Can a lawyer close a residential loan whose documents use another state's law (and a prepayment penalty) contrary to South Carolina law, and what if the lawyer isn't competent in that other law?

Plain-English summary

Lawyers who handled residential real estate closings noted that some lenders (federally chartered banks incorporated in other states) included prepayment penalties and choice-of-law provisions inconsistent with South Carolina law, which for residential loans under $100,000 gives the debtor a right to prepay without penalty. The lenders claimed federal law, as interpreted by the Comptroller of the Currency, preempted South Carolina law; at least one used a Delaware choice-of-law provision. The lawyers asked whether they could close such transactions, and how to proceed if they did not believe themselves competent to advise on the other state's law.

On the first question, the committee explained that under Rule 1.2(d) a lawyer may not counsel or assist a client in a transaction the lawyer knows is criminal or fraudulent, so if the lawyers concluded the out-of-state terms were criminal or fraudulent they could not proceed. But it does not decide questions of law, and noted that South Carolina law might not apply if federal law preempts it, and that even a prepayment penalty violating South Carolina law would not necessarily be criminal or fraudulent (citing Smiley v. Citibank on a national bank exporting its home-state interest rate). It added that the lawyer's competence duty (Rule 1.1) requires advising the client(s) of the inconsistency between the choice-of-law provisions in the note and mortgage, and noted that under South Carolina law a choice-of-law provision in a consumer loan is invalid for a South Carolina resident unless preempted by federal law.

On competence, the committee concluded the lawyers might, after study or consultation, be able to give competent advice on Delaware law; if not, they had two options. They could refuse to undertake loan transactions unless the documents provided that South Carolina law governs, or they could enter a limited-scope engagement under Rule 1.2(c) (limiting the objectives of the representation with the client's consent after consultation), offering a sample clause stating the lawyer will not advise on another state's law and the client must retain counsel admitted there for such advice. Because the note and mortgage terms would govern most significant issues, such a limited engagement would not violate the competence duty (Rule 1.1 does not require competence in another jurisdiction's law), and the lawyer should clarify whether the client is the borrower, the lender, or both, complying with Rule 1.7(b) for multiple representation.

Currency note

This opinion was issued in 1999, before the South Carolina Bar's adoption of the 2005 revisions to the Rules of Professional Conduct. 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, deadline, or requirement mentioned here.

Common questions

Q: Can a lawyer close a loan with out-of-state terms that conflict with South Carolina law?

A: The committee concluded the lawyer may not close a transaction the lawyer knows is criminal or fraudulent under Rule 1.2(d), but it does not decide whether such terms are unlawful, and noted they are not necessarily criminal or fraudulent because federal law may preempt South Carolina law.

Q: What if the lawyer is not competent in the other state's law named in the documents?

A: The committee concluded the lawyer may study up to become competent, may refuse the matter unless South Carolina law governs, or may use a limited-scope engagement under Rule 1.2(c) that excludes advice on the other state's law.

Q: Does a limited-scope engagement violate the competence duty?

A: The committee concluded it does not here: because the note and mortgage govern most significant issues, and Rule 1.1 does not require competence in another jurisdiction's law, the limited engagement would not violate Rule 1.1.

Background and rules framework

The opinion interpreted South Carolina RPC 1.2(d) (no assistance with criminal or fraudulent conduct), 1.2(c) (limited-scope engagements with client consent), 1.1 (competence), and 1.7(b) (multiple representation in closings), corresponding to the like-numbered Model Rules, against S.C. Code Ann. §§ 37-10-103 and 37-1-201(10)(a) and Smiley v. Citibank (South Dakota) N.A. The committee relied on its Opinions 92-03 and 93-23.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 1.2(d) / Model Rule 1.2(d): no counseling or assisting criminal or fraudulent conduct.
• South Carolina RPC 1.2(c) / Model Rule 1.2(c): limiting the objectives of the representation with client consent.
• South Carolina RPC 1.1 / Model Rule 1.1: competence.
• South Carolina RPC 1.7(b) / Model Rule 1.7: multiple representation in a closing.

Statutes:

• S.C. Code Ann. § 37-10-103 (prepayment without penalty on residential loans under $100,000); § 37-1-201(10)(a) (choice-of-law provision invalid for a South Carolina resident absent federal preemption).

Cases:

• Smiley v. Citibank (South Dakota) N.A., 517 U.S. 735 (1996).

Other opinions cited:

• S.C. Bar Ethics Advisory Ops. 92-03 (multiple parties in closings) and 93-23 (limited engagement in real estate transactions).

See also

• SC Bar Ethics Op. 00-17: Representing Only the Seller
• SC Bar Ethics Op. 06-11: Seller-Only Mail-Away Closing
• SC Bar Ethics Op. 06-03: 'Table Funding' a Closing

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-99-11/

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 99-11

Facts
The attorneys submitting this request handle residential real estate closings. Some lenders for which they handle closings are federally chartered banks incorporated under the laws of other states. Some of these lenders include penalties for prepayment in their loan documents. South Carolina Code Ann. §37-10-103 provides that for residential loans under $100,000 the debtor has the right to prepay without penalty. These lenders claim, however, that federal law, as interpreted by the Comptroller of the Currency, preempts South Carolina law and authorizes them to charge prepayment penalties when they are permitted to do so under the law of the state where they are incorporated. At least one lender includes a "choice of law" provision in its loan documents making the law of Delaware applicable to the extent allowed by federal law.

Questions
(1) May the attorneys close residential real estate transactions in which the loan documents provide for prepayment penalties or other provisions allowed by the law of the state where the bank is incorporated but which are inconsistent with South Carolina law?
(2) If the loan documents include a choice of law provision calling for the application of the law of another jurisdiction and the attorneys do not believe that they are competent to provide advice about the law of that jurisdiction, how should they proceed?

Summary
(1) An attorney may not counsel or assist a client in a transaction that the lawyer knows is criminal or fraudulent. S.C. Rule. Prof. Cond. 1.2(d). The Committee does not issue opinions on questions of law. If the attorneys conclude that provisions in loan documents applying the law of other jurisdictions are criminal or fraudulent, they may not ethically proceed with the transactions. South Carolina law may not apply to this transaction if federal law preempts South Carolina law. Even if South Carolina law applies, a prepayment penalty in violation of South Carolina law would not necessarily be criminal or fraudulent.

(2) The attorneys may decide that after necessary study or consultation they can provide competent advice regarding Delaware law for the representation. See S.C. Rule Prof. Cond. 1.1 and cmt. thereto. If the attorneys decide that they are not competent to provide advice about the law of another jurisdiction because the loan documents contain a choice of law clause, the Committee believes they have two courses of action. First, the attorneys can refuse to undertake representation in loan transactions unless the loan documents provide that South Carolina law governs the transaction. Second, they can enter into a limited engagement agreement pursuant to S.C. Rule 1.2(c).

Opinion
(1) An attorney may not counsel or assist a client in a transaction that the lawyer knows is criminal or fraudulent. S.C. Rule. Prof. Cond. 1.2(d). If the attorneys conclude that provisions in loan documents providing for a prepayment penalty are criminal or fraudulent, they could not ethically proceed with the transactions. South Carolina law may not apply to this transaction if federal law preempts South Carolina law. Even if South Carolina law applies, a prepayment penalty in violation of South Carolina law would not necessarily be criminal or fraudulent. The Committee does not issue opinions on questions of law, but it does note for the information of the requesting attorneys that the United States Supreme Court, approving the interpretation of the Comptroller of the Currency, has held that the National Bank Act authorized a national bank based in one state to charge its out-of-state credit card customers an interest rate on unpaid balances allowed by its home state when that rate is greater than that permitted by the state of the bank's nonresident customers. Smiley v. Citibank (South Dakota) N.A., 517 U.S. 735 (1996).

The general choice of law provision poses somewhat different issues. The attorney's obligation to provide competent advice (Rule 1.1) requires the attorney to advise the lender or the borrower or both (depending on whom the lawyer represents) of the inconsistency between the choice of law provisions in the Note and Mortgage. See S.C. Eth. Adv. Op. #92-03 dealing with representation of multiple parties in real estate closings. Depending on the choice of law provision adopted by the lender, the attorney would then need to decide whether the use of the choice of law provision would require the attorney to close transactions that are criminal or fraudulent. As indicated above, the Committee does not issue opinions on questions of law. The Committee notes that under South Carolina law, a choice of law provision in a consumer loan is invalid when the borrower is a resident of South Carolina, S.C. Code Ann. §37-1-201(10)(a), unless preempted by federal law.

(2) The attorneys may decide that after necessary study or consultation they can provide competent advice regarding Delaware law for the representation. See S.C. Rule Prof. Cond. 1.1 and cmt. thereto. If the attorneys decide that they are not competent to provide advice about the law of another jurisdiction because the loan documents contain a choice of law clause, the Committee believes they have two courses of action. First, they can refuse to undertake representation in loan transactions unless the loan documents provide that South Carolina law governs the transaction. Second, they can enter into a limited engagement agreement pursuant to S.C. Rule 1.2(c), which states: "A lawyer may limit the objectives of the representation if the client consents after consultation." For example, the attorneys' engagement agreements could provide as follows: "Limited Engagement. The note and mortgage provided by the lender include a provision making the law of the state of Delaware applicable to this transaction to the extent permitted by federal law. The attorney will not provide advice about the applicability of the law of another state to this transaction. If the client wishes advice about the applicability of the law of another jurisdiction, the client understands and agrees that he will retain a lawyer admitted to practice in that jurisdiction. The client understands and consents to this limitation of the attorney's engagement. _____ client signature."

The comment to Rule 1.2(c) states that "the client may not be asked to agree to representation so limited in scope as to violate Rule 1.1 . . ." Because the terms of the note and mortgage would govern most significant issues in the transaction, the Committee does not believe that such a limited engagement agreement would violate the attorney's duty of competency under Rule 1.1. In addition, Rule 1.1 does not require an attorney to be competent on the law of another jurisdiction. Cf. S.C. Eth. Adv. Op. 93-23 (limited engagement agreement between borrower and lender permitted in real estate transactions). In connection with such a limited engagement agreement, the attorney should clarify who is the attorney's client, whether the borrower, the lender, or both. If the attorney represents both the borrower and lender, the attorney should comply with the requirements of Rule 1.7(b). See S.C. Eth. Adv. Op. 92-03 dealing with representation of multiple parties in real estate closings.