By Alan Steven Wolf of The Wolf Firm (Reprinted with permission from Servicing Management - June 1996)
It's a very special relationship that requires a careful selection
process
By Alan Steven Wolf of The Wolf Firm
(Reprinted with permission from Servicing Management - June 1996)
Mortgage bankers, especially those heavily involved in servicing, often need to choose
counsel to represent them in various types of legal work. Indeed, having the proper
counsel is an integral part of a good servicing operation. The legal work ranges from
simple repetitive legal actions, such as foreclosures, bankruptcies and evictions, to
highly complex matters, such as the defense of class action lawsuits. This article
examines the systems that loan servicers ought to employ in choosing their counsel and
cautions the industry on some disturbing trends in the current practice of choosing
counsel.
The Attorney-client Link
The servicer's methodology for choosing counsel should be premised on a full understanding
of the unique nature of the attorney-client relationship. An attorney is a representative
of the client with a right to act on behalf of the client and to bind the client to
certain positions and obligations. But unlike many other vendors who act on behalf of the
servicer, an attorney acts as a fiduciary of the client.
The fiduciary relationship between an attorney and his client is extremely important.
Because an attorney is a fiduciary, an attorney must act in the best interests of the
client, even if the client's interests are directly contrary to the attorney's own
interests. Further, an attorney must fully disclose any conflict of interest with the
client whether actual or potential. In addition, an attorney cannot set up companies to do
outside, nonlegal work for the client without fully disclosing the attorney's interest in
the company and what profit, if any, the attorney is earning from this arrangement. And
even if these arrangements are fully disclosed, an attorney must not take any act where
the client might be better served through some other vehicle.
To further solidify the attorney-client relationship, in many cases, communication between
the attorney and client and the attorney's work product are considered privileged and are
protected by the courts, so that another party in litigation cannot have access to them
through the discovery process.
Also, the conduct of an attorney with outside third parties is highly controlled. For
example, an attorney cannot directly solicit work without having some prior relationship
with the potential client. An attorney
In short, the attorney-client relationship is a very special one. While attorneys are
retained by servicers to perform work just like any other vendor, and while attorneys are
subject to all of the normal vendor rules (such as the need to provide outstanding service
at a fair price), attorneys are much more than vendors; they have much higher duties to
their clients and to others. In essence, attorneys are partners of the servicer looking
only to the servicer's own best interest in providing advice and counsel. Because of this
special relationship, it is essential that servicers carefully choose their counsel.
The Three Criteria in Looking For An Attorney
While all attorneys have passed certain hurdles in order to obtain their license to
practice law, not all attorneys are alike. As in any large group, some attorneys are
simply better than others or are simply better suited to a particular case. Deciding which
attorney is best for the servicer depends on a number of factors; however, there are three
overriding considerations. The servicer should choose someone who:
Determining which attorneys meet these criteria, and which attorneys to avoid is more an
art than a science. However, if you want to serve your company well, it is absolutely
essential that you develop the skills to make this determination.
Unfortunately, there is no single method in choosing counsel. Rather, the selection
process is enhanced by a number of tools available to mortgage servicers.
Probably the best tool available, and the tool least used by servicers, is the century-old
attorney directory and rating service known as the Martindale-Hubbell Law Directory.
This 17 volume series, which can be found at all law schools and most public libraries, attempts to list every attorney and law firm in the country arranged alphabetically by state, city and then by name of law firm or attorney. More importantly, the Martindale-Hubbell Law Directory includes an unbiased and scientifically based rating system for those attorneys.
The system employed by the directory is described by Martindale-Hubbell as follows:
Martindale-Hubbell develops its rating for individual lawyers by soliciting
confidential opinions from members of the Bar, including those who themselves have ratings
and those who do not. In addition, members of the Judiciary are queried. Respondents to
written questionnaires and personal interviews are requested to base their opinions on the
following:
LEGAL ABILITY RATING
Based on the standard of ability for the place or area where the lawyer practices, it
takes into consideration experience, nature of practice and qualifications relevant to the
profession. Where a lawyer's practice is limited or specialized, rating opinions are made
on the basis of performance in those fields of law. There are no minimum periods of time
in practice required for any rating.
GENERAL RECOMMENDATION RATING
Embraces faithful adherence to professional standards of conduct and ethics of the
legal profession, professional reliability and diligence, and standards relevant to the
attorney's discharge of his or her professional responsibilities.
Legal Ability and General Recommendation ratings appearing in the Directory reflect
strictly confidential opinions and responses to professionally developed surveys and
adhere to meticulously monitored research principles and practices. Martindale-Hubbell
does not make any independent evaluation of lawyers, depending exclusively upon the
opinions expressed by its confidential sources.
Thus, the two ratings provided by Martindale-Hubbell are a Legal Ability Rating and a
General Recommendation Rating.
Except in the rarest of circumstances, mortgage servicers should only retain
"AV" rated counsel. This rating is an unbiased, well documented indicia that the
attorney's skill level is very high (or even better, that he or she is among the most
preeminent attorneys in his or her field) and that the attorney is very ethical.
A mortgage servicer should check with its current counsel to ascertain whether or not that
counsel is "AV" rated. In all fairness, some very fine attorneys have not yet
been rated. In that case, the mortgage servicer should ask that the attorney obtain a
Martindale-Hubbell rating. There is no cost in obtaining this rating.
In most instances, however, a nonrating should be a red flag to servicers. If there is no
rating for the attorney, it can mean that the attorney has been rated and has not
satisfied the General Recommendation Rating; i.e., that the attorney is not considered
ethical by his or her peers. It can also mean that even though the attorney is considered
ethical, the attorney was unhappy with the assessment of his or her Legal Ability and
specifically chose not to have the rating published.
In addition to its rating system, Martindale-Hubbell lists the area of practices of law
firms as listed by the firms. Unfortunately, the attorney listing are not grouped by
practice areas, so it is not possible to look up all attorneys practicing in the mortgage
banking area.
Foreclosure Network
Another approach to choosing counsel is to consult the decisions of other bodies that have
focused their resources toward selecting and maintaining the standards of attorneys in the
mortgage servicing industry. The US Foreclosure Network stands out in this model.
The US Foreclosure Network (sometimes referred to as simply "USFN") is a
organization of attorney firms across the country that focus their practices exclusively
on the mortgage banking industry. The US Foreclosure Network chooses its members based on
a number of factors, including recommendations of clients, years of the attorney's
experience in the field, notoriety in the field, certain levels of malpractice insurance
and high ethical standards. Virtually all of the attorneys in the US Foreclosure Network
have achieved an "AV" rating from Martindale-Hubbell. Moreover, they have a
proven track record of performing work expeditiously and within investor guidelines
There are other competing networks of lawyers, all of which have some very fine attorneys.
Nonetheless, servicers are cautioned that just because an attorney is part of a network
does not necessarily mean that the attorney has passed certain standards that a servicer
would require. Some networks merely require a fee to join and do not otherwise set
standards. Other networks appear directed toward choosing young and somewhat inexperienced
counsel while providing comprehensive centralized oversight of the attorneys' work. This
is sometimes known as the "one General theory." Whatever the model, servicers
are cautioned to look behind the hype to the substance of the network and to determine
what factors are used to decide who is and who is not allowed in the network.
Articles And Speeches
Another good way to evaluate counsel is to look to those counsel who are actively involved
in writing and speaking about mortgage servicing issues. These counsel have taken the time
to prepare and develop material; a task that evidences a great commitment to the industry.
Articles and speeches can provide a servicer with a method to assess the skills of the
attorney:
Still another way to assess the abilities of an attorney is by viewing the attorney's
involvement with mortgage banking trade groups. If the attorney is a member of the
national and/or state organization, it is a badge of commitment to the industry. However,
joining an organization is only part of the formula.
The Mortgage Bankers Association's National Servicing Conferences could double as State
Bar Conventions; attorneys are plentiful. Attendance at these events shows commitment. But
attendance alone is not enough. Participation in the committee meetings and attendance at
the panel discussions evidences that the event means more to the attorney than a mere
marketing opportunity.
Liability Insurance
A mortgage servicer should always ask for a copy of the attorney's malpractice insurance
and require a certified statement that the attorney is in good standing with the State Bar
and is not otherwise being investigated by the State Bar. An attorney's ability to obtain
malpractice insurance is evidence that a business skilled in assessing the attorney's
legal skills is comfortable with the risk associated with the possibility that the
attorney might commit malpractice. If an attorney cannot convince an insurance company
that it will not commit malpractice, it makes little sense for a servicer to undertake
that risk.
Some attorneys attempt to avoid the malpractice insurance issue by claiming that they are
self-insured or otherwise have assets to cover any potential losses. Indeed, whereas the
typical malpractice policy is $1,000,000-$2,000,000, some large firms can boast net assets
greatly in excess of these standard policy limits.
But betting on a noninsureable attorney is a bad bet even if the claimed assets are actually available. The losses that could be caused by inappropriate counsel far exceed the deepest pockets of those law firms. Class action liability alone far exceeds even the most prosperous law firm's assets. Indeed, potential RICO liability can exceed the assets of many major financial institutions.
The bottom line is that if a malpractice carrier will not bet on the attorney, neither should you. Similarly, a censure or investigation of an attorney by a State Bar should raise a red flag.
In fairness, mere investigation of an attorney is not uncommon; however, censure
action, whether private or public, should be a matter of grave concern. If the State Bar
believes the attorney has not met the Bar's standards, neither should you.
Solicit Recommendations
Another good way to assess an attorney is by obtaining recommendations from other
servicers and other attorneys.
If an attorney has been performing work for a mortgage servicer and has been doing a good job, chances are that the attorney will also do a good job for you. However, in this analysis the servicer should be careful to speak to a variety of people in the organization including both management and actual processors. It is sometimes the case that one or the other is happy with the attorney, while the other is not.
An often overlooked way of assessing counsel is to seek the advice of attorneys in other states.
The mortgage servicing legal community, is actually quite small. Through many years of
listening to clients and meeting various people, attorneys often know who is and who is
not good in each state. Ask your attorneys for a recommendation and remember that as a
fiduciary, your counsel must recommend the very best person.
Things To Avoid
The mortgage industry is a $4 trillion industry. While most mortgage servicing legal
issues revolve around loans in default, and while loans in default only comprise about 2%
of any portfolio, there is still a steady supply of legal work involving about $80 billion
of problem assets. Representing mortgage servicers is thus a very large business, and a
variety of schemes have been developed by attorneys, and others, to capture this legal
work.
Sadly, the focus of these schemes is to obtain the work without proper attention to the
goal of providing the client with exceptional legal services. These schemes can include
questionable outsourcing ventures and the coordination of legal work by nonattorneys.
Due to increasing costs and increasing competition, it is understandable that servicers
are trying to shift more and more of their functions and costs to various vendors
including their attorneys. However, the old adages, "If something seems to good
to be true, it generally is" and "There ain't free lunch" seem particularly
appropriate to the analysis to some outsourcing arrangements.
Stung by an average loss of over $40,000 per foreclosure, and alarmed by outsourcing and
other ventures which result in poor service and even poorer adherence to foreclosure time
frames, the major investors have stepped up their efforts to ensure the proper handling of
their foreclosure files through programs directed to the retention of competent counsel.
The approach has been threefold:
For example, at the time of this writing it is rumored that Fannie Mae will compile a list
of select counsel in 17 of its largest states. It was further rumored that if a servicer
uses one of these counsel, the servicer will not be subject to its normal representations
and warranties.
The fact that the investors were forced to take such direct action in order to protect
their assets is a sad commentary on servicers' inability to choose competent counsel.
The California Problem
The problem of choosing competent counsel is exacerbated in California, a non-judicial
foreclosure state where independent "trustees" conduct the sales.
These trustees do an excellent job in processing non-judicial foreclosures. They are
fast and efficient. Some have been in business for over twenty years. However, none of
these companies can practice law. Servicers must be mindful of this simple rule.
It is axiomatic that to perform legal services, the entity must be licensed to practice
law in the state. Moreover, it is equally clear that while an in-house attorney can
provide legal advice to the corporation it works for, unless the corporation is a law firm
(which means that all of the stockholders in the corporation must be attorneys and the
corporation must be licensed as a law firm by the State Bar), a corporation cannot provide
legal services to outside third parties nor can a corporation charge an outside third
party for legal services.
Thus, a California trustee cannot charge a servicer for legal services even if they are
simple bankruptcies, evictions and receiverships. Moreover, a California trustee cannot
share fees with an attorney; such a practice is known as fee splitting and is directly in
violation of established ethical rules.
California trustees do excellent work in processing foreclosures. California trustees
cannot practice law and cannot legally be retained to represent servicers.
Truth In Advertising
Once the word is out that a servicer is looking for legal counsel, or even merely
reviewing its approach to the selection of legal counsel, it is almost assured that the
servicer will be approached by a variety of counsel in a variety of ways.
The way in which counsel approaches the servicer, and the representations made by counsel, are important first tests and should be carefully considered. As noted above, attorneys have special ethical responsibilities. Among those special rules are restrictions directed toward what can and cannot be done in soliciting new work.
It may come as some surprise to servicers that attorneys cannot directly solicit their
work unless there is some prior relationship with the servicing entity. Therefore, an
attorney cannot ethically make a "cold call" to a servicer. If there was no
prior relationship, there can be no direct solicitation. A servicer who receives a cold
call is dealing with someone who violates ethical rules. The servicer should report that
person to the state bar.
Moreover, an attorney cannot make any statement that is false or potentially misleading.
Advertisements or statements made about the quality of services are especially suspect.
Finally, an attorney cannot ethically hire a nonattorney salesperson to bring in work.
This is not only prohibited by the rules of professional conduct, it is a crime in
California colloquially called "capping." If a servicer is approached by a
nonattorney salesperson hawking an attorney's legal services, the servicer should get that
person's card and report him or her to the state bar.
However, this restriction is to be carefully distinguished from the circumstance of
nonattorney specialists hired by some firms to aid in client relations and to do marketing
as opposed to sales. Here, the specialist acts to bridge the gap between the attorney and
the servicer and to provide effective communication. Hiring industry specialists to market
the firm shows a dedication to the industry and provides a service to clients.
And in conclusion....
Good attorney-client relationships are essential to the functioning of a mortgage
servicing operation. Selecting competent counsel seems to be a disappearing art among
servicers, especially those servicers caught in the tangled web of outsourcing. Developing
good selection techniques is critical to the mortgage servicing operation.
Servicers are advised to consult the Martindale-Hubbell Law Directory and assess
carefully legal networks.
Attorneys recommended by other servicers or competent counsel are also a good means of
selction.
Certain outsourcing relationships and schemes involving the coordination of legal work by
nonattorneys are best avoided in most situations.
Similarly, attorneys who directly solicit work, who hire salespeople to directly
solicit or who make bold unsubstantiated advertising claims are treading on shaky legal
ground.
By choosing competent counsel, servicers can avoid the penalties recently imposed by major
investors very concerned over tremendous losses, caused in part by the servicer's
inability to choose competent counsel.
Moreover, by choosing competent counsel, you protect your company and the industry from
potentially grave losses.
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies, credit unions, and the Resolution Trust Corporation. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
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Newport Beach, California 92660
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E-Mail us at Alan_Wolf@wolffirm.com
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