The consumer litigation finance industry in the state of New York is currently unregulated. The industry is not new, it has been around for about two decades, but it is starting to gain increased scrutiny. Companies in the industry help litigants make ends meet while they wait for settlements to be paid out, and only collect on their loan if the litigant is successful. However, there are reports of these companies charging interest rates of as high as 124 percent on those loans.
New York’s state legislature is considering legislation to regulate the industry with S. 3911 and A. 8966. S. 3911 would define consumer litigation financing agreements as those where the amount of funding is no more than $500,000. It also puts in place other restrictions, including a cap on charges of 16% of the funded amount.
- 8966 is largely similar, but notably does not define consumer litigation financing agreements as those where the funding amount is less than $500,000. It focuses much more on the details of the contracts but leaves the definition of what a consumer litigation financing agreement much more open than its Senate counterpart.
Maya Steinitz, Professor of Law at the University of Iowa College of Law and Visiting Professor of Law at Harvard Law School offered testimony on May 16, 2018 at the New York State Senate Committee on Consumer Protection regarding these two bills. Her testimony specifically focused on consumer litigation financing. Professor Steinitz notes areas in these proposed new regulations that can be improved upon to make the legislation more effective at protecting consumers.
She even notes that S. 3911 is going in the “correct direction” by exempting “contracts offering non-recourse financing of more than $500,000 from its scope.” This is a step in the right direction “in the sense that the Senate bill attempts to focus its protection on those individuals who are less sophisticated litigants.” While the exemption for contracts financing over $500,000 is a step in the right direction, it’s an “imperfect way to capture the difference between different kinds of litigation finance consumers.” Borrowing from the field of securities regulations – which distinguishes between unsophisticated and sophisticated investors she suggests “protecting ‘unsophisticated plaintiffs’” and advises “amending sections 2 and 4 of the Senate bill to read … “‘Consumer litigation funding company’ shall mean a person or entity that enters into a consumer litigation funding contract to provide non-recourse funding to an unsophisticated plaintiff” and “‘Consumer litigation funding contract’ shall mean a contract to provide non-recourse funding to an unsophisticated plaintiff.”” Essentially, to best protect consumers, she argues that the legislature create separate classes of litigants and that the regulations protect those who need the most protecting.
Another concern that Professor Steinitz expressed to the Committee was that “the combination of the compensation of the third part litigation funders and the attorneys’ contingency fees would, separately or combined, leave the wronged or injured plaintiffs without meaningful recovery and remediation.” Her suggestion to address this would be to have “the statute directly guarantee a minimum return to the plaintiff.”
She further elaborates that the legislation “should ensure a minimum recovery of no less than 50%, barring extraordinary circumstances, to the plaintiff.” This would necessitate defining “Net Recovery” in statute, and she suggests that the definition of Net Recovery be “the total amount awarded to the consumer less the disbursements of the litigation–including filing fees, transcript costs, expert witness fees, and similar expenses—advanced by the attorney. The charges of the consumer litigation finance company and any attorneys’ fees shall not be included in the calculation of the Net Recovery.”
Both the Assembly and Senate bills are still under review, and Steinitz’s suggested amendments have not yet been added to either piece of legislation. However, it is not unlikely that the bills will undergo further amendment as they progress through New York’s legislature, and Steinitz’s suggestions may still be added.