BUSINESS
01/17/2011 10:27 am ET | Updated May 25, 2011

Lawsuit Loans Are 'Legal Loan-Sharking,' Critics Say

Over the last decade, banks, hedge funds and private investors have begun pumping money into other people's lawsuits in the hopes of sharing in the potential winnings. As the New York Times reported on Sunday, for the borrowers, particularly those injured and seeking settlement, this can be exceedingly risky.

Lawsuit loans are unregulated in most states, which means that interest rates are high, and companies aren't required to provide complete pricing information. The companies argue that they shouldn't be regulated as lenders since they will get nothing if the case loses. If the case is won, the plaintiffs get only a fraction of their settlement -- the rest must be paid to the lawsuit lenders.

Now, the push back is starting. From the Times:

A growing number of lawyers, judges and regulators say that the regulatory vacuum is allowing lawsuit lenders to siphon away too much of the money won by plaintiffs.

"It takes advantage of the meek, the weak and the ignorant," said Robert J. Genis, a personal-injury lawyer in the Bronx who said that he had warned clients against borrowing. "It is legal loan-sharking."

The lawsuit loans industry now lends plaintiffs more than $100 million a year, according to the Times.

The Times piece -- a collaboration with the Center for Public Integrity -- has documented extensively the pitfalls of lawsuit loans for those who borrow, and can be read in full here.

A previous report on the same provides more detail on the history and practices of lawsuit lenders:

The industry's great innovation, and still its defining trait, is the willingness to lend based on the potential value of unresolved cases.

The roughly one dozen major lenders tend to cultivate an image of conservative prudence. Counsel Financial, which bills itself as the largest, with more than $200 million in outstanding loans to law firms, shares a suburban office building outside Buffalo with an insurance firm.

But the work sits somewhere between banking and gambling.