The debate over how to properly regulate the legal funding (aka presettlement finance or lawsuit lending) industry has come to the New Jersey General Assembly courtesy of Democratic lawmakers John McKeon, Joseph Lagana and Nia Gill. The issue provides an opportunity for Democrats to see if they can help consumers with reasonable protective legislation without hurting them through over-regulation that eliminates this option for New Jersey consumers.
The debate over regulation of the industry started in 2005, when then Attorney General of New York Eliot Spitzer's office investigated the industry and came to an agreement with the primary companies providing these services over best practices for transparency, disclosure and protection of the consumer's relationship with his or her attorney. The New York Attorney General recognized that the nature of these transactions were asset purchases, and distinct and separate from loan products because no consumer installment payments are collected and the consumers have no obligation to repay the legal funding companies. The legal funding companies are only repaid if the claim is successful and proceeds are sufficient to repay the legal funding company along with other lien holders.
Most of the Representative John McKeon – Representative Joseph Lagana – Senator Nia Gill bill looks like the successful bills adopted in Ohio, Maine, Nebraska and Oklahoma. It offers pricing transparency, clear disclosures, a right of rescission and addresses the role of the consumer's attorney in reviewing the transaction, all in line with the Spitzer agreement from 2005. As drafted, the question of whether this economic option will survive comes down to the discussion as to whether the bill includes a rate provision, which the other states did not see fit to impose on an asset sale.
The McKeon - Lagana - Nia bill imposes a 16% annual return on the investment, which treats the transaction as if it was a standard recourse loan with installment payments, consumer credit exposure, and default provisions that allow for collection actions and wage garnishments. As an asset purchase, these transactions have none of those features. The consumer is not on the hook for anything if the claim produces insufficient proceeds.
That might seem like a nice rate for the consumer, except there will be no buyers for any fractional piece of the claim. The winner will not be the consumer, but (1) the insurance industry lobby that will have protected this threat to its profits and (2) the U.S. Chamber of Commerce's tort reform movement, which will be able to show a pelt to its corporate donors that donate to its megaphone.
Accidents make people miss work, miss car payments, and suffer financial pressures because the majority of Americans (50%+ according to bankrate.com) live paycheck to paycheck and are not prepared for unexpected financial interruptions. Legal funding companies offer people who have been thrust into litigation against an insurance company a new economic option in their battle against a well-capitalized defendant by offering to buy up to 5% of what they believe the fair value of that claim to be.
This product allows New Jersey residents to cover household expenses that might be in jeopardy due to an unexpected economic disruption caused by the actions of another without resorting to taking a low early settlement (a "quick settlement" or "rapid settlement" in insurance industry parlance) due to financial pressures. The insurance industry lobby has aggressively attempted to fight any legislation that might, in their words, “legitimize” the legal funding product. The insurance companies represent defendants in lawsuits – i.e., the guy that ran the red light or the hit and run driver, and have no incentive to settle a claim quickly or for full value. The insurance lobby prefers the playing field as is. As this legislation gets debated, time will tell whose voices the sponsors listen to.
For those interested in more background:
The Tennessee Debate over Legal Funding:
The legal funding industry has a small microphone, and the insurance industry has a large megaphone. That can be seen in these articles in NJ, primarily articulating the insurance industry POV:
http://www.njlawjournal.com/...
http://www.law360.com/...