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‘Lawsuit loans’ face more scrutiny

Berne lawmaker wants practice regulated

– Indiana lawmakers are eyeing a growing industry that advances money to plaintiffs waiting for a lawsuit settlement, sometimes at a high cost.

Indiana currently has no regulations for so-called lawsuit lending. Rep. Matt Lehman, R-Berne, pushed a bill last year to impose some restrictions, but it failed under lobbying pressure by the industry.

He is trying a new tack in 2014, bolstered by the Indiana Chamber of Commerce tapping it as a top legislative priority.

“There is probably a necessity for this industry. People need to pay bills. At the same time, there is desperation here and consumers are making bad choices,” he said. “A 100 percent return is ridiculous. We don’t want to stop free-market enterprise, but when you begin to take advantage, we need to step in.”

He said he considers the practice predatory lending, though some don’t agree with him.

As chair of the House Insurance Committee, the issue came to Lehman’s attention because the cases usually involve insurance settlements. For instance, someone is injured in a car accident and sues. But in the meantime, that person needs need cash to pay rent because he or she can’t work.

So the person goes to a third-party company that reviews the case and agrees to advance money that will be repaid – with additional fees – when a settlement is reached.

Most of these companies are nationwide, and the industry has been around for 10 or 15 years.

Lehman said no states have banned the practice. And he is focused on regulations, starting with having companies register with the state.

The industry welcomes some basic rules, said Kelly Gilroy, executive director of the American Legal Finance Association.

In some states, for instance, businesses register with a state agency, and there are standardized contracts.

She said members of her association abide by some key rules, including that the person must be represented by an attorney and an attorney has to sign off on the contract. The money also is not used to cover legal expenses.

But these rules are voluntary in Indiana, where the practice is unregulated.

Gilroy doesn’t refer to the money as a loan or lending. She says instead it is consumer legal funding.

Lehman tried to insert the regulations under the current loan statute last year, but the industry fought hard against it until the bill died.

Gilroy argues it is not a loan because there is no guaranteed repayment. If the settlement is less than expected, the company might receive a lower amount or nothing at all. It doesn’t affect a person’s credit either.

She said her association has more than 30 members and the average advance is about $4,200. Some of them say 50 percent of the time they get what is agreed to in the contract, while others say it is more like 20 percent.

That risk is why the cost to receive the money is sometimes high, and the fees grow the longer the case lingers.

“Companies don’t know when or even if it will be paid back,” Gilroy said.

Lehman said there are examples of someone borrowing $1,000 and owing $2,500 the next week.

He has moved away from calling the practice a loan and is willing to move it to a separate part of state law. His legislation will include disclosure requirements and registering with the state.

But he and other lawmakers still want a cap on fees that can be charged for the cash. That is where the debate will occur in the legislature, as he suggested maybe starting at a 40 percent rate.

Gilroy said a cap isn’t necessary.

“When you deal with a very unique product like this all the regulations have to be meant for this,” she said. “When you completely disclose in a contract what a person is getting into – and an attorney signs on – that allows a consumer on Day One to determine if they want to be a part of it.”

She noted her association members also allow plaintiffs to take the money and return it within five days with no penalty or fees.

The Indiana Chamber of Commerce believes that on a long-term basis the practice is causing more jury trials.

Though there are no statistical data to back up the claim, Indiana Chamber Vice President Mike Ripley said plaintiffs are turning down settlements because they don’t leave anything for the person after the cash is paid back and attorneys are compensated.

“We think if there is maybe a cap on the interest rate on the loans that may cut down on some of the big loan amounts they have to pay back,” he said. “Transparency issues also should be addressed.”

He said the industry has said even a 50 percent cap on fees might put them out of business.

The Indiana Trial Lawyers Association is trying to stay out of the issue, calling itself neutral.

“It’s one of those necessary evils that exist in our world. For cases where someone is catastrophically injured … the only place they have to turn is someone willing to loan them money while they hope to get a cash settlement. It serves a necessary purpose,” said Daniel Ladendorf, legislative chair for the Trial Lawyers Association.

He did note that some might call the costs abusive.

“That part is distasteful,” Ladendorf said. “If the goal is to regulate the industry and make these loans more consumer safe, that’s not a bad thing.”

He said he hasn’t seen any settlements being turned down or prolonged because of lawsuit lending in his personal practice.

There also was testimony this past summer that there have been no complaints filed with the attorney general on the issue.