The Consumer Financial Protection Bureau filed a lawsuit in federal court this week against two companies that offered consumers pension loans. The action was taken in conjunction with the New York Department of Financial Services against Pension Funding, LLC and Pension Income, LLC. The complaint, found here, also names three individual managers involved in both companies. The suit alleges that the defendants violated the Dodd-Frank Act by deceiving consumers as to the actual costs of loans that are taken out against a consumer’s pension. In most cases, the consumer were military veterans and civil servants.
Specifically, the complaint alleges that the defendants represented to consumers that their product was not a loan, but rather a “sale” of their future pension income. The defendants offered to pay consumers a lump sum of cash in exchange for customers agreeing to redirect all or part of their pension payments to the companies for the next 8 years.
Also, the defendants, in many cases, misrepresented or failed to inform consumers of the applicable interest rate or fees for the loans. In some cases, the defendants 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 fact, due to fees and interest on the advance, the “sale” had an effective annual interest rate that was typically greater than 28 percent. That rate is higher than many comparable products available to consumers, such as credit cards and home equity lines, and high enough to qualify as usury under New York law. These misrepresentations, according to the complaint, deceived consumers, interfered with consumers’ ability to understand the risks, costs, and conditions of the transactions, and took advantage of consumers’ lack of understanding of the product and inability to protect their interests.
“These companies duped consumers into taking out pension advance loans by deceiving them about the terms of the deal,” said CFPB Director Richard Cordray. “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.”
This action marks the CFPB’s first civil action involving pension loans. The CFPB has issued no new rules or guidelines for such products. It is also a rare instance of the CFPB naming individual managers or directors in a lawsuit. The complaint seeks injunctive relief to stop defendant’s practices, as well as unspecified damages.