Is consumer legal finance a loan? Why is this important?

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Opponents of consumer legal finance worked overtime to classify the product as a loan within the limits of state lawmakers.

So why is this important?

The classification of Consumer Legal Funding as a loan is more than just semantics. Consumer legal finance is the purchase of an asset; this being part of the proceeds of the consumer’s legal claim. This form of investment allows consumers to access the much-needed support they need to get the financial help they need while their demand moves through the system.

In his publication “Harmonize the regulation on the financing of third-party litigation, “Professor Victoria Shannon Sahani explained why consumer legal finance is not a loan:

  • First, there is no absolute obligation on the financed client to reimburse the funder of the dispute. If the client is the claimant, the client should only reimburse the funder if the client wins the case. If the client is the defendant, the premium payments end as soon as the case is settled, and if the defendant loses, the funder will not receive any success or bonus fees.
  • Second, litigation funding is non-recourse, which means that if the client loses the case, the funder cannot sue the client’s other assets unrelated to the dispute to gain satisfaction.
  • Third, the lender takes more risk than a traditional collateral-based lender; therefore, the lender seeks a much higher rate of return than a traditional lender. It is not a unique concept. For example, an unsecured credit card typically carries more risk than a secured loan, so regulations tolerate much higher interest rates on unsecured credit cards than allowed, even on mortgages. at risk, which are backed by guarantees. Likewise, as mentioned above, lenders structure their agreements to avoid classification as loans in order to avoid the caps that usury laws place on mortgage and credit card interest rates.
  • Fourth, by pushing the financing of a loan even further away, lenders take even more risk than unsecured credit cards because the credit card contract is a two-way transaction, while the financing is a multilateral transaction.

Shahani explains that Consumer Legal Funding does not contain any of the characteristics of a loan, as shown in the table below:

Characteristics To lend Consumer legal financing
Personal obligation to reimburse YES NO
Monthly or periodic payments YES NO
Risk of collection, garnishment, bankruptcy. YES NO

What’s interesting is that no state where lawmakers have carefully considered the product have classified it as a loan. In fact, states have gone so far as to state that legal consumer finance is unequivocal. not a loan. Take the example of Indiana: recently, a law was passed to regulate the industry, which specifically states: “Notwithstanding article 202 (i) of this chapter and article 502 (6) of this chapter, a CPAP[1] the transaction is not a consumer loan. The statute further specifies: “This section cannot be construed as causing a CPAP transaction in accordance with this section to be considered a loan or otherwise subject to any other provision of Indiana law governing loans. “

The Nebraska State Legislature said: Non-recourse civil litigation financing means a transaction in which a civil litigation finance company purchases and a consumer assigns the eventual right to receive an amount of the potential proceeds of the consumer’s legal claim to the finance company. civil litigation over the proceeds of any made settlement, judgment, award or verdict that the consumer may receive in the legal claim.

In Vermont: “Consumer Litigation Funding means a non-recourse transaction in which a business buys and a consumer assigns to the business a contingent right to receive an amount of the potential net proceeds of a settlement or judgment obtained from of the consumer’s legal claim. “

In other words, Consumer Legal Funding is specifically classified as a purchase and not a loan. And it’s not just state legislatures that have weighed in on this, so have the courts.

On June 27, 2017, the Georgia Court of Appeal stated: “Unlike loans, financing agreements don’t always require repayment. Any reimbursement, under the funding agreement, depends on the direction and timing of the plaintiffs’ personal injury litigation, which can be resolved by a myriad of possible outcomes, such as settlement, referral, judgment. summary or trial.

Even going back to 2005, when the New York attorney general’s office struck a deal with the industry, he said in his press release: “Cash advances provided by these businesses are not considered ‘loans’ under New York State law because there is no absolute obligation on a consumer to repay them.”

So that brings me back to my opening question: why is this important?

Classification is important because once you misrepresent the product by calling it a loan, you limit consumers’ availability to access it by subjecting Consumer Legal Funding to state laws that regulate lending. According to CNBC, 78% of Americans live paycheck to paycheck. When their stream of income is interrupted (usually due to an accident), they are in desperate need of economic assistance to help them get through the long and extensive process of filing their claims in court.

So we ask state legislators, when deciding how best to regulate this important financial product, to do what’s best for your constituents by giving them access to economic aid when they need it, and ensuring they are fully informed of the terms and conditions of the transaction by having their lawyer review it with them to confirm that it is properly classified as a purchase.

General statements characterizing the legal financing of consumer loans only serve to harm those who need its help.

Eric Schuller
President
Alliance for Responsible Legal Financing for Consumers

[1] Advance payment for CPAP civil proceedings

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