LEGAL MATTERS: Be Wary of Litigation Lenders
Wednesday, August 08, 2012
Litigation lenders loan Plaintiffs money to meet their expenses while Plaintiffs wait for their cases to be resolved. Because lenders are paid back from the proceeds of the lawsuit, they lend money only to those Plaintiffs likely to win.
If it sounds too good to be true, it usually is
However, these loans can come at a huge cost to Plaintiffs. While most lenders are subject to usury laws – laws that control interest rates – litigation lenders escape that by avoiding specific terminology, such as renaming interest a “use fee”. Equally astounding is that the litigation lenders contend that the loans are not even loans because lenders only recover if the Plaintiff wins. And, because litigation lenders are not considered creditors under the Federal Truth in Lending Act, lenders don’t have to disclose annual percentage rates so borrowers have no idea what their interest rate is. This has led to borrowers signing up for loans with APRs between 58% and 200%. How out of the realm of normal is this? Under RI GEN LAW § 6-26-2, other lenders can charge no more than 21 percent or the domestic prime rate plus nine percent.
So, how is it that no one knows what the interest rate is? Here’s how one litigation lender does it. The lender charges a monthly “use fee” (i.e. interest) from the date it makes the “loan” until the lender is paid back. The “use fee” amount is set forth in increasing amounts for the first six months. Here’s the catch – if the Plaintiff pays the “use fee” even ONE day after the expiration of the first six months, the use fee automatically jumps to the full, one-year rate.
In order for Plaintiffs to receive these loans, their attorneys must sign off on them. Our firm, like many, has a policy of advising our clients not to take these loans and we routinely refuse to sign off on the agreements. This year, the Rhode Island Association of Justice (RIAJ), of which we are members, worked with members of the General Assembly -- Representatives Michael Marcello, (D-41), Peter J. Petrarca (D-44), Cale P. Keable, (D-47) Charlene Lima (D-14), and Christopher R. Blazejewski (D-2) -- to bring these loans into compliance with state and federal laws governing lending. Although the legislation did not pass this year, there will likely be an ongoing effort to tackle this issue in the future given its detrimental impact on Plaintiffs.
The foregoing is offered for informational purposes only and is not legal advice nor does it create an attorney-client relationship.
Susan G. Pegden is a litigation associate with the Law Firm of Hamel, Waxler, Allen & Collins in Providence. She is admitted to practice in Rhode Island and Massachusetts and is a member of the Board of Governors of the Rhode Island Association of Justice (RIAJ) and a member of the Rhode Island Women’s Bar Association.
Sean P. Feeney is a partner with the Law Firm of Hamel, Waxler, Allen & Collins. He is admitted to practice in Rhode Island, Illinois and Wisconsin. Mr. Feeney is a former special counsel to the City of Providence, military prosecutor with the United States Marine Corps and Special Assistant United States Attorney for the Central District of California.
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