Beware of Sharks: Consumers warned about advance-fee loans

Colorado Springs Business Journal, Sep 26, 2008 by Rebecca Tonn

Advance-fee loans promise to restore a business or individual's credit by holding money in an account to build credit.

But there's a hitch -- such lenders demand upfront "fees" of up to 3 percent of the loan's value, and after paying the fee, applicants have no guarantee that they will receive the loan.

"Scam lenders promise to repair your credit and contact lenders to arrange payment," said Casey Perkins of Ent Federal Credit Union. "Never pay anybody up front for a loan -- and don't give personal information over the phone or over an unsecured Web site. Anything online you have to be skeptical about."

Credit unions and banks offer legitimate credit repair, as does Consumer Credit Counseling Service.

"Under Colorado law, it is illegal to charge up-front fees to obtain a loan," said Nate Strauch, communications director for the attorney general's office.

Criminal code section 18-5-109 states that a loan finder "shall not charge or collect any fee from a borrower until a borrower actually receives the agreed-upon loan." Violation of this statute, Strauch said, is a class 1 misdemeanor. However, fees for a credit check are excluded from the statute.

Strauch recommends that consumers report any individual or business that attempts to collect an advance fee for a loan to the district attorney. He also said that consumers should not do business with unknown individuals or companies that offer to make loans over the Internet, via classified advertisements or through unsolicited electronic mail.

Frank Dorman, public affairs specialist for the Federal Trade Commission, said that consumers also should report any loan they feel is fraudulent to the FTC and the Better Business Bureau

But advance-fee loans are not the only scams of which consumers should be aware.

On Monday, the FTC announced that it had charged Florida-based Financial Advisors & Associates and its principal James Sweet, with fraudulently telemarketing consumers in an attempt to sell them advance-fee credit cards, while promising to repair consumers' credit scores by reporting payment histories to the major credit bureaus -- which the company did not do.

Starting to sound familiar?

If a credit report contains errors, consumers can correct them on their own -- at no cost -- by contacting the reporting agencies, according to the Uniform Consumer Credit Code Unit of the attorney general's office.

However, if information in a credit report is "bad" -- but correct -- it cannot be legally removed.

In other words, anything a credit repair company can legally do to improve a credit score -- can be done by consumers -- for free.

Despite the public's penchant for doing business online, when applying for a loan, it's safer to physically visit a local brick- and-mortar bank, credit union or certified lender.

"People are taking desperate measures -- they'll try anything," Perkins said. "With all the scams out there -- it's scary."