Lawsuit Lending

Lawsuit lending is a financial practice that provides “up-front” cash to individual plaintiffs to cover immediate living or medical expenses during litigation. These loans are typically attached to sky-high interest rates, fees, and charges – as much as 200 percent – that can leave borrowers with little to no recovery. In addition, lawsuit lending prolongs litigation and distorts the fundamental nature of the civil justice system.

In lawsuit lending, repayment is contingent on the plaintiff recovering some sort of monetary compensation, either through a settlement or verdict. In fact, the lawsuit lending industry goes to great lengths to tell the public that consumer lawsuit loans are not really loans at all, but are instead “nonrecourse financing.” This rationale is how lawsuit lenders have managed to avoid regulation in many states. Read More...

Unfortunately, lawsuit lending is far from harmless. It hurts consumers while undermining the integrity of the justice system.

The practice hurts consumers by eating into their recoveries in litigation. The New York Law Journal reported on the case of a Brooklyn man who borrowed $27,000 from a lawsuit lender for a slip-and-fall lawsuit. His case was settled five years later, but the lender demanded $100,000 – two-thirds of the total settlement and more than three times the amount of the original loan. To add insult to injury, the plaintiff’s lawyers pocketed an additional one-third of the settlement – leaving the plaintiff with just $111 out of a $150,000 settlement. In another case reported by the New York Times, a plaintiff actually lost money. After winning nearly $170,000 at trial, the plaintiff’s lender claimed it was owed $221,000 – an amount 30 percent larger than the total recovery.

Moreover, lawsuit lending distorts the civil justice process by altering a plaintiff’s decision making process. For example, a plaintiff may reject a reasonable settlement offer for the chance of obtaining a higher verdict in court because they will need to pay off a high-interest loan. This choice jeopardizes the chance of any recovery, as litigation could result in a lower than expected verdict or a judgment in favor of the defendant. It also increases costs for defendants, who are forced to endure prolonged and costlier litigation.

Finally, lawsuit lending undermines the integrity of the civil justice system. By inserting a third party into the case, lawsuit lending compromises the interests of litigants – upsetting a primary bedrock of the justice system. It also creates conflicts of interests for plaintiffs’ lawyers, who may develop referral relationships with certain lawsuit lenders and be expected to “steer” clients to those lenders.

Reforms

Lawsuit lending should be regulated like any other consumer financial product. In November 2015, the Colorado State Supreme Court unanimously decided that lawsuit lending is subject to the state's existing consumer lending law. The ruling established an important legal precedent that lawsuit lenders must play by the same rules as other lenders in the state. Several bills have also been introduced in state legislatures to do exactly that. Oklahoma became the first state to pass such legislation in 2013. In 2014 Tennessee passed a law that provides meaningful regulation to lawsuit lending, and in 2015, Arkansas followed suit. Indiana joined the community of states regulating this product under state consumer lending laws in 2016. 

Suggested Resources

Research

All Results for Lawsuit Lending

  1. Law Professor: "Lawsuit Lenders are Like Sharks to Shipwrecks"

    June 21, 2018 | News

    A law professor at Roger Williams University School of Law said "lawsuit lenders are like sharks to shipwrecks" who "capitaliz[e] on tragedy" in a response to a defense of the industry in Crain's New York Business.... Read More

  2. New York Legislators Take On Lawsuit Lending Industry

    June 05, 2018 | News

    New York State lawmakers are considering three bills to regulate the lawsuit lending industry after a series of scandals in the state, Legal Newsline reports.... Read More

  3. "Who's Behind the Curtain?": Rise of Third Party Litigation Funding

    June 04, 2018 | News

    In a Des Moines Register op-ed, U.S. Chamber Institute for Legal Reform President Lisa A. Rickard said it is "vital that Congress recognizes the need for oversight of" third party litigation funding, "which undermines fairness and ethical practice in our courts."... Read More

  4. In the News Today - May 30, 2018

    May 30, 2018 | News

    NY Lawmakers Considering Lawsuit Lending Bills... Read More

  5. In the News Today - May 29, 2018

    May 29, 2018 | News

    California Senate Considering Bill to Regulate Medical Lawsuit Advertising; Personal Injury Lawyer Made $200K By Pocketing Lawsuit Loans on "Bogus" Lawsuits... Read More

  6. NFL Settlement Judge Invalidates Lawsuit Loans

    May 24, 2018 | News

    U.S. District Judge Anita Brody invalidated all lawsuit loans in the National Football League (NFL) concussion settlement to "prevent breach of the settlement agreement," Law360 reports.... Read More

  7. In the News Today - May 22, 2018

    May 22, 2018 | News

    Pa. Attorney Takes on Former Client, Lawsuit Lender... Read More

  8. In the News Today - May 21, 2018

    May 21, 2018 | News

    Private Equity Firms and Hedge Funds "Found a New Way to Get Richer" By Funding Lawsuits; "Recent Developments Have Let the Air Out of Slack Fill Lawsuits"... Read More

  9. In the News Today - May 16, 2018

    May 16, 2018 | News

    FCC Looking for Autodialer Definition Suggestions After Court Ruling; State Group Calls on N.Y. Government to Act on Lawsuit Lending... Read More

  10. "What Are People Saying About Senate's New Lit Funding Bill?"

    May 15, 2018 | News

    Five days after the Litigation Funding Transparency Act of 2018 was introduced in the U.S. Senate, National Law Journal gathered the thoughts of the legal industry's top members.... Read More