TRENTON, N.J. (Legal Newsline) - In the next year, New Jersey will join states like Indiana and Missouri in their attempts to regulate the lawsuit lending industry.
On Sept. 18, Assemblymen John McKeon, D-Essex and the chair of the Judiciary Committee, and Joseph Lagana, D-Paramus, introduced a new bill that targets lawsuit lending – the practice in which third-party companies fund litigation in exchange for a portion of a successful recovery – for the first time in their state’s history.
The New Jersey General Assembly, which is now in the middle of a two-year session, will consider and potentially pass the bill in 2015.
According to Assembly Bill 3699, lawsuit lenders, or “litigation funding providers,” would be prohibited from charging an annual percentage rate that exceeds the state’s civil or criminal usury rates.
They would also be required to specify:
-The total amount of funding the consumer receives from the providers;
-A list of fees he or she must pay;
-The total amount he or she must repay, in six-month intervals for 36 months; and
-The annual percentage rate.
Additionally, consumers and their attorneys would be required to sign a specific form, acknowledging that they reviewed the contract and that all of its costs and fees were disclosed by the providers.
Marcus Rayner, president of the New Jersey Civil Justice Institute, pointed out that as in many other states, lawsuit lending is also largely unregulated in New Jersey. He said that his organization supports McKeon’s bill and plans to help the assemblyman pass it in 2015.
“It certainly is very appropriate that the legislature look at this practice from a consumer protection standpoint and make sure to the extent that lawsuit lending happens, it happens in a way that doesn’t harm consumers and doesn’t distort the civil justice system,” he said.
Rayner contended that the most significant provision in the new bill is its cap on the lawsuit lenders’ interest rates.
According to the New Jersey Department of Banking and Insurance, the civil usury rate is any rate greater than 16 percent when there is a written contract that specifies the interest rate, and any rate greater than six percent for an agreement that is not in writing.
In addition to civil usury rates, the state’s criminal usury limitation is 30 percent for non-corporate borrowers and 50 percent for corporations.
“It will really limit how much interest lenders can charge plaintiffs,” Rayner said.
The cap on interest rates could also become the most controversial provision as the bill moves forward.
While the business community will likely support the cap, Eric Schuller, director of government affairs for Oasis Legal Finance, one of the largest lawsuit lending companies, contended that it would take regulation of the industry too far.
“We applaud his efforts to regulate this industry, but we want to regulate it in a way in which we can still operate,” Schuller said. “The bill needs some tweaking, especially when it comes to the issue of the rates in it.
“They are more onerous than the ones that were passed in Tennessee, and as a result, the industry pulled out of Tennessee.”
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 in that state, lenders must cap their interest rates at 36 percent. They are also permitted to charge an additional 10 percent administrative fee.
According to Schuller, those caps put Oasis Legal Finance and other lawsuit lenders out of business in Tennessee.
Rayner argued that New Jersey has a history of strong consumer protection laws. He said his organization is currently working to reform the state’s Consumer Fraud Act, because it sometimes takes a too-aggressive attitude toward businesses.
“But generally, I think in an issue like this, with a financial services product of some sort, it’s good to have disclosure and it’s good to make clear to the consumer what their rights are,” Rayner said. “In the case of lawsuit lending, I think it’s very good to make sure that the lender is regulated.”
After McKeon introduced Assembly Bill 3699, it was referred to the Assembly Regulated Professions Committee.
On Oct. 27, New Jersey Senator Nia Gill, D-Essex, introduced Senate Bill 2541, its companion legislation in the Senate. It was referred to the Senate Commerce Committee.
Rayner pointed out that since McKeon, who chairs the Assembly Judiciary Committee, and Gill, who chairs the Senate Commerce Committee, are both prominent legislators, the bill has a greater chance of succeeding in the coming year.
Other states - including Colorado, Kansas, Louisiana, Maryland, North Carolina and South Carolina - have also made recent attempts to regulate lawsuit lending.
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.