True Lawsuit Lending Reform Protects Borrowers & Reins In Sky-High Profits
Proverbs 22:7 declares: “The rich ruleth over the poor, and the borrower is servant to the lender.” That is most certainly the case with the woefully unregulated lawsuit lending industry, which targets and takes advantage of vulnerable individuals at their most desperate moments.
Also known as litigation financing or third-party financing, lawsuit lending enables individuals who are suing over alleged injury, injustice, or mistreatment to borrow against their expected settlement to cover living expenses and medical bills.
It can be a life-saving option for those who are unbanked and without a financial safety net – most often lower-income members of communities of color – who are unable to work while awaiting the outcome of their legal cases.
But due to the complete absence of regulation, unethical lenders, often backed by wealthy hedge funds or overseas investors, can – and do – charge as much interest as they want, sometimes 100 percent or higher. As a result, borrowers and their families or estates sometimes see very little of their financial settlements, and can even end up in in debt.
A bill pending in Albany – A1270-A – would impose some commonsense reforms on the lawsuit lending industry. Most notably, it caps the amount of interest companies can charge at 25 percent, which is higher than what is considered criminal usury in New York for all regulated lending.
Timothy 6:10 says: “For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.”
The exploitation of the weak and vulnerable is not to be lauded but shunned and condemned.
Opponents claim the changes we seek will end lawsuit lending. Not so. The truth is that the so-called reform measure THEY are pushing – A3315 – is a red herring, or as some would say, a banana in the tailpipe. Their bill claims to reform the industry but does nothing to protect borrowers from sky-high interest rates, allowing unscrupulous lenders to continue making massive amounts of money on the backs of desperate and vulnerable New Yorkers.
How much profit is enough? The average rate of interest on a lawsuit loan runs from 27 to 60 percent a year and compounds monthly. That’s comparable to payday loans, which are illegal in New York. If a borrower takes out a $25,000 loan, for example, that can result in approximately $12,500 in interest – or more – in a single year.
If it takes two years to settle the case, that’s $32,000 in interest PLUS the original $25,000 loan. In New York, it usually takes between one and three years to negotiate a settlement or obtain a verdict in a personal injury case. But medical malpractice and product liability cases – if they go to trial – can take much longer. Those compounding interest rates add up quickly.
Between 2013 and 2017, the lawsuit lending industry grew 414 percent, according to one report. Across the globe, it ballooned to $39 billion in 2019, thanks to growing interest from hedge funds, foreign investors, and private equity. The U.S – now the world’s most significant third-party lawsuit-lending market – accounted for more than half of that sum, which is predicted to soar to $20.5 billion by 2026.
From time to time, the overreach of exploitative lawsuit lenders makes headlines – like when 9/11 first responders or NFL players got bilked. In recent years, individuals who were wrongfully convicted and are awaiting large civil settlements have been targeted. But the average victim is far more likely to suffer in silence.
These everyday New Yorkers need Albany to act by passing A1270-A before the current legislative session ends, providing them with reasonable protections from lawsuit lenders who are bad actors while still being able to access the funds they need. Lawmakers should also go a step further to improve transparency by requiring lawsuit loans to be disclosed during litigation, making clear any possible conflicts of interest.
On the subject of lending, the Bible does not only warn borrowers to be on their guard, but also encourages individuals of means to “give to those who ask, and don’t turn away from those who want to borrow.” (Matthew 5:40-42). Let us heed that call by appropriately regulating, not ending, lawsuit lending. In doing so, we will protect a much-needed source of relief for those in economic distress and protect vulnerable families from economic exploitation.
The Rev. Dr. Phil Craig is senior pastor Springfield Gardens Community Church in Queens; the Rev. Kevin McCall is the founding president of the Crisis Action Center in Brooklyn.