In the final hours of the 2016 legislative session, the Indiana General Assembly arrived at a compromise which, for the first time, will regulate companies that fund plaintiffs in civil lawsuits in Indiana.
House Enrolled Act 1127, civil proceeding advance payment transactions, puts lawsuit funding companies like Oasis Financial under the authority of the Indiana Department of Financial Institutions and limits the amount of interest and fees these businesses can charge consumers. It was approved late on March 10, the last day of the session.
Rep. Matthew Lehman, author of the bill, said the final draft did not contain all that he had originally wanted but he believes the measure does provide good protections for consumers. He noted the legislation will put regulations on the lawsuit funding industry that currently operates without any oversight in Indiana.
The funding providers are also supportive of the new law.
“It validates the industry,” said Eric Schuller, director of government and community affairs for Oasis Financial. “The Legislature said this industry can operate here and should operate here.”
A key victory for lawsuit funders was the inclusion of language in HEA 1127 that specifically states a civil proceeding advance payment transaction is not a consumer loan. Indiana is the first Uniform Consumer Credit Code state to take that position since the Colorado Supreme Court ruled in November 2015 that money given to plaintiffs while in litigation is, in fact, a loan.
Not only is the industry avoiding the tougher regulation that would have come if their product was defined as a “loan” but the industry now has a precedent to show other states that might consider placing limits on their business.
However, that is one provision in the law with which Lehman does not agree. The language was inserted as his bill made its way through the Statehouse.
“I personally believe they are loans,” the Berne Republican said. “I don’t think that verbiage benefits consumers.”
Schuller countered that consumers benefit from the service. In particular it helps plaintiffs, who do not win their case or collect a settlement high enough to cover the full amount of the advanced payment, because they will not be subjected to an additional tax obligation. If the lawsuit funder was operating under banking regulations, it would have to write off any unpaid amount and thus saddle the consumer with a federal tax liability.
The bill limits the annual interest rate – up to 36 percent – that lawsuit lenders can charge. In addition, the companies may not charge more than 7 percent annually for service fees. Initially the “service fee” was called a “deferral charge” and the House bill allowed for a 36 percent service charge rate while the Senate version was slightly higher at 38 percent. But as the session was ending, legislators changed the term to reflect that lawsuit funds are not loans and significantly reduced the rate.
Schuller warned the reduction may bring unintended consequences. Namely, he said, the low service rate would squeeze mom-and-pop funding providers out of the Indiana market.
The Insurance Institute of Indiana maintains the limit on fees protects consumers. Michael Niland, government affairs advisor for the institute, said without cutting the service fees, the lawsuit funding companies would have been able to effectively double the annual rate and charge consumers up to 72 percent in interest and service fees combined.
“We believe this bill as it passed is an important consumer protection for all Hoosiers who might need access to this type of loan,” Niland said. He emphasized consumers will know upfront exactly what they will owe and will not be shocked by a bill that is much higher than they had anticipated.
Other provisions in HEA 1127 include:
• Repayment is required only if the claimant prevails in the civil lawsuit and must come from the proceeds of the judgment, settlement or other resolution.
• If the funded amount is less than $5,000, the provider may charge no more than $250 for obtaining and preparing documents. If the amount is at least $5,000, the provider may up the document charge to $500.
• Attorneys representing claimants must be informed of the CPAP contract.
• The funding provider may not pay a commission or referral fee to any attorney, law firm or medical professional, nor may the provider accept a commission from any of these entities.
• If the consumer needs legal representation, the company may refer the individual to a local or state bar association referral service but may not make a referral to a specific attorney or law firm.
• The lawsuit funding provider may not pay or offer to pay for court costs, filing fees or attorney fees.
• Any attorney or law firm retained by a claimant in a civil proceeding must not have a financial interest in the CPAP provider.
• After Dec. 31, 2016, CPAP providers must be licensed by the Indiana Department of Financial Institutions. The provider must either post a bond for no more than $50,000 or an irrevocable letter of credit.
Lehman has tried several times to get a bill like this passed in previous sessions and going into the final days, he expected his measure would be defeated again. In fact, he was planning on having to try again next session but other legislators told him they wanted to get the bill passed this year.
Niland credited Lehman and Sen. Randall Head with working hard to get the legislation through the Statehouse. Head, R-Logansport, introduced Senate Bill 353 this session that sought to regulate the lawsuit lending industry.
Neither Lehman nor Schuller believe the Legislature will have to revisit the statute during the 2017 session. Both said they want to monitor the new regulations for a couple years before deciding if any tweaks may need to be made.