Consumer Protection Guidelines on Pre-Settlement Loans

Consumer Protection Guidelines on Pre-Settlement Loans

Lending companies like take a substantial risk of approving pre-settlement lawsuit loans since they do not get any amount from the plaintiff if the case is lost.  Lawsuit funding companies want to make sure that the plaintiff’s case will pay off handsomely so they are picky about cases they accept before they approve pre-settlement funding.

Pre-Settlement Lawsuit Loans are Not Regulates as Much as Other Loans Are

Not all states and courts require lawsuit lenders to comply with state lending laws.  For this reason, it is best to talk to an attorney about the existing laws in your state regarding lawsuit lending laws.

Generally, the lawsuit and settlement funding industry are largely unregulated because it is a relatively new industry according to Amy Loftsgordon, a legal editor at The Nolo Network.  She further emphasized that you must be extra vigilant if you are considering a lawsuit loan. Favorably, however,  she said that state legislatures have begun considering whether the lawsuit loan industry should be regulated.

Why Lawmakers Are Considering a Reform in Lawsuit Funding

The lack of regulation in the lawsuit funding industry together with the nature of pre-settlement lawsuit loans, with emotionally charged cases and high dollar amounts at stake, has turned some lending companies into predators.  

The New York Post and other news outlets have reported the urgent need for reform in funding lawsuit loans.  They highlighted the ways in which many lawsuit funding companies aggressively advertise to vulnerable individuals, among other predatory moves like:

  • Exploiting victims of personal injury when they are distressed and desperate
  • Lawyers who funnel cash-strapped consumers to lenders, banking on a guaranteed payout after the case is settled
  • Unapologetically capitalizing on people looking for a  frenzied solution to their financial woes
  • Charging un-capped and unregulated interest rates that can surpass 200 percent that leave the plaintiff with little to no money at the end of the lawsuit. 

 The US Chamber of Commerce stated that these exorbitant interest rates make it significantly more difficult for the borrowers to settle their cases as the cost is so driven up by the loan costs, ending up with the lawsuit lender as the sole beneficiary.

Are There Laws Addressing Pre-Settlement Lawsuit Loans to Protect Consumers?

A number of states have enacted legislation to protect consumers from predatory lawsuit funding companies where plaintiffs turn to for financial assistance during a lawsuit.  It’s pleasurable to know that the pre-settlement funding companies have generally welcomed these regulations and have even spoken before legislatures to help inform these new policies.

These laws were made to protect consumers from unwarranted high costs and to ensure that both lenders and lawyers are working in the best interest of their clients.  Regulations, restrictions, and enacting legislation or consumer protection guidelines on litigation financing differ in each state.

Here are most of the regulations on aspects of the lawsuit funding process that are being considered in several states:

  1.  Limit interest rates on lawsuit cash advances or pre-settlement lawsuit loans to compare rates on other consumer-lending contracts.

The state of Colorado, for example, set a maximum annual interest rate limit of 45% for consumer loans, including pre-settlement lawsuit loans.  Imposing interest caps by setting reasonable rates and fee restrictions will protect consumers against “unfair practices by some suppliers of consumer credit”.  This is to support the purpose of permitting and encouraging the development of fair and economically sound consumer credit practices.

  1.  Ban lawyers from receiving referral fees for pre-settlement lawsuit loans and from having a financial stake in lawsuit funding firms.
  1.  Regulation on the other aspects of the pre-settlement lawsuit loan process like obtaining a license from the state, and other fees.

Choose the Right Pre-Settlement Lawsuit Loan Company

A reputable pre-settlement lawsuit company is one who has welcomed the regulations on lawsuit funding to protect consumers like you.  Before you decide to take on a settlement loan, talk with a trusted and reputable lawyer who has experience with lawsuit funding companies. 

Pay close attention to interest rates and fees before you sign any document.  Your lawyer should be able to represent your case competently and the lawsuit loan company should take your best interest at hand.  In short, when choosing a lawyer and a pre-settlement lawsuit loan lender, shop carefully, and shop smart.