Bill To Regulate 'Lawsuit Lending' Companies in NY Gains Momentum

Dan M. Clark

Originally published in New York Law Journal

Lawmakers in New York are one step closer to establishing regulations for the state’s “lawsuit lending” industry, which provides financing for litigants to seek legal help on a number of matters.

The State Senate Consumer Protection Committee on Tuesday approved the Consumer Litigation Funding Act, which seeks to establish the state’s first regulations for companies that finance lawsuits.

The legislation would require those companies to register with the state in order to operate in New York and establish protections for consumers who seek their business. Among those protections are certain contract requirements, like language that’s easily understandable to consumers, and a right to cancel the agreement at no cost within 10 days of its execution.

The bill would also preclude consumer litigation funding companies from offering commissions or referral fees to attorneys. The reverse would also be true: Those companies would not be allowed to accept payments from attorneys for exchanging business. Companies that violate the law could be subject to a $5,000 penalty for each violation, according to the bill.

State Sen. Anna Kaplan, D-Nassau, sponsors the bill in the Senate, and said regulations over the industry are long overdue.

“It is something I truly believe in and I think it’s long overdue to have some sort of monitoring program to make sure our residents are being protected,” Kaplan said after the vote Tuesday.

It’s the first time the bill has moved this year since Kaplan introduced it in March. It has yet to be considered in the State Assembly, where Assemblyman William Magnarelli, D-Syracuse, is its sponsor.

Kaplan said Tuesday that since introducing the bill, she’s heard from several stakeholders on the issue, who have sought to change the legislation. She did not say who those stakeholders were specifically, but said the bill might be amended before it’s taken up for a full floor vote in the Senate.

“I have gotten a lot of calls in regard to this bill … a lot of stakeholders who have reached out, and I’m working with them,” Kaplan said. “There might be some amendments with this bill but we’re working on it.”

Among those stakeholders is the American Legal Finance Association, a trade association representing consumer litigation funding companies across the country. Kelly Gilroy, executive director of ALFA, said the group is looking forward to working with Kaplan to strengthen the bill in the coming weeks.

“As evidenced by our work to implement regulation and licensure in other states across the country, ALFA is committed to upholding high standards for the consumer legal funding industry to protect consumers and preserve access to pre-settlement advances,” Gilroy said. “Consumer legal funding is a valuable product that allows many people to pursue justice through our legal system, regardless of their financial means.”

The bill was previously sponsored by Sen. Robert Ortt, R-North Tonawanda, last year in the Senate, where it passed the chamber. It didn’t come up for a vote in the Assembly at the time.

The Lawsuit Reform Alliance, an advocacy group that aims to reduce litigation in New York, hailed the bill’s movement in the Senate in a statement Tuesday.

“Today’s action to advance a bill to combat predatory lawsuit lending is an important first step to ensure that vulnerable New Yorkers are no longer exploited by this unregulated sector of the finance industry,” said Tom Stebbins, executive director or LRANY. “To further reduce harm to individuals and protect the integrity of the civil justice system, the bill also ensures that lawyers do not have overlapping financial interest in lending outfits, or arrangements to collect lucrative referral fees.”

They’ve claimed, as have the bill’s sponsors, that some have used the industry as a money-making scheme to encourage litigation where individuals might not have sought that option in the past. Reports have claimed that some companies have even tried to cash in on the growing #MeToo sexual harassment movement by encouraging specific individuals to seek financing for litigation against their alleged harassers.

Lawmakers in both chambers have the next five weeks to amend the bill and send it to the floor for a vote, before they’re scheduled to leave Albany for the year in June.