A Wall Street Journal article today reports on the pre settlement funding industry. Much of the article revolves around the “costs” of lawsuit funding and how it is unfair to consumers. These arguments have been made since the first lawsuit cash advance businesses emerged over 15 years ago. Since that time, lawsuit funding operators have helped hundreds of thousands of people with immediate liquidity needs. The industry thrives because it serves a legitimate need in the marketplace.
We regularly post about opponents’ fairness arguments. And history has no shortage of people, supposedly without an agenda, loudly demanding fairness in an unfair world. Ultimately however, fairness is a subjective concept. What makes sense for one person, may not make sense for another. This is simply the way the world works.
The purpose of this post is respond to these arguments made by people supposedly saving consumers from themselves. As long as the attacks keep getting published, these posts will continue.
Pre Settlement Case Funding Costs
“The interest rates are ridiculous,” said Louisiana Republican Sen. Dan Claitor, about lawsuit funding. Although a politician, he is not lying. He is simply offering an opinion on the “cost” of lawsuit funding. The charged “rates” (sometimes referred to as “use fees”) for lawsuit funding transactions are usually higher than:
- Bank loans on homes, car loans or any other “secured” debt.
- Sometimes, but NOT ALWAYS, credit card cash advances.
- A personal loan from a family member.
Rational market participants would undoubtedly pursue any of the above as a “fix” for their liquidity needs if they were available. Unfortunately, pre settlement loan customers normally do not have the ability to secure funds from these sources.
Lawsuit funding serves this market – the people who cannot, for some reason or another, access money with terms some random Senator deems “fair”.
And what is “fair”? According to our esteemed representative, “fair” equals 21% and 36% a year according to the article citing provisions contained in the Senator’s proposed Bill on the subject. Still far in excess of home or car loans.
Cost of Money and Other Line Items
Opponents make it seem as though litigation finance is akin to loan sharking with obscene, tax-free profits. But that is simply not the reality. Lawsuit funding operations make a profit, but also have the same expenses as other legitimate businesses such has taxes, advertising, etc.
So what goes into the pricing of lawsuit loans? Why are the costs so “high”? collection laws in California
For lawsuit funding enterprises, the costs are the usually salaried professionals and support staff, rent, advertising, losses, etc. And since the product the customer is seeking is currency itself, the cost of money is also a “line item” that must be factored in.
Lawsuit funders, unlike some banking establishments, do not have the ability to print money and lend it out at interest. Instead they must borrow the money from themselves or third parties. At the business’ inception, the money which constituted the bulk of lawsuit cash advances was first borrowed from hedge funds. These hedge funds demanded far more in earned interest than those companies lending on mortgages for example. That cost was passed on to the consumer. This is normal business practice and we see it every day for every product or service the market consumes.
In fact, the pricing has actually come down in recent years.
All and all, this was and is a good thing. For lawsuit settlement funding, the market saw a need, and entrepreneurs filled it. The fact that consumers took advantage of the offering simply confirmed there was a legitimate need and that need was adequately met. Who but the consumers themselves can know what is best for them?
The Effect of Capping Costs
When we discuss a cap on charges “to protect the consumer”, we can logically predict the outcome. Government meddling in an otherwise free market always throws a wrench in the pricing mechanism. From these distortions emerge winners and losers. Perhaps you can guess who the ultimate losers usually are.
So while capping charges may very well afford certain individuals a better deal on their advance. Many more will not be helped simply because the business cannot justify additional risk at those price levels.
For example, when an applicant requests money for his lawsuit in advance, he is required to provide pertinent information about the case. Relevant documentation is then requested from the applicant’s attorney. Often, the requested paperwork is not in the attorney’s possession, especially if the case is fairly new. Requests for funding are routinely denied because the necessary paperwork is not provided.