Entries in Structured Settlement Professionals (46)
Let's Be Careful Out There
Friday, September 26, 2008 at 03:41PM One of my favorite TV shows from the 80s, or ever really, was “Hill Street Blues.” If you're old enough to remember it, you may recall Sgt. Esterhaus at the end of each day’s briefing sternly but grandfatherly telling all the cops "let's be careful out there." As we all try to figure out how the current “Wall Street Blues” will shake out, I think this is sound advice, particularly for people who have structured settlements or are contemplating entering into structured settlements.
Hysteria and panic are generally bad bases for making financial decisions. All indications are that the backbone of the American insurance industry remains strong and stable. Effective state insurance laws that closely regulate the type and diversity of assets that insurers can hold (that back-up the insurance obligations) are working. Consider for instance the largest and most prominent insurance company, AIG. Headlines scream that AIG is “in trouble” and so forth. Read further and you will see, almost mentioned in passing, that the insurance business units at AIG, particularly the life insurance companies, seem to be sound. The fact that potential buyers are clamoring for AIG’s insurance lines should tell us all something.
The insurance business is unique. In our otherwise generally laissez-faire economy, insurance is excruciatingly and minutely controlled by state regulators. Details concerning what can be sold and to whom, and how payment obligations and risks are planned for and capitalized are all subject to strict rules and review. By all accounts at this point, the system is working, even at AIG.
Some insurers have failed in the past to be sure. But to echo remarks made by Messrs. Darer and Cravenho, these are few and far between. The largest “failure” that I know of is Executive Life of New York (ELNY). In 1991 ELNY was taken over by the State of New York and has been in “rehabilitation” ever since. To date, all policies have been paying as planned. Recent news was made when regulators from New York determined that there might be a shortfall in 12-15 years unless corrective action is taken now. Let me summarize: This “failed” insurer has been able to pay 100% of its obligations for the past 17 years, and while ELNY is likely to need its own bailout/rescue from New York regulators, it appears that individual payees of ELNY structured settlement annuities should fair well in the ultimate resolution of this company. To be sure, the projected shortfall needs to be addressed, and I think it will be, but individual payees should take comfort from this example of a “failure.”
AIG is not only one of the largest insurers, but is one of the largest structured settlement annuity issuers. Structured settlements remain a very viable and useful means of settling personal injury lawsuits, providing long-term financial security for tort victims. Predictable and reliable monthly or yearly tax-free income is a great boon for these former plaintiffs and their families, and all indications are that nothing in this current economic turmoil will diminish those benefits. Structured settlement recipients and their advisors should think twice about trying to “dump” this asset in the face of generally bad economic news. The “best interest” standard given in the federal tax code and in most state transfer laws still applies, and a decision to liquidate all of one’s future structured settlement payments in a factoring transaction because of bad news in the press is probably a bad one. Moreover, liquidating solely because of fear and uncertainty relative to the financial circumstances of AIG or any other annuity issuer would likely not meet the best interest standard required for court approval of a transfer.
However, if a structured settlement recipient does have a real need to sell future payments, structured settlement factoring companies can help. But, in this and all things, “let’s be careful out there.”
If you would like to discuss this or any other matter, please contact me at mbracy@setcap.com. I welcome comments to this and all articles, either here on the blog, or privately to me via email or phone.
Part 3 of "A Critical View of Factoring"
Monday, June 2, 2008 at 11:30AM In this third and final installment of my video interview with Jan Schlichtmann, Mr. Schlichtmann concludes his "cross-examination." As always, I look forward to your comments. You can reach me at mbracy@setcap.com.
Part 2 of "A Critical View of Factoring"
Friday, May 16, 2008 at 09:17AM Click below for part 2 of Jan Schlichtmann's "cross-examination" of me on factoring issues. As always, I look forward to your comments and questions. You can reach me directly at mbracy@setcap.com
Factoring 101: The Truth About Servicing
Tuesday, April 22, 2008 at 04:17PM This is the first article in a new series on structured settlement factoring basics. These articles will attempt to educate about factoring, open a dialogue on some basic factoring issues, and dispel rumors and misunderstandings. If there is a topic you think should be addressed here, please let me know.
“Servicing” refers to a common practice in structured settlement factoring transactions, where only part of a monthly or lump sum payment is purchased by a factoring company, but the factoring company receives the entire payment. Once received, the factoring company sends the unpurchased portion to the seller/payee. As explained below this is actually a good and necessary practice (contrary to comments by John Darer and Andrew Cravenho, who seem to not fully understand it).
Servicing can best be understood in the context of a typical factoring transaction. Here’s an example: Assume a payee receives $1,000 per month from a structured settlement. The payee has a need for a lump sum for some reason, let’s say it’s to replace an old and not working car.
First Question: How Much?
The payee (now “seller”) contacts a structured settlement factoring company, who first asks the seller how much money they need and why. The new car costs $20,000, and without reliable transportation the seller can’t get to work.
Second Question: How Many?
There are many options available to the seller to reach the desired funding amount, and many factors will go into this analysis. One option would be for the seller to transfer 100% of the monthly payments for a period of time. Under this scenario, the seller would transfer about a couple years worth of payments to generate the desired $20,000.
An obvious problem with this scenario is that it leaves the seller with no monthly income from the structured settlement during those years. Depending on the individual circumstances of the seller, that might be acceptable. For others who rely on some of that monthly income for fixed costs, that would not be the best alternative.
Another option would be to sell just a portion of the monthly payments. For example, the seller could receive $20,000 by transferring $500 per month out of the total $1000. Under this scenario, the seller would need to sell more months of payments, but will be keeping $500 per month throughout. For the remainder of this hypothetical example I will assume that this is the most desirable course for the seller.
Third Question: How’s it done?
Most structured settlement factoring transfers involve only part of the structured settlement payment stream. Sometimes that part is 100% of the payments, but only for a period of time less than the total payment stream (as in the first example above). Sometimes, probably most often, the partial transfer is of a part of the monthly payments or lump sum (as in the latter example above).
There are two ways to accomplish this kind of transfer. First, which is the easiest and preferred method, is for the insurance company that issues the payments to “split” the payments in question, sending the purchased part to the factoring company and rest to the payee/seller. However, in some cases and for a variety of reasons, the issuer will not agree to split the payments. When the payments cannot be split, the only other option is for the entire payment to be sent to the factoring company, who in turn sends the unpurchased portion to the payee/seller. This is called “servicing.”
In circumstances where the annuity issuer will not agree to split payments, servicing is the best alternative for the annuitant. Absent the servicing option, sellers would either not be able to factor payments at all, or would be forced to sell more payments than necessary (or more than is in their best interest to sell). I am not aware of any factoring company that charges a fee for servicing payments in this way. Payees receive their serviced portions promptly and generally experience no significant delay.
Such servicing arrangements should be reflected in the transfer order. Payees/sellers who later elect to sell more payments should be free to do so, and the order approving the subsequent purchase should simply reflect that the prior order is amended as to the servicing and the serviced portion should now go to the new factoring company.
If you have any questions about servicing or factoring in general, please do not hesitate to contact me at mbracy@setcap.com.
***Update 4/23/2008: Messrs. Darer and Cravenho have both responded to this article on their blogsites. My response is attached as a comment to Mr. Darer's blog post here.
What’s Going On in West Virginia?
Friday, February 15, 2008 at 11:36AM Pat Hindert and John Darer have both written about legislation proposed in West Virginia that would radically alter the current law there, as well as depart from the national model act and standards used in most states. As identified by Hindert, the proposed law, HB 4380, has three essential elements:
- Mandating that a guardian ad litem be appointed for every prospective seller
- Changing the standard for approval from “best interests” to requiring clear and convincing evidence that the transfer is to avoid a financial hardship (and is in the seller’s best interest), and
- Imposing a rate cap for discount rates equal to the average mortgage rate for 20 year mortgages (the average rate is thought to be around 6%, but the state Banking Commissioner has indicated that they do not track that and don’t want to).
Contrary to John Darer’s position, in my opinion none of these would be good for tort victims. In fact, each prong of this proposed new law effectively shuts the courthouse doors on tort victims who will never have their chance to sell structured settlement payments when they need to. They are also just bad public policy. ALL sellers would have to have a guardian ad litem appointed, irrespective of their sophistication or understanding. For the non-lawyers who read this, a guardian ad litem is a court appointed person, usually a lawyer, who is supposed to essentially act as that person’s parent in the matter before the court. (“A guardian ad litem is a special guardian appointed by the court in which a particular litigation is pending to represent an infant, ward or unborn person in that particular litigation…” Black’s Law Dictionary, 6th Ed.). How insulting to tort victims. Does being a tort victim mean you are not capable of making your own decisions? Or is it because you are a structured settlement recipient? What does that imply about structured settlement recipients? Sure, some tort victims are truly not capable of making financial decisions, and the courts of West Virginia, like courts everywhere, already have the inherent power to appoint guardians ad litem in those cases. But should it be mandatory for all sellers, irrespective of their individual status?
Only sellers needing money to avoid “financial hardship” would be able to sell future payments under the proposal. This is vastly different from the common “best interest” standard, and again would restrict which West Virginians would be able to even make it into the courtroom to tell their story. Is getting a new prosthetic leg “avoiding a financial hardship”? Probably not. How about being able to attend college or a trade school. Again, most likely not. Should structured settlement recipients be able to sell their asset, future payments, to do these things. Maybe. But under the proposed law, they would never get to make that case, under any circumstances.
The “rate cap” is probably the most clear evidence of what this bill is really about. If the rate is capped at 6%, then the structured settlement factoring market in West Virginia is closed. Period. All funding companies in this business must borrow money to use in funding. 6% is far below the rate at which we can borrow, so each transaction would start at a loss, and just get worse. Don’t forget, we would also need to pay the guardian ad litem, and the attorney bringing the action, not to mention covering our overhead, and making a reasonable profit. Under this proposal, we would never get to this level of analysis, because a large “Closed for Business” sign would be hung at the West Virginia border. Customers like “Mr. Smith” (real person, real West Virginian, fake name for this article), a retired Veteran, would not have been able to sell some of his future payments to buy an oxygen machine to help him breathe.
What is this bill really about? Delegate Walters, the key sponsor and a structured settlement broker, has made it very clear that this is really about putting the factoring companies out of business in West Virginia. His bill would do just that. If that is the goal, then let’s debate that issue directly and not dress it up in all this costuming, pretending to be “consumer protection”. But, if the factoring companies are out of business in West Virginia, then West Virginians with structured settlements are out of luck when they experience a life change, not anticipated at the settlement table. They will no longer enjoy the same financial freedom and flexibility as their neighbors in Virginia, Ohio or Pennsylvania.
HB 4380 is bad law and bad policy, and everyone, including the NSSTA and Mr. Darer, should oppose it.
Misinformation and Misconception -- Part 2: The Broker’s Fees Debate
Thursday, January 31, 2008 at 11:24AM I have written before about the vast amount of misinformation out there on structured settlement factoring. But, misinformation is only part of the problem. Underlying some of the misinformation and some of the criticism of the factoring world is an inherent belief that factoring is evil (or at least very bad). Not that some factoring folks are bad, or that factoring is bad for some people, but that factoring in itself is, inherently and intrinsically, bad. This view is all too pervasive, and seeps into legitimate discussions about some factoring practices, unfairly coloring the discussion. Let me give an example.
John Darer, a structured settlement broker (that means he advises and helps people settle lawsuits and get into structured settlements), blogger extraordinaire and someone I admire has been engaging in a blog discussion about structured settlement brokers who accept referral fees for sending customers to factoring companies. This is an important discussion, and John has raised good points. However, intertwined in the dialogue and in some endorsements of John’s “clean vendor list” is the “factoring is evil” theme. The best example of this is Richard Halpern’s voiced support for eliminating factoring referrals, quoted by John in his December 13, 2007 posting. The discussion is whether structured settlement brokers should receive a referral fee for sending customers to factoring companies. John thinks not, as he sees this as “taking money out of the pockets of tort victims.” Mr. Halpern supports John’s position – or does he? “I applaud your call for all structured settlement brokers to sign your affidavit and to refrain from helping plaintiffs squander their money.” Mr. Halpern is apparently supporting a different plan, one that eliminates any referral to a factoring company at all – not simply refraining from taking a fee for doing so. That is clearly not what John is suggesting. Arguments about whether factoring leads to plaintiffs “squandering their money” should be considered independently and not mixed into this discussion.
I suggest that unless your “worldview” of factoring is clear, honest debates like this one can never go anywhere. Should factoring be abolished? If not, then at what level of involvement should various advisors be engaged? Who are these advisors? Several of John’s posts indicate that he thinks everyone who factors payments should be represented by an advisor. Who pays for that? Is there any difference between the payments that would need to go to such advisors and the payments to a broker who refers the business? They both would “take money out of the pockets of tort victims.” Is there a value being added, or otherwise a justification for the fee?
We’ve already said goodbye to 2007, let’s also say goodbye and good riddance to misinformation. Clear thinking and clear communication will help us all move our respective industries forward – beyond the misconceptions.
For more information on this topic and more, watch and/or listen to our latest video podcast.
Misinformation and Misconception
Monday, January 14, 2008 at 04:22PM When it comes to structured settlement factoring, terms and terminology get constantly mixed up, misquoted and misrepresented. Folks can’t seem to get it straight that “structured settlement brokers” are not in the factoring business and factoring companies are not in the structured settlement brokerage business. Misinformation is rampant. Depending on who you read and your perspective, factoring is evil, a necessary evil, a viable alternative, or the only way. Where is the truth in all this?
It seems the world’s understanding of structured settlement factoring, and the intersecting world of structured settlements, is in disarray. Why are the basic facts constantly misstated, overstated, understated or not stated at all? How can you explain the enormous quantity of misinformation on the internet?
The large volume of “information” on the internet concerning structured settlement factoring is undoubtedly a function of the high cost of terms like “sell structured settlement” for sponsor ads on Google and such. With lots of money to be made on the internet by simply getting people to click on ads, nature takes over and you then have many, many internet sites featuring information on how to “sell your structured settlement”. Naturally there is no real regulation or screening, and much of what is written about factoring is garbage. The volume of misinformation is astounding, with new entries nearly daily.
I have discussed such misinformation in the past. Another recent example is the “Ezine” article by Lance Winslow. Although Mr. Winslow has a very diverse background, and is a self-proclaimed Very Interesting Guy who traces his ancestry to the Mayflower, he knows little or nothing about structured settlements and factoring. For instance, Mr. Winslow’s short breezy article on structured settlement factoring states that you can use the money you generate from the factoring sale for "investing, buying a house or buying new car, plasma TV and other things humans want to make them happy.” I wonder if Mr. Winslow would like to come to court with me and explain how selling guaranteed, income tax-free payments and buying a plasma TV is in the “best interest” of the seller.
If you are involved in the structured settlement business, please take some time to educate yourself on what factoring really is, how it works and how courts influence the process and the underwriting.