New Jersey real estate attorneys who act as the settlement agent in real estate transactions must take extra precautions when signing the real estate settlement statement known as a HUD-1. The HUD-1 form lists all the fees for services that the lender or broker charges to the buyer during the purchase of a property, as well as the money exchanged between the buyer and seller, closing costs, escrow charges, apportionment of taxes, title fees, legal fees and other costs associated with transaction. The settlement agent, also known as the escrowee, prepares the HUD 1 form for the final closing.
Why should attorneys take precautions when acting as a settlement agent? In recent years the Office of Attorney Ethics has adopted a very aggressive approach in pursuing professional ethics grievances against lawyers who make even the slightest errors on the HUD-1 form. An attorney acting as the settlement agent is responsible for collecting and disbursing all funds in connection with the real estate transaction. The HUD-1 form requires the settlement agent’s signature based on the following written Certification:
The HUD-1 Settlement Statement which I have prepared is a true and accurate account of this transaction. I have caused or will cause the funds to be disbursed in accordance with this statement.
The HUD-1 Certification is significant because lenders are relying on the accuracy of the information when funding the loan. Attorneys acting as settlement agents in real estate transactions frequently run afoul of this Certification for a variety of reasons. Some common examples include:
- Disbursing fees to third parties who are not identified on the HUD-1
- Paying fees in amounts that differ from the amounts reported on the HUD-1
- Failing to disclose an agreement between the buyer and seller involving credits for closing costs or repair costs
- Failing to prepare an amended HUD-1 form after the closing if the attorney becomes aware of an error
In these examples, the Office of Attorney Ethics will likely assert that any deviation that renders the HUD-1 Certification inaccurate constitutes a violation of New Jersey Rule of Professional Conduct 8.4(c) involving conduct of dishonesty, fraud, deceit or misrepresentation.
There is of course a very simple solution for attorneys whose practice is devoted to real estate; namely, hire a real estate title service to act as the settlement agent and pass the cost onto the client. Using a title company to act as the settlement agent spares the lawyer from running all of the loan proceeds through his or her trust account, and more importantly spares the lawyer from signing the HUD-1 and recording the Deed and Mortgage. In this author’s opinion no attorney should ever sign a HUD-1 Certification and expose himself or herself to a professional ethics Complaint by the Office of Attorney Ethics.