Former New York City police officer Elmer Santiago was living in the back of his Jeep when he learned that a hedge fund could help pay his medical bills from the Sept. 11 terrorist attacks, according to his attorney.

A few phone calls later, he agreed to borrow $355,000 from affiliates of the fund, called RD Legal Capital. Eighteen months later, the bill came due: $860,000, or an effective interest rate of 67%.

RD...