A post near and dear to my heart, I've mentioned this before, but...
No, they often are not, not at 3.5 and 4.0. At 4.5 they are, no one is doing this nonsense mentioned below at 4.5, at 4.5 they probably had success enough to play in college division 2 or 3 and rec tennis isn't that big of a deal.
A larger group of 4.5 players in Dallas once went 2 and some of them 3 seasons losing on purpose, losing every match, to get bumped down to 4.0. Then they won almost every match at 4.0 to try and get to nationals, it didn't work. Although, frankly, the Caribbean and sometimes other teams are at nationals that can require this kind of manipulation to have a chance at winning. Furthermore, Houston once put together an all-star team at 4.0 (they took the best players from all over the city and put them on one team to win regionals/Texas) and to beat that you had to do something, but it all boils down to why? Most in this Dallas group had families and kids, I mean, isn't free time away from the wife and kids limited on a weekend? I wouldn't spend it playing a tennis match I lose on purpose, it's just makes no sense to me.
I've known some people returning to tennis from a break self rate at 3.5 and go to a nationals event, but I agree, is it fun? If you've played tennis off and on since childhood, 3.5 should be embarrassing for you to play. 3.5 should be reserved for older players or those new to tennis in my opinion. Those 3.5s wouldn't mention their level, mostly just casually mention they went to nationals or couldn't play next week because they made it to nationals lol.
USTA cares somewhat, but what can they do, they get your money anyway. I've seen some teams video tape players and submit it, to prove they are out of level, and that works, but it's just getting silly at that point.
Here is a funny video about leagues in Dallas...