State usury laws attempt to protect borrowers from unscrupulous lenders who wish to pray on people in a financial bind. Society realizes that people under financial stress will agree to even the most oppressive terms in an effort to ease the financial strain. These debtors may simply reason that it is better to deal with the immediate situation than a perhaps more burdensome situation in the future. Yet, in an effort to protect its citizens, laws are enacted to limit abuse. These laws set the limit on the amount of interest to be paid thus reflecting what society deems as “fair” as it pertains to people borrowing money.
It should be noted that usury laws deal with loans to individuals or other entities in which there is an agreement to repay the loan at a later date, with interest.
Contrast this with lawsuit funding transactions which are also referred to as “lawsuit loans” or “settlement loans”. These exist to provide liquidity to mostly personal injury plaintiffs while they pursue their lawsuit. The cost of these agreements sometimes conflicts with what some people would consider “fair”.
Opponents of lawsuit funding liken pre-settlement cash advance transactions to usurious loans because they are sometimes referred to as “case loans” or “lawsuit loans”. Furthering the confusion is the use of interest charges in calculating the cost which are normally higher than traditional forms of lending.
If you consider a lawsuit loan a traditional loan, then there is little doubt that terms and conditions are in violation of state usury laws. As discussed below however, there are major differences between traditional loans and lawsuit funding advances.
Traditional Loans Imply Repayment
A major difference between lawsuit loans and traditional loans is that a traditional loan implies repayment of the amount borrowed. In fact, in order to be considered a loan, as opposed to a gift, there is an understanding that the amount must be repaid.
With a “lawsuit loan”, there is no obligation to repay the advance if there is no recovery on the lawsuit. This makes the deal “non-recourse” because the “lawsuit lender” has no right to pursue repayment in the event the lawsuit fails.
Lawsuit Loans are a Sale of Property
The most important distinction between loans and lawsuit loans may be the fact that the plaintiff (borrower) actually has something of value to transfer in return for the money. That something is the potential proceeds of the lawsuit. Because there is a transfer of value, lawsuit funding transactions are structured as an assignment of property rights in the future proceeds of the case.
When a borrower enters into a traditional loan arrangement, the borrower usually has no collateral to pledge or if he does, he is unable to pledge it. One such reason could be the property of value is difficult to sell. In this sense, the lawsuit funding industry provides a marketplace where the proceeds of a lawsuit can be sold.
Lawsuit Loan Critics
Critics of lawsuit loans assert that deal terms are oppressive and take advantage of clients who are in desperate need of funds. However, because lawsuit funding transactions are a sale of property rights, ANY price is a ‘fair’ price for the sale of property when two willing parties agree to that price. These same critics would probably not criticize a pawn shop because it low balls customers for their belongings or criticize a convenience store because a Coke is sold for $2.50 instead of the $.89 it costs at the grocery store. In all exchange of property transactions, there must be willing participants to the transaction. And these participants are in the best possible position to know what is or is not “fair”.
Critics may also argue the exact purchase price is not known at the time of the funding contract because the purchase price depends on how long it takes for the lawsuit to reach a settlement. But this fact fails to consider that the exact payoff amount is listed on each contract. That is, the contract terms will specifically state what the payoff is during a specific time frame. There is no room for debate. The client cannot get blindsided because the numbers do not lie. Time remains a variable but the potential payoff terms are known at the time of execution.
Conclusion
Lawsuit settlement funding is specialty finance. Although the term “lawsuit loan” is sometimes used to describe these transactions, the structure of these deals is altogether different than traditional loans. Lawsuit loan transactions are a sale of property rights in the future proceeds of a lawsuit. As such, they are non recourse and therefore not “loans.” The structure is by design. The intention is to offer this type of financing to the marketplace.
The option of choosing lawsuit funding as a liquidity source simply provides an opportunity for litigants to willingly explore some non traditional finance options in their search for financial relief. The popularity of lawsuit funding illustrates that this option is well received.
Thank you for your interest in the lawsuit cash advance business.
