Structured Settlements Secondary Market and Factoring 2 — Questions and Answers
Question 1: What is the typical legal structure used by factoring companies to resell purchased structured settlement payment rights to investors?
- Direct sale of the annuity contract
- Securitization — pooling payment rights into asset-backed securities sold to institutional investors (Correct answer)
- A limited partnership interests offering to retail investors
- A mutual fund investing in structured settlement annuities
Correct answer: Securitization — pooling payment rights into asset-backed securities sold to institutional investors
Factoring companies commonly pool acquired payment rights and issue asset-backed securities, allowing institutional investors to purchase interests in the diversified pool of structured settlement cash flows.
Question 2: What is the 'face value' of a structured settlement payment stream in factoring transactions?
- The annuity's surrender value
- The sum of all future payments without any discounting (Correct answer)
- The lump sum offered by the factoring company
- The insurance company's reserve for future payments
Correct answer: The sum of all future payments without any discounting
Face value (or gross value) is the simple arithmetic total of all future periodic payments, before any time-value discounting.
Question 3: Why is the effective discount rate in a factoring transaction often higher than the nominal rate disclosed?
- Because the IRS adds a surcharge to the disclosed rate
- Because fees, closing costs, and the timing of payment receipts mean the true cost to the payee exceeds the nominal discount rate (Correct answer)
- Because the court adds interest to the factoring company's rate
- Because the annuity issuer charges transfer fees that increase the effective rate
Correct answer: Because fees, closing costs, and the timing of payment receipts mean the true cost to the payee exceeds the nominal discount rate
Transaction costs and fees reduce the net amount the payee receives below what the nominal discount rate alone would suggest, making the effective (APR) rate higher than the stated rate.
Question 4: Can a factoring company acquire structured settlement payment rights without a transfer agreement signed by the payee?
- Yes, if the court approves the transfer independently
- No — a voluntary transfer agreement signed by the payee is a prerequisite to any court approval process under SSPAs (Correct answer)
- Yes, if the annuity issuer consents
- Yes, if the transaction is below $10,000
Correct answer: No — a voluntary transfer agreement signed by the payee is a prerequisite to any court approval process under SSPAs
SSPAs require a voluntary, written transfer agreement from the payee as the foundation of the court approval process — involuntary transfers are prohibited.
Question 5: What recourse does a structured settlement payee have if a factoring company violates SSPA disclosure requirements?
- The payee can only seek damages in federal court
- The payee may rescind the transfer agreement and potentially seek damages under state consumer protection laws (Correct answer)
- The payee must pay back any advance received
- No recourse is available — signed agreements are final
Correct answer: The payee may rescind the transfer agreement and potentially seek damages under state consumer protection laws
Failure to comply with SSPA disclosure requirements can render the transfer agreement voidable, entitling the payee to rescind and potentially recover attorney fees and damages under state law.
Question 6: What is a 'partial transfer' in structured settlement factoring?
- A transfer that has been partially approved by the court
- A transaction in which the payee sells only some of the future payments (e.g., every other payment) while retaining others (Correct answer)
- A transfer involving only part of the payments from one of multiple annuities
- A factoring transaction in which two buyers share the purchase
Correct answer: A transaction in which the payee sells only some of the future payments (e.g., every other payment) while retaining others
A partial transfer allows a payee to sell a subset of future payments — such as a few years' worth or alternating payments — while retaining the remaining payment stream for ongoing income security.
Structured Settlements Secondary Market and Factoring 2
What is the typical legal structure used by factoring companies to resell purchased structured settlement payment rights to investors?