In this third and final installment of my video interview with Jan Schlichtmann, Mr. Schlichtmann concludes his "cross-examination."  As always, I look forward to your comments.  You can reach me at mbracy@setcap.com.   

Click below for part 2 of Jan Schlichtmann's "cross-examination" of me on factoring issues.  As always, I look forward to your comments and questions.  You can reach me directly at mbracy@setcap.com

Late last year renowned plaintiff’s attorney Jan Schlichtmann (of “A Civil Action” fame) presented me with an interesting opportunity. He said he really didn’t like structured settlement factoring and had lots of questions about how it works and problems with the practice. I suggested that he “cross-examine” me, on video tape, with no script or preparation. For almost an hour we let the tape roll and had a very interesting conversation that I think you will find informative and provocative.

The first part of this video interview is available now (below), with the second and third parts to come soon.

This is the first article in a new series on structured settlement factoring basics. These articles will attempt to educate about factoring, open a dialogue on some basic factoring issues, and dispel rumors and misunderstandings. If there is a topic you think should be addressed here, please let me know.

“Servicing” refers to a common practice in structured settlement factoring transactions, where only part of a monthly or lump sum payment is purchased by a factoring company, but the factoring company receives the entire payment. Once received, the factoring company sends the unpurchased portion to the seller/payee. As explained below this is actually a good and necessary practice (contrary to comments by John Darer and Andrew Cravenho, who seem to not fully understand it).

Servicing can best be understood in the context of a typical factoring transaction. Here’s an example: Assume a payee receives $1,000 per month from a structured settlement. The payee has a need for a lump sum for some reason, let’s say it’s to replace an old and not working car.

First Question: How Much?

The payee (now “seller”) contacts a structured settlement factoring company, who first asks the seller how much money they need and why. The new car costs $20,000, and without reliable transportation the seller can’t get to work.

Second Question: How Many?

There are many options available to the seller to reach the desired funding amount, and many factors will go into this analysis. One option would be for the seller to transfer 100% of the monthly payments for a period of time. Under this scenario, the seller would transfer about a couple years worth of payments to generate the desired $20,000.

An obvious problem with this scenario is that it leaves the seller with no monthly income from the structured settlement during those years. Depending on the individual circumstances of the seller, that might be acceptable. For others who rely on some of that monthly income for fixed costs, that would not be the best alternative.

Another option would be to sell just a portion of the monthly payments. For example, the seller could receive $20,000 by transferring $500 per month out of the total $1000. Under this scenario, the seller would need to sell more months of payments, but will be keeping $500 per month throughout. For the remainder of this hypothetical example I will assume that this is the most desirable course for the seller.

Third Question: How’s it done?

Most structured settlement factoring transfers involve only part of the structured settlement payment stream. Sometimes that part is 100% of the payments, but only for a period of time less than the total payment stream (as in the first example above). Sometimes, probably most often, the partial transfer is of a part of the monthly payments or lump sum (as in the latter example above).

There are two ways to accomplish this kind of transfer. First, which is the easiest and preferred method, is for the insurance company that issues the payments to “split” the payments in question, sending the purchased part to the factoring company and rest to the payee/seller. However, in some cases and for a variety of reasons, the issuer will not agree to split the payments. When the payments cannot be split, the only other option is for the entire payment to be sent to the factoring company, who in turn sends the unpurchased portion to the payee/seller. This is called “servicing.”

In circumstances where the annuity issuer will not agree to split payments, servicing is the best alternative for the annuitant. Absent the servicing option, sellers would either not be able to factor payments at all, or would be forced to sell more payments than necessary (or more than is in their best interest to sell). I am not aware of any factoring company that charges a fee for servicing payments in this way. Payees receive their serviced portions promptly and generally experience no significant delay.

Such servicing arrangements should be reflected in the transfer order. Payees/sellers who later elect to sell more payments should be free to do so, and the order approving the subsequent purchase should simply reflect that the prior order is amended as to the servicing and the serviced portion should now go to the new factoring company.

If you have any questions about servicing or factoring in general, please do not hesitate to contact me at mbracy@setcap.com.

***Update 4/23/2008:  Messrs. Darer and Cravenho have both responded to this article on their blogsites.  My response is attached as a comment to Mr. Darer's blog post here.

A structured settlement factoring bill did pass the West Virginia legislature this year, and is at this moment on the Governor’s desk. This bill (HB 4613), which is anticipated will become law shortly, differs drastically from the original proposal that caused such a stir (see our last blog post, “What’s Going On in West Virginia?”). In addition to cleaning up some outdated provisions, the new law confirms that a judge may (not “must”) appoint a guardian ad litem in a transfer case, excuses the judge from being forced to give tax advice to the seller (now the judge is expressly allowed to inquire about tax issues of a guardian ad litem, if appointed, and the factoring company), and requires all attorney’s fees and costs to be paid by the factoring company. This is a very far stretch from the original bill, which would have been disastrous for West Virginians.

For more information on the West Virginia bill and my commentary on some of the political issues surrounding it, listen to my audio interview with Scott Drake of the Legal Broadcast Network by clicking here.

Pat Hindert and John Darer have both written about legislation proposed in West Virginia that would radically alter the current law there, as well as depart from the national model act and standards used in most states. As identified by Hindert, the proposed law, HB 4380, has three essential elements:

• Mandating that a guardian ad litem be appointed for every prospective seller
• Changing the standard for approval from “best interests” to requiring clear and convincing evidence that the transfer is to avoid a financial hardship (and is in the seller’s best interest), and
• Imposing a rate cap for discount rates equal to the average mortgage rate for 20 year mortgages (the average rate is thought to be around 6%, but the state Banking Commissioner has indicated that they do not track that and don’t want to).

Contrary to John Darer’s position, in my opinion none of these would be good for tort victims. In fact, each prong of this proposed new law effectively shuts the courthouse doors on tort victims who will never have their chance to sell structured settlement payments when they need to. They are also just bad public policy. ALL sellers would have to have a guardian ad litem appointed, irrespective of their sophistication or understanding. For the non-lawyers who read this, a guardian ad litem is a court appointed person, usually a lawyer, who is supposed to essentially act as that person’s parent in the matter before the court. (“A guardian ad litem is a special guardian appointed by the court in which a particular litigation is pending to represent an infant, ward or unborn person in that particular litigation…” Black’s Law Dictionary, 6^th Ed.). How insulting to tort victims. Does being a tort victim mean you are not capable of making your own decisions? Or is it because you are a structured settlement recipient? What does that imply about structured settlement recipients? Sure, some tort victims are truly not capable of making financial decisions, and the courts of West Virginia, like courts everywhere, already have the inherent power to appoint guardians ad litem in those cases. But should it be mandatory for all sellers, irrespective of their individual status?

Only sellers needing money to avoid “financial hardship” would be able to sell future payments under the proposal. This is vastly different from the common “best interest” standard, and again would restrict which West Virginians would be able to even make it into the courtroom to tell their story. Is getting a new prosthetic leg “avoiding a financial hardship”? Probably not. How about being able to attend college or a trade school. Again, most likely not. Should structured settlement recipients be able to sell their asset, future payments, to do these things. Maybe. But under the proposed law, they would never get to make that case, under any circumstances.

The “rate cap” is probably the most clear evidence of what this bill is really about. If the rate is capped at 6%, then the structured settlement factoring market in West Virginia is closed. Period. All funding companies in this business must borrow money to use in funding. 6% is far below the rate at which we can borrow, so each transaction would start at a loss, and just get worse. Don’t forget, we would also need to pay the guardian ad litem, and the attorney bringing the action, not to mention covering our overhead, and making a reasonable profit. Under this proposal, we would never get to this level of analysis, because a large “Closed for Business” sign would be hung at the West Virginia border. Customers like “Mr. Smith” (real person, real West Virginian, fake name for this article), a retired Veteran, would not have been able to sell some of his future payments to buy an oxygen machine to help him breathe.

What is this bill really about? Delegate Walters, the key sponsor and a structured settlement broker, has made it very clear that this is really about putting the factoring companies out of business in West Virginia. His bill would do just that. If that is the goal, then let’s debate that issue directly and not dress it up in all this costuming, pretending to be “consumer protection”. But, if the factoring companies are out of business in West Virginia, then West Virginians with structured settlements are out of luck when they experience a life change, not anticipated at the settlement table. They will no longer enjoy the same financial freedom and flexibility as their neighbors in Virginia, Ohio or Pennsylvania.

HB 4380 is bad law and bad policy, and everyone, including the NSSTA and Mr. Darer, should oppose it.

I have written before about the vast amount of misinformation out there on structured settlement factoring. But, misinformation is only part of the problem. Underlying some of the misinformation and some of the criticism of the factoring world is an inherent belief that factoring is evil (or at least very bad). Not that some factoring folks are bad, or that factoring is bad for some people, but that factoring in itself is, inherently and intrinsically, bad. This view is all too pervasive, and seeps into legitimate discussions about some factoring practices, unfairly coloring the discussion. Let me give an example.

John Darer, a structured settlement broker (that means he advises and helps people settle lawsuits and get into structured settlements), blogger extraordinaire and someone I admire has been engaging in a blog discussion about structured settlement brokers who accept referral fees for sending customers to factoring companies. This is an important discussion, and John has raised good points. However, intertwined in the dialogue and in some endorsements of John’s “clean vendor list” is the “factoring is evil” theme. The best example of this is Richard Halpern’s voiced support for eliminating factoring referrals, quoted by John in his December 13, 2007 posting. The discussion is whether structured settlement brokers should receive a referral fee for sending customers to factoring companies. John thinks not, as he sees this as “taking money out of the pockets of tort victims.” Mr. Halpern supports John’s position – or does he? “I applaud your call for all structured settlement brokers to sign your affidavit and to refrain from helping plaintiffs squander their money.” Mr. Halpern is apparently supporting a different plan, one that eliminates any referral to a factoring company at all – not simply refraining from taking a fee for doing so. That is clearly not what John is suggesting. Arguments about whether factoring leads to plaintiffs “squandering their money” should be considered independently and not mixed into this discussion.

I suggest that unless your “worldview” of factoring is clear, honest debates like this one can never go anywhere. Should factoring be abolished? If not, then at what level of involvement should various advisors be engaged? Who are these advisors? Several of John’s posts indicate that he thinks everyone who factors payments should be represented by an advisor. Who pays for that? Is there any difference between the payments that would need to go to such advisors and the payments to a broker who refers the business? They both would “take money out of the pockets of tort victims.” Is there a value being added, or otherwise a justification for the fee?

We’ve already said goodbye to 2007, let’s also say goodbye and good riddance to misinformation. Clear thinking and clear communication will help us all move our respective industries forward – beyond the misconceptions.

For more information on this topic and more, watch and/or listen to our latest video podcast.