Educational Consumer Tips
Advance Fee Mortgage and Loan Brokers
What Are Advance Fee Loans and Loan Brokers?
Discouraged by high interest rages and hard-to-find risk or investment capital, businesses in need of commercial loans to expand or even stay in existence may use the services of loan brokers who promise to find needed funds for a fee.
Loan brokers should not be confused with either mortgage brokers, who arrange real estate loans, or money lenders, which include such entities as banks, savings and loans, and credit unions. Loan brokers cannot make real estate loans and do not lend money directly to borrowers.
A loan broker may or may not require an advance fee before performing any services. Under the terms of an "advance fee" contract, the fee charged may not be refundable, regardless of whether or not the loan money sought is obtained. Some brokers offering refunds state in their contracts that the fee is refundable "if our lenders deny your loan request and you obtain the loan for the same amount or larger from another lender." In addition to the advance fee, the contract may state that the client will also pay a certain percentage of the total loan amount, say 1%-5%, at the time of the loan becomes effective-if the money for the loan is found by the broker.
Many kinds of business transactions require that an advance fee or a deposit be made before services are provided. Further, some loan brokers provide a legitimate service to their customers. However Better Business Bureau (BBB) strongly advises would-be borrowers to exercise caution before paying advance fees to unknown firms.
How Are The Loans Arranged?
Advance fee loan brokers usually communicate their services through newspaper advertising in the "Money to Loan" columns. The ads may be in larger display space in the business and sports sections of the newspaper, and may also be broadcast over television or radio.
Newspaper ads like the following examples appeal to individuals with poor or no credit records who are seeking to borrow money, as well as to businesses needing cash:
After the potential client calls the number provided in the advertisement, an application or agreement is received from the loan broker. Some applications request detailed financial statements, proposed business budgets, and tax returns. A fee of anywhere between $25 and $3,000 (or more) is paid as an advance fee for the broker's finding the risk capital or loan. Some brokers request the fee at the time an application is submitted. Other represent to their clients that the loan money has been located and then state that "preliminary closing costs" must be paid before the loan can be granted. As mentioned earlier, a percentage of whatever the loan or funding might be located also will be charged, according to some contracts. Some companies' agreements refer to the loans sought as "signature loans" or "loans by mail" since all paperwork is done through the mail. Signature loans are described as "unsecured," meaning the applicant does not have to have any collateral to guarantee the loan. Companies' literature also states the loans are obtainable regardless of the applicant's past credit. Sometimes ads like these are placed by individuals or companies who, for a fee of approximately $10 - $35, simply provide a list of finance companies and other lender sources. The listed finance companies often have their own application fees in addition to the advance fee already paid to get the list. An increasing number of companies advertise 900 numbers to call, enabling the companies to automatically collect a fee from a charge placed on the caller's telephone bill. Such advertisements may note a fee of $35 but do not make it clear that the $35 will be charged immediately on the caller's telephone bill, not after initial information in received from the advertiser.
Advertisements may say "guaranteed financing," but since brokers themselves do not lend money, they really cannot guarantee that any given lending source will come through with funds for the applicant. Signing the agreement and paying the advance fee may be the end of the client's contact with the advance fee broker, despite the broker's assurances of unlimited sources, even foreign ones, from which to obtain capital to lend. In many cases, no effort is even made to find the funds promised. And, sometimes, according to one state comptrollers office, loan brokers set up sham loan companies for the purpose of "denying" loans. A business or individual in search of money not only doesn't receive a loan, but also loses all advance fees paid to the broker.
Better Business Bureau Experience
Some Better Business Bureaus (BBBs) state that they identify new advance fee loan companies almost daily. After taking advance fees from businesses and individuals alike, many of the companies disappear or get put out of business by law enforcement agencies, only to have new ones soon appear in their places.
Complaints in BBB files around the country tell of typical problems occurring with advance fee loan companies. For instance, a client sent a loan application along with the required $150 fee to the loan broker and then heard nothing at all about the loan, despite a supposed 21 day turnaround time. Numerous calls to the company to learn the status of the application resulted in a response that the "underwriting" department was evaluating the request and the client would receive a response the following week. Needless to say, the client did not receive the requested loan money and lost the advance fee paid.
Another potential client responded to a newspaper advertisement which claimed business loans were available regardless of credit history. He was told that his ability to repay was the most important factor related to getting a loan. After sending in the application and the $94 fee, however, the loan was denied due not to the applicant's ability to repay, but due to a lack of sufficient collateral. The advance fee company refused to return the fee or even respond to Better Business Bureau's inquiries regarding the matter.
Yet another complainant stated: "I first met with the loan broker and gave him $50 cash along with my application. Then after a month, he said a loan had been approved. I met him again and wrote a check for $325 for processing papers. That was the last I heard from him. I've tried calling his home and work numbers and there is never any answer."
Many of these complaints go unanswered. Some brokers respond by referring the client to the part of the contract that states there are no guarantees. Sometimes a broker will refund a small portion of the advance fee, keeping the majority of it to cover "administrative costs." Consumer Protection
There are no Federal Trade Commission or U.S. Postal Service regulations specifically dealing with loan brokers. However, the U.S. Postal Service operates under general false representation statutes when investigating any schemes perpetrated through the mail and has, in fact, filed numerous suits against advance fee or signature loan companies. Such suits allege false advertising claims were made to induce consumers to remit money through the mail.
The Federal Trade Commission has advised that about half of all states have statutes called "Credit Services Businesses Acts." These laws govern companies involved in extending credit to consumers and generally mandate that companies requiring advance fees post bonds. Whether or not loan brokers are covered by these state laws is a matter of each state's interpretation of the law, however. In addition, some state legislatures have passed laws designed specifically to curtail abuses of advance fee loan brokers by prohibiting advance fees or requiring that such fees be held in escrow until the loans are completed.
Other states do not specifically outlaw advance fees, but require that all lenders and others conducting financially-related services, including loan brokers, be registered to do business in that state. For specific information as to any applicable law in your state, you may wish to check with your local BBB, local or state consumer protection agencies, state securities commission, or state department of finance.
Some state attorneys general and securities commissioners have taken legal actions against brokers for allegedly misrepresenting to customers that loans were brokered through major lenders and advance fees were held in escrow, when neither was the case. Actions have also been taken for failure to register with the state securities commissioner. In one scheme reported in Idaho, loan brokers received $3,000 in advance fees from each client for agreeing to obtain a loan and take 49% ownership in a farm or business plus "full management and control." Once the loan was made and the borrower back on its feet, the 49% ownership was to be returned to the borrower for fair market value. "It was alleged, however, that none of the promised loans were ever made. The state of Idaho received a judgement against the loan brokers restricting future business activities and ordering refunds to be made to customers.
Ask the Right Questions!
Better Business Bureau slogan "Investigate Before You Invest" applies fully to advance fee loan brokers. Before signing a contract with a broker, be sure to consider the following:
Better Business Bureau advises securing the following information in writing at least several days in advance of signing an agreement or paying any fees to the broker:
- The name and the address of the broker.
- The length of time the broker has been in business. (And confirm this information with your state's department of corporations.)
- The total number of contracts the broker has signed in the last twelve months.
- The number of successful contracts brokered in the last twelve months and the number of actual loans made.
- The percent of company income derived from fees paid by clients before obtaining funding.
- The possible sources of the loan money. (Confirm this information with the alleged sources, law enforcement agencies, and BBB where the company is located.)
- A complete description of services offered by the broker. Find out exactly what is to be received for the advance fee.
- A full description of the broker's refund policy including circumstances where the client does not obtain a full refund if the funding is not received. Keep in mind, however, that a refund guarantee is only as good as the company itself.
- A copy of the broker agreement. If possible, have the agreement reviewed by a lending institution you are familiar with for an impartial evaluation, and by an attorney - before signing.
File a Complaint
If any business or individual becomes a victim of an unscrupulous advance fee loan broker, a complaint should be made to Better Business Bureau where the company is located, to the U.S. Postal Service and Federal Trade Commission, and to state and local consumer protection agencies. It is important that all documents involved in the transaction, along with names, addresses, and telephone numbers, be saved and assembled.
Better Business Bureau, according to national polls, is by far the most recognized and most used third-party complaint handling mechanism in the United States. Financed entirely by the business community, the BBB has assisted in the resolution of consumer/business disputes since 1912. Recognizing that consumer confidence is basic to the health of the American marketplace, one role of the BBB is that of an unbiased third party seeking voluntary resolution of reasonable complaints.
In addition, BBB can often tell a prospective borrower whether it has received complaints about the loan broker and whether the complaints have been resolved.
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