Can a North Carolina real estate firm hold recording and courier costs in a separate non-trust account and keep the markup if actual costs come in lower?

Plain-English summary

A high-volume residential real estate firm collects estimated recording and overnight/courier costs at closing, because lenders require recording before disbursement and will not let the closing lawyer deviate from the figures in the loan package. The firm marks up those estimated costs (by $2 to $15), shows the marked-up figure on the HUD-1, transfers it to a separate "Recording Account" treated as firm money, and asks clients to sign an affidavit consenting to the up-charges.

On using the interim account, the opinion concludes the firm may not move the closing funds into a non-trust Recording Account. Even though the transaction has closed, the funds collected to cover recording and courier costs remain client funds until disbursed and must be segregated, deposited, and disbursed under the trust-accounting rules (Rules 1.15-1 to 1.15-3). As a trust account those funds could be moved to the operating account only when earned by or payable to the firm.

On an account funded with the firm's own money, the opinion concludes that procedure complies: if the firm deposits its own funds, pays the costs from that account, and later reimburses itself from the closing proceeds, the account holds only firm funds and need not be a trust account. The opinion also confirms that tendering a firm trust-account check written against the loan proceeds to the Register of Deeds at the time of recording satisfies the lender's requirement that documents be recorded before the proceeds are disbursed.

On keeping the markup, the opinion concludes the firm may inflate its cost estimates and retain the overcharge, but only if the practice is not prohibited by law, the disclosure is made to the lender as well as the seller, the overcharges are not clearly excessive under Rule 1.5(a), and the clients are not misled under Rule 8.4(c) about the fact that the firm keeps the overcharge as profit. The opinion notes federal appellate decisions holding that recording-fee markups do not violate RESPA.

In practice

Under the North Carolina rules as they stood at the time of the opinion, the analysis turns on whose money is in the account. The opinion holds that closing funds collected to pay third-party costs are client funds requiring a trust account until disbursed, while an account seeded with the firm's own money and later reimbursed is not a trust account.

Per the opinion, a markup of estimated recording and courier costs is permissible only with disclosure to both the lender and the seller, a charge that is not clearly excessive under Rule 1.5(a), and no client deception under Rule 8.4(c).

Common questions

Q: Can a firm hold collected recording and courier costs in a regular (non-trust) account after closing?

A: No. The opinion concludes those funds remain client funds until disbursed and must be kept in a trust account governed by Rules 1.15-1 to 1.15-3.

Q: Is there a way to use a non-trust account for these costs?

A: Yes. The opinion concludes that if the firm funds the account with its own money, pays the costs from it, and reimburses itself from the closing proceeds, the account holds only firm funds and need not be a trust account.

Q: Can the firm mark up its estimate of recording and courier costs and keep the difference?

A: Yes, but only if the practice is lawful, disclosed to the lender and seller, not clearly excessive under Rule 1.5(a), and not misleading to the client under Rule 8.4(c).

Q: Does writing a trust-account check to the Register of Deeds at recording satisfy the lender's record-before-disbursement rule?

A: Yes. The opinion concludes tendering a firm trust-account check against the loan proceeds at the time of recording complies with that requirement.

Background and rules framework

The opinion interprets the North Carolina trust-accounting rules (Rules 1.15-1 to 1.15-3, corresponding to Model Rule 1.15) together with Rule 1.5(a) (fees that are not clearly excessive, corresponding to Model Rule 1.5) and Rule 8.4(c) (conduct involving dishonesty or misrepresentation, corresponding to Model Rule 8.4). It also references RPC 44 and the North Carolina Good Funds Settlement Act (Chapter 45A) on disbursement timing.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / NC Rules 1.15-1 to 1.15-3 (trust accounting; segregation of client funds)
• MR 1.5 / NC Rule 1.5(a) (clearly excessive fees)
• MR 8.4 / NC Rule 8.4(c) (dishonesty, misrepresentation)

Statutes:

• N.C. Gen. Stat. Ch. 45A (Good Funds Settlement Act)

Cases:

• Boulware v. Crosland Mortgage Corp., 291 F.3d 261 (4th Cir. 2002), recording-fee markup not a RESPA violation
• Krzalic v. Republic Title Co., 314 F.3d 875 (7th Cir. 2002), recording-fee markup not a RESPA violation
• Haug v. Bank of America, 317 F.3d 832 (8th Cir. 2003), recording-fee markup not a RESPA violation

Other opinions cited:

• RPC 44 (disbursement against trust funds in real estate closings)

See also

• NC State Bar 2006 FEO 8: Disbursement of Trust Funds
• CA COPRAC Op. 2005-169: Client Trust Account Overdraft Protection

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2005-formal-ethics-opinion-11/

Original opinion text

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

Inquiry #1:

ABC Law Firm limits its practice to residential real estate sale and refinance transactions. On a monthly basis, it processes a high volume of such transactions involving real estate in both the county where its office is located and in contiguous counties.

RPC 44 and North Carolina's Good Funds Settlement Act, Chapter 45A of the North Carolina General Statutes, prohibit disbursement of funds from a lawyer's trust account prior to recording if the lender so requires. Lenders' instructions often require the recording of documents prior to disbursement of loan proceeds.

A number of the lenders providing financing to ABC's clients require the closing lawyer to estimate the settlement charges and disbursements, including courier and recording costs, prior to the issuance of the final loan package. Once the loan package is issued, the closing lawyer is not permitted to deviate from the figures specified in the loan package because the lenders are subject to scrutiny, and potential liability, for deviations between their "good faith estimate" of closing costs and the actual closing costs. Not infrequently, however, the actual costs for recording and overnight mail/couriers exceed the initial estimates.

ABC Law Firm has adopted the following procedure to address the above-described situation:

1. ABC established with its depository bank a depository account called the "Recording Account;"

2. ABC prepares for each real estate client, each of whom reviews and signs prior to closing, a closing affidavit making various disclosures, including the following:

I/we hereby acknowledge and agree that certain charges on my HUD-1 Settlement Statement, including but not limited to overnight/courier and recording fees, may not reflect the actual costs and in fact may be more than the actual costs to the settlement agent. The additional amount(s) may vary and are to help cover the administrative aspects of handling the particular item or service. I/we hereby consent to and accept the above-referenced up-charges.

3. ABC marks up the estimated overnight/courier fees and recording fees it provides to lenders by anywhere from $2.00 to $15.00, and reflects the marked-up amount on the HUD-1 Settlement Statement on line 1201 denominated as "Recording Fees."

4. When the transaction closes, the amount reflected on the HUD-1 Settlement Statement as "Recording Fees" is transferred from ABC's trust account to ABC's Recording Account, and disbursements to recording offices and for reimbursement for overnight/courier fees are made from the Recording Account.

5. All amounts reflected on the HUD-1 Settlement Statement which are payable to ABC, including the Recording Fees, are reported by ABC as business income, and all disbursements from the Recording Account for overnight/courier fees and recording charges are reported as business expenses.

6. ABC considers all funds in the Recording Account to be funds of ABC, and from time to time, surplus funds are drawn from the Recording Account and transferred to the firm's Operating Account, or if necessary, funds are transferred from the Operating Account to the Recording Account.

After a closing but before the recording of the documents, may ABC transfer the amount for Recording Fees, as reflected on the HUD-1, from the law firm trust account to the Recording Account and write a check to the Register of Deeds (and courier/overnight service) against those funds to tender to the Register of Deeds when the documents are recorded?

Opinion #1:

No, unless the Recording Account is maintained as a lawyer's trust account in accordance with Rule 1.15-1 to Rule 1.15-3 of the Rules of Professional Conduct. Although the transaction has closed, the funds to cover costs of the closing, including recording and overnight/courier fees, remain client funds until disbursed and must be segregated from the lawyer's funds and be deposited and disbursed in accordance with the trust accounting rules.

As a trust account, the funds in the Recording Account would be client funds and not the funds of ABC. Funds could not be transferred from the Recording Account to the firm's operating account unless earned by the firm or payable to the firm as reimbursement for costs advanced.

Inquiry #2:

ABC does not want the Recording Account to be a trust account. Therefore, ABC deposits its own money into the Recording Account. Checks for the recording and overnight/courier fees for a closing are written from this account. At closing, the line item for these closing costs on the HUD-1 reflects payment to the law firm to reimburse the firm for advancing these costs. After the closing and the recording of the documents, ABC deposits the check to the firm from the closing into the Recording Account to reimburse the firm for advancing the funds to cover these costs. Does this procedure comply with the trust accounting rules?

Opinion #2:

Yes. Because the Recording Account contains only the funds of the law firm, it does not have to be maintained as a lawyer's trust account.

Inquiry #3:

ABC would like to avoid advancing the funds of the law firm to cover the recording and courier/overnight fees. If the closing lawyer tenders a firm trust account check, written against the loan proceeds on deposit in the trust account, to the Register of Deeds at the time that the documents are recorded, has the lawyer complied with the lender's requirement that documents be recorded before the loan proceeds are disbursed?

Opinion #3:

Yes.

Inquiry #4:

The Fourth Circuit in Boulware v. Crosland Mortgage, 291 F.3d 261 (4th Cir. 2002), the Seventh Circuit in Krzalic v. Republic Title Company, 314 F.3d 875 (7th Cir. 2002), and the Eighth Circuit in Haug v. Bank of America, 317 F.3d 832 (8th Cir. 2003) have all ruled that "up charges," or markup, by mortgage lenders and settlement agents for recording fees and other expenses of settlement is not a violation of the Federal Real Estate Settlement Procedures Act.

If there is disclosure to its clients as set forth in Inquiry #1 above, may ABC inflate its estimate of the costs for recording and overnight/couriers fees that will be incurred in closing a transaction and, if the actual costs prove to be less than the estimated costs, retain the overcharges?

Opinion #4:

Yes, provided this practice is not prohibited by law, the disclosure is made to the lender as well as the seller, the overcharges are not clearly excessive in violation of Rule 1.5(a), and the clients are not misled, in violation of Rule 8.4(c), about the fact that the overcharges will be kept by the law firm as profit.