Website design By BotEap.comA Wall Street Journal article today reports on the pre-liquidation finance industry. Much of the article revolves around the “costs” of lawsuit financing and how it is unfair to consumers. These arguments have been made since the first cash advance companies emerged more than 15 years ago. Since then, claim financing operators have helped hundreds of thousands of people with immediate liquidity needs. The industry thrives because it meets a legitimate market need.
Website design By BotEap.comWe regularly post about opponents’ fairness arguments. And history has no shortage of people, supposedly without an agenda, loudly demanding justice in an unjust world. However, ultimately, equity is a subjective concept. What makes sense to one person may not make sense to another. This is simply the way the world works.
Website design By BotEap.comThe purpose of this article is to answer these arguments from people who supposedly save consumers from themselves. As long as the attacks continue to be published, these publications will continue.
Website design By BotEap.comPre-settlement case financing costs
Website design By BotEap.com“Interest rates are ridiculous,” said the Republican senator from Louisiana. Dan Claitor, on lawsuit funding. Although political, he does not lie. You are simply offering an opinion on the “cost” of claim financing. The “fees” charged (sometimes called “usage fees”) for claims financing transactions are typically higher than:
- Bank home loans, auto loans, or any other “secured” debt.
- Sometimes, but NOT ALWAYS, credit card cash advances.
- A personal loan from a relative.
Website design By BotEap.comRational market participants would undoubtedly look to any of the above as a “solution” to their liquidity needs if available. Unfortunately, pre-settlement loan clients typically do not have the ability to obtain funds from these sources.
Website design By BotEap.comLawsuit financing serves this market: people who, for some reason or another, cannot access money on terms that some random senator deems “fair.”
Website design By BotEap.comAnd what is “fair”? According to our esteemed representative, “fair” is equivalent to 21% and 36% per year according to the article that cites provisions contained in the Senator’s bill on the subject. Still well above home or auto loans.
Website design By BotEap.comCost of money and other line items
Website design By BotEap.comOpponents make it appear that litigation financing is akin to stealing loans with obscene, tax-free earnings. But that is simply not the reality. Lawsuit financing operations generate profits, but they also have the same expenses as other legitimate businesses, such as taxes, advertising, etc.
Website design By BotEap.comSo what does the price of lawsuit loans imply? Why are the costs so “high”?
Website design By BotEap.comFor companies that finance lawsuits, the costs are generally salaried professionals and support staff, rent, advertising, losses, and so on. And since the product the customer is looking for is the currency itself, the cost of money is also a “line item” that must be considered.
Website design By BotEap.comLawsuit funders, unlike some banking establishments, do not have the ability to print money and lend it at interest. Instead, they must borrow the money from themselves or others. At the start of the business, the money that made up the bulk of the lawsuit cash advances was borrowed from the hedge funds. These hedge funds required far more accrued interest than mortgage lenders, for example. That cost was passed on to the consumer. This is normal business practice and we see it every day for every product or service that the market consumes.
Website design By BotEap.comIn fact, the price has dropped in recent years.
Website design By BotEap.comOverall, this was and is a good thing. For the financing of the resolution of lawsuits, the market saw a need and the entrepreneurs filled it. The fact that consumers benefited from the offer simply confirmed that there was a legitimate need and that it was being adequately met. Who, except the consumers themselves, can know what is best for them?
Website design By BotEap.comThe effect of limiting costs
Website design By BotEap.comWhen we speak of a cap on charges “to protect the consumer,” we can logically predict the outcome. Government meddling in an otherwise free market always damages the pricing mechanism. Winners and losers emerge from these distortions. Maybe you can guess who the final losers are.
Website design By BotEap.comSo while the limited charges can provide certain people with a better deal on their advance payment. Many more will not be helped simply because the company cannot justify additional risk at those price levels.
Website design By BotEap.comFor example, when an applicant requests money for their lawsuit in advance, they must provide relevant information about the case. Then, the relevant documentation is requested from the applicant’s lawyer. Often the requested documentation is not in the attorney’s possession, especially if the case is fairly new. Funding applications are routinely rejected because the necessary documentation is not provided.
Website design By BotEap.comHowever, sometimes these cases ARE approved by a lawsuit financing team, but at a higher cost, simply because there is additional risk. This risk could come in many forms, such as dishonest applicants, attorneys, or other issues that would have arisen if the documents had been provided. The cost simply must reflect the risk or there will be no deal. The lawsuit financing industry currently has the flexibility to make this happen.
Website design By BotEap.comHowever, the Senator’s bill would exclude these types of arrangements because these price adjustments would be illegal. Instead, only those companies that have access to a lower cost of money could provide the rates the Senator is proposing. This would further solidify the market position of the largest players and stifle competition. All other market participants could not stay in business. Thousands of jobs would be lost.
Website design By BotEap.comWorse still, an advance would only be offered to those cases that fit into your underwriting parameters. The fringe cases would no longer be approved even though they are currently funded by market participants who are willing to take the additional risk. Plaintiffs with the same immediate cash need but outside of these parameters would be out of luck. This would be a disaster for plaintiffs / consumers whose lifeline was removed for “their own good.” This kind of practice is an affront to a free market and frankly anti-American system.
Website design By BotEap.comThe senator may or may not realize what he is saying. If you knew you were thwarting the efforts of thousands of people who desperately needed help, you might not be proposing such legislation. Are you really meeting the needs of consumers?
Website design By BotEap.comThe original article is published here.
Website design By BotEap.comThank you for your interest in the lawsuit financing business.
