NCOIL Extends Consumer Legal Funding Debate Into 2014, Leaves Door Open For New Proposal

Lawmakers at the November 21-24 2013 National Conference of Insurance Legislators (“NCOIL”) Annual Meeting in Nashville agreed to continue debate on proposed regulation of third-party lending to consumers engaged in legal action–and to leave the door open for new model legislation in 2014.  The decision to hone in on a possibly new approach builds on an almost two-year NCOIL look at the issue and reflects a willingness to re-evaluate existing proposals.

According to NCOIL’s Property-Casualty Insurance Committee Chair, Indiana State Representative Matt Lehman, who sponsored a draft Model Consumer Lawsuit Lending Alignment Bill that treats consumer legal funding as a loan, “I think we’ve come to the realization that the proposals before us, including my own, may not create the kind of regulation that will best protect consumers.  The key issue is how to ensure that what consumer lawsuit lenders charge people is fair–and, if subjecting the transactions to the same oversight as credit card companies may not be appropriate, and I no longer think that it may, we need to consider caps on what lenders can charge.  Lender fees can be extremely high, making it all the more important that we get this right,” he said.

New York Senator Neil Breslin, NCOIL President-Elect and sponsor of a draft Civil Justice Funding Model Act, added, “I’m pleased to see that the Committee may be moving away from looking at whether lawsuit lending arrangements are loans and seems inclined to consider a more balanced approach that recognizes the unique nature of these transactions.  I strongly believe that lawsuit lenders must be regulated, but it is misguided for us to treat consumer funding transactions like loans because lenders, unlike banks, have no guaranty that they’ll ever see the money they give a consumer.”

During the Committee’s November 23 consideration of the issue, legislators discussed initiatives in Tennessee and Indiana to develop proposed legislation, which may influence a proposed NCOIL model in 2014.  Representative Lehman expressed interest in incorporating certain provisions in Senator Breslin’s draft, which establishes rules related to disclosure, conflicts of interest, lender registration, and other items–if possible.

A third model law, sponsored by NCOIL Immediate Past President, Tennessee State Representative Charles Curtiss, contains similar disclosure and conflict-of-interest provisions as Senator Breslin’s proposed model, but differs regarding time frames for charging fees, among other provisions.

At the conclusion of the special meeting during which the Property-Casualty Committee explored the issue, legislators agreed to consider the possible new approach at NCOIL’s March 7-9 Spring 2014 Meeting in Savannah and plan to vote on a draft model at the July 10-13 Summer 2014 Meeting in Boston.

In general, consumer legal funding, also known as non-recourse funding, takes place when a lending company gives money to a plaintiff in return for receiving a portion of any settlement or award.  The third-party lender receives nothing–including the amount of the original transaction–if the plaintiff loses.  Consumers often use the funds to pay daily expenses while a lawsuit works its way through the courts.

The Property-Casualty Insurance Committee will continue to review the proposed NCOIL model proposals to regulate third-party lending to consumers bringing legal action, which are outlined below:

Consumer Legal Funding

The Consumer Legal Funding Model Act, sponsored for discussion by Tennessee State Representative Charles Curtiss, would require disclosure of fees/charges and of a consumer’s right of rescission, among other things; ban commissions, referral fees, conflicts of interest, and the ability of a funding provider to have a say in the underlying legal claim; establish that the amount a consumer would pay a funding company would not be a percentage of the award/settlement; and state that consumer legal financing transactions are not loans.  Representative Curtiss’ model also would ban a funding company from assessing fees more than three years after giving the consumer his or her funded amount; require fees to be assessed no less than semi-annually; say that the proceeds of a legal claim cannot be purchased more than three times after a consumer receives his or her initial funding; prohibit a funding company from requiring arbitration; and, among other things, allow the funding provider and the consumer to negotiate how much the consumer will pay the provider if, after all liens to a settlement/award are paid, there are insufficient proceeds to pay the funding provider what the consumer owes it.  To view this Model, click here.

Civil Justice Funding

A substitute Civil Justice Funding Model Act, sponsored by New York Senator Neil Breslin, would require various disclosures; ban certain behavior on the part of funding companies and attorneys; establish that the money owed to a funding provider will not be a percentage of the settlement/award; and establish that consumer legal financing transactions are not loans.  It would set no limit on the length of time that a funding provider can assess fees; would not address how often fees could be compounded; would allow multiple funding companies to provide funds to a consumer contemporaneously; and would establish a detailed process by which funding companies must register with a state before doing business there.   To view this Model, click here. 

Consumer Lawsuit Lending Alignment Bill

A third model, the proposed Model Consumer Lawsuit Lending Alignment Bill, sponsored by Indiana State Representative Matt Lehman, would subject consumer legal funding to state laws regarding consumer credit transactions, including disclosure requirements and caps on allowable interest rates.  It also would require a plaintiff who has accepted third-party funding to file information regarding the transaction with the opposing party and with the court.