The Risks Of Non-Recourse Loans In Personal Injury Claims
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The New York Times, in an article of 1/16/11, exposes the risks of non-recourse loans to injured plaintiffs. The practice is unregulated in most states and is exempt from laws that protect borrowers from other lenders, such as banks.
A number of professionals--lawyers, judges, and regulators--believe the lack of regulation is resulting in great sums of money being siphoned from the injured into the hands of the lawsuit lenders. Rates often exceed 100 percent a year, according to a review by The New York Times and Center for Public Integrity. Moreover, the lenders are not required to provide prospective borrowers detailed information about the interest rates.
One personal injury attorney in the Bronx calls the practice "legal loan sharking." The state of Colorado has filed suit against two of the largest lawsuit lenders, LawCash and Oasis Legal Finance, charging them with violations of the state's lending laws.
The companies, however, maintain, that they are not lenders because the plaintiffs are not required to repay the money if they lose their cases. This argument has persuaded many states to exempt the legal lenders from regulation.
In Maine, one of the first laws in the country requiring some regulation of the practice went into effect in 2008. Initially, legislation was proposed to make the laws subject to consumer protection laws. However, the lawsuit lenders persuaded lawmakers to reverse the intent of the bill, making clear that the loans were exempt from these rules. The legislature was likely swayed by the testimony of three plaintiffs who described the great benefits they received from their loans.
In other states, to counter legislation, the industry has begun to submit to self-regulation, allowing for disclosure of terms, but excluding interest caps. The industry asserts that because the loans are so risky--plaintiffs may lose altogether or take many years for compensation--that its loans cannot be restricted by traditional borrowing rates.
Personal injury lawyers often advise their clients against taking out the loans but realize, in the end, there may be no alternative.
