Lenders: What To Do About Unauthorized Practice of Law By Loan Auditing Companies?

The news is everywhere: lenders face a rapidly-growing number of lawsuits from homeowners trying to avoid or set aside foreclosures.  Many homeowners choose to represent themselves, and may file cases without knowing whether they have legally-cognizable claims.  Some simply copy sample pleadings found on the internet.  Others work with foreclosure rescue companies or loan auditing services.  Lenders face mounting legal fees incurred in defending against – and, often, obtaining dismissal of – such cases.  When it appears that a meritless case is based on advice from a company engaged in the unauthorized practice of law, however, lenders may have some recourse.

Homeowners Choose the Internet Over Lawyers

Instead of hiring and seeking guidance from a licensed attorney, many homeowners turn to the Internet.  A quick and free Google search will lead the homeowner to YouTube videos and blogs explaining how to avoid paying a mortgage.  For example, one blog explains:

There is a foreclosure prevention strategy that can challenge every pending Foreclosure on the planet.  It is the most powerful Constitutional right granted and yet most homeowners facing foreclosures don't know how to use it or even what it is.  I will cut through the case, what I am speaking of is the UCC (Uniform Commercial Code) and Common Law.  The most powerful property asset protection for those in foreclosure!

While a practicing lawyer reading this blog entry may question the merits of these statements, many homeowners are led to believe that they have valid Constitutional and other claims against lenders.   

The same Google search may also lead a homeowner to a "forensic loan audit" company.  For $1,500, a loan audit company will conduct an analysis of a homeowner's loan documents to determine if they believe there were any defects in the origination of the loan and will provide a list of claims that the homeowner might bring against the lender.  For instance, we have seen a loan audit report recommending that the homeowner assert claims against a lender for unjust enrichment, civil conspiracy, and violation of various provisions of the UCC.  Not surprisingly, the homeowner asserted precisely those claims and even attached the loan audit report to a legal brief opposing dismissal of the case.

Loan Audit Companies May Be Engaged in the Unauthorized Practice of Law

Despite the fact that many loan audit reports set forth an explicit legal analysis, nearly every report that we have encountered has included a disclaimer that the loan audit company is not providing legal advice.  But a company's disclaimer that it is not engaged in the practice of law is not determinative.  Rather, an analysis of the unique facts presented by each case is necessary, particularly because the definition of "practicing law" varies by jurisdiction. 

At the most general level, the American Bar Association suggests that each jurisdiction's definition should include the basic premise that "the practice of law is the application of legal principles and judgment to the circumstances or objectives of another person or entity."  Report of the Task Force on The Model Definition of the Practice of Law (last visited Nov. 4, 2010).  Under this general definition, it is likely that a loan audit prepared by non-lawyers – or even by lawyers not admitted to practice in the jurisdiction at issue – that analyzes laws and specifies legal theories that an individual homeowner should pursue constitutes the unauthorized practice of law. 

Consumer Lawsuits Against Loan Audit Companies

Regardless of whether loan auditing companies are engaged in the unauthorized practice of law, it is clear that consumer dissatisfaction with them is rising.  Due to the escalating number of homeowner complaints, various states' bar associations and attorneys general have started to take action against these types of companies.  For example, in late 2008, the Tennessee attorney general filed a civil lawsuit against foreclosure rescue company Patrick & Patrick, LLC, challenging its unauthorized practice of law in providing foreclosure avoidance services.  Similarly, in 2009, the Florida attorney general filed a civil lawsuit against Lincoln Lending Services for the unauthorized practice of law when providing forensic analysis of mortgage documents for errors and fraud.  Also in 2009, the Supreme Court of Ohio issued an injunction prohibiting a foreclosure avoidance firm, Foreclosure Solutions LLC, from advising homeowners on ways to avoid foreclosures and from preparing papers to file in response to foreclosure complaints.  And in October of this year, the California attorney general filed a $60 million civil lawsuit against a pair of Sacramento-based loan audit companies, alleging deceptive marketing and the unauthorized practice of law relating to forensic loan audits.     

Strategy for Dealing with the Unauthorized Practice of Law

Lenders, too, may be indirectly injured when they incur attorneys' fees to defend against frivolous theories of liability recommended by loan audit companies engaged in the unauthorized practice of law.  At first blush, it may not seem worthwhile from a financial standpoint to pursue such companies.  Yet given the widespread use of foreclosure rescue services by pro se plaintiffs and the sheer volume of foreclosure avoidance lawsuits, it may make sense in certain circumstances to go on the offensive.  

Depending on the jurisdiction, one strategy is for the lender to join the loan audit company as a third-party defendant in a lawsuit brought by a homeowner, assert a claim for negligence and/or negligence per se, and seek to recover damages against the loan audit company in the form of the attorneys' fees incurred defending against the homeowner's frivolous lawsuit.  Liability likely could be established against the loan audit company by proving a violation of the licensure or unauthorized practice of law statute applicable in the jurisdiction.  Damages could be proved under a narrow, well-established exception to the American Rule, which typically would bar recovery of attorneys' fees as an element of damages.  In many jurisdictions, including Colorado and Minnesota, the exception provides that where one party is involved in litigation with a third party as a natural and proximate consequence of a wrongful act of a defendant, reasonable attorneys' fees associated with the third-party litigation are recoverable against the defendant as damages.  This exception likely would allow a lender to recover from a loan auditing company the attorneys' fees incurred defending against a lawsuit brought by a homeowner as a natural and proximate consequence of the unauthorized practice of law by the loan auditing company. 

Conclusion

While easy and free access to legal advice on the internet may be tempting to homeowners, the unauthorized practice of law is always dangerous.  Recognizing these dangers, state bar associations and attorneys general increasingly are filing consumer-driven lawsuits against loan audit companies and other foreclosure avoidance firms who are engaged in the unauthorized practice of law.  What has been overlooked, however, is how these companies may be harming lenders that are forced to defend against frivolous homeowner lawsuits brought as a result of the unauthorized legal advice provided by the loan audit company.  In certain circumstances, it may make sense for a lender to do something about the unauthorized practice of law.  We would be happy to discuss this strategy, or others, with you.