Pension Advance Transactions: Questionable Business Practices and the Federal Response
Published: 2015-09-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Recent questions have been raised about companies attempting to take advantage of retirees using pension advances. In June 2014, GAO issued a report on pension advances. The report (1) described the number and characteristics of pension advance companies and marketing practices; (2) evaluated how pension advance terms compare with those of other products; and (3) evaluated the extent to which there is federal oversight.
This testimony summarizes GAO's June 2014 report (GAO-14-420) and actions taken by CFPB and FTC in response to GAO's recommendations. In June 2014, GAO identified 38 pension advance companies and related marketing practices. GAO conducted a detailed nongeneralizable assessment of 19 of these companies. GAO used undercover investigative phone calls to identify additional marketing practices and obtain pension advance offers. This information was compared with the terms of other financial products, such as personal loans. GAO also examined the role of selected federal agencies with oversight of consumer protection and pension issues.
section_title: What GAO Found
paragraphs: In a June 2014 report, GAO identified at least 38 companies that offered individuals lump-sum payments or “advances” in exchange for receiving part or all of their pension payment streams. The 38 companies used multistep pension advance processes that included various other parties. At least 21 of the 38 companies were affiliated with each other in ways that were not apparent to consumers. Some companies targeted financially vulnerable consumers with poor or bad credit nationwide.
GAO undercover investigators received offers from 6 out of 19 pension advance companies. These offers did not compare favorably with other financial products or offerings, such as loans and lump-sum options through pension plans. For example, the effective interest rates on pension advances offered to GAO's investigators typically ranged from approximately 27 percent to 46 percent, which were at times close to two to three times higher than the legal limits set by the related states on the interest rates assessed for various types of personal credit.
GAO identified questionable elements of pension advance transactions, including lack of disclosure of some rates or fees, and certain unfavorable terms of agreements. GAO recommended that the Bureau of Consumer Financial Protection (CFPB) and Federal Trade Commission (FTC)—the two agencies with oversight responsibility over certain acts and practices that may harm consumers—provide consumer education about these products, and that CFPB take appropriate action regarding identified questionable practices.
Since the time of GAO's review, CFPB has investigated pension advance companies that GAO referred to the agency and disseminated additional consumer-education materials on pension advances. Similarly, FTC posted consumer education on pension advances on its website, and FTC officials report that they have reviewed consumer complaints related to pension advances, pension advance advertising, and the pension advance industry overall. CFPB's and FTC's actions are a positive step toward strengthening federal oversight or enforcement of pension advance products.
section_title: What GAO Recommends
paragraphs: In its June 2014 report, GAO recommended that CFPB and FTC review the pension advance practices identified in that report and exercise oversight or enforcement as appropriate. GAO also recommended that CFPB coordinate with relevant agencies to increase consumer education about pension advances. CFPB and FTC agreed with and have taken actions to address GAO's recommendations.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the findings of our June 2014  report on Pension Advance Transactions. Pensions are the foundation of  economic security in retirement for millions of middle-class families and  play a critical role in ensuring financial security at retirement. During an  individual’s retirement years, pensions are often the key source of income  that allows the retiree, along with Social Security, to maintain a  reasonable standard of living. Thus, a partial loss of pension benefits can  significantly affect a retiree’s ability to pay monthly living expenses,  medical bills, or other unexpected expenses. Recent media coverage has  highlighted marketing efforts of companies to encourage borrowing  against pensions—generally referred to as pension advances—and has  indicated that some companies may be attempting to take advantage of  financially distressed retirees who are in immediate need of a large sum  of cash.
In 2010, the U.S. Census Bureau reported that the number of Americans  age 65 and older is projected to more than double over the next 40 years,  reaching almost 89 million in 2050. Also, a 2011 study by the MetLife  Mature Market Institute on elder financial abuse reported that older  Americans lose an estimated $2.9 billion annually to financial exploitation  when factoring in estimated unreported losses. These statistics highlight  that the elderly population will grow significantly in the next few decades  as well as concerns about the population’s vulnerability to abuse and  related financial exploitation.
Various federal agencies have oversight roles and responsibilities related  to consumer and investor issues, including those related to the elderly  population. The Federal Trade Commission (FTC), Bureau of Consumer  Financial Protection, commonly known as the Consumer Financial  Protection Bureau (CFPB), and Securities and Exchange Commission  (SEC) may have consumer-protection and investor-oversight roles or  other responsibilities related to pension advances depending on a  number of factors, including whether the transaction involves consumer  financial products and services, other consumer products or services, or  investment products; or depending on the provider of the service. The  Department of Labor’s (DOL) Employee Benefits Security Administration  (EBSA), Department of the Treasury (Treasury), Pension Benefit  Guaranty Corporation (PBGC), Office of Personnel Management (OPM),  and Departments of Defense (DOD) and Veterans Affairs (VA) may also  have pension-oversight roles depending on whether the pensioner was a  private-sector employee, a federal-government civilian worker (hereafter  referred to as a federal pensioner), or a military veteran.
My remarks today highlight the key findings of our June 2014 report on  pension advance transactions and highlight the actions that federal  agencies have taken to date to address our report findings and  recommendations. Like the report, this testimony (1) describes the  number and characteristics of entities offering pension advances and the  marketing practices that pension advance companies employ, (2)  evaluates how pension advance terms compare with those of other  financial products, and (3) evaluates the extent to which there are federal  oversight mechanisms in place related to pension advances.
My statement is based on our June 2014 report, which identified and  examined 38 companies that offer pension advances and obtained  demographic information about these companies using public and  nonpublic data. We also obtained additional data on 19 of the 38 pension  advance companies selected for case studies from a variety of sources  including undercover investigative phone calls, which we used for  illustrative examples in our June 2014 report. Though not generalizable to  all pension advance companies, this information provided insights into a  variety of pension advance transactions. For the six companies that  provided written quotes to our undercover investigator, we conducted an  actuarial analysis of the lump-sum pension advance that we were offered  to determine how the pension advance products compare with certain  other financial products. We also reviewed criteria from relevant laws  and regulations and met with members from the North American  Securities Administrators Association, federal and state agencies that  have oversight over consumer-protection regulations, financial  transactions, marketing and sales-practice regulations, or pensions, and  advocacy organizations associated with the retired population. We used  this information to examine the extent to which federal agencies had  undertaken actions to monitor or assess pension advance products’  relevance to federal laws and regulations, or provide consumer-education  outreach, training, or other oversight efforts. Additional details on our  scope and methodology are included in the June 2014 report. In  addition, for this statement, we obtained information on the status of the  implementation of our recommendations from CFPB and FTC. The work  upon which this statement is based was conducted in accordance with  generally accepted government auditing standards and standards  prescribed by the Council of the Inspectors General on Integrity and  Efficiency.
subsections: section_title: Background
subsections: section_title: Pension-Based Products
paragraphs: Pension advances and pension investments are products that, while  based on or related to pension benefits, are generally distinct from the  pensions themselves. A pension advance is an up-front lump sum  provided to a consumer in exchange for a certain number and dollar  amount of the consumer’s future pension payments plus various fees.  Pension investments, the related product, provide investors a future  income stream when they make an up-front lump-sum investment in one  or more pensioners’ incomes.
Multiple parties can be involved in pension advance transactions,  including consumers (pensioners), investors, and pension advance  companies. After the pensioner signs the pension advance contract, the  pension advance company gives the lump sum to the pensioner after  deducting, if applicable, life-insurance premiums or other fees from the  lump sum. Pension advance companies may also be involved in the  related pension investment transaction. These companies can identify  financing sources (investors) to provide the lump-sum monies to a  specific pensioner or to multiple pensioners. The investor pays the lump- sum amount by depositing the funds into the bank or escrow account that  was previously established. The investor receives periodic payments,  such as on a monthly basis, over the agreed-upon period either from the  pension advance company or through the escrow account. See figure 1  for an illustration of the parties that we identified as part of our June 2014  report in the multistep pension advance processes that we reviewed.
section_title: State and Federal Laws, Regulations, and Oversight Roles and Responsibilities
paragraphs: Various state and federal laws could potentially apply to pension  advances, depending on the structure of the product and transaction,  among other things. For example, certain provisions that prohibit the  assignment of benefits could apply to pension advances, depending on  whether these advances involve directly transferring all or part of the  pension benefit to a third party. In addition, potentially applicable state  laws include each state’s consumer protection laws such as those  governing Unfair and Deceptive Acts and Practices (UDAP) and usury  laws that specify the maximum legal interest rate that can be charged on  a loan. Depending on the overall structure of the products involved,  state securities laws could also apply.
Various state and federal agencies have oversight roles and  responsibilities related to consumer and investor issues. CFPB, FTC, and  SEC may have consumer and investor-related oversight roles related to  pension advance transactions depending on a number of factors,  including the structure of the pension advance product and transaction.  Many other federal agencies may have pension oversight roles related to  the pension itself depending on whether the pensioner was a private- sector or federal employee or a military veteran: EBSA, Treasury, and  PBGC have oversight over private-sector pensions; OPM has oversight  over federal civilian pensions; DOD has oversight over military pensions;  and VA has oversight over a needs-based benefit program called a  “pension.” States may also oversee and investigate pension advance  transactions. As we describe later in this testimony, the state of New York  worked with CFPB to file a lawsuit in August of 2015 against two of the  firms that we referred to CFPB for review and investigative action.
section_title: A Number of Geographically Concentrated and Affiliated Companies Were Involved in Pension Advances and Marketed to Financially Vulnerable Consumers Nationwide
paragraphs: In June 2014, we reported on the number and characteristics of entities  offering pension advances and the marketing practices that pension  advance companies employ. During our review, we identified at least 38  companies that offered lump-sum advance products in exchange for  pension payment streams. Eighteen of the 38 companies we identified  were concentrated in one state and 17 of these 38 companies also  offered lump-sum cash advances for a wide range of other income  streams, in addition to pension advances, including lottery winnings,  insurance settlements, and inheritances. Another 17 companies  exclusively focused on offering pension advances.
We also found that at least 30 out of 38 companies that we identified had  a relationship or affiliation with each other, including working as a  subsidiary or broker, or the companies were the same entity operating  with more than one name. However, only 9 out of those 30 companies  clearly disclosed these relationships to consumers on the companies’  websites. While companies having affiliations is not uncommon, the lack  of transparency to consumers regarding with whom they are actually  conducting business can make it difficult to know whom to file a complaint  against if the pensioner is dissatisfied or make it difficult to research the  reputability of the company before continuing to pursue the business  relationship. See figure 2 for an illustration of some of the relationships  between companies that we identified during the June 2014 review.
At least 34 out of 38 pension advance companies that we identified  marketed and offered their services to customers nationwide,  operating primarily as web-based companies and marketing through  websites and other social-media outlets.
Twenty-eight of the 38 companies that we identified used marketing  materials or sales pitches designed to target consumers in need of  cash to address an urgent need such as paying off credit-card debts,  tuition costs, or medical bills, or appealed to consumers’ desire to  have quick access to the cash value of the pension that they have  earned.
Eleven of the 38 companies that we identified used marketing  materials or sales pitches designed to target consumers with poor or  bad credit. These 11 companies encouraged those with poor credit to  apply, stating that poor or bad credit was not a disqualifying factor.  We also observed this type of marketing during our undercover  investigative phone calls. For example, a representative from one  company stated that the company uses a credit report to determine  the maximum lump sum that it can provide to the pensioner, and  stated that no application would likely be declined.
section_title: The Six Pension Advance Companies That Provided GAO Investigators Quotes Offered Unfavorable Terms Compared with Other Financial Products
paragraphs: Six pension advance companies provided our undercover investigator  with quotes for pension advances with terms that did not compare  favorably with other financial products such as loans and lump-sum  payment options provided directly through private-sector pension plans.  We compared the 99 offers provided to our undercover investigators by  six pension advance companies in response to phone calls and online  quote requests with those of other financial products. Specifically, we  compared the terms with: (1) relevant state usury rates for loans and (2)  lump-sum options offered through defined-benefit pension plans. As  discussed below, we found that most of the six pension advance  companies’ lump-sum offers (1) had effective interest rates that were  significantly higher than equivalent regulated interest rates, and (2) were  significantly smaller than the lump-sum amounts that would have to be  offered in a private-sector pension plan that provided an equivalent lump- sum option.
subsections: section_title: Comparison to Usury Rates
paragraphs: We determined that the effective interest rate for 97 out of 99 offers  provided to our undercover investigator by six companies ranged from  approximately 27 percent to 46 percent. Most of these interest rates  were significantly higher than the legal limits set by some states on  interest rates assessed for consumer credit, known as usury rates or  usury ceilings. For example, in comparison to the usury rate for California  of 12 percent, we determined that the quotes for lump-sum payments that  our undercover investigator received from three pension advance  companies for a resident of California had effective interest rates ranging  from approximately 27 percent to 83 percent. The effective interest rates  on some of these offers could be even higher than the rates we  calculated to the extent some pension advance companies require the  pensioner to purchase life insurance, and “collaterally assign” the life- insurance policy to the company, to protect the company in the event of  the pensioner’s death during the term of the contract. For many of the  quotes our undercover investigator received, it was unclear whether the  pensioner would be responsible for any life-insurance premium  payments. See table 1 for additional examples of usury-rate  comparisons for states where our fictitious pensioners resided for our  case studies.
We compared pension advance offers that our undercover investigator  received to lump-sum options that can be offered in pension plans, where  a lump sum can be elected by plan participants in lieu of monthly pension  payments. The amount of such a lump-sum option of a private-sector plan  must comply with Employee Retirement Income Security Act of 1974  (ERISA) and Internal Revenue Code requirements that regulate the  distribution of the present value of an annuity by defining a minimum  benefit amount to be paid as a lump sum if the plan offers a lump-sum  option and a private-sector pensioner chooses that option. We  determined the minimum lump-sum amount under ERISA rules for private  defined-benefit plan sponsors. On the basis of our analysis of 99  pension advances offered by six companies, we determined that the vast  majority of the offers our undercover investigator received (97 out of 99)  were for between approximately 46 and 55 percent of the minimum lump  sum that would be required under ERISA regulations. This means that if  these transactions were covered under ERISA regulations, the  pensioners would receive about double the lump sum that they were  offered by pension advance companies.
Again, to the extent pension advance companies require the pensioner to  pay for life insurance, the terms of the deal would be even more  unfavorable than indicated by these lump-sum comparisons. Additional  information on the basis for the ERISA calculations is included in our  June 2014 report.
In January 2015, we reported that pension plan participants potentially  face a reduction in retirement income if they accept a lump sum offer.  Since the time of our review, Treasury announced plans to amend  regulations related to the use of lump-sum payments to replace lifetime  income received by retirees under defined benefit pension plans.  Specifically, these amendments generally would prohibit plans from  replacing a pension currently being paid with a lump sum payment. As  noted above, our June 2014 comparison observed that ERISA-regulated  lump-sum payments from pension plan sponsors were considerably  higher than the lump sum amounts offered by pension advance  companies. In the future, pension advance offers may appear more  appealing to some consumers who require money immediately that do  not otherwise have the option to obtain an ERISA-regulated lump sum  payment.
section_title: There Is Limited Federal Oversight of Pension Advances
subsections: section_title: Questionable Practices Related to Unregulated Transactions Pose Consumer Risks
paragraphs: Our June 2014 report identified questionable elements of pension  advances, such as the lack of disclosure and unfavorable agreement  terms. Whether certain disclosure laws apply to pension advance  products depends partly on whether the product and its terms meet the  definition of “credit” as set in the Truth in Lending Act (TILA), and whether  pension advances are actually loans and should be subject to relevant  TILA laws is a long-standing unsettled question. During our June 2014  review, we found that the costs of pension advances were not always  clearly disclosed to the consumer and some companies were inconsistent  about whether the product was actually a loan.
For example, 31 out of the 38 companies we identified did not  disclose to pensioners an effective interest rate or comparable terms  on their websites. For loans, under TILA, companies would be  required to disclose an effective interest rate for the transaction.
We also found that some of the offers provided to our undercover  investigator by six pension advance companies were not clearly  presented. Specifically, these companies provided a variety of offers  based on differing number of years for the term as well as differing  amounts of the monthly pension to be paid to the company. For  example, one company provided a quote including 63 different offers  with varying terms and monthly payment amounts to our fictitious  federal pensioner. We considered this volume of information to be  overwhelming while not including basic disclosures, such as the  effective interest rate or an explanation of the additional costs of life  insurance.
In addition, the full amount of additional fees such as life-insurance  premiums was not always transparently disclosed in the written  quotes that six pension advance companies provided to our  undercover investigator.
We also found that some of the 38 companies we reviewed were not  consistent in identifying whether pension advances are loans. For  example, while nine companies referred to these products as a loan  or “pension loan” on their websites, six of these companies stated  elsewhere on their websites that these products are not loans.
section_title: Limited Federal Oversight and Consumer Education Related to Pension Advances
subsections: section_title: Oversight
paragraphs: During our review we found that there was limited federal oversight  related to pension advances. Both CFPB and FTC are authorized to  protect consumers and to regulate the types of financial and commercial  practices that consumers should be protected against, some of which  appear to be relevant to practices that we describe in our June 2014  report. However, at the time of our 2014 review, neither agency had  undertaken any direct oversight or public enforcement actions regarding  pension advances. According to CFPB officials, they were concerned  about the effect of pension advances on consumers, but stated that they  had not taken an official position or issued any regulations regarding  pension advance transactions or products, or taken any related  enforcement actions. According to FTC officials, the agency had not  taken any public law-enforcement action as they had not received many  complaints regarding this issue. As noted in our 2014 report, conducting a  review to identify whether some questionable practices—such as the  ones highlighted in our report—are unfair or deceptive or are actually  loans that should be subject to disclosure rules under TILA, and taking  any necessary oversight or enforcement action, could help CFPB and  FTC ensure that vulnerable pensioners are not harmed by companies  trying to exploit them. Hence, we recommended that CFPB and FTC  review pension advance practices and companies, and exercise oversight  and enforcement as appropriate. CFPB agreed with this recommendation  and took action by investigating pension advance companies with  questionable business practices. We also referred the 38 companies that  we identified in our review to CFPB for further review and investigative  action, if warranted. In August 2015, CFPB filed suit against two of the  companies included in our review for a variety of violations including,  among others, unfair, deceptive, and abusive acts or practices in violation  of the Consumer Financial Protection Act of 2010 and false and  misleading advertising of loans. FTC also agreed with our  recommendation and, according to FTC officials, the agency has also  taken actions to review consumer complaints related to pension  advances, pension advance advertising, and the pension advance  industry overall.
section_title: Consumer Education
paragraphs: In our June 2014 report, we highlighted that consumer financial education  can play a key role in helping consumers understand the advantages and  disadvantages of financial products, such as pension advances. As we  reported, it can be particularly important for older adults to be informed  about potentially risky financial products, given that this population can be  especially vulnerable to financial exploitation. The federal government  plays a wide-ranging role in promoting financial literacy, with a number of  agencies providing financial-education initiatives that seek to help  consumers understand and choose among financial products and avoid  fraudulent and abusive practices. CFPB plays a role in financial  education, having been charged by statute to develop and implement  initiatives to educate and empower consumers (in general) and specific  target groups to make informed financial decisions. At the time of our  2014 review, we found that CFPB and four other agencies had taken  some actions to provide consumer education on pension advances.  However, several other federal agencies—including some that regularly  communicate with pensioners as part of their mission—did not provide  information about pension advance products and their associated risks  and were not aware of CFPB publications at the time of our review.  Also, these agencies reported that they had not identified many related  complaints and some were just learning about pension advance products.  We recommended that CFPB coordinate with the federal agencies that  regularly communicate with pensioners on the dissemination of existing  consumer-education materials on pension advances. CFPB agreed with  this recommendation and released a consumer advisory about pension  advances in March 2015. In addition, CFPB provided the Financial  Literacy and Education Commission with material related to pension  advances in April of 2015. Similarly, FTC—which educates consumers on  consumer products and avoiding scams through multimedia resources— had not previously provided any specific consumer education about  pension advances. However, in response to our review, in 2014, FTC  also posted additional consumer-education information about pension  advances on its agency website.
In conclusion, some older Americans are both at greater risk of being in  financial distress and of being financially exploited as they typically live off  incomes below what they earned during their careers and assets that took  a lifetime to accumulate. Some pension advance companies market their  products as a quick and easy financial option that retirees may turn to  when in financial distress from unexpected costly emergencies or when in  need of immediate cash for other purposes. However, pension advances  may come at a price that may not be well understood by retirees. As  illustrated by examples in my statement and by related consumer  complaints and lawsuits, the lack of transparency and disclosure about  the terms and conditions of these transactions, and the questionable  practices of some pension advance companies, could limit consumer  knowledge in making informed decisions, put retirement security at risk,  and make it more difficult for consumers to file complaints with federal  agencies, if needed. CFPB and FTC have taken actions to implement the  recommendations that we made to review pension advance practices and  companies, and exercise oversight and enforcement as appropriate, as  well as to disseminate consumer-education materials on pension  advances. We believe their implementation of these recommendations  will help to strengthen federal oversight or enforcement of pension  advance products while ensuring that consumer-education materials on  pension advances reach their target audiences, especially given that  Treasury’s recent announcement restricting permitted benefit increases  may make these products more desirable to pensioners.
Chairman Collins, Ranking Member McCaskill, and Members of the  Committee, this concludes my prepared remarks. I look forward to  answering any questions that you may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information on this testimony, please contact Stephen Lord at  (202) 512-6722 or lords@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this testimony  include Latesha Love, Assistant Director; Gabrielle Fagan; John Ahern;  and Nada Raoof. Also contributing to the report were Julia DiPonio,  Charles Ford, Joseph Silvestri, and Frank Todisco.
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