The role of brokers in consumer credit
If you are involved in the transfer of money or goods, chances are you are dealing with brokers in some way. Brokers are used in many industries: mortgages, real estate, stocks, wholesale goods. The list is endless. If you need something, someone will find it for you. For a fee, of course. You’ll also find brokers working to match litigation finance firms with plaintiffs, defendants, and their law firms.
Brokers and credit for consumer lawsuits
Litigation funding began with large commercial lawsuits and helping attorneys recover their costs in lengthy cases. But many financiers soon dove into the courthouses of America to capture a market worth hundreds of billions of dollars in personal injury, workplace discrimination, product liability and catastrophic multi-plaintiff lawsuits.
While some accolades for consumer litigation have reached the stratosphere, the average personal injury case settles for less than $100,000. The average litigation loan is $10,000 or less, or about 10 percent of the value in dispute. When scaled up, it’s easy to see that there’s money to be had in the consumer litigation space.
As more lenders and investors entered the market, and more litigants became familiar with litigation credit, the industry began to attract a class of corporations (some individuals and some corporations) who settled in the middle and helped make sense of it all give.
The Claim Loan Process
Understanding what a broker does helps to understand how consumer lawsuit loans are processed and funded.
Plaintiffs typically initiate a transaction by contacting a litigation funder directly, often through search engines, television advertisements, or other advertising. To qualify for litigation funding, consumers must have pending litigation. Some companies provide credit to claimants in large class actions, such as sexual abuse, mass torts, or asbestos cases, who have documented and verifiable claims.
The application process is easy. The lender needs little more than the plaintiff’s contact information, a description of the case and the name of the attorney. The funder will contact the applicant’s attorney to learn more about the lawsuit and gather documentation. The lender’s underwriters do what underwriters do and recommend a loan amount. If the applicant agrees, the funder prepares the paperwork, the parties execute the agreement, and the funder transfers the money to their new client.
Depending on the cooperation of the applicant’s attorney, the process can take as little as 24 to 48 hours to fund a well-documented simple personal injury case. Complicated cases and higher dollar amounts may take a little longer.
Who raises the money?
Although these transactions are commonly known as litigation loans, they bear little resemblance to the traditional bank loan. Properly recognized, they are an investment vehicle. The financing company provides an amount of money in return for a share of any compensation. Your profit is the fee charged to the plaintiff. The fate of the investment stands and falls with the fate of the case. If the plaintiff loses the case or no settlement is reached, both the plaintiff and the investor lose.
The money that the litigation funding company uses to buy into a plaintiff’s lawsuit often comes from their own coffers. However, the litigation funder doesn’t always have a pool of liquidity in its bank accounts to fund the hundreds of thousands of dollars in deals the average company can pull together in a month. Instead, the lender relies on investors to come up with that money.
How does a broker add value?
Google and TV are remarkably effective advertising mediums for the litigation finance industry, but they’re not the only sources. Brokers are a growing resource. There are no statistics on how many funding transactions brokers initiate.
According to the CEO of Tribeca Lawsuit Loans, brokers bring in between 20% and 25% of our business.
As with any middleman, the broker’s primary job is to curate and grease the wheels of the transaction. For the financing company, the broker brings qualified and often pre-screened candidates to the table. For the consumer, the broker’s role is the matchmaker: the most money for the lowest fee. To this end, the broker will likely
Develop or follow leads—prospects that are often referred by law firms or doctor’s offices
Conduct a preliminary assessment to determine if the case is eligible for litigation funding
Gather the required documentation from the client’s attorney
Match the customer to one or more funders based on the type of case, value and location of the customer
Negotiate the terms of the transaction
Hold the client’s hand while the lender’s underwriters review the application
Supervise the execution of the paperwork
The real value of a broker is in connections, with access to more information, more investors, and more financing firms than a client would have if they happened to call an 800 number on a Google ad. The good guys spend time building relationships with investors and lenders to get a feel for their lending needs: which companies welcome customers from specific states, which companies prefer which types of cases, who has the lowest fees, and the most generous insurers. Brokers also form relationships with attorneys and medical professionals, surprisingly lucrative sources of leads.
Won’t brokerage fees increase costs?
Brokers make a living, but they can often get a better deal and close it quicker. They know which lenders are more likely to work with which customers and offer them the best conditions. The best brokers know their market, are smart negotiators and stand up for their clients.
Litigation finance brokers charge an average of 15%, comparable to the fees charged by leasing brokers and shipping brokers. That 15% is not set in stone. Often the fee is negotiable, and some brokers will cut their percentage to close the deal. For the broker, the deal comes about when the customer signs the contract with the finance company.
Unlike the litigation funder, the agent typically does not have to wait for the case to be resolved before claiming its fee. The broker will almost certainly have received his money from the finance company when the lender and the client enter into the contract.
No one is going to argue that litigation funding is cheap, just like no one is going to say that title loans are a steal or that credit card cash advances are a budget-conscious way of borrowing. The transactions are risky for the lender and the investor because, among other things, they are non-recourse for the customer. A plaintiff who does not win or disagree will walk out of the transaction with no further obligations, while the finance company and the investor absorb 100% of the loss. When people choose emergency loans, they probably understand that they will pay for the privilege. But unlike other sources of cash, the litigation loan broker can save the consumer money despite the fee.
How do you find a broker?
Finding a broker can be a problem. At present, direct lenders and brokers are not required to disclose their role. Litigation finance is a fledgling industry that has experienced exponential growth over the past 20 years. Few legislators have even attempted to regulate the companies that provide the financing, let alone the companies that broker the deals.
The bottom line is that clients will not know they are transferring an interest in their litigation to a third party funder or investor until they see a different name on the filing unless the plaintiffs ask or the brokers voluntarily provide the information. Unless they’re particularly savvy, many won’t tell the difference or even care.
In an industry barely 20 years old, the litigation loan broker has quickly become a major player in a market that is estimated to invest more than $100 million a year in consumer litigation. The signs are that the industry will continue to grow. Likewise, brokers will continue to match those who have money to invest and those who need it.
© 2022 Copyright Tribeca Lawsuit LoansNational Law Review, Volume XII, Number 48