Retirees Targeted by Pension-Advance Loans
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UPDATED: May 1, 2013
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Pension advances have become the latest exploitative quick cash loan under investigation by federal regulators. These loans target the public pensions of federal and state employees—including teachers, firefighters and military personnel—while misrepresenting the long-term expense for borrowers.
Pension advance firms target low-income senior citizens with bad credit who are in need of financial assistance. In exchange for a lump sum of money upfront, retirees sign over a percentage of their pension income over the next several years. The New York Times reported that the interest rates on these loans vary between 27 and 106 percent.
Unlike 401(k)s, pension plans are designed to be more difficult to borrow from, and for this reason the legality of these loans has been called into question by consumer advocates. Federal laws and protections from the Internal Revenue Service forbid the transference of pensions to third parties. The interest rates on the advances also regularly exceed the usury rates of most states.
Pension advances lenders make a point of identifying their service as an advance, however, and not a loan. In answer to the question “Is this a loan against my pension?” Pension Funding LLC’s website reads: “You are not borrowing against your pension. You are the owner of the pension asset. And you can turn it into a working asset by selling a portion of it.”
Pension-advance regulation has been scarce so far. The pension-advance industry does not have its own set of regulators, meaning no single group is tasked with monitoring these loans. Regulation has fallen on consumer advocate groups like the California Department of Corporations, which, in 2011, filed a desist-and-refrain order against a firm that later went bankrupt.
According to sources for the Times, both the Consumer Financial Protection Bureau and the Senate’s Committee on Health, Education, Labor and Pensions are also expected to look into the matter.
As regulators decide how to manage the industry, personal finance experts urge future pensioners to look into alternative sources of income before borrowing against their pensions.
“The day we retire, our nest egg becomes a paycheck that has to support us from that day forward. If you borrow from that nest egg, it will be the most expensive omelet you could ever eat,” said Elle Kaplan, CEO of Lexion Capital Management, in an email. “You’re much better off living within your means for now than borrowing from your future.”