State Lawmakers Consider Limits On ‘Payday’ Lawsuit Loans

We’ve written a lot over the years about standard payday loans — short-term, high-interest loans from non-bank lenders — and similar deposit-advance loans offered by some of the nation’s largest banks. But there is a growing form of short-term loan that lawmakers are concerned about — loans to plaintiffs of pending lawsuits.

These loans often involve personal injury lawsuits, with plaintiffs borrowing enough money to remain solvent pending an outcome. Once a settlement or verdict in favor of the plaintiff is reached, the money is paid back. If the plaintiff receives nothing, neither do the lenders.

Some say the loans are necessary to make sure that plaintiffs don’t back down from a lawsuit out of fear of going broke, but the Wall Street Journal reports that some state lawmakers contend that these loans encourage nuisance lawsuits. Other critics worry that plaintiffs may accept settlements that are too low just to get out from under the thumb of the lender.

“If the litigation goes on for any protracted period of time, there’s a good chance your client isn’t going to see any money at all,” explains a lawyer and president of the Rhode Island Association for Justice to the Journal. “Every other type of loan is regulated, and these should be, too.”

Finally, there are those that say — much like other forms of short-term lending — that the lenders charge an exorbitantly high amount to the borrowers; in some cases, it’s the equivalent of a 100% APR.

A number of states, including Louisiana, North Carolina, Oklahoma, Rhode Island, and Texas, are considering legislation that would regulate these sorts of loans.

“The interest rates are ridiculous,” says the Louisiana state senator who sponsored legislation that caps legal loan fees between 21% and 36% a year, depending on the amount of the loan. “You have $3,000 loans that turn into $15,000 obligations.”

However, those that offer these loans contend that, since the borrower puts up nothing as collateral and repays nothing if the lawsuit fails, this form of financing does not even qualify as a “loan.”

“These aren’t loans,” explains a rep for one legal financing company. “They’re fundings in which we bear all the risk.”