Discussing Lawsuit Loan Criticism
Lawsuit loans emerged as a potential liquidity solution for certain plaintiffs who needed immediate cash while waiting out the litigation process. Because local ethics rules often prohibited attorneys from advancing their clients money prior to settlement, entrepreneurs offered lawsuit loans into the marketplace. Early on (the late 1990’s), due to the “newness” of the practice, fair pricing was still being sorted out. Investors had to charge what was generally considered “outrageous” rates and fees for this service. This spawned a wave of lawsuit loan criticism from clients, injury attorneys and consumer groups. Insurance companies who were financially responsible to pay these claims also rallied against the practice.
In this post, we examine lawsuit loan criticism and why some of it has merit. We also explore how some of these criticisms can be neutralized by clients and their attorneys. Our hope is the information provided will assist in understanding how lawsuit loans can be properly utilized in certain situations to benefit plaintiffs.
Lawsuit Loan Critics
Legal system delays are the very reason lawsuit funding exists. These delays are inherent in the process as courts try to resolve a large number of cases with limited resources. Unfortunately, plaintiffs sometimes encounter financial difficulty while their cases progress through the system. This is especially true where cases involve personal injuries which prevent plaintiffs from working. Lawsuit funding allows financially strapped plaintiffs to refuse low-ball settlement offers and endure the process.
Most lawsuit funding contracts involve personal injury loans. Not surprisingly, those defending against these claims (i.e. insurance companies) condemn the practice. These deep pocketed parties hold financial leverage over plaintiffs during litigation. As stated above, some insurers offer very low settlement amounts to plaintiffs in an effort to minimize their exposure.
Other critics include attorneys. Some plaintiff lawyers and defense counsel frown upon the practice for various reasons discussed below.
Lawsuit Loan Criticism
Most lawsuit loan criticism centers around its cost. Consumer groups label lawsuit loan cost as “outrageous” and call for reform for clients’ own “protection”. Attacks classify settlement loans as traditional loans and because the terms are more expensive than traditional loans, opponents argue terms violate established usury laws. These groups point to the fairness of traditional personal loan pricing and compare that cost to what plaintiffs must pay to obtain lawsuit cash advances.
There are also some ethical concerns. Some lawsuit loan criticism accuses funding companies of exploiting vulnerable plaintiffs and charging excessive interest rates and fees. Because lawsuit funding generally exists in an unregulated marketplace, companies can charge whatever they want. Undoubtedly, some plaintiffs overpay for this service supporting critics’ claims that lawsuit loan regulation is needed.
Other critics contend lawsuit funding encourages litigation. They argue that claims can be filed simply to access their value through lawsuit loans, encouraging plaintiffs to pursue a payday through the litigation process.
Still others (lawyers) maintain that lawsuit loans make settlement negotiations more difficult. Since lawsuit settlements make sense for all involved parties, anything that hinders the process is undesired.
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Lawsuit Loan Criticism Answers
Lawsuit funding opponents have their arguments, especially when comparing personal loans and lawsuit loans. Certainly, settlement funding is a more expensive proposition than getting a loan from family or friends. Yet comparing regular loans and settlement loans is comparing apples to oranges.
Loans v. Lawsuit Loans
Lawsuit loans are entirely contingent upon a successful outcome in the case. Because of this, they are actually not “loans” in the traditional sense. Regular loans imply repayment with interest at some point in the future. They are usually set up with periodic repayments over time.
Lawsuit loan contracts specify the advance be repaid at the case’s conclusion and only if the case is successful. In other words, if the plaintiff should fail to obtain an award, the advance is not repaid under the contract. Further, the source of repayment is the proceeds themselves. Lawsuit funders cannot pursue plaintiffs personally for repayment. These types of arrangements are often referred to as non-recourse advances.
Since there is no recourse against plaintiffs personally and there is a substantial risk of loss, the risk is higher as compared to traditional lending. That increase must be reflected in the pricing if a funding enterprise is to be profitable. To be sure, there would be no lawsuit funding available to plaintiffs if the cost was similar to traditional loans.
Increased Litigation
Of all the lawsuit loan criticism, arguing that lawsuit loans encourage litigation is the least persuasive. Valid claims/lawsuits exist prior to considering cases for lawsuit loan approvals. The claims exist first, then lawsuit funding is considered.
One lawsuit loan eligibility pre-requisite is that plaintiffs have attorneys representing them on a contingency fee basis. This means attorneys only earn a legal fee if there is a recovery. Contingency fees and lawsuit loans go hand in hand. Since attorneys are only paid if a case is valid, this requirement ensures that at the very least, representing attorneys believe in the cases they pursue. Attorneys are generally not willing to work for free after all.
Moreover, lawsuit funding enterprises are run by legal professionals who generally understand the legal process. They easily spot frivolous claims and reject them for funding. Even if claims are filed simply to secure lawsuit funding, plaintiffs will find that obtaining funding on these claims very difficult.
Regulation
On the surface, regulation sounds like a great idea. By limiting lawsuit loan rates and fees, plaintiffs will be protected from predatory lenders. But there is a trade-off. Unregulated businesses benefit from their ability to craft deals in creative ways. Regulation generally prohibits lenders and plaintiffs from doing so.
For example, cases from atypical lawsuit loan case types are sometimes funded because funders can change pricing to reflect additional risk. These cases would be denied if regulation capped rates at 36% annually as some proposed legislation suggests. This would remove the opportunity for these parties to obtain funding. Thus, any regulation must compare the risk of people being taken advantage of and the risk that some plaintiffs will no longer have access to this particular financial solution.
Settlement Negotiations
Lawsuit loan payoffs in some instances make settling cases more difficult. This is particularly true when an offer is far lower than expected. Some disappointed plaintiffs might not want to settle if the majority of their settlement goes to attorney’s fees, medical or other liens, and repaying a lawsuit loan.
Consider a client wanting to go to trial if he feels his portion of the award is less than adequate. Trying cases costs money and time so attorneys are likely to resist anything which would increase this possibility. Of course, funders don’t want cases to go to trial either because almost anything can happen in a courtroom. Funders respond to this risk by limiting how much lawsuit funding is available on any particular case.
Funding companies generally will work with the parties when a case goes south. They will rarely stand in the way of a settlement. Most of the time, a phone call between attorney and funder will result in a positive result.
The Good News
Lawsuit loan criticism remains persistent but there’s some good news. First, since the lawsuit loan business began in the mid 1990’s, pricing changed dramatically. At that time, some pre-settlement loan companies charged 10% per month on their advances. Currently, plaintiffs obtain lawsuit loans for far less. This is primarily the result of funders lowering pricing to capture market share. Once funding efforts showed a provable return, increased competition for fundable lawsuits organically lowered lawsuit loan cost.
Those who are willing to shop for lawsuit loans obtain the best deals. And doing so has never been easier. A few website visits and a couple of phone calls are all it requires.
Lawsuit Loan Criticism Takeaways
It is likely lawsuit loan criticism will be part of the business. The danger of consumers being taken advantage of will remain but this risk exists in all businesses. Lawsuit loans are often a “last resort” for plaintiffs who need immediate cash. And they should be since costs are relatively high. Still, lawsuit loans are part of the current legal landscape and a legitimate solution for many plaintiffs.
Thank you for your interest in lawsuit funding.
