Editor’s note: This commentary is by Matt Mincieli, who is the Northeast region executive director for TechNet, a national high tech advocacy member association. He lives in Massachusetts, where he is registered lobbyist.
[Y]ou’ve seen the ads on TV promising fast cash for joining a class action lawsuit. If it seems too good to be true, that’s because it usually is. The promises of big payouts come at a cost that hurts hardworking consumers and businesses alike.
Here’s how it works. A lending company offers you a certain amount of money upfront as part of a potential payout of a settlement. You need the money to cover medical or living expenses, so it seems like a good deal.
But what the representative doesn’t tell you is the loan comes at astronomically high interest rates — as high as 150 percent annually, sometimes even more than that. Eventually, if you win and there’s a payout, there’s usually very little left for you, if any. And, in some cases the consumer ends up actually owing the lending company because of the usurious interest rates.
So why would people fall for it? Because these lending companies prey on those who are most vulnerable — people who are in dire financial situations and desperately need a quick infusion of cash. The industry’s success is based on a lack of transparency and a lack of regulation. According to the Center for Public Integrity, business is booming for these companies, to the tune of more than $1 billion invested in these lawsuits at any given time.
While you’re waiting for your big payout, it’s these companies that are getting rich. The payout from the lawsuit is redirected from you, the consumer, to them, the lenders.
Make no mistake about it: if these companies had nothing to hide, they would disclose their interest rates. But their lack of transparency is intentional.
As is stands right now, these companies operate under the radar of state regulatory officials. But Vermont lawmakers are taking action with a bill that would force consumer litigation funding companies to abide by the same regulations as other licensed lenders in the state. This means these “lawsuit lending” companies would have to file financial statements, business plans and show proof of good character. If the company doesn’t live up to these standards, the Department of Financial Regulation can pull the license. It’s a good start, but it’s not enough.
In order for consumers and businesses to be protected, legislators must place a cap on the interest rate these companies can charge, that’s in line with other Vermont lending rates currently set at 18 percent. Without it, consumers are left holding the bag, businesses in the state will be subjected to frivolous lawsuits, and the judicial system will continue to be bogged down due to unnecessary litigation.
Make no mistake about it: if these companies had nothing to hide, they would disclose their interest rates. But their lack of transparency is intentional. Think about it. Why would anyone agree to a loan with an annual interest rate of 150 percent in some instances?
The practice of lawsuit lending not only crosses ethical lines by encouraging unsuspecting people to enter into lawsuits that have no legal grounds on which to stand, but it also hurts businesses by forcing them to pay high defense costs in cases that are meritless to begin with.
In states across the country, lawmakers are working to enact laws to regulate this industry to ensure their constituents and businesses are protected. Some are forcing these companies to have an actual physical office in the state. Others states are capping interest rates.
We strongly urge Vermont’s legislators to do the same by supporting H.12 but also by taking it a step further, and cap the rate of interest these companies use — for the sake of Vermont’s citizens and its businesses.
