Introduction
It was a run of bad luck that put Dr. Louis Kroot and his wife, Kathie, in debt in late 2005.
A daughter with mental illness cost them thousands in medical and related bills for treatment in hospitals from London to San Antonio. An unexpected tax bill triggered by taking money out of a retirement plan led to more than $100,000 in debts to the state of Kentucky and the Internal Revenue Service. A broken water pump caused $12,000 in damage to their home.
“We were trying to figure out, how are you going to pay these bills?” says Louis. “And we were just scratching our heads.”
But one of the Lexington, Ky., couple’s most expensive moves was answering an ad in a military magazine from a company called Retired Military Financial Services that offered quick cash backed by Louis’ pension from 23 years as a Navy doctor. Louis signed a contract with the company that gave him $91,566.37 in a “lump-sum payment” in return for eight years of pension payments.
Including fees and other charges, the deal was equivalent to a loan at an annual percentage rate of over 30.7 percent — a rate that would be illegal under usury laws in many states. That’s made the company the subject of two class-action lawsuits over the past decade, and a frequent plaintiff and defendant in bankruptcy courts around the country.
“We needed the cash flow to pay for what we needed paid for at that point in time,” says Kathie, 59. “To us, they were a godsend. We didn’t even know that people were filing lawsuits against them.”
Retired Military Financial Services, also known as Structured Investments, says its payments are “not a loan” and therefore not subject to usury laws. The company also says it provides an important service to military retirees who could not otherwise monetize their pension payments.
Steven P. Covey, an Army veteran who is one of the founders, defends his company and says its business practices are legal.
“The position is: We’re purchasing at a discounted lump-sum, future cash flow,” he said in an interview with iWatch News. “We’re not lenders. When you’re not lenders, you’re not dealing in potential usury areas.”
The Kroots are not the only military family to run into problems with what consumer advocates call predatory lenders. More than one in five active-duty military households have taken out auto title loans, tax refund “advances,” or other types of non-bank loans in the past five years, according to an online 2010 survey by the FINRA Investor Foundation.
Huntington Beach, Calif.-based Structured Investments Co., which does business as Retired Military Financial Services and U.S. Pension Funding., said it has given pension “buy-outs” to nearly 500 retired and disabled service members since the mid-1990s.
Structured Investments’ focus on lending to veterans could draw the attention of the newly launched Consumer Financial Protection Bureau, created by the Wall Street reform law signed last year. The CFPB has an office devoted to helping military service members, headed by Holly Petraeus, the wife of the former top U.S. commander in Afghanistan, Gen. David Petraeus.
She told Congress her office would set and enforce rules to help military families clearly understand the costs and features of financial products. “One way to help is to enforce the laws that are already on the books to protect them,” Holly Petraeus said. “Another is to write new rules when needed.”
Heightened government oversight may have come too late for the Kroots. As required by Structured Investments, the Kroots used their lump sum to help pay off nearly $60,000 in credit card debt, retire $23,000 in tax debts and repay another nearly $13,000 in loans from the Navy Federal Credit Union.
To do this they signed over 95 monthly pension payments — a total of $2,457.37 per month after taxes — to an account controlled by Structured Investments. They also agreed to pay $131.04 per month over six years for a $180,000 life insurance policy that lists Structured Investments as a beneficiary — an assurance the company would be repaid if Louis dies and his pension payments end.
‘Taken to the cleaners’
The contract with Structured Investments granted the company’s co-founders power of attorney over the Kroots with authority “to take any and all necessary and lawful actions” to ensure the couple made their monthly payments. Structured Investments also prepared and provided Louis with waivers saying he had been advised to seek counsel from legal and financial advisors and declined to do so.
The 25-page contract with Structured Investments made no mention that the nearly $92,000 lump sum payment carried the equivalent of an annual percentage interest rate of 30.7 percent. While loans must include interest rate information under the federal Truth in Lending Act, Structured Investments emphasized the transaction was “not a loan.” One letter told the Kroots their debt load would be “decreased if you exchange the lump sum for pay-off of current credit card or other debts.” It even suggested they could make tens of thousands of dollars over the next decade by taking the lump-sum payout and investing it. Their contract with the company termed the transaction an “Annuity Utilization Agreement,” and acknowledged it presented “novel and complex legal issues.”
The deal has proved a costly one for the Kroots.
Including insurance premiums, the couple has paid $178,600.29 through August of 2011, according to data provided by the Kroots and compiled by iWatch News. They are due to pay an additional $64,153.70 through October of 2013. That means the Kroots will wind up paying $242,753.99 over 95 months for the initial $91,566.37 in cash.
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The total due can rise, however, if a single monthly transfer is disrupted by the couple’s “failure to take reasonable steps” to ensure the continued payment of Dr. Kroot’s pension to Structured Investments. Should that occur, Structured Investments will penalize the couple with an additional two years of pension and insurance payments, or $62,121.84 payable through 2015.
“We’re being taken to the cleaners,” says Kathie. “I didn’t think about how much more we were paying in interest.”
Indeed, the Kroots used the lump-sum from Structured Investments to pay off creditors charging much lower effective interest rates. Their credit union charged 9.5 percent to 12.5 percent for personal loans, the state of Kentucky charges annual interest rates between 5 percent and 10 percent on tax debts. Even their highest interest credit card charged only 22.9 percent.
Had the couple instead consolidated their debts in late 2005 into a single loan with an interest rate of 18 percent — slightly higher than their average credit card rate — they could have made the same monthly payments and finished repaying the loan last year.
The Kroots aren’t strangers to adversity. The couple has moved a half dozen times to accommodate Louis’ career at U.S. military hospitals in Germany, Virginia, California and Maryland.
One of their sons, Joseph, died of a brain aneurysm at 13. His death spurred Kathie to become an advocate for organ donation and led the couple to adopt two special-needs girls from the Kentucky foster-care system in 1997.
Other military retirees have taken lump-sum payments from Structured Investments that make credit card interest rates look good.
Kirkland Brogdon Sr., a former Marine from Janesville, Calif., took a payout of $24,542 in 2003 in return for eight years of payments from his pension and the purchase of a $60,000 life insurance policy assigned to Structured Investments. Including insurance premiums, his effective annual percentage rate topped 39 percent under the contract, according to documents in a class-action lawsuit against the company in California that was tentatively settled in 2007.
Daryl Henry, a disabled Navy veteran from Laurel, Md., took a $42,131 payment from Structured Investments backed by his pension in 2003. Including life insurance premiums, his contract’s effective annual interest rate was 28 percent, according to data in his class-action court filings.
“I went in eyes wide open. I knew they were screwing me,” says Gary Infinger, 48, a former Army sergeant with multiple sclerosis. Infinger told iWatch News he took a lump-sum payment from Structured Investments a decade ago backed by his veterans disability payments.
Lucrative company, legal woes
Contracts such as those with the Kroots apparently have been lucrative for Structured Investments. By 2009, the company was no longer a start-up and had added two-full-time and two-part-time employees to help track its finances and its agreements with veterans.
Although Structured Investments collects returns on its pension buy-outs that banks could only dream of, it has a history of legal woes. Founded in southern California in 1996, two years after Covey, one of its co-founders, was convicted of felony bank fraud, Structured Investments began by selling membership interests to investors in companies whose purpose was to buy pensions from military veterans and retirees.
“We had a pensioner come to us who wanted to know if we could provide some lump sum amount of cash for him for a military pension he had,” Covey told iWatch News. “We looked into it and essentially started purchasing these.”
Investors in the company were promised an 8 percent return on investments over $50,000 for eight years, and were told it was an “opportunity to own a cash stream of payments generated from U.S. military service persons’ government pensions,” according to the California Department of Corporations.
Among those later hired to raise capital for the company was Andre Fite, a southern California man whose work with a collapsed Los Angeles-based investment pool led a federal court in 1997 to issue a permanent injunction barring him from ”cheating and defrauding” people in the sale of commodities. Fite did not respond to numerous calls for response.
Though the company had marketed investments as having zero risk, Structured Investments halted payments to its investors in 2009, according to the California Department of Corporations. Earlier this year, the state agency barred Structured from using false statements to sell any additional securities after accusing it of failing to tell investors about a class action lawsuit it was facing and for failing to disclose Covey and Fite’s prior legal issues.
Cash flow purchase
Covey, who earned a law degree from the University of Southern California, defends his company and says its business practices are legal.
The company may legally have control of bank accounts that Kroot and other veterans direct their pensions to, but Covey said, “It’s quite clear that the pensioners have ultimate and unilateral control over where the government sends those funds,” he says.
Structured Investments’ lump-sum payments can be a better deal than credit cards for some pensioners, he says. “The interest rates credit cards charge their customers vary significantly,” he says. “If you don’t pay the principal, even leaving aside fees, you’re talking about months and months of increases in the principal amount.”
Structured Investments no longer buys veterans disability payments, Covey said. He also denied the company requires pensioners to pay off certain debts. When pensioners face debts, “We coordinate with them as to which accounts they would be best served paying off or down,” he said.
Covey said he plans to contest the California ban on the sale of securities by him and his company, adding that he can’t comment on the company’s decision to stop paying its investors because the matter is subject to litigation
Covey doesn’t dispute that the clause in company contracts penalizing pensioners who miss a single monthly payment with an additional two years of payments may be viewed by critics as onerous. “That’s something that was put in there by the attorneys who drafted the documents for us in 1996,” he said.
In 2005, the company was hit with a pair of class action lawsuits by retired servicemen who alleged that Structured Investments violated a California usury law capping loan rates and violated a federal law barring military retirees from “assigning” their pension benefits to someone else.
Structured Investments’ lawyers argued in court in 2009 that veterans “all across the country” are unable to access credit from conventional lenders. “By purchasing portions of government-issued payment streams from retirees (including veterans), Structured provides a valuable service,” wrote Justine Casey, a lawyer for the firm.
(UPDATE: California class action lawsuit settled) In late August, a state court in California found the contracts to be an illegal assignment of a military pension and awarded a group of former service members $2.9 million plus attorneys’ fees.
An earlier class action suit reached a tentative settlement in 2007, with pensioners agreeing to receive between $1,000 and $1,200 from Structured Investments. The company also agreed to drop some fees and penalties from the pensioners’ contracts.
Both the CFPB and the Defense Department declined to comment to iWatch News about Structured Investments’ products.
Stuart Rossman, a lawyer with the National Consumer Law Center, which helped file the most recent class action suit against the company, scoffs at the company’s assertion that its products are not loans. “If it walks like a duck and talks like a duck, it’s a duck,” he says.
Stable and abusive
The company’s website touts Structured Investments as the “go-to source for pension buyouts — sometimes referred to as pension loans” and informs potential customers that “banks don’t recognize pensions as collateral.”
And though dozens of companies advertise on the Internet to purchase income streams from lotteries, court settlements, and salaries, Structured Investments is likely to face continued scrutiny for its focus on veterans and other military retirees, says Christopher Peterson, a law professor at the University of Utah, who has researched alleged predatory lending to soldiers and other service members.
“There are few things more certain in our society than that our government will pay veterans their pension,” he says. “To see a pension loan…being made at 30 percent, especially to a veteran, that’s pretty abusive.”
The Kroots, who did not join either of the class-action lawsuits, continue to send Louis’ monthly Navy pension payments to Structured Investments. The disappearance of Louis’s military pension has helped stall their retirement plans and Louis, 62, continues to work as an emergency room physician at a Veterans Administration hospital.
“We can’t retire now,” says Kathie. “We’ve got at least another 10 to 15 years.”
Reporter Shirley Gao contributed to this report.
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