In recent years there has been a proliferation of secondary market firms touting higher yields through either individual payment streams or trusts backed by factored payment rights.  However, in light of recent developments, I strongly advise caution and due diligence.  This is no indictment of any secondary market seller, but a warning of what may lie ahead in this market.  My concern is that some of these secondary market trusts may be sitting on ticking time bombs of potentially toxic assets.  I believe that the following longstanding and unethical business practices in the factoring industry may finally come home to roost:

Forum shopping – This has been a rampant problem where factoring companies will fake the residency of an annuitant in a rubber stamp jurisdiction to get a transfer approved easily.  The motive is either that the proper jurisdiction is particularly difficult to get any case approved, or that much higher profits can be made in jurisdictions with little oversight.

Coercion – Unethical factoring companies are notorious for pressuring at-risk annuitants into unwarranted transactions.  These annuitants have no business selling payments so the factoring companies lie to the Court to get the transfer approved.  A perfect example is the recent Baltimore lead paint fiasco, where cognitively impaired annuitants were manipulated into predatory discount rate transactions, complete with bogus independent professional advice.

Fraud – Likely not as common but factoring firms have been known to forge documents.  A NASP firm was recently sued for forging an annuitant’s signature on lottery transfer documents and I am aware of another pending case alleging forged signatures by two NASP firms buying structured settlement payments.

In total, the number of questionably sourced transactions falling into the above categories is quite considerable.  The common denominator is that all these transactions constitute fraud committed upon the Court.  Consequently, we are now starting to see suits being brought to vacate some of these deceitfully obtained court orders.  When orders are vacated, the purchased payments revert back to the annuitant, potentially leaving the investor holding the bag.

For these secondary market firms, the security of the factored payments they buy is only as good as the ethics of the factoring companies with which they do business.  Compounding the risk is the fact that secondary market firms typically buy from smaller producers since the larger firms usually have institutional investors.  The exposure lies in the fact that many of these smaller firms are scamming, unethical, fly-by-night court record scrapers who, just like Access Funding in the wake of the Baltimore investigations, will simply close up shop if they get caught, leaving few to no assets to go after.  Ultimately, how many vacated orders can these trusts absorb before they’re in serious trouble?

That leaves the question of how bad the fallout will be from vacated orders.  It will depend on what transpires with the Baltimore situation and whether the plaintiff bar truly takes notice.  There have only been a handful of suits to date, so how it all shakes out is anyone’s guess.  It could be minor, but it could also be game changing. That’s why I’m suggesting caution.  If you’re considering a trust product, I recommend waiting until the dust settles unless you can be assured that they have contingencies in place to cover potential losses.  If you’re considering the purchase of individual payment streams, there are other firms who do factoring transactions by the book, like us.  You simply need to ask where the transaction was sourced and do some research.  An upcoming article may help you sort the wheat from the chaff when it comes to reputable factoring companies.  In the interim, feel free to call us with any questions.