When the National Structured Settlement Trade Association (NSSTA) supported enactment of IRC Section 5891 as part of the Victims of Terrorism Tax Relief Act of 2001 and began a successful state by state process to help secure enactment of state structured settlement protection acts (SSPAs) in all 50 states plus the District of Columbia, NSSTA envisioned the resulting comprehensive legislative scheme as a viable strategy to stop, or at least substantially reduce, the business abuses of factoring companies.
Unfortunately, as highlighted in a recent series of articles published by the Minneapolis Star Tribune (subscription required) and summarized in an earlier (Part 1) Independent Life article, that legislative strategy has not solved the problem of factoring abuse. Factoring companies continue to abuse both the SSPA process itself as well as committing related marketing abuses.
Star Tribune Recommends Guardians
To address these problems, the Star Tribune has recommended that Minnesota amend its state law to allow judges to appoint guardians to advise structured settlement payees who are considering transfers and to advocate on their behalf. The factoring companies would be required to pay the cost of the guardians which would, of course, increase the cost of the any transfer.
To support its proposed solution, the Star Tribune cites the record of Albuquerque, New Mexico where this practice occurs and where judges approve 42 percent of transfers compared with Minnesota judges who currently approve 90 percent of transfers.
Many SSPAs already include provisions for professional advisors. Edward Stone, an attorney who represents transfer victims in actions against factoring companies, estimates that more than 90 per cent of structured settlement payees who are given this option waive the right to professional advisors, often without full knowledge. Stone favors the Star Tribune proposal but points out, even if enacted, guardianship would not provide a comprehensive solution for factoring abuse.
Shortcomings of the Star Tribune Series
The Star Tribune series includes other suggestions to address factoring abuses but generally fails to ask meaningful follow-up questions or explore the ideas that are presented. Examples:
- One Star Tribune article features Richard Cordray, the first Director of the Consumer Financial Protection Bureau (CFPB). The CFPB has filed Complaints against at least two factoring companies and issued public warnings against factoring. In the Star Tribune article, the reporters quote Cordray as saying factoring companies need “more oversight” and “need to be policed more closely.” However, the Star Tribune reporters offer no further details and apparently failed to ask follow-up questions which might have expanded upon a possible regulatory solution.
- While discussing states that allow judges to appoint guardians, the Star Tribune reporters mention Maryland’s law “which also require[s] settlement purchasing companies to register with the state attorney general.” What the Star Tribune reporters fail to mention or explore as a possible solution is a further requirement of Maryland’s Transferee Registration law. To do business in Maryland, factoring companies must file an irrevocable letter of credit or a surety bond in the amount of $100,000, or deposit $100,000 with the Office of the Attorney General.
On a more basic level, the Star Tribune series never directly asks, or attempts to answer, three fundamental questions that its own research would seem to require:
- Can the statutory scheme in its current form (IRC 5891 and the SSPAs), even adding guardians, solve the problem of factoring abuses?
- If not, why not?
- Assuming the statutory scheme is not working, what other viable solutions, if any, have been proposed?
One assumes the Star Tribune reporters would first ask each of these three questions to NSSTA. In an October 5, 2021 “Open Letter” to members, NSSTA indicated it had “provided background information and guidance to the [Star Tribune] reporters.” Here are quoted comments by NSSTA members within the Star Tribune series – with this writer’s reactions:
- Craig Ulman, NSSTA General Counsel from 1991 to 2021, who helped draft the laws that govern settlement purchases in many states: “selling payments is rarely in the customer’s best interest.” This quote presumably represents the fundamental premise upon which the IRC 5891 and SSPA legislative “solution” is based.
- Eric Vaughn, NSSTA Executive Director: “The way [factoring companies] prey on people is unconscionable. I’m just angry.” This quote, reminiscent of Claude Rains in the movie Casablanca, acknowledges the limitations of NSSTA’s legislative “solution.”
- John McCulloch, a member of NSSTA’s legal committee “proposed mandatory “speed bumps” that would restrict settlement recipients from selling payments more than once every two of three years.” This comment represents the only additional legislative or regulatory recommendation mentioned by a NSSTA member in Star Tribune series.
- Brennan Neville, an attorney for annuity provider Berkshire Hathaway Group (BHG) who also co-chairs NSSTA’s legal committee, explained BHG’s “hardship exchange program” as follows: BHG offers a discount rate of 6.5%, plus a $1,000 administrative fee if a transfer gets approval whereas factoring companies typically offer 15%. The reason, said Neville, is “we understand that people are taken in by the appeal of factoring companies…. We view it as a means for them to do it in a more socially responsible manner.”
Questions readers might ask at this juncture: why doesn’t every NSSTA’s annuity provider emulate Berkshire Hathaway’s “hardship exchange program” and/or Independent Life’s “Payee Protection Policy”? Why didn’t the Star Tribune reporters pursue this same question to explore a possible method for improving the existing statutory scheme? Why hasn’t NSSTA?
The Gordon and Czapanskiy Law Review Articles
Indeed, James Gordon does discuss related issues and specifically addresses the role of structured settlement annuity providers as it relates to factoring in his 2020 Columbia Law Review article titled “Enforcing and Reforming Structured Settlement Protection Acts: How the Law Should Protect Tort Victims,” in which he argues that the state legislative scheme to approve transfer petitions “has fundamental substantive and procedural flaws that prevent it from achieving its purpose.”
Mr. Gordon concludes that: “[i] Improving the monitoring system for individual transactions … will not address the scheme’s consistent failure to protect against the systemic abuse of consumers” because “there are two basic problems underlying the current legislative scheme’s failure to protect tort victims and effectuate the congressional intent of preventing victims from becoming public charges”:
- The transfer process is “non-adversarial,” and therefore judges don’t have sufficient information to make judgments and are forced to play the role of “paternal guardians.”
- Lack of market transparency has hidden the majority of factoring abuses from state enforcement agencies and plaintiff attorneys and even when abuses are challenged in court, procedural and jurisdictional hurdles create unreasonable litigation barriers.
As a preferred solution, Mr. Gordon proposes that courts:
- Recognize that personal injury victims are direct or third-party beneficiaries of the anti-assignment clauses incorporated in virtually all structured settlement agreements; and
- Require annuity providers (or their assignment companies) responsible for structured settlement payments to exercise their contractual obligation of good faith when choosing whether to waive these clauses.
Mr. Gordon further maintains that annuity providers violate their contractual obligation of good faith to a personal injury victim payee when they accept an administrative fee from a factoring company to waive an anti-assignment clause.
Independent Life, with our Payee Protection Policy, and BHG are among the examples of “major players in the market” that Mr. Gordon mentions having “already established transfer petition objection policies that both illustrate how these duties could manifest and demonstrate that insurance companies are fully capable of investigating whether a tort victim is being abused.”
None of the Star Tribune articles mention Mr. Gordon or his recommendations. Nor do the Star Tribune articles mention Professor Karen Czapanskiy who published an article titled “Tax Policy, Structured Settlements and Factoring: Making Exploitation Easy and Profitable,” in the University of Detroit Mercy Law Review, also in 2020.
Professor Czapanskiy’s proposed solution for factoring abuse: repeal the exemption of judicially approved state structured settlement protection act factoring transactions from the confiscatory 40% excise tax imposed by IRC section 5891 (a) which, she argues: 1) is supported by critical tax policy; and 2) would provide a significant disincentive to factoring companies who might otherwise want to purchase periodic payment rights.
Edward Stone and John Darer
Among additional oversights and shortcomings, in this writer’s opinion, the Star Tribune reporters failed to interview the previously quoted (in this article) Edward Stone, one of the most prominent attorneys nationally representing factoring victims. They also neglected to consider (or at least publish) any of John Darer’s recommendations for solving the factoring crisis. Darer, a member of NSSTA, AASC and SSP and frequent speaker at NSSTA and industry conferences, is one of the best-known factoring critics and bloggers about the structured settlement industry.
Why are these two final omissions important and what do these two factoring “experts” have to say about factoring problems and solutions that the Star Tribune reporters, with NSSTA’s input and guidance, missed?
Stone and Darer agree that the Star Tribune series failed to identify and address at least three important factoring problems:
- No penalty exists for non-compliance with the SSPA other than the excise tax for which there is no private right of action. No deterrence exists for bad actors.
- Factoring companies create shell companies to file transfer petitions so real parties in interest are concealed. Sometimes shell companies are established for just one specific transfer and commit to the transfer before it has the money to complete the transfer.
- Agreeing with James Gordon analysis above, most structured settlement annuity providers and assignment companies fail to enforce anti-assignment provisions in settlement documents.
Stone and Darer also agree on the following proposed solutions:
- Factoring companies should be licensed, bonded and regulated – which will help eliminate shell companies.
- Personal appearances should be required in all cases.
- Settlement agreements that restrict the power of a payee to assign should be enforced.
- Pre-transfer order advances and inducements to sell (gift cards, vacations, etc.) should be limited or outlawed to at least be consistent with other financial service regulations.
- Annuity providers should scrutinize multiple factoring requests to limit repeat seller concerns.
In addition, Darer offered these further insights and recommendations about factoring “regulation”:
“Unfortunately, a huge gap in regulation fails to protect how consumers and investors can be solicited. What regulation there is, is not consistently effective enough and weaknesses are exploited to the detriment of American consumers.
“Specifically why is there no licensing and enforceable regulation of sales practices of (1) each and every person and entity soliciting people receiving guaranteed income streams from structured settlements; (2) each and every person and entity advising annuitants about the sale of structured settlement payment rights; (3) those advising investors, whether accredited or not, about the purchase of structured settlement payment rights; (4) those dispensing advice about alternative investments without a license in conjunction with any of the aforementioned and getting paid for it directly or indirectly?
“There needs to be a regulator that has the power to fine, suspend or revoke authority to do business. Some states, such as Connecticut, already have life settlements under the purview of their department of financial services or insurance department, so that seems like a logical place to start.”
The Star Tribune series was successful only if it helps generate renewed national conversation about the problems and solutions for factoring company abuses. NSSTA has an important role to play in this conversation but so too do other associations such as the AASC and SSP as well as individual companies and industry leaders whose ideas were not featured in the Star Tribune series. Unless and until the blight of factoring company abuse is brought under control, the full potential of structured settlement products and the structured settlement market as originally envisioned by Congress will never be realized.