By Nick Thornton
Undercover investigators with the Government Accountability Office
were offered loans from six out of 19 pension-advance companies with interest rates of 27 to 46 percent.
That’s two to three times higher than the legal limits states set on interest rates for various types of personal lines of credit, according to a report the GAO filed with the Senate’s Committee on Health, Education, Labor and Pensions.
The investigation – GAO investigators posed as federal, military or private-sector retirees -- was launched in response to concerns brought to the GAO about companies attempting to take advantage of retirees by offering cash advances on their pension checks.
All of the companies investigated by the GAO are web-based, some of which openly target financially vulnerable retirees with poor credit.
The investigation found that at least 38 companies offer lump-sum payments in exchange for part or all of an individual’s pension income
; 18 of the companies are concentrated in California; 17 offer financial products other than pension advances.
And 21 of the 38 companies were found to be affiliated with one another, creating conflicts of interest not disclosed to consumers.
Pension advance companies deploy teams of agents to market to both pensioners, and to investors willing to underwrite the loans.
The GAO’s report to the Senate recommended the Bureau of Consumer Financial Protection and the Federal Trade Commission review the practices reported in the investigation and exercise oversight, as appropriate. Both agencies agreed with the recommendations, according to the report.
The FTC issued a warning earlier this month advising consumers that they should be cautious before they accept any sales pitches which target their pension plans.
According to the FTC, pension advances require retirees to sign over all or some of their monthly pension checks for five to 10 years. Beyond interest rates that are higher than allowed, the danger is that the lump-sum payment pensioners receive is less than the pension payments they sign over.
The pension advances also often require retirees to buy a life insurance policy, with the pension advance company as the beneficiary, to ensure that the repayments continue.
The FTC warned pensioners that getting a large lump-sum can put them in a higher tax bracket. It also said many of these schemes cannot be canceled.
New York and Massachusetts launched their own investigations into pension advance companies in 2013. According to the GAO’s report, those investigations were still under way as of April.
Vermont recently passed a law requiring such lenders to be licensed by the state and to stay compliant with state limits on interest rates.
Originally published on BenefitsPro.com