President-elect Donald Trump and the Republican Party weren’t the only big winners on Election Day. When the market rallied the following morning in response to the election results, the world’s top 10 richest individuals became a combined $64 billion richer — the “biggest daily increase” of wealth since 2012.
Wall Street’s enthusiasm is a clear indication that, although Trump is still shaping both his administration and his agenda, the policy scales over the next four years are all but certain to be tipping in favor of the nation’s top one percent.
This comes as no surprise, given that the president-elect did little in his first term to close the racial wealth gap, but did much to exacerbate it. There’s little evidence thus far that his second time in the Oval Office will be any different. As a result, it’s more important than ever that New York and other states work to remove the discriminatory obstacles hindering the ability of people of color to improve their economic standing.
One area where states could focus their efforts is reforming lawsuit lending, also known as third-party litigation funding, where investors, hedge funds, and other financiers fund lawsuits and allow plaintiffs to borrow against a potential settlement or judgement. This may not seem an obvious choice, but make no mistake, the wholly unregulated practice of lawsuit lending and its ripple effects negatively impact Black Americans and make it harder to close the wealth gap.
A lack of rules and oversight have turned lawsuit lending into the wild west where unscrupulous lenders target vulnerable individuals who are suing over some harm or injustice and lack a financial safety net because they are unbanked or underbanked. These lenders provide access to quick cash to cover medical bills or day-to-day living expenses, with often disastrous consequences.
No regulation means lenders can charge as much interest as they want — and they do, at times requiring borrowers to pay back their loans at a rate of 100% or more. Lenders deny these are, in fact, traditional loans, since they only get their investment back if the borrower wins their case.
To make matters worse, lawsuit loans are not required to be disclosed at any point during the litigation process, masking potential ethical breaches and conflicts of interest – particularly among attorneys who refer their clients to lenders in return for a cut of the action. This makes a mockery of our justice system and can only be addressed by injecting transparency into the process and providing a level playing field for all participants.
The consequences of the unchecked and booming lawsuit lending industry reverberate throughout other sectors in our economy and disproportionately impact Black Americans.
For instance, the average cost of auto insurance increased 25% this year, but minorities’ wallets were hit harder than others. A Bureau of Labor Statistics’ Consumer Expenditure Survey (CE) reveals that “minorities pay far more than whites to insure each motor vehicle they own, and additional data indicate that minority consumers also receive less coverage for their expenditure.” Factoring in different levels of car ownership, Black Americans spend 100% more than whites for each car insured.
A report published earlier this year by the Insurance Information Institute (Triple-I) found that legal system abuse was an exacerbating factor in the increasing cost of auto insurance. Such fraudulent litigation brought by overzealous plaintiff attorneys drives up court costs and attorney fees for insurers and its policyholders who end up paying the price — or in the case of Black Americans, an even higher price. The report cited lawsuit funding, specifically, as contributing to this increase.
Triple-I CEO Sean Kevelighan noted the correlation between lawsuit lending and auto insurance costs, saying, “The price of insurance is the effect, not the cause of risk, and there must be more work done to curb legal system abuse, as auto insurers – both personal and commercial – are seeing significant increases in claims costs when attorneys enter into the picture.”
While not all transactions in the space have nefarious motivation, some common sense reforms – a simple interest rate cap and transparency provisions – will protect vulnerable New Yorkers while also preserving the industry’s ability to provide a financial lifeline to those in need.
The racial wealth gap between white and Black families already hit a record high of $1 million two years ago, and a report released earlier this year by McKinsey & Company found that “it would take more than three centuries for Black residents across the nation to reach parity with their White neighbors.” Black Americans can no longer afford governmental inaction – lawsuit lending reform is a sensible place for states like New York to start to chip away at this long-standing problem.
Michael A. Grant, J.D. is president emeritus of the National Bankers Association and former assistant professor of political science at Morgan State University.
EDITOR’S NOTE: A previous version of this op-ed quoted Burford Capital CEO Christopher Bogart. The quote was removed due to conflicting information.
