Time to Regulate Lawsuit Lending

For decades, Alabama was known as “tort hell.” The legal environment was tilted toward plaintiffs and businesses were taking it hard on the chin. This made some trial lawyers very wealthy, but it cost Alabama untold thousands of jobs as businesses and doctors went elsewhere. During the 1990s, voters flipped the appellate and Supreme Court to Republican justices. In 2010, the people of Alabama elected a conservative, Republican majority to the Legislature. Common sense reforms since then have brought Alabama’s legal environment back to healthy balance. Now over the past few years, a new form of predatory lending – known as lawsuit-lending or litigation finance - has to come to the surface. Lawsuit-lending companies, often backed with hundreds of millions of dollars from Wall Street financial firms, speculate on the outcome of legal cases by placing bets on the final decision of a case in the form of loans to a plaintiff. These loans usually have excessively high interest rates, sometimes exceeding 150 percent, which often drain away payments awarded to a plaintiff. For example, Binyamin Applebaum of the New York Times has reported that in 1995, a woman in Philadelphia borrowed money to finance a lawsuit concerning a car accident. But Applebaum writes that by “the time she won $169,125 in 2003, [her] lenders were owed $221,000.” The aggressive lawsuit lending industry poses two challenges to Alabama’s legal system. First, the exorbitant interest rates on lawsuit loans distort how plaintiffs negotiate in the legal process. Inevitably, plaintiffs refuse reasonable offers of damages from the defendant and push for more and more money to cover the excessive loans they will owe, like the woman from Philadelphia. But the main problem now is that lawsuit lenders operate largely in the dark, outside the normal regulations governing other types of lenders. Lawsuit loans are not subject to overview from the state Banking Department and lenders can operate without a license in Alabama. It is time to bring lawsuit lending into the light of common-sense regulation. In February, I will introduce legislation in the Alabama Senate that will cap lawsuit loan rates at 10%, require lawsuit lenders to obtain a license, and give the state Banking Department oversight of the industry. Every other type of lending is regulated in Alabama; why should lawsuit-lending companies, often backed by hundreds of millions of dollars from hedge fund titans and Wall Street financiers, alone be exempt from regulation? Conservatives have worked hard to achieve a legal system that is fair to businesses, individuals, and plaintiffs. But left unchecked, lawsuit-lending companies will continue to prey on unsuspecting consumers, drive up the cost of doing business in Alabama, and add more cases to an already overburdened legal system. Tennessee, Arkansas, and Oklahoma have all passed common-sense regulations of the industry over the past few years. It is time Alabama joined their ranks.

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