Avoiding loan scams after a natural disaster

Editor’s Note: This was originally posted on the Consumer Financial Protection Bureau’s website. If you suspect anyone – an inspector, disaster survivor, or someone posing as one of these – of fraudulent activities, call our toll-free Disaster Fraud Hotline at 866-720-5721, or your local law enforcement officials.

This year has seen quite a few notable natural disasters, including deadly tornados, wild fires, and floods. Most recently an unusually strong earthquake, hurricane and floods have stuck the eastern United States.

Of course, with any disaster comes the cleanup, which can be expensive. Unfortunately, many families do not have emergency funds and may need to borrow money in a hurry to make important repairs. This post-disaster stress can sometimes make us easier targets for deceptive lenders.

In particular, watch out for the “home improvement” loan scam. Here’s how the FTC has described this fraud:

A contractor calls or knocks on your door and offers to install a new roof or remodel your kitchen at a price that sounds reasonable. You tell him you’re interested, but can’t afford it. He tells you it’s no problem—he can arrange financing through a lender he knows.

You agree to the project, and the contractor begins work. At some point after the contractor begins, you are asked to sign a lot of papers. The papers may be blank or the lender may rush you to sign before you have time to read what you’ve been given. 

The contractor threatens to leave the work on your house unfinished if you don’t sign. You sign the papers. Only later, you realize that the papers you signed are a home equity loan. The interest rate, points and fees seem very high. To make matters worse, the work on your home isn’t done right or hasn’t been completed, and the contractor, who may have been paid by the lender, has little interest in completing the work to your satisfaction.

Fortunately, there are things to watch out for and things you can do to avoid these scams.

Warning signs:

• The contractor demands full payment up front or in cash only.

• The contractor has no physical address or refuses to show ID.

• You have to disclose personal financial information (perhaps to “speed up payment”) to start the repair or lending process.

• If you have to borrow to pay for the repairs, the contractor steers you toward a particular lender or tries to act as an intermediary between you and a lender.

• You are asked to sign something without enough time to review it.

Avoiding the scam:
 

• Carefully question strangers who show up and knock on your door, offering repairs.

• Never give any personal financial information, such as an insurance number or Social Security Number.

• Never sign any document without fully reading and understanding it. If you don’t understand something, ask for an explanation.

• Do your own research before borrowing any money to pay for repairs.

• Get a loan quote from someone who is not recommended by your contractor and compare their amounts, repayment schedules, and rates. If they differ significantly, ask both parties why.

The Department of Housing and Urban Development has information that can help you be smart about home improvement loans. Find out more about federal and community-based programs, as well as general consumer advice. Your own state’s attorney general may also be a good resource to learn more or file a complaint.

These are not the only post-disaster scams you may encounter. For more information about avoiding other types of scams like repair scams and charitable giving scams, check out these resources:

• FTC Warns Consumers: Charity and Home Repair Scams May Appear After a Disaster

• The Missouri State Emergency Management Agency on Avoiding Scams and Fraud

• The University of Illinois Extension on Home Repair Fraud