Back in July, I denounced three Cincinnati, Ohio lawyers who shamelessly served as a front for a foreclosure solutions scam.  The lawyers never met with clients (who were going to lose their homes!) or did any work on their behalf; they merely signed their name to canned pleadings prepared by a so-called foreclosure solutions company for $125 a case (later upped to a whopping $150).

Turns out, though, these lawyers did much more than simply sacrifice their own law licenses (they were suspended, though honestly, at least two deserved disbarment) for a $125 a pop.  No – sadly, lawyers like these and others of their ilk sold out the overwhelming majority of ethical solo and small firm lawyers who capably and zealously represent clients in foreclosure and loan modification proceedings.

Last month, the FTC issued a notice of proposed rule (NOPR) that forbids loan modification providers — including attorneys — from charging up front for these modification services, even though we attorneys have our own set of ethics rules governing advance payment of fees and trust accounts.  And it’s precisely because of the bad acts of more than a few that the FTC refused to issue a broad exemption for lawyers from the upfront payment ban. From the FTC’s NOPR:

In the Commission’s view, the present record does not support a broad exemption for attorneys. Some attorneys have engaged in unfair conduct in conducting activities covered by the proposed rule.  First, some lawyers have engaged in the same deceptive practices as non-attorney MARS provides, in failing to provide promised services, falsely touting high likelihood of success, misrepresenting refund policies and falsely claiming affiliation with the government.  Second, some MARS providers have begun employing or associating with attorneys to support the MARS providers (often false) claims that they provide legal services and to avail.  In such attorney MARS provider arrangements, attorney often do little or no legal work on behalf of consumers, with non-attorneys handling most functions including communications with the lender…Many state statutes offers exemptions, but attorneys offering MARS often have flouted state bar rules, such as prohibitions on fee splitting, referral fees…

What a disgrace.

The practical effect of the FTC’s rule is to eliminate many lawyers (including this heroic one) from offering loan modification services.  That’s too bad, modification was a fairly manageable niche for new solos given the many pro bono training programs for handling loan modifications under the Obama HAMP plan and the huge demand for affordable loan modification options.

However, in the absence of the ability to collect a fee up front (and hold it in a trust account as required by ethics rules), most lawyers simply cannot afford to handle loan modification cases.  For starters, there is no guarantee that even an exceptional attorney will actually be able to secure a HAMP modification – with only 30 percent granted, the odds are stacked against success from the get go (something good lawyers will disclose).  Yet without an upfront fee, clients who don’t obtain a modification would likely never pay their lawyers, thus leaving them uncompensated for a substantial amount of work.  Second, modifications can take a several months, even as long as a year.  To be sure, a lawyer doesn’t have to wait that long to send a bill, but if the bill is sent several months into the process and the client fails to pay, what can the lawyer do?  Withdrawing could jeopardize the modification but remaining on the case means more work for no pay.

The FTC rule  does allow a limited exception for lawyers to the “no fees up front” prohibition – lawyers may collect a fee up front when modification services are provided in connection with bankruptcy or a document that must be filed in a court or administrative proceeding (so, presumably, if a client has already been sued for foreclosure, a lawyer defending the case could take a fee up front and apply for modification as a way to avoid foreclosure).  Unfortunately, by that time, a case will be more expensive, and the lawyer’s ability to do anything with respect to the modification would be limited.

In addition, the bar on upfront payments won’t necessarily shut down non-lawyer foreclosure providers.  These companies are private entities – they can get funding from a parent company or seek private investors.  Lawyers don’t have that option.

Reporting on the Second Circuit’s recent decision in Alexander v. Cahill striking down New York’s onerous lawyer advertising regulations, Simple Justice‘s Scott Greenfield warns lawyers that they’d better behave themselves, asserting that:

I don’t want my free speech restricted because your tacky and disgraceful marketing effort makes people’s stomachs turn.

But it’s not enough for lawyers to police their own conduct.  Scott makes the point that lawyers also need to call out colleagues who don’t tow the line, and he’s been doing more than his fair share.  Restrictions on advertising are one consequence of standing silent as lawyers engage in unseemly or unethical advertising — and that’s bad enough.  Far worse, in my view, is a rule like that of the FTC, which restricts good lawyers’ ability to earn a livelihood.

So if you see lawyers going astray – whether it’s a new lawyer who does so inadvertently or a seasoned lawyer who’s gotten jaded or greedy – please, step forward and say something.   You’re not interfering or overstepping boundaries; it’s your obligation.  Moreover, if as lawyers we don’t step up to the plate, someone else will step in and do it for us.

Note:  The FTC’s rules seeks comment on the impact of the ban on advance payment on attorneysIf you handle loan modifications responsibly and believe that the ban would prevent you from doing so, please file comments and let the FTC hear from you.  You can access the rule through this page – a notice of proposed rule.

Update (4/1/2010) – The ABA weighs in on the FTC’s proposal in support of solo and small firm lawyers, as reported here.