99 Formal Ethics Opinion 5

Obtaining Canceled Deed of Trust Following Residential Real Estate Closing

Opinion rules that whether the lawyer for a residential real estate closing must obtain the cancellation of record of a prior deed of trust depends upon the agreement of the parties.

Inquiry #1 

Attorney A engages in a high volume real estate practice. She routinely handles closing transactions in which existing mortgage loans are paid. Attorney A follows a procedure in which the payoff check is directed to the owner and holder of the note with a cover letter that directs the owner and holder to mark the original note and the deed of trust securing the note "paid and satisfied in full" and requests that the original papers be returned to Attorney A's office. Upon receipt of the "paid and satisfied"papers, Attorney A delivers the papers to the appropriate county registry for cancellation. Attorney A includes in the payoff letter a reference to N.C.G.S. 45-36.3(a)(1) which requires that "the holder of the evidence of the indebtedness" shall "within sixty days discharge and release of record such document and forward the document to the grantor, trustor, or mortgagor."

Lenders routinely fail to comply with their duty to return paid loan documents. Although Attorney A sends at least two reminder letters to lenders who fail to cooperate, she does not bring a lawsuit against lenders to enforce the return of the loan documents. Is Attorney A required by the Revised Rules of Professional Conduct to continue diligently to try to obtain the loan documents including bringing a civil action against a lender if necessary?

Opinion #1:

Although Rule 1.3 of the Revised Rules of Professional Conduct states that "a lawyer shall act with reasonable diligence and promptness in representing the client," whether there is a duty to obtain paid loan documents from a lender depends upon the lawyer's agreement with the new lender and the borrower. The lawyer's engagement letter, the lender's loan closing instructions, and the lawyer's representations to the clients establish the expectations of the clients. However, Rule 1.2(c) specifically permits a lawyer to limit the objectives of a representation with the client's consent. To avoid any misunderstanding, the lawyer must explain any limitations on her representation. Specifically, if she does not intend to obtain the cancellation of record of the paid deed of trust, she must so advise her clients.

Inquiry #2: 

Does the procurement of an owner's title insurance policy relieve the lawyer of a duty to get the deed of trust canceled of record?

Opinion #2:

See opinion #1 above.

Inquiry #3:

If Attorney A collects a $25 "deed of trust cancellation fee," is she required to obtain the cancellation of the deed of trust before closing the file?

Opinion #3:

If a lawyer specifically charges for canceling the existing deed of trust on the property, the lawyer may not close the file until the deed of trust is canceled of record. The cancellation of the deed of trust should be pursued with reasonable diligence and promptness. See opinion #1 above.

Inquiry #4:

If Attorney A charges a "payoff processing fee," must she obtain the cancellation of record of the deed of trust before closing the file?

Opinion #4 

There is no practical distinction between a "deed of trust cancellation fee" and a "payoff processing fee." Regardless of what the fee is called, if a fee is charged, the client will expect the deed of trust to be canceled. See opinion #3 above.

Inquiry #5:

Is Attorney A required to disclose to the borrower that she will close the client's file after a certain period of time regardless of whether the prior deed of trust is canceled of record and that an uncancelled deed of trust may affect the marketability of title?

Opinion #5:

Attorney A must explain the limits of her representation sufficiently to allow the borrowers to make reasonably informed decisions about the representation. Seeopinion #1 above and Rule 1.4(b).