Thursday, August 20, 2020
Ronen Avraham, Lynn Baker & Tony Sebok have posted to SSRN The Anatomy of Consumer Legal Funding. The abstract provides:
Litigant Third-Party Funding (LTPF), where financial companies advance money on a non-recourse basis to individual plaintiffs, is a growing and increasingly controversial industry in the U.S. This funding made headlines during the NFL concussion litigation with more than 1,000 players reported to have received such advances and with class counsel raising concerns of “predatory lending” with the Court. Policymakers and scholars echo these concerns as they call for regulation of the industry to protect vulnerable consumers. Any regulations, however, should be based on systematic data rather than good intentions or isolated anecdotes. But to date there has been almost no empirical research on the actual practices of the industry. This Article begins to fill that void.
Using a unique data set from one of the largest consumer litigation financing firms in the U.S. (“Funder”), we are the first to explore the anatomy of pre-settlement litigant finance in mass tort cases, such as the NFL class action. We are also the first to examine general post-settlement litigant finance in the U.S., which is the type of funding many NFL players were reported to have obtained. Our comprehensive data set includes approximately 225,593 requests for funding from 2001 throughout 2016.
With respect to pre-settlement funding, we find that the Funder makes an annual median gross profit of 55% from Mass Tort claims (compared with 60% from Motor Vehicle claims, our control group). We also find that the Funder includes complicated terms in their contracts that make it extremely difficult for clients to understand the actual interest rate they will be eventually be charged. We believe lawmakers should regulate these contracts, banning any unnecessarily complicated provisions and requiring that the effective annual interest rate and total amount due be straightforwardly disclosed.
With respect to post-settlement funding, we find that the effective annual interest rate charged and the profit to the Funder are even greater than for post-settlement fundings – 68% compared to 60% for Motor Vehicle claims. This is striking given that post-settlement fundings present virtually no risk to the Funder. Indeed we find that the rate of default in post-settlement cases is close to zero, which means that this category of advance is “non-recourse” on paper but not on the ground. We therefore recommend that funding in post-settlement cases should be subject to consumer protections similar to those usury laws provide for ordinary loans.