Pension Advances: Another Way to Rip You Off
With the holiday season in full force and 2013 drawing to an end, cash-strapped older adults may find themselves in need of extra money for gifts and possibly unexpected expenses.
Recently, companies offering pension advances have targeted military veterans and public sector retirees. In a pension advance loan transaction, retirees receive an upfront cash payment in exchange for part or all of their monthly pension check. The retirees give up all or some of their monthly pension checks for a set period of time, usually five or 10 years. However, the retirees end up paying hidden fees, finance charges, and exorbitant interest rates. Like any other high-interest predatory loan, pension advances can lead to a cycle of indebtedness that is impossible to escape. Other types of predatory loans include title loans, payday loans, and certain types of credit cards.
In one case, an elderly man took out an $8,000 advance against his $1,028 monthly retirement pension. The retiree agreed to pay $284 per month for five years. At the end of the advance term, the retiree would have paid $17,040, an APR of 35%. The pension advance companies claim that they are not required to follow state and federal regulations because the advances do not qualify as loans.
Some pension advance companies require retirees to establish and deposit pension payments into separate bank accounts, which the companies conveniently control. In doing so, these companies circumvent usury laws, which regulate and limit the amount of interest that can be charged on loans.
According to the National Consumer Law Center and the New York Times, many of these loans include additional, hidden fees which push the interest rates on the loans anywhere from 27 percent to 106 percent.
Retirees are taking action against pension advance scams. This past August, a California court found the contracts to be an illegal assignment of a military pension and awarded a group of former service members $2.9 million plus attorneys’ fees.
Awareness of pension advance scams has spread nationwide. Other states, such as New York and Massachusetts, are investigating pension advance companies for fraud, deceptive advertising, and violations of state laws. Congress and the Consumer Financial Protection Bureau formed a committee to investigate this issue and warned retirees against entering into these agreements.
Follow these steps to avoid becoming the victim of these unscrupulous scams:
- Do not enter into any agreement with an organization offering pension advances.
- Investigate and consider other alternatives, including borrowing money from a regulated financial organization.
If you believe you have been the victim of a pension advance or charity scam, call Elder Law & Advocacy at (858) 565-1392 to consult with an elder law attorney at no charge.