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Personal finance

Pension advances — loans, really — should raise lots of red flags

Veteran Ronald Govan paid an interest rate of more than 36 percent.

Tami Chappell/New York Times

Veteran Ronald Govan paid an interest rate of more than 36 percent.

To retirees, the offers can sound like the answer to every money worry: Convert tomorrow’s pension checks into­ today’s hard cash.

But these offers, known as pension advances, are having devastating financial consequences for a growing number of older Americans, threatening their retirement savings and plunging them further into debt. The advances, authorities say, are not advances at all, but carefully disguised loans that require borrowers to sign over all or part of their monthly pension checks. The interest rates are often many times higher than those on credit cards.

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In lean times, people with public pensions — veterans, teachers, firefighters, police officers, and others — are being courted aggressively by pension-advance companies, which operate largely outside of state and federal regulations but are now drawing scrutiny from Congress and the Consumer Financial Protection Bureau.

The pitches come mostly via the Web or ads in local circulars.

‘‘Convert your pension into CASH,’’ LumpSum Pension Advance, of Irvine, Calif., says on its website. ‘‘Banks are hiding,’’ says Pension Funding LLC of Huntington Beach, Calif., on its website, signaling the paucity of credit. ‘‘But you do have your pension benefits.’’

Another ad on that website is directed at military veterans: ‘‘You’ve put your life on the line for Americans to protect our way of life. You deserve to do something important for yourself.’’

A review by The New York Times of more than two dozen contracts for pension-based loans found that, after factoring in various fees, the effective interest rates ranged from 27 to 106 percent — information not disclosed in the ads or contracts. Furthermore, to qualify for one of the loans, borrowers are sometimes required to take out a life insurance policy that names the lender as the sole beneficiary.

LumpSum Pension Advance and Pension Funding did not return calls and e-mails seeking comment.

While it is difficult to say precisely how many people have taken out pension loans, legal aid offices in Arizona, California, Florida, and New York say they have recently encountered a surge in complaints from retirees who have run into trouble with the loans.

Ronald E. Govan, a Marine Corps veteran in Snellville, Ga., paid an interest rate of more than 36 percent on a pension-based loan. He was enraged that veterans were targeted by the firm, Pensions, Annuities & Settlements, which did not return calls for comment. ‘‘I served for this country,’’ said Govan, a Vietnam veteran, ‘‘and this is what I get in return.’’

The pension-advance firms geared up before the financial crisis to woo a vast and wealthy generation of Americans heading for retirement. Before the housing bust and recession forced many people to defer retirement and to run up debt, lenders marketed the pension-based loan largely to military members as a risk-free option for older Americans looking to take a dream vacation or even buy a yacht. ‘‘Splurge,’’ one advertisement in 2004 suggested.

Now, pension-advance firms are repositioning themselves to appeal to people who need cash to cover basic living expenses, according to interviews with borrowers, lawyers, regulators, and advocates for the elderly.

‘‘The cost of these pension transactions can be astronomically high,’’ said Stuart Rossman, a lawyer with the National Consumer Law Center, an advocacy group. ‘‘There is profit to be made on older Americans’ financial pain.’’

The oldest baby boomers became eligible for Social Security during the recent housing bust and recession, and many nearing retirement age watched their investments plummet in value. Some are now sliding into debt.

The pitches for pension loans emphasize how difficult it can be for retirees with scant savings and checkered credit histories to borrow money, especially because banks typically do not count pension income when considering loan applications.

The combined debt of Americans ages 65 to 74 is rising more quickly than that of any other age group, according to Federal Reserve data. For households led by people 65 and older, median debt levels have surged more than 50 percent, rising from $12,000 in 2000 to $26,000 in 2011, according to the latest census data available.

While adults of all ages ran up debt in good times, older Americans today are shouldering unusually heavy burdens. According to a 2012 study by Demos, a liberal-leaning policy group, households headed by people 50 and older have an average balance of more than $8,000 on their credit cards.

Households headed by people age 75 and older devoted 7.1 percent of total income to debt payments in 2010, up from 4.5 percent in 2007, the Employee Benefit Research Institute says.

Financial products like pension advances appear especially enticing because their long-term costs are largely hidden from the borrowers.

Regulators are spotting fresh examples of abuse, and both the Consumer Financial Protection Bureau and the Senate’s Committee on Health, Education, Labor and Pensions are examining these loans, according to people with knowledge of the matter.

Borrowing against pensions can help some retirees, elder-care lawyers say; but, like payday loans, which are commonly aimed at lower-income borrowers, pension loans can turn ruinous for people who are already financially vulnerable.

To circumvent state usury laws that cap loan rates, some pension advance firms insist their products are advances, not loans. On its website, Pension Funding asks, ‘‘Is this a loan against my pension?’’ The answer, it says, is no. ‘‘It is an advance, not a loan.’’

The advance firms have evolved from a range of different lenders; some made loans against class-action settlements, while others were subprime lenders that made installment and other short-term loans.

A now-bankrupt firm in California, Structured Investments, has been dogged by legal challenges virtually from the start. It was founded in 1996 by Ronald P. Steinberg and Steven P. Covey, an Army veteran who had been convicted of felony bank fraud in 1994, according to court records.

To attract investors, the firm promised an 8 percent return and ‘‘an opportunity to own a cash stream of payments generated from US military service persons,’’ according to the California Department of Corporations. Neither Covey nor Steinberg returned calls for comment. In 2011, a California judge ordered Structured Investments to pay $2.9 million to 61 veterans who had filed a class action.

But the veterans, among them Daryl Henry, a retired Navy disbursing clerk in Laurel, Md., who received a $42,131 pension loan at a rate of 26.8 percent, have not received any relief.

Robert Bramson, a lawyer who represented Henry, said pensioners too often failed to contemplate the long-term costs of the advances.

“It’s simply a terrible deal,’’ he said.

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