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. This contributed to shortcuts in documentation - law firms lacked a back office that could keep up with the flood of work. These problems came home to roost when the mortgage boom went bust and it came time to foreclose on the mortgages.
Now lawyers are trying to train their creaky business model to deal with the boom in bad-document claims. One approach has been for lawyers to take stakes in their clients’ mortgages. Then lawyers become part of the foreclosure problem.
This still leaves many consumer debtors in court with small debts they cannot pay. Monday’s Wall Street Journal reports that firms are buying lots of these debts and then flooding the courts with suits enforcing them. While the creditors have achieved economies of scale, there evidently are no similar economies in defending the suits. The claims on which the story focuses 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 percent showed up in court at all.” A Cook County, Ill., 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: “Roughly 94 percent 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.”
At the bottom of these stories, as suggested above, is a legal industry that cannot seem to achieve the scale and efficiency necessary to deal with many types of small transactions and claims in our modern economy. One could imagine, for example, Web-based software that consumers could use that would help them respond to complaints. Perhaps they could walk into the nearest Wal-Mart and find a legal adviser who would have useful information on common consumer problems such as foreclosure of delinquent mortgages. But these options are not available.
Lawyer regulation helps explain why we do not have adequate legal services for ordinary consumers. Every lawyer must get the same type of costly license and is subject to basically the same set of uniform rules. Those rules sharply regulate not only who can be lawyers but what kinds of firms they can practice in. Neither people nor technology may provide legal advice without the intervention of a licensed lawyer. Every lawyer must get essentially the same costly training from 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 helps explain why thousands of people who 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, markets could find a variety of solutions to foreclosure-gate, including form and software litigation documents and other novel ways to sell legal advice or finance handling consumer claims. Those concerned about unscrupulous lawyers should turn their attention to a regulatory system that keeps them in business.
We need a new approach to regulating legal services. Our archaic system of lawyer licensing blocks innovation in legal services while the rest of the business world changes rapidly. Recent stories about foreclosure-gate make clear that this is a justice issue and not simply about new ways for lawyers to make money.
Larry E. Ribstein is associate dean for research at the University of Illinois College of Law.