To retirees, the offers can sound like the answer to every money worry: convert tomorrow?s pension checks into today?s hard cash.
But these offers, known as pension advances, are having devastating financial consequences for a growing number of older Americans, threatening their retirement savings and plunging them further into debt. The advances, federal and state authorities say, are not advances at all, but carefully disguised loans that require borrowers to sign over all or part of their monthly pension checks. They carry interest rates that are often many times higher than those on credit cards.
In lean economic times, people with public pensions ? military veterans, teachers, firefighters, police officers and others ? are being courted particularly aggressively by pension-advance companies, which operate largely outside of state and federal banking regulations, but are now drawing scrutiny from Congress and the Consumer Financial Protection Bureau.
The pitches come mostly via the Web or ads in local circulars.
?Convert your pension into CASH,? LumpSum Pension Advance, of Irvine, Calif., says on its Web site. ?Banks are hiding,? says Pension Funding L.L.C., of Huntington Beach, Calif., on its Web site, signaling the paucity of credit. ?But you do have your pension benefits.?
Another ad on that Web site is directed at military veterans: ?You?ve put your life on the line for Americans to protect our way of life. You deserve to do something important for yourself.?
A review by The New York Times of more than two dozen contracts for pension-based loans found that after factoring in various fees, the effective interest rates ranged from 27 percent to 106 percent ? information not disclosed in the ads or in the contracts themselves. Furthermore, to qualify for one of the loans, borrowers are sometimes required to take out a life insurance policy that names the lender as the sole beneficiary.
LumpSum Pension Advance and Pension Funding did not return calls and e-mails for comment.
While it is difficult to say precisely how many financially struggling people have taken out pension loans, legal aid offices in Arizona, California, Florida and New York say they have recently encountered a surge in complaints from retirees who have run into trouble with the loans.
Ronald E. Govan, a Marine Corps veteran in Snellville, Ga., paid an interest rate of more than 36 percent on a pension-based loan. He said he was enraged that veterans were being targeted by the firm, Pensions, Annuities & Settlements, which did not return calls for comment.
?I served for this country,? said Mr. Govan, a Vietnam veteran, ?and this is what I get in return.?
The allure of borrowing against pensions underscores an abrupt reversal in the financial fortunes of many retirees in recent years, as well as the efforts by a number of financial firms, including payday lenders and debt collectors, to market directly to them.
The pension-advance firms geared up before the financial crisis to woo a vast and wealthy generation of Americans heading for retirement. Before the housing bust and recession forced many people to defer retirement and to run up debt, lenders marketed the pension-based loan largely to military members as a risk-free option for older Americans looking to take a dream vacation or even buy a yacht. ?Splurge,? one advertisement in 2004 suggested.
Now, pension-advance firms are repositioning themselves to appeal to people in and out of the military who need cash to cover basic living expenses, according to interviews with borrowers, lawyers, regulators and advocates for the elderly.
?The cost of these pension transactions can be astronomically high,? said Stuart Rossman, a lawyer with the National Consumer Law Center, an advocacy group that works on issues of economic justice for low-income people.
?But there is profit to be made on older Americans? financial pain.?
The oldest members of the baby boom generation became eligible for Social Security during the recent housing bust and recession, and many nearing retirement age watched their investments plummet in value. Some are now sliding deep into debt to make ends meet.
The pitches for pension loans emphasize how difficult it can be for retirees with scant savings and checkered credit histories to borrow money, especially because banks typically do not count pension income when considering loan applications.
?The result often leaves retired pensioners viewed like other unqualified borrowers,? one of the lenders, DFR Pension Funding, says on its Web site. That, the firm says, ?can make the ?golden years? not so golden.?
Faster rising debt
The combined debt of Americans from the ages of 65 to 74 is rising faster than that of any other age group, according to data from the Federal Reserve. For households led by people 65 and older, median debt levels have surged more than 50 percent, rising from $12,000 in 2000 to $26,000 in 2011, according to the latest data available from the Census Bureau.
While American adults of all ages ran up debt in good times, older Americans today are shouldering unusually heavy burdens. According to a 2012 study by Demos, a liberal-leaning public policy organization, households headed by people 50 and older have an average balance of more than $8,000 on their credit cards.
Meanwhile, households headed by people age 75 and older devoted 7.1 percent of their total income to debt payments in 2010, up from 4.5 percent in 2007, according to the Employee Benefit Research Institute.
Financial products like pension advances, which promise quick cash, appear especially enticing because their long-term costs are largely hidden from the borrowers.
Federal and state regulators are spotting fresh examples of abuse, and both the Consumer Financial Protection Bureau and the Senate?s Committee on Health, Education, Labor and Pensions are examining these loans, according to people with knowledge of the matter.
Though the firms are not directly regulated by states, officials from the California Department of Corporations, the state?s top financial services regulator, filed a desist-and-refrain order against a pension-advance firm in 2011 for failing to disclose critical information to investors.
That firm has since filed for bankruptcy, but a department spokesman said it remained watchful of pension-advance products.
?As the state regulator charged with protecting investors, we are aware of this type of offer and are very concerned with the companies that abuse it to defraud people,? said the spokesman, Mark Leyes.
Borrowing against pensions can help some retirees, elder-care lawyers say. But, like payday loans, which are commonly aimed at lower-income borrowers, pension loans can turn ruinous for people who are already financially vulnerable, because of the loans? high costs.
Some of the concern on abuse focuses on service members. Last year, more than 2.1 million military retirees received pensions, along with roughly 2.6 million federal employees, according to the Congressional Budget Office.
Lawyers for service members argue that pension lending flouts federal laws that restrict how military pensions can be used.
Mr. Govan, the retired Marine, considered himself a credit ?outcast? after his credit score was battered by a foreclosure in 2008 and a personal bankruptcy in 2010.
Unable to get a bank loan or credit card to supplement his pension income, Mr. Govan, now 59, applied for a payday loan online to pay for repairs to his truck.
Days later, he received a solicitation by e-mail from Pensions, Annuities & Settlements, based in Wilmington, Del.
Mr. Govan said the offer of quick, seemingly easy cash sounded too good to refuse. He said he agreed to sign over $353 a month of his $1,033 monthly disability pension for five years in exchange for $10,000 in cash up front. Those terms, including fees and finance charges, work out to an effective annual interest rate of more than 36 percent. After Mr. Govan belatedly did the math, he was shocked.
?It?s just wrong,? said Mr. Govan, who filed a federal lawsuit in February that raises questions about the costs of the loan.
Pitches to military
Pitches to military members must sidestep a federal law that prevents veterans from automatically turning over pension payments to third parties. Pension-advance firms encourage veterans to establish separate bank accounts controlled by the firms where pension payments are deposited first and then sent to the lenders. Lawyers for retirees have challenged the pension-advance firms in courts across the United States, claiming that they illegally seize military members? pensions and violate state limits on interest rates.
To circumvent state usury laws that cap loan rates, some pension advance firms insist their products are advances, not loans, according to the firms? Web sites and federal and state lawsuits. On its Web site, Pension Funding asks, ?Is this a loan against my pension?? The answer, it says, is no. ?It is an advance, not a loan,? the site says.
The advance firms have evolved from a range of different lenders; some made loans against class-action settlements, while others were subprime lenders that made installment and other short-term loans.
The bankrupt firm in California, Structured Investments, has been dogged by legal challenges virtually from the start. The firm was founded in 1996 by Ronald P. Steinberg and Steven P. Covey, an Army veteran who had been convicted of felony bank fraud in 1994, according to court records.
To attract investors, the firm promised an 8 percent return and ?an opportunity to own a cash stream of payments generated from U.S. military service persons,? according to the California Department of Corporations. Mr. Covey, according to company registration records, is also associated with Pension Funding L.L.C. Neither Mr. Covey nor Mr. Steinberg returned calls for comment. In 2011, a California judge ordered Structured Investments to pay $2.9 million to 61 veterans who had filed a class action.
But the veterans, among them Daryl Henry, retired Navy disbursing clerk, first class, in Laurel, Md., who received a $42,131 pension loan at a rate of 26.8 percent, have not received any relief.
Robert Bramson, a lawyer who represented Mr. Henry in the class-action lawsuit, said that pensioners too often failed to contemplate the long-term costs of the advances.
?It?s simply a terrible deal,? he said.
This article first appeared in the New York Times under the headline, "Loans Borrowed Against Pensions Squeeze Retirees."
Copyright ? 2013 The New York Times
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