The role of brokers in consumer loans
If you are in the business of transferring money or goods, you are probably dealing with brokers in some way. Brokers are used in many sectors: mortgages, real estate, stocks, wholesale products. The list is endless. If you need something, someone will find it for you. For a fee, of course. You will also find brokers who work to bring litigation finance companies closer to plaintiffs, defendants and their law firms.
Consumer Lawsuit Brokers and Loans
Litigation funding began in large commercial lawsuits and helping lawyers cover their expenses in protracted cases. But, many moneylenders quickly dove into American courthouses to grab a bargain worth hundreds of billions of dollars in personal injury, employment discrimination, product liability and catastrophic actions to several plaintiffs.
While some consumer lawsuit awards have reached the stratosphere, the average personal injury case settles for less than $100,000. The average court loan is $10,000 or less, or about 10% of the case value. Once scaled, it’s not hard to see that there is money to be made in consumer lending.
As more lenders and investors entered the market and more litigants became familiar with court lending, the industry began to attract a class of entities (some individuals and some companies) that would sit in the middle and help make sense of it all.
The legal loan process
Understanding what a broker does helps in knowing how consumer loans are processed and funded.
Complainants typically initiate a transaction by contacting a funder directly, often through search engines, TV ads, or other advertisements. To be eligible for litigation funding, consumers must have awaiting trial. Some companies will provide loans to claimants in large class action lawsuits, such as sexual abuse, mass tort, or asbestos cases, that have documented and verifiable claims.
The application process is simple. The funder only needs the contact details of the applicant, the description of the case and the name of the lawyer. The funder will contact the plaintiff’s attorney to learn more about the lawsuit and gather documentation. The funder’s underwriters do what underwriters do and will recommend a loan amount. If the applicant agrees, the funder drafts the documents, the parties execute the agreement, and the funder transfers the money to their new client.
Depending on the level of cooperation from the plaintiff’s attorney, the process can take as little as 24-48 hours to fund a simple, well-documented injury case. Complicated cases and higher amounts may take a little longer.
Who puts the money?
Although these transactions are commonly referred to as court loans, they bear little resemblance to a traditional bank loan. Properly recognised, they constitute an investment vehicle. The finance company puts up a sum of money in exchange for a share of the eventual settlement. Its profit is the fee charged to the applicant. The fate of the investment depends on the fate of the case. If the plaintiff loses the case or fails to settle, both the plaintiff and the investor lose.
The money the litigation funder uses to help with a plaintiff’s lawsuit often comes from its own coffers. But, the litigation funder doesn’t always have a reserve of cash in their available bank accounts to fund the hundreds of thousands of dollars in deals that an average business can put together in a month. Instead, the funder relies on investors to provide that money.
How does a broker add value?
Google and TV are remarkably effective advertising mediums for the litigation funding industry, but they are not the only sources. Brokers are a growing resource. There are no statistics on the number of financing transactions initiated by brokers.
According to the CEO of Tribeca Lawsuit Loans, brokers bring us 20-25% of our business.
Like any intermediary, the main role of the broker is to manage and grease the wheels of the transaction. At the finance company, the broker brings qualified and often pre-screened candidates to the table. For the consumer, the broker’s role is that of matchmaker: the most money for the lowest fees. To this end, the broker will likely be
Develop or follow leads – potential clients often referred by law firms or medical practices
Perform a preliminary assessment to determine if the case is suitable for litigation funding
Gather the necessary documents from the client’s attorney
Match the client with one or more funders based on case type, value, and client location
Negotiate the terms of the transaction
Hold the client’s hand while funder underwriters assess the application
Supervise the execution of administrative formalities
The real value of a broker is in their connections, with access to more information, more investors, and more finance companies than a client would get by randomly calling an 800 number in an ad. Google. Good ones spend time developing relationships with investors and lenders to get a sense of their lending needs: which companies serve clients from particular states, which companies prefer which types of cases, who has the lowest fees and most generous underwriters. Brokers also develop relationships with lawyers and medical personnel, surprisingly lucrative sources of leads.
Won’t the brokerage fees increase the cost?
Brokers make a living but can often close a better deal and close it faster. They know which lenders are more likely to work with which clients and offer them the best terms. The best brokers know their market, are savvy traders, and stand up for their clients.
Litigation finance brokers charge an average of 15%, which is comparable to what leasing brokers and shipping brokers charge. This 15% is not set in stone. Often the fees are negotiable and some brokers will lower their percentage to close the deal. For the broker, the transaction is concluded when the client signs the contract with the finance company.
Unlike the funder, the broker is generally not required to wait for the case to be settled before claiming their fees. The broker will almost certainly have gotten its money from the finance company when the funder and client commit to the contract.
No one will argue that litigation funding is cheap, just like no one will argue that title loans are good business or credit card cash advances are budget-conscious ways to borrow. The transactions are risky for the funder and the investor because, among other reasons, they are without recourse for the client. A claimant who does not win or settle accounts will walk away with no further obligation on the transaction while the finance company and investor will absorb 100% of the loss. When people choose an emergency loan, they probably understand that they will pay for this privilege. But, unlike other sources of cash, the loan broker can save the consumer money despite the fees.
How do you find a broker?
Finding a broker can be a hassle. Currently, direct funders and brokers are under no obligation to disclose their roles. Litigation funding is a young industry that has grown exponentially over the past 20 years. Few legislatures have even attempted to regulate the companies that provide finance, let alone the entities that broker the deals.
Ultimately, unless plaintiffs request or brokers provide the information, clients will not know that they are transferring an interest in their dispute to a third-party funder or investor until they see another name on the documents. Unless they are particularly knowledgeable, many will not realize the difference or even care.
In an industry barely 20 years old, the lawsuit loan broker has quickly become a major player in a market estimated to invest more than $100 million annually in consumer lawsuits. Everything indicates that the industry will continue to grow. Likewise, brokers will continue to bring together those who have money to invest and those who need it.
© 2022 Copyright Tribeca Lawsuit LoansNational Law Review, Volume XII, Number 48