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The Shame of Pension-Advance Loans

David Callahan

The financial services industry is second to none in dreaming up ways to rip off Americans. Show me a a financial product—credit cards, mortgages, checking accounts, 401(k)s, annuities—and I'll show you a stack of consumer complaints documenting how banks and other firms have sought to bleed dry the American public. 

The latest alarming example are "pension-advance loans." Never heard of these nifty loans? Well, I hadn't either until the New York Times ran a shocking expose Saturday about firms that offer workers and retirees a chance to "convert tomorrow’s pension checks into today’s hard cash"—but with annual interest rates that have "ranged from 27 percent to 106 percent—information not disclosed in the ads or in the contracts themselves."

The story focused on loans against defined benefit pensions, the kinds you get if you serve in the military or civil service. Unlike 401(k)s, which are a failed retirement vehicle in part because so many people borrow against their nest eggs, DB pensions have been one of the bright spots in an era of collapsing financial security. Those with such pensions tend to face a more secure retirement. And, until recently, there was no easy way to get at that money prematurely. 

But the financial services sector is unrelenting in its search for fresh veins of wealth, however modest, that it can tap into and drain away. And so it's no great surprise that eventually a bunch of firms would come to specialize in pension advances—companies with names like LumpSum Pension Advance, Pension Funding, and DFR Pension Funding—and begin showering come-on offers on those with such pensions. 

In lean economic times, people with public pensions—military veterans, teachers, firefighters, police officers and others—are being courted particularly aggressively by pension-advance companies, which operate largely outside of state and federal banking regulations, but are now drawing scrutiny from Congress and the Consumer Financial Protection Bureau. . . . 

But these offers, known as pension advances, are having devastating financial consequences for a growing number of older Americans, threatening their retirement savings and plunging them further into debt. The advances, federal and state authorities say, are not advances at all, but carefully disguised loans that require borrowers to sign over all or part of their monthly pension checks. They carry interest rates that are often many times higher than those on credit cards.

Pension-advance firms are focusing particular attention on military service people and veterans, who have been targeted in the past by other predatory financial services. In fact, there has been so much financial abuse of current and former military personnel that the Consumer Financial Protection Bureau has an entire office focused on this problem. 

It's worth pausing for a moment to consider how utterly unpatriotic it is to target those who protect us for financial exploitation. But, again, no big surprise there: Modern capitalism isn't guided by any sort of moral compass or respect for values universally embraced by all Americans. It's guided by the bottom line, and it doesn't matter whether the targets of exploitation wear a uniform or not. 

Like other high interest predatory loans, pension advances can lead to a cycle of indebtedness that is impossible to escape. Especially since many of the true costs of these advances are hidden from borrowers, a characteristic of any well-laid trap. These advances contribute to rising levels of debt among seniors, a phenomenon that Demos has documented in a recent research report which the Times cites in the article. That report, along with other data, paints a bleak picture of senior indebtedness. As the Times writes: 

The combined debt of Americans from the ages of 65 to 74 is rising faster than that of any other age group, according to data from the Federal Reserve. For households led by people 65 and older, median debt levels have surged more than 50 percent, rising from $12,000 in 2000 to $26,000 in 2011, according to the latest data available from the Census Bureau. . . 

Meanwhile, households headed by people age 75 and older devoted 7.1 percent of their total income to debt payments in 2010, up from 4.5 percent in 2007, according to the Employee Benefit Research Institute.

This story is yet another example of why the CFPB is so important. Republicans trying to kill that agency should have to explain why they want to leave veterans and police officers at the mercy of financial bottom feeders.