SPRINGFIELD — With powerful lobbyists on both sides of the issue, lawmakers in several states, including Illinois, continue to grapple with the question of how to regulate a growing industry linked to consumer litigation. But a new law in Vermont shows it can be done.
After a year of scrutinizing consumer lawsuit lending in the state, Vermont legislators passed a law setting stricter boundaries on the emerging industry, with the goal of setting clear rules and protecting consumers.
Travis Akin, executive director of Illinois Lawsuit Abuse Watch Courtesy of Travis Akin
“This was an issue that was important for us to take up in Vermont,” said Rep. William Botzow, a Democrat who sponsored the legislation known as House Bill 84.
The lawsuit lending industry provides upfront money to consumers who want to cover immediate living or medical expenses during an ongoing civil lawsuit. There are several types of lawsuit lending, but legislation in Vermont and Illinois refers to consumer legal funding by which a financing company provides a non-recourse loan or cash advances to a plaintiff involved in a lawsuit, typically over a personal injury.
“Non-recourse” means the consumer isn’t on the hook for the loan if they don’t recover anything through court action. These types of loans are usually provided at high interest rates – often more than 150 percent – and then must be paid back to the lender once the plaintiff’s claim results in a settlement or judgment.
Proposed legislation comes up pretty regularly in Springfield, Travis Akin, director of Illinois Lawsuit Abuse Watch, which advocates legal reform, told the Record. Though Democrats and Republicans have shown an interest in regulation of some kind, nothing has passed the committee stage.
In 2014, a pro-business bill sponsored by State Sen. Dale Righter (R-Mattoon) would have capped the amount of money a lender can finance for litigants at $40,000, as well as cap the amount of interest and fees lenders can charge these consumers at 80 percent of a legal claim.
The same year, Sen. Bill Haine (D-Alton) sponsored a pro-industry bill favoring the plaintiffs' bar. It also outlined some regulations, but fell short of setting any caps.
Earlier attempts also failed, including a pro-business bill aimed at capping the annual percentage rate that financiers could charge consumers at 36 percent. An industry bill would have allowed financiers to charge 36 percent “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.”
Illinois needs more oversight of lawsuit lending, Akin said. He added that lawmakers should pursue a "thoughtful and reasonable compromise."
“Here in Illinois, lawsuit lenders have been pushing legislation to codify outrageously high interest rates,” he said. “These high interest rates ultimately lead to a higher cost of litigation. The money to pay back lawsuit loans has to come from somewhere and that somewhere would be the businesses and individuals who are the targets of litigation.”
In Vermont, Botzow first learned about lawsuit lending when he attended a National Conference for Insurance Legislators where those in attendance worked on model legislation. At home, he and other lawmakers had noticed more television ads for this form of financing that led them to wonder if it was driving consumers toward this industry that they didn’t understand.
He said attorneys raised examples of clients who signed on to loans whose terms included interest rates “north of 100 percent.”
“We didn’t want to completely ban the activity because we found it was often quite helpful to individuals,” he said. Without it, some plaintiffs with strong cases whose circumstances were more desperate would be more likely to settle for an unfairly low amount to avoid a drawn out case.
Vermont tackled the issue in two steps over two legislative sessions. In 2015, the legislature passed a bill requiring the state finance department to study the issue — how prevalent is it in the state? Should regulation include a cap on interest rates?
In December, a report concluded that there isn’t a lot of activity in the state right now but it should be watched. This year, legislators agreed on a law that requires litigation funding companies to get licensed if they want to operate in the state. These companies also must are also provide certain information to customers and submit annual reports on their business in the state, which includes how much they loaned and at what interest rates.
Along with registration, the bill requires funding companies to post a surety bond or a letter of credit. The security should be either twice the amount of the largest fund they provided over three years, or $50,000 — whichever is greater.
Botzow said legislators went a different route on interest rates because, without a lot of history in the state or knowledge of what’s suitable for the industry, they “would just be picking a number out of thin air.” He said they agreed requiring companies to report will push the market to regulate interest rates on its own. If a company charges too much, it’s likely legislators would come back and reconsider the law.
“We’ll see if that bears out,” Botzow said. “It’s all emerging. It’s all something we should continue to watch.”
The matter received attention from pro-industry and pro-business interest groups as it has in Illinois. Botzow said lending companies were supportive of the approach Vermont took.
“They wanted it to be fair because they believed their new and emerging industry would be damaged by bad actors,” he said.
Insurance companies and other business entities wanted a cap but understood legislators wanted to let the market work.
The issue has been controversial since before it came to the U.S. On a grander scale, third-party litigation funding has become a way for investors to speculate on judicial outcomes to make money. Deborah Hensler, a professor at Stanford Law School, who has expertise in the higher value commercial financing of litigation, told the Record she has mixed views on the consumer side of the spectrum.
For medical malpractice or product liability claims that take a long time to resolve, a plaintiff may need help covering medical expenses or lost income. Taking out a loan may be attractive to avoid taking a settlement too early in the course of the trial. But that doesn’t justify some lenders fees that can leave the plaintiff with little at the lawsuit’s conclusion, Hensler said.
“This can be a very bad deal for the plaintiff, who may not be well-informed about how easy or hard it will be to settle her case or for how much,” she said. “In other words, there is considerable risk of exploitation. In my view this puts at least some lawsuit lending in a similar category to payday loans, which serve a need but often at an immense cost to borrowers.”
She would like to see the dispute resolution process become more efficient to reduce the need for lawsuit lending. She also supports limiting what lenders can charge and would require lawyers and lenders disclose more information, such as the range of possible outcomes and how long the matter could last, so plaintiffs are well informed.
People who have studied the industry also worry about the influence the money may have on a case, particularly in high-value cases. Botzow said Vermont lawmakers took their time examining the issue because they realized there’s more at stake than business interests.
“You always have to be careful. You don’t want it to influence in any way how justice is being done,” he said, adding that the law is about protecting consumers – from the industry and from taking a settlement that doesn’t make them whole. “It gets down to real people’s lives.”