A new study found that some litigation funders charged their clients more than 60 percent in yearly interest on some loans and earned even more on loans to plaintiffs who had already agreed to settle their cases. The new study, conducted by three law professors, looked at thousands of actual case files, according to a report in Legal Newsline.
“We believe lawmakers should regulate these contracts, banning any unnecessarily complicated provisions and requiring that the effective interest rate and total amount due after every one-month period be straightforwardly disclosed in a standardized format,” the authors wrote.
The study, “The Anatomy of Consumer Legal Funding," reveals how lenders take advantage of exemptions from usury laws in most states to charge rates that are much higher than other forms of credit such as home-equity loans or credit cards.
“While some may argue that the risks faced by the Funder justify making a median gross profit of 55-60% annually in pre-settlement cases, the same justification does not exist for post-settlement cases,” the authors wrote. "Because the rate of default and eventual haircuts in these cases is very low -- which means that the non-recourse advances on paper are not non-recourse on the ground -- we see no reason why funding in such cases should not also be subject to usury laws.”