Key differences in litigation funding firms
By Paula Kulig, AdvocateDaily.com Contributor
Not all settlement loan providers are created equal, and clients need to be aware of the differences and ask some key questions before agreeing to financial assistance, says Dawn Simons, client relations manager at CaseMark Financial.
“Among settlement loan providers, certain companies have just entered this space with the thought that they can charge somewhat higher interest rates and fees than on a conventional loan, so it has become a case of buyer beware,” Simons tells AdvocateDaily.com.
CaseMark is a financial services company that provides litigation funding for the personal injury market through such services as pre-settlement lending, post-settlement funding, monthly staged loans for living expenses, treatment financing, disbursement funding and term sheets.
“We actually review and underwrite every file, and we take a holistic and individual approach to each and every file. There isn’t some cookie-cutter formula and there aren’t parameters that are predefined,” Simons says.
“For the most part, we serve clients who are perhaps not as sophisticated as other borrowers, and they’re also quite vulnerable and even desperate. Some loan providers try to take advantage of their vulnerability.”
Many clients tend to focus on the interest rate, but it’s not the same as the cost of borrowing, she says.
“The cost of borrowing has other factors in it. We’re now finding that other lenders are advertising ‘low’ interest rates, but aside from interest rates, a client should be asking about things related to additional fees and charges. Fees and charges take all kinds of different forms.”
Simons says there’s a growing trend toward “teaser” interest rates, where a lender will offer a relatively low rate at the outset, but the fine print indicates that the rate increases “substantially” during the length of the loan.
“Teaser rates are a problem. The idea of saying you can have a loan at 15 per cent today is attractive, but if a client is going into this for the long run — three, four, five years — and that 15 per cent becomes 30 per cent in six months or 12 months, that’s going to cost them much more,” she says.
Instead of raising its rates, CaseMark Financial does the opposite and drops its interest rate to 15 per cent after 24 months, Simons says.
“Costs are spiralling out of control for clients. When interest continues to compound over three, four or five years, lawyers and clients feel like maybe it just makes sense to settle rather than drag the case on,” she says.
“We don’t want our loans to be something that forces people to settle. The loan is supposed to be a tool that helps people maximize their settlement. So when we’re dropping down at that 24-month mark, you don’t have to worry that the interest is going to spiral out of control.”
Just as important as interest rates are the fees and charges, and it’s essential that clients ask lenders about them before signing on the dotted line, Simons advises.
“The most egregious are discharge fees, which come at the end. What some lenders have done, in very convoluted and complex language in their loan agreement, is they have fees that crystallize and become known only at the time of repayment,” she says.
“A person may enter into a loan agreement for $5,000 at 18 per cent, and then three years later their case is settling and they ask for a payout statement. They get a payout statement and the breakdown is in there. On a $5,000 loan, they get assessed $1,500 in discharge fees. We have payout statements from competitors who actually do this.”
Clients also need to ask about upfront administration fees, which can be about $350 for lump-sum loans and as high as $475 for staged loans — where the client receives payments on a monthly basis, she says.
CaseMark charges no discharge fee and a flat $250 administration fee, she adds.
In the settlement loan field, Simons says, “There are some fine companies. Competition and options for people are good. For a long time, there was really just one choice, and that is not the case today.
"But with more options in the marketplace, the challenge for clients and lawyers is to sort through the riff-raff.”