Trials & Litigation

Indiana and Vermont regulate consumer litigation funding

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Indiana and Vermont are now regulating firms providing litigation funding for clients in civil lawsuits.

According to Reuters’ On the Case blog, Indiana and Vermont on July 1 joined six other states that have passed some form of law protecting consumers from predatory litigation funding companies or services. The Indiana and Vermont laws both include notice and disclosure requirements, a prohibition of attorney referral fees, extension of attorney-client privilege and standardized contract language. Additionally, both laws state that consumer legal funding is not a loan, thereby exempting them from state usury laws.

Perhaps surprisingly, one of the loudest voices in support of these laws came from the very industry the laws seek to regulate. The Alliance for Responsible Consumer Legal Funding, which represents about half of the companies that provide litigation funding for consumers, issued a press release praising lawmakers in both states and predicting that more states would pass similar laws in the future. Eric Schuller, president of ARC and director of government and community affairs at Oasis Financial, says ARC is supportive of “good legislation that will make sure consumers are protected.”

For instance, Schuller says, he is pleased that Indiana and Vermont joined Nebraska as the only states to extend the attorney-client privilege to funding companies. “Sometimes we get privileged information by mistake, and the defense has put subpoenas on funding companies to try and get that information that would otherwise be privileged,” Schuller says. “Extending the privilege is very good consumer protection.”

He is also happy to see both states make clear that consumer litigation funding is an advance and not a loan. “There are lots of consequences that go with being classified as a loan,” he says. “By not being classified as a loan, consumers don’t have to make periodic payments to the funding companies. They only pay at the end when they get their money.”

On the other hand, Schuller believes there should not be a strict cap on interest rates, something the Indiana statute provides for by putting in a 36 percent ceiling. (Vermont does not have a hard cap written into the statute). “Not having an arbitrary number put on companies allows the free market to operate,” Schuller says. “As long as the company clearly discloses its rate, the consumer can make the determination what is best for them.”

Schuller points out that Arkansas, which adopted a 17 percent cap, effectively shuts out most consumer litigation funders, whose costs of capital can run between 20 to 25 percent per case.

Schuller notes that, in trying to pass consumer litigation funding laws throughout the country, ARC has often come up against groups like the U.S. Chamber of Commerce’s Institute for Legal Reform and the property casualty insurance industry. Perhaps surprisingly, the chamber’s institute actually reacted favorably to the Indiana and Vermont laws, singling out the Indiana interest rate cap in an interview with Reuters. Still, the chamber was worried about what it considered to be ARC’s lobbying efforts.

“They are running around the country ‘lobbying’ to put a frame of legitimacy on their business,” ILR spokesperson Bryan Quigley told Reuters. “The industry is trying to establish favorable precedent they can take around to other states.”

Schuller, however, says he can’t predict what the legislative landscape might look like in 2017 and beyond. “Who knows what will happen?” Schuller says. “This year, there were about a dozen bills in different states that were offered. Some we liked, some we didn’t. Going forward, we don’t know what things will be like.”

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