Factoring "Wet Ink" Structured Settlements : PR Disaster For Factoring Cos. and Investors?

by John Darer CLU ChFC CSSC RSP

Factoring of "wet ink" structures

Last year's  "Connecticut Woman" story involved a member of our industry who sold a resident of my state a large structured settlement in August 2008. Then, an incredibly short time later, figuratively, before the ink was even dry on the structured settlement,  referred her to a factoring intermediary when she needed cash to help complete an add-on to her home so her ailing father could live on the premises in his remaining time on this Earth. My account of the story was based on extensive conversations with the Connecticut woman, who was referred to me by the former Executive Director of NSSTA, Joe Ricci. We've already covered the issue of the ensuing 6 month delay.

The issue of factoring of a wet ink structured settlement is what troubles the structured settlement watchdog. While fellow muckraker Mark Wahlstrom's posts about "changing the industry conversation" do not include a discussion of this problem, it is one that is timely, perhaps even more timely than some of the mostly former practices he cites. Factoring, or perhaps the misconceptions about factoring has got to be a.. er... "factor" in the equation.

FACT: If an annuitant factors a "wet ink structured settlement", he or she will likely suffer a significant short term loss of capital

Such loss is likely to be commensurate with losses owners of shares in a mutual fund or stock would suffer in a stock market crash, even though a structured settlement is supposed to be a safe investment. One measures this loss of capital by comparing the original cost of the payment stream being sold or transferred just a month or two earlier, with the cash that the unfortunate annuitant will now receive from a factoring company. I would like to underscore that It's NOT that the structured annuity is unsafe, it's the sequence of transactions in such an incredibly short period of time that raises the ethical eyebrow.

The need to factor a "wet ink structured settlement"  is,  in the opinion of this author, the likely result of:

1. Failure of the settlement planner or lawyer to gain an adequate understanding of client needs

2. Inadequate job by settlement planning or financial advisor in settlement planning process to assess immediate cash needs

3. Over structuring the settlement, which in my opinion is a function of 1 and 2 (although the cynical might attribute it to greed)

Regardless of the reason, the factoring companies who buy these are the enablers of this activity and they have the power to stop it. Buying, or attempting to buy,  "wet ink structured settlements" is a sleazy practice in the opinion of this author. 

While my industry may wish to chuck spears at the cash now pushers, I would also opine that the factoring industry response is likely to provide support for the points I have made above. Within the structured settlement industry look no further than Allstate Life Insurance Company which, to its credit, established policy and procedure concerning its Advanced Funding Exchange Notice (AFEN) to prohibit such transactions for the first two years of the contract's existence.

Members of the settlement profession should learn more about the business practices of those they refer business to, in advance, and obtain a commitment from the companies they do business with that they do not engage in this practice. They should consider boycotting those companies that enable these transactions.

I also pose the following questions to the public relations departments and chief executives of major domestic and European institutional investors of securitizations in structured settlements.

1. Is it not enough that the "discount rates to the desperate" for the structured settlement factoring cash flows brimming the portfolios that you purchase, average in the high teens?
2. How would it look if it hit the mainstream media or some attorney general conducted an investigation and determined that your institution is buying paper that included "wet ink structured settlements"? 
3. Does your company's stated investment policy for the portfolio of structured settlements you are purchasing, does it include a filter for "wet ink structured settlements"?
   

Comments

[Matt Bracy]

John -- I appreciate the dialogue we've been having on this, and wanted to move it over from Facebook to here. Here was my comment to your post:

I must disagree with part of your argument John. I agree that injury victims who have recently entered into structured settlements and now want to sell some or all of those payment do present some problems, and further I agree with your pr...emise that often this is attributed to poor settlement planning. However, this is not always the case. Despite the best efforts of the folks like you at the settlement table to predict the future, occasionally you are wrong. More often you are wrong about events and needs many years down the road. But, your human weakness in prediction can also be as to unforeseen events or needs very shortly after settlement. Moreover, and my key disagreement with you, for whatever reason very shortly after settlement and establishment of the structured settlement the annuitant feels a need to sell payments. We can argue about why that is, be it poor planning or just good intentioned and competent planning that is not 100% prescient. However, from the annuitant's standpoint the reason they are in that position is of no importance to them -- all that matters is that they now have some articulated and provable need to sell payments. In either circumstance, factoring is really the only option. Better planning to try to anticipate these shorter term needs is certainly warranted, but chastising factoring companies for filling this need is not.

To which you responded:

Good points Matt, but a competent settlement planner should be asking about immediate cash needs and even tell a client that they have too much of a good thing if not matched to those needs. In the CT woman case as an example the CT woman stated that she felt her broker and attorney pushed her into more structure than she wanted. A few simple questions from the attorney or planner would have saved her a lot of heartache and the loss of capital. Should a broker who fails to ask the right questions be entitled to keep a commission when the client loses 30% of their capital in a month or two? Isn't a crack dealer simply providing a solution for someone who needs to get high NOW. Companies in the secondary market are free to do as they choose. But I'm putting the message out there so that both the primary and secondary market, the secondary market investors, lawyers and the disinfecting sunlight of the mainstream media can inspire a better solution.

My response now:

I do think the focus should be on proper settlement planning. However, my 2 points about factoring these "wet ink" structures are: (1) sometimes even the very best planning fails to account for all contingencies, and factoring is an option even if the structure was just set up, and (2) if the factoring option is shut off from people with recent structured settlements (some of whom will be the victims of poor settlement planning and some will simply be victims of unforeseeable changes in circumstance) then these people are the ones who will suffer. Elimination of the factoring option can lead to really bad consequences.