Nevada could become one of the few states to pass explicit regulations monitoring companies that offer cash advances to plaintiffs in pending lawsuits, thanks to a bill that has quietly passed the Legislature.
Proponents of the bill believe it provides operational clarity and consumer protection for a growing industry that is largely unregulated today. However, at least one state regulator has warned that the bill could open the door for predatory companies to prey on financially vulnerable people the same way payday lenders do.
The practice under discussion goes by many names: consumer legal financing, third-party litigation financing, pre-settlement loans, court cash advances, or some combination of those words.
Here’s an example of how it’s supposed to work: a man has to pay his rent soon or face eviction. He does not have enough money on hand because he is unable to work due to an ongoing injury. However, he is suing the company responsible for his injury. The man’s lawyer thinks the case is solid and will result in a large payout, but only after a lengthy court battle. In the meantime, the man in need of the rent money could turn to a third-party company and ask for what is essentially a cash advance on his future legal settlement. The third party company would assume the risk. If the man’s trial fails and he doesn’t make any money, the man pays them nothing. If the man’s lawsuit is successful, the man repays the money advanced under terms detailed in a contract.
Only about half a dozen states have specific regulations for companies that offer these types of financial arrangements. Other states, including Nevada currently, bundle these companies with traditional installment loan businesses like banks.
Senate Bill 432 would create a new class of business called “consumer litigation funding companies” and set standards and limits 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 finance is not a loan and therefore needs to be treated separately. They argue that loans, by definition, must be repaid.
Critics of legal cash advances counter that when such transactions require repayment (following the successful conclusion of a lawsuit), the consumer often owes much more than he received due to interest rates – a little like a loan.
A study cited in a Law 360 article earlier this month, we analyzed 200,000 cases handled by a national litigation funding firm over a decade. According to the article: “Researchers found that in funded and completed cases, the company provided an average of $6,903 in funding; the median was $2,250. The average amount owed at the end of the litigation was $16,964 and the median was $4,849.
In the worst horror stories across the country, unlicensed or unregulated companies have taken almost every penny from people’s settlements or judgments.
An approved amendment to SB 432 includes provisions intended to protect consumers from what is happening here in Nevada. These include disclosing the fees that will be charged, prohibiting bribes, commissions and referral fees, and setting a cap on fees at 40% per year. (This 40% fee cap mirrors the state’s cap on traditional loans. Meanwhile, Nevada does not cap interest rates for payday loans; therefore, interest rates may exceed 600%.)
“It’s a tool,” Kelly Gilroy, executive director of the American Legal Finance Association (ALFA), told lawmakers during her Senate committee hearing. “For people in the right circumstances, for the right reasons, it can save their lives.”
A Federal Reserve study released last year found 41% of Americans couldn’t cover a $400 emergency expense in cash and would have to borrow through credit cards, family or friends.
Only 5% of respondents said they would consider payday loans or a similar product.
The litigation funding industry is struggling to distance itself from payday loans, which more and more states are trying to clamp down on.
“We have no impact on credit. We are not repossessing,” Gilroy said. “It never puts (the consumer) in a worse position, even if they lose the case. That’s okay. It doesn’t get them into a cycle of indebtedness.
Instead, argue Gilroy and others, consumer legal funding allows plaintiffs to “get by” and prevents them from settling their valid lawsuit early out of financial necessity.
Others expressed doubts.
George Burns, the recently retired commissioner of the Nevada Business Department’s financial institutions division, told lawmakers at the Senate committee hearing that consumer legal financing is “a form of lending in all conventional understandings.” . He was concerned that the industry-preferred “not a loan” classification would ultimately hurt consumers, as they are used to understanding loan terms (like APR). It would also exempt these companies from federal laws like the Truth in Lending Act that require the disclosure of certain information.
“I don’t expect another payday loan problem for the state,” he added.
Local consumer protection advocates, who have been quick to limit or limit payday lending practices in Nevada, have so far been silent on the topic of consumer legal funding. Nationally, the debate on the subject has centered on whether consumers are truly aware of the terms of the contracts they sign and whether the practice of consumer legal financing has become more commonplace as the legislation is spreading in various states.
A perusal of existing websites advertising pre-settlement loans here in Nevada promise low rates, no income checks, and no credit checks. They largely target people with personal injury claims – car accidents, dog bite accidents, or workplace injuries. Some promise immediate cash the same day.
The imaginary scenario of a man using a cash advance to keep his family in his house is a good selling point for the proposed legislation, but critics worry about a future where mass advertising begins to market to people who are not facing real emergencies. Some fear this will prolong or encourage more lawsuits and cost companies more money.
SB 432 was passed unanimously by the Senate on April 23. It was rejected by the Assembly Trade and Labor Committee on deadline day. He is now awaiting a floor vote.