What Is Lawsuit Lending?
Also known as “litigation funding”, “pre-settlement funding,” or even “car accident loans”, lawsuit lending includes the practice of advancing to individuals who are suing over injuries a portion of their potential legal recoveries while their case is pending. This money can be used to cover medical bills, day-to-day living expenses and more.
Because the industry is completely unregulated, lenders – often deep-pocketed hedge funds – can charge ruinous interest rates as high as
100% or more.
Unscrupulous lenders prey on vulnerable New Yorkers who lack a financial safety net, are desperate for cash and may be unable to work. In the short term, their bills are covered. But when and if a judge or jury finds in their favor, they often see little – if any – of the award for their injuries, suffering, and hardship because the lender takes it all.
CFLF Spokesman, the Rev. Kirsten John Foy, Tells His Lawsuit Lending Story
“It takes advantage of the meek, the weak and the ignorant. It is legal loan sharking.”
— Bronx personal injury attorney
Is This Legal?
Almost all forms of lending are regulated – either at the state or federal level, or both – but NOT litigation funding.
According to New York law, lenders who charge higher than 16% a year can be liable for civil usury, and interest higher than 25% constitutes criminal usury.
One New York City-based lawsuit lender has charged clients interest rates as high as 124%.
Lenders, on average, make 68% profit on these loans. And the industry has grown exponentially over the past decade, with lenders earning multiple billions annually.
“We were having a crisis, and they knew we were having a crisis. They take advantage of people that are in need.”
— Lawsuit loan recipient
These are the true stories of lawsuit lenders and their victims:
A quick internet search for “lawsuit loans” turns up millions of results from companies looking to lend money to injured parties waiting for a lawsuit to settle or reach verdict. These funders promise a cash advance for medical bills or just day-to-day living expenses, and their websites share tales of grateful “borrowers” who can’t say enough good things about their experience with the practice.
Photo: New York Daily News
Elmer Santiago
9/11 first responders scammed out of settlement funds
In February 2017, New York Attorney General Eric Schneiderman filed a complaint against RD Legal Funding, a New Jersey based lawsuit cash advance firm, for shamefully taking advantage of 9/11 first responders and brain-injured NFL players by offering high interest advances on expected payouts from legal settlements.
In 2016, former NYPD officer Elmer Santiago was sued by RD Legal for refusing to pay 66% interest on the advance loaned to him by the company as he awaited payment from the federally-funded Ground Zero Victims Compensation Fund.
The Attorney General’s filing also highlights the case of an unnamed first responder on the ground on 9/11 who was advanced $18,000 while she awaited settlement funds, after six months she owed $33,000—an 83% increase in less than a year.
Photo: New York Post
Joseph Gill
“LawBuck$ won’t let me get on with my life”
Brooklyn resident Joseph Gill borrowed $4,000 from lawsuit lender LawBuck$ to pay for medical bills while his lawsuit against the NYPD was in court. By the time Joseph’s lawsuit settled five years later, LawBuck$ demanded repayment to the tune of $116,000—29 times the amount loaned. The Judge who presided over Joseph’s case, Justice Ellen Spodek, demanded that LawBuck$ explain its loan agreement, reportedly calling the loan “usurious” and “unconscionable.” Currently, a ruling has not been reached.
Photo: The New York Times/ Gary Tramontia
Carolyn Williams
“I was definitely misled”
In 2007, Carolyn Williams, a former nurse in the midst of a disability lawsuit with her former employer, borrowed $5,000 against her case to pay medical bills. The lender, USClaims, did not inform Williams or her lawyer of the rate of interest to be charged on the loan, and it was not until nearly a year later that she discovered the annual rate was 76%. Quoted in the New York Times, Williams said, “I was definitely misled. I never expected that high of a rate.” After three years, Williams’ case remained unresolved and her loan debt had ballooned to nearly $19,000.
Photo: The New York Times/Gordon Grant
Anthony Fammia
“I’m going to be very careful”
Former New York City Police Officer Anthony Flammia developed sleep apnea and lung scarring after working for three months in the wreckage of ground zero. In 2010, he joined more than 9,000 other ground zero workers in a class action lawsuit against numerous City agencies. Unbeknownst to Flammia, however, his lawyers borrowed more than $35 million to finance the lawsuit—a fact he first discovered when he received an interest bill for $828.93. The law firm attempted to bill clients $6.1 million of the $11 million owed on the loan—fortunately the judge overseeing the case, Alvin Hellerstein, ordered the law firm to pay the entire cost.
Elwin Francis
Received less than 20% of his final settlement
Brooklyn resident Elwin Francis borrowed $27,000 from lawsuit lender LawCash while his slip and fall lawsuit was pending. When the case finally settled for $150,000, Francis was relieved to be done with the ordeal. To his horror, he discovered that he owed LawCash $99,889 for interest and principal on the loan. After paying his lawyers, he was left with only $111. Francis sued his lawyers for legal malpractice, but the case was dismissed by the Supreme Court in 2013.
How Is This Possible?
Litigation financiers skirt laws that protect consumers by exploiting a loophole that enables them to call the money they front to borrowers “investments” and “non-recourse agreements”, not loans.
Just under a dozen states have enacted laws putting sensible guardrails around this practice to protect vulnerable borrowers.
Otherwise, hedge funds who engage in litigation funding have virtually free reign to prey on individuals who are already in distress.
“It looks like a loan and smells like a loan, and we believe that these are, in fact, high-cost loans. I can see a legitimate role for it, but that doesn’t mean that they shouldn’t be subject to regulation.”
— Former Colorado state AG John W. Suthers
“It looks like a loan and smells like a loan, and we believe that these are, in fact, high-cost loans. I can see a legitimate role for it, but that doesn’t mean that they shouldn’t be subject to regulation.”
— Former Colorado state AG John W. Suthers
Who Is Most At Risk?
Individuals who have no financial safety net – those who are unbanked, who have no savings, no credit cards, and no friends or family from whom they can borrow - are easy targets for lawsuit lenders.
As a result, some of the most vulnerable New Yorkers – members of communities of color who are more likely to lack financial safety nets – be unbanked or underbanked – may be particularly vulnerable to being targeted by unscrupulous lenders.
There have even been incidents in which particularly unscrupulous litigation funders fleeced homeless New Yorkers by encouraging them to file lawsuits against the city and then charging them up to 100 percent interest for subsequent loans. There have also been reports of a lender charging clients interest rates as high as 124 percent.
But anyone in need of cash with pending litigation can fall victim to the siren call of a lawsuit loan – including 9/11 first responders and brain-injured NFL players.
Rising Insurance Costs
Recent research also indicates that unchecked and unregulated third-party litigation funding is in part contributing to the rise in insurance costs.
New Yorkers already pay, on average, some of the highest auto insurance premiums in the nation - something hardworking individuals trying to make ends meet can’t afford. Commonsense reforms have the potential to prevent future insurance increases.
New York Must Act NOW To Protect Consumers!
The governor has made consumer protection a top priority this year, promising in her 2024 State of the State address to protect New Yorkers’ hard-earned money from “bad actors and predatory lenders.”
A truly equitable and just consumer protection agenda MUST reign in the unchecked lawsuit lending industry and prevent unscrupulous lenders from targeting vulnerable individuals.
Lawsuit lenders say they provide a critical service to those who need fast cash at a particularly difficult time in their lives. They argue that they do so with little to no risk to the borrower, who doesn’t pay back a dime if they don’t win their case.
However, by charging egregiously high interest rates, lenders often end up siphoning all of a plaintiff's recovery – at times, even more – leaving vulnerable individuals even worse off than when they started.
The answer is not to outlaw litigation funding altogether, but to put guardrails around it and provide much-needed protections to often unsuspecting consumers. Regulations should include:
Require lenders to
register with the state
Increase transparency when loans are present in any given case
Limit the interest rate lenders can charge to 25%
Sources
Elmer Santiago: Whitehouse, Kaja. “Lender scammed 9/11 first responders out of millions: suit”. The New York Post. 7 February, 2017. http://nypost.com/2017/02/07/lender-scammed-911-first-responders-out-of-millions-suit/Joseph Gill: Gorta, William J. “Bitten by Lawsuit ‘Sharks’”. New York Post. 12 December, 2011. http://www.nypost.com/p/news/local/brooklyn/bitten_by_lawsuit_sharks_50H1EYevFanwCmIFBzgsWMCarolyn Williams: Applebaum, Binyamin. “Lawsuit Loans Add New Risk for the Injured”. Center for Public Integrity/The New York Times. 14 January, 2011. http://www. publicintegrity.org/2011/01/14/2198/lawsuit-loans-add-new-risk-injuredAnthony Flamia: Applebaum, Binyamin. “Betting on Justice: Borrowing to Sue”. Center for Public Integrity/The New York Times. 15 November, 2010. http://www. publicintegrity.org/2010/11/15/2320/betting-justice-borrowing-sueElwin Francis: Rogers, Joan C. “Law Firm Wins Dismissal of Suit by Client Whose Litgation Loans Ate Up Settlement”. Bloomberg BNA. 30 January, 2013. http://www.bna. com/law-firm-wins-n17179872101/Fritz, Will. “Former City Aide Shares His Story of Falling Victim to Lawsuit Lending After Police-Involved Injury”. BKReader. 11 May, 2022. https://www.bkreader.com/news/former-city-aide-shares-his-story-of-falling-victim-to-lawsuit-lending-after-police-involved-injury-6549042