State lawmakers are looking to regulate companies that give cash advances to litigants waiting for their civil cases to be decided.
Susan Donegan, commissioner of the Department of Financial Regulation, said the companies provide cash advances to plaintiffs who are expected to receive settlements for personal injury cases, workers compensation claims, civil rights cases or multimillion-dollar divorces.
Donegan testified this week on legislation that would allow the department to regulate settlement loan companies under the state’s licensed lender laws.
The House Committee on Commerce and Economic Development is preparing to fold H.12, into a comprehensive Consumer Protection Act, which would include the Senate’s recently passed rent-to-own regulations, provisions on romance or catfish scams, and a few others.
Plaintiffs who use the services usually have a contingency arrangement with a lawyer, according to Donegan, but cannot afford to wait until the lawsuit is over to receive the money, so they call numbers such as 1-800-LAW-CASH and 1-877-377-SUIT to ask for help. (In Vermont, a civil trial can take as long as two years.)
The legal finance industry emerged in 1997, according to the American Legal Finance Association, but was not regulated until the association entered into a voluntary arrangement with the state of New York. The New York City Bar Association estimates that non-recourse legal financing has grown into a $1 billion industry. No companies have been reported in Vermont yet.
“When you think about when people might need this type of advance, it’s probably at a vulnerable point in their life,” Donegan said. “These are folks who are in high-stress situations, financially, so they would be tempted as sort of a means of last resort to do this kind of financial transaction.”
Regulating the litigant financiers under licensed lender laws would force the companies to provide information such as financial statements, business plans and proof of good character to the state. It would also give the Department of Financial Regulation the power to revoke a company’s license if it doesn’t act in good faith.
“From what I’ve been reading, most of these companies are not going to make an advance unless they’re pretty, pretty sure that it’s going to be a winner,” Donegan said. “It’s also non-recourse in the statute, which means that if [plaintiffs] lose, they’re not going to be on the hook for paying back the money.”
As written, H.12 does not have usury language to put a maximum interest rate on litigant financing, even though the payments may be low-risk for the company. But unlimited interest rates could pose a problem to a plaintiff if the settlement drops enough over a period of a few years due to the time value of money, Donegan said Thursday.
Rep. Michael Marcotte, R-Coventry, one of the bill’s sponsors, echoed the concern about plaintiffs losing money over time.
Marcotte said he wants to add language to the bill that would let the commissioner work with each company to set an appropriate interest rate.
“If we put in a cap, [companies] may go to a cap,” Marcotte said. “I think the industry itself likes the bill as it is.”
