by Structured Settlement Watchdog®
Would Limiting the Amount of Factoring of Structured Settlement Payments Be Viable?
Purchasers of structured settlement payments would be barred from buying more than 25 percent of the remaining funds owed to the seller, under legislation pending in the Maryland House of Delegates as the fallout from Washington Post articles about the alleged exploitation of lead paint structured settlement annuitants by a settlement purchaser continues. Is that the right approach for everyone?
I. Attack the Bloated Profit Incentive by Capping Interest Rates at a Market Sensitive Amount to Be Set by a Regulator Empowered by State Legislature.
As I proposed in my White Paper on Constructive Solutions to Structured Settlement Secondary Market, the insurance regulator would be a plausible choice since regulatory oversight of the parallel life settlement market general falls on the shoulders of the insurance regulator. The structured settlement secondary market should not be permitted to regulate itself because it has failed miserably in that regard for its entire existence, even after the passage of structured settlement protection acts.
I have heard arguments from a number of members of the secondary market about why interest rates should not be capped. Generally the reasons offered are (1) the sources of money will dry up (2) capping will not cure anything because people will be lured by intermediaries to forum shop into other states (e.g. North Carolina, where there is an interest rate cap, to Florida) (3) It’ll drive small players out of the business leaving the “big bad guys”
Weaknesses in the Arguments Against Interest Rate Capping
Considering these arguments, the core of the issue doesn’t seem to hold up over time.
Perhaps a reasonable cap should be implemented by a much-needed regulator, empowered by the state legislature, with the flexibility to adjust based on current market conditions. While the judge would still determine whether a structured settlement factoring transaction is in the best interest of the seller and their dependents, there would also be independent expertise monitoring market conditions. When companies like Novation Funding LLC can profit over $1,000,000 above market on a naive 21-year-old in Florida in 2015—when interest rates and the cost of money were at historic lows—operating as an unregistered DBA and assigning deals to itself in court documents, it’s clear that something is deeply wrong. Some call that “grabbing the low hanging fruit”
PT Barnum Famously Sold Tickets to See the Exit
They used to say “There’s a sucker born every minute”. That kid could still have had a substantial amount of his structure left instead of bloating the opportunistic coffers of the settlement purchaser. What if the Okeechobee County judge that approved that awful Novation Funding deal and every judge in the State of Florida and elsewhere had the guidance of a market sensitive regulatory cap and/or the range of current discount rates in the market?
Speaking of Maryland Structured Settlement Protection
Speaking of Maryland, in In a June 1, 2007 article in Financial Adviser magazine, Tracy Longo profiles the Towson Maryland firm of WMS Partners, whose partner Tim Chase, now 52, was quoted at the time, saying that WMS Partners had done 500 transactions and bought $100 million of structured settlement payment rights in the preceding 5 years, since 2002. Chase is quoted “In some cases, however, the injured party wants to cash out immediately and they are willing to accept a significant discount. That’s where WMS gets involved. Working through intermediaries, WMS buys these deals and puts them into a pool, which then pays clients a fixed stream of 8% to 9% annually“.
If you are working through intermediaries, the intermediary gets a cut, WMS gets a cut lawyers get a cut and the annuity issuer gets a fee. Where does that leave a seller?
At 8%-9% the effective discount rate with all legal fees and costs could be well into the teens. That’s a lot of discount. The benefit goes to wealthy investors.
As Tim Chase was quoted in the 2007 article “Because we’re relying on the insurance company who issued the annuity, we haven’t had a single late payment. They come in like clockwork.” If they come in like clock work, then why was there so much fat in the deals for investors at the expense of structured settlement annuitants? What is WMS Partners paying its investors in structured settlements now?
In doing my research into the Camacho forgery case a number of the deals were coming in with at discount rates that could have been bettered in the market.
The current system also sees other companies aggressively and marketing structured settlement payment rights as annuities when they are not and implying that they receive the same statutory protections that someone who actually completed an annuity application and purchased a retail annuity from people that actually have licenses and whose sales practices are regulated.
Has the Demand of Investors for Structured Settlement Investments Been A Catalyst For The Escalation By Certain Structured Settlement Secondary Market Intermediaries, Their Agents and Affiliates, to Engage in Aggressive Behaviors?
To Be Continued…