I saw today an interesting blog post by a Massachusetts law firm advocating that Massachusetts ban finance companies that offer loans to people using their personal injury cases as collateral. The post (and comment on the post) argues that by making the loans non-recourse loans contingent on the settlement, these companies get around existing usury laws. Particularly where liability is not an issue and payment is a near certainty, using non-recourse seems like a backdoor around the law.
Mixed Feelings on These Loans
I do not know what my opinion is on these personal injury loans. It seems like the interest rate and the fees these companies charge are beyond ridiculous. But I’m sure these are risky loans from people who cannot otherwise get a conventional loan or even a credit card. As a personal injury lawyer, the loans are difficult because they make resolving the case and getting the client a desirable outcome even more difficult.
I had a case this year where the client took out a $23,000 loan that morphed into a $75,000 loan in three years. What ended up being a substantial settlement offer we received in meditation did not look nearly as good to the client who owed $150,000 in medical bills, legal fees, and the repayment of that loan. Here, we called the finance company, which agreed to reduce their loan substantially from a preposterous return on investment to a mere obscene return on investment. The guy who I spoke to was a lawyer who owned the company, and he was reasonable. While negotiating the lien, I contended that the interest and fees were unconscionable. His response was that you cannot possibly know how many of these loans go bad. (My response is if they are going bad you are making awful decisions.)
Between unconscionable and reasonable, the answer probably lies somewhere in the middle. But obviously, in our free-market economy, if there was that much money to be made from making these loans, more companies would have entered the market, which would have decreased the loans’ overall costs. This reminds me of personal injury lawyers who complain about the obscene profits insurance companies make. If this were true, wouldn’t we all buy a ton of Allstate stock today? But look at their stock over the last three years.
It is worth mentioning that most of these personal injury loan companies have some clause in the agreement with the client that their personal injury lawyer cannot attempt to negotiate the loan. (I hope I am not giving ideas to companies that don’t have that clause.) We take the position that this agreement does not bind us from negotiating the lien and no one has ever suggested that our lawyers must honor that clause.
- Why your lawyer hates the idea of you getting a loan before your case settles