Legal funding has only become popular in the last couple decades. Thus, many states are still deciding what kind of regulations should be place on the industry.
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The rates on legal funding are higher than the rates of many bank and other traditional lenders. Some people believe the rates charged for legal funding are unfair to consumers. They believe the consumers are not capable of deciding whether the legal funding is worth the cost. These individuals have proposed caps on the rates legal funding companies are allowed to charge.
Although caps are meant to protect the consumer, the effect would likely be to harm the consumer. While capping charges may provide some individuals with lower interest rates, many more individuals will not be helped simply because the legal funding company cannot justify additional risk at those price levels.
Legal funding companies typically only fund cases they expect the client to get a settlement in. However, sometimes even strong cases are not able to get a settlement. The interest rates the legal funding companies charge allow the legal funding companies to handle an occasional loss. However, capping these interest rates will require legal funding companies to be much more cautious. In the end, the cost of investing in legal cases for many legal funding companies would not be worth the risk. Many legal funding companies would go out of business and many injured plaintiffs would have no way to bring a lawsuit.
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Further, the legal funding industry already provides protection for the consumers. That protection is the competitive market. There are many legal funding companies that are competing for personal injury victims’ business. If a legal funding company’s rates are too high, most consumers will use a different legal funding company. Thus, these companies will lower their rates or they will go out of business.
Although a lot of individuals who propose caps on the legal funding industry have good intentions, it is likely the caps would not have the effect they are expecting.
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