30 Pages Posted: 19 Jun 2017 Last revised: 3 Aug 2017
Date Written: May 5, 2017
This article provides a side-by-side comparison of payday lending and consumer litigation funding in order to aid policymakers. Funding has similarities with payday lending because they are both alternative financial services, involve high interest rates, and cater to customers who need money for living expenses. However, they differ in ways that regulators should recognize. Many justify bans on payday lending by pointing to the fact that millions of borrowers every year are getting stuck in an inescapable cycle of interest payments. While legal finance has real costs, funding’s nonrecourse nature prevents consumers from getting stuck in a cyclical repayment of debt. Moreover, prohibitions may not be appropriate at this time because there is little empirical evidence on how funding affects consumer welfare and there is room for interest rates to fall as the industry continues to expand and competition increases among funders. States should take the initiative to partner with financiers to study the effect of this new form of credit on borrowers. Some states have implemented disclosure regulations that mandate that funders itemize the fees, present a repayment schedule, and relay the APR. However, customers do not have the legal expertise or financial sophistication to estimate case duration and to put this information together with funding contract terms to get an accurate sense of where they may end up on a repayment schedule. Thus, financiers should disclose a reasonable approximate repayment amount and date to improve borrowers’ understanding of the costs of nonrecourse advances.
Keywords: Consumer Litigation Funding, Consumer Legal Finance, Litigation Funding, Legal Finance, Alternative Litigation Funding, Payday Loans
JEL Classification: G23, G28
Suggested Citation: Suggested Citation
Skiba, Paige Marta and Xiao, Jean, Consumer Litigation Funding: Just Another Form of Payday Lending? (May 5, 2017). Law and Contemporary Problems, Vol. 80, No. 3, 2017. Available at SSRN: https://ssrn.com/abstract=2988123