Veteran Benefit Buyout Plans and Other Bad Ideas
Look in any military magazine and you'll likely find multiple ads promising a cash lump sum in exchange for a veteran's future disability benefit or pension payments. Drive toward any military base and you'll see business after business offering fast cash for veterans in the form of auto title, tax refund anticipation, payday, and other quick cash loans. The Center for Public Integrity reported in August 2011 that more than one in five active-duty military households have taken out non-bank loans in the past five years.
It's no wonder veterans are being targeted. According to the U.S. Department of Veterans Affairs (USDVA), California veterans were paid more than $3.8 billion in compensation and pension dollars in 2010. That figure represents only about 15% of the California veterans eligible to receive those payments.
For veterans struggling to find work after returning home from deployment or veteran families that have incurred unexpected or overwhelming debt, offers of quick cash can appear to be a godsend. Unfortunately, as the saying goes, if it sounds too good to be true it probably is.
Companies that offer cash in exchange for assignment of future military benefit and pension payments typically pay only a fraction of a veteran's actual entitlement over time—about 30 or 40 cents on the dollar. To add insult to injury, veterans that agree to sign away 8 to 10 years of their benefits for cash may be required to put up a form of collateral, such as their house, to secure the contract in case they default. They may also be required to take out a life insurance policy payable to the company in case they die before the contract period is complete. With loan charges and other fees, veterans may pay interest rates exceeding 30%.
With payday loans, a veteran takes out a quick loan to deal with a temporary financial problem and promises to pay back the loan with the next paycheck. The Consumer Federation of America warns that some payday loans can cost up to $30 per $100 borrowed and borrowers carry annual interest rates (APRs) as high as 650%! If the veteran uses his or her pay check to pay off the loan and doesn't have the money they need to pay their other bills, they take out another payday loan and the expensive cycle continues.
Tax refund anticipation loans (RAL) are no picnic either. One of America's largest personal income tax preparation firms will grant clients a $5,000 within two days of filing their taxes—for an additional $110 in fees and charges. According to the firm, if the clients do not take advantage of the RAL, they have to wait an average of three weeks to receive their refund. However, consumers who accept the loan offer may be spending more money than they'll receive on the refund. This is because the fees and charges of the RAL actually add up to an annual interest rate of more than 37 percent.
While acknowledging that these pension buyouts and quick-cash loans are not necessarily illegal, the U.S. Department of Veterans Affairs calls this type of offer a “financial scam” that takes advantage of desperate veterans who may be down on their luck and need quick cash.
Last summer, an Orange County Superior Court Judge, ruled against one company that offered pension buyouts, awarding a total of $2.9 million to 63 veterans in a class action lawsuit. The judge said the agreements that the retirees had signed violated federal law against “assigning” military pensions to other parties and called the buyouts “unscrupulous and substantially injurious.”
The new federal Consumer Financial Protection Bureau (CFPB) was established to protect veterans and other consumers. Holly Patreaus, wife of Army Gen. David H. Petraeus, heads the bureau's Office of Servicemember Affairs. Mrs. Patreaus is working to educate military personnel about how to protect themselves financially, enforce consumer protection laws already on the books and hold accountable companies that ignore them.
In the meantime, the best defense against unscrupulous and predatory lenders may still be a good offense. Check out the Federal Deposit Insurance Corporation's web site and take advantage of its Money Smart facts, tips, and calculators.
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