by John Darer CLU ChFC CSSC RSP CLTC
High effective discount rates are the scourge of sellers of structured settlement payment rights who are forced to sell more of their structured settlement than they need to when there are no others options for raising money. Everyone seems to make money along the food chain of the structured settlement secondary market at the expense of the seller when high discount rates are set.
H.R. 3897 is a new bill which would amend IRC 5891(b)(2) by adding the following transaction requirements:
- The annual discount rate of the consideration for the transfer, determined by taking into account charges, fees, and other expenses, does not exceed the prime rate plus 5 percentage points.
- The aggregate amount of charges, fees, and other expenses payable by the payee do not exceed 2 percent of the value of the consideration to the payee (net of such charges, fees, and other expenses).
- The payee is not liable for any penalty, and will not forfeit any amounts already paid or incurred, if the transfer does not satisfy the requirements of this paragraph.
- The transferee has given written notice of the transferee’s name, address, and taxpayer identification number to the annuity issuer and the structured settlement obligor and has filed a copy of such notice with the State court or responsible administrative authority issuing the qualified order.
- The transfer is fair and reasonable.
- Not later than 5 days, and not earlier than 15 days, before the date on which the payee first incurs any obligations with respect to the transfer, the transferee provides to the payee a disclosure statement which sets forth in a clear and conspicuous manner the following: (I) The remaining amounts payable and payment dates under the structured settlement. (II) The aggregate of such amounts. (III) The discounted present value of the structured settlement payment rights determined by using a discount rate equal to the applicable Federal rate, compounded annually. (IV) A statement of the total consideration made in exchange for8 the structured settlement payment rights.(V) An itemized list of all charges, fees, and other expenses payable by the payee, or deductible from the gross amount otherwise payable to the payee, with respect to the transfer. (VI) The value of consideration to the payee net of the charges, fees, and other expenses described in subclause (V).(VII) The quotient (expressed as a percentage) of the amount of net consideration described in subclause (VI) divided by the discounted present value of the structured settlement
PRIME RATE is defined for the purposes of the proposed amendeed IRC 5891 as "the bank prime rate for the first day of the month in which the transfer agreement is executed, as published in the Federal Reserve Statistical Release on selected interest rates (daily or weekly), and commonly referred to as the H.15 release (or any successor publication)".
What does this mean to the bottom line?
If H.R. 3897 were to become law, the cap on discount rates based on the current prime of 3.25% would be 8.25% (3.25% plus 5 ). The prime has been at 3.25% since 2009, so one must really consider how much sellers would potentially preserve more of their structured settlement assets while solving their immediate financial needs. When Imperial Structured Settlements published its S-1 disclosure before going public it revealed discount rates in the high teens. That's an effective rate of double what it would be if the "prime plus 5" was effective back then. That meant an annuitant had to sell more than they needed to.
North Carolina has had a discount rate cap for several years. Rampant forum shopping has meant attempts to circumvent this law by setlement purchasers, an example of which I reported here.
When one considers just recently a Berkshire Hathaway annuitant was jacked for 20% on A++ A.M. Best and AA+ S&P rated paper it's not hard to see why such reform is necessary.
H.R. 3897 was introduced by the following members of the House of Representatives
Matt Cartwright D-PA
Raul Grijalva D-AZ
Brian Higgins D-NY
Mike Honda D-CA
John Lewis D-GA
Barbara Lee D-CA
Jan Schakowsky D-IL
While the introducer's of this bill are all Democrats, this is truly a bi-partisan issue. Structured settlement annuitants, many of whom are disabled, deserve the same financial protections afforded seniors, in my opinion.