For military veterans with money troubles, their monthly pension or disability check can be a tantalizing source of quick cash.
Lured by online ads or promotions that promise “Receive Cash in As Little As Two Weeks!,” some military vets have signed contracts that promise lump sums in exchange for handing over rights to their future payments, sometimes for five to 10 years.
Last month, the state Department of Business Oversight warned against “military pension advance” plans, which can be risky for both investors and veterans.
“While we don’t know the full extent of the problem, we issued the advisory to prevent the problem from getting any bigger,” said DBO spokesman Tom Dresslar. “Veterans deserve to be honored, not lured into unlawful schemes to trade away their pension payments for quick cash. We want to do whatever we can to stop the perpetrators of this scam.”
The department doesn’t have statistics on how many military veterans may have taken out pension advances, but the number could be high, considering that California is home to roughly half – 18 of 38 – of the U.S. companies selling this type of financial product, according to the DBO. “We know there are veterans in this state who have been victimized,” said Dresslar.
For veterans, these offers can be laden with fees and commissions that pay the veteran far less than the total value of their pension payments. And for investors, who enter contracts for a guaranteed income stream from the pension payments, they may be investing in something that’s illegal. Under federal law, it’s unlawful to assign a federal benefit, such as a pension, to a third party.
“Both vets and investors are victimized by these deals,” said Dresslar. Investors aren’t told they’re at risk of not getting paid because federal law prohibits assigning pension benefits. And veterans get significantly less in cash than the full value of the pension payments they relinquish, he noted.
“This is another really bad scenario,” said Colleen Corliss, communications director for Swords to Plowshares, a San Francisco-based not-for-profit agency that provides services to low-income, homeless and disabled military veterans. She said pension advances fall in line with other predatory financial schemes that target military members and retirees, such as payday loans and check cashing outlets that charge excessive fees.
Last month, the DBO issued a desist-and-refrain order against Voyager Financial Group LLC, which it said was selling investment contracts that were based on receiving income streams from veterans’ benefit payments. DBO said Voyager, based in Little Rock, Ark., arranged contracts between veterans and investors, but failed to inform investors that federal law prohibits a pension or disability payment from being transferred to a third party.
“Offering these is not illegal, but the transaction itself is unlawful,” Dresslar noted.
Voyager has been hit with enforcement actions in three other states – Arkansas, New Mexico and Pennsylvania. In the Arkansas case, the DBO said, the regulator alleged the firm had arranged about 317 transactions in 31 states, with the deals valued at $34.2 million.
Earlier this summer, the Federal Trade Commission issued its own alert on all kinds of pension advances, not just those targeting military retirees. The FTC said these transactions often include fees that can push the annual percentage rate (APR) above 100 percent.
It advised pension holders to consider alternatives, such as a low-cost loan from a credit union or small bank. For those seeking a pension advance because of trouble paying bills, it recommends contacting creditors to request help in reducing payments or extending loan terms. Or find a nonprofit credit counseling agency to get help in sorting out finances and creating a debt repayment plan.
Call The Bee’s Claudia Buck at (916) 321-1968 or read her Personal Finance columns at sacbee.com/claudiabuck.
Military pension advances: What to ask
Before an investor or military retiree enters a contract involving an advance on a military pension or disability check, the state Department of Business Oversight advises asking:
Is the transaction legal? By federal law, it is illegal to assign a federal pension or disability payment to a third party. Check with your pension administrator or an attorney to see if the proposed transaction is legal.
What is the actual cost? Ask about the “discount rate” the lender will apply to your income stream to determine your lump-sum payment. Also factor in commissions, fees and other administrative costs. Compare the total cost to alternatives such as a regular bank loan.
Is buying life insurance required? Some pension advance companies require that you buy a life insurance policy naming them as the beneficiary. Buying the policy will add to your transaction expenses and reduce your payout.
Is the seller properly registered? Check with your state financial oversight agency to verify the registration status of the firm or financial professional offering the pension advance. Also check with the Better Business Bureau or state and federal consumer protection agencies to see if there have been complaints filed against the company offering the contracts.
What are tax consequences? The lump-sum payment may be taxable and could push you into a higher tax bracket.
Can you cancel? Ask about the company’s cancellation policy. Some companies may not let you cancel once you sign the contract.
Source: California Department of Business Oversight, Federal Trade Commission