The ugly side of lawsuit loans
A number of companies advertise heavily on television, offering injury victims "lawsuit loans" that will help the victims survive financially until their claim reaches trial or settlement. The companies don't advertise, however, the true cost of these loans. Stroke victim Larry Long was waiting for his confirmed settlement from the makers of Vioxx when he borrowed $9,450.00 from Oasis Finance to avoid eviction from his home: 18 months later when his $27,000.00 Vioxx payment was made, he owed $23,588 to Oasis--nearly the entire payment. Under his agreement, even if the loan were paid back within six months, Long would have owed interest and fees of fifty percent of the loan balance, according to the New York Times. Long's experience is typical.
Ernesto Kho borrowed $10,500.00 from Cambridge Management Group to pay medical bills while his car accident case was pending. When the case settled two years later, Kho owed the company $35,939. That is more than 100% interest, annually, if our math is correct. Carolyn Williams borrowed $5,000.00 from USClaims to pay debts while her lawsuit was proceeding: three years later, she owes the company $18,976.00. Her annual interest rate is 39 percent, but compounded monthly. She was charged fees and interest in the first year that equaled 76 percent of the amount of the loan: in any other context, these charges would be criminal usury, yet these companies remain unregulated by most states. Desperate and often unsophisticated injury victims are left to the mercy of greedy investors who can make substantial loans relatively quickly.In states where efforts have been made to regulate "lawsuit lending," the tables have been turned onthe regulation effort, and statutes were adopted that instead protected the companies from existing regulation. In Maine, for example, Sharon Anglin Treat, a lawyer and legislator, proposed a bill that would have confimed that lawsuit lenders are subject to the state's consumer lending laws: instead the bill was amended to exempt the lenders from existing consumer protection rules. In Ohio, when the state Supreme Court declared lawsuit lending illegal in 2003, the industry sought and obtained legislative relief in the form of a statute legalizing the loans without regulation. In 2010, Nebraska adopted a similar statute.
The companies claim that they are exempt from laws regulating interest and costs because they claim they are not "lenders" and the transactions are not "loans" but rather "investments" in the pending litigation. They justify criminal loan rates by reference to provisions in the agreements that waive repayment in the event the case is unsuccessful, however, critics point out that the companies avoid true risk by carefully screening cases to eliminate "potential losers." The companies acknowledge that they reject about 70% of litigants' requests--and that they fund lawsuits only to the tune of 10-20 percent of the anticipated value.
Meanwhile, given the opportunity, courts in Michigan, New York and North Carolina have held that individual debtor victims were not required to repay a particular loan because the terms were so onerous. Unfortunately, similar rulings are rare and inconsistent, and in many cases the victim lacks the necessary standing to challenge the fairness and legality of the "investment" contract. Under current Michigan law, for example, the Republican majority of the Michigan Supreme Court has ruled that it does not have the power to address the "reasonableness" of a contract and is limited to enforcing an agreement according to its written terms---regardless of the fairness of the contract and regardless of the inequality of the parties' bargaining strength.