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Legal Funding is NOTHING like Payday Loans

Republished with permission from Legal Funding Central

On Monday, NY state prosecutors brought criminal charges against Carey Vaughn Brown, who owned a syndicate of payday loan companies that were violating state usury laws by charging outrageous interest rates to borrowers. Such loans were clearly illegal in NY, and Mr. Brown setup over 12 subsidiaries around the world to try and flout those laws.

Critics of legal funding sometimes try to lump legal funding and payday loans in the same sentence. However, they couldn’t be more different. First, payday loans are loans. The borrower has to pay them back no matter what, and if they can’t, then they get hit with late fees and maygo into debt. As we’ve discussed many times, legal funding is not a loan at all – it’s an investment. Plaintiffs pay legal funders back only if they win their case. There is no such thing as a late fee in legal funding because money is only due at settlement. But because a payday loan is a loan, it is subject to state usury laws. Because legal funding is not a loan, it is not.

 Legal funding is not a loan at all – it’s an investment.

States understand the difference, too. Take New York, for example. Two years before Mr. Brown was arrested, the New York Attorney General informed one of his companies that usury laws applied to his loans, even if the lenders operated outside New York. Conversely, when the New York attorney general also got involved in legal funding in 2005, it was not to prevent usury, but instead to promote best practices for funding companies in order to ensure consumers who needed legal funding knew exactly what they were getting into. And NY is not alone. A number of states, including Maine, have even enacted laws and regulations to codify legal funding into law.

Another key difference between legal funding and payday loans is that payday loans are usually taken by people who don’t understand what they’re getting or what they will pay back. People who take payday loans rarely seek legal counsel to help them understand the transaction. On the other hand, almost everyone who applies for legal funding is represented by an attorney. In fact, almost every legal funding company requires an attorney to sign off on the legal funding transaction, helping to make sure consumers are properly protected.

Finally, another key difference is that legal funding is often used as a legal strategy in order to end up with more money, not less. As we illustrate in this animated video about legal funding, taking legal funding may be helpful in avoiding the desperation tax charged by insurance companies and other large defendants trying to get desperate plaintiffs to accept early, low-ball settlement offers. Sometimes, attorneys recommend legal funding to their clients to help them stay patient and avoid paying this tax — which can be massive. Like taking any investment money, the plaintiff and attorney hope that by giving up a piece of their pie, they will help make that pie larger..

Over the past decade, payday loan transactions have continually fallen under scrutiny, and their originators now tend to be less than reputable. See Mr. Brown, who was once a used-car salesman. To fully grasp the shadiness of the payday loan industry, check out John Oliver’snew tune. Legal funding, however, has been gaining wider acceptance and attracting quality talent (if we do say so ourselves). Just last year a new legal funding company, Gerchen Keller, was founded by 4 former U.S. Supreme Court clerks. Now we know why.