Considering the entire buzz around a new bank-funded structured settlement loan and all the subsequent questions I have gotten about it, I thought it appropriate to give this product an initial review even though I don’t yet have an actual contract to examine.  So far, what stood out to me most in the bank’s promotional material was the great lengths they went to differentiate themselves from conventional factoring companies.  They really go all out in selling their product as a bank loan and not a factoring transaction, making it appear that getting liquidity out of a structured settlement is as simple as applying for a car loan.  They even suggest that you promote this product to your attorney clients as the solution to their concerns about factoring. So is this product as innovative and revolutionary as they claim or mostly semantics and marketing spin?  To start, I have a hard time believing that this loan process is as simple and straightforward as they suggest.   Foremost is the fact that a structured settlement annuity cannot be used as collateral for a loan.  That begs the question as to whether a five-star rated bank would provide large, unsecured loans to annuitants?   That’s highly unlikely, especially in light of the fact that most annuitants come to us with significant debts and less-than-stellar credit.  These two statements in their advertisement reveal the bigger picture to me:

  • “Costs to your client include: Bank costs for establishing the loan including attorney fees and court costs.”
  • “Loan payments made directly by the insurance carrier so your client doesn’t have to worry about making the payments”

Based on my knowledge of factoring, I immediately thought: if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.  Here’s why:

  1. They are charging the client for attorney’s fees and court costs.  Why is this required for a simple loan?   These are costs associated with every factoring transaction.
  2. The only way an insurance company will redirect payments to another payee (the bank in this case) is with a court order, just like that required for all factoring transactions.
  3. To recover principal and interest for the term of the loan, the bank then collects the monthly factored payments from the insurer directly and not from the annuitant, just like a factoring transaction.

This leads me to believe that what they’re actually doing is factoring the annuitant’s payments as both collateral and payment for a so-called loan.  How is that a radical departure from the status quo?  To me, it all sounds like just another duck… perhaps a slightly different species of duck, but still a duck nonetheless.

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The promotional material for this new structured settlement loan product left me with several nagging questions and concerns, as follows:

  • How much of the structured settlement does the annuitant have to factor as collateral for the loan?  Perhaps all of it?  We encourage partial liquidations to preserve as much of the annuity as possible.
  • If they are factoring the entire annuity as collateral, what’s to stop the bank from marketing that client for more loans, lines of credit or other banking products afterwards?
  • This bank is also engaged in the structured settlement trust business.  Many trust clients also have structured settlements.  What’s to stop this bank from marketing the trust clients for structured settlement loans?
  • Does the annuitant have to pay the bank origination fees up front?  Attorney and court costs add up to thousands, not to mention other bank fees.  We always incorporate these costs into our fixed transaction.
  • What happens if the transaction is denied?  Does the annuitant still owe the origination fee to the bank?  Denials occasionally happen at the whim of a judge and we absorb these losses as a cost of doing business.
  • Simple loans, like those for a car, tend to have short durations. Is there a maximum annuity term that the bank will lend against?  We don’t have one.
  • Will the bank accept deferred annuities and lump sums like us?  If so, and this is a simple loan, how can the insurance company be paying the monthly principal and interest owed on the loan, as stated in the advertisement?
  • Can annuitants get their funds within a couple days like a car loan or do they have to wait weeks for court approval like every other factoring transaction?
  • If the annuitants do have to wait weeks to get funded, will the bank provide unsecured advances in the interim like we often do?
  • What if the annuitant dies or enters bankruptcy during the loan term?  How will that affect the structured settlement that is used as collateral?
  • The traditional factoring transfer process is tried and true for over a decade.  How will the bank address the new loan provision in the court pleadings?   If something goes wrong, it can be difficult to have an order amended down the road.

I will update this post with a detailed analysis after I review an actual contract document.  Stay tuned.

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