Opinion: Albany Must Reform the Out-of-Control Lawsuit Lending Industry

By: Anthony Gaddy

Small businesses took it on the chin at the outset of the coronavirus pandemic, with more than one-third of them both in New York and across the nation shuttering – some temporarily, others for good – as a result of the economic downturn.  

As was the case with the health and financial impacts of the COVID crisis, Black individuals were disproportionately impacted, with Black business ownership declining 41 percent between February and April of 2020 – the largest drop across any ethnic group, according to a House Committee on Small Business report. 

Thankfully, small businesses bouncing back. Census data shows there were 5.4 million applications to start companies in 2021 – a 53 percent increase from pre-pandemic levels. Their success is crucial to our overall recovery. We must do everything we can to support them. 

That includes removing potential pitfalls like frivolous lawsuits, which can be a death knell for small businesses that lack the infrastructure necessary to handle the financial, emotional, and administrative strain of litigation. Between 36 and 53 percent of small businesses are involved in at least one litigation in any given year, according to a US. Small Business Administration’s Office of Advocacy report. 

One way to discourage such suits is to crack down on the litigation funding industry - otherwise known as lawsuit lending - which enables plaintiffs to borrow against potential settlements or judgments. This industry grew an eye-popping 414 percent between 2103 and 2017 and is now a multibillion-dollar business, according to one report.

A 2014 DePaul Law Review article argues that the absence of limitations on the litigation finance industry - such as fee structures, for example - can encourage non-meritorious lawsuits. But in New York, lawsuit lending is almost entirely unregulated, enabling unscrupulous lenders to charge plaintiffs as much as 100 percent or more, regardless of whether their case has merit.

Individuals who can’t work and opt for a lawsuit loan because they need cash to cover living expenses and medical bills end often up owing most of – or even more than – any financial settlement they receive. Though stories of 9/11 first responders or NFL players getting bilked by lawsuit lenders make headlines, the average victim is more likely to be under-banked and without a financial safety net – frequently lower-income members of communities of color.

In her State of the State address, Governor Kathy Hochul announced a “Billion Dollar Rescue Plan” for small businesses, noting they account for 98 percent of all business statewide and “are the backbone of New York’s economy.” Her proposal, although far-reaching, did not include regulation of the lawsuit lending industry, which was a missed opportunity.

But there is still time to act. If the governor and state lawmakers are indeed serious about spurring a full post-pandemic economic recovery and encouraging social justice across New York, they will move quickly to put guardrails around the out-of-control lawsuit lending industry before the current legislative session ends.

A bill introduced in both houses of the Legislature would establish an interest cap on lawsuit lending, while also implementing important consumer protections. A newly created coalition, Consumers for Fair Legal Funding, of which my organization, the UpState New York Black Chamber of Commerce, is a founding member, is advocating for additional reforms, including requiring any lawsuit loan to be revealed during litigation, so any potential conflicts are clear.

A key component of the Upstate Black Chamber’s mission is to promote small business growth, particularly policies that address the challenges of Black business owners. Black-owned businesses faced disproportionate challenges prior to the pandemic, and those difficulties were only exacerbated by the COVID crisis.

It’s time for Albany to remove unnecessary obstacles that are holding these – and all small businesses – back from fully contributing to the state’s economic recovery by regulating the lawsuit lending industry today.

 Anthony Gaddy is the Co-Founder and President/ CEO of the UpState New York Black Chamber of Commerce