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many foreclosures were on hold during this time period, so at least this uncompensated expenditure of effort by the firms did not seriously impact production. It did, however, result in mixed results and, in some instances, inconsistent findings. More frustrating were legal audits conducted by outside law firms that knew little, if anything, about the foreclosure process, learning as they went at the expense of the servicers they represented. Countless hours were spent educating auditors that had not yet determined how to evaluate these firms or had yet to develop different standards for small law firms versus the larger "mills." Eventually the larger and more sophisticated servicers streamlined audit procedures and from that has come a level of consistency. In 2012, an ad hoc committee of the Mortgage Bankers Association consisting of servicing representatives, major law firms, and auditors proposed a uniform audit standard to the FHFA for use by the GSEs that suggested, among other points, a different standard for large and small law firms. All of these efforts continue to refine the process. While the first level of audits inquired if the law firm had policies (which most did not, but they were designed and implemented), the second level of audits delved into the training of employees on those policies. The third level— where we are now in this continuum—requires each law firm to create an internal audit and compliance function. As one servicer said to me recently on a call, "Now you know what we go through with our investors and regulators. Welcome to our new reality." This isn't to say this paradigm shift was unwarranted, but it was not contemplated in the staffing or pricing models and was created at breakneck speed by constantly evolving standards imposed on the firms. (We'll return to the issue of fee structures in a moment.) So where did all this effort lead? How has it changed the landscape of the formerly unimportant and sometimes trivialized practice of foreclosure law? First, based on anecdotal evidence, a high percentage of law firms failed the initial audits in areas such as compliance, training, written policies and procedures, data security, and technology. This forced firms already struggling to meet the increased challenges of prosecuting foreclosure cases in an environment of consumer activism to expend additional time and capital to develop the level of sophistication that was by 2012 60 becoming the minimally accepted level to continue in the business. More than a few firms decided to exit this line of business rather than comply or found themselves and their historical practices so deficient that they lost client share. A very small number of firms were driven out of the industry entirely, but far more were exposed to scrutiny formerly reserved for riskier vendors (cash and check processing, customer service, property management companies, etc.). or omissions, effectively making the foreclosure firm a guarantor not only for its own activity, but also for that of its third-party vendors—including title companies, service of process companies, and auctioneers. This, in turn, forces the law firms to ensure those vendors comply with similar standards of their own, thus subjecting what are, in many instances, small local vendors to these same rigorous requirements. The standards are forcing some smaller vendors out of the business—the ultimate unintended consequence of that first fluttering of the butterfly wings when servicers were subjected to introspection by their regulators. The first complaint many law firms made when exposed to these increased servicer The good news for the industry is most of and investor performance requirements was the firms they utilize are in fact very good at insufficiency of fees. At the same time, state law what they do and are committed to spending changes dramatically increased the workload on the human and capital resources to meet these those firms and imposed new legal procedures changing expectations. The other potentially related to prosecuting foreclosures. In response to good news for these law firms is that the majority these changing conditions, Fannie Mae increased of all new mortgage loans originated today are fees across the board with Freddie Mac and GSE-backed. That means a standardization of HUD expected to adjust their compensation sorts has emerged for the future conduct of these levels about the time this article goes to press. players. These pay adjustments, while deserved and In November 2012, both Fannie Mae and overdue, are not the long-term solution. Essentially, Freddie Mac announced they were, at the behest the entire landscape has changed and foreclosure is of the Federal Housing Finance Agency, getting increasingly recognized as a higher-risk and more out of the business of directly managing law important legal function than in the past. The firm relationships and putting that burden on pertinent and more appropriate approach to this the servicers. In the wake of that, the GSEs change would be for all participants in the process created an approval process that imposed on the to, first, define the tasks that are expected of counsel servicers (and, by implication, their law firms) in prosecuting these loan foreclosures; second, a minimum set of standards for any law firm agree on uniform industry standards of compliance handling a GSE loan. The old retained attorney networks are being phased out in a sunset fashion, and conduct; and, third, only when the first two have been defined, should a suitable fee structure so only those firms that meet these minimum that fairly compensates counsel for the work be standards—as certified by the servicers—can established that is commensurate with the effort and process new foreclosure or bankruptcy matters the risk associated with handling distressed assets in referred after June 1, 2013. today's marketplace. If a firm wants to stay in this business, it has It is indeed a brave new world for all no choice but to establish the requisite training, participants in the default process. In that world, audit, compliance, and technology (specifically increased compliance is the standard. But it also intrusion detection, perimeter security, protection comes with a level of intolerance for performance of non-public personal information [NPPI], short of perfection, a standard that is impossible and document retention) required to satisfy the to sustain without reassessing the industry as a GSE-mandated standards. Also, minimum whole. And that is a challenge that must be met, financial stability requirements are imposed on firms to ensure they can operate efficiently and still or else who will survive to protect the collateral that sustains the entire mortgage industry? retain profitability while being robust enough to Jerry Alt is president of LOGS Network, where withstand these challenges. he leads a team of nearly 2,000 legal and business Another consequence of this level of scrutiny is legal services agreements submitted to law firms process outsourcing professionals serving the residential contain higher levels of indemnity for their acts mortgage and financial services industry.

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