It’s our fault. Well, if not entirely our fault, we certainly enabled it (you business types let this happen with nary a peep of protest). What am I banging on about? Legal documents. The legal documents we use in mortgage finance and securitization are the most turgidly unreadable, repetitious, corpulent, elephantine abuses of the English language of which I am aware (except perhaps instruction manuals from my grandkids’ toys that were written by a German and translated into English by a Korean). Why are our documents so unreadable? Why are they so inscrutable and so replete with error? (Yes, there are errors in legal documents.). Why do we tolerate it? Why do we continue to, in a weird way, to celebrate it? Tradition? (Cue Tevye.)
Taking inspiration from the Governmental Proclamations of the Peoples Republic of China, I have identified the Four Flaws:
- The Flaw of Extraordinary Wordiness.
- The Flaw of Opaqueness.
- The Flaw of the Pursuit of an Elusive Mechanistic Desiderata.
- The Flaw of Indifference to the Magnitude of Risk.
The Flaw of Extraordinary Wordiness
Offering documents have grown from 100 pages to 400 pages over the past 25 years while loan agreements and mortgage documents similarly have grown from dozens of pages to hundreds of pages. Did the world get more complex? Did the fundamental structure of the universe change so much that it required that many more words to describe what is fundamentally the same transaction? Are our transactions so much more sophisticated and complex today than they were 20 years ago, such that the language of 20 years ago is simply inadequate for purpose? I don’t think so. Are we better for it?
I opened up a fairly recent securitization offering document at random to find a sentence with over 150 words and 11 defined terms. Is that sensible? Could the author have bought a period or two? Is that sort of punctuation expensive? What possibly is the point of a sentence that stretches that long except laziness or, for the conspiratorially inclined, obfuscation? A few pages later in the same document, I found a description of an Interest Coverage Test that consumed an even more impressive 450 words with 20 defined terms, often with one defined term embedded in another and with an extraordinary number of cross references. Not a period in sight, although replete with much abuse of the semicolon (regrettably, I may have written this). Sorry my tin-foil hat friends, it’s just laziness.
Our once reasonably short (and understandable) legal documents have metastasized into large, zoftig, repetitive, meandering documents as generations of lawyers have continued to knit away, committing to make “improvements” in whatever was said before. In some measure, the technology of word processing is the villain. It facilitates continued and often purposeless revisions. How many times have you gotten a new distribution of a 400 page document with a distro to 100 folks just to show that the word “while” had been changed to “that”? That’s the power of endless, expensive (more on this later) and non-productive fiddling. Couple that with a disinclination to delete anything in the misguided notion that deletions draw negative attention, and you’ve created a Frankenstein monster document. Proust would blush.
Long is not positively correlated with clarity. Long is the handmaiden of mistakes and the killer of your reader’s attention as she/he sags into somnolence, having probably lose the thread of what these documents are supposed to do hours ago.
There’s rarely any criticism, any pushback, about documents growing larger and larger and the rising tide of opaqueness. Why? Maybe because no one except opposing counsel actually reads them, and that reader is equally inculcated into the drafting errors of the writer. In some way, lawyers seem to rather take delight in the linguistic and syntactic complexity of the documents. As an author, haven’t you ever started to giggle while writing something late at night and wondering whether you should insert a “John is dead” sort of thing on page 279 just to see if anyone would notice?
Our documents need to go on a diet.
The Flaw of Opaqueness
I hear all the time that it doesn’t matter that the documents might be narratively unreadable, as long as they include necessary disclosure and contain the mechanics of the business people’s deal, at least as envisioned by the lawyers (and let’s be clear, business folks frankly learn all they will ever learn and care about a transaction from reading the term sheet and really sort of lose interest thereafter…just saying). This is a false argument. I can virtually guarantee that any document without some level of narrative clarity is going to get stuff wrong. As the writer descends into increasingly awkward circumlocutions, errors will proliferate. If you’re stuck reading our drivel, I’m sure you have found yourself staring at a paragraph for a considerable amount of time wondering what it means and whether it’s relevant. I certainly have both written this type of twaddle (probably reveling in my sophisticated drafting at the time) and had the pleasure of attempting to parse out meaning from someone else’s nonsensical prose, long after the documents were signed and the deal was closed.
The certain to be frustrated search for precision through intellectually cute and complex syntax and grammar coupled with an utter insensitivity to any level of understandability will produce bad documentation. As one walks through an endless series of subjective clauses confronting definitions embedded in definitions like a Russian doll and being tortured by endless cross references, meaning slips away. Opaqueness trumps narrative clarity and the goal of precision will often turn out to be betrayed by the word salad on the page. If our average, intelligent and sophisticated reader cannot sort out what we are trying to say, without the devotion of a Talmudic scholar reading from sun up to sundown, we have failed as draftspersons.
Making all of this more difficult, our documents, are larded with inconsequential verbiage that inevitably obscures meaning. Whenever someone suggests that we clean this up, remove this linguistic plaque from the veins of our documents, the answer was always “Well, that language was in the documents for the last deal and we want to minimize the amount of blacklining.” Huh? I’ve seen documents, regularly including disclosure of things which demonstrably passed into irrelevance years ago. Clean it up? No way! I mean, assuming we think someone is actually reading our deathless prose, don’t we think they’re smart enough to understand that it’s not 2007 anymore?
The Flaw of the Pursuit of an Elusive Mechanistic Desiderata.
There’s a healthy argument within the accounting profession about the tension between principal-based rules and prescriptive rules. Prescriptive rules have the ascendancy in GAAP and so it is rather refreshing to look at IAS stuff and see rules that accept and indeed embrace the notion that there is some discretion in professional performance and principles are more important than automaton-like mechanical precision. This choice has relevance for our drafting protocols. Trying to squeeze out judgment and create decisional roadmaps that would make an AI-bot blush is one of the reasons our documents are so long and so unreadable. Unfortunately, legal documents are rather like fractals. Fractals? Stick with me here. A fractal in physics is a never-ending and repeating pattern across different scales. In another words, if you look at it under magnification, it looks the same. What it means here is that the pattern of what’s precisely delineated and what requires the exercise of judgment is that pattern. The more mechanistic text is written; the more mechanistic text is needed. You’ll always need more. You’ll never drive out the need for the exercise of judgment as each level of mechanistic rules raise more questions than they answer. Judgment is ultimately an irreducible aspect of contract law. The scope and scale of that judgment never really diminishes, no matter how long, how complex, how painfully precise its mechanistic predicate.
The Flaw of Indifference to the Magnitude of Risk
The north star of our drafting seems to be that all risks are of equal dignity. Whether a risk is likely to occur and whether it’s likely to have outsized economic consequences seems not to be central to the design process. All risks are equal. That means that we feel compelled to devote the same 1000 words to a risk that is extremely unlikely to happen or will have di minimus consequences to risks that are quite obviously likely to happen with significant consequences. Lots of text on inconsequential risks is a big part of the linguistic plaque in our contractual veins.
The place where this is most obvious is in our risk factors in disclosure documents which can now run more than 70 single spaced pages. Apparently, it’s vitally important that we advise the readership in a CRE securitization document that investing in real estate involves risk. Who knew? Call CMA’s brilliant Bob Mura. Bob, please write a story ASAP!There are risks involved in investing in real estate! My, my. One might observe that if an investor in a CRE securitization is too dim to know that, they probably should not be let out of the house without a caregiver.
There are two ways to obscure a distressing fact. First, of course, is not to mention it at all and hope no one notices the omission. Ouch! Can’t do that. Omissions are violations of the securities laws. However, the other way is to bury a distressing fact is to embed it in thousands of words of linguistic twaddle so that the reader’s mind is entirely numbed by the time it reaches the discussion of a risk that perhaps is consequential and not entirely unlikely. Legally, this is regrettably still defensible and therefore in a very counterproductive way encouraged. Again, I’m not suggesting that anyone is intentionally trying to fool the reader. It’s just the way lawyers have been trained to draft when all risks are of equal dignity, all risks require disclosure. All risks require risk factors…and that’s how we get 70 pages of risk factors in most of our securitization documents.
I’ve often wondered that whether at some point this or a future SEC might actually spank the industry for irrelevant disclosure and point out that our process of endlessly adding wordy risk factors for things that are unlikely to happen is not consistent with good practice, indeed not adequate disclosure. Our SEC has repeatedly mumbled about this a bit, but not in a way to change our practices and we are clearly not taking the hint.
In a better world, where we wanted to get clarity about the business deal, the drafting of risk factors in securitization transactions would explicitly acknowledge that the readers of these documents are Institutional Accredited Investors, with the knowledge, expertise and competence to make investment decisions and with sophistication about the asset classes they are investing in, the structure of these transactions and the risk associated with the underlying assets. That should be the baseline. We don’t need to teach grandma to suck eggs. To be clear, there are real risks in transactions that are either asset specific or structurally specific that need to be disclosed and it makes sense to pick these out and call these to the attention of the reader. We just don’t do that. The judgment required to do that seems to be an unintellectual no-fly zone for the industry writ large. I’m surely not suggesting that there is a conspiracy to intentionally obscure relevant disclosure. While a cynic might wonder, to me it’s just a symptom of our approach to these documents where more is always better, length and wordiness is a positive (and again, of course, the state of our securities laws enables these choices).
With indifference to the quantum of risk, it’s not just a disease of the disclosure in securitization documents, it infects all our documents. It affects how we draft covenants, how we draft reps, and how we draft those endlessly mechanistic provisions dealing with everything from insurance, property management, leasing and the like. Consider our mortgage finance documents now running well over 100 pages and full of complex and endless covenants, reps and mechanics. I get it (and certainly I’ve drafted it), but honestly, we need some perspective here. We cannot prescriptively address everything that might happen to such a complex asset as a commercial property over a multi-year timeframe. (Most of us fully remember the End of the World clause and perhaps still pine that it didn’t make it regularly into our documents.) As we draft these documents, we should take a moment to remember the reality that it’s extraordinarily rare to foreclose out a borrower for anything other than a monetary default. Now I’m not suggesting we simplify our documents to a one sentence saying, “Pay me on time or I’ll take your collateral,” but the reality of how our legal documents are enforced should to some extent inform our drafting. We should take a moment to exercise common sense about what actually needs to be prescribed in these document and what could be delegated to the judgment of the parties.
Am I shouting down a well here? I suspect I am.
Nonetheless, it would be a good thing if we could, in a common sense sort of way, increase our commitment to understandability and simplicity. Make narrative clarity the touchstone of our documents. Make the principal behind the words clear and embrace the notion that judgment is an important part of mortgage finance and securitization. Embrace standardization. Let’s face it, at the end of the day all mortgages sort of look like mortgages and all securitization disclosure documents sort of securitization disclosure documents. These documents share a great deal of DNA, probably more than pigs and people and frankly, we’re just about the same with a sufficient remove. Embrace standardization where we can. Risk factors that would embarrass Captain Obvious should be deleted. Remember there are questions to which there are no finite legal answers. Recognize that when you draft. Get a deal done more quickly and efficiently. They actually might understand what the documents say. That can’t be bad, can it?
The business folks could help here. What’s a business person to do? Well, read the documents. If you don’t understand what’s being said, make the lawyers fix it. Tell the lawyers to stop making non-essential ping-pong edits (those famous thats to whichs). Ask why something is in the document. If it doesn’t seem terribly critical to the transaction, consider its deletion.
As a disclosure against interests, this might significantly reduce legal fees as the lawyers get better managed to insure they don’t wander off into a place where length is a virtue, narrative understandability almost a form of betrayal and the pursuit of more and more mechanistic precision is always an unalloyed good. Better documentation would make transactions work better and it would be cheaper.
Just saying.