New York Tightens Rules on Lawsuit Loans — Industry Praises the Change

What New York’s Consumer Litigation Funding Act Does — and ALFA’s Take

New York’s governor, Kathy Hochul, signed the Consumer Litigation Funding Act into law this week. The new law creates a clearer set of rules for companies that give cash to people who are waiting on the outcome of a lawsuit, an area often called litigation funding or lawsuit lending. The American Legal Finance Association (ALFA) issued a statement praising the move, calling the law a step toward fairer, more transparent deals for consumers.

The law is meant to make these transactions easier to understand and harder to abuse. It says funders must give plain-language contracts, explain the fees and risks up front, and follow a state oversight process. Supporters say this will protect people who need money while their case is pending. ALFA’s public message welcomed the clarity, saying the rules will help reputable funders and make the space safer for consumers.

How the Law Changes Protections for People Using Legal Funding

For people who accept money while waiting on a case, the new law focuses on clear information and basic rights. Funders now have to spell out, in simple terms, how much a person will owe if their claim succeeds, and how fees are handled if the case is lost. The idea is to remove small-print surprises that have hurt some consumers in the past.

The statute also requires written disclosures about the non-recourse nature of many funding deals — meaning the borrower won’t have to pay back the advance if they lose the case — and it forces funders to show how fees are calculated. In practical terms, plaintiffs should see shorter, easier contracts and a better sense of whether a cash advance is worth it for their situation.

That said, the law does not make every advance free or cheap. Consumers will still trade a slice of any future recovery for cash now. What changes is that the trade should be clearer, and there are new guardrails to stop misleading or predatory terms.

Industry Response — ALFA Praises It, But What Do Funders and Lawyers Say?

ALFA’s statement was upbeat. The group said the law gives a reliable framework that benefits ethical funders and protects consumers. For association members, clear rules can reduce uncertainty and the risk of bad actors giving the whole market a poor reputation.

Funding companies are likely to adjust contract templates and tighten underwriting to meet the new rules. Some funders may slow down approvals at first while they build compliance teams. Plaintiff lawyers have mixed reasons to like and to watch the change: many welcome better client protections and greater transparency, while others worry new paperwork or licensing could slow access to funds for clients who need cash quickly.

Consumer advocates generally see the law as a win, since it pushes toward clearer deals and oversight. But some advocates will be watching closely to make sure the protections are enforced, not just written down.

Compliance Rules and Enforcement: What Funders Must Now Do

The law creates several new obligations for anyone offering consumer litigation funding in New York. Funders must register with the state and keep records of transactions. They must use clear, standard disclosures and show how fees or charges work. The statute also sets out oversight powers for state regulators, including the ability to audit, investigate complaints, and levy penalties for serious violations.

Companies that already operate in multiple states will likely centralize compliance work, updating forms and training staff. Smaller firms may face higher short-term costs to meet licensing and record-keeping rules. The statute gives regulators a timeline to write implementing rules, so the exact forms and filing steps will appear in coming months.

Wider Effects — Access to Justice, Costs and Possible Market Ripple Effects

At a big-picture level, the law aims to keep access to civil justice open while cutting down on harmful practices. Clearer rules may slightly raise funders’ costs, which could mean either higher fees for some borrowers or a tighter market where only better-run funders continue to operate. Over time, the hope is for a more transparent market that consumers can use with confidence.

What to Watch Next — Timeline, Guidance and Potential Challenges

The next phase is rulemaking. State regulators will publish specific guidance and forms, and those details will determine how disruptive the change is for borrowers and funders. Expect a window for public comments and stakeholder meetings where funders, lawyers and consumer groups will make their cases.

Legal challenges are possible but not certain. Companies that see the rules as too costly could sue, arguing state rules conflict with other laws. Watch for early cases and for the regulator’s first enforcement actions — those will signal how strictly the new law will be applied.

For now, the main takeaway is simple: New York has set a new standard for litigation funding. Funders must be clearer, and consumers should get plain language about the deals they sign. ALFA applauds the change, and the rest of the market will spend the next months adapting to the new rules.

Sources

• prnewswire.com