April 24, 2013
Cash-now Promise of Lawsuit Loans Under Fire
"Get Cash in 24 hours!" "Need cash now? Get a cash advance for your pending lawsuit." "Lawsuit Loans for Lawsuit Cases."
Your credit card bill already comes attached to alluringly blank "convenience checks." Your tax preparer tempts you to apply for tax refund loans. You're bombarded with television commercials for payday loans.
Now, a relative newcomer to this list of "fast cash" borrowing enticements is beginning to hit critical mass and it suddenly is attracting a high degree of attention from state legislatures.
It is called a "lawsuit loan" or, if you are in that business, "lawsuit funding." Regardless of the label, it is cash loaned to plaintiffs awaiting judgments or settlements in civil lawsuits, most often personal injury cases such as auto accidents, product liability issues, slips and falls, and so on.
It is a rapidly growing -- if still little known -- financial phenomenon, one that 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 prove helpful to some people, particularly those who are in dire financial straits, but they are controversial and politically charged. Since January 2013, at least 20 bills have been filed in state legislatures to regulate the burgeoning industry. Lobbyists pro and con are waging pitched battles this year in the legislatures of Illinois, Indiana, Missouri, Texas and at least seven other states.
If you're a borrower, they can be astonishingly expensive. Some lawsuit loan borrowers find themselves paying annual interest rates in excess of 100%.
"The lawsuit lenders charge sky-high 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.
Representatives of the lawsuit funding industry acknowledge that interest rates, which they prefer to call "funding fees," are high. They say this is necessary because they are taking most of the risk. The borrowers tend to have poor credit ratings, few other resources and one great advantage when it comes to lawsuit loans: If the borrower loses the underlying court case, he or she never has to repay the loan.
"In our case, we are only paid back when and if there are sufficient funds to repay us 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 cases, the attorney gets paid first, then any other liens on the claim, such as medical and mechanical liens," Schuller said. "Also, there may be statutory liens on the claim, such as child support. Then and only then, if there is enough to pay us, we get our money. We never go after a consumer after the fact if there are not sufficient funds to repay us."
How lawsuit funding works
Here's how it works:
The cash-strapped plaintiff calls a toll-free number or fills out an online application. The firms are easy to find. Many advertise on television and host attractive websites. "America's Premier Funding Source," claims Cash4Cases. "Providing Cash to Plaintiffs NOW!" says Lawsuit Funding Solutions. "No credit or work history needed. Hablamos Espanol," offers USA Lawsuit Loans.
The lawsuit funding firm then contacts the applicant and his or her attorney, assesses the underlying case and, if it believes that the plaintiff-applicant will prevail, offers the cash. Most borrowers end up with a few thousand dollars, though some can receive tens of thousands of dollars. It all depends on the case and the prospects of winning a judgment or settlement.
The industry and its representatives say they are performing a public service. More than 60% of these borrowers use the funds, at least partially, to avoid mortgage foreclosures or eviction from their homes, according to one industry study.
"We help people who are waiting for a settlement or a judgment, people who need to make ends meet as they wait for a fair outcome of their case," said Kelly Gilroy, executive director of the American Legal Finance Association, which represents 31 lawsuit funding companies.
"It's for living expenses," she said. "It's not for legal expenses. Frankly, most of these people don't need this for legal expenses because their attorneys have taken the case for contingency fees. This is just some gas for them, so they can stay in the game."
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 resource-laden insurance companies and other defendants, according to Gilroy, Schuller and other industry figures.
"Over 85% of the funds we give to consumers go to pay immediate household needs, such as the mortgage, rent, car payments and putting food on the table," said Schuller, the officer of Oasis Legal Finance. "It is used to keep them above water until they wait for the outcome of their legal claim.
"These funds allow consumers to get a just and fair settlement instead of pennies on the dollar," he said. "We allow a consumer the ability to not have to decide [between] a lowball offer and putting food on the table or paying the electric bill."
Representatives of insurance companies and other businesses that often find themselves cited as defendants in civil cases offer a different view. They say these loans encourage plaintiffs and their lawyers to needlessly prolong their cases, delaying outcomes and causing courthouse logjams.
"Logic dictates and experience shows that plaintiffs are less likely to accept reasonable settlement offers if they have to pay not only their attorneys and costs, but also the litigation funding 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 others that sometimes find themselves on the other side of lawsuits filed by personal injury lawyers.
"The lawsuit lenders acknowledge that litigation funding is intended for the desperate, which necessarily means this industry is designed to prey on the most vulnerable," Fullenbaum said.
High rates ... or are they fees?
Which brings us to interest rates. Virtually no advertising sponsored by these companies offers prominent mention of interest rates (again, usually called "funding fees" for a reason we will get to shortly) and many firms go to great lengths to obscure the rates.
The reason: Many charge 2% to 4%, plus fees. That doesn't sound so bad, right?
But the thing is, that's 2% to 4% 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% annual percentage rate. If your case and your loan drag on for two years, your $1,000 loan at 4% per month now has a payoff of $2,563.50.
"We don't check credit," Gilroy said. "If you have a bad credit rating, it doesn't affect this product. We don't do employment checks and there's no collateral. This is a very risky product.
"This is a higher cost product than some other things because other financial products have a guarantee that they'll get something back and our companies do not have that guarantee," she said.
'Non-recourse' source of money
In legalese, the term is "non-recourse." This means if the plaintiff-applicant loses the case, the lender has no other way to recover the loan.
"Is this product cheap and inexpensive? No," Schuller said. "Is there a high risk associated with these types of transactions? Yes.
"We are the last resort for people and as such we have a high loss rate," he said. "As an example, in 47% of the cases we fund, we get less than our contracted amount. 22% of the time, we get less than the principal back, and 10% of the time, we get zero back.
"Now what financial institution would survive when 47% of the time they get less than what they thought they would get back? Not many."
Generally speaking, a borrower is not compelled to repay more money than he or she receives from the ultimate settlement or judgment, but industry critics say that some borrowers end up with nothing much more than the temporary use of the borrowed money.
"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 funding companies charge their customers exorbitant fees," Fullenbaum said. "Such fees are considered usury in most contexts, but because the litigation funding company provides a non-recourse feature, they maintain that these transactions are not subject to banking rules, regulations and lending laws."
Lawsuit funding firms are working to keep it that way. This explains their aversion to terms like "loans," "lender" and "interest rates." They say it is important to distinguish this form of funding from what most people generally regard as loans.
"The lawsuit lending industry goes to great lengths to tell the public 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 explains the action in many state legislatures.
The lawsuit funding industry already has successfully convinced lawmakers in Maine, Ohio and Nebraska to essentially sanction and modestly regulate lawsuit funding, while keeping it distinct from interest rate and other limitations enforced on regular loans.
At the same time, the lawsuit funding industry is fighting a multifront campaign against proposals to ban or significantly restrict these transactions. Such bills, in most cases written with the assistance of the U.S. Chamber or other pro-business groups, have been filed this year in Iowa, Illinois, Indiana, Kansas, Missouri, Mississippi, Nevada, Oklahoma, Rhode Island, Tennessee and Texas. (See chart.)
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% and require disclosure of such agreements to all parties in a lawsuit. In private life, Miller and his wife run an insurance agency.
"This is a troubling trend that we've seen growing across this country -- the impact of predator lawsuit lending," Miller told reporters after filing his bill. "Right now, in Texas and in 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 opposed to lawsuit loans:
"At a minimum, litigation funding companies should be subject to the same banking laws as traditional lenders," Fullenbaum said. "However, ATRA recommends that lawmakers ban the practice of third-party financing of litigation altogether. We would recommend that anyone considering a lawsuit loan first 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 an opportunity for you to survive until your claim settles so you do not have to take pennies on the dollar and get shortchanged.
"But, when you do, make sure that the company that you are working with clearly discloses the terms of the contract and they you fully understand what it is you are signing and your attorney fully knows about the transaction," he said.
"This is typically a once-in-a-lifetime product and you need to make sure that you are protected. Only deal with a firm that will explain everything to you upfront."
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