The classification of Consumer Legal Funding as a loan is more than mere semantics. Consumer Legal Funding is the purchase of an asset; that being a portion of the proceeds of the consumer’s legal claim. This form of investment allows the consumer to access much needed support in order to obtain the financial assistance they need while their claim is making its way through the system.

You may ask yourself, so why does this matter?

In her publication “Harmonizing Third-Party Litigation Funding Regulations,” Professor Victoria Shannon Sahani clarified why Consumer Legal Funding is not a loan:

• First, there is no absolute obligation for the funded client to repay the litigation funder. If the client is the claimant, the client must only repay the funder if the client wins the case. If the client is the defendant, the premium payments end as soon as the case settles, and if the defendant loses, the funder will not receive a success fee or bonus.

• Second, litigation funding is non-recourse, meaning that if the client loses the case, the funder cannot pursue the client’s other assets unrelated to the litigation to gain satisfaction.

• Third, the funder is taking on more risk than a traditional collateral-based lender; therefore, the funder is seeking a much higher rate of return than a traditional lender. This is not a unique concept. For example, an unsecured credit card typically carries more risk than a secured loan, so regulations tolerate much higher interest rates on unsecured credit cards than allowed even on subprime mortgages, which are backed by collateral. Similarly, as mentioned above, funders structure their agreements to avoid classification as loans in order to avoid the caps that usury laws place on interest rates for mortgages and credit cards.

• Fourth, distancing funding even further from a loan, funders are taking on even more risk than unsecured credit cards because the credit card agreement is a bilateral transaction, while funding is a multilateral transaction.

Shahani explains that Consumer Legal Funding does not contain any of the characteristics of a loan, as illustrated in the chart below:

Characteristics	Loan	Consumer Legal Funding
Personal repayment obligation	YES	NO
Monthly or periodic payments	YES	NO
Risk of collection, garnishment, bankruptcy.	YES	NO

What is interesting to note is that no state where the legislature has carefully examined the product has classified it as a loan. In fact, states have gone so far as to declare that Consumer Legal Funding is unequivocally not a loan. In 2020, Utah passed HB 312 that specifically states that the product does not meet the definition of a loan or credit.

In Indiana for example: A statute was passed regulating the industry which specifically states: “Notwithstanding section 202(i) of this chapter and section 502(6) of this chapter, a CPAP[1] transaction is not a consumer loan.”  The statute further articulates: “This article may not be construed to cause any CPAP transaction that complies with this article to be considered a loan or to be otherwise subject to any other provisions of Indiana law governing loans.”

The Nebraska state legislature has declared: “Nonrecourse civil litigation funding means a transaction in which a civil litigation funding company purchases and a consumer assigns the contingent right to receive an amount of the potential proceeds of the consumer’s legal claim to the civil litigation funding company out of the proceeds of any realized settlement, judgement, award, or verdict the consumer may receive in the legal claim.”

In Vermont: “Consumer litigation funding means a nonrecourse transaction in which a company purchases and a consumer assigns to the company a contingent right to receive an amount of the potential net proceeds of a settlement or judgement obtained from the consumer’s legal claim. “

In other words, Consumer Legal Funding is specifically classified as a purchase, not a loan. And it’s not just the state legislatures that have weighed in on this, the courts have as well.

In 2018, the Georgia Supreme Court affirmed the Georgia Court of Appeals ruling, that the product is not subject to the Industrial Loan Act. The Appeals Court stated: “Unlike loans, the funding agreements do not always require repayment. Any repayment, under the funding agreement is contingent upon the direction and time frame of the Plaintiffs’ personal injury litigation, which may be resolved through a myriad of possible outcomes, such as settlement, dismissal, summary judgment, or trial.”

Even dating back to 2005, when the New York Attorney General’s office came to an agreement with the industry, it stated in its press release: “The cash advances provided by these firms are not considered “loans” under New York State law because there is no absolute obligation by a consumer to repay them.”

So, this leads me back to my opening question: Why does it matter?

Classification matters, because once you mischaracterize the product by calling it a loan, you limit consumers’ availability to access it by subjecting Consumer Legal Funding to state laws that regulate loans. According to MarketWatch, in January of 2021, as many as 74% of Americans are living paycheck to paycheck. When their income stream is interrupted (typically due to an accident), they desperately need some economic assistance to help them through the lengthy and extensive process of filing their legal claim.

So we ask State Legislators, when you are deciding how best to regulate this important financial product, to do what is best for your constituents by providing them access to economic assistance during their time of need, and ensuring that they are fully informed as to the terms and conditions of the transaction, by having their attorney review it with them in order to confirm that it is properly classified as a purchase.

Blanket statements labelling Consumer Legal Funding as loans only serve to hurt those in need of its assistance, especially at a time when they need it.

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[1] CPAP Civil Proceeding Advance Payment

On October 1, 2020 the California Bar Association published Formal Opinion NO. 2020-204 on Third-Party Litigation Funding.

The bar’s opinion states that attorney and consumer must be fully informed as to the terms and conditions of the contract. Additionally, the lawyer must ensure competence in advising on any litigation funding agreement, and is obligated to obtain a client’s permission before discussing any confidential information with the funding company.

During the comment period of this opinion, the Alliance For Responsible Consumer Legal Funding (ARC) weighed in on the issue by submitting a letter to the review committee. In the letter ARC stated: “The Proposed Formal Opinion properly establishes that a lawyer is under an ethical obligation to decline to represent a client in legal funding negotiations if the lawyer does not have sufficient knowledge and expertise to help the client avoid being exploited in the legal funding relationship.”

In addition, it was stated that this opinion will give consumers additional confidence in the industry: ”By requiring adequate representation in the legal funding negotiation, bad actors will be less likely to survive. As those bad actors are driven out, consumer confidence in legal funding services will rise and the resulting increase in demand for legal funding services will draw even more reputable funders into the market. This, in turn, will create stronger incentives for funders to cater to the price and quality preferences of individual plaintiffs.”

The California Bar Association and the American Bar Association have each released a recent opinion on Litigation Funding. In both opinions, the bars acknowledge a need for the product, and propose best practices for how consumers and attorneys should work with companies that offer financial assistance to consumers in their time of need.

ARC and its member companies continue to ensure that both consumers and their attorneys are fully-informed on the terms and conditions of the contract, and that the only parties that have a say in the prosecution of the case are consumers and their attorneys. These are enforced in the most recent set of Best Practices that ARC and its companies have released.

ARC is very pleased the California Bar Association, the largest State Bar Association in the United States with over 242,000 members, has taken this position on the issue and put forward these important guidelines.

On August 3, 2020, The American Bar Association (ABA) House of Delegates, by a vote of 366-10, voted to adopt the resolution for “Best Practices for Third-Party Litigation Funding”. This established a slew of national guidelines that law firms, consumers and legal funding companies should follow.

We applaud the ABA in setting these standards that ARC and its members already follow. Some of the items that they highlight are:

• The arrangement should be spelled out in writing.
• The writing should make clear the non-recourse nature of the investment the funder is making in the claim; how the funder will be compensated
• Who is responsible for paying the funder, from what source (g., the recovery after trial or settlement) and when (e.g., time period after receipt of judgment or settlement funds)
• The arrangement should be structured so that the client retains control of the litigation, and not the funder.
• Lawyers should be cautious in making case-related reports or predictions.
• Funding agreements should state the amount of funding to be provided, the amount or method of calculating the return to the third-party funder, and how and when the proceeds of the party’s recovery are to be distributed among Funding agreements should provide a fair, transparent, and independent dispute resolution process.
• Funding agreements also should include a recommendation that a party obtain independent legal advice as to whether to enter into the proposed There should also be a confidentiality obligation for the funder that survives termination of the agreement
• In client-funder financing, the third-party funder and the party should be the sole parties to the funding agreement, in order to avoid any potential attorney conflicts of interest, should the party and the funder disagree on a material issue during the course of the litigation. Many non-recourse finance agreements ask the attorney to promise the funder that the attorney will notify the funder when the case is resolved.
• Limitations on a third-party funder’s involvement in, or direct or indirect control of, or input into (or receipt of notice of), either day-to-day or broader litigation management and on all key issues (such as strategy and settlement), should be addressed in the funding agreement.
• Lawyers may want to obtain written acknowledgement that the funder will not seek to control the litigation or the expense.

These items are consistent with the statutes that ARC and its members support in legislation. ARC fully supports proper regulation of the Consumer Legal Funding Industry across the country.

What is the best way to reduce the amount of companies offering Consumer Legal Funding?

Simple: Put a RATE on it!

In Beyonce’s “Single Ladies (Put a Ring on it),” the lyrics read: “If you like it then you shoulda put a ring on it.” The US Chamber and Insurance Industry are singing a similar tune when it comes to Consumer Legal Funding. However in their song, the lyrics read: “Put a RATE on it.”

They want to put a rate on Consumer Legal Funding because they want the product to disappear from the marketplace, plain and simple.

If you look at the recent passage of an 18% rate cap in West Virginia, which passed earlier this year, the bill has eliminated the Consumer Legal Funding industry from the state. According to the West Virginia Secretary of States website, there are ZERO Consumer Legal Funders registered to operate in the state.

This is a replication of what happened in Arkansas when the state passed a 17% rate cap in 2015. There has been ZERO business there since.

Now let’s compare this to Oklahoma which passed a strong regulatory bill in 2013 that did not include a rate cap. Today, there are 20 companies offering the product in the state. But here is a real interesting fact about Oklahoma: Of the 20 companies offering the Consumer Legal Funding, a full 25% are Oklahoma-based. Check out Oklahoma’s own website.

These are companies paying local taxes, hiring local employees, and growing the local economy. Isn’t that what the US Chamber of Commerce claims it tries to promote? Entrepreneurship, taking a risk and grabbing the American Dream. In fact, the motto of the US Chamber is “The Spirit of Enterprise.” CEO Tom J. Donohue talked about that very spirit in a speech back in 2017 at the AEI’s Summer Honors Program.

Maybe the US Chamber should piggyback off another Beyonce song, “Lemonade,” where she sings “You can taste the dishonesty, it’s all over your breath, as you pass it off so cavalier.”

So which is it? Is the US Chamber for growing the US and local economies or are they for limiting and reducing them?

Just want to know which song to queue up…

“Millions of Americans Are Just 1 Paycheck Away From ‘Financial Disaster’” was the title in a recent story in Barron’s. The article stated that 51% of working adults in the US would need to access savings to cover necessities if they missed more than one paycheck. That is the equivalent of over 78.2 million Americans.

The story went on to state that roughly two-thirds of households earning less than $30,000 annually and Hispanic households would not be able to cover basic living expenses. That is the equivalent of over 101.2 million Americans.

Consumer Legal Funding is a vital resource for those very Americans. Funding allows the 101.2 million Americans who cannot cover basic living expenses to bridge that gap while their legal claims make their way through the system. With some cases taking several months – if not years – to settle, these Americans need help today. Consumer Legal Funding allows them to pay their mortgages, put food on their tables and keep a roof over their heads while the Insurance industry slow-walks their legal claims.

Perhaps the most chilling revelation here is that the Insurance industry, led by the US Chamber of Commerce, supported legislation to eliminate Consumer Legal Funding in two of the top-10 poorest states in the country: first in Arkansas, where 15.4% of the population lives in poverty, and just last week in West Virginia, where the poverty rate is 17.7%. What is even more striking, is that those are two of the top-10 hungriest states in the US. In West Virginia, 14.9% of the population goes hungry, and in Arkansas the rate is 17.4%. The elimination of Consumer Legal Funding in these two states was implemented merely to increase Insurance industry profits, and force consumers to accept lowball offers (as an aside: State Farm ended 2018 with a net worth of over $100 Billion).

Thanks to the latest legislation that went into effect on June 5, 2019 in West Virginia, residents who need Consumer Legal Funding assistance will no longer be able to access it. Take for example, Patressa from Barboursville, WV, who said: “I am completely broke financially due to a car accident. I have medical needs and doctor appointments that I need to go to.” Now Patressa is among the 1.8 million residents of West Virginia who no longer have access to alternative funds while their cases are pending in the legal system. As a result, Patressa will be forced to accept an offer for less than what she deserves.

One of the most heartbreaking responses to the recent legislation comes from Victoria of Clarksburg, WV, who stated quite candidly that she “needed the money so I could have a place to live.” Who can the 4.8 million Patressa’s and Victoria’s of West Virginia and Arkansas turn to for help? How will they meet their medical needs? How will they find a place to live?