The Center for Public Integrity

As finance companies that make loans to plaintiffs grow in power and reach, lawyers should advise their clients on the risks involved with borrowing, the ethics committee of the New York City bar association says in a new opinion.

“This is a kind of stop, look, and investigate directive,” Seth Schwartz, chairman of the bar’s ethics committee, told iWatch News. “Don’t assume that the borrowing is some kind of routine thing – check it out.”

The opinion, which is likely to influence how other legal professional organizations answer ethical questions about betting on lawsuits, also requires lawyers to check with clients before disclosing confidential information to lenders. But it doesn’t stop attorneys from accepting referral fees from lenders, even though Schwartz said in an interview that it would be hard for a lawyer who did so to “maintain objectivity.”

The opinion comes several months after an investigation by iWatch News and the New York Times that found that lawsuit funders charge interest rates that often exceed 100 percent to people who need help making ends meet while they await the resolution of a personal injury lawsuit.

The high cost of borrowing means that many plaintiffs owe three or four times what they initially borrowed to the finance company. In some instances, plaintiffs have owed the lender their entire recovery.

The companies say they must charge high prices because betting on lawsuits is very risky. They say that the money they lend is not a loan, and thus not subject to laws in many states that forbid high-cost lending, because the money doesn’t have to be paid back if the client loses the case.

A daily round-up of commentary, analysis and news about the Dodd-Frank financial reform law.

Anti-competitive? - Wall Street has seized upon a new argument to fight new regulations required by Dodd-Frank:  Tougher rules will weaken banks and hurt the U.S. economy.

The reform law requires changes in some of the banking industry's biggest profit centers such as derivatives trading and debit card fees, reports the New York Times' Dealbook. JPMorgan Chase & Co., Morgan Stanley and other big banks are complaining that the new regulations mean they will lose customers to European competitors which have less-stringent regulations.

The European Commission is not expected to take up stricter derivatives rules until 2012 or later, while the Commodity Futures Trading Commission plans to finalize its derivatives rules by the end of this year.

Cost-benefit analyses requested – Senate Republicans are demanding that regulators carefully analyze the economic impact of dozens of Dodd-Frank rules to determine how much they will cost banks and Wall Street, reports Reuters.

Congress has many millionaires, but the chairmen of the powerful House and Senate committees that regulate banking and Wall Street aren’t among them, according to both lawmakers’ annual disclosure forms.

Members of Congress are required to file annual forms listing their major sources of income, assets, liabilities and gifts.  Most lawmakers, except for members of leadership, were paid $174,000 in 2010. Each is allowed to earn up to $26,100 in annual income for work performed outside Congress.

However, the chairman of the House Oversight and Government Reform Committee -- which has a subcommittee dedicated to monitoring the roll-out of the Dodd-Frank financial reform law and repayment of federal bailouts -- is a different story. He listed assets totaling at least $150 million.

Following are the 2010 disclosures made by the chairmen of the House and Senate committees that regulate financial services, and by the chairman of the House Oversight and Government Reform Committee, as reported by the Associated Press:

Rep. Spencer Bachus, R-Ala., chairman, House Financial Services Committee

Earned income: $174,000

Major assets: Accounts with Congressional Federal Credit Union, Fidelity Investments and Regions bank, each less than $1,000.

Major sources of unearned income: Earnings on credit union, Fidelity and Regions accounts, less than $200 each.

Major liabilities: Loan from BBVA Compass Bank, $15,001-$50,000

A daily round-up of analysis, commentary and news about the Dodd-Frank financial reform law.

Derivatives delay - The Commodity Futures Trading Commission agreed on Tuesday to delay for six months, until Dec. 31, the effective date for derivatives registration and other requirements.

Certain derivatives-related requirements were mandated by the Dodd-Frank law to automatically take effect on July 16, on the assumption that the CFTC would have completed writing rules to police the multi-trillion-dollar market. The CFTC and the Securities and Exchange Commission, which has a smaller regulatory role,- have fallen behind in rule-writing.

More than half of the 387 sets of all Dodd-Frank rules have yet to be proposed, according to the Wall Street Journal. Some Obama administration officials, including Treasury Secretary Tim Geithner, are worried that delays could sap the momentum to carry out financial reforms as the 2008 global crisis recedes farther into the past, the newspaper said.

Funding for SEC, CFTC - Funding for the Securities and Exchange Commission would be flat at $1.2 billion in fiscal 2012 under a bill approved on Wednesday by the Republican-controlled House Appropriations Committee. The lawmakers rejected a request from the Obama administration to boost SEC funding by $222 million to help pay for its new responsibilities under the Dodd-Frank law.

A daily round-up of commentary, analysis and news about the Dodd-Frank reform law.

TBTF banks – A senior Federal Deposit Insurance Corp. official says a systemically important bank or financial institution may be required to restructure its operations if it can’t create a plan to unwind its business in an orderly manner.

"Ultimately, a SIFI (systemically important financial institution) could be required to restructure its operations if it cannot demonstrate that it is resolvable in an orderly manner under the bankruptcy code," said Michael Krimminger, the FDIC chief counsel, in prepared testimony.

Krimminger also notes that the lack of an international insolvency framework makes it more difficult to resolve big, complex financial companies with global operations. Krimminger is among those scheduled to testify at a House Financial Services subcommittee hearing today, and his written testimony is posted here.

Hedge funds, insurers suddenly modest – Insurance giant Mass Mutual Financial Group, hedge fund legend Paulson & Co., and influential funds such as Fidelity Investments, BlackRock and PIMCO are among the financial services companies trying to convince federal regulators that they aren’t big enough to pose a threat to the U.S. financial system, the New York Times reports.

A daily round-up of commentary, analysis and news related to the Dodd-Frank law.

Bank of America investigated - The New York attorney general is targeting Bank of America Inc. in a new investigation that questions the validity of "potentially thousands" of mortgage securities and their foreclosures, the Huffington Post reports.

Sources told HuffPo that Attorney General Eric Schneiderman's probe is part of a bigger investigation examining if mortgage companies and Wall Street firms took the necessary steps under New York state law when creating mortgage-backed securities.

If legal steps required for securitization -- like taking mortgage documents from one party to another -- did not comply with New York state law, HuffPo said that the investors who bought the bundled loans could force the companies to buy them back. And state investigators also find that those securities aren't valid financial instruments and take action under state law.

Forums on swaps, capital  – Financial regulators meet this week to clear up confusion over swaps oversight and bank capita requirementsl, two of the most contested areas of reform.

The Federal Deposit Insurance Corp on Tuesday will finalize rules for bank capital requirements. On the same day, the Commodity Futures Trading Commission will discuss missed deadlines in finalizing its new rules to police the swaps market.

The Commodity Futures Trading Commission reaches out to derivatives traders this week to calm their fears about the agency’s failure to finalize dozens of new rules that are required by law to take effect on July 16.

Commissioners will meet Tuesday morning to discuss a broad exemption for over-the-counter derivatives trading, so that the market can continue to operate as usual until regulators complete the new rules. Companies and banks with derivatives contracts, also known as swaps, are worried that any deals done after the missed deadline could be challenged in court.

The Dodd-Frank law, approved nearly one year ago, set specific deadlines for regulators to write and finalize rules policing the multi-trillion-dollar derivatives market. Among them: new requirements to use clearinghouses to guarantee derivatives trades and to improve transparency in the secretive market.

A derivative is a sophisticated financial instrument whose value is derived from the value of another asset. Large companies often use derivatives to hedge against risks in interest rates, oil prices, foreign exchange, or even weather.

The Securities and Exchange Commission, which has a smaller role in regulating the derivatives market, announced on Friday that it would suspend some of the new derivatives rules.

“While such swaps will be subject to provisions addressing fraud and manipulation, the Commission intends to provide temporary relief from certain other provisions of the Exchange Act so that the industry will have time to seek, and the Commission can consider, what if any further guidance or action is required,” the SEC said in a statement.  The agency also estimated that it had either proposed or finalized rules for about two-thirds of more than 90 derivatives-related measures required by the law.