California’s lawsuit lending industry is thriving, but Californians are not

OPINION- An ongoing lawsuit against the wealthy law firm Girardi Keese reveals the dark underbelly of how the lawsuit lending industry targets the most vulnerable Californians.

Thomas Girardi, husband of “Real Housewives” star Erika Jayne, allegedly colluded with lenders to steal more than $100 million from clients — some of whom have been waiting years for their settlements.

Lawsuit lending, which advances plaintiffs a portion of a potential settlement or judgment to cover medical bills or day-to-day expenses, is not illegal. In fact, it often provides a much-needed lifeline to individuals who are unbanked, underbanked, or without a financial safety net.

But an absence of regulation enables bad actors to take advantage of borrowers who are desperate for cash and have nowhere else to turn. Lenders, many of whom are backed by hedge funds, are getting rich by exploiting Californians at their weakest.

This can’t continue. That’s why we are proud to support SB 581, the Predatory Lawsuit Lending Prevention Act. This bill proposes commonsense reforms to establish guardrails around this booming industry and protect borrowers who are injured and need help.

Currently, lawsuit loans are considered “investments” or “non-recourse agreements,” because plaintiffs do not have to pay back the money they borrow, unless they win their case or negotiate a settlement. Due to this loophole, there is no cap on the interest rates lenders can charge.

Lenders can — and do — charge rates that are far higher than the limitations for criminal and civil usury. According to a 2020 study, lenders, on average, make a 68 percent profit on post-settlement lawsuit loans, though some borrowers have reportedly paid 100 percent or more in interest. As a result, borrowers can end up owing a large portion of their lawsuit proceeds to pay off their loans, and some even find themselves in debt.

By appropriately regulating the industry, Californians will be able to borrow funds when they need them without fear of getting fleeced.

Lawsuit lenders argue that they are taking a risk by loaning cash to borrowers who may not win their lawsuit. But the CEO of Burford Capital, the world’s largest litigation funder, admitted during a recent “60 Minutes” story that his company carefully vets borrowers and is “right about 90 percent of the time” and regularly doubles its money.

Those odds are hardly risky. They’re raking in billions of dollars a year from the lawsuit lending industry, which was first introduced in the U.S. in the 1990s and grew by an eye-popping 414 percent between 2013 and 2017. And California has been deemed one of the most attractive places for those looking to make big money on lawsuit loans.

The truth is that success is coming at the expense of some of our nation’s most vulnerable individuals. High-profile victims of this industry have included 9/11 first responders, former NFL players, survivors of police brutality, and people impacted by the Deepwater Horizon spill.

In recent years, lenders have also targeted those who were wrongfully convicted and, following their exoneration, stand to receive significant settlements. These payouts can take years to materialize. Exonerated individuals are thus often forced to turn to high-interest lawsuit loans, which, a veteran civil rights attorney told the New York Times, are a “necessary evil.”

Though these stories are troubling, most lawsuit lending victims never go public. They are hardworking, everyday people who have been abused, harassed, injured, and mistreated, and just want to make ends meet while they await the outcome of their cases.

By appropriately regulating the industry, Californians will be able to borrow funds when they need them without fear of getting fleeced. In addition, by introducing transparency into the litigation process, as the legislation proposes, we can expose conflicts of interest in the legal system and establish a level playing field.

These simple reforms strike a balance between protecting vulnerable borrowers and ensuring the lawsuit lending industry can continue to serve an important role for those in financial need. That’s a win-win for everyone involved—and will further establish California as a progressive policy leader.

Anna M. Caballero is a California State Senator representing Senate District 14. Linette Lomeli, executive director of Madera Coalition for Community Justice, is a member of Consumers for Fair Legal Funding, California (CFLF-CA).