Trending Now
Consumer Special Features

Is Consumer Legal Funding a loan? Why does it matter?

February 4, 2021

Is Consumer Legal Funding a loan? Why does it matter?

The following article was contributed by Eric Schuller, President of the Alliance for Responsible Consumer Legal Funding (ARC). The classification of Consumer Legal Funding as a loan is more than mere semantics. Consumer Legal Funding is the purchase of an asset; that being a portion of the proceeds of the consumer’s legal claim. This form of investment allows the consumer to access much needed support in order to obtain the financial assistance they need while their claim is making its way through the system. You may ask yourself, so why does this matter? In her publication “Harmonizing Third-Party Litigation Funding Regulations,” Professor Victoria Shannon Sahani clarified why Consumer Legal Funding is not a loan:
  • First, there is no absolute obligation for the funded client to repay the litigation funder. If the client is the claimant, the client must only repay the funder if the client wins the case. If the client is the defendant, the premium payments end as soon as the case settles, and if the defendant loses, the funder will not receive a success fee or bonus.
  • Second, litigation funding is non-recourse, meaning that if the client loses the case, the funder cannot pursue the client’s other assets unrelated to the litigation to gain satisfaction.
  • Third, the funder is taking on more risk than a traditional collateral-based lender; therefore, the funder is seeking a much higher rate of return than a traditional lender. This is not a unique concept. For example, an unsecured credit card typically carries more risk than a secured loan, so regulations tolerate much higher interest rates on unsecured credit cards than allowed even on subprime mortgages, which are backed by collateral. Similarly, as mentioned above, funders structure their agreements to avoid classification as loans in order to avoid the caps that usury laws place on interest rates for mortgages and credit cards.
  • Fourth, distancing funding even further from a loan, funders are taking on even more risk than unsecured credit cards because the credit card agreement is a bilateral transaction, while funding is a multilateral transaction.
Shahani explains that Consumer Legal Funding does not contain any of the characteristics of a loan, as illustrated in the chart below:
CharacteristicsLoanConsumer Legal Funding
Personal repayment obligationYESNO
Monthly or periodic paymentsYESNO
Risk of collection, garnishment, bankruptcy.YESNO
What is interesting to note is that no state where the legislature has carefully examined the product has classified it as a loan. In fact, states have gone so far as to declare that Consumer Legal Funding is unequivocally not a loan. In 2020, Utah passed HB 312 that specifically states that the product does not meet the definition of a loan or credit. In Indiana for example: A statute was passed regulating the industry which specifically states: “Notwithstanding section 202(i) of this chapter and section 502(6) of this chapter, a CPAP[1] transaction is not a consumer loan.”  The statute further articulates: “This article may not be construed to cause any CPAP transaction that complies with this article to be considered a loan or to be otherwise subject to any other provisions of Indiana law governing loans.” The Nebraska state legislature has declared: “Nonrecourse civil litigation funding means a transaction in which a civil litigation funding company purchases and a consumer assigns the contingent right to receive an amount of the potential proceeds of the consumer’s legal claim to the civil litigation funding company out of the proceeds of any realized settlement, judgement, award, or verdict the consumer may receive in the legal claim.” In Vermont: “Consumer litigation funding means a nonrecourse transaction in which a company purchases and a consumer assigns to the company a contingent right to receive an amount of the potential net proceeds of a settlement or judgement obtained from the consumer’s legal claim. “ In other words, Consumer Legal Funding is specifically classified as a purchase, not a loan. And it’s not just the state legislatures that have weighed in on this, the courts have as well. In 2018, the Georgia Supreme Court affirmed the Georgia Court of Appeals ruling, that the product is not subject to the Industrial Loan Act. The Appeals Court stated: “Unlike loans, the funding agreements do not always require repayment. Any repayment, under the funding agreement is contingent upon the direction and time frame of the Plaintiffs’ personal injury litigation, which may be resolved through a myriad of possible outcomes, such as settlement, dismissal, summary judgment, or trial.” Even dating back to 2005, when the New York Attorney General’s office came to an agreement with the industry, it stated in its press release: “The cash advances provided by these firms are not considered “loans” under New York State law because there is no absolute obligation by a consumer to repay them.” So, this leads me back to my opening question: Why does it matter? Classification matters, because once you mischaracterize the product by calling it a loan, you limit consumers’ availability to access it by subjecting Consumer Legal Funding to state laws that regulate loans. According to MarketWatch, in January of 2021, as many as 74% of Americans are living paycheck to paycheck. When their income stream is interrupted (typically due to an accident), they desperately need some economic assistance to help them through the lengthy and extensive process of filing their legal claim. So we ask State Legislators, when you are deciding how best to regulate this important financial product, to do what is best for your constituents by providing them access to economic assistance during their time of need, and ensuring that they are fully informed as to the terms and conditions of the transaction, by having their attorney review it with them in order to confirm that it is properly classified as a purchase. Blanket statements labelling Consumer Legal Funding as loans only serve to hurt those in need of its assistance, especially at a time when they need it. Eric Schuller President Alliance for Responsible Consumer Legal Funding   [1] CPAP Civil Proceeding Advance Payment
Secure Your Funding Below
Secure Your Funding Sidebar

Consumer

View All
Consumer

Karyn Cerulli Joins High Rise Financial to Bolster PI Funding

By John Freund |

High Rise Financial has added industry veteran Karyn Cerulli as Regional Vice President of Sales, deepening the Los-Angeles-based funder’s reach into the personal-injury bar. Cerulli spent more than a decade with FindLaw and Thomson Reuters, where she partnered with firms on digital marketing and business-development strategies. In her new role she pivots from lead generation to liquidity, positioning High Rise’s non-recourse advances as a client-care tool for plaintiffs’ firms facing lengthy litigation timelines.

A post on LinkedIn sets out Cerulli’s agenda: hands-on attorney support, a “best rate guarantee,” and white-glove service that places “zero pressure” on case strategy while delivering cash within days. Cerulli frames High Rise as a complement rather than a competitor to existing funders, inviting firms to keep her on standby as a “second option” or safety net when primary partners stall or pricing shifts.

The move comes amid rapid growth for High Rise, which secured a $100 million senior credit facility late last year to expand its pre-settlement portfolio and medical-lien program. The funder touts 24-hour approvals, no credit checks, and repayment only from a successful resolution—features that resonate with Cerulli’s long-time focus on consumer-friendly legal services. With her network of plaintiff-side marketers and case managers, the company hopes to accelerate origination across high-volume auto and premises claims.

Announcements Consumer

Golden Pear Upsizes Corporate Note to $78.7M Amid Growth Plans

By John Freund |

Golden Pear Funding has extended and upsized its investment-grade corporate note to $78.7 million, further bolstering the firm's capacity to serve the expanding litigation finance sector. The New York-based funder, a national leader in both pre-settlement and medical receivables financing, said the proceeds will support working capital and fuel strategic growth initiatives.

A press release from Golden Pear outlines how the capital raise reflects continued investor confidence in the firm’s business model. CEO Gary Amos noted that the infusion is critical as Golden Pear seeks to scale alongside the “rapidly expanding litigation finance market.” CFO Daniel Amsellem added that the new funding aligns with the company’s capital allocation strategy, aimed at optimizing operational efficiency and executing strategic projects.

Brean Capital, LLC acted as the exclusive financial advisor and sole placement agent on the transaction.

Founded in 2008, Golden Pear has funded more than $1.1 billion to over 87,000 clients and remains one of the largest specialty finance companies in the U.S. Its business model spans legal case funding and medical receivables purchasing, with backing from a network of private equity partners that provide institutional support for continued expansion.

Commercial Consumer

Mayfair Legal Launches Wildfire Support Program for Plaintiffs

By John Freund |

Mayfair Legal Funding has unveiled a new initiative aimed at aiding wildfire victims in Los Angeles and Maui by providing pre-settlement advances tailored to individuals pursuing legal claims related to recent wildfire disasters. The program seeks to ease the financial burden on plaintiffs during the lengthy litigation process, allowing them to cover essential living expenses and medical costs without being forced into early or inadequate settlements.

An article in OpenPR reports that Mayfair’s program will provide wildfire-impacted claimants with cash advances while their cases proceed through court or settlement negotiations. The funding is non-recourse, meaning recipients are only obligated to repay the advance if their case is successful. This offering is particularly timely in light of the mounting legal battles related to utility-sparked wildfires in California and the catastrophic 2023 fires in Maui, both of which have left thousands seeking legal recourse and financial recovery.

Mayfair emphasized that this initiative aligns with its mission to ensure access to justice regardless of a claimant’s financial status. “We believe that no one should have to choose between basic survival and pursuing a rightful claim,” said a spokesperson for the funder, noting that the company’s underwriting process is designed for speed and minimal paperwork.

With natural disasters on the rise and litigation timelines stretching longer than ever, targeted pre-settlement funding like this may become an increasingly vital tool for plaintiffs. The wildfire-specific program from Mayfair underscores a growing trend of funders developing specialized products for mass torts and disaster-related litigation—an area likely to see heightened investor and regulatory attention in the years ahead.