On August 20, 2015, the Consumer Financial Protection Bureau (CFPB) and the New York Department of Financial Services (NYDFS) filed a lawsuit against two companies (Pension Funding, LLC and Pension Income, LLC) and three of the companies' individual managers for deceiving consumers about the costs and risks of their pension advance loans. The companies marketed the pension advance loans to military veterans, retired civil servants, and consumers with corporate pensions.
The companies solicited investors to provide the lump sum amount paid to the consumers. Investors and consumers entered into purchase-agreement contracts that contained liquidated damages clauses that allowed the investor, through the companies, to pursue legal action against consumers that missed payments. The contracts obligated consumers to pay back the lump sum payment, interest to the investors, and fees, including:
- 9% commission for the agent who recruited the investor;
- 3% commission for the broker who recruited the consumer;
- 5-9% fee to Pension Funding;
- 8% fee for a "re-direct" reserve fund to protect against consumers who failed to make payments by directing their pension payment away from the two companies; and
- 2.84% fee for a "death reserve fund," also called the "life insurance impound," for Pension Funding and Pension Income to self-insure the life of the consumer and from which payments could be made to investors should a consumer die and no other recourse be available.
The CFPB and NYDFS allege that the companies:
- Deceptively marketed the pension advance loans as a sale instead of a loan: Advertising on the companies' websites called the loan product a "pension lump sum" or pension buyout.
- Failed to disclose interest rates and fees: The companies stated that the product had no interest rate, but rather had a "cost of money rate" or "discount rate," since the product was not a loan.
Despite the advertising claims that the product was a "sale" rather than a "loan," the companies engaged in extensive underwriting and in collection activity when consumers missed payments or redirected pension funds. The regulators allege that these actions deceived consumers, interfered with consumers' ability to understand the "risks, costs, and conditions" of the loan product, and took advantage of consumers' lack of understanding of the product. Additionally, the NYDFS alleged that the defendants charged interest rates that violated New York usury laws, illegally transmitted money without a license, and violated New York state laws prohibiting deception.