United States: Pension Advance Loans Come Under Federal And State Scrutiny

Last Updated: September 4 2015
Article by Cliff P. Riley

A booming sector within the consumer financial service industry has encountered a formidable challenge at the hands of both federal and state agencies. Pension advances—also referred to variously as pension loans, sales, or buyouts—have sprouted a cottage industry of independent lenders eager to assist individuals in leveraging their pensions for immediate access to cash. Typically, a lender will offer the consumer a lump sum payment in return for an assignment of all or some of the consumer's monthly pension checks over a given period of time, often ranging from 5 to 10 years. As the lending niche has grown, however, so has the impetus for government oversight.

In Consumer Financial Protection Bureau, et al., v. Pension Funding, LLC, et al., the Consumer Financial Protection Bureau (CFPB) and the New York Department of Financial Services (NYDFS) jointly filed suit in federal court against Pension Funding, LLC and Pension Income, LLC based on allegations that the defendants deceived consumers concerning the costs and risks associated with the loans. Of note, and deep alarm to those active in the field, three managers were named as individual defendants in the suit. The suit was filed August 20, 2015 in the Central District of California, and a copy of the complaint can be found here.

Two alleged practices landed the defendants in federal court. First, the complaint alleges that the defendants misrepresented the pension advances as a product for sale and not a loan, which left consumers unaware of risks, costs, fees, and conditions attendant to the transactions. Second, defendants allegedly failed to disclose or affirmatively misrepresented the interest rates and fees associated with the loans. Specifically, the complaint states that effective interest rates could surpass 28 percent on the loans, despite representations that the interest rates were more favorable than other forms of credit extension, such as home equity lines of credit or even credit cards. The complaint also contains allegations that the defendants violated New York state usury laws based on the effective rates. Additionally, the CFPB and NYDFS made emphasis in their complaint of the factual allegation that the defendants marketed their products to military veterans and other pensioners.

While the lawsuit is only in its preliminary stage, the fact that it was brought in the first instance, and after a thorough investigation by federal and state authorities dating back to 2011, reveals a shift in government focus towards scrutinizing the growing pension advance industry. This lawsuit is ripe to set precedent that will have wide-ranging impact on pension lenders. What remains clear at the moment is that pension advance loans must be unequivocally advertised as loans, rather than sales, and pension advance companies must act to ensure their interest rate regimes comply with both federal and applicable state standards.

For lenders currently involved in or considering involvement in the pension advance space, it will be critical to heed these warnings and take prudent steps now to avert the pitfalls of litigation. Consumers also will have to be solicitous of their rights and wary of pension loans clothed as sales or buybacks. On all sides, increased knowledge and attentiveness to the shifting legal landscape will afford the best institutional and personal security. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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