Yesterday, the New York Times shined a light on the growing business of lending money to plaintiffs in exchange for a lien on thier personal injury lawsuits. This business, which the industry wants to characterize as an investment in the lawsuit rather than a secured loan to the plaintiff, has exploded in recent years. Banks, hedge funds, and private investors have started companies all over the country which advertise on TV and send unsolicited letters to people who file lawsuits and to plaintiff’s attorneys emphasizing that they offer quick and easy money. What they rarely emphasis are the interest rates charged for such loans.
This industry, which now lends plaintiff’s more than $100 million a year, is not regulated in most states, which means that usury and other laws designed to protect people who borrow money from most other kinds of lenders do not apply to lawsuit lenders. Unrestrained by laws that cap interest rates, the rates charged by lawsuit lenders often exceed 100 percent a year, according to a review by The New York Times and the Center for Public Integrity. Furthermore, companies are not required to provide clear and complete pricing information — and the details they do give are often misleading.
In one example cited by the New York Times, a plaintiff involved in the Vioxx litigation borrowed $9,150 from Oasis Legal Finance, pledging to repay the loan from any recovery he received in the litigation. This was a fairly risk-free loan for Oasis because, at the time of the loan, the Vioxx litigation had already settled and the projected payouts to the borrower were already relatively easy to calculate. Oasis nonetheless imposed its standard interest charge: 50% of the loan amount if repayment was made within six months, with increasing percentages after six months. In the example cited, by the time the borrower received the first installment of his settlement 18 month later, he owed $23,588 on his $9,150 loan. That’s over 150% interest.
There are two sides to every story. The lawsuit lenders’ side is that they are not lenders but rather investors. Their argument is that plaintiffs are not required to repay the money if they lose their case. The industry takes pains to refer to these transactions as investments, advances, financing, or funding–anything but loans. Companies also say that they must charge high prices because betting on lawsuits is very risky. Borrowers can lose, or win less than expected, or cases can simply drag on, delaying repayment until the profit is drained from the investment.
The state of Colorado, for one, is not buying the companies’ argument. Colorado filed suit in December against Oasis and LawCash, another lawsuit "investor," charging them with violating the state’s lending laws. “It looks like a loan and smells like a loan and we believe that these are, in fact, high-cost loans,” John W. Suthers, the state’s attorney general, said in a recent interview. “I can see a legitimate role for it, but that doesn’t mean that they shouldn’t be subject to regulation.”
The Colorado AG’s argument seems well-balanced. In fairness to the industry, no one is forcing plaintiff’s to borrow money from lawsuit lenders, and, in most instances, the plaintiffs who do borrow from these companies are in desparate need of money which they cannot borrow from any other source. It’s a Catch-22. A plaintiff suffers a disabling injury through no fault of his own and cannot work. He or she has likely called his personal injury attorney and been advised that it is unethical for his or her attorney to lend him or her money. The bills are mounting and he or she sees an advertisement for quick and easy money which can be repaid from his or her lawsuit. The legislative answer seems to, at a minimum, require greater transparency and disclosures. Borrowers should know exactly how much money they will have to repay.
There is another answer, though, and that involves plaintiffs attorneys. When we learn that our clients are contemplating accepting such a loan, it is incumbent upon us to know the details of the loan and explain them to the client. The Times article talks about a former applicant screener for Whitehaven Plaintiff Funding who said he was told not to mention the cost of loans unless asked directly. He said he screened 50 to 60 calls a day from plaintiffs and their lawyers, and most never asked about the price of the loan, which at Whitehaven was as high as 99% of the loan amount in the first year.