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Lending scheme offers up-front money to those needing cash

By Joel Hoffmann noon Nov. 3, 2014

Federal auditors and local veterans are concerned about a novel lending practice that gives military pensioners money up front in exchange for signing over monthly benefits for a period of time.

Of 38 companies that offer pension advances to veterans and other federal retirees, 18 are incorporated in California, according to a recent federal audit.

The industry has been the subject of at least one class action suit, with a Marine Corps veteran from San Diego County as a lead plaintiff.

“For the veterans community, this is a matter of serious concern,” said Jack Harkins, a Marine Corps veteran and past chairman of the United Veterans Council of San Diego County. “But we’re hopeful that there will be controlling measures or legislation to prevent this to the best extent possible.”

Harkins said he and other veterans are troubled that their comrades could find themselves in a financial situation in which they borrowed money from companies that didn’t have their best interest in mind.

The industry markets itself to veterans who are in need of quick cash, not as predatory lending. In exchange for signing over future monthly pension payments for a certain period of time, veterans are promised a lump sum in advance, with few strings attached. After the time period ends, they’re told, they’ll get their monthly payments back.

In a June audit, the Government Accountability Office found that the terms of the financial products are often unclear, sometimes concealing interest rates that are “significantly higher than equivalent regulated interest rates” from banks and other financial services companies.

The auditors did not identify any of the pension advance companies by name, but details in the report suggest that auditors were particularly concerned with an Orange County-based operation that filed for bankruptcy and opened under a new name.

In 2011, a Superior Court judge ordered the company, Structured Investments Co., and its affiliates to pay $2.9 million in damages to veterans who had filed a class-action lawsuit.

The crux of the ruling was a federal law that prohibits enlisted military personnel from transferring their government income to a third party — a provision that the judge interpreted to apply to veterans’ pensions.

Kirkland Brogdon Sr., a Marine Corps veteran who lives in an unincorporated part of San Diego County, was a plaintiff in the class action suit.

Brogdon declined to comment, but documents show he took out a pension advance of nearly $25,000 from Structured Investments, pledging to turn over eight years of pension payments and to purchase a life insurance policy that made the company his beneficiary.

The company later alleged that Brogdon owed $78,000 for breaching the contract, but the judge found that Structured Investments had entered illegal agreements with Brogdon and other plaintiffs.

In the absence of clear and specific regulations for the industry, pension advance companies have continued to flourish, including Pension Funding, LLC, a company started by former Structured Investments executive Steven Covey in 2012. Covey and Structured Investments filed for bankruptcy the same year.

Covey, an Army veteran, has long argued that pension advances are legal.

Covey did not return a call for comment from U-T Watchdog, but he told the Center for Public Integrity in 2011 that veterans never turn over complete control of their pensions when they take the advance, and it is therefore not an illegal transfer of benefits.

“It’s quite clear that the pensioners have ultimate and unilateral control over where the government sends those funds,” Covey said.

Another issue identified by federal auditors is the web of companies offering the pension advances.

“We found that at least 30 out of 38 companies that we identified had a relationship or affiliation with each other, including working as a subsidiary or broker, or the companies were the same entity operating with more than one name,” the federal auditors wrote.

The auditors found that most of the companies did not fully disclose those affiliations, which posed a problem for consumers who wanted to understand how the companies worked before signing a pension advance agreement. It was also a problem for those who wanted to file a complaint against one of the companies, the auditors said.

So far there has been little movement to regulate the new loan products, said Scott Silver, managing partner of the Silver Law Group, which is attempting to file class action lawsuits against pension advance companies across the country.

Silver said he gets three to four calls a week from retirees who signed up for pension advances that they now regret. He said the cases are difficult to take to court because the contracts include clauses that prevent veterans from participating in class-action suits and lock them into arbitration.

“They tell these people that they can make an affordable loan to them, but ultimately the contract they sign is contrary to how it was pitched,” Silver said. “We’re seeing over five-year periods people paying back five to eight times the money borrowed.

“The one commonality that I keep seeing is that none of the entities seem to be registering with any of the regulators,” Silver added.

In its June audit, the Government Accountability Office also homed in on the lack of regulation.

“We identified questionable practices associated with pension advances that currently have little, if any, oversight,” auditors said in the report.

Auditors urged the Bureau of Consumer Financial Protection and the Federal Trade Commission to step up enforcement and consumer-education efforts to curb any deceptive lending practices by pension advance companies.

In the meantime, Harkins said the veterans council would monitor pension advance companies and help veterans proceed with caution on the financing arrangements.

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