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"Ruiz The Day". Did NSSTA Embellish Judge's Words? Why? To What End?

by John Darer

At the NSSTA hospitality suite in Las Vegas Thursday night November 11, 2010, I couldn't believe that I actually heard that a member of the NSSTA Board of Directors believes that the NSSTA apparent embellishment of a judge's mischaracterization of a discount rate "is defensible".

The "play-by-play" on the NSSTA blog (at time of this writing) reads like this:

"That’s New York Judge Norma Ruiz of the Supreme Court (Bronx County) in a decision this month describing a proposed contract that that a structured settlement factoring company tried to get an accident victim to sign.  The judge cited the contract's effective annual interest rate as being 71.40 percent. 

According to the Judge, the proposed reduction in payment to the accident victim was “at a rate is more than double that which banks are currently charging and more than even the steepest credit card rates of 29%.”

In her commentary denying a factoring petition, Judge Ruiz divided the purchase price by a lump sum which equaled the sum of 60 future periodic payments, which sum was mischaracterized by the Judge as "discounted present value" to arrive at what she erred in referring to as " a final discount rate". By her commentary, Judge Ruiz then displayed her intention to compare the errant rate to annual interest rates charged by credit card companies. It was apples and oranges at that point.  The error made the difference highly dramatic, but the comparison not reasonable.  As we stated in the first post linked below, the Judge's statement was inconsistent with the facts presented by her earlier in her decision.

WHY did the NSSTA THEN choose to (1) mislabel and (2) mischaracterize Judge Ruiz label of "final discount rate" as an "effective annual discount rate" -words that Judge Ruiz DID NOT use. If you follow the second linked post to a copy of Judge's decision (see page 5 of 8) you will see the evidence of what the Judge actually said. The NSSTA could very easily have chosen to correct the Judge's statement, but chose not to. It would still have made a powerful statement. Peachtree is known for high discount rates. Why? Was this B.S. supposed to help sell more structured settlements?

The NSSTA, and each of its Board of Directors,  has been put on notice that their published statement is not correct. It will be interesting to see how long the NSSTA Board of Directors chooses to give direct or tacit authority the misleading statement to be posted on its website. In the meantime members of the NSSTA should pause to reflect on the NSSTA Code of Ethics and how the aforementioned  misinformation disseminated by the association affects their credibilty.

Related Reading

NSSTA's Structured Settlement Factoring: The 71% "Non Solution" is Wide Of The Mark November 6, 2010

Judge Norma Ruiz Gives Peachtree Settlement Funding the "Bronx Cheer"  July 28, 2010

What is Present Value and How Does It Apply to Structured Settlements?  November 8, 2010

 

 

The "Fugu Logic" of the WSJ and the Secondary Market For Structured Settlements

by John Darer CLU ChFC CSSC RSP

The image in the Wall Street Journal article "Another Can't-Miss Deal That Can Miss Spectacularly ",  shows a crouching vulture over a yield sign.

Perhaps that's the reason one can't help cackling with the irony of author, Jason Zweig, citing as authority, Jim Terlizzi of Peachtree Settlement Funding, a company with the formidable reputation of charging very unfavorable and uncompetitive discount rates to tort victims for liquidity. All sneering aside, Terlizzi does actually provide sage advice in suggesting you do your homework. Yet it is this author's opinion that Terlizzi's company relies on tort victims who are too ignorant, lazy  or desperate to "do their homework" and shop around for better deals. Why else would someone pay well over the discount rates available in the market to get liquidity for structured settlement payments?

Zweig's article is a cautionary piece about investing in the structured settlement secondary market that focuses on the negatives and irresponsibly, in the opinion of this author,  on none of the positives. Even on the negatives, the article runs short, failing to address the most significant aspect of the market- the lack of regulatory oversight and lack of licensing requirement.

The article also fails to differentiate between the risks, if any, of the  purchaser being the one who is the buyer in the Court hearing  of payment rights directly from the original annuitant, or a follow on sale of payment rights from that purchaser to another buyer.

Investing in structured settlements via the Secondary Market has been compared to this Japanese fish, which must be prepared by specially train chefs to avoid the ultimate form of food poisoning.

Zweig cynically implies that somehow the returns are too good to be true or are even false advertising:

"Boasting guaranteed high yields for typical terms of five to 20 years, the investments sound like an ideal way to augment your income with safety".

"Thus the word "guaranteed"—which rarely accompanies yields of 7%—beams out from the promotional materials of firms that market these deals".

Indeed the working title for Zweig's article was apparently "A Yield of Dream's That Really Wasn't", according to the Google Alert I received Download Google alert 7252010 composite was:

A Yield of Dreams That Really Isn't - WSJ.com
What is a factored structured settlement? It all starts with the plaintiff in a wrongful death or injury lawsuit, who has the right to receive the ...
online.wsj.com/.../SB10001424052748704249004575385140...

(Note: Clicking on the aformentioned title from the Google alert leads you to the article with the tltle displayed at the begining of this post)

Yet "The Intelligent Investor" fails to prove in his article that these returns are not achievable. This author contends that they are very achievable if one understands the factoring discount. Anyone with any concern can simply analyze the cash flow using our factoring discount rate calculator that appears on this blog or, if you want to spend some money, the widely used T-Value software.

I'll give credit where credit is due to Jim Terlizzi. who is quoted:

"If you're going to deploy any real capital, you need to do some real homework," says Jim Terlizzi, chief executive of Peachtree Financial Solutions, a structured-settlement packaging firm in Boynton Beach, Fla., that sells exclusively to institutional investors. You will need to verify that the documents signed by the original seller are valid, that the court order originates in the proper jurisdiction and that your contract fulfills all the state and federal requirements. You should also call the annuity issuer and the company that services the annuity payments to confirm that you are officially recorded as the new recipient".  Terlizzi's general advice is relevant for any major purchase. Know what you are doing. Research and learn what you are doing.

One other point that Zweig does not make is that insurance companies are known to be purchasers of securitizations of structured settlements. If these deals were so bad why would they do that?

Those that choose to take the time to learn more about the secondary market have something extra to offer their clients. I have spoken and written about ways to use the secondary market to help deal with the primary market problem of currently low short term interest rates, to provide ideas for allocating deferred lump sum payments when they come due, et cetera. I have also spoken privately with a few insurers about how they can improve their offerings using this asset class.

In the meantime potential purchasers of structured settlement payment rights should not be afraid. They SHOULD do their homework.

On Friday July 23, 2010, the NSSTA notified its membership that The Wall Street Journal would publish Zweig's article about investing in factored structured settlement payment streams. The email emphasized that NSSTA engaged The Journal columnist directly and at length about problems related to factoring.  The email went on to state that NSSTA obviously cannot guarantee what finally appears in The Journal but you should know that the new (management) team is working to represent this industry and its interests.  Other than a cautionary quote from attorney Mike Miller of Drinker Biddle, one wonders what part of the meat of  Zweig article content can be attributed to "engaged directly and at length" with the NSSTA.

Financial advisors are, sometimes effectively, competing with a slow to adapt primary market using secondary market opportunities.  Addressing suitability is not foreign to them. One longtime insurance general agent offers E&O coverage for secondary market purchases placed through its facility. As the segment becomes more mainstream, I expect others will offer E&O as well.

Kudos to NSSTA for seeking publicity about the problem areas of factoring. NSSTA membership must realize that "the train has already left the station" on this issue. Perhaps it would be appropriate for NSSTA to seize the opportunity to include this topic in its Las Vegas Regional meeting program in November.

 

In Force Structured Annuity Market-5 Direct Transfer; Assignment of Warehoused Payments; What About the Annuitant?

by Structured Settlement Watchdog

There are several types of transactions for individual investors (including tort victims):

1. Acting as the direct counterparty to a structured settlement factoring transaction. You invest money in the right to receive periodic payments from someone else's structured settlement directly or through an intermediary; the transaction is subject to a judge's approval and your name as the buyer appears in the Court Order approving the transfer.
2. Acting as the assignee for "warehoused" payments that have already been purchased by someone else, for example a factoring company. The factoring company then assigns the rights to you in exchange for cash in an amount that is greater than the amount that they paid for the structured settlement payment rights.

One such person who has purchased "warehoused payments" suggests that there is an active market buying and selling these rights by individuals. If the original annuitant sells with a 16% discount rate, follow on sales are possible with lower discount rates of 10% or 8.5% so that every one "with their hand out" makes money. Clearly one understands the motivation of a yield hungry investor, but what about the original annuitant?

The question is why does the original acquisition cost have to be so expensive for the annuitant? If a deal is available at 9% discount rate instead of 16% or 18% (thereby putting MORE cash in the annuitant's pocket or MINIMIZING the amount of payments needing to be sold to raise cash)  why shouldn't the annuitant get that rate?

Possible reasons:

• Annuitant is too ignorant to shop or negotiate for better rates.
• Annuitant is too lazy to shop. It's their money and they want it now.
• Annuitant can't get over stupid but memorable commercials that cost millions of dollars (something that "factors"-pun intended- into the buyer's low offer) and is willing to take much less money for the value of absurd entertainment.
• Annuitant is getting poor advice from a financial adviser or settlement planner.
• Annuitant is not seeking independent professional advice

On the other hand advisers for investors seek, and may have a duty to find, the highest possible yields. Those highest possible yields may have been acquired "by any means necessary", even if it  ultimately means opportunistically hosing the annuitant for a non competitive discount rate. A judge can always reject the transaction and they sometimes do. What is reasonable in relation to an average, and the best deal out there,  may be entirely different things.

The current system has the potential to set up annuitants to be mugs. 

 

 

 

 

Structured Settlement Factoring Illiteracy and Lance Winslow

It's financial literacy month and time to bring back an old pantomime villain.

Car wash guy, erstwhile wannabe structured settlement expert and confessed key word manipulator Lance Winslow IV has resurfaced after 4 years with an article on structured settlement factoring that appears at 101settlement.com.

After doing a half decent job of explaining what factoring is in general, Lance Winslow presents an unrealistic explanation of the impact that factoring has on a structured settlement annuitant's long term financial security.

He states:

"Let us say you have a structured settlement and you cash out of the deal using the same type of company? They will get the structured settlement money each month instead of you, but you will have all the money up front minus a 10-15% discount on the total money you would have received. You can then use this money for whatever you want. Such as investing, buying a house or buying new car, plasma TV and other things humans want to make them happy. You see?

Lance Winslow appears to confuse the discount rate (or effective discount rate) used to calculate the present value that a seller could receive from a sale of structured settlement payment rights, with the   percentage difference between the gross amount of the future benefits before the sale and the present value received after the sale.

Let's say you have a structured settlement that pays you $2,200 per month over the next 20 years, with the next payment May 5, 2010. The total payout over 20 years is $528,000 income tax free.

You find the home of your dreams and don't have enough for the down payment so you consider selling your structured settlement payment rights to a factoring company. You are fascinated by a late night commercial featuring Vikings doing the "can can", so you contact Thor Settlement Funding which tells you that its effective discount rate is 14.9%.  This translates into an offer of $177,000 in cash, assuming a Court approves that the transfer of such payments is in your best interest.

$177,000 is approximately 1/3 of $528,000. Said another way, you forfeit approximately 2/3 of your future value by taking cash in 90 days or so. Sound good to you?

As I said 4 years ago, Lance Winslow may know suds but he ain't no stud when it comes to financial literacy on structured settlements.

Read our Lance Winslow archive

Financial Literacy Tip

Use a structured settlement factoring discount rate calculator to help you better understand the cost of money. The structured settlement factoring discount rate calculator puts cash strapped structured settlement annuitants in control.

Please note that certain structured settlements cannot be factored.