Senate Approves Regulations on ‘Lawsuit Lending’

On the first day of the legislative session that began Tuesday, the Tennessee Senate passed a bill to regulate a form of quick-cash lending that critics say is unacceptably unregulated and potentially predatory.

While the outcome on the vote for Senate Bill 1360 was a bipartisan and lopsided 27-2, it offered a glimpse into the kind ideological skirmishing that is anticipated to be a prominent feature of the 2014 session of the General Assembly.

The legislation, sponsored by Franklin Republican Jack Johnson, puts new regulations and financial controls on a practice called “lawsuit lending” or “lawsuit funding.” 

Lawsuit funding is defined in SB1360 as “a non-recourse transaction in which funding is provided to a consumer in return for a consumer assigning to the funder a contingent right to receive an amount of the potential proceeds of the consumer’s judgment, award, settlement or verdict obtained with respect to the consumer’s legal claim.”

Such lending is, in the words of the U.S. Chamber of Commerce-sponsored website FacesOfLawsuitAbuse.org, “a growing and troubling practice.”

And Sen. Johnson tends to agree. His legislation mandates certain contract disclosure information and a 5-day no-obligation loan-cancellation period. Senate Bill 1360 also limits the terms of loans to three years and caps annual interest on loans at 25 percent.

“There are no regulations with regards to this industry right now. It is absolutely the wild, wild west in the state of Tennessee,” Johnson said. “There is no oversight, there is no regulation, there is no cap and there is no absolutely no limit on what a lawsuit lender or lawsuit funder can charge some of these folks who potentially are in a very, very vulnerable situation.”

Last year when the legislation was first discussed, Johnson suggested lenders sometimes seek out plaintiffs who have “particularly good cases” and offer them cash in anticipation of an “exorbitantly high rate of return” once the settlement comes in. He said significant sums can be advanced and borrowers often end up owing significantly more than they anticipated.

“Some folks call this a loan, some call it an investment. Regardless, I believe that it falls within the purview of regulation in this state because there are some unscrupulous folks that are doing this,” Johnson said when the bill came before the Senate last year.

On Tuesday, though, some Republicans expressed reservations about the regulatory push, worrying that it constitutes an unwarranted government intrusion into private-sector transactions.

Mark Green, R-Clarksville, said he agrees “wholeheartedly” regulation is needed, but he’s “really opposed at the core of my conservative free-market being” to limiting what people who’re willing to take risk can make on a return.

Todd Gardenhire, R-Chattanooga, told Johnson, “You are violating a basic principle of free enterprise here.”

“I have a real problem with this body, or any of us, dictating to an industry what they can and can’t do (in) a free-market society,” Gardenhire said. He added that he has “a real problem with us putting a cap on anything.”

“If you think 25 percent is fair, well maybe I think 10 percent is fair, or 50 percent,” he said.

Johnson maintained that the lawsuit-funding regulations he’s proposing aren’t particularly novel — that he’s simply trying to “provide a degree of normalcy as we do in other areas of finance in the state of Tennessee.”

“Payday lenders have a lot of caps. Title pledge companies have a lot of caps. It is not a foreign concept for this body and this General Assembly to set caps and usury rates on lending rates in the state of Tennessee,” said Johnson. “It’s been done before and this would be very consistent.”

The House version of the legislation, HB1242 sponsored by Clarksville Republican Curtis Johnson, is awaiting action in the Consumer and Human Resources Committee.

 

  • cannoneer2

    While we’re railing about infringement on our “conservative free market” system here, WHY CAN’T I BUY A BOTTLE OF WINE AT MY LOCAL KROGER YET??!