On August 22, 2015, the Consumer Financial Protection Bureau (“CFPB”) and the New York Department of Financial Services (“New York DFS”) filed suit in U.S. District Court for the Central District of California against two companies, Pension Funding, LLC and Pension Income, LLC and three of the companies’ individual managers for deceiving consumers about the cost and risks of their pension advanced loans. The action demonstrates the aggressive stance being taken by both regulatory bodies.

The complaint filed by CFPB and New York DFS alleges that the companies and individuals violated the Dodd-Frank Wall Street Reform and Consumer Protection Act by:

  • Representing the product as a sale and not a loan
  • Failing to disclose or misrepresenting the interest rate and fees for the loan

The Companies allegedly represented to consumers that their product was not a loan but rather a “sale” of their future pension income. In some instances, the defendants advised consumers that the product was preferable to a home equity line of credit or credit card because of lower interest rates and fees. According to the regulators, however, the effective interest rate typically was greater than 28%, higher than many comparable products available to consumers and certainly higher than most credit card and home equity line rates.

The complaint also includes various state law claims asserted only by NY DFS.  For example, NY DFS alleges that the defendants violated New York usury laws, engaged in false and misleading loan advertising in violation of the New York Banking Law, and intentionally misrepresented a material fact (i.e. that they purchased pension income and there was no interest rate) in violation of the New York Financial Services Law.

The complaint includes allegations that the defendants solicited investors to invest in the transactions and paid investors from pension payments deposited into checking accounts of consumers who entered into transactions with the defendants.  In the complaint, NY DFS alleges that by transmitting money from consumers’ accounts to investors, the defendants were engaged in the business of money transmitting.  New York Banking Law requires a person engaged in money transmitting to be licensed as a money transmitter unless such person is acting as the agent of a licensee or a payee.  NY DFS claimed that the defendants were in violation of such law because they were not licensed as a money transmitter or appointed agents of a licensee or the investors.

While the complaint charges that the transactions in question were loans rather than asset purchases, it does not specify that the pensioners had any liability to the pension advance companies in the event the pension payments were smaller than anticipated.  Indeed, the complaint states that the defendant companies purchased insurance against the risk of premature death (and cessation of pensions) of the pensioners.

A copy of the complaint can be found here: http://files.consumerfinance.gov/f/201508_cfpb_complaint-pension-funding-llc-pension-income.pdf.