Nevada may become one of a handful of states to enact explicit regulations overseeing businesses that offer cash advances to plaintiffs of pending lawsuits, thanks to a bill that has quietly been moving through the Legislature.
Proponents of the bill believe it provides operational clarity and consumer protections for an expanding industry that is largely unregulated today. However, at least one state regulator has cautioned the bill could open the door for predatory businesses to prey on the financially vulnerable in much the same way payday lenders do.
The practice up for debate goes by many names: consumer legal funding, third-party litigation financing, pre-settlement loans, lawsuit cash advances or some combination of these words.
Here’s an example of how it’s supposed to work: A man needs to pay rent soon or face eviction. He doesn’t have enough money on hand because he’s been unable to work due to an ongoing injury. However, he is suing the company responsible for his injury. The man’s lawyer believes the case is strong and will result in a significant payout, but only after a drawn-out court battle. In the meantime, the man in need of rent money could turn to a third-party company and request what is essentially a cash advance on his future legal settlement. The third-party company would take on the risk. If the man’s lawsuit fails and he wins no money, the man pays them nothing. If the man’s lawsuit is successful, the man repays the advanced cash according to terms detailed in a contract.
Only about half a dozen states have regulations specific to the companies that offer these types of financial agreements. Other states, including Nevada currently, lump such companies in with traditional installment loan businesses like banks.
Senate Bill 432 would create a new business category called “consumer litigation funding companies” and establish standards and limitations on how these companies can legally operate. The legislation is sponsored by the Senate Judiciary Committee, which is chaired by Senate Majority Leader Nicole Cannizzaro.
Proponents say a separate classification is needed because consumer legal funding is not a loan and therefore needs to be treated separately. They argue that loans by definition must be paid back.
Critics of legal cash advances counter that when such transactions do require repayment (after the successful end of a lawsuit), the consumer often owes significantly more than they received due to interest rates — much like a loan.
A study cited in a Law 360 article earlier this month analyzed 200,000 cases handled by a nationwide litigation finance firm over a decade. According to the article: “Researchers found that in cases that were funded and completed, the firm provided an average of $6,903 in funding; the median was $2,250. The average amount due at the end of the litigation was $16,964 and the median was $4,849.”
In the worst of the horror stories from across the country, unlicensed or unregulated companies took nearly every penny of people’s settlement or judgment.
An approved amendment to SB 432 includes provisions meant to protect consumers from having that happen here in Nevada. Those include disclosing what fees will be charged, prohibiting kickbacks, commissions and referral fees, and setting a cap for fees at 40% annually. (That 40% fee cap mirrors the state’s cap on traditional loans. Meanwhile, Nevada does not cap interest rates for payday loans; as a result interest rates can be upwards of 600%.)
“This is a tool,” American Legal Finance Association (ALFA) Executive Director Kelly Gilroy told legislators during its senate committee hearing. “For people who are in the right circumstances, for the right reasons, it can be a lifesaver for them.”
A study from the Federal Reserve released last year found 41% of Americans could not cover a $400 emergency expense in cash and would have to borrow from credit cards, family or friends.
Only 5% of those surveyed said they’d turn to payday lending or a similar product.
The litigation funding industry pushes hard to distance itself from payday lending, which more and more states are attempting to crack down on.
“We don’t impact credit. We don’t repossess,” said Gilroy. “It never puts (the consumer) in a worse position, even if they lose the case. There’s no harm. It doesn’t pull them into a cycle of debt.”
Instead, Gilroy and others argue, consumer legal funding allows plaintiffs to “ride it out” and keeps them from settling their valid lawsuit early out of financial necessity.
Others have expressed doubts.
George Burns, the recently retired Commissioner of the Nevada Department of Business’s Financial Institutions Division, told legislators during the Senate committee hearing that consumer legal funding is “a form of lending in all conventional understandings.” He worried that going along with the industry-preferred “not a loan” classification would ultimately hurt consumers because they are accustomed to understanding loan terms (like APR). It would also exempt such companies from federal laws like the Truth in Lending Act that mandates certain information be disclosed.
“I am not looking forward to another payday lending issue for the state,” he added.
Local consumer protection advocates, which haven’t been shy about their desire to cap or curb payday lending practices in Nevada, have so far been mum on the topic of consumer legal funding. Nationally, debate over the topic has focused on whether consumers are truly aware of the terms of the contracts they sign, and how commonplace the practice of consumer legal funding might become as legislation spreads through various states.
A perusal of existing websites advertising pre-settlement loans here in Nevada promise low rates, no income verification and no credit check. They largely target people with personal injury claims — auto accidents, dog bite accidents or workplace injuries. Some promise same-day immediate cash.
The imagined scenario of a man using a lawsuit cash advance to keep his family in his home is a good selling point for the proposed legislation, but critics worry about a future where mass advertising begins to market to people who aren’t facing true emergencies. Some worry it will prolong or encourage more lawsuits and cost businesses more money.
SB 432 unanimously passed the Senate on April 23. It was voted out of the Assembly Commerce and Labor Committee on deadline day. It now awaits a floor vote.