That's my intent... that the ERL uses itself (including as a DNS cache), falling back to the external DNS when the entry is not in the cache.
tcat@ubnt# show service dns forwarding cache-size 150 listen-on eth1 listen-on eth2 listen-on vtun0
vtun0 is the VPN. eth1 is the LAN; eth2 is disconnected. (eth0, not listed, is the WAN.)