We have all heard the phrase “caveat emptor,” let the buyer beware, but there is a growing trend in lending within the legal world – lawsuit loans – that calls for the borrower to be extra cautious. As detailed in a recent New York Times article, lawsuit loans have been around since the late 1990s, and have allowed banks and hedge funds to invest in plaintiff’s lawsuits. Lawsuit lending companies are able to skirt lending regulations because plaintiffs are not required to pay the loan if they lose their case. However, if a settlement is awarded, the plaintiff receives only a fraction. This has led to an outcry against this lending practice from many within the legal profession as well as state lawmakers.
By not being subject to loan regulation, lawsuit loans can carry with them interest rates varying from 39, 76 to even 100 percent, compounded annually. Litigation lending companies are also not required by law to disclose in full to the consumer the terms of the loan, nor do they have to inform the borrower of any modifications to the terms of the agreement, unlike the heavily criticized and scrutinized credit card and mortgage industry. With the commercials on television promising quick cash, the industry has been able to grow to over $100 million annually in the United States by marketing, often with unsolicited mail, to plaintiffs in cases involving automobile collisions, medical malpractice, and work-related disabilities. These companies have been described as “legal loan-sharks,” and very few states have passed legislation to regulate the industry. What is necessary above all is transparency and disclosure, as borrowers should know exactly what amount they will have to repay. Individuals need to be able to make an informed decision, as these companies prey on the vulnerable.
Due to the inherent risks, we never recommend that our clients get a lawsuit loan. Every case involves a human being, not a dollar amount.