The cash-now promise of lawsuit loans under fire

Lawsuit loans — cash advances given to lawsuit filers before a case is settled — are the latest fast-growing, high-fee lending industry to draw controversy and attempts at regulation.

 “Receive Cash in one day!” “Need cash now? Get an advance for your pending lawsuit.” “For Prosecute Cases, Lawsuit Loans.”

 You have to pay a credit card bill that comes attached to alluringly glazed “easy checks.” You are tempted to apply for tax refund loans. For payday loans, you’re bombarded with television commercials.

Now, a relative newbie to this list of “fast cash” borrowing enticements is beginning to hit critical mass, and it suddenly is attracting a high level of attention from the state council.

It is called a “lawsuit loan” or, in case you are involved in that business, “lawsuit funding.” Regardless of the label, it is cash loaned to plaintiffs awaiting acumen or settlements in civil litigation, most often personal injury cases such as vehicle accidents, good liability issues, slips, and falls, and so on.

It is a rapidly growing — if still little known — financial phenomenon, currently accounts for an estimated $100 million in business every year. Plaintiff lawsuit funding began around 1997, according to an industry group.

Lawsuit loans can help some people, particularly those in dire financial straits, but they are controversial and politically charged. To control the burgeoning industry, at least 20 bills have been registered in state legislatures since January 2013. Lobbyists pro and con are waging pitched battles this year in Illinois, Indiana, Missouri, Texas, and at least seven states more.

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If you’re a borrower, they can be astonishingly expensive. Some lawsuit loan recipients find themselves paying annual interest rates over 100%.

“The lawsuit lenders charge too much interest rates on these loans, often more than 100 % annually,” said Justin Hakes, a spokesman for the U.S. Chamber Institute for Legal Reform, which represents business interests and serves as a counterweight to groups representing plaintiff trial lawyers.

“Even when the consumer ‘wins’ or settles the case, he or she often recovers no money because the entire amount of the award or settlement goes to pay the plaintiff’s attorneys or to repay the lawsuit lender,” Hakes said.

The lawsuit funding industry representative acknowledges that the rate of interest, which they prefer to name “funding fees,” is high. They say this is necessary as they are taking much risk. The mendicants tend to have miserable credit ratings, few other assets, and one great advantage when it comes to litigation loans: If the borrower loses the filed case, he or she never has to return the loaned amount.

“As with us, we are returned with our money back if enough funds are available from the settlement,” said Eric Schuller, director of government affairs for Oasis Legal Finance, based in the Chicago area and one of the nation’s most active legal financing firms.

“In most instances, the attorney is paid first, then any other medical and mechanical liens that are claimed,” Schuller said. “Also, there may be statutory liens like child support on the claim. Then, if there is enough remained to pay us, we get our money at least priority. We never chase a client after the fact if there are not sufficient funds available to repay us.”

How lawsuit funding works

Here’s how it works

The money deprived plaintiff calls a toll-free number or fills out an application via an online system. The firms are easy to find. Many advertise on television and host catchy websites. “America’s Premier Funding Source,” claims Cash4Cases. “Providing Cash to Plaintiffs NOW!” says Lawsuit Funding Solutions. “No credit or work history needed. HablamosEspanol” offers USA Litigation Loans.

The lawsuit funding firm then reaches the applicant and his or her attorney, assesses the underlying case, and believes that the plaintiff-applicant will prevail, and offers the cash. Most borrowers end up with a few thousand dollars; however, few might receive tens of thousands of dollars. It all depends on the case and the prospects of winning a case of judgment or settlement.

The industry and its representatives say they are performing a public service. Over 60 percent of these mendicants use the funds, at least partially, to avoid mortgage foreclosures or eviction from their homes, according to one industry study.

“We aid people waiting for a settlement or a judgment, people who need to make ends meet as they stay for a fair outcome of their case,” said Kelly Gilroy, executive director of the American Legal Finance Association, which represents 31 litigation funding firms.

“It’s set for living expenditures,” she said. “Instead of legal expenses. Most of these people don’t require this for legal expenditures because their attorneys have opted for the case for stash fees. This is just some gas for them to keep them struggling.”

Level the playing field

Given the glacial pace of some civil court proceedings and settlement negotiations, these loans help needy plaintiffs level the playing field with defendants and resource-laden insurance companies, according to Gilroy, Schuller, and other industry figures.

“More than 85% of the funds are provided to consumers for immediate household needs, including the mortgage, rent, car payments, and food,” said Schuller, the officer of Oasis Legal Finance. “It is a way to help them survive until they wait for their legal claim’s outcome.

“These funds allow consumers to find a just and fair settlement instead of pennies on the dollar,” he said. “We support a consumer the ability not to have to decide [between] a gauge and buying food or making payments of the electric bill.”

Representatives of insurance firms and other businesses that often appear as defendants offer a different view in civil cases. They say these loans or funds allow plaintiffs and their prosecute to easily take time in their cases, delaying outcomes and causing courthouse logjams.

According to the lawsuit lenders, litigation funding is intended for the forlorn, which necessarily means this field is designed to prey on the most vulnerable.
“Logic dominate and experience depicts that plaintiffs are less likely to accept enough settlement offers if they have to make payment not only their attorneys and costs but also the litigation financing company,” said Matt Fullenbaum, director of legislation for the American Tort Reform Association, a Washington, D.C., group that represents companies, business associations, nonprofit groups and those often find themselves on the contrary of lawsuits which personal injury lawyers have filed.

“The lawsuit lenders concede that litigation funding is meant for the miserable, which necessarily means this field is designed to prey on the most vulnerable,” Fellenbaum said.

High rates … or are they fees?

Which brings us to interest rates. Virtually no commercialization sponsored by these corporations offers bold mention of interest rates (again, usually called “funding fees” for a reason we will get to shortly). Many firms go far to obscure the rates.

The reason: Many charge 2-4%, plus fees. That doesn’t sound so bad.

But the thing is, that’s 2 percent to 4 percent per month and compounded. So, for a one-year $1,000 loan, you could end up paying $1,601.03 (plus fees), which yields a 60% yearly percentage rate. If your case and your loan persist for two years, your $1,000 loan at 4 percent per month now has a payoff of $2,563.50.

“We don’t see credit,” Gilroy said. “No matter even if you have a bad credit rating, it will make no effect. Also, we don’t even keep an employment check, and there’s no collateral. This is a risk-bearing product.

“This is comparatively an expensive product because other financial products come with a guarantee that they’ll get something in return, and our firm does not have this kind of guarantee,” she said.

‘Non-recourse’ source of money

In legalese, the term is “non-recourse.” In case the plaintiff-applicant loses, the lender has no other means to get back the given loan amount.

 This product is not cheap and inexpensive,” Schuller said. “It is a highly risky product with these types of transactions.

“We are the last option for people, and as such, we have a high loss rate,” he said. “For example, we get less than our contracted money, in 47% of the cases we fund. And 22% of the cases, we receive less than the principal back, while 10 percent of the time, we get zero back.

“Now, what funding department would survive when 47 percent of the cases they get back less than what they thought they would think of? Not enough.”

Generally speaking, a loan taker is not compelled to repay more money than he or she receives from the ultimate decision or settlement. Still, industry critics say that some borrowers end up with nothing much more than the borrowed money’s temporary use.
“Lawsuit lending abuses are, unfortunately, common,” said Hakes, spokesman for the U.S. Chamber group.

The American Tort Reform Association agreed.

Not really loans?

“Litigation financing firms charge their customer’s exorbitant fees,” Fellenbaum said. “Such fees are taken as usury in most contexts, but because the litigation financing company provides a non-recourse option. These transactions are not confused with banking rules, regulations, and lending laws.”

Lawsuit funding incorporation is working to keep it maintained. It explains their abhorrence to terms like “loans,” “lender,” and “interest rates.” It is crucial to differentiate this form of funding from what people generally name as loans.

“The lawsuit lending group goes far to let the public know that consumer lawsuit loans are not really loans but are instead ‘non-recourse financing,’ and this is how, in many states, lawsuit lenders have managed to skirt usury and fair-lending laws,” Hakes said. “But their advertisements sing a different tune. A simple Web search using the term ‘lawsuit loan’ turns up a flurry of paid advertisements with headlines like ‘lawsuit loans NOW!’ ”

State legislative battles

In turn, that describes the step in many state legislatures.

The lawsuit financing company already has successfully convinced lawmakers in Maine, Ohio, and Nebraska to essentially sanction and modestly regulate lawsuit funding while keeping it distinct from rate of interest and other limitations enforced on regular loans.

Simultaneously, the lawsuit funding industry is fighting a multi-front campaign against proposals to ban or significantly limit these transactions. In most cases written with the assistance of the U.S. Chamber or other pro-business groups, such bills have been filed this year in Iowa, Illinois, Indiana, Kansas, Missouri, Mississippi, Nevada, Oklahoma, Rhode Island, Tennessee, and Texas.

In Texas, for instance, Rep. Doug Miller, R-New Braunfels, filed a bill that would define such funding as “loans,” cap the interest rate at 10 percent and require disclosure of such agreements to all parties in a lawsuit. In private life, Miller and his Mrs. run an insurance company.

“This is a troubling trend that we’ve seen growth across this country — the impact of predator lawsuit lending,” Miller told reporters after filing his bill. “Right now, in Texas and states across this country, some lenders are allowed to prey on consumers, specifically plaintiffs in lawsuits, offering them fast and sometimes easy cash. However, sometimes this money comes with serious strings attached, and it comes with virtually no recourse for the consumer and no regulatory oversight.”

So, as this plays itself out around the country, potential borrowers are largely on their own, as so often is the case.

Words of advice

Advice from those against lawsuit loans:

“At a minimum, litigation funding companies should be implemented with the same banking laws as traditional lenders,” Fellenbaum said. “However, ATRA recommends that lawmakers ban the implementation of third-party financing of litigation altogether. We would suggest that anyone considering a lawsuit loan first must consult with their attorney.”

Advice from the lawsuit funding industry

“If you can go to a friend or relative to get some financial help, do so,” Schuller said. “But if you do not have that option, consumer legal funding is a chance for you to make your survival easy until your claim settles. Hence, you do not have to drag yourselves in front of the opposite party and get deprived of a single penny.

“But, when you do, make sure that the company that you are working with clearly discloses the conditions of the contract, and then you are completely aware of what it is you are signing, and your advocate is clear regarding the transaction,” he said.

“This is literally an once-in-a-lifetime product. You need to make sure of your safety. Connect with a company that will elaborate everything to you in advance.”

Lakisha Davis

Lakisha Davis is a 20-year-old business studies student who enjoys watching tv shows, stealing candy from babies, and listening to the radio. She is creative and friendly, but can also be very boring and a bit selfish.

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