Some consumers looking to free up cash for their vacation spending this year are turning to an expensive source: cash advances on lawsuits.
“It’s a very busy time with cash needs for the holidays,” said Chris Janish, managing director of Legal-Bay LLC, who describes the money he sends to plaintiffs as “cash advances without recourse.”
Advance volume increases 30-40% during the holiday season compared to usual months, said Ronald Sinai, founder of Nova Legal Funding. He said it was the busiest time of year for his business.
“We get a lot of requests from $ 1,000 to $ 2,000 for family gifts and related expenses,” Sinai said. “People want to give their children this memorable Christmas.”
More than half of consumers took on credit card debt to pay for their vacation purchases last year, according to NerdWallet data, and 14% still haven’t paid off their 2016 vacation debt. used debt to fund their vacation purchases last year took on an average of $ 1,003 in new debt, according to MagnifyMoney.
But exploiting a pending legal claim for money can be much more costly than incurring credit card debt.
In a disclosure on its website regarding loans made in South Carolina, Oasis Legal Finance LLC states that its maximum annual rate on personal loans is 98%. Legal-Bay’s website says it charges a maximum rate of 26.9% in the first year of an advance.
In some cases, borrowers may also pay brokerage fees on advances. The Cash4Cases website states that it pays a “referral fee” of up to 25%.
By comparison, the average annual variable credit card interest rate was recently 16.61%, according to Bankrate.
There are no publicly available industry-wide figures on the number of lenders or dollar amounts loaned to individual plaintiffs.
But the numbers on commercial litigation loans show a booming industry. Some 36% of U.S. law firms reported using litigation financing this year, up from 7% in 2013, according to Burford Capital LLC. The company cautions that these numbers reflect use in commercial litigation, as opposed to use by individuals.
Individuals can turn to legal loans after, for example, an accident in a store or an injury at work. Some lenders work directly with injured people, while others are linked to borrowers through plaintiffs’ lawyers.
Lenders review medical records
To determine whether to grant funds, lenders can review the applicant’s medical records and any relevant police reports or court documents, if a claim has already been filed. In some cases, advances are approved within 24 hours.
Lenders are usually only reimbursed if a plaintiff wins in court or settles down. This is why the structure is generally referred to as a “non-recourse advance” instead of a loan.
It also means that advances are not, under the laws of most states, considered loans and therefore generally not subject to the laws that govern traditional loan products. These laws include state usury laws that limit interest rates and the Truth in Lending Act, which requires lenders to provide certain information about the total cost of the loan, said Stuart Rossman, director of loans. litigation at the National Consumer Law Center.
“It’s an unregulated industry for the most part,” Rossman said. “Without a truth about loans or a comparable opinion, it is very difficult for consumers to know how much they will ultimately pay.”
The Consumer Financial Protection Bureau said earlier this year that it may begin to take a more active role in monitoring the industry. In February, the agency filed a lawsuit against RD Legal Funding LLC, alleging the lender scammed 9/11 responders by paying expensive advances on settlement payments and lying about the terms of the advances. This trial is ongoing.
CFPB may not play an active role
But the CFPB is unlikely to play an active role in regulating legal lenders under interim director Mick Mulvaney, or under a future permanent director appointed by President Donald Trump, said Nora Freeman Engstrom, professor of law at Stanford Law School.
“At least in the short term, if there is to be protection for consumers, it will have to come from states,” she said.
Arkansas, Indiana and Tennessee have passed laws in recent years to limit interest rates to the maximums set by existing consumer loan laws or to require disclosures from lenders, Page Faulk said, Senior Vice President of Legal Reform Initiatives for the US Chamber Institute for Legal Reform, an affiliate of the US Chamber of Commerce.
Rich Palma, president of Golden Pear Funding, said applicants who take out cash advances have better protection than borrowers in other lending situations because their own lawyers usually review and sign upfront agreements.
“In our company, the claimant receives an agreement that both the claimant and the lawyer recognize,” he said.
Because litigation progresses slowly, loans may have a beneficial role to play for aggrieved plaintiffs, Engstrom said.
“What these companies are doing is responding in some cases to a real financial need, as a victim is injured, the victim cannot go to work, the bills keep piling up and the settlement takes months. , even years, ”she said. “But the question is whether these funding agreements are fair and concluded with adequate transparency.”
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