So-so for borrower, so nice for lender Lawsuit loans: Lenders sometimes collect interest as high as 33 percent from loans made on personal-injury lawsuits.

November 01, 1995|By Mark Hyman | Mark Hyman,SUN STAFF

At least once a week, Baltimore attorney Joel J. Shugarman estimates, one of his clients borrows money from a finance company.

The loans are different from new-car loans or home-equity credit lines. Many of Mr. Shugarman's clients don't own houses or other valuable assets they would need to secure those types of garden-variety financing.

Instead, his clients pledge their most precious and, often, only collateral: their personal injury lawsuit.

If their whiplash or workers compensation claims seem promising, one of a few finance companies in Maryland specializing in loans secured by personal-injury lawsuits might pay out several thousand dollars. It's money that the lender expects to get back -- with interest as high as 33 percent.

Mr. Shugarman is a believer in such companies.

"They fill a wonderful void for the client who is incapacitated and unable to continue his usual employment," said the lawyer, who handles many personal injury lawsuits.

"Even though the interest rate sounds shockingly high, you're talking about a loan that's usually paid back within 90 days."

Towson lawyer Irwin E. Weiss said he advises clients to avoid dealing with finance companies. "If we're talking about someone who truly is destitute, starving and on the verge of homelessness, I guess it makes sense. Those cases are rare," said Mr. Weiss, who reported that he recalls only three of his clients entering into such loans.

What these lenders are doing is perfectly legal. Their interest rates, though high, are within limits allowed for small loans in Maryland. Lending money on lawsuits also is permissible.

Attorneys aren't violating their canons of ethics either, as long as they refrain from lending to clients or getting paid by finance companies.

Still, the lawsuit loans trouble some lawyers and state lawmakers. Among their concerns is that increasingly large amounts of money are spoken for before recoveries reach accident victims.

Those victims collect only when the lawyers' contingency fee and the debt to the finance company have been paid.

Others question whether lawyers can avoid being drawn into cozy relationships with lenders. A lawyer risks disciplinary action when he funnels his clients to a lender in return for a finder's fee.

Critics of lawsuit lending acknowledge that most lawyers probably are acting properly when they point clients to finance companies. But the opportunity for attorneys to engage in self-dealing is troubling, they say.

"It is so lucrative that it is hard to believe otherwise," said House Speaker Casper R. Taylor Jr., who three years ago sponsored a bill that would have prohibited making loans on lawsuits.

Mr. Taylor's bill passed the House with three dissenting votes. It failed in the Senate, in part because supporters of the bill couldn't point to disgruntled borrowers or misbehaving lawyers.

"Unfortunately, evidence [of lawyer misconduct] is almost impossible to get without a crusade," said Mr. Taylor.

William I. Weston, a professor of ethics at the University of Baltimore Law School, also questions the relationship.

"It just bothers me. It doesn't pass the smell test," Mr. Weston said. "I'd love to believe every lawyer was Mother Teresa, but I know better. The reality is some dealing is going on."

Mr. Weiss, the Towson lawyer, does not discount that possibility. "I don't know of any kickbacks, but any time you are dealing with human beings, money and greed there can be improprieties," he said.

In Maryland, finance companies have been lending on lawsuits for at least five years. Not all have been successful.

Advance Finance Inc. started making loans in 1990 and was out of the business three years later. A company spokesman wouldn't explain why, but it's not uncommon for such lenders to disappear.

Each time they approve a loan, finance companies are betting on the success of the borrower's lawsuit. If the borrower doesn't win or collect a settlement, loans usually go unpaid.

"It only works for the lenders if, when the case is settled, there's money to repay the loan," said J. Steven Lovejoy, assistant attorney general for consumer credit. "A whole lot of business assumptions fall by the wayside if that doesn't happen."

At least two companies continue to make these lawsuit loans, Monumental Finance Co., in Baltimore and Legal Lenders in Towson.

Neither company would agree to an interview. An information sheet supplied by Legal Lenders lists its president as A. Gordon Boone III and notes that the company "provides injured parties with funds while they await the disposition of their claims."

Finance companies making loans on lawsuits are closely watched by state regulators. Interest rates they charge are prescribed by the state's consumer credit regulations.

Under the state's Consumer Loan Act, lenders may charge maximum interest of 33 percent on loans up to $1,000. On the next $1,000, the allowable rate is 24 percent. For loans of more than $2,000, the maximum loan rate is 24 percent.

By limiting their loans to $2,000, the finance companies can charge the higher rates. They also limit losses when loans aren't repaid.

"What these guys have done is carved out a little niche that nobody else knew existed," said Mr. Lovejoy.

For plaintiffs' lawyers, finance companies can be a blessing. Their clients may need money for medical bills or to pay rent. Whatever the reason, the attorney cannot lend.

Finance companies are a very expensive option.

"For a person who has no income because of an accident, the only thing he's got is his [personal-injury] claim," Mr. Shugarman said.

Mr. Weston lamented that plaintiffs are forced to turn to such lenders. "Some things are fundamentally wrong," he said.

"Here, the victim already has been harmed, allegedly. Then he's getting ripped off along the way with outrageous interest rates."

Mr. Taylor said: "The interest rates are sinful."

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