When you buy a car, you often take out a loan to pay for it. Once you fill out the application for a credit check and the loan with the finance associate at the dealership, a clerk researches companies willing to make the loan. These might be the car manufacturer’s finance company or a national credit company. Essentially, though, a third party sets up the loan and another company buys it. These large companies accrue portfolios of loans that can run into millions of dollars.
Often, however, other companies will buy those portfolios because they have managed to borrow the money to do so at a lower interest rate than the rate for which they know they can later lend the money. In consumer credit parlance this is known as “spread.” The greater the spread, the more money the ultimate owner makes.
The same is true with mortgages. Large companies buy and sell mortgage portfolios many times; five large companies ultimately end up owning almost all of them.
However, each time a lender purchases a portfolio, it has to go through a due-diligence process. This is where lawyers get involved. According to David Zarski of Zarski and Associates, a Chicago, Illinois, law firm, one of his jobs is to perform legal due diligence on the portfolio for the purchaser. Whether it’s car loans, mortgages, or other types of consumer credit loans, says Zarski, “The main asset in the consumer lending business is the portfolio because that’s the lender’s earning asset.”
Because of the pressures of such deals, his firm must do this quickly and accurately. Unfortunately, the work is such drudgery few lawyers want to do it; not many American lawyers enjoy long days performing redundant activity on complex files.
However, Zarski and Associates, which specializes in performing due diligence on loan portfolios lenders want to purchase, has had great success using the Oregon outsourcing company, iBridge LPO. The outsourcing supplier performs detail-oriented and time-sensitive consumer credit work on the prospective portfolios.
For instance, say each loan in a $100 million portfolio is in the range of $20,000 – that’s 500 files. Zarski’s legal team might have 30 days to perform due diligence. It can choose to perform a sampling or a total review. A sampling always leaves the law firm open to malpractice suits, while a total review is exhausting. However, especially with subprime mortgage portfolios, total reviews are necessary because the borrowers’ financial situation may be tenuous.
Zarski explains, “In the subprime world you also have rather draconian laws that have a bad impact on lenders if they don’t dot all their i’s and cross all their t’s. So there are some situations where your sampling is going to be heavy or you’ll have to review the entire portfolio.”
Before outsourcing, Zarski says he used to bring on enough paralegals and lawyers from other firms who often knew nothing about consumer credit law to make sure he met the due-diligence deadline. But this is expensive talent, and Zarski would have to relocate the team to wherever the client was and stay in a hotel there until the job was done. As a result he was traveling and apart from his family 50 percent of the time.
Better skills for a lower bill
Now iBridge LPO scans all the files and electronically stores them in a secure facility in the United States. The iBridge LPO teams based in Delhi and Bangalore, India, access and review the files over a secure Web-based system. But these teams are not paralegals – they are lawyers. “If I can get an Indian lawyer for $35 an hour when I have to pay a U.S. paralegal $50 an hour, guess which one I’ll take?” says Zarski. What’s more, he says, “lawyers are more analytically trained,” so they’re better suited for the work.
According to Desh Urs, CEO of iBridge, Indian lawyers are glad for the work because “there is an oversupply of attorneys in India and they want to work for multinational firms that are serving the U.S. market. If they work for a U.S. law firm, they can cite that experience if they want to work for a multinational later.”
LPOs’ additional value to customers, he adds, is that they increase efficiency by maintaining a 24×7 schedule that follows the sun and deploys teams on rotation or simultaneously, depending on the workload, to serve customers in Europe and the United States.
Zarski creates a master checklist of data the iBridge team must check in each file. “With a checklist I’m comfortable that I know what they’re looking at because consumer credit is one of those areas where there’s a lot of regulation,” he says. Also, because most of his due-diligence work is on car loans and mortgages, he adds, “There are all kinds of required disclosures and truth-in-lending considerations” which require scrutiny to protect the lender from potential liability. “Even most lawyers don’t understand these things,” he admits.
But with iBridge he’s become confident that “I know they are doing the proper analysis when they follow the checklist.” This really is no extra work for Zarski either. If he employed U.S. paralegals and lawyers not trained in consumer credit — as he used to — he’d still have to create a thorough checklist.
The obvious benefits to Zarski are that the outsourcing provider is processing his files faster and more efficiently so he can get the highest and best use of his own lawyers for value-added work. What’s more, “The bill I pass on to the client for due diligence is less than half than what I would normally pass on,” which obviously keeps his clients happier.
Legal process outsourcing is growing. Research and Markets, a consulting firm, project LPO will be “the second fastest-growing segment of the global BPO industry.” It estimates its revenues will increase dramatically from about $80 million in 2006 to approximately $4 billion by 2010.
Lessons from the Outsourcing Journal:
- Legal process outsourcing (LPO) has a compelling value proposition because buyers get more skilled legal talent – lawyers instead of paralegals — in another country for low-level work at a fraction of the cost they would pay in their home country.
- Using cheaper offshore legal talent for lower-level work frees in-house legal staff for the highest and best use, so in-house lawyers can dedicate themselves to specialized areas and develop more profitable practices.
- LPO is obviously a boon to end clients because the bill that the home country law firm passes on to them is less, which keeps clients happier and more loyal.