Judge: Flat-Fee Arrangements in Foreclosures, Bankruptcies “Corrosive” to Practice of Law

Housing Wire recently covered a Texas lawsuit involving Countrywide and its foreclosure and bankruptcy management practices, in which the lender was found to be “bungling” but not acting in outright “bad faith.”

The Calculated Risk blog’s Tanta got her hands on the two-document-long ruling from Judge Jeff Bohm in a federal bankruptcy court in Houston, and while the opinion is long, it’s reading that’s absolutely relevant to anyone servicing a mortgage. Especially any default managers and attorneys in the industry. (Here is the first half; here is the second).

Bohm finds serious fault with the flat fee-based approach to foreclosure and bankruptcy law in the industry, a sentiment many industry participants have shared with me from time to time in the past. But I don’t know that anybody had expected a judge to weigh in like this.

From Bohm’s conclusion (with a hat tip to Tanta for transcription):

In the consumer bankruptcy field, many financial institutions–for example, Fannie Mae in the case at bar–have negotiated flat fee engagements with certain law firms to avoid large fees that can accrue under an hourly rate system. In theory, this arrangement seems appropriate: fixed fees minimize costs that are primarily passed on to consumer debtors. In practice, this arrangement has fostered a corrosive “assembly line” culture of practicing law.

As the case at bar shows, attorneys and legal assistants at Barrett Burke and McCalla Raymer are filing motions to lift stay without questioning the accuracy of the debt figures and other allegations in these pleadings and appearing in court without properly preparing for the hearings. These lawyers appear in court with little or no knowledge because they have been poorly trained. Indeed, the case at bar shows that the attorneys from Barrett Burke and McCalla Raymer often appear in court ill-prepared to think or effectively communicate.

This fixed-rate fee business model appears to have been an overwhelming financial success. In Allen, Bankruptcy Judge Steen noted that Barrett Burke’s revenues totalled between approximately $9.7 million and $11.6 million per annum. . . . Based upon the testimony at the show cause hearings, this Court estimates that McCalla Raymer has generated revenues of approximately $28 million over the past decade from representing solely Fannie Mae. Meanwhile, the profession has suffered from the ever decreasing standards that firms like Barrett Burke and McCalla Raymer have heretofore promoted.

This demise must stop.

And therin lies the rub. I don’t know that I’ve ever heard of a judge taking on the flat-fee legal work that has become the code de rigeur for the default servicing industry. And calling the attorneys in the field “ill-prepared to think or effectively communicate” cuts to the heart of this business — it goes to show that it isn’t just the servicers that are starving for quality people right about now.

The thing is, many foreclosures have been mainly turn-and-burn affairs for years, with attorneys relegated primarily to paper pushing. HW has covered this in the past. I don’t claim to know if this is because of the pay structure, because of the nature of the foreclosure, bankruptcy and eviction process itself, or perhaps it was a function of a court’s general willingness to be a bit more lax in the past. It might even be fact that servicers and their vendors have looked to automate and systematize as much of the legal process as possible, in the name of process efficiency. Perhaps all of the above.

And while this industry has some dynamite attorneys in it, I do know that the most successful attorneys in this field haven’t always needed to be the best lawyers — much more critical for success was being the best businessman. And it shouldn’t be all that surprising, really, given how default management is structured as an industry.

And that’s where Bohm gets off-base, blaming the attorneys for “promoting” flat-fee work. Most attorneys I know of in the field abhor the pay structure, and have been fighting even to get small raises in the allowable flat rates they can charge. Take a look at recent changes in the attorney fee schedule from the Veteran’s Administration, for example; this is a government agency setting flat fee rates for attorneys, for crying out loud.

That being said, Bohm is absolutely asking the right questions: has a dependence on low-rate flat-fees so degraded the quality of legal work to the point that it is now generating more risk than reward for the mortgage banking industry?