Saturday, June 15, 2019

Guest Bloggers: Febe Zepeda and Baldomero Garza “How ‘lawsuit lending’ is putting families at risk”

Zepeda and GarzaAn insidious problem has been creeping into the shady world of predatory lending – the practice of lawsuit lending.   It goes something like this: a seemingly helpful representative of a lawsuit lender approaches plaintiffs who are involved in a personal injury or other type of lawsuit.  In many cases, these plaintiffs find themselves in tough situations because they may not be working and may have mounting medical bills.  The lawsuit lender offers plaintiffs money, with no details on interest rates, so they can make ends meet while their lawsuit is pending.

The kicker line is when the “lender” tells the plaintiff that if they lose, they do not have to pay one cent of it back.  What is left out is that even once the plaintiff’s case settles or goes to judgment, the plaintiff, even if they do win, will have very little left because the interest rates on these loans can top 200 percent.

Lawmakers in various states have been grappling with how to deal with these “lawsuit funders” who have been tip toeing their way around the country, hiding behind their illusive business models touting slogans like “if your case loses, you don’t pay.” Or “a 2-minute call can get you cash for your case now.”  To many middle to low-income families, who are struggling day to day, this alternative might sound like a reasonable option that would provide some much needed immediate relief while they await what is many times a long-drawn out judicial process.  But these loans come at a much greater risk than the borrower ever would have bargained for.

A lawsuit loan, as Ashby Jones of the Wall Street Journal terms it, is nothing less than “the legal equivalent of the payday loan.”  A 2011 New York Times and Center for Public Integrity review found that the rates charged by lawsuit lenders often exceeded 100 percent annually.  Cases have been found to exceed 200 percent.

So what can we do about it?  Let’s first start with the current problem – lawsuit lenders are operating in a gray area of the law, usually outside of state law designed to regulate consumer lenders.  To keep this status quo, lawsuit funding companies have gone to great lengths asserting they are “not actual lenders” but rather a kind of “non-recourse financing” and therefore do not have a legal obligation to abide by the same interest caps, disclosure, transparency, or any other requirements as other lenders.

In fact, they defend their high charges, arguing they are necessary in order to cover the possible risk of not being paid back at all if a plaintiff’s case is unsuccessful.  What they also don’t disclose is their practiced formula for knowing which cases are more than likely to succeed.  They do not lend money unless the case has an excellent chance of succeeding – and which a lawyer has likely already agreed to take on a contingency fee basis.

The lenders have been selling these arguments to state lawmakers across the country to buy into their story and to continue to allow them to essentially regulate themselves and operate their business model with little to no oversight.   In April 2013, Fox Business News ran a report on the lawsuit lending industry and the various legislative battles taking place in numerous states.  According to the report, the lawsuit funding industry has successfully convinced lawmakers in Maine, Ohio and Nebraska to legitimize lawsuit lending, with no corresponding interest rate caps or other limitations placed on other types of consumer loans.

This approach is an egregious error and puts millions of vulnerable Americans at risk.  That is why, this year, we fought hard, shedding a light on this industry’s deceptive practices, joining forces with business and grassroots leaders alike to call on state legislators to take action in Texas.   Lawsuit lending reform bills were also introduced in several other states this year including Iowa, Illinois, Indiana, Kansas, Louisiana, Missouri, Nevada, Oklahoma, Rhode Island, Tennessee, and Texas.

Our efforts to bring these companies in line with other lenders garnered diverse and broad based support from the business community, legal groups such as the Hispanic Bar Association in Austin and the Mexican American Bar Association in Houston, and advocacy groups such as the League of United Latin American Citizens (LULAC) and the Rio Grande Valley Citizens Against Lawsuit Abuse.

State Representative Doug Miller authored the Texas Consumer Lawsuit Lending Act (House Bill 1595) and though the bill passed out of the House Judiciary Committee at the end of April, it unfortunately went no further.  We can however, point to one very notable victory this year.  In the state of Oklahoma, State Senator Brian Crain and State Representative Leslie Osborn helped to enact an important landmark law that will help curb these abusive practices, and further elevate this issue onto the national stage.  In addition, state attorney generals and other state regulators are taking action to limit lawsuit lending abuses.  Colorado Attorney General John Suthers has been a national leader on this issue, finding that lawsuit lenders must operate under the state’s lending laws, as the AG of Louisiana has previously found.

If it walks like a duck and talks like a duck…well, you get our drift.  We cannot allow these financial predators to get away with abuse no matter how nicely they package what they are selling.

The last thing hard-working families need during times of heightened stress and uncertainty is a lender trying to make a quick buck off their unfortunate circumstance.

A better option to protect consumers, while ensuring that they have access to necessary funds is to make lawsuit lenders play by the same rules as other consumer lenders in the state.  We will continue to work together and dispel the industry’s misleading approach to plaintiff “services”.   If you or someone you know has ever been the victim of these predatory lenders please encourage them to share their story at http://www.facesoflawsuitabuse.org/tell/.

Febe Zepeda is the Executive Director with the Rio Grande Valley Citizens Against Lawsuit Abuse (CALA). Baldomero Garza is the National VP for the Southwest with the League of United Latin American Citizens (LULAC).

This article originally appeared in NBC Latino.