by John Darer CLU ChFC CSSC
Andrew Cravenho, owner of factoring brokerage Settlement Quotes LLC, has put together an informative post which does a nice job of graphically illustrating the component costs associated with a structured settlement factoring transaction and their effect on the "effective discount rate" for such transactions.
It's clear from the material presented that the effective "cost of money"for such transactions is likely to be excessive for small amounts (because of those costs) when compared to other potentially available alternatives. This explains why someone who needs a small amount of money is often told by factoring companies to sell a multiple of that amount in order to net out at the sum required. To his credit, Andrew Cravenho explicitly states that his company DOES NOT recommend that a tort victim sell more payments simply to obtain a lower discount rate.
The logical question inspired by Cravenho's charts is how can companies like Peachtree Settlement Funding get away with their 19% plus discount rates? Whether or not compensation is received, if lawyers, financial planners, settlement planners and advisors for tort victims are taking the step to refer business to Peachtree Settlement Funding, isn't there a responsibility to understand the deal? Unless the market "chops down" the Peach tree, it will continue to offer rates to desperate tort victims that far exceed what is reasonable in today's environment to appease investors in the deal flow.
Some judges in New York are already onto Peachtree Settlement Funding as well as some of their competitors "friends". Read my July 4, 2007 post New York Judges Getting It Done!
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