Car owners, beware. Fraudsters have launched a new scam in which they offer to help struggling car owners rework the terms of their car loans, only to take your money and run.
Sound familiar? A similar fraud popped up a few years ago during the height of the housing crisis. As homeowners fought to avoid foreclosure, all sorts of sketchy companies appeared to offer help in securing a loan modification. The companies collected up-front fees without ever delivering the promised assistance.
That same type of fraud is now invading the auto loan market, said Malini Mithal, assistant director of the division of financial practices at the Federal Trade Commission. On Wednesday, the agency filed charges against two California companies that allegedly duped struggling car owners into handing over hundreds of dollars. These are the first cases that the FTC has brought against companies offering car loan modifications.
"We're concerned about scammers moving from the mortgage arena to the auto arena," Mithal said in an interview with The Huffington Post. "Now that the FTC has rules against companies advertising mortgage modifications and debt relief services, auto loans is one area of debt not covered by our rules."
The FTC alleges that two companies -- Hope for Car Owners and Auto Debt Consulting -- engaged in a variety of problematic practices: Not only did they charge up-front fees for services that they never provided, they also refused to provide refunds to customers, despite advertising refunds and guaranteed services, according to the agency.
In other instances, the companies provided advice that resulted in the customer's losing the car -- the exact scenario that the person had intended to avoid by hiring the company, explained Mithal.
"Instead of paying their lenders, these car owners paid these companies, so some of them ended up having their cars repossessed," Mithal said. "A few of the car owners were told by the companies to hide their cars to avoid repossession," she said.
Hope for Car Owners could not be reached for comment.
Auto Debt Consulting's founder, Naythem Nafso, denied the charges. "Our services are absolutely outstanding," he said in an interview with The Huffington Post. "We absolutely help and assist clients struggling with vehicle payments. And if we are unsuccessful we issue either partial or full refunds depending on how much work we did on the case."
Buying a car is the second most expensive financial transaction that a consumer will make after buying a home, said Mithal, who says her agency is increasingly interested in the auto market.
When it comes to auto loans, Americans owe a total of $730 billion, even more than the amount of credit card debt nationwide, which is $693 billion, according to the Federal Reserve Bank of New York.
In 2009, the number of car repossessions peaked at 1.9 million, according to Manheim Consulting. Although that figure has since dropped to 1.3 million, Manheim anticipates that this will rise once again as a result of a spike in the number of car loans and "some easing in lending standards," creating more opportunities for scammers to try to defraud consumers.
Hope for Car Owners typically charged $200 to $500 up front for obtaining the elusive loan modification that would supposedly reduce the borrower's payments by as much as half. Auto Debt Consulting charged even more -- $350 to $799 -- for loan modifications that could supposedly reduce payments by an even smaller amount -- 25 percent to 40 percent, according to the FTC.
The FTC has asked a U.S. district court to order the two companies to stop operating while the agency pursues the two cases.
For more information on fraudulent car loan scams and suggestions about how to negotiate with your lender if you are struggling with making car payments, check out the FTC's page on auto loan scams, which also includes advice about what to do if your car has been repossessed.