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Lawsuit Loans - Caveat Emptor!
By Wayne C Walker, Fri Dec 9th
If you have been injured in an accident it is quite likely thatyou have been financially stressed as a result, and are in needof an advance against your insurance claim, lawsuit or otherlegal action. If you are looking for someone to lend you moneybased on your future settlement, BEWARE! There are reputablesources available but, unfortunately, there are many moredisreputable ones as well. In this article we will explain whatto look for in a funding company and how to avoid being burned. First of all lawsuit are not really – they arenon-recourse investments and are not subject to usury laws. Toavoid the usury limits, which would render the producteconomically infeasible, the typical lawsuit loan or lawsuitfunding transaction is done in the form of an investment ratherthan a loan. This means that the funding company only gets paidif the lawsuit or claim is successfully resolved. If you loseyour case you own them nothing! Generally speaking, thisnon-recourse element renders the transaction an investment (nota loan) under the law[1]. In the past, there were no sources of help available to personalinjury victims due to a strange confluence of circumstances.1.Bar Association rules of ethics prohibit your attorney fromlending you money for anything but case expenses, experts,tests, travel to the doctor etc. This rule exists for yourbenefit. The Bar is rightly concerned that if your lawyer lentyou money against your future settlement, a conflict of interestmight arise, and you could be pressed into accepting asettlement that was less than you otherwise would accept. Also,attorneys are not banks and they simply can’t afford to operatetheir law practice and be a lending institution as well. 2.Banksand traditional lending institutions do not have the skills toevaluate personal injury lawsuits and thus, will not lend moneyto someone whose primary asset is their lawsuit. About sevenyears ago, this void in the financial system started to befilled by a number of entrepreneurial companies – some good,some bad. It was a rather strange group consisting largely oflawyers, wall streeters, and well-heeled business people. Theyused their own capital to fund cases and a new industry was born.
In these early years fees were very high and contracts verysevere. While rates generally ranged from 3% to 6% per month, itwas not uncommon to see contracts with rates of 15% per month,compounded! Contracts were also very Byzantine. However, rateshave steadily come down and contracts, while not exactlyconsumer friendly yet, have become less severe. In short, thebusiness was maturing into a responsible part of the specialtyfinance industry. However, over the past two years or so, American Cash FlowCorporation[2], a “marketing” company with a rather checkeredhistory, targeted the industry for promotion. Since then, thelawsuit funding industry has resembled a Wild West gold rushattracting an unbelievable number of “get-rich-quick” rip-offartists, amateur lending brokers with no experience and justplain folks who paid their $5,995 ($2,495 for the tape course)to become a “cash flow broker” and are trying to make theirfortune. Virtually all of these “cash flow brokers” are just that –brokers. They do not invest their own money to fund lawsuitadvances. However, they all do have websites that trumpet theirexpertise without revealing that they have none and are notacting as principal. If you are not careful dealing with themcan make your situation worse – much worse. Tips for shopping for a lawsuit funding: •Deal with a companythat is investing for its own portfolio. Otherwise, you couldwind up paying a great deal more than necessary. Do not dealwith brokers - someone has to pay the brokers fee and thatsomeone is you! Would there be so many brokers if theircommissions were not high? •Deal only with certified websites.When applying online, deal with a website that has the seal ofTrust-e or one of the other recognized non-profit websiteprivacy confirmation organizations. Your personal informationmay be used improperly. •Do not supply information that is nototherwise discoverable. Certain information is privileged(between you and your attorney) but that privilege is lost onceit is shared with a third party. An inexperienced fundingcompany may require information about your case that, once intheir possession, will lose its attorney-client privilege andmay be subpoenaed by the defendant. Experienced companies likeCapTran www.captran.com never ask for this type of information.•Look for the best rate. Some companies like CapTran offer bestrate guarantee. If CapTran approves a case and makes an offer,they will match or beat any legitimate competitor’s writtenoffer or pay you $200. (You only get the $200 if they fund thecase or you turn their offer down for some other reason.) •Donot make multiple applications with different funding companies.First of all, you have no way of knowing if that company isgoing to try to sell your deal to one of the others to which youhave applied (which will not sit very well with the real fundingsource). Multiple applications create a nuisance for yourattorney since he or she will have to complete many requests forinformation. Your best bet is to make an informed choice andwork with that company. •Check with your attorney. Never sign acomplicated contract such as a lawsuit funding agreement withoutfirst consulting with your attorney. Questions to ask a fundingcompany: 1.How long have you been in business? The lawsuitfunding industry is very young and has a great number of brokersand inexperienced companies with no real money. A sure tip-offis if the company advertises a mind-boggling array of financialproducts and services including note purchasing, accountreceivable financing, structured settlements, purchasing oflottery winnings etc. They simply want to shop your fundingapplication until they find someone
with money to fund it.Meanwhile, nothing is really happening with your application. Ifa company advertises that they work with a “network ofinvestors” it simply means that they have no real funds of theirown and therefore, cannot make a funding decision themselves.2.How many cases have you funded (approximately)? CapTran forexample, has handled over 10,000 funding requests and investedin several thousand of them. 3.Do you use your own money or areyou a broker for others? Be wary of companies that are membersof the American Cash Flow Association as they almost certainlyhave no experience. Also be wary if a human never answer thetelephone, as that is surely an indication of the level ofservice you are likely to get. 4.Who owns your company? 5.Whatis their business experience? 6.Do you have lawyers andparalegals on staff? 7.What the Annual Percentage Rate (APR) youcharge? (If you are quoted a monthly rates see the nextquestion.) You will probably be told that it depends on yourcase, which is true, but they can tell you what they charge fora typical case. If they tell you there are no typical cases hangup and go the next company on your list. You should expect topay simple interest rates as low as 2% per month for a casewhere strict liability standards apply; 4% to 6% for a typicalauto case, and; 6% or higher for medical malpractice. ANY ratehigher than 7% per month can be bettered with a little shopping.8.Are your monthly fees compounded? Many companies advertisedeceptively low rates but load up the contract with many chargesand monthly compounded rates. The most common practice is tocharge an application fee and/or a closing fee that is sometimes10% or more of the amount you are advanced. If you contract for$10,000 you might be charged an application fee of $500 ANDanother fee equal to 10% or $1,000 – a total of $1,500 in fees.Now, here is the best part – you will have to pay interest on$11,500 – interest on the $1,500 you didn’t even get! In thisexample, if you were charged a 4.00% compounded monthly rate thetrue annual cost is not 48% but 75%! In this scenario it wouldbe cheaper to take a 6% simple interest rate from someone else.DO NOT AGREE TO PAY COMPOUNDED RATES! Almost every client wedeal with thinks that their case will settle in a short while,but personal injury cases can drag on and on for many reasonsand those compound fees can eat up all of your settlement ifyour case takes much longer than you anticipate. 9.Do you chargeany fees or discounts of any kind? This is very important assome firms charge a low monthly rate but add on applicationfees, discounts and other hidden charges that will dramaticallyraise the cost. 10.Will you send a sample contract to myattorney? Any reputable company will do this. 11.Can you give mean attorney with whom you have done business for a reference?Any reputable company will do this also. 12.Are you a member ofthe Better Business Bureau? www.bbbonline.com CapTran is amember of the BBB online and subject to mandatory disputeresolution. 13.If not, do you have a mandatory disputeresolution policy? What is your rescission policy? CapTran’spolicy allows for rescission for up to 5 business days afterfunding. If you follow these tips and ask these questions, yourchances of finding the right funding company and the best dealfor you are excellent. Armed with a little preparation and theage old admonition caveat emptor – let the buyer beware, you cansuccessfully obtain a pre-settlement advance that allows you tostay the course and get a much better case settlement. [1] This is a complicated topic but, generally speaking, ifrepayment of any part of the principal or interest is contingenton an event that is “more than a mere colorable hazard”, thetransaction is not considered a loan and not subject to usurylaws. [2] American Cash Flow Association™ ( ACFA ), also known as theAmerican Cash Flow Institute ™ ( ACFI ), American Cash FlowCorporation™ ( ACFA ), National Mortgage Investor's Institute (NMII ), Diversified Cash Flow Institute ™ ( DCFI ), among manyother names – were all founded by Orlando lawyer Laurence J.Pino , who reprimanded by the Florida Bar Association formisusing an investor’s funds. On June 20, 2003 the State of Tennessee issued a Cease andDesist Order in which the State charged that American Cash FlowCorporation together with 12 related businesses and 12 namedindividuals “operated an illegal securities scheme that promisedto make investors through the business of brokering “cash flowtransactions”. Pino was cited by the Attorney General ofTennessee in 1996 for a similar scheme under the name ofDiversified Cash Flow Institute ™. At that time DCFI paid feesand costs to the state of $10,284 for violating the TennesseeConsumer Protection Act of 1977. Noted Columnist Jane BryantQuinn also wrote disparagingly about Pino and his operations inThe Washington Post 0n June 18, 1998 "Note Brokering: HarderThan it Sounds" "Pino, 46, a lawyer in Orlando, Fla., describeshimself as an "exceptional business trainer." His seminarexperience goes back to 1983 - not always in the best ofcompany. He first lectured for huckster Charles J. Givens Jr.,who ran some dubious financial-planning organizations. In 1993and again in 1996, juries decided that Givens had committedfraud. Later, Pino taught for Dave Del Dotto, an earlierpopularizer of "cash flow," who settled an FTC action in 1996with a $200,000 fine. (Del Dotto went bankrupt; the FTC says henever paid). Pino himself was reprimanded by the Florida BarAssociation in 1988 for misusing an investor's funds." And inNewsweek reporter: Show Me The Money" "Larry Pino's priceycash-flow workshops plug an easy way to get rich quick. It's areal business, all right -- but there isn't much easy or quickabout it." Wayne C Walker President of Capital Transaction Group Incwww.captran.com "CapTran" a leader in Litigation FinancialServices
About the author:Wayne Walker is President of Capital Transaction Group Inc, aleading litigation financial services company.
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