Structured Settlements Secondary Market and Factoring

Question 1

What is the 'discount rate' in a structured settlement factoring transaction?

Accepted Answer

The annual interest rate used by the factoring company to calculate the present value it will pay for future payment rights

Answer

The discount rate is the annualized rate the factoring company applies to convert future payment rights into a present-value lump sum, directly determining how much the payee receives.

Question 2

What is 'present value' as used by factoring companies when pricing a purchase of structured settlement payments?

Accepted Answer

The lump sum a factoring company will pay today, which equals the future payments discounted back at the factoring company's required rate of return

Answer

The factoring company calculates the present value of the payment stream at its own discount rate (profit margin included) to arrive at the purchase price it will offer the payee.

Question 3

Under IRC §5891, to avoid the 40% excise tax, a factoring company must obtain what?

Accepted Answer

A qualified order — a court order approving the transfer that meets all applicable state SSPA requirements

Answer

IRC §5891 requires a 'qualified order' — defined as a final court order approving the transfer that satisfies state SSPA requirements — to avoid the 40% excise tax on the discount amount.

Question 4

What is 'double-dipping' in the context of structured settlement factoring?

Accepted Answer

A claimant selling the same payments to two different factoring companies

Answer

Double-dipping refers to a claimant (fraudulently) selling the same future payment rights to more than one factoring company, which is why title searches of prior transfers are conducted.

Question 5

What information must a factoring company typically disclose to a structured settlement payee before the payee signs a transfer agreement?

Accepted Answer

The gross advance amount, the present value of payments sold (at a standard rate), the net amount payable, and the effective annual discount rate

Answer

State SSPAs mandate comprehensive disclosure so the payee can evaluate the true economic cost of the transaction, including all fees and the effective annual percentage rate.

Structured Settlements Practice Test

Structured Settlements Practice Test

Structured Settlements Secondary Market and Factoring