Two bills once again are moving through the Statehouse that would regulate third-party financing of lawsuits. While such measures died in previous sessions, the current bills are getting a better reception because the consumer legal funding industry is learning what can happen when it does not compromise.
Rep. Matthew Lehman, R-Berne, and Sen. Randall Head, R-Logansport, have introduced separate legislation seeking rules and limits on companies that offer plaintiffs cash advances. During the 2015 legislative session, Head’s bill advanced through both chambers, picked up Lehman as a sponsor, and went to conference committee where it stalled.
Historically, the industry has worked on legislation with Lehman and Head, but a sticking point to getting full support has been the proposal to cap interest rates. The funding companies resisted the caps and argued against their products being classified as loans.
However, at the same time the Indiana Legislature tabled Head’s bill in 2015, the Arkansas General Assembly passed regulations that caused the industry to quit doing business in the state, saying it could no longer make a profit there. A year earlier, the Tennessee General Assembly enacted its own provisions that brought a similar result.
The industry stopped doing business in Colorado in 2010 after the state found the lawsuit funding companies’ pre-settlement cash advances were in fact loans and therefore subject to the Uniform Consumer Credit Code. Some companies, including Oasis Financial and LawCash, filed a case that sought a declaratory judgment that their products were not loans.
In November 2015, the Colorado Supreme Court agreed with the state that the money paid to plaintiffs fits the definition of a loan.
These events seem to have prompted the industry to be willing to accept some of Indiana’s regulatory proposals that it opposed in the past. Recent comments about Lehman’s bill from Eric Schuller, director of government and community affairs at Oasis Financial, reflected that change in attitude.
“We agree with Rep. Lehman this needs to come to a conclusion,” Schuller said. “We don’t agree with everything in (his bill) but we want to see some progress and get a final resolution.”
Tripping over the cap
Despite the industry’s softening stance, reaching a satisfactory resolution this session might still be a challenge. Interest rates remain a key difference between Head’s and Lehman’s bills.
Head currently has no language in his measure, Senate Bill 353, about interest rates. The legislator said the conversation about a cap could start once the other proposed regulatory provisions are set and the parties can see the bill in full.
Lehman, however, is including a firm cap in his House Bill 1127. Under his terms, companies would be prevented from charging consumers anything more than 36 percent interest annually. The representative conceded the rate is high but said the number is a “good compromise” considering the risk the companies take and the need for regulations.
Typically, these businesses offer money to plaintiffs whose litigation, such as for personal injury, is pending. If the case settles or goes to trial and the plaintiff wins, the companies will take a portion of the proceeds as payback.
Concerns about the industry’s practices arise over the interest rates that can be 150 percent or higher, and the unlimited amount of money a consumer can borrow. This puts individuals in danger of owing more money than their final settlement brings in.
Schuller said a higher interest rate is justified by the loss rate. Plaintiffs who lose or drop their case do not have to pay the companies back and statistics from Nebraska and Maine show the loss rate between 20 and 30 percent.
When the House Committee on Financial Institutions reviewed Lehman’s bill, Rep. Thomas Washburne, R-Evansville, proposed capping the dollar amount the businesses could offer. Limiting the cash advance to no more than $5,000, which according to the industry is the average size of a loan, would prevent consumers from getting in over their heads.
Schuller countered that kind of cap is not needed because the industry has an incentive not to provide more financing than the case is worth. Overvaluing a claim does not make business sense, he said, because the companies know they are not going to get a return.
Business and insurance groups charge the practice encourages frivolous lawsuits while the industry maintains that by providing a financial buoy, plaintiffs do not have to accept a lowball offer for their claim.
Lehman sees the industry as disrupting the legal process.
“As it currently is, it’s forcing litigation to go on longer,” he said. The representative believes putting restrictions in place will prevent plaintiffs from rejecting valid settlements and continuing their lawsuits because they are trying to get more money so they can repay their loan.
Letting lawyers make loans
Having studied the practice of lawsuit funding since 2009, Damon Leichty, partner at Barnes & Thornburg LLP in South Bend, said regulation is the best way to address potential abuse.
While some feel the companies are less than honorable, Leichty said the market for lawsuit funding is robust. Regulations like requiring fees and interest rates to be disclosed, giving the plaintiff the right to cancel the contract without penalty and mandating the plaintiffs’ attorneys review the contracts should help consumers from getting into financial distress.
Schuller disputed the funding extends litigation. He pointed to a study by Vanderbilt University which concluded third-party funding can induce plaintiffs to settle. The authors reasoned that the plaintiff will not have an incentive to ask for compensation that would likely drive defendants to take their chances in court.
However, Eric Riegner, member at Frost Brown Todd LLC, had a different experience when he encountered third-party lending while litigating a motorcycle accident. Although the case was weak, it was bewildering why the plaintiff would not settle until Riegner asked if he had gotten outside funding.
Riegner remembered by the time the loan came to light, the plaintiff, who had borrowed $30,000, already owed upwards of $70,000. The case became impossible to resolve because the lender would not reduce the amount owed. Finally the settlement was paid to the court which then divvyed up the money.
According to the Indiana Attorney General’s Consumer Protection Division, it received one consumer complaint against Oasis Legal Finance, the former name of Oasis Financial, but it was closed without being settled when the consumer did not respond further. It also received one complaint each involving Oasis Funds LLC and Blue Trust Loans. Both complaints were settled through mediation.
The solution to the problems that can come with lawsuit funding might be addressed by a change in the rules. James O. McDonald, president of the Indiana Trial Lawyers Association, said a real solution would be to allow lawyers to make loans to clients.
He acknowledged doing so would probably not be practical because the Indiana Supreme Court would not want the offer of money to be used as a way to lure new clients. Still, the loan would provide for a plaintiff who needs money and enable the injured party to hang on for a better settlement, he said.•