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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

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Florida Advocates Press Lawmakers to Revive Third-Party Litigation Funding Bill in Next Special Session

By John Freund |

With Florida's redistricting special session wrapping up and another special session expected, tort-reform and insurance-industry advocates are pressing state lawmakers to use the next window to take up unfinished business on third-party litigation funding. The push centers on legislation that would impose greater transparency obligations on outside funders and that has previously cleared the Senate Judiciary Committee but stalled before reaching the floor.

As reported by Florida's Voice, proponents argue that third-party litigation financing inflates settlement and verdict values, drives up insurance premiums, and operates with too little visibility into who is bankrolling Florida lawsuits. The most recent vehicle, Senate Bill 1396, was approved by the Senate Judiciary Committee earlier this year and would require disclosure of funding agreements and limit the influence funders may exert over case strategy.

Florida has been a focal point of the national TPLF debate as states from Georgia to Louisiana have moved ahead with disclosure regimes, registration requirements, and foreign-funder restrictions. Advocates in Tallahassee see the post-redistricting calendar as a narrow but real opportunity to close the gap with neighboring states, while litigation funders and plaintiff-side groups are likely to mobilize against any fast-tracked vehicle that re-emerges in a special session with a compressed schedule.

Consumer

Legal-Bay Flags NY Archdiocese at “Critical Crossroads” Amid Nearly 2,000 Abuse Lawsuits

By John Freund |

Legal-Bay Pre-Settlement Funding has issued a sector update flagging the Archdiocese of New York as approaching a "critical crossroads" in its handling of nearly 2,000 sex abuse lawsuits, with plaintiffs' counsel pursuing settlements estimated to total approximately $2 billion against an institution whose financial position cannot currently meet that demand.

According to Legal-Bay's report via PR Newswire, the Archdiocese — covering Manhattan, the Bronx, and seven Hudson Valley counties — is weighing two paths: a global settlement funded in part by parish-level contributions, or a Chapter 11 bankruptcy filing of the kind already pursued by multiple U.S. dioceses confronting similar exposure. CEO Chris Janish, who recently sat for an LFJ Conversation, noted that "a bankruptcy would introduce significant complexity and could further delay compensation for victims."

Legal-Bay points to a series of recent diocese settlements as comparative benchmarks: Albany, NY ($148M pending), Rockville Centre, NY ($323M approved), Rochester, NY ($246M-$256M approved), Syracuse, NY ($176M approved), Buffalo, NY ($150M-$274M proposed), Camden, NJ ($180M pending), and New Orleans, LA ($230M pending). The cumulative outcomes underline both the scale of historic abuse claims now in the U.S. court system and the practical reality that institutional defendants of this size frequently end up resolving claims through structured insolvency proceedings rather than direct settlements.

For the consumer legal funding industry, the matter is operationally significant. Pre-settlement funders active in this space — Legal-Bay among them — provide cash advances to plaintiffs whose cases face the long, uncertain timelines characteristic of institutional abuse litigation. The longer cases run before resolution, the more important non-recourse advances become for plaintiffs facing their own financial pressures during proceedings, particularly when bankruptcy stays freeze recovery activity for extended periods.

The story also crystallizes a recurring theme across institutional abuse litigation: settlements scaled in the hundreds of millions but constrained by the realities of insurance coverage, real estate liquidity, and parish-level fundraising capacity. As the New York matter moves toward resolution, it is likely to influence how other large dioceses navigate the trade-off between bankruptcy protection and direct settlement structures.

Consumer

ACSO Launches Consumer Legal Association to Champion £5.5 Billion UK Claimant Industry

By John Freund |

ACSO, the UK trade body representing consumer-facing claimant law firms, has launched the Consumer Legal Association (CLA), positioning it as the unified voice of a £5.5 billion-plus personal injury and medical negligence sector that its leadership believes has not been "good enough at representing itself."

As reported by Legal Futures, the CLA is led by Matthew Maxwell Scott, who continues as chief executive of both organizations, with David Whitmore — former Slater & Gordon CEO — chairing the board. Other directors include Shirley Woolham (Minster Law CEO), Peter Haden (Fletchers CEO), and James Maxey (Express Solicitors CEO), with former SRA deputy chief executive Juliet Oliver serving as a non-executive director. The association is targeting around 20 larger claimant firms as core members, with plans to expand into adjacent sectors including medical reporting organizations and legal expenses insurers.

The CLA's stated agenda focuses on research demonstrating consumer benefits, behavioral benchmarks for client onboarding, settlement practices, and legal costs, alongside workforce data — including documenting that the sector's workforce is approximately two-thirds female. The launch reflects a sector under sustained pressure from personal injury reforms, fixed recoverable costs developments, and a narrative environment dominated by tort reform-aligned critics of the claimant economy.

For the litigation finance and ATE community, the CLA's emergence is meaningful. The trade body's planned expansion to include legal expenses insurers indicates an explicit intent to align the claimant law firm sector with its capital and insurance counterparts — a consolidation of voice that could reshape how UK regulators and policymakers engage with the broader funded-claims ecosystem. Litigation funders, ATE underwriters, and disbursement lenders all operate within markets where claimant law firm economics directly determine the viability of their products, and a more coordinated industry voice has obvious implications for how reforms are debated and implemented.

The launch also lands in a UK market increasingly defined by a parallel set of pressures: the FCA car finance redress scheme, intensifying SRA enforcement against problematic claims firms, the Law Commission's review of consumer class actions, and continued PACCAR-related uncertainty around the enforceability of funding agreements. A consolidated trade body that can speak credibly across these intersecting issues is, by design, well-positioned to influence the next phase of UK consumer claims regulation.