Secondary Market and Factoring Flashcards
6 cards from real Structured Settlements practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Secondary Market and Factoring flashcards as text
What is the 'discount rate' in a structured settlement factoring transaction?
Answer: The annual interest rate used by the factoring company to calculate the present value it will pay for future payment rights
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.
What is 'present value' as used by factoring companies when pricing a purchase of structured settlement payments?
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
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.
Under IRC §5891, to avoid the 40% excise tax, a factoring company must obtain what?
Answer: A qualified order — a court order approving the transfer that meets all applicable state SSPA requirements
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.
What is 'double-dipping' in the context of structured settlement factoring?
Answer: A claimant selling the same payments to two different factoring companies
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.
What information must a factoring company typically disclose to a structured settlement payee before the payee signs a transfer agreement?
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
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.
What is a 'best interest' finding in the context of structured settlement factoring?
Answer: A court's finding that the transfer of payment rights is in the best interest of the payee, considering financial needs and dependent welfare
State SSPAs require the approving court to make an affirmative finding that the transfer serves the payee's best interest, acting as a safeguard against exploitative transactions.