NSSTA has submitted a formal comment to the Consumer Financial Protection Bureau (CFPB) calling for an end to abusive, deceptive, and unfair practices employed by the factoring industry. Congress created the CFPB to provide a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace.
NSSTA has called upon the CFPB to take action to protect vulnerable structured settlement payees and their families and ensure that structured settlement payees are protected from the predatory conduct of the factoring industry. NSSTA also encouraged the CFPB to provide effective oversight of factoring transactions and work to augment current Structured Settlement Protection Acts to ensure the factoring industry is incapable of taking unreasonable advantage of structured settlement payees. The following is the National Structured Settlements Trade Association Comment to the Consumer Financial Protection Bureau regarding the “Statement of Policy Regarding Prohibition on Abusive Acts or Practices.”
COMMENT OF THE NATIONAL STRUCTURED SETTLEMENTS TRADE ASSOCIATION IN RESPONSE TO THE CONSUMER FINANCIAL PROTECTION BUREAU STATEMENT OF POLICY REGARDING PROHIBITION ON ABUSIVE ACTS OR PRACTICES
The National Structured Settlements Trade Association (“NSSTA”) appreciates the opportunity to submit this Comment to the Consumer Financial Protection Bureau (the “Bureau”) regarding the Statement of Policy Regarding Prohibition on Abusive Acts or Practices (the “Statement”). In light of the unfair, deceptive, and abusive practices of the factoring industry that purchases structured settlement payment rights (the “Factoring Industry”), NSSTA believes the Bureau should take action to protect vulnerable structured settlement payees and their families. As noted by United States Senator Tina Smith, in her October 7, 2021, letter to the Bureau, the protections provided by state and federal law intended to protect against abusive purchases of structured settlements are generally inadequate. To ensure fair dealing and protect consumers, the Bureau should employ its authority to make revisions to the policy against abusive acts or practices.
NSSTA is an association comprised of the structured settlement industry including consultants, attorneys, insurance companies, and other professionals working with accident victims and their dependents. NSSTA was founded in 1985, three years after the enactment of the federal laws recognizing structured settlements as a valuable tool for personal injury plaintiffs, and since then, NSSTA has sought to promote the growth, establishment, and preservation of structured settlements to ensure and protect the long-term financial security of personal injury claimants and their families. NSSTA provides resources related to structured settlements for the industry, governmental authorities, and the consumer public. Structured settlements offer an effective mechanism for compensating, by way of periodic future payments, injured personal injury plaintiffs or other individuals receiving unexpected awards such as lottery winners. Structured settlements provide streams of future periodic payments, secured by annuities, or in some cases, by U.S. Treasuries or other sources, to provide asset dissipation security and tax benefits to the recipients.
The federal Periodic Payment Settlement Act of 1982, P.L. 97-473, formally recognized structured settlements as a desirable method for compensating personal injury plaintiffs. Since then, members of NSSTA have assisted with many thousands of settlements where personal injury victims have become protected structured settlement payees. Unfortunately, in the1990s, a number of “factoring” companies began convincing structured settlement payees to sell their future settlement payments at large financial discounts. While the Factoring Industry has grown exponentially, so too have the harmful terms and marketing tactics of many “factoring companies.” The practices of many factoring companies have generally gone unaddressed by both regulators and the courts. As discussed herein, the actions of the Factoring Industry often materially interfere with the consumer’s ability to understand the terms and conditions of the transactions (i.e., the product and service the Factoring Industry purports to provide) and take advantage of the payee’s lack of understanding and inability to protect his or her own interests by assuming the role of a trusted source or agent of the payee.
Factoring Transactions Are Harmful to Payees
A factoring transaction refers to the process through which structured settlement payments are redirected and transferred from the original settlement payee to a third-party, in exchange for an immediate, typically heavily discounted, cash payment from the factoring company to the settlement payee. Factoring first began in volume in the 1990s, and very quickly, these factoring transactions were revealed to be almost always harmful to structured settlement payees, mostly because the discount rates were extremely high, and also because the Factoring Industry used exploitative methods and terms. Typically, the discount rates were in the range of 16% to as high as 28% (thereby, generally above what most usury laws permit). For example, if a structured settlement payee sold today a lump sum payment of $22,468.21 due October 4, 2027 where the discount rate applied by the factoring company is 24.99%, the payee would only receive $8,378.52. (*1) The unfair methods of many factoring companies include the use of complex and lengthy form agreements that are too difficult for a lay person to understand, and the frequent filing of lawsuits in remote for a. See Wiggins v. Peachtree Settlement Funding, 273 B.R. 839 (Bankr. D. Idaho 2001) (finding particularly “outrageous and offensive to the public conscience” a factoring company’s knowledge of payee’s inability to protect his own interest or understand the 75-page “extremely complex” purchase agreement, resulting in his selling ten years of his annuity payments “for a fraction of their face value”).
(*1) In Re: The Matter of R. M., Circuit Court, 19th Judicial Circuit, Lake County, Illinois, No. 23CH00000091.
Factoring is a problem not just for the personal injury victims, who become the structured settlement payees, but also for the insurance industry participants who are typically the annuity owners and issuers that fund these settlements in the first place. Indeed, if a Google search is conducted for “structured settlement,” the first dozen or so responses have nothing to do with actual structured settlements but instead refer the user to factoring company advertisements.
Through these and other aggressive advertising campaigns, touting the benefits of selling structured settlement payment rights, the Factoring Industry lures in payees by the thousands. With aggressive television advertisements suggesting that payees should “Get Cash Now” and teaching them to say “It’s My Money and I Need It Now,” the Factoring Industry takes advantage of desperate structured settlement payees. According to the Wall Street Journal, factoring companies are “a sort of lender of last resort to a particular group: the rising number of claimants in personal-injury cases who settle out of court to receive structured payments over time.” Like It or Lump It, Wall Street Journal, Feb. 25, 1998.
In fact, one judge referred to certain factoring companies as "vultures" and imposed statewide procedures on all petitions requesting transfers of structured settlement rights. E. Fitzpatrick, "Judge Warns of Financial 'Vultures,'" Providence Journal, p. A-1 (Feb. 3, 2008); E. Fitzpatrick, "State Offers Legal Advice on Settlement Cashouts," Providence Journal, p. C-1 (Feb. 18, 2008.) An Arizona judge described how "Rapacious Factors, L.L.C. uses television and hard sell tactics to entice recipients to give up secure payments in exchange for a paltry sum.” E. Burke, “Structured Settlement Factoring: Panacea or the Road to Ruin?," Arizona Attorney, p. 23 (Mar. 2008).
The predatory tactics of the factoring industry repeatedly have caught the attention of the Wall Street Journal which wrote an exposé stating that “people with grievous injuries end up destitute” from repeat factoring transactions. Firms Help Settlement Holders Cash Out Payments Meant to Last a Lifetime, Leslie Scism, Wall Street Journal, March 23, 2015. “The competition is leading to what some consumer advocates, state lawmakers and industry participates say is a pickup in questionable deals that have exposed soft spots in state and federal statutes.” Id. The sharp practices of the Factoring Industry were further detailed in a 2015 Washington Post exposé. Terrence McCoy, How companies make millions off lead-poisoned, poor blacks, THE WASHINGTON POST, Aug. 25, 2015. By befriending marginalized structured settlement payees, treating them to fancy meals, gift cards, and promises of vacations, Access Funding, LLC, a Maryland factoring company, was able to get hundreds of lead-poisoned, poor African American individuals to enter into factoring transactions. At or about the time of these articles, in the only action of its kind, the Maryland Attorney General filed a lawsuit against Access Funding alleging the tactics it employed to effectuate factoring deals with young, “injured and intellectually impaired Marylanders” were “egregiously unfair” and resulted in large profits for Access Funding, which purportedly purchased settlement payments worth $32.6 million for $7.5 million.
See Terrence McCoy, Company that reaped millions from deals with Baltimore’s lead-poisoning victims violated law, authorities say, THE WASHINGTON POST, May 12, 2016. (*2)
The Minnesota Star Tribune ran a more recent series of articles and reported that “[e]ach year, companies such as J.G. Wentworth, DRB Capital and Novation Settlement Solutions buy an estimated $1 billion worth of payments from people who have received a legal settlement [and these companies go to extraordinary lengths to find their customers]. They comb court records and spend tens of millions of dollars on television commercials, for premium placement in online search results and on direct mail.” Indeed, according to the Star Tribune, one industry leader has historically spent over $700 million annually in marketing. See Jeffrey Meitrodt and Adam Belz, Relentless Tactics Target Wary Sellers, THE MINNESOTA STAR TRIBUNE, Oct. 13,2021. (*3)
(*2) In November 2022, the Access Funding principals were found guilty in connection with related criminal charges.
In 2022, the Myrtle Beach Sun News published another recent and similar series of investigative reports exposing numerous issues with factoring. The articles detail the manner in which the Factoring Industry has preyed on vulnerable South Carolinians. The Sun News findings highlight the dangers faced by structured settlement payees as a result of unfair factoring transactions and the “onslaught of marketing directed at [the payees] ...” See David Weissman, SC fails to protect injury victims while other states curbed abuse, our investigation found, THE SUN NEWS, Sept. 8, 2022; David Weissman, Money was promised to her after brain injury. But SC judges let most of it go to companies, THE SUN NEWS, Sept. 8, 2022.
(*3) The Minnesota Star Tribune articles detailed the predatory tactics used by certain factoring companies with specific stories from payees:
Brandon Kaczmarek, who as a child was so badly burned over much of his body that he had to wear a mask and tights on his legs for two years. He dropped out of high school and was unemployed and living in his car — but sitting on an annuity that would pay him almost $1 million over the course of his life — when he first saw a commercial for J.G. Wentworth. For his first sale in 2010, Kaczmarek received 77% of the present value of the payments. By 2017, for his fifth sale, J.G. Wentworth bought $80,000 in payments for $28,000, meaning Kaczmarek received about 48% of the present value of those payments. After a judge approved Kaczmarek’s first sale, Wentworth’s competitors swung into action. He still gets as many as 10 to 12 calls a day, sometimes beginning as early as 7:30 a.m., from companies offering him a cash advance on payments he willr eceive through 2047. He has begged to be placed on do-not-call lists and has changed his phone number several times. But the companies always find him.
In another paradigm case, at the age of 7, Steve Matiatos’s skull was partly crushed when a 1,200-pound concrete sewer culvert rolled over him. He lost most of his teeth; went blind in his right eye; and was permanently scarred on his face. He never finished high school. Now 52, Matiatos could be receiving more than $2,000 a month from an out-of-court settlement that guaranteed him an income for life. But in 2000 he started selling his future payments to J.G. Wentworth, which buys more “structured settlements” than anyone else in the United States. Wentworth went to court six times to buy payments from Matiatos. With the loss of sight in his remaining eye and unable to work, Matiatos will not receive another check until he is almost 80 years old. Altogether, Matiatos sold$1.5 million in payments to J.G. Wentworth for $226,500, about 25% of what the company said the payments were actually worth.
While all fifty states and the District of Columbia recognize the risks presented by the Factoring Industry and factoring transactions and have adopted a Structured Settlement Protection Act (“SSPA”) to “regulate the transfer of structured settlement rights” and “place conditions on the transfer of structured settlement rights,” these SSPAs have not proved sufficiently effective in preventing and controlling the sharp practices used by the Factoring Industry. The court decisions and other sources documenting these ongoing problems are many. In just one example, a New York Court refused to permit the transfer of settlement payments because an industry leader had presented “one of the most outrageous and unconscionable structured settlement proposals it [had] seen over the past several years and is most certainly contrary to [the payee’s] best interests. …
Permitting [the payee] to transfer more than 85% of his future payment for such a paltry amount would run contrary to the intent of establishing structured settlement agreements in the first place: to prevent recipients from making rash decisions upon their receipt of large lump sum payments and to safeguard their future financial security.…” In the Matter of the Petition of J.G. Wentworth Originations, LLC and John Cotton, John Hancock Life Insurance Company (USA), and John Hancock Assignment Company, Index No. 2014-1216CV, Supreme Court of New York, Steuben County. The Court also declared the terms of the proposed transfer to be unfair, unreasonable, and excessive. Id.
Ultimately, structured settlement payees are at a significant disadvantage in resources, sophistication, and understanding when compared to the Factoring Industry. Asthe Minnesota Star Tribune reported, the Factoring Industry employs an army of researchers to review court records for cases ending in large settlements. These cases include plaintiffs of the most vulnerable type: serious car crash victims, medical malpractice claimants, wrongful death claimants, and payees in large class action suits such as those arising out of asbestos or lead paint poisoning. The Factoring Industry views information related to payees as a pool of untapped payment streams to be aggressively pursued: by 2014, one industry leader had acquired a database of 122,000 current and prospective customers with $32 billion of structured settlement payments to acquire. See Jeffrey Meitrodt and Adam Belz, Relentless Tactics Target Wary Sellers, THEMINNESOTA STAR TRIBUNE, Oct. 13, 2021. Moreover, while courts play an important role in protecting payees, they cannot prevent the Factoring Industry from pursuing aggressive marketing campaigns—which themselves create mental stress and harm for the payee—nor can courts prevent all abusive transactions from moving forward. As published in The Sun News, structured settlement payees face a multitude of risks as a result of unfair factoring transactions and noted that judges are often unable to fully protect payees given the “onslaught of marketing directed at [the payees] once they complete their first deal.” One structured settlement payee allegedly heard from factoring companies “nearly every day,” including mail from multiple entities “with checks and prepaid Visa gift cards.” See David Weissman, SC fails to protect injury victims while other states curbed abuse, our investigation found, THE SUN NEWS, Sept. 8, 2022; David Weissman, Money was promised to her after brain injury. But SC judges let most of it go to companies, THE SUN NEWS, Sept. 8, 2022.
Regulation is Required to Combat Factoring
Employing its authority, the Bureau should enact rules to augment SSPAs and thereby ensure the Factoring Industry is incapable of taking unreasonable advantage of structured settlement payees. “Safeguards put in place by the state legislatures to protect sellers, including a requirement that judges sign off on the deals, stop very few from gaining approval.” David Weissman, Money was promised to her after brain injury. But SC judges let most of it go to companies, THE SUN NEWS, Sept. 8, 2022. In reaction to extensive news articles detailing the predatory practices of the Factoring Industry, certain state legislatures have amended their SSPAs to enact more robust measures to protect vulnerable payees from unscrupulous factoring companies. The Bureau should enact additional strict rules governing the conduct of the Factoring Industry and thereby protect structured settlement payees.
A. Cognitively Impaired Structured Settlement Payees
As the Bureau noted in its Statement, “[c]onsumers may also be unable to protect their interests when the inequality in bargaining power flows from circumstances or vulnerabilities that are present for individual or particular groups of consumers.” Statement, fn. 60. As a result of their underlying injuries, many structured settlement payees suffer from cognitive impairments and other mental health issues which render them incapable of understanding the terms and/or consequences of factoring transactions. Few SSPAs, however, include provisions providing for a guardian ad litem (“GAL”) to review the transaction and ensure the payee’s financial future is protected. Moreover, none of the SSPAs require a statement from a physician certifying the injured payee is competent.
Only five SSPAs – Minnesota, South Carolina, West Virginia, Delaware and Maryland – include specific language providing the court with authority to appoint a GAL in connection with transfer petitions filed pursuant to those statutes. Generally, the provisions grant the court discretion to appoint a GAL to make an independent assessment and advise as to whether the proposed transfer is in the payee’s best interest, taking into consideration the payee’s dependents.
Appointment of the GAL is generally mandatory only in cases involving a transfer of minor’s payment rights or a payee suffering from an established mental or cognitive impairment. The appointment of a GAL typically has the effect of providing the reviewing court with additional information to consider in connection with its decision on whether a given transaction is in the payee’s best interest. The appointment of a GAL tends to result in fewer approvals of structured settlement transfer petitions because the court is provided with additional information related to the payee which is not presented by the factoring company. Furthermore, the costs and fees of the GAL is borne by the factoring company and may not be passed on to the payee or deducted from the purchase price paid to the payee.
In addition, a competency statement signed by an independent physician provides the reviewing court with additional confirmation that the payee has the necessary reasoning to understand the financial transaction. Often the settlement occurred years ago, and the mental and physical condition of the payee has changed. Further, it is common for payees to receive their payments directly despite possible competency issues. Absent appointment of a guardian or conservator on behalf of the payee, insurers generally do not have information related to the current mental or physical status of a payee. Thus, requiring documentation from an independent physician in matters where a payee’s mental capacity is in question is valuable. As the news articles detailed, the Factoring Industry targets lead paint victims and others whose cognitive abilities have been compromised. The costs and fees of such a physician’s statement should be borne by the factoring company.
B. Payees between the age of 18 and 25
The aggressive advertising campaigns and targeted mailers of the Factoring Industry take advantage of young, structured settlement payees as they reach the age of majority and often just begin to receive their payments. The Factoring Industry trolls public dockets to gather information regarding payees and proceeds to aggressively market their services to these young, financially unsophisticated individuals. In fact, the Factoring Industry targets payees while they are still minor’s and enters into a factoring transaction with them as soon as they reach the age of majority.
With dreams of starting a business, a struggling kid just out of high school allegedly learned he could get immediate cash for his future payments from watching commercials. Thus, at 19, he sold his payment rights to a factoring company that allegedly promised to teach him to start his business. However, as soon as the deal was approved, the factoring company allegedly disappeared and within six months the payee’s painting and pressure washing business was lost. “They took advantage of me … I was just a dumb kid and didn’t know what I was doing.” David Weissman, Money was promised to her after brain injury. But SC judges let most of it go to companies, THE SUN NEWS, Sept. 8, 2022.
While legally able to enter into contracts, young and financially inexperienced individuals lack the experience and understanding necessary to fully appreciate the consequences of selling their payment rights for a fraction of their worth. Regulations should require appointment of a GAL to protect the interests of any structured settlement payee between the ages of 18 and 25 who seeks to transfer their future payment rights. As discussed above, the GAL would be able to advise the court whether the payee had a sound reason for seeking the transfer or was merely lured into the glamor of a new car, as peddled by the Factoring Industry to young payees.
Moreover, information related to the settlement of a minor’s claim should not be subject to public disclosure. Effective April 3, 2023, Ohio amended its Code to shield information about a minor’s settlement from third parties trolling court dockets looking to exploit a minor once they reach the age of majority. Ohio Rev. Code § 2111.18 (“If the claimant is a minor, records of proceedings pursuant to this section are not subject to disclosure to any person who is not a party to the settlement, or made available for publication or inspection, except upon motion and show of good cause.”)
C. Repeat Transactions
The exposés regarding factoring are replete with stories of how once a payee enters into a single transaction selling part of his or her payments, they are then on the hook for many more. By way of phone calls, emails and letters, the Factoring Industry entices structured settlement payees into doing deal after deal until they have nothing left. See David Weissman, Companies brought victims to S.C. courts where they didn’t live to get upper hand, THE SUN NEWS, Sept. 11, 2022 (“The 21-year-old sold his future payments to private companies, known as structured settlement factoring companies, in a series of deals in 2019 and 2020, … And Antwun’s future wealth was gone.”) see also In the Matter of Sapphire Valley Group, LLC v. J.H. et al., No. 532707/2022, 2023 WL 2980415 (N.Y. Sup. Ct., Kings Cty., April 14, 2023) (doing its own post-hearing research, the Court learned that the factoring company lawyer and payee failed to disclose a prior transfer to the Court, and made other misrepresentations (i.e., the factoring company lawyer told the Court that he had never spoken to the payee before the instant deal, which is not true, as he had represented the prior factoring company as well) that led Court to conduct holistic review of petition and ultimate denial on best interest standard.); Legacy Capital Funding, LLC v. Manuel Scott et al., No. 524426/2022, 2022 WL 15943667 (Sup. Ct. NY, Kings Cty., Oct. 28, 2022) (having reviewed prior factoring petitions, found that proceeds from prior sales were not used as intended, and denied petition on best interest grounds.); J.G. Wentworth Originations, LLC v. McDonald, No. 2020-67893, 67 Misc.3d 1239(A), 2020 N.Y. Slip Op. 50790(U) (N.Y. Sup. Ct., July 8, 2020)(following four previous applications involving the same payee – two granted and two denied – denying application on best interest grounds, finding “Considering the history of these several applications and Ms. McDonald’s expressed desire to relinquish the aggregate amount of $153,000.00 in exchange for a $2,500.00 kitchen appliance, the Court specifically finds that the proposed transfer is not in her best interest.”).
Some insurers have attempted to place restrictions upon the frequency within which a payee may engage in factoring transactions. However, because the SSPAs do not include such a provision, the Factoring Industry is able to persuade judges to approve multiple transactions over a short period of time. Therefore, regulations are needed to curtail the number of transactions a payee may enter into within a specified period of time.
NSSTA believes the Bureau should ensure that structured settlement payee’s are protected from the predatory conduct of the Factoring Industry and enact regulations providing oversight of factoring transactions. NSSTA welcomes the opportunity to provide the Bureau further information regarding the issues raised herein and craft solutions to stop the abusive practices of the Factoring Industry.
Respectfully submitted by Eric Vaughn, Executive Director of the National Structured Settlement Trade Association.