First of all lawsuit loans are not really loans – they are non-recourse investments and are not subject to usury laws. To avoid the usury limits, which would render the product economically infeasible, the typical lawsuit loan or lawsuit funding transaction is done in the form of an investment rather than a loan. This means that the funding company only gets paid if the lawsuit or claim is successfully resolved. If you lose your case you own them nothing! Generally speaking, this non-recourse element renders the transaction an investment (not a loan) under the law.
In the past, there were no sources of help available to personal injury victims due to a strange confluence of circumstances.
- 1Bar Association rules of ethics prohibit your attorney from lending you money for anything but case expenses, experts, tests, travel to the doctor etc. This rule exists for your benefit. The Bar is rightly concerned that if your lawyer lent you money against your future settlement, a conflict of interest might arise, and you could be pressed into accepting a settlement that was less than you otherwise would accept. Also, attorneys are not banks and they simply can’t afford to operate their law practice and be a lending institution as well.
- Banks and traditional lending institutions do not have the skills to evaluate personal injury lawsuits and thus, will not lend money to someone whose primary asset is their lawsuit.
About seven years ago, this void in the financial system started to be filled by a number of entrepreneurial companies – some good, some bad. It was a rather strange group consisting largely of lawyers, wall streeters, and well-heeled business people. They used their own capital to fund cases and a new industry was born.
In these early years fees were very high and contracts very severe. While rates generally ranged from 3% to 6% per month, it was not uncommon to see contracts with rates of 15% per month, compounded! Contracts were also very Byzantine. However, rates have steadily come down and contracts, while not exactly consumer friendly yet, have become less severe. In short, the business was maturing into a responsible part of the specialty finance industry.
However, over the past two years or so, American Cash Flow Corporation, a “marketing” company with a rather checkered history, targeted the industry for promotion. Since then, the lawsuit funding industry has resembled a Wild West gold rush attracting an unbelievable number of “get-rich-quick” rip-off artists, amateur lending brokers with no experience and just plain folks who paid their $5,995 ($2,495 for the tape course) to become a “cash flow broker” and are trying to make their fortune.
Virtually all of these “cash flow brokers” are just that – brokers. They do not invest their own money to fund lawsuit advances. However, they all do have websites that trumpet their expertise without revealing that they have none and are not acting as principal. If you are not careful dealing with them can make your situation worse – much worse.