The Loan = Factoring Transaction Myth
October 11, 2022
Myth: You will lose money by factoring, so take out a loan instead.
Reality: Whether you factor annuity payments or take a loan, there is a cost to obtaining money, but many people believe that factoring involves “losing” money. This misconception comes from comparing the cumulative future payments with the present value lump sum payment offered by the factoring company.
For instance, if an annuitant has 200 monthly payments of $1,000, the cumulative payments would be $200,000. In this case, a factoring transaction might net the annuitant approximately $100,000 or 50% of the cumulative total. This is not “losing” money, it is the result of obtaining future payments early at a 10% discount rate. If instead the annuitant took a $100,000 loan at 10% and paid it back over 200 months, the total cost including interest would also be $200,000 (assuming the annuitant had sufficient credit to get the loan).
A loan requires credit, collateral, origination fees, and carries the risk of late fees and foreclosure if payments are not made when due. In the factoring scenario, the annuitant would
need to wait 200 months (almost 17 years) to collect the
full $200,000, during which time the equivalent present value of the payments is continually diminishing due to inflation. A dollar will not have the same purchasing power in 17 years as it has today.
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The foundation of abuse in the factoring industry is cracking! South Carolina’s supreme court as well as its senate are readying for reform in response to the most recent expose (see here , here and here ). Both the court and the legislature are intent on fixing a clearly broken system. Despite the natural inclination to copy what other states have done (MN, GA, LA, etc.), whose reforms ironically ended up benefiting the worst abusers of the industry, we suggest a simpler reform that will solve the absolute majority of abuse: Keep the personal identification information (PII) protected for all structured settlement recipients from here on out. This way, the companies guilty of these abuses won’t be able to find new victims. More: make such protection retroactive. This is already standard practice for minors receiving structures, and it works, at least until they turn 18. Extending this protection would do wonders for structure health. What predatory companies can’t find, they can’t chase. Keep people safe and their identification information secure. Advocate for smart reforms.
Another day, another question of abusive cash now transactions. Another lead paint victim, too. See here for more details. It all begs the question: why do the big cash now companies prey on the head injured? Is it a delicacy? Or are they just hoping no one will notice? Ladies and gentlemen, this is why we harp on brokers needing to educate their annuitants on how factoring is useful in some situations, and completely inappropriate in others. It’s why brokers are the referral gatekeepers, or at least, they should be. Anyone with a severe personal injury, especially one affecting their judgment, requires greater aid in both pre and post structure environments. Even if a factoring transaction might have addressed the legitimate needs of the man in the article, was factoring the whole thing really necessary? Probably not. It’s why consultation is required, not just telemarketing. As for the court and its involvement in the issue of whether insurers have a duty to question factoring transactions, full stop. Requiring insurers to question factoring transactions would increase their liability, as well as the fact that while courts must apply the best interest standard, an ethical factoring company uses the annuitant’s best interest as its guiding light. Furthermore, it is the duty of the court to determine whether a factoring transaction is in the best interest of the seller and serves as final gatekeeper. That’s the whole purpose of going to court in the first place. If not the courts, then the legislatures in whatever state is affected by abusive or exploitative practices. We’ve seen this throughout the country in the past few years, such as in Louisiana, Georgia, and Minnesota. It’s cumbersome to add additional requirements upon the companies involved in a potential transaction when the issue isn’t whether the company’s sought to conduct business as usual, but whether the court authorized it in the circumstances they are meant to scrutinize. Factoring transactions can and should be done according to set rules. No forum shopping, no poaching, no scraping, no “gotcha!” checks, no flagrant flouting of the TCPA and other applicable state consumer protection laws. There’s a right way and a wrong way. Promote the right way. Educate. Consult. Refer. We’ll be here.
We're thrilled to see that others are contributing to the factoring expose by the Minnesota Star Tribune . This time, structured settlement consultant Dan Finn. You can read his take on factoring and the Star article here . What's more, you can see Cam Mears delve into the details on factoring in his one-on-one interview with Finn here on YouTube! Factoring doesn't have to be the boogeyman. Make sure it's done right by referring only to those you trust to offer proper consultation.
Yet again abuses in the factoring business have had light shone on them, this time in Minnesota , and we can only shake our heads. This is what we’ve been talking about for what feels like an eternity. Minnesotan outrage is absolutely deserved. The state legislature there has already determined that reform is necessary , and we hope they take reasonable, sensible measures that account for the reality of the abuses with proper context. The ultimate question born out of this and every other state that has had reform, though, is will it be enough? The answer: No. It's easy to add registration and bond requirements, change the domicile language, or the number of days in a disclosure period while beating our chests about fair competition, but in the end the overwhelming majority of abuse is enabled by a single issue: the lack of redaction of the personal identifying information (PII) in structured settlement agreements and ongoing factoring transactions which permits endless , high-pressure marketing directly to annuitants. Protecting the PII of annuitants doesn’t need to be legislated, though it certainly should be. Those of us involved in the business can and should merely add a single confidentiality page to agreements. If preventing harassment and abuse isn’t cause enough to protect annuitants through confidentiality provisions, we don’t know what is. We don’t need to rewrite SSPAs to get a handle on this when we can police ourselves. Join us in making this small change. It’ll make a huge difference. Maybe the industry might even get some good press every now and then.
