LD 1703, “An Act to Regulate Presettlement Lawsuit Funding”

TESTIMONY OF REP. SHARON ANGLIN TREAT

SPONSOR, LD 1703, “AN ACT TO REGULATE PRESETTLEMENT LAWSUIT FUNDING”
April 25, 2007

Insurance & Financial Services Committee

Senator Sullivan, Representative Brautigam, and fellow members of the Insurance & Financial Services Committee. I am Sharon Treat of Farmingdale, and I represent House District 79. I am the sponsor of LD 1703, “AN ACT TO REGULATE PRESETTLEMENT LAWSUIT FUNDING.”

This legislation would regulate a relatively new, but growing practice: loans to consumers in anticipation of a financial settlement in a legal case, generally a personal injury lawsuit. I learned about this issue while attending an ethics class required as part of my continuing legal education. The Board of Bar Overseers, in a December 21, 2006 Opinion (#191, attached), has concluded that the practice of third party lending to consumers in anticipation of a financial settlement raises many ethical issues for lawyers, and that they should tread very, very carefully when dealing with a client who has entered into a loan arrangement with one of these companies.

In addition to the ethical issues raised for lawyers, the practice also raises concerns under our consumer lending laws, because these companies, and their lending practices, are simply unregulated. The opinion of the Board of Bar Overseers raised many questions that the Board could not answer under current Maine consumer credit laws. The opinion reveals a situation that is ripe for abuse unless the Legislature acts promptly to clarify the scope of Maine law.

However, the Board of Bar Overseers does not have jurisdiction to address consumer credit issues. But we do, and I am asking this committee to act.

LD 1703 would protect consumers who are at their most vulnerable point by providing a basic level of protection that already applies in other loan situations:

• Lender licensing;
“
• Truth in lending” disclosures; and
• An upper limit on the interest rate that may be charged.

“ For example, are the representations made in the advertisements borne out by the loan documents? What control, if any, does the financing company maintain over settlement decisions? Is the loan truly non-recourse, or is there any situation where the client might be obligated to repay a portion of the loan in the event of no recovery? Is the client’s obligation to repay capped by the amount of any settlement or verdict, or is it possible that the client could have a repayment obligation that exceeded that amount? Is the loan secured by the judgment, and if so, does that have a bearing on any issues? Additional questions arise if there are others to whom the plaintiff will be indebted and who expect to be paid out of a litigation recovery. For example, who gets paid first out of any settlement as between the financing company, lien holders (e.g., insurers and medical providers) and the attorney? What is the order of priority for payment? What amount is the client likely to net after case resolution and after the financing company and others have been paid?”

These are good questions. I would add: are the 24-48% annual interest rates unreasonable? I think they are; and some companies have charged interest rates even higher than this.

The opponents of this bill will follow me and hand out a hefty handbook of materials making the case that these companies provide a vital service, and a bunch of legal decisions and memos from their counsel saying these loans are not “usurious.”

As to the first point, fine. This bill will not prevent these companies’ continued service to Maine people, but it would set reasonable interest rates, disclosure requirements, and licensing provisions so that consumers know what they are getting into when they sign on the dotted line, and so that there is some recourse if the company they are dealing with turns out to be a fly-by-night entity or doesn’t comply with the rules.

As to the second point, what is or is not “usurious” is for this Legislature to decide. The fact that current law did not envision this particular type of loan (the practice just started around the year 2000) doesn’t mean that the sky is the limit when it comes to what interest rate can be charged. That’s up to us, and leaving this loophole in current law, or relying on a voluntary agreement to simply provide disclosure, doesn’t seem wise to me.

Disclosure is only part of what is needed, and voluntary agreements are either unenforceable or enforceable only against those who sign them. There are about 100 of these companies operating in the U.S. but only 18 are in the trade association that will testify here today. True, those companies represent a large share of the business, but if rules are needed, then they should apply to all and be enforceable through the courts.

The opponents also say regulation is not warranted because these loans aren’t “loans.” Really? What the heck are they? I have come to respect the common sense of this committee. I hope you will see this practice for what it is: a consumer loan. As such it should be regulated. LD 1703 does that, and I urge your support.