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Another Voice: A loan is a loan and usury is usury

By Jenna Wims Hashway 

What do 9/11 first responders, former NFL players with concussion-related complications, and victims of workplace sexual harassment have in common? As injured parties to be compensated by high-profile legal settlements, they are targets of a specific brand of predatory lending known as consumer litigation financing.

The consumer litigation financing industry offers cash advances to plaintiffs while their lawsuit or claim is pending with the promise that if the plaintiff does not win a judgment or a settlement, then he or she owes nothing. If there is a monetary recovery, the “advance” is repaid (along with fees and interest) from the proceeds.

Although these are clearly loan agreements, the industry uses the term “advance” to avoid state usury laws, which are designed to protect consumers from predatory interest rates. The word “loan” never appears in the contracts. And neither does “Annual Percentage Rate.” The true cost of these offers is hidden from the borrower.

Imagine taking out a car loan and agreeing that you would not know either the actual rate of interest or the total amount due until the day you had to pay it off. Now, imagine that on the day you wrote that check, you find out that triple-digit interest had been applied and you are required to pay two or three times what your car was worth when it was new. Many plaintiffs, who are desperately in need of funding, find themselves in this position. Once the lawsuit concludes, much of the settlement or award has to be turned over to the funder. If the amount of the judgment is less than the sum ultimately owed, the plaintiff may end up with nothing.

Litigation funders claim that their exorbitant interest rates are justified by the risk they bear. But in this unregulated industry, there is little information publicly available to assess a funder’s risk or profitability. Their assertions, absent figures to back it up, are meaningless. However, in interviews, industry leaders have cited default rates of 2-5 percent, suggesting that actual risk is lower than they’d have us believe. And lenders carefully scrutinize each application, favoring cases that will settle soon and rejecting claims where the outcome is less certain. Which brings us back to 9/11 first responders and injured NFL players. They were already guaranteed settlement payouts and were merely awaiting their first checks when lenders began dangling “cash now” offers.

What level of risk could possibly justify charging a 9/11 first responder 250 percent interest? That’s one of the questions posed in a joint lawsuit filed last year by the New York attorney general and the Consumer Financial Protection Bureau against RD Legal Funding. Through this enforcement action, victims of lawsuit lending may see one of these sharks ultimately held accountable. But one action against one lender is not likely to do much to protect New Yorkers from the excesses of an entire industry.

Fortunately, state Sen. Rob Ortt (R-Lockport) and Assemblyman William Magnarelli (D-Syracuse) have introduced a bill into the New York State Legislature that would protect consumers from these predatory lenders. If signed into law, S3911A/A8653 would require litigation funders to clearly disclose their fee structures; would prevent mandatory arbitration clauses and penalties for early repayment; and, most importantly, would prohibit lenders from exceeding the maximum interest rate established by the state’s lending statutes.

Individuals who have been injured by the reckless and negligent acts of others are often the most emotionally and financially vulnerable. Is it too much to ask that they not be further victimized?

Jenna Wims Hashway is a professor of legal practice at Roger Williams University School of Law. She is the author of “Litigation Loansharks: A History of Litigation Lending and a Proposal to Bring Litigation Advances Within the Protection of Usury Laws.”

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