John O'Brien Nov. 17, 2014, 1:28pm

COLUMBIA, S.C. (Legal Newsline) – Entities that fund litigation in exchange for a piece of any recovery are providing loans, as the term is defined by South Carolina law, a state agency has ruled.

On Friday, the South Carolina Department of Consumer Affairs decided that those companies that conduct such business must comply with state law governing loans. The practice is known as third-party litigation financing, lawsuit lending and litigation funding, among other terms.

Lawsuit lenders have argued that they are not providing loans because they ask for no repayment if the litigation is unsuccessful.

“Given the plain language of the Code and necessity to interpret its provisions liberally to further the protection of consumers, transactions similar to litigation funding have also more recently been determined to constitute loans pursuant to the Code,” SCDCA administrator Carri Grube Lybarker wrote.

“The absence of an unconditional obligation to repay an advance of funds has not dissuaded South Carolina courts and the Department in ruling a transaction is a loan either.”

Lybarker considered how other states are dealing with lawsuit lenders, mentioning Colorado Attorney General John Suthers’ so-far successful lawsuit against Oasis Legal Finance that seeks to treat the company as a traditional lender. The state Supreme Court will decide Oasis’ appeal.

Meanwhile, Oklahoma and Maine have signed bills aimed at the industry. As Legal Newsline previously reported, Oklahoma Gov. Mary Fallin signed her state’s bill into law in June 2013.

Also of note was the Kansas Office of the State Bank Commissioner’s 2009 ruling that the agreements constitute loans under state law.

The loans are usually provided at high interest rates — often more than 100 percent — and then must be paid back to the lender once the plaintiff’s claims result in a settlement or judgment.

By ruling a lawsuit lender is a traditional lender, it places restrictions on the interest rates that can be charged.

“The broad concept of a ‘loan’ under the (Uniform Consumer Credit Code) certainly encompasses those circumstances where the consumer does not have an unconditional obligation to repay,” Lybarker wrote.

“The potential for non-payment in a litigation loan transaction is similar to a pawn transaction – the goods pawned may not have the value anticipated, thus the lender would not receive payment (whether full or at all), nor is there an alternate means to collect.

“Refund anticipation loans place the lender in a like position whereby conditions are placed on the consumers obligation – payment is only required under specified circumstances.”

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