Lawsuit lenders prey on desperate personal injury plaintiffs

Lawsuit lenders convince cash-strapped plaintiffs to give up most of their future settlement in exchange for money now. Image: CC mrmaccc/Flickr

Lawsuit lending involves investing cash in a legal case for a percentage of the proceeds if the plaintiff wins. Lawsuit lending has exploded in the last decade as banks and hedge funds look for lucrative investment alternatives. Lawsuit loans are unregulated in most states and the practice is being called “legal loan-sharking” by consumer advocates.

Lawsuit lenders deny making loans

Lawsuit lenders shell out more than $100 million a year in bets that plaintiffs will win their cases. Lawsuit loans escape regulation by lending laws because companies engaging in the practice contend they are not lenders. Lawsuit lenders call their transactions investments, not loans, because a client doesn’t have to pay the money back if they lose their case. Because they are not subject to limits on interest rates, lawsuit lenders charge APRs as high as 215 percent, claiming that lawsuit loans are riskier than other forms of lending.

Lawsuit loans billed as quick cash and easy money

The claim by lawsuit lenders that lawsuit loans are risky is challenged by certain facts. Lawsuit lenders scan legal notices for prospects and saturate late-night television with ads promising quick cash and easy money. They cherry-pick opportunities to look for sure things such as pharmaceutical class action suits and cash-strapped plaintiffs involved in personal injury cases. A personal injury lawyer told the New York Times that when he was hired to screen applicants for a lawsuit lender he was told to never mention the cost of the loan, which could go as high as 99 percent of the lawsuit loan amount.

States catching up with lawsuit lenders

Lawsuit lenders have escaped regulation by successfully lobbying state legislatures to exclude lawsuit loans from laws that regulate the credit and lending industries. But a law exempting lawsuit lenders from regulation was blocked Jan. 7 in the Illinois General Assembly. In December, Colorado filed a lawsuit against two of the nation’s largest lawsuit lenders, Oasis and LawCash. Colorado attorney general John W. Suthers said that since borrowers are charged interest once they receive a settlement, lawsuit loans are indeed loans, and Oasis and LawCash are violating Colorado lending laws.