Recent Regulation of Lawsuit Loans

Lawsuit loans, also known as settlement loans or litigation finance, have grown in popularity across the United States because they enable plaintiffs to fund and fight lawsuits when they are in need of potential damages awards who might otherwise be forced to settle for small sums that will not cover the necessary medical bills and lost wages when they are injured. These loans are not traditional loans, because they typically must be repaid only when the plaintiff prevails in their lawsuit and is awarded damages, whereas traditional loans must always be paid back. However, they do come with some of the trappings of traditional loans. Lawsuit loans also require the payment of interest and fees. Due to the hybrid nature of lawsuit loans, several states have enacted recent legislation to regulate the lawsuit loan industry.

There are several types of lawsuit loan regulation. The most prominent is licensing, followed by caps on interest rates and fees charged. In Illinois, the Non-Recourse Consumer Funding Lawsuit Act was passed in 2015. It provides that all lawsuit loan companies must obtain a license from the state and imposes a cap of $40,000 per consumer per legal claim on the amount that can be advanced by a loan company. In addition, the interest and other fees charged to the consumer cannot exceed 80% of the total loan amount advanced. To consumer advocates, the bill did not go far enough to limit fees, as 80% of the total is still high. Nevada's 2019 bill regulating lawsuit loans, entitled SB 432, exemplifies further effort made elsewhere; it allows for a much higher loan amount per consumer, but halves the allowable interest charge.

According to the Nevada state government's published guidance for lawsuit loan companies and potential consumers, any person or company wishing to engage in the business of lawsuit loans must apply for and obtain a state license prior to doing so. If a loan is made, it cannot exceed $500,000 per consumer, per legal claim they have made. There can be no refinancing, rollover, or consolidation after 180 days that would increase the interest and fees due on the principal balance of the loan, and the total interest and fees charged to the consumer cannot exceed 40% annually of the total principal advanced to the consumer. This is similar to the 40% cap in Nevada on regular business loans, but prior to the passage of SB 432, since lawsuit loans were not treated the same as regular loans, interest and fees could accrue to an amount in excess of the original sum advanced to the consumer. The cap is similar to the 36% allowed in Indiana. The intent of the bill is to curb the practice of extending loans with exorbitant interest rates, since they do not benefit the consumer.

Other legislation, such as Oklahoma's Senate Bill 1016 passed in 2013, made similar attempts to regulate consumer litigation funding, but did not go so far as to implement strict fee caps. Instead, the legislation focuses on the ethical conduct required of companies in the industry. In Oklahoma, litigation funding companies must register with the state and obtain a license to engage in the lawsuit loan business. Funding companies cannot participate in decisions related to the consumer's litigation or pay referral fees to lawyers. These are important ethical considerations; to have a funding company unduly influence an attorney because of payments made directly to the attorney is in direct violation of the legal code of ethics called the Rules of Professional Responsibility that attorneys must follow across the country. An industry association for consumer litigation funding, the American Legal Finance Association (ALFA), includes a provision in its code of conduct prohibiting members from attempting to influence the litigation in recognition of this conflict of interest, demonstrating the necessity recognized on all sides.

At this time, Florida is next in line to join the states that have already passed consumer litigation funding legislation. The Florida bill would cap interest rates at 30% and set a cap on total other fees and charges of $500. Like other state bills, it would prohibit lawsuit loan companies from participating in the litigation process, and require the company to obtain a license from and file a bond with the state. What makes the Florida bill different is that it combines the key tenets from each of the other states' prior bills, in an attempt to cover each concern posed by consumer advocates. If the bill passes, it will go into effect on July 1, 2020.

As indicated above, ALFA and companion organization Alliance for Responsible Consumer Legal Funding (ARC) impose strict ethical obligations on their members. However, membership ALFA or ARC is not required of all lawsuit loan companies. While consumers should do their due diligence in evaluating potential lawsuit loan companies, it can be difficult to tell which companies belong to an appropriate umbrella organization and which do not, particularly for consumers unfamiliar with the process. Thus, state legislative codification of ethical requirements is essential to enact a uniform standard. Ideally, legislatures would take into account the needs of consumers alongside the business concerns facing lawsuit loan companies. For example, when it comes to interest rate caps, the 30 to 40 percent range makes sense because companies cannot usually provide loans and recoup their costs without at least a 20 to 25 percent rate; in states that passed lower caps, such as 17% in Arkansas, it effectively took the option of a lawsuit loan off the table. However, rates in excess of 50 percent might mean that consumer take home nothing after their attorney's fees and the loan company are paid. Thus, a middle range works best for both consumer and consumer litigation funding company. If such an approach is taken to other concerns, it will provide for regulation and understanding beneficial to both consumers and lawsuit loan companies.

If you're a plaintiff in an active litigation and seeking litigation finance and reside in a state which have recently adopted state regulations and/or compliance, do your research carefully. You will no doubt find Tribeca Capital Group's lawsuit loan division; Tribeca Lawsuit Loans on the short-list.

Applying for a legal funding with Tribeca is quick and easy, you can visit our website and you can chat or call one of our knowledgeable representatives or just fill out the form and we will do the rest. So, if you're injured at no fault of your own and having financial problems, then call Tribeca Lawsuit Loans today at 866-388-2288. One of our friendly and courteous staff will explain the process and help you get the funds you need.

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