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Deepthroat: Debt Collector Edition

posted by Adam Levitin

The American Banker has been running an important series on credit card debt collection (here, here, and here) that Joe Nocera highlighted in his NY Times column today. The story that they're telling, however, is only part of the picture. To fully understand the debt collection industry, it's necessary to take Deepthroat's advice, and "follow the money." 

I haven't gone very far down this rabbit hole, but it's clear to me that there's another important angle to this story, namely, who is funding the debt collectors. 

A lot of debt collection is done by law firms, because if you can't convince the borrower to pay on unsecured debt, then you've got to go to court in most cases. So enter the law firms. These aren't law firms as anyone would traditionally recognize them, however. A traditional law firm would have a bunch of lawyers supported by paralegals and administrative personnel.  It would fund its operations from cash flow and perhaps a line of credit and partners' contributions. And the income-generating work would be done by lawyers.

That doesn't describe a lot of the collections law world. Instead, collections law firms are the dystopia of the legal industrial complex. These firms take the theory of the firm serious and rather often the "firm" is little more than an lawyer or two and their law license. Everything else, from the office equipment to the support staff, is contracted out. Most of the work is done by non-lawyers, and the lawyers are essentially renting out their law license to firms that supply the equipment and staffing. Instead of rent-a-BIN or rent-a-charter, it's rent-a-license lawyering. Robosiging?  Of course--the whole point of the operation is to be industrial.  It's transaction processing with a legal heksher. And it is the antithesis of the sort of judgment and counsel that lawyers have traditionally prided themselves as providing. 

These firms also often work in network pyramids--a national contractor firm will then farm work out to regional contractors, who ultimately farm it out ot the locals.  (That's the LPS network model, for example). Again, industrialized transaction processing and economies of scale. 

But back to the money. Who do you think is funding the firms that are renting the law license? That's Wall Street money. It wouldn't shock me at all if some of the Holier than Thou financial institutions mentioned in the stories happened to have a sizable stake in a firm that provides virtually everything but the law license for debt collection. And if that's right, then what's really going on, is a PR move, in which Wall Street can claim that it isn't engaged in debt collection abuses, while it profits from it all the same. 

Again, follow the money. 

Comments

Your post reveals that you have not done much research and have little familiarity with collection law firms. You could not be more wrong that "Wall Street money" funds collection firms and that "financial institutions ... have a sizable stake in" such firms.

Law firms CANNOT have investors that are not lawyers. The only Wall Street money they have is from credit lines (that most firms and all big firms have).

Furthermore, Collection law firms and lawyers are actually the minority in the debt collection business -- both in terms of individuals and in terms of money collected, and it is not even close.

Collection law firms by and large also work mostly on contingency (or buy debt themselves if not prohibited by the barratry laws of their jurisdiction). They make money when their clients collect money -- and no one (except Chase and their inside counsel and process servers) wants to take a small unsecured credit card case to court as it is a sure money loser for everyone. The court fees and expenses alone sometimes make it uneconomical.

As a lawyer that does collection work, I am almost insulted by your insupportable sweeping accusations. But then I remember that someday someone will do something that will cause you to seek a lawyer's service -- maybe someone doesn't pay you after agreeing to -- and I take comfort in the fact that I do honest work for my clients in support of their business and I, and others like me, will be there when you need us.

I hasten to add that it never ceases to amaze me that academia and other lawyers look down upon collection lawyers, without really knowing what we do. It is an area with a myriad of obtuse rules and byzantine statutes. So much so that I can always tell when a general "litigator" makes an appearance in a post-judgment court thinking "anyone can do such pedestrian work." I often wonder what they tell their clients after they are turned away for not following rules.

Charles, before you get huffy, you might want to read the post more carefully. I know very well that the Rules of Professional Responsibility for every jurisdiction except the District of Columbia forbid lawyers from sharing profits with non-lawyers.

The point here is that the law firm has been disaggregated with lots of traditional part of the firm contracted out. The lawyers don't share their profits with investors in a formal sense, but they do so functionally. The law firm rents its equipment, paralegals, etc. from another company. It does so at a ridiculous mark-up. All the lawyer provides is the law license.

But don't take it from me. There are law suits against LPS for illegal fee-splitting in bankruptcy cases, and then how about this one noting that JPMorgan's private equity arm is the majority owner of a debt collection company. http://www.investmentnews.com/article/20120326/FREE/120329934

In any case, the point here isn't that collection lawyers are evil people. It's that we're seeing a shift in the naturing of lawyering toward a transaction processing model, and that's something really, really different.

In my NC county I see two types of collection lawyers: traditional collection law firms (brick and mortar places with lawyers and paralegals) and licensed (no firm affiliation listed) lawyers who file lots of complaints for large creditors. I always figured the second group was something like what this post describes, a single lawyer who is practically an employee of the creditor.

Adam, you simply are wrong. Everything in your second paragraph is insupportable -- everything. You just do not know what you are writing about -- which you do admit, commendably.

However, in your zeal to find a new wrinkle to write about, you have equated "collection law firms" with collection agencies and creditors that have lawyers as employees. My posts were not prompted by a reading comprehension problem, but by your writing on a topic about which you are confused and ill-informed.

If, as you say, your point is that there is a shift to "transaction processing" by firms that "rent-a license," your attacks should be directed to "collection agencies." They are publicly traded and funded by wall street. And "employing" a lawyer or having a "captive law firm" that employs the lawyers is the only way what you are describing could possibly happen. I do not know of any "captive" collection law firm, but I suppose there could be some -- after all it is legal and most insurance companies have captive law firms to save money while providing defenses to their insureds. Moreover, the "disaggregation" you point to is no different than outsourcing office services, document review and other functions to make them profit centers (even if the situation you imagine would be obviously more extreme).

But would would be the point? Obtaining a judgment if a debtor doesn't pay is not transactional -- no money comes in just because there is a judgment. The same is true of filing claims in BK. And, for the most part, credit card agreements no longer have attorneys fees clauses so there is no hope of recovering any fees (or increasing the amount of the claim). Collection law is, frankly, less "transactional" than typical PI and accident law where firms mostly settle cases to monetize/liquidate claims with insurance money. Maybe there are some outliers, but the "industry" is just not what you have described.

Which is also not to say that there have not been abuses of the "law firm" model in the past. There was a time that "collection law firms" were formed to try to get around FDCPA and other laws by claiming that collectors were "paralegals," not collectors. But that time has long passed after the courts (rightfully) saw through the ruse. Today, the problems (and there are many) lie with the creditors and collections agencies. Again, Chase is a poster child for "rent a license" abuse -- until it stopped collecting a short time ago, its in house "lawyers" would file tons of form complaints then hand them off to their "process server" employees for sewer service or simply make a false declaration of service to obtain a default. Again, if you want to go after "rent-a license" or "transactional" liquidation of claims, your target should be the creditors and collections agencies.

If you actually want to research this, and "not take it from me," I suggest that you at least get some information from the National Association of Retail Collection Attorneys ("NARCA") and some of the other attorney groups. Even if you believe everything they say is partisan and take it with a grain of salt, you will find that the collection law firms are not what you have described at all.

Adam, I think Mr. Hokanson has unintentionally strengthened your point about lawyers. Any non-lawyer who has ever had to deal with an attorney has to deal with the exact same attitude as he has shown. He is better than all the others, is smarter than all the others, knows everything and everyone else is stupid. What a horrible existence.

I have done some research about collections practices and noticed that some creditors (including capital one) filed numerous lawsuits to collect small debts (often less than $2000 and sometimes even less than $1000). They easily obtain judgments by default since the defendants rarely respond to the summons. There must be a substantial return on the judgments to justify their spending at least $500 on each suit for court filing and process server costs. My guess is they obtain the judgments to avoid the statute of limitations (typically 3-6 years) on debt collection. They then use the judgments to garnish wages or levy bank accounts of the debtors, often years later. It would be interesting to obtain statistics on how much is actually collected versus the original balances. I presume this must be a profitable practice for it to continue.

I am not an attorney. However, I have been in the credit and collection business since 1964. Still am by the way and not planning to ride off into the sunset yet. In my experience, I have worked with more better attorney or lawfirms than bad ones.There is no doubt problems exist and should be corrected. Since 1964 when I engaged an attorney to file a lawsuit, very few consumers answered the complaint nor attended the trial hearing and still don't. Would that be wrong in that I as a lender try to communicate to a debtor on the importance to responding to the complaint? And yes, there was and still is evidence of the debt when engaging any lawyer .I can see each point made, but agree that to include all attorneys or law firms, who practice their profession in a legal and ethical manner, is wrong. To Zac's point, is the other option to just ignore the debt owed and move on? I think not.I have seen and experienced managing credit and collection cases, including consumer bankruptcy cases for over 48 years.I can attest there is good and there is bad.Easy to single out negative points, just like the days when a small number of attorneys would advertise to file bankruptcy and thus began the 'mills' that helped lead a law profession to big business called money before BAPCPA.To those attorneys and/or law firms who do the right thing-good. To those who do not do the right thing-bad.

I'm sorry but this model does exist, and it is simply an application of a pre-existing model. In South Carolina, a lawyer is required to handle a closing on a mortgage. During the boom, title companies would set up a system exactly like that Adam is describing to close hundreds of transactions which looked like they were supervised by an attorney but in fact were not. See In the Matter of Lester, 353 S.C. 246, 578 S.E.2d 7 (2003) for an example of such an arrangement. I would be surprised to find it was not in use for some collectors.

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