My current project analyzes the responsibility of lawyers for the financial crisis through their involvement in the preparation of offering documents for mortgage-backed securities and related financial products.
Although not the main focus of the project, my research has made me skeptical of non-lawyer providers of legal services. It is possible, as some have claimed, that "sophisticated" clients do not need the protection of MR 5.4 and other conduct rules and should be able to retain firms that are not owned by lawyers to complete legal work. But the Model Rules are not solely concerned with client protection. They are also concerned with fostering compliance with the law.
As is now widely-known, one of the chief causes of the financial crisis is that many mortgage loans were extended to borrowers who realistically had no capacity to repay. This was generally not disclosed to individuals who invested in MBS and related products.
Lawyers were integral to the securitization process but had very little role in assuring that loans were fit for sale to investors. Instead financial institutions would hire so-called due diligence firms to examine a sampling of the mortgage loans they planned to acquire from an originator. These due diligence firms would generally provide two weeks training to their reviewers and pay them $30-$40 an hour. The firms themselves would receive a flat fee of $150 for each reviewed mortgage file. Not surprisingly, reviewers were instructed to spend no more than an hour per file so as to maximize the due diligence firms' profits. One of the largest firms, Clayton Holdings, saw its revenue climb from $19 million in 2000 to $239 million in 2006. See generally Robert Kolb, The Financial Crisis of Our Time, 209-211 (2011).
From one perspective, due diligence firms could be seen as a massive success story. They fill a niche that is not currently being met by traditional law firms. After all, what financial institution would want to pay BigLaw associates hundreds of dollars an hour to look through mortgage files? But the reviews undertaken by due diligence firms were very cursory, and on the few occasions where reviewers did raise concerns, they were overruled by their supervisors or a financial institutions' business personnel. There were few negative consequences until the real estate bubble crashed and almost decimated the global financial system.
The point is not that only lawyers are capable of conducting due diligence. Indeed, in certain circumstances, accountants and other professionals may be better-equipped. But lawyers have ethical responsibilities that non-lawyers do not. They are supposed to, for example, "exercise independent professional judgment and render candid advice" and seek to deter their clients from committing fraud.
Perhaps part of the success of non-lawyer providers of legal services can be explained by the fact that they are less hamstrung by ethical obligations in completing legal and quasi-legal tasks. If a client is intent on a particular course of conduct, why hire lawyers who might be inclined to raise uncomfortable questions about mortgage fraud and responsibilities to investors and seek to stop the conduct in question?