As part of the Dodd-Frank financial reforms, the federal government established a new agency within the Federal Reserve, the Consumer Financial Protection Bureau (CFPB), as a “cop on the beat” to protect consumers in their financial dealings. The CFPB is charged with setting and enforcing clear and consistent rules that allow banks and other consumer financial services providers to compete on a level playing field and that let consumers see clearly the costs and features of products and services.
Specifically, the Dodd-Frank Act authorizes the CFPB to carry out its mission by:
• Implementing and enforcing federal consumer financial laws;
• Reviewing business practices to ensure that financial services providers are following the law;
• Monitoring the marketplace and taking appropriate action to make sure markets work as transparently as they can for consumers; and
• Establishing a toll-free consumer hotline and website for complaints and questions about consumer financial products and services.
However, nothing in the Dodd-Frank Act references lawsuit funding, litigation funding or any of the other names by which litigation finance is known. To the contrary, the Dodd-Frank Act’s consumer protections are geared to credit products. Lawsuit funding, even when errantly called “lawsuit loans” is NOT a credit product. Instead of making a loan, a lawsuit funding company purchases an interest in a plaintiff’s claim against another party. Unlike traditional credit, where an interest rate is charged and payment obligations are generally absolute, litigation finance is a non-recourse sale. In other words, the funding company purchases a specified part of what the plaintiff has to sell, i.e., a potential future recovery. But if the plaintiff’s recovery is zero, the value of the lawsuit funding company’s interest is zero as well, and the plaintiff owes nothing.
There is a distinct lack of specific language about litigation funding in Dodd-Frank; however, the Act gives the CFPB residual authority to define “new” financial products and to apply its powers to protect consumers that use them. Herein lays the lack of clarity as to the relationship between the CFPB and lawsuit funding. To date, the CFPB has made no public statements or taken any other action concerning litigation finance. However, most customers of lawsuit finance companies fall within the definition of “consumer” and the fact that money is exchanged, even in the form of a sale rather than a loan, may be sufficient for the CFPB to define lawsuit funding as a “financial product.”
In other words, while the CFPB has not indicated any opinion on litigation finance, it has the power to do so at any time in the future. Rest assured, however, that any rulemaking by the CFPB must be “prospective,” i.e., can only apply in the future. Any lawsuit funding contracts entered into before the CFPB acts (Which may never occur!) will not be affected.