Can a lawyer refer clients to lenders recommended by a consulting company that the firm pays and that earns referral fees from those lenders?

Currency note

This opinion was issued in 2002, before Ohio's adoption of the Ohio Rules of Professional Conduct (effective February 1, 2007). The Board flagged it as a "CPR Opinion" because it interprets the former Ohio Code of Professional Responsibility, since superseded. The DR 5-101 and DR 5-104 provisions discussed here are now addressed by Ohio Prof. Cond. R. 1.7 and 1.8. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule or requirement mentioned here.

Plain-English summary

The Board addressed a lawyer's use of the attorney-client relationship to facilitate client loans within a web of business relationships. In the proposed arrangement, the lawyer would provide loan applications and refer clients to lenders that a consulting company recommended to the firm; the consulting company received commissions or referral fees from the lender for each completed loan, and also received an annual consulting fee from the law firm. The Board concluded the arrangement was improper under DR 5-101(A)(1) and DR 5-104(A) unless there was full disclosure and informed consent.

The Board explained that because the multiple business transactions were interrelated and impacted the attorney-client relationship, the required full disclosure and informed consent would be difficult to meet without independent legal counsel for each client. To preserve client loyalty and to avoid even the appearance of professional impropriety, the Board discouraged lawyers from using the attorney-client relationship to facilitate client loans that financially benefit both a lender and a consulting company with which the lawyer has business relationships.

The Board added a confidentiality caution. It warned that the degree of involvement of a firm, a lawyer, or law firm staff in the client loan application process might trigger legal implications, such as a requirement of licensure and regulation by the Division of Financial Institutions of the Department of Commerce, which could in turn jeopardize the attorney's duty to preserve client confidences and secrets.

Common questions

Q: Could an Ohio lawyer refer clients to lenders recommended by a consulting company the firm pays?

A: Only with full disclosure and informed consent, and the opinion discouraged the practice. It concluded the arrangement was improper under DR 5-101(A)(1) and DR 5-104(A) absent that consent.

Q: Why did the opinion say informed consent would be hard to obtain?

A: The opinion reasoned that the interrelated business transactions affecting the attorney-client relationship made genuine informed consent difficult to achieve without independent counsel for each client.

Q: What confidentiality concern did the opinion raise?

A: The opinion warned that heavy firm involvement in the loan application process could trigger licensure and regulation by the Division of Financial Institutions, which might jeopardize the duty to preserve client confidences and secrets.

Background and rules framework

The opinion interprets former Ohio Code of Professional Responsibility DR 5-101(A)(1) (the lawyer's own financial or business interest that may affect professional judgment) and DR 5-104(A) (business transactions with a client where interests differ), against the appearance-of-impropriety concept then reflected in Canon 9. Those conflict-of-interest subjects are now addressed by Ohio Prof. Cond. R. 1.7 and 1.8 (Model Rules 1.7 and 1.8).

Citations and references

Rules of Professional Conduct:

• Former Ohio Code of Professional Responsibility DR 5-101(A)(1), DR 5-104(A); EC 5-1

See also

• Ohio BPC Op. 2002-001: Law Firm Paying a Real Estate Agency for Promotion
• Ohio BPC Op. 2000-001: Accepting a Referral Fee From a Financial Services Group
• Ohio BPC Op. 2001-004: Lawyer Selling Annuities to Estate Planning Clients

Source

• Landing page: https://ohioadvop.org/advisory-opinion-index/
• Original PDF: https://www.ohioadvop.org/wp-content/uploads/2017/04/Op-02-002.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

The Supreme Court of Ohio
BOARD OF COMMISSIONERS ON GRIEVANCES AND DISCIPLINE
41 SOUTH HIGH STREET-SUITE 2320, COLUMBUS, OH 43215-6104
(614) 644-5800 (888) 664-8345 FAX: (614) 644-5804
www.sconet.state.oh.us

                                         OFFICE OF SECRETARY




                                      OPINION 2002-2
                                     Issued April 5, 2002

[CPR Opinion-provides advice under the Ohio Code of Professional Responsibility which is superseded
by the Ohio Rules of Professional Conduct, eff. 2/1/2007.]

SYLLABUS: It is improper under DR 5-101(A)(1) and DR 5-104(A) of the Ohio Code
of Professional Responsibility for a lawyer to provide loan applications and
make referrals of clients to lenders recommended to the law firm by a consulting
company that receives commissions or referral fees from the lender for each loan
completed and also receives an annual consulting fee from the law firm, unless there
is full disclosure and informed consent. Because of the interrelated multiple business
transactions that impact the attorney-client relationship, the requirement of full
disclosure and informed consent would be difficult to meet without the benefit of
independent legal counsel for each client. To preserve client loyalty which is a
fundamental aspect of the attorney-client relationship and to avoid even the
appearance of professional impropriety, lawyers are discouraged from the proposed
use of the attorney-client relationship to facilitate client loans that financially benefit
both a lender and a consulting company with which the lawyer has business
relationships. Further, lawyers are cautioned that the degree of involvement of a
law firm, a lawyer, or law firm staff in the client loan application process may
trigger legal implications such as a requirement of their licensure and regulation
by the Division of Financial Institutions of the Department of Commerce which
might jeopardize the attorney’s duty to preserve client confidences and secrets.

OPINION: This opinion addresses a lawyer’s use of the attorney-client relationship
to facilitate client loans that financially benefit both a lender and a consulting company
with which the lawyer has business relationships. Is it proper for a lawyer to provide
loan applications and make referrals of clients to lenders recommended to the law firm by
a consulting company that receives commissions or referral fees from the lender for each
loan completed and also receives an annual consulting fee from the law firm?

A law firm pays an annual membership fee to a consulting company to select, implement,
evaluate, and manage products and services used by the law firm in operating its law
practice. As part of the agreement, the consulting company contracts with various
service providers to provide products and services to the law firms in an efficient and cost
saving manner. Each member law firm is eligible to receive the favorable terms and
conditions offered by the service providers listed with the consulting company.
Op. 2002-2 2

The consulting company’s list of service providers typically includes, but is not limited to
telecommunications, office supplies, computers, office equipment, court reporting,
accounting, marketing, banking, and insurance. The consulting company now proposes
the addition of “client financing lenders” to its list of service providers.

It is anticipated that the consulting company would select one or more client financing
lenders to become service providers. The consulting company would evaluate and select
client financing lenders as service providers based upon established criteria, such as:

      Capability to originate the loan in a fast and efficient manner;

      Ability to close and service the loan;

      Ability to provide competitive interest rates and disclosure of interest rates to
       qualified applicants;

      Ability to create monthly payment schedules based upon the amount and
       length of the loan;

      Strength of the client financing lender’s balance sheet;

      Client financing lender’s knowledge of the legal industry.

Member law firms would agree to make available the lender’s electronic loan application
so that a law firm client could complete the loan applications online at the law firm
office. In addition, the scope of duties of the law firm to the client financing lender
would be to:

 Establish an account with the client financing lender;

 Make available the client financing lender’s credit application for completion by
the client;

 Verify the identity of the client/borrower;

 Provide an estimate of the expenses of litigation or legal representation in order
for the client financing lender to determine the loan amount;

 Provide proof to the client financing lender through a standard billing statement
that the law firm performed legal services or advanced costs and expenses.

The lawyers would refer clients in need of financing to pay the costs and expenses in
contingent fee cases and clients in need of financing to pay attorney fees as well as costs
and expenses in non-contingent fee cases. The lawyers would not refer law firm clients
for financing of attorney fees in contingent fee cases.
Op. 2002-2 3

The law firm and the lawyers would not receive referral fees from the lender or from the
company. Lawyers would have discretion as to whether to refer law firm clients in need
of financial assistance to the client financing lender recommended by the company or to
consider any other available financing option. The choice as to whether to use a lender
would be made by the client.

The consulting company would be paid either a referral fee or a commission from the
lender on each loan made to a client referred by the law firm. The consulting company
would not have an equity or ownership interest in the lenders.

The Board must determine whether a lawyer providing loan applications and making
referrals to client financing lenders is proper under the Ohio Code of Professional
Responsibility in view of the above business agreements that exist among the law firm,
the company, and the lender.

The following rules apply:

   DR 5-101(A)(1) Except with the consent of the client after full disclosure,
   a lawyer shall not accept employment if the exercise of professional
   judgment on behalf of the client will be or reasonably may be affected by
   the lawyer’s financial, business, property, or personal interests.

   DR 5-104(A) A lawyer shall not enter into a business transaction with a
   client if they have differing interests therein and if the client expects the
   lawyer to exercise his [her] professional judgment therein for the
   protection of the client, unless the client has consented after full
   disclosure.

DR 5-101(A)(1) prohibits a lawyer from accepting employment if the exercise of
professional judgment on behalf of the client will be or reasonably may be affected by the
lawyer’s business interests. A lawyer who makes available loan applications and refers
clients to a lender recommended to the law firm by a consulting company that receives
commissions or referral fees from the lender for each loan completed and also receives an
annual consulting fee from the law firm has a business interest under DR 5-101(A)(1)
that may reasonably affect the lawyer’s exercise of professional judgment in making
client referrals to lenders.

A lawyer’s exercise of professional judgment may be influenced by reliance on the
consulting company’s judgment as to an appropriate lender. A lawyer’s exercise of
judgment may be influenced by the convenience of having a pre-selected lender’s loan
application available through the law office. A lawyer’s exercise of professional
judgment may be subtly influenced by a desire to further the consulting company’s
ability to negotiate good deals from service providers, by making referrals that contribute
to the consulting company’s overall continued financial success.

Further, DR 5-104(A) prohibits a lawyer from entering a business transaction with a
client when there are differing interests therein. “‘Differing interests’ include every
Op. 2002-2 4

interest that will adversely affect either the judgment or the loyalty of a lawyer to a client,
whether it be a conflicting inconsistent, diverse, or other interest.” Definitions Section,
Ohio Code of Professional Responsibility.

Circuitously, a lawyer enters a business transaction with a client as a result of the
multiple business arrangements, the financial success of which in part hinges upon the
attorney-client relationship. The law firm enters a business agreement with a consulting
company, the consulting company enters an agreement with a lender, the law firm enters
an agreement with the lender to make loan applications available to clients, the lawyers
refer clients to the lender, and the lender enters agreements with the lawyers’ clients that
financially benefit the lender and the consulting company.

A consequence of the business transactions is that differing interests arise in the attorney-
client relationship. A client’s interest is to obtain financing when needed from the best
available source. A client expects his or her lawyer to exercise, free of compromise,
independent professional judgment in making referrals to client financing lenders. A
lawyer’s interest is to properly refer a client who needs financing to the best available
source, but the lawyer’s interest may be compromised by the business transaction. The
lawyer knows that the consulting company will benefit financially on the loans made to
law firm clients by the lender. The lawyer knows that a strong and financially successful
consulting company may be better able to negotiate cost saving deals for the law firm
with other service providers. Further, the lawyer knows that the convenience of
completing a loan application at the lawyer’s office may influence the lawyer’s judgment
in making the referral as well as the client’s judgment as to obtaining financing.

To resolve conflicts prohibited under DR 5-101(A)(1) and DR 5-104(A), full disclosure
and informed consent are options within the rules. Nevertheless, in view of the
interrelated multiple business transactions that impact the attorney-client relationship, the
requirement of full disclosure and client consent would be difficult to meet without the
benefit of independent legal counsel for the client.

Client loyalty is a precept that is fundamental to the attorney-client relationship. When a
lawyer agrees to provide loan applications for a lender and participates in referrals that
provide financial benefit to a lender and a consulting company that have business
relationships with the law firm, the lawyer dilutes his or loyalty to the client and may
create an appearance of impropriety. The broad mandate of Canon 9 is a reminder to the
legal profession that “A LAWYER SHOULD AVOID EVEN THE APPEARANCE OF
PROFESSIONAL IMPROPRIETY.”

A client’s interest should be paramount in the attorney-client relationship, not the
interests of third persons.

   EC 5-1 The professional judgment of a lawyer should be exercised, within
   the bounds of the law, solely for the benefit of his [her] client and free of
   compromising influences and loyalties. Neither his [her] personal
   interests, the interests of other clients, nor the desires of third persons
   should be permitted to dilute his loyalties to his [her] client.

Op. 2002-2 5

Preservation of the personal nature of the attorney-client relationship, including loyalty to
the client, fosters the exercise of professional judgment on behalf of a client.

   EC 3-2 The sensitive variations in the considerations that bear on legal
   determinations often make it difficult even for a lawyer to exercise
   appropriate professional judgment, and it is therefore essential that the
   personal nature of the relationship of client and lawyer be preserved.
   Competent professional judgment is the product of a trained familiarity
   with law and legal processes, a disciplined, analytical approach to legal
   problems, and a firm ethical commitment.

To preserve client loyalty which is a fundamental aspect of the attorney-client
relationship and to avoid even the appearance of impropriety, lawyers are discouraged
from using the attorney-client relationship to facilitate client loans that financially benefit
both a lender and a consulting company with which the lawyer has business relationships.

Further, the degree of involvement by a law firm, a lawyer, or law firm staff with lenders
in the client loan applications process may trigger legal implications. For example, if a
law firm, lawyer, or law firm staff engages in loan activities that require licensing by the
Division of Financial Institutions in the Department of Commerce, they would be subject
to state regulation and licensure which might jeopardize the preservation of client
confidences and secrets. A lawyer with questions regarding what constitutes regulated
activities with regard to loans should contact the Department of Commerce for guidance.

In conclusion, the Board advises that it is improper under DR 5-101(A)(1) and DR 5-
104(A) of the Ohio Code of Professional Responsibility for a lawyer to provide loan
applications and make referrals of clients to lenders recommended to the law firm by a
consulting company that receives commissions or referral fees from the lender for each
loan completed and also receives an annual consulting fee from the law firm, unless there
is full disclosure and informed consent. Because of the interrelated multiple business
transactions that impact the attorney-client relationship, the requirement of full disclosure
and informed consent would be difficult to meet without the benefit of independent legal
counsel for each client. To preserve client loyalty which is a fundamental aspect of the
attorney-client relationship and to avoid even the appearance of professional impropriety,
lawyers are discouraged from the proposed use of the attorney-client relationship to
facilitate client loans that financially benefit both a lender and a consulting company with
which the lawyer has business relationships. Further, lawyers are cautioned that the
degree of involvement of a law firm, a lawyer, or law firm staff in the client loan
application process may trigger legal implications such as a requirement of their licensure
and regulation by the Division of Financial Institutions of the Department of Commerce
which might jeopardize the attorney’s duty to preserve client confidences and secrets.

Advisory Opinions of the Board of Commissioners on Grievances and Discipline are
informal, nonbinding opinions in response to prospective or hypothetical questions
regarding the application of the Supreme Court Rules for the Government of the
Bar of Ohio, the Supreme Court Rules for the Government of the Judiciary, the
Code of Professional Responsibility, the Code of Judicial Conduct, and the
Attorney’s Oath of Office.
Op. 2002-2 6