For years, Scotland has allowed realtors to act on behalf of both lenders and borrowers in real estate sales, but a recent vote to change the law has resulted in this exception to the conflict of laws to be removed. Some critics believe that it will mean higher costs for the borrower because the lender will pass those costs along, while others say these types of negotiations are too complicated and the exception will mean added delays and confusion, which will mean more added costs for the borrower. Proponents argue, however, that costs should be absorbed by the lender because it is the lender that will pay to ensure loan qualification. For more on this continue reading the following article from Property Wire.
Solicitors in Scotland have voted in favour of the principle of changing the current practice whereby a solicitor can act for both buyer and mortgage lender in property transactions.
But a row has broken out about the cost implications with the Law Society suggesting it will only mean higher costs if lenders pass them on to borrowers. But the Council of Mortgage Lenders says it will mean added costs, delays and confusion.
As a result of the vote the current exception to Law Society conflict of interest rules, which permits a single solicitor to carry out work for a client wishing to buy a property and their mortgage lender, will be removed.
The Law Society will now bring forward new practice rules for its members to vote on at a special general meeting in September. If voted through at the SGM and subject to approval by the Lord President, solicitors will no longer be able to act for both buyer and lender.
‘This was a highly important debate to have and I thank everyone for their contributions. We can view the vote as just the start of a move towards reforming and improving conveyancing practice and we intend to hold further discussions with the Council of Mortgage Lenders and others,’ said Austin Lafferty, president of the Law Society.
‘The exception to the rules was introduced in 1986 to help ensure a smooth transaction but the world is a very different place now. The severe economic downturn, increasingly complex transactions, increasing risk of mortgage fraud and the additional pressures from lenders mean that it is no longer appropriate, and indeed is arguably not in the public interest to continue,’ he explained.
He said that solicitors provide conveyancing services for communities the length and breadth of Scotland and are fully aware of the potential for increased costs for buyers and increased paperwork for solicitors. ‘However these costs are not the borrowers, they are costs associated with lenders satisfying themselves on their own lending risk and it will be for the lenders to decide on whether they are prepared to pass on these costs to their customers,’ he pointed out.
‘The recession meant a greatly reduced the property market, however the risk on a loan has been largely borne by solicitors as banks and building societies have increased the number of claims on the legal profession’s indemnity insurance where things have gone wrong, for example if a client has defaulted on payment or in a repossession case, negative equity means there is a loss to the lender,’ he continued.
‘Additionally, we know there have been situations where conflict of interest arises and the protection of borrower client interests as well as the lender simply do not align,’ Lafferty added.
Recent changes introduced by lenders have also meant that solicitors are no longer automatically permitted to act for clients who have chosen a particular mortgage product.
‘It’s now the case that if a solicitor no longer on the lender’s solicitor panel, they are not entitled to do the work for both parties which means the client can choose to retain their own solicitor of choice and pay an additional fee, or use the lender’s solicitor,’ he said.
‘It’s in everyone’s interests, particularly the prospective house buyer, to provide efficient and cost effective services. Technology has improved things enormously and it’s worth remembering that conveyancing fees in Scotland are moderate compared to elsewhere, for example it can be up to three times as much in Ireland. Market forces will also play a role and undoubtedly determine a new fee structure so, while the borrower and lender will each pay for the work of their own solicitor, I do not foresee any astronomical price rises,’ he added.
However, the Council of Mortgage Lenders described the vote as ‘disappointing’. CML director general Paul Smee said it is ‘blatantly against consumer interests and will impose added costs and added scope for confusion and delay,’ added that he believes there was not sufficient consultation on the issue.
But Law Society vice president Bruce Beveridge said this was not true. ‘We consulted widely on the issue with CML, banks, building societies as well as Consumer Focus, Which, the Office of Fair Trading and Registers of Scotland. Indeed, this has been a matter of wide discussion ever since the director general of the CML first floated the idea of separate representation back in September 2010. It is therefore unfortunate that the CML has chosen to issue such a misinformed statement,’ he pointed out.
‘The CML says this proposed change would increase consumer costs but these are the legal costs of mortgage lenders, which are mostly large banks. If consumers are impacted, it will only be because the lenders themselves have allowed it by placing additional costs on their own customers,’ he said.
‘We are still keen to engage with CML and others to ensure any effects of a rule change can be properly managed. Indeed, we see the opportunity for positive benefits for lenders in reducing their panel management costs,’ he added.
This article was republished with permission from Property Wire.