Legal Services Scramble to Help Subprime Victims

Responding to the subprime mortgage crisis, California legal services organizations are scrambling to address the needs of poor people who are losing their homes.

Most of these organizations have been dealing with fraudulent lending and mortgage scams for years. But they can no longer count on pro bono assistance from law firms that have helped on such cases in the past because of a greater potential for conflicts.

Fraudulent Lenders

As the banking industry continues to consolidate, law firms are finding that alleged fraudulent lenders are connected to big-bank clients.

"You think you're dealing with a small lender and you do some research and it turns out you're dealing with Citibank or Wells Fargo," said David Ackerly, pro bono director for the Legal Aid Foundation of Los Angeles. "Law firms throughout the city are very eager to help foreclosure victims, but there have been all these mergers and acquisitions. The cases I've recently tried to place, they seem smaller, more local. But there's a connection to a larger bank."

Firms that used to take cases against fly-by-night fraudulent lenders are increasingly cautious, if not resistant, to accepting those cases now.

"Very often we will run into a direct conflict somewhere along the chain," said Cristin Zeisler, pro bono coordinator for Manatt, Phelps & Phillips.

'Floodgate of Cases'

"They're really hard for us to take."

As a result, legal services organizations find they are unable to address one of the most pressing issues their clients are facing, an issue likely to double or triple in size in the next year, they say.

"There's a floodgate of cases," said Elissa Barrett, pro bono director for Bet Tzedek Legal Services. "When we have the right partners lined up we can open the gate."

But finding those partners is proving to be difficult, if not impossible, for legal services organizations throughout the country.

"For a lot of people, this is really a third rail of pro bono," said Esther Lardent, director of the Washington, D.C.-based Pro Bono Institute.

"Almost every large financial institution probably has some problematic loans they've consolidated.

"So the firms are obviously very worried. They don't want to be in a situation where they're creating conflicts."

Attorneys at private firms said they can't even discuss the issue on the record for fear of appearing to implicate their clients.

"This is a really significant problem," Lardent said. "The impact of this could be devastating."

Direct conflicts are not the only issue. Even if a client is not involved, firms cannot appear to be going after the big lenders.

And Ackerly said the law in this area is so unsettled "that firms may fear establishing precedents that would negatively impact their existing clients."

Lardent agreed.

"If you represent a major financial institution, impact work on this will be difficult," she said.

But Lardent believes big firms can play a role in alleviating the problem. She said the big banks, often tangentially involved, don't have to be parties in a lawsuit against the fraudulent lender.

"There is potential for some of the advocacy to be done by big firms," she said.

"But people are a little frozen around this and not really willing to raise the issues."

So Lardent's organization is doing the talking for them.

"We're having some discussions with the financial institutions to see if we can ease the firms' concerns by sending a message from the clients," she said.

It's a path the San Francisco Bar Association's Volunteer Legal Services has already embarked on in the area of credit card debt.

"We're trying to go to the lenders to get them to waive conflicts," said executive director Tiela Chalmers.

"It's an easier sell than in the foreclosure situation because the bank usually sells the debt to the collection agency, and the typical debt we're talking about in these cases is $10,000."

Chalmers said her organization is just beginning to talk to the lenders, but believes the response will be positive.

Legal services organizations said they would welcome a similar solution.

"We know the firms want to help and we want to find a way for them to do that," Barrett said. "We just need to get creative."

Ackerly agreed.

"Private firms and legal services providers are ... seeking ways for firms to help pursue those individuals who duped vulnerable homeowners into adjustable-rate mortgages they did not understand," he said.