Rep. Andre Thapedi hopes to have a bill regulating the lawsuit lending industry on the governor’s desk by the end of May.
Thapedi, D-Chicago, presented two such measures, both of which he is signed on to as a sponsor, to the House Judiciary Committee on Thursday, when lawmakers spent about an hour hearing subject-matter testimony from eight witnesses and asking questions.
House Bill 2300 is backed by the Illinois Chamber of Commerce and would create the Consumer Lawsuit Lending Act while House Bill 2301 is being pushed by the industry and would create the Non-Recourse Civil Litigation Funding Act.
Thapedi told the committee that both bills address a relatively new business product in civil litigation. Some, he said, would label this product as litigation funding while others would dub it lawsuit loan sharking.
This product, he said, basically provides plaintiffs in litigation living money while they wait for their case to settle. He described it to committee members as a “non-recourse loan” because the financier “eats the loss” if the plaintiff borrower loses the underlying lawsuit.
Regardless of titles, Thapedi said the industry that offers this product needs to be regulated in order to protect consumers, the civil justice system and businesses.
“While there are huge benefits to plaintiffs, the catch with this new product is the amount of interest charged to the plaintiffs,” he said, noting that some rates are upwards of 200 percent.
“On the flipside,” Thapedi added, “there are concerns that this product both promotes lengthy and drawn out litigation while also discouraging settlements by plaintiffs who essentially have nothing to lose by having their cases fully discovered and going to trial.”
Todd Maisch, executive vice president of the Illinois Chamber, said his group made some concessions in an amendment to HB2300 that adopted consumer-friendly language from the industry’s proposal.
“We care about the consumer,” he said, adding that “we think these loans have huge potential to impact court cases … that’s our real aim here.”
He said he believes the issue at the crux of negotiations over legislation to regulate the lawsuit lending industry boils down to interest rates.
The chamber’s measure would cap the annual percentage rate that financers can charge consumers at 36 percent while the industry’s bill would allow financers to charge that rate “plus a deferment fee not to exceed 3 percent for each month the funding is outstanding with compounding to occur no more often than monthly.”
As president of Preferred Capital Funding, which provides cash advances to plaintiffs, Brian Garelli said “it is difficult, if not impossible to survive” at the 36 percent interest rate cap.
He told committee members that under the
Consumer Installment Loan Act, under which his business is currently regulated, he offers consumers two options when they seek cash advances.
They, Garelli said, can either agree to make monthly payments at the flat 36 percent interest rate or be charged that rate plus a 1 to 1.5 percent deferral fee that would allow them to bypass the monthly payments.
Most consumers end up agreeing to the deferral rate, which would bring the interest rate they are charged on their loan to about 48 percent a year.
“The market has set the rate and it’s not that high,” Garelli said, reminding the committee that if the plaintiff loses his or her underlying lawsuit, he’s out of money too. “The consumers aren’t complaining.”
Garelli, who said he believes he was the first person to get an Illinois license to do lawsuit lending in 1998, explained to lawmakers why he got into the business.
He said he worked as a defense attorney in Chicago for several years, during which time he watched insurance companies drag out the litigation process. By offering plaintiffs cash advances while they waited for their case to settle, Garelli said he hoped that would prevent them from accepting low ball offers.
Kevin Martin, executive director of the Illinois Insurance Association, told lawmakers during his testimony that he can ensure them that “the companies we represent are more inclined to want to settle more quickly.”
Obviously, he said, some cases encounter delays, but that “dragging things out” is “not our intent or goal.”
His group, Martin said, supports the Chamber’s bill for the most part.
On behalf of the Illinois Association of Defense Trial Counsel, Stephen Kaufmann, an attorney at HeplerBroom in Springfield, said he agreed with Martin.
In his experience as a defense attorney, Kaufmann said “insurance companies and defense counsels as a whole, I’m sure there are exceptions, do not have a strategy and practice of dragging out lawsuits and making them too expensive.”
“If anything,” he added, “there is pressure in the industry to get things handled and settled expeditiously” through mediation.
Pointing to the interest rate issue, Kaufmann said the IDTC supports the Chamber’s measure.
Tim McLean, who handles government relations for the Illinois Trial Lawyers Association (ILTA), gave lawmakers a list of what his group thinks should and should not be included in legislation regulating the lawsuit lending industry.
Saying that his group seeks to protect the right of plaintiffs, McLean said an agreed bill should protect the attorney client relationship by creating some “sort of firewall between the legal claim and the litigation funding agreement.”
It should also include provisions providing for fair regulation of fees, rescission, prompt notice to plaintiffs’ lawyers on the existence of a funding contract and language ensuring “that a plaintiff’s lawyer does not have a financial interest in the company that is providing the civil litigation funding.”
Jim Covington, director of legislative affairs for the Illinois State Bar Association, said the statewide bar group has a handful of technical issues with the industry-backed bill and a few concerns with the Chamber’s measure.
One of those concerns, he said, is the HB2300’s definition of lawsuit lending. Covington said its broadness and vagueness makes them actually contingency fee contracts between plaintiffs and attorneys.
In support of the industry’s bill, Eric Schuller, director of government affairs and community outreach at Oasis Legal Finance, told the House committee that HB 2301 includes best practices and standards that his and Garelli’s companies already adhere to.
He said the push to regulate this industry is part of national effort of the U.S. Chamber of Commerce. The Record is owned by the Chamber’s Institute for Legal Reform.
Schuller said there are currently 20 bills in 13 different states to better regulate the industry. He said three states – Maine, Nebraska and Ohio – have already passed legislation.
HB2301, he said, “goes further” than all three of those states combined did in their legislation.
Also in support of the industry’s bill, Kelly Gilroy, executive director of the American Legal Finance Association, said her trade association has “been working around the country to properly regulate this.”
She stressed to lawmakers that the term “lawsuit loans is a little bit of a misnomer” and reminded them that these types of loans, which she referred to as “a unique product” that simply provides consumers money for life needs.
Gilroy said these loans are not for legal fees as consumers seeking them already have contingent fee attorneys.
She told lawmakers that legal funding companies aren’t trying to help plaintiffs get more than what they deserve, but “help them hang on” for a fair settlement without having to worry about life expenses, like rent or bills.
They aren’t right for every case, but Gilroy said these types of lawsuit loans have proven to be “lifesavers” in others.
In addition to the testimony, several committee members, many of whom are lawyers, asked questions about how the industry works and expressed concerns about delaying the litigation process and charging consumers too high of an interest rate.
As a businessman, Rep. Dwight Kay, R-Glen Carbon, focused his line of questioning on the business side of the issue, but stopped after Thapedi asked that Oasis and Prudential not be required to give away too much of their business plans.
As an attorney, Rep. Scott Drury, D-Highwood, asked several questions about the relationship between attorneys and the lending companies.
In response to Drury’s question about how potential plaintiff consumers find out about legal funding companies, Garelli said many of his clients are referred to him by attorneys.
“We don’t give lawyers anything,” Garelli said.
He also told Drury in response to a question about the relationship between attorneys and these companies that “it’s not my goal to take the risk and go to trial either.”
Schuller said Oasis confirms that there is a legal claim pending when consumers seek funding from it and then has people in house who look at the case to determine what they think the case should settle for.
He said his company typically doesn’t fund more than 10 percent of that amount and if the attorney isn’t comfortable with that, Oasis “stops at that point.”
Although not in attendance at Thursday’s hearing, Travis Akin, executive director of the Illinois Lawsuit Abuse Watch, said in a statement that he supports the Chamber’s proposal.
“There is a danger that the growth of the lawsuit loan industry will lead to higher settlements and more lawsuits but I believe the common sense reforms contained in House Bill 2300 would provide the right framework and oversight for lawsuit loans,” he said.
Akin added, “If we are going to have lawsuit loans in Illinois, let’s make sure the industry is appropriately regulated and consumers are protected. Setting reasonable interest rates and requiring more transparency will go a long way toward protecting consumers.”