Lessons in Loan Fraud

Located in a South Los Angeles storefront, Priscilla’s Professional Services churned out hundreds of fraudulent tax returns, an illegal though not uncommon enterprise that this summer earned its proprietor, Priscilla Ann Hamilton, a conviction on 11 federal felony fraud charges.

Hamilton also had a sideline: She and her employees filed false applications for federal student loans, netting them at least $116,000 over a four-year period--and resulting in a guilty plea by Hamilton to conspiracy and mail fraud.

“It was a very simple thing to do: Fill out the paperwork, send it in and get the money,” said Assistant U.S. Atty. Alicia Villareal.

As such cases go, Hamilton, who is scheduled to be sentenced next month in U.S. District Court, was a small fry swimming in a very large pond.

The U.S. government will hand out about $43 billion in grants, loans and work-study stipends to 7.5 million students during 1997. And officials acknowledge that the huge sums can tempt unscrupulous applicants, and even schools, to try to obtain money fraudulently.

Indeed, while federal officials have reduced the rate at which borrowers default on loans--mainly by pressuring schools to do a better job of collecting and by allowing more affluent people to take out the loans--fraud in the Pell Grant program appears to be on the rise.

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A U.S. Senate subcommittee investigation spotlighted one case in which officials who ran a chain of Los Angeles-area trade schools allegedly obtained more than $50 million by submitting applications for grants for students who did not exist or never enrolled.

Kenneth Williams Jr., the financial aid officer for the IADE American schools, is scheduled to go on trial in September, along with the schools’ former owner, Sergio Stofenmacher. Williams has proclaimed his innocence on charges of conspiracy, theft, money laundering and making false statements.

More frequent are the instances in which parents or students obtain $3,000 Pell Grants for tuition when they aren’t poor enough to qualify. They do it by fudging their incomes, the balance in their savings accounts or their expenses.

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Officials say the problem appears to be worsening as the costs of college rise faster than inflation and the amount of available aid fails to keep up.

An audit of the Pell Grant program during the 1995-96 school year by the U.S. Department of Education turned up 102,000 students who had received at least $109 million to which they were not entitled. More than 300 of the students’ families had understated their income by more than $100,000.

What’s more, the audit probably understates the problem--it involved fewer than a third of the students who were receiving aid. “I can only tell you about what comes through the door,” said Assistant Inspector General Dianne Van Riper. “But when we [conduct audits] we find very serious, significant, widespread fraud.”

Her office runs about 325 investigations at a time. One underway involves grant applications for athletes, which stemmed from the case of a University of Miami academic advisor who was convicted of helping football players obtain aid improperly.

She said inspectors in her office also have turned up cases in which enterprising middlemen help families cheat--for a price.

Two financial aid consultants in the Detroit area would file false applications for financial aid on behalf of clients, then--if the applications were questioned--supply false tax forms to back up the income claims.

In that case, in which investigators uncovered at least $20 million in improper grants, Van Riper said her department has obtained restitution from 100 families and is pursuing 100 others through lawsuits. It was “not an isolated instance,” Van Riper said. “We’ve got these marketing companies operating all over the country.”

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So what can be done to reduce such fraud?

Officials say one powerful tool would be the ability to match the financial information reported by applicants against their tax returns.

Priscilla Hamilton was snagged almost by chance, after Internal Revenue Service auditors in Utah and investigators for the U.S. Department of Education in Washington noticed separately that questionable tax returns and student loan applications--

including several submitted by nonexistent students--all had her Los Angeles storefront as their return address.

But the cooperation of those agencies is not the norm. Generally, the IRS does not share information with the Education Department--creating a loophole that allows fraud to go undetected.

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Confidentiality laws preclude IRS participation in loan application processing unless the taxpayer--here the parent or student--signs a release. And even with such a release, the information can be delayed up to a month, which often is too slow to meet financial aid processing deadlines.

As an alternative, the Education Department expects colleges or private firms they contract with to spot-check financial aid applications for hints that the amount of reported income--one of the most important factors in determining aid--is ridiculously low. The family might report its mortgage as $3,500 a month, for example, but only report a total monthly income of $3,500.

Gaston Green, who heads the financial aid office for the Los Angeles Community College District, said suspicions may be raised if the listed income might be too low to support the number of people in the family or if it shows a sudden, drastic drop. Such applications can be flagged and the family can be required to submit tax forms.

But not all colleges take that step, Van Riper said, and even if they do, it doesn’t guarantee fraud will be detected because--as in the Detroit case--those forms can be falsified as well.

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“If someone really wants to commit fraud, there’s only so much that can be done to catch it,” said Kate Jeffery, director of student financial support for the University of California.

That’s why Congress earlier this year recommended that the IRS begin providing access to its computers to verify such data. Congress called on the Department of Veterans Affairs to do the same, to make sure that applicants claiming to be veterans actually served in the military.

Van Riper said such suggestions always prompt concerns about privacy. But, she noted, “when applying for federal taxpayer dollars they have to give up a little bit. That’s the trade-off.”