Shut out by conventional lenders, people with low incomes or bad credit have long been targeted by high-cost operators offering payday loans, car title loans and the like. In the past few years, a new and insidious player has come into this field offering pension “advances.”
Also known as pension loans — although they are not usually advertised as loans — these advances are marketed to individuals who have rights to a lifetime pension but who need immediate cash. The sellers of this product offer immediate cash, in return for which the pension holder must give up his or her rights to some or all of the pension, generally for a certain number of years. Such agreements usually result in extremely high interest payments, in some cases more than 100 percent per year.
This product is being marketed to all retirees, but prime targets include ex-military personnel and federal employees. It is illegal for the holder of a federal pension to assign or sell it, but this has not stopped the sellers of this product from marketing it. It’s why they term it an “advance” and not a loan.
One of the major problems for the general public is that no federal regulator has taken steps to prevent the marketing of this product. Hopefully, steps will be taken in the future. However, until this happens, it is important for the public to understand this product — and avoid it.
I contacted the Consumer Financial Protection Bureau (CFPB) to determine whether it had any immediate plans to prevent such loans. The bureau responded with a prior statement from Richard Cordray, its director: “We are concerned about military pension buyout schemes. Military retirees are offered lump-sum cash payments in return for surrendering their rights to their pension payouts. These schemes are usually very bad deals for the retirees. We want to collect information on all these kinds of financial practices.”
Although Cordray’s statement singled out military pensions, the danger applies to all pensions.
The National Consumer Law Center (NCLC), a nonprofit advocacy group, has played an active role going after the organizations offering this product. NCLC has sued these companies, arguing that the transactions associated with these products were illegal for two reasons: (1) their exorbitant interest rates and (2) the illegality of assigning a military pension.
NCLC has prevailed in court against pension lenders, but, unfortunately, winning a judgment does not necessarily mean that a plaintiff will be able to collect on it. The unscrupulous companies who lost in court have chosen bankruptcy as a way to avoid paying compensation.
If you own a pension, do not enter into any agreement with an organization offering this product. If you have a short-term cash flow problem, pursue other alternatives. If you must borrow, do so from a financial organization that is regulated by either state or federal authorities. State and federal regulators offer consumers protection and limits on the interest rates they can be charged on loans.
What if you have already entered into an agreement and have signed over your pension rights in exchange for immediate cash? According to NCLC, most of these agreements can be successfully challenged in court. You should definitely obtain legal advice. You may even be able to get low-cost (or even free) legal advice from attorneys in your area. Contact the local bar association to determine whether there are elder care attorneys or legal aid attorneys who can assist you either free or at nominal cost. You may be able to get assistance from your state attorney general. In addition, you should provide information to or file complaints with the CFPB.
Elliot Raphaelson may be contacted by email at elliotraph@gmail.com.