For two decades, factoring companies buying structured settlement periodic payments in exchange for heavily discounted lump sums have done their best to avoid the anti-assignment language in underlying settlement documents. Now, some of those same companies as well as others have turned their attention to pension proceeds, offering pensioners discounted advances in return for promises to effectively redirect their pension streams to investors. These transactions, however, can be raw deals for the pensioners, and they may threaten the tax-qualified status enjoyed by the pension plans themselves.
Under ERISA1 and the Internal Revenue Code,2 pension plans must provide that the benefits provided thereunder “may not be assigned or alienated.” Pension advances appear to be an attempt to avoid these provisions as well as state lending regulations and usury prohibitions.
Federal and State Regulators Take Aim
On Thursday, August 20, 2015, the Consumer Financial Protection Bureau (CFPB) and the New York Department of Financial Services (collectively, “Regulators”) filed a seven-count complaint against Pension Funding, LLC, Pension Income, LLC (collectively, “PF-PI”), and their managers and managing members Steven Covey, Edwin Lichtig, and Rex Hofelter (together with PF-PI, “Defendants”).3 The Regulators allege that PF-PI, operating as a common enterprise, offered consumers “pension advances” in exchange for agreed repayments that match their future expected pension payments. According to the complaint, the defendants targeted military, civil service, and corporate pensioners and engaged in unfair, deceptive, and abusive practices in violation of the Consumer Financial Protection Act, as well as usury violations, false advertising, intentional misrepresentation, and unlicensed money transmitting in violation of the New York Banking Law and the New York Financial Services Law.
The Regulators further allege that (i) the defendants falsely represented that the pension advances were not “loans,” (ii) there was no applicable interest rate, or (iii) the effective interest rate was lower than alternative sources of cash. In fact, according to the complaint, the defendants’ “product was a loan, and the effective interest rate was greater than those typically available for other products to which [the] [d]efendants drew comparisons” — on average, the transactions orchestrated by the defendants had an effective interest rate of 28.56%.
According to the allegations of the complaint, in exchange for a lump-sum payment from PF-PI, pensioners were required to submit extensive underwriting information, including personal financial information and HIPAA authorizations to obtain medical records and life insurance information. The Regulators allege that, if pensioners failed to transfer any pension payment as agreed upon, the defendants quickly threatened legal action, including civil and criminal penalties. 4
The complaint is the first of its kind to be filed, but it is unlikely to be the last. The CFPB issued a warning in March 2015 to look out for pension advance schemes. Also, the New York Department of Financial Services has been investigating companies offering pension advances since at least May 2013, when it subpoenaed 10 companies, including PF-PI.