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What People Get Wrong When They Criticize Pre-Settlement Funding

What People Get Wrong When They Criticize Pre-Settlement Funding

US Direct Advance funds lawsuits by providing loans directly to litigants, allowing them to continue their lives while waiting for their lawsuits to settle. This type of settlement loan is called third-party consumer-litigant funding, or litigant third-party funding (LTPF) for short. A recent study by Ronen Avraham, a professor at Tel Aviv University, and Anthony Sebok, a professor at the Benjamin N. Cardozo School of Law, found that critiques of the lawsuit-loan industry have been overblown. In conducting their study, “An Empirical Investigation of Third Party Consumer-Litigant Funding,” the two law professors collected real-world data from a major settlement-loan company. Specifically, according to Avraham and Sebok’s data, descriptions of how much the pre-settlement cash-advance industry charges have been overestimated, and estimates in mainstream news articles are generally based on faulty, if not obsolete, data. More generally, claims of usury in the settlement-funding industry are based on rates from decades ago.

            Avraham and Sebok believe that a lack of empirical data has driven ignorance about the settlement-funding industry. In fact, a 2010 RAND report admitted that “there [was] no systematic empirical information about the sizes of financing fees” for either consumer-litigant funding, like that which US Direct Advance provides, or for commercial pre-settlement funding. Even according to anecdotal evidence, the RAND paper claimed rates ranged from 24 to 60 percent per year––far lower than the 100 percent interest that The New York Times claimed in 2018, for instance.

            In contrast to the guessing games researchers have attempted for years, Avraham and Sebok obtained real data from a real lawsuit-cash-advance company. Using that data, the two concluded six key points that demonstrate the effectiveness and worth of the settlement-loan industry.

  1. Companies like US Direct Advance only approve loans for lawsuits we believe have merit, lawsuits we believe can win. Obtaining an attorney shows that a lawsuit is legitimate and can win. Our approval of an application for a pre-settlement loan means that both your attorney and we believe your lawsuit has a good chance of going to a favorable settlement if we choose to fund it.
  2. LTPF firms, including US Direct Advance, only fund a percentage of your lawsuit. We take a stake in your suit, but you are the litigant. As Avraham and Sebok note, one of the main criticisms of this industry is that firms take suits––and, with them, potential large sums in settlement––from litigants. As they demonstrate, this is exaggerated and usually untrue.
  3. Many beneficiaries of lawsuit cash advances don’t end up paying back the loan because their lawsuits are unsuccessful. When US Direct Advance puts up a pre-settlement loan, we are making an investment. As noted in point 1, our funding part of your lawsuit already demonstrates that we believe it has a good shot of winning. But US Direct Advance takes a risk when we decide to fund a lawsuit. If the lawsuit is successful, US Direct Advance makes a profit (even though you keep most of the earnings) by taking back the principal it invested and some interest. If the lawsuit is unsuccessful, however, the litigant does not pay US Direct Advance back anything––even the principal. In order to maintain this business model (we believe it would add insult to injury to charge litigants after they lose a lawsuit), lawsuit-funding firms like US Direct Advance charge interest on winning cases. Otherwise, we wouldn’t be able to continue to fund settlements.
  4. After analysis of complete data, Avraham and Sebok have shown that the media’s estimates of the cost of a settlement loan have been blown so out of proportion because they do not take point 3 into account. The media claim that borrowers pay a median interest of 115 percent on loans they take out. This is not an outright lie, but it is an exaggeration because estimates of the cost of a lawsuit loan do not take into account the fact that many cases end with the litigant losing. The true median annual cost, according to Avraham and Sebok’s analysis, is interest of 43 percent. While this seems high, one must remember that it is the profit US Direct Advance makes for taking the risk of giving you a loan that you only have to pay back if your lawsuit fails. As a simple example, imagine US Direct Advance loaned you $100 while you wait for your case to settle. You win $5,000 in settlement, and as part of the contract you signed with US Direct Advance, you give $215 of that award to US Direct Advance. Another $400 of the settlement pays for your lawyer and her fees. That leaves you with $4,385––87.7 percent of the total awards, and that’s after you’ve paid yourself back. In this case, you paid 115 percent interest; but that was only 4.3 percent of your total award. And this is a case where US Direct Advance takes 115 percent interest––the median amount only of cases that succeed. These numbers are fictitious, and all (including the settlement) are lower than the real numbers, but they demonstrate how interest even as high as 115 percent is really very little relative to the massive cash awards that can result from settlements. The value of pre-settlement funding is clear. With real numbers, after a successful settlement, you are unlikely to complain about the relatively small amount of funds you pay US Direct Advance.
  5. Point 4 outlined one way in which the media get their estimates so wrong. In their fifth finding, Avraham and Sebok demonstrate another. Often, after a settlement has been reached, firms like US Direct Advance recover their principal but do not take the full interest they are owed under contract. This is called a “haircut.” When the media report that firms offering pre-settlement cash advances charge interest upward of 100 percent, they do not take into account that many litigants are offered these haircuts after the resolution of their cases.

            Avraham and Sebok’s findings provide an empirical, fact-based rebuttal to claims of the settlement-funding industry’s abuse of litigants. They prove that settlement-loan firms are not predatory, that they do not strip litigants of a stake in their own suits, that they forgive loans when cases do not work out (you will not pay US Direct Advance a cent if your case is unsuccessful), that they do not charge interest as high as what the media claim, and that they often charge even less than what they are owed.

            Deciding whether or not to accept an outside loan to help you while your case is pending is a critical decision. We would not expect you to just take our word as to whether the settlement-loan industry is fair and safe. But until now, your only source material from outside the industry was from the media, who might have done their best to warn about an industry they saw as predatory, but who relied too often on faulty, old data that have no place in a discussion about the industry in 2019. Any real consideration of the value of pre-settlement funding must take into account the facts––real, hard data from actual cases. Avraham and Sebok have done just that. With their paper, they have provided litigants with an invaluable resource to reference when considering whether to allow US Direct Advance to take a stake in their lawsuit.

            Below are questions and answers based on some interesting statistics Avraham and Sebok found over the course of their study.

Who’s requesting pre-settlement funding?

Ninety-six percent of the 203,307 cases Avraham and Sebok surveyed included litigants who requested funding for one case. Of those 96 percent, three-quarters requested funding once; the remaining quarter made multiple requests. The average requester was 42 years old.

Where are litigants living?

The cases Avraham and Sebok surveyed came from all 50 states in the union, though 32 percent originated in New York. California was the home state for 4 to 5 percent of litigants requesting loans in preparation of potential settlement in the cases included in Avraham and Sebok’s data.

How often was funding approved?

If your request for funding is approved, you are part of less than half of the general applicant population. Of the 52 percent of cases that were denied, about 40 percent were given some form of review before denial. Overall, Avraham and Sebok found that of all applicants, 34 percent received funding, settled their lawsuits, and paid the settlement-loan firm what it was owed. In 6 percent of cases, lawsuits were still pending and/or the firm had not received any payment. Only 8 percent of applicants refused funding after it was offered to them by a lawsuit-funding firm.

What kinds of lawsuits do loans go to?

These may be the most relevant statistics for interested litigants. What are you suing for? How does that compare to what kind of lawsuits get settlement loans? In Avraham and Sebok’s data, nearly three-fifths of litigants got accident loans, given out after a car accident. The next highest category encompassed far fewer cases: About one out of every 10 applicants got an injury loan. Other types of litigants who received loans were victims of various types of negligence, including medical malpractice suits, as well as police brutality cases and labor cases.

Hammer and Scale

How much time passed between the event and the request for funding?

Another piece of data litigants may find helpful is how long others in their position waited before contacting a lawsuit-loan firm like US Direct Advance, as well as how much time passed between each of what Avraham and Sebok call “milestones,” important steps along the way to a successful case.

            Avraham and Sebok looked only at cases in their dataset that they marked “completed,” which, as we have explained above, means that the litigant received funding, settled his or her lawsuit, and paid the settlement-loan firm what it was owed. (Thirty-four percent of cases fell into this category.) In those cases, a median of 308 days passed between the event’s occurring and the victim’s contacting a settlement-loan firm.

How much time passed between the request for funding and acquisition of funds?

In completed cases, litigants waited a median of 10 days for a lawsuit-loan firm to process their request. Litigants who made second or third requests for funding waited even shorter because they were already known to the lawsuit-loan firm.

How long from when funds were granted until the case reached completion?

Litigants waited a median of 417 days from the time they got funds to the time their case was closed. That’s a median of 735 days––a little over two years––from the time of the event until the complete end of a case.

How can that period of time be shortened?

The shortest period of time between “milestones” was the 10 days between a request for funding and approval of funding. That time period, during which firms like US Direct Advance obtain the facts about your case, is about as short as it can be. The longest period was the 417 days between when a pre-settlement loan was granted and when a case was completed. The length of settlement negotiations is hardly in your control, if at all; and it certainly is out of ours. There is one period that is completely in your control: the first 10 months between an accident or injury and your calling US Direct Advance. Contact US Direct Advance as soon as you obtain a lawyer after the event that led you to pursue a lawsuit. Most US Direct Advance clients contact us 30 to 60 days after a car accident or injury.

How much money is given to each approved applicant?

The amount a settlement-loan firm funds each case varies wildly depending on what kind of case it is and how much money the litigant needs. The median approved case received $2,250 and paid back $3,380. That’s nearly $1,500 less than the full amount due.

How much does the median case pay in interest?

The findings in the last sentence specifically led Avraham and Sebok to conclude that the 115-percent interest often reported in the media is based more on what is due on paper than what is actually paid. In real cases, settlement-funding firms made back 50 percent more than they put up––on successful cases. On unsuccessful cases, they lost 100 percent of their initial investment.

How is interest compounded for most cases?

For 88 percent cases, interest was compounded monthly. The median case lasted 14 months from funding to completion, and with a 3 percent monthly interest rate, litigants paid back a median of about 50 percent interest once their case was completed.

How many cases got “haircuts”?

In 12 percent of the cases that went to completion––meaning at least some money was awarded and the case was closed––the settlement-loan firm took none of the money. In over half of successful cases in which the lawsuit-loan firm received at least some profit, they took less than they were contractually owed. Only in about three out of every 10 completed cases did the firm get back what it was owed from the outset. Thus, the overall percentage––which would include cases that were unsuccessful and for which no money was owed––would be even lower.

So is pre-settlement funding worth it?

After they accounted for haircuts, Avraham and Sebok conclude that the interest rate for settlement lending is higher than were you to go to a bank. But, even if a bank were to grant you a loan, when you take a loan from a bank and you lose, you still must pay the bank back the full cost of the funds you borrowed plus the full cost of interest. If you make only enough to cover the cost of your attorney, you still owe the bank the full cost of the funds you borrowed plus the full cost of interest. If you make only enough to cover lawyer’s fees and medical bills, you still owe the bank the full cost of the funds you borrowed plus the full cost of interest. If you make only enough to cover those but still not enough to pay back the cost of the loan, you still owe the bank the full cost of the funds you borrowed plus the full cost of interest.

            With a settlement loan from a firm like US Direct Advance, you would not have to pay back the full cost of the loan in any of these situations. In all the scenarios but the last, you would pay back nothing; in the last, you would pay back the remainder of the award. In other words, when you take a loan from a bank, you risk losing money from your lawsuit. With a loan from US Direct Advance, you never run that risk.

Reference: Avraham, Ronen and Sebok, Anthony J., An Empirical Investigation of Third Party

Consumer Litigant Funding (March 9, 2018). 104 Cornell Law Review __ (2018); Cardozo Legal Studies Research Paper No. 539; U of Texas Law, Law and Econ Research Paper. Available at SSRN: https://ssrn.com/abstract=3137247

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