"And here I sit so patiently
Waiting to find out what price
You have to pay to get out of
Going through all these things twice"
-- Bob Dylan
"I was there when it happened
And so I guess I ought to know"
-- Johnny Cash
As Terrence McCoy of the Washington Post has noted, structured settlement purchasers are back. Making millions of dollar as they prey upon the poor and uneducated.
Ironically, I'm writing this on former Kentucky State Representative Harry Moberly Jr's 65th birthday. Harry was one of the most effective and honorable legislatures in the history of Kentucky, and the achievement that I thought was his greatest was in 1998 when he made Kentucky the first state to pass model legislation to regulate those companies like J.G. Wentworth that buy up structured settlements.
An unusual coalition of trial lawyers, insurance carriers, the structured settlement industry and the Kentucky Bar Association banded together to support a bill that passed the Kentucky legislature unanimously.
Although Moberly was a master of the legislature and Kentucky House Judiciary Chairman Michael Bowling had a personal, and very negative, interaction with one of the settlement purchasers, what really made the structured settlement bill zip through the legislature is when the Louisville Courier-Journal did a feature about a 20-year-old injury victim named Anita Alsabrook who testified in front of the Kentucky legislature about how she sold her structured settlement for a pittance to a company named J.G. Wentworth.
When I pulled up in front of a newspaper rack and could see Anita's front page picture halfway across the parking lot, I knew the legislative battle was going to end quickly. Although companies like J.G. Wentworth are frequent advertisers (flip on daytime television like Jerry Springer and you are likely to see a commercial offering to purchase a structured settlement) and very aggressive marketers, companies like Wentworth operate best in the shadows or through the lens of their big time marketing machine.
For example, there is no such person as "Mr. Wentworth." He is an actor. Wentworth is a big time, publicly traded company. One that got to ring the bell at the New York Stock Exchange in 2013 to celebrate the company's public offering and listing.
There are numerous companies just like them and a lot of "friend of a friend" brokerage operations where settlement purchasing brokers (who I think need no license to operate) offer deals to buy structured settlement annuities for small change on the dollar. In fact, J.G. Wentworth and Peacetree Financial Solutions are owned by the same company. I've seen people try to "bargain" by getting quotes from the two companies. That's like trying to bargain between two makers of the same kind of car.
Despite the settlement purchasers high profile in the financial world, exposes like the one that Mr. McCoy did in the Washington Post are few and far between in the popular media. The poverty industry is never a popular beat and companies that trade on the New York Stock Exchange have far better lobbyists. In response to the Washington Post articles, there has been an outcry from legislatures and members of Congress. I hope those voices translate into legislative action, but I have a certain cynicism about any real protection.
I fought hard against the settlement purchasers. I thought we had gotten them under control.
I was wrong.
The settlement purchasers are doing better than ever. After a while, one starts to feel like the character in Greek mythology Sisyphus, who daily pushed a boulder up a hill only to watch it roll back down. Thus, I am thrilled that McCoy and the Washington Post have put their considerable media clout behind the issue. I'll be more thrilled if Congress uses this opportunity to put in meaningful reform that protect consumers and doesn't allow loopholes.
I thought we had already done that, but the settlement purchasers are smart people with millions of dollars in potential profits on the table. Also, just like payday lenders, they truly understand their customers and that most of the people who cash in structured settlements are not concerned about the long term.
Which is ironic. The primary reason that structured settlements exist is to make sure that people have money for the long haul. People may have good intentions when they enter into a structured settlement, but like people who cash out a 401k plan or retirement plan early, those intentions may be sidetracked by short-term desires or needs.
Is there a legislative structured settlement solution?
"Aren't you sharp as a tack
You some type of lawyer or something
Somebody important or something?
Well I ain't passed the bar, but I know a little bit"
-Jay-Z
Most of the other states and the federal government followed and passed their own legislation. On the heels of the Kentucky "victory," I was elected to the board of the National Structured Settlement Trade Association and I spent a lot of my own time, and own money, testifying in other states and doing all I could to fight against the settlement purchasers.
I thought the "good people" had won the fight. We left a little bit of loophole in the law for people who had "legitimate needs." The settlement purchaser companies are making their millions off the loophole.
Not only are the settlement purchasers making money, one of the greatest outrages is that at least two companies that were issuing structured settlement annuities flipped and got into the settlement purchasing business. I've been a structured settlement broker for over 30 years and suddenly my clients were getting letters from the companies that issued their annuities offering to purchase them! The life insurance companies have access to all the address and payment information for all of the structured settlement annuities that they issued. Any legislative solution should ban these companies from contacting injury victims or being in the settlement purchasing business.
When it comes to a long-term solution, it needs to be a national one. The state-by-state approach is not working and the legislation (26 USC 5891) that passed Congress in 2002 has proven useless as the Washington Post has noted.
Then comes the larger question: what kind of solution are we looking for?
At the time I was pushing legislation in Kentucky and other states, I was probably an absolutist. I did not want people selling their structured settlements for any reason whatsoever. A deal is a deal and the payments should stay in place for life.
Looking back 18 years later, I realized I was naive on a couple of fronts. First of all, there are unique situations where people actually need to cash in some of their structured settlement. Financial needs change and people have health reasons. For many years, I would not respond to anyone trying to sell part of their structured settlement. In recent years, I have helped some people do that. I finally understood the obvious: If I refused to help them, they would call a company that found them via data mining or when they were watching a television commercial. I was better off trying to help them get the best deal they could get.
Three books changed my thinking about settlement purchasing: Adam Tanner's What Stays in Vegas: The World of Personal Data - Lifeblood of Big Business - and the End of Privacy as We Know It (I called it one of the best business books of the century in a Huffington Post book review); Broke, USA by Gary Rivlin, my friend and best-selling former New York Times reporter, which was the "must read" book about the poverty industry and payday lenders; and Money for Nothing by Edward Ugel, who worked at a settlement purchasing company, but was focused on buying annuities from lottery winners.
After reading those books, I came to the following conclusions:
1. No matter how much you want to protect the privacy of someone receiving a structured settlement, someone else with a fancy computer or data mining program is going to find them and make them an offer to buy their payments.
2. My father was a professional gambler and I grew up watching people run through their money. Thus, I should have figured out long ago that there is a large subset of the population who is going to be susceptible to immediate gratification over long-term savings.
3. Money for Nothing showed me the amount of talent and sales ability in the settlement purchasing industry. As Glenn Frey once said, "the lure of easy money has a very strong appeal." There is easy and big money in buying up structured settlements, and the people buying them know how to sell.
4. Broke, USA opened my eyes about many aspects of the poverty industry, but one that comes home crystal clear is that disclosure of outrageous interest rates does absolutely NOTHING to keep people from selling their structured settlements. Many of us thought that a person would back away from selling a structured settlement if they saw how outrageous the interest rate was that they had to pay.
Not a chance. You can tell people the internal rate of return or the discount rate (financial terms that the average consumer does not understand), and they will still sell the annuity. You can tell them that a random person in their neighborhood will be punished and hit by lightning, and they will still sell the annuity. It reminds me of a (now deceased) family member who cashed in her retirement account to go on a cruise to Mexico. I could explain the long-term ramifications and the short-term tax ramifications, but she was going anyway.
This kind of mindset happens a lot with injured people. And the settlement purchasers know how to prey upon it.
In several Huffington Post pieces, I used the term "legalized loan sharks" to refer to payday lenders and have been fighting a battle to have them reigned in. It's a battle I am mostly losing. The payday lenders have better lobbyists and make the argument that "people should do what they want with their money." Even if they have to pay outrageous interest rates and destroy their future to do it.
Rivlin did some later magazine articles on a group that was even more outrageous, those who advanced tax refund money. People would pay the equivalent of hundreds of percent in interest rates just to get their tax refund a week or two early. It was instant gratification to an extreme. Congress was able to eliminate the tax refund and put a cap of 36 percent interest rate on military personnel who used a payday lender. (They left the non-military part of society on their own.)
Thus, if we are going to reign in the abuses in the settlement purchasing industry, the best solution is to follow what Congress did to payday lenders preying on the military and put a cap on the interest rate, or internal rate of return, that a settlement purchaser is able to charge.
The second option would be to develop a more efficient market for structured settlement purchasers or to allow the companies who issue structured settlements to commute the payments at a set discount rate. Either would be a realistic and workable solution.
There are a number of roadblocks that can be used in making it difficult to sell a structured settlement, and the concepts should be explored and anticipated by structured settlement consultants when a plan is being implemented.
Having devoted my adult life to working with injured people, I understand that structured settlements are a wonderful financial tool. A few weeks ago, I received this message (that I have edited to maintain privacy) on my Facebook page.
"Mr. McNay,
My son and I were clients of yours. You met me as a widowed mother who lost her husband to an accident. You were there the day of the settlement and took over my son's money to go to college. They money was set up where he got 8 checks for each semester in college. I just wanted you to know he attended college and is now in a tremendous career. Sort of success story for you to know. He's now doing well."
A message like that one makes me realize that I chose a profession that allows me to have a deep and profound impact on people's lives. My second career as a writer has that kind of psychological benefit. Having a large forum allows me to make a difference, but I get to make a difference, person by person, in the structured settlement industry.
I'm thrilled that Terrence McCoy stepped up and took on the settlement purchasers. With the power of the Washington Post and its high readership in Congress, his writing ought to put the wheels in place for substantial change.
This time around, I hope it is substantial and lasting change that truly protects injured people and does not make them another "marketing opportunity" for the poverty industry.
Don McNay, ChFC, MSFS, CLU, CSSC, is the founder of McNay Settlement Group in Lexington and Richmond, Kentucky and has been a structured settlement consultant since 1983. He is a best-selling author and former syndicated columnist. You can read more about him at www.donmcnay.com. McNay has Masters Degrees from Vanderbilt University and the American College and is a member of the Hall of Distinguished Alumni at Eastern Kentucky University, where he received his undergraduate degree and is currently a member of the University's Foundation Board. McNay has served on the Board of Directors for the National Structured Settlement Trade Association and the Society of Settlement Planners.
His upcoming book, Brand New Man: My Journey to Health and Happiness After Weight Loss Surgery, will be released by RRP International Publishing in January 2016.