Nevada could become one of the few states to enact explicit regulations governing companies that offer cash advances to plaintiffs of pending lawsuits, thanks to a bill that has quietly been submitted to the Legislature.
Supporters of the bill believe it provides operational clarity and consumer protections for a growing industry that is now largely unregulated. However, at least one state regulator has warned that the bill could open the door for predatory businesses to prey on financially vulnerable people in the same way payday lenders do.
The practice being debated goes by many names: consumer legal financing, third party litigation financing, pre-settlement loans, legal cash advances, or a combination of these words.
Here is an example of how it is supposed to work: a man has to pay rent quickly or risks eviction. He does not have enough money on hand because he was unable to work due to an ongoing injury. However, he sues the company responsible for his injury. The man’s lawyer believes the case is solid and will result in a large payout, but only after a long legal battle. In the meantime, the man in need of rent could turn to a third-party company and ask for what is essentially a cash advance on his future court settlement. The third party would assume the risk. If the man’s trial fails and he doesn’t earn money, the man pays them nothing. If the man’s trial is successful, the man repays the cash advance according to the terms detailed in a contract.
Only about half a dozen states have specific regulations for companies that offer these types of financial arrangements. Other states, including Nevada, are currently bundling these businesses with traditional installment loan businesses like banks.
Senate Bill 432 Create a new class of businesses called “consumer litigation finance companies” and set standards and limits on how these companies can legally operate. The legislation is sponsored by the Senate Judiciary Committee, which is chaired by Senate Majority Leader Nicole Cannizzaro.
Proponents say a separate classification is needed because consumer legal finance is not a loan and therefore needs to be treated separately. They argue that loans must by definition be repaid.
Critics of legal cash advances counter that when such transactions require a repayment (after a successful end of a lawsuit), the consumer often owes much more than what they received because of the interest rates – quite a bit. as a loan.
A study cited in a Law 360 item earlier this month, it analyzed 200,000 cases handled by a national litigation finance company over a decade. According to the article: “The researchers found that in funded and completed cases, the company provided an average funding of $ 6,903; the median was $ 2,250. The average amount owed at the end of the litigation was $ 16,964 and the median was $ 4,849.
In the worst horror story across the country, unlicensed or unregulated companies have taken almost every penny of people’s settlement or judgment.
An approved amendment to SB 432 includes provisions to protect consumers from this happening here in Nevada. These include disclosing what fees will be charged, prohibiting bribes, commissions and referral fees, and setting a cap for fees at 40% per year. (This 40% fee cap reflects the state’s cap on traditional loans. Meanwhile, Nevada does not cap interest rates for payday loans; therefore, interest rates can reach 600%.)
“It’s a tool,” Kelly Gilroy, executive director of the American Legal Finance Association (ALFA), told lawmakers at the Senate committee hearing. “For people who are in the right circumstances, for the right reasons, this can save their lives.”
A Federal Reserve study released last year found 41% of Americans couldn’t cover an emergency expense of $ 400 in cash and should borrow from credit cards, family or friends.
Only 5% of those surveyed said they would turn to payday loans or a similar product.
The litigation finance industry is struggling to distance itself from payday loans, which more and more states are trying to crack down on.
“We have no impact on credit. We’re not repossessing, ”said Gilroy. “It never puts (the consumer) in a worse situation, even if they lose the deal. No harm done. It doesn’t drag them into a cycle of debt.
Instead, Gilroy and others argue that consumer legal funding allows plaintiffs to “get over it” and prevent them from settling their lawsuits early out of financial necessity.
Others expressed doubts.
George Burns, the recently retired commissioner of the financial institutions division of the Nevada Department of Business, told lawmakers at the Senate committee hearing that consumer legal finance is “a form of loan in all conventional arrangements.” . He was concerned that accepting the industry-preferred “not a loan” classification would ultimately hurt consumers, as they are used to understanding the terms of loans (like the APR). It would also exempt these companies from federal laws such as the Truth in Lending Act, which requires the disclosure of certain information.
“I’m not looking forward to another payday loan problem for the state,” he added.
Local consumer advocates, who have not shied away from wanting to cap or restrict payday lending practices in Nevada, have so far been silent on the subject of consumer legal financing. Nationally, the debate on the subject has focused on whether consumers are truly aware of the terms of the contracts they are signing, and how commonplace the practice of consumer legal financing might become as they go. as the legislation spreads in various states.
A read of the existing websites advertising pre-settlement loans here in Nevada promises low rates, no income checks, and no credit checks. They largely target people with personal injury claims – car accidents, dog bite accidents or workplace injuries. Some promise same day cash.
The imagined scenario of a man using a cash advance to keep his family in his house is a good selling point for the proposed legislation, but critics worry about a future where mass advertising begins to market to people who do not face real emergencies. Some fear that this will prolong or encourage more lawsuits and cost companies more.
SB 432 was passed unanimously by the Senate on April 23. It was rejected by the Assembly’s Trade and Labor Committee on the deadline day. He is now waiting for a vote on the ground.