OCOB Opines that Lawyers May Not Secure Legal Fees with Deeds of Trust on Clients’ Residential Property
By Suzanne Lever
In July 2009, North Carolina enacted the North Carolina Secure and Fair Enforcement Mortgage Licensing Act (NC S.A.F.E.), N.C. Gen. Stat. § 53-244.010 et seq. NC S.A.F.E. provides, with limited exceptions, that
no person may engage in the mortgage business or act as a mortgage loan originator with respect to any dwelling located in this state without first obtaining and maintaining a license under this Article. It shall be unlawful for any person, other than an exempt person, to act as a mortgage loan originator without a mortgage loan originator license, which authorizes an individual who is employed by a licensee holding a license as provided in subsection (b) of this section to conduct the business of a mortgage loan originator.
N.C. Gen. Stat. § 53-244.040(a).
The North Carolina Office of the Commissioner of Banks (OCOB), among other responsibilities, regulates non-exempt persons and entities engaged in the mortgage business in the State. According to OCOB, they have very little leeway under NC S.A.F.E. to allow individuals to make loans secured by deeds of trust on residential real property. While there is an exemption for lawyers under NC S.A.F.E., the exemption only applies to “[a]n attorney licensed pursuant to Chapter 84 of the General Statutes who negotiates the terms of a residential mortgage loan on behalf of a client in the course of and incident to the attorney’s representation of the client, so long as the attorney does not hold himself out as engaged in the mortgage business and is not compensated by a mortgage lender, a mortgage broker, or other mortgage loan originator when negotiating the terms of a residential mortgage loan.” N.C. Gen. Stat. § 53-244.040(d)(4)(emphasis added).
This raises the inquiry of “What happens when an attorney takes a promissory note for unpaid legal fees and secures it with a deed of trust from the client?” In 1995, the ethics committee issued RPC 186, which rules that “a lawyer who represents a client in a pending domestic action may take a promissory note secured by a deed of trust as payment for the lawyer’s fee even though the deed of trust is on real property that is or may be the subject of the domestic action.” RPC 186 does not distinguish between residential or non-residential real estate nor does it address any OCOB licensure issues.
According to the OCOB, to the extent a lawyer intends to secure the fee payments by a note and deed on “residential real estate,” as that term is defined in § 53-244.030(31), the lawyer would need to be licensed under NC S.A.F.E. OCOB opines that if the lawyer is not negotiating the terms of a residential mortgage loan on behalf of a client, but instead on his own behalf, he would not be exempt under § 53-244.040(d)(4), and would be “engaging in the mortgage business” as that term is defined in § 53-244.030(11)(a)–(c). On the other hand, and to the limited extent that the payments are secured by commercial or non-residential real estate, licensure is not required. According to OCOB, any lawyer who took a mortgage on a client’s home after the effective date of NC S.A.F.E. is in violation of the act and could be subject to prosecution by the Attorney General’s office. While the practice of securing fees with security interests may primarily be associated with family law practitioners, presumably, any prohibition under NC S.A.F.E. would apply regardless of practice area.
Compliance with the law is implicit in the Rules of Professional Conduct. To the extent that RPC 186 conflicts with NC S.A.F.E., the ethics opinion is trumped by the law. A footnote to that effect has been added to the online version of the ethics opinion. In addition, given the concern that there is a conflict between RPC 186 and NC S.A.F.E., the Ethics Committee will consider the fate of the ethics opinion at the next quarterly meeting in April.
OCOB is considering other inquiries pertaining to this prohibition, including how it may relate to lawyers securing obligations on behalf of clients in equitable distribution actions. Stay tuned.
Suzanne Lever is assistant ethics counsel for the North Carolina State Bar.
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