Let's face it, the only time an industry invites regulation is when it is certain it can dictate the terms.
That fact alone should make legislators skeptical of House Bill 412, legislation that was prepared and is being aggressively promoted in Kentucky by the very industry it purports to regulate.
Under the guise of helping consumers, the real purpose of House Bill 412 is to legitimize third-party lawsuit financing before any real efforts are made to understand the industry, how it works, who it represents and, most importantly, how to really protect consumers.
The absence of a cap on interest rates is just one of many problems with HB 412. Legislators should take the time to ask and answer a lot of questions before adopting any legislation that would further legitimize third-party litigation funding.
Should there be a cap on interest rates and should the practice be subject to banking and lending laws?
The answer to both questions is yes. HB 412 does neither. Exempting such contracts from fair-lending and usury laws allows litigation financiers to charge any interest rate they want, a fact that they like very much.
Where are the consumer protections in this bill?
Besides the obvious need to cap interest rates, there are other issues that HB 412 does not address. Thank goodness it specifies the type size in which the terms of the loan must be printed (sarcasm intended), but it doesn't address the terms themselves.
In a Dec. 23, 2010 editorial addressing a similar bill in Illinois, the Chicago Tribune called that "window dressing," which is exactly what it is.
Further, while the bill specifies that the consumer does not have to pay back anything in excess of recovery, it ignores the fact that after attorney's fees and expenses, the plaintiff can still be left with nothing, and might actually be in a financial hole. HB 412 clearly puts the consumer last in line. The bill does not protect consumers, it simply creates the framework within which this industry wants to operate.
How does lawsuit lending affect the attorney-client privilege?
While HB 412 says that the lender does not have the right to make any decisions, it does not address the influence of the "elephant in the room" with a major financial stake in the outcome.
Nor does HB 412 protect disclosure of privileged information to lawsuit lenders who generally want to know details of a case in order to evaluate their risk.
How is Kentucky going to regulate online transactions?
A number of companies take loan applications online with promises of a quick response. You can pass all of the so-called regulatory bills you want and never get a grip on everyone in this business.
Who is behind the bill?
A number of out-of-state lawsuit lending companies have joined together under a trade association banner to pay lobbyists to aggressively promote HB 412 while glossing over the fact that the bill is designed to protect the industry, not the consumer.
Perhaps the most powerful argument for a thorough study of litigation financing comes from the industry itself.
In a Jan. 16 front-page New York Times article, a lawsuit lender explains that his company only invests in cases he expects to settle before trial because "we don't want judges to shine a light on us."
Some people are arguing that HB 412 is better than nothing. That's what you say when you can't justify something on its merits. Unfortunately, once out of the hat, the rabbit doesn't like to go back in.
The only urgency attached to this legislation is the facade erected by its backers who, like the lender above, don't want legislators to look behind the curtain.
Rather than haphazardly pass legislation backed by the industry itself, lawmakers need to take a look at how and why this industry exists in the first place and what role it should have, if any, in the judicial process and the relationship between attorneys and their clients.
Some people argue that the practice of third-party lawsuit lending should not be allowed at all. One thing is for sure: A fast-tracked industry-backed bill is not the way to deal with this practice.
If regulation is needed, legislators should take the time to thoroughly examine third-party litigation funding and prepare legislation that actually regulates rather than enables the lender.