A new bonding requirement for structured settlement factoring companies in Maryland took effect on October 1. The bonding requirement was introduced with the passing of Maryland Senate Bill 734 which specifies a number of new conditions for structured settlement transfers in the state.
The reason for its introduction was to ensure that transfers are fair and in the best of interests of payees, and in order to protect payees from deception on the side of buyers – i.e. factoring companies.
Maryland Structured Settlement Protection Act
According to the Bill, a structured settlement is an “arrangement for periodic payment of damages for personal injury established by a settlement or judgment in resolution of a tort claim.”
People who receive such payments (payees) are usually people who have had an accident, such as being exposed to chemicals, and have suffered a permanent cognitive or physical injury as a result. These payments are intended to offer long-term care and support.
Senate Bill 734 introduces new conditions and requirements for structured settlement factoring companies (called ‘transferees’ in the Bill) in Maryland – people or companies who buy the rights to future payments under a structured settlement in exchange for cash given to payees.
This comes after Maryland Attorney General Brian Frosh filed a lawsuit in May against Access Funding LLC because the company had purchased structured settlements from victims of lead poisoning but misled them about the cash payment they received in return. The payment provided by the company was only a fraction of the full amount of the structured settlements these individuals had to receive.
The Attorney deemed this a form of unfair and deceptive business practice and filed the suit to seek restitution.
Factoring companies are to be differentiated from structured settlement consultants and life companies who work with injury victims, provide support to them and protect their rights. Structured settlement consultants and life companies are not subject to the requirements of the new Bill.
Structured Settlement Protection Act Requirements
To ensure that such cases are avoided in the future and factoring companies are discouraged from engaging in deceptive and dishonest practices, the Bill includes strict provisions that regulate the transfer of structured settlements.
- A requirement for transferees to provide payees with a disclosure statement
- A requirement for transfers of structured settlement rights to be filed in a court located in the county where the payee lives
- A requirement for transferees to become registered with the Attorney General and prohibiting them from filing a petition for a transfer unless registered
- The Bill also establishes registration requirements, such as a $2,000 registration fee – $1,500 of which are returned if the application for registration is denied.
- A requirement for transferees to file a $100,000 surety bond with the Attorney General
- A right of the Attorney General to suspend or revoke registrations of transferees as well as to impose penalties in certain cases
All of these provisions are intended to regulate transfers of structured settlements more clearly. The bill offers payees legal recourse if a factoring company attempts to obtain their structured settlement under the guise of “independent professional advice”, as was the case with Access Funding LLC. It also provides payees with the possibility to cancel a transfer without penalty until the moment the transfer is authorized by a court.
The Surety Bond Requirement
Similarly, the surety bond requirement for structured settlement factoring companies is also a form of protection for payees. Surety bonds are agreements made between three sides. In this case, the agreement is between the factoring company in Maryland (the bond principal), the Maryland Attorney General and payees (the bond obligees) and the surety bond company.
Under a bond agreement, if the bonded company engages in fraudulent or deceptive practices, obligees have the right to file a claim against the bond and receive compensation up to the full penal sum of the bond – $100,000. In return for extending compensation to obligees, the surety bond company has to be repaid by the bonded company for its financial backing.
If the company complies with the requirements of the Bill and of the Maryland Consumer Protection Act, the only cost related to the surety bond is that of obtaining it. Obtaining a surety bond usually costs only a fraction of the total amount of the bond. The exact rate at which companies can obtain the bond are determined by sureties when they apply for the bond. Typically, if applicants have a good credit score and are otherwise financially stable, they can expect to get a bond at a good rate.
Since bond claims can be quite costly and time consuming, it is considered that introducing a surety bond requirement will actively discourage companies from attempting to obtain structured settlements in illicit ways.
Vic Lance is the founder and president of Lance Surety Bond Associates. He is a surety bond expert who helps business owners get licensed and bonded. He graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan’s Ross School of Business.
UPDATE: This article was updated to better distinguish between structured settlement consultants and life companies, and structured settlement factoring companies, also known as factoring companies. The bonding requirement introduced by Bill 734 applies only to the latter type of companies. An earlier version of this article did not explicitly specify that difference.
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