Five months after the Consumer Financial Protection Bureau warned that pension advance loans could be the new payday loan – leaving consumers who are already struggling to make ends meet in dire financial situations – the agency announced it had teamed up with the state of New York to shut down two companies that allegedly deceived retirees about the risks and costs associated with the loan products.
The CFPB, along with the New York Department of Financial Services filed a lawsuit in federal court against Pension Funding, LLC, Pension Income, LLC, and three of the companies’ individual managers for allegedly duping consumers into borrowing against their pensions by deceptively marketing the products as a “tailored financing program” instead of a loan, and failing to disclose high interest rates and fees.
Similar to payday lenders, pension advance companies provide cash advances in exchange for a portion or all of a consumer’s future pension payment.
According to the complaint [PDF], from 2011 until December 2014, the California-based companies offered consumers with pensions — from sources such as military and civil service — lump-sum cash advances for agreeing to redirect all or part of their pension payments over a period of eight years.
To attract potential customers, the companies allegedly steered internet-search traffic to its website using Google AdWords. It targeted consumers who conducted Google searches for phrases such as “pension loan,” “retirement loans,” “military pension loans,” and “sell my pension.” Such consumers would often see online advertisements for “pension loans.”
Those ads would then take individuals to the companies’ website, which represented that “through a type of money purchase pension plan, Pension Funding LLC transacts a pension buyout and advances you the cash when needed.”
The sites then assured the customer that the “pension buyout is not a pension loan; it is a pension lump sum.” However, the CFPB and NYDFA allege the products were indeed loans.
To complete the transactions, the companies allegedly misrepresented or failed to inform consumers of the applicable interest rate or fees for the loans.
In some cases, the companies advised consumers that the product was better than a home equity line of credit or a credit card because of lower rates and fees. In reality, the effective interest rate was typically greater than 28% – higher than many comparable products available to consumers, the complaint claims.
The CFPB and NYDFS allege that the companies’ misrepresentations interfered with consumers’ ability to understand the risks, costs, and conditions of the transactions, and took advantage of borrowers’ lack of understanding of the product.
In addition to allegations that Pension Funding and Pension Income deceived consumers in violation of federal laws, the NYDFS claims that the companies violated state laws related to usury rates, transmitting money without a license and prohibitions of deception.
The complaint against the companies is the first from the CFPB since the agency issued a warning in March to older consumers to be on the lookout for unscrupulous pension advance companies that are more focused on bringing in money than providing aid.
Included in the warning was a list of ways consumers can protect themselves and their pension from being exploited, such as avoiding loans with high fees, never signing over control of benefits, and not buying insurance you don’t want or need.
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