In the past week, considerable attention has been focused on the issue of pension factoring. Sometimes, the news stories and press releases (which can be found at the links at the prior posts here, here, here and here) also have an emphasis about the problem of military pension factoring.
Why is there a problem with military pension factoring?
Well, putting aside the policy issues, there is one significant problem or potential problem: such transactions might be against the law.
An attempt to sell military pension payments can typically involve an agreement by a military retiree to agree that the pension payments he or she is to receive in the future will instead go to a “factoring company”, and in exchange that company would give the retiree an immediate – albeit lesser – payment. These transactions have at times involved what have been characterized as “abusive” terms, such as high interest rates and hidden fees, and so the military pension factoring business has come under criticism from officials. New York’s Superintendent of Financial Services, for example, said last week that “[t]hese pension advances appear to be nothing more than payday loans in sheep’s clothing” and that such “pension harvesting schemes” apparently target military veterans.
One law that has been interpreted as a prohibition against military pension factoring is 37 U.S.C. § 701(a). That statute provides that under regulations issued by the Secretary of Defense, a military officer “may transfer or assign his pay account, when due and payable.”
Because the statute limits assignments of pay, so that officers may only assign those payments that are “due and payable”, 37 U.S.C. § 701(a) “is an absolute prohibition on assignments and transfers of pay.” In Re Dunlap, 458 B.R. 301 (E.D. Va. 2011).
The Dunlap opinion – which collects and analyzes some of the prior judicial opinions on the subject, not all of which resulted in the invalidation of the subject pension factoring transactions – is available here, and is the subject of this Secondary Insurance Market Blog post from 2012, entitled “Court Strikes Down Attempted Sale Of Military Pension Pay”.
The Dunlap opinion can be a good place to start when considering the issues raised by military pension factoring.