Impulse Buy?

When I think of an impulse buy, I think of the Mastercard Priceless Commercial “That would go Great with that!” where the woman gets a pedicure and then starts racking up charges to match her newly painted toes. Some have recently cited structured settlement factoring advertising as condoning impulse buying. Factoring structured settlement payments is anything but an impulse buy.

Last November, we wrote Structured Settlement Factoring Funding Times which will walk you through the 2 to 3 month process it takes to complete a transfer. The state statutes shoot down any idea that this is an impulse buy due to the fact that the spontaneity is destroyed by the 3 to 10 day mandatory rescission period from the time of the disclosure, a 20 day required notice period before the court date, the option to have the contract reviewed by a legal professional and the time it takes to gather and process all the required documents.

It is hard to imagine an impulse buy will ever be associated with the idea that one must seek a judge’s approval before making a purchase? Not only do those who wish to sell their payments have to go through 60 – 90 days of processing, but they must go before a judge to seek the courts approval to find that the structured settlement transfer is in their best interest taking into account the welfare and support of their dependents. How long do you think Mastercard would be in business if their customers had to go through this process to seek approval? Of course, Mastercard customers who have had some credit issues in the past are being charged rates in the upper teens to upwards of 20% with fees while settlement transfer rates start from the single digits and go up to the mid teens.

Structured Settlement Factoring Interest Rates

In one of our previous articles titled Structured Settlement Factoring Discounts, we clear up the differences between discount rates and interest rates applied to transactions. For this article, we are going to focus on the interest rates applied to structured settlement factoring transactions. Keep in mind that structured settlement factoring transfers are not typically done as loans.  The term interest rate or rate as applied in this article is the percentage of the principal which is paid/payable over a period of time. 

So what rate does Settlement Capital apply to its settlement factoring transactions?

The generic answer is it depends on many different criteria such as the size of the transaction, insurance company rating, length of term, and current federal interest rates. Although all of those do have an impact on individual transactions, there are other contributing factors that have affected the current interest rates for settlement factoring as well. Settlement Capital has had a significant impact on the overall lowering of rates on both an industry wide and individual company level. Here are just a few examples of Settlement Capital’s contributions in this regard:

• Settlement Capital Corporation General Counsel Matt Bracy over the past few years has contributed a significant portion of his time successfully participating in lobbying efforts in multiple states to seek enactment of structured settlement factoring transfer laws.  These laws now provide annuitants the opportunity to sell some or all of their structured settlement payments.
• Settlement Capital has made our internal court order processes far more efficient to make transactions smoother and reduce costs to customers. Our proficient network of outside counsel and good working relationships with insures are just a couple of examples of how we are able to incorporate efficient protocols into our process.
• Settlement Capital’s leadership position in the settlement factoring industry coupled with our knowledge of the product has opened doors to lower sources of funding, from Wall Street to individual private companies, that are unmatched within the settlement factoring industry today.
• Settlement Capital is continually trying to provide educational information to our brokers and customers so they can make better informed decisions about the settlement factoring industry as a whole. Our website and blog are just a couple of examples of how we are at the forefront of providing education about structured settlement factoring. 
• At the time this article was written, we have published rates in the American Cash Flow Journal (December 2006 – Volume 14 – Issue 12) for structured settlement factoring transactions to brokers that start at 10.5%. There are some situations where we can go lower than 10.5% and there will be some situations where we will be above 10.5%.

These factors, among others, have played a significant role within the settlement factoring industry in improving the factoring process for consumers and lowering rates for annuitants who may have a need to sell future structured settlement payments. As our rates go down, competitiveness in this market leads to other companies following our lead. Whereas interest rates were once in the upper teens as an industry norm, Settlement Capital is leading the industry by applying rates on structured settlement factoring transactions that can typically range from single digits to the low teens.

To find out exactly what rate would be applied to your specific structured settlement payment stream, contact Settlement Capital to get the best rate in the industry.

Setting Up A Structured Settlement

John Darer is right, Settlement Capital does not set up structured settlements. However, our website clearly states we are "a specialty financing company that provides liquidity to owners and holders of periodic payments resulting from structured settlements, annuities, lottery winnings, government and commercial contracts and other secured future payment obligations."  We have also created a place for consumers to go within our website to find structured settlement companies and settlement brokers. We are currently in the process of making our website more user friendly for those who are looking for the services of a settlement broker. We do admit our list is not 100% complete. Here is the current list of companies we have so far:

Atlas Settlement Group
Bradford Settlement Company
Brant Hickey and Associates
Bridge Settlement Corp
Cambridge Galaher Settlements
Creative Capital
Delta Group
EPS Settlements Group
Forge Consulting
Huver and Associates
JMW Settlements
The James Street Group
Little, Meyers & Associates, Ltd.
The Mangelsdorf Companies
Millennium Settlements
National Settlement Consultants
Ringler Associates
Settlement Planning Associates
Settlement Professionals Incorporated
The Settlement Services Group
Structured Financial Associates
Summit Settlement Services
Wahlstrom & Associates

If you are a settlement broker or work for a settlement company and you would like to be listed and/or linked to our website, please contact me directly.

Structured Settlement Factoring Funding Times

Many consumers want to know how long it really takes to complete a settlement factoring transaction.  There are some companies that will inform potential customers that they can expect funds within 2-4 weeks.  What they neglect to tell the customer is when they are starting the clock on the 2-4 week time frame.  

Once the consumer and the settlement factoring company have agreed upon the pricing, the first step in the process is the disclosure statement. This must be sent out to the consumer prior to entering into a binding agreement.  Most states follow the model act that requires the disclosure to be sent 3 days before signing the transfer agreement.   Most of the other states require the disclosure to be received 10 days prior to incurring any obligation.  There are less than a handful of states who do not have a waiting period at all.  

Once the transfer agreements are sent, the consumers will usually take some time to review all the documents.  While some states make it a requirement to seek independent legal or financial advise before signing the transfer agreement, the majority of state laws allows the consumer the option to determine if they need to seek this advise or not.  The timing of this part of the process is completely up to the consumer.  In general, it can take consumers one to two weeks to return the completed transfer agreement.  

Once the transfer agreement is returned to the factoring company, some underwriting / due diligence is required to insure everything is in place for the court order process.  The time is takes to complete this process will depend on how much documentation the factoring company needs to complete the transfer process.  This process will vary from customer to customer as it can be difficult to obtain some of the necessary documents required to obtain the court approval. However, if a consumer is able to provide the factoring company copies of the required documents prior to or at the time they return the transfer agreement, the underwriting process can be completed in a matter of a couple of days.  Typically, this will take anywhere between one to three weeks (even more depending on how long it takes to track down particular information and documents.)

Once the transaction is approved internally, the factoring company must submit this to the court for final approval in order to avoid significant taxes.  The court must find that the transfer is in the best interest of the seller taking into account the welfare and support of their dependents.  The paperwork can be sent to outside counsel within 24 – 48 hours from the time of the internal approval.  The outside counsel will draft the petitions and orders to submit to the court. This process should not take more than a week.  

The majority of state transfer statutes requires all interested parties are provided a minimum of 20 days written notice of the actual court hearing.  Some states require less time and some require more time, but either way it is up to the court’s schedule as to when a hearing date will be set.  Each court is unique in how the paperwork is submitted, processed and ultimately assigned a court date.  This can sometime be scheduled out 21 –25 days and sometimes it is scheduled our 30 – 60 days.  The factoring companies have no control over the court and judges schedules.   

Assuming the transaction is approved, the factoring company will need the final signed order from the court.  Obtaining the certified order can sometimes take a couple extra days depending on the court.  Most factoring companies will be able to fund within 1 to 10 days of receiving the certified order depending on their internal funding abilities.  

With all that said, it is easy to see that it is next to impossible to expect to receive your money within 2 to 4 weeks.  However, it is important to keep realistic goals when considering selling your structured settlement payments.  A typical transaction will take between 60 to 90 days from the time the disclosure is sent.  This is industry norm. If anyone offers faster funding times, consider when they are starting the clock.  In order to get a more realistic view of the timing requirements, you should check your state statute to see exactly what the requirements are.  You can click here to see a list of all the state statutes.

Dire Need or Best Interest?

Not all annuitants who sell their structured settlements are in dire need of money as reported repeatedly by Rhonda Bentzen on her blog. Ironically, she proved the point with her testimonials, yet she continues to insist, “I have said it many times, and I will repeat it again; a factoring transaction should be used as a last resort for annuitants in dire need of liquidity.”

Webster’s Online Dictionary  defines Dire as 1. Fraught with extreme danger; nearly hopeless 2. Causing fear or dread or terror. I do not know about Bentzen, but I sure do not want any of our customers to sell because they are fearful or hopeless. I know people can sometimes get into financial situations that can cause some major frustrations, but the only reason someone should sell their structured settlement annuity payments is if it is in their best interest. There are only a couple of states that require a transaction to meet the financial hardship standard of that state, but I know of no states that have a dire need of liquidity standard.

Settlement Capital has helped many people meet their financial needs who were not in dire situations. We have helped people pay for their child’s college education, pay their child support, pay for a new prosthetic limb, pay for a new handicap accessible van and equip their house with handicap accessible ramps.

These are not all last resort options either. Car / van financing as well as unsecured loans can yield high interest rates from lenders when they are dealing with customers who have experienced some credit issues in the past. Although they may be able to obtain credit elsewhere, it can be in their best interest to sell to a company like Settlement Capital who can offer rates much lower than these other specialty financing companies.

In the end, not all annuitants who sell their structured settlement payments are doing so because they are in dire need of liquidity. These individuals are selling their payments because it is in their best interest or it is helping them get out of a financial hardship situation.

Structured Settlement Factoring Dissipation

There are many articles about dissipation stories related to lottery winners, inheritance recipients and individuals who come into large sums of money all of a sudden.  Most of the studies provide statistics of people who came into LARGE lump sums of money, but for one reason or another, they were not able to properly manage the money to meet their current or future financial needs.  Some people are spreading more urban legends by relating these situations to those who are looking to sell / factor structured settlement payments. 
 
For over 20 years, settlement brokers and planners have been able to help injury victims avoid the dissipation trap that sometimes affects lottery winners and others who receive large lumps sums of money unexpectedly by structuring their payments to meet their financial needs at the time of the settlement.  They plan for the future as best as they can in order to provide financial stability for their clients. Structured settlements fit the need of the vast majority of individuals, but there are a small percentage of people whose financial situation has changed for one reason or another and they need access to a portion of their structured settlement payments. 
 

The average purchase price for a factoring transaction on a structured settlement can range between $25,000 and $45,000 depending on the financial needs of the seller and the size of the annuity policy.  Although most structured settlement factoring transactions do not require the annuitants to give up 2 times the purchase price as the Texas Lottery Cash Out Option Requires, it is safe to assume that the amounts they sell in future payments are less than $50,000 and $90,000.  The average length of term purchased by Settlement Capital is around 8 years.  So the annuitants are selling roughly between $6,250 and $11,250 a year.  More than two thirds of all transactions purchased are partials which leaves the seller with additional money.

 

A Monthly Labor Review Online study  on 496 Massachusetts lottery winners showed winning $15,000 a year for 20 years would not have a major effect a winner’s labor force participation, automobile expenditures, the value of the home they own, and their savings, according to the study.  It would be irresponsible of me to suggest that selling $15,000 a year and coming into $15,000 a year would have the same financial outcome, but there are some parallels.  Most of the dissipation stories of lottery winners and inheritance recipients are dealing with value upward of $500,000 to $1,000,000+ .

Not everyone who has a structured settlement will meet the best interest standard that is applied to each transaction to be able to sell their payments either.  Each structured settlement factoring transaction will be reviewed by the court and must meet the best interest of the seller taking into account the welfare and being of the seller’s dependents in order to be approved.  There is no review process for lottery winners or inheritance recipients to insure it is in their best interest.
 
Those who are looking to sell their payments already have a plan in place proving to the court that the money is going to benefit them in the long run opposed blowing through it without thought.  All of them were given the opportunity to seek independent legal or financial advise.  The idea of structured settlement recipients dissipating their annuity should not be a concern given the relatively small values associated with the transactions coupled with the strict regulation governing the approval process.

Structured Settlement Factoring Discounts

Structured Settlement Factoring has been around for 18 years. In the 9 years I have been in the industry, I have heard and read some stories about our industry that are so absurd, you would think it was an Urban Legend. We hope to use this section to put to rest the misinformation that is consistently floating around about the structured settlement factoring industry.

I will start with the pricing issue that has been and still is the most misunderstood concept about our industry. The Urban Legend is that the factoring companies charge deep discounts to consumers. Like most urban legends, they started with some factual basis but the story has grown with time. The early years of the settlement factoring industry did have some high discount rates due to heavy expenses caused by costly litigation battles on individual cases and limited access to traditional investors. Once the Model Act was agreed upon and federal legislation came on board, interest rates began coming down dramatically, but the perception did not change.

Some of the confusion or misinformation lies within the terminology. There are several ways people explain the discount rate. First, there is the interest rate that is applied to the payment stream itself. The second option is the discounted present value. Finally there is the elementary school math where you take the purchase price and divide it by the total price of all the payments being purchased. Although all are expressed as an interest rate, they are all very different.

Interest rate as defined by Wikipedia is “the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. Interest rates are normally expressed as a percentage…” This is similar to an interest rate associated with home loans, credit cards and car loans. In a settlement factoring transaction, the factoring company knows the payment stream they are going to purchase and applies an interest rate to the payment stream itself and solves for the funding / loan amount. Interest rates from factoring companies to consumers can range anywhere between 9.5% up to 18%, but usually average somewhere in the middle. Interest rates can be a bit higher in factoring transactions opposed to home loans due to the fact the factoring transactions are more of a boutique product for investors opposed to the mainstream collateralized mortgage transactions.

The discounted present value as defined in the Texas transfer statute is the present value of future payments determine by discounting the payments to the present using the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service. The IRS discount rate, also known as the AFR or Applicable Federal Rate, is used to determine the charitable deduction for many types of planned gifts, such as charitable remainder trusts and gift annuities. The rate is the annual rate of return that the IRS assumes the gift assets will earn during the gift term. The IRS discount rate is published monthly. You will find the current available IRS discount rates here.

The term “discounted present value” has no bearing on the actual pricing of a factoring transaction. Some states will require a quotient to be listed on the disclosure that is sent to the customer prior to entering into a contract with a factoring company. The quotient is calculated by dividing the purchase price by the Discounted Present Value. The quotient provides no relevance in the pricing of a settlement factoring transaction either, yet some state transfer laws require it to be listed in the disclosure.

Finally, the most overused and insignificant value associated with “deep discounts” is the concept of dividing the purchase price by the total value of all the future payments added together and describing it as a percentage. The fact that the concept of time is completely disregarded in this equation should be enough evidence to dispel any comments using this illogical percentage as a true representative discount. If this logic was used when buying a home, then every homeowner who takes out a 30year mortgage is getting hit with “Deep Discounts.” Some mortgage companies are currently offering a 30year fixed rate at 6.48%. On a $150,000 loan / home price with a 6.48% nominal annual rate compounded monthly, you would be paying roughly $946.13 for 360 months (this does not include PMI or any additional insurance that may be required) for a grand total of $340,606.80 over the term of the loan. Applying the illogical formula of discounting from above ($150,000 / [$946.13 x 360]), the discount rate would be 44%, but you never hear anyone complaining about mortgage companies charging “Deep Discounts?”

Interest rates, discounted present value and the purchase price divided by the total value of all future payments all share the commonality of being displayed as a percentage, but at the end of the day, they do not tell the whole story. Hopefully when the topic of structured settlement factoring rates are discussed, everyone will have a better understanding of what type of “discount rate” is being implied in the conversation. The concept of factoring companies applying “deep discounts” really is an outdated misconception that has turned into an urban legend.