Consumer Finance Scams
"Swindlers have no shame. They hit consumers when they're down because they're vulnerable and take their last dime."Susan Grant
National Fraud Information Center
National Consumers League
The Scope of the Problem
Consumers who face financial troubles, such as heavy debt, poor credit, or the need for substantial help for educational or personal finances, usually can least absorb the economic injury caused by fraud. Fraud promoters know that these consumers are willing to pay small amounts of money to process loans, arrange financing, or help locate sources of credit that promise to cure their financial woes. Recent FTC law enforcement efforts demonstrate that fraud promoters who promise financial services or assistance for a several-hundred-dollar fee generally do not deliver. Instead, they take millions of dollars from consumers without providing any services at all.
Advance-Fee Loan Scams
Consumers often respond to ads in the classified section of newspapers or magazines that promise loans or credit cards regardless of an applicant's financial situation or credit history. A fraudulent telemarketer typically tells them that they must pay a fee in advance --ranging from $25 to several hundred dollars--for the loan or the credit card. Consumers are reassured that they have nothing to lose because they will get a refund if they are turned down. However, consumers generally receive nothing, even after paying the fee. Sometimes, they are referred to other companies that require additional payments. These "turn down rooms" do not make good on their promises to deliver refunds, either.
Credit Repair Scams
Credit repair is an especially pernicious fraud that preys on consumers who have run into financial trouble and as a result, have bad credit reports. Thousands of firms across the country claim that they can restore consumers' creditworthiness for a fee. Most credit repair firms claim that if information on a credit report is not 100 percent accurate, they can challenge it and have it permanently removed from a consumer's credit report.
The fact is that accurate negative information stays on consumer credit reports for seven years--10 years in the case of bankruptcies. Credit repair firms can challenge the accuracy of information on consumers' credit reports, but consumers can do the same thing for themselves for free.
Some credit repair firms use a technique known as file segregation. These firms advise consumers to apply for an employer information number (EIN) from the IRS, which has the same number of digits as a social security number, and use it to build fresh credit. What they do not tell consumers is that this is a felony.
To combat these problems, Congress has given law enforcement and the public two key tools to address credit repair fraud. In addition to the TSR, which became effective December 31, 1995, Congress also enacted the Credit Repair Organizations Act (CROA)(20) in September 1996 to ensure that the public has information necessary to make informed decisions about using credit repair firms--including those that do not principally telemarket their services--and to give the FTC, the states, and individual consumers legal remedies to combat credit repair fraud. The CROA takes effect March 30, 1997.
Scholarship and Educational Finance Schemes
The cost of higher education has far outstripped the rate of inflation, producing a wider pool of families receptive to guarantees of "free money for college." Fraudulent scholarship search companies typically promise consumers that they will find or obtain thousands of dollars in grants and scholarships for fees ranging from $10 to $300. The scams "guarantee" a full refund if students do not acquire a specified amount of financial aid. Some fraudulent companies say they award scholarships to students; others claim they will match students with available funding sources.
The reality is that students receive a list of scholarships and grants to which they can apply on their own--information that is available free in schools and libraries. More often than not, the scholarships and grants that scam artists "list" have expired deadlines, specify conditions that make the consumer ineligible, or simply do not exist. The promised "money-back guarantee" has conditions that are impossible to meet and most student victims are left with a smaller bank account and no financial aid.
Consumer finance scams keep their fees low enough so that even consumers facing heavy financial burdens can afford them. Scam artists can generate enormous profits by mass marketing their services to million of these consumers. Indeed, the FTC sued one fraudulent scholarship service in 1996 that sent more than a million allegedly deceptive mailers in six months to parents of college-age children. Given the aggressive marketing techniques used by consumer finance scam artists nationwide, more coordinated law enforcement is necessary.
The FTC targeted companies that promised loans and credit cards to anyone in return for a fee paid in advance. In June 1996, the FTC and 15 state Attorneys General initiated 13 lawsuits in federal district courts and state courts, naming 45 corporations and individuals operating out of the U.S. and Canada.
The FTC used coordinated federal-state efforts against telemarketers who promoted credit repair scams. In April 1996, the FTC, nine state Attorneys General, and the District of Columbia government brought 17 law enforcement actions against 13 credit repair firms across the country. Many of the actions invoked provisions of the Telemarketing Sales Rule that specifically address credit repair.
In August 1996, the FTC launched Project $cholar$cam, a massive consumer education and law enforcement effort highlighting scams that target high school and college students in search of money to finance their education. Since the start of Project $cholar$cam, the FTC has filed lawsuits against seven scholarship services located in Atlanta, New York, Ft. Lauderdale, Baltimore, and Seattle that targeted millions of high school and college students across the country. The FTC estimates that these seven companies brought in more than $15 million over the last five years from more than 100,000 consumers. Aside from putting a stop to the fraudulent practices of these companies, Project $cholar$cam was responsible for a huge surge in public awareness about this type of fraud. The FTC's action was covered in more than 100 newspapers in 40 states, as well as in national publications like the New York Times, Washington Post, USA Today, Smart Money, and US News & World Report. The FTC also produced creative consumer education materials that have been distributed to high schools and colleges throughout the country, including bookmarks and posters targeted to high school and college students and their parents, posters distributed to thousands of college bookstores, and flyers for college financial aid offices and high school guidance offices.
The FTC worked with many partners in the private sector to ensure that the "scholarship" message got out to students and families. Members of the Interactive Services Association's Project Open, a program to encourage safe and productive experiences for all online and Internet users, launched a campaign with the FTC featuring alerts about scholarship scams through their on-line members. The National Association of Student Financial Aid Administrators, the College Board, and Sallie Mae were among the organizations that publicized Project $cholar$cam and provided links to the Scam Alert on the FTC's home page.
With fraud promoters targeting millions of consumers coping with financial burdens, a multi-faceted anti-fraud approach is clearly necessary to make headway in shutting down such fraud. New legislation, such as the Credit Repair Organizations Act, provides a further basis for collaborative efforts in fighting consumer finance fraud.