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Go to for Don McNay's column and other articles.

Saturday, January 08, 2005

article on Veterans Pensions

Kevin D. Jones, a retired Army veteran, was desperate for
money. He wanted to get his wife out of the Philippines
quickly after her home had been destroyed in a bombing. But
she was being delayed as she waited for immigration papers
to come through that would allow her to join him in North

His military contacts, cultivated during a 25-year career
that included duty in Bosnia and Kosovo, helped speed the
paperwork. And a Florida financial services company that he
had found through an advertisement in The Army Times helped
him raise the money to fly to Manila, resettle his in-laws
and return home with his wife.

He was too frantic, he said, to consider the cost of that
money. But it was steep. In exchange for $19,980 after fees
and insurance, Mr. Jones signed over his $1,000-a-month
military pension for the next five years, a total of
$60,000. That is the equivalent of paying interest at a
rate of 56 percent a year.

Federal law prohibits retired military people from signing
over their future pension payments to others. The companies
offering these deals say they are arranged to avoid that
restriction. But two federal bankruptcy judges ruled this
year that deals like Mr. Jones's, in which veterans in need
of quick cash give up their future pensions for a small
fraction of their value, do in fact violate that law.

But the law has not been enforced or consistently
interpreted. Indeed, the Defense Department's payroll
centers routinely handle the paperwork that diverts the
pension payments, even though veterans are warned "to
exercise caution in these arrangements," a Pentagon
spokeswoman said.

As a result, a small but persistent band of financial
companies using military-sounding names continue to offer
these so-called pension advances to retired military people
over the Internet and in military newspapers.

Consumer lawyers are getting calls from people facing
lawsuits and bankruptcy after signing over future pension
payments to these companies. No one is certain how many
veterans have been affected, but the potential market is
substantial. In the last year, roughly 1.7 million military
retirees received about $33 billion in pension payments
from the Pentagon.

None of these practices are a surprise to either the
Pentagon or to Congress. In September 2002, the Senate
passed a bill that would have penalized companies offering
military pension advances, but the effort stalled in the
House. Veterans' groups have warned members about these
deals. And in May 2003, the National Consumer Law Center, a
nonprofit group in Boston that has worked on consumer
protection issues for more than 35 years, condemned the
cash advances as illegally disguised loans that do not
comply with federal truth-in-lending laws.

Despite these warnings, neither the Pentagon nor Congress
has clearly defined these deals or decided which laws apply
to them.

The Pentagon does not see pension advances as examples of
retirees signing away their future pensions, which it
acknowledged would be illegal. Instead, to the Pentagon,
"these agreements appear to be loans based on retired pay
as collateral," said Lt. Col. Ellen Krenke, a spokeswoman
for the Defense Department.

The companies making the pension advances, however, flatly
deny that they are loans of any kind.

In contrast to the enforcement gap that arises from these
dueling definitions, Congress adopted rules a year ago to
protect veterans' disability payments from deals like
these. Now, Senator Bill Nelson, the Florida Democrat who
co-sponsored that law, is "shaking the tree" at the Defense
Department "to get some idea of what's going on," a senior
aide to Senator Nelson said recently.

In October, the National Consumer Law Center organized a
band of lawyers, including the former governor of Georgia,
to file a suit that seeks to confirm the fundamental
illegality of buying out military pensions through
arrangements like the one Mr. Jones made.

"It seems like this practice falls between the cracks of
what the military and the veterans' organizations normally
deal with," said Steve Tripoli, a consumer advocate with
the Boston group.

The group's class action on behalf of three plaintiffs,
filed in federal court in Atlanta, names as defendants C &
A Financial Programs of Stuart, Fla., and Advanced Funding
Inc., a Maryland company that acted as a broker for C & A.

Those were the companies Mr. Jones dealt with during his
family crisis in July 2001, when his in-laws were caught in
the cross-fire of sectarian violence that had plagued their
hometown in the Mindanao province in the Philippines. In
August 2003, after repaying $26,000, he directed the
Pentagon to stop sending his pension to the Florida company
because, he said, he needed the money to support his wife
and newborn son. C & A responded by going to court in its
hometown in Florida to sue him and a number of other

Like Mr. Jones, the plaintiffs in the consumer law center's
case signed on for pension advances whose repayment terms,
expressed as annual interest rates, ranged from 45 percent
to 76 percent.

The suit argues that these deals are actually disguised
loans that failed to comply with federal truth-in-lending
laws and state interest-rate caps, said Stuart Rossman, the
litigation director at the center. "But if I'm wrong," he
added, "then it's an assignment of a military pension, and
that violates the law, too"

Teri Belcher, a lawyer for Advanced Funding, of Glen
Burnie, Md., said the company would not comment on the

Leif J. Grazi, a lawyer for C & A in Stuart, said that the
company had not offered any new military pension deals for
several years because it did not find them profitable. But
its existing deals are neither improper loans nor illegal
pension assignments, he said. "We are just purchasing a
stream of payments," he said, adding that other companies
were probably handling the business C & A had turned away.

"If the sale of these assets is improper, why is it that
the United States allows them to advertise on the Internet
and in the military newspapers?" Mr. Grazi said. "You'll
see a million ads every month."

Roy Barnes, the former Georgia governor who has joined the
suit against C & A, also wonders why the Defense Department
allows pensions to be diverted to third parties - and, in
fact, handles the paperwork for the payroll deductions,
called allotments.

"The easiest way to cut off these companies is for the
Defense Department to stop those allotments," Mr. Barnes
said. "That would get their attention."

The fundamental issues raised in the suit against C & A and
Advanced Funding have not deterred other companies engaged
in this business.

Carl Bachmann founded and runs Veterans First Financial
Services in Battery Park, Va., which also offers military
pension advances. The suit would not affect his business,
he said, because his company offered better terms and
clearer disclosure than did the companies cited in court.
"There is a right way to do this business, and a wrong way
to do this business," Mr. Bachmann said. But there is no
doubt, he said, that the business itself is not prohibited
by military pension laws.

Executives at Structured Investments Company, which offers
pension advances through a unit called Retired Military
Financial Services, said they were not familiar with the
consumer law center's case. But Steven P. Covey, a managing
member of Structured Investments, said that Retired
Military's business model was legal and that its rates were

"Firms that charge outrageous interest rates and take
advantage of financially unstable pensioners are completely
at the other end of the spectrum from our company," he
said. "We look for a long-term relationship with our

Some bankruptcy judges have upheld the right of Structured
Investments to claim future military pension payments. But
none of those judges addressed how their decision squared
with federal statutes - Sections 701 and 101 of Chapter 37
of the United States Code - that prohibit assignments of
future military pensions.

Judge Arthur B. Federman of Bankruptcy Court in Kansas
City, Mo., observed in a footnote to a July 2002 decision
that there were "limitations on an individual's ability to
assign his or her right to receive monthly pension
benefits," citing the law governing military pensions. But
the debtor did not raise the argument, the judge said, "and
the court will not address it."

Two other bankruptcy judges, in cases decided this year,
did address the special nature of military pensions, and in
those cases Mr. Covey's company lost.

Judge James G. Mixon in Little Rock, Ark., ruled in July
that the sale of future military pension payments was
"specifically prohibited by federal law," which, he said,
"unambiguously provides" that any such assignment is

And in August, Judge Philip H. Brandt in Tacoma, Wash.,
ruled that the company's claim on a retired Navy enlisted
man's pension violated the federal pension statutes. While
the company's contracts say the deal is not an assignment,
Judge Brandt wrote, "in the words of Gabby Hayes, 'Sayin'
it don't make it so.' "

But most veterans cannot afford to challenge the companies'
claims in court, especially when the court is far from
their homes, said Lynn Drysdale, a member of the
plaintiffs' team suing C & A and a staff lawyer at
Jacksonville Area Legal Aid. Instead, they wind up paying
default judgments without ever making the argument that the
debts were illegal and therefore uncollectible, she said.

That is what happened to Edgar J. Basford III, known as
Jack, who retired from the Navy as a senior chief petty
officer in 1993. In May 2001, facing divorce expenses, he
got $26,000 from C & A, after fees and insurance, in
exchange for signing over his $1,242-a-month Navy pension
for five years, a total of $74,520. After repaying almost
$35,000, he fell behind on the debt and was sued for the
rest of the money.

"I didn't have the money to fly down to Florida to defend
myself," Mr. Basford said. The $46,000 judgment the company
obtained was the sole reason he filed for bankruptcy last
June, he said. But he did not challenge the legality of the
debt and wound up agreeing to pay $500 a month to C & A for
more than seven years.

Mr. Jones, who now lives in Eldridge, Iowa, said newly
retired veterans like himself were especially vulnerable to
a marketing approach that relies on reassuring names like
Retired Military Financial Services and advertisements in
publications that veterans trust, like The Army Times.

Moreover, said Mr. Jones, who joined the Army at age 18,
"you spend your whole life in a culture where everything is
grounded in clear procedures and high standards," and where
instructions are followed without question. "But in the
civilian world, you have to question everything -

Now, he added, "I'm learning that."