LAW FIRM OUTSOURCING - THE RULES, ETHICAL CONSIDERATIONS, & BENEFITS

By Chris Qualmann

“Legal Process Outsourcing” (“LPO”) refers to a law firm obtaining legal support services from an unaffiliated, exterior, third-party company. LPO is growing in popularity as a result of firms and corporate legal departments seeking to minimize costs, increase flexibility, use outside talent and expand their capabilities.

Common examples of LPO include legal research and writing organizations that assist firms in the drafting of pleadings, memorandums of law, appellate briefs and other legal documents. 

Another example (which, like legal writing, is provided by my company Mitigation Resource Alliance) is a loss-mitigation processing group that handles “back office” collection, preparation, and assembly of financial packages for delivery to mortgage lenders (along with prompt and persistent follow-up) to assist the law firm in negotiating loan modifications or short sales.

A major breakthrough for the legal outsourcing industry came on August 5, 2008 when the American Bar Association (ABA) Standing Committee on Ethics and Professional Responsibility released a statement regarding a new ethics opinion (Opinion 08-451), which concluded that U.S lawyers can outsource legal and non-legal work provided that they adhere to ethics rules. The opinion is highly supportive of LPO, and as a result, legal outsourcing has gained tremendous ground and is one of the fastest growing industries today.

Like the ABA, the Florida Bar has ruled that attorneys may engage the services of non-attorney third parties to assist in the rendering of services to a client - as long as the attorneys exercise appropriate supervision and address their ethical obligations under applicable bar rules (including the need to preserve a client’s confidences and secrets, and the obligation to avoid conflicts of interest).

The opinion of the Florida Bar’s Professional Ethics Committee with respect to this issue was approved by the Board of Governors in Clearwater, Florida on July 25, 2008 (Final Opinion 07-2).

II.  THE BENEFITS OF LEGAL OUTSOURCING

• Better Work Efficiency & Cost Savings:  Not only do firms save money from outsourcing various services, but LPO allows attorneys to spend their time where it is most valued and needed.  There is no reason why an attorney should be doing basic legal research on a daily basis; creating "form contracts"; or picking up the phone and remaining on “hold” for 20-30 minutes (or more) while waiting for a mortgage servicer's loss mitigation negotiator to “pick up the line” – when this work can be outsourced for a a very affordable price. 

• Access to External Talent: Outsourcing work to external vendors allows firms to access high level talent and “niche” expertise that may not exist internally.   Access to external talent is particularly useful for firms who seek to fill in “gaps” and expand into new practice areas.

• Reduced Turnaround Time & Greater Flexibility:  Using external personnel can expand internal “bandwidth” to reduce turnaround time for pressing legal projects.  Workflow challenges are particularly prevalent for small and mid-size firms, and LPO enables them to quickly scale up for a case or project, thereby “leveling the playing field” with larger firms.  Flexible staffing also allows firms to avoid the fixed expenses of salaries as well as the cost of office overhead and benefits associated with full-time, permanent personnel.

IN-HOUSE, "PROPRIETARY" LOAN MODIFICATIONS ON THE RISE SINCE 2012 FORECLOSURE SETTLEMENT

By Chris Qualmann

Much has been said about the rise in loan modifications finally coming to completion through programs like the government's “Home Affordable Modification Program” (“HAMP”). However, since the 2012 “National Foreclosure Settlement" with major banks, the Department of Justice and 49 State Attorney General’s Offices, the number of “non-government”, private loan mods being completed (and designated “permanent”) also has increased sharply, according to a government report.

Per the U.S. Office of the Comptroller of the Currency (“OCC”), the number of finalized, permanent modifications under “non-government” programs (sometimes called “in house” or “proprietary” modifications) climbed 22 percent in the months immediately following the announcement of the Foreclosure Settlement.

Pursuant to this agreement (which was the result of an investigation into fraudulent foreclosure practices), the five (5) largest U.S. loan servicers, including Bank of America, JPMorgan Chase & Co., Citimortgage, Wells Fargo and GMAC agreed to a $25 billion settlement that required them to provide far greater assistance, and new, "private" programs to delinquent homeowners.  As stated by Bruce Krueger, a senior mortgage expert with the OCC, “Under the settlement, more people will be getting a modification.”

Notably, the Settlement has not only fueled a rise in the number of completed, “permanent” non-government modifications ... but also the number of “trial” non-government modifications.  The OCC reports that proprietary “trial” modifications jumped 74 percent in the quarter following the execution of the Settlement – representing a 50 percent increase from the same time period a year earlier, in 2011.

Lenders have struggled to find ways to reduce losses as more than 11 percent of mortgages were delinquent or in foreclosure as of the middle of 2012. The percentage of mortgages that were current and performing at that point was 88.7 percent, compared with 88.9 percent the previous three months and 88.1 percent a year earlier, according to the OCC.

NEWS AGGREGATORS LIKE GOOGLE NEWS AND HUFFINGTON POST - ARE THEY LIABLE FOR INFRINGEMENT?

By Chris Qualmann

QUESTION:  Are "news aggregation services" liable under copyright or misappropriation law for collecting and redistributing news articles first published by other sources?

SHORT ANSWER:  No - for so long as the aggregator service provides proper attribution to the original source, and does not mislead the public as to the authorship of the article.

“News Aggregators” (sometimes called “RSS Readers”, “News Readers” or “Feed Aggregators”) are websites that collect web content such as articles, headlines, blogs, podcasts, and even videos in a single location for easy, simple viewing.  Examples of popular, widely-known and commonly-visited news aggregation websites include Google News, Yahoo News, Drudge Report and many, many others.  The designation “news aggregator” can also apply to smaller-scale endeavors that engage in the collection and re-publication of news articles, such as private newsletters for “niche” industries, trade publications, law firm websites, and similar informational outlets.   

In some cases, the “aggregation” of content is strictly automatic, involving software and algorithms that “scan” the internet and “group together” stories, headlines, and other content of designated, similar natures.  In other cases, content strictly is collected, sorted and entered on a manual basis.  More often than not, a majority of better-known aggregators use a combination of both human and “robotic” data collection procedures.

But regardless of how the content is collected, concerns as to potential liability from the re-distribution of original news articles obtained from other outlets is an highly important topic for aggregators large and small, including but “new media” as well as older, “traditional” media companies.  Entities such as “Huffington Post” and “Flipboard” appear to engage in the re-packaging and recycling of news from other sources on a daily, round-the-clock, uninterrupted basis … so how do they do it, and why aren’t they being challenged on copyright infringement grounds?

Based upon not just recent court decisions, but also guidelines and “best practices” established within the industry, aggregator services do not face liability for their work, so long as they are honest and “up front” as to the source of their material.  As noted by intellectual property attorney Daniel Diskin (www.copymarkblog.com), a by-product and benefit of ensuring “proper attribution” is that news aggregators drive traffic to the original articles (as well as to the outlets that originally distributed the articles).  As a result, the aggregators don’t “siphon profits” from the original sources – but in fact, greatly increase the opportunities for increased traffic and profits to the original sources.

Citing Judge Richard Posner, a well-known legal scholar and media law expert, Diskin emphasizes that aggregator services are protected not only by proper attribution practices, but also by the guarantees of freedom of speech within the U.S. Constitution.  On his law blog, Diskin states:“Too much protection to the original source of the news story does not benefit the public. The original source would have a monopoly for a period of time. In reality, news reporting does not work this way, which can only be a good thing. The public does not have to find the one and only news source that is responsible for reporting the most important news of the day.”

On the basis that their activities are protected by the constitution (as well as the “fair use” exception to copyright law), news aggregators have been (and continue to be) protected through the efforts of media trade associations that have made appearances in court and filed legal briefs on their behalf when necessary.  Examples of groups that aggressively support the re-packaging and re-distribution of news from other sources include the “Citizen Media Project”, the “Electronic Frontier Foundation”, and “Citizen Project”. 

THE BOTTOM LINE, as emphasized by attorney Diskin, is that proper attribution is the main focus of misappropriation law.  For so long as an aggregator service consistently follows the practice of correctly citing not only the author of a “repackaged” news piece, but also the original outlet in which the piece first appeared, aggregators do not face liability for damages.

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HOW DO LOAN MODIFICATIONS AFFECT CREDIT SCORES?

Researched by Chris Qualmann

(EDITOR'S NOTE:  Homeowners looking to dig themselves out of an "upside down" mortgage can take steps to minimize damage to their credit scores from loan modifications - and also from short sales.  This "Q & A" as to the impact of loan mods on credit scores originally appeared in the online edition of the Wall Street Journal)

Question: How will a loan modification affect my credit?

Answer: It depends on what else is in your credit files, whether you were already late on payments and how the lender reports the modification to credit bureaus.

Your score probably won't fall by much if your credit has already taken a beating. But if you're someone with pristine credit, getting a modification could cause your score to take a steep dive.

If you are opting for a modification under HAMP—in which mortgage payments are lowered to 31% of a homeowner's gross monthly income—you will likely have to go through a three-month trial period when you are paying a reduced amount before lenders approve the modification. If you were behind on your payments before starting the trial period, lenders are supposed to continue reporting you as delinquent, which can hurt your score. (The loan modification could extend delinquency during the trial period. And once you're approved, the lender may continue to report the modification as "partial payment"—which generally hurts your score.)

If you're current, lenders are supposed to report you as current, but some lenders may also report the modifications as a "partial payment" of your mortgage, which is often considered a negative.

Question: Why would something endorsed by the government trash my credit score?

Answer: Many lenders and those in the credit-reporting industry have struggled to keep up with the dramatic housing remedies that Washington has devised.

Shortly after the government rolled out its modification program earlier this year, the Consumer Data Industry Association, which represents credit bureaus, advised lenders to classify such modifications as a "partial payment," a preexisting code that generally hurts your score. Under the widely used FICO model, for example, "partial payment plans" are considered comparable to a missed payment or some other type of derogatory or collection item on their file, says Tom Quinn, vice president of global scoring solutions at FICO.

But there's a temporary fix on the horizon. Starting in November, lenders will be able to use a new code that specifies whether a mortgage was modified under the government's plan. That code will reduce the hit to the credit files of people who work with the government to modify their loan; those who work directly with their own lender for more lenient terms could still see a significant hit if the lender reports their own modifications as a partial payment to the credit bureaus.

But while the new November status codes will have no impact on your score for now, that could change once the industry has had a chance to determine whether someone who modifies a loan is an elevated credit risk, says John Ulzheimer of Credit.com.

Question: Are loan modifications only for people who are seriously behind on their payments?

Answer: Not necessarily. Joanne Gregory of Fresno, Calif., for example, had never missed a payment but turned to the Making Home Affordable program to modify her two mortgages with Citigroup Inc.'s CitiMortgage because she was feeling the financial pinch of the recession. But because of delays in processing her applications, missing paperwork and conflicting information from representatives on when she needed to make payments, CitiMortgage began reporting her as delinquent to the credit bureaus earlier this year.

The 62-year-old retired teacher says she only became aware that something was wrong when her credit-card issuers began closing her accounts and slashing her credit lines this summer. "I thought I was getting involved in something that would be of temporary assistance until the economy turned around," says Ms. Gregory, who runs a small consulting practice and gets income from rental properties. "If they would have told me this would be a negative, I would not have done it."

A Citigroup spokesman declined to comment on Ms. Gregory's account, citing privacy restrictions, but noted in an e-mailed statement that the bank regrets any "misunderstanding."

(NOTE: Under the guidelines of the government's "HAMP" loan mod program, and also under the rules of many lenders who offer "private" modifications, a borrower can still qualify for a modification even if the borrower is "not behind" on payments - for so long as the borrower can show that default is is "imminent")

Question: Am I better off avoiding a loan modification and simply going through a foreclosure?

Answer: No. Foreclosures are generally more damaging to your credit, and stay in your record for up to seven years. Many lenders, for example, will automatically deny credit applications if they see a foreclosure in your credit files, said Evan Hendricks author of "Credit Scores and Credit Reports."

The answer is less clear-cut for short sales. In a short sale, a bank agrees to accept less than the full balance of a mortgage as a settlement on the loan. Much depends on how that sale is reported to the credit bureaus by the lender, and whether the lender enters a so-called deficiency judgment for the sale—a court judgment ordering the borrower to pay the remaining balance, which would be especially damaging to one's credit score. (However, some states don't allow deficiency judgments.)

Question: What can I do to save my credit?

Answer: Consumers and their advocates can negotiate with their lenders to report loan modifications and short sales in ways that are less damaging to their credit histories, says Sylvia Alayon, vice president of operations for the Consumer Mortgage Audit Center, which audits mortgages for attorneys and consumer groups.

Randy Wilburn, a real-estate broker and mortgage counselor in Boston who has helped negotiate loan modifications and short sales, says he has had some success in getting lenders to report a short sale to the credit bureaus as "paid as agreed"—which is less damaging to a person's score. "It is all in the language as to how it is reported to the credit bureau," he says.

Question: How quickly will my credit recover?

Answer: A bankruptcy can hurt your credit for up to 10 years, a foreclosure and other serious delinquencies for up to seven years. FICO, for example, classifies bankruptcies and foreclosures as negative items and treats them in a similar manner. Loan modifications and short sales can also be negatively classified, although that ultimately depends on how those items are reported on a credit profile, says FICO's Mr. Quinn. Under the VantageScore—an emerging competitor to FICO developed by the three major credit bureaus—scores can fall by as much as 140 points in a short sale or foreclosure and can plummet by as much as 350 in a bankruptcy, says Sarah Davies, head of analytics and product development at VantageScore Solutions LLC.

Borrowers with short sales and loan modifications should see their credit recover more rapidly if they keep making their payments on time, keep balances low and refrain from applying from new credit, said FICO's Mr. Quinn.

HOPE NOW ALLIANCE - AN ADVOCACY GROUP FOR HOMEOWNERS? ... OR BANKS?

By Chris Qualmann 

It’s right there … at the bottom of the monthly statement mailed to homeowners by their  lenders:

“Falling Behind on Your Bills? … Having Trouble Paying Your Mortgage?...  FREE HELP is available from the HOPE NOW ALLIANCE … a Non-Profit Association formed by the Dept. of Housing and Urban Development (“HUD”) to assist homeowners who are struggling to pay their mortgages."

But what, exactly, IS the “HOPE NOW ALLIANCE?”… and does it truly provide long-term benefit to consumers?  Quite simply  –  and contrary to the “White Knight” impression that the organization tries to put forth  –  Hope Now is NOT an alliance of “consumer first”, altruistic homeowner advocates, but rather a banking-industry coalition of loan servicers, lenders, investors, and other mortgage market participants.

Formed by the Mortgage Bankers Association (“MBA”) and other financial industry trade associations, Hope Now says it “finds solutions” (heavily slanted toward banks - obviously) to help consumers “avoid foreclosure” and “stay in their homes.”  Notably, the Executive Director for Hope Now since its inception has been Faith Schwartz, a Senior Vice-President for Option One Mortgage Company.

Further, the organization’s Board of Directors has been comprised of banking professionals from Goldman Sachs, Westwood Mortgage Corporation, Washington Mutual, the Commonwealth Mortgage Assurance Corporation, and the Federal Home Loan Bank Board.  And, its Washington D.C. headquarters are located in the offices of the “Housing Policy Council”, a division of the “Financial Services Roundtable” – a highly influential banking industry lobbying group (See: National Mortgage Professional Magazine (Web), 3/25/10 Edition).

Despite claims by Hope Now that it has assisted a “substantial number” of homeowners since its creation in 2007, critics contend that the assistance provided does not go far enough and that not only a small percentage of homeowners are actually being helped.  (See:  Les Christie, "Hope Now's numbers don't add up to much help", CNNMoney.com, 4/4/08).  In addition to the belief that the organization has little to no impact on the ability of distressed borrowers to remain in their homes “long term” … critics also raise the inescapable point that Hope Now is fully controlled by the lending and financial services industry  –  a point that seems to be proven by comments made by George Miller, Executive Director of American Securitization Forum (and one of Hope Now’s founding members).  While stating in the press release announcing the group’s formation that the Alliance would create procedures "to keep borrowers in their homes" … Miller admitted in a follow-up statement made in the April 2, 2008 edition of the New York Times that Hope Now "represents the interests of investors – and we want to minimize losses on bad mortgages and maximize recovery."

The Alliance also claims that its counselors help homeowners identify “possible sources of assistance”, and that it “provides education” on loss mitigation options such as “loan workouts” or “loan modifications”.  However, as banking industry writer Kate Adams reports (See “The Hope Now Alliance Strategy”, Investopedia.com 4/5/08), “The general consensus is that most consumers who contact Hope Now are steered toward “repayment plans” (which are considered far less effective than true, bona fide loan modifications for helping borrowers achieve an affordable payment, and avoid default in the future).

As noted by Dan Immergluck, a Professor from Georgia Tech University (and author of “Foreclosed”, a recent book on the mortgage crisis), Hope Now initially was formed to create the appearance of the mortgage industry taking “strong action” to assist borrowers after changes were made to the Bankruptcy Code.  But, as Immergluck observes, while Hope Now is quick to proclaim its so-called “successes” as to providing loan modifications, in reality its practice has been “do whatever you want and call it a loan modification”. (See: Lawson, Michael “A History of Foreclosure Prevention: Lots of Programs, Little Success”, Investigating Reporting Workshop, American University School of Communication, 7/21/11).

Generally, “Repayment Plans” are a way that banks work with borrowers to provide a path toward getting caught up on late payments andcurrent on the original loan.  However, with a “Repayment Plan” the loan itself is NOT fundamentally changed to become more affordable for the borrower.  As a result, "Repayment Plans" are criticized as "temporary fixes" -- and critics question how a homeowner that could not afford the terms of the original mortgage will be able to do so again since a repayment plan does not reduce the amount owed.

By contrast, a loan modification is a permanent change to the underlying mortgage agreement and typically includes terms such as lowering the interest rate to as low as 2%; extending the payment period/life of a loan; and in some cases, reducing the principal balance on a loan.  Local housing counseling groups across the country have voiced frustration that even though many of Hope Now Alliance counselors have good intentions, their “hands are tied” by the banking industry giants that created, and continue to oversee the organization.

Additionally, Hope simply does not have enough trained counselors to answer calls and provide adequate case analysis for the thousand of homeowners hoping for "free help".  While the Alliance claims an average of 3,000 – 4,000 calls each day to its 1-888-HOPE-NOW phone number, the Homeownership Preservation Foundation reports that a low percentage (4%) actually speak with a counselor.

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THE BOTTOM LINE:  While the HOPE NOW Alliance may have succeeded at raising awareness among distressed homeowners of the need to work with lenders and housing counselors to avoid foreclosure, there is substantial doubt among consumer advocates as to whether or not the group can overcome some of its inherent weaknesses (most notably its lack of an adequate number of trained housing counselors and its close affiliation with firms which represent investors' interests).  Only time will tell if it has the resources – and if its participating lenders have the financial motivation - to help stem the foreclosure rate in a meaningful, long-term way. 

COMMON EXAMPLES OF FORECLOSURE PREVENTION OPTIONS

Option	How Does the Option Work?	Key Benefits
Repayment  Plan	Distributes delinquent payments over a period of time, usually no more than 10 months. A portion of the deferred delinquent amount is added to the normal monthly mortgage payment.	Brings account up to date in a specific time frame. Original Payments then resume thereafter.
Loan  Modification	A permanent change in one or more of the terms of the mortgage loan, allowing the loan to be reinstated to a "current" status, and resulting in a more affordable monthly mortgage loan payment. Past due interest and escrow are added to the new unpaid principal balance and re-amortized over the remaining life of the loan.	Changes the mortgage note itself, allowing a "fresh" start on managing the loan. Brings account up to date when loan modification is executed, with more affordable terms
Partial Claim (FHA Loans only)	A second mortgage, interest free, that is paid off at the time when the homeowner's loan is paid off. This option allows up to 12 months of past due accrued mortgage payments to be included in the second mortgage. Available only on FHA loans.	This type of FHA/HUD loan is interest-free.  Brings your account up to date immediately.
Fannie Mae Home Saver Advance	A low interest rate loan provided by first lien loan servicer to bring current a customer's delinquent first mortgage. The loan is repaid over a 15 yr term w/ pymt and interest accrual deferred during the first 6 mos. after the advance.  Only Fannie Mae loans.	Brings account up to date immediately. Second mortgage is secured at a low interest rate.
Short Sale	Allows you to sell your home and use the proceeds to pay off the mortgage if you are unable to maintain payments, even if the home's market value is less than the total amount owed.	Avoids the lengthy legal process involved in foreclosure.  Usually less damaging to credit than foreclosure.
Deed in Lieu of Foreclosure	Allows you to voluntarily transfer legal ownership of your property to lender if you are unable to maintain mortgage payments and cannot sell the home at current market value.  Sometimes, lender will pay relocation assistance to the borrower (“cash for keys”).	Avoids the lengthy legal process involved in foreclosure.  May be less damaging to credit than foreclosure.