‘Borrowing in the Shadow of Death’ Takes a Look at Another Type of ‘Fringe Lending’ – Probate Lending

‘Borrowing in the Shadow of Death’ Takes a Look at Another Type of ‘Fringe Lending’ – Probate Lending

Here at Secondary Insurance Market Blog, we have examined legal issues involving secondary markets for insurance products from the point of view of insurers and other non-lending parties whose interests may be adversely affected by such transactions.

The types of such transactions include life settlements, litigation funding, pension factoring, and secondary markets for annuities, lottery payments, and for structured settlement payment rights.

Occasionally, we delve into analogous transactions – such as those for entertainment tickets, or the payday loan business – as a way of shining light on certain legal issues.

Today, there’s another category to add to the discussion: probate lending.

It’s not a new business, but for a number of reasons, probate lending seems to get very little attention.

A new law review article puts the focus directly on that business, and it’s worth a mention.

The article is entitled Borrowing In The Shadow Of Death: Another Look At Probate Lending, and is by law school professor David Horton, of the University of California, Davis, School of Law.  The article appears in the William & Mary Law Review, 59 Wm. & Mary L. Rev. 2447 (May 2018), and is available in full here.

Professor Horton describes an earlier article, Probate Lending, 126 Yale L.J. 102 (2016), which he co-authored with Andrea Cann Chandrasekher, acting professor of law at the University of California, Davis, School of Law.

The SSRN (Social Science Research Network) abstract description of the 2018 article sums it up this way:

“Fringe” lending has long been controversial.  Three decades ago, demand for subprime credit soared, and businesses started to offer high-interest rate cash advances, such as tax refund anticipation loans, payday loans, and pension loans.  These products have sparked intense debate and are subject to a maze of rules.  However, in Probate Lending, 126 YALE L.J. 102 (2016), a co-author and I examined a form of fringe lending that has gone largely unnoticed: firms that pay lump sums in return for an heir or beneficiary’s interest in a pending decedent’s estate.  Capitalizing on a California law that requires companies to file these contracts in probate court, we analyzed seventy-seven loans that stemmed from deaths in 2007.  In this companion Article, I report the results of a study of an additional twenty-two months of probate records.  My research provides hard evidence about the multi-million dollar inheritance-buying industry, including the prevalence of loans, characteristics of borrowers, how often lenders are repaid, and annual interest rates.  I then use this data to compare probate lending to other species of fringe lending and to outline how courts and lawmakers should regulate the practice.

In his latest article, Professor Horton urges the California legislature “to revise its probate lending statute by making judicial review of probate loans mandatory, rather than permissive.”  He also discusses the question of whether probate lending falls within the scope of usury laws and other lending laws.  Because lending laws cover loans of that are certain to be repaid, and because are set up as non-recourse assignments of inheritance rights so that lenders recover nothing if the estate becomes insolvent, probate lending appears to be outside of the limits of lending laws.  However, says Professor Horton, the data in his latest law review article shows that the hazard of non-recovery is “illusory” in that probate lending companies “recovered the full amount of the principal and interest on 97.5 percent of their probate loans.”  Professor Horton suggests that courts in states with no applicable usury or lending laws “review probate loans under the contract defense of unconscionability.”  Professor Horton also reviews “three well-known fringe products” – tax refund anticipation loans, payday loans, and pension loans – and compares them to probate loans.

The SSRN abstract is available here and, again, the law review article is available in full here.

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