UPDATE: Last week, we cited a report by The New York Times that a growing number of older adults are using their pensions as the basis to borrow cash — and paying interest rates as high as 106 percent.
That report caught the attention of New York banking regulators. They’re now probing 10 companies that do pension advances, the Times reported Tuesday.
Benjamin M. Lawsky, who heads the Department of Financial Services (DFS), calls pension advances ”nothing more than payday loans.”
Pension advances require retirees to sign over all or part of their monthly pension checks in return for a lump-sum payment. A review of more than two dozen loan contracts by the Times found that the loans’ effective interest rates (including fees) can range from 27 to 106 percent. Those rates are not disclosed in ads or contracts, the report said.
Officials are investigating:
- Whether the companies violated state usury laws that cap loan interest rates
- Whether the loans violate a federal law that limits how military pensions can be used
- Whether lenders deliberately disguised sky-high interest rates to lure retirees
Pension advances are becoming more popular as retirees living on fixed incomes seek new ways to generate cash to make ends meet, according to the report. They’re offered by companies that operate mostly outside of federal and state banking regulations.
The ads are marketed online or in local newspapers and circulars, enticing pensioners to convert tomorrow’s pension checks into today’s cash.
Many borrowers said they didn’t know they were paying such high fees because this information was not disclosed in the ads or their contracts. What’s more, some borrowers said they were required to take out a life insurance policy that named the lender as the sole beneficiary to qualify, the report said.
Officials with legal aid offices in Arizona, California, Florida and New York told the Times that they’ve recorded a surge in complaints from retirees who’ve gotten into financial trouble with these loans.
Other types of high-interest loans have come under scrutiny recently by federal authorities.
The Consumer Financial Protection Bureau issued a report last week on payday and deposit advance loans, both of which are designed to lend money for short-term needs or emergencies in return for the borrower’s commitment to repay the debt from the next paycheck or other source.
It found that the average consumer who is chronically short on cash and gets payday loans to bridge the gap until the next payday winds up shelling out an effective interest rate of 322 percent or more on the money borrowed.