Monday, October 19, 2015

No. 121: Cost-of-Insurance Increases in the News

In 2003 I wrote extensively in The Insurance Forum about cost-of-insurance (COI) increases imposed by an operating subsidiary of Conseco, Inc. on owners of certain policies Conseco had acquired from other companies. Later I wrote extensively in the Forum and on my blog about COI increases imposed by operating subsidiaries of The Phoenix Companies, Inc. on owners of certain policies involved in stranger-originated life insurance (STOLI) transactions. Recently COI increases appear to be spreading among other companies.

Conseco's COI Increases
The Conseco story began in 1992, when Massachusetts General Life Insurance Company and Philadelphia Life Insurance Company imposed COI increases on certain universal life policies. A policyholder sued the companies alleging they had breached their contracts. A federal judge ruled the companies had breached their contracts, the case was converted to a class action, the class was certified, the case was settled, and the companies rolled back the COI increases. Conseco acquired Massachusetts General and Philadelphia Life in the late 1990s. The unanswered question is whether Conseco officials were aware that the policies they acquired had been significantly underpriced for sales purposes and were a disaster waiting to happen.

In 2003 Conseco launched an assault on its policyholders by imposing sharp COI increases. One example: the COI on a $1,000,000 policy issued in 1988 to a man aged 52 increased from $373.78 per month to $1,484.05 per month. Another example: the COI on a $250,000 policy issued in 1987 to a man aged 56 increased from $26.65 per month to $349.81 per month. Litigation ensued. Eventually the cases were settled, and the policyholders were awarded substantial benefits.

My most extensive material on Conseco's COI increases appeared in the 16-page December 2003 issue of the Forum. The issue was devoted in its entirety to the Conseco story.

Phoenix's COI Increases
In 2010 Phoenix imposed substantial COI increases on the owners of policies of the type used in STOLI transactions. The New York Department of Insurance received complaints and, after an investigation, ordered Phoenix to rescind the COI increases—but only for New York policyholders. Phoenix complied.

In 2011 Phoenix imposed new increases on New York policyholders, and the Department did not object. Meanwhile, insurance regulators in California and Wisconsin ordered Phoenix to rescind the 2010 increases, but Phoenix refused to comply. California dropped the matter, but Wisconsin began legal proceedings that are yet to be finally resolved.

Phoenix was also the target of several lawsuits relating to the COI increases. In May 2015 Phoenix moved to settle two long-standing class action lawsuits just before the trial. The settlement was later approved by the court, and has been completed. Also, Phoenix is in the process of settling some of the other cases.

My major articles in the Forum about Phoenix's COI increases are in the October 2012, December 2012, and November 2013 issues. My three blog posts about Phoenix's COI increases are No. 9 (November 21, 2013), No. 26 (January 29, 2014), and No. 103 (June 15, 2015).

COI Increases at Other Companies
Recently I have learned of announcements by several other companies who are imposing COI increases. The announcements are vague about the magnitude of the increases, and about the reasons for the increases. However, it appears at least some increases will be substantial, and at least some increases are caused by increased prices of reinsurance or low market interest rates. Furthermore, it appears at least some increases apply to policies of $1 million or more issued at ages 70 and above. Among the companies imposing COI increases are AXA Equitable Life, Banner Life, Security Life of Denver, Transamerica Life, and William Penn Life.

Nassau's Acquisition of Phoenix
On September 29, 2015, Phoenix announced it was being acquired by Nassau Reinsurance Group Holdings L.P. for $37.50 per share, or an aggregate of $217.2 million. The purchase price represents a 188 percent premium over Phoenix's closing stock price of $13.03 on September 28. Nassau is backed by Golden Gate Capital, a private investment firm. After completion of the acquisition—expected by early 2016—Nassau will contribute $100 million of new capital into Phoenix, which will be a privately held, wholly owned subsidiary of Nassau.

General Observations
I mention Nassau's acquisition of Phoenix here because I think there is a connection between that development and the settlements of the lawsuits against Phoenix relating to the COI increases. The most important settlement, which I discussed in No. 103, occurred almost literally on the courthouse steps just before the trial was to begin. Phoenix had been fighting those lawsuits for years, and also had been fighting to keep confidential many of the documents filed in court in those cases. A few of those documents, however, have been unsealed, as discussed in No. 26. I think Nassau probably had no interest in acquiring a company bogged down in litigation over COI increases.

Available Material
I am offering a complimentary five-page PDF containing the Phoenix press release. E-mail jmbelth@gmail.com and ask for the Phoenix press release dated September 29, 2015. Ordering information for back issues of the Forum is available at www.theinsuranceforum.com.

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Wednesday, October 14, 2015

No. 120: The Federal Insurance Office Expresses Concern about Principles-Based Reserving and Captive Reinsurance Transactions

In September 2015, the Federal Insurance Office (FIO) of the U.S. Department of the Treasury issued its Annual Report on the Insurance Industry. The FIO expresses concern about principles-based reserving (PBR) and the related subject of captive reinsurance (sometimes called "shadow insurance"). Here are three excerpts from the Report:
  • Wholesale adoption of PBR continues to raise concerns, including potential overreliance on an insurer's internal modeling and a shortage of resources and expertise on state insurance regulatory staffs.
  • State insurance regulators are developing a framework for consistent standards for reinsurance captives that would allow lower-quality assets to support the so-called "redundant reserves" relating to term life and universal life with secondary guarantee products. The Report outlines FIO's concerns about the scope and yet-to-be-determined specific details of the framework, including that reinsurance captives will continue to be established in states competing to serve in that capacity.
  • While disclosure requirements of life insurers pertaining to cessions of reinsurance captives of reserves related to term and universal life with secondary guarantee products has improved, state insurance regulators do not require public disclosure of the financial statements of reinsurance captives.
The Report is in the form of a 105-page PDF. The first two excerpts above are on page 15 of the PDF, and the third is on page 67. The full discussions of PBR and captive reinsurance are on pages 65-68.

Presumably the discussions of PBR and captive reinsurance are of great interest to members of the American Council of Life Insurers and members of the National Association of Insurance Commissioners. However, I am not aware of any comments on those topics, or about the Report generally, from either of those organizations.

General Observations
I agree with the first excerpt above. I believe that adequate staffing in state insurance departments to handle PBR is not possible.

I also agree with the second excerpt above. The way it is worded in the Report is a polite way of describing what has become a race to the bottom in terms of the rigor of state regulation of insurance companies.

I agree with the third excerpt as far as it goes. However, it is not merely the lack of a requirement for public disclosure of the financial statements of reinsurance captives that concerns me. Rather, I am concerned about the lack of a requirement for public disclosure of the details of the phony assets carried by reinsurance captives. Among those assets are parental guarantees, contingent notes, credit linked notes, variable funding notes, note guarantees, and letters of credit.

If there were rigorous disclosure of the details of those assets, I think regulators would be so embarrassed that they would not approve such assets. Indeed, I think promoters would not even try to get such assets approved. As I have said previously, captive reinsurance is a shell game, and no shell game can survive disclosure.

Available Material
I am offering a complimentary 105-page PDF containing the 2015 Report of the FIO. E-mail jmbelth@gmail.com and ask for the FIO Report issued in September 2015.

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Wednesday, October 7, 2015

No. 119: Robert D. May, CLU—A Memorial Tribute

Robert D. May, CLU, 1994
Robert D. May, CLU, of Bloomington, Indiana, died June 30, 2015, at age 88. Bob was in the life insurance business for more than 50 years and retired several years ago. When I met him in the 1960s, he was an agent for Acacia Mutual Life Insurance Company. His favorite life motto was a quote that has been attributed to Theodore Roosevelt: "People don't care how much you know until they know how much you care."

I became acquainted with Bob shortly after I arrived in Bloomington. The School of Business at Indiana University did not offer preparatory courses for examinations leading to the Chartered Life Underwriter (CLU) designation. However, when the Bloomington chapter of what was then the National Association of Life Underwriters asked me to conduct an off-campus class for aspiring CLUs, I agreed to do so. Bob was in my first group of about ten agents who enrolled in the class, and he was the first of the group to receive the CLU designation. He and I became good friends.

One of Bob's favorite stories involved Elvis J. Stahr, Jr., who served as president of Indiana University from 1962 to 1968. (I always felt an affinity for Stahr because he and I joined Indiana University effective the same day—July 1, 1962.) Bob said he received a telephone call from Stahr out of the blue. Stahr had been invited to join Acacia's board of directors. According to the company's rules, however, a board member had to be an Acacia policyholder. So Stahr had to buy an Acacia policy right away. Knowing Bob, I am sure he did not allow Stahr to buy the smallest possible policy.

When I launched The Insurance Forum at the end of 1973, Bob subscribed immediately, and he remained a subscriber continuously until I closed down the Forum at the end of 2013. A close friend of mine in Bloomington was the first subscriber, and Bob was the second. When my first subscriber died several years later, Bob became my oldest living subscriber in terms of the length of his subscription. Bob often told me he was proud of that distinction.

The last time I saw Bob was on June 9, 2014, when he attended a celebration in Bloomington organized by three academic friends of mine to commemorate the 40 years of The Insurance Forum. It is regrettable that Bob did not live to see The Insurance Forum: A Memoir. I mentioned publication of the book in No. 118, which was posted on September 28, 2015. Bob was a wonderful human being and a dear friend.

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Monday, September 28, 2015

No. 118: My Memoir about The Insurance Forum Is Now Available

When I ended publication of The Insurance Forum at the end of 2013, I said one reason was my desire to write a memoir about my 40-year experiment in insurance journalism. The 379-page cloth bound book, entitled The Insurance Forum: A Memoir, is now available.

The book has five appendixes, a glossary, and an index. The book also has a foreword by Professors Travis Pritchett of the University of South Carolina, Joan Schmit of the University of Wisconsin—Madison, and Harold Skipper of Georgia State University. They call the book "an immensely enjoyable memoir" and "a compelling 'must read' for industry insiders, insurance regulators, reporters, lawmakers, and any others considering insurance issues."

My thanks to those who supported the Forum over the years. I am also grateful to those who submitted ideas and articles.

Information about how to obtain the book may be found at our website (www.theinsuranceforum.com). Here are the chapter titles:
  1. Introduction
  2. The Pre-Indiana Years: 1929-1962
  3. The Indiana Years: 1962-2015
  4. The Policy Replacement Problem
  5. The A. L. Williams Replacement Empire
  6. Life Insurance Prices and Rates of Return
  7. The Collapse of Executive Life
  8. Fractional (Modal) Premium Charges
  9. The Secondary Market for Life Insurance
  10. Universal Life Insurance
  11. The Military-Insurance Interlock
  12. Distortion of Important Policy Provisions
  13. Deceptive Sales Practices
  14. Professional Codes of Ethics
  15. Credit Life Insurance
  16. Disability Insurance
  17. Medical Insurance
  18. Long-Term Care Insurance
  19. The Annuity Business
  20. The Secondary Markets for Annuities
  21. Charitable Gift Annuities
  22. Financial Strength Ratings
  23. Transfers of Policies between Companies
  24. Compensation of Insurance Executives
  25. Surplus Notes
  26. The Demutualization Wave
  27. Life Insurance Policy Dividends
  28. Agents' Contracts with Insurance Companies
  29. The Insurance Regulators
  30. The Insurance Regulatory Information System
  31. Risk-Based Capital
  32. Conclusion
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Monday, September 21, 2015

No. 117: Life Partners—A New Dimension of the Bankruptcy Case

Life Partners Holdings, Inc. (LPHI), together with its operating subsidiaries, was an intermediary in the secondary market for life insurance. On January 20, 2015, LPHI (Waco, TX) filed for bankruptcy protection under Chapter 11 of the federal bankruptcy law. The case was assigned to U.S. Bankruptcy Court Judge Russell F. Nelms. On March 13, 2015, the U.S. Trustee appointed H. Thomas Moran II the Chapter 11 Trustee in the LPHI case, and Judge Nelms affirmed the appointment six days later. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289.)

I wrote extensively about LPHI in The Insurance Forum, and later I posted numerous blog items before and after the bankruptcy filing. Here I discuss a new dimension of the LPHI bankruptcy case. On September 11, 2015, Trustee Moran filed a 52-page complaint against Brian D. Pardo, the former chief executive officer of LPHI. (See Moran v. Pardo, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-04079.)

The Adversary Proceeding
Trustee Moran's complaint is called an "adversary proceeding," which is a lawsuit filed within a bankruptcy case and assigned its own case number in the bankruptcy court. In this instance, a major purpose of the adversary proceeding is to recover, for the benefit of the bankruptcy estate, property that Trustee Moran alleges was fraudulently transferred to Pardo prior to the bankruptcy filing.

The cover sheet of the complaint mentions a "demand" of $41 million. That figure appears at two places in the complaint, but other figures also appear. Therefore, I asked Trustee Moran to clarify what the figure represents. In response he said:
The $41 million is the total of salaries, bonuses, and other compensation ($5.8 million), dividends ($34 million or more), and other personal remuneration.
Trustee Moran is represented by three attorneys in the Dallas firm of Thompson & Knight LLP. Pardo is representing himself.

Trustee Moran's Complaint
The introductory section of Trustee Moran's complaint briefly describes the "scheme to defraud" and the "marketing of fraudulent life expectancy estimates." The factual background section contains three subsections, one of which is a subsection about such matters as purposeful reduction of life expectancies to lure investors and inflate profits, transfers to an insider company, failure to disclose policy lapses, exorbitant and undisclosed commissions and fees, and monies paid to Pardo.

The complaint contains 12 counts: two counts of actual fraudulent transfer, two counts of constructive fraudulent transfer, and one count each of preferences, fraud, breach of fiduciary duty, sham to perpetrate a fraud, unjust enrichment, disallowance of Pardo's claims, violation of the federal Racketeer Influenced and Corrupt Organizations Act of 1970, and equitable subordination. Trustee Moran also seeks attorneys' fees.

General Observations
Trustee Moran's complaint contains an elaborate discussion of the arbitrage involving two life expectancy estimates. One estimate, on which Life Partners relied in deciding what it would pay to acquire a policy, was based on a realistic estimate provided by one of the prominent firms that provide life expectancy estimates. The second estimate, invariably much shorter, was used in pricing fractional interests sold to investors. The shorter estimates were provided to Life Partners by Donald T. Cassidy, MD (Reno, NV), an internal medicine practitioner with no experience or training in the preparation of life expectancy estimates.

Trustee Moran's complaint relies heavily on a declaration he filed in the bankruptcy case on May 20. I described the declaration in No. 102 posted May 26, and offered the declaration to readers at the time. However, the recent complaint goes beyond the declaration in some respects, and I think it is stronger than the declaration.

In an adversary proceeding, trial is set routinely at the time of filing. On September 14, the bankruptcy court clerk set the trial for March 2016 before Judge Nelms. Under federal bankruptcy rules, the parties are to confer within 30 days, consider the claims and defenses, consider the possibilities for a prompt settlement, and submit a proposed schedule. In the absence of a settlement, a brief bench trial to resolve the complaint seems likely.

Available Material
I am offering a complimentary 52-page PDF containing Trustee Moran's complaint. E-mail jmbelth@gmail.com and ask for Trustee Moran's September 11 complaint against Pardo.

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Thursday, September 17, 2015

No. 116: Voting Rights—An Important New Book about the Ongoing Battle for the Franchise in the United States

Ari Berman is a political correspondent for The Nation. He is the author of an important 2015 book about the long and arduous political and legal battle for the franchise in our country. The book is entitled Give Us the Ballot: The Modern Struggle for Voting Rights in America.

Selma and the 1965 Voting Rights Act (VRA)
The book begins with "Bloody Sunday" in Selma, Alabama, and President Lyndon Johnson's introduction of a voting rights bill eight days later. Johnson already had achieved passage of the Civil Rights Act of 1964, and had defeated Barry Goldwater decisively in November 1964. When Johnson signed the Voting Rights Act (VRA) in August 1965, it became one of the crown jewels of his "Great Society," along with the Civil Rights Act and Medicare. The purpose of the VRA was to prevent racial discrimination in the voting process and thereby enforce the 14th and 15th Amendments to the U.S. Constitution.

Many were surprised by Johnson's actions because they differed so sharply from many of his previous actions in Congress. For example, Berman notes that Johnson's first vote as a freshman member of the U.S. House of Representatives in 1937 was against an anti-lynching bill.

Berman describes Johnson's famous speech—later known as the "We Shall Overcome Speech"—announcing introduction of the voting rights bill. Johnson delivered the speech to a joint session of Congress in March 1965; it was the first joint session in 19 years.

Early Efforts to Undermine the VRA
Berman describes early efforts to undermine the VRA. They were unsuccessful in part because of the U.S. Supreme Court headed by Chief Justice Earl Warren (an Eisenhower appointee). In 1966, for example, in an 8 to 1 decision, the Warren court upheld the constitutionality of the VRA in the case of South Carolina v. Katzenbach. (In 1954, in a 9 to 0 decision, the Warren Court had ordered desegregation of public schools in the landmark case of Brown v. Board of Education.)

Developments in 1968
Berman describes some major events in 1968. Among them were Johnson's decision not to seek re-election, the assassinations of Martin Luther King, Jr. and Robert Kennedy, Richard Nixon's "Southern Strategy," Nixon's election, and the appointment of Attorney General John Mitchell to head the U.S. Department of Justice, whose Civil Rights Division was charged with enforcing the VRA.

Developments in 1976
Berman describes some major events in 1976. Barbara Jordan of Texas in 1972 had become the first black woman elected to Congress from the South. In July 1976 she became the first black politician to keynote the Democratic National Convention. That event occurred 28 years before an Illinois state senator named Barack Obama keynoted the convention.

Jimmy Carter was elected in 1976, and he owed the election to black voters. Ironically, the state that put him over the top in that tight election was Mississippi, where blacks delivered a third of Carter's total and gave Carter the state by 11,537 votes. Nationally, Carter narrowly lost the white vote, but won 92 percent of about 6.6 million black votes.

Obama's Election in 2008
The election of Barack Obama in 2008 was a wake-up call for VRA opponents. Berman describes the voter identification laws and other laws enacted in various states to restrict voting rights. Also, by then the U.S. Supreme Court had moved sharply to the right with the appointments of Justice Antonin Scalia (a Reagan appointee), Justice Clarence Thomas (a George H. W. Bush appointee), Chief Justice John Roberts (a George W. Bush appointee), and Justice Samuel Alito (a George W. Bush appointee).

The Veasey Lawsuit
Berman describes a major lawsuit that grew out of the enactment of Texas Senate Bill 14 (SB 14) in 2011. It placed important restrictions on the ability of many Texans to vote, especially Hispanics, African-Americans, and the poor. In June 2013 several individuals and organizations filed a lawsuit seeking to prevent implementation of SB 14.

The lead plaintiff was Marc Veasey, then a member of the Texas House of Representatives and now a member of the U.S. House of Representatives. Among the organizations was the Civil Rights Division of the U.S. Department of Justice. The lead defendant was Rick Perry in his official capacity as Texas governor; Greg Abbott became the Texas governor in 2015 and succeeded Perry. (See Veasey v. Perry, U.S. District Court, Southern District of Texas, Case No. 2:13-cv-193.)

The case was assigned to District Judge Nelva Gonzales Ramos (an Obama appointee). She conducted a nine-day bench trial. On October 9, 2014, she issued a 147-page opinion. She entered a permanent and final injunction against enforcement of the voter identification provisions of SB 14. The seven major sections of the opinion are Texas's history with respect to racial disparity in voting rights, the status quo before SB 14 was enacted, the Texas photo identification law, the method and result of passing SB 14, challenges to photo ID laws, discussion, and the remedy. Berman referred to the Ramos opinion as "searing." Here are its three opening paragraphs:
The right to vote: It defines our nation as a democracy. It is the key to what Abraham Lincoln so famously extolled as a "government of the people, by the people, [and] for the people." The Supreme Court of the United States, placing the power of the right to vote in context, explained [in 1964]: "Especially since the right to exercise the franchise in a free and unimpaired manner is preservative of other basic civil and political rights, any alleged infringement of the right of citizens to vote must be carefully and meticulously scrutinized."
In this lawsuit, the Court consolidated four actions challenging Texas Senate Bill 14 (SB 14), which was signed into law on May 27, 2011. The Plaintiffs and Intervenors (collectively "Plaintiffs") claim that SB 14, which requires voters to display one of a very limited number of qualified photo identifications (IDs) to vote, creates a substantial burden on the fundamental right to vote, has a discriminatory effect and purpose, and constitutes a poll tax. Defendants contend that SB 14 is an appropriate measure to combat voter fraud, and that it does not burden the right to vote, but rather improves public confidence in elections and, consequently, increases participation.
The case proceeded to a bench trial, which concluded on September 22, 2014. Pursuant to [Section 52(a) of the Federal Rules of Civil Procedure], after hearing and carefully considering all the evidence, the Court issues this Opinion as its findings of fact and conclusions of law. The Court holds that SB 14 creates an unconstitutional burden on the right to vote, has an impermissible discriminatory effect against Hispanics and African-Americans, and was imposed with an unconstitutional discriminatory purpose. The Court further holds that SB 14 constitutes an unconstitutional poll tax.
The Appeals
The defendants appealed to the Fifth Circuit to stay the injunction. On October 14, 2014, a Fifth Circuit panel granted the stay primarily because the injunction was imposed less than a month before the 2014 election. The 12-page judgment was written by Judge Edith Brown Clement (a George W. Bush appointee), and a one-page concurrence was written by Judge Gregg Costa (an Obama appointee). Judge Catharina Haynes (a George W. Bush appointee) also concurred. (See Veasey v. Perry, U.S. Court of Appeals, Fifth Circuit, No. 14-41127.)

The plaintiffs appealed to the U.S. Supreme Court to vacate the stay. On October 18, 2014, without explanation, the Supreme Court denied the appeal. Justice Ruth Bader Ginsburg (a Clinton appointee) wrote a seven-page dissent. Justice Elena Kagan (an Obama appointee) and Justice Sonia Sotomayor (an Obama appointee) concurred in the dissent. (See Veasey v. Perry, U.S. Supreme Court, No. 14A393.)

In August 2015 a partly different Fifth Circuit panel issued a 53-page judgment written by Judge Haynes of the previous panel. She vacated and remanded the plaintiffs' discriminatory purpose claim for further consideration; she affirmed the district court's finding that SB 14 has a discriminatory effect in violation of the VRA, and remanded for consideration of the proper remedy; she vacated the district court's holding that SB 14 is a poll tax; she vacated the district court's finding that SB 14 unconstitutionally burdens the right to vote; and therefore she dismissed the plaintiffs' constitutional claims. Chief Judge Carl E. Stewart (a Clinton appointee) concurred. District Judge Nannette Jolivette Brown of the Eastern District of Louisiana (an Obama appointee), sitting by designation, also concurred. (See Veasey v. Abbott, U.S. Court of Appeals, Fifth Circuit, No. 14-41127.)

General Observations
Immigrants, African-Americans, Hispanics, young people, and low-income people tend to vote Democratic, and large voter turnouts favor Democratic candidates. The objective of efforts to undermine the VRA is to shrink the size of the electorate so as to favor Republican candidates. Opponents of the VRA have not produced evidence to support any of their arguments, such as the need to protect against voter fraud. The Berman book is required reading for those interested in the subject of voting rights. The Ramos opinion is also required reading.

Available Material
I am offering a complimentary 220-page PDF consisting of the 147-page October 2014 Ramos opinion, the 13-page October 2014 Fifth Circuit ruling, the 7-page Ginsburg dissent to the October 2014 U.S. Supreme Court ruling, and the 53-page August 2015 Fifth Circuit ruling. E-mail jmbelth@gmail.com and ask for the package relating to the Veasey case.

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Friday, September 11, 2015

No. 115: Annuity Factoring Companies in the Crosshairs

The August 2011 and October 2011 issues of The Insurance Forum contain major articles critical of factoring companies that pay cash to annuitants and in exchange receive the annuitants' annuity payments. The articles generated almost no feedback. I thought perhaps I was whistling in the wind, but a recent lawsuit causes me to think otherwise.

The CFPB/DFS Complaint
On August 20, 2015, the federal Consumer Financial Protection Bureau (CFPB) and the acting superintendent of the New York State Department of Financial Services (DFS) filed a lawsuit against two annuity factoring companies and three individuals. The plaintiffs are represented by several CFPB attorneys and an assistant attorney general of New York. The case was assigned to U.S. District Judge Josephine L. Staton and Magistrate Judge Jay C. Gandhi. (See CFPB v. Pension Funding, U.S. District Court, Central District of California, Case No. 8:15-cv-1329.)

Defendants Pension Funding LLC and Pension Income LLC are related companies that extend consumer credit, service consumer loans, and transmit money in connection with their loan business. They are at the same address in Huntington Beach, California. Steven Covey, Edwin Lichtig, and Rex Hofelter are associated with the defendants, which together are a successor to Structured Investments Co. LLC. The latter company was mentioned in my October 2011 article. Here is a lightly edited version of some of the allegations in the complaint:

  • Defendants said they transacted pension buyouts and advanced the cash when needed. They said a pension buyout was not a pension loan but rather was a pension lump sum.
  • Defendants denied their product was a loan, and they did not disclose fees or interest rates.
  • Defendants claimed the cost to consumers could be as little as 13 percent and contrasted their product with credit cards charging 18 to 24 percent or more per year in compound interest.
  • Defendants said their product was not a loan and there was no interest rate.
  • Defendants said that there was no interest because their program was not a loan, and that their "range" was a cost of money rate or a discount rate.
  • Defendants compared the discount rate to a typical mortgage and claimed participants paid approximately the same or less than credit card rates and not the highest rates.
  • The complaint says that the transactions on average had an effective annual interest rate of 28.56 percent, and that the transactions with New York consumers consistently had nominal annual interest rates in excess of both the New York civil usury cap of 16 percent and the New York criminal usury cap of 25 percent.

The seven counts in the complaint are unfair acts or practices in violation of the federal Consumer Financial Protection Act of 2010 (CFPA), deceptive acts or practices in violation of CFPA, abusive acts or practices in violation of CFPA, usury, false and misleading advertising of loans, intentional misrepresentation of a material fact regarding a financial product, and unlicensed money transmitting. The plaintiffs seek injunctive relief, damages, redress to harmed consumers, disgorgement, civil monetary penalties, and costs.

General Observations
In my 2011 articles, I deplored the lack of disclosure of vital information to the annuitant, especially what I called the "crucial disclosure" of the annual interest rate or annual percentage rate associated with the transaction. I also mentioned the absurd argument that paying cash to an annuitant in exchange for receiving the annuitant's annuity payments does not constitute a loan to the annuitant. As shown above, the defendants said such a transaction was not a loan and there was no interest, but also mentioned interest and understated the interest rate.

Available Material
I am offering a complimentary 29-page PDF consisting of the 24-page CFPB/DFS complaint, my three-page August 2011 article, and my two-page October 2011 article. Send an e-mail to jmbelth@gmail.com and ask for the package relating to the CFPB/DFS lawsuit against two annuity factoring companies.

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