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The legal finance industry, which advances cash to plaintiffs waiting for their lawsuits to be resolved, has launched its first national trade association in an attempt to raise standards and improve its image. The New York-based American Legal Finance Association (ALFA) was formed this month by a consortium of 11 national companies that have agreed to adhere to the “best practices” guidelines set out for the future-settlement financing industry, also known as nonrecourse funding or interim financing. ALFA currently has members in Connecticut, Illinois, New Jersey, New York and Pennsylvania, each of which does business nationwide. The trade group was born out of an investigation into a current ALFA member by the office of New York State Attorney General Eliot Spitzer. No charges of wrongdoing were brought, according to Spitzer’s spokeswoman, Christine Pritchard, but it was determined that more could be done to protect consumers. ALFA was launched voluntarily by companies that have agreed to abide by terms set out by Spitzer’s office. One of the first improvements is a requirement that an attorney review the contract, Pritchard said. “There is a concern in the industry that people are charging exorbitant rates and giving the industry a bad name,” said ALFA Chairman Harvey Hirschfeld, an executive vice president at New York-based Plaintiff Funding Corp., which does business nationwide as Law Cash. “If done properly, [financing] can serve a solid purpose.” The consortium has its work cut out for it. Consumer and legal groups have turned a skeptical eye toward the industry, with some financiers levying interest rates of more than 200%. And plaintiffs’ lawyers need convincing. “It’s not something we recommend,” said Michael Block of New York’s Sullivan Papain Block McGrath & Cannavo. “If you figure out what it would cost out of [a plaintiff's] recovery, it’s an enormously expensive proposition.” The industry’s interest rates are substantially higher than are traditional lenders because the money is not a loan. The company assumes the risk of litigation so the plaintiff only repays the advance-with interest-if the plaintiff recovers from the lawsuit. That is how legal finance companies are able to operate around most state usury laws, with the exception of Ohio, said Professor Susan Lorde Martin of the Frank G. Zarb School of Business at Hofstra University. To date, only an Ohio appellate court has applied state usury laws, calling the advances a loan. Rancman v. Interim Settlement Funding Corp., No. 20523 (2001). Hirschfeld concedes that this type of funding is not for everyone. He calls it an industry of last resort for people who have exhausted all financial means and cannot borrow from family, friends or traditional lenders. About 70% of those who have borrowed from Law Cash did so to stop an eviction or foreclosure, he said. ALFA members say the trade group is a response to an industry that is expanding. In its early stages, the industry’s target market was the small consumer with a personal injury lawsuit or auto accident, said Gary Chodes, CEO of Oasis Legal Funding in Illinois, an ALFA member. “Now it’s much broader,” Chodes said. “We work with all kinds of plaintiffs: inventors who own patents, business executives in litigation, whistleblowers, individuals in employment disputes.” Critics note that the companies do not advertise a flat interest rate, making it difficult for consumers to shop around. Martin would like to see the industry develop a standard way to report interest fees. Hirschfeld claims that rates fluctuate according to the risk factor of each case, but adds that fees are becoming more competitive as the market matures.

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