At Fair Rate Funding, we are frequently asked whether we run credit checks in connection with the funding process. The answer to this question is “no”. However, other “checks” are routinely used by lawsuit loan companies to help in their underwriting. This post will discuss this topic in a little more detail.
Credit checks are utilized by lenders to assess the likelihood a loan will be repaid and the terms of the loan followed. A lawsuit funding transaction is not technically a loan because in the event the lawsuit is unsuccessful, the cash advance does not need to be repaid. Instead, the funder purchases a portion of the the proceeds of the case, if any. Because of this, the creditworthiness of the applicant is a non-issue and the credit score not usually a factor in the underwriting process. However, the applicant’s background may be an issue and must be factored into the decision to fund a particular case.
When a case is submitted for lawsuit cash advance funding, the underwriter must assess all pertinent facts. Since the lawsuit loan is not repaid unless the case is ultimately successful, lawsuit funding underwriters face a difficult challenge because they must base their decision on a limited amount of information. In fact, thousands of cases are funded each week based on a few pieces of paper (e.g. police report, insurance information, and medical records) and a phone call to the attorney’s office.
What little information the underwriter does have must be used to the fullest extent. One piece of information is the applicant’s background.
Pre-settlement loan companies normally utilize background checks only after a case is approved for funding. Normally, the lawsuit funding outfit wants to see if there are other potential lien holders which would be in a priority position on the case. Examples might include Federal Tax Liens or Child Support Obligations.
In some instances however, a background check can be used as part of the approval process. For example, if a case is approved but the applicant’s background check shows a history of fraud, underwriters would seriously consider this fact when deciding to offer a cash advance. At worst, the applicant could be perpetrating a fraud. At best, his past transgressions go to his credibility as a truthful witness in the case.
Most often, background checks simply show minor criminal offenses and/or civil judgments. In the vast majority of circumstances, background checks do not disqualify a case from funding. However, as stated above, the presence of Federal Tax Liens or Child Support Obligations can throw a wrench in the lawsuit funding process.
When theses situations arise, all hope is not lost as there may be steps to rectify the situation. For example, simply because a tax lien or other priority judgment is listed on the background report, does not necessarily mean there is still a valid lien. Frequently, obligations such as these are current or otherwise satisfied but not updated on the background check. In other instances, a common name may yield many liens on a background search, but only after more investigation can the lien be verified or deemed an error.
As previously stated, lawsuit funding companies utilize many tools to more accurately asses the risks associated with advancing cash against the future proceeds of a pending lawsuit. Although the credit scores of applicants are usually of no real importance, background checks do play a role in the underwriting process.