3-minute read
More than a century ago, New York Gov. Al Smith championed broad social and government reforms during his four terms in office, building a strong foundation to as a national progressive policy leader and protector of vulnerable individuals.
Since then, the Empire State has cemented that reputation on the criminal justice front by enacting a wide range of reforms to address the deep seated racial and social inequities — including disparities in bail amounts and pretrial detentions and the disproportionate impact on lower-income communities of color of the war on drugs.
However, the state is falling far short when it comes to the unregulated lawsuit lending industry, which as a result is being allowed to prey unchecked on some of New York’s most at-risk residents — including the wrongfully convicted, the mistreated, and the injured.
As lawmakers embark on the 2025 legislative session, they have an opportunity to right this wrong by reining in lawsuit loans, also known as third-party litigation funding, or TPLF, through commonsense reforms that protect borrowers and bring transparency to a process currently shrouded in darkness.
Under TPLF, individuals who are suing after experiencing an injury or injustice to borrow against a potential settlement or judgement to help pay legal or medical bills and cover day-to-day expenses. The lender recoups their investment — and then some, in the way of double or even triple-digit interest — only if the borrower’s case is successful, though the nation’s largest lawsuit lender claims a 90% success rate, which is hardly a risk on their end.
Taken at face value, the practice seems benign and mutually beneficial: The plaintiff, who is often unbanked or underbanked and unable to secure a traditional loan, gets up-front cash. The lenders and their backers — typically deep-pocketed hedge funds, financiers, and even foreign investors — realize a significant profit.
But the reality is plaintiffs too often don’t realize the true cost of the agreement when they sign on the dotted line. Once a settlement or judgement is realized, funders take the first cut — usually 20-40% of the total. And with interest rates ranging from 15% to a whopping 124% or more, the plaintiff can be left with little to no money — or perhaps even in debt – finding themselves ensnared in a new cycle of entrapment and victimization.
The industry’s explosive growth over the last several years has launched the practice into the stratosphere with an estimated $15.2 billion in commercial litigation investments in the U.S. alone.
As a result, lawsuit lending is now influencing its funders as they look to maximize their payout. This, coupled with a lack of disclosure in the litigation process, has produced an ethical quagmire rife with undisclosed conflicts of interest that undermine what’s in the plaintiff’s best interests and threaten the veery integrity of our entire legal system.
Since lawsuit lending companies hold a direct financial interest in the outcome of the litigation, that should subject them to discovery, wrote the Kahana Feld law firm in a recent report.
“Moreover,” the firm states, “because their stakes accrue interest and, consequently, are ever increasing, the funding companies’ influence over the litigation, specifically their veto power over settlement, mounts as the case proceeds.”
Contrary to those who seek only to preserve the status quo, the state Legislature can regulate the industry and protect the public from bad actors while also finding common ground that will preserve this critical funding stream for plaintiffs who need it most.
Establishing reasonable interest rate caps on lawsuit loans is only the start. True reform will also mandate the disclosure of lawsuit loans during the litigation process to expose potential conflicts of interest as well any outside interests seeking to exercise undue influence over borrowers or their attorneys.
Disclosure would also discourage attempts to file baseless claims in the hope of reaching a quick settlement, protecting the integrity of our court system. Additionally, shining a light on the process would allow the courts to avoid any appearance of impropriety by allowing the judge to ensure there are no conflicts of interests between the plaintiff’s attorney and the funder.
While some bad actors in the industry may want to perpetuate the myth that this is a noble endeavor expanding access to justice for those who can’t afford it, leaving the system unchecked will continue to erode our court system and prey on the state’s most vulnerable.
A commonsense compromise exists, and we must act now to ensure that injured and exonerated New Yorkers are not further victimized by a predatory system.
That would be the ultimate injustice.
Barbara Arnwine is president and founder of the Transformative Justice Coalition, which advocates for social and racial justice. She is also president emerita of the Lawyers Committee for Civil Rights Under Law and has served as an adjunct professor of law at the Columbia University and UCLA law schools.
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Photo credits: One person with a glad walks by the New York State Capital in Albany, Jane 17, 2021. Tina Macintyre-Yee/Rochester Democrat and Chronicles