Can a New York lawyer handle a home sale that inflates the price and gives the buyer a matching seller's concession to enlarge the mortgage loan?

Plain-English summary

After buyer and seller agreed on terms, the buyer asked that the price be increased by 3% to cover the buyer's closing costs, with the seller granting a matching "seller's concession" in the same amount. The buyer thereby obtains a larger mortgage, based on the grossed-up price. The lender told seller's counsel the practice is "done all the time" and acceptable to Fannie Mae and Freddie Mac, but counsel was concerned that the ultimate purchaser of the loan in the secondary market might not know the price was grossed up, and that reporting the inflated price on the mortgage application and HUD-1 statement might violate federal law. Counsel asked whether participating as seller's attorney would violate the New York Code.

The committee explains that DR 1-102(A)(3) bars illegal conduct and DR 7-102(A)(7) bars counseling or assisting conduct the lawyer knows to be illegal or fraudulent, so if the conduct is unlawful or fraudulent it is per se unethical; but the committee does not opine on questions of law, so it cannot decide whether the practice is criminal or fraudulent. It can construe the Code's bar on dishonesty, deceit, and misrepresentation under DR 1-102(A)(4). Drawing on two sibling opinions, North Carolina Formal Ethics Opinion 12 (2001) and New Jersey Opinion 710 (2006), both of which found closely similar gross-up arrangements barred as dishonest where the inflated price concealed the device from later purchasers or secondary-market assignees, the committee reaches the same conclusion: a concession is misleading under DR 1-102 unless it reflects the actual price less costs the seller agreed to pay, or the arrangement is otherwise transparent.

The committee concludes that participation is unethical unless there is no unlawful conduct and the transaction documents fully disclose the substance and effect of the arrangement. It notes its earlier N.Y. State 545 (1982), which found it improper for a lawyer to execute a transfer report stating a price that excluded the cost of extras.

In practice

The opinion holds that a lawyer may participate in a grossed-up sale with a seller's concession only if two conditions are met: the transaction involves no unlawful conduct, and the gross-up's substance and effect are fully disclosed in the transaction documents so that no party (including secondary-market purchasers of the loan) is misled to its detriment. The committee treats the legality question as one of law it will not decide, and rests the ethical limit on DR 1-102(A)(4)'s bar on dishonesty and misrepresentation, in line with the North Carolina and New Jersey opinions it follows.

Common questions

Q: Can a lawyer close a home sale that grosses up the price to enlarge the buyer's mortgage?

A: Only if lawful and disclosed. The committee concludes participation is unethical unless the transaction involves no unlawful conduct and the documents fully disclose the substance and effect of the grossed-up price and matching concession.

Q: Did the committee decide whether the gross-up is illegal or fraudulent?

A: No. The committee states it does not opine on questions of law, so it could not determine whether the practice is criminal or fraudulent; it construed only the Code's prohibition on dishonesty and misrepresentation.

Q: What makes a seller's concession misleading?

A: The committee explains that a concession is misleading under DR 1-102 unless the recited price reflects the actual price of the property less costs the seller agreed to pay, or the gross-up is otherwise disclosed; concealing the device from later purchasers is what the sibling opinions found dishonest.

Background and rules framework

The opinion interprets DR 1-102(A)(3), (4), and (5) (illegal conduct; dishonesty, deceit, or misrepresentation; conduct prejudicial to the administration of justice, the area of ABA Model Rule 8.4) and DR 7-102(A)(7) (not counseling or assisting conduct known to be illegal or fraudulent, the area of ABA Model Rule 1.2(d) and 4.1). It does not decide the underlying questions of federal or state law.

Citations and references

Rules of Professional Conduct:

• MR 1.2 (scope; assisting client crime or fraud); MR 8.4 (misconduct, dishonesty); MR 4.1 (truthfulness to others)
• Former Code DR 1-102(A)(3), (4), (5); DR 7-102(A)(7)

Statutes:

• 18 U.S.C. sections 1001, 1010, 1012 (raised by the inquirer as a concern, not decided)

Other opinions cited:

• North Carolina Formal Ethics Op. 12 (2001): similar gross-up barred as dishonest and misleading
• New Jersey Op. 710 (2006): seller's-concession gross-up violates rules against assisting illegal or fraudulent conduct
• N.Y. State 545 (1982): improper to execute a transfer report stating a price excluding the cost of extras

See also

• NY State Bar Op. 819: Settling a court-awarded divorce fee with the client
• NY State Bar Op. 832: Selling shelf corporations as a nonlegal service

Source

• Landing page: https://nysba.org/ethics-opinion-817/