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ADVANCES ON PENSIONS: IS IT PREDATORY LENDING?

GOVERNMENT ACCOUNTING OFFICE INVESTIGATION

On September 30, 2015 the Government Accounting Office (GAO) issued a report following a 15 month investigation regarding advances to pensioners, secured by monies that the pensioner would receive in their pension. The same day the Senate Committee on Aging held hearings on this exact issue to determine if indeed this practice is predatory as well as how the federal government will respond. The GAO conducted an undercover operation and received substantive offers from six different pension advance companies. The GAO report also indicated that there was a lack of disclosure on some fees, interest rates and various options, in addition to undisclosed affliations between 21 of the 38 companies that were investigated. The majority of the offers had interest rates of a stiffling 27 to 46 percent. While there is no set federal definition for usury, New York law defines usury as any loan which requires a payment of 25 percent or more; more about this below. Not surpringly the some of the companies focused their efforts on financially vulnerable pensioners with poor or bad cre dit. One of the recommendations from the GAO report was that the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) educate consumers about these practices.

WHY THE GAO INVESTIGATED

The GAO conducted a related investigation in June, 2014 following then recent concerns regarding lenders taking advantage of retirees in the form of pension advance loans. That report made specific recommenendations to the various federal agencies that are implicated in these class of loans, most importantly the FTC and the CFPB. On August 20, 2015 the CFPB, in conjunction with the New York Department of Financial Services filed a federal lawsuit in the Southern District of California alleging a violation of unfair acts or practices under the Consumer Financial Protection Act.

ANOTHER FORM OF ELDER FINANCIAL ABUSE

The GAO report categorizes such transactions as a form of elder financial abuse. Indeed, the strategies allegedly employed by the lenders are both usurious under most state laws and decietful in general. The lowest effective rate under any of the offers was 27 percent. Four states have no set percentage (Maine, Nevada, New Hampshire and New Mexico), while the highest permitted rate is Florida, with 25 percent. It is important to note that the GAO report indicates that that is only the floor for some of these transactions. Page 25 of the the June, 2014 report indicates that some of the transactions reached an interest rate as high as 90 percent. Missouri seems to be the only state that specifically bans pension loans, while Vermont regulates such loans. The lawsuit is also interesting because it highlights the marketing practices allegedly employed by some of the lenders. One of the more problematic practices was the characterization of what transaction was occuring. More specifically, the transaction was characterized as a “sale” and not a loan.

WARNING SIGNS FOR PREDATORY LENDING

  • Are there unexplained or seemingly hidden fees built into the loan, as evidenced by unexpected or unexplained costs at closing?
  • Is there a truth in lending statement?
  • Does the borrower have to refinance, each time with a higher monthly payment to insure continued payment?
  • Is there a daily interest rate added to any late payments?
  • Are payments higher than expected?
  • Required to buy credit or life insurance if you pass away or become disabled during the life of the loan?
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