State Bar Act: consumer legal funding.

Kalra’s proposal would create a California-wide framework—the California Consumer Legal Funding Act—to regulate consumer legal funding and the conduct of consumer funding companies, including how they interact with attorneys and out-of-state legal services. The bill collapses these engagements into a formal regime that requires written contracts, mandated disclosures, and specific limits on charges, while also subjecting funding practices and related fee arrangements to state Bar oversight.

Key provisions define core terms and set contract standards for consumer legal funding. A consumer is a California resident with a pending legal claim; a consumer legal funding transaction is a nonrecourse deal in which a funding company purchases a contingent right to proceeds from a claim. All such contracts must be in writing and, if negotiated in a non-English language, must be provided in both English and that language. The contract must clearly itemize the funded amount, any one-time charges, and the maximum total amount the consumer could owe, and it must include a repayment schedule. A five-business-day right of cancellation applies after the funding date, and the consumer or attorney must initial each page and attest that disclosures were reviewed. The contract also requires disclosure that the funding company does not control whether a claim is settled, though the company may seek status updates, and it requires that funds be disbursed through the attorney’s client trust account or a similar settlement fund.

The bill establishes prohibitions, penalties, and definitional guardrails around the industry. A consumer legal funding company is barred from paying or receiving referral fees or otherwise compensating attorneys or firms for directing clients to the funding company, with certain narrowly drawn exceptions. It also restricts the use of a funding arrangement that involves the funding company influencing the underlying litigation or settlement, and it requires specific attestations from attorneys about disclosures, contingency compensation, and the handling of proceeds. The act creates a separate prohibition on sharing legal fees with out-of-state alternative business structures unless multiple conditions are met, and it imposes discipline by the State Bar for violations, including statutory damages (with a minimum and multipliers) and other remedies. The penalties and provisions apply to contracts entered into after January 1, 2026, and the new framework is set to expire and be repealed on January 1, 2030, unless extended.

The broader regulatory context includes ongoing State Bar oversight of attorney conduct and prior constraints on referral services and fee arrangements. The bill also defines several terms specific to consumer legal funding—the funded amount, the charges, the resolution date, and the assignability of the contingent right—while clarifying that certain arrangements approved by a court or in multi-district litigation may be exempt from the fee-sharing prohibition. Additionally, the act specifies that a consumer’s right to cancellation and the disclosure requirements survive the termination of an attorney, and it preserves existing case-law considerations as applicable. The combined measures aim to increase transparency, establish clear constraints on funding-related fees and referrals, and provide a structured enforcement mechanism within California’s regulatory framework for attorneys and funding entities.