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Worst Financial Scams of 2011

By Mitch Lipka • Illustrations by ilovedust

16 usaa magazine winter 2011

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hanks to everything from regular paydays to frequent moves, the country’s service members are prime targets for unscrupulous financial scammers. ¶ “Military members are popular targets for frauds of all kinds,” says John Breyault, vice president of the National Consumers League. ¶ The problem is so far-reaching that the Consumer Financial Protection Bureau recently launched a special office to help monitor the situation. ¶ Here are five of the top financial rip-offs that plagued service members during 2011.

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Overcharging on Purchases A recent investigation found that a financing company associated with a national retail chain purchased electronic equipment at warehouse clubs and then charged soldiers quadruple the retail price. How? The

firm refused to accept cash and instead forced buyers to sign financing contracts filled with charges and shocking interest rates. Over the summer, however, the company agreed to settle charges filed by New York’s attorney general, releasing nearly 1,000 service members from $3.5 million of debt. Young service members are particularly vulnerable to

this tactic, says John Breyault of the National Consumers League. “Not only do they have significant amounts of cash for the first time in their lives, it’s often their first time away from home.” Recommendation: Do your homework before you buy a costly item. And if entering into a financing deal, read the fine print rather than just taking the salesperson’s word.

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Buying Your Benefits The offers might sound tempting when you need money quickly, but beware of offers of cash secured by your military pension. Interest and fees tend to be outrageous, even though they don’t appear that way at the outset. One retiree reported getting $90,000 in cash in

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exchange for eight years of benefits that were worth nearly a quarter of a million dollars. In August a judge ruled in favor of dozens of retirees who filed a class action lawsuit to void dozens of these unscrupulous buyout plans. “These [high-interest loans] are generally illegal in most states,” Breyault says. “You should never sign over

Scamming Your Family

your benefits in exchange for upfront cash. It might sound like a good deal, but you’ll end up regretting it at the end of the day.” Recommendation: Find another way to raise cash that doesn’t sign away your future benefits, and always read the details of these arrangements to see how much they will really cost.

Some scammers have been gathering information from obituaries and social networks and then contacting a deployed service member’s grandparents to say he or she has gotten a leave and wants to surprise the family. That initial contact is then followed up by a call — either by someone posing as the service member or a friend — claiming the service member’s car has broken down and requesting that the grandparents wire money. Losses reported from these scams have averaged between $3,500 and $5,600 per family. “The key to avoiding this scam is to be certain you

know who you are talking to,” says Barbara Anthony, who heads Massachusetts’ Office of Consumer Affairs. “Chances are, with a few questions and a little pushing, a scammer will hang up and move on to the next target. Be insistent. If they do not give you their name or do not sound like the person they claim to be, ask for their phone number so you can call back.” Recommendation: Never wire money to someone you’re not familiar with. Always try to independently verify that the person you’re dealing with is who they say they are. If they’re not, report the crime to the police.

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Bogus Rental Deposits

In this scheme, service members on the move see a rental opportunity and scammers pressure them to wire a deposit without ever visiting. But the property either doesn’t exist or isn’t really for rent. Victims never see their money again — and they don’t have a place to live. This rip-off got a lot of attention near Fort Campbell in Kentucky, but it’s been found outside other installations around the country. “If you cannot visit properties in advance, make sure you are working with a reputable real estate agent,” says Anthony. “Ask the agent to visit the property and send you photos with him or her in it. Compare those photos to ones on the rental website, if possible. “Just because a site or company markets itself exclusively to service members and their families does not mean that it is trustworthy,” she adds. “Beware any offers made by an agent who initiated contact with you.” Recommendation: Don’t rent without seeing a property, if you can avoid it. And check the agent and landlord with your installation’s consumer and housing offices to see if others have reported problems. Mitch Lipka is the consumer columnist for The Boston Globe and Reuters, and founder of theconsumerchronicle.com, where he covers scams, rip-offs and other deceptive practices. usaa.com

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Loans You Don’t Owe

The payday loan industry likes to target enlisted men and women with offers of quick cash. The catch? Outrageous interest rates. (Even though the Military Lending Act capped these rates, they can still rise to a stunning 36 percent.) This year, there’s a new twist: collecting on loans that have been paid off or never even existed. It is illegal for a collector to threaten criminal prosecution for a debt, but it’s still happening. “We’re still hearing about threats of court-martial,” says Delicia Reynolds Hand, legislative director of the National Association of Consumer Advocates. Threats of going to a commanding officer or the military police can be scary

enough to force service members to offer payment — even when none is due. There is also a fear that poor credit could jeopardize security clearance. (The biggest cause of revoked security clearances is financial issues.) But these threats are just scare tactics; don’t fall victim. Recommendation: If you’ve never had the loan in question, report the collector to the Federal Trade Commission and your state’s attorney general. If it is a legitimate loan that you had taken out, use the contact information on the original loan papers to determine whether you still owe anything. And check with the Federal Trade Commission for rules governing debt collectors. winter 2011 usaa magazine 19


5 of the Worst Financial Scams of 2011