The Consumer Financial Protection Bureau released a consumer advisory March 16, warning consumers to think twice before responding to ads for cash advances on their pensions.
Pension advances (also known as pension sales, loans or buyouts) are loans in which a lender provides a cash advance (or lump-sum payout) in exchange for a portion or all of a consumer’s future pension payment, a cycle that is very similar to payday loans.
The CFPB warned that pension advance companies typically charge high interest rates and fees and often target government retirees with pensions.
“Former service members should also be on guard. Military retirees and veterans who receive monetary benefits from the Department of Veterans Affairs (VA) have been offered pension advances even though it’s illegal for lenders to take a military pension or veterans’ benefits. Many of those companies use patriotic-sounding names or logos and even claim they are endorsed by the VA as a way of enticing potential customers,” the CFPB stated.
The CFPB offered three suggestions for consumers to protect their retirement pensions: 1) Avoid loans with high fees and interest rates, 2) avoid signing over control of your benefits and 3) avoid buying life insurance that is neither wanted nor needed.
The CFPB has found that pension advance companies sometimes arrange for monthly payments to be automatically deposited in newly created bank accounts so companies can withdraw payments, fees and interest charges, leaving consumers with very little control of their accounts.
“Pension advance companies sometimes require consumers to sign up for life insurance with the company as the consumer’s beneficiary. If you sign up for life insurance with the pension advance company as your beneficiary, you could end up footing the bill, whether you know it or not,” the CFPB added.
According to the Federal Trade Commission (FTC), there are alternatives to taking out a pension advance, including small loans from either a credit union or small loan company or a cash advance on a credit card.
“If you’re considering a pension advance because you’re having trouble paying your bills,” the FTC stated, “contact your creditors or loan servicer as quickly as possible and ask for more time. Many may be willing to work with consumers whom they believe are acting in good faith. They may offer an extension on your bills; make sure to find out what the charges would be for that service — a late charge, an additional finance charge, or a higher interest rate.”
Regulators have been eyeing “quick cash” loans with high interest rates for a while; the CFPB will be hosting a field hearing on another type of loan notorious for creating consumer debt traps – payday loans – on March 26 in Richmond, Va. Dodd Frank Update will be in attendance at the hearing to provide live coverage.