Gulf War veteran Stephen Schmelz told of getting a $2,700 loan that would cost $27,000 of his pension payments. State Attorney General Lori Swanson, right, on Wednesday announced a suit against the companies that victimized Schmelz and others. (The Minnesota Star Tribune)

The Minnesota attorney general's office Wednesday filed suit against two companies that it said pressured desperate military veterans and senior citizens to sign over large portions of their monthly pension payments in exchange for loans of small sums of money.

The loans, known as "pension advances," often charged annual percentage rates of 200 percent and extended for as long as 10 years. The companies aggressively targeted consumers with poor or bad credit, the suit alleges.

"You're desperate. You trust them," said 68-year-old military widow Cecelia Gleb, who borrowed $2,249 and discovered she would be required to pay back $18,000. "You need it and no one else will help you."

The companies, which are the target of multiple state and federal investigations, issued the loans to veterans who receive pensions or disability benefits and to senior citizens with private-sector pensions. They are part of an industry that has been criticized for a lack of transparency and questionable business practices.

"By signing away your pension rights for years to come, you often end up making a bad financial situation far worse because you are forfeiting the right to have hundreds of dollars of future financial payments," Minnesota Attorney General Lori Swanson said.

About 55 percent of the companies' business targeted military pensions. The rest were private, Swanson said.

The lawsuit was filed against Future Income Payments, of Delaware, and FIP, of Nevada. Both companies list the same address. A company representative in Henderson, Nev., said it would have no comment, but the company website indicates it does not do business in Minnesota.

The lawsuit, filed in Hennepin County District Court, alleges that the companies violated state lending laws by issuing loans without a license.

It alleges that the companies sought to evade state lending laws by falsely characterizing the transactions as "purchase agreements" of a pension, not loans.

In the past two years, Colorado, California, Massachusetts, North Carolina, New York, Washington, Iowa, and Pennsylvania, and the Los Angeles City Attorney have taken action against one or both companies for issuing unlawful loans, according to a news release.

Under Minnesota law, lenders must obtain a license from the Minnesota Department of Commerce before issuing loans in the state. The companies did not obtain such licenses, Swanson said.

Federal law prohibits a company from acquiring the right to receive a veteran's military benefits or pension, but it permits a veteran to use a military pension or benefits to repay a loan, as long as a preauthorized electronic fund transfer is used to make the payment.

Minnesota Commerce Commissioner Mike Rothman said his department is investigating the companies' dealings with at least 100 Minnesotans. The department has demanded the companies stop activity in the state and enter into a consent decree. But they have refused, Rothman said,.

"These advanced pension payments are a fraud and a scam," Rothman said. "They are illegal, they are predatory and they are preying on Minnesota's senior citizens and our veterans."

"Snakes in the grass"

Disabled Gulf War veteran Stephen Schmelz, who has had seven spinal surgeries stemming from his service, found bills mounting and sought a loan from the companies after being turned down by other financial institutions. In exchange for $2,700 he would have been required to pay $27,000. The $450 a month would have been about 25 percent of his VA disability payment. He paid for eight months before reaching an agreement to pay off his loan. He called the companies "snakes in the grass."

"They know that we need the money desperately, they know we have a fixed income and they know that's going to be a direct payment every month," Schmelz said.

In another case, 72-year-old Billie Jo Slater, a widow of an Army Vietnam veteran, borrowed $2,100 for emergency surgery for her dog in February of 2017 and was required to repay $21,000. Under the contract, she was to pay $350 monthly deductions from her late husband's monthly VA benefits for five years. She made $750 in payments but stopped after she said the company twice overdrew her account.

"I feel stupid," she admitted at a news conference Wednesday. "Make them wait and read all the contract. Don't just let them just slide it right through."

The suit seeks to enjoin the companies from operating illegally in Minnesota and declare the current loans void. It also seeks restitution for the victims.

The companies often solicited borrowers through their own websites or websites of "lead generators" who marketed "pension loans" or "loans that can fit your needs," Swanson's office said. The companies' training materials encouraged sales agents to instill a "sense of urgency" and "fear of loss" that a loan may no longer be available if the borrower does not sign up immediately, her office said.

Mark Brunswick • 612-673-4434