Foreclosure-gate and the injustice of lawyer regulation

Larry Ribstein —  29 November 2010

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.

Larry Ribstein


Professor of Law, University of Illinois College of Law

15 responses to Foreclosure-gate and the injustice of lawyer regulation


    Re: Bobby B – I don’t do closing work so I am not familiar with the standard of care. But when you represent a client in signing off on an interest-only re-fi with balloon payments, don’t you think it is relevant to advise what will happen down the line and at least confirm whether this information was adequately explained by the bank? In some of these foreclosure cases, clients were told something by the bank that was not supported by the paperwork. If clients had an understanding of how something would work based on a lender’s representation that is not in the paperwork, wouldn’t you go back to the lender or explain the new terms to the clients?


    Perhaps my experience is not typical. My law firm represents many creditors in collection actions, and we conduct many, many foreclosures. Our involvement in enforcing financial obligations does not mean that we do not contact the client in connection with every case, and that we do not secure file materials and affidavits from people with actual command of the business records and knowledge of the loan payment history. One cannot foreclose without a court’s involvement and order (because there are so many protections for property owners courts must assure are followed), and hence no foreclosures go to arbitration. State law does not permit enforcement of an arbitration award without first going to a court and converting it into a judgment, so arbitration necessarily is only the first step in a two step process. Administrative work in gathering the file, making sense of it, and gathering of additional information is performed largely by paralegals, as are efforts such as preparing information subpoenas to banks, searching records of ownership of automobiles and property, ascertaining whether there is wage income subject to levy, and so forth. We handle telephone conversations with debtors only after proceedings have been filed in a court (in other words, we don’t make collection calls before suing a claim out). There are tightly enforced policies requiring a firm lawyer to review documentation in a file and to sign pleadings and other papers verifying our certification that we find the claim to be meritorious. Competition to handle collection claims and mortgage foreclosures is fierce, and many of our competitors have similar operations.

    Yes, most cases we actually get before a court result in defaults. Many involve calls from the debtor following initial service of the court papers, and the debtors admit that they cannot pay the amounts due and that they have defaulted. Many cases are settled based upon a client’s informed assessment of the financial circumstances of the debtor because our client-creditor does not want an empty judgment and rather would work with the debtor to recover something on the claim. Default judgments often are entered after many telephone calls with the debtor in which the parties cannot agree on a settlement amount. Others are entered because, despite service of the process and mailing to the debtor, the debtor chooses not to appear.

    I don’t find default judgments offensive based on watching these claims over the years. I can remember perhaps one claim where a debtor demonstrated that some payments were not properly credited, and such documentation occurs with a couple of faxes and some telephone calls. We would be horrified if a client confronted a claim for mishandling someone’s credit (by entering a judgment against that debtor) because we pursued the claim in the face of objective evidence of payment, and any employee (lawyer or staff person) who permitted such an outcome would no doubt lose their job.

    If, as my experience teaches, the vast majority of collection claims result from failures of the borrower to pay, the question is to what burden will our society put creditors to enforce. Perhaps we will decide that creditors cannot enforce. Eliminating enforcement actions or making enforcement unreasonably difficult inevitably will increase the cost of borrowing, make credit harder to obtain, or both. Failure of a borrower to pay is a cost in the system, and someone bears that loss in whole or in part. Presently, the cost falls between creditors and debtors, with creditors taking many haircuts, paying for collection actions by lawyers (and paralegals) and obtaining empty judgments, while debtors with funds find the creditors levying to collect from those funds. Creditors charge back their loss to the borrowers by higher interest rates or selecting out what they perceive as adverse risks. Someone will have to explain what system is better in the aggregate, taking into account the effects that changes in collection at the back will have on lending terms in the front.


    Remember, people who are in default and have been for a while are just reaping what they sowed when they promised to pay up or give their home (otherwise known as a mortgage).

    It is not in the interests of justice for spurious obstruction to valid foreclosure claims to be allowed.

    The mortgage market does a lot of good, and preventing mortgagees from enforcing their security will do a lot of harm by making it harder for anyone to get a mortgage. On the scales, one person in default cannot outweigh the whole housing market, however sympathetic that person’s situation is. They are, after all, in default.


    Every society that levelled the professions and turned legal (and for that matter, medical and spiritual) advice into tradable utilitarian commodities administered by centrally regulated bureaucrats came to regret it.

    Centralized regulation of the practice of law would result in more centralized everything. It is good thing, just like the Senate filibuster, that some local-yokel lawyers in the outback can procedurally outmaneuver the brightest lights from the biggest cities and the world’s biggest corporations. There are ways of encouraging states to allow reciprocity and ad hoc vice without letting the American Bar Association or some other central organ to dominate the practice of law from coast to coast.

    Utilitarians dream of a world without entry barriers, but it won’t and should not happen.


    Kill all the lawyers? Not all. You’ll need some of them to handle the wrongful death suits filed by the hanged lawyers’ families.


    The good news is that lawyers’ wage rates are dropping from an over supply. Arbitration is replacing the lawyers’ close shop court system.

    Life finds a way.

    What we need is special cars for lawyers, that use legal system emulating control systems: Something with with a toggle switch each for for hard left, or hard right, full accelerate and full stop, each with a three year delay in responding to corrective control inputs, and a 60% accuracy rate in providing the requested result. Require all lawyers to drive these cars to work… with them retaining full liability for the final performance.


    Licensing is the Rent Seeking behavior of other lawyers and all other licensed professionals for that matter. It keeps the cost of entry at a level that preserves their own income by denying/controlling entry for new competition. Basic economics, no news here…move along.


    Believe me, I don’t want to see any more regulation. But I wonder whether this foreclosure crisis might have been averted to some extent if lawyers had been better regulated. For example, I believe that foreclosure rates are generally the same in jurisdictions where lawyers are required to handle closings and in those where a realtor or bank rep can do it. Yet these lawyers who represented buyers just signed off on loans that the buyers couldn’t afford, rather than counseling them on the consequences.

    The problem is compounded again at the foreclosure defense stage. Lots of unscrupulous lawyers “rented” their licenses to scammy companies that promised to stop foreclosures, then just sat on files while people lost their homes. It wasn’t until lawyers started to get involved in the defense that the “show me the note” arguments and others were raised.

    I agree, there are lots of situations where lawyers don’t bring value to cases. But that doesn’t mean that the case doesn’t demand a good lawyer. Too many lawyers didn’t bring any value to foreclosure defense and that is a blight on our profession. But the solution is to penalize these lawyers (and perhaps civil/FTC penalties would be better than the state bar investigation – I don’t know), not to make it easier for non-lawyers to take over.


      . . . crisis might have been averted to some extent if lawyers had been better regulated. . . . Yet these lawyers who represented buyers just signed off on loans that the buyers couldn’t afford, rather than counseling them on the consequences.

      Two points:

      1. I’m curious exactly how you would phrase a regulation or rule that required the lawyer to jump from “legal representation and advice” to “business decision authority.” “The lawyer shall make the ultimate decision as to the advisability of the agreement“? “The lawyer shall familiarize herself with the client’s personal financial situation sufficiently to understand the client’s desires, capabilities, and motivations in the transaction and then counsel the client accordingly“? I cannot think of any way such a regulation could accomplish what you want in this situation.

      2. Clients do not hire me because they want me to assume the position of an all-knowing parent. They generally want me to give them advice about the law as it relates to their situation. Were I to begin opining as to the desirability of the actions for which they seek legal advice, I’d find myself out on my rear, and rightly so. Knowing arcane facts about mortgage language and real estate transfer law gives me no special authority or knowledge concerning what is best for them at that time. More importantly, those people have the right to do things that would NOT be among my first choices.

      In any event, I think that current real estate transaction disclosure requirements already provide all of the information that you’re suggesting the lawyer should be providing. I can review those numbers and tell my client “your payment will be $XX and _______ will happen if you miss payments or your house value decreases”, but I’m willing to bet I’d change no minds.

    save_the_rustbelt 29 November 2010 at 1:13 pm

    Collection agencies disguised as law firms to avoid fair debt collection laws have been a plague for a couple of decades.

    They use robo-signed affidavits and use every unethical debt collection practice known, and assume they are immune because they are a “law firm.” (Even if 95% of the personnel are not lawyers).

    This is old news, just at a larger volume. As long as lawyers are largely immune from both ethics and law, this will continue.

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