Matt Bracy of Settlement Capital wrote in this blog post, an uninformative post about servicing of structured settlement payments by factoring companies. Before I get into a rant about why Mr. Bracy did not get down to the real issues in his blog post, I would like to first say that I do respect Mr. Bracy and the work he does for the structured settlement factoring industry.
The issue revolving around the servicing of structured settlement payments has nothing to do with the split payment scenario. In Mr Bracy's blog post, he used an example of a payee (receiving structured settlement payments) who is receiving $1000 per month and needs to purchase a new car to get back and forth to work on a daily basis. In his scenario the payee (now "seller"---selling the rights to their structured settlement payments) chooses to split their $1000 payments in half and sell the rights to enough payments to purchase the new car.
Many times the insurance company will not agree to split the settlement payment and instead sends the entire payment to the factoring company, where in turn the factoring company sends the unpurchased half of the settlement payment to the payee. Yes, this is a form of "servicing," but this is not the real issue.
The REAL issue is when a factoring company purchases xx amount of payment rights, but has all of the remaining settlement payments assigned to them during the process. The factoring company now owns all of the payment rights to the policy and makes the appropriate payments when they are due to the payee. The problem with this scenario is if this annuitant wants to factor the remaining payments, the present value of the annuity is worth far less because the payee does not have the ability to shop around for a better quote. Now, the factoring company that owns the payment rights to the policy can offer the annuitant an unfair market value price. The annuitant is at the mercy of the factoring company.
Real Example (we will keep this client's last name concealed to protect her privacy)
Sarah, came to Settlement Quotes 2 weeks ago interested in factoring her remaining structured settlement payments. She had previously factored 100 payments with Peachtree Settlement Funding, but during that transaction Peachtree was able to assign the rest of Sarah's remaining payments to themselves. Sarah was unaware that she no longer owned her structured settlement. She first approached Peachtree asking for a quote on the remaining payments, Peachtree quoted her $9000 for the remaining 120 payments. She decided to go elsewhere to receive quotes. To make a long story short, we ended up quoting her $34,000 for her remaining 120 payments, but we were unaware the Peachtree was "servicing" all of her remaining payments.
To put this in perspective I had Sarah call New York Life (the issuing insurance company) with myself on the telephone. New York Life told Sarah that she no longer owned the policy, and although she is the measuring life, they refused to speak to her, she needs to contact Peachtree in order to obtain how many payments are remaining.
The value of this annuity is significantly reduced because of the following factors:
- From an investor's standpoint, they now have to rely on Peachtree to make payments and not a heavily regulated insurance company.
- From a client's standpoint-- Peachtree--as the owner of the payment rights can offer any figure for any further factoring transactions on the remaining payments.
- From a client's standpoint-- if the client decides not to sell any further structured settlement payment rights, they have substituted an A.M. Best rated/ Standard and Poor's AAA rated, heavily regulated company to a non-rated and unregulated company.
At this point the only way we could purchase Sarah's structured settlement payment rights is to first, payoff Peachtree, second, subtract a substantial amount of money due to the risk of accepting payments from another factoring company. We ended up offering Sarah $21,000 compared to the $34,000 she would have received if New York Life was still making the payments.
In Mr. Bracy's post he stated the following, "Such servicing arrangements should be reflected in the transfer order. Payees/sellers who later elect to sell more payments should be free to do so."
"Should be free to do so," is not a reality and unfortunately is not regulated within this industry. I feel that Mr. Bracy is skirting around the real issues.
Settlement factoring contracts need to be clarified in order for annuitants to be aware of the true facts behind the legal documentation. The real issue is that these annuitants no longer own their own structured settlement.