent and do not involve the practice of law:
ordering a survey, termite or other inspection(s), casualty insurance or certificates of insurance, lien payoff figures, loan checks or title insurance;
creating or preparing a title abstract;
determining the status of utility services and assisting in their transfer;
making mathematical calculations involving the proration of taxes, insurance, rent, interest and the like in accordance with the contract or local custom;
completing form documents selected by and in accordance with the instructions of the parties to the transaction, but not drafting or selecting such documents;
obtaining lien waivers from mechanics or materialmen in a form acceptable to the parties in interest, but not drafting such waivers or giving advice as to the legal sufficiency thereof;
preparing settlement statements, such as the HUD-1;
receiving and disbursing settlement funds;
drafting receipts and certificates of satisfaction, but not deeds, deeds of trust, deed of trust notes, or deeds of release;
completing other forms such as the Owner's/Seller's Affidavit, Notice of Availability, and tax reporting forms including FIRPTA, 1099, VA R-5, and VA R-5E.
You should ask your Settlement Agent to disclose to you his or her role in the process of closing your real estate transaction. You have the right to select your own Settlement Agent to handle the closing of your transaction. The Settlement Agent need not be an attorney, but must be a person authorized under CRESPA to serve as a Settlement Agent, even if he or she is an attorney.
A Settlement Agent cannot provide any legal representation or give legal advice to a party to a transaction unless the settlement agent is engaged in the practice of law in Virginia and he or she has been specifically retained to provide legal services to that party. A Settlement Agent other than an attorney who has been specifically retained to provide legal services to that party is prohibited by law from giving any legal advice, even if the Settlement Agent employs an attorney to conduct or be present at the closing. A party who desires legal advice should contact a lawyer or ask the Settlement Agent to provide a referral list of at least three local lawyers engaged in private practice who have expertise or experience in real estate matters.
A Settlement Agent who gives legal advice or drafts or creates a legal instrument has engaged in the "practice of law." The "practice of law" occurs whenever one furnishes to another advice or services under circumstances which imply his or her possession and use of legal knowledge and skill. One is deemed to be giving "legal advice" to another whenever the matter involves the application of legal principles to facts or purposes or desires. In the context of a real estate transaction, the question is always whether the advice given or service performed involves the exercise of legal judgment. If a non-lawyer engages in the "practice of law" it is the "unauthorized practice of law." The "unauthorized practice of law" in Virginia is a Class 1 misdemeanor, punishable by up to twelve months imprisonment and/or a $2,500 fine.
Defining what is "legal advice" is difficult; however, examples of "legal advice" which, if provided by a Settlement Agent would be the "unauthorized practice of law," include:
explaining the legal obligations of the parties under the real estate sales contract;
explaining the meaning of legal terms used in taking title to property or advising the parties to the transaction which way to take title to the property;
explaining the legal obligations of the parties under the loan documents;
explaining the legal effect of an item reported as an exception in a title commitment;
explaining the legal effect of a document in the chain of title;
drafting legal instruments for a party to the transaction, other than completing form documents selected by and in accordance with the instructions of the parties to the transaction;
selecting a legal instrument for a party if to do so requires the exercise of legal judgment;
instructing or assisting a party in the completion of a legal document if to do so requires the exercise of legal judgment;
providing legal opinions in response to the following types of questions:
a. "What should I do?"
b. "What are my rights or obligations under this document?"
c. "What are the lender's rights or obligations under this document?"
As a matter of public policy, consumers are deemed best served in legal matters by attorneys. If legal advice is requested, Settlement Agents should take care to refer all such inquiries to independent attorneys engaged in private practice. Similarly, the drafting of a legal document such as a deed, deed of trust or deed of trust note often requires the possession and use of legal knowledge and skills. Although the parties to a real estate transaction may draft their own legal instruments, a Settlement Agent may not do so.
The Virginia State Bar shall receive complaints concerning noncompliance with these guidelines and shall (1) investigate those complaints as they relate to the unauthorized practice of law or any other matter within its jurisdiction; and (2) refer all other matters or allegations to the appropriate licensing or regulatory authority. In addition to the penalties for unauthorized practice of law as stated in Section VI of these guidelines, if the appropriate authority determines that the Settlement Agent or any other person has violated CRESPA or any regulations and guidelines thereunder, it may seek enforcement of CRESPA's penalties, including a penalty not exceeding $5,000 for each violation and revocation or suspension of the applicable licenses.
The individual selected to conduct your closing may not personally meet any or all of the qualifications and conditions required under CRESPA, other than by virtue of being an employee of a registered Settlement Agent. Therefore, you may inquire about the employee's competence and qualifications to handle your transaction. All business entities or employers authorized under CRESPA to serve as a Settlement Agent using employees to provide "escrow, closing or settlement services" are responsible for such employees' compliance with all applicable provisions of the Act.
Approved by the Virginia State Bar Council
June 19, 1997