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Controlling your bank's legal fees

Sometimes improvement begins on the bank's side

Legal fees are on every bank management's list of expenses they can't seem to control, and that most acknowledge are too high. Why is this universally so? 

 

I suspect that it's largely the fault of the bankers, for not reining in these expenditures. It's not easy to do and you'll not get them down to zero. But there are lots of things you can do to manage them.

 

And sometimes doing that begins with managing yourself.

 

How are you using your lawyers?

First thing is to understand the human tendency of bankers to refer problems to lawyers. Business life is complicated these days. With the piled-on requirements of compliance with the avalanche of new rules and regulations coming out of the Dodd-Frank legislation, that's easy to understand.

 

There's a part of a bank's legal cost that's always money well spent.

 

But we also waste a lot of  our lawyers' time. And when we do that, we pay for it.

 

When a file has to go to an outside law firm, how many bankers just put big elastic bands around the credit and collateral files and ship them off? That's right, they just send them on, with no time or effort spent in either organizing the files or investing in a solid and careful explanation of the credit for the law firm.

 

This is laziness on the banker's part, and it's just asking for a big bill.

 

I used to work for a CEO who instructed all his officers to avoid meeting with the lawyers in the bank. But if they had to see the lawyers, he had a rule:

 

"Go to them. Don't pay them to travel to you."

 

I made this point one day to the bank's attorneys, who were located on the 12th floor of my bank's own building. I told them that we were forbidden to allow them to travel to us. Of course, there was a big guffaw around the table at that revelation. But it made an impression. This was a law firm that clearly understood that the new bank president was serious about managing the cost of their services.

 

We're watching you, counselor

When the costs of our legal representation went through the roof in the economic downturn of the early 90s, I took advantage of a change in our situation. A sole-practitioner lawyer who did some occasional work for the bank was retiring. He was trying to find hospitable places for his few employees. I hired his paralegal, a 35-ish lady who hit the ground running with us. She was tough and smart, analyzed all legal bills carefully, questioned what didn't look right, and made sure the bills got paid promptly by walking them through accounts payable if necessary. She also sat in on all conferences where we "handed off" legal work and knew what was said among the participants.

 

She also asked the lawyers to complete a deceptively simple looking form where they were asked to estimate the length of time to complete each case according to an agreed-upon plan of action.

 

We didn't actually consider this binding on the attorneys. Yet it highlighted how some things just seemed to drag on. As a result, it forced the lawyers to work more specifically on the root causes of the problems or find themselves explaining to us why a particular case was months in resolution and thousands of dollars over initial expectations for fees

 

Buy the retainer, buy the punch clock

Early in my banking days, the question for many bankers to resolve was whether a law firm should be on retainer. Lawyers like retainers as it guarantees them a predictable monthly income.

 

The bankers are generally suspicious, as we are never be sure that we are getting a fair deal on a case-by-case basis or whether we are leaving money on the table--paying for more time than we needed.

 

In one case where I worked for a large regional banking company, the lead bank hired an experienced lawyer from a large bank on the East Coast. He was sharp and knowledgeable with lots of experience in the Uniform Commercial Code, collections, and some courtroom litigation. We monitored his results and they were uniformly excellent in terms of the advice he gave.

 

The problem was that he didn't save us any money when we assessed his worth over a year's time.

 

Why?  Because he went home when the rest of us did.

 

And while he got the work done, it was never as swift or as timely as the work done by any of our outside law firms. Downtime in certain phases of collection work can be very expensive on the value of collateral or the disposition of a troubled borrower to assist in curing a documentation defect. Eventually, if I needed something right away, I referred it to outside counsel and I had the finished work product pretty quickly. Most of my colleagues did the same thing, too.

 

I suppose some of that was our fault. Perhaps we'd grown a bit casual about how we used our house counsel.

 

But it taught me a lasting lesson--no in-house lawyers for me. They just aren't hungry enough, nor share my sense of urgency in some matters.

 

Watch the billings!

There was also a time I vividly recall seeing the legal bill on one of my problem asset accounts. The attorney handling it was also a bank director and very senior member of the bar of that city at the time.

 

I don't recall the numbers with any specificity. But it was something like a $20,000 bill--when $7,000 or $8,000 would have likely been plenty.

 

I marched to the CEO's office and made the direct allegation that we had an example of white-collar crime perpetrated against an insured institution and punishable by who knows what. The CEO, thinking about the fullness of the relationships involved, thanked me for my vigilance and then promptly did nothing about the matter. It simply wasn't worth an unpleasantness with one of our senior directors and the law firm that did a lot of our work to make a fuss over the bill.

 

The lesson I took out of that experience is that the bank is always in a potentially compromised position in a business dealing with a director. That's probably why I didn't like handling directors' banking business either. It was just too easy to get sideways with a prime constituent and anyone with a long memory can probably remember the Bert Lance affair in the 1970s that produced major changes to Regulation O.

 

A resource to be managed

Lawyers represent essential resources in the lending business. We need their help to avoid trouble--and to extricate ourselves when we occasionally get into it.

 

However, they are resources that come with a price tag.

 

And they need to be managed.

 

Doing that in a smart, non-confrontational way can save a lot of money and build stronger, long-term relationships with the bank's service-providing professionals.

Ed O’Leary

Veteran lender and workout expert Ed O'Leary spent more than 40 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses and has been a frequent speaker in ABA's Bank Director Telephone Briefing series. You can e-mail him at etoleary@att.net. O'Leary's website can be found at www.etoleary.com.

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