A glaring example of this exists right now in New York, where a complete lack of regulation of the booming lawsuit lending industry is enabling unscrupulous lenders to take advantage of injured and mistreated borrowers. Also known as “litigation funding” or “car accident loans,” lawsuit lending is the practice by which individuals can borrow against potential legal settlements or judgments to cover day-to-day expenses or medical bills while they await the outcome of their case.
It is time for state lawmakers to protect the vulnerable individuals who too frequently find themselves as the victims of usurious lending practices. They can do this by passing some commonsense reforms of the lawsuit lending industry that cap the interest lenders can charge and require disclosure of lawsuit loans to ensure transparency in the legal system.
In theory, lawsuit loans can serve as a critical line of support for individuals who find themselves in unenviable positions as the victims of fraud, accidental injury or even malicious attacks — especially for those who are unbanked or underbanked and lack a financial safety net, which too often is the case for people of color.
In practice, however, the complete lack of regulation of the lawsuit lending industry is too often manipulated by bad actors, some of whom are bankrolled by big hedge funds or even foreign interests. Due to the lack of an interest rate cap, for example, unscrupulous lenders can charge as much as they want — sometimes as much as 200%.
Such was the case for a young mother from the Bronx, who worked hard during her pregnancy to ensure her twins’ needs would be met when they were born. Yet, despite all the preparations and precautions she took, one baby was injured during birth, resulting in severe brain damage. The mother filed a medical malpractice case, and the bills piled up. Her attorney directed her to a lender who gave her a loan with a 65% interest rate, which compounded by 1.5% every month.
Adding insult to injury, the mother later discovered that the firm her lawyer recommended was owned by the attorney’s brother. The court ultimately determined that the lack of knowledge of this relationship could be interpreted as a conflict of interest, since the attorney could have influenced his client’s acceptance of a settlement to his brother’s benefit.
Only by mandating the disclosure of lawsuit loans during the legal process can potential ethical lapses like this one be sure to be brought to light, leveling the playing field for all parties. Who knows how many settlements have been delayed, decreased or improperly influenced to the detriment of borrowers merely to ensure that usurious loans are repaid to their predatory lenders?
A properly regulated lawsuit lending industry could have benefited that mother in the Bronx. It also could have benefited the many people like me, who have been wrongfully imprisoned or convicted and, in some cases, are now being aggressively targeted by the lawsuit lending industry.
A reform bill that both reasonably caps interest rates and ensures transparency will ensure that New Yorkers and others across America in need can continue to access lawsuit loans and be protected from the greedy whims of the wealthy and powerful. Those experiencing some of the most difficult periods of their lives deserve support and protection, and surely do not deserve to be victimized repeatedly.
Chavis is president and CEO of the National Newspaper Publishers Association (NNPA).
