St. Louis Record

Tuesday, February 25, 2020

Consumer litigation lending reform is on legislative agenda, uncertainty whether it will advance this session

Reform

By John Breslin | Jan 16, 2020

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JEFFERSON CITY - Third party funding that helps litigants during their legal actions is open to abuse, according to critics, but supporters believe it is a key resource for those with limited means to receive what they deserve.

Legislators in various parts of the country, including Missouri, have in recent years scrutinized the industry amid claims that consumers are being ripped off by high interest rates, which reduces the amount of money going to the individual who has been harmed in some way.

Critics seeking regulation say lenders prey upon individuals who are often under duress and forced to make bad decisions. 

One state, West Virginia, introduced a cap lower than annual credit card rates, which effectively killed the busines in the state, according to a representative for the industry.

Consumer litigation funding delivers money up front to individuals involved in lawsuits, which is paid back when a case concludes through settlement or verdict. Interest is charged, but the lender does not receive any money if the plaintiff loses the litigation or decides to give up the action. It is primarily aimed at low income litigants.

Opponents of the industry want it either banned or strictly regulated, including interest rate caps.

Representatives of the industry say they welcome regulation but that interest rate caps make it impossible for companies to make any profit. They also oppose the cash advances being described as loans, which would mean they are regulated under state usury laws.

The issue is on the legislative agenda of the Missouri Chamber of Commerce, but the business organization does not believe it will be a priority for lawmakers.

"Litigation lending activities are not well regulated in Missouri, leaving this part of our system wide open for abuse," Karen Buschmann, the chamber's vice president of marketing and communications, told the St. Louis Record.

"The Missouri Chamber supports legislation that would provide some level of consumer protection to this type of lending practice in Missouri," Buschmann added.

"Our current system has created an environment of jackpot justice. Litigation lending companies prey on Missouri’s most vulnerable citizens by promising immediate money in exchange for an interest in any future recovery.

"This practice inevitably increases the duration and expense of lawsuits and often leaves plaintiffs in worse financial shape than when they started.

But Eric Schuller, president of the Alliance for Responsible Consumer Legal Funding, which represents the industry, believes there is a great deal of misinformation about the practice.

"This is not about paying for legal fees but paying for a roof over the heads, food, keeping their lights on," Schuller told the St. Louis Record.

Schuller said business opposition to the industry stems more from attempting to short change people who do not have the means to fight an action rather than concern for the consumer.

"The reason is because they want to keep pay outs to the least amount as possible," Schuller said. "But the object of actions is to make people whole, not rich, but gets the settlement they deserve not one that is forced upon them."

Some critics claim people loaned money sometimes end up paying more to the lender than the total amount of the settlement.

But that situation is 100 percent impossible, Schuller argued. Individuals receive money up front and it is the lender who takes the monetary hit if the payout is not as large as anticipated.

The industry representative added, "Companies usually will lend 10 percent of what they think the award or settlement might be, to make sure the plaintiff has a meaningful amount at the back end."

Chamber spokersperson Buschmann said her organization does not have a specific proposal on the table for the comining session.

In the past there have been a couple of variations depending on what type of loans are being offered. "Some cover costs of litigation while others have covered additional expenses," Buschmann said.

"There were competing bills last year that offered various interest rates and had some other differences. Bills may get filed and have hearings, but probably not a top priority this year."

Schuller said his group is keeping an eye on the states but he is not aware of any pre-filed bills. Last year, West Virginia passed a law that caps interest rates at 18 percent APR.

"That eliminated the industry. Not a single company is registered in the state following the legislation," Schuller said, adding that at a top rate of 18 percent a company with 15 to 20 percent costs cannot make any money. In New York, legislation to cap rates stalled in the legislature. 

He cited Oklahoma, where legislators were intent on banning the practice until they sat down with consumer litigation lending representatives. A bill regulating the industry, including notice and disclosure provisions, was passed. 

"It is flourishing in the state and not a single complaint," Schuller said.

In a comprehensive study of the industry, "An Empirical Investigation of Third Party Consumer Litigation Funding," Ronen Avraham, Thomas Shelton Maxey professor in law at the University of Texas, and Professor Anthony J. Sebok of New York's Cardozo Law School, stated: "The data suggests that the median amount due to the funder reflects costs of about 101%, the median actual annual cost is approximately 44% of the amount funded, once one takes into account fees, defaults and haircuts."

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