There has always been a push to regulate settlement funding also known as lawsuit loans or lawsuit funding. Proponents argue lawsuit loans are too expensive and can take advantage of an unsuspecting public. Opponents state that lawsuit funding self regulates through basic free market mechanisms.
Regulation arguments are not unique to the settlement funding industry. Issues such as self-regulation through competition will be debated and compromised until there are no free markets left. Nonetheless, we should discuss how regulating the lawsuit loan industry might affect the market.
Lawsuit funding currently exists in a free market in most jurisdictions. Market participants (plaintiffs and settlement funding companies) are free to negotiate and set their own terms and conditions onto what is technically an asset purchasing agreement, issuing the purchaser a partial interest in the future proceeds of a lawsuit or insurance claim. Although pricing can vary considerably, competition has drastically reduced pricing from 100% per year to under 40% in the last several years. The free market allows incredible flexibility within the industry to fund riskier lawsuits such as medical malpractice and large mass tort claims.
Regulating Price and Fees
Most settlement funding regulation efforts recommend setting limits upon what a lawsuit funding company can charge its clients. Certain states cap the “rate” at 36% per year, simple (non-compounding) interest. Most passed regulation also limits the amount of processing fees that can be charged at closing.
At first blush, the pricing seems fair. It exists at the upper edge of most state’s usury laws (although these transactions are not technically loans) and in connection with existing risk management techniques, its likely any foreseeable settlement will leave plenty of settlement money left for the plaintiff. Allowing but limiting processing fees helps lawsuit funding companies with operating cash flow. As we will discuss below, settlement funding regulation provides more advantages for these enterprises.
The desired result is that all companies will be forced to charge similar costs and fees for lawsuit funding transactions. The goal is to provide fair terms to litigants “for their own protection”. What is “fair” of course, is subjective. But leaving that issue aside, capping cost theoretically helps consumers in the marketplace. Certainly, horror stories where a plaintiff must repay 5x the advance amount will be eliminated.
However, there is always a cost to provide this “security” to the marketplace. For settlement funding regulation, decreased flexibility is the trade-off.
Free market participants benefit from flexibility. The ability to craft deals in creative ways allows parties to each serve their own needs simultaneously. It’s a win-win. Hampering creativity with regulation prohibits otherwise willing participants from solutions that would otherwise be available.
For example, it is certainly a risky lawsuit funding investment if liability cannot be clearly established when evaluating a case. These types of cases would be categorically denied if regulation capped rates at 36% annually as some proposed legislation suggests. In the unregulated marketplace however, investors fund these cases and adjust the pricing to offset the risk. Flexibility in pricing offers help to these litigants who often have already exhausted other liquidity sources before they pursue lawsuit funding as a solution.
There’s the rub. Settlement funding regulation actually hurts many of the people (consumers) it is trying to protect. Inflexible pricing shuts out in need litigants who need cash now. Unfortunately, the consumer always gets the raw end of the deal.
The silver lining for lawsuit funding companies with regulation is that pricing becomes stable and consistent. Armed with loss data and historical returns, lawsuit funding operators would find it easier to secure financing in a regulated market that has little chance of being outlawed by judges or administrative agencies. Therefore, one likely consequence would be an influx of investment money coming into this sector.
Another might be that more funding companies and attorneys will establish working relationships to help their collective clientele. With the pricing issue out of the way, attorneys would no longer have to “shop” rates and funding companies can focus on service and efficiency – the very things market players should be focusing on.
Regulation is often seen as a dirty word by entrepreneurs. Yet, not all companies will by driven out of business. The large players with access to “cheaper” money will remain. Lost will be the mom and pop funding outfits. Ironically, it is these companies in search of yield who stand ready to compete for business and who offer relief to plaintiffs with marginal cases.
If you have any questions regarding the cost of lawsuit funding, we are here to help. We endeavor to be your lawsuit funding company by building lasting relationships with the attorneys who refer cases directly to our firm. Contact us at 888-964-2224 for any reason and at any time.
Thank you for your interest in the settlement funding regulation and the lawsuit funding business.