Earlier this year, the Consumer Financial Protection Bureau (CFPB) released a report in which it explained that the newest product in the consumer credit industry, pension advance loans, are the same as bad credit loans.
When it comes to personal loans, consumers will often need short-term financial reprieve to pay the rent, cover a lighting bill or dole out cash for a home repair. They will then, in theory, pay the money back to the lender from their paycheck two weeks later. Well, the same thing is happening to pensioners today.
If pensioners are short on cash, they will use a pension advance loan to cover the cost of something. They would pay the loan back with their pension check, whether it’s from work or the government. This is dangerous, says the CFPB.
“Many retirees depend on a pension to cover day-to-day as well as occasional unexpected expenses, such as health emergencies or home repairs,” wrote the CFPB in a statement.
“We’ve heard that some retirees with pensions who are facing financial challenges have responded to ads for cash advances on their pensions. Although pension advances may seem like a ‘quick fix’ to your financial problems, they can eat into your retirement income when you start paying back the advance plus interest and fees.”
Federal, State Regulators Sue Pension Advance Lenders
On Thursday, the CFPB, alongside the New York Department of Financial Services (NYDFS), filed a lawsuit in federal court against two pension advance lenders: Pension Funding LLC and Pension Income LLC.
The lawsuit alleges that the two companies had preyed on retirees and military veterans. They lend these individuals high-cost bad credit loans similar to what online payday lenders provides BUT they disguise them as as pension advances. The CFPB and NYDFS claim the product would actually have jeopardized the victims’ retirement savings.
Complainants accuse the two companies of deceiving older Americans through online campaigns from 2011 to late 2014 into reallocating pension checks over eight years in exchange for cash upfront. Moreover, the regulators noted that these firms’ bad credit loan advances did not contain borrowing costs similar to credit cards or home equity lines of credit since they advertised themselves as “our program is not a loan.”
In addition, regulators say the loans came with an interest rate of 28.56 percent on average, which included fees for the businesses, sales agents, life insurance policies and a cash reserve to protect themselves from default.
“These companies duped consumers into taking out pension advance loans by deceiving them about the terms of the deal,” said CFPB Director Richard Cordray in a statement. “We are working to put a stop to the illegal practices these companies are using to sell their bogus product to military veterans and other pensioners.”
Anthony J. Albanese, Acting New York Superintendent of Financial Services, also said in a statement that the two partners are working to provide financial relief to the many retirees who were deeply affected by this scheme.
Benjamin Lawsky, Albanese’s predecessor, has referred to these pension advance loans as bad credit loans in sheep’s clothing.
Neither company has openly responded to the allegations made against them.
The CFPB had earlier released three tips to protect your retirement funds:
- Do not use loans with interest and fees.
- Do not sign control over your benefits.
- Do not buy life insurance you don’t want or need.