The Colorado Attorney General's Office has been investigating the major foreclosure law firms in that state for allegedly inflated billing practices. Most of you outside of Colorado may have heard little about it, since, as Housing Wire publisher Paul Jackson points out, the trade press has been strangely silent (other than Paul's Housing Wire). Paul suggests a reason for that silence: "at least one trade media outlet owns their own attorney guild."
Maybe yes, maybe no. Whatever the reason, it is odd that Housing Wire seems to be the only trade press publication that is running with the story.
The investigation centers around allegedly inflated charges for foreclosure costs, such as costs for posting of notices. Here's how Paul explains the issue.
At the core of the investigations, sources tell me, is how foreclosure law firms billed for allowable “costs” in conjunction with the foreclosure – with the lever being loans insured or guaranteed by Fannie Mae, Freddie Mac or the Federal Housing Administration.
While the GSEs set a public and fixed-fee schedule for foreclosures, they also allow law firms to bill for variable, additional reimbursable costs — typically things like process of service or posting and publication of notices, as well as filing fees with the courts. These pass-through costs are typically borne by the law firms and then billed back to their clients as an allowable cost; and in some cases, like filing fees, the fees are set by the court.
But in other cases, the fee structure is much more flexible. And it’s in these reimbursable costs that serious questions are starting to be asked by both Federal and state officials.
Here’s why: it turns out that many of the major law firms responsible for managing foreclosures for the GSEs also have a controlling interest in the ancillary service firms that generate the variable fees that appear as “costs” on the lawyer’s bill. Many law firms either outright own, or their partners have a significant interest in, the company that is posting and publishing notices; or they may own or have an interest in the company that manages process of service, as well.
It's not illegal for a law firm to own such a business, but it is illegal to inflate the "costs" of foreclosures by use of those firms, which is what is alleged to have happened. In one of the press reports that Paul links to (the Denver Post has been following the story as a matter of local interest), a whistleblower in one of the firms has alleged that is exactly what has occurred. The spread of the investigation to other firms indicates that the Colorado AG thinks that the practices may be widespread. According to Paul, Colorado may be the canary in the coal mine.
According to sources I’ve spoken with, similar investigations into foreclosure billing practices are already active in key states on the Eastern seaboard, too, even if the subpoenas haven’t been made public.
If there's substance to these allegations (and the fact that an attorney in one of these firms would risk her career by blowing the whistle gives some initial weight to the allegations), this is going to get very nasty. The law firms likely won't go down without scorching some earth, as the discussion indicates in one of the articles, where the law firm claims that the whistleblower was a "special counsel" to the law firm on the issue and, therefore, cannot divulge confidences of her "client" or breach attorney-client privilege.
If other states also make public similar investigations, maybe the rest of the trade press will begin to report on this, as well. After all, the story has all the elements the average American loves to hate: lenders, foreclosures, and attorneys.
UPDATE 08.19.13: EDITED TO FIX BROKEN LINK TO JACKSON'S BLOG POST.