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Scam artists target members of the military

For some members of the U.S. military, the enemy isn't a bearded guy with a gun in Iraq. Instead, the enemy is a slick-talking salesman with a fast pen and a slippery deal right here at home.

In many military communities, scam artists target active-duty military members and veterans with an eye-popping variety of rip-offs, including payday loans, car title cons and repair scams.

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Drive down the streets leading into virtually any military base in the nation and you'll see storefront after storefront advertising quick cash, fast loans and cheap furniture, cars and repairs. On base, the pages of military-affiliated newspapers feature ads from many of the same companies, many of which cloak themselves in military-sounding names.

The Department of Defense, consumer groups and state and federal governments are fighting back with educational campaigns, lawsuits and legislation designed to protect service members and veterans from exploitation. It's an ongoing effort that will also take more enforcement of existing laws to be truly effective.

Take Rick Sinclair, a single parent of four who moved to North Carolina after 19 years in the U.S. Navy. Like many Americans, he had a job, but couldn't get ahead of his bills.

Then the former submarine weapons officer spotted an ad in the Navy Times that looked like the answer to a prayer. It offered veterans such as Sinclair the chance to receive cash in return for a portion of their veteran's pension benefits.

So he signed an agreement under which he would get $19,000 in return for signing over his monthly pension benefit of $1,014 to C&A Financial Programs for three years. It wasn't just a bad deal, it was illegal, says Lynn Drysdale, an attorney with Florida Legal Services in Jacksonville, Fla. Drysdale represents Sinclair in a lawsuit filed against him by C&A Financial for nonpayment under the terms of the contract he signed.

While Sinclair was supposed to receive $19,000, he actually received $18,130. The assignment of his pension benefit meant he would have paid C&A $36,504, an effective interest rate of 53.25 percent, according to Drysdale.

Sinclair repaid more than $23,000 before stopping payment to C&A after being notified by the Florida Attorney General's Office that these benefits buyouts and the companies doing them were under investigation. Despite numerous requests for an interview, Leif Grazi, C&A's attorney, declined to comment about Drysdale's allegations.

"When these buyouts are packaged as sales rather than loans, the companies don't have to provide any truth-in-lending information or disclosures about interest rates, which frequently are in excess of state usury laws," says Drysdale. "These buyouts are prohibited by federal law and we're litigating a number of cases as a class action in Florida."

While Congress has passed legislation that curbs these practices, several companies are taking advantage of loopholes to market scams to veterans as sales rather than loans.

Such "buyouts" of veterans' benefits are only one of the many financial scams that victimize veterans and active-duty military.

The scams
Many of these scams take the form of high-interest loans, ensnaring service members in a cycle of repayments with stratospheric interest rates -- some at annual percentage rates of 365 percent.

Not only are many of these loans and scams outrageously expensive, some are illegal, says Steve Tripoli, consumer advocate at the National Consumer Law Center in Boston. Tripoli co-authored a report last year titled "In Harm's Way -- At Home: Consumer Scams and the Direct Targeting of America's Military and Veterans."

"Members of the military present an ideal demographic target for these scams," he says. "They are generally young, financially unsophisticated, low-income people whose financial affairs are easily upset by unexpected problems. They have a rock-solid paycheck that arrives on schedule twice a month and are not going to get laid off."

Here's a rundown of the various scams:

Payday lending. With outright payday loans, a service member signs up for a quick loan to deal with a temporary financial problem, promising to pay back the loan with his or her next paycheck.

"Many sailors live paycheck to paycheck, and when they take out a payday loan to cover some unexpected expenses, it is paid off with their next paycheck with an automatic withdrawal from their bank account, " says Dave Feraldo of the Navy-Marine Corps Relief Society, a nonprofit organization that provides financial assistance to members of the Navy and Marine Corps. "Then they don't have money to pay their other bills, so they take out another payday loan and the cycle continues."

Feraldo, who is based at the Jacksonville Naval Air Station., said the problem is getting worse. "The problem will continue to get worse until there is more legislation to control these practices and more awareness of the problem within the military community and the nation at large," he says.

Automobile-related scams. Car-related scams include "title pawn lending," "yo-yo-sales," "buy here, pay here" used car dealers and garden-variety high interest rate repairs and parts scams, says Tripoli. With title pawn lending, instant cash loans are given by lenders for a fraction of a car's value, using the car as collateral. If the soldier can't pay the loan back, the car is repossessed.

Under "buy here, pay here" scams, a used car dealer finances and sells cars that aren't in very good condition. The cars break down and the service member quits paying, leading to repossession. These cars are then sold again, the National Consumer Law Center report says, and another soldier is victimized.

Tripoli describes yo-yo sales as a form of bait and switch. A car dealer sells a car to a soldier, approves financing, but then backs out after the soldier drives the car away, saying the soldier either must put down more money or go with a higher interest rate, both of which lead to an eventual higher default rate.

Periodic payment investment plans and insurance. Periodic payment plans are basically mutual fund investments wrapped in this label to get around federal securities laws. Under these plans, investors are assessed excessively high sales loads that can amount to as much as half of their first year's investment. Many brokers who make these sales are former military personnel who conduct "educational" investment seminars on military bases and sign up many clients on the spot.

While investing is a wise practice, many military personnel could invest the small regular amounts that they typically place in periodic payment plans through no-load mutual funds at a fraction of the cost.

-- Posted: April 25, 2005





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