U.S. GOVERNMENT PUBLISHING OFFICE

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S. HRG. 114–856

PENSION ADVANCES: LEGITIMATE

LOANS OR SHADY SCHEMES?

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING

UNITED STATES SENATE

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

WASHINGTON, DC

SEPTEMBER 30, 2015

Serial No. 114–13

Printed for the use of the Special Committee on Aging

(

Available via the World Wide Web: http://www.govinfo.gov
(II)

SPECIAL COMMITTEE ON AGING

SUSAN M. COLLINS, Maine, Chairman

ORRIN G. HATCH, Utah

MARK KIRK, Illinois

JEFF FLAKE, Arizona

TIM SCOTT, South Carolina

BOB CORKER, Tennessee

DEAN HELLER, Nevada

TOM COTTON, Arkansas

DAVID PERDUE, Georgia

THOM TILLIS, North Carolina

BEN SASSE, Nebraska

CLAIRE MCCASKILL, Missouri

BILL NELSON, Florida

ROBERT P. CASEY, JR., Pennsylvania

SHELDON WHITEHOUSE, Rhode Island

KIRSTEN E. GILLIBRAND, New York

RICHARD BLUMENTHAL, Connecticut

JOE DONNELLY, Indiana

ELIZABETH WARREN, Massachusetts

TIM KAINE, Virginia

PRISCILLA HANLEY, Majority Staff Director

DERRON PARKS, Minority Staff Director
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C O N T E N T S

Page

Opening Statement of Senator Susan M. Collins, Chairman .............................. 1

Opening Statement of Senator Claire McCaskill, Ranking Member ................... 2

PANEL OF WITNESSES

Louis Kroot, M.D., CMDR, USN, Retired, (accompanied by wife, Kathie Kroot)

Lexington, Kentucky ............................................................................................ 5

Stephen Lord, Managing Director, Forensic Audits and Investigative Service,

U.S. Government Accountability Office, Washington, D.C. .............................. 7

Kaycee L. Wolf, Staff Attorney, Arkansas Securities Department, Little Rock,

Arkansas ............................................................................................................... 8

Stuart T. Rossman, Director of Litigation, National Consumer Law Center,

Boston, Massachusetts ......................................................................................... 10

Maria Cauwenbergh Walden, Director of Legislation and Policy, Public School

and Education Employee Retirement Systems of Missouri, Jefferson City,

Missouri ................................................................................................................ 13

APPENDIX

PREPARED WITNESS STATEMENTS

Louis Kroot, M.D., CMDR, USN, Retired, Lexington, Kentucky ......................... 33

Stephen Lord, Managing Director, Forensic Audits and Investigative Service,

U.S. Government Accountability Office, Washington, D.C. .............................. 37

Kaycee L. Wolf, Staff Attorney, Arkansas Securities Department, Little Rock,

Arkansas ............................................................................................................... 58

Stuart T. Rossman, Director of Litigation, National Consumer Law Center,

Boston, Massachusetts ......................................................................................... 71

Maria Cauwenbergh Walden, Director of Legislation and Policy, Public School

and Education Employee Retirement Systems of Missouri, Jefferson City,

Missouri ................................................................................................................ 80

QUESTIONS FOR THE RECORD

Kaycee L. Wolf, Staff Attorney, Arkansas Securities Department, Little Rock,

Arkansas ............................................................................................................... 87

STATEMENTS FOR THE RECORD

Letter of Resignation to VFG from Jonathan Sheets ........................................... 91

Email to VFG from Jonathan Sheets ..................................................................... 92

Consent Order with exhibits A through H ............................................................ 93

National Law Consumer Magazine regarding military advertisement ............... 117

Letters regarding pension beneftis from the Public School & Education Employee Retirement Systems of Missouri ............................................................. 119

The New York Times article regarding ′′Loans Borrowed Against Pensions

Squeeze Retirees′′ ................................................................................................. 126

News article from Treasurer Clint Zweifel regarding pension advances ............ 130

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PENSION ADVANCES: LEGITIMATE

LOANS OR SHADY SCHEMES?

WEDNESDAY, SEPTEMBER 30, 2015

U.S. SENATE,

SPECIAL COMMITTEE ON AGING,

Washington, DC.

The Committee met, pursuant to notice, at 2:30 p.m., Room 562,

Dirksen Senate Office Building, Hon. Susan M. Collins, Chairman

of the Committee, presiding.

Present: Senators Collins, Cotton, Tillis, McCaskill, Donnelly,

Warren, and Kaine.

OPENING STATEMENT OF SENATOR

SUSAN M. COLLINS, CHAIRMAN

The CHAIRMAN. Good afternoon. The hearing of the Special Committee on Aging will come to order.

Decades ago, the warning ‘‘caveat emptor,’’ buyer beware, was

the best advice one could give to a consumer seeking to borrow

money. Well, that advice is still valid today.

There are laws that seek to ensure that consumers understand

the obligations that they are taking on and that lenders have to

play by the rules. Since the passage of the Federal Truth in Lending Act in 1968 and similar State laws around the Nation, credit

providers have been required to disclose key terms of consumer

credit agreements up front in easy to understand language. If you

want to know what interest rate you will pay on a new credit card,

you will find it in big, bold letters right there on the front of your

application. Likewise, interest rates on car loans, personal loans,

mortgages, and myriad other consumer loan products are clearly

and conspicuously displayed, but as we will learn today, that is not

true for so-called pension advances. Pension advances are agreements under which consumers, usually retirees, receive cash lump

sums in exchange for part or all of their monthly pension check.

The effective interest rate on these lump sum payments can be outrageous. One company charged nearly 120 percent last year. That

fact, however, is hidden in the pension advance agreements, which

do not include the simple and clear disclosures required by law for

consumer loans. Instead, these contracts are so convoluted that it

is difficult for consumers to realize just how much their lump sum

pension advance is really costing them.

By way of comparison, I would like to direct your attention to

this chart. Using the State of Washington as an example, this chart

shows the average interest rate charged on various forms of consumer debt compared to the effective rates on pension advances.
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The first three bars from the left show interest rates on typical

sources of consumer credit—4.3 percent for car loans, 9.7 percent

for personal loans, and 12 percent for credit card debt.

The three bars on the right are interest rates calculated by the

Government Accountability Office, better known as GAO, on pension advances that one company sold in Washington State over the

past three years. As you will see, the rates escalated to an astonishingly high 117 percent last year. All of these rates are higher

than the State of Washington’s usury rate of 25 percent.

As if these interest rates were not bad enough, many pension advance companies require their customers to sign complex documents whose terms can only be described as deliberately deceptive.

Typically, customers are required to take out life insurance policies

naming the pension advance company as the beneficiary.

Most consumers simply do not realize that the rates that they

are paying are so high. For example, one of my constituents did not

understand that he was paying a rate of 54 percent on his pension

advance until his tax preparer told him that the deal just did not

look right and advised him to contact the Maine Bureau of Consumer Credit Protection.

Second, many of these consumers are financially vulnerable and

desperate for cash. These pension advance companies exploit this

desperation. They also use flashy, aggressive, and misleading advertising to encourage quick and uninformed decisions.

It is extremely troubling that some companies aggressively target

the patriots who have served our country, our veterans. They use

websites displaying the uniform and wrapped in red, white, and

blue, and run ads in military magazines. Federal law prohibits the

assignment of pensions of enlisted military retirees, but pension

advance companies too often ignore this prohibition, just as they ignore Federal and State laws requiring clear disclosure of interest

rates on consumer loans and just as they ignore State usury laws

that set a ceiling on the amount of interest that can be charged on

consumer loans. Pension advance companies claim that these laws

simply do not apply to them, arguing that their products are not

consumer loans or assignments, but simply advances.

Today’s hearing builds on this Committee’s ongoing investigation

into pension advances and continues our efforts to protect America’s seniors from shadowy schemes that threaten their financial

security. I hope that any retiree considering a pension advance will

think carefully before taking that step and will seek advice on

other ways to obtain financial assistance.

I look forward to hearing the testimony of all of our witnesses

today.

With that, I would like to turn to our Ranking Member, Senator

Claire McCaskill.

OPENING STATEMENT OF SENATOR

CLAIRE MCCASKILL, RANKING MEMBER

Senator MCCASKILL. Thank you, Senator Collins, Chairman Collins.

Retirement security and consumer protection are both large

parts of this Committee’s focus and mission under the leadership

of Chairman Collins. Today’s hearing presents an opportunity to
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look at an alarming practice that intersects both of these Committee priorities.

The defined benefit pension plan is considered the gold standard

in terms of retirement security. Although it is not as popular as it

once was, those people retiring today with a defined benefit plan

are incredibly fortunate. They get a fixed payment for life, so they

cannot outlive their savings, and they did not have to figure out

how to invest this money or how much to put aside, so they are

saved from the burden that they may not have had the financial

wherewithal to adequately care for themselves throughout retirement, nor do they have to worry about an economic downturn happening right before they cash out.

Willie Sutton explained that he robbed banks because that is

where the money is. Well, these seniors with defined benefit plans

are similarly ripe targets for a different kind of crook. These

fraudsters offering pension advances are undermining all the advantages of these defined benefit plans, making what had been a

secure retirement suddenly very unsettled. Worse still, these folks

are targeting some of the pillars of our communities—our firefighters, our teachers, our veterans.

They are also finding unwitting victims among elderly investors

looking for a safe investment at a time in their lives when they are

looking for ways to earn a little bit of money without taking a large

financial risk. It truly is an impressive scam that is able to take

advantage of both sides of the financial transaction, the investor

and the pensioner, but that is what these pension advance schemes

have been doing.

Today, we will hear firsthand from victims of these schemes as

well as those in the public sector and consumer protection groups

about their efforts to combat this problem. This Committee is also

investigating the bad actors behind these schemes, and I commend

Chairman Collins for using this Committee’s investigative and

oversight powers to go after these folks.

Right now, there simply is not enough being done here, because

it is a legal gray area. While we hear from our Arkansas witness

about all the good work she is doing down there to protect the public, unfortunately, once she catches these guys, she cannot prevent

the same bad actors changing their corporate name and putting

down roots somewhere else to find new victims in other states.

There is only one State in the country where pension advance

companies are not trying to take advantage of teachers, veterans,

and firefighters, and that, I am proud to say, is in my home State

of Missouri. I want to commend the work of our State Treasurer

Clint Zweifel, who joined Republicans in the Missouri General Assembly to push for this legislation last year. This bill received enormous bipartisan support with no one testifying against it.

Among those who spoke on the bill is one of our witnesses today,

Maria Walden, from the Public School and Education Employee Retirement Systems of Missouri, the largest defined plan in our State

and one of the best plans in the country. She will talk about the

legislation banning pension advances and the protections that

cover her members.

I am also pleased to say that, thus far, our State has not had

any reports of pension advance companies coming to Missouri since
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the bill was signed into law. I am hopeful other states will follow

Missouri’s lead and protect those public employees who have spent

their careers protecting us.

Once again, I want to thank the Chairman for calling this hearing and for our witnesses for joining to discuss this problem today.

I look forward to your testimony. Thank you.

The CHAIRMAN. Thank you very much.

We are now pleased to turn to our panel of witnesses. First, we

will hear from Dr. and Mrs. Louis Kroot. He is a retired Navy physician from Kentucky, and he and his wife, Kathie, will share with

us their personal experience in selling their pension to a pension

advance company.

Next, we will hear from Stephen Lord, the Managing Director at

the Government Accountability Office, who will discuss GAO’s investigation of the pension advance industry.

We will then hear from Kaycee Wolf from the Arkansas Securities Department, and I would like to call on our colleague, Senator

Cotton, for the introduction of Ms. Wolf.

Senator COTTON. Thank you. I am pleased to introduce Kaycee

Wolf, who will testify about the work she and her colleagues did

fighting pension advance fraud in Arkansas.

Kaycee is a University of Arkansas Law School alum and has

helped to protect Arkansans for the past five years as an attorney

with the Arkansas Securities Department. Her work with the Securities Department was not about preventing sophisticated parties

from entering mutually beneficial agreements. Instead, as we will

hear, her team spent thousands of hours successfully fighting outright fraud and blatant misrepresentation of contracts.

Kaycee, thank you for appearing before us today. It is an honor

for this Committee and Arkansas to have you here. Arkansas and

I are proud of the work you and your team have done and hope

it can be a model for the entire country.

The CHAIRMAN. Thank you.

We will then hear from Stuart Rossman, the Director of Litigation at the National Consumer Law Center, and I understand that

Senator Warren would like to introduce this witness.

Senator WARREN. Thank you, Chair Collins.

I am pleased to introduce one of our witnesses today, Mr. Stuart

Rossman. As you said, Mr. Rossman is the Director of Litigation

at the National Consumer Law Center in Boston, Massachusetts.

I just want to say about Mr. Rossman, he is deeply knowledgeable about the law, but he also has a very thorough understanding

about what is actually happening to people across this country. In

other words, he knows his stuff, and we are lucky to have him here

today.

Thank you, Mr. Rossman.

The CHAIRMAN. Thank you.

Finally, I want to ask Senator McCaskill if she would like to add

anything. You mentioned our final witness on this panel, Maria

Walden. If you have anything you would like to add to what you

said in your opening statement.

Senator MCCASKILL. Well, as I mentioned in my opening statement, she is the Director of Legislation and Policy for the Public

School and Education Employee Retirement Systems, and it is one
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of the finest pension programs in the country. I like to remind our

teachers in Missouri that we are not high on the scale when it

comes to salaries, but when I was an auditor, we were number one

in the country in terms of pension benefits. Are we still number

one?

Ms. WALDEN. We are very close, Senator.

Senator MCCASKILL. Yes. I know that we have one of the finest

pension programs for people on the front line of every social ill that

faces our country. I think we forget that it is teachers that we are

asking to do so much more than teach in so many places in our

country today, so well deserved, good pensions, I think, are something that we all need to in this country realize is an important

part of financial security.

I am proud of your organization and so glad that you are here

today. Thank you.

The CHAIRMAN. Thank you all for joining us. We look forward to

hearing your testimony, and we are going to start with Dr. and

Mrs. Kroot.

STATEMENT OF LOUIS KROOT, M.D., CMDR,

USN, RETIRED, LEXINGTON, KENTUCKY

Dr. KROOT. Chairman Collins, Ranking Member McCaskill, distinguished Senators on the Committee, thank you for the opportunity to appear before you today and to testify about our family’s

experience with pension advances. We are here today as husband

and wife, because in our 34 years of marriage, we have always operated as a team and ours is a shared cautionary tale.

For 22 years, I served our country in the Navy as a physician.

When I retired as Commander, I intended to continue to work as

a doctor, and I did so as an ER attending physician in several hospitals. Today, I continue to work as an ER attending at a VA hospital in Lexington, Kentucky.

My wife, Kathie, has been at my side throughout most of my career and has done incredible work as an advocate for organ donation and as a dedicated volunteer at our synagogue.

When I left the military, I planned to continue to provide for our

family through work and through my military pension, but due to

a perfect storm of unfortunate events, we were left with debt spiraling out of control. First, we received bad tax planning advice in

moving funds from a 401(k) and incurred around $100,000 in unexpected fees and penalties.

Second, we suffered over $10,000 in home repair from our basement flooding while our house was in escrow.

Third, we incurred an enormous amount of medical expenses

when it became necessary for our adopted special needs daughter

to be repeatedly hospitalized for a serious psychiatric medical condition.

We were financially desperate at that time and did not know

where to turn. We had incurred an extraordinary and unexpected

debt. We were looking for any way to pay off this debt.

We had seen advertisements in military magazines for companies

that gave lump sum payments for military pensions. We contacted

one of these companies, Structured Investments, which was doing

business under the name of Retired Military Financial Services,
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and they offered to provide us with a lump sum payment against

my future pension payments. We jumped at the opportunity. We

felt that the lump sum payment structured investments offered

would allow us to pay off much of our existing debt.

We understood at that time that we were taking an advance on

moneys that were due from future retirement payments. We understood that there would be fees for this service. We did not realize

how expensive it was going to be. We simply did not get out the

calculator or see it as a loan. We were desperate and we panicked.

In fact, we realized we had been taken to the cleaners by Structured Investments. We were shocked when the complex math in

the contract was broken down by a reporter and explained to us

that we were paying over 30 percent interest on our advance. The

paperwork we signed did not disclose the interest rate. It did not

break down how the numerous fees we were paying to Structured

Investments raised our interest rate.

An example of these fees are the thousands of dollars we paid for

a life insurance policy on me, required for the advance by Structured Investments, listing Structured Investments as a beneficiary,

and we needed to continue to pay this two years after the loan was

paid off because we needed consent from them in order to stop the

insurance policy.

We ended up paying more in interest with our pension advance

than we would have paid if we had simply paid off the interest over

time on our existing debt load.

Moreover, we learned after the fact that there were alternatives

we could have used to reduce our debt load while avoiding paying

the high fees charged by Structured Investments.

We have fully paid off Structured Investments. Looking back on

our experience, it is clear that we made a mistake. We should have

been more aware of what we were buying. We also want to make

clear that we accept that we signed the contract and we accept responsibility for that. We should have known better.

As we said, ours is a cautionary tale and we want to make two

points to those who may find themselves in a situation similar to

ours. First, you have other options. You should explore those options and should resist the urge to reach for easy, immediate cash.

Second, had we known what we now know, we never would have

taken out the pension advance from Structured Investments with

their unreasonable fees.

We wish we could do everything over again and make better decisions. It is our fervent hope that by testifying today, we can prevent other individuals from making the same mistake we did.

Thank you again for the opportunity to be here and we look forward to your questions.

The CHAIRMAN. Thank you very much for sharing your personal

experience. When people hear that a physician can be tricked by

these convoluted contracts with the lack of disclosure, I think it is

a cautionary tale to others, and by coming forward and being willing to share your story, I believe that you will save others from

making the same mistake, so I very much appreciate your sharing

your story with us today.

Mrs. Kroot, do you have anything you would like to add from

your perspective?
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Mrs. KROOT. No. We should have known better. I am a math

major and I should have done the math.

The CHAIRMAN. Well, I think the fact that these contracts could

fool a physician and a math major probably tells you all you need

to know about the lack of disclosure, the deception in the contracts,

the hidden fees, the charges, and I think we will hear next from

Mr. Lord that based on GAO’s investigation, your experience is not

at all uncommon, unfortunately. Thank you.

Mr. Lord.

STATEMENT OF STEPHEN LORD, MANAGING DIRECTOR,

FORENSIC AUDITS AND INVESTIGATIVE SERVICE, U.S.

GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, D.C.

Mr. LORD. Thank you, Chairman Collins, Ranking Member

McCaskill, and members of the Committee. I am really happy to

be here to discuss our June 2014 report on pension advances and

the status of agency efforts to implement our really important recommendations. This is a really important issue, because, as highlighted by Dr. Kroot, there are companies out there using aggressive marketing techniques to target those who are vulnerable and

those in urgent need of cash.

Today, I would like to discuss three issues. First, the number

and types of companies marketing these types of products. Second,

I would like to discuss how the terms of these products compare

to other similar financial products, such as consumer loans, and finally, I would like to clarify the role of the CFPB and the Federal

Trade Commission in overseeing these activities.

First, regarding the overall numbers, at the time of our review,

we identified 38 companies that offered lump sum pension advance

products. While 18 of these companies were located in California,

the remainder were spread across several other states and virtually

all of them marketed these products on a nationwide basis through

websites. I think that is one of the key points we revealed through

our work, as well, and we found—interestingly, we found that at

least 30 of these 38 companies were affiliated in some manner with

each other, and if you could turn your attention to, I called this our

‘‘connecting the dots’’ chart. This is not obvious from a consumer

perspective, because if you make phone calls or conduct website research, you are initially led to believe there are 38 companies out

there operating independently. Yet, by virtue of our undercover

phone calls and follow-up research, we were able to identify connections between these entities.

For example, Dr. Kroot, the two companies he dealt with are exhibited in the upper left-hand corner. That is Company four, as

well as Company five. Structured Investments is Company four,

and Retired Military Financial Services is Company five. It was obvious—it was not obvious to him at first blush that they are related, but through our work, we were able to identify these connections.

The bottom line is the lack of transparency can make it difficult

to file a complaint if you are a consumer, because you really do not

know who you are dealing with. Also, if you are considering making an investment in one of these companies, it is difficult to do
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any research to assess the reputability of these vendors before

making a financial decision.

A second key point is regarding the terms of these deals. As

highlighted by Dr. Kroot, the terms do not compare favorably with

other similar financial products. How did we determine this? We

analyzed 99 offers provided by six companies in response to our undercover phone calls. They did not know we were GAO calling.

They assume we were a consumer interested in investing in these,

and we found, first, these products had effective interest rates that

were significantly higher than the legal limits set by states on consumer credit, called the State usury limits, and these rates range

from 27 percent to 46 percent interest rates. As you can see, that

is considered really high.

Second, we also found that these lump sums offered through

these companies were about half of what you would get through a

defined benefits pension provider. If you were to get it directly from

your pension provider, it averaged about half. The percentage was

46 to 55 percent, so again, you could see these terms were not really that attractive from a consumer perspective.

In terms of disclosure, as also highlighted by Dr. Kroot, we found

that of the 38 companies, most did not disclose an effective interest

rate, so it is really difficult to assess what type of rate is being provided.

The bottom line of all our analysis, that these were not a good

deal for consumers and the companies appear to be operating in a

regulatory gray area.

There is some good news here. In terms of our report recommendations, CFPB has taken some recent enforcement action.

In August of this year, it filed a complaint against Pension Funding LLC. That is one of the entities Dr. Kroot was dealing with,

as well as one other related entity. They also have released, CFPB

and FTC, some consumer advisories in this area, so it is encouraging that the regulatory agencies are taking some regulatory and

enforcement action, as we recommended in our report.

This concludes my prepared remarks and I look forward to answering any questions you have later. Thank you.

The CHAIRMAN. Thank you very much.

Ms. Wolf.

STATEMENT OF KAYCEE L. WOLF, STAFF

ATTORNEY, ARKANSAS SECURITIES DEPARTMENT,

LITTLE ROCK, ARKANSAS

Ms. WOLF. Good afternoon, Chairman Collins, Ranking Member

McCaskill, Senator Cotton, and other distinguished members of the

Committee. I appreciate the opportunity to speak with you today

about the investigation that the Arkansas Securities Department

conducted against one such pension advance company, Voyager Financial Group, or VFG, and its owner, Andrew Gamber.

What we found in our investigation is that although VFG was located in Little rock, Arkansas, it used a network of individual

agents who were located throughout the United States as well as

various websites with multiple domain names, different company

names—that was mentioned by the GAO—under this one company,
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and so, it seemed like there were several different companies out

there and it was all under the umbrella of VFG.

Through these websites, they would try to locate pensioners who

were interested in selling the right to their pension payments for

a lump sum, and they would also look for buyers who were interested in paying a lump sum amount for a steady return on their

investment. I believe some of the interest rates promised were between seven and nine percent, which was more than what the market was offering.

Some of the investors also found out about this product through

agents with whom they had already a professional relationship.

VFG facilitated everything for the transactions on both sides.

The pensioner and the investor never spoke and never dealt directly with each other. They always dealt with VFG and VFG’s

agents.

Once a pensioner was located, VFG would place the pension up

for sale and they would help the pensioner establish an escrow account. The pensioner would then submit paperwork provided by

VFG to their pension company and the pension company would be

instructed to forward the pension amount to an escrow account. In

turn, once that money was in the escrow account, it was then directed to be forwarded to the investor each month.

This is an important distinction, because at no time was the actual pension assigned. At no time did the pensioner relinquish control over his pension, and at no time did the investor have control

over that pension. The reason why this is important is because the

number one complaint that we received was the failure of VFG and

its agents to disclose the redirect risk, and what I mean by this is

because the pensioner maintained control of his account, because

especially with military pensions it is illegal to assign away your

pension, they could direct the escrow company to—or direct the

pension company to redirect the funds back to a different account

and no longer to that escrow account. If the pensioner got into financial trouble and had to file bankruptcy, the pension would get

caught up in the bankruptcy and would no longer go to the escrow

account, so from the investor perspective, they were no longer getting that monthly return. They were never warned that this was

possible.

The problem is, that a lot of the investors we saw were senior

citizens looking for a safe, low-risk investment, and that is how

this product was packaged to them, that this was safe. You would

get a seven to nine percent return on your investment each month,

and some of the investors were told it was government insured,

which was patently false.

Another miscommunication and blatant, outright lie from VFG

was the failure to disclose the fees involved in these type of products, and you have heard some about that. VFG failed to disclose

a fee breakdown on both sides of the transaction. A pensioner

never actually knew what their pension sold for lump sum, and on

the other side of the table, an investor never knew how much of

that lump sum they paid actually went to the pensioner. They were

told VFG would receive a fee, sometimes an administrative fee is

how it was couched, and the investors were told, but most of your
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money is going to go to the pensioner, and that ended up not being

the case because there was a failure to disclose the fees.

What happened in reality was that VFG would receive the lump

sum payment from the investor. They would cut themself a rather

large commission off the top. Then they would forward all of the

commissions on to the individual agents. I saw one contract that

had as many as six individuals receiving commissions off of one

sale.

Then they would pay out administrative fees, such as the escrow

fee and other various fees, and then along down the line, finally,

the pensioner would receive a much smaller lump sum amount

than what it was purchased for, and again, there was no detailed

disclosure about that to either side, either the investor or the pensioner.

Unfortunately, with the Arkansas Securities Department in its

name, we are a securities regulator, so we were looking at this

from the investor side and we were very limited in the type of regulatory action we could take. Fortunately for us, Arkansas State

law is the risk capital test to be able to analyze it as an investment

contract, and we determined that it was under our State test, and,

therefore, it was a security, so we were able to take enforcement

action against VFG. However, the risk capital test is not the analysis in every State, nor is it the analysis federally, so it does vary

State to State whether this would be considered a security.

Although we were able to shut down VFG, it is unfortunate that

Mr. Gamber has not learned his lesson, because it seems that he

has continued to flout authority and has developed other companies

and looks to be doing the exact same thing, and we currently have

an ongoing investigation against him and some additional companies.

So, I want to conclude by thanking you for having me here to

talk about our investigation and I look forward to any questions

you have.

The CHAIRMAN. Thank you very much.

Mr. Rossman.

STATEMENT OF STUART T. ROSSMAN, DIRECTOR

OF LITIGATION, NATIONAL CONSUMER LAW CENTER,

BOSTON, MASSACHUSETTS

Mr. ROSSMAN. Thank you, Chairman Collins and Ranking Member McCaskill, Senator Warren, members of the Special Committee

on Aging. I appreciate being invited to testify today regarding pension advances and to report on recent cases involving military pension assignments where I have been counsel of record on behalf of

disabled and retired veterans of our armed forces.

As Senator Warren noted, I am the Director of Litigation at the

National Consumer Law Center. For the past 16 years, I have been

responsible for coordinating and litigating cases at NCLC on behalf

of income-and age-qualified individuals, and I testify today on behalf of NCLC’s low-income and elderly clients.

In May 2003, NCLC was researching consumer scams perpetuated on active military personnel and ultimately issued a report,

but while we were investigating that report, we came across a separate issue. The Judge Advocate General Corps felt that some of
11

the greatest abuses that they were seeing concerned the solicitation

of retired military personnel to gain access to their pension payments. What we discovered was that companies and individuals

were targeting veterans’ benefits, usually by offering those up-front

cash payments in return for several years of the veterans’ monthly

payments.

Veterans receiving retirement and disability benefits are highly

attractive targets for financial exploitation. I like to say that guaranteed streams of income are sort of like honey to bees. They are

just naturally attracted to the fact that the money is there, and

particularly where we are dealing with vulnerable populations that

are relying upon their pensions for their safety net. Retirement and

disability benefits are regular, dependable, and long-term, and it is

very easy to automatically transfer the funds each month. In the

military setting, it is done by way of allotments through the Defense Finance and Accounting Services.

Veterans are also easy to reach through affinity marketing and

advertising in targeted publications. More and more, it is now proliferated through the Internet. The companies engage in what we

call lead generators. When Dr. Kroot was contacted by RMFS, that

was a lead generator which then turned him over to Strategic Investments, which was, in fact, the lender, so they are actually serving as the agents, as we previously heard.

And, finally, veterans may have perceived themselves to have—

they usually have heavy debt burdens or poor credit as a result of

the financial strains of their deployment and their frequent relocations.

I want to talk about a specific case that we had. We represented

Darryl Henry, who retired as a Chief Petty Officer after 20 years

of military service and had both combined pension and disability

payments of over $1,000 a month. When he went to purchase a

home, he found out that because of the debts that he had had when

he left the service, he did not qualify for a prime loan to purchase,

and in trying to find a better option, he found an advertisement for

Retired Military Financial Services, the same company that

reached out to Dr. Kroot. They then referred him to the Structured

Investors Company, once again, the same company, and I have included the ad as part of my testimony, and he got a lump sum set

of payments, which if he as a Chief Petty Officer had figured out

what the actual interest rate was, it was 28 percent, which is far

above the California usury law would permit.

I do want to point out that we keep on pointing out on the usury

laws. Unfortunately, only approximately one-third of the states in

our country have usury laws at this point, so the fact in California,

he would have been protected under those circumstances, but in

many states, that would not have been true.

Mr. Henry was told that since the transaction was not a loan, his

credit score did not make any difference. They actually used it as

a way of selling it to him that he could improve his credit score

by paying down his loans.

Mr. Henry got in touch with us and we ended up bringing suit

on behalf of him and other enlisted personnel in a case in California in Superior Court. We alleged that it was a contract that violated the usury statutes and was also a violation of the Truth in
12

Lending. We also indicated that it was in violation of the Federal

statutes both from the Department of Defense and Veterans Administration that prohibit assignments, putting them in a rock and

a hard place. If they said it was not a contract and it was an assignment, if it was not an assignment, it was going to be a contract, and then if it was, in fact, a violation of either of those statutes, we claimed it was a violation of the California consumer protection statute.

We actually tried the case in May 2011, and in August 2011, the

judge issued his rulings, finding that, in fact, it was a violation of

DOD and Veterans Administration regulations and, therefore, was

a violation of the California consumer protection statute, and

awarded our clients $2.9 million worth of damages.

Unfortunately, in the interim, the California Division of Corporations had shut down SICO, mainly because our litigation had

stopped their flow of income, and that subsequent to our getting

the judgment against SICO and the two principals, they all filed

for bankruptcy and received bankruptcy protection. Interestingly

enough, one of the reasons why they do not want these to be contracts is because as contracts, they would be dischargeable as unsecured debts. Yet once we got the judgment against SICO and the

individuals, they sought the protection of the bankruptcy courts to

protect having to pay the judgments.

Our client, Mr. Henry, ended up getting nothing out of the deal

because he had paid off his loans already. A number of individuals

who had been in the process of paying off their loans at least could

stop at that point and we were able to save them funding.

Mr. Henry told me that at least he stopped this company from

doing these bad transactions. Unfortunately, and quite honestly,

my clients here are the heroes here. The lawsuit that Mr. Lord was

just referring to was filed a couple of weeks ago by the Consumer

Financial Protection Bureau along with the New York Department

of Financial Services was against a company called Pension Funding, and three of their managers were named as defendants in

those suits, one of whom was Mr. Steven Covey, who used the

bankruptcy laws in order to get out of the debt that he owed in my

case back in 2011. The Pension Funding Group does not do military loans. He apparently learned enough of that lesson, but fortunately, the regulators in that case were able to step forward.

I think the bottom line answer to this is that we certainly need

full disclosure. We need to ensure that the usury laws are obeyed.

We need to make sure that the various Federal and State agencies

are enforcing the law. Individuals have the ability to use consumer

advocates in order to protect their rights, but ultimately, preventing this from the very beginning is the best way to deal with

this problem. There are many, many other alternatives that are

much better than these loans.

The CHAIRMAN. Thank you very much.

Ms. Walden.
13

STATEMENT OF MARIA CAUWENBERGH WALDEN, DIRECTOR

OF LEGISLATION AND POLICY, PUBLIC SCHOOL

AND EDUCATION EMPLOYEE RETIREMENT SYSTEMS

OF MISSOURI, JEFFERSON CITY, MISSOURI

Ms. WALDEN. Chairman Collins, Ranking Member McCaskill,

and other distinguished Committee members, my name is Maria

Cauwenbergh Walden. I am the Legislative Director of the Public

School Retirement System and the Public Employee Retirement

System of Missouri.

There are over 575,000 Missourians that are now protected

under the statewide law ban that prevents pension advances in the

State of Missouri. Since 1946, PSRS/PEERS have worked to provide strong, stable, secure retirement benefits to over 250,000 Missouri public school teachers and public education employees. We

pay more than $2.5 billion annually in benefits to over 82,000 retirees. We continue to be a financially stable defined benefit plan for

our members. We have over $37.4 billion in assets. We are the

largest public retirement plan in the State. If you combine all other

85 retirement plans in the State, we have more assets and more

membership than all other.

The quality of our plan design, as Senator McCaskill mentioned,

has been nationally recognized by the Public Pension Coordinating

Council. We are governed by a seven-member board of trustees.

That system is an independent trust fund. The board is charged by

law with the administration of those systems. Due to the independent nature of our trust fund, staff is limited in the ability to

support matters of which the board have not yet taken an official

position. The comments that I am making today are solely for informational purposes and require that the systems remain neutral

on this issue.

As the Chairman indicated, pension advances are financial instruments where an individual with a pension receives an up-front

lump sum payment in exchange for contracting away a portion of

that individual’s pension payment.

During the fall of 2013, there were several national media reports on predatory practices of pension advances across the Nation.

They started in Missouri in the boot heel and they worked their

way up to Jefferson City. The news reports during that time stated

the monthly payments made by the borrower can be subject to effective interest rates of 27 to 106 percent. In some cases, as was

mentioned earlier, borrowers are required to take out a life insurance policy and name that pension advance as the sole beneficiary

to ensure payment.

In September 2013, State Treasurer Clint Zweifel went on record

as being very concerned about the predatory practice of pension advance companies in Missouri. In an effort to protect Missourians,

he established the Pension Advance Portal on his website to allow

public pensioners the ability to report any concerns or problems

they had faced.

That same month, the systems held several internal meetings to

discuss the impact of those pension advance companies on our own

members. Any time we see any firm or organization that might attempt to take advantage of our members, we become concerned and
14

we work toward ensuring that our members are aware of any potential challenges or pitfalls they might face.

In light of the media reports of these type of services, we really

took a proactive stance and updated our website to educate our

members, and we also informed them of the current statutory provisions that were in place that would protect them. In addition,

management notified our staff regarding pension advances to ensure that retirees would be informed of this type of practice during

any of our educational meetings that we hold throughout the State.

One of the challenges the system faced was educating members

and the public on the statutory protections that were already in

place. PSRS/PEERS members are covered by an anti-alienation

and an anti-assignment provision in statute. As you are aware, an

anti-alienation clause is a provision in the governing documents for

an arrangement such as a trust as ours that specifies that the beneficial or equitable owner of that property held in that arrangement

cannot transfer the interest to a third party. Those provisions prevent PSRS/PEERS from paying benefit payments to anyone other

than the retiree or from accepting an assignment of the retiree’s

benefit payment.

Therefore, by statute, we are prohibited from paying benefit payments directly to a pension advance company, and many of our

statewide plans provide similar protections in their statutes. However, after receipt of the benefit payment from PSRS/PEERS, a retiree can use his or her pension benefit in any manner. Therefore,

a PSRS/PEERS retiree would be able to enter into a contract with

a pension advance company as long as the contract did not require

PSRS/PEERS to make that payment to anyone other than our retiree.

On January 7th, at the request of State Treasurer Zweifel, Representative Tony Dugger and Senator Mike Cunningham sponsored

House Bill 1217. It prohibited pension advances from being sold in

Missouri to public pensioners. House Bill 1217 specified that the

right of a person to a public employment retirement benefit cannot

be transferred or assigned at law or in equity. A pension assignee

would be prohibited from using any device, scheme, transfer, or

other artifice to evade the applicability and prohibitions of this provision. Any contract or agreement made in violation of these provisions would be considered void and all sums paid and collected by

the assignee would be returned.

During the legislative process, proponents of House Bill 1217 testified that the bill served as a good consumer protection for all Missouri public pension retirees. Proponents testified that the bill prohibited a person’s Missouri public employment retirement benefit

from being transferred or assigned to a pension advance service

and would keep the benefit for what it was meant to be, a retirement benefit. The bill created a ban on pension advance lenders

and would ensure that pensions earned by teachers, our firefighters, our police officers, and other public servants would be protected from such a practice.

One of the reasons cited for the need of this legislation was to

protect all of Missouri’s public pensioners, especially any of those

members whose plans might not have an anti-assignment provision.
15

We had five groups that testified in support of the provision.

There were no groups that opposed the legislation. It was approved

by the Governor on July 9, 2014, went into effect that August.

Since the implementation of this law, we are not aware of any retiree-—of our retiree—who has been sold an income stream for all

or part of his pension. We also have not received a request from

a retiree to make a payment to a pension advance service or into

an escrow account.

Thank you so much for the opportunity to testify today. I look

forward to answering any questions you may have.

The CHAIRMAN. Thank you very much for your testimony.

Dr. Kroot, what we have learned from your experience, from the

testimony of Mr. Lord and Mr. Rossman, is that veterans are frequently targeted, probably because it is known that military retirees have pensions the way other public employees do, and so there

is a regular stream of income. You mentioned that you saw an ad

in a military magazine for one of these pension advances, and I

want to put up a couple of examples of the typical ads that we are

finding as part of our investigation, very patriotic looking.

You also initially dealt with an organization that was called Retired Military Financial Services. Did that give you a sense of comfort that this was a legitimate offering?

Dr. KROOT. Yes, it did, Senator.

The CHAIRMAN. How long did you sign away your pension—for

how long a period did you agree to sign away your pension?

Mrs. KROOT. Senator, it was for eight years. If we failed to make

a payment, then we would automatically go into a 10-year repay.

The CHAIRMAN. Eight years is a very long time. Can you tell us

what portion of your pension that you agreed to give up for those

eight years in return for the lump sum, approximately?

Mrs. KROOT. Approximately? Currently, we are receiving a little

over $3,000, like, $3,015 in retirement benefits. During the time

that we were paying Structured, we would get a check from Structured every month for about $300. I would say between $2,500 and

$2,700 was taken each month.

The CHAIRMAN. Instead of getting your military pension check

each month of about $3,500, you instead were getting $300?

Mrs. KROOT. Yes, ma’am.

The CHAIRMAN. That must have been so difficult for you.

Ms. Wolf, I want to commend you for being very aggressive in

closing down Voyager’s operations in your State. In my past, I

spent five years as the chief regulator overseeing the Bureau of Insurance, Consumer Credit Protection, Banking, and the Security

Division. I was very interested—in the State of Maine, I am talking

about—I was very interested to hear you talk about not only the

effect on the military retiree or the person giving up the pension,

but on the investor on the other end of the transaction. You looked

at it as if it were a security, whereas the Consumer Credit Protection Bureau in my State would look at it as a consumer loan.

My point, however, is this. You were able to close down this bad

company in Arkansas and protect the people of Arkansas from this

bad actor, but you pointed out he simply set up shop in another

State. Does that mean that we need to have some sort of Federal

regulation or legislation in this area?
16

Ms. WOLF. Well, I certainly—it is very limiting, what we can do

as a securities regulator, because you are right, we were looking at

it from the investor standpoint, and unfortunately, with the nature

of Mr. Gamber, and it sounds like from other types of pension companies like this, they do shut down in one State, and although Mr.

Gamber, we believe, is still in Arkansas, he has formed companies

in Texas and seems to be doing the exact same thing one State

over, and that seems to be quite common.

I cannot speak to Texas securities laws as well as other states’

securities laws, and so strictly from a security standpoint, it varies

State to State, and if there is not some type of overreaching protection otherwise in place, then we are limited to the action we can

take.

The CHAIRMAN. Obviously, Missouri has taken care of this, the

only State in the Nation, by banning this kind of practice when it

comes to public pensioners, but there are a lot of private sector people, as well. Although defined benefit plans have greatly declined,

there are still some. In Missouri, Ms. Walden, is there any protection for those who are receiving private pensions?

Ms. WALDEN. Not that I am aware of. The State law only addressed public pensioners.

The CHAIRMAN. Mr. Lord and Mr. Rossman, I want to give you

the opportunity to give us your recommendations on whether or

not, given the ease with which people can move from State to

State, the bubble chart that Mr. Lord put together showing the

interlocking companies. We will start with Mr. Lord. What do you

think Congress could do to help protect people in this area?

Mr. LORD. Well, there are a couple things. It has been a long unsettled question on whether these constitute consumer loans or not

and, therefore, should be subject to the Truth in Lending Act disclosure requirements. If there is some way to clarify that, number

one.

Also, just in terms of transparency, you could require in some respects more reporting about who these entities are or just have

some sort of minimum reporting requirements that help enhance

the transparency in this area. It is a very murky area. I know they

are doing this—they structure these products deliberately by design so they fall outside some of the existing statute, but from a

consumer perspective, it is simply—they do not have a lot of visibility.

I think there is a clear Federal role in consumer education. There

is a Financial Education Literacy Commission. It is vice chaired by

CFPB. I think they could take additional steps to educate the consumer. Obviously, consumers are ultimately responsible for their

own financial decisions, but I think they need to better understand

the risk of these transactions going into them.

The CHAIRMAN. It is clear that the companies are taking advantage of this murkiness, and the fact that in one State it is going

to be treated as a security in order to get at them and in another

as a consumer loan shows you some of the problems.

My time has expired, so Mr. Rossman, I will get to you on the

second round.

Mr. ROSSMAN. Fair enough.

The CHAIRMAN. Senator McCaskill.
17

Senator MCCASKILL. Thank you.

Ms. Walden, one of the more disturbing parts of these schemes—

I know this was applicable to your members—is the idea that your

pension members do not have Social Security.

Ms. WALDEN. Correct.

Senator MCCASKILL. Even those that do are subject to the complicated rules under the windfall elimination provision, so for these

people, selling off future income is even more dangerous because

they do not even have Social Security to fall back on. How does this

work with your plan? If someone signed up for a pension advance,

assuming they were still legal in Missouri, would they typically,

any of your members, any of them have Social Security income

they could rely on?

Ms. WALDEN. Some of them do. It depends on what they did prior

to teaching. It also depends on what they do during the summer

months. As you know, most teachers work year-round, but at the

same time, they have a little bit of a break during the summer

months. They can earn some Social Security benefits.

Senator MCCASKILL. Are there any options that your pensioners

have if they needed a substantial sum of money? Can they take a

lump sum at any time from this system? Is that allowed in Missouri?

Ms. WALDEN. The only allowing that we have is if a member, before they retired, we have an option called a partial lump sum.

That allows a member to take a portion—it is either a 12, a 24,

or a 36-month portion—and what it basically does is give them that

pension for those years that they take and it reduces their overall—actuarially reduces the pension they receive, but they do get

a lump sum, so if you have an individual who wants to pay off

their house before they retire, they will work an additional three

years and get that 36-month partial lump sum so they can pay off

their house, and it is actuarially reduced, so it is a dime-for-dime

transaction. There is no enhanced benefit for the system at all.

Senator MCCASKILL. If something occurred unexpected after they

had made their decisions about retirement, there is no options for

them, perhaps, except something like these scam artists.

Ms. WALDEN. They could potentially—in Missouri, it is not allowed at all for our teachers due to the law that was passed. Prior

to that, most of our teachers will call in. We have an unbelievable

member education system, and we touch teachers every day. The

call volume is unbelievable. They call us when they have any kind

of question, and what is great about it is we have that type of relationship with the teachers. Our teachers give 14.5 percent contribution rate. They love their retirement plan and they want to make

sure what they are doing is protected, and so we get calls and that

is where part of our education process was also to educate our

staff, to let them know if they received any calls regarding this to,

one, inform them of the problems that could result from it, such as

we have seen earlier today.

Senator MCCASKILL. Right, with Dr. Kroot.

Mr. Rossman, these products remind me a little of life settlements or payday loans in the sense they allow a consumer who is

desperate and feels pressure and needs cash in exchange for promises of something that would happen in the future. These indus-
18

tries are regulated in some capacity, although there is certainly a

concern with both products, but there is a market out there for people who need a large sum of money. Do you think pension advances

should be regulated like those products for people who really need

the money, with some sort of interest rate cap? I mean, are we

making a mistake by outlawing these a opposed to just making

them behave like moral human beings?

Mr. ROSSMAN. That would be a good start. I think that, first of

all, you have to distinguish between the payday lenders and the

other products, predatory products, that are out there. What is

unique about these pension advance companies, and it was a great

surprise to us, was that they are much smaller in size. Many of the

other predatory lenders are now publicly held companies, and these

were pretty much thinly capitalized corporations that had absolutely no skin in the game. What we found out with each of these

entities, and I do not know if Mr. Lord found the same experience,

was that they only loaned out what they were able to get in from

investors, so the individuals who were running the show——

Senator MCCASKILL. That is like a bookie.

Mr. ROSSMAN. Yes, exactly.

Senator MCCASKILL. They are just taking the ‘‘vig.’’

Mr. ROSSMAN. They are just taking the ‘‘vig,’’ exactly, and, so, the

other issue——

Senator MCCASKILL. I do not know how I knew that word, I just

want to say for the record.

I just want to put that on the record. I do not know where that

came from.

Mr. ROSSMAN. I come from Boston, so I know exactly what you

mean.

Senator MCCASKILL. You know exactly what it is.

The CHAIRMAN. I do not. I come from Maine.

Mr. ROSSMAN. I think that the other thing that is significant is

that most of the predatory loans that we usually see out there are

in the $5,000 to $10,000 range. As I think Mr. Lord said, and we

found certainly in our reports, we were seeing averages of $45,000

to $50,000 and upwards over $100,000, which is a much bigger

sum.

Look, we understand that individuals run into difficult times financially, like the Doctor was testifying. There are—certainly

each—in my case in the military, each of the branches of the military have relief funds to help people in cases of emergency. There

is also the possibility to use the guaranteed stream of income in

order to secure a loan from a more responsible and regulated

source. You could go to a credit organization or a savings and loan

to be able to take out the loan and then secure it. The key here,

though, is that you are controlling your funding, and that is not the

case with these companies. You literally lose control over your pension over that time.

I thought that the Doctor was absolutely correct, and we had

found the same situation, that if, in fact, you tried any way to get

yourself out of the transaction, you were penalized with a two-year

addition. That is two years, in their case, of almost $3,000, so looking at a $25,000 penalty. It is outrageous. It is unconscionable. It

is a sharp practice that really cannot be tolerated.
19

So, I do not know that regulating that makes a great deal of

sense. I think that providing other alternative products are important.

The last thing I want to just ad on this, Senator, is the fact that

we are dealing here with an Internet product now. It is very different than when we started this back in 2003.

Senator MCCASKILL. Right.

Mr. ROSSMAN. You know, you are saying they went from Arkansas to Texas, half the time, you have no idea where this company

is located.

Senator MCCASKILL. Right. This is an IP address.

Mr. ROSSMAN. Exactly.

Senator MCCASKILL. Right. Thank you very much. Thank you,

Madam Chair.

The CHAIRMAN. Senator Tillis.

Senator TILLIS. Thank you, Madam Chair. I made a personal

note to go on the Internet and look up what a ‘‘vig’’ is.

Senator MCCASKILL. Oh, come on. I do not believe you. You know

what a ‘‘vig’’ is.

Senator TILLIS. Dr. Kroot, first of all, thank you for your service

in the Navy and thank you for your continued service for our veterans. I wanted to get to the—you were required to take out a life

insurance policy, I think, for $180,000. This is after you have

agreed to pay about $230,000 back for a $91,000 loan. What is the

nature of the requirement that you have now in terms of keeping

that life insurance policy current? I mean, are they paying it at

this point and you have to keep it—I need to understand a little

bit about that ongoing obligation.

Dr. KROOT. We paid for this and it was paid up, and when

we——

Mrs. KROOT. It was a term life insurance and the term ends in

October. We were unable to stop paying it until the end of the term

because we needed permission from Structured to stop paying it.

Senator TILLIS. Thank you, and I am sorry for what you went

through.

Ms. Wolf, I had a question for you. The Operation Voyager in Arkansas, it sounds like this—I think it is fair to call him a thief—

he would originate some of these loans and then distribute them

and sell them. I am trying to get a sense of what his business operation. It sounds like he would do a loan for Dr. Kroot, identify people that would buy the product that he has sold, and did he continue to service these loans? Did he have a business operation, or

did he wash his hands of it after he transferred it or distributed

it?

Ms. WOLF. Originally—well, pretty much, he washed his hands

of it. What would happen is the company would, through an agent,

say, in Florida, would find a pensioner who went to the website

and filled out the information that wanted to sell their lump sum—

their pension for a lump sum. This person in Florida, usually a

military veteran, put the amount that they were looking to sell it

for or the amount of money they needed and the amount of money

that they got each month from their pension.

Voyager would then package these and put a purchase price on

them, unbeknownst to the pensioner, and through another network
20

of agents would find a buyer who was willing to pay that amount

of money for, say, $1,000 a month for six years coming in, but Voyager would facilitate all the paperwork between the parties and

would kind of stay out of it. They would facilitate everything——

Senator TILLIS. Yes, but who—I was trying to get a sense of who

is actually doing the servicing of the loan, though, because there

is still that process of, I guess, processing the pension payments,

providing some disbursement back to the person who is providing

the loans. I was trying to figure out or get a better understanding

of the underlying business enterprise that exists for the life of the

loan.

Ms. WOLF. Voyager would set up an escrow account for the lump

sum payment, but then they would have the pensioner set up an

escrow account for a certain amount of time to direct the pension,

so there was never actually a loan. They would just have the pensioner direct that money into the escrow account for a certain

amount of time, and that is where the issue came from, because

the pensioners would then turn around and either redirect the

money back to themselves or have to file for bankruptcy and get

caught up in the bankruptcy. There was never the—or, the money

to the pensioner would be distributed at the very beginning——

Senator TILLIS. Okay.

Ms. WALDEN [continuing]. and—yes.

Senator TILLIS. Mr. Rossman or Mr. Lord, or anyone else who

may want to contribute, the law that was passed by Vermont, is

that a best practice law? Is that something that all states should

consider, or is there a best practice baseline out there that as we

discuss what we may do at the Federal level, that we should be encouraging our respective states to take up?

Mr. LORD. Unfortunately, I do not know enough about the

Vermont specifics to comment on, other than they do have a law

that pertains to this issue.

Mr. ROSSMAN. The problem—the Vermont law is a good law,

there is no doubt about that. The problem is that because of the

situation of the Internet—it stops at the State line. States can only

do so much to protect their citizens from people coming from outside the jurisdiction, and I think that the proposal of having a Federal system that would guarantee uniformity across the country

would be a very good one, because there is going to always be a

situation where they are going to be able to find a jurisdiction to

be able to hide out, so to speak, in order to market their bad wares.

Senator TILLIS. Thank you very much, and thank you all for the

work that you are doing. Again, Dr. Kroot, thank you for your service to our country.

The CHAIRMAN. Thank you.

Senator Warren.

Senator WARREN. Thank you, Chair Collins. I want to thank you

for holding this hearing today. This is really important, and thank

you, Ranking Member McCaskill, for doing this, and thank you to

all the witnesses for coming. We really appreciate your coming and

telling this story. I know it is hard to do that, but it is very important that we understand what is happening here.

I just want to see if I can pull this together so we have kind of

got it all in one place, so defined benefit pensions, the steady, guar-
21

anteed income stream throughout retirement, we know these pensions are disappearing and the Americans who still have them

know that they are lucky to have these pensions, but now there is

this interconnected industry that is targeted to getting their hands

on pensions. These pension scam companies turn a profit by offering retirees cash in exchange for a fixed amount of the buyer’s future pension, as you testified to, plus, of course, interest and fees,

and according to a 2014 report from the nonpartisan Government

Accountability Office, and also as we have learned today from Senator Collins, these loans can have pretty shocking fine print, for example, effective interest rates over 100 percent, and to make sure

that they get paid no matter what, these companies require the retirees often to buy a separate life insurance policy to cover the loan

if the retiree dies and the pension stops, so it is a great deal for

the companies running the pension scam. No risk and a hundred

percent-plus interest rates on this.

I just want to pull a couple of the pieces apart here. Mr.

Rossman, as the Director of Litigation at the National Consumer

Law Center in Boston, you have seen the damage that these predatory pension scams do firsthand, and I want to ask about some of

the details. Who is the typical victim of this kind of scam?

Mr. ROSSMAN. The typical victim of the scam, you are going to

have someone who has a guaranteed stream of income-——

Senator WARREN. Who does that tend to be?

Mr. ROSSMAN. You will be including in here you are going to

have retired military personnel, you are going to have disabled

military personnel, State, municipal, and Federal Governmental

employees who are covered, and then in our case, those individuals

who are covered by ERISA will very often have—and ERISA does

have protections for anti-assignability——

Senator WARREN. So, military, teachers——

Mr. ROSSMAN. Teachers——

Senator WARREN [continuing]. firefighters——

Mr. ROSSMAN [continuing]. firefighters, exactly.

Senator WARREN. All right. Now, lots of states have consumer

protection laws prohibiting loans with exorbitant interest rates,

usury laws, and then there is the Federal Truth in Lending Act to

protect consumers from loans like this, as well, so how can this be

legal?

Mr. ROSSMAN. In our case, every single page of the contract was

stamped on the bottom of the page with a rubber stamp that said,

‘‘This is not a loan.’’ ‘‘This is not a loan.’’ Now, I must tell you, after

having done this for 20 years, if it quacks like a loan and it waddles like a loan and it smells like a loan, it is probably a loan——

Senator WARREN. It is probably a loan.

Mr. ROSSMAN [continuing]. but they went to great lengths in

order to avoid having typical contract loan language and discounting that it was a loan.

One of the things that was rather interesting, though, and we

caught them on, is that there were a number of cases early on

where people tried to discharge in bankruptcy and we were able to

get the bankruptcy records where the same company came running

in and saying, ‘‘No, no, no, it is not a loan. It is an assignment.’’

Then when we got in California, we said, ‘‘Wait a minute, Your
22

Honor. They were just in bankruptcy court saying that this was an

assignment. Now they are saying it is not a loan. It has got to be

something.’’ You have got them on the horns of a dilemma.

Senator WARREN. I want to pursue that, but I just want to make

sure. The reason they say it is not a loan——

Mr. ROSSMAN. Is because, first of all, you want to avoid the usury

statute——

Senator WARREN. They are trying to avoid laws that govern

loans.

Mr. ROSSMAN. Loans——

Senator WARREN. Second?

Mr. ROSSMAN [continuing]. including Truth in Lending, and second, they want to avoid having it discharged in bankruptcy——

Senator WARREN. That is right, so they do not want to have to

make the disclosures.

Mr. ROSSMAN. That is correct.

Senator WARREN. They do not want to comply with the laws

around loans, so they go over to the other side and they say they

are not loans, they are assignments.

Mr. ROSSMAN. Mm-hmm.

Senator WARREN. Let me ask that question, then. If these are assignments, are they then legal?

Mr. ROSSMAN. In certain cases they are not, and that is where

the cloudiness comes. If it is military pay for a retired veteran, for

enlisted personnel, you are protected by the Military Pay Act, but

if you are, unfortunately, like the Doctor, a commissioned officer,

you are not protected. All disabled veterans are covered under the

VA by anti-assignability. Virtually every Federal and State employee statute—pay statute—includes provisions for anti-assignment provisions, as well, and as I said, ERISA in many cases prevents it, but that is not a majority of the pensions that are still out

there.

Senator WARREN. For some people, it is the case——

Mr. ROSSMAN. That is——

Senator WARREN [continuing]. that it does not matter whether it

is a loan or an assignment. It is not legal——

Mr. ROSSMAN. That is correct.

Senator WARREN [continuing]. either way.

Mr. ROSSMAN. You have got them on the horns of a dilemma.

Senator WARREN. That is right. For some, assignment is still

legal, and this is just a place where the law has not given full protection.

Mr. ROSSMAN. That is correct.

Senator WARREN. It sounds like we are starting to get some action on this. Five years ago, Congress passed Dodd-Frank, created

the Consumer Financial Services Bureau to try to prevent companies from cheating consumers, and as someone mentioned earlier

in their testimony, the CFPB has now partnered with the New

York Department of Financial Services to file two suits against two

of the largest pension scam companies for using these deceptive

marketing practices to dupe retirees into borrowing from their pensions. Obviously, a good first step, but we need to do more. There

is no excuse for this. It is time to put a stop to these scams.

Thank you, Madam Chair.
23

The CHAIRMAN. Thank you.

Senator Kaine.

Senator KAINE. Thank you, Madam Chair, and thanks to all the

witnesses. This is, sadly, eye opening, and especially the specter of

ads targeting veterans with sort of flag waving and patriotic

themes and pictures perpetrated by scam artists. It just makes you

sick to your stomach. I mean, I am really discouraged at this.

A couple of questions I was going to ask you. Maybe I will start

with Ms. Wolf, so Andrew Gamber, he had had a previous history

before getting into this pension advance area. He had permanently

lost his license as an insurance broker for grossly misleading his

customers, according to the Committee briefing for this. I guess he

was in a field where there was a regulated environment and he

had engaged in activities that caused him to have his license

pulled.

Ms. WOLF. Right.

Senator KAINE. I guess it is an indication that this kind of falls

in the cracks, these pension advance, because he could go from a

regulated area, losing his license, to setting something like this up

without a license.

Ms. WOLF. Right.

Senator KAINE. Is that just the quirks of all the different State

laws and how this kind of financial product is treated, or maybe

more often not treated under State law?

Ms. WOLF. I would think so, but also, Mr. Gamber seems to not

really have a conscience and not really care what the laws are. He

was—his license was revoked in 2009 from the Arkansas Insurance

Department. He was not regulated as a broker-dealer or an investment advisor under our act, but that is not to say that he was not

selling securities, because it was a security under Arkansas law,

we were able to take action. I do want to point out, his license was

revoked in 2009. He formed VFG in 2010.

Senator KAINE. Mm-hmm.

Ms. WOLF. We took action against him in 2013 and 2014, and

now he has formed a new company, and so he is definitely finding

ways to skirt the law and finding those gray areas to exploit.

Senator KAINE. The GAO report is interesting, because I think

your study indicated with this bubble chart that the pension transactions are concentrated in these two large groups, and one was

Mr. Gamber, and we talked about him, and the second, Future Income Payments Group, is run by Steven Kohn, whose earlier business endeavors prior to his involvement in the pension advance

business led to him being convicted of Federal criminal counterfeiting, so, you have got the two main groups. One is being run by

somebody who has lost his license because of misrepresentations to

insurance clients, and the other is being run by somebody who had

been convicted of Federal criminal counterfeiting, and these are the

two main groups that are doing this in the country right now.

Mr. LORD. Well, unfortunately, you have several unsavory characters operating in these business lines. From a consumer perspective, again, it is very difficult to really know who you are dealing

with, because that is not revealed on the company website, so

again, from a disclosure perspective, that is why we raised that as

an issue in our report.
24

Senator KAINE. Again, from sort of a regulatory problem, if you

have got, you know, folks who have been in different sort of financial capacities and one has been suspended, his license is, because

of insurance challenges, and the other has been convicted of Federal criminal counterfeiting, but nevertheless they can do this kind

of a business, this suggests that there is sort of, like, a gap in

which they are trying to fit their work in a less regulated area.

Mr. LORD. Yes.

Senator KAINE. It is amazing that we would have less regulation

for these kinds of pension transactions than we would for insurance. I mean, insurance is really important. Pensions are really important, too, and that that would be a gap is something that is notable.

I want to take the Kroots’ testimony—and I really appreciate you

coming and sharing the experience, and I often find these hearings

are really valuable because people are willing, thank God, to come

share what has been a painful experience and we can learn from

it. Thank you for being willing to do that, but they talked about—

and I am going to ask the other witnesses to kind of help me with

this question. They talked about the challenge they were dealing

with. They had a challenge with medical bills for a daughter. They

had a challenge with some housing expenses. These are the kinds

of things that people run into every day, and one of you indicated,

there are many alternatives that are better than these kinds of

loans, so be sort of generic advisors to seniors or veterans that are

confronted with financial needs like they described. You have got

some real legitimate concerns. You see these kinds of ads in the

paper about maybe take advantage of this 800 number, or get on

this website to get help. What are the better alternatives? We are

having hearings like this to, you know, educate people. What are

the better alternatives that folks should explore? And I just would

love to have any of you talk about that, and again, we are not talking about a particular circumstance.

Mrs. KROOT. Right.

Senator KAINE. We are just generally—and, Mrs. Kroot, you

want to jump in first, so please.

Mrs. KROOT. Yes. One of the things that happened with us in

Structured, we took this money out to pay the IRS, and at the end,

when the loan was concluded, we were given a list of who we could

pay and who we could not. The IRS was not on it, so we paid those

other ones and we had to finally call the IRS, who has worked with

us on a payment plan for the $100,000.

Senator KAINE. Mm-hmm.

Dr. KROOT. I wish to put on the record, the IRS was extraordinarily cooperative in coming up with a payment plan that was

not a burden to us.

Senator KAINE. Mm-hmm.

Mr. ROSSMAN. Senator, one of the things that is important, and

we were talking before about why they were treated as loans or assignments, one of the pitches that these companies will make is

that because it is not a loan, you do not have to worry about your

credit score. Many of the people who are in dire financial straits,

it is because their credit scores have deteriorated to the point

where they cannot have access to prime loans and other sources of
25

funding, and what they are saying is that since this is not a loan,

we do not care about your credit score. Yes, you have got the U.S.

Government paying you off, so what are you going to worry about?

And you have got insurance covering you, as well.

I think that you are dealing with a community which has difficulties because of their credit scores and they are looking for options. There are a number of things. If you are dealing with credit

cards, for example, working with the credit card companies or dealing with a nonprofit——

Senator KAINE. Credit counseling——

Mr. ROSSMAN [continuing]. a credit counselor——

Senator KAINE. Right.

Mr. ROSSMAN [continuing]. to help you work out a plan to be able

to pay off is certainly better.

As I said beforehand, you do have this guaranteed stream of income which, although you do not want to lose control of it, you can

still use it as a collateral as part of a good plan in order to pay

down your debts in order to be able to secure funding against it but

while maintaining control of the funding and not turning it over to

someone else.

I would say the final area, at least in the military, is that the

JAG Corps was very upset because there are various programs set

up within the military with relief funds—Naval Relief, Air Force

Relief, Army Relief—to be able to work with their veterans to help

them in distress.

I think the thing that is so disturbing to me in the military area

is that these thieves are stealing what are essentially tax dollars

that are being paid on pensions, stealing them from veterans who

have served their country, and then expect us to be able to take

care of those veterans afterwards because, of course, we are not

going to abandon them when they do not have the ability to take

care of their own needs, so where is—there is just no justice in

there whatsoever. Everyone is being victimized and these thieves

are ripping us all off at the same time.

Senator KAINE. Madam Chair, I think Ms. Wolf was going to answer for me, too, and I know I am over time, but is that okay? Ms.

Wolf, were you going to weigh in?

Ms. WOLF. I will keep this very brief. Not necessarily an alternative, but I do want to thank Dr. and Mrs. Kroot for coming forward, because as a securities regulator, a lot of times, we do not

hear about these scams until someone is brave enough to pick up

the phone and call us, because we do not—we are not on the front

lines every day, and so, one of the most important things is that

if you are in doubt or you hear about a new company, especially

these companies that are very good at tricking you and making you

think they are one entity but they are really another, call your

local State agency, and whether it is an Attorney General’s office

or the securities department—a lot of times you do not know which

agency would regulate what—they are very good about working together and referring cases. If ever you have a question, call your

State regulator and ask and see if they are regulated or if they

have had complaints on this company, and that way, you at least

can know going forward—hopefully know what you are getting

into.
26

Senator KAINE. Great. Thank you, Madam Chair.

The CHAIRMAN. Thank you.

Mr. Rossman, I want to give you a chance to answer the question

that I posed about what we should do about this. Obviously, states

can take action. Litigation can be filed. Regulation can be implemented at the State level. There are new laws, lawsuits filed, et

cetera, but I am so outraged by what has happened to the Kroots

and so many others, particularly, as you said, those who have

served our country, or served our states and cities and are now

being taken advantage of, and it is evident that these transactions

fall in a very gray area, as Mr. Lord said, so do we try to get Federal legislation passed? Do we amend the Truth in Lending Act to

have better disclosure, at least? What is your suggestion for us?

Mr. ROSSMAN. Well, the simple practical responses are that there

are many laws already that are not being enforced, and I would

love to be able to see them being enforced. I would love to have the

Department of Defense, for example, monitor these allotments that,

if they are being placed into separate escrow accounts, that it

should send up some red flares to find out what is going on and

whether or not there has been a violation of the laws.

I thought, Senator Tillis, your comment was rather interesting,

because in the case with Dr. Kroot with RMFS, which was the lead

generator, they were the agent that was out there trying to solicit

for Strategic Investments, they are owned by the same people. It

is the same ganif who is the guy who had been convicted for Federal law, and then turned around and avoided liability through

bankruptcy court, getting his judgment discharged.

I am a former prosecutor. I would like to see some RICO claims

brought against these folks and maybe some jail time. As I said beforehand, they are the worst of the worst since they have literally

nothing invested in these cases whatsoever. They are taking investors’ money. They are taking the money that belongs to the taxpayers and to the pensioners. They are taking their cut for providing no service whatsoever and then they are returning into the

dark where they can get away with this time and time again, and

it is about time that someone stopped this kind of behavior with

something more than a slap on the wrist.

Beyond that, just clearly disclosure, so people understand the

product that you are getting, so you have the Schumer Box equivalent for pension loans that clearly identifies the interest that is

being charged. I think that, certainly, having anti-assignment provisions that extend beyond public officials but would apply to all

pensioners would be very, very helpful, as well.

The CHAIRMAN. Thank you. That is very helpful, and I want to

remind everyone that RMFS, which you mentioned, was Retired

Military Financial Services. If you saw that name, you would think

it was a completely legitimate organization, particularly if the ad

appeared in a military magazine, and I think that is why the Department of Defense needs to be more proactive in warning its military retirees that these schemes are out there.

I hope that the hearing that we have had today will help to

heighten public awareness, and that is why I am so particularly

grateful to Dr. and Mrs. Kroot for coming forward, but for all of

you sharing your personal experiences in this area.
27

I want to ask my colleagues if anyone has a final question that

they would like—yes, Senator Tillis.

Senator TILLIS. Thanks again for all of you being here today.

The one thing that just strikes me about—and I really do think

there is a criminal enterprise there. We have got some of the bad

actors we named here, but there are a lot of people in this process

or this chain that probably also need to be smoked out, as well.

It does not seem to me—is there any possible way that after you

get these agreements in place that you could actually have any

kind of defaults?

Mr. ROSSMAN. Certainly not in the ones that we were looking at,

no.

Senator TILLIS. The one thing—I think that this is extraordinary.

We can have our discussions about some other lending practices

and what is a fair rate, but at least some of their rates are driven

by loss ratios that they have to manage to be able to provide a

service, but this is completely independent of that discussion,

whether it is payday or residential lending or whatever else. This

is just purely criminal activity, where they are getting a guaranteed rate of return, charging an exorbitant interest rate, all upside,

and actually, to the point here, if you miss a payment, even greater

upside, zero downside. It is a criminal practice that we need to

work to eliminate.

Mr. ROSSMAN. You are absolutely right.

Senator TILLIS. Thank you.

Chairman COLLINS. Thank you.

Senator McCaskill.

Senator MCCASKILL. I just have one question.

Mr. Lord, I have found time and time again in doing oversight

that one of the biggest enemies of oversight is a whole lot of cooks

in the kitchen that have a piece of it, and because then when there

is something bad going on, everybody does like this. Well, why is

not—I mean, to Mr. Rossman’s point, things are not being enforced,

but, you know, we have got FTC, we have got CFPB, we have got

SEC. Then you have got Treasury, you have got PBGC, you have

got DOD, you have got VA.

If we were to work on a legislative action around these scams,

where should we place primary responsibility for oversight for

these products?

Mr. LORD. Well, I think CFPB—I mean, their authority is already well established and clear. To me, it is just a matter of exercising it. I think the good news is they took enforcement action on

two of the 38 companies we referred to them, but my question to

them is, well, what about the remaining 36, to the extent they are

independent entities? I think it is more——

Senator MCCASKILL. It is like shooting fish in a barrel. These

two guys should go to jail, like, immediately. Do not pass go. One

of them has already been in jail, I believe. Yes.

Mr. LORD. I mean——

Senator MCCASKILL. I am shocked, just shocked.

Mr. LORD. I am not sure they need more authority, but it is what

are they doing with the authority they already have.

Senator MCCASKILL. Do you believe that the primary authority

now is at CFPB?
28

Mr. LORD. Well, it is shared with FTC. They also have an enforcement role in this area, but if you—I mean, those are the two

key agencies, and again, in terms of consumer education, Treasury

chairs the so-called FLEC——

Senator MCCASKILL. Right.

Mr. LORD [continuing]. Financial Literacy and Education Commission, but CFPB, they are the vice-chair, so——

Senator MCCASKILL. Yes.

Mr. LORD [continuing]. they have a role in that, as well.

Senator MCCASKILL. Maybe we need to direct an inquiry to the

CFPB and to the SEC, or the FTC, and talk to them about what

is their plan——

Mr. LORD. Yes.

Senator MCCASKILL [continuing]. of going after these guys.

Mr. LORD. They will talk a lot about the consumer education, but

I——

Senator MCCASKILL. Yes. No, no, no, no——

Mr. LORD [continuing]. clarify the enforcement side——

Senator MCCASKILL. We need some deterrent here.

Mr. LORD [continuing]. so the FTC——

Senator MCCASKILL. Yes. People need to go to jail. Thank you,

Mr. Lord.

Mr. LORD. Thank you.

The CHAIRMAN. I want to thank our excellent panel of witnesses

for appearing today. You have really increased our understanding

of what truly is an unconscionable scam so frequently directed

against patriots who have served our country or those on the front

lines in municipal and State governments, and we are going to continue this investigation. This is a first of a series of hearings as we

begin to delve even deeper into these schemes.

I want to thank each and every one of you for being here today,

and again, particularly my thanks to the Kroots for coming and

sharing your personal story. I can assure you that because of your

willingness to share a very painful episode in your life, that you

will, in fact, prevent others from making the same mistake, so

thank you for coming forward, and my thanks and gratitude to all

of our witnesses.

The Committee members will have until Friday, October 9th, to

submit additional questions for the record, which we will send your

way if there are some, or any additional statements.

The posters that have been displayed will also be included in the

hearing record.

The CHAIRMAN. Again, my thanks to our expert panel, to my

Ranking Member Senator McCaskill, and to all the Committee

members, including the ever-faithful Senator Kaine, who comes to

all of our hearings, for participating in today’s investigation and

hearing.

This concludes the hearing. Thank you.

[Whereupon, at 3:57 p.m., the Committee was adjourned.]
APPENDIX

Prepared Witness Statements

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