In New Jersey, the going rate for lawyers to handle a foreclosure in court is as low as $1,300 per case.
Making a profit off such a relatively small fee requires firms to process cases very quickly. Anything that slows a collections effort down – any measure of due process for the debtor – ups the costs of handling the file for these “foreclosure mill” attorneys. Speed is imperative, and errors are rampant as a result.
“They’re not taking the time to investigate whether or not the information is accurate, because how can you afford to?” attorney Adam Deutsch of the consumer defense firm Denbeaux & Denbeaux said in an interview. “The law firm is accepting a low [payment per case] assuming that a large handful of the cases will never be contested and they won’t have to file motions or do appearances.”
The collections mills that Deutsch battles in New Jersey typically rely on back-room staffers with no formal legal training to draft all the paperwork that goes into winning a formal judgment against a debtor. A standard mill might have 50 non-professional support staff and just five attorneys who are barred to argue in court, he said.
After years of marching along rapaciously, that business model is beginning to limp. A prominent Georgia mill recently agreed to change its practices and pay a fine to the Consumer Financial Protection Bureau. The largest such firm in New Jersey declared bankruptcy in August.
Another dozen smaller competitors are still operating in the Garden State, but the fee structure they rely upon is starting to look unsustainable.
And now, the skies are darkening further for such firms. A federal judge in New Jersey has just given consumers and lawyers fighting that monster a vital new weapon.
Check Your Attorney-Client Privilege
Most consumers who run afoul of a foreclosure mill don’t have the wherewithal to find a lawyer who can effectively slow the sprint toward a collections judgment. Even if they know something’s fishy about the amount they’re being told they owe, they may either be unfamiliar with their rights or unsure how to enforce those rights effectively.
But when Steven Psaros of Hawthorne, New Jersey, sought out Denbeaux & Denbeaux to help save his house from foreclosure, it quickly became obvious to his lawyers that the court filings against Psaros included an illegally inflated dollar value.
The mortgage servicer seeking the foreclosure had taken out an insurance policy on the home even after Psaros provided proof that he had his own insurance policy for the home and was current on his premiums. The cost of that redundant insurance policy got tacked onto what lawyers were telling a judge Psaros owed. Denbeaux’s team pounced, ultimately convincing a federal judge that Psaros was being billed incorrectly.
But the judge went an important step further, beyond ordering corrections to the paperwork in Psaros’ ongoing case. He ruled that the lawyers pursuing foreclosure on behalf of his servicer were guilty of violating the Fair Debt Collection Practices Act (FDCPA) because they had failed to verify the information they’d been given by their client. Both Psaros’ servicer and the lawyers who chased him will be on the hook for damages if Denbeaux’s team can prove their case, and the lawyers are suing their own client over the misrepresentations it reported to the court in Psaros’ case.
“If this ruling is taken up properly by the attorneys representing consumers, it’s gonna wreak havoc throughout the entire country with regard to collection of debt,” Josh Denbeaux, Deutsch’s boss, said in an interview. “The foreclosure practice throughout the country has been based on mistake after mistake after mistake and the courts have been looking the other way.”
Not Just Foreclosures
At $1,300 a pop, lawyers have no incentive to do anything more than a perfunctory review of the files their clients send over. “That system requires shortcuts all the time,” Denbeaux said. “The $1,300 fee assumes errors and accepts errors, and nobody before could do anything about it.” These attorneys are also subject to FDCPA rules, but Denbeaux said he’s struggled for years to convince judges to properly scrutinize lawyers’ claims in debt cases.
The kinds of errors Denbeux and Deutsch are ferreting out in New Jersey, and which the CFPB is trying to combat nationwide, continue to crop up even four years after the Obama administration unveiled a multi-billion-dollar settlement with five large mortgage servicers over the “robosigning” scandal. Some of the largest and most profitable businesses in the country knowingly falsified key legal documents, paying temps to sign off on paperwork that would allow servicers to get foreclosure judgments in cases where they knew they couldn’t prove proper ownership of the loan in question.
Despite the federal settlement, people like Steven Psaros still have to reckon with an industry so bent on speed that it can’t be bothered with accuracy. “For the most part the damage from the last cycle of abusive lending is coming towards and end and those people who were taken advantage of but survived are coming out okay,” said Deutsch. “The epidemic we’re seeing now is abusive collections.”
It’s hard to keep public scrutiny trained on this new phase in the ongoing fallout from the 2008 collapse. The housing market has rebounded in most of the country, and the political sphere has largely moved on, said Center for American Progress housing finance expert Sarah Edelman.
“Throughout the foreclosure crisis we’ve seen examples of homeowners being foreclosed on when the party foreclosing on them doesn’t have all of the details right,” Edelman said. “I think the spotlight has moved away from some of these issues recently, but the hardest hit communities are still pretty hard hit. These issues are still very important for homeowners living in those communities.”
Now, the Psaros ruling provides precedent for holding foreclosure lawyers accountable for relaying inaccurate debt claims from their clients to the court. And if other circuits of the federal court system interpret lawyers’ obligations under the FDCPA in the same way around the country as U.S. District Judge Jose Linares held in Psaros’ case, that corner-cutting fraud machine could soon go extinct.
Attorney liability in collections cases isn’t limited to foreclosures either. Every law firm that goes after medical debts, credit card debts, and unpaid consumer loans must also verify that its client is providing an accurate record of the debt its asking a court to enforce, or face consequences.
That could be a death knell for the multi-billion-dollar collections industry that produces these kinds of abuses in the first place – or at least its current, sloppy mode of doing business. Even if the industry adapts to survive in some form, National Consumer Law Center staff attorney April Kuehnhoff said in an interview, a combination of stiffer penalties for screwing up and tighter regulations from the Consumer Financial Protection Bureau should mean better outcomes for consumers.
“I think law firms are going to start demanding more documentation of the debt at issue if courts are holding them responsible for making statements that aren’t supported,” Kuehnhoff said. “They’re going to have higher standards for what type of evidence they require in order to file a complaint on behalf of their clients.”
Higher standards mean higher costs – potentially changing the incentives radically enough that more creditors will try to collect on their own accounts rather than turning to the Wild West of secondary-market collections. Keeping collections work closer to home in this way would mean there were fewer opportunities for important information about a given debt to get lost along the way, which should in turn make for more accurate collections work that’s better grounded in the facts.
It won’t all be sunshine and roses. In-house collections efforts aren’t subject to the FDCPA’s consumer protections, for example, and Kuehnhoff also predicts that as collections work gets more expensive collectors will simply find ways to foist attorneys’ fees off onto debtors. “But in terms of having more and better information,” she said, “a creditor collecting on its own debt should have better access to the underlying documentation.”
“The bottom line is consumers need to have better information transferred about their debts. Whoever is collecting the debts needs to have the full and complete information available so that accurate information can be conveyed to the consumer and to the courts if they’re being sued,” Kuehnhoff said.
Raising standards for collections attorneys should help to drive them up across the board. But the sheer scope of the paperwork errors already out there in the collections business means it’s going to take a long time to unravel who actually owes what to whom.
The Psaros ruling offers a new tool for fighting those abuses. But for Denbeaux, who’s been fighting this battle for nearly a decade, the idea that it’s taken this long to convince a court that it’s not ok for collections attorneys to overcharge debtors is infuriating even in victory.
“It’s not even lawyer work. Just get the numbers right,” Denbeaux said. “You simply have to be right, period. These are people’s lives you’re playing with.”