Over half a dozen states have already introduced bills to regulate financing for plainitffs, and more will surely follow. On January 28, 2015, the debate began in Indiana’s House of Representatives.
A bit of clarity before we get into it: consumer protection is a good thing. Plaintiff financing is well-regulated in several states without inhibiting competition, which itself is a form of consumer protection. The danger is in restrictive policy that makes it impossible for legal plaintiff investors to operate, removing the product as an option for plaintiffs. A bill that passed recently in Tennessee – championed as consumer protection by the Chamber of Commerce and insurance lobby – effectively ended plaintiff financing in the state. Meanwhile regulation has existed for years in Ohio, where consumers enjoy options as well as security. Clearly policymakers must strike a delicate balance (and we have a few ideas about what they should know to do that).
Sponsored by Representative Matthew Lehman, Indiana’s HB 1340 is co-authored by Lehman and Representative Terri Jo Austin. It was brought before the House last year and failed to pass, despite vocal support from special interest groups like the insurance lobby. HB 1340 contains a number of provisions both concerning and outright hostile to the plaintiff financing industry.
Chief among these concerns is the lifetime rate cap of 25%; this is equivalent in a 3-year contract to an 8.3% APR, which is lower than most credit cards. HB 1340 additionally allows the state to impose even more price controls – on documentation fees, delivery charges, and on the rate cap itself – than those approved by the legislature. These two provisions alone will end plaintiff financing in Indiana.
It is intuitive to think that rate caps will protect plaintiffs. The closest parallels to plaintiff financing are financial products like payday loans and auto title loans, where rate caps prevent customers from falling into debt. But in plaintiff financing, this problem simply does not exist: plaintiffs who win their cases will never owe more than what’s in their settlement, while plaintiffs who lose owe nothing.
Plaintiff financing is expensive precisely because it is non-recourse (among other reasons). Rates are higher than traditional forms of financing because plaintiff investors assume more risk than traditional financiers. If that risk is not worthwhile for them, they cannot operate. If they cannot operate, it’s consumers who lose the most. A healthy marketplace dictates rates on its own, but a healthy marketplace cannot exist under restrictive regulation.
In one of the more bizarre stipulations of any plaintiff financing bill, HB 1340 dictates that if a plaintiff, who has taken financing, terminates her attorney and retains a new one, the new attorney must provide a written acknowledgment of the financing transaction. If the attorney does not acknowledge it, the transaction is no longer valid.
Whereas most model regulation parades reasonably well as consumer protection, this one is difficult to parse. Every plaintiff financing invesotr requires attorneys to sign off on plaintiff financing contracts, for two equally important reasons: to ensure that the company gets paid, and to ensure that the plaintiff is making an informed decision. This level of protection is wise, necessary, and rare in consumer finance products. But the logic of HB 1340’s nullification provision says something to the effect of
In other words: all attorneys are equal, but some are more equal than others.
Of course, the nullification provision is problematic for a more obvious reason: plaintiffs who don’t want to pay back their investors can simply get a new attorney and boom!, they are no longer contractually bound. It’s a provision with no precedent in contract law, and the precedent it sets is dangerous. Imagine if college students could absolve themselves of loan debt simply by transferring to a new school, or if homeowners could escape their mortgages by switching to a new bank!
Plaintiffs who receive financing deserve protection, and attorney approval is a powerful layer of security. Plaintiff investors deserve protection too – without enforceable contracts, they have none.
HB 1340 stipulates that consumers may only receive one funding from a funding provider. This is risky for two reasons:
The obvious rejoinder to the above is that a consumer could seek additional funding from another provider. This is true but it is not a cure-all: some companies specialize in cases others would never fund. The sad fact is that consumers may not always be able to get funding elsewhere.
We’ve said it before and it bears repeating: protection does not mean paternalism. People are smart and they know what they want. Especially in cases where consumers are advised by counsel, it is not the responsibility of policymakers to decide what is best for customers in a free market.
Though HB 1340 is the first to receive a hearing, it is not Indiana’s only pending plaintiff financing bill. Senator Randy Head has sponsored SB 373, an alternative in the Indiana Senate which contains none of the above provisions.
An attorney serving his hometown of Logansport, Senator Head said of his bill, “These are things the industry can accept… you have to put how much the [plaintiff] owes, they have to have a written contract, it has to have provisions that the lawsuit funder can exert absolutely no influence over the suit – they have to stay at arm’s length.”
Unlike HB 1340, Senator Head’s bill does not provide a rate cap. “What we’re trying to work out,” he told us, “is that the insurance people would like a rate cap… I would prefer we outlaw [caps] altogether.”
Representative Lehman, meanwhile, prefers a level of regulation comparable to that in Tennessee – where regulation drove the industry out of the state six months ago. The bill in that case, Rep. Lehman told us, “was good for the people of Tennessee.”
Photo credit: Daniel Schwen
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