The Consumer Legal Funding Act, which would govern third party consumer litigation lending in Illinois, moved quickly through the majority democratic state legislature—much to the chagrin of insurers and business interests—has reached Governor J.B. Pritzker’s desk for signing into law.
Litigation lending is a vehicle by which hedge funds or other investors advance money to plaintiffs while they pursue legal claims. In exchange, the lender can claim a significant portion of the lawsuit proceeds. One report indicates that lawsuit lending generates a three- to four-hundred percent return on investment, usually from settlements. Those returns are generally more resilient than those of other asset classes, which can lag under difficult market conditions.
The bill’s supporters include the Illinois Trial Lawyers Association and the Alliance for Responsible Consumer Legal Funding, a trade association representing forty-two lawsuit lenders. They say the bill ensures access to financial products that enable plaintiffs to prosecute claims without growing desperate to accept a quick, but unfair, settlement. The bill also includes protections like a cap on the interest rates lenders can charge, a fourteen-day period for borrowers to rescind their contract, and a bar on lenders participating in decisions about lawsuit conduct or settlement.
Opponents include the U.S. Chamber of Commerce’s Institute for Legal Reform, which cites high litigation costs as a problem affecting everyone. They say the average American household annually pays a $3,300 tort tax tacked onto goods and services to cover the litigation costs of businesses and insurers.
These opponents argue that despite the guise of regulation, the proposed law would only increase frivolous lawsuits that drive lender profits in Illinois’ plaintiff-friendly courts. They contend that ambiguity as to whether the interest cap—of eighteen percent, assessed every six months for forty-two months—applies to simple, compound, or cumulative interest could mean actual rates as high as one hundred twenty-six percent. Further, they assert that lenders whose identity is not disclosed can work from the shadows to slow settlement processes, increasing their returns while decreasing the consumer’s own recovery. They also expect few prosecutions of lender violations from the state’s Attorney General, whose campaigns have received steady funding from trial lawyer groups and related organizations.
Litigation lenders call these concerns disingenuous, noting that while State Farm and Allstate may not want new rules in their home state of Illinois, the insurance industry has in other states supported litigation funding reform measures with higher or no rate and fees caps. The lenders also denounce pushes to require automatic disclosure of third-party lawsuit financing as attempts to bypass judicial decision-making and unfairly spotlight plaintiffs’ financial vulnerability.
Judges, lawmakers, lawyers, lenders, and other stakeholders will continue to grapple with how best to protect consumers from predatory lending and social inflation while still ensuring important access to the courts. If advising a client considering a litigation loan, lawyers should make sure they clearly understand the agreement terms and look out for ethical issues implicating privilege, confidentiality, the attorney’s independent legal judgment, or case decision-making.
If you’re an attorney looking for litigation cost solutions, consider LevelEsq’s options for financing your plaintiff litigation, protecting your financial investment in your cases, and maximizing your firm’s profitability.