'Advance fee' loan: Crunch fules schemes

Companies charge would-be borrowers upfront fees but never seriously try to find financing for their projects

By The Wall Street Journal

Federal and state authorities say the nation’s housing slump and credit squeeze are resulting in a spike in reports of companies preying on frustrated borrowers who are having difficulty securing commercial loans through conventional sources.

The Federal Bureau of Investigation, the Federal Deposit Insurance Corp. and state regulators across the country say they have seen an increase in “advance fee” loan schemes in which companies charge would-be borrowers upfront fees but never seriously try to find financing for their projects.

The FBI says it recently received “several hundred” complaints about advance-fee loan schemes. “We saw some in 2007, but not nearly to the level we’re seeing this year,” says Cathy Milhoan, an FBI spokeswoman in Washington. On its Web site, the agency includes “advance fee scheme” in a warning to the public about “common fraud schemes.”

“Clever con artists will offer to find financing arrangements for their clients who pay a ‘finder’s fee’ in advance,” the Web site states. “Victims often learn that they are ineligible for financing only after they have paid the ‘finder.”‘

The FDIC says consumers should be wary of companies that request fees via a wire system, and of upfront fees, saying that “loan fees are normally paid to a business after the loan has been approved.”

In Alabama, the number of people awaiting trial for alleged advance-fee schemes has jumped from two to 10 since last year, according to Joseph Borg, the state’s top securities regulator.

“With the banks being tighter, this has become a nice little niche” for companies trying to take advantage of borrowers, says Borg, a past president of the North American Securities Administrators Association. He says some companies are targeting “upper-middle-class folks” and small businesses “who just couldn’t quite get” funding from conventional banks but who do have some cash.

The Better Business Bureaus serving Nebraska, South Dakota, southwest Iowa and Maryland say they recently shut down three “advance fee loan scam” Web sites that required consumers to wire fees to Canada before being eligible to receive loans. In August, Connecticut’s Department of Banking says it shut down the Web sites of four companies offering advance-fee loans and claiming to be operating in Connecticut.

Jill Beyer, a day-care operator and single mother in Waterford, Mich., says she lost $2,000 in January after paying a company called City Lending Group an advance fee to loan her $20,000. Despite sending her a “loan agreement” and telling her she was approved, the company failed to provide any money, she says.

The company subsequently shut down its Web site and disconnected its phone lines. Connecticut Attorney General Richard Blumenthal has warned his state’s residents about the firm.

In April, a Bloomfield Hills, Mich., man was sentenced to 54 months in prison after pleading guilty to charges related to tax evasion and advance-fee schemes on “nonexistent high-dollar loans” for business projects, according to the FBI’s Detroit branch. Samuel Abraham received at least $14.3 million through “advance fee and investment schemes,” the FBI said.