Can a North Carolina lawyer for a lender draft a foreclosure-notice waiver under N.C.G.S. 45-21.16(f) and give it to an unrepresented borrower to sign?

Plain-English summary

Under N.C.G.S. § 45-21.16(f), a party entitled to notice in a nonjudicial power-of-sale foreclosure may, after default, waive the right to notice and hearing by a signed, acknowledged instrument. For debts under $100,000 only the clerk may send the waiver form, and only after service of the notice of hearing; for debts of $100,000 or more the statute does not say who may draft the form or how it is provided, and lenders commonly require the waiver in connection with a forbearance, modification, or reinstatement agreement. The question is whether a lawyer representing the lender on such a larger debt may draft the waiver and provide it to unrepresented Notice Parties.

The committee answers yes, subject to a consumer exception. Rule 4.3(a) bars giving legal advice (other than to secure counsel) to an unrepresented person whose interests may conflict with the client's, and Rule 4.3(b) bars implying the lawyer is disinterested. Reviewing 2004 FEO 10 (a buyer's lawyer may prepare a deed for an unrepresented seller with proper disclosures) and 2009 FEO 12 (a lawyer may prepare an affidavit and confession of judgment for an unrepresented adverse party), alongside opinions barring preparation of an answer or an acceptance-of-service-and-waiver form (CPR 121, CPR 296, RPC 165, 2002 FEO 6), the committee reasons that the foreclosure waiver is like a deed or confession of judgment: it accommodates the client's needs and is prepared in negotiations to avoid the consequences of default. A foreclosure notice of hearing requires no action by the Notice Party, who may still pay the debt or attend the sale after signing. So, except in the consumer context, preparing the waiver is not tantamount to legal advice, and the lender's lawyer may draft and provide it without advising the Notice Parties or implying disinterest.

The exception: when the property is the borrower's primary residence, Rule 4.3 prohibits drafting the waiver for inclusion in a loan-modification package for the unrepresented borrower to sign, because the waiver prospectively eliminates a significant right (the borrower's right to notice of foreclosure on default of the modified loan) and there is a substantial risk an unsophisticated, distressed borrower will not understand it. On Inquiry #2, the committee holds that pairing the waiver with other lender documents (forbearance, modification, reinstatement) makes no difference, subject to the same primary-residence limitation, provided the lawyer fully discloses that the lawyer represents the lender and gives no legal advice other than to obtain counsel.

In practice

Under the North Carolina rules as they stood at the time of the opinion, the committee holds that whether the lender's lawyer may draft the § 45-21.16(f) waiver for an unrepresented borrower turns on whether doing so is tantamount to giving legal advice. Per the opinion, on a debt of $100,000 or more outside the consumer context, drafting and providing the waiver is permissible if the lawyer complies with the statute, fully discloses representing the lender, does not advise the Notice Parties about the meaning or significance of the form, and does not imply disinterest.

The opinion holds the consumer context is different: where the property is the borrower's primary residence and the waiver is included in a loan-modification package, the lawyer may not draft the waiver for the unrepresented borrower, because the prospective elimination of the borrower's right to foreclosure notice is, in the committee's analysis, tantamount to legal advice given the risk a distressed borrower will not understand it. Per Inquiry #2, bundling the waiver with other lender documents does not change the analysis, subject to that primary-residence limitation.

Common questions

Q: Can a lender's lawyer in North Carolina draft a foreclosure-notice waiver for an unrepresented borrower?

A: Yes on a debt of $100,000 or more, if the lawyer complies with N.C.G.S. § 45-21.16 and Rule 4.3, discloses representing the lender, and does not advise the borrower or imply disinterest, except in the primary-residence consumer context.

Q: Why is the primary-residence situation treated differently?

A: The opinion holds that drafting the waiver for inclusion in a loan-modification package on the borrower's primary residence is tantamount to legal advice, because it prospectively eliminates the borrower's significant right to notice of foreclosure and a distressed borrower is at substantial risk of not understanding it.

Q: Does bundling the waiver with a forbearance or modification agreement change the answer?

A: No, subject to the primary-residence limitation. Per Opinion #2, comment [2] to Rule 4.3 lets the lawyer prepare signature documents in a negotiation, so long as the lawyer discloses representing the lender and gives no legal advice except to obtain counsel.

Q: What must the lawyer disclose to the unrepresented Notice Parties?

A: The lawyer must fully disclose that the lawyer represents the lender's interests and will draft the documents consistent with the lender's interests, and may not give the Notice Parties any legal advice except the advice to obtain legal counsel.

Background and rules framework

The opinion interprets Rule 4.3 (Model Rule 4.3, dealing with unrepresented persons) in a foreclosure setting. Rule 4.3(a) bars giving legal advice, other than to secure counsel, to an unrepresented person whose interests conflict or may conflict with the client's; Rule 4.3(b) bars stating or implying the lawyer is disinterested and requires correcting misunderstandings. Comment [2] permits negotiating and preparing signature documents with disclosure of the adverse representation. The statutory backdrop is N.C.G.S. § 45-21.16 (notice and hearing in power-of-sale foreclosure; subsection (f) post-default waiver).

The committee relies on 2004 FEO 10 (preparing a deed for an unrepresented seller), 2009 FEO 12 (affidavit and confession of judgment), RPC 165, and 2002 FEO 6 (no preparing an answer or acceptance-of-service-and-waiver), and references Proposed 2015 FEO 1 (the companion opinion on filings for unrepresented opposing parties).

Citations and references

Rules of Professional Conduct:

• Model Rule 4.3 / NC Rule 4.3(a), 4.3(b) and cmt. [2] (dealing with unrepresented persons; no legal advice; no implied disinterest)

Statutes:

• N.C. Gen. Stat. § 45-21.16 (notice and hearing in power-of-sale foreclosure; subsection (f) post-default waiver; (c)(7)(a) content of notice; (d) clerk's findings)

Other opinions cited:

• 2004 FEO 10: a buyer's lawyer may prepare a deed for an unrepresented seller with Rule 4.3 disclosures.
• 2009 FEO 12: a lawyer may prepare an affidavit and confession of judgment for an unrepresented adverse party.
• 2002 FEO 6 (with CPR 121, CPR 125, CPR 296, RPC 165): a lawyer may not prepare an answer or an acceptance-of-service-and-waiver form for an unrepresented party.

See also

• NC State Bar 2015 FEO 1: Preparing Filings for an Unrepresented Opposing Party
• Florida Bar Op. 68-46: Asking an Unrepresented Party to Sign a Deed
• ABA Formal Op. 472: Communicating With a Person Receiving Limited-Scope Help

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2015-formal-ethics-opinion-2/

Original opinion text

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

Inquiry #1:

N.C. Gen. Stat. §45-21.16(f) provides that in a nonjudicial power of sale foreclosure, any person entitled to notice of the foreclosure (including owners, borrowers, and guarantors) (the “Notice Parties”) “may waive after default the right to notice and hearing by written instrument signed and duly acknowledged by such party.” The statute provides that in foreclosures where the original debt was less than $100,000, only the clerk may send the waiver form to the Notice Parties and the form can only be sent “after service of the notice of hearing.” In foreclosures where the original debt is $100,000 or more, the statute does not specify how the waiver form shall be provided to the Notice Parties or who can draft the waiver form.

It is common practice for lenders dealing with defaulted loans in excess of $100,000 to require Notice Parties to execute a N.C. Gen. Stat. §45-21.16(f) waiver in connection with a forbearance, modification, or reinstatement agreement.

The filing of a foreclosure notice of hearing does not require a Notice Party to file an answer or to attend the foreclosure hearing. See N.C.G.S. §45-21.16(c)(7)(a) (requiring foreclosure notice to inform debtor that “failure to attend the hearing will not affect the debtor’s right to pay the indebtedness...or to attend the actual sale, should the debtor elect to do so.”) The execution of a N.C. Gen. Stat. §45-21.16(f) waiver “waives” the right to receive notice of the foreclosure hearing and the right to require a foreclosure hearing to be held. The clerk is still required to receive evidence and make the findings required by N.C.G.S. § 45-21.16(d), but can do so based upon affidavits from the lender without holding a formal hearing.

May a lawyer who represents the lender on a debt of $100,000 or more draft a N.C. Gen. Stat. §45-21.16(f) waiver form and provide the waiver form to unrepresented Notice Parties for execution?

Opinion #1:

Yes, provided the lawyer complies with the requirements of N.C. Gen. Stat. §45-21.16 and with Rule 4.3 (Dealing with Unrepresented Persons). However, in the consumer context, when the property subject to foreclosure is the borrower’s primary residence, compliance with Rule 4.3 prohibits a lawyer from drafting the waiver form for inclusion in a loan modification package for execution by the unrepresented borrower.

In dealing on behalf of a client with a person who is not represented by counsel, Rule 4.3(a) states that a lawyer shall not give legal advice to the person, other than the advice to secure counsel if the lawyer knows or reasonably should know that the interests of such person are or have a reasonable possibility of being in conflict with the interests of the client. In addition, paragraph (b) of the rule prohibits the lawyer from stating or implying that the lawyer is disinterested and requires the lawyer to make reasonable efforts to correct any misunderstanding that the unrepresented person may have in this regard.

The Ethics Committee has previously considered whether a lawyer may prepare documents for execution by an unrepresented person. 2004 FEO 10 rules that the lawyer for the buyer in a residential real estate closing may prepare a deed as an accommodation to the needs of her client, the buyer, provided the lawyer makes the disclosures required by Rule 4.3 and does not give legal advice to the seller other than the advice to obtain legal counsel. Similarly, 2009 FEO 12 holds that a lawyer may prepare an affidavit and confession of judgment for an unrepresented adverse party as long as the lawyer explains who he represents and does not give the unrepresented party legal advice. Accord RPC 165.

However, other opinions have held that a lawyer may not prepare an answer or an acceptance of service and waiver form for an unrepresented opposing party. See CPR 121, CPR 296, RPC 165. 2002 FEO 6 explains the rationale for these prior opinions as follows:

The committee has consistently held, however, that a lawyer representing the plaintiff may not send a form answer to the defendant that admits the allegations of the divorce complaint nor may the lawyer send the defendant an "acceptance of service and waiver" form waiving the defendant's right to answer the complaint. CPR 121, CPR 125, CPR 296. The basis for these opinions is the prohibition on giving legal advice to a person who is not represented by counsel.

Except as noted below, the waiver form contemplated by the current inquiry is like a deed or a confession of judgment: it is prepared to accommodate the needs of the lawyer’s client and usually prepared in conjunction with negotiations between the lender and the borrower relative to avoiding the consequences of a default by execution of a forbearance, modification, or reinstatement agreement. A foreclosure notice of hearing does not require a Notice Party to take any action prior to a foreclosure hearing or to attend the hearing. After execution of a waiver form, the borrower may still pay the indebtedness or attend the foreclosure sale. Therefore, except as noted below, preparing a N.C. Gen. Stat. §45-21.16(f) waiver form for unrepresented Notice Parties is not tantamount to giving legal advice to an unrepresented person and the lender’s lawyer may draft the waiver and give it to unrepresented Notice Parties if the lawyer does not undertake to advise the unrepresented Notice Parties concerning the meaning or significance of the waiver form or state or imply that the lawyer is disinterested.

There is an exception to this holding in the consumer context. When the property subject to foreclosure is the borrower’s primary residence, compliance with Rule 4.3 prohibits a lawyer from drafting a waiver form for inclusion in a loan modification package for execution by the unrepresented borrower. In this context, preparation of the waiver form is tantamount to giving legal advice to an unrepresented person because the waiver prospectively eliminates a significant right or interest of the unrepresented person—the borrower’s right to notice of foreclosure upon default on the new or modified loan—and there is a substantial risk that an unsophisticated, distressed borrower will not understand this. See Proposed 2015 FEO 1.

Inquiry #2:

Does it make a difference if the waiver is executed in conjunction with other lender prepared documents, such as a forbearance agreement, modification agreement, or reinstatement agreement?

Opinion #2:

Subject to the limitation noted in the last paragraph of Opinion #1 on drafting a waiver form for inclusion in a loan modification package for a loan secured by the unrepresented borrower’s primary residence, this does not make a difference. Comment [2] to Rule 4.3 clarifies that Rule 4.3 does not prohibit a lawyer from negotiating the terms of a transaction or settling a dispute with an unrepresented person. So long as the lawyer has explained that the lawyer represents an adverse party, the lawyer may inform the unrepresented person of the terms on which the lawyer's client will enter into an agreement or settle a matter and may prepare documents that require the unrepresented person's signature. In dealing with unrepresented Notice Parties, however, the lender’s lawyer must fully disclose that the lawyer represents the interests of the lender and will draft the documents consistent with the interests of the lender. The lawyer may not give any legal advice to the Notice Parties except the advice to obtain legal counsel. Rule 4.3.