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."
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:
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:
Other than these fees and charges, a CPAP provider may not assess or collect any other fee or chargein 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:
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:
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:
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:
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:
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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