11 Facts Attorneys Must Know about Lawsuit Funding
As any successful personal injury attorney, you always look out for your client’s best interest.
So, when a client asks you for an advance on their case, you hesitate before referring them to a lawsuit funding company. You’ve probably been warned before about lawsuit loan sharks and their predatory tendencies.
We don’t blame you if you familiarize with the above scenario. In fact, we understand and even encourage all personal injury attorneys to practice the same caution. The reason why is simple: the lawsuit funding industry is still in its early stages and is barely regulated.
Regulatory environment still weak: attorneys and clients must stay vigilant
In certain states, even ‘barely regulated’ is too generous of a term. States like California, Nevada, Florida, Texas, New York and New Jersey lack any type of oversight to regulate pre-settlement funding. This murky regulatory environment has resulted in an exploitation of plaintiffs at the hands of litigation financiers.
As an attorney, there are many ways to prevent your client from getting taken by a shady lawsuit funding company. Below are 11 facts every attorney should know before co-signing a funding contract with their client.
11 Facts about Lawsuit Funding:
1. The “funding company” your client reached out to might be a broker-in-disguise.
There’s nothing wrong with lawsuit funding brokers, but there is when a broker is falsely presenting him/herself as a direct funder.
2. Broker fees are almost always passed along to the plaintiff.
Why would a broker not present themselves as they are? Because they are going to make 10-20% in commission on whatever amount your client will get funded. It is common for a funder to pass along the origination fee onto your client.
3. It is not uncommon for fees to go beyond 3.5% per month compounded MONTHLY until your clients’ case is settled.
At 3.5% per month compounded monthly, if the your client’s case takes 12 months to settle, expect to pay over 70% including fees. If the case lasts 24 months from the time the funding agreement was signed, your client will owe almost 150% worth of interest.
4. Many companies charge application fees north of $400.
Many funders do not expect the payment upfront, so they deduct the application fee from the purchase price. As a result, your client will also pay interest on the application fee.
5. Huge application fees are not reduced for smaller advances.
Some companies knowingly give out $1,000 advances with $400 in application fees. Even before one day of interest has accrued, your client is already in the hole for 40%. Ouch!
6. The second funder (almost) always buys out the first one.
If your client got an advance from “Funding Company A” and applies a few months later with “Funding Company B”, company “B” will always buy out the remaining interest of the first funder. This is known in the industry as “paying off” the initial funder.
7. If your client applies for lawsuit funding from a second source, there’s a chance their initial advance will get refinanced with a higher rate.
When the second lawsuit funding company buys out the advance given by the initial funder, the second company now owns the whole lien. The rate they assign, whether higher or lower, will now be the rate your client has to pay until the case is settled.
8. Every funding company has a different fee structure.
The two most popular fee structures are: a fixed payout amount every six month period or a compounded monthly interest. Both can be excessive or fair, so it all depends on the percentage rate for either fee structure.
9. Aggressive funding companies tend to over-fund cases to maximize profits.
Don’t allow a funding company to over-fund your client’s case. Over-funding could result in your client receiving next to nothing once the case is settled. Plaintiffs should only take what they need to get through their lawsuit. Typically, your client’s advance should not exceed 10% of the most conservative value of the case.
10. Regulatory conditions are always changing.
It’s important to keep up with the regulatory environment of lawsuit funding in your state. Always make sure the terms in the funding agreement abide by the current regulatory guidelines.
11. Some companies don’t disclose a payoff table in their agreements.
Always make sure your client knows how much they will owe 6,12, 18, and 24 months away from when the funding agreement is signed. A professional lawsuit funding company will always provide a clear payoff table in the agreement.
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