Tight Credit Market Opens Door to Loan Fee Scams : Economy: Firms accept desperate customers’ payments but never provide financing, officials say.

From a cluttered Redondo Beach office the size of a pickup truck, Jerome Overton got a peculiar glimpse at the ravages of recession. Ten to 12 hours a day, he and his co-workers at Capital Financial Services answered phones and heard hundreds of pleas from people across the country desperate for cash.

For a $75 fee, Overton says, the tiny company promised to do what it could to find callers a loan, even those with bad credit or too many bills.

Now, in interviews with the police and the Better Business Bureau, Overton claims that those fees were pocketed by the company’s owners and that many customer loan applications were simply tossed into storage boxes.

“One lady’s husband died and she called because she needed the money to bury him,” Overton recalled. “I kept trying to hint to her what was going on, telling her to try a bank or something. But we sent her an application.”

Roy Scroggin, Capital Financial’s co-owner, has denied any wrongdoing.

The Better Business Bureau lists Capital Financial among 80 Southern California companies that it suspects of involvement in advance-fee loan fraud. The bureau estimates there are hundreds more nationwide. These companies, the bureau and law enforcement agencies claim, are pulling down millions of dollars in upfront payments simply by promising consumers loans that rarely materialize.

One of the hottest con games in years, advance-fee loan fraud targets individuals already suffering from today’s harsh economy--the unemployed, those deeply in debt and struggling small-business people.

The scam is flourishing in what some are calling one of the tightest credit markets since the Great Depression. Banks, savings and loans, insurance companies and other lenders are exercising extreme caution when it comes to new lending. This has forced consumers with a few too many debts or a spotty work record to look to nontraditional sources of financing for help.

“People are so desperate for money they get suckered,” said James H. McIlhenny, the Better Business Bureau’s national president.

The Federal Trade Commission will begin airing radio and television spots next month as part of a campaign to alert consumers to these loan scams.

“Eighteen months ago this wasn’t much of an issue,” said H.L. Almond, an investigative consultant with the California Department of Justice in Orange. “Now it’s a very large problem because the money market is so tight.”

Advance-fee loan scams have been known to authorities since the late 1970s, when they were used to prey on desperate Midwestern farmers. But only recently have they become a big problem nationwide.

It is unusual, but not illegal, to charge upfront fees in exchange for a loan. Because of the problems with advance-fee loan operations, some trade associations and consumer groups are advising consumers to avoid any lender who asks for money in advance.

“It would be very rare to have an upfront fee,” said Virginia Stafford, a spokeswoman for the American Bankers Assn. “If they do exist, they would be nowhere near hundreds of dollars.”

Last month, the Better Business Bureau’s Washington-based headquarters issued its first consumer alert about a “national epidemic” of advance-fee loan operations after its branch offices were flooded with tens of thousands of complaints a month. One scam in Phoenix, the bureau said, raked in $400,000 in just a few days.

The bureau advises borrowers to be wary of companies claiming ties to unusual lending sources. Bogus loan companies, the bureau says, have falsely claimed that they had access to money from Kuwaiti oil sheiks and American Indians.

The typical advance-fee loan company charges an upfront fee ranging from $50 to $250, though some operations targeting small business have been known to charge $10,000 or more.

Often consumers “have to borrow from a relative or go without groceries to even afford that upfront fee,” said Karen Gardner, an FBI spokeswoman in Los Angeles.

Overton, 25, learned firsthand just how bad things are out there. His experience at Capital Financial offers a glimpse into how an advance-fee loan company works, according to police detectives and business officials who have heard his story.

Capital Financial has advertised in the National Enquirer, Rolling Stone and other publications, offering low-interest loans to bad credit risks.

“People call 24 hours a day” from Alaska to Puerto Rico, Overton said. “It was so busy that I could never take a lunch break.”

Overton said callers were connected to one of four employees, each of whom allegedly used a fictitious name.

“They told me I couldn’t use my real name,” said Overton, who went by the name Steve Bentley. “Jim or Bob or Steve or Don. Those are the four generic names they use.”

The initial call from a consumer to Capital Financial was allegedly known as the “open pitch.” Overton claims it went something like this:

“Hi, my name is Steve. I’m a loan officer here at Capital. How much are you looking to borrow? $5,000?,” Overton recounted. “I then said, ‘OK, what is your monthly income, roughly, before taxes?’ They would say maybe $1,000 or $2,000. I’d say, ‘You do qualify.’ Just like that.”

John A. Mendoza, a lawyer representing Capital Financial, said such promises were against the company’s rules. “If they (loan officers) are saying you are qualified, that is not (the company) policy,” he said. “I’ve reviewed their contract material thoroughly, and it says in bold letters that nobody’s loan is guaranteed to be approved.”

Capital Financial’s client agreement does, in fact, state that it “makes no representations or warranties regarding the loan transaction including lender’s ability to fund, or client’s ability to pay the loan.”

Overton, who quit the company after a month, said prospective clients who were sent a loan application were reminded in a so-called “re-close” phone call to enclose the $75 fee with the application.

Customers, Overton said, were told their loan applications would be sent “upstairs for processing.” But the company had no “upstairs,” Overton said.

Scroggin, a Capital Financial co-owner, described the company as a lender referral service. “We do everything we say we are going to do,” he said. “We’re not ripping anyone off.”

He promised to provide a reporter with a list of satisfied customers but never did so.

In repeated phone calls to The Times, Scroggin claimed he often suffered memory loss because of what he called “post-traumatic psychological disorder.”

Mendoza provided the names of three companies, including a Glendale car dealer, that he said accepted loan applications from Capital Financial. One of those companies said it had never heard of Capital Financial and all three said they had never loaned money to Capital Financial clients.

Mendoza later explained the companies’ comments by saying, “The L.A. Times called them and they’re scared to death.”

Gary Sauer, a Ventura County firefighter, said he sent Capital Financial $75 in hopes of getting a $10,000 loan to start a sports information hot line.

“It was like everything was guaranteed, no problem. Just send $75. We’ll get you a loan within 14 days,” said Sauer, 22, who never got a loan and lost the $75. “I’m a sucker.”

Despite the Better Business Bureau’s claims that tens of thousands of people have heard similar sales pitches, few advance-fee loan companies have been prosecuted.

One reason: Investigators often cannot find the companies. Some advance-fee loan operators move from office to office and use post office boxes for correspondence, investigators said. Proving a case against an advance-fee loan company is next to impossible. Because advance fees for loans are not illegal, prosecutors would have to show that a company almost never made a loan to convince a jury that a fraud had been committed.

“They’re a manpower-intensive case,” said Jim Donckels, head of the FBI’s office in Santa Ana. “Most police departments won’t touch them.”

Some law enforcement critics--and the Better Business Bureau--have publicly charged that investigators shun these cases because individual consumer losses are relatively small.

“I have yet to see any law enforcement action on advance-fee scams,” said Lona Luckett, who heads the bureau’s regional office in Cypress.

There is nothing particularly secretive about these schemes; in fact, many advance-fee loan companies maintain a high profile by advertising in newspapers and on radio and cable television. And many use 900 telephone numbers.

“Sometimes going home, I listen on the radio to these ads and then say, ‘That one is a fraud; that one’s a fraud too,’ ” said Donckels. “You can tell just by listening to them.”

Todd Breaux of Los Angeles was a perfect foil for an advance-fee loan fraud--young and heavily in debt.

The 23-year-old struggling pop singer makes $2,200 a month selling water and air purifiers--hardly a fortune, but enough to pay the bills and occasionally buy some time in the recording studio. His finances took a turn for the worse after a motorcycle accident left him with huge medical bills and his roommate moved to Colorado.

“It all came down in one month,” Breaux said, “and I didn’t know how to get out of it.”

Scanning this newspaper’s classified ads, Breaux thought he had found a solution. A Houston company was offering loans of $5,000 or more at 12% to 16% interest. To qualify, Breaux had only to provide his driver’s license, Social Security card and proof of income.

“They didn’t ask any credit questions at all,” said Breaux. “They said bad credit wasn’t a problem.”

He requested a $5,000 loan and sent the company a $250 processing fee after they allegedly promised him the money. After hearing nothing for weeks, he made more than a dozen phone calls to the company. Finally, he got a letter saying his credit was too bad.

“That is when I realized it was a big scam. . . . If I wasn’t in debt, I wouldn’t need the loan,” said a frustrated Breaux. “It wasn’t like I was going to take a cruise.”

The FBI is investigating seven Southern Californian firms that it believes took in between $2 million and $8 million in advance loan fees in the mid-1980s.

One of the firms raided by the FBI three years ago was Financial Collateral Corp., a Newport Beach company that charged customers upfront fees and then gave them a letter of commitment from a London firm indicating that Bank of Credit and Commerce International would provide the loan.

BCCI was closed down earlier this year by authorities around the world amid charges that it used depositors’ funds to finance everything from terrorists to drug cartels.

Financial Collateral President Herb West, in several interviews, denied any wrongdoing and provided documents indicating that his company has arranged loans for several small businesses.

“Just for the record, we have banks that call us” looking for borrowers, said Frank Grassi, West’s banking assistant.

The FBI, citing agency policy, refused comment.

The FBI filed an affidavit in U.S. District Court in Los Angeles three years ago in connection with a raid of Financial Collateral in which it said the company was issuing “worthless collateral commitments” and said West was the past president of at least one other questionable finance company.

Financial Collateral and West have not been charged with any wrongdoing.

Most investigators expect advance-fee loan scams to continue as long as the recession. While media attention and consumer education may deter some scam operators, no one expects the problem to go away entirely. The reason: The schemes are just too lucrative.

Advance-fee loan operators differ from the run-of-the-mill telemarketing scam, which typically prey on people with one thing in mind: getting rich quick.

Most telemarketing scams “depend on a little bit of greed on the part of the person who is being the victim,” said the Better Business Bureau’s McIlhenny. But advance-fee loan scams target people who are “desperate for money and . . . are willing to take their last few bucks to get a loan.

“They even intended to pay it back.”