Posted by AzBlueMeanie:
The New York Times last week investigated the connection between the law firms that are "foreclosure mills" and the Wall Street private equity firms they represent. Private Equity Firms Linked to Foreclosure Mills:
With a surge in lawsuits against law firms specializing in foreclosures, a case in Mississippi is casting light on another aspect of the mortgage mess — the connection between Wall Street private equity firms and those law firms, often known as foreclosure mills.
The lawsuit on behalf of homeowners claims that Great Hill Partners, a private equity firm, has benefited from what the lawsuit calls an illegal fee-splitting arrangement between Prommis Solutions and several of the busiest foreclosure law firms it controls. Great Hills is the biggest stakeholder in Prommis, a company that acts as a middleman between mortgage servicers and law firms.
A lawyer for Prommis rejected that claim, and officials of Great Hill Partners did not respond to inquiries. But a review of public filings, company news releases and other public statements shows that several private equity firms or entities they control have stakes in the business operations of some of the busiest foreclosure law firms in New York, California, Connecticut, Florida, Georgia and Texas.
Some of those law firms — like the offices of David J. Stern of Plantation, Fla., and Steven J. Baum of Amherst, N.Y. — are among those that are either under scrutiny by law enforcement officials or face actions by homeowners contending that they used inaccurate or fraudulent mortgage-related documents. Both lawyers have denied any wrongdoing, and neither has been charged with a crime.
The influence, if any, that private investors are having on the practices of the foreclosure mills is not clear. But the issue is likely to be examined in coming months in lawsuits like the one in Mississippi and as a nationwide task force of state attorneys general start their inquiry into the accuracy of mortgage documents.
To maximize investment returns, private equity firms often squeeze down costs in the operations they acquire. And some legal experts suggest that could be a factor in the quality of legal documents generated by foreclosure mills.
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Tom Miller, the Iowa attorney general who is heading up the task force investigating questionable document practices, said he was not aware that private equity firms had acquired some foreclosure-related operations. While there is no law against such purchases, Mr. Miller said the issue could prove significant because it expanded the possibilities of where and how the foreclosure system failed.
“If this is happening, this is something we are concerned about and would want to find out more about it,” Mr. Miller said in a telephone interview.
The investors involved in foreclosure mills include a publicly traded investment fund, Ares Capital, as well as other midsized and small buyout firms like Great Hill Partners.
The involvement of private equity firms in the legal industry is not new. But their involvement with foreclosure mills appears to have started about five years ago, just as the housing market was starting to collapse and the number of foreclosure procedures was beginning to boom.
The relationship between the Wall Street specialists and a law firm appears to work like this: A private equity firm, in a transaction worth tens of millions of dollars, buys a wide range of services used by the law firm, like its accounting, computer data, document processing and title search departments. Then, a subsidiary of that private equity firm or an entity it controls makes money by providing those services back to that law firm or other businesses for a fee.
For example, about three years ago, Tailwind Capital, a private equity firm in Manhattan, acquired many of the business-related operations of a law firm near Buffalo run by Mr. Baum, which does one of the highest volumes of foreclosures in New York State. Soon afterward, the fund bought similar operations from one of Connecticut’s biggest foreclosure law firms, Hunt Leibert Jacobson of Hartford.
Ares Capital, which financed the move, is also now a co-investor in those assets, which are held in a Tailwind unit called Pillar Processing, a public filing indicates.
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Law firms receive a relatively low fee from companies that service home loans, say about $1,200 a case for handling a foreclosure-related proceeding. But those fees can translate into big profits for lawyers and their private equity partners when tens of thousands of foreclosures are involved. The law firms and the private equity firms have structured these deals with an eye toward avoiding legal statutes and ethical rules like those that bar fee-splitting between lawyers and nonlawyers.
But that relationship has been challenged in the Mississippi lawsuit against Prommis and Great Hill Partners.
Another company, Lender Processing Services, is also accused in the lawsuit of illegally splitting fees with foreclosure law firms; it also denies doing so.
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In a telephone interview, Prommis’s general counsel, Richard J. Volentine Jr., said that the company did not split fees with its affiliated law firms and that those fees were paid directly to those firms by the loan servicers.
In its S.E.C. filing, Prommis alerted potential investors that it could face challenges from bar associations, prosecutors or homeowners that its relationship with its law firms constituted the “unauthorized practice of law” or involved “impermissible fee sharing” arrangements.
Prommis also stated in that filing that any steps that slowed the pace of foreclosures, like government programs that helped homeowners renegotiate loans, would hurt its revenue.
It will be fascinating to see how discovery into this aspect of the robo-foreclosure scandal plays out. There are some big-time law firms with legal exposure here.