In “fair interest rate financing”, people are often asked whether to conduct a credit check on the financing process. The answer to this question is "no". However, litigation loan companies often use other "checks" to help them underwrite. This article will discuss this topic in more detail.
The lender uses a credit check to assess the likelihood of repayment of the loan and the compliance of the loan terms. Legally, litigation capital transactions are not loans, because in the event of a failed lawsuit, there is no need to repay the advance cash. Instead, the funder purchases a portion of the proceeds of the case, if any. Therefore, the applicant's credibility is not a problem, and the credit score is usually not a factor in the underwriting process. However, the applicant's background may be a problem that must be considered in determining the factors that fund a particular case.
When a case is filed for a cash claim, the underwriter must evaluate all relevant facts. Because litigation loans are not repaid unless the case is ultimately successful, litigation fund underwriters face daunting challenges because they must make decisions based on a limited amount of information. In fact, thousands of cases per week are based on a few pieces of paper [for example, police reports, insurance information and medical records] and calls to the lawyer's office.
Very little information owned by underwriters must be used to the fullest extent possible. One of the information is the background of the applicant.
Before the settlement, the loan company usually uses the background check only after the case has been approved for funding. Often, litigation funding agencies want to see if there are other potential lien holders that are prioritized in the case. For example, a federal tax lien or child support obligation.
However, in some cases, background checks can be used as part of the approval process. For example, if the case is approved, but the applicant's background check reveals a history of fraud, the underwriter will seriously consider this fact when deciding to provide cash advances. In the worst case, the applicant may commit fraud. At best, his past sins became the credibility of his true witness as a case.
In most cases, background checks only show minor criminal offences and/or civil judgments. In the vast majority of cases, background checks will not qualify the case for funding. However, as noted above, the existence of federal tax liens or child support obligations may have an impact in the financing of litigation.
When these conditions arise, all hopes are not lost, as there may be steps to correct the situation. For example, a tax lien or other priority judgment listed only in the background report does not necessarily mean that there is still a valid lien. Typically, such obligations are current or otherwise satisfied, but are not updated in the background check. In other cases, generic names may generate many liens in a background search, but only after more investigation can you verify the lien or treat it as an error.
As mentioned earlier, litigation financing companies use many tools to more accurately assess the risk of prepaid cash compared to the future earnings of pending litigation. Although the applicant's credit score is usually not important, the background check does play a role in the underwriting process.
Thank you for your interest in the pre-settlement loan business.