State regulator tells U.S. Senate about pension-advance scheme

WASHINGTON -- A lending scheme gives retirees and former military members lump sum payments in exchange for future pension payments and then charges outrageous fees on the money they've advanced, Arkansas Securities Department staff attorney Kaycee Wolf told a U.S. Senate committee Wednesday.

The Senate's Special Committee on Aging is investigating pension advances, when a company gives pensioners a lump sum of cash in exchange for future pension payments. The company then sells those monthly payments to investors, pitching the contract as a reliable source of steady income. The company that acts as a middleman in the arrangement charges fees, commission or interest to both the pensioner and the investor.

Missouri is the only state that has specifically banned pension advances from being sold to public pensioners.

An investigation by the Arkansas Securities Department in 2014 helped shut down Voyager Financial Group, a Little Rock-based company that facilitated approximately 317 pension sales worth more than $34 million across 31 states, including Arkansas, Wolf said.

"A lot of investors we saw were looking for a safe, low-risk investment and that's how the product was packaged to them," she said. Instead, the contracts they signed didn't specify interest rates, explain the fees and commissions that the company would take off the top, or state that the government doesn't recognize the transactions or back the loans, she said.

Arkansas law considers the transactions investment contracts, and because they were not registered with the state, the Department issued cease-and-desist orders to stop Voyager from operating.

Wolf said that only kept the company from operating in Arkansas. The Department suspects that Voyager's owner has started a similar company under a different name in Texas, she said.

"That seems to be quite common," she said.

Without federal regulation, companies can just relocate when a state cracks down, Wolf said.

U.S. Sen. Tom Cotton, R-Ark., told the committee that the Securities Department's work protected seniors from being taken advantage of.

"Her team spent thousands of hours successfully fighting outright fraud and blatant misrepresentation of contracts," he said.

Wolf urged anyone with questions about pension-advance companies to call regulators.

"As a securities regulator, a lot of times we don't hear about these scams until somebody is brave enough to pick up the phone and call us," she said.

Stuart Rossman, litigation director for the National Consumer Law Center, said there should be national rules governing the companies. The Boston-based nonprofit has been involved in litigation against pension-advance companies.

"States can only do so much to protect their citizens from people coming from outside of the jurisdiction," Rossman said.

Rossman said victims tend to be retired military personnel, public employees like firefighters and teachers and others who have a guaranteed pension and need quick money. He said the pension-advance companies swarm like bees to honey.

"They are just naturally attracted to the fact that the money is there, particularly when we're dealing when vulnerable populations who are relying on their pension as their safety net," he said.

Individuals wanting to sell their income streams appoint private companies as a buying agent, which submit a contingent offer to a third-party buyer. The company then sets up an escrow account where the income is disbursed to the buyer.

He said the companies avoid calling the transaction a loan to avoid state and federal limits on interest rates and to prevent having the debt discharged in bankruptcy.

A Lexington, Ky., couple, Dr. Louis Kroot and Kathie Kroot, testified about their experience selling part of Louis Kroot's Navy pension to pay off more than $100,000 in unexpected tax and military bills.

"Ours is a shared cautionary tale," Louis Kroot said. "We didn't realize how expensive it was going to be."

He said the contract didn't explain that the couple would pay over 30 percent interest on the advance they took. The couple had to take out a life insurance policy, with the advance company as the sole beneficiary, as collateral. In order to pay off the accrued interest, the couple said they had to delay their retirement. The high interest rate meant they ended up paying back much more than they had borrowed.

"We should have been more aware of what we were buying," he said. "We should have known better."

Committee Chairman Sen. Susan Collins, R-Maine, said it isn't clear how many Americans are affected.

"I suspect that the scam is more widespread than we realize because I think that people don't know that they've been ripped off," Collins said. "It's so convoluted and usually people are desperate for the cash."

U.S. Sen. Claire McCaskill, D-Mo., said the companies should at least be regulated like payday lenders.

Government Accountability Office Managing Director Steve Lord said his office in 2014 identified nearly 40 companies in America using "questionable business practices" in selling pension advances. Many of the companies shared employees or appeared to be the same company operating under different names.

Lord told the committee that he believes the federal Consumer Financial Protection Bureau has oversight authority to regulate the companies, but so far has only gone after two.

"I'm not sure they need more authority," he said. "To me, it's just a matter of exercising it."

Metro on 10/01/2015

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