One of the primary reasons why personal injury lawyers accept lawsuits on a contingency fee basis is because it allows all persons equal access to the court system for negligence lawsuits.  Attorneys’ specialized knowledge and skill comes with a cost.  And not every individual has the financial means to pursue a lawsuit all the way to trial.  Undoubtedly, if clients had to pre-pay legal fees, many potentially successful lawsuits would not be prosecuted simply because of the cost.

Contingency Fee Basics

In response to this reality (and perhaps to encourage the property and casualty insurance business), state bar associations allow for a contingency fee arrangement between lawyers and clients in certain types of cases.

Some of the advantages for clients are:

• No Recovery – No Fee
• The attorney has a stake in the outcome of the case.
• The attorney thus has an incentive to maximize the value of the lawsuit.

Of course, attorneys also benefit from an increase of business and the ability to apply his craft and trade.  And there are  more widespread benefits resulting from contingency fee arrangements between lawyers and clients.

One such benefit is that the contingency fee arrangement acts as a filter of cases with merit.  Since no attorney would willingly waste his time, energy and expenses pursuing a case that has little chance of winning, lawyers are naturally inclined to be more selective in their choice of clients.  The attorney then, acts as a filter for lawsuits without any real chance of recovery.

Secondly and as stated above, the arrangement also provides access to the court system for all citizens.  Persons who could otherwise not afford to pursue a claim are able to do so with little or no out of pocket funding.  Providing access to the courts is something any civilized nation would want to provide for the citizenry.

Finally, the emergence of widespread access to the courts, means that more and more individuals were led to purchase insurance coverage to manage the risk.  Widespread insurance coverage can be viewed as a social utility whose purpose is to make injured parties whole and safeguard the population against the potential for loss.

Lawsuit Funding Shares the Contingency

As stated above, if a client is represented by an attorney on a contingency basis, his fee is “contingent” on the outcome.  His pay is derived from the lawsuit’s monetary awards, usually in the form of a percentage of the proceeds.

If the case is unsuccessful, the attorney does not get paid.  In fact, a lost lawsuit produces an economic loss on the lawyer in the form of time and expertise.  Moreover, many attorneys will front costs in contingency fee cases.  Litigation costs might include filing fees, stenographers, expert retainers, printing and many others.  These costs vary from case to case but are nonetheless still value invested by the attorney or law firm.

Likewise, pre-settlement funding companies share in the contingency of lawsuits.  Just like the attorneys paying for filing fees or other costs, enterprises which advance cash to plaintiffs, advance those funds in anticipation of repayment at a later date.   Essentially, these entities have their compensation “contingent” on the outcome of the lawsuit.  If the case is unsuccessful, the lawsuit cash advance does not get repaid and the pre settlement funding company loses its capital.

Obviously, litigation costs are essential to a successful outcome of the lawsuit.  Costs such as rent payments, groceries, heating bills, electricity, water and a host of other expenses are essential to the day to day survival and/or comfort of the litigant himself.   Both expenditures have their purpose and repayment is contingent on the lawyers skill and the facts of the particular case.

Like any business, settlement advance companies conduct transactions to service a need and profit from the venture.  Fair Rate Funding, a leader in the lawsuit finance arena, is proud to serve the needs of our clients, and do so efficiently.

Thank you for your interest in the lawsuit funding business.

Lawsuit Loans are Limited to Small Percentage of Total Value

Probably the most glaring error is the idea that lawsuit funding contracts are written for the entire amount of the settlement.  The author writes:

“The loan is usually for the full value of the damages, regardless of liability. If liability is disputed, there is no opportunity to resolve the claim for anything less than full value in the spirit of compromise.”

This is simply untrue and I have written extensively about this in prior posts.  Indeed, lawsuit funding professionals go to great lengths to make sure this does not happen.  Understanding that settlement is in EVERYONE’s best interest, funding outfits limit the amount of money advanced against a lawsuit.  As a general rule, lawsuit loans are limited to 8%-12% of the subjective value of the case.  At today’s pre settlement funding rates, this leaves more than enough room for settlement.

To be fair, some lawsuit funding transactions, especially older advances, cases which encounter unforeseen difficulties, and/or if the case drags on longer than expected, can have repayment terms that would eat up a great deal of the case’s settlement value.  The author’s argument is that this situation is by design.  Yet this flies in the face of reason.  If a plaintiff does not settle, his counsel must either try the case or remove himself from the attorney client relationship.  Neither of these situations are desirable outcomes as far as pre settlement loan companies are concerned.

Lawsuit Funding Companies Do Not Get Involved in the Case

Another more disturbing claim is the idea lawsuit funding companies contact insurance adjusters directly to pester them or otherwise get updates on the status of a claim.  While I cannot speak for every person in the business of advancing money against lawsuits for profit, I can honestly state I have never heard of this type of communication happening – EVER.  In fact, and I have been in this business for many years, I cannot fathom why an adjuster take a call from an outside party such as a lawsuit funding outfit.

If this potential is really a concern, the fix is very easy to achieve – simply do not take the calls.  Making insurance companies out as victims is pretty ironic since the real victims are the plaintiffs who are waiting to be made whole while the claim/lawsuit process drags on.

Lawsuit Funding Encourages Fair Resolution

Next is the idea litigation finance encourages litigation.  The author writes:

“If a claimant can convince a lender to make a loan, then they have essentially already made their recovery and have no incentive to cooperate in the resolution of the claim. In fact, if they try the case and lose, they have still won because they have the loan proceeds and the lender has no source of recovery. The plaintiff thus has the incentive to role the dice at trial.”

Here the author simply offers more opinion as fact.  As stated above, only 10% of the estimated value of a personal injury case is advanced.  His argument falls well short of necessary experience since there is normally more than enough money to create an incentive to settle a claim provided there is a reasonable offer is presented. Further, pre settlement finance companies seek to protect their investment first and then look for a return on it.  Along those lines, forcing a client to trial results increases risk for the funding entity.

Surely, there are instances of an advance repayment amount exceeding the offer, but they are the exception rather than the rule.  When it does occur, parties often negotiate a compromise.  Lawsuit funding companies, like all investors, operate by the old Mark Twain quip, “I am more interested in the return OF my capital than a return ON my capital”.

“Public Policy to Encourage Settlement and Discourage Litigation – Courts historically and in almost all circumstances discourage litigation and resolution by trial and encourage litigation. Litigation finance does exactly the opposite. By creating a bar over which the case must settle, they give a big disincentive for plaintiffs to compromise, despite facts that might dictate otherwise. This public policy weighs heavily toward defendants discovering the existence of these loans and the details behind them. If everyone knows what the obstacles to settlement are, settlement is always more likely. Furthermore, the lender is really the party whose interest is at stake in the litigation. There have been instances of judges allowing a defendant to add the lender as a “real party in interest” in the litigation and encouraging them to participate in the compromise necessary to get a case resolved. (Emphasis added)

Losing Cases

The goal of any business is to make a profit.  The lawsuit loan business certainly shares this objective.  It is fair to say if an enterprise has remained in business for a substantial period of time, a profit is being made.  Otherwise, why would business people continue?

It follows then, once a business is viable (making money), the business seeks to maximize profit.  In the pre settlement funding industry, the most effective way of increasing profit is minimizing losses.

Since every lawsuit cash advance is offered as “non-recourse” funding, the advance does not have to be repaid if the lawsuit is unsuccessful.  Usually, every loss is a TOTAL loss for the pre settlement loan company.

Limited Information

Although there are any number of reasons why a lawsuit may lose, for lawsuit funding enterprises, the vast majority of underwriting losses can be traced to the fact that lawsuit cash advance funding relies on limited information.

Since lawsuits are advanced money all over the country, each case contains a plethora of variables.  An unforeseen twist in any of these variables could have a catastrophic effect on ultimate resolution of the file.

These variables include:

• Jurisdiction
• Venue
• Choice of Law
• Inconsistent witness testimony
• Untruthful clients
• Untruthful lawyers
• Omissions of material facts
• Prior pre settlement loans
• and a host of others. . .

One Common Example

Let us take an example of a plaintiff who was injured in an automobile accident.  Clearly, the extent of the plaintiff’s injuries has a great impact on the value of the case.  If the plaintiff previously injured the same body part prior to the accident in question, this fact would likely reduce the case’s settlement value.  Unfortunately, people sometimes are less than forthcoming with this information both to lawyers and funding companies.  And although settlement loan enterprises are diligent in compiling pertinent information, omissions such as pre-existing conditions are sometimes left out of the analysis.  In some instances, this situation can be harmless and the settlement loan company will receive its return.  In others however, a large reduction in settlement value can mean a total loss.

Unfortunately, limited information is a landmine in any investing endeavor.  Lawsuit funding companies (underwriters, sales staff, etc.) seek to maximize the amount of information available while considering the needs of all the parties involved (clients, attorneys, investors).  And while an omissions like discussed above are not the norm, they are an example of why accurate information is an important factor in the lawsuit funding process.

Of course, some lawsuits simply lose.  However, a large portion of lawsuit funding losses can be traced to the inability to foresee (for whatever reason) the ultimate cause of the lawsuit’s failure.

In future posts, we will discuss how lawsuit funding enterprises respond with various pricing structures.

Thank you for your interest in the lawsuit funding business.

Cost of Money Affects Investor Returns

In any business, investors seek a return on capital larger than they could otherwise obtain and in accordance with their risk tolerance.  Normally, investors expect to “earn” more money investing in a “riskier” venture than simply placing money in “safe” investments such as government bonds or precious metals.  The lawsuit funding business is really no different.  Since the inventory of a lawsuit loan outfit is money itself, its cost – which is basically the investor return – is of paramount importance.

When assessing risk, investors generally are more comfortable with ventures which have a proven track record of providing the expected return.  That is not to say there are no “good” years or “bad” years, but generally speaking, investors would be more likely to invest in operations with a several year history of positive returns.  The more positive years, the better – as far as investors are concerned.

Since the lawsuit funding industry is approximately 10 years old, investors demand a better than average return in consideration for the use of their investment capital.  Lawsuit funders have to comply if they want to tap into these sources.  Accordingly, this cost must be passed on to the end user (usually the plaintiff) and is reflected  in the current market pricing for these transactions.  Pre settlement funding companies simply cannot currently afford to offer “bank rates” to plaintiffs.  Currently, applicants for pre settlement cash advances can expect to pay between 30%-80% “interest” for immediate cash against their lawsuits.

Protecting Against Losses

But cost of capital is only one of many line items which are part of the lawsuit funding business model.  Also of major importance is the loss ratio which signifies the percentage losses a pre settlement loan enterprise encounters during a litigation cycle.  Lawsuit loans are non-recourse, so every loss is a total loss of investment.  Accordingly, lawsuit funding companies are very careful to take this ratio seriously.

Let’s take a quick view of  the type of issues lawsuit funding enterprises encounter when evaluating the effect of portfolio losses.

For example, let’s say a pre settlement advance company has a bankroll of $100,000.  And a lawsuit loan is approved for a $10,000 contract, that amount advanced,  and is ultimately lost.  The amount of the loss in percentage terms, is 10% of the total portfolio.  What amount amount of return on the remainder of the portfolio would bring the portfolio back to even?

Many would quickly answer – 10%.  But those people would be incorrect.  A 10% return on the portfolio would fail to bring the portfolio back to $100,000 because 10% of the remaining portfolio is actually $9,000 ($90,000 x .10).  In fact, the portfolio would have to “gain” more than 11% to get back to even.  Taking this a step further, if the funding company forecasted a 10% return to its investors, a total of 22.22% would have to be earned on the remaining capital to meet the forecast.

The purpose of the above exercise is only to show the often unseen effects of risk capital being lost on lawsuit cash advance fundings or any investment for that matter.  A loss is actually more destructive than one would think since the lost capital is now unable to earn a return.  This is just one example of money management considerations facing investment professionals such as those employed by lawsuit funding companies.

In the next post, we will examine the typical causes of these losses.  Later, we will illustrate how current market pricing takes into consideration these factors.

Thank you for your interest in the lawsuit funding business.

“It stands to reason that third-party funding will increase the volume of litigation, and will especially encourage the filing of frivolous and ‘nuisance’ lawsuits,” said Robert Detlefsen, Ph.D., NAMIC’s vice president of public policy. “This will increase insurers’ litigation defense costs, which will ultimately cause premiums to rise.”

In his report, Dr. Detlefsen accomplishes little more than simply offering opinion as fact.  The original report can be viewed here.

It is difficult to envision a scenario where an attorney would be more likely to litigate a case because of lawsuit funding.  The business’ mission is to allow plaintiffs the ability to endure a long and drawn out litigation process.  Can these transactions somehow increase litigation and worse, frivolous lawsuits?

Much of the author’s reasoning is unsound and is based on very weak assumptions.  For example, an argument is made that plaintiff attorneys would intentionally prolong litigation so more interest can accrue on pre settlement funding transactions.  A similar argument suggests plaintiffs would be more willing to go to trial because of lawsuit financing.  These examples are not based in reality.

Addressing the first example is simply not necessary.  To suggest that lawsuit funding companies and attorneys would conspire together in this fashion is ludicrous.  More often than not, plaintiff attorneys resist the funding process frequently urging their clients to “hang in there” while the case progresses.  Even more absurd is idea that such arrangements would be so widespread as to necessitate an increase in premium.

The second “hypothetical” explains that plaintiffs and their attorneys are more likely to go to trial because of lawsuit funding.  This flies in the face of reason.  What the author fails to realize is that all parties involved in litigation, including plaintiffs and their counsel, want a settlement.

For plaintiffs, going to trial is indeed an expensive proposition.  And even if victorious, the wait for compensation is hardly over.  For plaintiff attorneys, much more time, energy and resources must be expended at trial.  Even after an award, the work is hardly over.  If you ask 100 attorneys if they would rather a fair settlement over a trial verdict, I would guess almost all of them would prefer a pre-trial settlement.

This report seeks to make a villain out of an industry which helps plaintiffs level an uneven playing field against insurers who hold a obvious financial advantage.

If potential plaintiffs would be more likely to sue if they thought they could get some money quickly rather than having to wait out the litigation process, then the author is in essence,  conceding that the delay in obtaining monetary relief from negligence cases precludes many potential plaintiffs from pursuing claims.  I am sure no insurer would want to admit that otherwise entitled claimants do not receive just compensation.  Keep in mind, the very purpose of the lawsuit funding industry is to allow legitimate claimants to hold on while all of the legal proceedings occur.

As far as frivolous and/or nuisance lawsuits are concerned, plaintiffs without injuries are virtually never advanced money on their cases.  Further,  I know of no attorney who will willingly waste time on a frivolous lawsuit so that their client can obtain a lawsuit cash advance.  Arguments such as these are simply without merit.

Much of the negative publicity presented against the lawsuit loan industry simply lacks the experiential foundation needed to open the issue to intelligent debate.  Moreover, these attacks fail to address the simple truth that many plaintiffs encounter financial difficulty while the case is litigated.  Pre settlement loans offer relief to those individuals who want to take advantage of the opportunity.

It is true, the lawsuit funding industry impacts insurers because it neutralizes, to some degree, their financial advantage.  That is its mission.  Attacks against the industry by insurance groups only illustrates their fear the mission is being accomplished – one case at a time.

Thank you for your interest in the pre settlement loan business.

Lawsuit funding companies sometimes meet resistance from law firms when their clients apply for a cash advance.  The reasons are many but usually revolve around a negative stigma attached to the litigation finance industry with regard to price AND the idea that counseling clients with regard to financial transactions is usually outside the scope of representation originally agreed upon by the attorney and client.

Below I address the top 5 things attorneys should know about the lawsuit cash advance business in an effort to address some of these concerns.

1. Not All Lawsuit Loan Terms are Oppressive.

I have touched on this in earlier posts, but the lawsuit funding industry has evolved since its inception almost 15 years ago.  Not only have origination and processing systems become more efficient, but there is also much more competition in the marketplace.  Thus, lawsuit advance outfits are forced to take a more competitive approach to pricing.  In fact, case loans are routinely offered at lower pricing structures than at any other time previously.  All of this has occurred in an economic climate where available risk capital is scarce and inflation rampant.

Today, it is not uncommon for lawsuit advances to be offered for up to 12% of the case’s value.  And for less than it costs for an advance on a credit card.  Of course, there are some lawsuit funding companies who have different portfolio objectives and must charge more expensive “rates” and fees to meet their objectives.

2.   Rate is of Paramount Importance when Settling the Case.

Lawsuit funding operations are well aware of the need to settle cases.  Attorneys who work on a contingency fee basis, such as personal injury lawyers, understand the best interests of all parties are served if the case settles before trial.  Most plaintiff attorneys would agree even if a favorable verdict is reached, they still have to spend considerable time and money pursuing justice in the appellate courts.  Lawsuit funding professionals, many who are attorneys themselves, are intimately aware of this fact.

Therefore, lawsuit cash advance liens rarely inhibit settlement.  In fact, many steps are taken to ensure this unfortunate circumstance remains the exception rather than the rule.  One such example is the limiting of the “lawsuit loan” to 10% of the estimated value of the case.  With today’s rates and fees, an advance would normally fail to reach a level where the plaintiff and his attorney would be unable to settle the matter because of the lien.

Further, funding companies are usually flexible for purposes of settlement.  If an unforeseen issue arises which would negatively impact the ability to recover damages, funding outfits – like most investors who want to ensure the safety of their risk capital first – would be likely to compromise the requirements of their contract in an effort close the file and move on.

3.  Lawsuit Funding Applicants Need Attorney Cooperation.

The whole process of offering money against the future proceeds of a legal proceeding depends on the participation and cooperation of plaintiff’s counsel.  From the moment an applicant requests funds, the attorney’s participation is required.  First, his office must forward the relevant documents supporting the claim.  Next, a conversation between the funding company and the attorney must occur prior to approval.  Once approved, attorneys must then acknowledge the lawsuit funding agreement and recognize it as a valid lien on the file.  The transaction is finalized and matter concluded when the attorney forwards a check from his trust account directly to the funding company.

I am unaware of any funding operation which will advance money against a lawsuit without the attorney participating in the transaction, at least on a limited basis.  Without attorney participation, the funding process simply cannot happen.

4.  Clients Need Speed.

The majority of lawsuit funding clients need money immediately.  It is doubtful any attorney who practices personal injury law has not had a client request an advance on his case.  Of course, many state ethical rules prohibit this type of assistance.  Yet that hardly helps plaintiffs who are behind on their bills or otherwise have financial difficulty.

What attorneys should realize is the process can and will move smoothly if the documents requested are forwarded in a timely manner.  Most lawsuit loans are approved with less than 30 pages of documentation being analyzed.  These papers can be faxed or emailed with minimal amount of time spent on the part of the lawyer or his support staff.  This makes the approval process move quickly so the pre-settlement funding company can do its job and the client can get much needed relief as soon as possible.

Similarly, approvals for many lawsuit loans, especially the larger deals, depend heavily on a successful conversation with the attorney about the merits of the case and other relevant issues.  Realizing an attorney’s time is limited and valuable, lawsuit funding underwriters do whatever is necessary to keep the conversation focused on only the most material considerations.

Keeping it “short and sweet” helps funders, attorneys, and clients alike by keeping the process moving along.  The sooner the case can be underwritten, the sooner the client can get the help he needs.  The attorney gains the reward of a grateful client and another task deleted from his list.

5.  Lawsuit Funding is a Business.

Attorneys who have clients wishing to obtain money from litigation finance professionals should keep in mind the business of offering legal loans is exactly that – a business.  Like any other business, there are origination costs in the form of advertising or other marketing efforts, cost of inventory (money), and administrative expenses just to name a few.  Further, it is the goal of any service based business to provide the service and turn a profit.

I mention this because many attorneys feel the need to negotiate the terms of a lawsuit funding transaction AFTER the case settles.  Understandably, plaintiff’s counsel will try to negotiate all liens if it increases the chance to settle a case.  However, some attorneys want to negotiate the payment terms after a settlement is in place simply because they feel they can.

However, the appropriate time to negotiate is before an agreement is executed, not after.  Further, offering the lawsuit funding company its money back, for example,  is not operating in good faith.  It is simply good business to allow a business to turn a profit.  As we all know, a win – win scenario is the goal.  If any business is not allowed to make money, it will soon be out of business.  Lawsuit funding is no different.

Fortunately, the pre settlement finance business is becoming more efficient every day and offers clients the ability to weather the financial storm while the case is being litigated.  In other words, lawsuit funding is part of the personal injury game.  A game that keeps reinventing itself from year to year.  Though many changes arise, the main goal remains the same – to help clients achieve justice.

Thank you for your interest in the lawsuit funding business.

The most common example is a plaintiff who is injured, due to the negligence of another, and whose injuries prevent him from financially supporting himself.  With nowhere else to turn for funds (many typical lawsuit funding clients have poor credit or would otherwise not qualify for a personal loan), pre settlement loan companies offered relief to these individuals.

According to an article entitled, “Regulation of ‘lawsuit funding’ industry faces uncertain future in Senate” originally published here, the Kentucky Legislature passed a bill through the State Senate in an effort to regulate the “lawsuit funding” business.

This is not the first attempt by state legislatures to consider regulating the pre settlement loan industry.  And ultimately, some sort of legislation may actually be passed.  This post will consider the costs associated with potential regulation and what possible consequences, intended or otherwise, could arise from this interference in the free market.

For Your Protection.

The whole argument for regulation is normally to protect the public – in this case from unscrupulous lenders who prey on the dire financial situation of their applicants.  And most of these arguments revolve around the issue of price.  In fact, the article states that “in some instances”, fees could reach the equivalent of 120% per year.  Of course, this seems outlandish on its face.  However, as with most things, we need to delve a little deeper for the truth.

While we do not know the exact example the article is referring to, we can envision a situation where this statement can be misleading.  For example, many lawsuit loan companies charge interest in six (6) months increments.  The rub is that if the case is settled anytime during the period, the entire amount of interest is still owed. So if a pre-settlement loan is taken at 30% interest every six months, at first blush the interest rate is 60% per year.

But this is true ONLY if the cash advance is paid on the last day of the second  six (6) month term.  Because of the time value of money, if the amount of the loan is paid in three months, then in effect the annual percentage rate is actually 120% because 30% interest was paid in three months.  Multiply 30% by four (4 three month periods = 12 months) and you get 120%.

Other examples might include the charging of process, origination, and underwriting fees.  Although these amounts are not paid up front by the client, they are usually set fees and NOT calculated (as a percentage) on the amount of the cash advance funding.  Because of this, the true rate of return (interest) can be far more than advertised on small advances.

For example, a lawsuit funding company could charge a $300 processing and application fee on a one thousand dollar advance.  That is a 30% charge upon execution and does not include the “interest” charged on the funding.  As a percentage, these fees could be considered outlandish relative to the amount of the advance.

Of course, these types of fees are present on transactions such as car notes, mortgage loans, or home equity lines of credit.  The lawsuit funding business did not invent the use of fees on loans.  This practice existed long before the lawsuit funding business emerged.

You will notice heavy regulation in the consumer loan business in almost every jurisdiction.  Yet loan origination, process and underwriting fees are still charged in these business models.

Moreover, lawsuit funding transactions are not loans in the traditional sense of the word, which implies repayment at some point in the future.  Since the lawsuit cash advance is not repaid if the case is ultimately unsuccessful, these contracts are called “non-recourse” financing.  This fact alone justifies the higher charges and fees because of the added risk to capital.

Missing the Point.

But discussing interest rates and transaction fees misses the point entirely.  Justifying the fees is simply taking the bait since the issue can now go through a public debate.  The real issue is whether there should be any interference in the litigation finance market at all, not the nature and extent of the interference.

The bottom line is that there is a need for this service and there are entities willing to fill this need.  Ideally, that should be the end of the discussion.  But there is the way it should be, and the way it actually is.  Regulation is part of the present business environment – for better or for worse.

To sell any regulation, lawmakers must argue the measures will benefit the citizenry.  Since one person’s benefit must come from someone’s detriment, there will be some winners if regulation such as currently before the Kentucky Legislature is passed.  An examination of the likely winners and losers is probably in order.

Winners and Losers.

The lawsuit funding business has historically derived its inventory (dollars) from hedge funds and private investors.  A large reason why lawsuit funding outfits could not secure bank financing was because there simply was not enough profitable history to justify traditional bank participation in the industry.  As you can probably surmise, investors required a greater return on these “risky” investment pools than commercial banks were demanding.

Regulation such as making a cap on charges (fees and rates) will most likely quell competition since many sources of funds are not available at bank rates.  Interest rates are simply one line item to be factored into the cost of providing lawsuit funding to clients.

Quite likely, existing lawsuit funding operations with cheaper cost of money expenses would benefit since those with higher expenses could not compete on price.  This is basic business.  Limiting competition would ultimately leave only a few players in the game.  And the power in the industry would be consolidated accordingly.  Those few entities which remain will have the luxury of funding only the best cases.

The losers then become those applicants who have a lawsuits which do not fit into the funding models of the big players.  This means many plaintiffs, who nonetheless face severe injuries and are unable to earn a living, will be less able to obtain funding.  Available money for plaintiffs with cases such as products’ liability, medical malpractice, legal malpractice would be reduced dramatically.  These cases are often more difficult and costly to litigate.  Since the loss ratios may not justify the risk involved in providing the “non recourse” advance, this may be the (unintended) consequence of the regulation.

Many plaintiffs obtain cash against their lawsuit.  Cases with subjectively marginal proofs are also funded because investors are willing to take on this risk.  Capping interest rates will remove these investors from the arena.  Thus, plaintiffs will be at the mercy of the funding tastes of the few players whose cost of money is small enough for them to turn a profit.

The Market Does the Job.

This industry began in the mid 1990’s.  At that time, some pre settlement loan companies charged 10% per month on their advances.  Presently, clients can obtain lawsuit loans at considerably lower rates.  And this is not due to any lack of greed on the part of the funding companies.  Instead, the reduction is primarily caused by the business showing a historical return on investment and increased competition for “fundable” cases in the marketplace.

Legal loans are repaid at the end of a pending lawsuit.  And lawsuits usually take from 1-4 years to reach their conclusion.  Once a couple of litigation cycles elapsed, enough data was compiled to show potential investors a historical return on capital.  This meant more money available for pre settlement loans and at lower rates.

Profitability usually attracts new players.  Although the cost of money savings might not have otherwise been passed along to the consumer, an increase in competition caused a reduction in pricing.  In fact, the number of funding companies has exploded in recent years.  Lenders simply were forced to lower rates to capture the business.  Currently, lawsuit funding companies advertise advances with rates as low as 2% per month or 20% per year.

And the market did what it was supposed to do – become more efficient.

Will Regulation Really Help?

Unfortunately, regulation will do little to help those who it is designed to protect.  Instead, it will block available relief for many.

Lawsuit funding clients sometimes find themselves in the unfortunate position of needing liquidity and needing it fast.  The policy argument is to “save” these unfortunate individuals not from the lawsuit funding industry – which is willing to risk capital on even marginal cases – but from themselves.

The question then becomes: who is in a better position to understand the risks and rewards of the transaction – a plaintiff faced with foreclosure on their home or other immediate need, or a legislator trying to do the right thing?

The answer is obvious.

Thank you for your interest in the lawsuit funding business.

pmc

Until recently, lawsuit financing, also known as pre-settlement loans, was unavailable for various reasons relative to applicable laws and their interpretation in that jurisdiction.  Fair Rate Funding is pleased to announce its intention to facilitate lawsuit funding deals in Missouri for personal injury cases including motor vehicle accidents, slip and falls, medical and legal malpractice, products liability and worker’s compensation.  All other cases are considered on a case by case basis.

“The opening up of Missouri is a much needed boost for our clients who are involved in a pending lawsuit but cannot, for one reason or another, afford to wait until the case is resolved to receive their monetary damages,” said Paul M. Coppola, Esq., president of Fair Rate Funding.  ”Until now, we were forced to decline these cases, even when it was very clear the client needed the money and would be successful in the case.”

The lawsuit financing company has already concentrated efforts and resources to meet the anticipated increase in applications.  Further, the company has implemented 24 hour operator service at their call center.

“We are very excited about this new ability to serve the people of the great state of Missouri,” said Coppola.  Reflecting on the possible necessity of plaintiff’s to accept “low ball offers” due to pressing financial obligations, Coppola states, “(t)he most important benefit we provide Missourians is the ability to ‘stay in the game’ long enough to gain a fair settlement.”

Fair Rate Funding also offers Missouri legal funding for pharmaceutical cases such as Avandia, Accutane, Baycol, Fen Phen, Fosomax, HRT, Ortho Evra, Paxil, Prempro, Vioxx, and Zyprexa.  Also, Fair Rate Funding will consider lawsuit cash advance funding for the Kugel Mesh Patch and Mesothelioma in Missouri.

This article will address this issue in further detail since it really can make a difference for the client in desperate need of funds.

Perhaps the most important thing to understand is that the lawsuit funding process begins and ends with the attorney’s cooperation.  Because of this, clients and lawsuit loan companies would be well served by understanding the attorney’s position as it pertains to the pre-settlement loan process.

Abraham Lincoln supposedly once said “An attorney has only his time and advice to sell.”  Along these lines, an attorney’s time is his inventory and no enterprise wastes their inventory if it wants to be profitable. Attorneys therefore must take great care in protecting their inventory(time) time as they pursue their business.

This practice is especially important when attorneys are paid on a contingency fee retainer agreement.  This means the attorney only gets paid a fee if he is successful in the pursuit of the claim/lawsuit.  This type of fee arrangement is most common in personal injury cases where the plaintiff needs legal counsel to pursue a claim for pain and suffering and other damages as a result of the negligence of another individual or entity.

Not coincidentally, the most common lawsuit type which qualifies for lawsuit cash advance funding is personal injury cases.  So what can pre-settlement loan companies AND clients do to help out the attorneys?  Here is how.

1.  Understand that the attorney’s time is very valuable and act accordingly by minimizing the amount of time he needs to spend on the transaction.  Because paperwork is essential to the lawsuit funding process, applicants and pre settlement loan outfits can:

a.  Ask for ALL the paperwork up front.  Of the utmost importance is to only “burden” the law office once so that they can get back to their business.  Unlike a mortgage application where the client is repeatedly asked for more and more information as the process continues, lawsuit funders would be well served to request all the required documents up front.  This will avoid the necessity of the law firm having to field multiple calls and dig through the file more than once.

b.  Specify exactly what type of paperwork is needed.  In most instances, insurance information, an incident report, and evidence of damages are required for a legal loan to be approved.

c.  Ask for only the most important documents.  Personal injury files can become very large, especially for cases with “heavy” injuries.  Requesting only material documents means the lawyer’s support staff will not spend hours in front of the fax machine sending over information that may or may not have an impact on the decision to offer a lawsuit cash advance.

2.  Once the paperwork is received, be a “one stop shop” for the clients’ needs by having access to multiple investment pools of funds.

Some legal loan companies are equipped to handle only certain types of cases at any given time.  If the applicant does not fall within the guidelines, then the case is denied for the pre-settlement loan.

In some instances however, companies (like Fair Rate Funding) have access to multiple pools of funds.  This is good news for the applicant and their attorney since the the paperwork only has to be submitted once instead of having the same documents forwarded multiple times to multiple funders to review.

3.  Lawsuit funding underwriters thoroughly review the file.

Underwriters can help save applicant’s counsel valuable time by understanding the facts and circumstances of the case so that he can speak intelligently with the attorney as part of the underwriting process.

Attorneys, clients and lawsuit funders must work together to provide litigation finance to persons in need of an immediate cash advance against the proceeds of their pending case.  By understanding and respecting the legal professional’s time and business, the advance of money for lawsuits becomes a very quick and easy process.

Thank you for your time and interest in the pre settlement loan business.

pmc

While all of the above are obviously necessary components of the lawsuit loan business, one of the most important aspects of the business is the compilation and analysis of paperwork.  This post will explore what we call “chasing the paper” as part of the litigation advance business.

Application - The lawsuit funding process begins with an application where the front office takes down the personal information from the applicant and some basic details about the lawsuit such as the type of lawsuit, damages, attorney info and circumstances about the case.

Request for Information – After the application is completed, a request for information is sent via fax or email to the attorney’s office.  Once the requested paperwork is compiled, sent and received, the case can be considered for funding.  The vast majority of lawsuits which are advanced cash are personal injury cases.  Below are the main three pieces of paperwork needed to evaluate these claims.

• Police Report/Incident Report
• Damages
• Insurance Information

Analysis - The analysis of the above paperwork will allow the underwriter to assess the merits of the case and to more intelligently speak about the action when he/she ultimately has a conversation with the applicant’s attorney.

More Paper – In many instances, the documents received are simply not enough for the underwriter to make a preliminary evaluation.  This may be due to oversight by the law firm or the fact that the firm does not yet possess the documents in question.  In either case, administrative steps must be taken to try to secure these important papers.

Contract - Once the application for a lawsuit loan is processed, paperwork received and case underwritten and approved, the file moves into the approval department where a contract is drafted memorializing the agreement between the parties.  Special care is taken to ensure the amounts, dates, captions, names, and all other material terms are correct.  At that time, the lawsuit funding agreements are forwarded to the parties.

Contracts Back – After the contracts are prepared and sent, the process moves along but is by no means finished.  Instead, questions frequently arise with regard to contract terms, drafting errors, amounts, or word usage.  Most often these issues are resolved by the parties and their counsel.  Once the funding documents are executed and received, the case is moved to its final stage – funding.

Funding - The transfer of money has never been as easy as it is today.  Lawsuit funding companies use a variety of different ways to transfer money to their clients.  Of course, checks are sometimes sent as in the old days, but more these legal loan outfits also utilize more modern forms of transfer such as wire transfer, direct deposit or wire houses.  Since time is usually of the essence in these transactions, wiring funds is the most efficient manner or money transfer.

Post Closing – Once the case is funded and money received by the applicant, the collection/monitoring process ensues.  In future posts, we will deal with this very important part of the lawsuit funding business in more detail.  For purposes of this post, suffice it to say that pre-settlement loan companies have entire departments dedicated to updating and monitoring the cash advances in their portfolio.

Payment – All of the above is designed for this last phase of the lawsuit cash advance business where the money outlaid is repaid.  When a lawsuit settles or otherwise comes to a conclusion, the attorney forwards the payoff amount to the pre settlement loan company.  The file is then closed and the money received is re-deployed in search of profit.

Above we paint broad strokes as we discuss chasing the various forms of paperwork needed to facilitate a lawsuit cash advance transaction.  Discussing the various steps in the process aids in the understanding of how the pre settlement loan business works.  From this knowledge, applicants know exactly what to expect when seeking the relief provided by lawsuit loan companies.

Thank you for your interest in the litigation finance industry.

pmc