[Senate Hearing 110-1157]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 110-1157
 
                    IMPROVING CONSUMER PROTECTIONS 
                          IN SUBPRIME LENDING

=======================================================================


                                HEARING

                               before the

        SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND TOURISM

                                 OF THE

                         COMMITTEE ON COMMERCE,

                      SCIENCE, AND TRANSPORTATION

                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 29, 2008

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation





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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                   DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska, Vice Chairman
    Virginia                         JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts         KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            GORDON H. SMITH, Oregon
BILL NELSON, Florida                 JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington           JOHN E. SUNUNU, New Hampshire
FRANK R. LAUTENBERG, New Jersey      JIM DeMINT, South Carolina
MARK PRYOR, Arkansas                 DAVID VITTER, Louisiana
THOMAS R. CARPER, Delaware           JOHN THUNE, South Dakota
CLAIRE McCASKILL, Missouri           ROGER F. WICKER, Mississippi
AMY KLOBUCHAR, Minnesota
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
   Christine D. Kurth, Republican Staff Director and General Counsel
                  Paul Nagle, Republican Chief Counsel
                                 ------                                

        SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND TOURISM

BYRON L. DORGAN, North Dakota,       JIM DeMINT, South Carolina, 
    Chairman                             Ranking
JOHN D. ROCKEFELLER IV, West         JOHN McCAIN, Arizona
    Virginia                         OLYMPIA J. SNOWE, Maine
JOHN F. KERRY, Massachusetts         GORDON H. SMITH, Oregon
BARBARA BOXER, California            JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington           JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas
CLAIRE McCASKILL, Missouri
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 29, 2008...................................     1
Statement of Senator Dorgan......................................     1
Statement of Senator McCaskill...................................    23
Statement of Senator Nelson......................................    21

                               Witnesses

Blumenthal, Hon. Richard, Attorney General, State of Connecticut.    27
    Prepared statement...........................................    29
Himpler, Bill, Executive Vice President, Federal Affairs, 
  American Financial Services Association........................    47
    Prepared statement...........................................    50
Keest, Kathleen E., Senior Policy Counsel, Center for Responsible 
  Lending........................................................    31
    Prepared statement...........................................    32
Parnes, Lydia B., Director, Bureau of Consumer Protection, 
  Federal Trade Commission.......................................     9
    Prepared statement...........................................    11
Rheingold, Ira J., Executive Director, National Association of 
  Consumer Advocates.............................................    43
    Prepared statement...........................................    44

                                Appendix

Letter dated April 28, 2008, to Hon. Byron Dorgan and Hon. Jim 
  DeMint from Stephen A. O'Connor, Senior Vice President, 
  Government Affairs, Mortgage Bankers Association...............    66
Response to written questions submitted by Hon. Olympia J. Snowe 
  to Lydia B. Parnes.............................................    68
Snowe, Hon. Olympia J., U.S. Senator from Maine, prepared 
  statement......................................................    65


                    IMPROVING CONSUMER PROTECTIONS 
                          IN SUBPRIME LENDING

                              ----------                              


                        TUESDAY, APRIL 29, 2008

                               U.S. Senate,
   Subcommittee on Interstate Commerce, Trade, and 
                                           Tourism,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:33 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Byron L. 
Dorgan, Chairman of the Subcommittee, presiding.

          OPENING STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. I call the hearing to order. This is the 
Subcommittee on Interstate Commerce, Trade, and Tourism of the 
Senate Committee on Commerce, Science, and Transportation.
    The subject of the hearing is improving consumer 
protections in subprime home lending.
    Some weeks ago, in a rather stunning move, the Federal 
Reserve Board offered $30 billion of guarantees so that J.P. 
Morgan could take over Bear Stearns, which was a very large 
investment bank in this country and one that almost certainly 
would have been headed for bankruptcy in a very short period of 
time had the Fed not taken action to allow the purchase of Bear 
Stearns by J.P. Morgan.
    The circumstances that led to all of this were subprime 
lending and the securitization of subprime mortgages. What has 
happened in our country in recent years is an unbelievable 
amount of speculation and financial engineering.
    That financial engineering meant that firms would sell 
mortgages--some good mortgages, some not so good. They would 
package up the subprime mortgages with the good mortgages, just 
like they used to pack sawdust into sausages for filler. And 
then they'd slice them and dice them, and then they'd sell them 
two or three times after they were securitized, and nobody who 
ended up with them knew exactly what they had, except they were 
fairly high-yield because most of these subprime mortgages 
ended up with prepayment penalties. When the interest rates 
were reset, the borrower was going to pay very high interest 
rates.
    Now, that's just a fact of what has happened. Most of us 
would have known this was going on because when we brush our 
teeth or shave in the morning while getting ready for work, if 
there's a television on, we've all seen the advertisements that 
started all of this: ``You have bad credit? You've been 
bankrupt? You can't get a loan? Come to us, we want to give you 
a loan.'' We've all seen that and all wondered, ``How does this 
add up?''
    Well, the fact is, it didn't add up, it doesn't add up. And 
it has led not only to the collapse of Bear Stearns, a $30 
billion guarantee by the Federal Reserve Board for some sour 
paper that exists. I believe, a $200 billion line of credit for 
direct lending to investment banks, the first time since the 
Great Depression--the list goes on. But also you can track a 
substantial portion of this back to an unbelievable amount of 
speculation and greed.
    Now, we're going to talk today about how all of this 
subprime lending happened, who was minding the store, who 
wasn't minding the store, and what should we do going forward.
    But first, I want to play a couple of videos, and I don't 
know if everybody can see the videos. These are advertisements 
for mortgages.
    [Video.]
    Senator Dorgan. Those are all advertisements that ran in 
this country, enticing people to change their mortgage or, when 
they get a mortgage, to get a subprime mortgage from one of 
these companies. The only thing I agree with in that is, ``No 
one can do it like Countrywide can,'' and Countrywide couldn't.
    Let me just mention, the first advertisement was Linden 
Home Loans advertisement, and they did run small script at the 
bottom of the screen that you couldn't see and, among other 
things, it says, ``The minimum payments do not cover all of the 
interest due. The loan balances may increase or decrease based 
on the payment option chosen monthly. The maximum negative 
amortization is 115 percent of the original loan. The no points 
and no fee option requires a 3-year prepayment penalty. Rates 
are subject to change without notice.'' That's the thing they 
didn't really want the person who watched the commercial to 
understand.
    Predatory lending? Seems to me it is. Greed? Seems to me it 
is. We read that brokers that could put somebody in a $1 
million subprime loan would get a $30,000 payment up front, as 
a fee--there was so much greed here, that it's unbelievable to 
me.
    By the way, I asked the presidents of all of the companies 
of which I just showed the commercials if they would join us 
this morning. They have decided they didn't want to join us at 
this hearing.
    But, I want to make this point. Let me show some, if I can, 
some charts of things I took off the Internet, just a couple of 
weeks ago, to show you that nothing has changed very much. I 
actually made charts of what I found on the Internet. This is a 
company that was advertising on the Internet 3 weeks ago--
twenty-five hundredths of 1 percent and a fixed loan. Does 
anybody believe that? You get a fixed loan for one-fourth of 1 
percent? The lowest fixed rate loan in America--well, I'd think 
so.


    [Laughter.]
    Senator Dorgan. One-quarter of 1 percent. Yes, I'd think 
that'd be the lowest. I don't think it's true, but I think 
that'd probably be the lowest advertised. ``Borrow $200,000 for 
the payment of $41.66 a month.'' All right.
    This I found on the Internet: ``30-year fixed rate, from 
two and three-quarters percent.'' Does anybody believe you can 
find a 30-year fixed rate for two and three-quarters? I don't 
think so. Predatory lending? Well, that's Florida Mortgage 
corporation showing at least deceptive advertising, I would 
think. Next chart?


    Senator Dorgan. Five year, fixed payments, one and a 
quarter percent. That's being advertised on the Internet now, 
at least it was 2 weeks ago and suggests that you really ought 
to be speculating in real estate: ``Control up to two to three 
times more real estate by using our rates.''


    Senator Dorgan. Finally, First Premier Mortgage--I don't 
know who they are or where they're from--but they said, 
``Perfect credit not required.'' Want to borrow from us? You 
don't need perfect credit. In fact, ``We give you loans with no 
income verification.''


    Senator Dorgan. Well, we know, most of us know the terms, 
``no doc.'' If you decide you don't want to document your 
income in order to get a home mortgage, that's kind of a good 
thing because then you pay a little higher interest rate, so 
you get your home mortgage without having to tell them all of 
your information about your financials, and the mortgage 
company actually makes a little more money--at least in the 
short-term, until it all collapses, of course.


    Senator Dorgan. And those are things that you can now go to 
the Internet and find, if you're curious about who's 
advertising in a deceptive way and who's trying to lure 
consumers.
    Now, there's been this discussion about whether consumers 
are the victims? Or, are consumers also greedy? Wanting to get 
a quarter of 1 percent home loan--would they know better? The 
answer is, yes. They should know better. But let me make this 
point--the most complicated financial transaction in the life 
of most people will be negotiating a mortgage on their primary 
residence--it's the largest asset anyone will have, in most 
cases, and getting a home mortgage is very complicated.
    I would like to know if anybody in this room--and I already 
know the answer--if anybody in this room has read through all 
of the papers that accompanied the mortgage you received on 
your home. And the answer is no, of course not. You could not 
possibly have done it. So, we rely on fair advertising, 
accurate advertising, and promotion of products that represents 
some basic honesty. And regrettably, that has not been the 
case.
    I don't want to tarnish everybody. There are some good 
folks out there providing home loans today, and owning a home 
is the American Dream. It used to be a sleepy old industry, you 
went down to the corner in your town and you sat with the 
person at the savings and loan who'd been there for 20 years, 
and they told you exactly what was going on, and you got a home 
loan, a mortgage, and everybody was happy.
    That sleepy industry turned into a Roman candle, recently, 
with a lot of powder, and a lot of flash. And now we see a lot 
of people making a lot of money, and the whole tent collapses 
because they've built a house of cards.
    The last ad was Countrywide. Countrywide was the largest 
home loan lender in this country. And they were doing a lot of 
things--they were securitizing, they were doing everything. 
But, they had brokers out there that were selling products. 
Among other things, they were putting people into subprimes 
that would have qualified for other mortgages--a whole series 
of things.
    And, by the way, Countrywide has now been bought by another 
company but the person that constructed Countrywide, and was 
engaged in this, made off with hundreds of millions of dollars. 
Hundreds of millions of dollars.
    There's a massive amount of greed, here, and the reason I'm 
holding this hearing is to try to figure out, what we are we 
doing about this. First of all, who is responsible? And second, 
why is it still happening? And third, what are we going to do 
to stop it?
    Greed is pretty hard to stop. Sometimes collapse stops it, 
but we've put now a safety net under institutions that we've 
been told are too big to fail but apparently not big enough to 
regulate. Something's wrong with that. If you're too big to 
fail, you're not too small to regulate. And if the American 
taxpayer is going to have to put a safety net under investment 
banks, and we're now going to lend money directly to investment 
banks through the Fed, then there needs to be an understanding 
that there should be some thoughtful regulation.
    I know regulation, for years, in this town has been a four-
letter word, but it's not a four-letter word when you look at 
predatory lending. The greed that's happened in all of these 
areas--and this goes from the brokers, in some cases, to the 
mortgage lenders, to the hedge funds--right up and down the 
line. Unbelievable profits--staggering profits. Then guess 
what? Then the Federal Government, the poor old taxpayer, and 
also some folks that received bad mortgages, end up holding the 
bag.
    So, obviously that was my short rant at the start of this 
because there is something dreadfully wrong here. At this point 
nobody is prepared to fix it. And we need to do that.
    We have a hearing today, Ms. Lydia Parnes is with us. She 
is the Director of the Bureau of Consumer Protection at the 
Federal Trade Commission. We will have a second panel of the 
Attorney General of the State of Connecticut, Richard 
Blumenthal--we appreciate his attendance--Kathleen Keest, 
Senior Policy Counselor for the Center for Responsible Lending; 
Ira Rheingold, the Executive Director of the National 
Association of Consumer Advocates; and Bill Himpler, Executive 
Vice President of Federal Affairs of the American Financial 
Services Association.
    I want to make one final point because I've talked a lot 
about greed and deception, and so on. I want to emphasize this 
point: there are good, honest, decent people in the industry 
we're talking about, who try to do a good job. And their 
reputation, too, regrettably, is tarnished by those that are 
trying to make a fast buck and those that are greedy.
    But, this morning there is someone buying a house, sitting 
across the desk in a financial institution that they can trust, 
working with a mortgage counselor they can trust, and they're 
being able to purchase their American Dream. I don't want this 
hearing, and I don't want other discussions to tarnish the 
goodwill and the honesty of a lot of people who work hard.
    But I want to point out that the dramatic increase in 
subprime loans by companies that have embedded in those loans 
unbelievable terms, penalties, and so on, in order to load up a 
piece of sausage that they would slice up and securitize with 
high rates--gave everybody the opportunity to behave like hogs 
in the corn crib. And frankly, this has to stop.
    So, Ms. Lydia Parnes, thank you for being with us. I want 
to challenge you a little, as well. I like the Federal Trade 
Commission, but I think it's been absent on some of these 
issues, so I'd like to hear your statement, then I want to ask 
you some questions.
    You may proceed.

  STATEMENT OF LYDIA B. PARNES, DIRECTOR, BUREAU OF CONSUMER 
              PROTECTION, FEDERAL TRADE COMMISSION

    Ms. Parnes. Well, thank you, Chairman. I'm pleased to be 
here today to discuss the FTC's actions to protect consumers in 
the subprime mortgage marketplace.
    As we are all well-aware, the recent crisis of subprime 
mortgage delinquencies and foreclosures is taking a toll on 
American consumers and their community.
    As the nation's consumer protection agency, we understand 
at the Commission that we do have a critical role to play in 
the subprime mortgage marketplace.
    And Chairman Dorgan, the Commission appreciates your 
efforts, and the efforts of this Subcommittee to address 
consumer protection problems in the subprime mortgage area.
    First and foremost, the Commission is a law enforcement 
agency with wide-ranging responsibilities, including over 
consumer financial issues. Mortgage lending has long been a 
Commission priority. In the past decade, the agency has brought 
22 actions focused on the mortgage lending industry, with 
particular attention to the subprime market, alleging that 
lenders and servicers have engaged in unfair and deceptive 
advertising and mortgage servicing practices. Through these 
cases, the FTC has returned more than $320 million to 
consumers.
    Today, the Commission is announcing its most recent action 
to protect consumers from mortgage foreclosure rescue scams. 
The FTC sued Foreclosure Solutions, alleging that it targets 
consumers facing foreclosure, charged these consumers an up-
front fee of about $1,000, and represented that they would stop 
the foreclosure.
    In fact, according to the FTC's complaint, the defendants 
engaged in minimal efforts on behalf of consumers, and 
consumers either lost their homes, or avoided foreclosure by 
exercising the same options that were available to them, 
anyway.
    The Commission has filed 3 cases this year against other 
defendants, allegedly engaged in mortgage foreclosure rescue 
fraud, and we have more investigations underway. We also 
continue to conduct outreach and share enforcement resources 
with state and local authorities through 7 regional task forces 
in cities with particularly high foreclosure rates.
    For consumers, deceptive mortgage advertisements can lead 
to an ultimately devastating experience, and so we are 
aggressively examining advertisements that appear in a variety 
of media. We're investigating the ads of about a dozen 
companies. Last year, we reviewed hundreds of mortgage 
advertisements and sent warning letters, as you know, to 200 
mortgage lenders, because their ads did not appear to comply to 
the laws we enforce.
    We're going back to those advertisers, and then if they're 
still non-compliant, we will follow up with law enforcement.
    Further FTC law enforcement to protect borrowers will 
include enforcing new Federal Reserve Board mortgage lending 
rules. The Fed has proposed rules that prohibit certain unfair, 
deceptive, or abusive acts and practices in mortgage 
advertising, origination, appraisal and servicing. It has 
received public comment on these rules, and has announced that 
it will issue its new rules before the end of 2008.
    We filed comments largely supportive of the proposed Fed 
rules. The Commission has the authority to enforce the final 
rules against the non-bank entities under its jurisdiction, and 
we commit to doing so.
    As noted in the Commission's written testimony, the FTC's 
enforcement efforts would be more effective if it could obtain 
civil penalties for violations of these rules.
    In conjunction with our law enforcement, we engage in 
extensive educational activities to empower consumers to better 
protect themselves. The Commission recently developed new 
educational materials in English and Spanish, to provide 
information to consumers about deceptive mortgage ads, mortgage 
foreclosure rescue scams, buying a home, and steps borrowers 
can take to avoid foreclosure.
    We also understand that mortgage disclosures are critical 
to helping consumers making better informed purchasing 
decisions. Next month, the FTC's Bureau of Economics will host 
a conference to discuss strategies for ensuring that mortgage 
disclosures provide the greatest benefit to consumers. And the 
FTC's conference is, we believe, timely with the Department of 
Housing and Urban Development considering substantial revisions 
to its mortgage disclosure rules, under the Real Estate 
Settlement Procedures Act.
    We hope that the discussions at the conference will promote 
comprehensive mortgage disclosure reform, so that consumers 
receive key information in a manner that is as clear and 
understandable as possible.
    Chairman thank you for your attention, and I'd be happy to 
answer any of your questions.
    [The prepared statement of Ms. Parnes follows:]

  Prepared Statement of Lydia B. Parnes, Director, Bureau of Consumer 
                  Protection, Federal Trade Commission
I. Introduction
    Chairman Dorgan, Ranking Member DeMint, and Members of the 
Committee, I am Lydia B. Parnes, Director of the Bureau of Consumer 
Protection at the Federal Trade Commission (``FTC'' or 
``Commission'').\1\ I appreciate the opportunity to appear before you 
today to discuss the Commission's wide range of activities to protect 
consumers in the subprime mortgage market. The Commission is concerned 
about the rise in delinquencies and foreclosures in the subprime 
market, and the impact on communities, and is committed to using all of 
its tools to protect consumers in this market.
---------------------------------------------------------------------------
    \1\ The views expressed in this statement represent the views of 
the Commission. My oral presentation and responses to any questions are 
my own, however, and do not necessarily reflect the views of the 
Commission or any individual Commissioner.
---------------------------------------------------------------------------
    During today's testimony, the FTC would like to emphasize the 
following points:

   The Commission has been at the forefront of the fight 
        against deceptive subprime lending and servicing practices 
        since 1998, when it filed its case against Capital City 
        Mortgage, which allegedly took advantage of African American 
        consumers here in Washington, D.C.

   In the past decade, the FTC has brought 22 actions focused 
        on the mortgage lending industry, with particular attention to 
        entities in the subprime market, alleging that mortgage lenders 
        and servicers engaged in unfair or deceptive acts and 
        practices. Through these cases, the FTC has returned more than 
        $320 million to consumers. Many of these cases have challenged 
        deceptive advertising and marketing practices.

   The Commission is currently investigating more than a dozen 
        mortgage companies as part of a mortgage advertising law 
        enforcement sweep. In addition to these investigations, the 
        Commission sent more than 200 warning letters last year to 
        mortgage brokers and lenders, as well as the media outlets that 
        carry their home mortgage advertisements. FTC staff recently 
        reviewed the current advertising of those who received warning 
        letters and will follow up with law enforcement where 
        appropriate.

   With the recent rapid increase in mortgage delinquencies and 
        foreclosures, the FTC also has intensified its focus on 
        protecting consumers from mortgage foreclosure rescue scams. 
        The Commission has filed law enforcement actions against 
        defendants allegedly engaged in mortgage foreclosure fraud, and 
        has additional nonpublic matters under investigation.

   This month, Commission staff filed a public comment in 
        response to the Federal Reserve Board's proposed rules to 
        restrict certain mortgage practices. The comment supports the 
        Board's goals of protecting consumers in the mortgage market 
        from unfair, abusive, or deceptive lending and servicing 
        practices. If finalized, the FTC will have the authority to 
        enforce these rules against nonbank entities under its 
        jurisdiction. The FTC's enforcement efforts would be more 
        effective if it could obtain civil penalties for violations of 
        these rules.

   To empower consumers to better protect themselves from 
        potentially harmful conduct, the FTC also engages in extensive 
        consumer education related to mortgage lending. The FTC has 
        recently developed new educational materials in English and 
        Spanish to provide information about deceptive mortgage 
        advertisements, mortgage foreclosure rescue scams, buying a 
        home, and the steps borrowers can take to avoid foreclosure.

   The Commission also engages in research and policy 
        development to better understand and protect consumers in the 
        mortgage marketplace. Next month, FTC staff economists will 
        host a conference to assess the role of consumer information in 
        the current mortgage crisis and discuss strategies for ensuring 
        that mortgage disclosures will be designed to provide the 
        greatest benefit to consumers.

    This testimony will discuss: (1) the Commission's authority and 
mission related to subprime lending; and (2) the FTC's efforts to 
protect mortgage borrowers, particularly in the subprime market. As 
detailed below, the agency's priorities include deceptive mortgage 
advertising, deceptive or unfair servicing practices, discrimination in 
lending, and foreclosure rescue scams.
II. The FTC's Role in Subprime Lending
    As the primary Federal agency that enforces consumer credit laws 
with respect to entities other than banks, thrifts, and Federal credit 
unions, the Commission has wide-ranging responsibility regarding 
consumer financial issues in the mortgage market, including those 
involving mortgage lenders, brokers, and servicers. The FTC enforces a 
number of Federal laws governing mortgage lending, including the Truth 
in Lending Act (``TILA''),\2\ the Home Ownership and Equity Protection 
Act (``HOEPA''),\3\ and the Equal Credit Opportunity Act (``ECOA'').\4\ 
The Commission also enforces Section 5 of the Federal Trade Commission 
Act (``FTC Act''), which more generally prohibits unfair or deceptive 
acts or practices in the marketplace.\5\ In addition, the Commission 
enforces a number of other consumer protection statutes that govern 
financial service providers, including the Consumer Leasing Act,\6\ the 
Fair Debt Collection Practices Act,\7\ the Fair Credit Reporting 
Act,\8\ the Credit Repair Organizations Act,\9\ and the privacy 
provisions of the Gramm-Leach-Bliley Act.\10\
---------------------------------------------------------------------------
    \2\ 15 U.S.C.  1601-1666j (requiring disclosures and establishing 
other requirements in connection with consumer credit transactions).
    \3\ 15 U.S.C.  1639 (providing additional protections for 
consumers who enter into certain high-cost refinance mortgage loans). 
HOEPA is a part of TILA.
    \4\ 15 U.S.C.  1691-1691f (prohibiting creditor practices that 
discriminate on the basis of race, religion, national origin, sex, 
marital status, age, receipt of public assistance, and the exercise of 
certain legal rights).
    \5\ 15 U.S.C.  45(a).
    \6\ 15 U.S.C.  1667-1667f (requiring disclosures, limiting 
balloon payments, and regulating advertising in connection with 
consumer lease transactions).
    \7\ 15 U.S.C.  1692-1692p (prohibiting abusive, deceptive, and 
unfair debt collection practices by third-party debt collectors).
    \8\ 15 U.S.C.  1681-1681x (imposing standards for consumer 
reporting agencies and information furnishers in connection with the 
credit reporting system and placing restrictions on the use of credit 
reporting information).
    \9\ 15 U.S.C.  1679-1679j (prohibiting untrue or misleading 
representations, requiring certain affirmative disclosures, and 
imposing other restrictions in the offering and sale of ``credit 
repair'' services).
    \10\ 15 U.S.C.  6801-6809 (imposing requirements on financial 
institutions with respect to annual privacy notices, procedures for 
providing customers an opt-out from having certain information shared 
with nonaffiliated third parties, and safeguarding customers' 
personally identifiable information).
---------------------------------------------------------------------------
    The Commission's legal authority does not extend to all entities 
that provide financial services to consumers. The FTC Act and the 
credit statutes that the FTC enforces specifically exempt banks, 
thrifts, and Federal credit unions, among other types of entities, from 
the Commission's jurisdiction.\11\ The FTC, however, has jurisdiction 
over nonbank financial companies, including nonbank mortgage companies, 
mortgage brokers, and finance companies. The agency also coordinates 
regularly on financial practices matters with Federal banking agencies, 
the Department of Justice (``DOJ'') and the Department of Housing and 
Urban Development (``HUD''). In addition, the FTC cooperates with state 
attorneys general and state banking departments to protect consumers in 
the mortgage lending arena.
---------------------------------------------------------------------------
    \11\ See, e.g., 15 U.S.C.  45(a)(2).
---------------------------------------------------------------------------
    The Commission employs a multi-faceted approach to protect 
consumers in the subprime market. The Commission brings enforcement 
actions against entities that violate the law, educates consumers and 
businesses as to their rights and responsibilities under the law, and 
engages in research to adapt its policies to protect consumers more 
effectively. The testimony below discusses how the FTC is using this 
approach to protect consumers in the subprime mortgage marketplace.
III. Protecting Subprime Mortgage Borrowers
    The Commission is committed to using all means at its disposal to 
protect mortgage borrowers from those who would prey on their financial 
turmoil, and to provide information to help these consumers confront 
the challenges they face.
A. Law Enforcement
    The Commission's law enforcement actions have targeted deception 
and other illegal practices in the mortgage market, with a particular 
focus on the subprime market. In recent years, the agency has brought 
22 actions against companies and principals in the mortgage lending 
industry, including both large and small companies located throughout 
the country.\12\ Several of these cases have resulted in large monetary 
judgments, collectively returning more than $320 million to consumers. 
These enforcement actions have targeted deceptive or unfair practices 
in all stages of mortgage lending--from advertising and marketing 
through loan servicing--by mortgage lenders, brokers, and loan 
servicers.
---------------------------------------------------------------------------
    \12\ FTC v. Safe Harbour Found. of Fl., Inc., No. 08-1185 (N.D. 
Ill. 2008); FTC v. Mortgages Para Hispanos.com Corp., No. 06-00019 
(E.D. Tex. 2006); FTC v. Ranney, No. 04-1065 (D. Colo. 2004); FTC v. 
Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004); United States v. 
Fairbanks Capital Corp., No. 03-12219 (D. Mass. 2003); FTC v. Diamond, 
No. 02-5078 (N.D. Ill. 2002); United States v. Mercantile Mortgage Co., 
No. 02-5079 (N.D. Ill. 2002); FTC v. Associates First Capital Corp., 
No. 01-00606 (N.D. Ga. 2001); FTC v. First Alliance Mortgage Co., No. 
00-964 (C.D. Cal. 2000); United States v. Action Loan Co., No. 00-511 
(W.D. Ky. 2000); FTC v. NuWest, Inc., No. 00-1197 (W.D. Wash. 2000); 
United States v. Delta Funding Corp., No. 00-1872 (E.D.N.Y. 2000); FTC 
v. Barry Cooper Prop., No. 99-07782 (C.D. Cal. 1999); FTC v. Capitol 
Mortgage Corp., No. 99-580 (D. Utah 1999); FTC v. CLS Fin. Serv., Inc., 
No. 99-1215 (W.D. Wash. 1999); FTC v. Granite Mortgage, LLC, No. 99-289 
(E.D. Ky. 1999); FTC v. Interstate Res. Corp., No. 99-5988 (S.D.N.Y. 
1999); FTC v. LAP Fin. Serv., Inc., No. 99-496 (W.D. Ky. 1999); FTC v. 
Wasatch Credit Corp., No. 99-579 (D. Utah 1999); In re First Plus Fin. 
Group, Inc., FTC Docket No. C-3984 (2000); In re Fleet Fin., Inc., FTC 
Docket No. C-3899 (1999); FTC v. Capital City Mortgage Corp., No. 98-
00237 (D.D.C. 1998).
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    In most of its mortgage lending cases, the Commission has 
challenged deception in the advertising or marketing of subprime loans. 
For example, the FTC's complaint against a large subprime mortgage 
lender, Associates First Capital Corp. and Associates Corporation of 
North America (the ``Associates''), alleged that the defendants 
marketed subprime mortgage loans through false and misleading 
statements about loan costs.\13\ Specifically, the complaint alleged 
that the Associates represented that consumers would save money when 
consolidating their existing debts, but these ``savings claims'' did 
not take into account the loan fees and closing costs the company 
typically added to consumers' loan amounts. Further, the claims did not 
reveal that, for certain Associates loans, consumers would pay only 
interest and still would owe the entire principal amount in a 
``balloon'' payment at the end of the loan term. The complaint also 
challenged as deceptive the Associates' practice of including single-
premium credit insurance in loans, without disclosing its inclusion to 
consumers. The defendants paid a record-setting $215 million in 
consumer redress to settle the allegations in the FTC complaint.\14\
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    \13\ FTC v. Associates First Capital Corp., No. 01-00606 (N.D. Ga. 
2001).
    \14\ FTC v. Associates First Capital Corp., No. 01-00606 (N.D. Ga. 
Sept. 23, 2002) (Order Preliminarily Approving Stipulated Final 
Judgment and Order). Defendants paid an additional $25 million to 
settle a concurrent class action.
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    Mortgage brokers also have been the subject of substantial FTC law 
enforcement activity in recent years. The FTC has brought enforcement 
actions against brokers for allegedly deceiving consumers about key 
loan terms, such as the existence of a prepayment penalty \15\ or a 
large balloon payment due at the end of the loan.\16\ In some of these 
cases, the Commission also has charged brokers with falsely promising 
consumers low fixed payments and rates on their mortgage loans.\17\ For 
example, in June 2004, the Commission sued Chase Financial Funding 
(``CFF''), a California mortgage broker, and its principals, in 
connection with sending unsolicited e-mail and direct mail promising a 
``3.5 percent fixed payment loan.'' \18\ The FTC alleged that CFF did 
not offer any such loan and that the loan CFF falsely advertised was 
actually a ``payment option'' adjustable rate mortgage in which 
interest accrued at a rate higher than advertised, the principal 
balance would increase if consumers made payments at the advertised 
rates, and the payments were not ``fixed.''
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    \15\ FTC v. Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004); FTC v. 
Diamond, No. 02-5078 (N.D. Ill. 2002).
    \16\ FTC v. Diamond, No. 02-5078 (N.D. Ill. 2002).
    \17\ FTC v. Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004); FTC v. 
Ranney, No. 04-1065 (D. Colo. 2004); FTC v. Diamond, No. 02-5078 (N.D. 
Ill. 2002).
    \18\ FTC v. Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004).
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    In 2006, the Commission filed suit against a mortgage broker for 
allegedly misrepresenting numerous key loan terms to Hispanic consumers 
who sought to refinance their homes.\19\ As alleged in the Commission's 
complaint, the defendant conducted business with his clients almost 
entirely in Spanish but then provided at closing loan documents in 
English containing less favorable terms. As a result of the FTC's case, 
the lender has been permanently enjoined from misrepresenting loan 
terms. In addition, the court entered a suspended judgment of $240,000 
against the broker, and the broker paid $10,000 in consumer redress 
based on a documented inability to pay the full judgment amount.\20\
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    \19\ FTC v. Mortgages Para Hispanos. Com Corp., No. 06-00019 (E.D. 
Tex. 2006).
    \20\ FTC v. Mortgages Para Hispanos. Com Corp., No. 06-00019 (E.D. 
Tex. Sept. 25, 2006) (Stipulated Final Judgment and Order of Permanent 
Injunction).
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    Currently, the Commission is investigating more than a dozen 
mortgage companies as part of a mortgage advertising law enforcement 
sweep. In addition, in September 2007, the Commission sent warning 
letters to more than 200 mortgage brokers and lenders, and media 
outlets that carry their advertisements for home mortgages, to advise 
them that certain of their mortgage ads may be deceptive in violation 
of Section 5 of the FTC Act or may violate the TILA.\21\ The FTC 
identified the ads, including some in Spanish, in June 2007 during its 
nationwide review of ads featuring claims for very low interest rates 
or monthly payment amounts without adequate disclosure of other 
important loan terms. The Commission staff recently reviewed the 
current advertising of those who received warning letters and will 
follow up with law enforcement where appropriate.
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    \21\ See Press Release, FTC, FTC Warns Mortgage Advertisers and 
Media That Ads May Be Deceptive (Sept. 11, 2007), available at 
www.ftc.gov/opa/2007/09/mortsurf.shtm.
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    In addition to law enforcement related to mortgage advertising, the 
FTC plays an important role in preventing unlawful mortgage 
discrimination.\22\ Since the ECOA was enacted, the Commission has 
brought more than three dozen cases against large subprime lenders, 
major non-mortgage creditors, and smaller finance companies alleging 
ECOA violations. About two dozen of these cases have alleged 
substantive discrimination on the basis of race, marital status, sex, 
age, and the receipt of public assistance.
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    \22\ The Commission's July 25, 2007 testimony before the 
Subcommittee on Oversight and Investigations of the House Committee on 
Financial Services detailed the Commission's fair lending program. The 
testimony is available at www.ftc.gov/os/testimony/P064806hdma.pdf.
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    The FTC closely coordinates its fair lending investigations with 
those of other Federal law enforcement agencies.\23\ A major component 
of the Commission's investigations is a statistical analysis of the 
data that companies within the FTC's jurisdiction have produced 
pursuant to the Home Mortgage Disclosure Act (``HMDA'').\24\ At this 
time, the Commission is conducting several non-public investigations of 
mortgage originators for possible violations of fair lending laws.
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    \23\ For more than a decade, the FTC has been a member of the 
Interagency Task Force on Fair Lending, a joint undertaking with the 
DOJ, the HUD, and the Federal banking regulatory agencies. Task Force 
members meet often to share information on lending discrimination, 
predatory lending enforcement, and policy issues.
    \24\ 12 U.S.C.  2801. HMDA requires certain mortgage lenders 
located in metropolitan areas to collect and report to the government 
data about their housing-related loans and applications for such loans. 
The data include pricing data for higher-priced loans made in 2004 or 
later. Of the 8,886 institutions that reported HMDA data in 2006, 2,004 
institutions are nondepository institutions subject to FTC 
jurisdiction. Robert B. Avery, Kenneth P. Brevoort, and Glenn B. 
Canner, The 2006 HMDA Data, 93 Federal Reserve Bulletin (Dec. 2007) at 
A73, available at www.Federalreserve.gov/pubs/bulletin/2007/pdf/
hmda06final.pdf. The remaining 6,882 institutions reporting data are 
depository institutions subject to Federal banking agency jurisdiction.
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    The FTC also has challenged deceptive and unfair practices in the 
servicing of mortgage loans. For example, in November 2003, the 
Commission, along with the HUD, announced a settlement with Fairbanks 
Capital Corp. and its parent company. The Commission alleged that 
Fairbanks (now called Select Portfolio Servicing, Inc.) failed to post 
consumers' payments upon receipt, charged unauthorized fees, used 
dishonest or abusive tactics to collect debts, and reported to credit 
bureaus consumer payment information that it knew to be inaccurate.\25\ 
The settlement agreement included a $40 million redress fund for 
consumers as well as strong injunctive provisions and specific 
safeguards to prevent the company from foreclosing on consumers without 
cause.\26\ Furthermore, last year, based on a compliance review of the 
company, the Commission negotiated modifications of the 2003 consent 
order. The modified consent order provides substantial benefits to 
consumers beyond those in the original order, including additional 
refunds of fees paid in certain circumstances.\27\
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    \25\ United States v. Fairbanks Capital Corp., No. 03-12219 (D. 
Mass. 2003).
    \26\ United States v. Fairbanks Capital Corp., No. 03-12219 (D. 
Mass. Nov. 21, 2003) (Order Preliminarily Approving Stipulated Final 
Judgment and Order as to Fairbanks Capital Corp. and Fairbanks Capital 
Holding Corp.).
    \27\ United States v. Fairbanks Capital Corp., No. 03-12219 (D. 
Mass. Sept. 4, 2007) (Modified Stipulated Final Judgment and Order).
---------------------------------------------------------------------------
    The Commission continues to investigate mortgage servicing 
practices for compliance with the law. Last month, The Bear Stearns 
Companies, Inc. (``Bear Stearns'') disclosed that FTC staff has 
notified its mortgage servicing subsidiary, EMC Mortgage Corporation 
(``EMC''), that the staff believes EMC and its parent Bear Stearns have 
violated a number of Federal consumer protection statutes in connection 
with its servicing activities. Bear Stearns further disclosed that FTC 
staff offered an opportunity to resolve the matter through consent 
negotiations before seeking approval from the Commission to proceed 
with the filing of a complaint. According to the disclosure, EMC 
expects to engage in such discussions with Commission staff.\28\ The 
FTC cannot comment further on this ongoing law enforcement 
investigation.
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    \28\ Form 10-K, Bear Stearns Mortgage Funding Trust 2007-AR4 (CIK 
No. 1393708), at Item 1117 of Reg AB, Legal Proceedings (filed Mar. 31, 
2008), available at www.sec.gov/Archives/edgar/data/1393708/
000105640408001164/0001056404-08-001164.txt.
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    Finally, with the rapid increase in mortgage delinquencies and 
foreclosures, the FTC has intensified its efforts to protect consumers 
from mortgage foreclosure rescue scams.\29\ There are many varieties of 
mortgage foreclosure rescue fraud but, in each case, the perpetrator 
makes misleading promises that a consumer's home will be saved from the 
pending foreclosure permanently.\30\ Many consumers, however, 
ultimately lose their homes and lose the money they paid to scammers.
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    \29\ In testimony on February 13, 2008 before the Senate Special 
Committee on Aging on foreclosure rescue fraud, the Commission set 
forth a more complete description of the FTC's efforts to address such 
fraud. The FTC's testimony is available at ftc.gov/os/testimony/
P064814foreclosure.pdf.
    \30\ See Prentiss Cox, Foreclosure Equity Stripping: Legal Theories 
and Strategies to Attack a Growing Problem, Clearinghouse Rev. J. of 
Poverty Law and Pol'y, Mar.-Apr. 2006 at 607, 608.
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    In February of this year, the Commission announced three cases 
targeting mortgage foreclosure rescue scams. These scams, as well as 
additional conduct currently under investigation, share at least two 
common characteristics. First, the fraudulent schemes target consumers 
who face imminent foreclosure and who thus have limited time and 
resources to save their homes. Second, these schemes falsely promise 
that they can save the consumers' homes from foreclosure.
    In two of these cases, the Commission alleges that the defendants 
promise to stop foreclosure in exchange for a consumer's up-front 
payment of $500 to $1,200. After a consumer makes the payment, the 
defendants do little or nothing to stop the foreclosure. This fraud 
deprives consumers not only of much-needed funds but also of the 
opportunity to explore realistic options to avoid foreclosure.\31\ In 
the third case, the Commission alleges that the defendants entice 
consumers into a second mortgage or home equity line of credit on very 
unfavorable terms without fully disclosing the costs, risks, and 
consequences of doing so.\32\
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    \31\ FTC v. Mortgage Foreclosure Solutions, Inc., Case No. 8:08-cv-
388-T-23EAJ (M.D. Fla., filed Feb. 26, 2008); FTC v. National Hometeam 
Solutions, Inc., Case No. 4:08-cv-067 (E.D. Tex., filed Feb. 26, 2008).
    \32\ FTC v. Safe Harbour Foundation, No. 08 C 1185 (N.D. Ill., 
filed Feb. 25, 2008).
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    As described above, the Commission has a vigorous law enforcement 
program to protect consumers in connection with many aspects of their 
mortgage loans. The FTC continues to explore ways to enhance the 
effectiveness of its law enforcement activities related to subprime 
lending. For example, through the Interagency Pilot Project to Review 
Subprime Lender Conduct, the FTC, the Federal Reserve Board (``FRB''), 
the Office of Thrift Supervision (``OTS''), and two associations of 
state regulators have combined forces to undertake an innovative law 
enforcement project. The agencies are jointly conducting consumer 
protection compliance reviews and investigations of certain nonbank 
subsidiaries of bank holding companies with significant subprime 
mortgage operations.\33\
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    \33\ See Press Release, FTC, Federal and State Agencies Announce 
Pilot Project to Improve Supervision of Subprime Mortgage Lenders (July 
17, 2007), available at www.ftc.gov/opa/2007/07/subprime.shtm.
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B. Consumer Education
    Although law enforcement is the primary means that the Commission 
uses to combat illegal mortgage lending acts and practices, consumers 
are, of course, better off if they are not injured in the first place. 
To empower consumers to better protect themselves from potentially 
harmful conduct, the FTC engages in extensive consumer education 
related to mortgage lending.
    In 2007, the Commission released several new mortgage-related 
consumer brochures, including brochures on deceptive mortgage 
advertisements, buying a home, how to manage a mortgage if the mortgage 
lender goes out of business or files for bankruptcy, and high-rate, 
high-fee mortgages.\34\ To help consumers facing possible foreclosure, 
the Commission also released an alert offering guidance on steps 
borrowers can take to avoid foreclosure. In conjunction with its law 
enforcement actions alleging foreclosure rescue schemes, the Commission 
also developed a stepped-up consumer outreach initiative on foreclosure 
rescue fraud. Among other things, the FTC submitted a series of radio 
public service announcements, in English and Spanish, to stations in 
cities hardest hit by mortgage foreclosures and published classified 
advertisements in English- and Spanish-language community 
newspapers.\35\ All of the Commission's consumer protection materials, 
including many released in Spanish as part of the Commission's Hispanic 
Outreach Program, are available to the public on the FTC's website or 
by calling the FTC's Consumer Response Center toll-free at 1-877-FTC-
HELP.\36\
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    \34\ The Commission's consumer education materials are available 
from the FTC's website, www.ftc.gov. The FTC publishes many of its 
materials in both English and Spanish. Educational materials on 
mortgage and real estate issues are directly accessible from the FTC's 
webpage, Credit and Loans: Mortgages/Real Estate, www.ftc.gov/bcp/
menus/consumer/credit/mortgage.shtm. In Spanish, the materials are 
available from the FTC's webpage, Credito y Prestamos: Hipotecas/
Propiedades, www.ftc.gov/bcp/menus/consumer/credit/mortgage_es.
shtm.
    \35\ The Commission also will send information to community 
libraries, unions, and other organizations warning consumers about 
foreclosure rescue scams.
    \36\ The Commission's Spanish-language publications are available 
from its webpages, Informacion de la FTC para Consumidores, available 
at www.ftc.gov/bcp/consumer_es.shtm, and OJO! Mantente alerta contra el 
fraude: Informate con la FTC, available at www.ftc.gov/ojo.
---------------------------------------------------------------------------
    The Commission also regularly partners with other agencies to 
educate consumers. Partnering with other agencies has proven to be an 
effective technique because it taps the respective expertise and 
distribution channels of the agencies involved. The FTC has jointly 
published with the banking regulators, the DOJ, and HUD, brochures 
addressing key lending issues.\37\ The FTC continues to participate in 
the governmental Financial Literacy and Education Commission, 
contributing its expertise to subcommittees that produced MyMoney.gov 
and Taking Ownership of the Future: The National Strategy for Financial 
Literacy.\38\
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    \37\ See, e.g., Looking for the Best Mortgage? Shop, Compare, and 
Negotiate, available at www.ftc.gov/bcp/edu/pubs/consumer/homes/
rea09.shtm.
    \38\ See www.mymoney.gov. In addition, each year, the FTC 
participates in Financial Literacy Month. Activities include 
presentations to students on the importance of responsible credit card 
use and safeguarding personal information, and exhibits at Financial 
Literacy Day on Capitol Hill, where agency representatives distribute 
free consumer education materials.
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C. Research and Policy Development
    The mortgage marketplace in the United States is dynamic. The 
Commission therefore engages in public workshops and other research 
efforts so that it may better understand particular consumer protection 
issues in the changing marketplace, and advocate for policies that 
promote protections for consumers, such as policies that foster 
informed mortgage borrowing.
    For example, in June 2007, the FTC staff released an empirical 
study assessing the effectiveness of mortgage disclosure documents that 
mortgage originators are required to provide to consumers under the 
Real Estate Settlement Procedures Act (``RESPA'') and TILA.\39\ The 
study found that these disclosures were not very effective in helping 
consumers of subprime and prime mortgages understand the terms of 
mortgages and their implications. The study also demonstrated that 
consumers could benefit from changes in current disclosure 
requirements. Significantly, the study suggested that, in actual market 
transactions, subprime borrowers may face even greater difficulties 
understanding the terms of their mortgages than they did in the study 
and, therefore, these borrowers may benefit the most from improved 
disclosures.
---------------------------------------------------------------------------
    \39\ James M. Lacko & Janis K. Pappalardo, Federal Trade Comm'n, 
Bureau of Economics Staff Report, Improving Consumer Mortgage 
Disclosures: an Empirical Assessment of Current and Prototype 
Disclosure Forms (2007), available at www.ftc.gov/os/2007/06/
P025505mortgagedisclosurereport.pdf.
---------------------------------------------------------------------------
    Based in part on its mortgage disclosure study, the FTC staff in 
November 2007 submitted comments to the Federal banking agencies in 
response to their request for comments on proposed illustrations to 
disclose information to consumers about subprime mortgages.\40\ The 
comments stated that consumers likely would benefit from one clear 
disclosure document that alerts them to the major costs and features of 
a mortgage. The comments also noted that such a document would 
significantly reduce the cost of obtaining accurate information about 
the value of different mortgage options, be noticeable and easy to read 
and understand, feature up-front summaries of key loan features, and 
make clear what a consumer is getting before signing legal documents. 
The comments further noted the importance of consumer research and 
expressed the FTC staff's readiness to participate with the FRB and HUD 
in a more comprehensive effort to improve mortgage disclosures.\41\
---------------------------------------------------------------------------
    \40\ See Federal Trade Comm'n Staff Comments to Jennifer J. 
Johnson, Secretary, Board of Governors of the Federal Reserve System 
(November 2007), available at www.ftc.gov/be/v080000.pdf.
    \41\ Similarly, in a comment filed with the FRB, the Commission 
stated that, as consumers shop for a mortgage, it is important that 
they receive timely and understandable information about the loan terms 
and costs of the particular products they are trying to analyze and 
compare. Moreover, for many mortgage products with payment schedules 
that likely will increase substantially in future years, it is 
important that consumers receive information about their future 
payments at a time when they can readily use the information in 
selecting their preferred loan and terms. See Federal Trade Comm'n, 
Comment Before the Board of Governors of the Federal Reserve System, 
Docket No. OP-1253: Unfair and Deceptive Practices in the Mortgage 
Lending Market, Alternative Mortgage Products, and Informed Consumer 
Choice in the Mortgage Marketplace (September 2006), available at 
www.ftc.gov/os/2006/09/docketop-1253commentfedreserve 
homeeqlenditextv.pdf. The comment was based, in part, on information 
learned at a May 2006 workshop the Commission sponsored on consumer 
protection issues associated with nontraditional mortgage products. See 
Protecting Consumers in the New Mortgage Marketplace, 71 Fed. Reg. 
15417 (Mar. 28, 2006); see also www.ftc.gov/bcp/workshops/mortgage/
index.html.
---------------------------------------------------------------------------
    Next month, the FTC will host a conference to highlight and assess 
the role of consumer information in the current mortgage crisis from an 
economic perspective. Experts from several relevant specialties will 
gather to examine how consumer information--and regulation of such 
information--affects consumer choices, mortgage outcomes, and consumer 
welfare. For example, panelists will discuss the causes and effects of 
mortgage market product developments, the role of consumer information 
in the mortgage market and how it relates to the current mortgage 
crisis, and strategies for ensuring that mandatory information 
disclosures will provide the greatest benefit to consumers.
    Finally, the Commission continues to coordinate and share its 
expertise with Federal banking agencies in connection with their 
proposals to protect consumers in the mortgage marketplace. This month, 
the FTC staff filed a public comment with the FRB in response to its 
proposed rule to restrict certain mortgage practices under the TILA and 
HOEPA.\42\ In the comment, the FTC staff supported the FRB's goals of: 
(1) protecting consumers in the mortgage market from unfair, abusive, 
or deceptive lending and servicing practices while preserving 
responsible lending and sustainable home ownership; (2) ensuring that 
advertisements for mortgage loans are accurate and not misleading; and 
(3) providing consumers with transaction-specific disclosures early 
enough to use while shopping. The comment concludes that the FRB's 
proposed restrictions on appraisal, servicing, and advertising 
practices, and the revised timing requirement for TILA disclosures, 
would be beneficial for consumers. The comment also notes that, while 
FRB's proposed restrictions on a new category of higher-cost loans 
appear to strike a reasonable balance, FTC staff encourages the FRB to 
continue to weigh their potential benefits and costs, including 
considering any empirical evidence submitted in response to its 
proposed rulemaking to confirm that this balance is reasonable. 
Finally, the comment assesses the Board's proposal regarding mortgage 
broker compensation disclosures and recommends an alternative 
approach.\43\
---------------------------------------------------------------------------
    \42\ Truth in Lending, Proposed Rule, 73 Fed. Reg. 1672 (Jan. 9, 
2008), available at http://a257.g.akamaitech.net/7/257/2422/
01jan20081800/edocket.access.gpo.gov/2008/pdf/E7-25058.pdf.
    \43\ Similarly, the FTC staff late last year shared with the OTS 
the Commission's experience in challenging unfair or deceptive acts and 
practices in the financial services context. The FTC staff filed a 
public comment with the OTS in response to a request for information 
about whether the OTS should issue regulations to expand its 
prohibitions against thrifts engaging in unfair or deceptive acts and 
practices in mortgage and non-mortgage lending. Federal Trade Comm'n 
Staff Comment to John E. Bowman, Chief Counsel, Regulation Comments, 
Office of Thrift Supervision, Regarding Section 5 Policy Issue for 
Financial Practices (December 2007), available at www.ftc.gov/os/2007/
12/P084800anpr.pdf.
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    If the FRB's proposed rules are finalized, the Commission will have 
the authority to enforce those rules against nonbank entities under its 
jurisdiction. As with its current authority, the Commission intends to 
use that new authority to the fullest extent possible to protect 
consumers in the subprime mortgage market. The FTC's enforcement 
efforts would be more effective if civil penalties were available 
against nonbank entities within the FTC's jurisdiction who violate the 
rules, a remedy that will be available against entities within the 
jurisdiction of the Federal banking agencies.\44\
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    \44\ Under the Federal Deposit Insurance Act, 12 U.S.C. Section 
1818(i)(2), Federal banking agencies can obtain civil penalties from 
the entities they regulate who violate the laws they enforce, including 
TILA and its implementing regulations. The FTC has no comparable 
authority to obtain civil penalties from the nonbank entities it 
regulates for violations of TILA and its implementing regulations.
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IV. Conclusion
    The Commission is committed to protecting subprime mortgage 
borrowers. The FTC's law enforcement, consumer education, and policy 
research initiatives in the mortgage market are part of the FTC's 
broad, vigorous, and continuing program to protect consumers from 
deceptive, unfair, and otherwise illegal practices. The Commission 
appreciates the opportunity to appear before you today to discuss the 
FTC's work.

    Senator Dorgan. Thank you very much, Ms. Parnes.
    Let me ask you your assessment of the advertisements that I 
showed in the clip prior to this hearing. Or at the start of 
the hearing, I should say.
    Ms. Parnes. Chairman, I'd prefer not to opine on the 
specific companies.
    Senator Dorgan. Right.
    Ms. Parnes. But I can certainly tell you that the types of 
claims that were depicted in these ads are claims that we would 
find troubling. These are the kinds of claims that we would 
certainly pursue. Savings claims often don't reveal all of the 
hidden costs that consumers face, they're false savings claims. 
As you've indicated, very low interest rates don't disclose 
that the interest rate is for a very short period of time, and 
the disclosures in fine print would not be adequate, as far as 
we're concerned at the FTC.
    Senator Dorgan. Ms. Parnes, how many people work at the 
Bureau of Consumer Protection at the Federal Trade Commission? 
How many employees do you have in that Bureau?
    Ms. Parnes. We have total employees, we have, I believe it 
is a little bit under 400, and that includes about 100 people 
who are in our regional offices.
    Senator Dorgan. Has that employment level decreased as it 
has with the entire FTC over recent years, and the last couple 
of decades?
    Ms. Parnes. I actually--I don't know what the trend has 
been in the Bureau of Consumer Protection, I do know over the 
past few years, resources in BCP have increased.
    Senator Dorgan. Now, you see what I have shown, and I've 
shown some charts, and it's pretty clear to me that there is at 
least deceptive advertising going on, and I'm trying to 
understand what you all have done to deal with it.
    I know that you've brought 22 cases in the last decade, but 
those cases affect only the case that you bring, right? These 
are not precedent cases. You bring a case against 22 companies. 
I guess I'm going to ask you to answer the larger question--as 
this has grown and become a huge problem with the giant bubble 
of greed and speculation, why only 22 cases brought by the FTC?
    Ms. Parnes. Well, that's a bit of a hard question to 
answer. I mean, I can tell you, kind of two things. One is 
that, for the past several months at the Commission we have 
certainly been questioning ourselves as to whether we could 
have done more, and what we should do, going forward. It's 
certainly been a concern of ours.
    The other point I would make is that while the subprime 
mortgage crisis that we're facing right now--and financial 
practices, generally--is a very significant priority for the 
Commission. Our mission, itself, is incredibly broad. We deal 
with the entire range of consumer protection issues--deceptive 
national advertising, we're looking at data breaches, privacy 
issues, green marketing, I mean, those are just a few of the 
other issues that we're looking at.
    Senator Dorgan. I recognize that the jurisdiction is broad, 
and as I indicated, I very much support the role of the Federal 
Trade Commission. You must have a referee in this system of 
ours. And I know, as I said, regulation is given a bad name, 
but regulation is critically important to provide the role of 
referee in this market system.
    Because, sometimes events just go out of whack, and that's 
what's happened here--and I'm trying to understand, as you 
would see, just as I saw, these advertisements saying, ``You've 
been bankrupt, you've got bad credit? Sole credit? Don't pay? 
Come to us, we're going to give you some money.'' And then we 
started hearing about pre-payment penalties, and subprimes, and 
so on. Was there any effort at the Federal Trade Commission to 
say, ``Look, something's going on here that is creating a 
foundation of quicksand that could be a very serious problem 
for the economy,'' or did it just not register? Did you do any 
rulemaking at all? Or attempt to proceed to do any rulemaking?
    Ms. Parnes. We did not--we did not do rulemaking. And we 
did, you know, it wasn't something that we had started. I will 
tell you, and I--Chairman, I know you understand--that at the 
FTC, the rulemaking, the procedures that govern our rulemakings 
are pretty time and resource-intensive. When we have been 
directed by Congress to engage in a rulemaking, and we've given 
APA rulemaking authority, and told a time limit has been set 
for that rulemaking, we've been able to do those rules in a 
year, sometimes less.
    Rulemaking under the Magnuson-Moss rulemaking procedures, 
at a bare minimum, would take 2 to 3 years.
    Senator Dorgan. I understand that, and I'm trying to fix 
that for you in the FTC reauthorization. But it seems to me no 
matter how long it takes, one would start a rulemaking if they 
see substantial abuse.
    I just showed you charts of what's on the Internet today--
or at least as of 2 weeks ago, when I pulled it off. Do you 
have people down there, seeing those same things, and taking a 
look at those companies?
    Ms. Parnes. Absolutely. Looking at those companies and 
others that make the same kinds of claims--deceptive mortgage 
advertising is an area where we are actively pursuing 
enforcement efforts.
    And I would say that we do certainly hope in some areas 
that our law enforcement effort has a deterrent impact on the 
rest of the agency--on the rest of the economy.
    The ads that you were showing, these, you know, and some of 
the other deceptive mortgage advertising ads that we've seen--
I'm not sure that it really, truly has a deterrent effect on 
outfits that are engaging--really trying to scam consumers.
    But certainly, as you know, there is a legitimate--there 
are legitimate businesses out there, and we think for 
legitimate businesses, when we lay down a marker, we do think 
that that has an effect on their practices, even if we lay that 
market down in a case.
    Senator Dorgan. But, here we have a situation. I just got 
the numbers. The FTC, 25 years ago, had 1,700 employees, and 
now it has 1,000. So, in 25 years, we've cut the agency, by 40 
percent. Now we see growing up this set of activities that's 
far afield from what one would consider to be normal business 
practices.
    I go back to the year 2001 when, I believe it was Mr. Pitt, 
who was appointed to the Securities and Exchange Commission. I 
don't have his exact quote, but he essentially said, ``There's 
a new Sheriff in town, and it's a much more friendly 
environment for business at the SEC.'' Well, we understood what 
that meant.
    What I'm trying to understand is, why did the FTC--as it 
began to see what was developing here--why did it pursue only 
22 cases over a period, I think, of 10 years, on deceptive 
advertising, with respect to these mortgages?
    Now, I will also admit that these, I think, started 
probably 7 or 8 years ago, but Mr. Mazzilo and all of the 
others that, got in the trough here, creating this speculative 
binge, and making a lot of money while they were doing it--it 
wasn't exactly out of sight. I mean, we weren't necessarily 
spending our day thinking about it, or seeing it, but we have 
agencies that are supposed to do that. So, what failed?
    Let me make one additional point--I understand that some of 
these were outside of your purview, but the non-banks--such as 
Countrywide and others--about half of them were well within 
your jurisdiction.
    Ms. Parnes. Well, I, you know, I certainly--I understand 
fully the concern that you're expressing about the actions that 
we took at the FTC--or the non-action.
    Senator Dorgan. Or the lack of them, I'm concerned about 
the lack of them.
    Ms. Parnes. I understand that--I fully understand that. At 
that time, even though in the financial sector, those 22 cases 
don't reflect the breadth of the actions that we had taken.
    We have a very, I think, fulsome record of law enforcement 
in other areas affecting consumers' financial well-being, as 
well. The subprime crisis certainly is having a devastating 
impact on consumers. And the FTC--we are looking, as you know, 
at the--at deceptive mortgage advertising. We have other, non-
public investigations that are ongoing right now in this area. 
But there are other practices that affect consumers' financial 
well-being, and we've been very active in those areas, as well.
    Senator Dorgan. Again, I'm going to call on Senator Nelson 
next, but I want to say that because I can go to the Internet 
right now and get the same kind of deceptive advertising that 
is attempting to lure people into bad mortgages. It seems to me 
the FTC should be apoplectic about that, and holding press 
conferences and saying, ``Don't even think about this. Don't 
even dare move in this direction, given what we've found with 
this spectacular collapse as a result of what has happened in 
the subprime area.''
    So, I'll come back with another question, but let me call 
on Senator Nelson.

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Mr. Chairman, to your point, the Federal 
Trade Commission has the regulatory authority over these kind 
of lending practices through the enforcement of existing laws. 
As a matter of fact, the agency retains jurisdiction over non-
bank financial companies such as the mortgage brokers, and non-
bank mortgage companies, and get this: in 2007, 19 of 20 
subprime mortgage lenders in the U.S. fell under the FTC's 
jurisdiction.
    So, the question is begged--why haven't we done this? And 
what are we going to do about it, in the future? And I just 
kind of lay the predicate, or set the table here for you.
    My state is very much affected. The foreclosures are 
skyrocketing--you know what the real estate market is like. We 
had the second highest total of foreclosures nationwide, and 
four of the top twenty metro areas in the country were in 
Florida. Fort Lauderdale was 8th, Orlando was 13th, Miami was 
14th and Sarasota/Bradenton was 15th.
    Of course, many of those in Florida that are facing the 
foreclosure, were the victims of the abusive and predatory 
lending practices. And the interesting thing is that some of 
these victims actually qualified for a better prime loan 
instead of a subprime loan, and a December Wall Street Journal 
article found that 61 percent of subprime borrowers, if 
reviewed, had actually high enough credit scores to qualify for 
the prime loans.
    And so, this game was going on where lenders and brokers 
gave these borrowers mortgages with exploding interest rate 
payments that they knew that the borrower could not afford, and 
then they packaged these mortgages in deceptive and confusing 
ways.
    And that's what the FTC has jurisdiction over. And so, what 
are we going to do about this? Now that we didn't do anything 
about it, what are we going to do about it on a going-forward 
basis?
    Ms. Parnes. Well, Senator, on a going-forward basis, one of 
the things that we are very concerned about--we think that 
consumers that are--who are facing foreclosure are particularly 
susceptible to mortgage foreclosure scams. And we are 
participating in regional task forces throughout the country 
with state attorneys general and other local law enforcers to 
pool our resources and take action against these entities that 
are engaging in this type of fraud, and kind of, essentially, 
adding insult to injury to consumers who have already been 
seriously injured. So, that's the first thing that we're doing.
    As you know, the Federal Reserve Board has proposed a rule 
that would govern the subprime mortgage market, and it covers 
the entire marketplace. So, it would cover those entities that 
fall within the Commission's jurisdiction. We understand that 
rule will be effective this year, and we will enforce that 
rule.
    Senator Nelson. Now, is that how we're going to draw a 
clear line between a valid subprime lending, and the predatory 
lending?
    Ms. Parnes. Well, I'm not certain that for purposes of FTC 
enforcement--I understand the terminology, subprime and 
predatory lending, but we don't--we're not necessarily 
concerned with making that distinction. We really look to our 
statute. And if there is deception or unfairness, we will--we 
can and will--pursue that actor.
    Senator Nelson. Didn't you all go after the practices like 
bad advertising, and that sort of activity? Is that really 
going to address the problem? Isn't it going to be that we've 
got to dig in deeper as to what these people are doing when 
they cross the line between a valid subprime loan and the 
predatory lending?
    Ms. Parnes. I actually--I think it's both. I think the 
deceptive advertising kind of lures the consumer in, and as we 
know, mortgages are extremely complicated transactions for 
consumers. And if they're being, kind of, pulled in through 
lies, that's certainly a problem, and that's something that we 
would want to go after.
    But the other practices that you're talking about, the 
other unfair practices are also problems. And we have pursued 
them in our cases, we will certainly will continue to do that 
in the future.
    Senator Nelson. The Chairman said that your employment 
level of full-time employees at the FTC had dropped from 1,700 
down to 1,000. Do you need more people to help you?
    Ms. Parnes. Well, we certainly--I will tell you that in the 
Bureau of Consumer Protection we are--we are shifting 
resources, and we have been doing so for the past, oh, maybe 18 
months. We're shifting resources into financial practices, we 
are growing--we are growing that division. And that's the area 
that we've asked for additional resources.
    So, we appreciate this Subcommittee and Committee's support 
for the agency in that respect.
    Senator Nelson. How many additional people have you asked 
for?
    Ms. Parnes. Senator, I don't recall, I would need to go 
back and look at the documents.
    Senator Nelson. Mr. Chairman, I think to follow up on your 
line of questioning, we would need that information.
    Senator Dorgan. Senator Nelson----
    Senator Nelson. Thank you.
    Senator Dorgan. Ms. Parnes can't answer your question, 
frankly, because Mike Parker, a former Congressman, went to 
work for this Administration and was with the Division of Civil 
Works of the Corps of Engineers. He came to a Congressional 
committee and answered the question honestly, ``Yes, we need 
more resources. We don't have the resources to do this,'' and 
the next morning he was fired.
    Ms. Parnes has a responsibility, I suppose, to support the 
President's budget request, or she may not have a job tomorrow 
morning.
    So, her answer, I think, was that they're shifting people 
around. But, the fact remains, in this time of pretty 
substantial difficulty, we have a good agency but one with 
1,000 people, when it had substantially more people, 700 more 
people 25 years ago, and that's a serious problem.
    And I want to make one additional point before I call on 
Senator McCaskill. The point, I think, Senator Nelson was 
making, was not just deceptive advertising, which I was 
dwelling on earlier, but the issue of the mortgage company and 
the broker that would put a borrower in a subprime mortgage 
when, in fact, they qualified for a regular mortgage. Putting 
him in a subprime with pre-payment penalties and so on--that's 
what made all of this very lucrative.
    It's what made the hedge funds, and others, that began to 
securitize them--the fact that they had pre-payment penalties 
embedded in the mortgage--very attractive for everybody.
    Those were practices, not advertising, practices--in my 
judgment--that run far afield of what should be acceptable.
    And one final point--the Federal Reserve Board rules are 
out for comment at this point--I mean, I might say, the Federal 
Reserve Board has been vacant for a long, on vacation on these 
issues, for a long period of time, and bear substantial 
responsibility, as well.
    But their so-called rules are OK, but they don't do 
anything with respect to pre-payment penalties, which is a 
significant problem, but----
    Senator Nelson. Which agency, Mr. Chairman, should be 
looking after that circumstance that you just described. Where 
they deceptively shove somebody into a subprime loan, instead 
of where they would qualify for a prime loan?
    Senator Dorgan. --there's deception and unfair practices. 
FTC is involved in both and would have responsibility for both.
    Senator McCaskill?
    Senator Nelson. Well said.

              STATEMENT OF HON. CLAIRE McCASKILL, 
                   U.S. SENATOR FROM MISSOURI

    Senator McCaskill. Thank you, Mr. Chairman.
    I think you hear the frustration. I'm a former prosecutor. 
If we had a crime outbreak in a certain area of Kansas City 
that involved armed robbery of convenience stores, we would 
have a cop on the beat, we would know who the cop on the beat 
was, and we would know how to address that problem.
    So far, there seems to be a lack of anyone stepping up and 
saying, ``I'm the cop on the beat.'' And we want you, Ms. 
Parnes, to be one of the cops on the beat. And it doesn't 
appear, so far, that people are taking responsibility for not 
being the cop on the beat, or really saying, ``I want to be 
that cop.''
    And let me talk specifically now about the aftermath. As we 
would say in Missouri, the cow is out of the barn, and we now 
have to try to clean it up, we now have to prevent these 
problems from occurring going forward, and one of the things 
that's happening is that the same people that were vulnerable 
to these subprime loans, are now vulnerable to the scams that 
are coming after the subprime loan debacle.
    There's a company called Mortgage Shield out of Houston, 
Texas--are you familiar with this company, Ms. Barnes? Parnes, 
excuse me. Does that sound familiar at all?
    Ms. Parnes. Well----
    Senator McCaskill. I know you said earlier in your 
testimony, you didn't want to talk about specific companies, 
but let me tell you what Mortgage Shield is doing.
    They call people in stress situations whose names they are 
getting, saying they are a loan modification program--that they 
can help people with a loan modification. Then if you want to 
hear more, you press 2--and then someone comes on the line and 
has speaking points. And they give the impression that they can 
help you at your time of crisis--these vulnerable people. All 
you have to do is send them $19.95 for the subscription. And if 
you pay $19.95 for the monthly subscription, they can help you 
through this mess.
    That is just one example, and I'm sure there are dozens and 
dozens out there, of the vultures preying upon these people in 
their time of crisis, trying to make a quick buck.
    Now is the time for all of those cops that you have--not 
enough, obviously, and you can't say you need more, or the 
President will get mad--but all that you have to step up and 
say, ``We are, at least, going to be really aggressive, and 
high-profile,'' because you have the deterrent ability. You 
know, there is deterrence that is possible here. And you know 
it because you guys have done it in other areas before, when 
the FTC's authority has been exercised.
    And I just hope you all are as exercised. Are you aware of 
any investigations you have ongoing concerning these companies 
that are now preying upon these vulnerable people?
    Ms. Parnes. These are exactly the types of investigations 
that we have ongoing. There are--the types, the companies that 
are preying on consumers who are particularly vulnerable right 
now, because their homes--because they're in foreclosure.
    We have a case that we brought yesterday where consumers 
whose names were list--consumers were targeted, we allege, by 
this company because their names were included in public 
records----
    Senator McCaskill. Right.
    Ms. Parnes.--as, as being--as being----
    Senator McCaskill. Defaulting.
    Ms. Parnes. --exactly. Defaulting on their loans, and these 
consumers received solicitations from the company that we sued, 
charging them--not $19.95--but $1,000.00. And promising that 
they would take then out of foreclosure, and not delivering. 
And we've sued that company--several others--we have many more 
investigations underway, and our cops on the beat are 
participating in regional task forces throughout the country, 
so that we can work with our colleagues in state and local 
governments, and really share resources, and leverage our 
resources, and be most effective that way.
    Senator McCaskill. I certainly would recommend--I know that 
you're having task forces, but the people who are losing their 
homes aren't going to those task forces. I would certainly 
recommend that you forward information to all of our offices. 
We get heartbreaking phone calls, every day. Somebody tells the 
people at the end of their rope, ``Well, call your Congressman, 
call your Senator.'' And we are fielding calls on a daily basis 
that make me sick. These people are trying so hard.
    I would love it if you guys would begin communicating 
directly with our offices, so we can send out e-mails to those 
who have e-mail and so we can send letters to people who have 
called us with information about some of the scams that you all 
are looking at, as it relates to these people that are 
vulnerable, who are looking for any kind of lifeline, and 
mistakenly are giving people money, thinking they're getting a 
lifeline, and they're getting nothing.
    Ms. Parnes. Senator, we would be happy to do that. We 
actually have--we have some pages on our website that are 
specifically geared toward these types of consumer--financial 
issues. We would be happy to work with your staff, and make 
sure that your website links to our website, so your 
constituents can get that information directly.
    Senator McCaskill. If I might, Mr. Chairman, one more 
question?
    Senator Dorgan. Yes.
    Senator McCaskill. Thank you. There's another area that has 
the same danger signals that subprime had. And if you take a 
helicopter-view of subprime, it was pretty simple. The people 
who made money on closing the loans had no risk. And when you 
don't have risk, then you don't care whether people can pay 
them back, you don't care if it's unfair, you're not going to 
have an ongoing relationship with this person. It's not like a 
small community bank. These are people who knew that if they 
closed the loan, they made the money, and they were done. They 
washed their hands of it.
    The same situation is true in reverse mortgages. The people 
who are closing reverse mortgages have no risk. Now, what's 
really kind of scary about reverse mortgages is that taxpayers 
have the risk. And now these things are being marketed as a 
government benefit you can't miss. They are being widely 
marketed--and as you know, Congress wants to take the lid off 
of reverse mortgages because we make money in our budget to 
spend.
    In the closing cost of a reverse mortgage, there's a fee 
that goes to the Federal Government, so the appropriators--all 
due respect, because I know you're an appropriator, Mr. 
Chairman--we want more money in the budget, and we get money 
off the closing of those reverse mortgages, but the tale of 
them is a long tale. It is expensive for seniors, and frankly, 
a mortgage is not nearly as complicated as a reverse mortgage.
    I would like to know, specifically, from you, what the FTC 
is doing, on an ongoing basis, to look at these reverse 
mortgage firms and to look at these marketing techniques. I 
mean, we saw in a hearing that companies were marketing 
annuities in tandem with a reverse mortgage to 80-year-old 
people. I mean, no shame. Absolutely no shame.
    I am anxious. We've taken some legislative steps to try to 
correct some of these things, but I'm anxious to get specifics 
from your agency as to what you're doing because this is the 
next problem that could occur if we don't get on it now. Shame 
on us if we don't fix it now, rather than waiting until we've 
got the kind of problem that we've got with subprimes.
    Ms. Parnes. Right. And I think certainly with the changing 
demographics in our country, it's the beginning of the issue, 
and you're absolutely right. It's an area that we are getting 
on, and we would be happy to do further briefings for you, as 
we move ahead.
    Senator McCaskill. OK. And we'll try to get you more people 
next year.
    Ms. Parnes. Thank you.
    Senator McCaskill. Thank you, Mr. Chairman.
    Senator Dorgan. Senator McCaskill, thank you very much.
    At the risk of injuring your career, I assume that you need 
more people, and I assume you need the resources to deal with 
this issue, is that not correct?
    Ms. Parnes. Yes, it is correct.
    Senator Dorgan. And----
    Ms. Parnes. And I hope I'll be here tomorrow--well, maybe 
not here tomorrow, but----
    [Laughter.]
    Ms. Parnes.--I hope I'll be back at work tomorrow.
    Senator Dorgan. Well, I didn't ask the question to get rid 
of you, but I appreciate your candor.
    Let me also ask you about what I see as the lack of roar--
the lack of a national voice coming from the Federal Trade 
Commission on an issue of its jurisdiction.
    Why, given what we now know of these dramatic impacts on 
the economy of what has happened, the continued advertising 
still going on--why is the FTC not holding press conferences, 
not making a big fuss about this, not going to the National 
Press Club? Maybe you are, and maybe they're not covering it--I 
don't know.
    At least, I hear none of it. I would think you'd be 
apoplectic about it. This is right in your wheelhouse. Your 
agency is an agency we fund because we want you up at the 
plate, taking the swing, and getting rid of this bad behavior. 
So, tell me why that's not happening? Why I don't see it?
    Ms. Parnes. Well, Senator, if you think that we're not 
making enough noise--we're not. And we need to go back and take 
a look at that. You know, we're doing--we are bringing cases, 
we are, we're investigating but, we obviously need to take it 
up a notch, or two.
    Senator Dorgan. The point I was trying to make is that 
bringing cases is something you should do--but only 22 cases in 
a decade. There are hundreds, and hundreds, and hundreds of 
cases out there, I assume. You can't track them down one-by-
one. I'm going to try to give you some additional authority in 
the Federal Trade Commission reauthorization bill, but, in the 
interim, you still have some capability under Section 5 to take 
action. And I really hope that this agency will begin to take 
much, much more aggressive action.
    Ms. Parnes. Well, I think we should certainly consider 
whether even--you know, absent APA authority whether we should 
be considering a rule to supplement whatever the Fed ultimately 
issues in this area. And I also think we need to consider 
additional strategies.
    Senator Dorgan. I mean, I don't lay awake at night placing 
great hope in the Fed. I mean, the Fed is part of the problem 
here, not part of the solution, regrettably. And had they not 
been asleep for some of these years, and very interested in 
ignoring what was happening, we wouldn't be in this situation. 
I must say, some of the same holds true, I think, for some lack 
of aggressiveness on the part of the Federal Trade Commission.
    Let me just ask a question more specifically--in September 
of last year, you issued warning letters to lenders regarding 
their advertising, and the FTC is investigating, as I 
understand it, more than a dozen mortgage companies as part of 
a mortgage advertising law enforcement sweep. What's the status 
of that, and what's the status of the further investigations 
into advertisements used by non-bank lenders at this point?
    Ms. Parnes. Mr. Chairman, those--the status of those 
investigations are non-public, and so we would have to provide 
a non-public briefing for you, and we would be happy to do 
that.
    Senator Dorgan. All right, I appreciate that.
    Well, thank you for being with us. This Committee wants you 
to succeed. We want the agency to succeed. We don't want there 
to be inaction, we want there to be a lot of action on behalf 
of a regulatory agency that has the tools and the capability to 
address these issues.
    Ms. Parnes, thank you very much for being with us today. We 
appreciate your testimony.
    Ms. Parnes. Thank you, Mr. Chairman. And thank you for your 
support of the agency.
    Senator Dorgan. Thank you.
    Next, we will call the second panel to the dais.
    Mr. Richard Blumenthal, the Attorney General of the State 
of Connecticut, Kathleen Keest, Senior Policy Counsel, Center 
for Responsible Lending--Ms. Parnes, are you able to stay to 
listen to the testimony? Or do you have to leave? Are you able 
to listen to a portion of it?
    Ms. Parnes. I can stay for a--for a portion----
    Senator Dorgan. If you would.
    Ms. Parnes.--of their testimony.
    Senator Dorgan. I'd appreciate that.
    Kathleen Keest, Senior Policy Counsel, Center for 
Responsible Lending, Ira Rheingold, Executive Director, 
National Association of Consumer Advocates and Bill Himpler, 
Executive Vice President, Federal Affairs, American Financial 
Services Association.
    Let me thank all of you for being here, and we will begin 
today with the Honorable Richard Blumenthal, Attorney General 
of the State of Connecticut.
    Mr. Blumenthal, thank you very much. I believe you have 
appeared before this Committee previously.

             STATEMENT OF HON. RICHARD BLUMENTHAL, 
             ATTORNEY GENERAL, STATE OF CONNECTICUT

    Mr. Blumenthal. I have, Senator, and I want to thank you 
for having me again today on a subject of supreme importance, 
for Connecticut citizens, for homeowners around the country, 
and for all of us in both state and Federal Government.
    I think a number of the observations made already by 
yourself and other Senators are extraordinarily pertinent, but 
I would just respectfully suggest that the legislation you've 
submitted can lead us to a new paradigm, a new partnership, 
between state and Federal authorities.
    The Federal agencies have been AWOL. Federal enforcement 
has been lax and lackadaisical. But even more insidiously, the 
Federal Government has increasingly preempted and blocked the 
states from enforcing their laws to protect consumers against 
exactly the kind of predatory and abusive practices that were 
displayed before us today, and are on display--still, day in 
and day out.
    And my office has prosecuted such cases, we have cases 
ongoing right now involving major predatory loan schemes in New 
London, and elsewhere in our own state. And the states were 
involved in enforcing laws against these kinds of no doc loans, 
inflated appraisals, other kinds of abuses, before the subprime 
debacle became a public spectacle.
    In fact, the two major cases done by our multi-state task 
forces produced close to a billion dollars--Household Finance 
and Ameriquest--two cases that produced close to a billion 
dollars, as compared to the 22 cases done by the FTC, with 
about $320 million in restitution for consumers.
    So, the States are very much a law enforcement presence, 
they have been, they should continue to be so, and 
unfortunately, States have been shackled and subverted by this 
doctrine and increasing approach of Federal preemption, which 
is really an arrogant assumption of exclusive power that all 
too commonly replaces State enforcement with Federal inaction.
    It isn't only that the Federal Government is inert. It says 
to the States, ``We know better, and only we can do it, but we 
choose not to do it,'' when it comes to consumer protection. 
And that has been the pernicious approach of many Federal 
agencies--most prominently, the Office of the Comptroller of 
the Currency, which culminated in a decision by the U.S. 
Supreme Court under the National Bank Act in April 2007, Waters 
v. Wachovia, which held, in effect, that the National Bank Act 
precludes States from operating subsidiaries of national 
banks--those federally chartered banks, even operating as 
lenders in our States, through their operating subsidiaries, 
are beyond our regulation, and consumer protection activities.
    Your bill, Mr. Chairman, would break that trend. And set a 
different course toward this new paradigm of partnership, 
enabling States to be active allies of the Federal Trade 
Commission and of other Federal agencies in this very, very 
important activity.
    We have suggested, my office, has urged our legislature to 
ban those pre-payment penalties. Not just in the subprime 
areas, but for all loans. Because they really imprison 
homeowners in loans that may be unaffordable, and actually 
promote foreclosure and default.
    We have urged stronger action against the mortgage rescue 
scams that are now increasingly prevalent, in the wake of the 
foreclosure increase in numbers. We see, increasingly, a follow 
up scam, through mortgage rescue promises and claims.
    Resources are tremendously important, for both the FTC and 
the States, and as a prosecutor, as a Federal prosecutor, 
former United States Attorney for Connecticut, as well as State 
law enforcement officer, resources are always on my mind, 
because they are the lifeblood of any successful prosecutorial 
office.
    The Federal role ought to be reconstituted and 
reconfigured, so as to enable States to play this kind of role, 
and the combination of State and Federal Government can be 
very, very profoundly important as a deterrent, as well as a 
source of restitution.
    I think you made this point earlier, that publicity, and 
public notice form a deterrent purpose. And that is very 
important, as we've seen in our prosecutorial activities.
    The kinds of abuses that we see--one-stop shopping for 
predatory lending schemes, inflated appraisals, fabricated 
loans, the no doc loans, the Alt-A loans--typically target 
first-time homebuyers--many of them non-English-speaking 
people, but really across the board. And very often involve 
bait-and-switch tactics at closings that are inherently 
deceptive, and misleading.
    Let me just close by saying that, I hope that this hearing 
will lead to additional momentum toward these goals. We have an 
opportunity--it really is an obligation--to unite Federal and 
State governments, to end the trend toward Federal preemption, 
to empower States in protecting their citizens against these 
abusive practices, and in forming the kind of combination that 
I think is important.
    Because, it is an enduring truth that, when we work 
together, we do well in protecting people.
    Thank you.
    [The prepared statement of Mr. Blumenthal follows:]

   Prepared Statement of Hon. Richard Blumenthal, Attorney General, 
                          State of Connecticut
    I appreciate the opportunity to speak on the timely topic of 
``Improving Consumer Protections in Subprime Lending.''
    The steadily worsening housing crisis threatens millions of 
families from rural, urban and suburban neighborhoods, undermining 
communities across the Nation. In Connecticut alone, there were more 
than 3,500 foreclosure actions in just 1 month, putting our state in 
the top ten.
    The ongoing, deepening crisis creates an opportunity--indeed an 
obligation--for a new, aggressive, innovative effort to fight fraud and 
protect consumers. The bill before you exemplifies the more vigorous 
and vigilant spirit that is necessary--uniting Federal and state 
governments against abusive anti-consumer practices.
    There must be a new Federal/state consumer protection partnership--
really a renewed and reinvigorated alliance and enforcement paradigm. 
States have been shackled and subverted by Federal preemption--an 
arrogant assumption of exclusive power that all too commonly replaces 
state enforcement with Federal inaction. A new partnership would allow 
states to enact consumer protection measures concurrently and 
cooperatively with Federal authorities, provide Federal regulation 
based on the best state safeguards, and establish Federal/state 
collaborative enforcement of these consumer protections.
    This paradigm has sound precedent. A model would be antitrust 
enforcement with separate but parallel Federal and state laws and joint 
enforcement. Others involve Medicaid fraud and deceptive product 
advertising.
    For too long, we have been at odds. Federal and state enforcers and 
regulators have been in conflict, rather than collaboration. Our 
message to an inert, inattentive Federal Government has been: join us, 
or get out of the way. An enduring historical truth is how well we do 
when we work together.
    The Federal role should be reconstituted and reconfigured. States 
should be enabled and encouraged to do what they do best: efficiently 
and effectively protect consumers from constantly evolving financial 
schemes. The Federal Government should review these laws, enacting into 
Federal regulation the best state consumer protections, applying them 
across the country as Federal law. A formal joint Federal and state 
strike force on financial services consumerism would combine the 
strengths of both--the resources and national scope of the Federal 
Government with the nimble responsiveness of state government--to help 
consumers combat fraudulent and deceptive industry practices.
    As states like Connecticut are now doing, the Federal Government 
should specifically ban prepayment penalties, prohibit inflated 
appraisals, require clear disclosure of key mortgage terms including 
estimates of taxes and insurance and reasonable projections of future 
monthly payments for adjustable rate loans. It should compel mortgage 
companies to demonstrate that borrowers can afford their loans, and 
require disclosure of concealed fees or charges. It should ban 
advertising and promotions that are deceptive or misleading.
    Lax and lackadaisical Federal enforcement must end. States should 
be empowered as full partners to enforce consumer protection laws.
    At present, rather than encouraging or enabling effective state 
enforcement, Federal agencies have been an impediment and obstacle. The 
Office of Comptroller of the Currency (OCC) has continually--and 
successfully--scuttled state consumer protection laws as applied to 
national banks, Yet, the OCC has been AWOL during the recent mortgage 
crisis. The Federal pattern has been to claim sole authority, and then 
fail or refuse to exercise it.
    The Federal Government must stand up and speak out as an aggressive 
partner with the states in fighting deceptive lending practices, 
especially affecting subprime loans. The Federal Reserve Board and the 
Office of Comptroller of the Currency have focused almost entirely on 
sustaining and preserving the lending industry, rather than fighting 
serious illegal activities that harm consumers.
    The combination of Federal power grab and Bush Administration 
hostility toward consumer rights created a perfect storm allowing 
predatory lending to flourish.
    As law enforcement officials, state attorneys general have acted 
where we could. In 2002, Connecticut and 18 other states compelled 
subprime lender Household Finance to pay consumers almost $500 million 
for predatory lending practices. In 2006, Connecticut and 48 other 
states forced Ameriquest to pay $325 million for anti-consumer actions.
    But these victories are built on sand as long as we face the huge 
loophole provided by inadequate Federal regulation and preemption of 
state law. We were only able to win these settlements because Household 
Finance and Ameriquest were state licensed, giving the states 
jurisdiction. Had they been federally chartered, the states couldn't 
have won a penny for consumers, no matter how gargantuan and glaring 
their violations of the law.
    Indeed, our settlement with Household Finance would be impossible 
today because the company has since obtained a Federal charter.
    I strongly support--as a good first step--the proposed initiative 
to empower the Federal Trade Commission (FTC) to regulate the marketing 
of subprime loans and to make the states an effective enforcer of these 
regulations, along with the FTC. Any such regulations should preserve 
the authority of states to enact even stronger protections for 
consumers.
    Here, Federal preemption should be explicitly eschewed.
    I also urge the Subcommittee to provide immediate concurrent state 
attorney general enforcement authority over the FTC regulations. States 
should not have to wait 60 days--as required under the proposed 
language--to file a lawsuit alleging violations of the FTC regulations. 
The proposal provides for an exception if the sixty day period is not 
``feasible.'' But the meaning of feasible is ambiguous at best. Notice 
to the FTC of state litigation is appropriate but often states will 
seek immediate injunctive relief to protect consumers from further 
harm. Such relief should not be delayed 2 months for notice to the FTC. 
The proposal should either eliminate the sixty day notice period or 
provide for broad exception where waiting the sixty days would 
jeopardize consumers.
    States have been at the forefront for many years in combating 
abusive and deceptive practices pervading the mortgage lending 
industry--fighting housing loan fraud well before the subprime debacle 
became a public spectacle.
    In our investigations of Household Finance and Ameriquest, we 
uncovered extensive abusive practices, including inflated appraisals, 
fabricated income statements, misrepresentations about prepayment 
penalties and other loan terms, and illegal or deceptive fees and 
interest rates. Our settlements returned almost $1 billion in 
restitution to consumers nationwide. Importantly, both companies agreed 
to follow strict procedures and disclosure requirements, ensuring 
fairness to borrowers.
    In Connecticut, my office's numerous active and ongoing 
investigations and legal actions have revealed and pursued clearly 
deceptive and predatory practices:

   ``One stop shopping'' predatory lending schemes in which 
        mortgage brokers, real estate agents and other co-conspirators 
        combine to sell rehabilitated distressed houses with structural 
        flaws, cosmetically repaired. They typically target non-
        English-speaking first-time homebuyers with impaired credit. To 
        obtain loans for their victims, they concoct and submit false 
        income information, inflate appraisals, and conceal the actual 
        terms of the mortgage loans from buyers.

   Inflated appraisals resulting from mortgage brokers 
        pressuring appraisers to exaggerate property values by 
        threatening explicitly or implicitly to deny them business.

   Misrepresentation and non-disclosure of loan terms and 
        interest rates and bait-and-switch tactics at closings--
        typically targeting first-time homebuyers who rely on false 
        assurances from their brokers.

   Abusive foreclosure practices including deceptive and 
        illegal fees--a practice that often impairs the ability of 
        distressed borrowers to reach an arrangement with the lender or 
        mortgage servicer to avoid losing their homes.

    States like Connecticut are also taking the lead in developing a 
comprehensive, hard-hitting, proactive response to this crisis, even in 
the face of disconcerting and discouraging threats of Federal 
preemption. Working with key legislative leaders in Connecticut like 
State Senator Bob Duff and State Representative Ryan Barry, we are 
crafting legislation to establish a pool of funds that would assist 
homeowners to stay in their homes by replacing crushing high-cost 
mortgages with more affordable loans. The legislation will also impose 
greater responsibility and specific obligations on the lending industry 
to ensure that borrowers can afford mortgages--even when the interest 
rates are adjusted. Finally, the legislation will slow the foreclosure 
process to provide mortgage companies and homeowners with time to reach 
reasonable solutions that help keep families in homes.
    State leadership through proactive homeowner protection can promote 
a Federal and state cooperative effort with a national enforcement 
footprint and impact. Federal/state enforcement partnerships are hardly 
new or novel. Currently, states work in conjunction with Federal 
agencies on a broad spectrum of cases including Medicaid fraud, 
antitrust, and deceptive or misleading consumer advertisements. Federal 
and state law enforcement agencies hold regular regional meetings, 
exchange investigative information and engage in other cooperative 
projects. Because many of the companies that have engaged in deceptive 
lending practices or predatory lending conduct their business in many 
different states. Federal regulations will assist national enforcement 
efforts among states and between the Federal Government and the states.
    Federal regulations regarding deceptive practices should constitute 
a floor not a ceiling. States should have the authority to provide 
stricter and stronger consumer protections. Such an approach has been 
successfully implemented in other similar Federal laws--from Do-Not-
Call regulations to the Truth in Lending Act.
    I urge the Committee to favorably consider the proposed legislation 
to facilitate a renewed Federal and state alliance in this area of 
significant national and local concern.

    Senator Dorgan. Attorney General Blumenthal, thank you very 
much for your testimony.
    Next, we'll hear from Kathleen Keest, who is a Senior 
Policy Counsel, for the Center for Responsible Lending.

 STATEMENT OF KATHLEEN E. KEEST, SENIOR POLICY COUNSEL, CENTER 
                    FOR RESPONSIBLE LENDING

    Ms. Keest. Thank you, Chairman, and thank you for inviting 
me to testify.
    I'm going to cut out a lot of what my--I was going to say, 
because it's very clear from your earlier comments that you 
really ``get it,'' and don't need to have a lot of the benefit 
of my explanation of what happened.
    And I'd like to just start by saying that I think the 
provisions in the proposed reauthorization to get rid of the 
Mag-Moss rulemaking albatross around the FTC's neck would do a 
great deal of--would remove a great deal of the impediments 
that they've had to even think about addressing this by 
rulemaking, and also, the ability for--giving the ability for 
the State Attorney General's to enforce it would help a lot.
    A lot of the State Attorney Generals have the authority 
under State--have parallel authority under State laws, but some 
of them didn't, which, in Ohio was a good example of that. 
Which, I think, is one of the reasons why Ohio started 
suffering so early, so badly. So, that's going to be a great 
deal of help, and I want to compliment you for that.
    What--as I think you've noticed, or that you've talked 
about, part of the real problem here is the perverse incentives 
of the secondary market who paid the originators to push these 
kinds of risky loans, and push the risk layering. So, I think 
one of the things that we need to keep in mind in terms of 
thinking about the problem is that, to some extent we've got a 
little bit of a parallel to the drug problem. You know, we've 
got the difference between going after the kingpins on one 
hand, and the street peddlers on the other hand.
    The advertisements out there are sort of the street 
dealers, bringing the people in. And it's very important, and 
particularly important for law enforcement to go after that, 
but on the other hand, as long as the kingpins are out there, 
and the perverse incentives aren't addressed, to some extent, 
it's a whack-a-mole game.
    And that's by way of saying, that while the FTC, I think, 
you know, is--it's important to get after these things, this 
was a systematic--a systemic breakdown. A systemic breakdown of 
no accountability and no oversight, and a system that led the 
self-regulating nature that was supposed to be in a marketplace 
to break down.
    And so, there's a limit to what the FTC can do, and--but 
within those confines, I guess one of the things that I'd like 
to suggest is that the FTC, one of the things it could do is 
beef up its use of unfairness. Even if we eliminate deceptive 
advertising, what happened here, is that the incentives were to 
sell structurally unfair, and unsuitable products. So, 
virtually, the only FTC hook they have to do that is to call 
this unfair--to get at the kingpins, in other words.
    And, so I think the FTC, sort of, at the top, you've said 
earlier that for a long time regulation has been a four-letter 
word in this city, and to some extent, the use of the 
unfairness doctrine is one of the things that the industry has 
been most--I guess I could say angry about. They feel that 
that's just a way for people to interfere with a business that 
they know how to do.
    Whether or not, sort of, the environment was such that they 
could have succeeded in using that authority earlier to get at 
that problem, is sort of a question that it's too late for us 
to ask.
    But the Agency hasn't done a lot with its unfairness 
authority, and I would suggest that one of the things that this 
committee can do is--as I think, actually, the Chairman has 
done today--is encourage it to be more proactive in getting to 
the root causes of it, which is to destroy the incentives that 
has made it so profitable for the street dealers to do what 
they do.
    Thank you.
    [The prepared statement of Ms. Keest follows:]

    Prepared Statement of Kathleen E. Keest, Senior Policy Counsel, 
                     Center for Responsible Lending
    Mr. Chairman Dorgan, Ranking Member DeMint, and Members of the 
Subcommittee, thank you for the invitation to appear before you 
concerning what has become one of the most important developments in 
the U.S. economy in this young century. We have yet to know how many 
families will suffer the heart-wrenching and economically devastating 
experience of being forced from their homes and neighborhoods by 
foreclosure. The most recent estimate is for a total of 6.5 million 
foreclosures by 2012.\1\ The subprime industry itself is decimated, and 
the International Monetary Fund recently estimated that direct mortgage 
losses will exceed $500 billion, and consequential losses could reach 
nearly a trillion dollars.\2\
---------------------------------------------------------------------------
    \1\ Rod Dubitsky, Larry Yang, Wen Zhang, Thomas Suehr, Foreclosure 
trends--a sobering reality, Credit Suisse Fixed Income Research (April 
23, 2008), http://www.credit-suisse.com/researchandanalysis. They 
estimate 2.7 million total subprime foreclosures and 4 million other 
mortgages.
    \2\ Christopher Swann, IMF Says Financial Losses May Swell to $945 
Billion, April 8, 2008, available at http://www.bloomberg.com/apps/
news?pid=email_en&refer=home&sid=aK1z
Aj5FZ9Io.
---------------------------------------------------------------------------
    At root, it was the industry itself that recklessly abandoned sound 
business sense, with the consequences to the economy magnified and 
multiplied through complex financial instruments that spread the 
infection like a pandemic.\3\ There were other factors, of course, but 
the consequences would have been much more contained had old fashioned 
common sense and prudence prevailed. Though it was highly profitable 
for a long while, in the end that recklessness ill-served everyone.
---------------------------------------------------------------------------
    \3\ See, e.g., Roger Lowenstein, Triple-A Failure, New York Times 
Magazine, p. 36 (April 27, 2008).
---------------------------------------------------------------------------
    How could it have gone so wrong? How could it have gotten so far 
out of hand before anyone noticed? Many are trying to sort out what 
went wrong, and that is as it should be. It is not simply a finger-
pointing ``blame game'' to do so, for an accurate diagnosis is a 
necessary precondition both for both effectively treating the resulting 
problems, and preventing a recurrence. The truth is, there is plenty of 
blame to go around. Many forces came together to bring this economic 
storm about, and we can't afford to ignore any of them as we look for 
solutions to today's consequences and preventions for tomorrow. But 
today, we look at just one of those pieces--one agency among many with 
some authority in the fragmented system.
    My testimony today is on behalf of the Center for Responsible 
Lending (CRL) (www.responsiblelending.org), a not-for-profit, non-
partisan research and policy organization dedicated to protecting 
homeownership and family wealth by working to eliminate abusive 
financial practices. We are affiliated with a community development 
lender, Self Help, which provides carefully underwritten subprime loans 
to people who have been under-served by other lenders. Self Help has 
provided over $5 billion of financing to 55,000 low-wealth families, 
small businesses, and nonprofit organizations, and our loan losses have 
been less than 1 percent per year.
    In addition to my experience as a senior policy counsel with CRL, I 
was previously an assistant attorney general in Iowa and Deputy 
Administrator of the Iowa Consumer Credit Code. This allows me to bring 
to this testimony some personal perspective on both the possibilities 
and limitations of public enforcement.
I. Introduction: a Cursory Overview of the Rise and Fall of the 
        Subprime Market
    There are many contributors to the meltdown, and far too many 
players involved to adequately describe in short testimony. But at 
root, the bottom line is this:

   Far too large a portion of the subprime mortgage industry 
        from its inception has put origination volume ahead of prudent 
        lending practices. Underwriting for sustainability never was 
        its strong suit. Nearly half of all subprime loans originated 
        in 1999 and 2000 suffered delinquencies, and foreclosures were 
        initiated at least once on 1 in 4 to 5 subprime loans 
        originated during those years.\4\ But, as we shall see, other 
        factors obscured those early cracks in the foundational 
        fundamentals.
---------------------------------------------------------------------------
    \4\ Ellen Schloemer, Keith Ernst, Wei Li and Kathleen Keest, Losing 
Ground, p. 13, Table 4, (Center for Responsible Lending, December 
2006).

   For a long time, the underlying weakness in the industry was 
        obscured to all but those most closely attuned to that market 
---------------------------------------------------------------------------
        by at least two factors.

     First, the share of the subprime market was relatively 
            small, and so ill-effects were relatively contained. Some 
            $138 billion of subprime loans were originated in 2000. By 
            2006, there were $600 billion in subprime originations, and 
            some $400 billion of ``alt-a'' which includes many of the 
            nontraditional loans, particularly payment option ARMs.\5\
---------------------------------------------------------------------------
    \5\ I Mortgage Market Statistical Annual: 2007, pp. 133, 209, 218.

     Second, as long as housing prices appreciated, the 
            troubled loans could avoid completed foreclosures by taking 
            the ``exit ramps'' of refinancing or sale. Ultimately, 
            these loans were paid off--albeit by what is termed 
            ``distress prepayment.'' These ``distress prepays,'' many 
            of which led directly to new subprime or non-traditional 
            originations,\6\ disguised the fundamental weaknesses 
            except to those who looked carefully. So, though nearly 1 
            in 5 of the originations of 1999 and 2000 had a foreclosure 
            filed, only about 1 in 8 went to a completed foreclosure. 
            But when completed foreclosures were combined with 
            ``distress prepays,'' by May 2005, almost 1 in 4 subprime 
            loans originated in those 2 years had failed to prove 
            sustainable.\7\
---------------------------------------------------------------------------
    \6\ Though the subprime industry often justified itself as a 
``bridge to prime'' for credit impaired borrowers, what data exists 
does not support that characterization. Subprime to subprime 
refinancings were more the norm, as far as we know. Although 
longitudinal studies by borrowers are difficult to trace, and therefore 
rare, what evidence does exist does not support the ``bridge to prime'' 
hypothesis. For example, in early 2007, CRL reviewed 106 Option One 
subprime loans originally written in 2004, and found that three in four 
refinanced into another subprime loan, while only 1 in 4 refinanced 
into a prime loan. ``Case Study in Subprime Hybrid ARMs Refinance 
Outcomes,'' (Center for Responsible Lending, February 21, 2007) 
available at http://www.responsiblelending.org/pdfs/subprime-
outcomes_2_.pdf. See also Ira Goldstein, Lost Values: A Study of 
Predatory Lending in Philadelphia, Appx. B, p. 74, (The Reinvestment 
Fund, April 2007) (two-thirds of subprime loans refinanced into other 
subprime loans), available at http://www.trfund.com/resource/downloads/
policypubs/Lost_Values.pdf.
    \7\ Losing Ground, supra note 4.

   The continuing inflation of the housing bubble in some 
        regions of the country, the fact that a large share of the 
        Nation's economy was based on housing and housing-related 
        activity (including consumer spending generated by the ``wealth 
        effect'' \8\) meant that far too many in public life and the 
        private sector encouraged what, we now see, is a ``debt 
        bubble'' that underlay the housing bubble.
---------------------------------------------------------------------------
    \8\ E.g., ``[T]he President would like to push it to even higher 
levels of growth. But there are a number of other factors that go into 
it: low inflation; high productivity; low interest rates, which allow 
the American people to refinance their homes, which puts more money 
into their pockets, which has been happening to the tune of hundreds of 
billions of dollars throughout the economy. All of those are causes for 
optimism about the state of the economy.'' (emphasis added.) White 
House Press Briefing by Ari Fleischer, January 14, 2003.

   The invention of complex financial instruments like 
        ``collateralized debt obligations,'' often rated as investment 
        grade, attracted more investors, vastly increasing the 
        secondary market's demand for these loans. Appetite for the 
        higher-yield instruments--which, as theory tells us, are higher 
        yield because they are higher risk--increased at least in part 
        because other complex financial instruments like ``credit 
        default swaps'' were thought to insure against the ``risk'' 
        part of that equation. In other words, the demand for 
        ``riskier'' investments increased because they thought they 
        could get the higher returns on the upside, while ``insuring'' 
        against the downside.\9\ Subprime securitizations jumped from 
        about $52 billion in 2000 to over $200 billion in 2007, 
        according to Inside Mortgage Finance MBS database.
---------------------------------------------------------------------------
    \9\ See, e.g., Interview with Prof. Michael Greenberger, Fresh Air 
(NPR April 3, 2008), http://www.npr.org/templates/story/
story.php?storyId=89338743.

   The perverse incentives from the ``back-end'' demand side 
        encouraged the originators to make the riskier kinds of loans, 
        and the voracious appetite from that back-end demand led to a 
        virtual abandonment of fundamental underwriting principles in 
        order to generate loans to feed that appetite.\10\ The 
        combination of riskier products and weak underwriting fed off 
        each other in a downward spiral of massive defaults.
---------------------------------------------------------------------------
    \10\ See, e.g, Structured Finance in Focus, The Subprime Decline--
Putting it in Context p. 3, Moody's Investors Service (March 2008) 
(``The subprime crisis is largely a product of increasingly aggressive 
mortgage loan underwriting standards adopted as competition to maintain 
origination volume intensified amid a cooling national housing 
market.''); Interview with Alan Greenspan, The Oracle Reveals All, 
Newsweek, p. 32, 33 (Sept. 24, 2007) (``. . . you had Wall Street's 
securitizers basically then talking to the mortgage brokers saying, 
`We'll buy what you've got.' . . . The big demand was not so much on 
the part of the borrowers as it was on the part of the suppliers who 
were giving loans which really most people couldn't afford. We created 
something which was unsustainable. And it eventually broke. If it 
weren't for securitization, the subprime-loan market would have been 
very significantly less than it is in size.'') Cf Benjamin J. Keys, 
Tanmoy Mukherjee, Amit Seru, Vikrant Vig, Securitization and Screening: 
Evidence From Subprime Mortgage Backed Securities, p. 26-27 (January, 
2008) (securitization weakens creditors' incentive to screen the loans 
they make), available at http://www2.law.columbia.edu/
contracteconomics/conferences/laweconomicsS08/Vig%20paper.pdf.

   With the bursting of the housing bubble, and declining 
        housing values even outside the ``bubble'' regions--the ``exit 
        ramps'' of refinance or sale for troubled borrowers were cut 
        off. And then a feedback loop kicks in--the more housing values 
        decline, the more loans that are caught in the downward spiral, 
        which, in turn, affects housing values of entire neighborhoods, 
        not just the homes securing the troubled loans.\11\
---------------------------------------------------------------------------
    \11\ See, e.g., Dubitsky, et al, supra note 1, at p. 6 (``We 
believe the housing markets in 2008 and 2009 will be under significant 
downward pressure due to the big rise in forced sales related to new 
foreclosures and REO properties. . . .'')

    This is the 2-minute version of the arc of the subprime and 
nontraditional mortgage meltdown. It was, in short, a systemic 
breakdown. For purposes of today's hearing, we are focusing primarily 
on the first item on the list--the abuses and the breakdown of sound 
business practices in the origination of these loans, and what one 
regulator could--and could not--do about that. But to understand what 
happened at that ``front-end'' of the market, we also have to 
understand the ``back-end'' of the market--what Wall Street wanted.
The Supply and Demand(s) of the Subprime Market
    Traditional economics thinks in terms of a ``supply and demand'' 
curve. But that is not what has been operating in this market, 
especially over the past five or so years. Instead, the ``supply'' 
side--the originators of subprime and non-traditional loans--is 
sandwiched between two ``demand'' sides.

``Front-end''       ``Supply''          ``Back-end''
 Demand                                                    Demand
Homeowners &                 Originators &                Secondary
 home buyers                 Related                       Market
                              entities


    The ``front-end'' demand (in theory) was from refinancing 
homeowners and home buyers. As a practical matter, however, much of 
that front-end demand was ``generated'' demand, not natural demand. In 
the early years, these loans were overwhelmingly refinance loans, and 
they were ``sold, not bought''--they were loans in search of borrowers, 
not the other way around. But there was a self-feeding nature to this 
market, as the originators wished to ensure continued growth through 
more originations. There isn't a great deal of downside to assuring 
repeat business for local grocers--in fact, that helps keep those 
grocers on their toes. But for sellers of debt--debts on which 
borrowers are contractually obligated--there's a downside to looking 
for repeat business--trying to get more borrowers deeper into debt and 
keeping them longer carries with it seeds of predictable, and 
foreseeable, problems.
    Much of the ``product'' the originators supplied tried to assure 
that origination volume would ``grow.'' Whether the ``packing and 
flipping'' model of old-line finance companies like Associates that was 
the ``dysfunctional'' part of the market attracting attention in the 
early part of this century,\12\ or the subsequent standard ``exploding 
ARM''--the 2/28 hybrid ARM that functioned almost like two-year balloon 
loans--increasing origination volume was the primary goal. For those 
lenders that sold their loans on the secondary market, the concern with 
how those loans performed over time was, to too large a degree, ``not 
their problem.'' Their job was to make loans. It was origination that 
they were paid for, not performance over time. It was somebody else's 
problem to live with the consequences--which brings us to the back-end 
demand side.
---------------------------------------------------------------------------
    \12\ ``Equity stripping through insurance packing, fee-padding, and 
loan flipping (frequent refinances by the same lender) was the ``abuse 
du jour'' as the century turned. Several state legislatures, including 
North Carolina, enacted state ``HOEPAs'' that closed the loophole in 
Federal HOEPA that these lenders exploited; and the Federal Reserve 
Board amended Federal HOEPA to close one of the loopholes, by making 
single-premium credit insurance count toward HOEPA's 8-percent fee 
trigger. On the enforcement side, the Federal Trade Commission brought 
an enforcement action against Associates (which was purchased by 
Citigroup during the investigation), settled for $215 million, and the 
states brought an enforcement action against Household, settling in 
2002 for $484 million. It is worth noting that Associates and Household 
were among the three subprime originators each year in 1998-2002. In 
2001, the year before the enforcement actions were settled, they held 
20 percent of the subprime market share between them.
---------------------------------------------------------------------------
    More recently, as the housing prices wildly appreciated in some 
areas of the country, a larger portion of subprime loans (though still 
a minority) and nontraditional loans were used to purchase homes. But 
the core problem was the disconnect between houses prices and 
affordability. The housing affordability index in California in 2005 
was just around 14 percent.\13\ Though the answer to a housing 
affordability problem is not unaffordable mortgages, we pretended as 
though it was, and the same weak underwriting--perhaps even worse--
infected the purchase money market.\14\
---------------------------------------------------------------------------
    \13\ In 2005, the average income within the 4th quintile--the 
second highest quintile--was approximately $70,000. Center on Budget 
Policy and Priorities, Arloc Sherman, ``Income Inequality Hits Record 
Levels, New CBO Data Shows,'' December 14, 2007, available at http://
www.cbpp.org/12-14-07inc.htm. In 2005, the median home price in 
California was $548,000 for an affordability index of 14 percent. State 
of California, Department of Housing and Community Development, 
Division of Housing Policy Development, ``California's Deepening 
Housing Crisis,'' (February 15, 2006) at 2, 6.
    \14\ With the refinance market, homeowners had both the emotional 
tie to a home and neighborhood, as well as some equity in the home. 
``No down payment'' home purchase loans meant that the loans were 100 
percent loan-to-value from the day they were made. And with products 
like the non-traditional loans, the only equity to come for some time 
would be from continuing appreciation.
---------------------------------------------------------------------------
    The ``back-end'' demand side was the secondary market--investors 
looking for investments to buy. The way it let its guard down by 
creating what it thought of as graded risk, widely dispersed risk, and 
insured-risk is a story for another day and another hearing.\15\ As it 
relates to the practices of the originators, though the bottom line is 
that Wall Street valued most highly (that is, paid the most for) 
precisely the kinds of products and terms that made the loans most 
risky for the borrowers.\16\ In short, the secondary market created 
perverse incentives, and the originators responded to those perverse 
incentives.
---------------------------------------------------------------------------
    \15\ See, e.g., Lowenstein, note 3, supra and Greenberger, note 9, 
supra.
    \16\ See, e.g., Gretchen Morgenson and Geraldine Fabrikant, 
Countrywide's Chief Salesman and Defender, New York Times (November 11, 
2007) (``Investors were willing to pay significantly more than a loan's 
face value for A.R.M.'s that carried prepayment penalties, for 
instance, because the products locked borrowers into high-interest-rate 
loans with apparently predictable income streams.'')
---------------------------------------------------------------------------
    For those who apply common sense, not complex mathematical models, 
to business, this has been one of the most maddening aspects of the 
meltdown: the ``what were they thinking?'' factor. Give it just a 
moment's thought. There are roughly three categories of default risk: 
borrower risk--the ``creditworthiness'' of the borrower; macroeconomic 
risks--unemployment, housing prices; and loan product and term risks. 
That is to say, some kinds of loan products and some loan terms 
themselves exacerbate the risk of default and foreclosure, irrespective 
of borrower traits.\17\ In an industry that claimed to be serving a 
niche where the ``borrower'' risks were higher (setting aside the 
question of steering), common sense would tell a lender to minimize the 
risk from the other two factors by selling the least risky loan 
products and terms. (That's what the sensible 19 and 20 year olds in an 
economics class recently said when I put the question to them.) Instead 
the standard industry practice was to compound the risk by making the 
standard products on the market the riskiest kinds of products--they 
pushed the products and loans terms that made these loans more, not 
less, likely to default.
---------------------------------------------------------------------------
    \17\ CRL's president, Michael C. Calhoun testified to this 
subcommittee previously about the increased likelihood of default for 
several kinds of loan terms, such as prepayment penalties and 
adjustable rates, and the prevalence of risk-layering in this industry, 
which, of course, simply compounds the risk yet further. See Testimony 
of Michael C. Calhoun Before U.S. Senate Subcommittee on Interstate 
Commerce, Trade, and Tourism ``Federal Trade Commission 
Reauthorization,'' Sept. 12, 2007.
---------------------------------------------------------------------------
    Why would they do that? There are a number of reasons. In part, 
ignoring underwriting to push a borrower to the maximum on capacity to 
pay, or pushing an exploding ARM is likely to force the borrower into 
seeking a refinance later--a new origination. In part, some of the 
products, like teaser-rate ARMs and POARMs are tailor-made for 
deceptive sales pitches--low-balling the monthly payments made it 
easier to sell a complex, risky loan. But the biggest incentive of all 
was the perverse incentive--the fact that those were the products and 
terms that Wall Street paid the originators the most for. In the end, 
it was the ``back-end'' demand, with its increasingly voracious 
appetite asking for more and more volume, and paying those originators 
more for the toxic products than the less remunerative ``plain 
vanilla'' products, that drove this market.
    That's a birds-eye view of what happened. There was a very long 
supply chain along the way--from local brokers and settlement agents to 
national lenders to global investment houses. Deconstructing what 
happened to oversight, then,--the question of ``who was minding the 
store''--isn't simple. This wasn't ``a store''--this was a mega-mall, 
and lapses in security were everywhere. The unfettered explosion and 
subsequent implosion raises questions of whether deregulation of both 
lending markets and investment markets went too far. It raises 
questions of whether legislators, regulators and the public did have, 
or could have had, adequate insight into what was happening in time to 
have stopped it. It raises questions about whether regulators had 
adequate tools, adequate resources, or adequate will to have done 
something more. And if not, what do they need for the next time.
    Today, we look at only one aspect of this process: the practices of 
the non-depository originators as they dealt with consumers (the 
``front-end'' demand side): first, how well equipped was the Federal 
Trade Commission to deal with the problems on its watch, and, second, 
within the limits it faced, how well did it perform. We believe that 
for it to have performed optimally, it needed better tools and more 
resources. But within the confines of those limitations, could it have 
done more? Probably yes.
II. ``Regulation''--It Comes in Different Flavors
    Before evaluating the FTC's performance as a regulator, it is 
necessary to distinguish among kinds of regulation. As the industry 
began to unravel, it was common to hear that these loans were mostly 
made by the ``unregulated'' segment of the mortgage market--non-
depository lenders. In fact, virtually the only major segment of this 
daisy chain that is truly unregulated is the very tail end--the complex 
derivatives market.\18\ But there are differences in the kinds of 
regulation and oversight to which the various segments were subject. 
There is substantive regulation--the laws and rules that set down the 
rules of the game. There is oversight--routine and regular monitoring 
that allows regulators on-going access to the regulated industry to 
keep on top of its compliance. Finally, there is enforcement--
investigating alleged violations and prosecuting them after the fact.
---------------------------------------------------------------------------
    \18\ See Greenberger, supra note 9, discussing the Commodity 
Futures Modernization Act of 2000.
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A. The Underlying Infrastructure: Legal Authority and Political Will
    Regulatory agencies are creations of the law, and have only the 
authority that the law gives them. The scope of their authority is set 
by the law that creates them: The laws they enforce with respect to the 
entities within their jurisdiction are only those that the legislative 
branch--Federal or state as relevant--enacts. And finally, the 
resources they have to do their job with are determined by their 
enabling law.
    In other words, it all starts with elected officials--here in 
Congress, and out in the state capitols. An agency may be--and should 
be--taken to task if it does not use the tools it has to tackle a 
problem. But if the agency's jurisdiction is inadequate in the first 
place, it is because the enabling laws make it so; if the laws the 
agency is to enforce are inadequate, it is Congress and the state 
legislatures that must act first to strengthen them; if the resources 
are inadequate, and the agency is funded by appropriations, then it is 
the body that makes the appropriations that must step up and reassess 
its spending priorities. As we will see, some, though not all, of the 
FTC's inadequate responses can be traced back here.
    While the tools and the resources must be sufficient, so too must 
be the will of the agency's leadership. No matter how strong or weak 
the regulatory infrastructure is, it depends upon the will of the 
regulator to make the most of what it has. If a regulator--any 
regulator--believes that the best regulation is the least regulation--
then it matters little what the regulatory structure looks like. 
Regulators must believe in the importance of their job in order to do 
it right. For nearly three decades, the prevailing political and 
economic philosophy has been that the markets work best when left 
alone, with minimal intervention. Whether that was part of the problem, 
and contributed to a too-weak regulatory response is a legitimate 
question. It is, however, ultimately is a political question. We will 
not discuss it today, but only note that it is a question that must be 
answered at some point.
B. The Legal Tools: The Substantive Law Relating to Abuses in the 
        Subprime and Non-traditional Market
    In our 2-minute overview of the root of the problem, we identified 
a few areas of abuse in the origination marketplace.
    Marketing: Sometimes there were misleading advertisements, although 
often the problem with subprime ads was not misrepresentations about 
cost or terms, but a complete absence of information about costs or 
terms. While prime borrowers could easily find information about 
prevailing rates for ``plain vanilla'' fixed rate mortgages, there was 
very little transparency about prices and terms for subprime markets. 
While advertising rules in the Truth in Lending Act,\19\ or general 
prohibitions against deceptive advertising practices set some ground 
rules, there was nothing clearly illegal about advertising of what 
could be called the `` `Come into my parlor,' said the spider to the 
fly'' variety.\20\ Though some of the ``trust us'' variety of 
advertising could be argued to create a fiduciary duty or related duty 
for originators, this was an area of the law that was in flux through 
out this period.
---------------------------------------------------------------------------
    \19\ 15 U.S.C.  1661-1665b. These rules do not require that price 
terms be advertised. If the lender chooses to disclose some ``trigger 
terms,'' then the rules require some additional disclosures.
    \20\ See, e.g., Vanessa G. Perry and Carol M. Motley, Reading the 
Fine Print: An Analysis of Mortgage Advertising Messages (working 
paper, 2008).
---------------------------------------------------------------------------
    Moving from mass marketing to individual sales marketing, there are 
some specific requirements--mostly regarding disclosures. The Truth in 
Lending Act requires some early disclosures about loan costs and 
repayment terms for mortgage lending, and more disclosures at closing. 
The Real Estate Settlement Procedures Act (RESPA) requires some early 
disclosures and closing disclosures about closing costs. But generally, 
it is simply the prohibition against ``unfair and deceptive acts and 
practices'' in commerce that is an agency's primary tool to attack 
deception in a sales pitches.
    Loan Terms and Products: There is little substantive law that 
governs loan products and terms. In some states, some of the higher-
cost, higher fee loans were subject to additional requirements by the 
``state-HOEPAs,'' but, for the most part, those laws took aim at the 
kinds of abuses that were more prevalent in the predominant business 
models in the late 1990s and early 2000s. In fact, to some extent, 
Federal law made it impossible for states to squarely address in 
substance some of the risk-enhancing products. One of the unintended 
consequences of the 1982 Alternative Mortgage Transaction Parity Act 
(AMTPA), which preempted state laws limiting ``creative'' mortgages--
like adjustable rate loans and balloon loans, was to encourage the 
growth of ARMs to take advantage of that Federal preemption.\21\ That 
same law preempted state laws on prepayment penalties from 1996 to July 
1, 2003 in most states--another ``risk-enhancing term.''
---------------------------------------------------------------------------
    \21\ 12 U.S.C.  3801, et seq. (This preemption was available to 
state chartered lenders, not just to federally chartered institutions.)
---------------------------------------------------------------------------
    Perverse Incentives and Conflicts of Interest: There are few laws 
in place to effectively address the perverse incentives that led 
originators to respond to Wall Street's incentives to push the higher-
cost, riskier loans. At the beginning of the subprime era, the trade 
association of mortgage brokers considered themselves to owe a duty to 
their customers, and some courts had held that there was a fiduciary 
duty.\22\
---------------------------------------------------------------------------
    \22\ See generally National Consumer Law Center, The Cost of Credit 
 12.9.2 (3rd ed. 2005). See esp. note 686, which quotes an earlier 
version of the National Assoc. of Mtg Brokers' Code of Ethics.
---------------------------------------------------------------------------
    But the industry's self-image changed, and it became a legal battle 
as to whether brokers had a duty to provide their customers with the 
most appropriate and best loan for them. While individuals could, and 
did use the common law regarding fiduciary duty, and UDAP claims as a 
tool, as a clear and potent message to deter such practices industry-
wide, it was insufficient. And creditors making their own loans have 
never had such a duty. As the fundamental problem of putting people 
into loans ill-suited to their needs and situations, it was only as the 
crisis became too great to be ignored did state legislatures respond. 
Since the spring of 2006, several states have enacted laws that 
specifically impose on originators some kind of duty with respect to 
their customers.\23\ The Federal Government has yet to respond. The 
Federal Reserve Board has proposed some UDAP regulations pursuant to 
its authority under the Home Owners Equity Protection Act (HOEPA), but 
we believe that those rules, if enacted as proposed, would not 
significantly reduce these perverse incentives.
---------------------------------------------------------------------------
    \23\ E.g., Ohio and Minnesota.
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    Weakened Underwriting: The massive failure of underwriting, one of 
the most fundamental causes of the break down, is the conduct that the 
existing law was perhaps most inadequate to address. While there is 
legal precedent to argue that it is ``unconscionable'' or unfair to 
make a loan knowing that there is little reasonable probability of 
repayment,\24\ that, too, has been more successful on an individual 
basis than system-wide. In fact, with respect to the highest cost 
loans, those subject to the Federal HOEPA, there is a prohibition 
against a ``pattern and practice'' of making loans without regard to 
the ability to repay, but as long ago as 1998, the FRB and HUD admitted 
that was very difficult to enforce.\25\
---------------------------------------------------------------------------
    \24\ See, e.g., Iowa Code  537.5108(4); cases collected in 
National Consumer Law Center, The Cost of Credit  12.5, 12.7.3.
    \25\ Joint Report to Congress Concerning Reform to the Truth in 
Lending Act and the Real Estate Settlement Procedures Act, Board of 
Governors of the Federal Reserve System and the Department of Housing 
and Urban Development (July 1998), at 62-63, available at http://
www.federalreserve.gov/boarddocs/rptcongress/tila.pdf.
---------------------------------------------------------------------------
    Here, too, the recent spate of state laws that began to address the 
current generation of abuses addressed the need to consider ability to 
repay. Federal financial regulators issued underwriting guidances for 
non-traditional loans in 2006, and for subprime loans in 2007.\26\ Many 
state financial regulators adopted parallel guidelines shortly 
thereafter. The FRB's proposed HOEPA UDAP rules would extend to the 
subprime market a prohibition against a ``pattern and practice'' of 
making loans without regard to ability to repay. However, as the Board 
admitted a decade ago that it was a rule difficult to enforce, it seems 
equally an equally unpromising solution today.
---------------------------------------------------------------------------
    \26\ Interagency Guidance on Nontraditional Mortgage Product Risks, 
71 Fed. Reg. 58609 (Oct. 4, 2006); Interagency Statement on Subprime 
Mortgage Lending, 72 Fed. Reg. 37569 (July 10, 2007).
---------------------------------------------------------------------------
    Of the laws that might be applied to the abuses in the market, the 
primary one within the FTC scope of authority was section 45 of the FTC 
Act, the Federal UDAP. Though the FTC has authority to enforce the 
Truth in Lending Act and the Equal Credit Opportunity Act, among 
others, the nature of the recent abuses were such that its UDAP 
authority was the primary weapon available to it. However, the FTC's 
ability to wield that weapon is governed by rules of engagement which 
make it difficult to prevent abuses.
C. Prophylactic vs. Retrospective Regulation: Prevention vs. Law 
        Enforcement
    Regulation can be forward looking--preventative, or it can be 
retrospective. They can set the standards to be met, and exercise 
oversight to continually monitor the market to assure compliance. Or it 
can be retrospective--an investigation begins only after there is 
reason to believe that violations have occurred, and prosecution 
follows.
    Preventive regulation comes in two forms: rule-making and routine 
oversight, that is, regular, recurring monitoring for compliance with 
the ground rules. The law-enforcement model--the one available to the 
FTC, is retrospective. By definition, it has preventive value only to 
the extent that the fear of prosecution deters potential violators. In 
assessing the FTC's performance, it is useful to compare its capacity 
for preventive regulatory action with that of financial regulators.
1. Rule-making: The FTC's ``Mag-Moss'' Albatross
    The FTC has rule-making authority to define ``unfair or deceptive 
acts and practices'' in commerce generally: it is a ``generalist'' with 
a scope that encompasses the practices for all of American's 
businesses--except those that are explicitly entrusted to another 
agency, such as federally chartered depository institutions. Federal 
UDAP rule-making authority for federally chartered depository 
institutions is given to the Federal Reserve (for banks), the OTS (for 
thrifts) and NCUA (for credit unions.) \27\ If the FTC promulgates a 
relevant UDAP rule, such as one which deals with consumer credit, then 
the Federal banking agencies are mandated to enact ``me-too'' rules, 
unless they determine it is not ``unfair or deceptive'' when a 
depository institution does it, or when the FRB deems it would 
interfere with monetary and payment system functions.
---------------------------------------------------------------------------
    \27\ 15 U.S.C.  57a(f).
---------------------------------------------------------------------------
    The FTC has promulgated some UDAP rules which have been very 
important in making the consumer finance marketplace fairer and more 
honest. Of particular importance is the ``preservation of claims and 
defenses rule,'' \28\ which assures that lenders that finance merchants 
can't separate the consumer's obligation to pay from the seller's 
obligation to comply with the law and contract.
---------------------------------------------------------------------------
    \28\ 16 C.F.R.  433, effective 1975.
---------------------------------------------------------------------------
    Unfortunately, Congress in 1975 enacted a special rule-making 
procedure which the FTC must use to promulgate rules defining what 
``unfair and deceptive practices'' are. This so-called ``Magnuson-
Moss'' or ``Mag-Moss'' rule-making is much more cumbersome, lengthy, 
and expensive, than the standard agency ``notice-and-comment'' rule-
making procedure prescribed by the Administrative Procedures Act. Just 
how much of an albatross this ``Mag-Moss'' rule-making procedure has 
been for FTC's UDAP rule-making is evident from its experience with the 
Credit Practices Rule.
    It was standard practice in consumer finance contracts to use 
boiler plate language in adhesion contracts that let the creditors 
engage in harsh collection tactics--waivers of exemptions even when the 
credit did not finance the acquisition of the exempt goods, or taking 
wage assignments. The proposal began internal development in the early 
1970s, and the proposed rule was published in 1975. As it happened, 
this was my first year as a practicing lawyer. Under the Mag-Moss rule-
making, industry has an opportunity to turn rule-making into a quasi-
legislative process, complete with hearings and the right to cross-
examine. My own first foray into the national scene of consumer law was 
to testify at one of the regional hearings the FTC held on the 
proposal, in October, 1977, where I was questioned by industry 
representatives. Fat volumes were published with the report from the 
hearing and recommendations over the next few years--two, if memory 
serves. The final rule was published in 1984, to be effective in 1985. 
There was a legal challenge to the rule from the industry--under Mag-
Moss, there are even special rules for judicial review of these rules. 
Finally, some 10 years after it was first proposed, the U.S. Court of 
Appeals for the DC Circuit upheld the rule and it became effective.\29\
---------------------------------------------------------------------------
    \29\ American Financial Serv. Assoc. v. FTC, 767 F.2d 957 (1985), 
cert den. (1986).
---------------------------------------------------------------------------
    During the process for the ``credit practices rule,'' I went from a 
totally green new practitioner to a consumer specialist with a decade's 
experience. Clearly, Mag-Moss' rule-making procedure is not a recipe 
for a nimble regulatory response to rapidly evolving dysfunctions in 
the marketplace.
2. Oversight--Routine Monitoring
    Another way an agency can get ahead of the curve to prevent abuses 
or stop them before they get out of hand is through the exercise of 
oversight authority. The distinction between the regulatory authority 
over depository lenders and non-depository lenders is particularly 
stark here, because so much of the root failure here--the collapse of 
underwriting standards--occurred in the ``back offices.'' Unlike 
earlier trends in predatory lending--insurance packing and ``equity-
stripping'' which was visible on the face of the consumers' loan 
documents, failure of underwriting is almost asymptomatic until the 
failure starts showing up in performance. Asymptomatic, that is, unless 
it is happens in depository institutions, where regulators routinely 
examine for ``safety and soundness.''
    To argue that pushing inappropriate loans on borrowers, or failing 
to underwrite, fell on the ``illegal'' side of the UDAP law, or in a 
grey area is one issue the FTC had to resolve for itself, but clearly 
financial regulators can do so. Because depository institutions hold 
depositors money, and because those deposits are generally insured by 
the FDIC, ``safety and soundness'' oversight is the core mission of 
financial regulators. Financial regulators therefore have routine 
access through their examination authority. Whether the financial 
regulators paid enough attention to both the origination and investment 
activities of their institutions is a question for another day and 
another committee,\30\ but as to today's question--the FTC, by 
contrast, does not have this clear ``safety and soundness'' authority.
---------------------------------------------------------------------------
    \30\ Arguments that ``non-bank'' originators were primarily 
responsible for the shaky practices ignore the extent to which their 
practices were driven by the ``back-end demand'' we described earlier. 
And certainly depository institutions were a part of that aspect, as 
the losses and write-downs taken by major banks indicate. See, e.g., 
Todd Davenport, OCC: Banks Lost $10B on 4Q Trading, Am. Banker (April 
3, 2008). Additionally, some of the highly questionable practices 
concerning non-traditional loans have come from depositories, see, 
e.g., Andrews v. Chevy Chase Bank, 240 F.R.D. 612 (E.D. Wis. 2007), 
app. pending.
---------------------------------------------------------------------------
    In sum, the FTC was not the best equipped agency to engage in 
prevention. Its UDAP rule-making does not give it the flexibility and 
nimbleness necessary to response to fast-moving abuses in the 
marketplace, and it can only act once evidence of a problem surfaces 
outside the internal walls of the lender, such as from a whistleblower, 
or an accumulation of complaints. Its preventative capacity, then, is 
all tied up in whether its enforcement is sufficiently vigorous to act 
as a deterrent.
3. Law Enforcement--Prosecutions and Deterrence
    Earlier in this testimony, I've intimated that the nature of the 
predominant abuses in the subprime market have shifted over the past 
decade. The root causes of the most recent crisis we've identified as a 
massive failure of underwriting and ``suitability'' (for want of a 
better word to describe appropriately matching product and borrower).
    Before that, the visible abuses were the ``packing, stripping and 
flipping'' model. The combination of state laws, the FRB's amendment to 
add credit insurance premiums to the list of HOEPA's trigger fees, the 
FTC's enforcement action against Associates and the states' action 
against Household in fact did send strong deterrent messages to the 
industry.
    Unfortunately, the message received by the industry was--``don't 
engage in those particular abuses.'' The shift in the kinds of abusive 
practices was even more problematic, as it turned out. As to the new 
generation of problem practices, one might offer an explanation for the 
FTC's caution, if not a justification. The FTC is a ``generalist'' 
agency, whose expertise is in general unfair and deceptive business 
practices and fair competition. The central abuses of the past few 
years--underwriting and suitability--might have seemed more within the 
purview of ``specialist'' financial regulators. Further, absent 
misrepresentations, those abuses may more properly fall within the 
``unfairness'' rubric. So, while deceptive sales representations are 
clearly covered by ``deception,'' for an agency that seems 
uncomfortable in enforcing its unfairness jurisdiction in any case, it 
is easy to explain an institutional caution about attacking the root 
abuses with its UDAP authority.
    That is not to say that such caution was necessary. Indeed, the 
states' action against Ameriquest, number one among subprime 
originators for 3 years before the states case was completed and 
publicized,\31\ was an example of the states using the parallel state 
UDAP authority to reach this most recent generation of abusive 
practices. Even more on point, the Massachusetts Attorney General posed 
the question squarely, by filing a lawsuit charging that Fremont 
Investment & Loan's practices were such as to make their loans 
structurally unfair, in violation of the Massachusetts UDAP 
statute.\32\
---------------------------------------------------------------------------
    \31\ After the 2002 enforcement actions against top originators 
Associates (purchased by Citigroup in 2000) and Household (purchased by 
HSBC in 2002), Ameriquest shot to the top in 2003, where it stayed 
until 2005. It alone held nearly 16 percent of the market share in 
2004.
    \32\ Commonwealth v. Freemont Investment & Loan, No. 07-4373-BLS 
(Suffolk Cty. Super Ct.), prelim inj. Granted Feb. 25, 2008.
---------------------------------------------------------------------------
III. Necessary Preconditions for Effective Regulation
    For any public regulator to be effective in their role as watchdogs 
for the public, they require several things:

   Tools. They need adequate laws, and the authority to enforce 
        those laws. The UDAP law was the most relevant tool. An 
        aggressive Commission could have done more, but then again, 
        Congress could have provided them both more targeted tools, and 
        more encouragement to take on this industry.

   Resources. The FTC is the default agency charged with 
        policing most of the market: everyone not specifically assigned 
        elsewhere is under the FTC's watch, from the major mortgage 
        loan servicers and originators to a mom-and-pop payday store to 
        telemarketing fraudsters to identity theft to purveyors of 
        phony health products. Resources are obviously a problem. But 
        even looking just at this one slice of American commerce, when 
        the business standards of a $600 billion industry fall so far 
        that bad practices are the norm, not the exception, public 
        enforcement resources will be insufficient.

   Expertise. At the Federal level, the FTC is the agency with 
        expertise in unfair and deceptive acts and practices. Financial 
        regulators are the agencies with the expertise in the 
        fundamentals of banking and lending.\33\ The SEC is the agency 
        with expertise in the secondary market. This crisis implicated 
        all of them. Though the Federal financial agencies coordinated 
        responses, such as the joint guidances, perhaps fragmented 
        oversight kept anyone from looking at the whole picture until 
        it was too late.
---------------------------------------------------------------------------
    \33\ It took the OCC 25 years to use its UDAP authority at all, see 
Julie L. Williams and Michael S. Byslma, On the Same Page: Federal Bank 
Agency Enforcement of the FTC Act to Attack Unfair and Deceptive Acts 
and Practices By Banks, 58 Bus. Lawyer 1243 (2003).

   Undivided loyalty to the public good. The FTC is funded 
        primarily by appropriations, and is answerable to the 
        taxpayers. By contrast, some of the Federal financial 
        regulators are funded by the entities they regulate, raising 
        the prospect of ``regulatory capture.'' To make matters worse, 
        depositories can choose their regulator--they can choose 
        between state and Federal regulators, and choose among Federal 
        regulators, raising the prospect of ``charter competition,'' as 
        regulators may be unduly soft on their own to capture their own 
        ``market share.'' The FTC, therefore, has no inherent conflict 
        of interest.
IV. The FTC's Enforcement Record on Predatory Lending
    As of last September, the FTC had brought 21 actions relating to 
mortgage lending.\34\ It includes actions against some of the major 
subprime lenders of their day: Associates, First Alliance (in which it 
cooperated with state enforcement), Delta Funding (also in cooperation 
with state enforcement), and a servicing case against one of the 
biggest--and worst--subprime servicers (Fairbanks.) The Associates case 
began as a broad-based challenge to a wide array of abuses, though the 
settlement focused just on one of them.
---------------------------------------------------------------------------
    \34\ The actions are described in the Commission's comments to the 
Federal Reserve Board Home Equity Lending Market, Federal Reserve 
Docket OP-1253 (Federal Trade Commission Letter, Sept. 14, 2006).
---------------------------------------------------------------------------
    However, as to the core abuses that are more directly responsible 
for today's crisis, there is less activity--perhaps for the reasons we 
have described. Though it describes actions relating to deception and 
misrepresentation against some originators, including brokers, it does 
not appear to have squarely addressed the present abuses as violations 
of the UDAP law in and of themselves. The state of Massachusetts, 
instead, has taken the lead.
    Some of its targets illustrate a persistent choice facing public 
enforcement officials with limited resources: how to prioritize between 
local actors doing greater harm to fewer people, and national actors 
doing somewhat less harm, but to many more people. Allocating resources 
to the former can be a rational choice. But in the meantime, what 
appears to be a ``lesser harm'' but one visited on far more people, can 
get out of hand. As we are seeing now, the consequences to the economy 
as a whole can be grave indeed.
    In sum, the FTC has done more enforcement than other Federal 
regulators, despite having less capacity to spot problems early one. 
However, it could have done more to get to the root causes of today's 
problem.
V. Recommendations
    We appreciate the efforts of Senators Dorgan and Inouye in S. 2831, 
the proposal to reauthorize the FTC. There are several provisions that 
we especially welcome:

        Changes to the Mag-Moss Rule-making. We particularly welcome 
        Section 9 of S. 2831, which mandates the use of the APA rule-
        making, rather than Mag-Moss rule-making regarding subprime and 
        non-traditional laws. We recommend, however, that the APA rule-
        making be used for all consumer protection rules. Section 8 of 
        the bill, gives the Commission the authority to waive Mag-Moss 
        rule-making for any consumer protection rule, but does not 
        mandate the change as it does for mortgage rules. We believe 
        that the current crisis demonstrates that consumer protection 
        regulation is key to protecting an efficient economy--
        protecting it from wild swings of excess. Congress could send a 
        strong message to the Commission that consumer protection, far 
        from being a ``drag'' on commerce, is essential to a fair and 
        efficient economy, and that the Commission should be proactive.

        Cooperative rule-making with bank regulatory agencies. S. 2831 
        would give the FTC concurrent rule-making with Federal bank 
        regulatory agencies, and requires consultation and coordination 
        ``to the extent practicable.'' We have recommended elsewhere 
        independent and concurrent authority as a result of concerns 
        about regulatory capture. We recognize that there are limits to 
        this committee's jurisidiction, and we welcome the steps taken 
        in S. 2831. We would hope, however, that Congress will make 
        further refinements, to assure that adequate consumer 
        protection rules apply to all lenders. If the bank regulatory 
        agencies do not act when they should, we believe that the FTC 
        should have independent jurisdiction to do so, with due regard 
        for the need for appropriate safety and soundness adjustments 
        for depository institutions.

        State Attorneys General's authority to enforce Federal UDAP 
        law. Giving state attorneys general authority to enforce 
        Federal UDAP law and other laws within the FTC's enforcement 
        authority with respect to subprime or nontraditional loan is 
        welcome. Adding fifty ``cops on the beat'' to supplement the 
        FTC's limited resources will be of immeasurable help. While 
        many state UDAP laws provided state AGs with jurisdiction over 
        lending practices, that is not universally the case. For 
        example, until recently, Ohio's UDAP statute exempted mortgage 
        lenders from coverage. Neither Ohio's attorney general nor its 
        citizens had that tool available to them to challenge abuses in 
        the subprime market. Undoubtedly, that was a contributing 
        factor to the serious foreclosure crisis in Ohio.

    As we understand the proposed provision that prevents a state AG 
from exercising this new authority when the FTC has instituted an 
action,\35\ the preemption would not preclude the AG from exercising 
any investigation and enforcement authority of state or Federal laws 
that it has pursuant to its own state law. We hope that this is made 
abundantly clear.
---------------------------------------------------------------------------
    \35\ S. 2831, Section 11(f).
---------------------------------------------------------------------------
    Aiding and abetting liability. In today's complex marketplace, few 
transactions involve only a consumer and seller of goods or services. 
Clarifying aiding and abetting liability will help assure that all 
those involved can be reached by the law.
    The bill should include a private enforcement right for consumers. 
There is one change not present in S. 2831 which we continue to 
recommend. Congress should provide a private right of action to enable 
consumers to enforce their own right to be free of unfair and deceptive 
acts and practices, for the FTC's resources will never be adequate to 
police the entire market, and public enforcement will never move fast-
enough to prevent the foreclosures that are occurring--homeowner by 
homeowner--all over the country.
    Thank you again for providing me with the opportunity to testify 
today on this important matter. I'm happy to answer any questions you 
might have.

    Senator Dorgan. Thank you very much.
    Mr. Ira Rheingold is Executive Director of the National 
Association of Consumer Advocates.
    Mr. Rheingold, you may proceed.

  STATEMENT OF IRA J. RHEINGOLD, EXECUTIVE DIRECTOR, NATIONAL 
               ASSOCIATION OF CONSUMER ADVOCATES

    Mr. Rheingold. Thank you, Mr. Chairman. Like Ms. Keest, I'm 
going to adapt my remarks, and cut out a lot of what I was 
going to say, because it's clear that you understand exactly 
what's been happening in this mortgage marketplace. And I'm 
going to talk a little bit about what we saw here today, what's 
wrong with our marketplace, and what some of the solutions, 
maybe, we need, going forward.
    I should offer what my perspective is, because I have been 
working on this issue for more than a dozen years. I was a 
legal assistance attorney in Chicago, running a home 
foreclosure prevention project in the late-1990s, and did that 
for a number of years.
    I now run a project called the Institute for Foreclosure 
Legal Assistance, where we are funding attorneys from around 
this country, to fight against some of the foreclosure problems 
that we're seeing.
    I talk--on a daily basis--to the attorneys on the front 
line, trying to stop foreclosures. I've litigated cases against 
all of the mortgage lenders, way back in the 1990s. The 
practices that we're seeing today existed in a lot of low-
income communities across urban and rural landscapes in this 
country for a long time.
    What's happened is, it has spread. It has spread to the 
entire marketplace. And I think it's important, as I speak, I 
hear the voices of all of the consumers I've talked to over the 
years--because I've looked at thousands of documents, and 
talked to thousands of consumers. And I hear the conversations 
I've had and the interviews I've done with them.
    And I think what you got at--but what most people don't 
understand--is how screwed up the mortgage marketplace really 
is. It's not our parent's marketplace. It's not our 
grandparent's marketplace. How many consumers have come to me 
and said, ``But Ira, why would they give me a loan that I can't 
afford? Don't they make money when I pay my mortgage?'' And the 
fact is, they don't.
    And when we see that type of advertising out there, you 
would think, that loan could not work. Why would a mortgage 
broker advertise a 1.9 percent mortgage, when in fact, they're 
not going to make any money, because it's going to expect--the 
payments aren't going to work for them? Well, the payments do 
work for them, because the system is broken, and the incentives 
are completely perverse.
    And what happened in the last number of years really is a 
product of incredible greed--just incredible greed--and a 
marketplace that was specifically not regulated. The FTC shares 
some of the blame, but the real blame goes to the Federal 
Reserve and the Office of the Comptroller of the Currency--I 
cannot echo Attorney General Blumenthal's remarks any further--
they are a culprit in this beyond all imaginations.
    What happened was, is that the Wall Street--it reminds me 
of the movie, Little Shop of Horrors. You had this plant, 
``Feed me, Seymour, feed me, Seymour.'' And, sort of, 
everywhere it turned, it wanted more food, more loans, and more 
product--regardless of whether it was good for the plant, and 
it was regardless of whether it was the homeowners that were 
being fed.
    And what happened in the marketplace today, was that 
homeowners were not consumers. There was no transaction that 
really existed between a mortgage lender and a homeowner. The 
homeowner was the product. The homeowner was a commodity that 
was being bought and sold to Wall Street, who could then slice 
and dice them, and then sell them. And unless we understand 
that fundamental problem in the marketplace that consumers were 
products to be sold, as opposed to, consumers who were going to 
get a fair transaction, we're not going to be able to solve 
this problem.
    One point that you made, I think, is so very important, is 
that there are good players in the mortgage marketplace. Not as 
many as there used to be. And I think part of it is what we saw 
here today.
    I look at appraisal fraud as one of the, sort of, 
systematic of the entire problem. Many appraisers are good 
people, and wanted to do the right thing, and price things 
appropriately. Well, guess what? If they priced things 
appropriately, they got no business. And so, they had to engage 
in the same practice--because the market encouraged them to do 
that.
    It's the same thing. That small corner bank, you know, in 
Bismarck, who's offering a loan at 6 percent and 6 and a half 
percent to their neighbor, ``Come in, we'll give you a loan, 
it's fair, it's affordable, it treats you right, I can make a 
profit on it.'' Well, how do they compete against a company 
who's offering a 2 percent loan? They can't compete, and they 
fail.
    So, the regulation that we need--we need the market economy 
to work appropriately. And the market economy can only work 
appropriately, and the good actors can only survive in this 
marketplace if we have proper regulation. And we haven't had 
it, and we need it desperately.
    The Federal Trade Commission is the one place in our 
Federal Government--the States have a key role--but the one 
place in our Federal Government that has consumer protection as 
part of their mission. And they need to be expanded, and they 
need to be given more power and more ability to regulate this 
market.
    Thank you.
    [The prepared statement of Mr. Rheingold follows:]

      Prepared Statement of Ira J. Rheingold, Executive Director, 
               National Association of Consumer Advocates
    Mr. Chairman, Ranking Member DeMint, and Members of the 
Subcommittee, thank you for inviting me to testify before you today 
about the breakdown of the American home mortgage market and its impact 
on our Nation's homeowners and communities.
    My name is Ira Rheingold, and I have been a public interest 
attorney for my entire adult career. I have worked in some of our 
Nation's poorest urban and rural communities and I've witnessed the 
incredible resilience and optimism that mark the great strength of our 
Nation's people. I have also seen the incredible fear and despair of 
Americans faced with the loss of their long-term home and its 
devastating impact on their families and on their communities.
    In the mid-1990s through 2001, I lived and worked in Chicago, where 
I ran the Legal Assistance Foundation's Homeownership Preservation 
Project. During those years, I watched (and worked against) the unfair 
and deceptive practices of all the actors in the mortgage industry, 
that slowly, but inexorably stripped away the wealth of that city's low 
and moderate income minority communities. Today, I am the Executive 
Director of the National Association of Consumer Advocates (NACA), an 
organization of attorneys and other advocates who represent those very 
same consumers and communities all across this country. At NACA, I also 
manage the Institute for Foreclosure Legal Assistance, a project that 
provides funding and training to non-profit legal organizations that 
help homeowners negotiate alternatives to foreclosure. In my current 
roles, I speak to and assist our Nation's consumer advocates who, on a 
daily basis, meet with and represent the consumers victimized by bad 
lending practices and see the very real-life consequences of an out of 
control mortgage lending marketplace. What I see from them are the same 
unfair and deceptive practices that I personally witnessed in Chicago, 
except now, those behaviors have moved across all of our Nation's 
communities. What I hear from their clients is the same fear and 
despair that I heard all too often on the streets of Chicago. At 
today's hearing, I hope that you will hear their voices through me, and 
that you will begin to see what we all need to do to build a rational, 
robust and well-regulated mortgage market that actually serves the 
needs and demands of consumers and communities across our Nation.
Introduction
    To understand what it has been like to be a consumer attempting to 
buy their first home, a homeowner attempting to refinance their home 
for necessary home repairs or to help pay for their children's 
education or to lower their payment so they could remain in their life-
long home on a fixed income, we must first understand how the mortgage 
market has been working. The mortgage market of the late 1990s and 
early 21st century, in no way resembled what most of us thought we 
understood about buying a home or getting a loan. I have talked to 
literally thousands of consumers, who, until recently, believed (or 
were led to believe) that the mortgage entity that originated their 
loan, would only profit when they timely made their monthly mortgage 
payment. While this may have been the case when our parents or even our 
grandparents bought their homes, this has not remotely been the truth 
for more than the past dozen years. Instead, because of the growth of 
securitization as the tool to fund both prime and subprime mortgages, 
with all its confusing layers, multiple actors and often perverse 
incentives, the nature of the consumer-mortgage originator relationship 
(unbeknownst to the consumer) had fundamentally changed. These changed 
relationships and backward incentives have led us to the precipice that 
we stand at today.
Securitization and the Consumer
    For my purpose today, I'm going to keep this very simple.\1\ At its 
most basic level, securitization is a process, which involves the 
pooling and repackaging of cash-flow producing financial assets into 
securities that are then sold to investors. As securitization grew to 
be the dominant way that mortgage loans were funded, the role and 
purpose of mortgage originators (and all the other actors in the 
mortgage market) fundamentally changed. No longer were mortgage 
originators, ``lenders'' who expected (or really cared) about mortgage 
repayments. Instead, these originators became manufacturers of a 
commodity, the American mortgage borrower (unfortunately, most 
homeowners did not and don't understand their role in this 
transaction). This commodity was then sold to the capital markets, 
which in turn, chopped, spindled and mutated this new commodity into 
something that could be purchased by investors from around the world.
---------------------------------------------------------------------------
    \1\ For a much greater detailed discussion, please see Peterson, 
Christopher Lewis, ``Predatory Structured Finance''. Cardozo Law 
Review, Vol. 28, No. 5, 2007.
---------------------------------------------------------------------------
    While advocates of securitization have argued that the process 
produced additional capital and greater access to homeownership for 
some consumers, they fail to recognize the fundamental shift and 
potential dangers it created in the consumer marketplace. No longer was 
the borrower's best interest (or even their ability to repay the loan) 
part of the mortgage transaction calculation. Instead, the real 
transaction was between the mortgage originator and the investment 
bank, which not only set the standards for the borrower/product they 
wanted to buy (and then turn around and sell), but also provided the 
money for the originators' loans.
    Under these set of circumstances, what American consumers needed 
was the vigorous enforcement of existing consumer protections as well a 
new set of consumer protections to correspond with the very different 
mortgage world that had now been created. Unfortunately, what the 
Federal Government gave us was the exact opposite, not only diminishing 
its regulation and enforcement of this market, but providing 
interference and protection (under the guise of preemption) for 
mortgage market players when states, recognizing the fundamental flaws 
in the system, attempted to protect their own citizens.
The Mortgage Market, Unfairness, Deception and the Consumer
    Understanding what mortgage originators (and all of the actors in 
the process) were attempting to do, i.e., create commodities to sell, 
when they made a loan to consumer helps us understand all the unfair 
and deceptive practices that have flourished in the mortgage 
marketplace over the last decade. I'd like to talk about some of those 
practices now, and explain why they were not caused by a few rogue 
actors, but were instead a product of the fundamentally flawed 
marketplace that securitization created and the Federal Government 
passively permitted to flourish.
A. The Predatory Pitch
    As the demand for product to sell to Wall Street investment banks 
grew (ultimately exponentially), the pitch to vulnerable homeowners 
(and prospective homeowners) became more targeted and more personal. 
Armed with financial and personal data and carefully conducted 
research, mortgage brokers and lenders (and their ``bird dogs'') used 
TV and radio advertising, mailings, telephone calls, and even home 
visits to reel in consumers who otherwise had no real reason to get a 
new home mortgage. With promises too good to be true (``refinance your 
home, fix your roof and lower your monthly payment'') consumers were 
later bait and switched to loans far more expensive than they thought 
they were promised. Because the mortgage ``originators'' received their 
full compensation when they manufactured the ``product/borrower'' to 
sell onward and upward, there was little concern whether the loan was 
sustainable. As many of us knew, and most of us have now learned, many 
of those loans were completely unsustainable.
B. The Over-Inflated Appraisal
    In a rational world, a consumer would not want to pay (or borrow) 
more for a home than what it was worth. In the securitization created 
``bizarro'' mortgage world, an over-inflated house made perfect sense 
to the parties involved in the transaction (except for the unsuspecting 
consumer, of course, and maybe the ultimate investors left holding the 
bag). Let's look at the parties to the transaction. We have the 
mortgage originator (the broker or the lender or sometimes both) whose 
incentive is quite obvious. Simply put, the greater the house price, 
the larger the loan, the greater the fee they will receive from the 
transaction. (The same can be said for the investment bank). Sometimes 
the incentives are a little more complicated. Take for instance a 
homeowner whose existing mortgage is already 100 percent of the actual 
value of the home. If the real house value was used, no loan could be 
made, no product could be created. So the house value is increased to 
meet the loan purchasing parameters (the underwriting guidelines) set 
by the investment bank and the loan gets made and everyone is happy 
(including the ``unknowing'' investment bank who has another product to 
slice and dice and sell to someone else).
    As for the appraiser who creates the fraudulent value for the home, 
we've seen time and again why they go along with this fraud. Simply, if 
they actually want to stay in business and continuing doing appraisals, 
they'll create the value the mortgage originator wants.
    What we have left, is a consumer who has a mortgage that is too 
often worth more than the real value of their home.
C. Yield Spread Premiums and Prepayment Penalties
    Unfortunately (for me), I have been around long enough to hear 
multiple and ever-shifting explanations as to why yield-spread premiums 
(ysps) are an acceptable practice and why they can work for consumers. 
I can safely state, that none of those arguments are true in the 
mortgage marketplace that actually exists in our country. I do however, 
fully understand why they work for every mortgage market actor except, 
again--of course--for the consumer.
    Let's see. Mortgage brokers get paid more if they produce mortgages 
with an interest rate higher than what a borrower qualifies for (that, 
in short is a ``ysp''). Unless a mortgage broker actual lives up to 
their off-stated (but never written) commitment to serve in the best 
interest of their consumer client, their incentive--a bigger paycheck--
to produce a loan with a ysp is clear. Same with the mortgage lender 
and investment bank, who now have a loan with a bigger interest rate to 
sell.
    To make matters worse, almost any loan with a ysp is sure to have a 
prepayment penalty. In English, a prepayment penalty is a charge to a 
consumer who repays their loan ``too soon,'' typically during the first 
few years of the loan's existence. What makes this product so cynical, 
and so closely intertwined with a ysp, is that the very existence of 
the ysp means that the consumer has an interest rate that is higher 
than they actually qualify for. Therefore, if the consumer acts 
rationally and shops for a lower interest and enters into a new 
mortgage, they will be punished with a steep prepayment penalty.
    In all my years talking, interviewing, and representing consumers, 
I have yet to meet that one consumer who actually understood that they 
were charged a ysp or that the ysp led to a higher interest rate than 
they were otherwise qualified for. I simply can't imagine how this 
practice is not deceptive or just plain unfair. Yet none of our 
Nation's Federal regulators have ever really done anything about it 
(except to find ways to allow its widespread use).
D. The Disappearance of Escrow Accounts
    Because the borrower has become the product to be created and sold, 
mortgage originators have become experts at getting borrowers to take 
out loans that make little or no economic sense. A classic and 
pervasive practice in the mortgage market is the ``promise'' that a new 
loan will allow the borrower to pay a lower monthly mortgage payment. 
What the borrower is not told is that their new payment does not 
include their taxes and insurance (for escrow), so that their lower 
payment really is just a mathematical fiction (otherwise known as a 
lie). While the Federal Reserve now finally appears ready to take some 
action on this practice, it is ridiculous that this blatantly unfair 
and deceptive practice (which had been standard operating practice in 
the mortgage marketplace for over a decade), had never been outlawed or 
prosecuted by our Federal regulators.
E. Reckless Underwriting and the Rise of Community Endangering Loan 
        Products
    In place of an efficient market that provides real consumer choice 
and rewards consumers for smart credit decisions and rational 
aspirations, we have seen, in the past few years, a mortgage market 
that has recklessly created and sold ridiculously risky mortgage 
products that have excessively benefited all of the market players at 
the expense of the American consumer and our Nation's communities. In a 
rational marketplace these loans make no sense. Looking at them however 
through the lens of our fundamentally flawed and unregulated mortgage 
marketplace, they unfortunately made perfect sense (at least at the 
time they were made).
    Simply put, in order to meet the product demand of voracious Wall 
Street investors, originators ignored basic, common-sense underwriting 
principles in order to boost their loan volume. No doc or ``stated-
income'' loans were great because loan originators made more money (it 
was less work and they could charge borrowers a higher interest rate) 
and they fed the beast that wanted high-risk products that would 
produce a higher return for investors. Underwriting adjustable rate 
mortgages only at the initial interest rate, without considering how 
homeowners would be able to pay their loans once the payment adjusted 
upward, was also quite profitable for mortgage originators and the 
investment banks that were fed by them. These fundamentally 
unsustainable loan products, in all their derivations (including 2-28s 
and option ARMs) were destined for failure and failed they have and 
we're all now living with the consequences.
    But it didn't have to be this way. Many of us saw the current 
disaster coming, but our voices were ignored. This administration, its 
Federal regulators and this Congress could have chosen to protect 
consumers, but instead it sat on the sidelines as our mortgage market 
came to a predictable crash. My only hope is that we have all learned 
the right lessons from this current and ongoing crisis, and we move 
together to build a well-regulated mortgage market that meets the needs 
of all our Nation's homeowners.

    Senator Dorgan. Mr. Rheingold, thank you very much.
    Finally, we will hear from Mr. Bill Himpler, Executive Vice 
President of Federal Affairs, the American Financial Services 
Association.
    Mr. Himpler, welcome.

 STATEMENT OF BILL HIMPLER, EXECUTIVE VICE PRESIDENT, FEDERAL 
             AFFAIRS, AMERICAN FINANCIAL SERVICES 
                          ASSOCIATION

    Mr. Himpler. Thank you, Mr. Chairman. I appreciate you 
having this important hearing today, and giving AFSA the 
opportunity to testify. While the scope of mortgage-related 
issues in the current environment is immense, my testimony will 
focus on the FTC's role in helping to restore confidence in 
housing in the mortgage sectors. Let me state at the outset, 
that AFSA member companies share your concern--and all of my 
fellow panelists' concerns--about the growing number of 
homeowners who are having difficulty making their mortgage 
payments. We ask the Subcommittee to consider four key points.
    First, the voluntary nature of the partnership efforts 
between lenders and distressed homeowners is very important.
    Second, to maintain liquidity, policymakers and regulators 
must avoid imposing new mandates and policies for mortgage 
lending that would create uncertainty for investors.
    Third, enhancing consumer understanding of mortgage 
products through educational programs is crucial, and the FTC 
has been an indispensable partner in this.
    And finally, limited Federal resources should be focused to 
encourage at-risk borrowers to contact their lenders to learn 
what assistant is available to them.
    While relief for borrowers whose adjustable rate mortgages 
are about to reset, cannot come fast enough, the right way to 
proceed, and provide relief is through outreach campaigns that 
are currently underway.
    Our Association is a founding partner of the HOPE NOW 
Alliance, which has provided loan workouts, for approximately 
1.4 million homeowners since July of last year. During the 
first quarter of this year, loan modifications represented 44 
percent of all subprime workouts, which is double the rate of 
last year.
    Furthermore, the Federal financial regulators have provided 
great consumer protection in the mortgage arena. The regulators 
have strongly encouraged lenders to limit the use of balloon 
terms, and pre-payment penalties on adjustable rate mortgage 
products, and called for increased use of escrow accounts in 
relation to these products.
    In addition to cutting rates, the Federal Reserve is 
expected to publish a final rule in the next 2 months, 
exercising its authority to ban unfair and deceptive practices 
by mortgage lenders. HUD has proposed a significant re-write of 
its RESPA regulations. What's more, States have become more and 
more aware of the need for more stringent regulation, 
particularly with respect to mortgage brokers. Thus, whether at 
the Federal level or at the State level, government is acting 
to address problematic conduct.
    Let me turn briefly to the FTC. AFSA believes that the FTC 
has been successful in enhancing consumer protection, and has 
addressed the subprime mortgage crisis in at least two ways.
    The first, by using its enforcement authority, under the 
FTC Act, to pursue bad actors in the subprime mortgage 
industry. For example, the FTC successfully negotiated a $40 
million settlement with Select Portfolio Services, after the 
Agency alleged that Select Portfolio engaged in unfair and 
deceptive practices in servicing subprime mortgage loans.
    The FTC also entered into a $65 million settlement with 
First Alliance Mortgage, for making deceptive mortgage loans.
    The second way in which the FTC has helped to alleviate the 
mortgage crisis, is by issuing guidance, and submitting public 
comments to the Federal banking agencies. In June of last year, 
the FTC released a Staff Report on Improving Consumer Mortgage 
Disclosures. The report concluded that improved disclosures 
would help consumers better understand their loan terms and 
costs, and that consumer testing is an imperative part of 
developing effective disclosures.
    AFSA believes that the FTC has been effective in enhancing 
consumer understanding of the mortgage process, and protecting 
the public against bad actors. However, we also believe that 
some of the provisions in the reauthorization act will have the 
unintended consequence of reducing investor confidence, which 
will ultimately make credit less affordable for consumers.
    In particular, Section 5 would expand the Commission's 
authority to seek civil penalties for violations of the FTC 
Act, without any prior rule or order by an agency. As a result, 
a defendant could face civil penalties of as much as $11,000 
per violation, based on an act or practice that is adjudicated 
to be unfair or deceptive for the first time against that very 
defendant, in that very lawsuit.
    The bill would eliminate the current requirement that the 
FTC involve of the Department of Justice when the Commission 
seeks to enforce violations of the FTC's rules, or cease and 
desist orders in U.S. District Court.
    However, if a company were to face the prospect of 
substantial penalties on an act or practice that's never 
previously been determined by any court or agency to be unfair 
or deceptive, then review an input by DOJ, would ensure that 
the act or practice warranted prosecution for civil penalties 
rather than less draconian relief.
    Section 8 would allow the agency--by a majority vote of the 
full Commission--to promulgate rules on any consumer 
protections matter, under expedited rules of the Administrative 
Procedure Act, rather than under the procedures of the 
longstanding Magnuson-Moss Act. The expedited rulemaking 
authority could lead to a serious rush to judgment, allowing 
the FTC to create major industry-wide regulatory changes, 
without adequate time for business input.
    Section 9 of the bill would require the FTC to promulgate 
an APA rule for subprime mortgage and non-traditional mortgage 
loans, yet provides no specificity or guidance as to the 
substance or scope of such rule. This provision is an 
abdication of the responsibilities of Congress to consider and 
enact such legislation as may be necessary and appropriate in 
these areas.
    Under Section 11, the bill would give new powers to the 
State Attorneys General, including the authority to enforce a 
violation of whatever rule the FTC would promulgate for 
subprime mortgage and non-traditional mortgage loans. 
Currently, State Attorney General enforcement of Federal law is 
limited to specific acts of Congress. Their enforcement 
actions, involving unfair and deceptive acts and practices, are 
limited to the State laws affecting the citizens of that State.
    If Congress were to give the State Attorneys General the 
authority to enforce Federal rules and statutes, this could 
result in duplicative and inconsistent laws based on the same 
conduct--in other words, we could end up with 50 different 
interpretations of the same Federal law. It is unnecessary to 
give this new power to the State Attorneys General, as they 
regularly join with the FTC in enforcement actions and 
settlements.
    While we appreciate all the Government has done so far to 
address the mortgage situation, more can be done. We need help 
in reaching as many homeowners as possible about the importance 
of contacting their lenders, if they're struggling to make 
their mortgage payment. Far too many homeowners have not taken 
this step, often because of ignorance, fear, or a combination 
of the two. Yet, the sooner these borrowers contact their 
lenders, the better their chances of finding a workable 
solution.
    Again, AFSA appreciates the opportunity to testify before 
you, Mr. Chairman, and I'd be happy to answer any questions you 
may have.
    [The prepared statement of Mr. Himpler follows:]

     Prepared Statement of Bill Himpler, Executive Vice President, 
        Federal Affairs, American Financial Services Association
    My name is Bill Himpler, and I am the Executive Vice President for 
Federal Affairs at the American Financial Services Association 
(``AFSA''). AFSA is the national trade association for the consumer 
credit industry, protecting access to credit and consumer choice. The 
association encourages and maintains ethical business practices and 
supports financial education for consumers of all ages. AFSA has 
provided services to its members for over 90 years. AFSA's 350 member 
companies include consumer and commercial finance companies, 
``captive'' auto finance companies, credit card issuers, mortgage 
lenders, industrial banks, and other financial service firms that lend 
to consumers and small businesses.
    AFSA appreciates the opportunity to provide testimony to the 
Members of the Subcommittee on the state of the mortgage market, 
efforts by industry to partner with government agencies and consumer 
counselors to provide mortgage security to at-risk borrowers, and our 
members' perspective on policy recommendations currently before 
Congress. As the Members of the Subcommittee know, the scope of 
mortgage-related issues in the current environment is immense. Today, 
however, I will focus my testimony on the role that the Federal Trade 
Commission has played and can continue to play in helping to restore 
confidence in the housing and mortgage sectors.
    Let me state at the outset that AFSA members share Congress' 
concern about the growing number of homeowners who are having 
difficulty making their mortgage payments. Not only do foreclosures 
affect individual borrowers and their communities, they also affect 
mortgage lenders, which lose approximately $40,000 per foreclosure.
    AFSA asks the Subcommittee to consider several key points. First, I 
would like to emphasize the importance of the voluntary nature of the 
partnership efforts between lenders and consumers who face financial 
difficulty but want to stay in their homes.
    Liquidity is equally important in today's tightened credit market. 
To maintain liquidity, it is imperative that policymakers and 
regulators avoid imposing new mandates and policies for mortgage 
lending that would create uncertainty for investors.
    Enhancing consumer understanding of mortgage products through 
personal finance education programs is crucial and the FTC has been an 
indispensable partner in this effort.
    Finally, AFSA believes that limited Federal resources should be 
used to buttress public and private efforts to encourage at-risk 
borrowers to contact their lenders to learn what assistance is 
available to them.
Voluntary Foreclosure Prevention Programs
    While relief for borrowers whose adjustable rate mortgages are 
about to reset cannot come fast enough, AFSA believes the right way to 
provide this relief is through the outreach campaigns that are 
currently underway. A paper that describes ongoing foreclosure 
mitigation efforts is attached to this testimony.
    AFSA is a founding partner of the HOPE NOW Alliance that was 
launched last October at the behest of Treasury Secretary Paulson and 
HUD Secretary Jackson as a coordinated outreach program utilizing the 
resources of the lending industry and the credit counseling community. 
The HOPE NOW plan is designed to help subprime borrowers who can at 
least afford the current, starter rate on a subprime loan, but will not 
be able to make the higher payments once the interest rate goes up. 
HOPE NOW members have agreed on a set of new industry-wide standards to 
provide systematic relief to these borrowers in one of three ways: (1) 
refinancing an existing loan into a new private mortgage; (2) moving 
them into an FHA Secure loan; or (3) freezing their current interest 
rates for 5 years.
    Fourteen HOPE NOW servicers, responsible for more than 33.3 million 
home loans, or about 62 percent of both prime and subprime loans 
outstanding nationwide, reported that they provided loan workouts for 
about 1,376,000 homeowners since July 2007. Of the 502,500 prime and 
subprime loan workouts that servicers provided to homeowners during the 
first quarter of 2008, approximately 323,000 were repayment plans and 
179,500 were loan modifications. During the first quarter of 2008 loan 
modifications represented 44 percent of all subprime loan workouts, 
which is double the 2007 rate.
    In addition to HOPE NOW, six major lenders announced the launch of 
Project Lifeline earlier this month. These servicers will begin the 
program by providing a letter to seriously delinquent homeowners 
nationwide. The letter gives homeowners a simple step-by-step approach 
that, if followed, may enable them to ``pause'' their foreclosure for 
30 days while a potential loan modification is evaluated. The ultimate 
goal of this step-by-step approach is to find a solution which meets 
the individual's needs. This is different than the streamlined approach 
to loan modification announced previously. Subprime, Alt-A, and prime 
loans may qualify for this program, including second liens and home 
equity loans.
Current Federal and State Regulatory and Legislative Activity
    Furthermore, I call your attention to the activity by the Federal 
financial regulators to provide greater consumer protection in the 
mortgage arena. The regulators have provided guidance to strongly 
encourage lenders to limit the use of balloon terms and prepayment 
penalties on adjustable-rate mortgage products, and called for the 
increased use of escrows in relation to these products. In response to 
calls from Congress to address current mortgage market conditions, the 
Federal Reserve Board is expected to publish a final rule in the next 2 
months in which it will, for the first time, exercise its authority to 
ban unfair and deceptive practices by mortgage lenders. In its new 
rule, the Federal Reserve Board is also expected to use its regulatory 
authority over mortgage lenders to police the activities of mortgage 
brokers. Moreover, the Department of Housing and Urban Development has 
proposed a significant overhaul to regulations under the Real Estate 
Settlement Procedures Act with an eye toward greater consumer 
understanding of the mortgage process and clearer disclosure of 
consumer obligations associated with adjustable rate mortgages.
    Congress, as well, is considering legislation that would promote 
consumer protection in the mortgage markets, forestall future abuses 
and instill consumer confidence back into the marketplace. In addition 
to the housing stimulus package passed by the Senate earlier this month 
and being considered in the House as we speak, the House has already 
passed the Mortgage Reform and Anti-Predatory Lending Act of 2007, H.R. 
3915 and the Senate Banking Committee is poised to markup the Home 
Ownership Preservation and Protection Act of 2007, S. 2452 that will 
address the specific abuses that led us into the current crisis.
    States have also been active on both the legislative and regulatory 
fronts. States have become aware of the need for more stringent 
regulation, particularly with respect to mortgage brokers, which have 
received little attention by Federal regulators. These state 
legislative and regulatory initiatives appropriately target specific 
practices that are perceived as abusive. This type of regulation both 
puts the responsible mortgage lenders and brokers on notice of the 
practices that they must avoid and also provides direction to the 
secondary market investors who want to avoid purchasing loans from or 
investing in companies that fail to live up to clear legislative or 
regulatory mandates. The state legislation also has, for the most part, 
provided measured penalties for violations of the acts and practices 
that have been identified as inappropriate.
    Thus, whether at the Federal or the state level, we perceive 
government as appropriately addressing problematic conduct going 
forward. Legislative committees and regulatory bodies have studied the 
actions that have led to the current crisis through public hearings and 
investigations. Unacceptable acts and practices have been identified as 
such and have been appropriately prohibited or restricted. The result 
is a developing framework of Federal and state rules that provide clear 
guidance and assess appropriate penalties if one nevertheless chooses 
to engage in such activities.
Market Liquidity
    Market liquidity is the key to lenders' ability to provide 
affordable credit to consumers. When credit is tight, the interest 
rates that lenders can offer consumers rise. After the credit crisis 
last August, many borrowers with less-than-perfect credit found getting 
a mortgage loan extremely difficult. However, the Federal Reserve 
Board's recent rate cuts have improved liquidity and made credit more 
affordable. Market liquidity should continue to improve and help abate 
the current housing crisis provided that lenders and investors can be 
assured of which acts and practices are prohibited.
FTC: Effective Regulator
    The FTC has been very successful in addressing the subprime 
mortgage crisis and enhancing consumer protection under its current 
authority. The FTC has addressed this crisis in two ways: first, by 
using its enforcement authority under Section 5 of the FTC Act to 
pursue bad actors in the subprime mortgage industry, and second, by 
setting Federal policy through guidance and public comment. The FTC 
successfully negotiated a $40 million settlement with Select Portfolio 
Services (formerly known as Fairbanks Capital Corporation) in November 
2003. The FTC alleged that Select Portfolio engaged in unfair and 
deceptive practices in servicing subprime mortgage loans. Under the 
terms of the settlement, Select Portfolio agreed to pay $40 million, 
which the FTC in turn distributed to consumers as redress. The 
settlement was modified in August 2007 to provide additional 
protections to borrowers, including mandatory monthly mortgage 
statements, a five-year prohibition on marketing optional products such 
as home warranties, and refunds for foreclosure attorney fees for 
services that were not actually performed. The FTC also entered into a 
$65 million settlement with First Alliance Mortgage Company for making 
deceptive subprime mortgage loans. The FTC alleged that First Alliance 
misrepresented the existence and amount of origination fees and 
increases in interest rates and monthly payments on adjustable rate 
loans. The settlement included payment not only by First Alliance, but 
also by Brian and Sarah Chisick, the founders and owners of First 
Alliance. The FTC distributed the $65 million to nearly 20,000 affected 
borrowers. These are just two examples of successful FTC enforcement 
actions concerning subprime mortgage lending. The FTC has successfully 
pursued other subprime mortgage lenders engaged in what the FTC deemed 
to be inappropriate conduct, including Capital City Mortgage 
Corporation and Quicken Loans, Inc.
    In addition to pursuing bad actors in the subprime mortgage 
industry, the FTC has helped to alleviate the subprime mortgage crisis 
and improve mortgage lending practices by issuing guidance and 
submitting public comments to the Federal banking agencies. In June 
2007, the FTC released a Staff Report on Improving Consumer Mortgage 
Disclosures. The FTC conducted a study on the effectiveness of mortgage 
loan disclosures and found that current disclosures do not adequately 
explain mortgage loan terms and costs to consumers. The FTC concluded 
that improved mortgage loan disclosures would help consumers to better 
understand their loan terms and costs, and that consumer testing is 
imperative in developing effective disclosures. The FTC has also 
submitted public comments to the Federal banking agencies on numerous 
occasions, setting forth the FTC's position on various issues. For 
instance, on the issue of mortgage disclosures, the FTC submitted 
comments to the Federal banking agencies in response to their Proposed 
Illustrations for Consumer Information for Subprime Mortgage Lending. 
The FTC commented that consumers would benefit from a single disclosure 
that consolidates the disclosure of important features and costs of a 
mortgage loan. Additionally, based on its own mortgage disclosure 
research, the FTC encouraged the Federal banking agencies to conduct 
consumer research to ensure that the proposed disclosures would be 
effective.
    In sum, the FTC has successfully addressed and helped to curtail 
abuses in the subprime mortgage industry through its current 
enforcement authority and its role in developing Federal policy.
FTC Reauthorization Act of 2008
    As I noted above, AFSA believes that the FTC has been effective in 
enhancing consumer understanding of the mortgage process and protecting 
the public against bad actors. Moreover, we have been proud to partner 
with the FTC on a number of these efforts. However, AFSA believes that 
some of the provisions in the FTC Reauthorization Act of 2008 will have 
the unintended consequence of reducing investor confidence, which 
ultimately will make credit less affordable. I would like to take a 
moment to explain our principal concerns.
Section 5. Civil Penalties for Violations of the FTC Act
    This section would expand the Commission's authority to seek in 
U.S. District Court civil penalties for violations of the FTC Act, and 
it would give the FTC power to seek these penalties without any prior 
rule or order by the agency. As a result, a defendant could face civil 
penalties of as much as $11,000 per violation, based on an act or 
practice that is adjudicated to be unfair or deceptive for the first 
time in the lawsuit against the defendant.
    Today, in court actions involving initial determinations that a 
particular practice is unfair or deceptive, the FTC is limited to 
injunctive and monetary relief and the equitable powers of a court to 
redress demonstrated consumer injury. Civil penalties are reserved for 
violations of a rule or a final cease and desist order with actual 
knowledge or knowledge fairly implied that the act or practice is 
unfair or deceptive and is prohibited by the rule or is unlawful under 
the FTC Act. Thus, civil penalties essentially punish a defendant for a 
law violation when the FTC can prove that the defendant knew that the 
practice was not only unfair or deceptive but was also prohibited by an 
exiting rule or order.
    Given the Commission's very broad mandate to address ``unfair or 
deceptive acts or practices,'' no company should face the prospect of 
civil penalties for an act or practice until there has been a prior 
determination that the act or practice is unfair or deceptive and the 
company has had actual knowledge of that determination. That is why FTC 
civil penalty actions in U.S. District Court under Section 5 of the FTC 
Act are reserved for violations of rules or cease and desist orders. 
This process provides appropriate notice, not only to the target of the 
FTC enforcement action, but to the industry as a whole, and lets market 
participants reform their practices before facing crippling fines and 
penalties.
    The requirement of knowledge that an act or practice is ``unfair or 
deceptive'' is based on the fact that these terms are very broad, 
susceptible to differing interpretations and applied to many different 
industries. ``Unfairness'' is a particularly evolving standard, in both 
the FTC's interpretation and its use in enforcement actions. For 
example, the FTC has applied the unfairness standard in settlements 
against holders of credit card data that suffered security breaches. In 
settlements with BJ's Wholesale Club, Inc., Life is good, Inc., and 
TJX, the FTC alleged that the failure of these retailers to adequately 
safeguard customers' personal information, which ultimately led to 
security breaches, constituted unfair practices under Section 5. These 
settlements resulted in orders requiring the retailers to develop and 
maintain adequate security information programs and safeguarding 
practices. Had the FTC been empowered to seek civil penalties of up to 
$11,000 for each violation in these cases, the settlements could have 
had a crippling effect.
Section 3. Independent Litigation Authority
    The bill would eliminate the current requirement that the FTC 
involve the Department of Justice (DOJ) when the Commission seeks to 
enforce violations of FTC trade regulation rules or cease and desist 
orders in U.S. District Court. As noted above, violations of those 
rules or orders may result in the defendant paying civil penalties to 
the government. In addition, when the FTC seeks civil penalties under 
statutes such as the ECOA, COPPA or CAN-SPAM, the agency must notify 
the DOJ, which has the right to bring the case itself. Because the FTC 
is currently limited to seeking civil penalties for rule or order 
violations or for specific statutory violations, the DOJ has not 
exercised that right, and for those kinds of enforcement actions, the 
opportunity for DOJ involvement may be less important. However, if the 
FTC were also given the authority to seek civil penalties based on an 
alleged unfair or deceptive act or practice, as discussed above, DOJ 
oversight would be crucial. If a company were to face the prospect of 
substantial penalties for an act or practice that had never previously 
been determined by any court or agency to be unfair or deceptive, then 
review and input by the DOJ would assure that the act or practice 
warranted prosecution for civil penalties, rather than less draconian 
relief. For that reason, there should be no change to the current 
requirement that the FTC involve the DOJ in civil penalty actions.
Section 7. Liability for Aiding and Abetting
    The bill would make it unlawful to ``aid or abet another person 
violating any provision of this Act or any other Act enforceable by the 
Commission.'' There is no definition of ``aid or abet''--terms that are 
usually used in a criminal context.
Section 8. Permissive Administrative Procedure for Consumer Protection 
        Rules
    This section would allow the agency, by a majority vote of the full 
Commission, to promulgate rules on any consumer protection matter under 
the expedited rules of the Administrative Procedure Act (APA), rather 
than under the procedures of the Magnuson-Moss Act. The expedited 
rulemaking authority could lead to a serious ``rush to judgment,'' 
allowing the FTC to create major industry-wide regulatory changes 
without adequate time for business input and thoughtful consideration.
    The Magnuson-Moss rulemaking requirements, which have been in 
effect for more than 30 years, provide procedural safeguards that are 
appropriate when a Federal agency is given a broad mandate to proscribe 
by regulation ``unfair or deceptive acts or practices'' in interstate 
commerce. When applied to the Commission's consumer protection mission, 
``unfair or deceptive acts or practices'' can be, and has been, 
interpreted very broadly. Without adequate opportunity for concerned 
public input, the agency could promulgate rules that are based on 
subjective notions of unfairness or on an incomplete understanding of 
an industry or of the full consequences of a rule. When Congress gave 
the FTC substantive rulemaking authority in the Magnuson-Moss Act of 
1975, it included procedural safeguards against these dangers. As a 
result, Magnuson-Moss rulemaking procedures require more than just the 
``notice and comment'' requirements of the APA. They also require the 
FTC to conduct public hearings and to give interested parties an 
opportunity to present data, views and arguments and conduct cross 
examination of the witnesses. Any final rule must be based on the 
rulemaking record, and published with a statement of basis and purpose. 
The final rule is subject to review by a U.S. Court of Appeals. It is 
noteworthy in this regard that, in at least two instances, a Court of 
Appeals overturned the FTC's final rule as unsupported by the record. 
In many other cases, the Magnuson-Moss rulemaking process led the FTC 
to decline to publish a final rule or to promulgate a more reasonable 
rule than originally proposed. Thus, the deliberative process inherent 
in Magnuson-Moss rulemaking has served the public interest well.
    The FTC has promulgated APA rules from time to time pursuant to a 
specific Act of Congress, such as under the Telemarketing and Consumer 
Fraud and Abuse Prevention Act and the FACTA amendments to the FCRA. In 
those cases, however, Congress specifically delineated the scope of the 
FTC's authority. Absent such statutory restrictions, there would be 
inadequate limits on the FTC's authority to define unfair or deceptive 
acts or practices.
    FTC rules establish industry standards, proscribe conduct and carry 
significant civil penalties for violations. For these reasons, it is 
imperative that the rules be promulgated in accordance with the 
procedural safeguards of the Magnuson Moss Act.
Section 9. Rulemaking Procedure for Subprime Lending Mortgages and 
        Nontraditional Mortgage Loans
    The bill would require the FTC to promulgate APA rules for subprime 
mortgage and nontraditional mortgage loans. The bill provides no 
specificity or guidance of any kind as to the substance or scope of 
such rules. The provision is nothing short of a complete abdication of 
the responsibilities of Congress to consider and enact such legislation 
as may be necessary and appropriate in these areas.
Section 11. Enforcement by State Attorneys General
    The bill would give state attorneys general the authority to 
enforce a violation of whatever rule the FTC would promulgate for 
subprime mortgage and non-traditional mortgage loans (as provided for 
in Section 9). In addition, state attorneys general could enforce 
violations of the Truth in Lending Act (TILA) or the Home Ownership and 
Equity Protection Act (HOEPA). The bill would also give the state 
Attorneys General the authority to enforce the provisions of the FTC 
Act or any other Act enforced by the FTC with respect to violations of 
the FTC rules for subprime mortgage and non-traditional mortgage loans 
and for violations of TILA or HOEPA. Thus, the bill would empower state 
Attorneys General with all the authority and remedies currently 
available to the FTC, including injunctive relief, monetary damages, 
restitution and other consumer redress.
    Currently, state attorney general enforcement of Federal law is 
limited to specific Acts of Congress. State attorney general 
enforcement actions involving unfair or deceptive acts or practices are 
appropriately limited to the state laws affecting the citizens of that 
state. If Congress were to give the state Attorneys General the 
authority to enforce the Federal rules and statutes, the result would 
be the creation of new Federal requirements and prohibitions based on 
state enforcement actions. State attorney general lawsuits enforcing 
the Federal law could result in duplicative and inconsistent lawsuits 
based on the same conduct. Such lawsuits would undermine the Federal 
standards under the FTC rules and Federal statutes. Moreover, state 
unfair or deceptive acts or practices statutes often provide that they 
are to be interpreted consistently with the Federal law. As a result, a 
state attorney general action could create new law in other states, as 
well as under the Federal law.
    It is unnecessary to give state Attorneys General this new power. 
As a matter of practice, the state Attorneys General regularly join 
with the FTC in enforcement actions and settlements. When they do so, 
however, each attorney general proceeds under its own state law, which 
is how it should be.
Personal Finance Education Programs
    Part of the solution must also include consumer education programs 
that equip potential homeowners with a clear understanding of the 
mortgage lending process and the tools that are available to them in 
choosing the mortgage product that best meets their financial needs. 
AFSA's Education Foundation (AFSAEF) has produced a world-class 
personal finance curriculum, MoneySKILL, which aims to help high 
school students meet the financial challenges that lay ahead. 
MoneySKILL is a highly interactive, reality-based Internet curriculum. 
The course consists of 34 ``how to'' modules on income, money 
management, spending and credit, and saving and investing. MoneySKILL 
is used by educators in all 50 states and several other countries. More 
than 80,000 students have enrolled in the program. AFSAEF also plans to 
translate MoneySKILL into Spanish and undertake a campaign to encourage 
the Latino community to use this curriculum.
    In addition, AFSAEF has developed an educational mortgage brochure, 
available in both English and Spanish, in conjunction with AFSA and the 
American Association of Residential Mortgage Regulators. The brochure 
contains worksheets to help consumers shop for the best mortgage deal 
and determine an affordable monthly mortgage payment. A glossary 
defines basic, but important, loan terms, such as Annual Percentage 
Rate, finance charge, balloon payment and arbitration clause.
Borrower Contact with Lenders
    As you can see, lenders are working successfully with credit 
counselors to help at-risk borrowers stay in their homes. Where we need 
help is reaching as many homeowners as possible about the importance of 
contacting their lenders if they are having difficulty making their 
mortgage payment. Far too many homeowners have not taken this step, 
often because of ignorance, fear, or a combination of the two. Yet the 
sooner these borrowers contact their lenders, the better their chances 
of finding a workable solution.
    As this committee considers how best to assist at risk borrowers, 
we encourage you to augment the private sector's efforts to convey this 
important message. In particular, the U.S. Treasury Department's Office 
of Financial Education and/or the newly created President's Advisory 
Council on Financial Literacy may be ideal places to conduct these 
kinds of campaigns.
    Again, AFSA appreciates the opportunity to testify before 
Subcommittee on the state of the mortgage market, efforts by industry 
to partner with the government agencies and consumer counselors to 
provide mortgage security to at-risk borrowers, and our members' 
perspective on policy recommendations currently before Congress.

    Senator Dorgan. Mr. Himpler, thank you very much. First of 
all, I appreciate you being here, and I might say to you, the 
last thing you should lose sleep over is that the Congress 
would rush to judgment about anything.
    [Laughter.]
    Senator Dorgan. This is not a body known for speeding. And 
my hope is that we will begin to take some effective action 
soon.
    First of all, I thank all of you for providing, in many 
ways, different viewpoints about a very controversial issue. 
Mr. Himpler, yours are perhaps more different than the other 
three, I might say.
    Mr. Himpler. I noticed that too, Mr. Chairman.
    Senator Dorgan. But, let me ask, if I might, Mr. Himpler, 
first--you saw the advertisements that I used on the clip and 
you saw what I was able to pull off the Internet at the moment. 
Are companies that would advertise like that able to be a 
member of your organization? In other words, do you have any 
self-regulation inside your organization?
    Mr. Himpler. Yes, we do. We have best practices and 
voluntary standards that all of our--our member companies must 
meet. I will say that the Countrywide was the only lender that 
I noticed in both the charts that you had and the 
advertisements on the screen.
    Senator Dorgan. And Countrywide, for example--there have 
been stories--and I have not documented them personally--but 
I've seen stories in major publications that talk about the 
number of mortgages that were written by Countrywide for 
borrowers who qualified for non-subprime loans but were put 
into subprimes with pre-payments and so on. When that happens, 
does your organization have any mechanism by which you're 
policing these standards?
    Mr. Himpler. We have an Executive Committee that reviews 
those matters and makes advisements to our board. But, I will 
say that as a best practice--this goes back a few years ago now 
when the House was considering predatory lending legislation in 
the last Congress, a number of our members, on our Mortgage 
Advisory Board, sent a letter to Congressman Kanjorski, 
specifically addressing that very issue of steering, and have 
made it a best practice of our association not to.
    Senator Dorgan. But from what we now know, the largest 
mortgage lender in America was pretty busy steering.
    Mr. Himpler. I don't know how old that--the advertisement 
that you had was up, and I don't know the time-frame under 
which you're speaking, Senator.
    Senator Dorgan. Attorney General Blumenthal, you heard Mr. 
Himpler say that if we have Attorneys General involved in the 
various States, enforcing a Federal rule, you'll have a mess on 
your hands. Respond to that, if you would?
    Mr. Blumenthal. Well, I think the bad guys will have a mess 
on their hands. The kinds of ads that you've seen here will be 
pursued before they become a template for the failure of the 
system.
    You know, the argument that there will be duplicative 
actions, we'll have 50 different interpretations, you know, 
I've heard it for 18 years, it just doesn't happen. It's a 
false argument. Because what happens really is, that Attorneys 
General work together, as we did on Household Finance, where 19 
Attorneys General brought an action under our consumer 
protection laws, which are largely identical, or Ameriquest, 
where all 50 Attorneys General brought actions based on our 
consumer protection laws.
    Now, we could bring those actions, then. Now, Household 
Finance has chartered itself or licensed itself federally, so 
it would be beyond our jurisdiction today. But we recovered in 
Household Finance for consumers and States about $484 million, 
because we recovered for excessive interest rates, 
unconscionable fees, abusive pre-payment penalties, unnecessary 
insurance charges--all the kinds of abuses that we then found 
in Ameriquest, where we recovered $325 million, and all the 
same practices that we see today. And I would second Mr. 
Rheingold's observation, that what has happened is, that those 
abusive practices have migrated. The cancer has metastasized 
into the general business practices in the industry.
    There are, by in large, hard-working, honest people in this 
business, but like any cancer, if it's not checked, it will 
grow and kill the person, the patient. And that's what we're 
seeing in the seizing up of all our credit markets.
    As you have observed, now the effects are rippling and 
spreading through the economy. The disconnect between the loans 
and the ultimate owner of those loans is now so complex that 
not only is the market undermined, but it is impossible to 
unravel the loans. And as much as everyone wants some relief 
provided to homeowners, it is a challenge to know how to do it 
because the ultimate owner of that loan is so disconnected from 
the homeowner.
    And I might just make this last point, because we're 
involved and we get the same argument that you've heard here 
this morning on anti-trust, where we now have an investigation 
underway into the sales of those investment instruments that 
sliced and diced and securitized--investigations because the 
buyers of those securities, we believe, may have been mislead 
and deceived as to how secure they were. And, that potential 
deception involved not just the investment banks, but also the 
credit rating agencies, and others in this industry.
    So, there's a lot of work to do here, Mr. Chairman. And the 
argument that State should be barred from enforcement simply 
because there would be more of it, and it would be uncontrolled 
centrally, I think is profoundly fallacious.
    Senator Dorgan. So you're opposed to it.
    [Laughter.]
    Senator Dorgan. Ms. Keest, let me ask you--you heard the 
testimony of the Attorney General about his belief that pre-
payment penalties ``should be abolished.'' I'm going to ask Mr. 
Himpler about pre-payment penalties in a moment, but what is 
your assessment of the role pre-payment penalties have in all 
this?
    Ms. Keest. I would say that pre-payment penalties had, sort 
of, three key roles in there.
    First, and the most obvious one, is that they locked people 
into bad loans. What often happened when people got in with 
deception, you know, the logical thing to do once they figured 
it out was to try to get out as quickly as possible, but those 
pre-payment penalties locked them in. That part of it is 
visible and that we all saw fairly early on.
    The part that was more part of this whole structural, 
fundamental problem, is that--that it became part of steering, 
it became part of making loans more expensive at both the front 
and the back ends for consumers, and it became part of the 
incentive--the perverse incentives. Which is to say that, 
because Wall Street liked pre-payment penalties, Wall Street 
not only paid the brokers more for loans with pre-payment 
penalties, but they then penalized brokers by reducing the 
amount of what's called yield-spread premiums, which is sort of 
the rate back--the kick back they get out of the rate--by 
reducing that, if the broker delivered them a loan without a 
pre-payment penalty.
    So, pre-payment penalties are integrally involved in, sort 
of, the structural unfairness of these loans. And, they are 
often justified as a way of buying a, you know, sort of lower 
rate, but the data indicates that's not there.
    Senator Dorgan. As I understand, a pre-payment penalty is 
this: The way the system has worked is if you have a mortgage 
with a pre-payment penalty, and it's a subprime mortgage that 
resets at a higher interest rate than normal, then attach a 
pre-payment penalty to that, and then securitize it and cut it 
up and sell it someplace, embedded in that new security is a 
pre-payment penalty, which guarantees the higher rate will 
follow the security through its life.
    So that makes it more attractive to hedge funds. It makes 
it more attractive to the system in which you sell the 
security. That gets back to the proposition that the lender no 
longer has the loan. The borrower comes to the lender and says, 
``I've got a problem here, can we work on it?'' And they say, 
``Well, I don't have your loan.''
    And they can follow it in many cases through two or three 
sales, which transfers risk, transfers the asset, which is now 
a security. And you can't really unwrap or unravel it for a 
lender to be talking effectively to a borrower.
    So, what I'd like to hear from you, Mr. Himpler, is the 
issue of how these pre-payment penalties developed. Have they 
been around for a long time? And how do they play a role here 
in helping guarantee the reset at the higher interest rate 
under subprime that makes Wall Street happy?
    Mr. Himpler. Well, I'm glad you asked if they've been 
around for some time, because I think this story does go back 
some time. Essentially what we're talking about in the subprime 
arena and securitization, is a story that goes back 15, 20, 
maybe even 30 years. It wasn't too long ago that we were--maybe 
20 years or so--that if you had blemished credit, you were 
essentially shut out from the American Dream.
    We took credit from an on/off switch, if you will, to a, 
more of a dial type of mechanism, whereby lenders can price for 
risk. That allowed a number of folks that fit into the subprime 
category to be able to buy their first home.
    Essentially, in order to preserve the investment that they 
had, to have greater certainty about the cash-flow that's 
associated with a subprime loan, investors wanted pre-payment 
penalties, to ensure that they--they were putting up their 
money for a certain number of years, they wanted to make sure 
that they had a cash-flow from that investment for the years 
that they were putting up. That's essentially where it comes 
from.
    They can also be used to buy down interest rates. Despite 
my friend Kathleen's reports, we've also got studies that pre-
payment penalties do, essentially, afford borrowers to get a 
lower interest rate over the life of the loan.
    The--generally speaking, pre-payment penalties don't last 
over the life of the loan. More importantly, the good news, if 
you will, is that as of last year, the Federal financial 
regulators, as well as the State financial regulators, which 
followed suit under subprime mortgage guidance, have 
essentially limited the scope of pre-payment penalties so that 
they must expire before a first reset of a mortgage interest 
rate.
    Senator Dorgan. Mr. Rheingold, I want to ask you about the 
general proposition here. My understanding of the general 
proposition has been that--seeing these advertisements and 
seeing the money that's involved in this stream--you can 
essentially attract someone who doesn't have perfect credit and 
perhaps may have filed bankruptcy or may have not particularly 
good credit, and say to them, ``We will provide you a 
mortgage.''
    In fact, some of this, represents cold calls to a home of 
someone who already has an existing mortgage they're perfectly 
happy with. This cold call from a broker says, ``We have a 
mortgage where you pay no principal in the first period. In 
fact, not only do you not have to pay principal, but also you 
don't have to pay a portion of the interest, so no principal 
and only a portion of the interest. And by the way, you don't 
have to document your income.''
    Is that the case? I mean, that's what I've read. Is it the 
cast that that's the kind of sales technique that would put a 
mortgage out there in the hands of a borrower who's pretty 
unsuspecting about the consequences of all of that?
    Mr. Rheingold. It's kind of mind boggling, isn't it?
    Senator Dorgan. It is.
    Mr. Rheingold. But in fact, that's exactly what's happened.
    Again, those advertisements--those products really are a 
symptom. There were people who wanted to buy those loans, 
because they were high-yield and high-risk loans. It had 
nothing to do with what was best for the consumer.
    I think one of the things that's happened in our country, 
when you look at those products, when you talk about somebody 
in bankruptcy or who had bad credit, is we've gotten away from, 
sort of, the traditional notion that it's good to save, that 
you need to have some money to put down into your house, that 
your house is not your bank, that in fact, putting money down, 
earning enough money, making sure you buy a house that fits 
into your budget, are good things.
    And instead, what we've turned around, because there was 
this voracious appetite for mortgage loans, we created these 
ridiculous products that were destined for failure, not because 
it was good for our economy, not because it was good for our 
neighborhoods or community, and certainly not because it was 
good for our consumers, but because we had a beast that needed 
to be fed. And that was completely wrong.
    And I think all of those things, I mean, all of those ads, 
all the things we see daily, the credit card ads that you see 
that keep encouraging people to get into debt. The notion that 
you should get a loan that allows you to pay less, that allows 
your home to get--to be negative amortizing, that your 
principal continues to go up--is absurd.
    It may work for a few people. That product was designed for 
one point, sort of, it's not the products that kill, it the 
people who sell them that kill. There's a market for that 
product, right? If you're a really sophisticated consumer and 
you want to pay less on your mortgage because you've got all 
these great investments, and instead of having to pay five, you 
know, you don't want to pay it at 7 percent interest, you're 
going to go stick it in some bonds and make 20 percent, you're 
going to invest that money, maybe that loan works for you. But 
for the average American consumer, that product is insane.
    And the fact is, is that nobody understood what they were 
getting, or at least, unless they were sort of speculative 
investors and that's still a small portion of the mortgage 
borrowers, people did not understand any of this. They had a 
chance to pursue the American Dream, it was sold hard to them, 
and they were told they could buy the house of their dreams 
with this loan, and they fell for it, and they had no 
protection.
    Ms. Keest. Mr. Chairman?
    Senator Dorgan. Yes.
    Ms. Keest. Could I supplement----
    Senator Dorgan. Yes.
    Ms. Keest.--something that he just said? It sort of relates 
to the fragmented nature of the market. What we saw from 
Countrywide was their ads for the payment option ARMs. 
Countrywide is such a big organization, that it has different 
kinds of lenders within it, including non-bank lenders and bank 
lenders.
    And, I don't know whether this was routine or not, but the 
Countrywide payment option ARMs, like those that were 
advertised, that I saw, made in 2005, were made through the 
national bank that Countrywide had, not through the non-banks. 
Now, whether that was their practice routinely or not, I--or 
whether it was an accident of what I saw, I don't know.
    But one of the things that I think, you know, is 
interesting about the fragment--fragmented nature of the 
oversight is the question of whether or not they were in--with 
that kind of a product and that kind of advertising, they were 
less afraid of the Federal regulator--Federal banking regulator 
than they were of the FTC and the State Attorney Generals. I 
would be interested in knowing that.
    Senator Dorgan. Well, someone once said, the problem isn't 
the arrow, it's the archer.
    [Laughter.]
    Senator Dorgan. And in many ways that's the case here. We 
can get rid of bad practices, bad products, deceptive 
advertising, we can--but it's the culture here that has grown 
up in recent years, in which there is, to quote Ross Perot on 
another subject, ``There is a giant sucking sound, it seems to 
me, coming from markets that want to securitize almost 
everything and move them along.'' I call it an area of dark 
money these days because the financial engineers have found 
really unique and almost unbelievable ways to securitize almost 
everything, and the transparency is gone for a lot of it.
    We should ask ourselves, how is it that the biggest firms 
on Wall Street, presumably with these unbelievably smart 
people, have lost so much money because they didn't understand 
what my parents and your parents would understand: if you're 
going to provide a home loan to somebody, it ought to be to 
somebody that might have a reasonable chance of being able to 
make monthly payments. I mean, that's not high finance, that's 
basic.
    [Laughter.]
    Senator Dorgan. So, we're trying to understand what has 
happened here, how to change it, how to shut down the bad 
practices, how to make sure it doesn't happen again because the 
consequences of this are pretty staggering. The consequences 
are economy-wide and everybody is affected. This practice 
helped exacerbate the housing bubble, and its collapsed now, 
has----
    Mr. Himpler. There were a lot--there were a lot of 
practices.
    Senator Dorgan. --there were a lot practices, but this was 
an accommodating practice, for sure. And, as I said, I was 
going to--Mr. Rheingold, give you a chance to give due credit 
to the Office of the Comptroller of the Currency--you just 
mentioned it briefly. It deserves, it really deserves more 
mention, perhaps, at this hearing.
    Mr. Rheingold. Sure. They do--there was a special place for 
them, there really is. I mean, this was a bank regulator who 
not only did nothing, as the world was falling apart around 
them, but they stopped everybody else from doing something. It 
really, there's no words to describe.
    I'm a private attorney, a legal services attorney, I work 
as a non-profit attorney. We brought cases, we knew what was 
going on here, we saw all of the bad practices. I've seen this 
for a dozen years. And in case after case where private 
attorneys bring cases, you can be sure the OCC is going to step 
in and say that State law doesn't apply to my national bank, 
let alone what they did to States Attorneys General. It is an 
absolute--they should--they should be ashamed of themselves.
    Senator Dorgan. Let me ask briefly--the legislation that I 
have proposed, reauthorizing the Federal Trade Commission--
generally, are you supportive of that, Mr. Rheingold?
    Mr. Rheingold. Absolutely.
    Senator Dorgan. Ms. Keest?
    Ms. Keest. Yes.
    Senator Dorgan. And, Attorney General Blumenthal?
    Mr. Blumenthal. I do as well, and if I might just----
    Senator Dorgan. Yes.
    Mr. Blumenthal.--address a couple of points.
    First of all, as you may have gathered, I join in the 
general opinion that has been expressed about the OCC, but 
there are a bunch of other Federal agencies, including the 
Federal Reserve, and a number of Federal supposed enforcers 
that have been completely AWOL here. And, just to repeat, have 
not only seized complete power, but also blocked others from 
exercising any power, and failed to use it themselves.
    But, I want to, because it might be my last chance to 
speak, come back to a point that you raised at the very 
beginning, who's at fault? You know, obviously, some of the 
pushback to you, in your debate, when you aggressively seek the 
kind of legislation which I do support, the reauthorization 
bill that would provide stronger enforcement, more resources, 
will be--well, ``You know, the home owners should have known it 
was too good to be true. You know, who gets a mortgage for a 
fraction of a percent of 2 percent?''
    Well, you know, Mr. Chairman, what we've seen at the ground 
level, what we see in ordinary consumers, the real lives, is 
that they are persuaded, they don't need an attorney of their 
own, they don't need a home inspector, they don't need any sort 
of independent advice that would help them evaluate all that 
squiggly fine print that you see on the screen here and that 
mortgages typically include as well.
    And often, what we found in Ameriquest, for example, and 
what we've found in our local predatory loan schemes, is that 
the deal has changed when the consumer appears at the closing. 
Often he is literally moved into the house with his family or 
he's sold--he's moved out of the other house or he's sold, 
sometimes sold the house that he had. And literally, on the 
verge of the closing, the terms are changed, as a kind of bait-
and-switch.
    So, this idea that the consumer should have known, I think 
is--is also fallacious, and I think that it also defeats the 
argument that the markets should be allowed to work without any 
regulation, without any intervention, because the markets are 
simply not working if there is deceptive and misleading pitches 
and practices.
    And, I would just conclude by saying, one of the reasons 
why I think that this bill is so important, is, you know, we 
have a lot of laws on the books, if they're not enforced, 
they're dead letter. And that's the problem with a lot of the 
best Federal laws, that the Federal agencies responsible for 
enforcing them simply aren't doing so, and I think this bill 
should send a message to them and send a message to the 
industry that there will be real penalties.
    I differ with the view that was expressed earlier about 
penalties being excessive in this bill. We need stronger 
penalties and we need to see them imposed, otherwise they'll be 
seen as simply the cost of doing business. And, the bad guys in 
this industry, even if they're just a minority, will give 
everyone a bad name and do harm to the economy.
    Senator Dorgan. Attorney General, thank you very much.
    And, Mr. Himpler, I would say--I asked the others about the 
FTC Reauthorization bill. I noted your objections in your 
testimony to the bill.
    Mr. Himpler. Is it possible for me to----
    Senator Dorgan. Yes, of course.
    Mr. Himpler. OK. A couple comments, I know it may surprise 
Attorney General Blumenthal, but to a certain extent I agree 
with some of his comments. Our association doesn't have any 
problem with the borrower having independent representation at 
settlement to make sure that they understand the mortgage 
contract that they're undertaking. We think it's vitally 
important and we're committed to that.
    On the issue of securitization, let me be the lone voice 
that says that I still think it plays a very vital role in our 
financial services sector. It's--we're talking about a 
phenomena that has taken place over the last 10 to 15 years. No 
one would say that Fannie and Freddie should stop securitizing. 
We do need to learn some lessons. I stand shoulder to shoulder 
with you, Mr. Chairman, in the need for transparency in that 
area, but I think it's still a vital piece of the puzzle.
    Senator Dorgan. I learned a lesson about these things some 
while ago when we had a major flooding disaster. An entire city 
was evacuated and there were small business disaster loans 
provided by the SBA to people who had suffered greatly.
    And later, when some issues arose, we tried to track back 
on these loans, and they were sold by the SBA, so it wasn't a 
case where even a Federal agency could sit down with the person 
who had borrowed the money because they'd sold it. And I was 
one of the most surprised people around trying to understand 
that even the Federal Government had gotten into some of this 
act.
    Well, I want to thank all of you for being here and 
providing information. I thank Ms. Parnes for listening to the 
testimony as well. I want the Federal Trade Commission to do 
well. I want us, as a Congress, to try to think through and 
understand what has happened and what we must prevent from 
happening again, and how we put this back on track to represent 
the kind of home mortgage lending we would expect.
    The housing industry is a very big industry in our country. 
The dream of owning a home is an important American Dream. And 
the notion of financing it is one of the most complicated 
things that happens in the life of a consumer, and we need to 
get this right. It got far off track and we need to bring it 
back.
    I thank all of the witnesses for being here today.
    This hearing is adjourned.
    [Whereupon, at 12:18 p.m., the hearing was adjourned.]
                            A P P E N D I X

  Prepared Statement of Hon. Olympia J. Snowe, U.S. Senator from Maine
    Thank you, Mr. Chairman, for holding today's hearing on how the 
Federal Trade Commission's (FTC) oversight of subprime lenders can be 
more effective. I am appreciative of Chairman Dorgan's steadfast 
efforts to combat these flagrant abuses. I also welcome the expert 
witnesses who will testify today about the impact of predatory lending 
on American consumers and how the FTC can better regulate this industry 
to both help us get out of the current housing crisis, caused by the 
subprime lending grist, and to prevent the next crisis from occurring. 
I am particularly interested this morning in hearing comments on steps 
we in Congress could take to broaden the FTC's oversight authority over 
unscrupulous mortgage lenders.
    I am deeply concerned that it could take the FTC up to 10 years, 
under the Magnuson-Moss Act, to put out ``new'' oversight rules. 
Because this Act prescribes a rulemaking procedure which requires the 
FTC to accept oral testimony, evidence, and make fact-finding 
determinations, we might be in our next--heavens forbid--housing crisis 
before the FTC is able to put out a ``new'' rule. We in Congress need 
to help arm the FTC with as many weapons as possible to combat and 
rectify the current housing crisis, and streamlining the FTC's present 
method by moving to Administrative Procedure Act (APA) notice-and-
comment rulemaking will help speed up the process.
    To comprehend the devastating effects that predatory loans are 
having on our economy, it is imperative that we understand the 
magnitude of mortgage difficulties facing our Nation. By 2009, more 
than a trillion dollars of mortgages originated during the subprime 
lending boom will reset to higher interest rates. Currently, according 
to the Mortgage Bankers Association, subprime adjustable rate mortgages 
(ARMS) constitute 42 percent of foreclosures started during the fourth 
quarter of 2007. This exceptionally high number is expected to 
skyrocket over the next year once the subsequent wave of adjustable 
loans reset and borrowers' mortgage payments increase by 30 to 50 
percent. In December 2007, the Center for Responsible Lending predicted 
that 2.2 million families with subprime loans will lose their homes to 
foreclosure because of recent predatory lending.
    The FTC must vigorously fight against the type of predatory lending 
that is forcing so many Americans into foreclosure and causing many to 
lose their homes. For most Americans, their home is the single largest 
investment and their retirement nest egg! Unfortunately, though the FTC 
has information warning consumers about predatory mortgage schemes 
dating back to 1998 on its website, the Commission does not have 
specific rules for regulating the non-bank lenders that account for 
many of these predatory loans.
    The FTC's job is to protect consumers against unfair or deceptive 
acts and practices. Our experience with subprime lending has taught us 
that we in government must work to prevent similar crises from 
occurring. While I commend the FTC for bringing 21 actions against 
companies and principals in the mortgage industry, as well as 
monitoring advertisements for illegal claims over the last few years, I 
wonder if these activities are enough?
    Frankly, the enormity of the subprime mortgage crisis begs us to 
question why the FTC has not already promulgated rules to regulate non-
bank lenders and if the FTC has sufficient authority to oversee non-
bank lenders, such as mortgage brokers?
    I am especially concerned with the calamitous consequences of 
unfair predatory lending that continue to affect borrowers in my home 
state of Maine. According to a recent report on subprime mortgages by 
Coastal Enterprises Inc., predatory lending in Maine is dominated by 
out-of-state non-bank lenders and mortgage brokers that are subject to 
fewer regulations than Maine-based brokers. The report estimates that 
Maine families will lose at least $23.4 million annually because of 
equity stripping from predatory mortgage lending. And this figure does 
not include foreclosure costs!!
    On Friday, March 7, 2008, the Portland Press Herald reported that, 
according to the Mortgage Bankers Association, Maine's foreclosure rate 
is 2.36 percent of homes, above the national rate of 2.04 percent of 
homes. This rate is expected to only increase over the next few years. 
While not all of Maine's foreclosures are directly attributably to 
predatory lending, it makes me curious as to how Maine would have 
faired without those iniquitous, predatory loans.
    High foreclosure rates harm communities, creates blighted areas, 
and stunt local and national economic potential. Consequently, it is in 
the best interest of all of the parties involved in the subprime 
crisis--the banks, the investors, and the borrowers--to act to preserve 
homeownership and minimize foreclosures.
    In that vein, we should consider any and all measures to assist the 
FTC to more vigorously regulate the conduct of non-bank lenders. Our 
current economic downturn threatens the stability and vitality of our 
economy. The FTC must take every action within its power to reduce 
predatory lending and protect consumers against these onerous 
practices. It is my fervent hope that this hearing with provide us 
answers on how the Congress can empower the FTC to better accomplish 
these goals.
    Thank you, Mr. Chairman.
                                 ______
                                 
                               Mortgage Bankers Association
                                     Washington, DC, April 28, 2008
Hon. Byron Dorgan,
Chairman,
Subcommittee on Interstate Commerce, Trade, and Tourism,
Senate Commerce Committee,
Washington, DC.
Hon. Jim DeMint,
Ranking Member,
Subcommittee on Interstate Commerce, Trade, and Tourism,
Senate Commerce Committee,
Washington, DC.

    Dear Chairman Dorgan and Ranking Member DeMint:

    The Mortgage Bankers Association \1\ (MBA) greatly appreciates the 
opportunity to comment on the record for the April 29 hearing at the 
Senate Committee on Commerce, Science, and Transportation's 
Subcommittee on Interstate Commerce, Trade, and Tourism concerning S. 
2831, The Federal Trade Commission (FTC) Reauthorization Act of 2008.
---------------------------------------------------------------------------
    \1\ The Mortgage Bankers Association (MBA) is the national 
association representing the real estate finance industry, an industry 
that employs more than 370,000 people in virtually every community in 
the country. Headquartered in Washington, D.C., the association works 
to ensure the continued strength of the Nation's residential and 
commercial real estate markets; to expand homeownership and extend 
access to affordable housing to all Americans. MBA promotes fair and 
ethical lending practices and fosters professional excellence among 
real estate finance employees through a wide range of educational 
programs and a variety of publications. Its membership of over 2,400 
companies includes all elements of real estate finance: mortgage 
companies, mortgage brokers, commercial banks, thrifts, Wall Street 
conduits, life insurance companies and others in the mortgage lending 
field. For additional information, visit MBA's website: 
www.mortgagebankers.org.
---------------------------------------------------------------------------
    MBA supports the FTC's regulatory efforts respecting lenders not 
regulated by Federal financial regulators and the efforts of the FTC 
and Federal financial regulators to stop abusive lending. MBA 
unequivocally regards abusive lending as a stain on the mortgage 
industry that should be dealt with effectively in a uniform manner.
    MBA is concerned; however, that the provisions in S. 2831 may lead 
to unnecessarily burdensome and overly costly regulation of the 
mortgage market that may undermine uniform regulation. MBA strongly 
believes judicious regulation and a uniform national lending standard 
are the best means of providing consumers innovative financing choices, 
increased competition and lower costs. MBA has the following comments 
on the specific provisions of the bill.
    Section 3 would increase the FTC's independent enforcement 
authority by removing the necessity for the FTC to provide a 45-day 
opportunity for the Department of Justice to bring a civil money 
penalties case on behalf of the Government before the FTC brings a case 
of its own. Under current law, the FTC can already go directly to court 
for injunctive relief, redress or monetary damages. Actions under the 
FTC's authority are grounded in its Section 5 ``unfair and deceptive 
acts and practices'' (UDAP) authority which is vague and can be applied 
very broadly. Considering this, MBA believes the provisions under 
current law, which establishes a ``check'' for the Department of 
Justice, further the objective of assuring there is clear and 
consistent enforcement government-wide.
    Section 5 would significantly broaden the FTC's authority to seek 
civil money penalties including penalties under its UDAP authority. 
This would pertain even where the FTC may have provided little or no 
guidance for companies regarding what constitutes a violation. The 
penalties provided for in this section, up to $12,000 per violation, 
may compound rapidly for behavior that may not have been thought to be 
illegal. MBA believes statutes with vague terms should not have 
significant penalties. Such statutes increase compliance costs, reduce 
competition and ultimately result in higher costs to borrowers. 
Statutes that clearly define and proscribe misbehavior may be coupled 
with penalties as a deterrent.
    Section 8 would provide the FTC the option, by a majority vote of 
the full Commission, to promulgate rules on any consumer protection 
matter under the expedited rules of the Administrative Procedures Act 
(APA), rather than under the procedures of the Magnuson-Moss Act. While 
other agencies may utilize the APA, they do not have the broad 
jurisdictional reach of the FTC or its broad, and at times vague, UDAP 
authority. MBA is concerned, considering the UDAP standards involved 
coupled with increased civil penalties for violations, that the FTC's 
powers may be overly increased by this change.
    Section 9 would provide the FTC authority to conduct rulemaking 
proceedings with respect to ``subprime mortgage lending and 
nontraditional mortgage loans.'' MBA believes assigning the FTC this 
authority may invite additional rules inconsistent with those of other 
Federal financial regulators. This problem would be further exacerbated 
by the fact the bill does not define either the term ``subprime 
mortgage lending'' or ``nontraditional loans.'' Without further 
guidance, it would be left to the FTC to define these terms and the 
scope of its rules, independent of any definitions promulgated by the 
Federal banking regulators now or in the future. The fact that this 
provision would invite varying regulation coupled with increased 
penalties and jurisdiction provided elsewhere in the bill, would, in 
MBA's view, result in unnecessary costs to the industry and ultimately 
to consumers.
    Section 10 would broaden the FTC's authority by making all Federal 
banking agencies, not just the Federal Reserve and the Federal Home 
Loan Bank Board (now the Office of Thrift Supervision), subject to the 
FTC Act. Under these provisions, whenever the FTC prescribes a rule 
concerning an unfair or deceptive practice, the agencies would have to 
adopt a similar rule within 60 days of the effective date unless the 
agency finds the practice is not ``unfair or deceptive'' or there is a 
finding implementation of similar regulations with respect to banks, 
savings and loans, or Federal credit unions would conflict with 
essential monetary and payment policies.
    While MBA appreciates the bill would require regulations be 
prescribed jointly ``to the extent practicable,'' MBA does not believe 
the bill would go far enough to ensure consistency or provide 
sufficient authority for Federal financial regulators to determine that 
an FTC rule should not be implemented.
    Section 11 would allow state Attorneys General, with 60 days 
notice, to bring cases under the FTC Act to seek civil penalties, 
disgorgement or injunctions against bad actors for certain actions. 
These actions would include enforcement of a violation of a subprime 
mortgage lending rule or a nontraditional mortgage loan rule, or a 
violation of the Truth in Lending Act (TILA) or the Home Ownership and 
Equity Protection Act (HOEPA) with respect to subprime mortgage lending 
or a nontraditional mortgage loan.
    Under current law, state Attorneys General regularly work with the 
FTC and other government regulators to bring a wide range of actions 
using state consumer protection laws consistent with Federal law. MBA 
does not believe there is a need to provide for a direct action by 
state Attorneys General under Federal law and is concerned authorizing 
such action would simply invite widely diverse and inconsistent 
theories and interpretations of the law which will countermand efforts 
at greater uniformity. Adding to this concern is the fact actions may 
be brought in any district where a lender or related party operates; it 
is also not clear whether state actions would be able to be brought 
under these provisions as well. Finally, as a practical matter, the 
notice provision would allow little ``check'' to ensure consistency. 
FTC is unlikely to have the time or resources to regularize lawsuits 
across the country.
    Again, MBA appreciates the opportunity to provide comment to the 
Subcommittee and welcomes the opportunity to recommend specific changes 
to improve the bill as it moves through the legislative process.
            Sincerely,
                                       Stephen A. O'Connor,
                         Senior Vice President, Government Affairs.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                            Lydia B. Parnes
    Question 1. According to the Federal Deposit Insurance Corporation 
(FDIC), non-bank lenders are primarily responsible for predatory 
mortgage loans. Even though the Federal Trade Commission (FTC) has 
oversight authority over nonbank lenders, to date it has not published 
a broad rule for overseeing this industry or regulating subprime 
lending. The Federal Trade Commission has known about problems with 
predatory mortgage loans for at least 10 years. On the Federal Trade 
Commission's (FTC) website, there is a document entitled ``Home Equity 
Loans--Borrowers Beware'' which was published by the FTC in April 1998. 
Knowing that predatory lending is an ongoing problem, why has the FTC 
failed to promulgate a rule to govern non-bank lenders? If the Congress 
doesn't enact Senator Dorgan's proposal, which would allow the FTC to 
promulgate rules under the Administrative Procedures Act (APA) will the 
FTC ever issue a broad rule to regulate predatory lending and the 
conduct of non-bank lenders.
    Answer. The Commission has had to decide how best to focus its 
efforts to protect consumers in the subprime mortgage lending area that 
has expanded so rapidly in recent years. As primarily a law enforcement 
agency, the Commission found that focusing its resources on law 
enforcement allowed the agency to target new and evolving harmful 
practices, obtain redress for injured consumers, and obtain injunctive 
relief to ensure that those companies did not continue to violate the 
law. At the same time, these actions put industry on notice of how the 
Commission was applying the laws it enforces to subprime lending and 
servicing practices. For example, in FTC v. Associates First Capital, 
Inc., the FTC challenged as deceptive a large subprime mortgage 
lender's practice of including single-premium credit insurance in loans 
without disclosing its inclusion to consumers.\1\ After the defendants 
agreed to pay $215 million in consumer redress to settle this and other 
allegations, major subprime lenders discontinued the sale of such 
insurance.
---------------------------------------------------------------------------
    \1\ FTC v. Associates First Capital Corp., No. 01-00606 (N.D. Ga. 
2001).
---------------------------------------------------------------------------
    Focusing on law enforcement has enabled the agency to challenge 
practices as they are discovered and as they change. Based on that law 
enforcement experience, we found that those practices varied from case 
to case, and over time. In contrast to law enforcement, the 
Commission's rulemaking procedures are burdensome and time-consuming, 
making it difficult to address evolving practices in a timely manner.
    The Federal Reserve Board appears likely in the near future to 
issue comprehensive new rules under the Truth in Lending Act (``TILA'') 
and the Home Ownership Equity Protection Act (``HOEPA'') which would 
apply broadly to subprime loans; many of these rules would apply to all 
mortgage loans. If the Board's rules are finalized, the Commission will 
have the authority to enforce those rules against nonbank entities 
under its jurisdiction. As with its current authority, the Commission 
intends to use that new authority to the fullest extent possible to 
protect consumers in the subprime mortgage market. I also anticipate 
that the FTC would carefully examine whether additional practices are 
unfair or deceptive and how to address them, including whether to use 
its current or any new rulemaking authority pursuant to Senator 
Dorgan's bill, if enacted. The Commission would make this determination 
in light of the types of practices at issue and balancing the resources 
needed for both law enforcement and any rulemaking.

    Question 2. Section 5 of the Federal Trade Commission Act gives 
pretty broad authority to the FTC by prohibiting unfair methods of 
competition in or affecting commerce, and unfair or deceptive acts or 
practices in or affecting commerce. Section 5 empowers and directs the 
FTC to prevent persons, partnerships, or corporations from using unfair 
methods and deceptive acts related to commerce. Certainly, much of the 
advertising that subprime lenders utilized was clearly deceptive and 
misleading due to the lack of helpful information disclosed to the 
consumer. The FTC reauthorization legislation Senator Dorgan introduced 
earlier this month would require the FTC to conduct an expedited 
rulemaking on the issue of subprime loans and unfair or deceptive 
behavior by lenders. Would this provision be helpful to the FTC in 
preventing some of the questionable practices and advertising that led 
to the subprime mortgage meltdown?
    Answer. As noted above, the Federal Reserve Board appears close to 
issuing comprehensive new rules under TILA and HOEPA which would apply 
broadly to subprime loans; many of these rules would apply to all 
mortgage loans. The proposed rules address underwriting practices, such 
as lending not based on ability to pay or documented income, as well as 
a variety of additional acts and practices related to mortgage 
appraisals, servicing, advertising, and disclosures. If the Board's 
rules are finalized, the Commission will have the authority to enforce 
those rules against nonbank entities under its jurisdiction. As with 
its current authority, the Commission intends to use that new authority 
to the fullest extent possible to protect consumers in the subprime 
mortgage market.
    The Federal Reserve Board's proposal is a comprehensive effort to 
address a wide range of mortgage lending acts and practices that may 
cause harm to consumers. Nevertheless, we recognize that inherent in 
the promulgation of general rules, including the FRB's rules, is the 
risk that they could prove to be under-inclusive. The FTC therefore 
would carefully examine whether additional practices are unfair or 
deceptive and how to address them, including whether to use its current 
rulemaking procedures or any new streamlined rulemaking procedures 
permitted under Senator Dorgan's bill, if enacted. The Commission would 
make this determination in light of the types of practices at issue and 
balancing the resources needed for both law enforcement and any 
rulemaking.

    Question 3. During the Commerce Committee's FTC reauthorization 
hearing on April 8, the FTC Commissioners stated that the Commission 
sent over 200 warning letters to mortgage advertisers and the media 
outlets that carried their advertisements for home mortgages. These 
letters stated that the mortgage advertisements identified may be 
deceptive in violation of Section 5 of the FTC Act or may violate the 
Truth in Lending Act. Can the Commission provide an update as to how 
many of the mortgage advertisers corrected their practices and stopped 
employing deceptive advertising? What action was taken to those lenders 
that continued their deceptive practices?
    Answer. FTC staff recently reviewed current solicitations 
disseminated by those advertisers who received warning letters in 
September 2007. Although many have corrected their ads, more than one-
third still are disseminating advertising that potentially violates the 
FTC Act and TILA in a manner identified by the initial warning letters. 
The potential violations range from noncompliance with technical 
aspects of TILA to potentially false representations about loan 
products. We have opened investigations into several of the most 
egregious violations. In total, the FTC has more than a dozen ongoing 
nonpublic investigations of home mortgage companies for potential 
deceptive advertising practices and violations of the Truth in Lending 
Act (``TILA'').

    Question 4. Ms. Parnes testimony states that ``The FTC's 
enforcement efforts would be more effective if civil penalties were 
available against nonbank entities within the FTC jurisdiction who 
violate the rules.'' What type of civil penalties would help the FTC 
increase the effectiveness of its enforcement against non-bank lenders 
which violate the rules? How would additional civil penalties increase 
the effectiveness of FTC enforcement over non-bank lenders? What is the 
reason that the FTC can not use these types of civil penalties against 
non-bank lenders?
    Answer. Under its current authority, the FTC is not authorized to 
seek civil penalties for violations of TILA and HOEPA. The Commission 
can seek other types of monetary relief, including consumer redress and 
other equitable remedies such as disgorgement of ill-gotten gains, from 
defendants. However, in some cases, restitution or disgorgement may not 
be appropriate or sufficient remedies, or may be difficult to prove. 
For example, it may be difficult to determine or quantify the consumer 
injury or disgorgement amount that would be appropriate to remedy 
certain advertising or disclosure violations. Civil penalties for 
violations of the Board's proposed rules would enable the Commission to 
better achieve the law enforcement goal of deterrence.
    The type of civil penalties that would help the FTC increase its 
effectiveness are those that the Commission can currently obtain for 
violations of its trade regulation rules under Section 5(m)(1) of the 
FTC Act, 15 U.S.C.  45(m)(1). This provision provides a maximum civil 
penalty of $10,000 per violation per day, as adjusted by inflation to 
$11,000. This civil penalty could be incorporated by stating in the 
language of a bill that the FTC has the power to enforce the provisions 
of TILA and HOEPA in the same manner as if the violation had been a 
violation of a Commission trade regulation rule.

                                  
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