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Lawsuit Lenders

The Boston Globe ran an article that led me to the New York Times, where the full article was originally published by Binyamin Appelbaum on the business and abuses of lawsuit lenders. The article is part of a series on the topic, which has been a collaboration between the Times and the Center for Public Integrity, a non-partisan, journalism non-profit in Washington, D.C. (here is a link for their investigation, "Betting on Justice: Borrowing to Sue.") The problem is that the companies that lend to individuals who are involved in lawsuits but find their daily expenses require a cash infusion are not regulated much at all. They often charge interest rates that would be usurious in any other loan setting (sometimes 99-100% compounded interest in the first year). And they do very little to inform the borrower of the cost of the loan.

The individuals who take these loans may feel they have few options if they want to maintain their suit. The Center for Public Integrity reports that a civil lawsuit may cost between $15,000 and $100,000, depending on whether there is complex scientific evidence to be presented. The costs of the suit, added to living expenses and the costs incurred by treatment of injury or illness exceed most individuals' capability to pay. And people do not understand what they are signing up for. Often the details of the contract are hidden in fine print or vague, or minimized by the loan officer. These may amount to contracts of adhesion, where the individual has very little negotiating power or feels they have very little ability to shop for alternative sources. Advertisements emphasize the ease and speed of the loan, and loan officers are instructed to never mention the cost of the loan unless directly asked. Some of the stories reported misleading information about the interest cost on the contracts.

The lawsuit lenders fight against being classified as traditional lenders, according to these articles, because they point out that, if the litigator loses the suit, they are not required to repay the loan. They say they take more of a risk, and should be able to charge higher rates accordingly. But there is a growing backlash among the judiciary and legislators against the industry.

James N. Giordano, chief executive of Cambridge Management Group, a New Jersey lender, compared the deals to venture capital. ?It?s as if your buddy came up to you and said, ?I?m starting a business, I need $25,000 ? and, by the way, you may never get your money back,? ? he said.

Lawsuit lenders, however, are much better than venture firms at picking winners. Lenders pay lawyers to screen cases, looking for slam-dunks like Vioxx. Three of the largest companies each estimated that they rejected about 70 percent of applications. Oasis said it had approved about 80,000 of 250,000 applications in recent years. To further limit losses, companies say they generally lend no more than 10 or 20 percent of the amount they expect the borrower to win.

Companies say they still lose money in a significant share of cases, from 5 to 20 percent, although there is no way to verify those numbers.

But courts in several states ? including Michigan, New York and North Carolina ? have ruled in recent years that individual borrowers did not need to repay lawsuit loans, finding that the apparent risks did not justify the outsize prices. The rulings have encouraged lenders to avoid judicial scrutiny. Dimitri Mishiev, who runs Alliance Claim Funding, another Brooklyn lender, said that while his prices were fair, he tried to invest only in cases he expected to be settled before trial. (snip)

The industry?s pursuit of regulation on its own terms began in Maine in 2007.

Sharon Anglin Treat, a lawyer and state legislator, had proposed a bill making clear that lawsuit lenders were subject to state consumer protection laws. She said she could not understand why the industry should be allowed to charge higher rates than other lenders. (Maine passed P.L. Ch. 394, ?An Act to Regulate Presettlement Lawsuit Funding." I hope you can get the link to work -- I am missing a plug-in.)

Oasis, LawCash and other companies persuaded other legislators to reverse the intent of the bill, instead making clear that the rules did not apply to lawsuit loans. Both Ms. Treat and Mr. Hirschfeld said the debate turned on the testimony of three Maine residents who had benefited from the loans. ?These are powerful companies that have lots of money, and they brought in people with these sob stories,? Ms. Treat said.

Supporters of lawsuit lending next turned its attention to Ohio, where the state?s Supreme Court had declared lawsuit lending illegal in 2003. This time, Mr. Hirschfeld said that the industry asked lawyers throughout the state for examples of clients who had suffered because they were not able to borrow money. Both chambers of the legislature voted unanimously in 2008 to legalize the loans. (see brief article here by attorney Mark Bello announcing in summer, 2009, Ohio House Bill 248 effective August 27, 2008, Ohio Revised Code § 1349.55)

Last year, Nebraska followed suit, passing a bill sponsored by State Senator Steve Lathrop, a trial lawyer.

?My own personal view of these groups is that I discourage clients from using them,? Mr. Lathrop said during the final debate. ?I tell them, go borrow from anybody you can before you have to use them.?

?But,? he concluded, ?the reality is, sometimes there?s no other place to turn.?

(from the N.Y Times article)

Full post as published by Out of the Jungle on January 17, 2011 (boomark / email).