[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
                TAX TREATMENT OF STRUCTURED SETTLEMENTS

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 18, 1999

                               __________

                             Serial 106-12

                               __________

         Printed for the use of the Committee on Ways and Means


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 58-892 CC                   WASHINGTON : 1999
------------------------------------------------------------------------------
                   For sale by the U.S. Government Printing Office
 Superintendent of Documents, Congressional Sales Office, Washington, DC 20402



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff
                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                    AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
WES WATKINS, Oklahoma                JIM McDERMOTT, Washington
JERRY WELLER, Illinois               JOHN LEWIS, Georgia
KENNY HULSHOF, Missouri              RICHARD E. NEAL, Massachusetts
J.D. HAYWORTH, Arizona
SCOTT McINNIS, Colorado


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.



                            C O N T E N T S

                               __________

                                                                   Page

Advisory of March 11, 1999, announcing the hearing...............     2

                               WITNESSES

U.S. Department of the Treasury, Joseph M. Mikrut, Tax 
  Legislative Counsel............................................     8

                                 ______

National Association of Settlement Purchasers:
    Hon. John E. Chapoton........................................    15
    Donna Kucenski...............................................    46
    Timothy J. Trankina..........................................    15
National Spinal Cord Injury Association, Thomas H. Countee, Jr...    51
National Structured Settlements Trade Association, and Little, 
  Meyers, Garretson & Associates, Thomas W. Little...............    36
Peachtree Settlement Funding, Timothy J. Trankina................    15

                       SUBMISSIONS FOR THE RECORD

American Bankers Association, statement..........................    73
American Council of Life Insurance, statement....................    74
Facciani, Gerald D., Henderson, NV, statement....................    76
J.G. Wentworth, Philadelphia, PA, statement......................    77
Liberty Funding Corp., North Bergen, NJ:
    Fury Nardone, letter.........................................    80
    Doreen Kirchoff, letter......................................    80
    Lee Anne Rizzotto, letter....................................    80
    Lisa Terlizzi, letter........................................    80
Stanton, John B., Hogan & Hartson, L.L.P., letter and attachments    82



                TAX TREATMENT OF STRUCTURED SETTLEMENTS

                              ----------                              


                        THURSDAY, MARCH 18, 1999

                  House of Representatives,
                         Subcommittee on Oversight,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The  Subcommittee  met,  pursuant  to  call,  at  1  p.m.,  
in  room B-318, Rayburn House Office Building, Hon. Amo 
Houghton (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE                        CONTACT: (202) 225-7601
March 11, 1999
No. OV-3

                     Houghton Announces Hearing on
                Tax Treatment of Structured Settlements

    Congressman Amo Houghton (R-NY), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on the tax treatment of structured 
settlements. The hearing will take place on Thursday, March 18, 1999, 
in room B-318 Rayburn House Office Building, beginning at 1:00 p.m.
      
    Oral testimony at this hearing will be from invited witnesses only. 
Witnesses will include an official from the U.S. Department of the 
Treasury and representatives from the National Structured Settlements 
Trade Association and the National Association of Settlement 
Purchasers. However, any individual or organization not scheduled for 
an oral appearance may submit a written statement for consideration by 
the Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    Present law provides tax-favored treatment both to the payor and 
recipient of ``structured settlements'' for damages paid as a result of 
personal injury. A structured settlement consists of a series of set 
payments made over a determinable period of time for damages paid as a 
result of personal injury.
    Generally, section 130 of the Internal Revenue Code grants tax-
favored treatment to structured settlements payments. If the payments 
qualify, the payor can deduct the amount of payments made to the 
recipient, and the recipient can exclude the same amount from income. 
To qualify for tax-favored treatment under section 130: (1) the 
payments must be fixed as to amount and time, (2) the payments cannot 
be accelerated, deferred, increased, or decreased by the recipient, (3) 
the payor's obligation is no greater than the liable person's 
obligation, and (4) the payments are excludable by the recipient as 
those under section 104(a)(2) of the code.
    In recent years, firms called ``factoring companies'' have 
purchased from recipients the right to receive their periodic payments. 
Generally, the recipient receives a lump-sum amount at a discount from 
the present value of the payment stream. There is some question whether 
these transactions violate section 130 by ``accelerating'' the 
payments, calling into question the exclusion for the payor and whether 
a portion of the payment may be includable as income to the recipient. 
Critics of these transactions have also argued that factoring companies 
take advantage of the recipients who may depend on the flow of income. 
Those who favor such transactions contend that they do not violate 
section 130 and that some recipients are well-served by the opportunity 
to receive lump-sum payments.
    The President, in his fiscal year 2000 budget, proposed an excise 
tax of 40 percent on the difference between the amount paid by the 
factoring company and the value of the acquired income stream. The 
proposal included an exception for purchases entered into under court 
order finding of hardship.
    Representatives E. Clay Shaw, Jr., (R-FL) and Fortney ``Pete'' 
Stark, (D-CA) introduced H.R. 263, a bill which provides for a 50 
percent excise tax on the discount with an exception for court-approved 
hardship to the recipient.
    In announcing the hearing, Chairman Houghton stated: ``When 
Congress last addressed the tax treatment of structured settlements, it 
could not have foreseen the market that currently exists in the 
purchase of structured settlements. It is timely and appropriate that 
the Subcommittee examine the tax treatment of these transactions. I am 
looking forward to hearing both sides of this debate.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the tax treatment of structured 
settlements and legislative proposals to alter the tax treatment of the 
purchase of structured settlements.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Thursday, 
April 1, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Oversight office, room 1136 Longworth 
House Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.

      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://www.house.gov/ways__means/''.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

    Chairman Houghton. Good afternoon, ladies and gentlemen.
    Thank you very much for being here.
    We will begin the Ways and Means Subcommittee hearing on 
the tax treatment of structured settlements. We are going to 
review a matter that may be of little importance to most 
taxpayers, but it is of great importance to many who have 
experienced personal injuries. We are here, of course, to 
review the tax treatment of structured settlements.
    Structured settlements, in a word, are a series of set 
payments made over a specific period of time for damages 
incurred as a result of a personal injury. The Internal Revenue 
Code provides tax-favored treatment to structured settlements. 
There are some important limitations. For example, payments 
must be fixed in amount and duration. The payments cannot be 
accelerated, deferred, increased, or decreased by the 
recipient.
    In recent years, factoring companies have been purchasing 
structured settlements and providing the recipients with lump-
sum payments. These transactions raise two important questions. 
First of all, do they run afoul of the requirement that 
recipients cannot accelerate payments? Second, do recipients 
suffer by accepting a lump-sum payment at a discount, rather 
than a guaranteed payment stream?
    Both the administration and our colleagues, Mr. Shaw and 
Mr. Stark, have proposed an excise tax to discourage these 
transactions. So, today, we will hear from the administration 
and from people on both sides of this debate.
    But before hearing from the Treasury and my two associates, 
I would like to yield to our ranking Democrat, Mr. Coyne.
    Mr. Coyne. Thank you, Mr. Chairman.
    I just want to point out that I am a cosponsor of Mr. 
Stark's and Mr. Shaw's legislation. I would just like to submit 
my statement for the record, and yield to Mr. Stark for his 
statement.
    Chairman Houghton. Absolutely.
    [The opening statement follows:]

Opening Statement of Hon. William J. Coyne, a Representative in 
Congress from the State of Pennsylvania

    Today's hearing will focus on an issue which has generated 
much attention in recent months--the proper tax treatment of 
settlement agreements.
    Current tax law provides for tax advantages to injured 
parties choosing to receive their damage awards in the form of 
structured settlements, rather than in lump sums.
    The Congress decided many years ago, and correctly so, that 
injured individuals should be encouraged to receive their 
damage awards over time, as periodic payments. This insures 
that they have the funds needed to meet their ongoing living 
needs and medical costs.
    More recently, questions have been raised about the 
practice of ``factoring'' settlement agreements. In other 
words, individuals have been selling their settlement award 
payments in exchange for a lump-sum amount at a significant 
discount.
    One response to this situation has been legislation 
introduced by Congressmen Shaw and Stark--H.R. 263. I have 
joined in co-sponsoring this bill which would impose a 50 
percent excise tax on factoring transactions. A similar 
proposal has been offered by the Administration which we will 
discuss further today.
    The discussion this afternoon should be insightful. I 
welcome our review of the tax policy concerns underlying 
current law, and the business dynamics of the settlement 
industry and factoring transactions.
    As we proceed, I hope that we keep in the mind those for 
whom this controversy really matters--those thousands of 
injured individuals and their families.
      

                                

    Mr. Stark. Thank you. I hadn't meant to preempt Mr. Shaw. 
Mr. Chairman, thank you.
    I am here with my colleague, Mr. Shaw, because we are 
concerned about an arrangement that has worked pretty well for 
two decades.
    I chaired the Select Revenue Measures Subcommitee when we 
enacted this bill in 1982. I was skeptical then that the 
finance sharks were out there just finding a way to reduce what 
the courts might offer in a way of tort settlements.
    But as we saw this unfold, it became apparent that there 
was some great social value in a structured settlement in 
protecting, particularly in protecting people who first of all 
might not have had any acquaintance with handling large sums of 
money or investing it, or indeed, budgeting it.
    The stories of people who received large lump-sum 
settlements and squandered them were equally heart rending, 
some ended up back on welfare if they were in fact disabled. It 
made great good sense then, and I think it makes great good 
sense now.
    The problem is that over the course of some years, people 
with a great deal more understanding of the cost of things and 
the value of things have found a way to arbitrage or buy these 
payments at a discount. You are going to hear later, I'm sure, 
in testimony, many tales of people whose lives have been 
disrupted, if not destroyed by the fact that they in a very 
unsophisticated way, squandered their benefits.
    We are therefore, suggesting that what was originally a 
social issue, a consumer protection issue, needs some fine-
tuning.
    You may hear some testimony today that will indicate that 
this ought not to be a tax issue. This is a consumer protection 
issue. I would just like to suggest that it was no less a 
consumer advocate than Russell Long, who I don't think ever saw 
an issue of Consumer Reports in his life, but he used to say 
that it ain't an issue of fairness.
    We decided the winners and losers in this business. I guess 
that is what we are here to do, to see whether we can even out 
the score between the winners and losers. Russell Long also 
said in regard to using the Tax Code to solve a problem, that 
he could take the Tax Code and make water run uphill. I suspect 
that he was correct.
    I hope today that this Subcommittee will hear testimony 
that will encourage all of you to support the legislation that 
will reasonably protect these disadvantaged, and indeed, often 
disabled individuals, that we have been trying to protect. I 
know it's not often a tenet of my more conservative colleagues 
to say that government has a duty to protect people from 
themselves, but I think you are going to hear an awful lot of 
evidence today to suggest that in these cases, we have been 
doing the right thing.
    I am pleased to be here with the author of this 
legislation, Mr. Shaw. And thank you, Mr. Chairman, for having 
this hearing.
    Chairman Houghton. Before I turn to Mr. Shaw, do you have 
any other testimony you would like to admit for the record?
    Mr. Stark. Mr. Chairman, no.
    Chairman Houghton. Just your statement?
    Mr. Stark. Not at this point. Thank you.
    Chairman Houghton. Fine.
    [The opening statement follows:]

Opening Statement of Hon. Fortney Pete Stark, a Representative in 
Congress from the State of California

    Mr. Chairman, thank you for holding this hearing today.
    I am here today with my colleague, Rep. Shaw, because we 
are concerned that an arrangement that has worked very well for 
almost two decades to compensate victims of serious, often 
disabling, physical injuries is now being unwound. And it's 
being unwound by companies out to make a fast buck at the 
expense of injured victims. I was the chairman of the Ways and 
Means subcommittee that considered the original bipartisan 
legislation in 1982 to enact the structured settlement tax 
rules. The Committee adopted a bipartisan proposal to provide 
long-term financial protection to seriously injured victims and 
their families, so that they would not have to turn to 
taxpayer-financed assistance programs to meet their needs.
    Today there is a troubling spread of structured settlement 
factoring transactions which threaten that policy. Factoring 
companies are enticing injured victims to sell off their 
guaranteed stream of payments for quick--but sharply 
discounted--cash. The long-term financial protection for the 
victim and their family disappears.
    The factoring companies assert that they are just providing 
a financial service to people who need money. The public record 
shows otherwise. Court records show that across the country the 
factoring companies are buying up the financial futures of 
paraplegics, quadriplegics, people with traumatic brain 
injuries, permanently-disabled children who've just barely 
reached the age of majority.
    This completely frustrates what our Committee intended when 
it adopted the original legislation to encourage structured 
settlements. Chairman Archer has talked about rooting out 
abuses and closing them down. This one we don't even have to 
ferret out. It is right there in front of us, and it is time we 
did something about it.
    Rep. Shaw and I have introduced H.R. 263 as a solution to 
the abuses at hand. Seventeen Ways and Means Members have 
cosponsored this bill. Treasury supports it. The National 
Spinal Cord Injury Association and the National Organization on 
Disability have endorsed it.
    I am hopeful that this hearing will prompt the favorable 
consideration of HR 263 by the full committee of Ways and 
Means. I thank my colleague, Rep. Shaw for his efforts to get 
this bill enacted.
      

                                

    Chairman Houghton. Mr. Shaw.
    Mr. Shaw. Thank you, Mr. Chairman. I thank you very much 
for having this hearing and allowing me and Mr. Stark to 
participate in support of H.R. 263, the Structured Settlement 
Protection Act.
    Mr. Stark and I, along with a broad bipartisan group of 
colleagues, introduced this bill to address serious public 
policy concerns that are raised by transactions in which so-
called factoring companies purchase recoveries under structured 
settlements from injured victims.
    Congress enacted structured settlement tax rules as an 
incentive for injured victims to receive periodic payments as 
settlements of personal injury claims. I was an original 
cosponsor of that legislation, along with Mr. Stark. Congress 
was concerned that injured victims would prematurely spend a 
lump-sum recovery and eventually resort to the social safety 
net. The integrity of the entire system is being undone by 
factoring transactions. Injured victims are selling their 
settlements to factoring companies, and I might say, at very 
sharp discounts, for quick cash, spending it, and eventually 
winding up on public assistance, leaving them in the very 
predicament that structured settlements were set up to avoid.
    These sales also create the risk that the special tax 
treatment, accorded to the original structured settlement, no 
longer applies after a sale. Thus, the uncertainty caused by 
factoring transactions may hinder the use of structured 
settlements themselves.
    H.R. 263 addresses these concerns in the following manner. 
To discourage factoring transactions, the bill imposes an 
excise tax on the factoring company. Essentially, 50 percent of 
the amount of the discount is being taxed. Because of the sharp 
discounts at which many of these purchases are made, an excise 
tax of 50 percent is necessary to act as a real deterrent to 
factoring transactions.
    The excise tax on a factoring company will not apply to a 
sale of a structured settlement in a court-approved hardship. 
The reason for this exclusion is simple. It is to provide for 
flexibility for those injured victims that need it, and have a 
genuine reason to sell their settlements.
    Finally, the bill clarifies that a subsequent transfer of 
structured settlement payments will not jeopardize the original 
tax treatment of the other parties to the settlement; namely, 
the settling defendant and the financial institution assuming 
the liability to make periodic payments.
    If the parties originally complied with the structured 
settlement tax rules when entering into the structured 
settlement, then their tax situation should not be changed on a 
subsequent sale of the settlement and over which they have no 
control.
    The way to deal with the abuses involved in factoring 
transactions, the aggressive sales practices, and the sharp 
discounts is not through State consumer protection laws or 
through lawsuits. Because the purchase of structured settlement 
payments by factoring companies so directly thwarts the 
congressional policy underlying the structured settlement tax 
rules, and raises such serious concerns for structured 
settlements and injured victims, it is appropriate to deal with 
these concerns in the tax content.
    I want to thank Representative Stark for his support and 
assistance working together with him in enacting this bill. I 
urge my colleagues to do the same. Again, Mr. Chairman, I want 
to thank you for holding, I think what is a most important 
hearing on this most important matter.
    Thank you.
    Chairman Houghton. Thank you very much, Mr. Shaw. I 
appreciate it.
    Mr. Collins, do you have anything? Would you like to----
    Mr. Collins. Mr. Chairman, I just appreciate the fact you 
have let me sit in on your hearing this afternoon. We do have a 
constituent from Georgia that is here. I appreciate the 
opportunity. But no statement at this point.
    Chairman Houghton. Thank you very much.
    Mr. Watkins, would you like to make a statement?
    Mr. Watkins. I don't have one----
    Chairman Houghton. No, wait 1 minute. We are not going to 
do that here. We have heard too much about the oil patch from 
you. [Laughter.]
    Well anyway, to continue, I would like to introduce Mr. 
Mikrut. I don't know you, Joe, but you used to be with the 
Joint Tax Committee 6 months ago. I think this is the first 
time you have testified in front of the Ways and Means 
Committee.
    So, we are delighted to have you here--if you would like to 
give your testimony and would like to proceed.

 STATEMENT OF JOSEPH M. MIKRUT, TAX LEGISLATIVE COUNSEL, U.S. 
                   DEPARTMENT OF THE TREASURY

    Mr. Mikrut. Thank you, Mr. Chairman. It is a pleasure to be 
here.
    Mr. Chairman, Mr. Coyne, Members of the Subcommittee, and 
Members of the Full Committee, it is a pleasure to speak with 
you today about the tax treatment of structured settlement 
arrangements.
    As you know, the administration has proposed in its fiscal 
year 2000 budget to impose an excise tax on structured 
settlement factoring transactions. The administration believes 
that the proposed tax, which is intended to act as a deterrent 
to factoring transactions, is necessary to preserve the 
integrity of the structured settlement tax regime and the 
underlying policy objective of protecting and providing for the 
long-term financial needs of injured persons.
    Our budget proposal is very similar to H.R. 263, the 
Structured Settlement Protection Act of 1999, as introduced by 
Messrs. Shaw and Stark, and cosponsored by other Members of the 
Subcommittee and the Full Committee.
    In my brief remarks, I would like to touch upon the 
following act matters: One, a description of the typical 
structured settlement arrangement; the favorable tax rules 
applicable to such arrangement; the tax and nontax policy 
concerns underlying such rules; a description of the factoring 
transaction; and finally, an explanation of how the proposed 
excise tax would operate in support of the legislative 
proposals underlying the current law. My written statement 
describes these matters in greater detail. I request that it be 
submitted for the record.
    Mr. Chairman, an injured party that receives an award or a 
settlement for his or her injury generally has two options. 
One, to receive a lump sum, up front payment. Or alternatively, 
to receive a stream of deferred payments. If the person chooses 
the lump-sum payment, the transaction is over, but as described 
below, there may be some negative tax consequences to such a 
choice.
    However, if the person chooses to receive deferred 
payments, he or she can enter into a qualified structured 
settlement arrangement and the inside buildup on whatever 
investment is within the arrangement is never subject to tax.
    Qualified structured settlements typically have the 
following characteristics: The defendant, who is required 
either by a suit or by an agreement to pay damages to a 
physically injured or ill person, enters into a structured 
settlement agreement with the injured person and a structured 
settlement company, under which terms, the structured 
settlement company is required to pay the injured person 
specified amounts over a period of time. Pursuant to this 
agreement, the defendant pays a lump sum to the structured 
settlement company, which assumes the defendant's liability to 
the injured person. The structured settlement company then 
purchases an annuity contract, or some other qualified asset, 
to fund the liability and uses the payments received under that 
contract to pay the amounts due to the injured person.
    Pursuant to legislation enacted in 1982, the tax results of 
the structured settlement arrangement are as follows: The 
defendant gets an up front deduction for his payment to the 
structured settlement company. The structured settlement 
company does not recognize income on receipt of that payment to 
the extent it requires an annuity or other qualified 
investment.
    The payments to the structured settlement company are not 
subject to tax to the extent they are netted out as payment to 
the injured person. The injured person is not subject to tax on 
any amounts received. Taken together, these rules effectively 
provide that the earnings on funds set aside for the injured 
person are never subject to tax, in essence, giving tax-free 
buildup.
    Conversely, if the injured party had received an up front 
lump-sum payment outside a structured settlement, such receipt 
is not subject to tax, but if the person were to invest that 
lump sum, any earnings thereupon would be subject to tax. Thus, 
structured settlement arrangements are tax-preferred 
investments relative to lump-sum payments.
    As I said before, the rules that allow a tax-free buildup 
of structured settlements were first enacted in 1982. 
Legislative history indicates that the legislation was intended 
for two purposes. One, to clarify that the tax-free treatment 
of deferred payments to injured parties was subject to section 
104.
    Prior to 1983, the Treasury Department and the Internal 
Revenue Service had taken an administrative position similarly 
exempting the injured person from any tax on the earnings on 
certain funds set aside. Congress decided that it was much more 
preferable to have such law enacted statutorily.
    Second, legislative history provides similar tax benefits 
to the structured settlement companies. This benefit, which 
allows no tax upon receipt of the amount from the defendant, is 
necessary to effectively allow the tax-free buildup on 
structured settlement amounts. Congress conditioned these 
favorable rules on a requirement that the periodic payments 
could not be accelerated, deferred, increased or decreased by 
the injured person.
    It appears that certain nontax policy considerations 
underlie these favorable rules for structured settlements. 
There was a recognition that recipients of structured 
settlements are much less likely than recipients of lump-sum 
awards to consume their awards too quickly and then thereby 
require public assistance. It appears that Congress' tax and 
nontax concerns underlying structured settlements may be 
frustrated by factoring transactions.
    In a factoring transaction, an injured party accepts a 
discounted lump-sum payment from a factoring company in 
exchange for their future payment streams under the structured 
settlement. These discounts may be large, and factoring 
transactions appear to have become prevalent.
    Factoring transactions effectively contravene the statutory 
requirement conditioning favorable tax treatment on the injured 
person's inability to accelerate such payments and undermine 
the policy objectives for these favorable rules, that of 
protecting the long-term financial needs of injured persons.
    By replacing structured settlement payments with a lump sum 
in the hands of the injured person, the factoring transaction 
facilitates the potential dissipation of these amounts by the 
injured person. Thus, the current state of affairs affords 
favorable tax treatment without ensuring that the legislatively 
intended conditions for such treatment are satisfied, thereby 
potentially costing Federal revenues without ensuring that the 
goal of long-term income protection for injured parties is 
achieved.
    Both the President in his fiscal year 2000 budget and 
Representative Shaw and Stark in H.R. 263, have proposed the 
imposition of a substantial excise tax on discounts relative to 
factoring of structured settlement payments. The excise tax 
would not be imposed when the purchase is pursuant to a court 
or administrative order finding that certain extraordinary and 
unanticipated needs of the original intended recipient render 
such a transaction desirable.
    The imposition of a substantial excise tax should make it 
far less likely that factoring transactions will occur, because 
the transactions would become less profitable. To the extent 
that the market for such purchases is reduced or eliminated, 
far fewer injured persons would be approached or convinced to 
assign their future income rights, and the integrity of the 
structured settlement tax regime of present law would be 
preserved. This will help ensure that the tax benefits 
conferred by present law accomplish their legislative purpose.
    In conclusion, Mr. Chairman, Mr. Coyne, and Members of the 
Subcommittee, the administration looks forward to working with 
you and other Members of Congress in addressing this problem. 
We thank you for your interest in this issue, and for an 
invitation to participate in today's hearing. I am happy to 
answer any questions you may have.
    [The prepared statement follows:]

Statement of Joseph M. Mikrut, Tax Legislative Counsel, U.S. Department 
of the Treasury

    Mr. Chairman, Mr. Coyne, and Members of this Subcommittee, 
it is a pleasure to speak with you today about the current-law 
tax treatment of structured settlement arrangements and 
legislative proposals to impose an excise tax on the purchase 
of structured settlement payment streams.
    As you know, the Administration has proposed in its fiscal 
year 2000 budget to impose an excise tax on structured 
settlement factoring transactions. The Administration believes 
that the proposed tax, which is intended to act as a deterrent 
to factoring transactions, is necessary to preserve the 
integrity of the structured settlement tax regime and the 
underlying policy objective of protecting and providing for the 
long-term financial needs of injured persons. Our budget 
proposal is very similar to H.R. 263, the ``Structured 
Settlement Protection Act of 1999,'' as introduced by Messrs. 
Shaw and Stark and other Members of the Subcommittee and full 
Committee.
    Following is an overview of the tax treatment of structured 
settlements under current law, a discussion of the rationale 
for these favorable rules, an analysis of the potential impact 
of a factoring transaction, and an explanation of how the 
proposed excise tax would operate in support of the legislative 
purpose underlying current law.

                Tax Treatment of Structured Settlements

    Since 1983, section 130 and other provisions of the 
Internal Revenue Code have contained a series of special tax 
rules intended to facilitate the use of structured settlements 
to resolve physical injury damage claims.
    Structured settlements that qualify for this favorable tax 
treatment typically have the following characteristics: A 
tortfeasor who is required (whether by suit or agreement) to 
pay damages to a physically injured person enters into a 
structured settlement agreement with the injured person and a 
structured settlement company (``SSC''), under which terms the 
SSC is to pay the injured person specified amounts for a number 
of years or for the life of the injured person. Pursuant to the 
agreement, the tortfeasor pays a lump sum to a structured 
settlement company (``SSC''), which assumes the tortfeasor's 
liability to the injured person. The SSC purchases an annuity 
contract to fund the liability, and uses the annuity payments 
received under the annuity contract to pay the amounts due to 
the injured person.
    The tax results of the structured settlement arrangement 
are as follows: The tortfeasor is permitted immediately to 
deduct the lump sum paid to the SSC, but the SSC does not 
include in income the amount received from the tortfeasor to 
the extent that such funds are used to purchase the annuity 
contract. The earnings on the annuity contract are taxed to the 
SSC according to the favorable rules generally applicable only 
to individual annuity holders. These rules generally defer 
taxation of income under the annuity contract until such time 
that the SSC actually receives annuity payments, at which time 
the SSC is eligible for a corresponding offsetting deduction 
for the amounts paid to the injured person. Furthermore, the 
injured person is not taxed on any amounts received from the 
SSC, even though significant portions of such payments are 
funded through the SSC's investment earnings. Taken together, 
these rules effectively provide that the earnings on funds set 
aside for the injured person are never subject to tax.
    Prior to 1983, the Treasury Department and Internal Revenue 
Service had taken an administrative position similarly 
exempting the injured person from tax on the earnings on 
certain funds set aside on his or her behalf. See, e.g., Rev. 
Rul. 79-313, 1979-2 C.B. 75. The legislative history to the 
rules enacted in 1983 explains that the statutory changes were 
intended, at least in part, to provide statutory certainty that 
the injured person was not subject to tax on the earnings from 
qualified structured settlements. In addition, the legislation 
removed potential tax impediments with respect to SSCs. See H. 
Rpt. No. 97-832, 97th Cong., 2d Sess. 4 (1982); S. Rpt. No. 97-
646, 97th Cong., 2d Sess. 4 (1982). Congress conditioned the 
favorable rules on a requirement that the periodic payments 
cannot be accelerated, deferred, increased or decreased by the 
injured person. Both the House Ways and Means and Senate 
Finance Committee Reports stated that ``the periodic payments 
as personal injury damages are still excludable from income 
only if the recipient taxpayer is not in constructive receipt 
of or does not have the current economic benefit of the sum 
required to produce the periodic payments.''
    Although the non-tax policy considerations underlying the 
favorable statutory clarifications are not discussed in these 
reports, Senator Max Baucus (D-Mont.) described these 
considerations in introducing the legislation that led to the 
favorable tax rules. Senator Baucus explained that the 
recipients of structured settlements are less likely than 
recipients of lump sum awards to consume their awards too 
quickly and require public assistance:

        In the past these awards have typically been paid by defendants 
        to successful plaintiffs in the form of a single payment 
        settlement. This approach has proven unsatisfactory, however, 
        in many cases because it assumes that injured parties will 
        wisely manage large sums of money so as to provide for their 
        lifetime needs. In fact, many of these successful litigants, 
        particularly minors, have dissipated their awards in a few 
        years and are then without means of support.

        Periodic payments settlements, on the other hand, provide 
        plaintiffs with a steady income over a long period of time and 
        insulate them from pressures to squander their awards....

[Congressional Record (daily ed.) 12/10/81, at S15005.]

    Since 1983, Congress has further expressed its support of 
structured settlement arrangements. In the Taxpayer Relief Act of 1997, 
Congress extended the section 130 exclusion to cover qualified 
assignments of liabilities arising under workmen's compensation acts. 
In deciding to extend such favorable tax treatment, ``the Committee was 
persuaded that additional economic security would be provided to 
workmen's compensation claimants who receive periodic payments if the 
payments are made through a structured settlement arrangement, where 
the payor generally is subject to State insurance company regulation 
that is aimed at maintaining solvency of the company, in lieu of being 
made directly by self-insuring employers that may not be subject to 
comparable solvency-related regulation.'' See H. Rpt. No. 105-148, 
105th Cong.,1st Sess. 410-11 (1997).

                          The Factoring Issue

    Many injured persons are willing to accept heavily 
discounted lump sum payments from certain ``factoring 
companies'' in exchange for their future payment streams from 
structured settlements. These factoring transactions directly 
undermine the policy objective underlying the structured 
settlement tax regime, that of protecting the long-term 
financial needs of injured persons. The factoring transactions 
also effectively contravene the statutory requirement 
conditioning favorable tax treatment to the various parties to 
the arrangement on the injured person's inability to accelerate 
such payments.
    The same policy considerations expressed in introducing the 
structured settlement tax legislation in 1981 remain relevant 
today. Dissipation of an award by an injured person who is 
unable to earn money because of his or her injury or illness 
may result in the need for welfare payments or other public 
assistance. By replacing structured settlements with a lump sum 
in the hands of the injured person, the factoring transaction 
facilitates potential dissipation.
    Factoring transactions are prevalent today. According to 
recent press reports, one large factoring company has completed 
more than 15,000 structured settlement transactions with an 
approximate total value of $370 million. The company broadcast 
more than 90,000 television commercials in a period of less 
than two years. See Margaret Mannix, ``Settling for Less,'' US 
News & World Report, p. 63 (January 25, 1999); Vanessa 
O'Connell, ``Thriving Industry Buys Insurance Settlements from 
Injured Plaintiffs,'' The Wall Street Journal, p. A8 (February 
25, 1998).
    We understand that almost all structured settlement 
arrangements contain anti-assignment clauses that are intended 
to satisfy the section 130 statutory requirements. The fact 
that only companies able and willing to contravene these anti-
assignment clauses can engage in factoring transactions allows 
such companies to pay heavily discounted amounts for payment 
rights. While one large factoring company reports an average 
discount rate of 16%, there have been reports of rates that in 
some cases have exceeded 75%. See US News & World Report, id. 
at 66; see also Gail Diane Cox, ``Selling Out Structured 
Settlements: Abuses in Secondary Market Leads to Reform 
Legislation,'' The National Law Journal, p. B1 (August 18, 
1997).
    In sum, the Administration believes that the factoring 
transaction undermines the purpose of the special favorable tax 
rules applicable to structured settlements. In fact, the 
combination of the existing statutory requirements and the 
willingness of certain companies to ignore those requirements 
(but to exact heavy discounts in so doing) leaves injured 
persons potentially more vulnerable than before the enactment 
of the 1983 changes. The current state of affairs affords 
favorable tax treatment without ensuring that the 
legislatively-intended conditions for such treatment are 
satisfied--thereby costing federal revenues without ensuring 
that the goal of long-term income protection for injured 
persons is achieved.

             The Proposed Factoring Transaction Excise Tax

    Both the President, in his fiscal year 2000 budget, and 
Representatives Shaw and Stark, in H.R. 263, have proposed the 
imposition of a substantial excise tax on the difference 
between the amount paid by the factoring company and the 
undiscounted value of the acquired payment stream. The excise 
tax would not be imposed where the purchase is pursuant to a 
court (or administrative) order finding that certain 
extraordinary and unanticipated needs of the original intended 
recipient render such a transaction desirable. H.R. 263 also 
would provide that factoring transactions would not 
retroactively affect the tax treatment of the original parties 
to the structured settlement transaction.
    The imposition of a substantial excise tax should make it 
far less likely that factoring transactions will occur, because 
the transactions would become less profitable. To the extent 
that the market for such purchases is reduced or eliminated, 
far fewer injured persons would be approached or convinced to 
assign their future income rights, and the integrity of the 
structured settlement tax regime would be preserved. This will 
help ensure that the tax benefits conferred by section 130 
accomplish their legislative purpose.
    The Administration recognizes that the policy concern 
underlying the proposed tax--the long-term financial protection 
of injured persons--could also be addressed outside the 
Internal Revenue Code. However, such policy concern already 
underlies the favorable tax rules applicable to structured 
settlements. The proposed excise tax is intended to ensure the 
continued effectiveness of the existing tax rules in protecting 
the long-term financial security of injured persons. In 
addition, as of the close of calendar year 1998, we are aware 
of only three states--Illinois, Connecticut and Kentucky--that 
have passed laws requiring court approval of and fuller 
disclosure in connection with factoring transactions, and it is 
unclear whether and when other states might pass similar 
consumer protection laws.
    In conclusion, Mr. Chairman and Mr. Coyne, and Members of 
this Subcommittee, the Administration looks forward to working 
with you and other Members of Congress in addressing this 
problem. We thank you for your interest in this issue, and for 
inviting us to participate in today's hearing.
      

                                

    Chairman Houghton. OK. Thank you very much, Mr. Mikrut. I 
am going to start with Mr. Coyne.
    Mr. Coyne, would you like to ask any questions?
    Mr. Coyne. No.
    Chairman Houghton. Let me see. Mr. Collins, have you got 
questions?
    Mr. Collins. Not at this time.
    Chairman Houghton. OK.
    Ms. Dunn.
    Mr. Watkins.
    Mr. Watkins. I don't at this time, Mr. Chairman. Mr. 
Chairman, there are several questions that do come about when 
we start looking at taxing of settlements and different things 
and how they prorate them out. I may want to follow back up 
with some of those questions in a more serious discussion on 
that.
    Mr. Mikrut. I will be happy to answer any questions you 
have, Mr. Watkins.
    Mr. Watkins. Thank you.
    Chairman Houghton. I have three questions. First of all, it 
involves the Treasury. Has the Treasury Department taken any 
action with the structured settlement companies, one way or 
another, to explain what the tax consequences are, when a 
recipient has sold his or her settlement to a factoring 
company?
    Mr. Mikrut. No, Mr. Chairman, we have not. Under present 
law, it is unclear what happens to both the recipient and the 
settlement company when these amounts are factored. I believe 
some have taken the position that to the extent that the amount 
is assigned, that section 130 does not apply and would not 
apply from the inception. Therefore, the settlement company 
would be subject to tax, and the recipient would be subject to 
tax on the earnings thereon.
    Others read the Code differently and would seem to indicate 
that section 130 still applies for several reasons. One, from 
the literal reading of the Code. Two, that the settlement 
company itself does not know, many times, whether the amount 
has been factored or not.
    I would say at present, it is unclear what happens with 
respect to these sales. H.R. 263 would clarify that treatment 
and essentially say that so long as the original requirements 
of section 130 were complied with at the outset of the 
transaction, that that treatment would maintain throughout.
    Chairman Houghton. OK. Now look, just let me talk about the 
time. We have got a vote coming up now. I don't know how many 
can come back, but I will just finish with a couple of 
questions. Then, we will cut it and we'll go and vote. We will 
come back; it will only be about a 5-minute break.
    Just two other questions. If Congress clarifies the tax 
treatment of the other parties to the original structured 
settlement, does that really resolve the controversy that is 
before us?
    Mr. Mikrut. No. I think what would resolve the controversy, 
Mr. Chairman, if you were to craft an excise tax which would 
stop the factoring transactions to the extent that the Congress 
deemed that appropriate. It is unclear what the appropriate 
rate is. The administration proposed a 40-percent rate. H.R. 
263 has a higher 50-percent rate.
    I think the elasticity between various injured parties and 
firms would depend on their own particular facts and 
circumstances. But I think that the important parts are that an 
excise tax is necessary to back up current section 130, and 
also the clarification how section 130 operates after a 
factoring transaction.
    Chairman Houghton. Yes. Then the last question. Really, are 
these transactions consistent with the tax policy that 
underlies most structured settlement tax rules?
    Mr. Mikrut. No. I don't believe they are, Mr. Chairman. 
Section 130 is premised on the fact that the recipient cannot 
accelerate the payments. This is generally done between the 
structured settlement company and the injured party through an 
antiassignment clause. The factoring transactions abrogate that 
clause and in essence, as I mentioned before, call into 
question the validity of section 130 treatment.
    To the extent that Congress was concerned about these 
payments being paid over time, the factoring transaction 
completely undoes that.
    Chairman Houghton. OK. Well, those are all the questions I 
have. Unless anybody has a question, we are going to break here 
for about 5 minutes. Thanks very much.
    Ms. Dunn. Mr. Chairman.
    Chairman Houghton. Have you got a question?
    Ms. Dunn. I do. It just occurred to me. Is there anything 
in current legislation that provides for waiver situations, 
like a change of lifestyle, for example, if somebody marries 
and wants to convert the settlement to a lump sum to buy a home 
or something? Is there any waiver ability right now?
    Mr. Mikrut. Ms. Dunn, there is not under present law, but 
there would be under H.R. 263.
    Ms. Dunn. Thanks, Mr. Chairman.
    Chairman Houghton. OK. Good. Well, thanks very much.
    Mr. Collins. Mr. Chairman.
    Chairman Houghton. Yes. Go ahead.
    Mr. Collins. One quick question to Mr. Mikrut. In order to 
clear up the tax treatment, we could do that with a provision 
of clarity without the excise tax, could we not?
    Mr. Mikrut. Yes, you could. You could clarify the treatment 
of the recipient, as well as the treatment of the structured 
settlement company. The excise tax, however, is intended to 
inhibit the factoring transactions themselves.
    Mr. Collins. That is the truth? It is intended to stop the 
transaction itself?
    Mr. Mikrut. Yes. Not the setup of the original 
establishment of the structured settlement, but the later 
factoring of those amounts.
    Mr. Collins. But it is a way that would probably eliminate 
the structured settlements totally?
    Mr. Mikrut. No. I believe it would backstop the structured 
settlements because it would allow the amounts to be paid over 
time as originally intended, as opposed to being accelerated.
    Mr. Collins. That is the structured settlement. But it 
would penalize and probably cease the purchase of those 
structured settlements because of the punitive tax that would 
be levied against the settlement, against the purchase?
    Mr. Mikrut. No. Because, again, as long as the taxpayer and 
the structured settlement company stayed within the bounds of 
the original section 130, there would be the tax-free buildup 
as Congress intended. It would only be when another party came 
in and bought up those deferred payment rights that the excise 
tax would kick in.
    Mr. Collins. That is exactly right. That excise tax would 
have a tendency to stop that purchase of that structured 
settlement. The structured settlement, the settlement company 
itself would not be affected because that cash flow remains the 
same?
    Mr. Mikrut. That's right.
    Mr. Collins. Their cash flow remains the same to the person 
or the company or the entity that purchased the settlement?
    Mr. Mikrut. That's right.
    Mr. Collins. The excise tax itself would be a punitive 
issue, a measure to stop the purchase of those settlements?
    Mr. Mikrut. That is correct.
    Mr. Collins. Thank you.
    Chairman Houghton. OK.
    [Recess.]
    Chairman Houghton. Again, I apologize for the interruption 
of the vote. We had a vote on the rule; we have a little 
breathing space now.
    The next group of panel members starts with John Chapoton, 
a partner from Vinson & Elkins, on behalf of the National 
Association of Settlement Purchasers, along with Tim Trankina, 
chief executive officer of Peachtree Settlement Funding in 
Georgia.
    We also have Thomas Little, president of Little, Meyers, 
Garretson & Associates in Cincinnati, and past president of the 
National Structured Settlements Trade Association; Donna 
Kucenski from Seneca, Illinois, on behalf of the National 
Association of Settlement Purchasers; and Thomas Countee, who 
is the executive director of the National Spinal Cord Injury 
Association in Silver Spring, Maryland.
    We will start with Mr. Chapoton.

 STATEMENT OF HON. JOHN E. CHAPOTON, PARTNER, VINSON & ELKINS, 
     LLP; ON BEHALF OF NATIONAL ASSOCIATION OF SETTLEMENT 
PURCHASERS; ACCOMPANIED BY TIMOTHY J. TRANKINA, CHIEF EXECUTIVE 
    OFFICER, PEACHTREE SETTLEMENT FUNDING, ATLANTA, GEORGIA

    Mr. Chapoton. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here today. As you mentioned, I am appearing 
on behalf of the National Association of Settlement Purchasers.
    Accompanying me today is Tim Trankina, who is chief 
executive officer of Peachtree Settlement Funding, a structured 
settlement purchasing company in Atlanta. I am a tax lawyer. I 
am here to address the tax issues that are confronting this 
Subcommittee.
    This is an industry dispute. It is not a tax issue. In my 
view, it is not an issue that ought to be resolved by the tax 
writing Committees. As you have heard, it is alleged that there 
are abuses in the purchases of structured settlements.
    If there are abuses, they should be addressed. NASP 
supports any reasonable change that will give the consumer 
adequate information to make a correct choice, both at the time 
he or she enters into the structured settlement and at the time 
he or she is later considering a sale. If there is a problem, 
it is a consumer protection problem and not a tax issue.
    What I would like to do today is clear up some 
misunderstanding concerning the meaning and history of section 
130 and the amendments to section 104 that were originally 
adopted in 1982.
    First, let me address the point that you have already heard 
today, that the purpose of the 1982 legislation was to provide 
an incentive in the tax law to encourage structured 
settlements. That is not entirely true. The legislation was 
adopted to codify IRS ruling policy that had existed in the 
late seventies and into the early eighties. The IRS adopted a 
position in both private rulings and published rulings that 
would not place a tax hurdle in the path of structured 
settlements. Congress liked it, and Congress adopted it.
    At that time, Treasury expressed some concern about it 
because there was some tax slippage. As I believe Mr. Mikrut 
pointed out, any structured settlement does involve an interest 
element.
    If a structured settlement is used, under the Code 
provisions adopted in 1982, that interest is converted into a 
tax-free award for a personal injury to the recipient, while at 
the same time the payor gets a full deduction for the full 
amount paid, including the interest payment. There is some tax 
slippage. Treasury expressed some concern, but Treasury did not 
stand in the way of the provision in 1982.
    Unquestionably in 1982, everyone involved then was talking 
about catastrophic injuries. Everybody thought it was clearly 
desirable if the tax law permitted tax-free, long-term payout 
in such cases. Sometimes the 1982 legislation is described as 
protecting people who cannot protect themselves.
    Congressional support in 1982 for tax rules that would 
permit long-term payouts in catastrophic injury cases is a far 
cry from the interpretation some are now putting on the 1982 
congressional action.
    Today we hear that Congress had adopted a rule that said if 
you accept this tax benefit designed for catastrophic cases, 
designed to keep you from being a ward of the State, you are on 
notice that you are forever locked in, and can never use this 
stream of payments as an asset for any financial purpose.
    It is even more of a reach to suggest that Congress 
intended this to be the rule in the thousands of settlements 
involving lesser injuries that are also granted the option to 
take long-term payouts tax free under this tax benefit. In my 
view, that wasn't the congressional intent in 1982. I doubt it 
is the congressional policy today.
    In brief, the congressional decision in 1982 was to grant a 
benefit, but not to attach a condition to that benefit and not 
to impose what is now being described as a lock-in, one-way 
swinging trap door that you cannot get out of. That is, if 
there is a sale to require that the structured settlement 
company pay a tax when the sale is made. Those conditions I 
submit, were not the intent.
    The 1982 congressional action was simply a codification of 
then-existing IRS ruling practice. I discuss this in some 
detail in my written statement. The words of section 130 that 
people point to as creating this tax problem were in fact 
language drawn from the IRS ruling policy. That language was 
put in the statute. It had no other purpose than to avoid 
constructive receipt, and certainly not the lock-in policy that 
is now being attributed to it today.
    More proof that this was not the policy in 1982 and should 
not be the policy today is found in a wide variety of fact 
situations in which long-term payouts are selected by 
claimants.
    There is no one-size-fits-all. The facts vary far too much. 
Some involve private catastrophic permanent disability that 
render the claimant unemployable, where sales should not be 
permitted. At the other end of the spectrum, they involve the 
creation of a financial asset, the use of which should not be 
denied the owner when his or her circumstances change.
    Distinguishing between these two extremes is not easy. It 
should certainly not be legislated by a single Federal tax 
rule. It is not a tax problem. It calls for careful, 
thoughtful, consumer protection regulation. I think the need 
for flexibility becomes particularly obvious when it is 
realized that once these benefits were firmly ensconced in the 
Code in 1982, the use of structured settlements has grown 
dramatically. Some 50,000 structured settlements are arranged 
each year.
    There are estimates that there are $10 billion in premiums 
a year, from almost nothing in the late seventies. A large part 
of this growth has nothing to do with catastrophic injuries. I 
am advised that over 85 percent of structured settlement 
claimants are not disabled and are gainfully employed. More 
than 50 percent of the structured settlements involve total 
premiums of less than $50,000, and fewer than 13 percent of 
structured settlements involve settlements of greater than 
$250,000.
    Whatever social policies are involved here, they do not 
justify locking every informed and properly advised claimant 
into a box and preventing him or her from selling a portion or 
all of his future payments. Circumstances change. I am told the 
settlement purchasers are on average first contacted by 
claimants some 5 to 7 years into their structured settlement. A 
secondary market has quite appropriately evolved to fill that 
need.
    Thank you, Mr. Chairman. I will be happy to answer any 
questions.
    [The prepared statements and attachments follow:]

Statement of Hon. John E. Chapoton, Partner, Vinson & Elkins, LLP; on 
Behalf of National Association of Settlement Purchasers

    Mr. Chairman and Members of the Subcommittee:
    My name is John E. Chapoton and I appear before you today 
on behalf of the National Association of Settlement Purchasers 
(NASP). I am a partner with the law firm of Vinson & Elkins 
here in Washington. Accompanying me today is Tim Trankina, CEO 
of Peachtree Settlement Funding, a structured settlement 
purchasing company located in Atlanta, Georgia.
    I was the Assistant Secretary of Treasury for Tax Policy 
from 1981 to 1984. I served in that capacity at the time the 
tax provisions under discussion today were enacted. I testified 
before the Ways and Means Subcommittee on Select Revenue 
Measures about these provisions, and was actively involved in 
the development of the legislation.
    I want to discuss the tax issues presented by the 1982 
legislation and by the proposal before you today. From my 
reading of the record from 1982, and my memory of that process, 
I believe there are some misconceptions concerning the original 
tax issues that need to be clarified. I believe they bear on 
the task before you.

                               Background

    A structured settlement is a financial arrangement that resolves a 
personal injury or wrongful death claim with an agreement to make 
payments over time instead of in one lump sum. This vehicle is often 
very useful in settling litigation or potential litigation. Structured 
settlements are used for everything from slip and fall cases to 
serious, lifelong injuries. They are not, and never have been, limited 
to catastrophic injuries, however. The perception that structured 
settlements typically involve lifelong disabilities is simply wrong.
    Generally, under a structured settlement the beneficiary or 
claimant is paid over a period of years in a series of installments 
with inflexible payment terms. Most typically, the settlement takes the 
form of monthly payments, periodic lump sums, or a combination of both. 
It is estimated that in excess of 50,000 structured settlements are 
arranged each year, generating premiums to annuity companies that may 
be approaching $10 billion annually. These arrangements are often 
utilized because of the highly favorable tax treatment granted to both 
claimants and insurers, and because the arrangement lowers the cost to 
insurers of compensating personal injury victims.
    According to one of the largest brokers of structured settlements, 
more than fifty percent (50%) of structured settlements involve 
premiums of less than $50,000. Fewer than thirteen percent (13%) 
involve settlements of greater than $250,000. Whatever the original 
conception of structured settlements and the purpose of the tax rules 
facilitating them, these figures clearly belie any assertion that they 
are today used principally for catastrophic injuries.
    Under the terms of a structured settlement that qualifies for 
preferable tax treatment, the claimant is prohibited from possessing 
the right to accelerate, delay, increase or decrease future payments 
from the structured settlement company. If a claimant's life 
circumstances change creating a need for additional funds from the 
settlement, the only way the claimant may gain access to additional 
funds is to sell a portion, or all, of his or her settlement. This need 
has given rise to a secondary market where companies will purchase a 
portion of the individual's settlement for a lump sum payment. That 
lump sum reflects the discounted present value of the payments being 
purchased, using discount rates that presently average sixteen to 
eighteen percent (16%-18%). These discount rates reflect the cost of 
capital, the inherent risk involved, and a profit for the companies.
    The National Association of Settlement Purchasers (NASP) is a non-
profit trade association composed of companies that purchase structured 
settlement and other deferred payment obligations. Formed in July 1996, 
NASP and its member companies support rational regulation to protect 
the rights of consumers seeking to sell structured settlement payment 
rights. NASP has adopted a code of ethics, which includes consumer 
protection and suitability standards, and has created a fraud alert 
system. NASP is dedicated to providing claimants and their 
representatives with an efficient, legal and ethical means by which to 
obtain liquidity from inflexible structured settlement payments. NASP 
is actively working in a number of states to pass comprehensive 
legislation that protects the interests of personal injury victims both 
at the time of settlement, and subsequently should the individual 
choose to liquidate a portion of his or her structured settlement 
payments.

              Growth in the Use of Structured Settlements

    Historically, personal injury lawsuits were settled with an 
up-front, lump-sum payment to the claimant in exchange for a 
release of liability delivered to the defendant. The amount 
received by the plaintiff was exempt from taxation under Code 
section 104, which was originally enacted in 1919. Beginning in 
the 1970s IRS began issuing private rulings which permitted 
claimants to receive payments in settlement of personal injury 
claims over time on the same tax-free basis as lump sum 
settlements. This lead to an effort in the early 1980s to 
streamline and codify this IRS ruling position. The result was 
enactment of the Periodic Payment Settlement Act of 1982 (the 
``1982 Act'').
    The 1982 Act did two things. First, it codified through 
amendments to section 104 the IRS ruling position that the full 
amount of settlements received over time retained their tax-
free character when received by claimants. Second, and most 
importantly today, it enacted a new section 130 which set up 
favorable tax procedures that allowed defendants and their 
insurers to assign their liability to structured settlement 
companies in exchange for the purchase by the structured 
settlement company of an annuity to fund the liability. 
Technical rules specified how these assignments of liability 
had to take place in order to receive the favorable tax 
benefits.

               Typical Structured Settlement Transaction

    By definition, structured settlements are agreements 
entered into to settle actual or potential lawsuits. They may 
not be used after a jury has rendered a verdict. As a result, 
they are sometimes (approximately 25 percent of settlements) 
entered into without the claimant having the benefit of 
counsel. Often, a broker becomes involved in setting up these 
arrangements. Those brokers typically receive a four percent 
(4%) commission, which is the industry standard. A diagram 
illustrating the flow of funds in a structured settlement is 
attached.
    Structured settlements are useful because they facilitate 
settlement of lawsuits. They allow defendants and their 
insurance companies to offer small settlements that look big 
because they are paid out over time. Most of us are familiar 
with the various sweepstakes awards that offer $10 million 
dollar prizes. It is only when you read the fine print that you 
discover that they are really offering $10 million over 20 
years and that the real value, in present dollar terms, is far, 
far less. Structured settlements are often sold to claimants in 
the same way.
    Unfortunately, many claimants who enter into structured 
settlement agreements do not receive this information before 
they settle their claim by agreeing to the long-term payout. 
Often the settlement is a take it or leave it offer--settle now 
or take your chances with litigation, which in crowded court 
dockets may not take place for years. Faced with this Hobson's 
choice, many take the settlement. As a result, claimants often 
discover later that (i) the settlement is really not what they 
expected, or (ii) after a period of time the settlement no 
longer fits their needs. The average length of a structured 
settlement is 20 years. It is impossible for an individual to 
predict with accuracy what his or her needs will be over the 
next 20 years.
    Inflexibility can be the most significant flaw of 
structured settlements. When financial needs change, a fixed 
payment schedule may no longer satisfy those needs. Structured 
settlement purchasers have stepped in to fill that legitimate 
consumer need. Settlement purchase companies provide a useful 
and vital service for individuals to deal with unforeseeable 
financial situations.
    Although the majority of claimants work or have other 
sources of support, they often need the flexibility to pledge 
or assign their rights to meet unanticipated needs. Many 
claimants use the proceeds from payment sales to pay medical 
and educational expenses, make bill payments or arrange debt 
consolidation, cope with job loss or take advantage of an 
unexpected opportunity such as starting or expanding a 
business, purchase or make improvements to a home, or start or 
expand a family. Occasionally, sales of a portion of structured 
settlements are used to pay estate taxes due on the death of 
the claimant.

                    Structured Settlement Purchases

    The structured settlement purchase market has developed in 
response to the needs of claimants who find that a fixed 
schedule of payments no longer meets their needs. They make the 
choice of altering the arrangement to better address their 
present circumstances. The attached diagram shows how a typical 
purchase is structured.
    Settlement purchasers buy the right to receive a specified 
amount of structured settlement payments in exchange for a lump 
sum of cash. These purchases do not change the responsibilities 
of the structured settlement companies: the companies continue 
to make the same payments over the term of the settlement. They 
merely send their check to a different address. The amount, 
timing or duration of the payments do not change at all. 
According to statistics maintained by the NASP, 88 percent of 
settlement purchases are partial purchases. In such 
transactions, only a portion of the settlement is sold and the 
claimant retains the balance of the periodic payments.
    Statistics from one of the largest NASP company members 
indicate that the average purchased payment amount is $20,406, 
representing a portion of up to seven years worth of payments. 
NASP statistics also reveal that the average seller of 
structured settlement payments is 33 years old, employed, and 
has an annual household income of nearly $25,000. Over 85 
percent of structured settlement claimants are not disabled and 
are gainfully employed. Thirty-four percent of claimants use 
the money to buy a home, 31 percent to pay off existing debts 
or pay educational expenses, and 16 percent to open or expand 
an existing business. A NASP survey showed that 92 percent of 
claimants are ``satisfied'' or ``very satisfied'' with the 
refinancing they were able to accomplish with the help of the 
settlement purchasing industry.

                      Consumer Protection Concerns

    NASP companies comply with a code of ethics that includes 
consumer protection and suitability standards. NASP members do 
not conduct transactions with minors, incompetents or their 
guardians except by court order. They do not conduct 
transactions with individuals dependent on future periodic 
payments for medical necessity or with those who are unemployed 
or unemployable who rely on their payments as the sole source 
of income. They do not buy payments from individuals with 
catastrophic or head injuries. All member companies encourage 
or require individuals to consult with their own legal counsel 
prior to entering into a funding transaction. Prospective 
sellers are given amply time and opportunity to secure 
alternative sources of capital or back out of a transaction.
    NASP is committed to ensuring that the consumer receives 
adequate protection. NASP has worked in various states to 
advance legislation that requires state courts or court-like 
proceedings to approve settlement purchases. Such statutes 
would be greatly strengthened if language could be added to 
identify which beneficiaries are affected, which courts could 
approve lump-sum payments, and the standards the court would 
apply. NASP has prepared model legislation addressing these 
concerns and is working with several state legislatures to 
encourage enactment of this legislation.

   President's Fiscal Year 2000 Budget Proposal and H.R. 263, ``The 
                 Structured Settlement Protection Act''

    President Clinton's fiscal year 2000 budget contains a 
proposal that would impose an excise tax on any person 
acquiring a payment stream under a structured settlement 
arrangement. The amount of the excise tax would be 40 percent 
of the difference between (1) the amount paid by the acquirer 
to the injured person and (2) the undiscounted value of the 
acquired income stream. The excise tax would not be imposed if 
the acquisition were pursuant to a court order finding that the 
extraordinary and unanticipated needs of the original recipient 
of the payment stream render the acquisition desirable.
    H.R. 263 (106th Cong., 1st Sess., introduced by Rep. Clay 
Shaw (R-FL) and others) provides for a 50 percent tax on the 
amount equal to the excess of (1) the aggregate undiscounted 
amount of structured settlement payments being acquired, over 
(2) the total amount actually paid by the acquirer to the 
seller.
    Presumably these proposals are motivated by the valid 
concern that individuals who own structured settlements not 
deplete their assets. NASP members also are concerned about 
protecting the individual claimants. NASP views an informed 
consumer as the most appropriate way to prevent any abuses that 
could otherwise occur. Such legitimate concerns should not, 
however, permanently lock claimants into inflexible financial 
arrangements that might be completely inconsistent with a 
financial situation. Full disclosure of all the terms of a 
contemplated sale transaction, including discount rates, 
present values, fees and commissions, as well as representation 
by counsel, would go far to protecting individual claimants. 
Ironically, these same claimants do not now have the benefit of 
this full disclosure when they enter into structured 
settlements.
    There is no question that one of the reasons motivating 
this Committee to adopt the Periodic Payment Settlement Act of 
1982 was that structured settlements are useful in protecting 
people who cannot protect themselves. Although catastrophic 
injuries were clearly on everyone's mind when the 1982 Act was 
adopted, the legislation did not limit structured settlements 
to the catastrophically injured. In what is perhaps a classic 
example of the law of unintended consequences, the tax and 
economic benefits of structured settlements are so valuable 
that they are now used primarily for non-catastrophic cases. 
There has been a virtual explosion in their use since 1982. 
Estimates of annuity premiums received by life insurers from 
third party (non-affiliated) sources in the United States 
during the twenty year period shows an increase from $.005 
billion in 1976 to $4.0 billion in 1996. When transfers to 
affiliates are included, this number increases to $10 billion. 
It defies reality to think that more than a small percentage of 
these represent people who should be locked into these 
settlements forever.
    The policy considerations that support permitting 
structured settlements of personal injury claims do not justify 
preventing each and every claimant from selling all or a 
portion of his or her future payments. The notion that Congress 
should preclude claimants from revisiting a decision they may 
have made years before under entirely different circumstances--
after being made aware of all the expenses and other facts, and 
being properly advised as to the consequences--cannot be 
defended. Circumstances change, and Congress should make it 
easy rather than difficult for these individuals to change 
their financial arrangements accordingly. The secondary market 
has quite appropriately evolved to fulfill this need.
    The assumption that claimants are incapable of making 
reasoned financial decisions if provided full information is 
unsupportable. We offer as evidence the hundreds and thousands 
of satisfied customers of NASP members, many of whom have 
written to our companies attesting to their satisfaction. 
Virtually all of these individuals are competent to handle 
their own financial affairs and do so in all other contexts. 
NASP members, working together with claimants and their 
representatives, including counsel in many cases, provide 
various payment options to suit the needs of interested 
sellers, understanding the balance between demands for 
immediate cash and how much should be ``held in reserve'' for 
the future. Their decision is not always the correct one, but 
that cannot be prevented without taking away the individual's 
freedom to choose.

                             Discount Rates

    It is often alleged that the discount rates used by 
structured settlement purchasing companies are too high, and 
thus financially disadvantaged claimants who sell their rights 
to a portion of their future payments. That is simply false. At 
present, the discount rate applied in the overwhelming majority 
of cases ranges from 16 to 18 percent, no higher than the 
interest rate charged on credit card balances. In fact, these 
rates have fallen steadily over the last two years. This 
reflects the fact that, as the secondary market has grown, more 
and more competition among settlement purchasing companies has 
developed. Often, claimants will shop among the companies to 
maximize the amount of money they receive, thus lowering the 
discount rate. In addition, one of the factors keeping rates 
high is the legal impediments raised by opponents of structured 
settlement purchases. If Congress can further streamline and 
make clear that sales are permitted under appropriate 
circumstances, it is a certainty that discount rates will drop 
substantially. Thus, consumers would be the ultimate 
beneficiaries from clarification of the tax and other rules 
that apply when settlements are purchased.
    NASP believes that if Congress has concerns about discount 
rates it should address those concerns in a manner that does 
not have the effect of raising the cost of the transaction even 
higher. Imposition of an excise tax would only increase the 
cost to claimants who chose to engage in a sales transaction. 
For example, a claimant who desires to sell five years' worth 
of a settlement (approximately the current average length of 
payments sold according to NASP statistics) would be forced to 
sell in excess of eight years' worth in order to receive the 
same dollar amount if an excise tax became law.
    The surest way to increase the amounts provided to the 
intended beneficiaries is to require adequate consumer 
protection in all phases of a structured settlement, including 
the original settlement and the subsequent transfer of payment 
rights. This would assure that beneficiaries are informed of 
the values and settlement options at the time of the original 
settlement so that they would be less likely to enter into 
settlements that do not meet their needs. Additionally, 
adequate protection in the form of a ``consumer bill of 
rights'' as adopted under the code of ethics by NASP members 
would help to weed out any unscrupulous refinance companies. 
Just as in the case of lotteries, consumer protection should 
include required cooperation between the companies making the 
settlement payments and any companies involved in transfer of 
payment rights.

       Tax Effects of the Sale of Structured Settlement Payments

    Finally let me turn to the Federal income tax issues 
presented by settlement purchases. Tax issues have been raised 
by proponents of the legislation before you today. In a 
nutshell, some assert or at least suggest that there are 
possible adverse tax consequences if structured settlement 
payments are sold.
    Let me state, in no uncertain terms, that there is no tax 
issue. The sale of structured settlement payments by a claimant 
should have no adverse tax consequences to any party.
    Section 130, which was enacted as part of the 1982 Act, 
codified IRS ruling practice dating back to the late 1970s. The 
IRS rulings permitted the use of structured settlements as a 
vehicle through which a claimant could receive payments over a 
period of years rather than in a lump sum without adverse tax 
consequences to either party, so long as the claimant was not 
considered to be in constructive receipt of those payments. The 
language appearing in the IRS rulings was copied into the 
statute, and the legislative history of section 130 reflects 
that purpose and intent.
    The language in the statute prohibits the payments from 
being ``accelerated, deferred, increased or decreased'' by the 
recipient (claimant). Some have argued that this language bars 
the sale of structured settlement payments because a sale could 
be viewed as an acceleration. They argue that this language was 
intended to lock the claimants into their settlements and 
prohibit them from selling their payments, presumably because 
these are individuals who are incapable of making decisions on 
their own.
    That is not what the language of section 130 does or was 
intended to do. First and foremost, there was no tax policy 
reason in 1982 (and there is none today) to encourage 
structured settlements of claims. As the hearing in 1982 makes 
clear, the tax policy concerns went the other way--the effect 
of a structured settlement is to exclude interest income from 
the taxable income of claimants while granting a full deduction 
for that same amount to the structured settlement company. In 
spite of this tax slippage, it was decided (originally by IRS 
and later by Congress) to adopt tax rules that do not stand in 
the way of structured settlements.
    The principal tax rule that might have impeded structured 
settlements was the doctrine of constructive receipt. If the 
claimant was deemed to have constructively received the 
promised future payments, he or she would owe tax on those sums 
immediately with no readily available cash to meet that tax 
obligation. Thus the IRS rulings, and later section 130 of the 
Code, used language designed to make clear that the terms of 
any structured settlement avoided constructive receipt when it 
was created. If constructive receipt was avoided at the outset, 
it will not reappear.
    This language--the claimant could not have the right to 
``accelerate, defer, increase, or decrease'' the payments--is 
the language of the constructive receipt doctrine. It has no 
meaning for or impact on a subsequent, independent transaction 
entered into by the claimant to borrow against or sell future 
payments. The notion that a sale by a claimant, many years 
after the fact, could cause the structured settlement company 
to lose its original benefit under section 130 (or could 
somehow cause constructive receipt to be revisited) is 
nonsensical. It cannot be a serious assertion under the tax law 
as it existed in 1982, or as it exists today.
    It might be noted, almost parenthetically, that a sale of a 
stream of settlement payments would solve, not exacerbate, the 
tax policy issue that concerned Treasury in 1982. Thus the tax 
system (and Treasury and IRS) should have absolutely no 
interest in inhibiting sales of settlement payments.
    If there is a policy concern about sales of structured 
settlement payments, therefore, it is solely a consumer 
protection concern. It is not a tax policy issue.
    Consistent with this conclusion, it is interesting to note 
that the IRS has never raised this as an issue. There is no 
regulation, ruling, notice, or formal or informal pronouncement 
which indicates the IRS views the sale of settlement payments 
as raising tax issues under sections 104 or 130. There is no 
evidence that the IRS has ever raised this issue in any audit. 
Only one court case has dealt with this issue. The Third 
Circuit, in a bankruptcy decision, squarely addressed and 
rejected the argument that a subsequent assignment would cause 
a settlement company to retroactively lose the income exclusion 
provided by Section 130. The court went so far as to dismiss 
the argument as ``novel.''

                               Conclusion

    Mr. Chairman, the settlement purchasing companies strongly 
support and actively seek consumer protection legislation to 
regulate structured settlements and secondary market 
transactions. Indeed, member companies have been actively 
working through NASP at the state level to pass such 
legislation to protect the interests of personal injury victims 
at the time of settlement and subsequently should they choose 
to sell a portion of their settlement. It is interesting to 
note that the Staff of the Joint Committee on Taxation in 
discussing the arguments for and against the Administration's 
proposal states ``[a]rguably consumer protection and similar 
regulation is more properly the role of the States than of the 
Federal government.'' NASP would welcome adoption of standards 
to assure the adequate disclosure of present value, fees, and 
commissions, both at the time that structured settlements are 
established and at the time of secondary purchase.
    I would be pleased to answer your questions.
      

                                

[GRAPHIC] [TIFF OMITTED] T8892.001

Statement of Timothy J. Trankina, Chief Executive Officer, Peachtree 
Settlement Funding, Atlanta, Georgia; on Behalf of National Association 
of Settlement Purchasers

    Mr. Chairman and Members of the Committee:
    My name is Timothy J. Trankina and I am the founder and 
Chief Executive Officer of Peachtree Settlement Funding (PSF). 
PSF is a niche finance company specializing in providing 
liquidity to individuals holding high quality illiquid assets, 
including structured settlements. I appear before you today 
along with John E. Chapoton, a partner with the law firm of 
Vinson & Elkins located here in Washington, and the former 
Assistant Secretary of Treasury for Tax Policy from 1981 to 
1984.
    Structured settlement is a term of art used to describe the 
settlement of a tort claim by way of a series of future 
installment payments. These payments are made at fixed dates in 
the future and are often monthly payments or lump sums although 
virtually any type of payment arrangement can be structured. 
The use of structured settlements has grown in popularity over 
the last 15 years as insurers have aggressively marketed them 
as a cost effective settlement tool. The settling accident 
victim is often given a choice between a lump sum (for example 
$100,000) or a series of future payments (e.g. $1,000 per month 
for 240 months). Since the present value of the future payments 
is usually not disclosed to the victim, they will often accept 
the installment payments under the mistaken belief that they 
are worth more than the lump sum (ie. they believe, wrongly, 
that $1,000 per month for 240 months is worth $240,000 when in 
fact it is worth considerably less).
    While structured settlements are often very useful as 
settlement tools, they suffer from one very serious drawback--
inflexibility. Thus, several years into a structured settlement 
payout, a victim's life circumstances will have changed such 
that they need or desire a lump sum. Settlement Purchasers such 
as Peachtree fill this void by re-financing a portion of the 
future payment in order to give the accident victim the lump 
sum they desire now. Contrary to the message being ``spun'' by 
the proponents of the excise tax, on average, we charge 
discount rates of 18-20% per annum. These rates are consistent 
with credit cards and other ``b'' and ``c'' lenders rates.
    As you may or may not know, the National Association of 
Settlment Purchasers (NASP) is a trade group made up of 
companies and individual small businesspeople who are involved 
in the secondary market for structured settlements. NASP 
members provide liquidity for individuals who are receiving 
structured settlement payments over a long period of time. This 
liquidity is provided either by way of a loan, secured by a 
pledge of the individual's right to receive the structured 
settlement payments, or by way of an outright assignment of the 
right to receive the structured settlement payments. While most 
firms (and all NASP members) already provide financial 
disclosures and rights of recission in their contracts, 
settlement purchasers support broad consumer protection 
legislation to require full and complete disclosure from 
everyone.
    In order to appreciate the complexity of the structured 
settlement area, I have attached a brief Structured Settlement 
Overview. NASP and its members have no quarrel with and have in 
fact supported true consumer protection legislation. However, 
HR 263 is really a ban of the sale of structured settlements in 
the guise of a consumer protection bill. The particular 
shortcomings of the bill can be summarized as follows:
    1. Settlements that did not require court approval when 
they were set up should not require court approval to re-
finance.HR 263 imposes needless and burdensome conditions of 
the rights of an individual to use their money as they see fit. 
The typical structured settlement claimant is seeking less than 
$20,000 when they re-finance their settlement with a NASP 
member. Requiring court approval can easily cost the consumer 
10% or more of that sum in attorney's fees and court costs. 
Moreover, in the three states that require court approval (CT, 
KY and IL) the insurance industry routinely files 40 and 50 
page briefs and objections to the transfers. How could an 
individual possibly afford to combat the insurance industry in 
court ??? Succinctly stated, transfer of settlements that were 
not approved by a court in the first place should not require 
court approval to re-finance.
    2. Sales Shouldn't be Limited to the Desperate and The 
Needy. This bill would tell the courts that only a claimant 
facing ``imminent financial hardship'' could sell. In other 
words, the richest guy in town can't negotiate a sale--even 
with court permission; but the fellow who's desperate--who 
faces ``imminent financial hardship''--can. That's 
discriminatory and arbitrary (and perhaps backward). The court 
should be asking, ``what is in the best interest of the 
claimant?''
    3. Bank Lending Should Be Excluded. The bill was supposed 
to be about unregulated ``factoring'' transactions, but by its 
terms, it also covers loans and bank lending. We already have 
plenty of regulations dealing with lending by banks and finance 
companies. This will make it difficult (if not impossible) for 
banks to make secured loans to people who are getting payments 
like this over time. And it will make it difficult for personal 
injury law firms to secure affordable credit.
    4. Claimants Deserve These Protections Whenever Asked to 
Choose Between Cash and Payment Over Time. Whenever a personal 
injury claimant is asked to choose between up-front cash and 
payment over time, the claimant should be: (1) advised to 
consult with a lawyer or other professional advisor; (2) told 
what they are getting and what they are giving up; and (3) told 
what the interest rate or discounted value is. The disclosures 
should be made and claimants advised to consult counsel when 
they are considering a sale and when getting into a settlement 
in the first place. That's only fair. In its current form, this 
bill will be seen as a one-sided effort to protect insurance 
companies at claimants' expense, leaving claimants without any 
meaningful disclosure requirements or safeguards at the 
``front-end''--and no meaningful opportunity to cash out when 
and if their circumstances later change.
    There is an enormous amount of misinformation, 
disinformation and demagoguery regarding structured settlement 
purchasers and the financial terms of the transactions we 
engage in. Attached as exhibit ``B'' is a three page document 
which separates fact from fiction. I have also attached a 
document entitled ``What's this Fight Really All About'' and 
one regarding the ``tax issue'' as exhibits ``C'' and ``D'' 
respectively. It is also important to note that the individuals 
with whom we do business are not catastrophically injured. They 
are normal working people who have a need or desire for a lump 
sum of money now rather than in the future. The following 
statistics bear this out:
     More than 85% of structured settlement recipients 
are not disabled and are gainfully employed.
     92% of claimants are ``satisfied'' or ``very 
satisfied'' with the re-financing of their settlement which 
they accomplished with the help of Settlement Purchasers.
     The average person who re-finances a structured 
settlement is 33 years old, employed with a household income of 
nearly $25,000.
     More than 50% of structured settlements have a 
present value of $30,000 or less. (Source: Best's Review--
November 1998)
    In conclusion, Settlement purchasers such as Peachtree 
provide a valuable financial alternative to thousands of people 
annually. We encourage and will support meaningful regulation 
that protects consumers. However, as presently drafted, HR 263 
will effectively ban our business. Additionally, it will deny 
Americans access to a valuable financial alternative. As 
presently drafted, HR 263 will sacrifice the interests of 
ordinary Americans on the alter of insurance company special 
interests.
      

                                


Structured Settlement Overview

    Structured settlement is a term of art used to describe the 
settlement of a tort claim by way of a series of future 
installment payments. These payments are made at fixed dates in 
the future and are often monthly payments or lump sums although 
virtually any type of payment arrangement can be structured. 
The use of structured settlements has grown in popularity over 
the last 15 years as insurers have aggressively marketed them 
as a cost effective settlement tool. The settling accident 
victim is often given a choice between a lump sum (for example 
$100,000) or a series of future payments (e.g. $1,000 per month 
for 240 months).
    The National Association of Settlement Purchasers is a 
trade group made up of companies and individual small 
businesspeople who are involved in the secondary market for 
structured settlements. NASP members provide liquidity for 
individuals who are receiving structured settlement payments 
over a long period of time. This liquidity is provided either 
by way of a loan, secured by a pledge of the individual's right 
to receive the structured settlement payments, or by way of an 
outright assignment of the right to receive the structured 
settlement payments. While most firms (and all NASP members) 
already provide financial disclosures and rights of recission 
in their contracts, settlement purchasers support broad 
consumer protection legislation to require full and complete 
disclosure from everyone.
    The National Structured Settlement Trade Association has 
circulated legislation in the form of a so called model act. 
This legislation was drafted by the NSSTA, who has vowed to put 
the settlement purchasers out of business. For your 
information, the NSSTA is made up of independent brokers and 
insurance companies who make billions of dollars each year in 
connection with structured settlements. Estimates of the 
premiums received each year by insurance companies in 
connection with the issuance of annuities used to fund 
structured settlements are between 3 and 5 billion dollars 
annually. The NSSTA brokers that ``consult'' with the parties 
during the settlement negotiations (usually with the defendant, 
defense counsel and/or property and casualty insurance carrier 
for the defendant) and attempt to persuade one or both of the 
parties to settle the case by way of a structured settlement. 
They earn commissions and fees from the insurance companies by 
brokering the purchase of an annuity to fund the payments due 
and payable under the structured settlement agreement.

                  I. A Typical Structured Settlement.

    While structured settlements can take several forms. Below 
is a brief description of what I would consider to be a typical 
structured settlement transaction. I've also attached a diagram 
as Exhibit A that may be helpful.
    1. An individual (the ``Plaintiff'') is involved in, for 
example, an automobile accident with another individual or 
company (the ``Defendant'').
    2. The Plaintiff may file a lawsuit against the Defendant 
or simply file a claim with his own automobile insurance 
company or against the casualty insurance carrier for the 
Defendant. (It is important to note that all structured 
settlements do not necessarily arise from a lawsuit. Often, 
claims against property and casualty insurance carriers that 
have not resulted in a lawsuit are resolved by way of a 
structured settlement. Nevertheless, for purposes of our 
example, let's assume that the Plaintiff has retained a lawyer 
and filed a lawsuit against the Defendant.)
    3. The Defendant's property and casualty carrier will 
retain an attorney to provide a defense for the Defendant.
    4. As is the case with almost all litigation, the parties 
agree to settle; in this case let's say they agree to settle by 
way of a structured settlement.
    5. Under a structured settlement agreement, the Defendant 
will contractually agree to pay the Plaintiff (i) an up front 
cash payment (which almost always goes to pay the Plaintiff's 
attorneys fees, court costs, medical expenses, etc.) and (ii) 
future periodic payments. The future periodic payments may be 
monthly payments, annual payments, every five years, or any 
combination of these and more. The available payment options 
are limited only by the creativity and negotiating skills of 
the parties. The parties execute a settlement agreement, 
whereby the Defendant and/or the Defendant's property and 
casualty insurance company agree to make the future periodic 
payments to the Plaintiff in return for a release by the 
Plaintiff of all claims and causes of action against the 
Defendant and the Defendant's insurer.
    6. Often, the Defendant and/or the Defendant's insurer will 
execute a Qualified Assignment, whereby the Defendant and/or 
the Defendant's insurer will assign to a third party (the 
``Assignment Company'') the obligation to make the payments due 
under the settlement agreement. The Assignment Company is 
typically, but not always, an affiliate or subsidiary of a 
large insurance company.
    7. Typically, the Qualified Assignment arrangement is 
contemplated and described in the Settlement Agreement and the 
Plaintiff contractually agrees to permit the Defendant and/or 
the Defendant's insurer to assign their obligation to make the 
future periodic payments due under the Settlement Agreement to 
the Assignment Company. Often, the Plaintiff actually signs the 
Qualified Assignment and the Defendant and/or the Defendant's 
insurer is released from any obligation to make the periodic 
payments called for by the Settlement Agreement.
    8. The Assignment Company will then purchase an annuity 
from a life insurance company (``Life Insurance Company'') to 
fund its obligations to make the payments due under the 
Settlement Agreement and/or Qualified Assignment. Often, the 
Assignment Company purchases the annuity from an affiliated 
life insurance company. For example, Safeco Assigned Benefits 
Service Company, an Assignment Company, will often purchase an 
annuity from Safeco Life Insurance Company to fund its 
obligations to make structured settlement payments.
    9. The Assignment Company is the ``owner'' of the annuity, 
Life Insurance Company is the ``issuer,'' and the Plaintiff is 
identified as the ``payee,'' ``annuitant'' and/or ``primary 
beneficiary.'' The Settlement Agreement often, but not always, 
will provide that the Assignment Company may, at its option, 
purchase an annuity from Life Insurance Company to fund the 
Assignment Company's obligation to make the periodic payments.
    10. Life Insurance Company will then make the annuity 
payments directly to the Plaintiff, as payee, annuitant and/or 
beneficiary under the annuity, at the direction of the 
Assignment Company, as owner of the annuity.
    11. NASP members come into the equation by providing the 
Plaintiff (i.e. the (annuitant/payee/beneficiary under the 
Annuity) liquidity, in the form of assignments or loans secured 
by the Plaintiff's right to receive all or a portion of the 
payments due under the Settlement Agreement and annuity. For 
example, a NASP member may accept an assignment of the 
Plaintiff's right to receive certain payments due in connection 
with the structured settlement arrangement or may loan the 
Plaintiff money, in return for a pledge of the Plaintiff's 
right to receive the payments due under the settlement 
agreement and/or annuity.
    This is not the exclusive method by which structured 
settlements arise, but certainly the most common. For example, 
there is no requirement that a structured settlement involve an 
Assignment Company or an annuity. As discussed in more detail 
below, the Assignment Companies, Life Insurance Companies and 
structured settlement brokers enjoy tremendous economic 
benefits from structuring these transactions in the above 
manner, which helps explain why this structure is so valuable. 
Nevertheless, defendants in litigation and their property and 
casualty insurance companies may simply agree with plaintiffs 
and claimants to settle a case which calls for a payout of the 
settlement amount over time. That would be considered a 
structured settlement, but would not involve a Qualified 
Assignment company and would not fall under Section 130 of the 
Internal Revenue Code (see below). The defendant or property 
and casualty carrier may bypass the Assignment Company and 
simply purchase an annuity directly to fund its obligation 
under the settlement agreement or simply make the future 
periodic payments directly to the plaintiff/claimant out of its 
own funds. Structured settlements that predated 1986 (and the 
enactment of certain tax provisions) typically did not involve 
Qualified Assignments.

                           II. The Tax Code.

    The structured settlement business generated by the members 
of the NSSTA exists, almost entirely, because of the presence 
of two provisions of the Internal Revenue Code. Sections 104 
and 130. Section 104 provides that monies received by 
individuals on account of personal injury, sickness or death is 
excludable from the gross income of the taxpayer receiving said 
monies. This exclusion applies whether the monies are received 
in a lump sum or over a period of time. Hence, monies received 
under a structured settlement are not taxable to the Plaintiff. 
This section of the Code dates back to 1939 and is well-
established. The exclusion from gross income applies to all 
monies received as a result of personal injury, sickness or 
death as long as there was some physical injury.
    The other relevant provision of the Internal Revenue Code 
is Section 130, which conveys certain tax benefits on the 
insurance companies that enter into structured settlements. 
This provision was not enacted until 1986 and resulted from 
intense lobbying by insurance companies and structured 
settlement companies. It provides that an entity that accepts, 
by way of a ``qualified assignment,'' the obligation to make 
structured settlement payments to an injured claimant shall not 
be taxed on the amount paid to said party by the defendant to 
assume such obligation, provided that the Assignment Company 
(i) assumes the liability from a person who was a party to the 
suit or settlement agreement; (ii) the periodic payments are 
fixed and determinable as to amount and time of payment; (iii) 
the periodic payments cannot be accelerated, deferred, 
increased, or decreased by the recipient of the payments; (iv) 
the assignee's obligation is no greater than the obligation of 
the person who assigned the liability; (v) the periodic 
payments are excludable from the gross income of the recipient 
under Section 104; and (vi) the amount received by the assignee 
for assuming the periodic payment obligation is used to 
purchase a ``qualified funding asset.'' A quailed funding asset 
is defined as an annuity contract issued by a life insurance 
company or an obligation of the United States (such as treasury 
bills). It allows NSSTA broker members to ``sell'' structured 
settlements more effectively and amounts to a huge tax benefit 
for the insurance companies, which own the Qualified Assignment 
companies.
    As a result of Section 130, much of the 5-8 billion dollars 
received by Assignment Companies each year to assume the 
obligation of defendants and property and casualty carriers to 
make the periodic payments due under structured settlements is 
not taxable to the entities that receive these payments. While 
it is true that the Assignment Companies use most or all of 
this money to purchase ``qualified funding assets,'' it is 
important to note that almost all of these qualified funding 
assets are purchased from affiliated life insurance companies 
(parent or sister companies). Thus, the life insurance 
companies get to sell their annuity products at very 
competitive rates. For those life insurance companies that own 
property and casualty companies and also issue annuities to 
fund structured settlements, the they have a potentially very 
large and lucrative captive customer.

             III. Who Benefits From Structured Settlements?

    The transaction provides a great many benefits to the 
players that are not always recognized or appreciated by those 
unfamiliar with the transaction.
    a. It is widely reported that insurance companies (i.e. the 
property and casualty carriers) are able to settle personal 
injury claims for 15-20% less than it would typically cost them 
to settle such claims by way of a cash payment. Benefit to the 
insurance industry.
    b. The plaintiff's lawyer almost always receives their fee 
up front, out of the cash portion of the settlement; otherwise 
you can be sure that plaintiff's lawyers would be reluctant to 
put their clients into structured settlements. Benefit to 
plaintiff's lawyers.
    c. Structured settlement brokers who structure the 
settlement and place the annuity with the insurance company 
earn a fee in connection with the transaction. Benefit to 
structured settlement brokers [i.e. NSSTA members]. (Note: the 
vast majority of these structured settlement brokers represent 
the defendant/property and casualty insurance carrier. Thus, 
their incentive is to settle the case as cheaply as possible 
for the defendant/insurance carrier, to insure additional 
business with the casualty carrier.)
    d. The Assignment Company receives cash compensation from 
the defendant/property and casualty carrier for agreeing to 
assume the obligations to make the future structured settlement 
payments and said compensation is not taxable. Benefits the 
Assignment Company.
    e. Life Insurance Company gets to sell their annuity 
policies at very competitive rates. In turn, they put that 
money to work on investments earning large returns for 
themselves which far exceed the rate at which the annuities 
were placed. Benefits Life Insurance Company. (Currently, rates 
for annuities to fund structured settlement payments are around 
5.5 to 6%. It is not difficult to see the large profits the 
Life Insurance Companies enjoy if they are taking in 4 Billion 
Dollars per year in annuity premiums that yield [to the 
Plaintiff) 6% per year and then invest the money and earn a 
return of 10 % or higher.)

               IV. Problems With Structured Settlements.

    The problems with structured settlement transaction are as 
follows:
    a. They are inflexible. In order to prevent the claimant 
from being in ``constructive receipt'' of the annuity payments, 
Section 130 of the Internal Revenue Code provides that payments 
cannot be increased, decreased, accelerated or deferred. Thus, 
once the Plaintiff agrees to the structured settlement, they 
are stuck with it. If the Plaintiff has a change in his life 
circumstances (i.e. death, divorce, serious illness, etc.), 
which was not (and could not have been) anticipated at the time 
of the structured settlement, the Plaintiff is unable to access 
or liquidate his structured settlement payments to address 
those issues. If the Plaintiff has a financial emergency (i.e. 
unexpected medical procedure not covered by insurance, 
bankruptcy, foreclosure, etc.) they would be unable to access 
their funds to address the emergency. If the Plaintiff wanted 
to access their structured settlement payments to continue or 
finish their education; buy, improve, or remodel a home; or 
start a business; pay off debts; avoid foreclosure or 
bankruptcy, etc. they are precluded from doing so.
    b. Structured settlements require the parties to anticipate 
far into the future. It is impossible for a Plaintiff and his 
counsel to look into the future and anticipate, with any degree 
of certainty, what the person's financial situation and needs 
will be.
    c. No states have regulations requiring disclosure of the 
terms of the structured settlements, such as the present value 
of the future payments due under the structured settlement, the 
discount rate used to calculate the present value, the total 
amount of payments to be paid (so a comparison can be made of 
the present value vs. the total future payments), etc. 
Plaintiffs do not always fully understand the ramifications of 
a structured settlement and the Defendants and insurance 
brokers an insurance companies who forge structured settlements 
on these Plaintiff's and their counsel are not in a big hurry 
to explain the transaction in its entirety, particularly with 
respect to the present value of the future payments.
    d. Often, structured settlements are negotiated with 
individuals who are not represented by counsel. That is a 
particularly true when a person files a claim with their own 
insurance company. In fact, there are several pending class 
actions against insurance companies for discouraging their 
insured's from retaining counsel to represent them in 
connection with personal injury claims. In fact, in one state 
one insurance company was cited for practicing law without a 
license by providing legal advice to claimants regarding their 
claims. In cases where the Plaintiff is not represented by 
counsel, the problems caused by the absence of any meaningful 
regulations requiring disclosure, representation by counsel, 
etc. when structured settlements are originally proposed are 
exacerbated.

V. Business Practices of Insurance Companies and Structured Settlement 
                                Brokers.

    For your information, the structured settlement brokers and 
insurance companies who make hundreds of millions of dollars 
per year on structured settlements and who are proposing the 
legislation to eradicate our business have some skeletons in 
their own closet.
    a. As indicated above, structured settlements have numerous 
benefits for the property and casualty insurance carrier and 
defendants who settle litigation with structured settlements 
(cheaper to settle and a reduction in attorneys fees); the 
brokers who structure the settlement (they earn a fee for 
selling the annuity to fund the structured settlement 
payments); the plaintiff's lawyer (who settles the case without 
having to go to trial and who receives his/her fee up front, in 
cash); and the life insurance company/assignment company (who 
accepts the obligation to make the payments and gets to sell an 
annuity [they receive cash tax free, sell an annuity at 
relatively low fixed rate [i.e. currently about 6%], and are 
able to earn a return on the money they receive for issuing the 
annuity]).
    b. There are few, if any consumer protection regulations 
imposed on the front end of a structured settlement 
transaction, such as required disclosures, court approval, 
mandatory review by an attorney or financial advisor, etc.
    c. Insurance companies and structured settlement brokers 
representing defendants in structured settlement negotiations 
use questionable practices in trying to persuade defendants to 
accept structured settlements. For instance:
    (i) Travelers Insurance is currently a defendant in a class 
action case in Connecticut involving claims of fraud, deceptive 
trade practices, civil conspiracy, breach of fiduciary duty, 
etc. The plaintiff's class are recipients of structured 
settlements. The Complaint in that case quotes liberally from 
Travelers' structured settlement manual as follows:
    --``Essentially, when a claimant has a reduced life 
expectancy and a substandard age rating has been obtained, the 
more life contingent benefits provided in the structure offer, 
the higher the savings on the claim.''
    --``The primary objective in expanding use of structured 
settlements is to maximize their value as a tool to reduce both 
claim loss and expense costs.''
    These quotes from Travelers own manual illustrates the 
motives of the insurance companies in promoting structured 
settlements. Moreover, the allegations in the Connecticut class 
action lawsuit were that Travelers received illegal kickbacks 
and rebates from structured settlement brokers in exchange for 
directing business to said brokers. Thus, the structured 
settlement brokers would rebate part of the commission they 
earned for arranging a structured settlement through or for 
Travelers in return for Travelers' agreement to direct business 
to the brokers who agreed to make such rebates. (It is my 
understanding that rebating is prohibited by statute in 
virtually every state in the country.)
    (ii) Insurance companies, defendants, and structured 
settlement brokers endeavor to ``back-load'' structured 
settlement contracts and, as evidenced above, increase the life 
contingent component in the structured settlement agreements. 
For example, it is not uncommon for structured settlement 
agreements to call for periodic payments every five (5) years 
or so to, with the payments increasing substantially toward the 
end of the agreement. We've seen deals that call for a payment 
of $ 10,000 in Year 5, $ 15,000 in year 10, $ 25,000 in year 
15, $ 50,000 in year 20, $ 100,000 in year 25, and $ 100,000 in 
year 30. The deal may be ``sold'' by the defendant, insurance 
company and/or structured settlement broker as a $ 300,000 
settlement (referring to the total amount of payments), yet the 
true value of these future payments, assuming an 8% discount 
rate, is around $ 57,000.
    --Another example involves an actual structured settlement 
involving one of our clients in Oregon from 1991. Our 
customer's parent settled this case when our customer was 16 
years old. The settlement documents specifically refer to a 
settlement of $ 581,173.82, broken down as follows:
     Cash payment of $ 110,443, of which $ 50,136 went 
to the plaintiff's attorney, $ 41,443 went to reimburse his 
health insurance company for money paid to medical providers 
related to the accident, and $ 18,863 was paid to the 
plaintiff's father to reimburse him for his out-of-pocket 
medical expenses (probably the deductible) and to replace the 
plaintiff's car.
     The remaining $470,730.82 was structured over a 
period of 19 years. The plaintiff was to receive $15,000 in 
January 1996, when he was 22 years old; $30,000 in January 
2003, when he was 29 years old; and $425,730.82 in January 
2010, when he was 36 years old. This deal was marketed and sold 
to the plaintiff and his father as a $581,173.82 settlement. In 
reality, the settlement resulted in reimbursement of the 
plaintiff's health insurance provider, a replacement car for 
the plaintiff, and future payments over a period of 19 years 
that had a present value, assuming an 8% discount rate, of $ 
120,770.
    --Other examples involve monthly payments of $ 125 per 
month, payments every five years of $ 5,000 per year, four 
annual payments of $ 12,000 each, etc. Claims adjusters and 
attorneys representing property and casualty carriers will 
often tell the claimant/plaintiff (particularly when they are 
not represented by counsel) that the only way the case can be 
settled is by way of a structured settlement. We are involved 
in a deal right now, where the plaintiff's attorney has been 
told point blank by Liberty Mutual that they will not settle 
his client's case except by way of a structured settlement. 
They have offered three (3) payments that total approximately $ 
16,300, to be paid in the years 2004, 2006, and 2009. The 
present value of those payments, assuming an 8% discount rate 
is $ 9,203.
    The point of these examples is not that parties should not 
have the right to settle a claim or case on any terms that they 
deem appropriate. The point is that the insurance companies and 
structured settlement brokers often argue, in their ongoing 
effort to put us out of business, that structured settlements 
were created to serve important public policies such as to 
settle cases involving catastrophically injured individuals who 
have long term and continuing medical needs and physical 
disabilities with little or no ability to provide for 
themselves or their families. They contend or imply that 
structured settlements are used exclusively or mostly where the 
claimant/plaintiff is disabled and unable to work such that he 
or she is dependent on the monies he receives under the 
structured settlement agreement for future medical expenses and 
to support himself and his family. That simply is not true.
    Certainly, there are structured settlements that involve 
catastrophic injuries. However, for the vast majority of 
structured settlements the overriding reasons underlying the 
decision to settle the case by way of a structured settlement 
are that they are a tool that promotes the settlement of claims 
and disputes because (I) the defendant and/or casualty carrier 
can settle the claim for less money than if it was settled by 
way of a structured settlement; (ii) the structured settlement 
broker earns a fee, (iii) the life insurance company is able to 
sell an annuity; and (iv) the plaintiff and the plaintiff's 
counsel are able to avoid a lengthy and expensive trial and 
resolve their dispute. There is nothing wrong with these 
reasons underlying structured settlements, but it is 
disingenuous for our opponents to suggest that these are not 
important reasons underlying the use of structured settlements. 
Furthermore, any suggestion by the opposition that all (or even 
a majority) of structured settlements involve individuals who 
have sustained catastrophic injuries which require long-term 
care is simply inaccurate, deceptive, and misleading. Remember, 
these insurance companies that have suddenly developed this 
pro-consumer interest in preserving and protecting the long 
term well-being of these injured claimants are, in many cases, 
the same people who tried like heck to defeat the claimants in 
court. Since when were insurance companies the bastion of 
consumer protection?
    d. Another argument that the insurance companies and 
structured settlement brokers advance in support of their 
efforts to shut down our business are as follows:
     structured settlement recipients are 
unsophisticated in financial matters and by structuring the 
settlement so as to spread the payments over time, the 
recipients will not receive a large lump sum which they are 
likely to dissipate prematurely, leaving them and their family 
destitute, unable to work, and a ward of the state.
    Response: This argument presumes that all structured 
settlement recipients are unsophisticated in financial matters 
and will prematurely dissipate a cash settlement. Not true. 
Occasionally, the settlement agreement provides that the 
plaintiff's attorney shall receive their fee over time as part 
of the structured settlement. (That does not happen too often, 
because attorneys appreciate the time value of money.) There 
simply is no correlation between being unsophisticated in 
financial matters and being the recipient of a structured 
settlement, unless one were to assume that someone who was 
unsophisticated in financial matters would be more likely to 
accept a structured settlement in the first place instead of a 
cash settlement. If that were true, then it would seem to me 
that these transactions cry out for some basic consumer 
protection and disclosure regulations on the front end. If 
structured settlement recipients are so unsophisticated in 
financial matters and so seriously injured, as our opposition 
claims, what is so wrong with requiring the insurance companies 
and structured settlement brokers who sell these products, 
which call for payments to people 20, 30, 40, even 50 years 
down the road, to provide some basic information about these 
structured settlements. (Insurance companies can and do go 
broke.) One could argue that an injured claimant deserves and 
needs more information about structured settlements on the 
front end, when they are considering releasing their claim in 
return for the unsecured promise of future payments that may 
come due far out in the future, than they need on the back end, 
when deciding to assign five or six years of payments in order 
to address an immediate need or when they desire to pledge 
their right to receive said payments as collateral for a small 
personal loan. Yet, the insurance industry opposes all 
suggestions for basic disclosures to be provided claimants when 
faced with the decision of accepting a structured settlement.
    The vast majority of structured settlements involve 
accidents where the claimant/plaintiff did not sustain 
catastrophic or permanent injuries and/or where the plaintiff 
has recovered from their injuries. (NASP members typically do 
not enter into transactions with individuals who are both 
unemployed and unemployable.) In addition, structured 
settlements are often used to settle wrongful death cases 
(where the recipient of the payments is not the person who was 
physically injured). I've even seen cases where a structured 
settlement was used to resolve a same sex sexual harassment 
case.
    Furthermore, simply because the person sustained serious or 
permanent injuries does not necessarily mean: (I) that they 
cannot lead a productive life; (ii) that they cannot provide 
for themselves and/or their family; (iii) that they are 
unsophisticated in financial matters; (iv) that they received a 
large structured settlement that was designed to provide for 
them for the rest of their life; or (v) that they would not 
benefit from having the opportunity to assign or pledge all or 
a portion of their right to receive structured settlement 
payments to address a personal need, situation or emergency. 
Some examples:
     We closed a transaction with a young man in 
Arizona who had sustained a spinal injury that left him a 
paraplegic. Because of the nature of the accident (i.e. no 
liability by the defendant and/or the defendant who was liable 
had no money and/or the plaintiff was partially at fault) this 
person's structured settlement was rather small (the original 
settlement called for $ 15,000 per year for 10 years). However, 
this young man was self-sufficient and able to work. He was 
completing his education and preparing to take the CPA exam. He 
wanted some money to purchase a new handicapped van, complete 
his education, and prepare for a new job. He had four (4) 
annual payments remaining and assigned them to us for a lump 
sum payment of around $ 41,000.
     Another gentlemen who was our customer had 
sustained serious injuries and was physically disabled. He 
desired to put a down payment on a house and do some work on it 
to make it handicapped accessible. He also wanted to purchase a 
handicapped van. Although this gentleman had not fully 
recovered from his injuries, such that he could hold down a 
full time job, he was working toward that goal. His immediate 
objective was to gain some independence by purchasing his own 
home and transportation. (Previously, he had been living with 
his parents.) He was receiving over $ 7,500 per month from his 
structured settlement, which was increasing 3% per year. He 
wanted to assign $ 1500 per month for 8 years so that he could 
raise funds to start these projects. He was represented by 
counsel throughout the process and was very much in favor of 
proceeding with the transaction. Without the option to complete 
a transaction with Settlement Capital, this fellow would have 
had no other alternative.
     There are numerous examples. We completed a 
transaction with a gentlemen who wanted to purchase a mobile 
home park. (He had recovered from his injuries and was working, 
but wanted to go into business for himself.) We completed a 
transaction with a lady who was working for AT&T and making $ 
52,000 per year, but wanted to raise some money to send her 
daughter to Tulsa University. We loaned her $ 16,000, secured 
by her structured settlement payments. Another client was about 
to get married and she and her fiancee had saved approximately 
$ 15,000 for her wedding. A few weeks prior to the wedding, 
there was an unexpected death in her family. She had to use the 
money for her wedding to pay for the funeral. Her parents had 
settled a case for her when she was a child and she was 
scheduled to receive a $ 30,000 payment in approximately two 
(2) years. She was able to assign that payment to us and use 
the proceeds for her wedding. She was neither disabled nor 
unsophisticated. Everyone in our industry has been able to 
complete transactions with individuals to help them purchase a 
house, improve their home, start a business, continue their 
education, avoid foreclosure or bankruptcy, consolidate debts, 
pay off tax liens and child-support obligations, etc. The list 
is endless.
    Query: If the insurance companies and structured settlement 
brokers are so concerned about the welfare of the structured 
settlement recipient, why do they back-load their structured 
settlement agreements and push life contingency payments. If 
they are concerned about the claimant dissipating large 
settlements, why do they back-load their deals with huge lump 
sum payments far in the future (i.e. $ 500,000 due in 2012, $ 
1,000,000 due in 2020, etc.). Why do the news letters of the 
structured settlement brokers and NSSTA members emphasize 
selling the ``gross value'' and ``aggregate total value of the 
payments'' in settlement negotiations? In an article in a 
recent NSSTA newsletter, addressing overcoming objections to 
structures, the emphasis was on the use of ``gross dollars'' to 
compare a structure to a cash offer. Why won't they support 
legislation that requires that a person consult with counsel 
prior to entering into a structured settlement? The answer is 
that they want to destroy our business and continue to operate 
their business in a manner that maximizes their ability to 
place structured settlements and earn billions of dollars, 
while denying the consumer the right to make an informed choice 
or have control of their financial future.
     In a public hearing before the Texas State Senate 
Judiciary Committee in Texas in April of last year, a 
structured settlement broker and member of the NSSTA testified 
that there was not enough disclosure and information provided 
to the plaintiff in structured settlement negotiations. He 
testified that too often the property and casualty insurance 
carrier who has insured the defendant insists on placing the 
annuity to fund the structured settlement with an affiliated 
life company, even though another life company is offering a 
better rate and even though doing so might not be as beneficial 
to the claimant. He cited an example involving one case in 
which he was involved where the cost of the ``in-house'' 
annuity was $ 350,000 and a competing offer was around $ 
260,000. (The point was if the property and casualty carrier 
was willing to purchase an annuity from its own affiliate for $ 
350,000, they should have been willing to pay the same to 
another life insurance company, meaning the claimant/plaintiff 
could have received more structured settlement payments for the 
same cost from another independent life company.) He commented 
that some structured settlement brokers are only licensed by 
certain life companies, meaning any structured settlements 
involving said brokers would necessarily be placed with the 
life companies with which the broker was licensed, regardless 
of the benefits to the claimant/plaintiff. Other property and 
casualty companies have an approved list of companies with whom 
they will do business, further limiting the choices of the 
consumer. He also commented on problems with rate and age 
adjustments in connection with structured settlements. Finally, 
and perhaps most importantly, he complained about the practice 
of ``rebating'' which he stated was not uncommon in the 
structured settlement industry. He said that this practice 
never benefits the consumer. He concluded by saying that any 
legislation that requires disclosure and more information to be 
provided to the injured claimant and his attorney would be a 
positive development. Remember all of these comments were made 
by a structured settlement broker and member of the NSSTA in a 
public hearing and under oath. His statements closely followed 
the allegations asserted against Travelers in the Connecticut 
class action cases.
    In short, the insurance industry, NSSTA, and structured 
settlement brokers preach consumer protection and public policy 
in their efforts to discredit and destroy our industry, while 
ignoring their own problems and resisting any efforts to 
address and/or regulate their industry. Contrary to their 
stated positions, their true interest is to expand their market 
and continue to earn billions of dollars without being subject 
to disclosure requirements and other consumer protection 
provisions and regulation and without the presence of the 
secondary market to educate the public or otherwise challenge 
them. (Remember, none of their proposed legislation imposes any 
regulation on them and, most notably, does not apply to a 
commutation of the future benefits due under the structured 
settlement to the Plaintiff by the Assignment Company and/or 
Life Insurance Company. In other words, we would be subject to 
extremely onerous disclosure and court order provisions to 
complete our transactions with our customers, while they would 
not be subject to such requirements, meaning they would have a 
substantial competitive advantage in completing such 
transactions. Sounds like a legislative monopoly to me.)

  VI. Why the NSSTA, Structured Settlement Brokers, and the Insurance 
                      Industry Wish To Destroy Us.

    There is no simple answer to this question. They will tell 
you that secondary market transactions threaten the tax 
benefits which structured settlement recipients and the parties 
obligated to make structured settlement payments enjoy under 
the Internal Revenue Code. That is, I believe, a red herring. 
There is no reported case, rule, regulation, IRS ruling or 
other authority that supports their contention that these 
transactions threaten their tax status. In fact, the only case 
to address the matter was a Third Circuit case, which rejected 
this proposition.
    They will, of course, argue consumer protection and claim 
that the secondary market is ripping off consumers and charging 
exorbitant and unconscionable discount rates. That is also 
untrue. While discount rates are high, relative to mortgage 
rates and the prime rate, they are in line with credit card 
rates and other relatively risky lending. Discount rates range 
from 12% to as high as 25%, but the vast majority of deals are 
completed in the range of 16% to 22%. To be absolutely fair and 
frank, there certainly are some transactions where the discount 
rate exceeds 25%, rising to 30 or even 35%, but those involve 
very short and small transactions. (For example, someone may be 
scheduled to receive 2 annual $ 5,000 payments over the next 
two years and seek to raise some cash now. Our industry members 
do have a cost of capital [maybe 7,8, 9, or 10%], therefore to 
make the transaction economical, the annuitant might receive $ 
6,700 at a discount rate of 31.41%. While that rate might seem 
a bit high, compared to the prime rate of interest, the fact is 
that our customers do not have access to traditional sources of 
capital. Moreover, the actual dollar difference between a rate 
of say 21.5%, which you might be able to get on a credit card 
and the 31.41% rate, would be $ 800. When you are dealing with 
transactions this small and this short-term, the actual dollars 
is what is important. Due to the risk inherent in our 
transactions and the cost of bringing in a transaction, we 
simply cannot do deals this size at these types of rates.)
    Our opposition often argues that our customers receive 10 
or 20 cents on the dollar. In this particular case, while the 
rate is relatively high, the annuitant receives 68 cents on the 
dollar. In a longer term transaction, say a $ 25,000 payment 
due in five years, the transaction could be completed at a rate 
of 15.5% and the annuitant would receive less than 50 cents on 
the dollar. The point is that you must be careful when 
comparing transactions, interest rates, and dollar amounts. You 
must not compare apples to oranges.
    It is important to note, however, that when these 
transactions are completed by way of a loan, as some NASP 
members do, they are bound by usury limits. In Texas, the usury 
limit is an 18% effective rate, which means that our 
transactions are completed at a contract rate of interest of 
around 16.5%. Furthermore, lenders are required to provide 
disclosures of effective interest rates, etc. as required under 
applicable state law and the Federal Truth-in-Lending laws, may 
not charge fees or points, and must allow pre-payment of the 
loan without penalty.
    All NASP members would support regulation of our industry 
which would require disclosures, that the seller/borrower be 
represented by counsel, and other consumer protection 
provisions. I believe NASP would also support a reasonable 
court/administrative agency review process, as long as the 
procedure was not too expensive and time consuming for the 
borrower/seller and as long as the standards of review were 
reasonable. In short, we support true ``consumer protection'' 
regulation, but not laws that give the insurance industry 
control over our customers and our business and which, in 
effect, regulate us out of business.
    I believe the true motivation behind the insurance 
industries' opposition to our business is that by virtue of the 
fact that we exist, we necessarily educate the public and 
plaintiff's attorneys as to the true value of structured 
settlements, which is something our opponents cannot accept. We 
also have raised the profile of their industry and highlighted 
the profits they are earning and the tax boondoggle that they 
enjoy in Congress. A representative of the NSSTA once said to 
me that they have been told by their leadership that they must 
destroy us or we will destroy them. While I disagree with that 
statement, the fact that that is how they feel should give you 
some insight as to why they are fighting us.
    We happen to believe our arguments are compelling and our 
position is reasonable and makes sense. However, we recognize 
that our opponents have done a good job of painting us as 
immoral companies who prey on widows, orphans, and the weak and 
uninformed. That simply is not true. Our objective is to 
survive and thrive in a reasonably regulated industry.
      

                                


What are Structured Settlements Really About ???

    On August 12, 1998, a hearing was held in the Circuit Court 
for Montgomery County, Maryland in the matter of Stone Street 
Capital v. Deborah L. Jackson, Civil No. 176131. In this 
hearing, Counsel for State Farm Insurance company discussed the 
reasons for pursuing structured settlements in personal injury 
case. Following is an excerpt from the transcript on this 
hearing:
    THE COURT: Why is it, by the way, that traditionally these 
[structured settlement annuity contracts] are non-assignable?
    COUNSEL FOR STATE FARM: There are a lot of reasons. One is 
to protect the victim usually of personal injury. The whole 
reason for setting up these--
    THE COURT: Protect them from what?
    COUNSEL FOR STATE FARM: The whole reason for setting up 
these structured payments is so that they do not get a lump 
sum; they do not get $300,000 up front. These people--
    THE COURT: No it is not. The reason for setting up these 
structured payments are so that the insurance companies can 
settle out cheaper.
    COUNSEL FOR STATE FARM: That is one reason
    THE COURT: All right, come on--
    COUNSEL FOR STATE FARM: I am not going to deny that.
    THE COURT: They are not looking out for a plaintiff in a 
personal injury case. Please.
    COUNSEL FOR STATE FARM: That is one reason that Your Honor 
has said. It is more cost effective for the insurance company--
    THE COURT: That is the reason. That is the reason.
    COUNSEL FOR STATE FARM: Okay.
      

                                


How Insurers Abuse Structured Settlements

    The attached are examples of structured settlements. These 
example show how, when they are being set up, the insurance 
industry abuses them and how the true economics of a structured 
settlement are buried, hidden and obscured to make them seem 
more appealing to the plaintiff lawyer and his client.\1\
---------------------------------------------------------------------------
    \1\ Over 20% of all structured settlements involve clients with no 
attorney representation!
---------------------------------------------------------------------------

                     Exhibit: Explanation/Comments:

    1. Examples of actual insurance company settlement 
documents showing the amount they paid for the annuity and the 
future value of the settlement. This is why structured 
settlements ``seem'' like a great deal for the claimant when 
they are really a great deal for the insurer.
    2. Attorney accidentally took his fee on the future value 
of the settlement.
    3. Christy's proposal states that the value of the 
settlement is $222,000. In fact discounted at 10% it is really 
worth only $140,000 an overstatement of more than 58%!
    4. The proposal for Rose states that the value of $630.89 
per month for 240 months is $151,413. Discounted to present 
value at 10% per annum it is only worth $63,000--an 
overstatement of the value of more than 140% !!
    5. The Mr. & Mrs. Gibbons settlement proposal says that 
they are guaranteed $830,000. However, the real economic value 
of the guaranteed portion of the settlement is half that 
amount!!!
    6. This settlement agreement wrongly sets forth the 
settlement values suggesting that the client is settling for 
over $413,000 when in fact the settlement is a mere $129,000.
    7. The settlement foisted on this 19 year old accident 
victim tells her the settlement is worth $1,594,918 when in 
fact, it is only worth $341,166 in present value--this 
settlement proposal overstates the true value of the settlement 
by an astounding 367.4 %!!!
    8. The settlement proposal for Kimberly sets out the actual 
cost of the annuities being purchased. With this information we 
can see that the yield she is receiving on the annuities 
purchased is a miserly 3.452% for the monthly annuity and 
4.253% for the one paying the lump sum whereas, in 1993, United 
States Treasury Bonds were yielding over 7%.
    9. Here again, due to lack of information, the attorney 
over-charged his client by taking a fee on the entire future 
value of the settlement.
    10. This comparison is so utterly misleading and incorrect 
as to need almost no commentary. First, yields on U.S. Treasury 
securities at the time (7/'93) were over 7%. Thus, the annual 
payment would have been closer to $46,800. Second, the tax code 
specifically allows one to fund a structured settlement with 
U.S. Govt. securities--thus there would be no taxes due! Third, 
A U.S. Govt. bond is risk free whereas, a commercial annuity 
has default risk (see First Executive Life, Mutual Benefit 
Life, Confederation Life, etc.).
    11. As a result of the death of her father, a structured 
settlement was used to provide for the care of Bobbyjo Plank 
(12 years old at the time). It provides her monthly payments of 
$2,250. However, they don't start until 43 years latter !!! The 
true value of this settlement discounted at a mere 5% is less 
than $64,000. How, pray tell, was this structured settlement 
designed to care for her???

More examples available upon request.
      

                                


PEOPLE WITH STRUCTURED SETTLEMENTS NEED PROTECTION, ALL RIGHT FROM THE 
INSURANCE COMPANIES!

    You may have heard talk about how people who have been 
awarded structured settlements as compensation for some injury 
need protection from settlement purchasers. They say these 
helpless people--who have been crippled or maimed and who rely 
on their settlement payments for sustenance--are being preyed 
upon by unscrupulous businessmen who want to dupe them into 
selling these lifelines for only a tiny fraction of what 
they're worth. Through H.R.4314, which was introduced at the 
end of July, they are demanding that a 50 percent excise tax be 
imposed on such transactions to drive settlement purchasing 
companies out of business and prevent recipients from 
``foolishly'' dissipating their awards.
    Nonsense. The facts tell a much different story. Not only 
is the vast majority of people who have sold their structured 
payments for a lump sum not disabled, but as we'll see, they're 
happy with the choices they have made. Speaking of choices, 
other facts suggest that the insurance companies who are behind 
these structured settlements in the first place have not always 
been up-front with recipients, and have kept some pretty 
important information to themselves. Maybe that's why they're 
working so hard to keep exclusive control over this industry.
    Let's look at the facts:

     Nearly a third (32 percent) of recipients were not 
allowed to choose for themselves whether or not they wanted a 
structured settlement instead of a lump some. Some of these 
were minors at the time their cases were settled, and in some 
cases the insurance carrier made a ``take it or leave it'' 
offer.
     Almost half the time (48 percent), the actual 
mathematical value (called present value) of the settlement was 
not explained to the claimant.
     Almost as often (43 percent of the cases), 
claimants were not advised that their future scheduled payments 
were absolutely inflexible.
     Astoundingly, 12 percent of structured settlement 
recipients were not represented by counsel when they agreed to 
the settlement.
    So it appears that the insurance companies have a lot of 
explaining to do. But what about their claims that they're now 
just trying to help protect defenseless recipients.
    Again, let's look at the facts:
     More than 85 percent of structured settlement 
recipients are gainfully employed and suffer no long term 
disability. (So much for preying on the defenseless!)
     34 percent of those who exchange their settlements 
for lump sums use the proceeds to buy or renovate a home, 31 
percent pay off debts or pay for educational/vocational 
education, 9 percent use the proceeds for a medical procedure 
or existing medical bills, 16 percent use the funds to open or 
expand a business. (So much for frivolously dissipating their 
awards!)
     92 percent are ``satisfied'' or ``very satisfied'' 
with the refinancing they were able to accomplish with the help 
of the settlement purchasing industry. (So much for supposedly 
shady tactics!)
     The average discount rate charged by settlement 
purchasers is 18-22 percent--about the rate credit cards 
charge. (So much for outrageous interest rates!)
    Bottom Line, the facts simply aren't what the insurance 
companies would have you believe. If you really want to help 
injured people who have been awarded structured settlements, 
take your time and demand a carefully crafted consumer 
protection bill that mandates full and understandable 
disclosure of financial details at every stage in the process--
beginning when settlements are first agreed to, and continuing 
through any future transfer--and also recognizes the right of 
recipients to change their minds as their needs and 
circumstances change and to choose to sell their annuity 
payments for a lump sum if that's what they want.
      

                                


WHY WON'T THE BIG INSURANCE COMPANIES TELL THE TRUTH ABOUT STRUCTURED 
SETTLEMENTS?

    There's been talk recently about how Congress ought to 
impose an extreme new 50 percent excise tax on settlement 
purchasing companies in order to protect people who have been 
awarded structured settlements. The big insurance companies who 
support this scheme, known as H.R. 263, have created a string 
of myths in their rush to ram this unfair tax through. The 
problem is, their myths don't hold up in the light of day. 
Let's look at those myths and the facts they leave out:
    Myth: Structured settlements are essential for the long-
term financial health of seriously injured people.
    Truth: More than 85 percent of people receiving structured 
settlements have full-time jobs or are capable of working. They 
don't suffer from long-term disabilities.
    The average size of a structured settlement is only 
$75,000--not nearly enough to pay for the long-term care of 
someone who's been critically injured.
    Myth: People who sell some or all of their structured 
settlements just squander the money, like the woman who 
allegedly wanted to cash in her settlement to help her new 
boyfriend buy a new motorcycle.
    Truth: Far from squandering the money, of the people who 
exchange their monthly payments for lump sums:
     34 percent use the money to buy or renovate a 
home.
     31 percent pay off existing debts and child 
support obligations. In fact, settlement purchasers require 
that tax liens, child support and alimony are paid as part of 
their contracts.
     14 percent pay medical expenses.
     11 percent open or expand a business.
    Myth: Structured settlements were designed to prevent 
people from quickly dissipating their awards. Truth: The real 
reason the big insurance companies push structured settlements 
is their incredible profitability. Consider this, from The 
Travelers Structured Settlements Manual:
        The primary objective in expanding the use of structured 
        settlements is to maximize their value as a tool to reduce both 
        claim loss and expense costs.''

        ``Essentially, when a claimant has a reduced life expectancy 
        and a substandard rating has been obtained, the more life 
        contingent benefits provided in the structured offer, the 
        higher the savings on the claim.''

    In other words, the sooner a person with a structured 
settlement dies, the less the insurance company has to pay. 
That's why they're pushing structured settlements--not some 
altruistic desire to protect people from themselves. Why won't 
the big insurance companies tell the truth? They can't afford 
to. Don't let them use Congress to put an entire industry out 
of business.

    [Additional attachments are being retained in the Committee 
files.]
      

                                

    Chairman Houghton. Thanks very much, Mr. Chapoton.
    Mr. Little.

   STATEMENT OF THOMAS W. LITTLE, PRESIDENT, LITTLE, MEYERS, 
GARRETSON & ASSOCIATES, CINCINNATI, OHIO; ON BEHALF OF NATIONAL 
            STRUCTURED SETTLEMENTS TRADE ASSOCIATION

    Mr. Little. Mr. Chairman, Members of the Subcommittee, good 
afternoon. My name is Thomas Little. I am a structured 
settlement broker from Cincinnati, Ohio. I am testifying today 
as past president of the National Structured Settlement Trade 
Association, NSSTA. NSSTA is an association composed of more 
than 500 members which negotiate and fund structured 
settlements involving persons with serious, long-term physical 
injuries.
    Structured settlements were developed because of the 
pitfalls associated with the traditional lump-sum form of 
recovery in serious personal injury cases, where all too often, 
a lump sum meant to last for decades or a lifetime swiftly 
eroded away, and victims were left unable to meet their ongoing 
medical and living expenses.
    Over the past two decades, structured settlements have 
proven to be a very effective means of providing long-term 
financial protection to persons with serious long-term, often 
profoundly disabling injuries. A voluntary agreement is reached 
between the parties generally through counsel under which the 
injured victim receives damages in the form of an insured 
stream of payments, often for the rest of the victim's life. 
This payment stream is tailored to the day-to-day living 
expenses and the future medical and financial needs of the 
victim and the victim's family, and comes from a financially 
secure institution. The victim has a choice whether to take a 
structured settlement, and generally only about one-third of 
the victims who are offered a structure take it.
    As a structured settlement broker, I sit at the settlement 
table with the injured victim and a defense, and work with the 
parties to try to reach a fair resolution that meets the 
victim's needs. In my 19 years in the field, I have seen first 
hand how a structured settlement enables seriously injured 
victims and their families to put their lives back together and 
move forward. Structured settlements have the strong support of 
the plaintiffs bar, the defense bar, judges, and mediators.
    Congress has adopted special tax rules to encourage and 
govern the use of structured settlements in order to provide 
long-term financial security for injured victims and their 
families. Under these rules, structured settlement payments are 
supposed to be nonassignable. However, all of this careful 
planning and long-term financial security for the victim and 
the family can be unraveled in an instant by a factoring 
company offering to buy future structured settlement payments 
for quick cash at a steep discount. Having factored away their 
assured source of future financial support, these injured 
victims are likely to face uncertain financial futures. They 
may find themselves in the very predicament that the structured 
settlement was used to avoid, and may now have to resort to 
taxpayer-financed assistance programs to meet basic needs.
    We in the structured settlement industry are here today 
because we are trying to do the right thing. We are on the 
frontlines. We see what is happening out there. We see the 
human cost when factoring companies unravel the structured 
settlements of injured victims. Court records from across the 
country tell the story. There is a quadriplegic in Oklahoma, 
another in California, the paraplegic in Texas, the victim in 
Connecticut with traumatic brain injuries dating from 
childhood, and the injured worker who was receiving worker's 
compensation benefits in Mississippi, all selling their future 
payments to the factoring companies.
    Having worked with this Subcommittee and the Congress over 
the last two decades to encourage the use of structured 
settlements, we felt a responsibility to step forward and alert 
Congress and the Treasury about what is going on about how the 
congressional policy is being undermined. H.R. 263 represents a 
balanced approach to these problems created by structured 
settlement factoring. H.R. 263 imposes a stringent penalty tax 
on a factoring company that purchases structured settlement 
payments from an injured victim. The penalty would be subject 
to an exception for genuine court-approved hardship to protect 
instances of true hardship of the victim or the family. This is 
a penalty to discourage a transaction that thwarts 
congressional policy. It is not a new tax or a tax increase.
    H.R. 263 has broad bipartisan support among Members of the 
Ways and Means Committee and the Senate Finance Committee. It 
is endorsed by the National Spinal Cord Injury Association and 
the National Organization on Disability. It is supported by the 
Treasury. It should be enacted as soon as possible.
    Thank you, Mr. Chairman, for the opportunity to testify.
    [The prepared statement follows:]

Statement of Thomas W. Little, President, Little, Meyers, Garretson & 
Associates, Cincinnati, Ohio; on Behalf of National Structured 
Settlements Trade Association

    Mr. Chairman, my name is Thomas W. Little. I am President 
of Little, Meyers, Garretson & Associates, a structured 
settlement broker firm headquartered in Cincinnati, Ohio. I am 
testifying today as Past President of the National Structured 
Settlements Trade Association.

    I. Background and Policy of the Structured Settlement Tax Rules

    The National Structured Settlements Trade Association (NSSTA) is an 
organization composed of more than 500 members which negotiate and fund 
structured settlements of tort and worker's compensation claims 
involving persons with serious, long-term physical injuries. Structured 
settlements provide the injured victim with the financial security of 
an assured payout over time. Founded in 1986, NSSTA's mission is to 
advance the use of structured settlements as a means of resolving 
physical injury claims.

A. Background

     Structured settlements in wide use today to resolve 
physical injury claims 
    Structured settlements are used to compensate seriously-injured, 
often profoundly disabled, victims of torts and workplace accidents. A 
lump sum recovery used to be the standard in personal injury cases. The 
injured victim then faced the daunting challenge of managing a large 
lump sum to cover substantial ongoing medical and living expenses for 
decades, even for a life-time. All too often, this lump sum swiftly 
eroded away. When the money was gone, the victim was left still 
disabled and still unable to work. In such cases, responsibility to 
care for this disabled person fell to the State Medicaid system and 
public assistance system.
    Structured settlements provide a better approach. A voluntary 
agreement is reached between the parties generally through their 
counsel under which the injured victim receives damages in the form of 
a stream of periodic payments tailored to the future medical expenses 
and basic living needs of the victim and his or her family from a well-
capitalized, financially-secure institution. This process may be 
overseen by a court, particularly in minor's cases. Often this payment 
stream is for the rest of the victim's life to make sure that future 
medical expenses and the family's basic living needs will be met, and 
that the victim will not outlive his or her compensation.
    These are voluntary arrangements. The injured victim has a choice 
whether or not to take a structured settlement, and generally about a 
third of the injured victims who are offered a structured settlement 
take it. The other two-thirds take the cash lump sum.
    A recent study underscores the fact that structured settlements 
typically are used in the case of major physical injuries ``when the 
loss payments are very large.'' (``Closed Claim Survey for Commercial 
General Liability: Survey Results, 1997,'' p. 22, prepared by ISO DATA, 
Inc., a nonprofit arm of the Insurance Services Office, Inc., which 
conducted the survey under the auspices of the National Association of 
Insurance Commissioners (NAIC), the national group of the State 
insurance regulators).
    The ISO study found that of the 215 claims involving structured 
settlements in the survey sample, 67% arose from ``major injuries'' 
(``permanent significant,'' ``permanent major,'' ``permanent grave,'' 
death and ``temporary major''), with an average total payment of 
$408,000. The remaining 33% of claims involving structured settlements 
had an average total payment of $210,000. ``Total payment'' for this 
purpose means in effect the total present value of the settlement, and 
consists of (i) the lump sum of cash paid at settlement, plus (ii) the 
present value of the future structured payments. The ISO study found 
that about half of the present value of the case was paid in an upfront 
lump sum to meet the victim's cash needs (e.g., retrofitting the house 
for wheelchair access), and the remaining half represented the present 
value of the structured future payments. (ISO Study, at p. 22). 
Overall, the ISO study found that the average total present value 
(including the upfront cash and the present value of the future 
payments) of a case resolved by structured settlement was $343,000. 
(ISO Study, at p. 21).
    Structured settlements have the strong support of the plaintiff's 
bar, the defense bar, judges, and mediators.
     Structured settlements provide crucial financial 
protection to seriously-injured tort victims
     Protection against premature dissipation by injured 
victims lacking the experience to manage the financial responsibilities 
and risks of investing a large lump sum to cover a substantial, ongoing 
stream of medical and basic living expenses for a lengthy period.
     Payout tailored to the day-to-day living expenses and the 
ongoing medical and financial needs of the victim and his or her 
family.
     Avoids shift of responsibility for care to the taxpayer-
financed social safety net.
     Congress has adopted special tax rules to encourage and 
govern structured settlements
    Congress has adopted a series of special rules in sections 130, 
104, 461(h), and 72 of the Internal Revenue Code to govern the use of 
structured settlements by providing that the full amount of the 
periodic payments constitutes tax-free damages to the victim and that 
the liability to make the periodic payments to the victim may be 
assigned to a structured settlement assignment company that will use a 
financially-secure annuity to fund the damage payments.
    In the Taxpayer Relief Act of 1997, in a provision co-sponsored by 
a majority of the House Ways and Means Committee, Congress recently 
extended the structured settlement tax rules to worker's compensation 
to cover physical injuries suffered in the workplace.

B. Structured Settlement Tax Rules Were Adopted by Congress to Protect 
Victims from Pressure to Dissipate Their Recoveries 

    In introducing the 1981 legislation that originally enacted 
the structured settlement tax rules, Sen. Max Baucus (D-Mont.) 
pointed to the concern over squandering of a lump sum recovery 
by injured tort victims or their families:

        ``In the past, these awards have typically been paid by 
        defendants to successful plaintiffs in the form of a single 
        payment settlement. This approach has proven unsatisfactory, 
        however, in many cases because it assumes that injured parties 
        will wisely manage large sums of money so as to provide for 
        their lifetime needs. In fact, many of these successful 
        litigants, particularly minors, have dissipated their awards in 
        a few years and are then without means of support.''

[Congressional Record (daily ed.) 12/10/81, at S15005.]

    By contrast, Sen. Baucus noted: ``Periodic payments 
settlements, on the other hand, provide plaintiffs with a 
steady income over a long period of time and insulate them from 
pressures to squander their awards.'' (Id.)
    In introducing legislation last year to protect structured 
settlements and injured victims from the practice of factoring, 
Sen. Baucus reiterated this original legislative intent:

        ``Thus, our focus in enacting these tax rules in sections 
        104(a)(2) and 130 of the Internal Revenue Code was to encourage 
        and govern the use of structured settlements in order to 
        provide long-term financial security to seriously injured 
        victims and their families and to insulate them from pressures 
        to squander their awards.''

[Congressional Record (daily ed.) 10/5/98, at S11499.]

    Therefore, the federal tax rules adopted by Congress to 
govern structured settlements reflect a policy of insulating 
injured victims and their families from pressures to dissipate 
their awards.
    In addition, Congress was concerned that the injured victim 
not have the ability to exercise such control over the periodic 
payments that he or she would be deemed to have received a lump 
sum recovery that was then invested on his or her behalf, 
destroying the fully tax-free nature of the periodic payments 
to the injured victim. The House Ways and Means and Senate 
Finance Committee Reports adopting the structured settlement 
tax rules both state: ``Thus, the periodic payments as personal 
injury damages are still excludable from income only if the 
recipient taxpayer is not in constructive receipt of or does 
not have the current economic benefit of the sum required to 
produce the periodic payments.'' (H.R. Rep. No. 97-832, 97th 
Cong., 2d Sess. (1982), 4; Sen. Rep. No. 97-646, 97th Cong., 2d 
Sess. (1982), 4.)
    Reflecting this Congressional policy of protecting injured 
victims from pressure to squander their recoveries and the need 
to avoid any risk of constructive receipt of a lump sum by the 
victim, the structured settlement tax rules prohibit the victim 
from being able to accelerate, defer, increase, or decrease the 
periodic payments. (I.R.C. Sec.  130(c)(2)(B)). In addition, 
the periodic payments must constitute tax-free damages in the 
hands of the recipient. (I.R.C. Sec.  130(c)(2)(D)).
    In compliance with these Congressional requirements and 
consistent with State insurance and exemption statutes, 
including ``spendthrift'' statutes that restrict alienation of 
rights to payments under annuities and under various types of 
claims (e.g., worker's compensation and wrongful death claims), 
structured settlement agreements customarily provide that the 
periodic payments to be rendered to the injured victim may not 
be accelerated, deferred, increased or decreased, anticipated, 
sold, assigned, pledged, or encumbered by the victim.
    As the Treasury Department has noted, ``Consistent with the 
condition that the injured person not be able to accelerate, 
defer, increase or decrease the periodic payments, [structured 
settlement] agreements with injured persons uniformly contain 
anti-assignment clauses.'' (U.S. Department of the Treasury, 
General Explanations of the Administration's Revenue Proposals 
(Feb. 1999), at p. 192).
    Sen. John Chafee (R-R.I.), in introducing along with Sen. 
Baucus recent legislation to protect structured settlements and 
injured victims from the practice of factoring observed: 
``Structured settlement payments are nonassignable. This is 
consistent with worker's compensation payments and various 
types of Federal disability payments which also are 
nonassignable under applicable law. In each case, this is done 
to preserve the injured person's long-term financial 
security.'' (Congressional Record (daily ed.), 10/2/98, at 
S11340).

  II. Purchases of Future Structured Settlement Payments by Factoring 
 Companies Directly Undermine the Important Public Policies Served by 
                        Structured Settlements 

A. Background

    Over the past two years, there has been dramatic growth in a 
transaction, generally known as a ``factoring'' transaction, that 
effectively takes the structure out of structured settlements.
    In such a factoring transaction, the injured victim who is 
receiving periodic payments of damages for physical injuries under a 
structured settlement sells his or her rights to future periodic 
payments to a factoring company. In exchange, the injured victim 
receives from the factoring company a sharply discounted lump sum 
payment.
    This is a transaction that the injured victim enters into with a 
third party, completely outside of the structured settlement and 
generally without even the knowledge of the other parties to the 
structured settlement. The factoring company is not in the structured 
settlement business, and the structured settlement company is not in 
the factoring business.
    In an effort to avoid the anti-assignment provisions in the 
structured settlement agreements, the factoring companies typically 
have the injured victim simply present the structured settlement 
company with a change of address to a post office box, or change of 
direct deposit to a bank account, under the control of the factoring 
company to accomplish the redirection of payments to the factoring 
company. Thus, the structured settlement company obligated to make the 
periodic payment damages under the structured settlement is not a party 
to the factoring transaction and often has no notice of it at all.
    At the time the structured settlement is created, the victim has 
multiple layers of protection by means of State insurance licensing and 
regulatory requirements and oversight, the Federal tax law requirements 
for the terms of a structured settlement, legal counsel, and in many 
cases court oversight. By contrast, the factoring companies and their 
transactions are completely unregulated.

B. Rapid Growth in Factoring Company Purchases of Structured Settlement 
Payments

    Factoring companies use extensive advertising and telemarketing, as 
well as direct appeals to plaintiffs' lawyers coupled with a finder's 
fee, to solicit new business. For example, one major factoring company, 
J.G. Wentworth, stated in a 1997 Securities and Exchange Commission 
filing that during the first 9 months of 1997 alone, it ran 56,000 
television commercials. Wentworth's SEC filing states that it runs a 
telemarketing call center with 200 telemarketing stations operating 24 
hours a day, 6 days a week.
    The factoring companies direct considerable advertising at the 
plaintiffs' bar, promising the injured victim's lawyer a second fee on 
the same case--this time by unwinding the structured settlement. For 
example, an ad by Stone Street Capital, a factoring company, placed in 
a prominent trial lawyer publication, states:

        ``You helped your clients once by winning them a structured 
        settlement. Now you can help them again by showing them how to 
        convert all or a portion of their settlement to a lump-sum 
        payment.

        ``For each of your clients who exercise this exciting new 
        option, your firm will be compensated for legal fees by 
        facilitating the standardized processing of an annuity purchase 
        agreement. On average, these fees amount to about $2,000 per 
        conversion. [Emphasis in original].''

    The factoring company business is a rapidly growing one. 
J.G. Wentworth recently announced that it has undertaken 
approximately 7,700 structured settlement purchase transactions 
with a total value of $370 million. According to SEC filings, 
during the first 9 months of 1997, J.G. Wentworth undertook 
3,759 structured settlement purchase transactions. These 
purchased structured settlement payments had a total 
undiscounted maturity value of $163.6 million and were 
purchased for $74.4 million. Blocks of purchased structured 
settlement payments are now being ``securitized'' by the 
factoring companies and marketed on Wall Street.

C. Public Policy Concerns Created by Factoring Company 
Transactions 

    Factoring company purchases of structured settlement 
payments create serious problems affecting all participants in 
structured settlements and directly thwart the clear 
Congressional policy that underlies the structured settlement 
tax rules.
     Factoring company purchases of structured 
settlement payments trigger the very same dissipation risks 
that structured settlements are designed to avoid 
    As Sen. Baucus observed ``All of the careful planning and 
long-term financial security for the injured victim and his or 
her family can be unraveled in an instant by a factoring 
company offering quick cash at a steep discount.'' 
(Congressional Record (daily ed.) 10/5/98, at S 11500).
    As lump sum tort recoveries frequently dissipate, the lump 
sum from the factoring company is as quickly dissipated, and 
the injured person finds himself or herself in the very 
predicament the structured settlement was intended to avoid.
    Having factored away their only assured source of future 
financial support and then dissipating the cash received, these 
injured victims are likely to face an uncertain financial 
future and may face the prospect of taxpayer-financed 
assistance programs to cover their future medical expenses and 
basic living needs.
    As Rep. Clay Shaw (R-Fla.) stated in introducing the 
``Structured Settlement Protection Act'' (H.R. 263) along with 
Rep. Pete Stark (D-Ca.) and a broad bipartisan group totaling 
some 17 Members of the Ways and Means Committee: ``As long-time 
supporters of structured settlements and the congressional 
policy underlying such settlements, we have grave concerns that 
these factoring transactions directly undermine the policy of 
the structured settlement tax rules.'' (Congressional Record 
(daily ed.) 2/10/99, at E192).
    On the Senate side, as Sen. Baucus observed in introducing 
the same legislation:

        ``I speak today as the original Senate sponsor of the 
        structured settlement tax rules that Congress enacted in 1982. 
        I rise because of my very grave concern that the recent 
        emergence of structured settlement factoring transactions--in 
        which factoring companies buy up the structured settlement 
        payments from injured victims in return for a deeply-discounted 
        lump sum--completely undermines what Congress intended when we 
        enacted these structured settlement tax rules.''

[Congressional Record, (daily ed.), 10/5/98, at S11499.]

    Sen. Baucus then went on to say:

        ``As a long-time supporter of structured settlements and an 
        architect of the Congressional policy embodied in the 
        structured settlement tax rules, I cannot stand by as this 
        structured settlement factoring problem continues to mushroom 
        across the country, leaving injured victims without financial 
        means for the future and forcing the injured victims onto the 
        social safety net--precisely the result we were seeking to 
        avoid when we enacted the structured settlement tax rules.''
[Id., at S11500.]
    Sen. Chafee, lead Republican co-sponsor of the legislation, 
echoed Sen. Baucus's concerns: ``These factoring company 
purchases directly contravene the intent and policy of Congress 
in enacting the special structured settlement tax rules.'' 
(Congressional Record (daily ed.) 10/2/98, at S11340.)
    NSSTA's members are on the front lines. We see the human 
costs when factoring companies unravel the structured 
settlements to injured victims. Court records from across the 
country tell the story--there's the quadriplegic in Oklahoma, 
the quadriplegic in California, the paraplegic in Texas, the 
victim of Connecticut with traumatic brain injures dating from 
childhood, and the injured worker receiving worker's 
compensation benefits in Mississippi--all selling their future 
payments to the factoring companies. The human costs in 
factoring cases such as these were recently chronicled in a 
U.S. News & World Report entitled ``Settling for Less--Should 
accident victims sell their monthly payments?'' (January 25, 
1999), pp. 62-66.
     Factoring company purchases often are made at 
sharp discounts
    In many cases the injured victim's dissipation risks are 
magnified because the lump sum payment that the injured victim 
receives in the factoring transaction is so sharply discounted. 
While factoring transactions apparently reflect a range of 
discounts, it is not uncommon for an injured victim to receive 
a lump sum payment of half or even less of the present value of 
the structured settlement payments being sold.
    In one recent case, a 20-year-old structured settlement 
recipient who was receiving monthly payments from a tort action 
when she was a child was persuaded to sell a series of her 
future payments for approximately 36 percent of their 
discounted present value. A few months later, she was persuaded 
to sell additional future payments for approximately 15 percent 
of their discounted present value.
    Based on this case and many similar examples from court 
records, it is clear that in factoring company transactions 
structured settlement recipients often are persuaded to sell 
future payments for far less than the payments are worth.
     Factoring company transactions create serious 
Federal income tax uncertainties for the original parties to 
the structured settlement
    The structured settlement tax rules require that the 
periodic payments constitute tax-free damages on account of 
personal physical injuries in the hands of the recipient of 
those payments. (I.R.C. Sec. Sec.  130(c)(2)(D); 104(a)(2)). 
Following the factoring away by the injured victim, the 
periodic payments are received by the factoring company and its 
investors and do not constitute tax-free damages in their 
hands. One of the requirements for a qualified assignment no 
longer is met. This creates serious Federal income tax 
uncertainties under the structured settlement tax rules for 
both the victim and the company funding the structured 
settlement.
    Injured victim:
     The injured victim not only loses the benefit of 
the future tax-free damage payments, but also runs a risk of 
being taxed on the lump sum received from the factoring company 
if such payment is treated as received on account of the sale 
of the victim's future payment rights and not on account of the 
original injury.
     If the structured settlement payments were freely 
assignable by the injured victim and a ready market of 
financial institutions was available to acquire such payments, 
the victim might be deemed in constructive receipt of the 
present value of the future payments just as if the payments 
could be accelerated. In that case, from the outset of the 
settlement a portion of each periodic payment would be treated 
as taxable earnings, rather than tax-free damages.
    Company funding the structured settlement:
    Under the structured settlement tax rules, the settling 
defendant (or its liability insurer) assigns its periodic 
payment liability to a structured settlement company in 
exchange for a payment which is excluded from the structured 
settlement company's income if the structured settlement tax 
rules under I.R.C. Sec.  130 are satisfied and such payment is 
reinvested in either an annuity or U.S. Treasury obligations 
precisely matched in amount and timing to the periodic payment 
obligation to the injured victim. The structured settlement 
company's income from the payments under the annuity or 
Treasuries is matched by an offsetting deduction for the damage 
payment to the victim.
     Once the factoring company buys the injured 
victim's payments, those payments no longer constitute tax-free 
personal physical injury damages under Code section 104 in the 
hands of the recipient, and hence one of the requirements for a 
qualified assignment under Code section 130(c)(2)(D) no longer 
is satisfied. The critical question then becomes whether the 
Code section 130 requirements for a qualified assignment apply 
only at the time the structured settlement is established or 
constitute continuing requirements for the structured 
settlement. On that question, there is no clear-cut answer, and 
considerable tax uncertainty results.
     The factoring transaction raises the concern that 
the structured settlement tax rules no longer may be satisfied 
and the risk that the structured settlement company may be 
required to recognize and pay tax on amounts previously 
excluded from its income or to pay tax on the ``inside build-
up'' under the annuity, for which there is no cash distribution 
to pay the tax. This is a tax risk that the structured 
settlement company had sought to avoid through use of the anti-
assignment provisions in the structured settlement agreement 
and is not in a position to absorb.
     The structured settlement company may face an 
obligation to report the payments made to the factoring company 
as taxable income even though in many cases the identity of the 
purchaser or even the existence of the factoring transaction 
itself is unknown.
     Factoring company transactions create risks of 
double liability for the structured settlement companies
    While factoring transactions normally involve only the 
injured victim and the factoring company, the underlying 
structured settlements typically involve multiple parties such 
as family members, defendants, liability insurers, and state 
workers' compensation authorities in workers' compensation 
cases. Because structured settlement agreements prohibit 
transfers of payments, if the structured settlement company 
makes the payments--even unwittingly--to the factoring company, 
the structured settlement company may become subject to later 
claims that it paid the wrong party and could still be required 
to make the payments as originally required under the 
settlement. This has happened in several recent cases.
    In many cases this risk of double liability is magnified by 
state statutes that (i) in more than 20 states give statutory 
effect to contract provisions prohibiting transfers of annuity 
benefits, and (ii) in nearly all States directly restrict or 
prohibit transfers of recoveries in various types of cases 
(e.g., worker's compensation, wrongful death, medical 
malpractice).
     The uncertainties created by factoring company 
transactions may discourage future use of structured 
settlements
    These tax risks and double liability risks raised by the 
factoring transaction are risks that the structured settlement 
company specifically sought to avoid through the anti-
assignment provisions in the structured settlement agreement 
and is not in a financial position to absorb, years after the 
original structured settlement transaction was entered into.
    These uncertainties and unforeseen risks could jeopardize 
the continued ability of structured settlement companies to 
fund settlements in the future. The structured settlement 
company's participation is necessary to enable structured 
settlements to be undertaken in the first instance by 
satisfying the objectives of both sides to the claim: the 
injured victim needs the long-term financial protection that 
the structured settlement company's funding arrangement 
provides, and the settling defendant wishes to close its books 
on the liability rather than bearing an ongoing payment 
obligation decades into the future.

 III. A Stringent Penalty Tax on Factoring Company Purchasers, Subject 
 to a Limited Exception for Genuine, Court-Approved Hardship, Protects 
  Structured Settlements, the Injured Recipients, and the Underlying 
                         Congressional Policy 

A. Gravity of Problem Requires Strong Action by Congress

    In acting to address the concerns over factoring companies that 
purchase structured settlement payments from injured victims the 
Treasury Department noted that: ``Congress enacted favorable tax rules 
intended to encourage the use of structured settlements--and 
conditioned such tax treatment on the injured person's inability to 
accelerate, defer, increase or decrease the periodic payments--because 
recipients of structured settlements are less likely than recipients of 
lump sum awards to consume their awards too quickly and require public 
assistance.'' (U.S. Department of the Treasury, General Explanations of 
the Administration's Revenue Proposals (Feb. 1999), p. 192).
    Treasury then observed that by enticing injured victims to sell off 
their future structured settlement payments in exchange for a heavily 
discounted lump sum that may then be dissipated: ``These `factoring' 
transactions directly undermine the Congressional objective to create 
an incentive for injured persons to receive periodic payments as 
settlements of personal injury claims.'' (Id., at p. 192 [emphasis 
added].)
    The Joint Tax Committee's analysis of the issue last year echoes 
these concerns: ``Transfer of the payment stream under a structured 
settlement arrangement arguably subverts the purpose of the structured 
settlement provisions of the Code to promote periodic payments for 
injured persons.'' (Joint Committee on Taxation, Description of Revenue 
Provisions Contained in the President's Fiscal Year 2000 Budget 
Proposal (JCS-1-99), (February 22, 1999), p. 329).
    A natural question is why use the tax system to solve this problem? 
Isn't consumer protection best left to the States? We believe there are 
compelling reasons for the Ways and Means Committee to act. The problem 
is nationwide and mushrooming. A State-by-State approach could take 
years. Moreover, while noting that the States traditionally have been 
the province of consumer protection, the Joint Committee's analysis 
reasons that there is a clear role for the Federal tax law to address 
the policy concerns raised by sales of structured settlement payments: 
``On the other hand, the tax law already provides an incentive for 
structured settlement arrangements, and if practices have evolved that 
are inconsistent with its purpose, addressing them should be viewed as 
proper.'' (Joint Committee Description, supra, at p. 330).
    Indeed, as Rep. Shaw observed in introducing H.R. 263 which 
addresses the structured settlement problem by means of a penalty tax 
on the factoring company: ``Because the purchase of structured 
settlement payments by factoring companies directly thwarts the 
congressional policy underlying the structured settlement tax rules and 
raises such serious concerns for structured settlements and injured 
victims, it is appropriate to deal with these concerns in the tax 
context.'' (Congressional Record (daily ed.) 2/10/99, at E192).
    Similarly, as Sen. Chafee observed last year in introducing the 
same legislation on the Senate side: ``It is appropriate to address 
this problem through the federal tax system because these purchases 
directly contravene the Congressional policy reflected in the 
structured settlement tax rules and jeopardize the long-term financial 
security that Congress intended to provide for the injured victim. The 
problem is nationwide, and it is growing rapidly.'' (Congressional 
Record (daily ed.), 10/2/98, at S11340).
    House Ways and Means Chairman Archer has indicated informally that, 
``If there are abuses out there, we'll look for them, we'll ferret them 
out, and we will do away with them.'' (BNA Daily Tax Reporter, 12/5/99, 
GG-1), and in later remarks pointed to transactions that make ``an end 
run around the Code.'' Clearly, factoring company purchases of 
structured settlement payments from injured victims fall into the 
category of abusive transactions to which Chairman Archer refers.
    A Federal tax approach also is necessary in order to address the 
tax uncertainties that the factoring transaction creates for the 
parties to the original structured settlement.
    There is broad bipartisan support among Members of the House Ways 
and Means Committee, the Senate Finance Committee, and from Treasury 
for addressing the structured settlement factoring problem by means of 
a stringent penalty on the factoring company to discourage the 
transaction, except in cases of genuine, court-approved hardship of the 
injured victim.

B. Treasury Proposal

    The Treasury Department in the Administration's FY 2000 Budget has 
proposed a 40-percent excise tax on factoring companies that purchase 
structured settlement payments from injured victims.
    Under the Treasury proposal, ``any person purchasing (or otherwise 
acquiring for consideration) a structured settlement payment stream 
would be subject to a 40 percent excise tax on the difference between 
the amount paid by the purchaser to the injured person and the 
undiscounted value of the purchased income stream, unless such purchase 
is pursuant to a court order finding that the extraordinary and 
unanticipated needs of the original recipient render such a transaction 
desirable.'' (Treasury General Explanations (Feb. 1999), at p. 192). 
The proposal would apply to transfers of structured settlement payments 
made after date of enactment.
    The Treasury proposal represents a strong and appropriate response 
to the structured settlement factoring problem.

C. Bipartisan Congressional Proposal

    1. Stringent penalty on factoring company that purchases structured 
settlement payments from injured victims 
    Reps. Clay Shaw (R-Fl.) and Pete Stark (D-Ca.), two senior Members 
of the Ways and Means Committee, have introduced H.R. 263 (the 
``Structured Settlement Protection Act'') which adopts a similar 
approach by imposing a 50 percent excise tax on the difference between 
the amount paid by the purchaser to the injured victim and the 
undiscounted value of the purchased payment stream. H.R. 263 is co-
sponsored by a broad bipartisan group totaling 17 Members of the Ways 
and Means Committee. It is endorsed by the National Spinal Cord Injury 
Association and the National Organization on Disability. It is 
supported by Treasury.
    Sens. John Chafee (R-R.I.) and Max Baucus (D-Mt.) introduced 
companion legislation last year with similar broad bipartisan support 
among Finance Committee Members.
    As Sen. Baucus noted, the excise tax approach is a penalty, not a 
tax increase or a new tax: ``I would stress that this is a penalty, not 
a tax increase--the factoring company only pays the penalty if it 
undertakes the transaction that Congress is seeking to discourage 
because the transaction thwarts a clear Congressional policy.'' 
(Congressional Record (daily ed.), 10/5/98, at S11500).
    2. Exception for limited cases of genuine, court-approved hardship 
    This stringent excise tax would be coupled with a limited exception 
for genuine, court-approved financial hardship situations. The excise 
tax would apply to factoring companies in all structured settlement 
purchase transactions except in the case of a transaction that is 
pursuant to a court order finding that ``the extraordinary, imminent, 
and unanticipated needs of the structured settlement recipient or his 
or her dependents render such a transaction appropriate.''
    This exception is intended to apply only to a limited number of 
cases in which a genuinely ``extraordinary, imminent, and 
unanticipated'' hardship actually has arisen (e.g., serious medical 
emergency for a family member) and which has been demonstrated to the 
satisfaction of a court, as well as a showing that transferring away 
such payments will not leave the injured victim and his or her family 
exposed to undue financial hardship in the future when the structured 
settlement payments no longer are available.
    3. Need to protect the tax treatment of the original structured 
settlement 
    In the limited instances of extraordinary and unanticipated 
hardship determined by court order to warrant relief, adverse tax 
consequences should not be visited upon the claimant or the other 
parties to the original structured settlement. Accordingly, the 
bipartisan Congressional proposal would clarify in the statute or the 
legislative history that in those limited instances in which the 
extraordinary, imminent, and unanticipated hardship standard is found 
to be met by a court, the original tax treatment of the structured 
settlement under I.R.C. Sec. Sec.  104, 130, 72, and 461(h) would be 
left undisturbed.
    That is, the periodic payments already received by the claimant 
prior to any factoring transaction would remain tax-free damages under 
Code section 104. The assignee's exclusion of income under Code section 
130 arising from satisfaction of all of the section 130 qualified 
assignment rules at the time the structured settlement was entered into 
years earlier would not be challenged. Similarly, the settling 
defendant's deduction under Code section 461(h) of the amount paid to 
the assignee to assume the liability would not be challenged. Finally, 
the status under Code section 72 of the annuity being used to fund the 
periodic payments would remain undisturbed.
    Despite the anti-assignment provisions included in the structured 
settlement agreements and the applicability of a stringent excise tax 
on the factoring company, there may be a limited number of non-hardship 
factoring transactions that still go forward. If the structured 
settlement tax rules under I.R.C. Sec. Sec.  130, 72, and 461(h) had 
been satisfied at the time of the structured settlement and the 
applicable structured settlement agreements included an anti-assignment 
provision, the original tax treatment of the other parties to the 
settlement--i.e., the settling defendant and the Code section 130 
assignee--should not be jeopardized by a third party transaction that 
occurs years later and likely unbeknownst to these other parties to the 
original settlement.
    Accordingly, the bipartisan Congressional proposal also would 
clarify in the case of a non-hardship factoring transaction, that if 
the structured settlement tax rules under I.R.C. Sec. Sec.  130, 72, 
and 461(h) had been satisfied at the time of the structured settlement 
and the applicable structured settlement agreements included an anti-
assignment provision, the section 130 exclusion of the assignee, the 
section 461(h) deduction of the settling defendant, and the Code 
section 72 status of the annuity being used to fund the periodic 
payments would remain undisturbed.
    Finally, the bipartisan Congressional proposal would clarify the 
tax reporting obligations of the annuity issuer and section 130 
assignee in the event of a factoring transaction. In the case of a 
factoring transaction, either on a court-approved hardship basis or a 
non-hardship basis, of which the annuity issuer has actual notice and 
knowledge, assuming that a tax reporting obligation otherwise would be 
applicable, the annuity issuer would be obligated to file an 
information report with the I.R.S. noting the fact of the transfer, the 
identity of the original payee, and the identity where known of the new 
recipient of the factored payments. No reporting obligation would exist 
where the annuity issuer (or section 130 assignee) had no knowledge of 
the factoring transaction.

                               Conclusion

    H.R. 263 fully protects structured settlements, the injured 
victims, and the Congressional policy underlying structured 
settlements.
    H.R. 263 has broad bipartisan support among Members of the 
Ways and Means Committee. It is endorsed by the National Spinal 
Cord Injury Association and the National Organization on 
Disability. It is supported by Treasury.
    This bipartisan Congressional proposal should be included 
as part of the tax legislation considered by Congress this 
year.
      

                                

    Chairman Houghton. Thank you very much.
    Now, I would like to call on Ms. Kucenski from Illinois.

  STATEMENT OF DONNA KUCENSKI, SENECA, ILLINOIS; ON BEHALF OF 
         NATIONAL ASSOCIATION OF SETTLEMENT PURCHASERS

    Ms. Kucenski. My name is Donna Kucenski. I appear here 
today to express my concern that the Federal Government and 
Congress are considering legislation that would eliminate my 
right to choose how to conduct my financial affairs. This 
proposed new excise tax would make it prohibitively expensive 
for me and thousands of individuals like me to receive lump 
sums in exchange for an asset that may no longer serve the 
needs for which it was originally established. This proposal 
will punish rather than protect consumers. Individuals who 
enter into structured settlements and those who later wish to 
sell them deserve full and complete disclosure in order to make 
informed financial decisions.
    I am 30 years old, married with a 7-year-old daughter, and 
live in Seneca, Illinois. When I was 13 years old, I was mauled 
by a dog that resulted in serious scarring and damage to my 
thigh. The incident was traumatic for me, but not by comparison 
to the fight put up with me by the insurance company and the 
litigation that followed.
    Further, that fight pales in comparison to the struggles I 
have engaged in over the past 2 years to gain access to a 
portion of my settlement to meet legitimate needs of me and my 
family that arose years after the agreement was negotiated. 
Those needs could not have been anticipated at the time the 
settlement was proposed.
    After the incident, when I was 13, my mother and 
grandfather obtained an attorney, and 3-year litigation ensued. 
Only after I was at court on that case, a jury was selected, 
did the insurance company make a serious settlement offer to my 
attorney.
    After decisions, my mother and grandfather, through the 
help of our attorney, agreed to a structured settlement, which 
provided $475 a month beginning at the age 19, a minimum of 30 
years guaranteed. In addition, I was entitled to receive four 
$10,000 payments beginning at age 19, $35,000 at age 30, 
$60,000 at age 35. I think it is important to know that part of 
the reason for settling in this manner was sheer exhaustion and 
exacerbation in the litigation process.
    I suffered no disabilities as a result of the incident that 
gave rise to the settlement other than a disfigured thigh that 
cannot be repaired with surgery. I am college educated. I had 
been employed as a successful real estate agent for the past 5 
years. In 1990, I was married. My husband is employed as a 
mechanical engineer. Several years after our marriage, we 
decided to have our first child. I am now the mother of a 7-
year-old daughter. Planning to expand our family and wanting to 
improve the living arrangements, my husband and I decided to 
purchase a home in late 1997.
    However, notwithstanding the fact that we both earn good 
salaries and have for some time, we didn't have sufficient 
downpayment to purchase the home we really wanted. A large 
downpayment would make the mortgage payments much more 
affordable, allowing us to live the life we desire.
    We also want to avoid paying private mortgage insurance at 
no extra cost of first-time home buyers. Furthermore, we want 
to be able to afford monthly expenses on my husband's salary 
alone, as we are hoping for our second child.
    With these things in mind, we began examining our financial 
options. In late 1997, I responded to an advertisement from the 
company that stated it could pay me a lump sum in exchange for 
some of my settlement payments. After contacting Singer Asset 
Finance Co., the process was explained to me in detail. The 
paperwork provided to me was extremely thorough, set forth the 
exact terms of the transaction in plain English with no hidden 
terms, charges, or provisions. The company was also very 
careful in explaining those terms to me.
    After consulting my husband and negotiating the purchase 
price of a portion of my future settlement payments, I agreed 
to this transaction. Singer began a thorough underwriting 
process in which they carefully evaluated my ability to support 
my family and myself. Singer wanted to ensure that the 
transaction would be in my and my family's best interest.
    After filing the requisite documents and complying with 
their thorough due diligence, Singer informed Prudential 
Insurance of the assignment by sending them a notarized 
document signed by me instructing them to make a series of 
future payments to Singer instead of me. At that point, I 
received a lump sum I had been promised. We purchased our home.
    As a result of that refinancing transaction, we were able 
to make a substantial downpayment on the home of our choice, 
thereby reducing our monthly expenses. This also provided for 
significant equity nest built into the house. The folks at 
Singer were professional and courteous throughout the process, 
that was made even longer because of resistance and lack of 
cooperation from the insurance company, Prudential.
    After closing on our home and living in it some time, my 
husband and I decided to make home improvements. We were also 
interested in expanding our investment portfolio. Having been 
satisfied with the first transaction with Singer, we contacted 
them again for future payments in which I was entitled to. In 
the summer of 1998, I again contacted Singer. They spelled out 
the terms of the transaction. Unfortunately, I was advised that 
due to a change in the law with the State of Illinois, it would 
be required for me to go to court in order to transfer these 
payments. This process was costly, time consuming for me and my 
husband. Both us and Singer retained a counsel and waited 2 
months until the hearing could be scheduled. The judge in this 
matter was not familiar with the law and how to apply it. He 
took testimony from us, including very invasive personal 
questions. After hearing this testimony, the judge granted the 
order, permitting me to sell a future portion of my payments. I 
was embarrassed at having to answer very detailed, personal 
questions regarding my life and finances in open court.
    Now I understand that virtually every insurance carrier 
contests court proceedings such as mine, which increases the 
cost many thousands of dollars, and stretches out the process 
to 6 months or more. Had they done this to me and my husband, I 
would not have been able to afford the risk of such a potential 
litigation.
    After the court order was finally obtained, Singer paid me 
the money they had agreed to under the terms of the contract. 
Again, everything was spelled out in writing and fully 
disclosed to me ahead of time. No hidden charges, no hidden 
agendas. With the money we received from the second 
transaction, my husband and I were able to do home 
improvements, such as finishing a basement, adding a deck, and 
adding a driveway. We also took $15,000 remaining and invested 
it with a Templeton growth fund.
    Mr. Chairman, I am here to challenge in the strongest terms 
possible, the notion that Congress should and can dictate to me 
and anyone else what we do with our assets. My husband and I 
are educated and astute individuals. We decided to sell a 
portion of our payments in order to accomplish the things in 
life we wanted. Simply stated, there is no reason in the world 
that people shouldn't be able to refinance their settlements if 
they choose to do so.
    Before I conclude, I would like to share another experience 
with you and the Committee. In 1998 I was scheduled to appear 
before the Illinois Legislature to testify against the proposed 
law that could make it virtually impossible for people like me 
to access our money. Before the hearing, I heard stories of 
other individuals who chose to sell their structured settlement 
payments. They included Mrs. Halit. She was involved in a 
serious accident resulting in a broken femur----
    Chairman Houghton. Is it possible, since the red light is 
on, to submit those stories of Mrs. Halit, Mrs. Bochette, and 
Mr. and Mrs. Davenport for the record?
    Ms. Kucenski. Surely.
    Chairman Houghton. Would that be all right?
    Ms. Kucenski. That's fine.
    Chairman Houghton. Maybe you would want to conclude your 
comments.
    Ms. Kucenski. OK. Mr. Chairman, my story and those like 
mine are just some of the thousands of individuals who have 
been helped by structured settlement purchasing companies. The 
settlement purchasers I have dealt with have been forthright, 
honest, and open about the transactions. The right to do with 
one's money as one chooses should not be quickly or arbitrarily 
stripped from Americans such as myself. Furthermore, 
conditioning the right to use one's money on obtaining a court 
order that is cumbersome, expensive, and very time consuming is 
not, in my opinion, sensible. The right to economic self-
determination is fundamental to all Americans. I urge you to 
consider this seriously before you act. I appreciate the 
opportunity to present my views to the Committee, and trust 
that they will be incorporated in the Committee's decision 
respecting this matter.
    [The prepared statement follows:]

Statement of Donna Kucenski, Seneca, Illinois; on Behalf of National 
Association of Settlement Purchasers

    My name is Donna Kucenski. I appear here today to express 
my concern that the Federal government and this Congress are 
considering legislation that would eliminate my right to choose 
how to conduct my financial affairs. This proposed new excise 
tax would make it prohibitively expensive for me and thousands 
of individuals like me to receive lump sums in exchange for an 
asset that may no longer serve the needs for which it was 
originally established. This proposal will punish rather than 
protect consumers like myself. Individuals who enter into 
structured settlements and those who later wish to sell them 
deserve full and complete disclosure in order to make informed 
financial decisions.
    I am 30 years old, married with a 7-year-old daughter and 
live at P.O. Box 761, Seneca, Illinois. When I was 13 years 
old, I was mauled by a dog that resulted in serious scarring 
and damage to my thigh. The incident was traumatic for me but 
not by comparison to the fight put up be the insurance company 
in the litigation that followed. Further, that fight pales in 
comparison to the struggles I have engaged in over the last two 
years to gain access to a portion of my settlement to meet 
legitimate needs of me and my family that arose years after the 
settlement agreement was negotiated. Those needs could not have 
been anticipated at the time the settlement was first proposed.
    After the incident when I was 13, my mother and grandfather 
retained an attorney and a 3-year litigation ensued. When I was 
16, I was in court on that case. After a jury had been 
selected, the insurance company finally decided to make a 
serious settlement offer to my attorney. After settlement 
discussions, my mother and grandfather with the help of our 
attorney, agreed to a structured settlement which provided for 
payments of $475 a month beginning when I reached the age of 
19. Those payments were for life with 30 years guaranteed. In 
addition, I was entitled to receive four $10,000 annual 
payments beginning when I was 19, a $35,000 payment when I 
reached the age of 30 and a $60,000 payment when I reached the 
age of 35. I think it is important to know that part of the 
reason for settling in this manner was shear exhaustion and 
exasperation at the litigation process.
    I suffered no disability as a result of the incident that 
gave rise to this settlement other than a disfigured thigh that 
cannot be repaired with surgery.
    I am college educated and have been employed as a 
successful real estate sales agent for the past 5 years. In 
1990, I was married. My husband is employed as a mechanical 
engineer. Several years after our marriage, we decided to have 
our first child. I am now the mother of a 7-year-old daughter. 
Planning to expand our family and wanting to improve our living 
arrangements, my husband and I decided to purchase a home in 
late 1997. However, notwithstanding the fact that we both earn 
good salaries and have for some time, we didn't have a 
sufficient down payment to purchase the home we really wanted. 
We had decided that a large down payment would make the 
mortgage payments much more affordable for us and would allow 
us to live the life we desire. We also wanted to avoid paying 
private mortgage insurance and the extra costs usually incurred 
by first time homebuyers. Furthermore, we wanted to be able to 
afford our monthly expenses on my husband's salary alone as we 
are hoping to have a second child.
    With these things in mind, we began examining our financial 
options. In late 1997, I responded to an advertisement from a 
company that stated it could pay me a lump sum in exchange for 
some of my settlement payments. After contacting this company, 
Singer Asset Finance Company, the process was explained to me 
in detail. The paperwork provided to me was extremely thorough 
and set forth the exact terms of the transaction in plain 
English with no hidden terms, charges, or provisions. The 
company was also very careful to explain those terms to me.
    After consulting with my husband and negotiating a purchase 
price for a portion of my future settlement payments, I agreed 
to the transaction with Singer Asset Finance. Singer then began 
a thorough underwriting process in which they carefully 
evaluated my ability to support my family and myself. Singer 
wanted to assure that the transaction would be in my and my 
family's best interest. After filing all the requisite 
documents and completing their thorough due diligence, Singer 
informed Prudential Insurance of the assignment by sending them 
a notarized document signed by me instructing them to make a 
series of future payments to Singer instead of me. At that 
point, I received the lump sum I had been promised and my 
husband and I proceeded to purchase our home. As a result of 
that refinancing transaction, we were able to make a 
substantial down payment on the home of our choice, and thereby 
reduce our monthly expenses. This also provided for a 
significant equity nest egg built into the house. The folks at 
Singer were professional and courteous throughout the process 
that was made even longer because of resistance and lack of 
cooperation from the insurance company, Prudential.
    After closing on our home and living in it for some time, 
my husband and I decided to do some home improvements. We were 
also interested in expanding our investment portfolio. Having 
been satisfied with the first transaction with Singer Asset 
Finance, we contacted them again in order to sell some more of 
the future payments to which I am entitled. In the summer of 
1998, I again contacted Singer.
    Once again, Singer spelled out all of the terms of the 
transaction in clear, easy to understand terms. Unfortunately, 
I was advised that due to a change in the law in the state of 
Illinois, I would be required to go to court in order to 
transfer these payments. This process was costly and time 
consuming for my husband and me. Both we and Singer retained 
counsel and waited over two months until a hearing could be 
scheduled. The judge in that matter was not familiar with the 
Illinois Law or with how to apply it. He took testimony from my 
husband and me, including very invasive personal questions. 
After hearing this testimony, the judge granted the Order 
permitting me to sell a future portion of my payments. I was 
embarrassed at having to answer very detailed, personal 
questions regarding my life and my finances in open court. Now, 
I understand that virtually every insurance carrier contests 
court proceedings such as mine, which increases the costs many 
thousands of dollars and stretches out the process to six 
months or more. Had they done this to me and my husband I 
wouldn't have been able to afford the risk of such a protracted 
litigation.
    Sometime after the hearing, an Order was finally obtained 
from the Court and Singer paid me the money they had agreed to 
under the terms of the contract. Again, everything was spelled 
out in writing and fully disclosed to me ahead of time. No 
hidden charges. No hidden agendas. With the money we received 
from that second transaction, my husband and I were able to 
make some home improvements and invest a substantial sum of 
money in the market. After finishing the basement, adding a 
deck to our home and repaving the driveway, we had more than 
$15,000 remaining with which to invest. This money is now 
invested in a Templeton Growth Fund.
    Mr. Chairman, I am here to challenge, in the strongest 
terms possible, the notion that Congress can and should dictate 
to me or anyone else what we can do with an asset. My husband 
and I are educated and astute individuals. We decided to sell a 
portion of our payments in order to accomplish the things in 
life that we wanted. Simply stated, there is no reason in the 
world that people shouldn't be able to refinance their 
settlements if they choose to do so.
    Before I conclude, I would like to share another experience 
with you and the committee. In 1998, I was scheduled to appear 
before the Illinois Legislature to testify against a proposed 
law that could have made it virtually impossible for people 
like me to access our money. Before that hearing I heard the 
stories of other individuals like myself who had chosen to sell 
some of their structured settlement payments. They include:
    Irene Halit: Ms. Irene Halit was involved in a severe 
accident resulting in a broken femur and the amputation of her 
left leg below the knee. Ms. Halit had the option of receiving 
a lump sum settlement or a structured settlement. After 
consulting with her family and her attorney she decided to 
accept the structured settlement which provided for lump sum 
payments as follows: $10,000 due January 1, 1989; $20,000 due 
January 1, 1994; $30,000 due January 1, 1999; $50,000 due 
January 1, 2004; and $100,000 due January 1, 2009. Ms. Halit 
was 18 years old at the time of the settlement. 15 years later, 
Ms. Halit's needs changed. She was getting a divorce, wanted to 
return to school and was in need of a new prosthetic limb. 
Faced with these needs, in 1997, Ms. Halit sold the payment she 
was to receive in 1999 for a discounted lump sum. With this 
money she was able to complete school, satisfy some debts, 
purchase a new prosthesis and conclude her divorce proceedings.
    Mr. and Mrs. Edward Bochette: Mr. Bochette's wife was 
involved in an accident in 1992. Mr. and Mrs. Bochette did not 
want a structured settlement. However, the insurance company 
indicated that if they did not accept the structure it would 
not settle the lawsuit. Mr. and Mrs. Bochette feel they were 
coerced into accepting the structured settlement. To quote Mr. 
Bochette the structured settlement was ``rammed down our 
throats'' by the insurance carrier. Mr. Bochette became the 
recipient of the annuity payments through a divorce settlement. 
Thereafter, Mr. Bochette decided to sell a portion of his 
future payments in order to purchase a new car and satisfy some 
outstanding debts.
    Mr. and Mrs. Anthony Davenport: Due to a 1987 accident, Mr. 
Davenport has a permanent scar across chest, rods in his legs, 
a scar across his hip, and a scar from his forehead all the way 
to the back of his head. Mr. Davenport begrudgingly accepted a 
structured settlement after battling with the insurance company 
and their lawyers for over five years. Six months prior to the 
settlement, Mr. Davenport and his wife gave birth to twin boys. 
This placed a significant and unexpected financial burden on 
the Davenports prompting them to accept the structured 
settlement. Their attorney also advised the structured 
settlement was, in his opinion, a better deal. The settlement 
was for ten annual payments of $2,295 commencing February 13, 
1994 through February 13, 2003. An additional lump sum payment 
of $40,000 was due February 13, 2005. The insurance company 
represented the settlement was worth $62,950, whereas the 
present value of the settlement was a mere $26,000. In 1997, 
the Davenport's found themselves in a financial bind as a 
result of temporary unemployment. They sold their remaining 
settlement payments to satisfy debts and clear up a mortgage 
default that was threatening their home. The flexibility and 
freedom provided by the lump sum allowed Mr. Davenport to 
return to school so he could qualify for a better job in the 
future.
    Mr. Chairman, my story and stories such as those of Irene 
Halit, the Bochettes, and the Davenports are just some of the 
thousands of individuals who have been helped by structured 
settlement purchasing companies. The settlement purchasers I 
have dealt with have been forthright, honest and open about the 
transactions. The right to do with one's money as one chooses 
should not be quickly or arbitrarily stripped from Americans 
such as myself. Furthermore, conditioning the right to use 
one's money on obtaining a court order that is cumbersome, 
expensive and very time consuming is not, in my opinion, 
sensible. The right to economic self-determination is 
fundamental to all Americans and I urge you to consider this 
seriously before you act. I appreciate the opportunity to 
present my views to the committee and trust that they will be 
incorporated in the committee's decision respecting this 
matter.
    Thank you very much.
      

                                

    Chairman Houghton. Thank you very much.
    Now I would like to call on Thomas Countee.

   STATEMENT OF THOMAS H. COUNTEE, JR., EXECUTIVE DIRECTOR, 
    NATIONAL SPINAL CORD INJURY ASSOCIATION, SILVER SPRING, 
                            MARYLAND

    Mr. Countee. Thank you, Mr. Chairman. My name is Thomas H. 
Countee, Jr., executive director of the National Spinal Cord 
Injury Association, a national nonprofit organization 
headquartered in Silver Spring, Maryland. The association's 
president is Jack Dahlberg, who is a quadriplegic.
    On a personal note, I was born, raised, and educated right 
here in Washington, DC. In 1958, 41 years ago, I sustained a 
diving accident on the Chesapeake Bay, rendering me a 
quadriplegic. I am an attorney. I served for 15 months as 
legislative counsel in the Ford White House. It is a pleasure 
and honor to return to the Hill today to testify, this time as 
a private citizen.
    Today, I represent over 5,000 members of the National 
Spinal Cord Injury Association, and thousands of other spinal 
cord-injured persons, many of whom benefit from structured 
settlements, including several hundred in the Metropolitan 
Washington area. The National Spinal Cord Injury Association 
has no business or tax effect stake in the outcome of this 
proposed legislation, H.R. 263. However, the association is 
deeply interested in the health, safety, and welfare of persons 
with catastrophic, traumatic, and/or debilitating injuries, 
many of whom are association members and receive structured 
settlements.
    The National Spinal Cord Injury Association is extremely 
concerned about factoring companies which increasingly prey 
upon the weakest, most gullible, and most vulnerable in our 
society. We believe that at present, the emerging gray market 
of factoring companies is largely unregulated, unresponsive to 
the needs and best interests of recipients of structured 
settlements, and unconscionable in their slick, high pressure 
marketing practices and unethical legal maneuvers and 
strategems, such as the use of a confessed judgment against the 
victim in a distant court to garnish the victim's payments.
    I have testified on this matter before State legislatures 
considering similar legislation, Mr. Chairman. I have read Mr. 
Chapoton's submitted testimony and listened to his testimony 
this morning. I am struck by its familiarity. Mr. Chapoton 
asserts that ``NASP members do not conduct transactions with 
individuals dependent on further periodic payments for medical 
necessity or with those who are unemployed or unemployable who 
rely on their payments as the sole source of income'' and 
``they do not buy payments from individuals with catastrophic 
or head injuries.''
    Mr. Chairman, with all due respect to my fellow member of 
the bar, these assertions are simply inaccurate, misleading, or 
false. Just look at the pictures in the U.S. News and World 
Report article of January 25, 1999. Look at Christopher Hicks, 
a quadriplegic. Look at Raymond White, who was unemployed when 
he sold the first portion of his settlement and who now relies 
partially on public assistance to get by, according to the 
article. Look at Davinia Willis in her wheelchair.
    Until the National Spinal Cord Injury Association realized 
what kind of business factoring companies were really in, our 
SCI Life magazine, published quarterly, accepted their 
advertising. We don't do that any longer. They were targeting 
our members and not only because many of them had structured 
settlements.
    One last point, Mr. Chairman, I have come here today to let 
you see the type of catastrophic injury affected by this bill, 
and to put a human face on this legislation, not as a 
beneficiary of a structured settlement, but as the leader of, 
and advocate for, severely disabled persons who have.
    In 1982, the intent of Congress, the social purpose, if you 
will, was to encourage those who receive monetary settlements 
growing out of catastrophic injuries to accept period payments 
to safeguard the very uncertain futures that they faced. 
Factoring companies' intent, on the other hand, is simply to 
cheat severely injured persons out of their money. H.R. 263 
does nothing to help those who have already been taken 
advantage of. We need this legislation to guide those who may 
be taken advantage of in the future. You can and should stop 
this outrage. Sound public policy and simple decency would 
indicate that as legislators, you have no choice but to do the 
right thing.
    For all the above reasons, the National Spinal Cord Injury 
Association respectfully recommends and strongly urges your 
support of H.R. 263, which would provide needed protection from 
the predatory practices of these factoring companies.
    Thank you very much for the time and attention, Mr. 
Chairman, you are devoting to this critical issue, and the 
opportunity to appear before you. I would be happy to answer 
any questions you might have about the association and our 
interest in this matter.
    [The prepared statement follows:]

Statement of Thomas H. Countee, Jr., Executive Director, National 
Spinal Cord Injury Association, Silver Spring, Maryland

    Good afternoon, Mr. Chairman and other Representatives.
    My name is Thomas H. Countee, Jr., Executive Director of 
The National Spinal Cord Injury Association, a non-profit 
organization, headquartered in Silver Spring, Maryland. The 
Association's President is Jack Dahlberg, who is a 
quadriplegic.
    On a personal note, I was born, raised and educated right 
here in Washington, D.C. Forty-one years ago in 1958, I 
sustained a diving accident on the Chesapeake Bay, rendering me 
a quadriplegic. I served 15 months as Legislative Counsel in 
the Ford White House. It is a pleasure and honor to return to 
The Hill to testify, this time as a private citizen.
    Today, I represent over 5,000 members of the National 
Spinal Cord Injury Association and thousands of other spinal 
cord injured persons, many of whom benefit from structured 
settlements, including several hundred in the Metro Washington 
area. The National Spinal Cord Injury Association has no 
business or tax effect stake in the outcome of this proposed 
legislation, H.R. 263. However, the Association is deeply 
interested in the health, safety and welfare of persons with 
catastrophic, traumatic and/or debilitating injuries, many of 
whom are Association members and receive structured 
settlements.
    The National Spinal Cord Injury Association is extremely 
concerned about factoring companies which increasingly prey 
upon the weakest, most gullible and most vulnerable in our 
society. We believe that at present, the emerging ``gray 
market'' of factoring companies is largely unregulated, 
unresponsive to the needs and best interests of recipients of 
structured settlements and unconscionable in their slick, high 
pressure marketing practices and unethical legal maneuvers and 
strategems such as the use of a confessed judgment against the 
victim in a distant court to garnish the victim's payments.
    One last point, Mr. Chairman, I have come here to let you 
see the type of catastrophic injury affected by this bill and 
to put a human face on this legislation, not as the beneficiary 
of a structured settlement, but as a leader of, and advocate 
for, severely disabled persons who have. In 1982, the intent of 
Congress, the social purpose, if you will, was to encourages 
those who receive monetary settlements growing out of 
catastrophic injuries, to accept periodic payments to safeguard 
the uncertain futures they face. Factoring companies' intent, 
on the other hand, is simply to cheat severely injured persons 
out of their money. You can, and should, stop this outrage. 
Sound public policy and simple decency would indicate that as 
legislators, you have no choice but to do the right thing.
    For all these reasons, The National Spinal Cord Injury 
Association respectfully recommends and strongly urges your 
support of H.R. 263 which would provide needed protection from 
the predatory practices of these factoring companies.
    Thank you for the time and attention you are devoting to 
this critical issue and the opportunity to appear before you. I 
will be happy to answer any questions you may have about the 
Association or our interest in this matter.
      

                                

    Chairman Houghton. Thank you, Mr. Countee. Thank you, 
everybody, for your testimony.
    What I would like to do is forgo my questions and turn it 
right over to Mr. Coyne. Then, we will go right down to the end 
and come back here with a question.
    Go ahead, Mr. Coyne.
    Mr. Coyne. Thank you, Mr. Chairman.
    Mr. Chapoton, you seem to be testifying more in opposition 
to the proposed legislation based on the fact that it is a 
consumer protection issue rather than a taxation issue.
    Mr. Chapoton. That is correct, sir.
    Mr. Coyne. But I would guess that you could imagine that 
there would be instances where people would have to succumb to 
some kind of situation where they needed money immediately?
    Mr. Chapoton. I certainly could imagine that. As I said in 
my written statement and in my oral presentation today, there 
should be protection. The result we should try to achieve is a 
fully informed, fully advised consumer.
    Mr. Coyne. Your major objection is just from a consumer 
protection standpoint?
    Mr. Chapoton. My major objection is that there are too many 
fact situations--it is too complicated an issue to deal with in 
one fell swoop in the tax law. It's really not a tax issue.
    Mr. Coyne. Thank you.
    Mr. Chapoton. Yes, sir.
    Mr. Coyne. Ms. Kucenski, you indicated that you and your 
husband are ``educated and astute'' and you were able to come 
to a conclusion that that was the best financial arrangement 
for you. I guess you could understand where some people who are 
not as educated or astute in financial matters and may need the 
protection of something like that?
    Ms. Kucenski. Yes, I can understand. But there are more 
factors involved in that too, that may not have the financing 
or good job or whatever. The age is a factor, well-being, 
mental stability, things like that.
    Mr. Coyne. Thank you.
    Chairman Houghton. OK.
    Mr. Weller.
    Mr. Weller. Thank you, Mr. Chairman. It is always nice to 
have a constituent on the panel today. Donna Kucenski is from 
Seneca, Illinois.
    It's nice the day after St. Patty's Day that someone from 
the home of the Seneca Irish is with us. I want to welcome you 
to the Ways and Means Committee. Donna, I appreciate your 
testimony. Mr. Countee made some pretty strong statements 
regarding this issue and the intent of those who purchase 
structured settlements.
    You have indicated in your testimony that you felt you were 
never pressured, you had all the information before you. You 
have given examples of others that you know personally who have 
used this as a way to have a little extra money to buy a car or 
make a downpayment on a home, go back to school. You feel that 
it's an option people should have as a choice for their 
finances.
    I was wondering, was there anything unexpected after you 
reached this agreement with the company that purchased your 
structured settlement? Were there any surprises?
    Ms. Kucenski. There were no surprises from Singer Assets in 
general. The surprise the second time was knowing that I had to 
go before court. That was a surprise. I was told the first time 
that you know, if you ever want anything else and you need 
anything, you know where to make a phone call, and that is what 
my husband and I decided to do. It surprised us going before a 
judge.
    Mr. Weller. And was there ever a time during your business 
transaction with the company where they did not honor their 
side of the bargain?
    Ms. Kucenski. No. Never a time.
    Mr. Weller. And you have indicated in your testimony that 
there were two sales, I guess, of two portions of your 
structured settlement. Do you still have some of your 
structured settlement that is still yours?
    Ms. Kucenski. Yes, I do.
    Mr. Weller. That is still outstanding. You have sold two 
pieces of it?
    Ms. Kucenski. Right.
    Mr. Weller. As part of this. From your experience and in 
talking with others, since you indicated in your testimony you 
know some other individuals that have done this, you know, Mr. 
Countee indicated that some people may be exploited by some bad 
apples maybe in the industry. What type of protections do you 
feel there is a need for? Clearly you oppose Mr. Shaw's 
legislation, from your testimony and from our personal 
conversation you have shared that with me. Do you feel there is 
a need, if this type of practice continues, for any additional 
protection to protect those who may be more vulnerable because 
of their mental condition or physical condition?
    Ms. Kucenski. I think as an individual who has the 
settlements and who has the opportunity to move forth with 
Singer Assets and everything, the documentation that they give 
you is pretty self-explanatory. If for any reason that me, as 
the settlement holder, feels that I have been taken for a ride 
or whatever, we have an attorney that you can hire. There are 
counsels. I have my own broker that does all my financial 
arrangements. I consult him. There are many other people that 
we can hire as a person if we feel that we are being ``taken 
for a ride.'' That is up to the individual's decision.
    Mr. Weller. OK. Mr. Countee, just in response to Donna 
Kucenski's statement there, if this practice were to continue, 
you know, not considering Mr. Shaw's legislation, but if this 
practice were to continue where people would have the 
opportunity to purchase settlements and also have the 
opportunity to sell them, would you see perhaps some particular 
additional protections that should be put into the law to 
protect those that you noted may be vulnerable in your 
testimony?
    Mr. Countee. You mean without the provisions of H.R. 263?
    Mr. Weller. That's correct. Are there any other--if the 
Shaw legislation is not adopted, are there protections that you 
would suggest that we consider, that the Congress consider as 
an alternative? Have you thought about any other protections 
for those who may be vulnerable?
    Mr. Countee. Probably some that would fall under the rubric 
of consumer protection laws. I think that the conduct of the 
factoring companies that I have outlined, such as confessed 
judgment against a victim in a distant court, for instance, 
should be looked at. I think the marketing practices should be 
looked at.
    I think that the provisions of State legislatures, such as 
bringing any factoring companies' award before the approval of 
State court should certainly be a provision that is required. I 
see nothing wrong with bringing these factoring companies' 
contracts before the light of day, and require court approval 
of them before they go into effect. I think that this has the 
advantage at the very least of having them reviewed by someone 
with the knowledge and background of what the recipient is 
getting into.
    Those are some provisions that I think, and there probably 
are others that would protect the recipient.
    Mr. Weller. Thank you, Mr. Countee. Donna, I am glad to 
have you here. Thank you, Mr. Chairman. I see my time is 
expired.
    Chairman Houghton. Thanks, Mr. Weller.
    The gentleman from Colorado, Mr. McInnis.
    Mr. McInnis. Thank you, Mr. Chairman. I appreciate the 
testimony from the witnesses today. I guess I take a different 
approach on this. I don't see this as a consumer issue. It 
appears to me that at some point in all segments of society, 
that consumers have to accept a little responsibility. I think 
having heard Ms. Kucenski's testimony, she is certainly capable 
of handling her own matters.
    What I do see, however, and I disagree with the one witness 
who did not see it as a tax issue, I see it right and center to 
be a tax issue. The reason is that the present law, because of 
the injuries that were sustained, according to the legislative 
history of this, they provided a special exception. They 
provided a tax subsidy for these type of payments. But to 
prevent the abuse of this tax subsidy, they put in certain 
requirements. One of those being that the payments could not be 
accelerated. It appears to me from my reading, that clearly 
there is an acceleration here. Clearly there is a change in tax 
status, and a noninjured party is now obtaining the benefit of 
the tax subsidy which was never intended for the noninjured 
party.
    I see this as clearly a tax issue. That is how I intend to 
approach it.
    But out of curiosity, I would ask Donna, so I don't keep 
butchering your last name, if you don't mind me just saying 
Donna, what was the discount rate that you ended up paying? Do 
you mind responding to me for that, for the first and second 
settlement?
    Ms. Kucenski. Yes. I don't have that information with me. I 
don't even want to speculate. I don't have that information.
    Mr. McInnis. Is it Mr. Chapoton, the gentleman there?
    Mr. Chapoton. No. I could not respond to that. Mr. Trankina 
could speak on the discount issue if you wish.
    Mr. McInnis. Now that I have got you on the microphone, you 
said--no, maybe I didn't hear you correctly. But you said you 
didn't see this as a tax issue?
    Mr. Chapoton. No. You heard me correctly.
    Mr. McInnis. Would you agree----
    Mr. Chapoton. Let me----
    Mr. McInnis. No. Let me finish.
    Mr. Chapoton. If I might go through it very briefly.
    Mr. McInnis. I reclaim my time. Let me ask you very 
briefly. Would you agree, yes or no, would you agree that this 
is a tax subsidy, that it is an exception in the Tax Code, that 
it is treated as a tax subsidy?
    Mr. Chapoton. That is an interesting question. It was the 
IRS ruling policy before the law was enacted. It was the IRS 
ruling policy before 1982. You got the same result before 1982 
as you got after 1982.
    Mr. McInnis. But it's still a tax subsidy.
    Mr. Chapoton. It is a tax benefit, yes. I agree with that. 
It is a tax benefit. The interest element of the structured 
settlement is not taxed.
    Mr. McInnis. And under these structured settlements, the 
tax benefit goes from the original intended party, which would 
be in most cases the injured party, now I understand you can 
have lottery winners and people like that, but the witnesses we 
have heard today are injured parties. It was intended that 
benefit went to the injured party. Wouldn't you agree now that 
the benefit through a discount rate, and it affects the 
discount rate, that benefit now transfers to the recipient 
receiving those structured checks under an assignment every 
month?
    Mr. Chapoton. Well, I think that question comes up, is 
exactly the same when the structured settlement is entered 
into, how you split that tax benefit between the structured 
settlement company and the claimant as it is on the purchase of 
a structured settlement company some years later. In other 
words, the two parties you are negotiating are going to split 
that tax benefit.
    Mr. McInnis. That's right. I mean it impacts the price.
    Mr. Chapoton. Correct.
    Mr. McInnis. I understand the impact on the price, but we 
have a third party involved here who is not involved in the 
negotiation. The government, who initiated a tax benefit for 
the injured party. Now, the second party, the purchaser of the 
payments come in. They are now the recipient of a tax benefit 
that was never intended to go to that party. Wouldn't you agree 
with that?
    Mr. Chapoton. No. I wouldn't. They are in no different 
position as far as negotiating for a piece of the whole 
arrangement than the structured settlement company is. The tax 
benefit is going to be split between all the parties that 
negotiate. I agree with that. But I don't know that I see your 
point that they are different than the structured settlement 
company.
    Mr. McInnis. Now correct me if I am wrong, but you said you 
are a tax attorney?
    Mr. Chapoton. I am.
    Mr. McInnis. How would you define then the intent as well 
as the literal definition of the terms under the qualified 
assignment cannot be accelerated. How would you define 
``accelerated''?
    Mr. Chapoton. The term ``accelerated'' was also used in the 
rulings issued by the IRS. It was dealing with the constructive 
receipt doctrine that the claimant could not accelerate. That 
does not mean that a claimant cannot enter into a separate, 
independent, later transaction based on different facts and 
sell that interest. Acceleration is different than assignment.
    Mr. McInnis. Even though the payments are accelerated to 
her, it's just another form? There is still an acceleration of 
payments to her, but it is through another form. But you don't 
think that fits under the definition of acceleration?
    Mr. Chapoton. No, it is not. I definitely do not think it 
is. The payments are not accelerated. They continue as 
originally----
    Mr. McInnis. Well, in form, they continue to another 
mailbox, but there is a transfer payment to the recipient that 
accelerates the payments to the recipient.
    Mr. Chapoton. The recipient gets the funds earlier than 
they would get them after the sale. Let me go back, if I 
might----
    Mr. McInnis. I am out of time. I appreciate it. I would 
call it acceleration.
    Thank you, Mr. Chairman.
    Chairman Houghton. Thanks very much.
    The gentleman from Georgia, Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman.
    Mr. Chapoton. Mr. Chairman, could I respond to one 
question?
    Chairman Houghton. Surely, you bet. Go right ahead.
    Mr. Chapoton. There was a suggestion that I misanswered Mr. 
McInnis' question. I assume that you understood, Mr. McInnis, 
that the payments received by the purchaser are fully taxable. 
You understood? You were not disagreeing with that, were you? 
Did I mislead you on that? A purchaser of a settlement is fully 
taxable on profit it makes on that settlement.
    Mr. McInnis. On the profit. But the payments that come in 
on the profit, yes. But on the payments that come in, still are 
in a tax-exempt status.
    Mr. Chapoton. No. They are not tax-exempt to the purchaser, 
no. There is a tax benefit involved in the original claimant's 
position, but the purchaser is fully taxable on whatever it 
makes in the transaction.
    Mr. McInnis. That helps. Thank you.
    Mr. Chapoton. I'm sorry if I confused you.
    Chairman Houghton. OK.
    Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman. I wanted to welcome 
Tim Trankina from the Peachtree Settlement Funding Co. of 
Norcross, Georgia. He is a good Georgian here today before this 
fine Subcommittee.
    My question is to Mr. Chapoton. What sort of information is 
provided to a claimant at the time the structured settlement is 
offered? Tim may want to answer this, I don't know.
    Mr. Trankina. If I may, Mr. Collins, respond. We typically 
receive inquiries from individuals at which point we discuss 
with them their particular financial needs. We attempt to 
determine the amount of money they are seeking to raise for 
purposes of improving a home, and so forth. We then go over the 
program with the individual and the requirements for the 
program. Then we provide them information on the amount of 
money we could pay them in exchange for a specific number of 
payments.
    We disclose a lot of information to our clients that is 
consistent with the disclosure information that has been 
suggested here. We are very much in favor of consumer 
protection, and support adding any kind of consumer protection 
or disclosures that might help people make informed decisions.
    Mr. Collins. It has been referred to in catastrophic cases 
that maybe there should be some provision that would prevent 
these type of purchases of catastrophic cases. But under the 
ADA, Americans With Disabilities Act, that would not be 
permitted, would it not?
    Mr. Trankina. Well, we are in a difficult situation in that 
circumstance. Eighty-five percent of the structured settlement 
claimants that we deal with in our business and on a national 
basis are not disabled and are gainfully employed, and did not 
sustain a catastrophic injury.
    However, our application process asks very specific and 
detailed questions to determine whether in fact they do have 
such a disability. Our policy is to reduce from their available 
payments amounts that are earmarked for specific medical needs 
and to take into account whether they have a disability.
    The ABA dilemma is that if an individual wants to proceed, 
and they have a disability, our underwriting requirements and 
commitments to our financial institution partners prohibit us 
from purchasing more than about 50 percent of such persons 
payments, even if they were not earmarked for specific medical 
needs, merely because of the concern for the long-term 
disability. That is, we don't want to purchase settlement 
payments that the individual may need on a going-forward basis.
    Mr. Collins. But you fully disclose all aspects of the 
agreement of proposed structure purchase before you purchase 
it?
    Mr. Trankina. Correct. I am not the general counsel of the 
company, but we follow, I believe, reg Z or similar Federal 
lending provision disclosures that would indicate the amount of 
money that is being given, the number of payments over time 
that are going to be given or transferred to us, and the 
interest rate associated with the transfer.
    We also provide as an industry, a 3-day right of recision, 
not merely after the date the contract is signed, which is 
fairly common in States, but after we have actually closed the 
transaction so that an individual could return the check to us 
after closing for up to 3 days thereafter.
    Mr. Collins. Mr. Little, it looks like the full intent of 
your support for this legislation is actually to end these 
purchases of structured settlements.
    Mr. Little. I'm sorry, Mr. Collins. Could you repeat the 
question?
    Mr. Collins. I said it appears that your support of this 
type of legislation is aimed at totally eliminating these types 
of purchases, purchases of structured settlements?
    Mr. Little. With the exception, sir, of a hardship case, I 
would say yes.
    Mr. Collins. And that is based on what?
    Mr. Little. That is based on the flagrant, I would say, 
attempt to thwart a congressional intent.
    Mr. Collins. What is the congressional intent?
    Mr. Little. The congressional intent, sir, I would say was 
best stated by Congressman Ramstad 4 years ago when I had 
breakfast with him. He said that he understood the amendments 
in 1982 to allow for the structured settlements to permit a 
profoundly injured person to live her life with dignity free of 
government.
    Mr. Collins. But you are wanting government to step in and 
prevent the opportunity from an individual having access to 
this type of settlement.
    Mr. Little. No, sir. I am wanting the intent of Congress, 
as embodied in section 104(a)(2) of the Code, and section 130 
of the Code to be upheld.
    Mr. Collins. And that is to prevent the dissipation risks 
to the individual who was injured who is under the structured 
settlement?
    Mr. Little. Yes, sir.
    Mr. Collins. Let me ask you this. You also say that a lump 
sum does the same thing. Would you be in favor of putting the 
40 percent on a lump-sum settlement too?
    Mr. Little. No, sir, I would not, because I think there's 
200 years of common law there.
    Mr. Collins. But you also go onto say that that also leads 
to the dissipation of funds.
    Mr. Little. I think that what we have to understand is that 
a personal injury victim has a choice at the time of 
settlement, a fully informed choice, often times at the advice 
of counsel, generally at the advice of counsel, and many times 
requiring court approval.
    Mr. Collins. But the 40 percent would not totally stop the 
possible purchase of these type of settlements?
    Mr. Little. No, sir. I think again, that our bill has the 
hardship clause. On the showing of genuine hardship, I think 
that the purchase could go forward.
    Mr. Collins. That would be your determination of hardship?
    Mr. Little. No, sir. That would be a court's determination 
of hardship.
    Mr. Collins. But then it also could lead to someone who is 
not total hardship, but also wanted to sell their structured 
settlement to be penalized?
    Mr. Little. I don't know if I would agree with you, sir, 
when you say would be penalized.
    Mr. Collins. You could pay the 40-percent penalty and still 
have the purchase of your settlement?
    Mr. Little. That is correct. Yes, sir.
    Mr. Collins. You could actually be penalizing someone as 
well as trying to stop, because if they were to decide to go 
ahead, they would just be penalized 40 percent?
    Mr. Little. I think that the intent----
    Mr. Collins. And there probably would be cases where there 
were people who would do that.
    Mr. Little. I suppose it would be foreseeable.
    Mr. Collins. This is very, I think, unneeded legislation.
    Thank you, Mr. Chairman.
    Chairman Houghton. Thanks, Mr. Collins.
    Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman. This is constituent 
day. The fine gentleman that my friend from Georgia was just 
grilling is a constituent of mine. I'll leave the Peachtree 
guys alone.
    Mr. Collins. I should have known that by your statement. 
[Laughter.]
    Mr. Collins. You are welcome to grill, if you want to, my 
good friend from Georgia.
    Mr. Portman. Thank you, Mr. Chairman, for having this 
hearing. It is a very important topic.
    Mr. Little, I appreciate your coming into town and 
providing my office, and I think this Subcommittee, with a lot 
of good information, from your association's position, and also 
based on your personal experience in being involved in a number 
of these structured settlements.
    One that I remember distinctly was in northern Kentucky, 
the Carollton bus tragedy. I have not talked to you about this 
personally, but I know that you were involved in creating some 
structured settlements for the kids who were injured. There 
were some severe injuries resulting from that. What has 
happened with that particular case? You did structured 
settlements. Have the factoring companies become involved in 
that, and gone to those families? Do you have any experience 
there to tell us about?
    Mr. Little. That particular case, sir, is probably one of 
the best examples of the law as it currently stands in place. 
There was everything in that particular catastrophic accident, 
from wrongful death to emotional trauma. Several kids died in 
that schoolbus crash. Several kids were profoundly burned. All 
of those children were the children of enlisted Army personnel 
based at Fort Knox. It was a church outing and resulted in that 
fiery crash on the interstate.
    All of those cases, with the exception of four, resulted in 
a partial structured settlement. There was a lot of analysis 
that went into that to determine the future of medical needs, 
the future surgeries that those burn victims would have to 
have. I am very pleased to say that a lot of those structured 
moneys was dedicated to the college education funds for those 
children, for the future psychological treatment of those 
children. Many of those children went on to become college 
graduates, the first in the history of their families. Many of 
those kids, the scarring notwithstanding and the future 
surgeries that they had, were able to reintegrate into society 
having had the benefit of the structure to pay for the future 
surgeries, and go on very well with their lives.
    Unfortunately, factually those children were from one 
community. It was very easy to get the court records by the 
factoring companies. They have in fact become targets for the 
factoring companies. They are located in one geographic area, 
very easy to contact them, very easy to try to persuade them to 
sell their settlements.
    I am happy to tell you that the Kentucky judiciary is not 
looking favorably on that, because there was a lot of analysis 
and a lot of thought that went into the settlement of those 
claims.
    Mr. Portman. Was this a court-ordered settlement? Was the 
judiciary involved?
    Mr. Little. It was a court-ordered settlement as to the 
children who survived. You know, they were minors at that time. 
The children who died, their parents brought the cause of 
action, and that did not----
    Mr. Portman. The judicial system was involved in the 
structured settlements as compared to a lump sum at the time?
    Mr. Little. Yes, sir. Absolutely.
    Mr. Portman. At the time of the accident?
    Mr. Little. Yes, sir.
    Mr. Portman. With the families of the children?
    Mr. Little. Yes, sir.
    Mr. Portman. Have the judges in that case and for that 
matter around the country, to the extent that you know about 
it, sealed the records of the settlements? You said that they 
haven't looked favorably upon the factoring companies. How are 
judges reacting around the country, to your knowledge?
    Mr. Little. We see a lot of judicial activism, particularly 
in cases involving incompetence concerning minors. By judicial 
activism, what I mean, sir, is that the judges have commented 
in open court that they are cautious of the factoring 
companies' advertisements on TV. In that regard, they are 
ordering that the settlements be sealed. When there is court 
approval, it needs to be brought to bear on the settlement.
    Mr. Portman. Are they permitted to do that?
    Mr. Little. Yes, they are.
    Mr. Portman. We have a situation now where at least in some 
cases, the judges are actively keeping the factoring companies 
from coming in by either sealing the records or in open court 
discouraging it, or how?
    Mr. Little. Not only saying in open court, sir, that the 
record will be sealed, the terms of the settlement will be 
sealed, but admonishing the attorneys on both sides to not 
reveal, if you will, the terms of the settlement in that 
regard.
    Also, we see situations in Hamilton County. That by the 
way, is particularly true with the judges in Hamilton County 
back in Cincinnati. Also, the other thing that we are seeing is 
that the judges, where there is a cash settlement involving a 
minor or an incompetent, are telling the attorneys to go back 
and to take a look at a portion of the settlement dollars that 
would be paid in lump sum, be paid partially in a structured 
settlement to protect the child or the incompetent from 
mercenary friends and relatives.
    Mr. Portman. Let me ask about the court approval clause in 
H.R. 263, the Shaw bill. It says there's an exception if the 
transfer is undertaken pursuant to an order of a court finding 
that there is an extraordinary unanticipated or imminent need 
of the structured settlement recipients, spouse or dependents 
to receive a lump sum.
    Mr. Little. Yes.
    Mr. Portman. How would that be likely to affect the 
structured settlements that are currently in place? In other 
words, how often do you think that would happen?
    Mr. Little. In my experience, in almost 20 years as a 
structured settlement broker, in working in every jurisdiction 
in this country, I have had three requests by claimants who 
said ``I have a genuine hardship,'' who have come back to me as 
the broker that I met at a settlement conference table, and 
said ``Is there any way that you can help me, because we have 
an emergency.''
    I am confronted with a surgery that was not anticipated. 
You know, we have lost our home in a fire, something like that. 
In all of those three situations, the insurance company worked 
very closely to try to find a way to help them.
    Mr. Portman. I just asked the Chairman if I could keep 
going beyond the red light here with his indulgence. I want to 
thank everyone for coming. Buck Chapoton is one of the premier 
tax lawyers in this town. I respect his opinion on tax matters. 
I disagree with him somewhat on this one because I do think, 
and we got into some of those specifics of it, that based on 
the revenue ruling and in the 1982 change in the law, that we 
made a conscious decision to provide a tax subsidy, which is 
the interest on the structured settlement over time, that 
otherwise would have been taxable. Having made that decision, 
that was a public policy determination that there was some 
public good, and what would be considered to be not only a 
subsidy, but an economic inefficiency otherwise. The question 
is, is that working and is it consistent with the public good. 
I think in this respect, there is a lot of evidence that it's 
not working well in many cases because of the public policy 
being thwarted by the factoring companies.
    Now the question is whether there should be a 50-percent 
excise tax, or 40 percent, or whether there is something in 
between, or another way to get at it. But I do think that there 
is an appropriate public policy here that Congress set out to 
try to at least confirm in 1982, based on the revenue ruling 
that ought to be consistent.
    Do you have any comment on that?
    Mr. Chapoton. I would just say I clearly think the benefit 
should last as long as the structured settlement stays in place 
and the claimant cannot have the right to accelerate it. My 
point is that there is a good policy behind that, and it works.
    If situations change, and that recipient decides to sell in 
an unrelated transaction to a third party, then that benefit 
stops. It seems to me that is quite appropriate and quite 
consistent with the 1982 legislation.
    Mr. Portman. Again, and I understand what you are saying 
there in terms of policy, that the question is what was the 
congressional intent and what was the public policy purpose. If 
it was indeed to permit people to have this protection, and 
that protection is taken away by a practice that has since 
occurred, you know, having set that policy in place, and having 
made that decision, it is a tax issue. It becomes an issue that 
is before this Subcommittee. Doesn't this Subcommittee have the 
right then on a tax basis to come in and adjust?
    Mr. Chapoton. Certainly, in that sense it is a tax issue. 
There is a tax provision here. My point is the tax provision 
did not mean to impose a lock-in effect as everyone is 
interpreting it. That is as clear as a bell. The tax provision 
did not mean to impose a lock-in effect on the claimant. It did 
not mean to impose a tax on the structured settlement company 
if there is a later sale. It meant simply not to stand in the 
way of structured settlements. Absent that rule, if you didn't 
have a rule such as contained in sections 130 or 104(a) or in 
the rulings before those provisions became law, then the 
structured settlement would have an adverse tax consequence. 
The rulings and the 1982 Code amendments said you can do it, 
but did not condition that as people are interpreting it, they 
did not condition that benefit to require that you can never 
can sell it in the future. That is just a separate issue, in my 
mind.
    Mr. Portman. Again, I think the more fundamental question 
is what was the public policy. You just interpreted it as being 
that the Congress decided it would not stand in the way of 
structured settlements, looking back at the legislative 
history. You were probably involved in this at the time and I 
wasn't. But I think it was not that Congress wouldn't stand in 
the way, but rather, that Congress would encourage. I think 
that is a distinction that is important with a difference with 
regard to what we do going forward. I don't know what precisely 
the right approach might be to resolve this, but I think if you 
look back at the public policy intent, it was not to stand in 
the way. It was actually to encourage, and to the extent that's 
being discouraged, it might be an appropriate remedy to amend 
the tax system.
    Also, one other thing, Mr. Chairman, if I might. I 
apologize for the time. We have a very famous panel with us. 
Mr. Countee was on TV last night. In case you didn't see him, 
he was there talking about a new golf course for people with 
disabilities in the State of Maryland. He was interviewed and 
he did a very good job, as he did this afternoon in talking 
about that issue.
    Thank you, Mr. Chairman.
    Mr. Countee. Thank you very much, Mr. Portman.
    Chairman Houghton. Should we all meet on the golf course? 
[Laughter.]
    Well, I just have one question. The association has said 
that under no circumstance would any company or grouping buy 
settlements from people who really depend upon that income. 
Here we have this U.S. News and World Report from January 25. 
There is an article here, ``Settling for Less. Should Accident 
Victims Sell Their Monthly Payments?'' Here are two 
quadriplegics who are suing because they have been taken 
advantage of. I mean is this true or not?
    Mr. Trankina. Mr. Chairman, if I could respond to that. I 
was disturbed as well when I read that article. I can primarily 
speak for our experience at Peachtree Settlement Funding, but 
also on behalf of our trade association.
    At Peachtree Settlement Funding, it is our policy to 
carefully examine and obtain information from claimants as to 
their physical condition and their intended use of funds. We do 
that through an application process, which asks these types of 
questions. Do you depend on your payments for medical 
necessities? Please describe other information about your 
medical and physical condition. Based on that information, we 
apply standards that allow us to purchase payments from 
individuals that are not earmarked for specific medical needs.
    Again, 85 percent of our clients do not have any type of 
long-term disability and are employed. Clients having a long-
term disability reflect only a small percentage of our 
applicants. But also I would like to say with respect to that 
article, on my own effort for my company and in trying to 
uphold the ethics we maintain, I wanted to investigate somewhat 
into those circumstances reflected in the article. There are 
somewhere in the area of 15,000 structured settlement 
transactions that have occurred in the secondary market by 
finance companies, I believe over the last few years. This 
article highlighted a few situations where transactions may or 
may not have been appropriate. It would appear they should not 
have occurred.
    We are in a consumer business. We are constantly striving 
to improve that business. We have wholeheartedly embraced the 
idea of consumer protection that would prevent any type of 
abuse to occur. In those particular instances, I believe two of 
the individuals had diverted some payments and one of the 
individuals had improperly completed and did not convey 
truthfully his medical condition in the application. The 
individuals referenced in the article were not clients of our 
company.
    I was interviewed for about 45 minutes by the author of 
that article. However, none of the information that I conveyed 
of the practices of our business was represented. I think it 
was a highlight of some situations.
    More importantly, I think it highlights the need for 
consumer protection. Again, we wholeheartedly embrace 
disclosure and the procedures that would permit an individual 
to make an informed decision.
    [The following was subsequently received:]

March 31, 1999

Mr. A.L. Singleton
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515

Re: Committee on Ways and Means, Subcommittee on Oversight, Tax 
        Treatment of Structured Settlements, Thursday, March 18, 1999

    Dear Mr. Singleton:

    I greatly appreciated the opportunity to testify before the 
Subcommittee on Oversight in the above-reference matter. It was truly a 
privilege and honor for me as a citizen to participate in the 
legislative process at the federal level.
    As a follow-up to the hearing, I have set-forth below responses to 
a few items/questions left open at the hearing and for which I have 
personal knowledge and/or requested permission to provide a response 
subsequent to the hearing.
    1) Ms. April Fely--Testimony was offered by the proponents of the 
excise tax related to Ms. April Fely, a client of Peachtree Settlement 
Funding. Ms. Fely, who was not present at the hearing nor consulted 
prior to, was portrayed by the proponents of the excise tax as having 
lost her dignity by squandering her structured settlement. This 
portrayal is not only inaccurate, but offensive to Ms. Fely, as well as 
others in her situation who often must make difficult decisions in 
order to move themselves and their families forward. Quite to the 
contrary, Ms. Fely made an informed and educated decision to sell her 
future settlement payments to meet her changing financial 
circumstances. As she states in her attached affidavit, her family 
benefitted greatly from her transaction with Peachtree Settlement 
Funding which, in part, permitted her to obtain an automobile to 
facilitate her childrens' commute to work and school. She is employable 
and not disabled. Certainly she will lose her dignity if denied the 
right of self-determination and control over her own financial affairs.
    2) Litigious Customers--The proponents of the excise tax offered 
testimony stating that our clients are so unhappy with our services 
that over 200 lawsuits have been filed against us as an industry. This 
assertion is absolutely false and reflects a gross misrepresentation to 
the Committee. Peachtree Settlement Funding has participated in several 
thousand transactions and has not been sued or served with a complaint 
by a single customer. Other NASP members have reported only a handful 
of customer initiated litigations out of 15,000 plus transactions. 
Unfortunately, a small percentage (1%) of our customers attempt to 
defraud us of payments we purchased. In these instances, we seek to 
enforce our purchase agreement against the individual perpetrating the 
fraud. The ``200'' lawsuits referenced by the proponents relate to 
those instances where a settlement purchaser instigated an action to 
enforce its contractual rights.
    3) Searching Through Court Records--The proponents of the excise 
tax offered testimony stating that settlement purchasers, like 
Peachtree Settlement Funding, actively seek out and ``target'' accident 
victims. This assertion is absolutely false. No member of the National 
Association of Settlement Purchasers researches court filings or other 
court documents to identify potential customers. The mere suggestion of 
such is a red-herring and pure nonsense as over 80% of structured 
settlements are reached without a single document ever being filed in 
court. To the contrary, we advertise broadly without any specific 
knowledge as to whether those who hear our message in fact have a 
structured settlement. We rely entirely on responding to inbound 
telephone inquiries initiated by the consumer.
    4) Interest Rates--The proponents of the excise tax offered 
testimony stating that settlement purchasers, like Peachtree Settlement 
Funding, charge egregious interest rates. This assertion is false. 
Peachtree Settlement Funding utilizes interest rates consistent with 
credit card rates. These rates average in the high teens. The largest 
issuer of sub-prime credit cards in the country (First USA Bank) 
charges a standard rate of 26.1 percent. For the vast majority of our 
customers, the interest rates we charge reflect the best credit terms 
they have ever been offered. Moreover, our rates have declined steadily 
as competition in the industry has increased.
    5) Consumer Bill of Rights--During my testimony, I referenced the 
National Association of Settlement Purchasers (``NASP'') Consumer Bill 
of Rights. The Consumer Bill of Rights sets forth broad disclosure 
requirements and recission rights for the consumer. All NASP members 
are required to follow a code of ethics which includes compliance with 
the Consumer Bill of Rights. I have enclosed a copy of the NASP 
Consumer Bill of Rights and Code of Ethics for your consideration.
    Thank you once again for the opportunity to make this submission to 
the Committee. I am available to provide additional information, 
testimony, or assist in any other manner to further the Committee's 
examination of the proposed legislation.

            Sincerely,
                                        Timothy J. Trankina
                                                 President & C.E.O.

TJT:ma

Encl.
      

                                


CONSUMER BILL OF RIGHTS

    You have the right to know the exact amount you are to 
receive in exchange for your transfer of payment rights;
    2. You have the right to know the discount rate applied to 
your transaction;
    3. You have the right to consult with your counsel of 
choice at any time regarding your transaction;
    4. You have the right to know the exact amount of all 
commissions, fees and other charges to be incurred by you in 
connection with your transaction;
    5. You have the right to cancel your agreement to transfer 
your payment rights for any reason within three (3) business 
days of the date you receive payment;
    6. You have the right to know about any penalty provisions, 
including claims for liquidated damages, in the event of a 
breach by you of your transfer agreement;
    7. You have the right to choose whether or not to transfer 
your payment rights at any time.
      

                                


NASP CODE OF ETHICS

    Be it resolved, that the NASP shall adopt a code of ethics 
for its members. All members shall:
     Observe high standards of commercial honor and 
just and equitable principles of trade;
     Comply with all laws governing the member's 
operations, and shall conduct its business so that the member 
deserves and receives recognition as a good and law abiding 
citizen;
     Be accurate and complete in its contract 
negotiations with prospective customers;
     Not engage in any unfair methods of competitions; 
and
     Not take any unfair advantage of a prospective 
customer; and shall insure that the prospective customer is 
legally capable of entering into the transaction contemplated.
      

                                

    To Whom It May Concern:

    I received payments pursuant to a structured settlement. 
This settlement arose out of a medical malpractice action from 
the death of my husband. My children receive a separate 
settlement which they will be able to collect when they turn 18 
years old. I also receive social security payments and I am 
employable, if need be and I am not disabled in any way.
    It is my understanding that the NSSTA has been using me as 
an example of how structured settlement purchaser take 
advantage of accident victims. First of all, I am offended by 
the NSSTA's position that I am incompetent to handle my 
financial matters. Secondly, my family greatly benefitted by 
doing transactions with Peachtree Settlement Funding. We used 
the money for several things: we purchased a vehicle which 
greatly facilitated my children's commute to school and to 
work. Also, we used a portion of the funds for recreation as we 
took a long due vacation in the island.
    I am puzzled as to why I am being used as an example 
against structured settlement purchasers. Selling MY payments 
has benefitted me and my family and I do not think ANY 
insurance company has the right to tell me whether I should or 
should not do it, or whether I should or should not improve my 
family's life. I am perfectly capable to make these decisions 
on my own.
    Thank you very much,

APRIL FELY

March 31, 1999

Notary Seal

State of Hawaii

County of Hawaii

    On this 31 day of March, 1999, before me personally 
appeared April Fely
    To me known to be the person------described in and who 
executed the foregoing instrument, and acknowledge that she 
executed the same as her free act and deed.

                                            Lauri M. Mattos
             Notary Public, Third Judicial Circuit, State of Hawaii

My commission expires February 6, 2000
      

                                

    Chairman Houghton. If I could just interrupt 1 minute. I 
mean it's the age-old issue. If it's a consumer protection 
issue versus an issue of law, then you have to make sure that 
the consumer is protected. If the industry is not going to do 
it, this is where the government moves in. I think most of us 
sitting around here don't want to create new laws.
    But we will create new laws if the industry isn't willing 
to protect itself or it isn't able to protect itself. Maybe you 
have an answer to this, and maybe somebody else would like to 
make a comment.
    Yes, Mr. Little.
    Mr. Little. Mr. Chairman, I would respectfully point out a 
case that Peachtree was involved in. I think it is important 
that we look at the circumstance of the claimant in each 
situation and not focus so much on language such as 
catastrophic. It would be a relative term that people would 
take exception to.
    Let me give you the example here that I am speaking of. Her 
name is April Feely. Mrs. Feely is an unemployed widow, 
approximately 40 years old with eight children. Her sole source 
of income are or were her $1,200 monthly structured settlement 
annuity payment and Social Security payments of $1,850. The 
transaction for which Peachtree has sought approval from the 
Kentucky court as its fourth transaction with Ms. Feely. Taking 
the transactions together, she has sold Peachtree all of her 
monthly $1,200 settlement payments through February 2005, and 
all but $100 of her monthly payments through February 2008.
    So, I think that case alone shows a circumstance. We are 
not talking about a catastrophic injury here. We are talking 
about a catastrophic situation, where she was dependent with 
eight children, on this annuity payment, in addition to her 
Social Security payment. It goes back to the Congressman 
Ramstad's comment of living one's life with dignity, free of 
government.
    I can assure you that if this goes forward as proposed and 
Mrs. Feely is left without her annuity benefits, that she 
surely will be on public assistance, and she will surely lose 
some of her dignity in that regard.
    Chairman Houghton. Thank you very much.
    Mr. Coyne. Thank you, Mr. Chairman. I just want to follow 
up. Mr. Trankina, what is the preferred method for payments to 
the companies' agents or salesmen?
    Mr. Trankina. I am not sure I follow.
    Mr. Coyne. Is it commission? Are they paid on a commission 
basis?
    Mr. Trankina. Our employees?
    Mr. Coyne. Yes, right.
    Mr. Trankina. At Peachtree Settlement Funding, we have 
employees that receive a base salary a commission based on a 
sales volume, typical for a sales organization.
    Mr. Coyne. The commission is based on sales volume?
    Mr. Trankina. For that individual, yes.
    Mr. Coyne. Along with a base salary?
    Mr. Trankina. Yes.
    Mr. Coyne. Thank you.
    Chairman Houghton. Yes. I was just going to get back to my 
issue. Do you really have a feeling that the industry is going 
to be able to police itself? Because absent that, then clearly 
legislation is going to take place. Maybe the rest of you would 
have comments about it.
    How about you, Ms. Kucenski?
    Ms. Kucenski. I do not understand the question.
    Mr. Trankina. If I may respond, if it please the Chair, if 
I may respond.
    The industry is a young industry. We have responded to a 
calling of thousands of individuals, 30 percent of which never 
had any representation when they entered into the structured 
settlement, did not understand completely what the 
transaction----
    Chairman Houghton. Can I interrupt? Would you answer my 
question?
    Mr. Trankina. Yes, sir. As a result of being an emerging 
industry, we have very diligently been organizing ourselves as 
a trade association, we have developed a consumer bill of 
rights and standards for membership in the organization. We 
believe those standards, which have not been submitted in the 
materials--I would appreciate the opportunity to do so. We 
believe those standards address the issues that have been 
raised.
    Notwithstanding that, we do realize as an emerging 
industry, that others may want to get into the industry that 
may not choose to participate in our national association. For 
that reason, we have, as an industry, proposed a model act of 
legislation in various States that would codify these types of 
consumer protections that we are all seeking.
    We wholeheartedly embrace the idea of consumer protection, 
as long as it's meaningful and still provides and recognizes 
that circumstances change over time. Consumers had a choice 
when they entered into a transaction. They were victimized at 
that point, had a choice to take a lump sum or a structured 
settlement, and now later, as circumstances change, our typical 
timeframe is 5 to 7 years after an incident occurred, that they 
be given that choice once again to evaluate whether a financial 
transaction is in their best interest.
    Chairman Houghton. Would you have a comment on that, Mr. 
Chapoton?
    Mr. Chapoton. No. I was simply going to make exactly that 
point. The industry is new. I have reviewed the Code of conduct 
that they have adopted and discussed with them at some length 
their effort at State legislation, where this should be dealt 
with.
    Chairman Houghton. And so you think that the Congress 
should wait, not pass legislation, and see this industry 
develop into greater maturity? Is that right?
    Mr. Chapoton. That is correct. I think we should make sure 
that the industry does it responsibly.
    Chairman Houghton. How do we get away from something like 
that?
    Mr. Chapoton. I think that is difficult, Mr. Chairman. I 
think highlighting situations like that is helpful, not 
harmful. I think the industry should deal with situations like 
that. As you say, it should police itself.
    Chairman Houghton. But is there anything we can do together 
to try to prevent something like this from happening tomorrow?
    Mr. Chapoton. I would defer to Mr. Little, but I do think 
industry associations such as NASP are good ways to police 
industries. I think it should be done, and I hope and believe 
it is being done.
    Chairman Houghton. Mr. Little.
    Mr. Little. Mr. Chairman, we would have the opinion very 
strongly, sir, that 263 should be enacted for the very reason 
that you are asking the question, as I understand your 
question, sir.
    We would be curious as to why even though it may be a young 
industry, that hundreds of purchase victims are suing the 
purchaser. If this is a legitimate business, and if it is 
serving some social good, why does all of this end up in such 
protracted lawsuits as we see, and are a matter of public 
record? Why are these interest rates so egregious? Why does it 
result in the stories that you see in U.S. News and World 
Report? Those are not isolated cases. We see it every day.
    In my practice, I get to know a lot of very successful 
attorneys around the country. You would be surprised, sir, and 
somewhat impressed if you would hear the comments that they 
make.
    That people come back to them after they have worked very 
diligently to procure the structured settlement, to protect the 
interest of their clients, their future medical needs, and see 
them come back 1 year, 2 years, or 5 years after the settlement 
and say ``I'm totally broke. I sold my structured settlement. I 
squandered what I got for it. Is there anything that you can do 
for me?''
    Chairman Houghton. There isn't. I am all through with my 
questions.
    Have you got any? Would you like to say something?
    Mr. Collins. Yes, Mr. Chairman. I would like to ask Mr. 
Chapoton.
    You mentioned what is occurring as far as what the 
association has drafted as their code of conduct and that State 
legislatures should look at this.
    Mr. Chapoton. That's correct.
    Mr. Collins. Are you familiar or are there any State 
legislatures that are actually looking at legislation like 
that?
    Mr. Chapoton. There have been proposals. I really couldn't 
answer that directly. We could discuss that, but I couldn't 
give you any details on it.
    Mr. Collins. But it is an industry that is an advantage for 
a lot of consumers who need help, who have structured 
settlements, to be able to go to an industry like this for 
assistance. But it is important that the State legislatures 
look at consumer protection legislation within their States.
    Mr. Chapoton. That is correct. Our industry association 
supports that.
    Mr. Collins. To me it is un-American for the Congress to 
try to tax any business out of existence, whether it be this 
type of industry or whether it be the tobacco industry, or 
whether it be an arms manufacturing industry or whatever. It is 
wrong to try to tax a business out of existence.
    Thank you, Mr. Chairman, for allowing me to participate.
    Chairman Houghton. OK. Thanks, Mr. Collins.
    Mr. McInnis.
    Mr. McInnis. Thank you, Mr. Chairman. I have some 
appreciation for the gentleman at the end of the table. In the 
U.S. News and World Report interview where he talked for 45 
minutes to the reporter and the reporter specifically left many 
of his comments out, I think everybody at this table has been a 
victim of that kind of reporting as well.
    But Mr. Little, maybe you can help me out. What is the 
premium, the typical premium that is charged by these factoring 
companies to purchase the structured settlement? Can you give 
me an idea what? You said earlier extravagant interest rates. I 
happen to believe that is probably true, but I am trying to get 
my hands on a number here.
    Mr. Little. As a matter of public record, some of the 
things that the National Structured Settlement Trade 
Association through counsel has pulled, which show that a 
mortgage equivalent rate on an annual basis to range from 19.8 
to 36.2, to 36.9, 41.7. Sir, I do not have an average for you. 
These are actual cases involving actual purchases. I would be 
happy to give you a copy of this.
    Mr. McInnis. Reclaiming my time, Mr. Little. These are 
probably the most egregious cases because they filed litigation 
on them. I am trying to determine what is more run-of-the-mill. 
These are going to be at one end of it. If you have any data 
that would give me a run-of-the-mill rate, that would be a 
little more helpful to me than probably the most egregious 
cases.
    Mr. Little. I'm sorry, I don't have that with me today, 
sir. If we have any of that data available, we will certainly 
make it available to you.
    Mr. McInnis. Then I guess the other point, Mr. Little, 
actually I find myself going back and forth with your 
testimony. I think it has been very helpful, and also the tax 
lawyer, I appreciate your counsel. But tell me at what point do 
you think that the client or the injured party should have the 
economic freedom to make a decision? If they make a bad 
decision, I mean who is responsible for that other than the 
person? Unless they have been sold through fraud or some other 
means, I mean at what point do you say hey, consumer beware. 
The same thing applies with charging on a credit card.
    Mr. Little. In my experience in working for many property 
and casualty companies and self-insureds, I don't see any 
fraud. The 104(a)(2) says damages received on account of 
personal injury or sickness, whether paid in a lump sum or 
periodic payments. Personal to the claimant, you have a choice. 
You can take it in a lump sum or you can take it in periodic 
payment. The property casualty adjustor who is sitting there at 
the settlement conference table is under no obligation to offer 
a structured settlement. He offers it as a choice, consistent 
with the tax law. So that is the moment of settlement there.
    It is very, very rare that a case settles on a day that the 
settlement conference is held.
    Mr. McInnis. Let me reclaim my time because I must have 
given you the wrong question. I am not talking about the 
original structured settlement. I am talking about the decision 
to factor their account or to go out and sell their structured 
settlement.
    Mr. Little. I think that our bill addresses that. I think 
with the showing of genuine hardship, that there would be no 
problem with that. I think it is reasonably foreseeable that 
there would be genuine hardship. I think if you go back the 
court of original jurisdiction, and you have the approval of 
that court, everything has been dealt with appropriately. The 
hardship has been demonstrated. The court has said yes, we 
understand the hardship and we let it go forward, and no excise 
tax is applied.
    Mr. McInnis. Then I'll conclude it with this, Mr. Chairman. 
What if at some point somebody who is astute, who is not 
experiencing a hardship, sees that they can get a better return 
for their money; in other words, they had an opportunity to 
invest in a home in a rapidly accelerating real estate market. 
At what point would you allow those people to make a voluntary 
choice to sell a structured settlement to a factoring company, 
or sell it to the companies that do this, without having a 
hardship.
    Mr. Little. I would think in your example, sir, that it is 
part of the American dream to have a home. If an astute couple 
had an opportunity to buy a home, that that may fall under the 
genuine hardship.
    I would find it a rare situation for a court of original 
jurisdiction to say if you have the opportunity as an American 
to own a home and you could do that, I would say that that 
would create a genuine hardship.
    Mr. McInnis. And help me. Would a person under this--
because I'm not completely clear on this--what if a person can 
go and convince the court, I have got an opportunity to invest 
in a fairly conservative investment which will give me a higher 
return. Would they have to qualify--at what point could they 
say, Judge, I want to make my own decision. I want to sell the 
structured settlement.
    Mr. Little. I think, using your assumption, sir, that they 
were astute, that they had the opportunity to apply their 
astuteness at the time that they settled their lawsuit or their 
claim on the personal injury. That is the choice that they have 
at the time of the settlement, consistent with 104(a)(2) of the 
Code. As you are saying, if it's accelerated----
    Mr. McInnis. We don't play semantics here. The investment 
comes after the settlement. Forget the structured settlement. 
It has already been settled. Five years later, an opportunity 
comes up to invest. You know what I am saying.
    Mr. Little. Yes, sir, I do.
    Mr. McInnis. I am just trying to determine whether or not, 
if there is a lesser step, like perhaps just going to the court 
and the court determining that the party selling is fully aware 
of what they are doing, and the rate at which they are paying. 
I'll wrap it up.
    Mr. Little. I think at that point that you are unraveling 
the intent of Congress and a large body of tax law. I think 
that that would create problems.
    You know, the Tax Code, I think that that narrow paragraph 
in there is the only segment of our society that you will find 
is protected in that way, are the profoundly injured. I think 
that if we undo that, we undo the intent of Congress, and we 
unravel all of that.
    I hope I am answering your question. I feel like I am 
frustrating you in not answering your question, but that is my 
opinion.
    Mr. McInnis. Mr. Chairman, if I might, the gentlewoman 
there is kind of jumping around, anxious. Does she wish to 
respond, if it meets the approval of the Chairman?
    Chairman Houghton. Please.
    Ms. Kucenski. When my husband and I decided to purchase 
this home, and it was exactly what you said, a great real 
estate opportunity, and we improved it and we made more money 
off of it, I took our money, my money made in Templeton Growth 
Fund, I am making more money, my money, making more than 
anybody could give me through what I have for settlement now. I 
had no choice to pick a structured settlement. I am 30 years 
old. I do not need this to physically improve myself or to live 
off of.
    This is money that I found that me and my husband could 
invest in. That's what we did. It was basically my choice. I 
resent the fact that I had to have a judge grant me permission 
of my money to use it the way I saw fit. Basically it comes 
down to it's my money. I have the right to do what I want. If I 
blow it, I blow it. If I invest it wisely, great. But it is my 
money.
    Mr. McInnis. Thank you, Mr. Chairman.
    Chairman Houghton. All right, thank you very much. Thank 
you, I really appreciate your time here this afternoon.
    [Whereupon, at 3:05 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]



Statement of American Bankers Association

    The American Bankers Association (ABA) is pleased to have 
an opportunity to submit this statement for the record 
regarding the tax treatment of structured settlements.
    The American Bankers Association (ABA) is pleased to have 
an opportunity to submit this statement for the record 
regarding the tax treatment of structured settlements.
    The American Bankers Association brings together all 
categories of banking institutions to best represent the 
interests of the rapidly changing industry. Its membership--
which includes community, regional and money center banks and 
holding companies, as well as savings associations, trust 
companies and savings banks--makes ABA the largest banking 
trade association in the country.
    The tax treatment of structured settlements is currently 
the focus of several legislative proposals. Representative Clay 
Shaw (R-FL) and others have introduced legislation, H.R. 263, 
The Structured Settlement Protection Act of 1999, to impose an 
excise tax on ``persons who acquire structured settlement 
payments in factoring transactions.'' Also, the 
Administration's Fiscal Year 2000 budget contains a proposal to 
impose an excise tax on ``the purchase of structured 
settlements.'' These proposals could have unintended and 
harmful consequences for banking institutions that make loans, 
pursuant to blanket security agreements, to consumers who 
receive structured settlement payments.
    This could have unintended consequences on legitimate 
lending arrangements. If legislators determine to proceed with 
structured settlement legislation, such arrangements should be 
excluded.

THE PROPOSED LEGISLATION WOULD SUBJECT LEGITIMATE LENDING ACTIVITY TO A 
                     SUBSTANTIAL EXCISE TAX PENALTY

    H.R. 263 would impose a 50 percent tax on ``any person who 
acquires directly or indirectly structured settlement payment 
rights in a structured settlement factoring transaction.'' The 
bill defines a structured settlement factoring transaction is 
defined as ``a transfer of structured settlement payment rights 
made for consideration by means of sale, assignment, pledge or 
other form of encumbrance or alienation for consideration.'' 
The bill provides that the tax should be applied to the 
``factoring discount,'' which it defines as ``the excess of (i) 
the aggregate undiscounted amount of structured settlement 
payments being acquired in the structured settlement 
transaction, over (ii) the total amount actually paid by the 
acquirer to the person from whom such structured settlements 
are acquired.'' As currently drafted, the proposed legislation 
would impose a substantial excise tax penalty on legitimate 
lending activity.
    For example, if an individual who borrows $100,000 from a 
bank, secured by a lien on the borrower's assets, is a 
recipient of annual structured settlement payments, the bank 
could be liable for an excise tax. The excise tax on such a 
transaction, assuming the borrower receives $20,000 per year 
for 15 years under the structured settlement arrangement, is as 
follows:

------------------------------------------------------------------------

------------------------------------------------------------------------
Face amount of settlement payments...................           $300,000
Loan amount..........................................            100,000
                                                      ------------------
Factoring discount...................................            200,000
Excise tax percentage................................                50%
                                                      ------------------
Excise tax due.......................................           $100,000
                                                      ==================
------------------------------------------------------------------------

    The Administration's proposal is similar, but would impose 
a 40 percent excise tax on any person purchasing (or otherwise 
acquiring for consideration) a structured settlement payment 
stream. Under the Administration's proposal, the bank's excise 
tax liability could be $80,000.

------------------------------------------------------------------------

------------------------------------------------------------------------
Undiscounted value of purchased income stream........           $300,000
Loan amount..........................................            100,000
                                                      ------------------
Difference...........................................            200,000
Excise tax percentage................................                40%
                                                      ------------------
Excise tax due.......................................            $80,000
                                                      ==================
------------------------------------------------------------------------

    The imposition of such substantial penalties on legitimate 
business activity would certainly not be an intended 
consequence of the subject legislation.

OUTSTANDING LOANS MADE PURSUANT TO BLANKET SECURITY AGREEMENTS COULD BE 
                             SUBJECT TO TAX

    A blanket security agreement generally provides that the 
loan made by the lending institution is secured by all property 
(tangible and intangible) the borrower presently owns or 
subsequently acquires. As currently drafted, both of the 
proposals could impose excise taxes on banking institutions 
that use such agreements to secure loans. Indeed, a financial 
institution may unknowingly become subject to the excise tax on 
outstanding loans to a recipient of structured settlement 
payments upon rollover or renewal of the loan, or if the 
borrower acquires settlement payment rights subsequent to 
receiving the secured loan. The lending institution would be 
subject to tax even though it did not rely on the existence of 
the settlement for the decision to make the loan nor for 
repayment purposes.
    Certain Members of Congress believe that by imposing the 
excise tax on the amount of the discount, rather than on the 
entire amount of the payment stream, the proposal is more 
targeted than the prior Administration proposal. However, for 
the reasons set out above, both proposals remain overly 
inclusive in that innocent and unknowing banking institutions 
may be unfairly snared in a punitive tax trap.
    Further, enactment of the proposed legislation as currently 
drafted would impose new and unduly burdensome administrative 
costs on lenders, who would be required to re-write their 
outstanding loans in the attempt to avoid imposition of the 
excise tax. Accordingly, we strongly urge you not to impose the 
factoring excise tax on banking institution lending activity.

                               CONCLUSION

    The ABA appreciates having this opportunity to present our 
views on the tax treatment of structured settlements. We look 
forward to working with you on this important matter.
      

                                


Statement of American Council of Life Insurance

    The American Council of Life Insurance (ACLI) supports H.R. 
263, the Structured Settlement Protection Act (``Act''). We 
believe that this Act better regulates the factoring (i.e. 
purchasing) of structured settlement payment rights, offers 
greater protection to injured persons who are receiving those 
payments, and clarifies the effect on the insurance companies 
who issue the annuities from which the payments are made. The 
ACLI represents four hundred ninety-three (493) life insurance 
companies, many of which issue annuities that are utilized in 
connection with satisfying obligations to provide structured 
settlements payments.
    Factoring Permitted with Finding of Court-Approved 
Hardship. Under the Act, an excise tax is imposed upon any 
person who acquires structured settlement payment rights except 
in the case of a transfer which is ``undertaken pursuant to the 
order of the relevant court or administrative authority finding 
that the extraordinary, unanticipated, and imminent needs of 
the structured settlement recipient or his or her spouse or 
dependents render such a transfer appropriate.'' We believe 
that the requirement that a court or administrative agency make 
an affirmative finding of fact regarding the appropriateness of 
factoring structured settlement payment rights is crucial in 
ensuring that the intent of the underlying structured 
settlement is preserved.
    Our member companies' experience has shown that structured 
settlements are often utilized in situations in which the 
recipient is physically disabled, in need of medical care, and 
may have a decreased ability to engage in gainful employment. 
The periodic payments from the structured settlement may be the 
main source of income available for support of the recipient 
and his or her family. Congress has recognized these concerns 
in the enactment of special tax rules which are beneficial to 
the structured settlement recipient, provided for primarily in 
sections 104 and 130 of the Internal Revenue Code. The 
legislation currently proposed would be consistent with the 
existing laws and would continue Congress' history of ensuring 
continued protection for injured persons receiving structured 
settlements.
    In 1981, the original sponsor of section 130, Senator Max 
Baucus, noted that periodic payment settlements would ``provide 
plaintiffs with a steady income over a long period of time and 
insulate them from pressures to squander their awards.'' 
Congressional Record (daily ed.) 12/10/81 at S15005. The same 
needs exist today. The ACLI believes that the Act would serve 
both to strengthen the protections for injured persons intended 
by Senator Baucus in 1981 as well as to further the 
Congressional intent of existing legislation affecting 
structured settlements.
    While the intent of a structured settlement is to ensure a 
steady income to an injured person, we also understand that an 
individual's circumstances can change and that there may be 
legitimate circumstances under which the factoring of a payment 
stream is appropriate for the injured person. The Act addresses 
these circumstances by providing that factoring is permitted 
without penalties where there has been a determination by a 
court or administrative agency that ``extraordinary, 
unanticipated, and imminent needs of the structured settlement 
recipient or his or her spouse or dependents render such a 
transfer appropriate.'' The injured person is protected by 
having this determination made by a court or administrative 
agency familiar with the factual circumstances of each 
individual factoring transaction. The standard is broad enough 
to cover true hardships that we know do occur from time to 
time, while also being narrow enough to protect injured persons 
from dissipating their payment streams in inappropriate 
circumstances. This hardship standard falls within the ambit of 
the original 1981 intent of the structured settlement tax 
legislation.
    Excise Tax. Our members prefer that factoring should be 
permitted only in cases of hardship as determined by a court or 
administrative agency. However, the Act does provide for a 
meaningful excise tax for factoring which occurs absent a 
finding of legitimate hardship. Any excise tax that is enacted 
must be of a sufficient amount as to discourage non-hardship 
factoring. In addition, any legislation must explicitly provide 
that the excise tax is to be paid by the settlement purchaser 
and that the amount of the tax is to be disclosed to the 
injured person.
    Tax Clarification. The Act provides that ``where the 
applicable requirements of section 72, 130, and 461(h) were 
satisfied at the time the structured settlement was entered 
into, the subsequent occurrence of a structured settlement 
factoring transaction shall not affect the application of the 
provisions of such sections to the parties to the structured 
settlement (including an assignee under a qualified assignment 
pursuant to section 130) in any taxable year.'' The ACLI 
believes that this provision is essential as it protects 
insurance companies issuing the structured settlement annuity 
contracts as well as the structured settlement obligors from 
unintended adverse tax consequences created by the actions of 
the injured persons and the transferee. At the time that the 
structured settlement annuity is entered into, insurers and 
obligors ensure that the qualified assignment underlying a 
structured settlement annuity contract will satisfy the 
requirements of the Internal Revenue Code, especially section 
130. Were the tax treatment changed after issuance of the 
annuity contract due to actions beyond the control of the 
insurer or obligor, the insurer and obligor could incur 
significant financial loss. Since whether a payment stream is 
factored is based on a decision of the injured person and not 
on any decisions of the insurer or obligor, it would be grossly 
inequitable for a factoring to trigger a change in the tax 
treatment of the insurer or obligor. The Act appropriately 
takes into consideration this fact.
    Conclusion. The Structured Settlement Protection Act should 
be enacted as it provides necessary limitations on the 
factoring of structured settlement payment rights while 
permitting factoring in true hardship situations.
      

                                


Statement of Gerald D. Facciani, Henderson, Nevada

    I appreciate the opportunity to provide written testimony 
regarding H. R. 263.
    I am interested in this proposed legislation because of its 
potential negative impact on people like me who have suffered 
personal injuries and/or continue to be afflicted with physical 
disabilities. Some of these people have benefited substantively 
and substantially by being able to ``monetize'' (i.e. convert a 
series of fixed or variable annuity payments to a lump sum) 
part or all of a personal injury ``structured settlement'' to 
help meet certain financial needs.
    Specifically, H. R. 263 would impose a 50% excise tax on 
certain types of financial transactions, known as ``factoring'' 
or ``monetizing,'' relative to a fixed or variable series of 
structured settlement payments made to personal injury victims, 
many of whom remain partially disabled. I am opposed to such a 
provision being in the IRC for a number of reasons:
    (1) H. R. 263 would prevent individuals who have suffered 
personal injuries -many of whom remain partially disabled -from 
monetizing a stream of fixed or variable payments made pursuant 
to a structured settlement arrangement. The vast majority of 
individuals who convert a series of payments to lump sums do so 
for important and critical financial reasons--e.g., to 
liquidate debts and avoid bankruptcy; to get a ``fresh start'' 
in life; to secure additional education or technical training; 
to capitalize a small business; to obtain the down payment for 
a home; etc. Only 3% of all structured settlement recipients 
monetize their payments, however for the majority of 
beneficiaries who choose to do so, access to monetization 
defines dignity, responsibility and freedom of choice. For such 
persons, the ability to convert part of their periodic payments 
spells HOPE! Why would any elected representative desire to 
circumscribe an individual's--and often a disabled individual's 
right--to achieve a modicum of financial dignity?
    (2) An excise tax will act as a damper on future monetizing 
transactions, and therefore little, if any, revenue will be 
raised as a result of imposing such a tax.
    (3) The small percentage of injured or disabled persons who 
will in the future engage in this transaction will encounter 
additional legal barriers, which in turn will cost them more 
(in the way of legal fees; higher interest rates due to 
increased transaction costs for factoring companies (also known 
as Settlement Purchasing Companies); etc) to access their 
money. End result: less money to those people--the injured and 
the disabled--who need it most.
    (4) Not withstanding the availability of a hardship 
provision, to a person of limited means and legal experience, 
the process can be overwhelming, in addition to the expense of 
accessing such hardship provision.
    (5) Do we really want to add to the load of our already 
overburdened judicial system?
    Some proponents of H. R. 263 have a salutary reason for 
desiring enactment of this legislation, namely, to protect 
recipients of structured settlements against themselves and the 
``predatory'' sales practices of a few sales people. Clearly, 
some individuals make choices they wish they had not made--
haven't we all? Assuming strong underwriting and appropriate 
consumer protection safeguards can be implemented which will 
enhance a disabled/injury victim's ability to make an informed 
and protected choice regarding monetization, is this not 
preferable to having such persons pay an excise tax?
    Other issues relative to monetization of structured 
settlements deal with (1) present value discounts to calculate 
lump sums and (2) legality of monetizing such payments. 
Regarding (1), interest rate discounts used by factoring 
companies, it is my understanding such rates normally fall into 
a range of 12% to 21%, depending upon the size of the 
settlement and the expenses associated with the transaction. 
For smaller amounts, the relative dollar cost to a factoring 
company is going to be greater than it would be for a larger 
dollar amount, because the fixed costs associated with a 
smaller transaction will comprise a greater percentage of the 
overall transaction's cost. A large portion of these fixed 
costs is attributable to the legal impediments raised by state 
and insurance companies! Finally, I know from personal 
experience as a disabled beneficiary under a group insurance 
contract, (and a former actuary-see Professional Credentials) 
that insurance company interest rates used to calculate 
``buyouts'' of disability payments are equivalent to rates 
charged by factoring companies buying out personal injury 
claims.
    Regarding (2), legal issues, Moody's rating service has 
established an asset class for factoring transactions, belieing 
the contention of those--principally insurance companies 
providing structured settlements,--who claim the assignment of 
a personal injury payment stream by a structured settlement 
beneficiary to a factoring company is not a qualified 
assignment. Furthermore, it is my understanding that the legal 
and tax validity of monetizing structured settlements has been 
totally buttressed by a tax opinion letter recently issued by 
Price Waterhouse Coopers to The National Association of 
Settlement Purchasers (NASP) 1
---------------------------------------------------------------------------
    \1\ NASP is a 501  trade association established by 
settlement purchasing companies to establish ethical and professional 
standards of conduct for the industry. The term ``Settlement Purchasing 
Company'' is used synonymously with ``factoring company.''
---------------------------------------------------------------------------
    While my goal is not to assume an advocacy position for 
settlement purchasers, the best of these companies have worked 
diligently to develop and implement underwriting and consumer 
protection safeguards relative to monetization of structured 
settlement payments. Additionally, only about 3% of all 
structured settlements have been converted to some form of lump 
sum payment; and, as Moody's report illustrates, there have 
been relatively few illustrated examples of high pressure sales 
tactics.
    The vast majority of structured settlement recipients are 
comfortable receiving a series of fixed or variable payments,--
a steady stream of income meets their needs; however, for that 
small percentage of recipients, who both need and want access 
to some type of properly underwritten lump sum, monetization 
has been a valuable option.
    On behalf of all injured and/or partially disabled persons, 
I urge Congress not to foreclose the option to convert part or 
all of a series of periodic payments to a lump sum. For the 
needy few (3%) structured settlement beneficiaries who have 
accessed monetization, its availability has helped and enabled 
them and their families achieve one of life's major goals--
financial dignity.
    Thank you very much
      

                                


Statement of J.G. Wentworth, Philadelphia, Pennsylvania

    J.G. Wentworth, located in Philadelphia, Pennsylvania, is a 
specialty finance company that originates, securitizes and 
services rights to receive payments from structured settlements 
and other deferred payment obligations. As the largest 
purchaser of structured settlements in the United States, we 
appreciate the opportunity to submit this statement for the 
record to the Committee on Ways and Means Subcommittee on 
Oversight hearing on the tax treatment of structured 
settlements.
    A structured settlement describes an arrangement that 
compensates a plaintiff or claimant in a personal injury 
lawsuit over time, rather than with a current lump sum payment. 
Under the terms of the settlement agreement, the defendant and/
or the defendant's insurer agree to and are obligated to make 
future payments to the claimant. The insurer also may elect to 
transfer the obligation under a qualified assignment to a 
structured settlement company and purchase an annuity contract 
to satisfy the periodic payment obligation.

                               Background

    J.G. Wentworth (JGW) is in the business of purchasing, 
among other things, a portion of claimants' rights to receive 
future scheduled payments under structured settlement 
agreements. The purchase transactions undertaken by JGW provide 
liquidity to claimants whose structured settlements no longer 
meet their particular life circumstances. The need for JGW's 
funding services arises from the inflexible nature of many 
deferred payment plans and the changing financial needs of many 
claimants. Some claimants want to sell their payments rights 
because they have an immediate cash need and lack access to 
traditional funding sources. The claimant gains the advantage 
of realizing immediate liquidity on an otherwise illiquid 
asset. The purchase transaction is structured as a sale of 
payment rights under the underlying settlement agreement 
because the claimant is not technically the owner of the 
annuity contract and does not have the power to alter any terms 
except the name of the beneficiary and the address for payment.
    JGW generally does not utilize brokers to originate 
structured settlement purchase transactions and its policies 
prohibit the solicitation or ``cold calling'' of prospective 
customers. Instead, JGW utilizes a nationwide television 
advertising campaign to provide information to claimants who 
might wish to sell the payments rights. The company's call 
center responds to claimant inquiries, attempts to quantify an 
individual's financial needs and endeavors to structure the 
funding transaction to meet those needs. JGW policies prohibit 
the origination of receivables from minors and incompetent 
persons and require independent representation by counsel of 
each claimant.
    Since August 1995, JGW has consummated over 16,000 
structured settlement transactions. By establishing the 
necessary infrastructure, includuing sound underwriting 
procedures and servicing capabilities, JGW has become the 
largest purchaser of structured settlements in the United 
States. Beginning in 1997, JGW has completed four 
securitization transactions through private placement of 
structured settlement-backed notes. To complete these 
transactions, JGW has sold a pool of structured settlements to 
a securitization trust which in turn issues debt that is sold 
to investors. Payments on the securitized receivables, less a 
servicing fee and certain related expenses, are made by the 
special purpose vehicle to investors. The most recent series of 
notes was at the time of initial issuance rated at ``AAA'' by 
Duff & Phelps Credit Rating Co. and Moody's Investors Services 
Inc., and was credit enhanced by MBIA.

                         Public Policy Concerns

    It is alleged that structured settlement purchases and, by 
implication, the actions of structured settlement purchasing companies 
such as JGW, undermine the public policy concerns that lead Congress to 
adopt special tax rules to encourage insurance companies to use 
structured settlements as a means to settle personal injury litigation. 
Let the record be clear that JGW emphatically believes that structured 
settlements are an appropriate vehicle to settle litigation or 
potential litigation. Structured settlements are especially effective 
to provide particular claimants with catastrophic injuries. However, 
the explosion in the use of structured settlements since the enactment 
of favorable tax legislation in 1982 belies the myth that structured 
settlements are used to protect catastrophically-injured individuals 
who are incapable of making informed financial decisions. Recent 
statistics indicate that between $5 and $10 billion in new structured 
settlements are generated annually. Information circulated by one of 
the largest structured settlement brokers states that over 50 percent 
of all cases structured in 1997 involved premiums of $50,000 or less 
and that only 12 percent included premiums over $250,000.
    Other assertions made against structured settlement purchases 
allege the following:
     Structured settlement purchases trigger the very same 
dissipation risks that structured settlements are designed to avoid.
    Untrue. JGW, and virtually every structured settlement purchasing 
company, As noted above, JGW attempts to quantify the need of a 
claimant before providing them with a variety of purchase options. 
Company statistics for calendar year 1998 transactions demonstrate that 
the average amount purchased was slightly over $16,000
     Structured settlement purchases often are made at sharp 
discounts.
    Untrue. The average discount rate for structured settlement 
purchases has fallen steadily over the past two years. The most-recent 
statistics for the three months ended December 31, 1998 indicate that 
the average discount rate is 16.64 percent. JGW and the member 
companies of the National Association of Settlement Purchasers (NASP) 
firmly believe that discount rates will fall dramatically if 
appropriate measures can be enacted to further streamline and make 
clear that sales of structured settlements are permitted under 
appropriate circumstances. Consumers would be the ultimate 
beneficiaries from clarification of the tax and other rules that apply 
when settlements are purchased.
     Structured settlement purchasing companies prey upon the 
weakest, most gullible and most vulnerable in our society and engage in 
unconscionable, high-pressure marketing practices.
    Untrue. JGW and NASP members have adopted a code of conduct and 
specific guidelines governing the sale of settlements. JGW will not 
purchase from minors, individuals who have been legally declared 
incompetent, or guardians (unless under court order); individuals who 
have been declared incompetent or guardians (unless under court order); 
individuals who depend on future payments for a medical treatment; the 
unemployed or unemployable whose payments are their only income.
    JGW company statistics demonstrate that only 3 out of every 100 
calls received by the company from individuals inquiring about 
potential sales ultimately result in a purchase transaction.
    Prospective customers are fully apprised of the underwriting 
process and are advised of the requirement to consult with an attorney 
prior to signing and returning needed materials to JGW. Potential 
customers are advised in boldface documents that the transaction is a 
sale, not a loan and are advised to explore all appropriate financial 
options before entering into the purchase transaction. The documents 
furnished to each potential customer include a rate disclosure 
statement 1as well as a purchase agreement including a three-day right 
of rescission clause that remains effective after funding has occurred.

                            Recent Publicity

    As the largest purchaser of structured settlements, JGW has 
become a ``lightening rod'' for those who would criticize a 
marketplace that permits consumers to choose to sell one of 
their assets to meet certain financial objectives. It is 
important to note that JGW is involved in a consumer business 
and each day interacts with hundreds of potential customers. As 
noted above, it is estimated that JGW enters into a purchase 
transaction with only 3 percent of those individuals that 
contact the company after viewing a JGW advertisement. JGW does 
not engage in ``cold calling'' and its independence from the 
broker community permits JGW to control the integrity of its 
origination process, avoid conflicts among origination channels 
and to provide more responsive customer service to claimants 
with legitimate requests for funding.
    Earlier this year, U.S. News & World Report (U.S. News) 
published a story entitled ``Settling for Less--Should accident 
victims sell their monthly payouts?'' (January 25, 1999, pp. 
62-66). That story includes four examples of individuals who 
engaged in purchase transactions with JGW and now express 
dissatisfaction with the company. There are compelling facts 
that were not included in the article about each of the 
individuals identified in the article. Importantly, 
notwithstanding each individual's serious physical difficulty, 
none of the individuals were, at the time they entered into 
their transaction with JGW, mentally incompetent or unable to 
work. In each case, JGW responded to the needs of the 
individuals as expressed on their application form. Moreover, 
in each case, the individual described in the article actively 
defrauded JGW by keeping or diverting payments purchased by 
JGW. Accordingly, JGW asserted its rights.
    Specifically, one individual, who was homeless when he 
contacted JGW, engaged in two transactions with the company 
after expressing a need to use the funds to assist with his 
living arrangements. A second individual sold roughly one-third 
of her future payments, entering into the transaction after 
being taken advantage of by friends and family members and 
after defaulting on a series of prior loans with banks that 
would not lend against her settlement. A third individual 
received a lump sum from JGW but continued to receive payments 
from the annuity company, keeping the payments purchased by 
JGW. During a two-month period, JGW attempted to work with the 
individual (even offering to forgive certain payments it did 
not receive) to direct the payments to JGW as he was 
contractually required. Only after these repeated attempts 
failed did JGW utilize a confession of judgment remedy to which 
the company was entitled. A fourth individual mentioned in the 
story has, by his own admission, been receiving payments that 
JGW has purchased. The annuity company had continued to send 
payments to his address. Again, JGW attempted to work with the 
individual and has also offered to completely unwind the 
purchase transaction, even allowing him to keep JGW's lump sum 
payment. He has refused, choosing instead to pursue litigation 
against the company.
    The U.S. News article and criticism from others makes 
reference to the fact that JGW uses confession of judgment in 
limited circumstances. In testimony aimed at putting companies 
such as JGW out of business, groups such as the National Spinal 
Cord Injury Association assert that JGW uses ``unethical legal 
maneuvers and stratagems such as the use of a confessed 
judgment against the victim in a distant court to garnish the 
victim's payments. This remedy is legal in Pennsylvania and 
several other states. Courts in New Jersey and California (the 
only two instances in which this remedy has been challenged) 
have upheld its use in terms of due process. JGW follows the 
Pennsylvania Rules of Civil Procedure to ensure certain 
protections such as service and notice are afforded to the 
claimant who has sold payments and complied with its 
underwriting and documentation. In fact, JGW provides an 
additional protection not required by the Rules of Civil 
Procedure by both sending notice to the claimant of the filing 
of the papers by both certified and regular mail. Moreover, it 
is a remedy that JGW employs only if there has been 
intentional, active fraud by a claimant. JGW will only confess 
upon a default under the terms of its documents, and does so 
only after its Customer Services and Collections departments 
have attempted to resolve the matter amicably. To date, no 
judgments obtained have ever been exercised against a claimant 
directly, other than by garnishing the annuity against the 
annuity payor.

                          Consumer Protection

    As the largest purchaser of structured settlements in the 
United States, JGW joins with its fellow NASP members in 
embracing meaningful consumer protection standards and 
regulations. JGW fully supports NASP-sponsored legislative 
initiatives which provide major safeguards for consumers and 
protects their rights to make their own financial decisions. 
Such initiatives are currently underway in over twenty 
different state legislatures. Consumers deserve the right to 
choose whether or not to receive a lump sum or a structured 
settlement payment. This choice should be available, both 
during settlement negotiations and years later. Claimants who 
decide to receive a structured settlement should have the right 
to sell that payment, not be forced to continue with inflexible 
periodic payments that do not meet their needs.
      

                                

                             Liberty Funding Corp.,        
                                    4303 Liberty Avenue    
                                     North Bergen, NJ 07047
                                                     April 14, 1999
The Honorable A.L. Singleton, Chief of Staff
Committee on Ways and Means
United States of Representatives
1102 Longworth House Office Building
Washington, DC 20515

    Dear Representative Singleton:

    I urge you to proceed with extreme prudence concerning proposed 
bill H.R. 263 until all of the data necessary to make an educated and 
unbiased decision as to the validity of the assertions contrived by the 
NSSTA (National Structured Settlement Trade Association) have been 
attained. Until now, only the NSSTA's unsubstantiated allegations 
regarding our effort to Re-Structure structured settlements have been 
heard by committee members. I am sure that as a highly-respected member 
of congress you would prefer to have all of the facts prior to forming 
your opinion, and I trust that you will make a concerted effort to be 
as fair and impartial as possible.
    This sense of fair play can only be achieved by courteously 
granting us the opportunity to present our position and evidence 
thereof. Prior to committing to a hasty, biased decision, please take 
some time to consider the devastating affect that this bill would have 
upon the thousands of people this industry employs, and more 
importantly, cautiously consider the onerous consequences which will be 
forced upon the very people that the NSSTA are reportedly attempting to 
protect, but may in fact be victimizing once again.
    As an employee of a Settlement Purchasing company I find the term 
``gray market,'' coined by the NSSTA, insulting and unsubstantiated. 
NSSTA members are virtually comprised of insurance brokers (a/k/a 
middlemen) whose high-pressure tactics force clients, often without the 
benefit of legal counsel, to commit to a settlement wherein they will 
receive their payments in future installments. These brokers are not 
required to disclose the current value of the settlement (i.e. purchase 
price of the annuity), nor do they inform these unwitting clients that 
they (the brokers) are being paid a commission fee for negotiating the 
settlement. I do not wish to demean the NSSTA, as they are in the 
business of making money, albeit from another's misfortune. However, 
before they can accuse factoring companies of exploitation, I suggest 
that they first look in the mirror. If ever there was a case of the 
``pot calling the kettle gray,'' this is surely it!
    I am still at a loss as to why the NSSTA and certain insurance 
companies are opposed to our business, except for the fact that we are 
enlightening the public as to the true ``time value of money''! 
Purchasing the right to receive payments does not affect their tax 
status, nor does it keep potential clients from accepting installment 
payments as a condition of the settlement. In fact, we make an effort 
to inform plaintiff attorneys of our existence and encourage them to 
advise their clients that should the need arise, there are options 
available to them in the future. Most of these attorneys have expressed 
to me that because an option exists allowing these clients to re-
structure their structured settlement, the clients have been more 
willing to agree to settle via a structured settlement than they have 
in the past.
    Our industry has recognized the need for people with limited access 
to traditional sources of capital to have an alternative. A vast 
majority of our clients are minorities and/or are in low or moderate 
income households. The NSSTA is of the opinion that families are being 
``held together by a structured settlement.'' In some instances this 
may be true, and if the circumstances are such that the client has no 
other means of support, under our self-imposed regulations those 
individuals are usually denied for funding, or are limited to assigning 
only a minimal portion of their periodic payment. In essence the best 
of both worlds; they have the benefit of a lump sum now, in addition to 
the security of continuing to receive most of their installment 
payments. Our decisions as to who is approved for funding and who is 
not, has a great deal to do with the client's well-being and their 
ability to live within the terms of the transaction, without government 
assistance and/or resorting to bankruptcy. In fact, we have saved 
numerous people from bankruptcy, so that they do not have to rely on 
already overburdened entitlement programs for support.
    All of our potential clients are subject to intense scrutiny as to 
their financial obligations. As a prerequisite to funding, they must 
authorize a complete background search including outstanding judgments, 
liens, child-support payments and the like. The searches are complete 
and thorough, and outstanding debts must be satisfied prior to funding, 
including but not limited to, child-support arrears, tax liens and 
overdue mortgage payments.
    Since structured settlements cannot be used as collateral by the 
client because the insurance company, not the client, usually ``owns'' 
the annuity, our industry has afforded clients their only means of 
obtaining money now in order to address a financial concern. Some of 
the items the money has been applied to include; debt consolidation, 
health emergencies, college/trade school tuition, down-payments on 
homes, business opportunities, foreclosure aversions, farm equipment 
and transportation.
    Most clients are not aware that the insurance company can assign 
the obligation to pay (via Qualified Assignment) to an entity other 
than themselves. This provides no benefit to the client, but rather it 
allows the insurance company an opportunity to capitalize on the 
favorable tax incentives provided to the insurance industry. 
Additionally, the client has not been told that in the event that the 
assignor becomes insolvent, as with Executive Life and Confederation 
Life, who are currently in rehabilitation, the client will be unable to 
sell their payments and reinvest in treasury bonds or similar, more 
secure investments.
    Despite obvious problems within the insurance industry, I am 
obviously not opposed to settling personal injury claims via structured 
settlements. At the time of the settlement, installment payments may 
have been the best course of action, but circumstances often change. 
Unfortunately, structured settlements do not provide for those changes 
and can do more harm than good for those in immediate need of money to 
which they are rightfully entitled. In a free society, it is up to the 
individual to determine what is right for them, and by imposing a 50% 
excise tax on our industry, particularly in light of the current budget 
surplus, you will be adversely affecting those who can least afford it 
by virtually severing the only option available to them. I feel that by 
imposing this unfair excise tax, you will have infringed upon an 
individual's right to freedom of choice, and on our right to free 
enterprise.
    I do not want to lose my job, and I am confident that you will not 
rush to judgment. Thank you for your time and consideration.

            Sincerely,
                                              Lisa Terlizzi
                                                              Owner
                                               Fury Nardone
                                               Sales Representative
                                            Doreen Kirchoff
                                                     Office Manager
                                          Lee Anne Rizzotto
                                                      Sales Manager
      

                                

                         Hogan & Hartson L.L.P.            
                                    Columbia Square        
                             555 Thirteenth Street, NW.    
                                  Washington, DC 20004-1109
                                                     March 31, 1999
BY HAND DELIVERY

Hon. Amo Houghton, Jr.
Chairman
Subcommittee on Oversight
House Committee on Ways and Means
1136 Longworth House Office Building
Washington, DC 205l5

Re: Follow-Up Submissions for Hearing Record of March 18 Oversight 
        Subcommittee Hearing on Structured Settlement Factoring

    Dear Chairman Houghton:

    Enclosed for filing as part of the hearing record for the March 18 
hearing held by the Oversight Subcommittee on the tax treatment of 
structured settlements and structured settlement factoring are 6 copies 
(and a disk in Word Perfect 5.1 format, where possible) of the 
following documents:
    (1) A memorandum of the National Structured Settlements Trade 
Association entitled, ``Point-Counterpoint--Responses to Assertions 
Made by Factoring Companies Regarding the Factoring of Structured 
Settlements,'' dated March 25, 1999 (document on hard copy and disk);
    (2) A memorandum of Hogan & Hartson L.L.P. entitled, ``Overview of 
Tax Concerns Raised for Structured Settlements by Factoring 
Transactions,'' dated March 24, 1999 (document on hard copy and disk);
    (3) A memorandum of Hogan & Hartson L.L.P. entitled, ``March 18 
Oversight Subcommittee Hearing on Structured Settlement Factoring--The 
Commonwealth of Pennsylvania Medical Professional Liability Catastrophe 
Loss Fund's Experience with the Factoring Companies,'' dated March 25, 
1999, to which is attached the brief of the Medical Professional 
Liability Catastrophe Loss Fund before the Supreme Court of 
Pennsylvania in the case of Legal Capital, LLC and Charles I. Artz v. 
Medical Professional Liability Catastrophe Loss Fund. (The memorandum 
of Hogan & Hartson L.L.P. is provided on both hard copy and disk; the 
attached brief is provided on hard copy only).
    (4) A letter from Hogan & Hartson L.L.P. to Hon. Scott McInnis, 
dated March 19, 1999 responding to a question that he raised during the 
March 18 hearing regarding factoring company discount rates, together 
with attachments to the letter: (i) a document entitled, ``Discount 
Rates Charged to Settlement Recipients in Factoring Transactions (Drawn 
from Court Records),'' dated March 15, 1999; and (ii) a document 
entitled, ``Factoring Companies Routinely Sue their Own Customers, 
Obtaining Judgments in Amounts That Dwarf the Amounts the Customers 
Have Received,'' dated February, 1999, to which is attached a series of 
court docket sheets. (All of these documents, with the exception of the 
court docket sheets, are provided on both hard copy and disk; the court 
docket sheets are provided on hard copy only);
    (5) A series of sample factoring company advertisements offering to 
purchase structured settlement payments. (These documents are provided 
on hard copy only);
    (6) A memorandum of Hogan & Hartson L.L.P. entitled, ``Presentation 
of Cost Information to Injured Victim at Time of Structured Settlement 
Offer,'' dated March 25, 1999, to which is attached a series of four 
examples of the detailed structured settlement illustrations that are 
presented to the victim and counsel during the settlement negotiations. 
(The memorandum of Hogan & Hartson L.L.P. is provided on both hard copy 
and disk; the attached structured settlement illustrations are provided 
on hard copy only); and
    (7) Relevant portions of two studies prepared by the Insurance 
Services Office, Inc. entitled ``Closed Claim Survey for Commercial 
General Liability: Survey Results, 1997'' and ``Closed Claim Survey for 
Commercial General
    Liability: Survey Results, 1995.'' (These documents are provided on 
hard copy only).

            Sincerely,
                                            John S. Stanton
Enclosures

cc:   Hon. William J. Coyne
      Ranking Minority Member
      Subcommittee on Oversight
      House Committee on Ways and Means--Minority Office
      1106 Longworth House Office Building

    [Attachments to this letter and an additional letter and 
attachments are being retained in the Committee files.]

                                  
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