WASHINGTON — Companies that advance money to plaintiffs involved in personal injury lawsuits are campaigning in state capitals for legislation making clear that their growing industry is not subject to usury limits on interest rates or other state laws that protect borrowers. Instead, the lawsuit lending companies want to adopt a separate and less rigorous set of protections. Since February, they have persuaded legislators in at least five states, including New York, to introduce bills based on the industry’s own proposals. The campaign is drawing strong opposition from chambers of commerce, insurance companies and others who worry that lawsuit loans encourage litigation by emboldening plaintiffs. These critics also argue that the bills would strip protections from borrowers. “They are coming in under the guise of accepting regulation when in fact what they are trying to do is to legalize lawsuit lending and to explicitly exempt themselves for consumer lending requirements,” said Lisa A. Rickard, president of the Institute for Legal Reform, an arm of the United States Chamber of Commerce. These clashes reflect both the uncertain legal status of lawsuit lending and the growing debate over its social value: Should third-party investment in lawsuits be encouraged, tightly restricted or banned altogether? Lending to plaintiffs is part of a broader trend in recent decades in which banks, hedge funds and private investors have been pumping money into other people’s lawsuits. About a dozen large companies, and many smaller ones, lend plaintiffs about $100 million a year, generally a few thousand dollars at a time, to cover housing, medical care and other expenses. The loans are repaid from winnings, with costs that can exceed 100 percent a year. People who lose their cases owe nothing. In making their case, the companies argue that they should not be subject to existing consumer protections because the transactions are investments, not loans. They say they must charge high prices to compensate for the risk that plaintiffs will lose. “Our approach is much more sensible and consumer friendly than curtailing the industry,” said Gary Chodes, chief executive of Oasis Legal Finance in Illinois, one of the largest lawsuit lenders and a driving force behind the legislative campaign. The legal status of lawsuit lending has been hotly contested in recent years. Authorities in some states, including Colorado and Maryland, have ruled that the companies must comply with lending laws, which severely restrict the kind of interest rates that can be charged. Authorities in other states, including New York, have ruled that the companies are not subject to those laws, accepting the industry’s argument that the transactions are conditional investments. In 2008, the industry began an effort orchestrated through its trade group, the American Legal Finance Association, to settle the issue through legislation. Ohio, Maine and Nebraska have since passed laws establishing customized regulations for lawsuit lenders. Efforts in other states, including Illinois, fell short. This year, the industry is greatly expanding the number of battlegrounds. Since February, the industry’s allies have filed bills in New York and in at least four other states: Alabama, Kentucky, Indiana and Maryland. Legislators in Tennessee and Maryland have also introduced similar bills, but with somewhat stronger consumer protections. Mr. Chodes said that Oasis is focusing on Arkansas, Illinois and Nevada. “We are seeking regulation in these states because, unlike the insurance industry, we want strong consumer protections in place,” he said. The State Senate in Indiana handed the industry its first victory of the year on February 17. The sponsor, Senator Randy Head, said that Oasis brought the issue to his attention and helped shape the legislation that he introduced. “Most of what they proposed is contained in the bill,” he said. Indiana has not tried to regulate lawsuit lending under existing consumer protection laws, and Mr. Head said the bill would establish relevant protections, for example barring lenders from any involvement in cases beyond providing money. It also makes clear, however, that lawsuit loans are not subject to the state’s 36 percent cap on interest rates. A similar bill passed the House in Kentucky one day later. But it has become bogged down in the Senate after opponents, including the Kentucky Chamber of Commerce, “raised a red flag” with Republican leaders, said Dave Adkisson, the chamber’s chief executive. “It’s being raised as a consumer protection issue,” he said, “but in reality they want an exemption to the laws that govern other loans.” Lenders have been forced to give ground in some states. Oasis has not made loans in Maryland since 2009, when it paid a fine of $105,000 after state regulators threatened to sue the company for violating state usury laws. It did not concede wrongdoing. Seeking a way back into the state, the industry now is supporting a bill that would impose some restrictions on pricing for the first time. The bill, pending before the House in Maryland, would allow charges of up to 80 percent of the loan amount in the first year and up to 200 percent of the loan amount in total. Oasis now charges customers up to 250 percent of the loan amount, but Mr. Chodes said the company was willing to accept “appropriate limitations.” The industry is also scrambling to respond to a bill in Arkansas that would ban lawsuit lending completely, and to a bill in Rhode Island that makes clear that lawsuit lending is subject to the same state regulations as other kinds of lending. The sponsor of the Rhode Island measure, Senator Michael McCaffrey, said that he only recently learned about the industry from a constituent, a lawyer, who was shocked by the price a client was charged for a loan. Mr. McCaffrey said he was surprised to learn that such loans were not clearly subject to consumer protections. Mr. McCaffrey said that he had been contacted by Oasis since filing the bill, but that he was not convinced by the company’s argument that it needed to charge high rates. “Consumers obviously need to be protected as best they can be,” he said.
