Amanda Robert Dec. 15, 2014, 10:50am

INDIANAPOLIS (Legal Newsline) - In recent years, states have increasingly introduced and passed legislation to regulate lawsuit lending, a trend that those familiar with the industry say will continue in 2015.

“You know how legislation goes, it’s a little uncertain, but there are a number of states where we are expecting legislative activity,” said Joe Thesing, vice president of state affairs for the National Association of Mutual Insurance Companies. “Indiana is certainly at the top of that list.”

Several Hoosier State legislators, like Rep. Matt Lehman, R-Berne, have already attempted to pass legislation aimed at lawsuit lending – the practice in which third-party companies fund litigation in exchange for a portion of a successful recovery.

“It is a totally unregulated industry,” Lehman said. “We regulate pawn shops, we regulate payday lenders, but we don’t do anything with this industry.

“We began to see a lot of predatory lending. A person would borrow $2,500, and they would pay that back, plus another $2,500. Their interest rates would be over 100 percent.”

Lehman, who chairs the House Insurance Committee, introduced a bill in 2013 that included specific requirements for “civil proceeding advance payment transactions,” asked lawsuit lenders to register with the state’s Department of Insurance and, most contentiously, capped the interest rates on lawsuit loans.

The bill passed the House in January, but failed to get a hearing in the Senate.

Lehman has also focused on lawsuit lending at the national level. As chairman of the National Conference of Insurance Legislators’ Property-Casualty Insurance Committee, he helped review model legislation that addressed lawsuit lending in 2013.

While Lehman proposed a model with a cap on interest rates, New York state Sen. Neil Breslin proposed a model without the cap. He said NCOIL didn’t pass either one and asked them to come up with a compromise.

“The problem was that the lawsuit lending industry never wanted to include a cap of any sort,” Lehman said. “But then in September, they came back with this 45 percent compromise.”

But, Lehman said, NCOIL again failed to pass the model legislation this year.

Lehman confirmed that in 2015, he will reintroduce a bill in Indiana that includes strong regulatory components for lawsuit lending and a cap on interest rates.

Marty Wood, president of the Insurance Institute of Indiana, argued that Lehman is the key to successful legislation not only in Indiana, but across the country. He said the lawmaker tried to bring the two sides together and encouraged the lawsuit lending industry to accept an interest rate cap.

“We’re hoping that will impact the position of the chairman who might hear the bill,” Wood said. “Aside from that, we’re going to try to make a strong case that rather than a tort bill, this is a financial institutions bill and should probably go to a different committee than it has gone the past couple of years.”

Indiana Sens. Doug Eckerty, R-Yorktown, and Randy Head, R-Logansport, have also introduced bills that target the lawsuit lending industry.

Eckerty introduced a bill in 2013 that made lawsuit lending loans subject to the same regulations as traditional loans. He said his intention was to end the practice, but the bill died in committee.

“I’m not a big fan of the lawsuit lending industry,” Eckerty said. “I think it’s just a mechanism to encourage more lawsuits and to burden the judicial system even further.”

Eckerty doesn’t plan to reintroduce his bill in 2015, but expects to see more bills from other legislators who want to regulate the industry.

“The problem is, once we enter into the regulation of the practice, basically by default, we’ve brought the industry into existence,” he said. “I don’t really want to do that, but it’s entirely possible that we might end up there.”

Head sees the issue from another perspective, and in 2011, introduced a bill that would “regulate the legal funding industry without putting it out of business.” He contends that while many believe the interest rates on lawsuit loans are too high, lawsuit lending companies can’t operate under the same rules as other loans.

Head’s bill, which established new procedures and contractual requirements for lawsuit lenders, passed the Senate, but never made it through the House.

Head plans to reintroduce a similar bill in 2015. He said it stands a better chance of gaining approval in the Senate than in the House, particularly since Lehman wants to put caps on interest rates next year.

“There’s a middle ground that we can reach,” Head said. “I can understand people being concerned about funding frivolous lawsuits, but really, we’re not. If a company wants to fund frivolous lawsuits all the time, they will go out of business.”

Eric Schuller, director of government affairs for Oasis Legal Finance, one of the largest lawsuit lending companies, contended that bills like the one Lehman proposes would restrict lawsuit lenders and potentially keep them from operating in Indiana.

Schuller said his company instead supports Head’s proposed bill since it includes comprehensive benefits for both the industry and consumers. He added that it mirrors legislation that has worked in other states, like Maine, Ohio, Nebraska and Oklahoma.

“The industry is actually regulated properly in those states,” Schuller said. “They have true notice and disclosures, so a consumer knows Day One what they will owe on the transaction. In other words, if we give you a dollar today, how much will you owe us in six months or 12 months?

“And, it is not treated as a loan product. It is treated as a purchase of an asset, meaning there are no rate restrictions associated with this.”

From Thesing’s perspective, as a leader of a national trade association of mutual property and casualty insurance companies, other states like Colorado, Kansas, Louisiana, Maryland, North Carolina, South Carolina and Tennessee, have come down on the right side of the issue.

In these states, attorneys general, courts or regulators have decided that lawsuit loans should be classified as loans and subject to the consumer code in each state. As a result, there will be a cap on their interest rates.

In July, Tennessee became the first state in the country to implement a cap on interest rates charged by lawsuit lenders. According to the new law, lenders must cap their interest rates at 36 percent. They are also permitted to charge an additional 10 percent administrative fee.

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