Pension Loans Finally Catch Regulators' Attention

Watchdogs have finally noticed that pension loan operators may need a closer look.

As Dan Fisher and I detailed in a Forbes piecelast year, there are an untold number of companies (mostly operating on the Internet) that offer to “buy” pensions.  But no one seems to be regulating them. Are they really operating like non-bank banks and providing loans against an income stream — as several courts have decided — or are they using pension income as a derivative that’s packaged to third-party investors? Probably both. In either case, neither banking nor securities regulators seem to have a handle on these companies, which typically offer lump sums to down-on-their-luck military veterans and other retirees who are willing to forgo payments in exchange for a discounted lump sum. Also known as “structured settlements,” these companies additionally buy annuities and legal settlements.

Today, FINRA, the securities industry self-regulator, and the SEC, jointly announced awarning on these companies in an investor alert:

• Investors may encounter commissions of seven percent or higher.
• Pension and structured settlement income-stream products may or may not be
  securities and likely are not registered with the SEC.
• These products could be difficult to sell if you need money and want to sell the product.
• Your “rights” to the income stream you purchased could face legal challenges.

When you encounter regulator-speak like “may or may not be securities,” you know you’re in for trouble.

If they’re selling securities, then these companies must register with state and federal securities agencies like FINRA and the SEC. If they are merely packaging loans, then banking regulators should be monitoring them. I’m not convinced either camp knows what’s going on.

It was telling that when an investigator from a federal banking agency called me two days ago about these companies, he didn’t know how many companies were in the business or how big the industry was. Neither did I, since no service is tracking them and they didn’t seem to have a trade organization representing them. In any case, I would ask many key questions before I considered doing business with them. Here’s some more from the SEC and FINRA:

• Is the transaction legal? Federal law may restrict or prohibit retirees from “assigning” their pension to someone else. In the case of military personnel, it’s clearly against the law to assign a pension to someone else, so these transactions are really loans.
• Is the transaction worth the cost? Find the discount rate that the
  factoring company has applied to your income stream and compare this
  rate to alternatives such as a bank loan. What are the companies making on this loan? They are never bargains and they count on you not comparing their rates to the best rate you can get from a bank. Remember that loan rates are at an all-time low. Shop around.
• What is the reputation of the company offering the lump sum? Check the factoring company’s record with the Better Business Bureau, and research the firm on the Internet and with a financial professional. Many of these companies, we discovered in our research, targeted financially needy retirees. When they filed for bankruptcy, the pension companies went after them in court.
• Will the factoring company require life insurance? The company may require that you to purchase a life insurance policy, which will add to your transaction expenses and reduce your payout. If life insurance is involved, then retirees are likely to pay a high premium plus a commission. In most cases, that will make the deal financially unsound for the “seller.”
• What are the tax consequences? The lump-sum payment you collect may be taxable. That diminishes your total proceeds even more.

My litmus test for these companies is simple: Ask for a contract to review upfront before you sign anything. Then tell the company you want to consult with a tax adviser/CPA, financial planner or lawyer. See how they react. If they refuse to show you a contract or be honest about the terms, then move on.

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