Lawsuit Lending

Lawsuit lending is a financial practice that provides “up-front” cash to individual plaintiffs to cover immediate living or medical expenses during litigation. These loans are typically attached to sky-high interest rates, fees, and charges – as much as 200 percent – that can leave borrowers with little to no recovery. In addition, lawsuit lending prolongs litigation and distorts the fundamental nature of the civil justice system.

In lawsuit lending, repayment is contingent on the plaintiff recovering some sort of monetary compensation, either through a settlement or verdict. In fact, the lawsuit lending industry goes to great lengths to tell the public that consumer lawsuit loans are not really loans at all, but are instead “nonrecourse financing.” This rationale is how lawsuit lenders have managed to avoid regulation in many states. Read More...

Unfortunately, lawsuit lending is far from harmless. It hurts consumers while undermining the integrity of the justice system.

The practice hurts consumers by eating into their recoveries in litigation. The New York Law Journal reported on the case of a Brooklyn man who borrowed $27,000 from a lawsuit lender for a slip-and-fall lawsuit. His case was settled five years later, but the lender demanded $100,000 – two-thirds of the total settlement and more than three times the amount of the original loan. To add insult to injury, the plaintiff’s lawyers pocketed an additional one-third of the settlement – leaving the plaintiff with just $111 out of a $150,000 settlement. In another case reported by the New York Times, a plaintiff actually lost money. After winning nearly $170,000 at trial, the plaintiff’s lender claimed it was owed $221,000 – an amount 30 percent larger than the total recovery.

Moreover, lawsuit lending distorts the civil justice process by altering a plaintiff’s decision making process. For example, a plaintiff may reject a reasonable settlement offer for the chance of obtaining a higher verdict in court because they will need to pay off a high-interest loan. This choice jeopardizes the chance of any recovery, as litigation could result in a lower than expected verdict or a judgment in favor of the defendant. It also increases costs for defendants, who are forced to endure prolonged and costlier litigation.

Finally, lawsuit lending undermines the integrity of the civil justice system. By inserting a third party into the case, lawsuit lending compromises the interests of litigants – upsetting a primary bedrock of the justice system. It also creates conflicts of interests for plaintiffs’ lawyers, who may develop referral relationships with certain lawsuit lenders and be expected to “steer” clients to those lenders.

Reforms

Lawsuit lending should be regulated like any other consumer financial product. In November 2015, the Colorado State Supreme Court unanimously decided that lawsuit lending is subject to the state's existing consumer lending law. The ruling established an important legal precedent that lawsuit lenders must play by the same rules as other lenders in the state. Several bills have also been introduced in state legislatures to do exactly that. Oklahoma became the first state to pass such legislation in 2013. In 2014 Tennessee passed a law that provides meaningful regulation to lawsuit lending, and in 2015, Arkansas followed suit. Indiana joined the community of states regulating this product under state consumer lending laws in 2016. 

Suggested Resources

Research

All Results for Lawsuit Lending

  1. 101 Ways To Improve State Legal Systems

    September 13, 2012 | Research

    "101 Ways to Improve State Legal Systems in 2013 & Beyond" provides policymakers with a compilation of some of the many avenues available to foster a sound legal system that promotes states' economies. The reforms are organized into five areas. The first section highlights five reforms that have gained momentum and should be of particular interest to state legislators. The report then considers fair and effective measures that would improve the litigation process, improve product liability law, promote rational liability rules, and rein in excessive damage awards. While this report presents proposals for legal reform options in a conceptual manner, it directs readers to recently enacted laws that show how legislators can move the proposals described in this guide from theory into practice.... Read More