Anybody beyond a certain age remembers J. Wellington Wimpy from the Popeye cartoons. Smart but lazy, Wimpy was incredibly cheap but addicted to hamburgers. Instead of spending his own money he was constantly saying “I’ll gladly pay you Tuesday for a hamburger today.”
If J. Wellington Wimpy was alive today and got off his lazy arse (and was real), he could make a killing in investment banking, derivatives and some of the murkier areas of modern finance.
The only difference is he’d be pushing cash advances that have dire consequences for those unlucky enough to fall to his burger-motivated powers of persuasion.
One product the 21st Century Wimpy would probably be selling are pension advance loans. The concept is simple. No-name companies spring up across the U.S. offering senior citizens cash now for a future share of a guaranteed income stream in the form of their pension cheques. Seniors obtain a sum of cash in exchange for providing a specific amount off the next number of pension cheques until the sum is paid off.
“I’ll gladly take eight years of payments for cold, hard cash today!” might be Wimpy’s pitch.
On the surface the companies make it look like a pension advance is no different than any other loan – you get something up front then you pay it off. Think car, house or dream vacation.
Many of the marketing campaigns play up the “you deserve it” angle, telling people they have worked hard their entire lives and deserve a break. It can seem like the ideal solution for someone wanting to help out their kids, pay for a grandchild’s education or to cover a sudden expense such as a home repair or medical bill.
What they do not deserve are the headaches that come with many of these loans. A recent analysis by the New York Times showed that after different fees were calculated in, people could end up paying 27 to 106% effective interest.
Some loan types even require the recipient to take out a life insurance policy which names the lender as sole heir. These are expenses above and beyond the effective interest rates mentioned above.
The combination of Baby Boomers starting to qualify for Social Security and the recent recession have made seniors a prime target for financial service companies.
When coupled with the fact that seniors average debt levels are rising faster than any other age group and you have a perfect storm of financial catastrophe awaiting financially unaware people who fall for the pitch.
“These companies often engage in overaggressive sales pitches,” says Sally Hurme, a fraud expert at the AARP. “Are some people capable of doing the due diligence required with complex financial investments?”
Many of the companies profiled publicly in the past have either altered their operations or closed altogether, but another generation of bottom-feeders have taken the baton and are running the next stage armed with the same flimsy rationale and reprehensible strategies used by the pioneers.
They are not loans, but cash advances. Tell them they deserve it. Target recipients of government pensions such as former civil servants or ex-military. Encourage the purchasing of life insurance policies.
Pension advance loans are not hard to find. Google “pension advance loans” and the fourth entry down is a link to www-sell-your-future-payments.com. All the carrots mentioned already are used, with the addition of mentioning this will not show up as a debt on person’s credit report.
Scroll down to FAQ’s and you’ll find a couple of gems. When explaining why the loan cannot be paid off earlier, they restate that the program is not a loan and because the funders have committed a certain amount of time “early repayment is not an option.”
Makes you wonder if Paulie Walnuts will take you on a little ride if you miss a payment.
The pension advance companies also tap into the sense of the immediate that pervades our culture. When answering the question “Why isn’t the amount of money paid to me equal to eight years worth of payments for an eight year contract?” they answer that “current dollars are more valuable than future dollars” and proceed to compare it to the lottery.
It’s actually the opposite.
“The key consideration is how much is this transaction going to actually cost?” asks Hurme. “Indications are that the discount from future value to the current value is quite deep.”
Pension advances might address an immediate issue, but what about the future?
“The primary purpose of a pension is the provision of long term financing through a person’s last days,” Hurme offered. “Sure you take care of today’s problem, but what about tomorrow’s?”
Another group that needs to be wary of pension advances are the investors that buy them.
FINRA has expressed concern that the marketing information produced by the brokers overstates the value to investors, as the benefits depend on the lifespan of the pensioner. The cost of life insurance that many borrowers have to buy comes off the investor’s bottom line, while the broker makes an additional commission on the insurance policy.
Then there’s the teeny issue that the investor may not even be buying a legal product. Many pensions of former government employees, including ex-military, cannot be transferred to a third party such as a pension advance company. The pensioner may not be legally able to engage in this transaction and the investor may be at risk of losing the money invested in what are essentially illegal products.
“Recouping your investment in this case may involve additional legal expenses,” Hurme advises. Other concerns she has include broker reputation and track record, licensing requirements, what body (if any) is responsible for regulation in a specific state, and is there anywhere to check for complaints against specific brokers. Some of these policies may carry inordinate risk if they are not pooled to reduce ROI risk.
Usually when there is profit to be made in the financial world banks are not far behind, so it is a good bet they are watching the development of this industry to determine its profit potential. They’ve done it before.
As the private check-cashing industry began to boom in the late 1990’s, America’s three largest check-cashing companies borrowed more than $700 million from Wells Fargo to finance the growing demand for these services.
There are other ways banks profit from relationships with alternative financial services. Banks can lend their charter to an AFS company located in a state with tougher usury laws. By doing so, the AFS can also import the bank’s interest rates, which are subject to the laws in the state of origin.
Most would agree that pension advance loans are, at minimum, greasy, but are they predatory? According to the Harvard report entitled Understanding Predatory Lending, which was published in 1999, subprime home mortgage lending practices became predatory when:
– a population was inappropriately targeted;
– the borrower’s inexperience and lack of knowledge was taken advantage of;
– a borrower was manipulated into a loan they cannot afford to repay;
– excessive fees and interest were charged; and,
– fraudulent, high-pressure or misleading marketing was used.
There is some hope that the situation with pension advance loans will not get out of hand.
In early May New York Governor Andrew Cuomo directed the Department of Financial Services to subpoena ten pension advance companies.
Cuomo asserted these companies “preyed on” retirees by disguising what actually are high-cost loans.
The subpoenaed companies are: Cash Flow Investment Partners of Irvine, California; DFR Pension Funding (indeterminate location), First American Finance Corp of Portland, Indiana; Investing Forward of Niceville, Florida, LumpSum Pension Advance of Irvine, California, Pensions Annuities & Settlements LLC of Wilmington, Delaware; Pension Funding LLC of Huntington Beach, California; Pension Income LLC of Lafayette, California; Veterans Benefit Leverage of Grandville, Michigan, and Voyager Financial Group LLC of Little Rock, Arkansas.
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