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» VISIT US ONLINE @ DSNEWS.COM INDUSTRY INSIGHT MARKET PULSE regulatory requirements, that would help. I think that has to be taken into account in the compensation structure." Ancillary Outlays Client Resistance Although law firms are doing their best to meet increased demands for compliance— including adding technology and staff, and providing adequate training to do all the things clients are asking—it seems most servicers are not willing to increase fees. Alt thinks one reason is that most servicers are not using their own money to pay those bills. "Money is coming from an investor, and they have set limits on what they consider reasonable attorneys' fees," he explained. POINT— COUNTERPOINT Most attorneys feel the best solution to compensation issues is to review attorneys' fees regularly. Castle believes a review should be conducted annually or at least every two years. "Compensation must be evolutionary because things are changing so quickly," she said. Weisserman suggests there are three ways a law firm can be paid: (1) a flat fee, (2) hourly like most law firms, or (3) a hybrid method based on the complexity of a file and the length of time required to finalize a particular foreclosure. Some warn that many law firms may not survive if fees are not assessed on a more equitable Though for years, attorneys' fees have not kept pace with market conditions or the requirements of new stringent regulations, the nation's two largest mortgage investors are now beginning to understand the need to reassess "reasonable fees." Both Fannie Mae and Freddie Mac have been reviewing current fee structures. Fannie revised foreclosure fees for the entire country last year and just raised the hourly litigation rate servicers are permitted to pay in mid-December. Freddie is currently evaluating its rate allowances. Castle says the GSEs "have gone a long way this past year" to bring attorneys' fees more in line with today's market demands. Nielson feels servicers face some of the same compensation issues that law firms face, with servicing fees tied to a different time, priced when these loans were initially packaged for sale. "The ultimate answer is that investors need to review the compensation paid to servicers," he said. GROUND FORCES Stipend Solutions basis. "Another way of looking at this issue is that law firms are privately held small businesses," Nielson said. "Generally speaking, they are less able to absorb the expenses related to handling the surge in default and litigated matters. On the other hand, large servicers have the ability to absorb expenses relative to dealing with delays and staffing requirements that local or regional law firms cannot absorb." Hultman points out that there are many high-quality, dedicated law firms serving the mortgage banking industry. "At some point, if they continue to experience these kinds of financial challenges as a result of an inadequate fee structure, they may decide to change their focus to a more sustainable area of the law. This will create a significant loss to the industry," she said. Hultman continued, "You need to have highly competent, experienced, professional lawyers handling these complex matters, but if they are not compensated adequately, they in turn will be unable to attract and maintain high-quality associates and provide the level of service that the industry demands." She believes those in the industry—servicers and regulators alike—need and want the best firms working on their behalf. BEST PRACTICES Castle also points to extra costs related to securing confidential information as well as the additional staff needed to keep track of case files for extended periods of time. "There are states in which foreclosures take years to complete," she said. "Once that file is in your office, you have to account for it and monitor it, no matter how long it is there." Other areas where law firms have to establish, maintain, or increase staff levels include accounting departments, billing, IT, human resources, and quality control. One compliance requirement concerns the Servicemembers Civil Relief Act (SCRA), and while important, this too costs money that is not reimbursed to the law firms. "Obviously, we all want to treat our servicemembers with the utmost dignity and respect," Nielson said. "The SCRA requires that we review foreclosure matters and judgments, in particular, to make sure we are not taking adverse action against those serving in the armed forces until we are certain they have had proper notice and have been given a fair opportunity to respond." He says the SCRA requires that the law firm check each foreclosure multiple times against a website maintained by the Department of Defense that lists active members of the military. "Legally speaking, we are required to check that four times, but most of the major servicers now require our firm to check that site as many as 18 times during the foreclosure process," Nielson said. "We're glad to do this, but we need to be compensated for it." Affirmative Effects Despite the negatives associated with the increased demands of the new world of default servicing, Castle sees a positive in the new requirements placed on foreclosure attorneys. "One of the positive things that has come out of the added scrutiny is that our firm's policies and procedures are better documented," she said. Weisserman also feels there is a positive side for an industry under ever-increasing scrutiny. "Our clients come and audit us, and we get to show them what a great job we are doing in securing their files and electronic information," he said. "This is an opportunity to confirm that we are doing things right." 41

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