Ky. lawsuit lending bill irks business group

John O'Brien Feb. 25, 2011, 1:19pm

Kentucky Attorney General Jack Conway

FRANKFORT, Ky. (Legal Newsline) - Companies that provide loans to litigants are the main beneficiaries of a bill pending in the Kentucky Legislature, the state Chamber of Commerce says.

The Chamber claims House Bill 412, which requires lawsuit lenders to register with the Attorney General's Office and disclose certain contractual terms, encourages more litigation and is disguised as a consumer protection effort.

"(I)t involves mere registration with a non-regulatory agency. Proponents of HB 412 claim the bill would effectively rid the industry's 'bad apples' simply by requiring companies to register with the Attorney General's office and make specific contractual disclosures," says a letter written by the Chamber's Bryan Sunderland to members of the state Senate.

"First, the nature of these transactions should require lenders to adhere to Kentucky's fair-lending and usury laws. Instead, HB 412 allows lenders to avoid these protections altogether by specifically providing that '(n)othing contained in... this Act shall be construed to cause any pre-settlement funding transaction... to be deemed a loan or to be subject to any of the provisions governing loans contained in the Kentucky Revised Statutes.'"

Sunderland, the Chamber's vice president of public affairs, says the bill does nothing to cap the interest rates charged to customers - just that the amount of interest and fees can't exceed the amount of recovery.

"This is no surprise since one industry executive testified at last week's House Judiciary Committee meeting that lenders typically charge 2-10 percent per month, compounded annually at 24-120 percent," Sunderland said.

"Companies must charge these exorbitant rates to ensure a healthy profit, all the while consumers suffer."

The bill passed the House of Representatives in a 68-24 vote on Feb. 18 and moved to the Senate Judiciary Committee. It gives the Attorney General's Office the power to regulate the industry, while requiring lenders to pay a $50,000 bond. Companies must also pay a $1,000 fee to register, then $200 for an annual renewal.

Among the consumer protection measures are:

-The consumer must be represented by an attorney in the legal claim for which the company is providing financing;

-Lenders can't pay or offer to pay commissions or referral fees to any attorney, law firm, medical provider, chiropractor or physical therapist for referring a consumer to them;

-Lenders can't accept commissions, fees or rebates from an attorney, law firm, medical provider, chiropractor or physical therapist;

-Lenders can't make false or misleading statements in advertisements;

-Lenders can't refer a client to a specific attorney, law firm, medical provider, chiropractor or physical therapist; and

-Lenders can't make any decisions about the litigation.

"(N)othing in the bill prevents lenders from otherwise exerting pressure or influencing plaintiffs at the plaintiff's expense," Sunderland wrote. "Even if lenders are not overtly involved in decision making, plaintiffs will often reject or accept settlement offers based on their ability to pay back the borrowed money and the resulting high interest fees.

"The control that lawsuit lenders exercise over claims, whether directly or indirectly incentivizes plaintiffs to prolong lawsuits until a settlement lucrative enough to cover their obligations is recovered."

Sunderland concluded that the bill was written for out-of-state lawsuit lenders by out-of-state lawsuit lenders.

"Under the banner of consumer protection, it authorizes the practice of litigation financing while offering few protections to consumers," he wrote.

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