Watchdog: Pension loans hit retirees hard
Naval veteran gets cash advance of $43,000; his repayment will be $102,000. He sued.BY TERI SFORZA / STAFF WRITER
Published: July 12, 2014 Updated: July 14, 2014 11:39 p.m.
The second of two parts
After serving 20 years in the U.S. Navy, Disbursing Clerk First Class Darryl Henry retired. His reward: A most modest pension of $1,083 a month.
Thirteen thousand dollars a year doesnt go very far not even in Maryland, where Henry lived so it didnt take long for money to get tight. Thats when an alluring ad by a company called Retired Military Financial Services aka Structured Investments Co. of Los Angeles and Huntington Beach caught his eye in the Navy Times.
As a retired or disabled military vet, Henry could sell his future pension benefits in exchange for cold, hard cash, he was told.
Henry signed an Annuity Utilization Agreement with the company, and got a lump sum of $42,131 in 2003. In exchange, he would pay the company almost his entire pension check $1,070 a month for a minimum of 8 years, and a maximum of 10 years, depending on how promptly he turned over the money.
As this was not a loan; there was no discussion of interest rates. But some basic calculations would reveal that, over the long term of this Annuity Utilization Agreement, Henry would repay either $102,720 (8 years) or $128,400 (10 years) in exchange for that $42,131 in cash, says the 2005 class action suit filed in Orange County Superior Court on behalf of Henry and 60 other military vets who got pension advances from Structured Investments.
That would translate to an interest rate of 26.8 percent to 30.5 percent, the suit said far in excess of the ceiling California slaps on consumer loans.
California is the epicenter of the controversial pension-advance universe, which dangles cash before public pensioners who may be in tight financial spots and have less-than-stellar credit. An investigation by the U.S. Government Accountability Office found that 18 of 38 companies probed hail from the Golden State. Several of the firms under investigation by New York and Washington state call Orange County home.
These firms operate largely outside regular banking rules, and no one is really watching or regulating them, the GAO found. Effective interest rates reached up to 90 percent. And despite red flags and warning bells and the fact that California has 1.7 million veterans, more than any other state not much official consumer action is under way here.
The courts can only do so much. In its spirited defense in the Henry case, Structured Investments argued that these cash advances were not loans at all, but the purchase of a future stream of revenue. On that point, the firm succeeded: Orange County Superior Court Judge David Velasquez agreed that the transactions were not loans (A loan of money is a contract by which one delivers a sum of money to another, and the latter agrees to return at a future time a sum equivalent to that which he borrowed), but rather assignments (which involve a transfer or rights or property).
Unfortunately for Structured, assignments or sales of military pensions are explicitly against the law, and thus prohibited and unenforceable, Velasquez concluded. The statutes at issue were passed to insure that retired and disabled military personnel actually receive the benefits provided to them and to prevent them from being lost through either the predation of others or their own poor judgment, he said.
The judge awarded Henry et al $3 million in 2011.
But that wasnt all the companys woes. A separate class-action suit against Structured had previously been settled for $1.8 million, reforming agreements for almost 500 people. The folks on the other end of these transactions investors who provided the lump sums up-front, effectively buying those future revenue streams were awarded $5 million in arbitration proceedings, according to Forbes.
Thus under siege, Structured Investments filed for bankruptcy in 2012. As did its principal, Steve Covey, who was convicted of bank fraud in 1994, according to court documents.
But years later, Henry and his fellow veterans have yet to collect a penny of the judgment, said their attorney, Rob Bramson.
Still, not far from Structureds former office in Huntington Beach, a new firm is doing very similar work. Pension Funding LLC bought one of Structureds old URLs. Covey shows up as its president on Manta, the online small-business site. But thats wrong, said Rex Hofelter, the companys managing member: Covey has an office at Pension Funding LLC, but he doesnt actually work for it, Hofelter said.
Hofelter, for his part, agrees that the industry needs more regulation. Some pension advance businesses are going crazy and giving everyone a bad name, he told us, and hed love to see them all playing by the same rules.
Consumer advocates implore regulators to crack down, and some have launched into action.
Last week, Missouri became the first state in the nation to prohibit pension advances targeting teachers, police officers, firefighters and other public employees. Its attorney general is empowered to help victims reclaim any money they may have lost in those transactions.
In April, Vermont passed a law formally recognizing pension advances as loans, and thus subjecting them to the same laws that govern traditional lending.
Washington state has charged two Orange County companies with making unlicensed loans charges the companies are fighting by arguing that advances are not loans. The ideal outcome, Washington officials said, is for companies to either stop making pension loans in the state, or to become licensed lenders and follow state law on interest rates and required disclosures.
New York and Massachusetts launched investigations of pension advance firms last year, and those probes are continuing.
The GAO called on the newly-formed federal Consumer Financial Protection Bureau to take up the issue, and officials there say theyre on it but consumer education must play a key role.
Weve asked the California Attorney Generals office what, if any, actions might be taken here, in the Golden State, where so much of the action is taking place. Well keep you posted.
Contact the writer: [email protected]: @ocwatchdog
Tags: Veterans News
