ALBANY, N.Y. (Legal Newsline) – Pressure is growing on the legal funding industry as more states are scrutinizing the growing business, including what some are describing as the extortionate interest rates charged.
Companion bills are making their way through the two chambers of the New York legislature that, if enacted, would cap interest rates and effectively brand the payments explicitly as loans rather than investments.
This branding would mean they would be more strictly regulated under various consumer protection and usury laws, particularly in relation to the interest charged, which in some cases can be as much as 100 percent annual percentage rate (APR).
But the industry is fighting back with its trade group by backing a rival bill and by warning the bills introduced to regulate the industry will kill the business in the state entirely. The bill envisages a cap of 25 percent.
Consumer legal funders offer money up-front to individuals involved in mostly personal injury suits in the expectation of receiving the principal and interest when it is settled. Questions are also being asked about the close relationship between the lending companies and attorneys.
In the face of opposition from the industry, some states have either enacted laws or seen court rulings that describe the payments as loans rather than investments. The industry claims that because individuals do not have to repay the money if they lose, it is therefore an investment.
"It is taking advantage of people who are desperate, are hurt and have not sufficient funds to get by," Ira Rheingold, executive director of the National Association of Consumer Advocates, told Legal Newsline. "It needs regulation with limits on interest rates and fees and that people have some idea of how much they are going to get."
Rheingold said it is a "cynical practice" to prey on people desperate for funds as companies involved simply regard it as potential asset.
While theoretically the federal Consumer Finance Protection Bureau could become more aggressive in enforcement, that is not likely to happen under the present regime headed by Acting Director Mick Mulvaney, Rheingold believes. Mulvaney has repeatedly advocated a light, or no-touch approach, to regulation.
"Really it is up to the states for it to be regulated at state level," Rheingold said.
The New York bill, introduced by Sen. Robert Ortt (R-Lockport), tightens contract rights, allows cancellation, describes the payments as loans, and caps the interest rate. Assemblyman William Magnarelli (R-Syracuse) has introduced a companion bill.
The involvement of lawyers in the industry has also come under scrutiny and Rheingold believes there must be some level of attorney involvement.
"When looking at the case, you need some level of legal knowledge - what is the value, how long will it take, what is the chance of success," he said. "Attorney involvement is not surprising."
Crucially, individuals can lose control and have little to do with the decision making as a case progresses, including when to settle and for how much, said Rheingold.
"This raises ethical questions for the legal profession," he added.
Eric Schuller, president of the trade group Alliance for Responsible Consumer Legal Funding, is backing a rival bill that he claims will allow consumers to know the terms and conditions in a contract.
"The Senate’s bill will do one thing: eliminate the industry from the State of New York, and harm all of the consumers who rely on it," Schuller stated in a post at Litigation Finance Journal.
A Senate committee recently held a hearing on the consumer legal lending business, hearing from both critics and supporters.
One of those who testified was Tom Stebbins, New York executive director of the Lawsuit Reform Alliance of New York, an organization deeply critical of the industry.
The hearing regarded how to best protect consumers from the excesses of the lawsuit lending industry, Stebbins told Legal Newsline.
"As the New York Post and the New York Times have both reported recently, there are countless stories of abuse and profiteering in this sector," he said.
And Stebbins said that a paid consultant for the industry who advocates a rate twice that of criminal usury has researched the business and concluded that lawyers and lenders often work closely to negotiate final payouts.
"Such arrangements are not in the best interest of the client and undermine the integrity of the justice system," Stebbins said.
One recent story in New York highlighted the relationship between lawyers and the legal lenders, the interest rates charged and the money involved and revealed what can happen when it goes wrong.
Lawyer Marina Trubitsky is accused by a legal lender of filing “bogus, inflated and/or contrived’’ personal injury claims on behalf of clients, according to a report in the New York Post.
The firm, Green Legal Funding of Queens, claims she managed to persuade it to hand over $200,000 in cash advances for four clients, who it planned to charge four percent interest a month, or 48 percent APR.
But Trubitsky, it is alleged in the suit, took commissions and other fees from the cash advances, money that the lawyer claimed was spent on medical services but which never took place.
Three of the cases were abandoned or withdrawn, the court records reveal, according to the Post. A fourth is pending.