A New York Law Taking Effect in 2026 Is Forcing Litigation Funders to Rebuild Their Contracts Around a 10-Day Clock
Pre-settlement litigation funding runs on a simple pitch: a plaintiff waiting years for a settlement gets cash now, the funder gets repaid only if the case wins or settles, and because repayment is non-recourse, most states have never treated it as a loan subject to usury caps. New York just stopped treating that distinction as a reason to leave the industry unregulated. Governor Hochul signed the Consumer Litigation Funding Act in December 2025, and when it takes effect on June 17, 2026, funders operating in the state will be working under rules that look a lot more like consumer lending law than the lightly regulated advance contracts most of the industry has run on for two decades.
A patchwork funders have learned to build around
Litigation funding has mostly grown up state by state, with huge gaps. Nevada, Ohio, Oklahoma, Maine, and a handful of others already require licensing or impose fee and disclosure rules; most states still have none. Funders operating nationally have handled this by maintaining separate contract templates per state and hoping volume stays concentrated in the unregulated ones. New York - one of the largest litigation funding markets by dollar volume - just removed that option for any funder who wants to keep operating there.
What the new law actually requires
The Act caps a funder’s total recovery at 25% of the plaintiff’s gross settlement or judgment, requires contracts in plain language, and gives the consumer a 10-day right to rescind after signing - not a formality, since a plaintiff who initially agreed under financial pressure now has a real window to back out before the advance is funded. It also bars funders from influencing a plaintiff’s settlement decisions and from referring clients to specific attorneys or medical providers, a practice regulators clearly saw as a conflict of interest baked into how some funders had built their referral pipelines. Registration with the state is now required to operate at all. Kansas passed its own litigation funding framework in early 2026, with a July 1 effective date, suggesting New York’s law is the template other legislatures reach for next, not an outlier.
Why this is a software problem, not just a legal-template problem
Generic loan servicing software assumes recourse debt with a credit-based risk model - set term, scheduled payments, default remedies. Litigation funding underwriting runs on a completely different variable: how long the case takes and what it’s worth when it resolves, which means duration risk, not credit risk, drives the model. A funder now also needs a system that enforces the 10-day rescission window per contract before funds release, caps projected recovery against the 25% ceiling before a deal is even quoted, and keeps referral activity separate from case intake so a compliance review doesn’t turn up the exact steering behavior the law just banned. That’s a different build than the plaintiff-side funding tools personal injury law firms already use for case intake, and a different regulatory problem than the one facing structured settlement transfer companies proving a sale is in a seller’s best interest to a judge - funders are underwriting a pending case, not a court-approved transfer of one that’s already resolved.
Talk to us if your outbound to litigation funding companies still pitches generic underwriting software instead of the state-by-state fee caps and rescission windows now deciding whether a deal can even close.