Unanswered Loan Questions
August 2, 2014
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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It’s a time to be thankful! We’d like to show our appreciation for everyone out there who, like us, is focused on crafting the best solution to our clients’ needs. Moreover, the season demands we take the time to acknowledge a few things. First, and the hard work NSSTA has done to ensure greater fairness in the factoring process. Work in Georgia and Florida to ensure aggressive poaching has been nullified is commendable and should be the standard everywhere. Likewise, a tip of the hat to Texas, whose personal identifying information (PII) protections guarantees that annuitants don’t get harassed ad nauseum from the moment the ink dries on their structured settlement agreements or when they’ve made the decision to cash something out. We’d also like to thank the work of those who go unrecognized too often: the IPAs who help both us and the courts with guaranteeing that our more vulnerable annuitants get the proper added input and security. It’s not required in all states, but we’re sure to use them as often as we can. The best consultation doesn’t just come from us, and we know plenty of clients need that added layer of protection to feel comfortable. Where some may try to lead annuitants away, knowing full well that the deal is a result of their aggressive telemarketing or clever jingles, we know we can trust you and your referrals. They wouldn’t be doing this unless they needed to. Finally, we give thanks to you. Enjoy the turkey, good company, and inevitable food coma.
“Happy Halloween!”
Factoring isn’t the boogeyman and structures are not perfect.
The best structured settlements are beautiful, but don’t get attached to them. Life happens, and as such it’s life, not factoring, that is the enemy of a structured settlement. The best laid plans, like the best policies, with the best intentions, can’t s
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.
