I’ve written how the collapse of the mortgage boom has put unprecedented stress on our legal system. Mortgages were securitized on a massive scale, but then had to be enforced at the micro level. While the finance industry was mutating rapidly, the law has remained a cottage industry, with individual lawyers representing individual clients in individual claims. I discuss here how this led to shortcuts in documentation, and here how lawyers are trying to adjust their business model to deal with the resulting boom in bad-document claims.
Today’s WSJ reports on another aspect of this story: the debt-buying industry, which is amassing these claims and flooding the courts with suits enforcing the debts. While the creditors have achieved economies of scale, debtors still haven’t caught up, despite the boom just noted in bad-documentation claims. The claims the story focuses on seem to be too small to attract the attention of contingent fee lawyers looking for documentation problems, although the story suggests there are many documentation problems in these smaller claims.
The story discusses one debt purchaser (Midland) that filed 109 claims averaging $2,069 each on a single day in Bronx County Civil Court. Although Midland had lawyers, the story points out that “[n]one of the borrowers sued that day had lawyers, and only 10% showed up in court at all.” A Cook County Illinois judge notes that “he has heard as many as 400 cases a day, filed by debt buyers, debt collectors and their attorneys who have often lugged their filings to his courtroom in crates.” Judges told the reporter that “[r]oughly 94% of collection cases filed against borrowers result in default judgments in favor of the debt buyer, according to industry estimates. The majority of borrowers don’t have a lawyer, some don’t know they are even being sued, and others don’t appear in court.”
These stories about foreclosure-gate raise the question of how long we will tolerate lawyer regulation that refuses to adjust to a rapidly changing business world. Every lawyer gets the same type of costly license, is subject to basically the same set of uniform rules, but must be licensed in every state in which she practices. No legal advice may be provided by people or technology without the intervention of a licensed lawyer. Every lawyer is trained in basically the same way by one of a couple of hundred cookie-cutter law schools despite increasing diversity in the work lawyers do.
Licensing’s hold on the supply of legal services and legal information explains why thousands of people who obviously need legal assistance dealing with their debts fail to get it. Legal aid for the poor can no longer paste over the gaping hole in assistance to the middle class.
Without the stranglehold of lawyer licensing, the market could provide a variety of solutions to foreclosure-gate, including form and software litigation documents and novel ways to finance defending mortgage claims and contesting their validity. Some specific practices might need to be regulated. But our archaic system of lawyer licensing should not continue to block all innovation in legal services when the rest of the world is changing so rapidly.
These stories about foreclosure-gate make clear that this is now a justice issue and not simply about new ways to make money.