Lawsuit Lending Facts



What is Lawsuit Lending?

What Is Lawsuit Lending?

Lawsuit lending is a process whereby a plaintiff receives “up front” cash from a third-party lender to cover immediate living or medical expenses for the duration of his or her lawsuit.  The plaintiff then repays the loan plus interest to the lender out of any settlement or judgment award resulting from the case. Importantly, in many states lenders are operating below the radar of state regulations and arguing that they shouldn’t be regulated because the plaintiff must only repay the loan if he or she wins.  We find this skirting of state regulatory regimes to be questionable.

What Separates Lawsuit Lending from Other Consumer Lending?

Companies providing lawsuit loans argue that usury and other consumer lending laws do not apply because the advance is repaid only to the extent of the consumer’s recovery in the lawsuit and thus "non-recourse".  However, consumer lending laws are intended to protect against exactly the types of abuses involved in lawsuit lending.  Regardless of whether the loans are non-recourse, consumers need to be protected from the excessive charges that diminish or completely consume any lawsuit recovery for the harm suffered by the consumer.  Lawsuit lending bears the hallmark traits of fringe financing schemes that have previously been recognized as predatory practices.  A lawsuit lending transaction is exactly the type of business practice that state legislators should, and historically have, addressed by regulating interest rates.    

What is the Average Interest Rate on These Loans?

Most lawsuit lenders charge an interest rate of 60 percent to 150 percent of the loan amount, but there are many examples of interest rates reaching as high as 250 percent. For comparison, many states cap interest on regular consumer loans at around 35 percent or lower. The lawsuit lenders justify their exorbitant rates by insisting that, as an “investment” contingent on the plaintiff’s victory in a civil suit, they are assuming a tremendous amount of risk. However, two of the largest lawsuit lending firms acknowledge that through extensive underwriting practices they are able to limit their default rate to between 2 percent and 4 percent.[1]  In other words, lawsuit lending firm greatly limit their risk by providing loans to plaintiffs who are sure to win their case and which have already been taken on by a contingency-fee lawyer.

How Can Consumers Protect Themselves?

Until states enact greater oversight on lawsuit lending, there is little an unwary plaintiff can do to protect themselves from predatory practices. This Web site is designed to be a resource for consumer looking for more information about lawsuit lending. Our warning to all who are wondering if lawsuit lending is right for them is: Be armed with the facts and know your risk.

Rhode Island Bar Journal, p. 8