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.
- 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?
- 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"?
- 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"?