Legislation & Lobbying

ABA & Others Object to Sweeping Law Practice Regulation in Financial Reform Bill

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A growing list of more than a dozen state bars and the ABA have asked for changes in congressional legislation aimed at protecting consumers from financial fraud because it contains language so broad that the everyday work of lawyers in various practice areas would be swept into the web of federal regulators.

The spate of recession-induced financial help scams loomed large in the push for national consumer protection, and competing House and Senate bills now headed for conference committee both specifically target for regulation anyone involved in offering a “consumer financial product or service.”

But the House version has an exemption for lawyers engaged in the practice of law as well as employees directly supervised by them, or in matters incidental to the practice and within the scope of attorney-client relationship. The Senate version does not. In the Senate version, for example, simply holding a trust account would bring a lawyer under the eyes of federal regulators.

The ABA and state bars are asking the U.S. Senate to add to its bill the same “practice of law” exclusion that’s in the House bill. They do not object to regulation of activities by lawyers outside lawyer-client relationships, and not under the disciplinary authority of state-court disciplinary systems.

“We’re not asking them to exempt someone with a JD who sets up some sham-façade nonlaw business where people think they’re dealing with a lawyer but aren’t being protected by the legal disciplinary arm,” says Thomas Susman, director of the ABA’s Governmental Affairs Office in Washington, D.C. “When we talk to people on the Hill, they say that kind of activity is the problem. The Senate solution as crafted is much too broad and doesn’t address it.”

“The question becomes whether such legislation is done with a scalpel, precisely going after the harm, or with the more blunt force of a cudgel,” says Carol Needham, who teaches professional responsibility at the Saint Louis University School of Law and has been researching the causes of the financial meltdown. “The financial reform bill can be like the health care reform bill, with a lot of unintended consequences.”

The House-Senate conference committee begins substantive work negotiating changes to the two bills June 15 and will finish at the end of the month. The House bill, H.R. 4173 is called the Wall Street Reform and Consumer Protection Act of 2009 (PDF); Senate bill S. 3217 is called the Restoring American Financial Stability Act of 2010 (PDF).

Though bar disciplinary investigations have picked up in response to the uptick in lawyer involvement in predatory businesses targeting debtors, the sheer volume has been daunting. A State Bar of California task force has been investigating hundreds of lawyers for possible involvement in loan renegotiation scams, having already suspended some and gotten resignations from others with more action to come.

But still, says Deborah Rhode, who teaches ethics at Stanford Law School, “I think the bar needs to do a better job of keeping its own house in order, and if it doesn’t, then others will do it for them.”

This latest reach for federal regulation of lawyers adds to an increasing trend, both legislatively and in the agencies.

For example, the Federal Trade Commission in 2002 said lawyers engaged in the practice of law were “financial institutions” under the Gramm-Leach-Bliley Financial Modernization Act of 1999. The ABA sued for a declaratory judgment and the U.S. Court of Appeals for the District of Columbia Circuit ruled in 2005 that lawyers are not “financial institutions.”

Under a rule recently proposed by the U.S. Department of Housing and Urban Development, any lawyer helping clients negotiate loan modifications would be considered a “loan originator” or “third-party loan modification specialist.” That would result in federal licensing and registration. Also, the FTC has proposed a Mortgage Assistance Relief Services rule that would dictate a fee structure to lawyers who are helping clients renegotiate mortgages or avoid foreclosure.

The ABA recently asked both agencies to expand exemptions for lawyers engaged in the practice of law.

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