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Regulation

Your Comprehensive Guide To Funding Under Indiana's New Regulations

June 17, 2016
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7min read

Indiana's Legal funding regulation: Key Take-Aways

  1. Legal funding in Indiana is now regulated.
  2. If you fund or plan to fund more than 25 ventures per year, you must register for a license.
  3. Your funding contract must adhere to specific language, formatting and other requirements.
  4. You may only charge up to prescribed fees and rates.
  5. Fundings must be compliant starting July 1, 2015 and funders must be licensed, if necessary, by January 1, 2017.
  6. This regulation is more funder-friendly than previously proposed legislation in Indiana.

Thanks to new legislation, companies funding plaintiffs in civil lawsuits in Indiana will be regulated for the first time, validating the industry in the state while providing protection for Hoosiers who need access to this type of financing.  Effective July 1, 2016, House Enrolled Act No. 1127 (the "Act") will revise Indiana Code in many ways, including a new requirement that certain legal funding companies, called Civil Proceeding Advance Payment ("CPAP") providers in the Act, obtain a license to transact legal fundings in Indiana.  Whether licensed or not, however, every funder must comply with numerous rules and contract drafting requirements now built into the revised Indiana Code.  This article will provide a practical reference to get you up to date and ready to fund in Indiana in light of the new legal funding regulation. 

 One key victory for lawsuit funders and the industry: the Act explicitly states that "a CPAP transaction is not a consumer loan."  

LICENSURE: what you need to know about Indiana'S licensing requirement

CPAP TRANSACTIONS AND THE LICENSE REQUIREMENT

The Act defines a CPAP transaction as a nonrecourse transaction in which a "CPAP provider" provides to a consumer claimant in a civil proceeding a funded amount, the repayment of which is: (1) required only if the consumer claimant prevails in the civil proceeding; and (2) sourced from the proceeds of the civil proceeding.  The "funded amount", regardless of the term used by the CPAP provider, means the amount of money (a) that is provided to the consumer claimant by the CPAP provider; and (b) the repayment of which is: (i) required only if the consumer claimant prevails in the consumer claimant's civil proceeding; and (ii) sourced from the proceeds of the civil proceeding, whether the proceeds result from a judgment, a settlement, or some other resolution. 

 After December 31, 2016, a person who "regularly engages" in the business of making CPAP transactions in Indiana must obtain, and maintain on an annual basis, a specific license issued by the Indiana Department of Financial Institutions (the "Department").  This means that you must be licensed if you engage in more than twenty-five (25) transactions during a calendar year

(each funding will be considered a transaction).  In other words, a CPAP provider essentially gets "25 free" transactions per year before having to apply for a license.

LICENSE APPLICATION PROCESS

The license application is available online.  To ensure licensing by January 1, 2017, the Department recommends that applications be submitted no later than October 1, 2016.  There is an application fee of $1,000.00 and the annual renewal fee will be the greater of $1,000 or $6 per $100,000 of transactions (in other words, to exceed the $1,000 fee would require more than $16 million in transactions funded solely in Indiana).  Applications should be processed approximately 90 days from submission, although complete applications in full compliance may be processed in as few as 30 days. The licensee will be notified each year in November that their renewal is due by December 31st (thus the initial renew date will be December 31st, 2017). 

Other notable application requirements:

  • At the time of filing, the provider may be required to either file with the Department a bond for no more than $50,000 or, at the option of the filer, post an irrevocable letter of credit. 
  • In the application, a partnership to disclose each partner in a partnership. For a corporation or LLC, the company must disclose the officers, directors and members of the company as well as all individuals who have more than a 10% interest in the company.
  • The applicant and its officers' and directors' information will be submitted for review of their "character, fitness and suitability" and a nationwide criminal background check based on fingerprints.
  • Applicants must provide a current business plan and financial statement prepared by an independent CPA, or the most recent 10K filing with the SEC, indicating a minimum net worth of $100,000 and liquid assets of at least $50,000.
  • An applicant who will manage an Indiana location must show a min of 2 years finance related experience.  
  • Applicant must submit a sample copy of all contracts they will use in Indiana. These contracts must comply with the statutory requirements.

PRACTICE POINTS: rules and restrictions for Indiana legal funders

Whether or not you plan to apply for license, every funder in Indiana will have to comply with the numerous rules and requirements now built into the revised Indiana Code per the Act.  By reading and following the rules below, you should be able to engage in compliant funding in Indiana, but funders should always read the full text of any new regulations before funding to make sure they are aware of the fine details and to provide context.

NOTE: all Indiana Code citations refer to the revised Code as it will appear after July 1, 2016.

RESTRICTIONS ON FEES AND OTHER CHARGES [Indiana Code 24-4.5-3-202]

A CPAP provider is permitted to charge the following for each CPAP transaction:

  1. a fee not exceeding an annual rate of 36% of the funded amount
  2. a servicing charge not exceeding an annual rate of 7% of the funded amount; and
  3. a one time document fee not to exceed $250 for a CPAP transaction with a funded amount of less than $5,000 or not to exceed $500 for a funded amount of at least $5,000.

Other than these fees and charges, a CPAP provider may not assess or collect any other fee or charge in connection with a CPAP transaction.

Note that CPAP transactions entered into before July 1, 2016 are not subject to these restrictions.

CONTRACT REQUIREMENTS [Indiana Code 24-12-2]

Every CPAP transaction must meet the following requirements:

1. The CPAP contract must be completely filled in when presented to the consumer claimant for signature.

2. The CPAP contract must contain, in bold and boxed type, a right of rescission, allowing the consumer claimant to cancel the contract without penalty or further obligation if, not later than five (5) business days after the funding date, the consumer claimant either:

  • returns to the CPAP provider the full amount of the disbursed funds by delivering the provider's uncashed check to the provider's office in person; or
  • mails, by insured, certified, or registered U.S. mail, to the address specified in the contract, a notice of cancellation and includes in the mailing a return of the full amount of disbursed funds in the form of the provider's uncashed check or a registered or certified check or money order.

3. The CPAP contract must contain the initials of the consumer claimant on each page.

4. If the consumer claimant is represented by an attorney in the civil proceeding on which a CPAP transaction is based, the CPAP contract must contain a written acknowledgment by the attorney that attests to the following:

  • That to the best of the attorney's knowledge, all costs and charges relating to the CPAP transaction have been disclosed to the consumer claimant.
  • That the attorney is being paid by the consumer claimant on a contingency basis under a written fee agreement.
  • That all proceeds of the civil proceeding will be disbursed through a trust account of the attorney, or through a settlement fund established to receive the proceeds of the civil proceeding on behalf of the consumer claimant.
  • That the attorney is following the instructions of the consumer claimant with respect to the CPAP transaction.
  • That the attorney has not received a referral fee or other consideration from the CPAP provider, and agrees not to receive the same at any time, in connection with the CPAP transaction.

If the attorney does not complete the acknowledgment required by this subdivision, the CPAP contract, and the CPAP transaction to which it pertains, are void. However, the CPAP contract, and the CPAP transaction to which it pertains, remain valid and enforceable if the consumer claimant or the attorney terminates the representation.

DISCLOSURES [Indiana Code 24-12-4]

Each CPAP contract must contain the disclosures, which are material terms of the contract. Unless otherwise specified, the disclosures must be in at least a 12 point bold font and be placed clearly and conspicuously within the contract. The following disclosures are required:

1. On the front page, under appropriate headings, language specifying:

  • the funded amount to be paid to the consumer claimant by the CPAP provider;
  • an itemization of one (1) time charges;
  • the total amount to be assigned by the consumer claimant to the CPAP provider, including the funded amount and all charges; and
  • a payment schedule including the funded amount and all charges, listing all dates and the amount due at the end of each one hundred eighty (180) day period, from the funding date until the date on which the maximum amount due to the CPAP provider by the consumer claimant occurs.

2. A notice within the body of the contract stating the following: "Consumer Claimant's Right to Cancellation: You may cancel this contract without penalty or further obligation within five (5) business days after the funding date if you either:

  • return to the CPAP provider the full amount of the disbursed funds by delivering the provider's uncashed check to the provider's office in person; or
  • mail, by insured, certified, or registered United States mail, to the CPAP provider at the address specified in the contract, a notice of cancellation and include in the mailing a return of the full amount of disbursed funds in the form of the provider's uncashed check or a registered or certified check or money order."

3. A notice informing the consumer claimant that the CPAP provider has no role in deciding whether, when, and how much the civil proceeding is settled for. However, the consumer claimant and consumer claimant's attorney must notify the CPAP provider of the outcome of the civil proceeding by settlement or adjudication before the resolution date. The CPAP provider may seek updated information about the status of the civil proceeding but in no event may the provider interfere with the independent professional judgment of the attorney in the handling of the civil proceeding or any settlement.

4. Within the body of the contract, in all capital letters in at least a 12 point bold font contained within a box the following: "THE FUNDED AMOUNT AND AGREED UPON CHARGES SHALL BE PAID ONLY FROM THE PROCEEDS OF YOUR CIVIL PROCEEDING, AND SHALL BE PAID ONLY TO THE EXTENT THAT THERE ARE AVAILABLE PROCEEDS FROM YOUR CIVIL PROCEEDING. YOU WILL NOT OWE (INSERT NAME OF THE CIVIL PROCEEDING ADVANCE PAYMENT PROVIDER) ANYTHING IF THERE ARE NO PROCEEDS FROM YOUR CIVIL PROCEEDING, UNLESS YOU HAVE VIOLATED ANY MATERIAL TERM OF THIS CONTRACT OR YOU HAVE COMMITTED FRAUD AGAINST THE CIVIL PROCEEDING ADVANCE PAYMENT PROVIDER."

5. Located immediately above the place on the contract where the consumer claimant's signature is required, in at least a 12 point bold font the following: "Do not sign this contract before you read it completely or if the contract contains any blank spaces. You are entitled to a completely filled in copy of the contract. Before you sign this contract, you should obtain the advice of an attorney. Depending on the circumstances, you may want to consult a tax, public or private benefits planning, or financial professional. You acknowledge that your attorney in the civil proceeding has provided no tax, public or private benefit planning, or financial advice regarding this transaction."

ATTORNEY PROHIBITIONS [Indiana Code 24-12-7]

An attorney or law firm retained by the consumer claimant in the civil proceeding may not have a financial interest in the CPAP provider offering a CPAP transaction to that consumer claimant. Additionally, any attorney who has referred the consumer claimant to the consumer claimant's retained attorney may not have a financial interest in the CPAP provider offering a CPAP transaction to that consumer claimant.

PROVIDER PROHIBITIONS: [Indiana Code 24-12-3]

A CPAP provider may not do any of the following:

  1. Pay or offer to pay a commission, referral fee, or other form of consideration to any attorney, law firm, medical provider, chiropractor, or physical therapist, or any of their employees (each, a "Prohibited Entity") for referring a consumer claimant to the provider.
  2. Accept a commission, referral fee, rebate, or other form of consideration from a Prohibited Entity.
  3. Intentionally advertise materially false or misleading information regarding the CPAP provider's products or services.
  4. Refer, in furtherance of an initial CPAP transaction, a consumer claimant or potential consumer claimant to a specific Prohibited Entity. However, if a consumer claimant needs legal representation, the company may refer the person to a local or state bar association referral service.
  5. Knowingly provide funding to a consumer claimant who has previously assigned or sold a part of the consumer claimant's right to proceeds from the consumer claimant's civil proceeding without first making payment to or purchasing a prior unsatisfied CPAP provider's entire funded amount and contracted charges, unless a lesser amount is otherwise agreed to in writing by the prior CPAP provider. However, multiple CPAP providers may agree to provide a CPAP transaction to a consumer claimant simultaneously if the consumer claimant and the consumer claimant's attorney consent to the arrangement in writing.
  6. Receive any right to make any decision with respect to the conduct of the underlying civil proceeding or any settlement or resolution of the civil proceeding, or make any decision with respect to the conduct of the underlying civil proceeding or any settlement or resolution of the civil proceeding. The right to make these decisions remains solely with the consumer claimant and the attorney in the civil proceeding.
  7. Knowingly pay or offer to pay for court costs, filing fees, or attorney's fees either during or after the resolution of the civil proceeding, using funds from the CPAP transaction.

  This guide should provide you with everything you need in order to prepare for compliant legal funding in Indiana.  As always, be sure to read the relevant statutes for more information before funding. 

 Have any questions, thoughts, or think we missed anything? Let us know in the comments below.  

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