As states regulate cash advances to plaintiffs, litigation funders cheer

June 29, 2016

(Reuters) – On Friday, Vermont and Indiana will begin regulating the business of advancing cash to plaintiffs in personal injury litigation, joining six other states that since 2008 have enacted laws intended to shield consumers from predatory litigation funders.

No one is celebrating that development more loudly than litigation funders. The Alliance for Responsible Consumer Legal Funding — a trade group representing about half of the established businesses in the pre-settlement funding industry — actually put out a press release hailing the new strictures for its members, describing them as “consumer protections.” (The new rules in Vermont and Indiana include notice and disclosure provisions, standardized contract language, and bans on attorney referral fees.)

“Legislation has been driven by the industry,” said Eric Schuller, president of the trade group and director of government affairs at Oasis Financial. “We saw the writing on the wall, that regulation of financial products was coming down the pike.”

Schuller likes to tell a story about a hearing before lawmakers in Nebraska, the second state, after Ohio, to pass legislation governing pre-settlement funding. The first question he faced, according to Schuller, was laced with incredulity. “I was asked, ‘Let me get this straight — you are an industry that wants to be regulated?'” Schuller said. His answer, to Nebraska legislators and other state lawmakers, is yes — as long as the industry has a chance to inform the process.

Funders want to avoid interest rate caps, whether they are set directly or indirectly by defining pre-settlement advances to plaintiffs as loans subject to state usury laws. So far, the consumer litigation funding industry has enjoyed great success in persuading state legislators that its advances are not loans. The new Indiana law, for instance, refers to “civil proceeding advance payment transactions.” Vermont’s rather cumbersome definition of the product is “a nonrecourse transaction in which a company purchases and a consumer assigns to the company a contingent right to receive an amount of the potential net proceeds of a settlement or judgment obtained from the consumer’s legal claim.” (Colorado’s Supreme Court took a different view, ruling in the 2015 decision Oasis v. Coffman that pre-settlement advances are loans.)

Despite the industry’s lobbying, two states, Tennessee and Arkansas, have adopted caps on the interest rates pre-settlement funders can charge consumers. According to Schuller, Arkansas’ 17 percent cap means funders, whose cost of capital can be 25 percent, cannot afford to do business in the state.

But responsible pre-settlement funders, Schuller said, welcome the licensing, registration and reporting requirements states have imposed on the industry. (In addition to the states I’ve already mentioned, Maine and Oklahoma have also regulated pre-settlement funding.) Vermont agencies prepared a report last year that offers a good analysis of the state laws already enacted; the National Conference of State Legislatures tracks proposed legislation in additional states.

Strangely enough, the U.S. Chamber of Commerce’s Institute for Legal Reform — which regards pre-settlement advances as usurious loans that ought to be banned — told me Wednesday that it also supports the new Vermont and Indiana regulations, though obviously not for the same reasons as the funding industry. ILR spokesman Bryan Quigley pointed out that Indiana set a cap on interest rates, albeit a high one, and that the Vermont law contemplates a cap.

Quigley’s group is concerned, however, that as more states pass laws backed by the industry, pre-settlement funding will become increasingly prevalent. “They are running around the country ‘lobbying’ to put a frame of legitimacy on their business,” he said. “The industry is trying to establish favorable precedent they can take around to other states.”

(This post has been corrected. An earlier version incorrectly reported that Tennessee has a 17 percent interest rate cap. The cap is in Arkansas. It also misspelled Bryan Quigley’s first name.)

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