Friday, September 8, 2017

Horton on the Predatory Probate Loan Industry

DhortonAs we say in the ABA’s Real Property, Trust, and Estate Law Section, for those who work in the world of “death” (rather than “dirt”), I wanted to share a piece by David Horton and Andrea Cann Chandrasekher (both of UC-Davis) on a phenomena that they identified in 2016 known as Probate Lending (Yale Law Journal). We are all familiar with the buying of interests in lawsuits, but what has been less known is the practice of lending funds to heirs in anticipation of a pay-off from the heirs’ interest in an estate. As Horton and Chandrasekher point out in their empirical work, probate lending is both quite lucrative and predatory.

Building upon this work, David Horton recently expanded the research and posted a new article titled Borrowing in the Shadow of Death: Another Look at Probate Lending (William & Mary Law Review) to SSRN. For those interested in property and consumer finance, these two articles are incredibly important. Here’s the abstract:

“Fringe” lending has long been controversial. Three decades ago, demand for sub-prime credit soared, and businesses started to offer high-interest rate cash advances, such as tax refund anticipation loans, payday loans, and pension loans. These products have sparked intense debate and are subject to a maze of rules. However, in Probate Lending, 126 YALE L.J. 102 (2016), a co-author and I examined a form of fringe lending that has gone largely unnoticed: firms that pay lump sums in return for an heir or beneficiary’s interest in a pending decedent’s estate. Capitalizing on a California law that requires companies to file these contracts in probate court, we analyzed seventy-seven loans that stemmed from deaths in 2007. In this companion Article, I report the results of a study of two additional twenty-two months of probate records. My research provides hard evidence about the multi-million dollar inheritance-buying industry, including the prevalence of loans, characteristics of borrowers, how often lenders are repaid, and annual interest rates. I then use this data to compare probate lending to other species of fringe lending and to outline how courts and lawmakers should regulate the practice.

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