Legal funding has largely remained unregulated. While there are various state and federal regulations that protect consumers against unscrupulous lenders, the area of lawsuit funding is one legislators are just beginning to consider. Legal funding is not a loan, but a cash advance taken out against your future settlement. However, several states have taken steps to regulate it.
From credit card applications to automobile installment and student loans, the federal government has regulated the disclosure of loan terms. State legislatures have passed laws regarding interest rate limits, setting penalties for lenders that charge unreasonably high rates. But what about lawsuit lending?
Lawsuit Funding Is Not Loan
Lawsuit funding companies have been adamant about their products not being loans; and rightfully so—these advances are nonrecourse. If a plaintiff’s case doesn’t win, they don’t repay the money. While some state legislatures have been convinced this doesn’t follow the same principle as traditional loans, and have not regulated lawsuit lenders, some have established requirements that demand funding companies comply with state lending laws.
Lobbying groups such as the U.S. Chamber Institute for Legal Reform, the Lawsuit Reform Alliance of New York, and the National Association of Mutual Insurance Companies have raised flags about lawsuit investments. The arguments range from lawsuit advances encouraging legal action to pressuring plaintiffs into unreasonable settlements—claims that have been unproven. Still, litigation finance opponents continue to push for strict regulations or an outlawing of third-party lawsuit funding.
State legislatures have enacted laws intended to regulate legal funding. They include:
- Wisconsin: Enacted in 2017, Wisconsin Act 235 requires that, in civil cases, for litigation funding arrangements to be disclosed. It was the first state to enact such a measure. Supported by the U.S. Chamber Institute for Legal Reform, the act is similar to a proposal made by the Texas state legislature in March 2019.
- Arkansas: In 2015, rate caps and other consumer litigation funding restrictions were enacted. The same year, rate caps were imposed in Tennessee, while West Virginia legislators capped interest rates so low that many litigation funders stopped operating in the state.
