[Senate Hearing 110-1173]
[From the U.S. Government Publishing Office]






                                                       S. Hrg. 110-1173

                FEDERAL TRADE COMMISSION REAUTHORIZATION

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

                                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

                             FIRST SESSION

                               __________

                           SEPTEMBER 12, 2007

                               __________

    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

                             FIRST SESSION

                   DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska, Vice Chairman
    Virginia                         JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
BARBARA BOXER, California            OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida                 GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington           JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey      JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas                 JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware           DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri           JOHN THUNE, South Dakota
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 September 12, 2007...............................     1
Statement of Senator Dorgan......................................     1

                               Witnesses

Abrams, Martin E., Executive Director, Center for Information 
  Policy Leadership, Hunton & Williams LLP.......................    74
    Prepared statement...........................................    75
Calhoun, Michael D., President, Center for Responsible Lending...    49
    Prepared statement...........................................    51
Cooper, Dr. Mark N., Director of Research, Consumer Federation of 
  America........................................................    36
    Prepared statement...........................................    38
Majoras, Hon. Deborah Platt, Chairman, Federal Trade Commission..     2
    Prepared statement...........................................     4
Murray, Chris, Senior Counsel, Consumers Union...................    59
    Prepared statement...........................................    61
Schwartz, Ari, Deputy Director, Center for Democracy and 
  Technology.....................................................    66
    Prepared statement...........................................    67

                                Appendix

Response to written questions submitted to Michael D. Calhoun by 
  Hon. Byron L. Dorgan...........................................   120
Response to written questions submitted to Hon. Deborah Platt 
  Majoras by:
    Hon. Byron L. Dorgan.........................................   103
    Hon. Daniel K. Inouye........................................   101
    Hon. Olympia J. Snowe........................................   113
Stevens, Hon. Ted, U.S. Senator from New Jersey, prepared 
  statement......................................................
             101.................................................

 
                FEDERAL TRADE COMMISSION REAUTHORIZATION

                              ----------                              


                     WEDNESDAY, SEPTEMBER 12, 2007

                               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 9:35 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. The Committee will come to order. This is 
the Senate Committee on Commerce, Science, and Transportation, 
Interstate Commerce, Trade, and Tourism Subcommittee, hearing 
on the Federal Trade Commission reauthorization.
    I regret to tell you that last evening, about 8:30 in the 
evening, they scheduled three votes, starting at 9:30 this 
morning. Because of that, the first vote is now underway; it'll 
be followed by two ten-minute votes. My expectation is, the 
votes will be completed by 10:15. And I deeply apologize for 
the inconvenience to all of you, but, because of that, we will 
have to recess until 10:15, at which time the hearing will 
begin.
    The Committee is in recess.
    [Recess.]
    Senator Dorgan. The Committee will come to order.
    First, again--I should say, again, let me apologize for the 
inconvenience. I know it is not convenient for any of you to 
wait for nearly an hour, but the schedule of the Senate 
sometimes isn't established for our convenience, or yours, it's 
an unusual body, and so, we are delayed today, but thank you 
very much for waiting, and thank you for being here.
    Chairman Majoras, thank you very much for being with us 
today. We will have testimony from you, and then we will have 
testimony from a second panel.
    The second panel will include Dr. Mark Cooper, from the 
Consumer Federation of America; Mr. Chris Murray, from the 
Consumers Union; Mr. Michael Calhoun, the President of the 
Center for Responsible Lending; Mr. Ari Schwartz, from the 
Center for Democracy and Technology; and Mr. Marty Abrams, from 
the Center for Information Policy Leadership.
    The hearing today is a reauthorization hearing for the 
Federal Trade Commission, which is an independent Federal 
agency established in 1914. This is an agency that has a gray 
beard, it's been around a long, long time, and serves a very 
useful purpose. Under the Federal Trade Commission Act of 1914, 
the Commission was established to protect consumers. The 
mandate has two different and distinct components--first, to 
protect consumers from unfair or deceptive acts or practices in 
or affecting commerce; and, second, to protect consumers from 
unfair methods of competition. As part of this authority, the 
agency enforces some 46 statutes and is the only Federal agency 
with both consumer protection and competition jurisdiction in 
very broad sectors of the economy.
    The Commission's consumer protection authority is provided 
under the FTC Act; and, under that Act, the Commission is 
charged with preventing a broad range of consumer abuses, 
including deceptive or misleading advertising, telemarketing 
fraud, credit report errors, and false labeling. The Act also 
grants the FTC jurisdiction over unfair methods of competition, 
deceptive acts or practices that unreasonably impede a 
consumer's ability to make an informed choice.
    I don't need to remind everyone how important these 
particular functions are, given what we have read in the 
newspapers in the last several months. The issue of consumer 
safety is paramount in this galloping global economy and rules 
for that global economy are not nearly keeping pace. We have 
stories, these days in the newspapers, about danger and risk to 
American consumers. I want to talk a little about that today. 
It's a very important function, the function of ensuring 
competition, as is the function of consumer protection. We need 
to reauthorize the Federal Trade Commission, and we will hope 
to do so with legislation that we move to the floor of the 
Senate very soon.
    The Commission itself is a five-member Commission appointed 
by the President, confirmed by the Senate, for 7-year terms. We 
have invited the Chairman of the Commission to be with us 
today.
    Let me, again, say thank you for your patience and ask you 
to proceed. Your entire statement will be made a part of the 
record today, and we will ask you to summarize.
    Madam Chair, go ahead.

  STATEMENT OF HON. DEBORAH PLATT MAJORAS, CHAIRMAN, FEDERAL 
                        TRADE COMMISSION

    Ms. Majoras. Thank you very much, Chairman Dorgan. It's a 
great pleasure to appear before you today to describe the FTC's 
broad program to protect consumers in today's dynamic 
marketplace through vigorous law enforcement, consumer and 
business education, competition advocacy, and market research.
    During the past 3 fiscal years, our consumer protection 
work has produced more than 250 court orders requiring 
defendants to pay more than $1.2 billion in consumer redress, 
47 court judgments for civil penalties, totaling over $38 
million, and approximately 180 new Federal court complaints 
aimed at stopping unfair and deceptive conduct. At the same 
time, we've developed 250 consumer and business education 
campaigns and publications, completed 54 statutorily mandated 
rulemakings and reports, hosted 48 public conferences and 
workshops, and issued 40 reports on issues of great 
significance to consumers. This active agenda continues.
    Protecting the privacy and identity of American consumers 
has become, and remains, a top priority in this information 
age. The FTC has brought 14 enforcement actions against 
companies for their failure to provide reasonable security for 
consumers' data, actions that have helped set standards for 
industry, and more are in the pipeline.
    Last year, we launched a nationwide identity theft consumer 
education campaign, ``Deter, Detect, Defend,'' and developed a 
new business education guide on data security. Over the past 2 
years, we've brought nearly a dozen enforcement actions against 
purveyors of spyware, and a steady stream of cases against 
spammers. We continue protecting Americans' privacy through 
implementation and enforcement of the highly successful Do Not 
Call Registry, which now contains more than 147 million 
telephone numbers, and enforcement actions against telephone 
pretexters and those who violate the Children's Online Privacy 
Protection Act.
    To protect consumers in the financial services marketplace, 
we're focusing on enforcement efforts in the marketing of 
mortgage products, particularly in the subprime market, 
deception in the credit area, and illegal methods used in debt 
collection. We've attacked false or inadequate disclosures 
relating to gift cards and rebate programs. Other areas of 
attack in our fraud program include business-opportunity and 
work-at-home scams, various forms of telemarketing fraud, and 
bogus health and weight-loss claims, and the latter rank very 
high on the agenda, because they have such potential to harm 
consumers who forego legitimate treatment options.
    We've been a driving force in the recent renewal of self-
regulation in the advertising of food to children, and we 
continue our work in monitoring self-regulation among marketers 
of video games, music, and movies with violent content, as well 
as alcohol. Indeed, as to the latter, this week we've been 
sponsoring ``We Don't Serve Teens Week,'' blanketing the Nation 
through PSAs and a lot of help from states and others, with the 
admonition not to provide alcohol to minors. Thanks to 
Congress, which worked with us to pass the U.S. SAFE WEB Act of 
2006, we now have better tools with which we are fighting 
cross-border fraud.
    We're equally active in protecting competition, focusing on 
areas that have the most significant impact on consumers; 
namely, healthcare, energy, real estate, and high-technology 
industries. So far, in this fiscal year, we've issued 31 second 
requests in mergers, we've had 20 merger cases that have 
resulted in enforcement action or withdrawal of the merger, and 
we've brought 11 nonmerger cases. In healthcare, for example, 
we've achieved substantial relief over the last year before 
allowing mergers in the areas of generic drugs, over-the-
counter medications, injectable analgesics, and other medical 
devices and diagnostic services. We've challenged price-fixing 
agreements among competing physicians, and agreements between 
drug companies that delay generic entry. We are continuing to 
stand up against reverse-payment settlements, including by 
working with Congress on bipartisan efforts to advance a 
workable legislative remedy. And the Commission recently issued 
an opinion ruling that Evanston Northwestern Healthcare 
Corporation's acquisition of Highland Park Hospital was 
anticompetitive.
    So far in 2007, the Commission has challenged three mergers 
in the energy industry: Western Refining's acquisition of Giant 
Industries--unfortunately, we were unsuccessful in District 
Court; Equitable Resources' proposed acquisition of the 
People's Natural Gas Company--that is still in litigation; and 
the proposed $22 billion deal whereby energy firm Kinder Morgan 
would be taken private by its management, and a group of 
investment firms, including Carlyle Group and Riverstone 
Holdings.
    We also charged the American Petroleum Company with 
illegally conspiring with competitors to restrict the 
importation and sale of motor oil lubricants in Puerto Rico. 
And other industries in which we've brought significant actions 
include real estate, grocery stores, and funeral homes, and 
related products and services.
    Complementing these antitrust enforcement efforts are our 
competition advocacy efforts, our market research, which has 
produced reports on IP issues, municipal provision of wireless 
Internet, broadband policy, and competition in real estate, and 
our new consumer education campaign.
    Mr. Chairman, the more than 1,000 employees of the FTC 
remain focused on our critical mission to protect consumers and 
competition. We always appreciate your support, and look 
forward to continuing to work together to further the interests 
of American consumers.
    Thank you for holding this hearing. I'd like to thank my 
fellow commissioners who are with me today, and some of our 
staff, and I also would like to thank those on the second 
panel, who obviously play a very important role in the work 
that we do.
    Thank you.
    [The prepared statement of Ms. Majoras follows:]

      Prepared Statement of Hon. Deborah Platt Majoras, Chairman, 
                        Federal Trade Commission
                            I. Introduction
    Chairman Dorgan, Ranking Member DeMint, and Members of the 
Subcommittee, I am Deborah Platt Majoras, Chairman of the Federal Trade 
Commission (``Commission'' or ``FTC''). I am pleased to come before you 
today at this reauthorization hearing.\1\
    The FTC is the only Federal agency with both consumer protection 
and competition jurisdiction in broad sectors of the economy.\2\ The 
agency enforces laws that prohibit business practices that are harmful 
to consumers because they are anticompetitive, deceptive, or unfair, 
and promotes informed consumer choice and understanding of the 
competitive process.
    The FTC has pursued a vigorous and effective law enforcement 
program in a dynamic marketplace that is increasingly global and 
characterized by changing technologies. Through the efforts of a 
dedicated, professional staff, the FTC continues to handle a growing 
workload.
    The agency's consumer protection work has focused on data security 
and identity theft, technology risks to consumers such as spam and 
spyware, fraud in the marketing of health care products, deceptive 
financial practices in the subprime mortgage and credit repair 
industries, telemarketing fraud, and Do Not Call enforcement. During 
the past three fiscal years, the FTC has obtained more then 250 court 
orders requiring defendants to pay more than $1.2 billion in consumer 
redress, obtained 47 court judgments for civil penalties in an amount 
over $38 million, and filed approximately 180 new complaints in Federal 
district court to stop unfair and deceptive practices. It also 
completed 54 statutorily-mandated rulemakings and reports, hosted 48 
conferences and workshops, issued 40 reports on topics significant to 
consumers, and developed 250 consumer and business education campaigns.
    The Commission's competition mission has worked to strengthen free 
and open markets by removing the obstacles that impede competition and 
prevent its benefits from flowing to consumers. To accomplish this, the 
FTC has focused its enforcement efforts on sectors of the economy that 
have a significant impact on consumers, such as health care and 
pharmaceuticals, energy, technology, and real estate. So far in Fiscal 
Year 2007, there have been 20 merger cases that have resulted in 
enforcement action or withdrawal--including three litigated preliminary 
injunction actions--and 11 nonmerger enforcement actions.\3\
    Our testimony today summarizes some of the major activities of the 
recent past and describes some of our planned future initiatives. It 
also identifies certain legislative recommendations that the Commission 
believes will allow us to better protect U.S. consumers. These are:

        1. to stop brand name drug companies from paying generic 
        companies not to compete at the expense of consumers;

        2. to repeal the telecommunications common carrier exemption; 
        and

        3.to ensure that the Commission has authority to impose civil 
        penalties in cases in which the Commission's traditional 
        equitable remedies are inadequate, such as spyware and data 
        security cases.\4\
                        II. Consumer Protection
    As the Nation's consumer protection agency, the FTC has a broad 
mandate. This year, it devoted significant resources to the issues of 
data security and identity theft, technology risks to consumers, fraud 
in the marketing of the health care products, financial practices, 
telemarketing fraud, and Do Not Call enforcement.\5\ The Commission 
plans to continue our important work in these areas in 2008. This 
testimony highlights key issues and initiatives for the agency's 
consumer protection mission, as well as the methods the FTC will use to 
address them.
A. Data Security and Identity Theft
    In 1998, Congress passed the Identity Theft Assumption and 
Deterrence Act (``Identity Theft Act''), which assigned the FTC a 
unique role in combating identity theft and coordinating government 
efforts.\6\ This role includes collecting consumer complaints; 
implementing the Identity Theft Data Clearinghouse, a centralized 
database of victim complaints used by 1,600 law enforcement agencies; 
assisting victims and consumers by providing information and education; 
and educating businesses on sound security practices. The FTC continues 
to focus on combating identity theft primarily through law enforcement, 
implementation of the recommendations of the President's Identity Theft 
Task Force, and education both to help consumers avoid identity theft 
and to assist the millions of Americans who are victimized each year.
1. Law Enforcement
    Although the FTC, a civil enforcement agency, cannot enforce 
criminal identity theft laws, it can take law enforcement action 
against businesses that fail to implement reasonable safeguards to 
protect sensitive consumer information from identity thieves. Over the 
past few years, the FTC has brought 14 enforcement actions against 
businesses, including BJ's Wholesale Club, ChoicePoint, CardSystems 
Solutions, and DSW Shoe Warehouse, for their alleged failures to 
provide reasonable data security. In these and other cases, the FTC has 
alleged, for example, that companies discarded files containing 
consumer home loan applications in an unsecured dumpster; stored 
sensitive information in multiple files when there was no longer a 
business need to keep the information, or in unencrypted files that 
could be easily accessed using commonly-known used IDs and passwords; 
failed to implement simple, low-cost, and readily available defenses to 
well-known web-based hacker attacks; failed to use readily available 
security measures to prevent unauthorized wireless connections to their 
networks; and sold sensitive consumer information to identity thieves 
posing as the company's clients. The Commission continues to monitor 
the marketplace to encourage companies to implement and maintain 
reasonable safeguards to protect sensitive consumer information. In 
appropriate cases, the Commission will bring enforcement actions.
2. Identity Theft Task Force
    On May 10, 2006, the President established an Identity Theft Task 
Force, which I co-chair, and which comprises 17 Federal agencies with 
the mission of developing a comprehensive national strategy to combat 
identity theft.\7\ In April 2007, the Task Force published its 
strategic plan for combating identity theft.\8\
    In the Strategic Plan, the Task Force recommends dozens of 
initiatives directed at reducing the incidence and impact of identity 
theft. To prevent identity theft, the Plan recommends that governments, 
businesses, and consumers improve data security. It recommends that 
Federal agencies and departments improve their internal data security 
processes; develop breach notification systems; and reduce unnecessary 
uses of Social Security numbers, which are often the key item of 
information that identity thieves need. For the private sector, the 
Task Force proposes that Congress establish national standards for data 
security and breach notification that would preempt the numerous state 
laws on these issues. The Plan also recommends the dissemination of 
additional guidance to the private sector for safeguarding sensitive 
consumer data; continued law enforcement against entities that fail to 
implement appropriate security; a multi-year consumer awareness 
campaign to encourage consumers to take steps to safeguard their 
personal information and minimize their risk of identity theft; a 
comprehensive assessment of the private sector's uses of Social 
Security numbers; and workshops on developing more reliable methods of 
authenticating the identities of individuals to prevent thieves who 
obtain consumer information from using it to open accounts in the 
consumer's name.
    To assist victims in the recovery process, the Plan recommends 
development of easy-touse reference materials for law enforcement, 
often the first responders to identity theft; implementation of a 
standard police report, often a key document for victim recovery; 
nationwide training for victim assistance counselors; and development 
of an Identity Theft Victim Statement of Rights. And finally, the Plan 
includes a host of recommendations for strengthening law enforcement's 
ability to detect and punish identity thieves.
    Many of the Task Force recommendations have already been 
implemented or are in the process of being implemented. For example, 
the Office of Management and Budget has issued data security and breach 
management guidance for government agencies.\9\ The FTC has developed 
and distributed detailed data security guidance for businesses,\10\ is 
planning regional data security conferences, has conducted a public 
workshop on consumer authentication,\11\ has published an identity 
theft victim statement of rights on its website and at www.idtheft.gov, 
and is leading the interagency study of the private sector usage of 
Social Security numbers.\12\ The Department of Justice has forwarded to 
Congress a set of legislative recommendations that seek to close 
existing loopholes for the prosecution of some types of identity 
theft,\13\ and is developing and presenting expanded training for their 
prosecutors and, in partnership with the FTC, for state and local law 
enforcement.
3. Education
    The FTC continues to educate consumers on how to avoid becoming 
victims of identity theft, and last year launched a nationwide identity 
theft education program.\14\ This program--Deter, Detect, Defend--has 
been very popular. The FTC has distributed over 2.6 million brochures, 
has recorded more than 3.2 million visits to the program's website, and 
has disseminated 55,000 kits, which can be used by employers, community 
groups, Members of Congress, and others to educate their 
constituencies.
    The FTC also sponsors an innovative multimedia website, OnGuard 
Online, designed to educate consumers about basic computer 
security.\15\ The website provides information on such as phishing, 
spyware, and spam. Since its launch in late 2005, OnGuard Online has 
attracted more than 3.5 million visits.
    The Commission directs its outreach to businesses as well. This 
April, the Commission released a new business education guide on data 
security.\16\ The Commission anticipates that the brochure will prove 
to be a useful tool in alerting businesses to the importance of data 
security issues and give them a solid foundation on how to address 
them.
B. Technology
    Although technology can play a key role in combating identity theft 
and improving consumers' lives, it also can create new consumer 
protection challenges. The Commission has worked aggressively to 
protect consumers from technological threats such as spam and spyware. 
In addition, the agency has focused on identifying new issues related 
to technology in order to better protect consumers in the future.
    To enhance consumer protections in cases involving spyware, as well 
as those involving data security, the Commission continues to support 
provisions in pending bills that give the FTC civil penalty authority. 
Civil penalties are important in areas where the Commission's 
traditional equitable remedies, including consumer restitution and 
disgorgement, may be impracticable or not optimally effective in 
deterring unlawful acts. Restitution is often impracticable in these 
cases because consumers suffer injury that is either non-economic in 
nature or difficult to quantify. Likewise, disgorgement may be 
unavailable because the defendant has not profited from its unlawful 
acts. As such, the Commission reiterates its support for civil penalty 
authority in these areas and looks forward to continuing to work with 
this Committee to improve the Commission's ability to protect 
consumers.
1. Spam
    Since 1997, when the FTC brought its first case involving spam, the 
Commission has aggressively pursued deceptive and unfair practices 
involving these e-mail messages through 90 law enforcement actions 
against 143 individuals and 100 companies, 26 of which were filed after 
Congress enacted the CAN-SPAM Act. These cases have focused on the core 
protections that the CAN-SPAM Act provides to consumers: opt-out 
mechanisms that function; message headers that are non-deceptive; and 
warnings, as appropriate, that sexually-explicit content is included. 
Through these 26 actions, the Commission has succeeded in obtaining 
strong injunctions and significant monetary relief. To date in the 
FTC's CAN-SPAM cases, Federal courts have awarded the Commission more 
than $10 million in disgorgement or redress and in excess of $2.6 
million in civil penalties.
    The FTC continues to devote significant resources to fight spam. In 
June 2007, the Commission hosted a ``Spam Summit'' to explore the next 
generation of threats and solutions in the spam arena. The Summit 
panelists, nearly 50 in number, all confirmed that spam is being used 
increasingly as a vehicle for more pernicious conduct, such as sending 
phishing e-mails, viruses, and spyware. This malicious spam goes beyond 
mere annoyance to consumers--it can be criminal, resulting in 
significant harm by shutting down consumers' computers, enabling 
keystroke loggers to steal identities, and undermining the stability of 
the Internet. Due to strong spam-filtering, however, much of this spam 
is not reaching consumers' inboxes. The panelists also confirmed that 
malicious spam is a technological problem, driven largely by 
``botnets'' (networks of hijacked personal computers that spammers use 
to conceal their identities) and the exploitation of computer security 
vulnerabilities that allow spammers to operate anonymously. Industry is 
taking a leading role in developing technological tools, such as 
domain-level e-mail authentication, to ``uncloak'' these anonymous 
spammers, and the Commission is encouraged by reported increases in the 
adoption rates for e-mail authentication. Panelists also agreed that 
there is no single solution to the spam problem and encouraged key 
stakeholders to collaborate in the fight against spam. To that end, the 
Commission looks forward to continued collaboration with consumer 
groups, industry members, international bodies, Members of Congress, 
and criminal law enforcement authorities.
2. Spyware
    The Commission has brought eleven spyware enforcement actions in 
the past 2 years. These actions have reaffirmed three key principles: 
First, a consumer's computer belongs to him or her, not the software 
distributor. Second, buried disclosures do not work, just as they have 
never worked in more traditional areas of commerce. And third, if a 
distributor puts a program on a consumer's computer that the consumer 
does not want, the consumer must be able to uninstall or disable it.
    The Commission's most recent settlement with Direct Revenue, a 
distributor of adware, illustrates these principles.\17\ According to 
the FTC's complaint, Direct Revenue, directly and through its 
affiliates, offered consumers free content and software, such as screen 
savers, games, and utilities, without disclosing adequately that 
downloading these items would result in the installation of adware. The 
installed adware monitored the online behavior of consumers and then 
used the results of this monitoring to display a substantial number of 
pop-up ads on their computers. Moreover, it was almost impossible for 
consumers to identify, locate, and remove this unwanted adware. Among 
other things, the FTC's complaint alleged that Direct Revenue used 
deception to induce the installation of the adware and that it was 
unfair for the company to make it unreasonably difficult to uninstall 
the adware. To resolve these allegations, Direct Revenue agreed to 
provide clear and prominent disclosures of what it is installing, 
obtain express consent prior to installation, clearly label its ads, 
provide a reasonable means of uninstalling software, and monitor its 
affiliates to assure that they (and any subaffiliates) comply with the 
FTC's order. In addition, Direct Revenue agreed to disgorge $1.5 
million to the U.S. Treasury. The Commission will continue to monitor 
this area and bring law enforcement actions when warranted.
3. The Tech-Ade Workshop
    The FTC is committed to understanding the implications of the 
development of technology on privacy and consumer protection--as, or 
even before, these developments happen. Last November, the FTC convened 
public hearings on the subject of Protecting Consumers in the Next 
Tech-Ade.\18\ The FTC heard from more than 100 of the best and 
brightest people in the tech world about new technologies on the 
horizon and their potential effects on consumers. The staff has 
incorporated what it has learned at the hearings into its enforcement 
and policy planning, will issue a report shortly, and will follow-up 
the hearings with a series of ``town hall'' meetings. The first such 
``town hall'' meeting will take place on November 1-2 in Washington, 
D.C. and will address the issue of online behavioral marketing. 
Behavioral marketing involves the collection of information about a 
consumer's activities online--including the searches the consumer has 
conducted, the web pages visited, and the content the consumer has 
viewed. The information is then used to target advertising to the 
consumer that is intended to reflect the consumer's interests, and thus 
increase the effectiveness of the advertising. The FTC will examine how 
behavioral marketing works, what types of data are collected, how such 
data are used, whether such data are sold or shared, and what 
information is conveyed to consumers about its use.
4. Repeal of the Common Carrier Exemption
    To address the consumer protection challenges posed by technology 
convergence, the Commission continues to support the repeal of the 
telecommunications common carrier exemption.
    Currently, the FTC Act exempts common carriers subject to the 
Communications Act from its prohibitions on unfair and deceptive acts 
or practices and unfair methods of competition.\19\ This exemption 
dates from a period when telecommunications were provided by 
government-authorized, highly regulated monopolies. The exemption is 
now outdated. Congress and the Federal Communications Commission 
(``FCC'') have dismantled much of the economic regulatory apparatus 
formerly applicable to the industry, and in the current world, firms 
are expected to compete in providing telecommunications services.
    Technological advances have blurred the traditional boundaries 
between telecommunications, entertainment, and information. As the 
telecommunications and Internet industries continue to converge, the 
common carrier exemption is likely to frustrate the FTC's ability to 
stop deceptive and unfair acts and practices and unfair methods of 
competition with respect to interconnected communications, information, 
entertainment, and payment services.
    The FTC has extensive expertise with advertising, marketing, and 
billing and collection, areas in which issues have emerged in the 
telecommunications industry. In addition, the FTC has powerful 
procedural and remedial tools that could be used effectively to address 
developing problems in the telecommunications industry if the FTC were 
authorized to reach them.
C. Health
    Of course not all fraud is technology-related. Fraud in the 
marketing of health care products, for example, can still be found in 
the offline world as in the online world. Too often, consumers fall 
prey to fraudulent health marketing because they are desperate for 
help. Fifty million Americans suffer from a chronic pain condition \20\ 
and have found no effective cure or treatment. Seventy million 
Americans are trying to lose weight.\21\ The FTC continues to take 
action against companies that take advantage of these consumers.
    From April 2006 through August 2007, the FTC initiated or resolved 
19 law enforcement actions involving 31 products making allegedly 
deceptive health claims.\22\ For example, in September 2006, a Federal 
district court found that defendants' claims for their purported pain 
relief ionized bracelets were false and unsubstantiated, and required 
the individual and corporate defendants to pay up to $87 million in 
refunds to consumers.
    In January 2007, the Commission announced separate cases against 
the marketers of four extensively advertised products--Xenadrine EFX, 
CortiSlim, TrimSpa, and One-A-Day WeightSmart. Marketers for these 
products settled charges that they had made false or unsubstantiated 
weight-loss or weight-control claims. In settling, the marketers 
surrendered cash and other assets collectively worth at least $25 
million and agreed to limit their future advertising claims.\23\
    Another important issue on the Commission's health agenda is 
childhood obesity. In the Summer of 2005, the Commission and the 
Department of Health and Human Services held a joint workshop on the 
issue of childhood obesity.\24\ The Commission's April 2006 report on 
the workshop urged industry to consider a wide range of options as to 
how self-regulation could assist in combating childhood obesity.\25\
    A number of companies took the FTC's recommendations seriously. On 
October 16, 2006, for example, the Walt Disney Company announced new 
food guidelines aimed at giving parents and children healthier eating 
options.\26\ And in November 2006, the Children's Advertising Review 
Unit, or ``CARU,'' which is administered by the Council of Better 
Business Bureaus, announced a new self-regulatory advertising 
initiative designed to use advertising to help promote healthy dietary 
choices and healthy lifestyles among American children.\27\ Eleven 
leading food manufacturers--including McDonalds, The Hershey Company, 
Kraft Foods, and General Mills--are participants in this initiative. On 
July 18, 2007, at a forum on childhood obesity hosted by the FTC and 
the Department of Health and Human Services (``HHS''), these companies 
released the details of their pledges to voluntarily restrict their 
advertising to children under 12 on television, radio, print, and 
Internet. Each of the companies committed either to limiting 100 
percent of their advertising directed to children to food products that 
meet certain nutrition criteria or to refrain from advertising to 
children.\28\ Nutritional standards vary by company, but all are 
required to be consistent with established scientific and/or government 
standards. As part of the initiative, the companies also committed to 
restricting their use of third-party licensed characters to products 
that meet these nutritional criteria and to websites promoting healthy 
lifestyles.
    At the July 18 FTC-HHS forum, select food and media companies 
reported on the progress they have made to date in adopting nutritional 
standards for advertising to children and reformulating products to 
offer children products that comport with these nutritional standards. 
The FTC also reported on its own research. The FTC's Bureau of 
Economics discussed the results of a study of children's exposure to 
food advertising on TV, released in June 2007. The study compared 
children's exposure to advertising on television in 1977 and 2004. The 
study concluded that today's children see more promotional 
advertisements for other programming, but fewer paid ads and fewer 
minutes of advertising on television. The study also found that 
children are not exposed to more food ads on television than they were 
in the past, although their ad exposure is more concentrated on 
children's programming.
    The FTC also updated the audience on its efforts to conduct a more 
comprehensive study of food industry marketing expenditures and 
activities targeted toward children and adolescents. Through this 
effort, the FTC is exploring not only traditional TV, print, and radio 
advertising, but all of the many other ways that the industry reaches 
children--through in-store promotions, events, packaging, the Internet, 
and product placement in video games, movies, and television programs. 
The Commission hopes to get a more complete picture of marketing 
techniques for which publicly available data have so far been lacking. 
The Commission will submit the aggregated data about children's food 
marketing in a report to Congress, as directed in the conference report 
on its 2006 appropriations legislation. This endeavor will be an 
important tool for tracking the marketplace's response to childhood 
obesity and identifying where more action is needed.
D. Financial Practices
    As with health issues, financial issues impact all consumers--
whether they are purchasing a home, trying to establish credit or 
improve their credit rating, or managing rising debt. Thus, protecting 
consumers in the financial services marketplace is a critical part of 
the FTC's consumer protection mission. The FTC has focused recent 
efforts in this area on subprime mortgage lending, payment cards, debt 
collection practices, and credit and debt counseling services.\29\
1. Mortgage Lending and Servicing
    In the last decade, the agency has brought twenty-one actions 
against companies and principals in the mortgage lending industry, 
focusing in particular on the subprime market.\30\ Several of these 
cases have resulted in large monetary judgments, with courts ordering 
that more than $320 million be returned to consumers.
    Most recently, in 2006, the Commission filed suit against a 
mortgage broker for deceiving Hispanic consumers who sought to 
refinance their homes. The FTC's complaint alleged that the broker 
misrepresented numerous key loan terms.\31\ The alleged conduct was 
egregious because the FTC claimed that the lender conducted business 
with its clients almost entirely in Spanish, and then provided loan 
documents in English at closing containing the less favorable terms. To 
settle the suit, the broker paid consumer redress and agreed to a 
permanent injunction prohibiting it from misrepresenting loan 
terms.\32\
    The Commission also has challenged deceptive and unfair practices 
in the servicing of mortgage loans.\33\ For example, in November 2003, 
the Commission, along with the Department of Housing and Urban 
Development (``HUD''), announced a settlement with Fairbanks Capital 
Corp. and its parent company. Fairbanks (now called Select Portfolio 
Servicing, Inc.) had been one of the country's largest third-party 
subprime loan servicers--it did not originate any loans, but collected 
and processed payments on behalf of the holders of the mortgage notes. 
The Commission alleged that Fairbanks failed to post consumers' 
payments upon receipt, charged for unnecessary insurance, and imposed 
other unauthorized fees. The complaint also charged Fairbanks with 
violating Federal laws by using dishonest or abusive tactics to collect 
debts, and by reporting to credit bureaus consumer payment information 
that it knew to be inaccurate. To resolve these charges, Fairbanks and 
its former chief executive officer paid over $40 million in consumer 
redress, agreed to halt the alleged illegal practices, and implemented 
significant changes to company business practices to prevent future 
violations.\34\ Just last month, the FTC announced a modified 
settlement with the company, which provided substantial benefits to 
consumers beyond those in the original settlement, including account 
adjustments and reimbursements or refunds of fees paid in certain 
circumstances.\35\
    To leverage resources in the Commission's work on subprime mortgage 
lending, this summer it announced that it will cooperate in an 
innovative pilot project with Federal banking agencies and state 
regulators to conduct targeted consumer-protection compliance reviews 
of selected non-depository lenders with significant subprime mortgage 
operations. The agencies will share information about the reviews and 
investigations, take action as appropriate, collaborate on the lessons 
learned, and seek ways to better cooperate in ensuring effective and 
consistent reviews of these institutions.
    Finally, the Commission's Bureau of Economics recently announced 
results of a study that confirms the need to improve mortgage 
disclosures.\36\ The research found: (1) the current federally required 
disclosures fail to convey key mortgage costs to many consumers; (2) 
better disclosures can significantly improve consumer recognition of 
mortgage costs; (3) both prime and subprime borrowers failed to 
understand key loan terms when viewing the current disclosures, and 
both benefited from improved disclosures; and (4) improved disclosures 
provided the greatest benefit for more complex loans, for which both 
prime and subprime borrowers had the most difficulty understanding loan 
terms. The Commission is working with Federal regulators on next steps.
2. Payment Cards
    The Commission continues to bring law enforcement actions against 
marketers and distributors of payment cards within its jurisdiction. On 
July 30, the Commission obtained a temporary restraining order 
prohibiting EDebitPay and related companies from marketing reloadable 
prepaid debit cards \37\ without adequately disclosing a processing and 
application fee of over $150. Moreover, the FTC alleges that some 
consumers who did not apply for defendants' prepaid card nevertheless 
suffered unauthorized debits from their bank accounts. When consumers 
complained about the unauthorized withdrawals, defendants allegedly 
erected formidable barriers to obtaining refunds, including 
misrepresenting that consumers could not contest the debits as 
unauthorized.
    The Commission has also been examining hidden expiration dates and 
dormancy fees on gift cards. This year, the Commission has announced 
two settlements in this area, one with Kmart Corporation and another 
with the national restaurant company, Darden Restaurants.\38\ According 
to the FTC's complaints, both Kmart and Darden promoted their gift 
cards as equivalent to cash but failed to disclose that fees are 
assessed after 2 years (initially 15 months, in Darden's case) of non-
use. In addition, the FTC alleged that Kmart affirmatively 
misrepresented that its card would never expire. Kmart and Darden have 
agreed to disclose the existence of any fees prominently in future 
advertising and on the front of the gift card. Both companies have also 
agreed to provide refunds of dormancy fees assessed on their cards. 
Kmart will reimburse the dormancy fees for consumers who provide an 
affected gift card's number, a mailing address, and a telephone number. 
Darden will automatically restore to each card any dormancy fees that 
were assessed. In 2006, both companies voluntarily stopped charging 
dormancy fees on their gift cards.
3. Debt Collection
    The FTC is tackling the problem of unlawful debt collection 
practices in two ways. First, the Commission engages in aggressive law 
enforcement. In nineteen lawsuits filed since 1998, the FTC has alleged 
that the defendants--including collection agencies, collection law 
firms, companies that purchase and collect delinquent credit accounts, 
and credit issuers--used illegal debt collection practices.\39\ In one 
such case, announced in February of this year, the Commission charged a 
collection agency, Rawlins & Rivera, Inc., and its principals with 
violating Federal law by falsely threatening consumers with lawsuits, 
seizure of property, and arrest.\40\ The court has granted the FTC's 
request for a preliminary injunction,\41\ and the litigation is 
continuing. In another case, in June 2007, the FTC obtained an 
injunction against defendants who victimized Spanish-speaking consumers 
by posing as debt collectors seeking payments consumers did not owe.
    Second, given the rise in consumer debt levels, as well as consumer 
complaints, it is time to take another look at the debt collection 
industry. This fall the FTC will hold a workshop to examine debt 
collection practices thirty years after enactment of the Fair Debt 
Collection Practices Act. The Commission will examine changes in the 
industry and the related consumer protection issues, including whether 
the law has kept pace with developments.
E. Telemarketing and Do Not Call
    Since the mid-1980s, the Commission has had a strong commitment to 
rooting out telemarketing fraud. From 1991 to the present, the FTC has 
brought more than 350 telemarketing cases; 240 of these cases were 
brought after 1995, when the FTC promulgated the Telemarketing Sales 
Rule (``TSR'').\42\ As one illustration of the Commission's robust 
enforcement program, in July, the FTC halted the allegedly unlawful 
telemarketing operations of Suntasia Marketing \43\ which, according to 
the FTC's complaint, took millions of dollars directly out of 
consumers' bank accounts without their knowledge or authorization. 
Suntasia allegedly tricked consumers into divulging their bank account 
numbers by pretending to be affiliated with the consumer's bank and 
offering a purportedly ``free gift'' to consumers who accepted a ``free 
trial'' of Suntasia's products. The complaint alleges that, once 
consumers divulged their bank account number, Suntasia debited many of 
their accounts. At the FTC's request, a court halted the scheme and 
froze the defendants' assets to preserve the Commission's ability to 
distribute redress to injured consumers, should the Commission prevail 
in this litigation.
    The FTC also works closely with its Canadian counterparts to combat 
cross-border telemarketing fraud. One recent case resulted in a 
judgment of more than $8 million against Canadian telemarketers of 
advance fee credit cards.\44\ In this case, the FTC closely coordinated 
its action with other members of the Toronto Strategic Partnerships, a 
group of Canadian, U.S., and U.K. law enforcers whose mission is to 
cooperate in bringing telemarketing fraud cases.
    As a complement to its anti-fraud work in the telemarketing arena, 
the Commission has an active program to enforce the Do Not Call 
provisions of the TSR. Consumers have registered more than 147 million 
telephone numbers since the Do Not Call Registry became operational in 
June 2003. The Do Not Call provisions have been tremendously successful 
in protecting consumer's privacy from unwanted telemarketing calls. 
Because currently consumers' registrations expire after 5 years, the 
Commission plans a significant effort to educate consumers on the need 
to reregister their phone numbers.
    Most entities covered by the Do Not Call provisions comply, but for 
those who do not, tough enforcement is a high priority for the FTC. 
Twenty-seven of the Commission's telemarketing cases have alleged Do 
Not Call violations, resulting in $8.8 million in civil penalties and 
$8.6 million in redress or disgorgement ordered.\45\
    The Commission understands that this Committee has passed S. 781, 
the Do Not Call Implementation Act (``DNCIA''). The Commission supports 
this legislation and appreciates the Committee's work on it. The 
Commission believes that the legislation, if enacted, will help ensure 
the continued success of the National Registry by providing the 
Commission with a stable funding source for its TSR enforcement 
activities. We also believe that the proposed legislation would benefit 
telemarketers, sellers, and service providers who access the Registry 
by providing them with a level fee structure.
F. Media Violence
    The Commission has continued its efforts to monitor the marketing 
of violent entertainment to children and to encourage industry self-
regulation. Since it began examining the issue in 1999, the Commission 
has issued six reports on the marketing of violent entertainment 
products to children. In April 2007, the Commission issued its latest 
report, which concluded that the movie, music, and video game 
industries generally comply with their own voluntary standards 
regarding the display of ratings and labels. Entertainment industries, 
however, continue to market some R-rated movies, M-rated video games, 
and explicit-content recordings on television shows and websites with 
substantial teen audiences. In addition, the FTC found that while video 
game retailers have made significant progress in limiting sales of M-
rated games to children, movie and music retailers have made only 
modest progress in limiting sales of R-rated and unrated DVDs and 
explicit content music recordings to children. The report also provides 
the results of a Commission survey of parents and children on their 
awareness and use of the video game rating system.
G. ``Green'' Marketing
    The Commission continues to monitor marketplace developments to 
identify new consumer protection issues. In monitoring developments in 
the energy and environmental areas, the Commission has observed that 
new ``green'' claims, such as claims for carbon reduction, landfill 
reduction, and sustainable packaging are entering the market daily. 
These claims can be extremely useful for consumers; however, the 
complexity of the issues involved creates the potential for confusing, 
misleading, and fraudulent claims. Given this potential, in the coming 
months, FTC staff plans to conduct research, develop consumer and 
business outreach, and bring appropriate enforcement actions in this 
area. As part of the research process, the Commission plans to host a 
series of public workshops to seek input from consumers, industry 
representatives, environmental groups, academics, and other government 
agencies on how to prevent fraud and deception in this marketplace, 
while at the same time encouraging innovation and competition on the 
basis of truthful claims.
H. Aiding Criminal Enforcement
    This testimony has highlighted various deceptive and unfair 
practices pursued by the Commission, from spam to spyware to health 
fraud to telemarketing fraud. These frauds that the FTC pursues civilly 
are also often criminal violations. The FTC's Criminal Liaison Unit, or 
``CLU,'' has stepped up cooperation with criminal authorities--an 
illustration of the FTC's efforts to bring the collective powers of 
different government agencies to bear upon serious misconduct in many 
consumer protection areas. Since October 2006, based on CLU referrals 
to criminal agencies, 115 FTC defendants or their associates have been 
charged, pled guilty, or were sentenced in criminal cases. The FTC's 
criminal referral program continues to be a high priority.
                      III. Maintaining Competition
    In addition to addressing unfair and deceptive conduct, the 
Commission is charged with protecting consumers by protecting 
competition. The goal of the FTC's competition mission is to strengthen 
free and open markets by removing the obstacles that impede competition 
and prevent its benefits from flowing to consumers. To accomplish this, 
the FTC has focused its enforcement efforts on sectors of the economy 
that have a significant impact on consumers, such as health care, 
energy, technology, and real estate.
A. Health Care
    The health care industry plays a crucial role in the U.S. economy 
in terms of consumer spending and welfare, and thus, the FTC has 
dedicated substantial resources to protecting consumers by vigorously 
reviewing proposed merger transactions, investigating potentially 
anticompetitive conduct that threatens consumer interests.
1. Agreements that Delay Generic Entry
    The FTC continues to be vigilant in the detection and investigation 
of agreements between drug companies that delay generic entry, 
including investigating some patent settlement agreements between 
pharmaceutical companies that are required to be filed with the 
Commission under the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003. In these ``exclusion payment settlements'' 
(or, to some, ``reverse payment settlements''), the brand-name drug 
firm pays its potential generic competitor to abandon the patent 
challenge and delay entering the market. Such settlements restrict 
competition at the expense of consumers, whose access to lower-priced 
generic drugs is delayed, sometimes for many years.
    Recent court decisions, however, have made it more difficult to 
bring antitrust cases to stop exclusion payment settlements, and the 
impact of those court rulings is becoming evident in the marketplace. 
These developments threaten substantial harm to consumers and others 
who pay for prescription drugs. For that reason, the Commission 
supports a legislative solution to prohibit these anticompetitive 
settlements, while allowing exceptions for those agreements that do not 
harm competition.
    In addition, in November 2005, in the case of FTC v. Warner 
Chilcott Holdings Company III, Ltd., the Commission filed a complaint 
in Federal district court seeking to terminate an agreement between 
drug manufacturers Warner Chilcott and Barr Laboratories that prevented 
Barr from selling a lower-priced generic version of Warner Chilcott's 
Ovcon 35, a branded oral contraceptive.\46\ Under threat of a 
preliminary injunction, in September 2006, Warner Chilcott waived the 
exclusionary provision in its agreement with Barr that prevented Barr 
from entering with its generic version of Ovcon. The next day, Barr 
announced its intention to start selling a generic version of the 
product, and it now has done so, giving consumers the benefits of price 
competition.\47\
2. Pharmaceuticals, Medical Devices, and Diagnostic Systems
    The Commission is active in enforcing the antitrust laws in the 
pharmaceutical, medical devices, and diagnostic systems industries. For 
example, the Commission challenged the terms of Actavis Group hf.'s 
proposed acquisition of Abrika Pharmaceuticals, Inc., alleging that the 
transaction would create a monopoly in the U.S. market for generic 
isradipine capsules, a drug typically prescribed to patients to lower 
their blood pressure and to treat hypertension, ischemia, and 
depression. Under a consent order that allowed the deal to proceed, the 
companies divested all rights and assets needed to make and market 
generic isradipine capsules to Cobalt Laboratories, Inc., an 
independent competitor.\48\ The FTC also challenged Barr 
Pharmaceuticals' proposed acquisition of Pliva.\49\ In settling the 
Commission's charges that the transaction would have increased 
concentration and led to higher prices, Barr was required to sell its 
generic antidepressant, trazodone; its generic blood pressure 
medication, triamterene/HCTZ; either Pliva's or Barr's generic drug for 
use in treating ruptured blood vessels in the brain; and Pliva's 
branded organ preservation solution. Last year, the FTC challenged 
several other pharmaceutical mergers, including: Watson 
Pharmaceuticals/Andrx Corporation; \50\ Teva Pharmaceutical Industries/
IVAX Corporation; \51\ Johnson & Johnson's acquisition of Pfizer's 
consumer health division; \52\ and Hospira, Inc./Mayne Pharma 
Limited.\53\ Recent FTC medical devices and diagnostic systems cases 
include: the FTC's challenge of the proposed $27 billion acquisition of 
Guidant Corporation by Boston Scientific Corporation, in which the FTC 
required the divestiture of Guidant's vascular business to an FTC-
approved buyer; \54\ and the FTC's challenges of mergers affecting 
markets for biopsy systems and for centrifugal vacuum evaporators used 
in the health care industry.\55\
    FTC staff also has initiated a study on authorized generic 
drugs.\56\ The study is intended to help the agency understand the 
circumstances under which innovator companies launch authorized 
generics; to provide data and analysis of how competition between 
generics and authorized generics during the Hatch-Waxman Act's 180-day 
exclusivity period has affected short-run price competition and long-
run prospects for generic entry; and to build on the economic 
literature about the effect of generic drug entry on prescription drug 
prices.
3. Hospitals and Physicians
    The Commission has worked vigorously to preserve competition in 
local hospital markets. Last month, the Commission ruled that Evanston 
Northwestern Healthcare Corporation's acquisition of Highland Park 
Hospital was anticompetitive,\57\ upholding an October 2005 Initial 
Decision by an FTC Administrative Law Judge that the consummated 
acquisition of its important competitor, Highland Park Hospital, 
resulted in substantially higher prices and a substantial lessening of 
competition for acute care inpatient hospital services in parts of 
Chicago's northern suburbs.\58\ Several other hospital mergers have 
been announced within the past several months, and the FTC has active 
investigations pending.\59\
    The FTC continues to investigate and challenge unlawful price 
fixing by physicians and other health care providers that may lead to 
higher costs for consumers. In the past year, the FTC challenged the 
practices of four physician groups alleging that the competing 
providers jointly set their prices and collectively agreed to refuse to 
deal with health care payers that did not meet their fee demands. The 
FTC charges against these groups were resolved by consent orders.\60\ 
Further, in June, the Commission accepted a consent order in South 
Carolina State Board of Dentistry,\61\ resolving charges that the South 
Carolina State Board of Dentistry restrained competition in the 
provision of preventive care by dental hygienists, limiting access to 
care by children living in poverty.
B. Energy
    Few issues are more important to American consumers and businesses 
than high energy prices. The FTC plays a key role in maintaining 
competition and protecting consumers in energy markets by challenging 
antitrust violations, conducting studies and analyses, and providing 
comments to other government agencies.
    So far in 2007, the Commission has challenged three mergers in the 
energy industry. This past spring, the Commission challenged Equitable 
Resources proposed acquisition of The Peoples Natural Gas Company, a 
subsidiary of Dominion Resources.\62\ Equitable and Dominion Peoples 
are each other's sole competitors in the distribution of natural gas to 
nonresidential customers in certain areas of Allegheny County, 
Pennsylvania, which includes Pittsburgh. In March, the FTC filed an 
administrative complaint against the acquisition, and in April the 
staff sought an injunction in Federal court. Both actions alleged that 
the proposed transaction would result in a monopoly for many customers 
who now benefit from competition between the two firms. The district 
court denied the FTC's request for an injunction, asserting that 
because the Pennsylvania Utility Commission has the power to approve 
the merger, the FTC is banned from taking action under the state action 
doctrine. The Third Circuit has issued an injunction pending appeal, 
and the appeal will be argued in early October.
    In January 2007, the Commission challenged the terms of a proposed 
$22 billion deal whereby energy firm Kinder Morgan would be taken 
private by its management and a group of investment firms, including 
The Carlyle Group and Riverstone Holdings.\63\ The Commission alleged 
in its complaint that Carlyle and Riverstone held significant positions 
in Magellan Midstream, a major competitor of Kinder Morgan in the 
terminaling of gasoline and other light petroleum products in the 
southeastern United States, and that the proposed transaction would 
threaten competition in those markets. In settling the Commission's 
charges, Carlyle and Riverstone agreed to turn their investment in 
Magellan passive and to restrict the flow of sensitive information 
between Kinder Morgan and Magellan.
    In the most recent petroleum merger challenge, the Commission 
challenged Western Refining's acquisition of Giant Industries to 
preserve competition in the bulk supply of light petroleum products to 
northern New Mexico, an area of the country where the Commission 
alleged that the two companies are direct and significant 
competitors.\64\ The Commission's complaint for a preliminary 
injunction filed in Federal court and its subsequently issued 
administrative complaint alleged that, if it were not acquired by 
Western, Giant would soon increase the supply of gasoline to northern 
New Mexico, and that the transaction as proposed would prevent this. 
The U.S. district judge in New Mexico denied the Commission's request 
for a preliminary injunction.\65\
    The Commission also actively monitors energy markets, and markets 
for related consumer products, for anticompetitive conduct. In June 
2007, the Commission charged the American Petroleum Company, Inc. with 
illegally conspiring with its competitors to restrict the importation 
and sale of motor oil lubricants in Puerto Rico, in an attempt to force 
the legislature to repeal a law that charged importers and others 
within the distribution chain an environmental deposit of 50 cents for 
each quart of lubricants purchased.\66\ The Commission's consent order 
bars American Petroleum from engaging in such conduct in the future.
    On April 25, 2006, President Bush directed the DOJ to join the FTC 
and the Department of Energy to inquire into ``illegal manipulation or 
cheating related to the current gasoline prices.'' \67\ Accordingly, 
staff of the Commission and the DOJ Antitrust Division, with assistance 
from the Department of Energy's Energy Information Administration, 
conducted an economic analysis and investigation of the likely factors 
that led to higher national average gasoline prices during the spring 
and summer of 2006, and to determine whether anticompetitive conduct 
may have occurred.\68\ This study identified six major factors that 
contributed to price rises during the spring and summer of 2006: (1) 
the market effects of the summer driving season; (2) an increase in the 
price of crude oil; (3) an increase in the price of ethanol; (4) 
capacity issues related to the transition to ethanol from MTBE; (5) 
refinery outages; and (6) increased demand. A report detailing the 
findings was sent to the President in August.\69\
    In May 2006, the FTC released a report titled Investigation of 
Gasoline Price Manipulation and Post-Katrina Gasoline Price 
Increases.\70\ This report contained the findings of a Congressionally-
mandated Commission investigation into whether gasoline prices were 
``artificially manipulated by reducing refinery capacity or by any 
other form of market manipulation or price gouging practices.'' The 
report also discusses gasoline pricing by refiners, large wholesalers, 
and retailers in the aftermath of Hurricane Katrina. In its 
investigation, the FTC examined evidence relating to a broad range of 
possible forms of manipulation. It found no instances of illegal market 
manipulation that led to higher prices during the relevant time 
periods, but found fifteen examples of pricing at the refining, 
wholesale, or retail level that fit the legislation's definition of 
evidence of ``price gouging.'' \71\ Other factors such as regional or 
local market trends, however, appeared to explain these firms' prices 
in nearly all cases.\72\
C. Real Estate
    Purchasing or selling a home is one of the most significant 
financial transactions most consumers will ever make, and 
anticompetitive industry practices can raise the prices of real estate 
services. In the past year, the agency has brought eight enforcement 
actions against associations of competing realtors or brokers. The 
associations, which control multiple listing services, adopted rules 
that allegedly discouraged consumers from entering into non-traditional 
listing contracts with real estate brokers. In seven of these matters, 
the Commission accepted settlements prohibiting multiple listing 
services from discriminating against non-traditional listing 
arrangements. The eighth matter, RealComp, is currently in 
administrative litigation; a trial was held in June and closing 
arguments are scheduled for September.\73\ The result of these actions 
will allow consumers more choice and ensure that consumers who choose 
to use discount real estate brokers will not be handicapped by rules 
preventing other consumers from seeing their home listings on the 
Internet.
D. Technology
    Technology is another area in which the Commission has acted to 
protect consumers by safeguarding competition. In February 2007, the 
Commission issued an opinion and final order on remedies in the legal 
proceeding against computer technology developer Rambus, Inc.\74\ 
Previously, in July 2006, the Commission had determined that Rambus 
unlawfully monopolized the markets for four computer memory 
technologies that have been incorporated into industry standards for 
dynamic random access memory (DRAM) chips. DRAM chips are widely used 
in personal computers, servers, printers, and cameras.\75\ In addition 
to barring Rambus from making misrepresentations or omissions to 
standard-setting organizations again in the future, the February 2007 
order, among other things, requires Rambus to license its SDRAM and DDR 
SDRAM technology; with respect to uses of patented technologies after 
the effective date of the order, bars Rambus from collecting more than 
the specified maximum allowable royalty rates; and requires Rambus to 
employ a Commission-approved compliance officer to ensure that Rambus's 
patents and patent applications are disclosed to industry standard-
setting bodies in which it participates.\76\ Rambus has appealed the 
Commission's rulings to the U.S. Court of Appeals for the District of 
Columbia Circuit.
E. Retail and Other Industries
    The FTC also guards against anticompetitive conduct in the retail 
sector. In June 2007, the Commission sought a preliminary injunction in 
Federal district court blocking Whole Foods' acquisition of its chief 
rival, Wild Oats Markets, Inc.\77\ The FTC charged that the proposed 
transaction would violate Federal antitrust laws by eliminating the 
substantial competition between these two uniquely close competitors in 
numerous geographic markets across the country in the operation of 
premium natural and organic supermarkets. On August 16, 2007, a judge 
for the U.S. District Court of the District of Columbia denied the 
FTC's motion for preliminary injunction, and on August 23, the Court of 
Appeals denied the FTC's emergency motion for an injunction pending 
appeal.\78\ The matter remains in administrative litigation. Also, this 
year in June, the FTC challenged Rite Aid Corporation's proposed $3.5 
billion acquisition of the Brooks and Eckerd pharmacies from Canada's 
Jean Coutu Group (PJC), Inc.\79\ To remedy the alleged anticompetitive 
impact of the proposed transaction, the Commission ordered Rite Aid and 
Jean Coutu to sell 23 pharmacies to Commission-approved buyers to 
preserve the competition that would otherwise be lost in the merger.
    In March 2007, the Commission announced a proposed order settling 
charges that the Missouri State Board of Embalmers and Funeral 
Directors illegally restrained competition by defining the practice of 
funeral directing to include selling funeral merchandise to consumers 
on an at-need basis.\80\ The Board's regulation permitted only licensed 
funeral directors to sell caskets to consumers on an at-need basis, 
thereby restricting competition from other retailers. The Board ended 
the restriction last year and agreed that it will not prohibit or 
discourage the sale of caskets, services, or other funeral merchandise 
by unlicensed persons, thereby settling the Commission's charges.
    The Commission also has sought to protect customers by imposing 
conditions on mergers involving diverse industries such as launch 
services; \81\ the manufacture of ammunition for mortars and artillery; 
\82\ the Nation's two largest funeral home and cemetery chains; \83\ 
and liquid oxygen and helium.\84\
F. Guidance, Transparency, and Merger Review Process Improvements
    The FTC works to facilitate cooperation and voluntary compliance 
with the law by promoting transparency in enforcement standards, 
policies, and decision-making processes. Last year, the FTC implemented 
two important reforms that streamlined the merger review process. In 
February 2006, the Commission announced the implementation of 
significant merger process reforms aimed at reducing the costs borne by 
both the FTC and merging parties.\85\ In June 2006, the FTC and the DOJ 
Antitrust Division implemented an electronic filing system that allows 
merging parties to submit, via the Internet, premerger notification 
filings required by the Hart-Scott-Rodino Act.\86\
G. Competition Advocacy
    The Commission frequently provides comments to Federal and state 
legislatures and government agencies, sharing its expertise on the 
competitive impact of proposed laws and regulations when they 
explicitly or implicitly impact the antitrust laws, and when they alter 
the competitive environment through restrictions on price, innovation, 
or entry conditions. Recent FTC advocacy efforts have contributed to 
several positive outcomes for consumers. In the past year, the FTC has 
sought to persuade regulators to adopt policies that do not 
unnecessarily restrict competition in the areas of gasoline sales,\87\ 
real estate brokerage,\88\ real estate legal services,\89\ attorney 
advertising,\90\ and pharmacy benefit managers.\91\
H. Hearings, Reports, Conferences, and Workshops
    The FTC's hearings, conferences, and workshops represent a unique 
opportunity for the agency to develop policy and research tools and 
help foster a deeper understanding of the complex issues involved in 
the economic and legal analysis of antitrust law.
    Beginning in June 2006 and continuing through May 2007, the FTC and 
the DOJ Antitrust Division held hearings to discuss the boundaries of 
permissible and impermissible conduct under Section 2 of the Sherman 
Act.\92\ The primary goal of the hearings was to examine whether and 
when specific types of single-firm conduct are procompetitive or benign 
and when they may harm competition. The Commission expects to issue a 
report with DOJ on the hearings.
    In August 2006, the FTC convened the Internet Access Task Force to 
examine issues raised by converging technologies and regulatory 
developments, and to inform the enforcement, advocacy, and education 
initiatives of the Commission. Under the leadership of the Internet 
Access Task Force, the FTC recently addressed two issues of interest to 
policymakers.
    First, in October 2006, the FTC released a staff report, Municipal 
Provision of Wireless Internet. The report identifies the potential 
benefits and risks to competition and consumers associated with 
municipal provision of wireless Internet service.\93\ Second, in June 
2007, the FTC released a staff report, Broadband Connectivity 
Competition Policy, which summarizes the Task Force's findings in the 
area of broadband Internet access, including so-called ``network 
neutrality.'' \94\ The report proposes guiding principles for assessing 
this complex issue, and makes clear that the FTC will continue to 
vigorously enforce the antitrust and consumer protection laws and 
expend considerable efforts on consumer education, industry guidance, 
and competition advocacy in the important area of broadband Internet 
access.
    In April 2007, the Commission held a three-day conference on Energy 
Markets in the 21st Century: Competition Policy in Perspective.\95\ The 
conference brought together leading experts from government, the energy 
industry, consumer groups, and the academic community to participate on 
panels to examine such topics as: (1) the relationship between market 
forces and government policy in energy markets; (2) the dependence of 
the U.S. transportation sector on petroleum; (3) the effects of 
electric power industry restructuring on competition and consumers; (4) 
what energy producers and consumers may expect in the way of 
technological developments in the industry; (5) the security of U.S. 
energy supplies; and (6) the government's role in maintaining 
competition and protecting energy consumers. The Commission expects to 
issue a report detailing the findings of this conference.
    Also in April of this year, the FTC and the DOJ issued a joint 
report, titled Antitrust Enforcement and Intellectual Property Rights: 
Promoting Innovation and Competition, to inform consumers, businesses, 
and intellectual property rights holders about the agencies' 
competition views with respect to a wide range of activities involving 
intellectual property.\96\ The report discusses issues including: 
refusals to license patents, collaborative standard setting, patent 
pooling, intellectual property licensing, the tying and bundling of 
intellectual property rights, and methods of extending market power 
conferred by a patent beyond the patent's expiration. This second 
report on antitrust and intellectual property joins a report issued in 
2003 following extensive hearings on this important topic.
    In May 2007, the Commission and the DOJ Antitrust Division released 
a joint report, Competition in the Real Estate Brokerage Industry. The 
purpose of the report is to inform consumers and other industry 
participants about important competition issues involving residential 
real estate, including the impact of the Internet, the competitive 
structure of the real estate brokerage industry, and obstacles to a 
more competitive environment.\97\
I. Competition Education Initiatives
    The FTC is committed to enhancing consumer confidence in the 
marketplace through enforcement and education. This year, Commission 
staff launched a multi-dimensional outreach campaign, targeting new and 
bigger audiences, with the message that antitrust enforcement helps 
consumers reap the benefits of competitive markets by keeping prices 
low and services and innovation high, as well as by encouraging more 
choices in the marketplace.\98\ As a part of this effort, the 
Commission's website, www.ftc.gov, continues to grow in size and scope 
with resources on competition policy in a variety of vital industries. 
This year, the FTC launched new industry-specific websites for Oil and 
Gas,\99\ Health Care,\100\ Real Estate,\101\ and Technology.\102\ These 
minisites serve as a one-stop shop for consumers and businesses who 
want to know what the FTC is doing to promote competition in these 
important business sectors. In the past year, the FTC also issued 
practical tips for consumers on buying and selling real estate, funeral 
services, and generic drugs, as well as ``plain language'' columns on 
oil and gas availability and pricing.
                           III. International
    The FTC's Office of International Affairs (OIA), created in January 
2007, brings together the international functions formerly handled in 
the Bureaus of Competition and Consumer Protection and the Office of 
General Counsel. OIA brings increased prominence to the FTC's 
international work, and enhances the FTC's ability to coordinate its 
enforcement efforts effectively to promote sound enforcement and 
convergence toward best practices with the agency's counterpart 
agencies around the world.
    The FTC has built a strong network of cooperative relationships 
with its counterparts abroad, and plays a leading role in key 
multilateral fora. The growth of communication media and electronic 
commerce presents new challenges to law enforcement--fraud and 
deception know no borders. The Commission works with other nations to 
protect American consumers who can be harmed by anticompetitive conduct 
and frauds perpetrated outside the United States. The FTC also actively 
assists new democracies moving toward market-based economies with 
developing and implementing competition and consumer protection laws 
and policies.
A. Consumer Protection
    Globalization and rapid changes in technology have accelerated the 
pace of new consumer protection challenges, such as spam, spyware, 
telemarketing fraud, data security, and privacy, that cross national 
borders and raise both enforcement and policy issues. The Internet and 
modern communications devices, such as Voice-over-Internet Protocol, 
have provided tremendous benefits to consumers but also have aided mass 
marketing fraud and raised fresh privacy concerns. The FTC has a 
comprehensive international consumer protection program of enforcement, 
networking, and policy initiatives to address these new challenges.
    In the coming year, the FTC will continue to implement the U.S. 
SAFE WEB Act of 2006, which was signed into law last December. Thanks 
to the actions of this Committee, the U.S. SAFE WEB Act provides the 
FTC with updated tools for the 21st century. It allows the FTC to 
cooperate more fully with foreign law enforcement agencies in the area 
of cross-border fraud and other practices that are global and harm 
consumers, such as fraudulent spam, spyware, misleading health and 
safety advertising, privacy and security breaches, and telemarketing 
fraud. The FTC already has used the powers conferred by the Act to 
share information with foreign agencies in several investigations. The 
increasing use of these new tools will remove some of the key 
roadblocks to effective international enforcement cooperation.
    The FTC works directly with consumer protection and other law 
enforcement officials in foreign countries to achieve its goals. In 
particular, in response to the amount of fraud across the U.S.-Canadian 
border, the FTC continues to build its relationship with its Canadian 
counterparts. The Commission has worked hard to expand partnerships 
with Canadian law enforcement entities to fight cross-border mass 
marketing fraud targeting U.S. and Canadian consumers.
    Increased globalization also requires the FTC to participate 
actively in international policy efforts to develop flexible, market-
oriented standards, backed by aggressive enforcement, to address 
emerging consumer protection issues. In 2006, for example, the FTC, 
working with its foreign partners through the Organization for Economic 
Cooperation and Development (``OECD'') and through the London Action 
Plan, the international spam enforcement network, called for increased 
cross-border law enforcement cooperation and increased public/private 
sector cooperation to combat spam. Already in 2007, the FTC, working 
with its foreign partners through the OECD, has developed a framework 
for privacy regulators and law enforcement authorities to facilitate 
cross-border privacy law enforcement cooperation and provide greater 
protection for consumers' personal information. Most recently, in July 
2007, the FTC, again working through the OECD, agreed with its partners 
on a set of principles to address the practical and legal obstacles 
that many consumers face when trying to resolve disputes with 
businesses, in their own country or abroad, particularly in cross-
border e-commerce transactions.
    The FTC will continue to focus the international community on the 
importance of enforcement as a key component of privacy protection in 
the OECD, the Asia Pacific Economic Cooperation (``APEC''), and other 
multilateral organizations. The FTC also continues to participate 
actively in APEC's Electronic Commerce Steering Group and several OECD 
committees, including the Committee on Consumer Policy, and in the 
International Consumer Protection Enforcement Network (``ICPEN''). The 
FTC supported ICPEN's operations this year by hosting its Secretariat.
B. Competition
    The FTC's cooperation with competition agencies around the world is 
a vital component of our enforcement and policy programs, facilitating 
our ability to collaborate on cross-border cases, and promoting 
convergence toward sound, consumer welfare-based competition policies.
    FTC staff routinely coordinate with colleagues in foreign agencies 
on mergers and anticompetitive conduct cases of mutual concern. The FTC 
promotes policy convergence through formal and informal working 
arrangements with other agencies, many of which seek the FTC's views 
when developing new policy initiatives. For example, during the past 
year, the FTC consulted with the European Commission regarding its 
review of policies on abuse of dominance, non-horizontal mergers, and 
merger remedies, with the Canadian Competition Bureau on merger 
remedies and health care issues, and with the Japan Fair Trade 
Commission on revisions to its Guidelines on Patent and Know-how 
Licensing Agreements under the Antimonopoly Act. We are closely 
following competition developments in China and have held high-level 
meetings with the drafters of the antimonopoly law and with officials 
in China's Ministry of Commerce responsible for their pre-merger 
notification guidelines, and conducted a multi-day, hands-on seminar on 
merger process and analysis for Chinese officials. The FTC continues to 
play a lead role with respect to market-based competition and 
innovation issues in the U.S.-China Strategic Economic Dialogue, 
including participation in the May 22-23 summit meeting in Washington. 
We have just held our annual bilateral meetings with the Japanese Fair 
Trade Commission, we participated in consultations in Washington and in 
foreign capitals with top officials of, among others, the Korean Fair 
Trade Commission and Mexican Federal Competition Commissions, and we 
will soon hold our annual consultations with the European Commission's 
Directorate General for Competition.
    The FTC plays a lead role in key multilateral fora that provide 
important opportunities for competition agencies to promote cooperation 
and convergence. In the International Competition Network, the FTC 
serves on the Steering Group, and FTC officials hold leadership 
positions in working groups on unilateral conduct, mergers, and 
competition policy implementation. We are also active in the 
competition work of the OECD, UNCTAD, and APEC. The FTC participates in 
U.S. delegations that negotiate competition chapters of proposed free 
trade agreements, such as with Korea, Thailand, and Malaysia.
    As competition enforcement has proliferated worldwide, the FTC's 
international competition program has promoted sound, coherent, and 
fair application of competition laws, to the benefit of American 
businesses and consumers.
C. International Technical Assistance
    The FTC assists developing nations that are moving toward market-
based economies to develop and implement sound competition and consumer 
protection laws and policies. Our program is funded mainly by the 
United States Agency for International Development (``USAID'') and 
conducted in cooperation with the DOJ Antitrust Division. In 2007, the 
FTC sent 20 staff experts on 20 technical assistance missions to 14 
countries, including the ten-nation ASEAN Community, India, Russia, 
Azerbaijan, South Africa, Central America, Tanzania, and Egypt.
    Because USAID resources for these activities have been declining, 
the Commission may need to consider alternative funding sources. The 
Antitrust Modernization Commission recently recommended that Congress 
appropriate funds for use by the agencies directly for this important 
work.
                             V. Conclusion
    The Commission wants to ensure that the quality of our work is 
maintained despite the breadth of our mission and the challenges that 
have been described involving technological change and an evolving 
global economy. In the last several years, Congress has passed a 
variety of significant new laws that the FTC is charged, at least in 
part, with implementing and enforcing, such as the CAN-SPAM Act, the 
Fair and Accurate Credit Transactions Act, the Children's Online 
Privacy Protection Act, the Gramm-Leach-Bliley Act, and the U.S. SAFE 
WEB Act. In light of these new laws and challenges, the FTC appreciates 
the Committee's continued support for providing the Commission with the 
authority, personnel, and resources needed to ensure that the FTC 
vigorously protects American consumers and promotes a vibrant 
marketplace.
    I would be happy to answer any questions that you and other Members 
may have about the FTC's reauthorization.
Endnotes
    \1\ The written statement represents the views of the Federal Trade 
Commission. My oral presentation and responses to questions are my own 
and do not necessarily reflect the views of the Commission or any other 
Commissioner.
    \2\ The FTC has broad law enforcement responsibilities under the 
Federal Trade Commission Act, 15 U.S.C.  41 et seq. With certain 
exceptions, the statute provides the agency with jurisdiction over 
nearly every economic sector. Certain entities, such as depository 
institutions and common carriers, as well as the business of insurance, 
are wholly or partly exempt from FTC jurisdiction. In addition to the 
FTC Act, the agency has enforcement responsibilities under more than 50 
other statutes and more than 30 rules governing specific industries and 
practices.
    \3\ The Commission wants to ensure that the quality of our work is 
maintained despite the quantity of demands placed upon us, the breadth 
of our mission, and the increasing challenges of a dynamic domestic and 
global marketplace. Today, the FTC has 1,074 full-time equivalent 
employees (``FTEs''). In the last few years, Congress has passed a 
variety of significant new laws that the FTC is charged, at least in 
part, with implementing and enforcing, such as the CAN-SPAM Act, the 
Fair and Accurate Credit Transactions Act, the Children's Online 
Privacy Protection Act, the Gramm-Leach-Bliley Act, and the U.S. SAFE 
WEB Act. We would like to work with the Committee to help ensure that 
our reauthorization includes appropriate increases in resources to meet 
these growing challenges.
    \4\ The Commission's ability to seek civil penalties is limited, 
and we look forward to working with you to ensure that the FTC has the 
authority it needs to deter wrongful conduct and protect American 
consumers. For example, where civil penalties are authorized (such as 
for violations of specific statutes like CAN-SPAM, or regulations 
including the Telemarketing Sales Rule), the Commission cannot, unlike 
other agencies such as the Securities and Exchange Commission or the 
Commodity Futures Trading Commission, go directly to court, but must 
first refer the case to the Department of Justice, which has 45 days in 
which to decide whether to bring the action. Only if the DOJ declines 
may the FTC bring the civil penalties claim. The Commission has a good, 
long-standing working relationship with DOJ, which has greatly assisted 
us in our consumer protection efforts. But, for example, there are 
cases in which we must forgo seeking civil penalties in the interest of 
seeking expeditious injunctive relief. We look forward to working with 
the Committee to examine this issue.
    \5\ So far during FY 2007, the FTC's Bureau of Consumer Protection 
has achieved many successes. It obtained 57 court orders requiring 
defendants to pay more than $236 million in consumer redress, obtained 
8 court judgments for civil penalties in an amount over $4.9 million, 
and filed 35 new complaints in Federal district court to stop unfair 
and deceptive practices. It also completed 14 statutorily-mandated 
requirements such as rulemakings and reports, led 2 law enforcement 
sweeps, hosted 11 conferences and workshops, issued 5 reports on topics 
significant to consumers, and developed 16 consumer and business 
education campaigns.
    \6\ Pub. L. 105-318, 112 Stat. 3007 (1998) (codified at 18 U.S.C.  
1028).
    \7\ Exec. Order No. 13,402, 71 FR 27945 (May 10, 2006).
    \8\ The President's Identity Theft Task Force, Combating Identity 
Theft: A Strategic Plan (``Strategic Plan''), available at http.//
www.idtheft.gov.
    \9\ OMB Memorandum 07-16, ``Safeguarding Against and Responding to 
the Breach of Personally Identifiable Information'' (May 22, 2007), 
available at http://www.whitehouse.gov/omb/memoranda/fy2007/m07-16.pdf; 
OMB Memorandum, ``Recommendations for Identity Theft Related Data 
Breach Notification'' (Sept. 20, 2006), available at http://
www.whitehouse.gov/omb/memoranda/fy2006/task_force_theft_memo.pdf.
    \10\ See http://www.ftc.gov/infosecurity/.
    \11\ See http://www.ftc.gov/bcp/workshops/proofpositive/
index.shtml.
    \12\ On July 30, 2007, the FTC issued a request for public comment 
on the uses of Social Security numbers in the private sector, and 
announced that it was planning to host one or more public forums on the 
issue in the coming months. See http://www.ftc.gov/opa/2007/07/ssn/
shtm.
    \13\ See http://www.usdoj.gov/opa/pr/2007/July/
07_crt_522%20%20%20.html.
    \14\ FTC News Release, FTC Launches Nationwide Id Theft Education 
Campaign (May 10, 2006), available at http://www.ftc.gov/opa/2006/05/
ddd.htm.
    \15\ Available at http://onguardonline.gov/index.html.
    \16\ Available at http://www.ftc.gov/bcp/edu/microsites/idtheft/
business/data-breach.html.
    \17\ In the Matter of Direct Revenue, LLC, FTC Dkt. No. C-4194 
(June 29, 2007), available at http://www.ftc.gov/os/caselist/0523131/
index.shtm.
    \18\ See FTC News Release, Hearings Will Explore Emerging 
Technologies and Consumer Issues in the Next Decade (July 26, 2006), 
available at http://www.ftc.gov/opa/2006/07/techade.htm.
    \19\ 15 U.S.C.  45(a)(2) exempts from the FTC Act ``common 
carriers subject to the Acts to Regulate Commerce.'' 15 U.S.C.  44 
defines the ``Acts to regulate commerce'' as ``Subtitle IV of Title 49 
(interstate transportation) and the Communications Act of 1934'' and 
all amendments thereto.
    \20\ Partners for Understanding Pain, Pain Advocacy Tool Kit (Sept. 
2006) (including members from American Cancer Society, American 
Pharmacists Association, and Arthritis Foundation, among others), 
available at http://www.nmmra.org/resources/Home_Health/Nurses_Tool_
Kit_2006.pdf.
    \21\ E.g., Approximately two-thirds of U.S. adults are overweight 
or obese. National Center for Health Statistics, Prevalence of 
Overweight and Obesity Among Adults: United States, 2003-2004. 
available at http://www.cdc.gov/nccdphp/dnpa/obesity/faq.htm#adults; 
and approximately 127 million adults in the U.S. are overweight, 60 
million obese, and 9 million severely obese, American Obesity 
Association, AOA Fact Sheet, available at http://obesity1.
tempdomainname.com/subs/fastfacts/obesity_US.shtml.
    \22\ E.g., FTC v. Window Rock Enters., Inc., No. CV04-8190 (JTLx) 
(C.D. Cal. filed Jan. 4, 2007) (stipulated final orders) (Cortislim), 
available at http://www.ftc.gov/os/caselist/windowrock/windowrock.htm; 
In the Matter of Goen Techs. Corp., FTC File No. 042 3127 (Jan. 4, 
2007) (consent order) (TrimSpa), available at http://www.ftc.gov/os/
caselist/goen/0423127agreement.pdf; United States v. Bayer Corp., No. 
07-01 (HAA) (D.N.J. filed Jan. 3, 2007) (consent decree) (One-A-Day), 
available at http://www.ftc.gov/os/caselist/bayercorp/
070104consentdecree.pdf; FTC v. Chinery, No. 05-3460 (GEB) (D.N.J. 
filed Dec. 26 , 2006) (stipulated final order) (Xenadrine), available 
at http://www.ftc.gov/os/caselist/chinery/
070104stipulatedfinalorder.pdf; FTC v. QT, Inc., No. 03 C 3578 (N.D. 
Ill. Sept. 8, 2006) (final judgment order), available at http://
www.ftc.gov/os/caselist/0323011/061113qrayfinaljdgmntorder.pdf.
    \23\ See FTC News Release, Federal Trade Commission Reaches ``New 
Year's'' Resolutions with Four Major Weight-Control Pill Marketers 
(Jan. 4, 2007), available at http://www.ftc.gov/opa/2007/01/
weightloss.htm.
    \24\ See FTC News Release, Workshop Explores Marketing, Self-
Regulation, and Childhood Obesity (July 15, 2005), available at http://
www.ftc.gov/opa/2005/07/obesityworkshopma.htm.
    \25\ Perspectives on Marketing, Self-Regulation, & Childhood 
Obesity: A Report on a Joint Workshop of the Federal Trade Commission 
and the Department of Health and Human Services (Apr. 2006), available 
at http://www.ftc.gov/os/2006/05/PerspectivesOnMarketingSelf-
Regulation&
ChildhoodObesityFTCandHHSReportonJointWorkshop.pdf.
    \26\ See Bruce Horovitz and Laura Petrecca, Disney to Make Food 
Healthier for Kids, USA Today (Oct. 17, 2006), available at http://
www.usatoday.com/money/media/2006-10-16-
disney_x.htm.
    \27\ See Annys Shin, Ads Aimed at Children Get Tighter Scrutiny; 
Firms to Promote More Healthful Diet Choices, Wash. Post, Nov. 15, 
2006, at D1.
    \28\ The one exception is Cadbury Adams, LLC, which committed 
either to refrain from advertising to children under 12 or to devote at 
least 50 percent of such advertising to a product that offers a 
healthier dietary option. Bubblicious gum is currently the only product 
Cadbury Adams advertises to children under 12.
    \29\ The Commission also brings other law enforcement actions 
related to financial services, such as credit reporting, financial 
privacy, data security, and identity theft. For a description of some 
of these recent cases, see ``The FTC in 2007: A Champion for Consumers 
and Competition,'' Federal Trade Commission, April 2007, at 24-25, 
http://www.ftc.gov/os/2007/04/ChairmansReport2007.pdf at 29-30, 37.
    \30\ 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. 2003); 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. 2002); FTC v. First Alliance Mortgage Co., No. 00-
964 (C.D. Cal. 2002); United States v. Action Loan Co., No. 00-511 
(W.D. Ky. 2000); FTC v. Nu West, Inc., 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., 128 
F.T.C. 479 (1999); FTC v. Capital City Mortgage Corp., No. 98-00237 
(D.D.C. 1998).
    \31\ FTC v. Mortgages Para Hispanos. Com Corp, supra note 28.
    \32\ Stipulated Final Judgment and Order of Permanent Injunction, 
FTC v. Mortgages Para Hispanos. Com Corp., supra note 28, Sept. 25, 
2006.
    \33\ United States v. Fairbanks Capital Corp, supra note 28; FTC v. 
Capital City Mortgage Corp., supra note 28.
    \34\ Order Preliminarily Approving Stipulated Final Judgment and 
Order as to Fairbanks Capital Corp. and Fairbanks Capital Holding 
Corp., United States v. Fairbanks Capital Corp., supra n. 28, Nov. 21, 
2003; Stipulated Final Judgment and Order as to Thomas D. Basmajian, 
United States v. Fairbanks Capital Corp., supra n. 28, Nov. 21, 2003.
    \35\ FTC News Release, FTC, Subprime Mortgage Servicer Agree to 
Modified Settlement (Aug. 2, 2007), available at http://www.ftc.gov/
opa/2007/08/sps.shtm.
    \36\ FTC, Bureau of Economics Staff Report, James M. Lacko and 
Janis K. Pappalardo, Improving Consumer Mortgage Disclosures: An 
Empirical Assessment of Current and Prototype Disclosure Forms, June 
2007. An earlier BE study addressed mortgage broker compensation 
disclosures. FTC, Bureau of Economics Staff Report, James M. Lacko and 
Janis K. Pappalardo, The Effect of Mortgage Broker Compensation 
Disclosures on Consumers and Competition: A Controlled Experiment, Feb. 
2004, http://www.ftc.gov/os/2004/01/030123mortgagefullrpt.pdf.
    \37\ A prepaid debit card, also called a prepaid card, is typically 
a plastic stored valued card that uses magnetic stripe technology to 
store information about funds that consumers ``prepay'' or ``load'' 
onto the card. Consumers can use prepaid cards to make purchases or 
withdraw money from merchants and ATMs that accept the network brand on 
the card.
    \38\ See FTC News Release, National Restaurant Company Settles FTC 
Charges for Deceptive Gift Card Sales (Apr. 3, 2007), available at 
http://www.ftc.gov/opa/2007/04/darden.htm.
    \39\ FTC v. Rawlins & Rivera, Inc., No. 07-146 (M.D. Fla. 2007); 
United States v. Whitewing Financial Group, No. 06-2102 (S.D. Tex. 
2006); FTC v. Check Investors, Inc., No. 03-2115 (D.N.J. 2003), appeal 
docketed, Nos. 05-3558, 05-3957 (3rd Cir. Aug. 2, 2005); United States 
v. Capital Acquisitions and Management Corp., No. 04-50147 (N.D. Ill. 
2004); FTC v. Capital Acquisitions and Management Corp., No. 04-7781 
(N.D. Ill. 2004); In re Applied Card Systems, Inc., FTC Docket No. C-
4125 (Oct. 8, 2004); United States v. Fairbanks Capital Corp., supra n. 
14; FTC v. Associates, supra n.14; United States v. DC Credit Services, 
Inc., No. 02-5115 (C.D. Cal. 2002); United States v. United Recovery 
Systems, Inc., No. 02-1410 (S.D. Tex. 2002); United States v. North 
American Capital Corp., No. 00-0600 (W.D.N.Y. 2000); United States v. 
National Financial Systems, Inc., No. 99-7874 (E.D.N.Y. 1999); 
Perimeter Credit, L.L.C., No. 99-0454 (N.D. Ga. 1999); In re Federated 
Department Stores, Inc., FTC Docket No. C-3893 (Aug. 27, 1999); FTC v. 
Capital City Mortgage Co., supra n. 14; United States v. Nationwide 
Credit, Inc., No. 98-2920 (N.D. Ga. 1998); United States v. Lundgren & 
Associates, P.C., No. 98-1274 (E.D. Cal. 1998); In re May Dep't Stores 
Co., FTC Docket No. C-3848 (Nov. 2, 1998); In re General Electric 
Capital Corp., FTC Docket No. C-3839 (Dec. 23, 1998).
    \40\ FTC v. Rawlins & Rivera, supra n. 34.
    \41\ Order Granting Motion for Preliminary Injunction, FTC v. 
Rawlins & Rivera, supra n. 34, Apr. 6, 2007.
    \42\ 16 C.F.R.  310. The Commission promulgated the TSR following 
Congressional enactment of the Telemarketing and Consumer Fraud and 
Abuse Prevention Act in 1994. 15 U.S.C.  6101-6108.
    \43\ FTC v. FTN Promotions, Inc., No. 8:07-cv-1279-T-30TGW (M.D. 
Fla. July 23, 2007).
    \44\ FTC v. 120199 Canada, Ltd., No. 1:04-CV-07204 (N.D. Ill.) 
(permanent injunction order entered Mar. 8, 2007).
    \45\ These Do Not Call cases are included in the 240 TSR cases 
noted above.
    \46\ FTC v. Warner Chilcott Holdings Co. III, No. 1:05-cv-02179-CKK 
(D.D.C. filed Nov. 7, 2005), available at http://www.ftc.gov/os/
caselist/0410034/051107comp0410034%20.pdf.
    \47\ FTC News Release, Consumers Win as FTC Action Results in 
Generic Ovcon Launch (Oct. 23, 2006), available at http://www.ftc.gov/
opa/2006/10/chilcott.htm. In October 2006, the district court entered a 
final order that settled the FTC's charges against Warner Chilcott. As 
a result of the settlement, Warner Chilcott: (1) must refrain from 
entering into agreements with generic pharmaceutical companies in which 
the generic agrees not to compete with Warner Chilcott and there is 
either a supply agreement between the parties or Warner Chilcott 
provides the generic with anything of value and the agreement adversely 
affects competition; (2) must notify the FTC whenever it enters into 
supply or other agreements with generic pharmaceutical companies; and 
(3) for 3 months, had to take interim steps to preserve the market for 
the tablet form of Ovcon in order to provide Barr the opportunity to 
compete with its generic version. FTC v. Warner Chilcott Holdings Co. 
III, No. 1:05-cv-02179-CKK (D.D.C. filed Oct. 23, 2006) (stipulated 
permanent injunction and final order), available at http://www.ftc.gov/
os/caselist/0410034/finalorder.pdf. The FTC's case against Barr is 
ongoing.
    \48\ In the Matter of Actavis Group, FTC Docket No. C-4190 (May 18, 
2007) (decision and order), available at http://www.ftc.gov/os/
caselist/0710063/index.shtm.
    \49\ In the Matter of Barr Pharms., Inc., FTC Docket No. C-4171 
(Dec. 8, 2006) (decision and order), available at http://www.ftc.gov/
os/caselist/0610217/0610217barrdo_final.pdf.
    \50\ In the Matter of Watson Pharms., Inc., and Andrx Corp., FTC 
Docket No. C-4172 (Dec. 12, 2006) (decision and order), available at 
http://www.ftc.gov/os/caselist/0610139/061212do
_public_ver0610139.pdf.
    \51\ In the Matter of Teva Pharm. Indus. Ltd. and IVAX Corp., FTC 
Docket No. C-4155 (Mar. 2, 2006) (decision and order), available at 
http://www.ftc.gov/os/caselist/0510214/0510
214.htm.
    \52\ In the Matter of Johnson & Johnson and Pfizer Inc., FTC Docket 
No. C-4180 (Jan. 19, 2007) (decision and order), available at http://
www.ftc.gov/os/caselist/0610220/0610220c4180
decisionorder_publicversion.pdf; see also In the Matter of Allergan, 
Inc. and Inamed Corp., FTC Docket No. C-4156 (Apr. 17, 2006) (decision 
and order), available at http://www.ftc.gov/os/caselist/0610031/
0610031.htm.
    \53\ FTC News Release, FTC Challenges Hospira/Mayne Pharma Deal 
(Jan. 18, 2007), available at http://www.ftc.gov/opa/2007/01/
hospiramayne.htm; In the Matter of Hospira, Inc. and Mayne Pharma Ltd., 
FTC Docket No. C-4182 (Jan. 18, 2007) (decision and order), available 
at http://www.ftc.gov/os/caselist/0710002/070118do0710002.pdf.
    \54\ In the Matter of Boston Scientific Corp. and Guidant Corp., 
FTC Docket No. C-4164 (July 25, 2006) (decision and order), available 
at http://www.ftc.gov/os/caselist/0610046/060725do0610046.pdf.
    \55\ In the Matter of Hologic, Inc., FTC Docket No. C-4165 (Aug. 9, 
2006) (decision and order), available at http://www.ftc.gov/os/
caselist/0510263/0510263decisionandorderpubrecver.pdf; In the Matter of 
Thermo Electron Corp., FTC Docket No. C-4170 (Dec. 5, 2006) (decision 
and order), available at http://www.ftc.gov/os/caselist/0610187/
061205do0610187.pdf.
    \56\ FTC News Release, FTC Proposes Study of Competitive Impacts of 
Authorized Generic Drugs (Mar. 29, 2006), available at http://
www.ftc.gov/opa/2006/03/authgenerics.htm.
    \57\ In the Matter of Evanston Northwestern Healthcare Corp., FTC 
Docket No. 9315 (Aug. 6, 2007) (Opinion of the Commission), available 
at http://www.ftc.gov/os/adjpro/d9315/070806opinion.pdf.
    \58\ In the Matter of Evanston Northwestern Healthcare Corp., FTC 
Docket No. 9315 (Oct. 20, 2005) (initial decision), available at http:/
/www.ftc.gov/os/adjpro/d9315/051021idtext
version.pdf.
    \59\ The Commission also challenged the merger of two of the top 
three operators of outpatient kidney dialysis clinics and required 
divestitures in 66 markets throughout the United States. In the Matter 
of Fresenius AG, FTC Docket No. C-4159 (June 30, 2006) (decision and 
order), available at http://www.ftc.gov/os/caselist/0510154/
0510154.htm.
    \60\ In the Matter of Puerto Rico Ass'n of Endodontists, Corp., FTC 
Docket No. C-4166 (Aug. 24, 2006) (decision and order), available at 
http://www.ftc.gov/os/caselist/0510170/
0510170c4166praedecisionorder.pdf; In the Matter of New Century Health 
Quality Alliance, Inc., FTC Docket No. C-4169 (Sept. 29, 2006) 
(decision and order), available at http://www.ftc.gov/os/caselist/
0510137/0510137nchqaprimedecisionorder.pdf; In the Matter of Advocate 
Health Partners, et al., FTC Docket No. C-4184 (Feb. 7, 2007) (decision 
and order), available at 
http://www.ftc.gov/os/caselist/0310021/0310021.htm; and In the Matter 
of Health Care Alliance of Laredo, L.C., FTC Docket No. C-4158 (Mar. 
23, 2006) (decision and order), available at http://www.ftc.gov/os/
caselist/0410097/0410097.htm.
    \61\ In the Matter of South Carolina State Board of Dentistry, FTC 
Docket No. 9311 (June 20, 2007) (decision and order), available at 
http://www.ftc.gov/os/adjpro/d9311/070
620decision.pdf.
    \62\ FTC v. Equitable Resources, Inc., Dominion Resources, Inc., et 
al., No. 07-cv-490 (W.D. Pa. filed April 13, 2007) (complaint filed), 
available at http://www.ftc.gov/os/adjpro/d9322/070413cmpltforpi-
tro.pdf.
    \63\ FTC News Release, FTC Challenges Acquisition of Interests in 
Kinder Morgan, Inc. by The Carlyle Group and Riverstone Holdings (Jan. 
25, 2007), available at http://www.ftc.gov/opa/2007/01/
kindermorgan.shtm.
    \64\ FTC News Release, FTC Files Complaint in Federal District 
Court Seeking to Block Western Refining's Acquisition of Rival Energy 
Company Giant Industries, Inc. (April 12, 2007), available at http://
www.ftc.gov/opa/2007/04/westerngiant_tro.shtm.
    \65\ Other recent energy matters include: Chevron/USA Petroleum, an 
abandoned transaction in which Chevron would have acquired most of the 
retail gasoline stations owned by USA Petroleum, the largest remaining 
chain of service stations in California not controlled by a refiner 
(USA Petroleum's president stated that the parties abandoned the 
transaction because of resistance from the FTC), see Elizabeth 
Douglass, Chevron Ends Bid to Buy Stations, LA Times, Nov. 18, 2006, 
Part C at 2; EPCO/TEPPCO, in which EPCO's $1.1 billion acquisition of 
TEPPCO's natural gas liquid storage business was only allowed to 
proceed if TEPPCO first agreed to divest its interests in the world's 
largest natural gas storage facility in Bellvieu, Texas, to an FTC-
approved buyer, see In the Matter of EPCO, Inc., and TEPPCO Partners, 
L.P., FTC Docket No. C-4173 (Oct. 31, 2006) (decision and order), 
available at http://www.ftc.gov/os/caselist/0510108/
0510108c4173do061103.pdf; Chevron/Unocal, which resolved the 
Commission's administrative monopolization complaint against Unocal and 
antitrust concerns arising from Chevron's proposed $18 billion 
acquisition of Unocal, see In the Matter of Chevron Corp., FTC Docket 
No. C-4144 (July 27, 2005) (consent order), available at http://
www.ftc.gov/os/caselist/0510125/050802do0510125.pdf and Union Oil Co. 
of Calif., FTC Docket No. 9305 (July 27, 2005) (consent order), 
available at http://www.ftc.gov/os/adjpro/d9305/050802do.pdf; and Aloha 
Petroleum/Trustreet Properties, in which the Commission alleged that 
Aloha's proposed acquisition of Trustreet Properties' half interest in 
import-capable terminal and retail gasoline assets in Hawaii would have 
reduced from five to four the overall number of island gasoline 
marketers that had guaranteed access to supply, and from three to two 
the number of suppliers selling to unintegrated retailers, see FTC v. 
Aloha Petroleum Ltd., No. CV05 00471 HG/KSC (Dist. Hi. complaint filed 
July 27, 2005), available at http://www.ftc.gov/os/caselist/1510131/
050728comp1510131.pdf. Ultimately, Aloha Petroleum was dismissed at the 
agency's request after Aloha announced a long-term agreement with a 
third party, Mid Pac Petroleum, that would give Mid Pac substantial 
rights to use the terminal to import gasoline into Hawaii.
    \66\ In the Matter of American Petroleum Company, Inc., FTC File 
No. 061-0229 (June 14, 2007) (decision and order), available at http://
www.ftc.gov/os/caselist/0610229/0610229
decisionorder.pdf.
    \67\ President George W. Bush, Remarks to the Renewable Fuels 
Summit 2006 (Apr. 25, 2006), available at http://www.whitehouse.gov/
news/releases/2006/04/20060425.html.
    \68\ The Commission and DOJ also extended an open offer to assist 
state Attorneys General with gasoline pricing investigations upon 
request. As part of its continuing law enforcement interaction with the 
states, through the National Association of Attorneys General, the 
Commission sponsored a Federal/state enforcement conference in 
September 2006 to explore competition issues in petroleum markets.
    \69\ ``Federal Trade Commission Report on Spring Summer 2006 
Nationwide Gasoline Price Increases'' (August 30, 2006), available at 
http://www.ftc.gov/reports/gasprices06/P040101
Gas06increase.pdf. Commissioner Leibowitz dissented from the Report. 
See http://www.ftc.gov/speeches/leibowitz/P010401gas06dissent.pdf.
    \70\ FTC News Release, FTC Releases Report on its ``Investigation 
of Gasoline Price Manipulation and Post-Katrina Gasoline Price 
Increases'' (May 22, 2006), available at http://www.ftc.gov/opa/2006/
05/katrinagasprices.htm.
    \71\ Science, State, Justice, Commerce, and Related Agencies 
Appropriations Act, 2007, Pub. L. No. 109-108  632, 119 Stat. 2290 
(2005) (``Section 632'').
    \72\ Federal Trade Commission, Investigation of Gasoline Price 
Manipulation and Post-Katrina Gasoline Price Increases (Spring 2006), 
available at http://www.ftc.gov/reports/060518
PublicGasolinePricesInvestigationReportFinal.pdf; but see concurring 
statement of Commissioner Jon Leibowitz (concluding that the behavior 
of many market participants leaves much to be desired and that price 
gouging statutes, which almost invariably require a declared state of 
emergency or other triggering event, may serve a salutary purpose of 
discouraging profiteering in the aftermath of a disaster), available at 
http://www.ftc.gov/speeches/leibowitz/060518
LeibowitzStatementReGasolineInvestigation.pdf.
    \73\ See, e.g., FTC News Release, FTC Charges Austin Board of 
Realtors With Illegally Restraining Competition (July 13, 2006), 
available at http://www.ftc.gov/opa/2006/07/austinboard.htm; see also 
FTC News Release, FTC Charges Real Estate Groups with Anticompetitive 
Conduct in Limiting Consumers' Choice in Real Estate Services (Oct. 12, 
2006), available at http://www.ftc.gov/opa/2006/10/realestatesweep.htm; 
FTC News Release, Commission Receives Application for Proposed 
Divestiture from Linde AG and The BOC Group plc; FTC Approves Final 
Consent Orders in Real Estate Competition Matters (Dec. 1, 2006), 
available at http://www.ftc.gov/opa/2006/12/fyi0677.htm.
    \74\ FTC News Release, FTC Issues Final Opinion and Order in Rambus 
Matter (Feb. 5, 2007), available at http://www.ftc.gov/opa/2007/02/
070502rambus.htm.
    \75\ In the Matter of Rambus, Inc., Docket No. 9302 (July 31, 2006) 
(opinion of the Commission), available at http://www.ftc.gov/os/adjpro/
d9302/060802commissionopinion.pdf.
    \76\ In the Matter of Rambus Inc., Docket No. 9302 (Feb. 5, 2007) 
(opinion of the Commission on remedy) (Harbor, P., and Rosch, T., 
concurring in part, dissenting in part), available at 
http://www.ftc.gov/os/adjpro/d9302/070205opinion.pdf; In the Matter of 
Rambus Inc., Docket No. 9302 (Feb. 2, 2007) (final order), available at 
http://www.ftc.gov/os/adjpro/d9302/070205finalorder.pdf.
    \77\ FTC v. Whole Foods Markets and Wild Oats Markets, No. 1:07-cv-
01021 (D.D.C. filed June 5, 2007), (complaint filed), available at 
http://www.ftc.gov/os/caselist/0710114/070605
complaint.pdf.
    \78\ FTC v. Whole Foods Markets and Wild Oats Markets, No. 07-1021 
(D.D.C. Aug. 16, 2007); FTC v. Whole Foods Markets and Wild Oats 
Markets, No. 07-5276 (D.C. Cir. Aug. 23, 2007).
    \79\ In the Matter of Rite Aid Corporation and The Jean Coutu 
Group, FTC Docket No. C-4191 (June 4, 2007) (complaint filed), 
available at http://www.ftc.gov/os/caselist/0610257/
070604complaint.pdf.
    \80\ In the Matter of Missouri Board of Embalmers and Funeral 
Directors, FTC File No. 061 0026 (Mar. 9, 2007) (proposed decision and 
order), available at http://www.ftc.gov/os/caselist/0610026/
0610026decisonorder.pdf.
    \81\ In the Matter of Lockheed Martin Corp. and The Boeing Co., FTC 
File No. 051 0165 (Oct. 3, 2006) (decision and order), available at 
http://www.ftc.gov/os/caselist/0510165/0510165decisionorderpublicv.pdf; 
In the Matter of Lockheed Martin Corp. and The Boeing Co., FTC File No. 
051 0165 (Oct. 3, 2006) (agreement containing consent order), available 
at 
http://www.ftc.gov/os/caselist/0510165/0510165agreement.pdf.
    \82\ In the Matter of Gen. Dynamics Corp., FTC Docket No. C-4181 
(Dec. 28, 2006) (decision and order), available at http://www.ftc.gov/
os/caselist/0610150/0610150decisionorder.pdf; In the Matter of Gen. 
Dynamics Corp., FTC Docket No. C-4181 (Dec. 28, 2006) (agreement 
containing consent orders), available at http://www.ftc.gov/os/
caselist/0610150/0610
150agreement.pdf.
    \83\ In the Matter of Serv. Corp. Int'l and Alderwoods Group Inc., 
FTC Docket No. C-4174 (Dec. 29, 2006) (decision and order), available 
at http://www.ftc.gov/os/caselist/0610156/070105do0610156.pdf.
    \84\ In the Matter of Linde AG and The BOC Group PLC, FTC Docket 
No. C-4163 (Sept. 5, 2006) (decision and order), available at http://
www.ftc.gov/os/caselist/0610114/0610114c4163LindeBOCDOPubRecV.pdf.
    \85\ FTC News Release, FTC Chairman Announces Merger Process 
Reforms (Feb. 16, 2006), available at http://www.ftc.gov/opa/2006/02/
merger_process.htm.
    \86\ FTC News Release, Federal Trade Commission and Department of 
Justice Allow Electronic Submission of Premerger Notification Filings 
(June 20, 2006), available at http://www.ftc.gov/opa/2006/06/
premerger.htm.
    \87\ FTC Staff Comments to Councilmember Mary M. Cheh, Chairperson, 
Committee on Public Services and Consumer Affairs, Council of the 
District of Columbia (June 8, 2007), available at http://www.ftc.gov/
os/2007/06/V070011divorcement.pdf; FTC Staff Comments to Christopher R. 
Stone, State of Connecticut House of Representatives (May 2, 2007), 
available at http://www.ftc.gov/be/V070008.pdf.
    \88\ Federal Trade Commission and United States Department of 
Justice Comments to Governor Jennifer M. Granholm of Michigan (May 30, 
2007), available at http://www.ftc.gov/be/v050021.pdf.
    \89\ Federal Trade Commission and United States Department of 
Justice Comments to Assemblywoman Helene E. Weinstein, Chair, Committee 
on Judiciary, New York State Assembly (Apr. 27, 2007), available at 
http://www.ftc.gov/be/V070004.pdf.
    \90\ FTC Staff Comments to Ms. Lilia G. Judson, Executive Director, 
Indiana Supreme Court (May 11, 2007), available at http://www.ftc.gov/
be/V070010.pdf; Brief of the Federal Trade Commission As Amicus Curiae 
Supporting Arguments to Vacate Opinion 39 of the New Jersey Supreme 
Court Committee on Attorney Advertising (May 8, 2007), available at 
http://www.ftc.gov/be/V070003opinion39.pdf; FTC Staff Comments to the 
Florida Bar (Mar. 23, 2007), available at http://www.ftc.gov/be/
V070002.pdf; FTC Staff Comments to the Rules of Professional Conduct 
Committee, Louisiana State Bar Association (Mar. 14, 2007), available 
at 
http://www.ftc.gov/be/V070001.pdf; FTC Staff Comments to the Office of 
Court Administration of the New York Unified Court System (Sept. 14, 
2006), available at http://www.ftc.gov/os/2006/09/V060020-image.pdf.
    \91\ FTC Staff Comments to Assemblywoman Nellie Pou, Chair, 
Appropriations Committee, New Jersey General Assembly (Apr. 17, 2007), 
available at http://www.ftc.gov/be/V060019.pdf; FTC Staff Comments to 
Terry G. Kilgore, Member, Commonwealth of Virginia House of Delegates 
(Oct. 2, 2006), available at http://www.ftc.gov/be/V060018.pdf.
    \92\ FTC News Release, FTC and DOJ to Host Joint Public Hearings on 
Single-Firm Conduct as Related to Competition (Nov. 28, 2005), 
available at http://www.ftc.gov/opa/2005/11/unilateral.htm.
    \93\ FTC Staff Report, Municipal Provision of Wireless Internet 
(Sept. 2005), available at 
http://www.ftc.gov/os/2006/10/V060021municipalprovwirelessinternet.pdf.
    \94\ FTC Staff Report, Broadband Connectivity Competition Policy 
(June 2007), available at http://www.ftc.gov/reports/broadband/
v070000report.pdf.
    \95\ FTC Conference, Energy Markets in the 21st Century: 
Competition Policy in Perspective (Apr. 10-12, 2007), available at 
http://www.ftc.gov/bcp/workshops/energymarkets/index.html.
    \96\ Federal Trade Commission and Department of Justice, Antitrust 
Enforcement and Intellectual Property Rights: Promoting Innovation and 
Competition (April 17, 2007), available at 
http://www.ftc.gov/opa/2007/04/ipreport.shtm.
    \97\ Federal Trade Commission and United States Department of 
Justice, Competition in the Real Estate Brokerage Industry (Apr. 2007), 
available at http://www.ftc.gov/reports/realestate/V050015.pdf. To 
complement the report, the Commission simultaneously released a 
consumer education publication, Buying a Home: It's a Big Deal, which 
has tips for considering the services of a real estate professional and 
using the Internet as a source of real estate information. FTC Consumer 
Education, Buying a Home: It's a Big Deal (May 2007), available at 
http://www.ftc.gov/bc/edu/pubs/consumer/alerts/zalt001.shtm.
    \98\ Available at http://www.ftc.gov/ftc/antitrust.htm.
    \99\ Available at http://www.ftc.gov/ftc/oilgas/index.html.
    \100\ Available at http://www.ftc.gov/bc/healthcare/index.htm.
    \101\ Available at http://www.ftc.gov/bc/realestate/index.htm.
    \102\ Available at http://www.ftc.gov/bc/tech/index.htm.

    Senator Dorgan. Madam Chair, thank you very much. We 
appreciate your testimony.
    Let me ask a number of questions of you.
    First, in your testimony, you indicate that you would like 
to work with the Committee to help ensure that the 
reauthorization includes appropriate resources--increases in 
resources to meet growing challenges. I note that, in 1979, the 
Federal Trade Commission had 1,750 full-time employees, it now 
has 1,074. So, from 1,700-plus to 1,000, that's a very 
substantial reduction in the number of employees of the Federal 
Trade Commission. What do you think represents a level of 
employment and an increase in the investment in the FTC that 
would be appropriate, given the challenges?
    Ms. Majoras. I think part of it depends, Chairman Dorgan, 
on whether new--whether there are new enforcement priorities 
that are assigned to the FTC. I think where we are today is, if 
we can grow by 10 to 15, perhaps 20, FTEs a year over the next 
number of years, we probably will still be in a strong position 
to continue to protect consumers at the level at which we have 
been.
    It's--there are--I think there are several reasons why the 
agency, particularly back in the 1980s, began to diminish in 
size. Over the last few years, it actually has been growing, 
and certainly in my tenure we've been growing steadily over the 
last few years as Congress--well, as markets have changed and 
required us to step in more--in new and different areas, and as 
Congress has given us new responsibilities.
    Senator Dorgan. Let me ask about the common carrier 
exemption. You have referred to that, and we've talked about 
that previously. The common carrier exemption is a gap that, in 
my understanding, prevents the Federal Trade Commission from 
moving in certain areas dealing with communications. Can you 
describe that gap? And how important is it that we deal with 
it?
    Ms. Majoras. I'm happy to do that. Thank you.
    Increasingly, as we are seeing the communications industry 
and players in that industry converging, technologies are 
converging, functions are changing, and, obviously, less of our 
communications function in this country falls under the rubric 
of common carrier. What we are bumping up against in trying to 
bring cases, say, in area of calling cards or the area of 
advertising of bundles of services--so, a bundle that might 
include your cable, your Internet access, and telephone--we are 
being asked to look at whether there may be some deception in 
those areas, whether the advertising is not fully accurate. And 
the difficulty is that, if a company falls under the rubric of 
common carrier, what they argue to us is that we have no 
authority. Now, we've taken a view that common carrier status, 
from our perspective--we look at the activity and whether it's 
common carriage, not the label that a company puts on itself, 
but, nonetheless, what we are finding in our enforcement work 
is that the telecom companies want to prohibit us from going in 
those areas, and we simply--this is what we, I think, are very 
good at. We have a lot of experience at rooting out deception 
in advertising and in other disclosures that are made to 
consumers in services that are extremely important to them. And 
so, we're--what we're worried about is that this problem is 
going to grow as the markets continue to evolve, and not be 
reduced.
    Senator Dorgan. Well, we agree. And my hope would be, in 
the reauthorization bill, that we will eliminate that exemption 
and give the FTC the authority that is necessary.
    Now, let me ask a question on a subject that you and I have 
disagreed on over the years, and that is the issue of oil 
pricing. There have been substantial mergers in the oil 
industry, mergers that have meant that virtually every oil 
company has two names--Exxon Mobil, ConocoPhillips--they marry 
up and have two names; they're bigger, they're stronger, they 
have more economic muscle in the marketplace. And many people 
feel that that has played a role in disadvantaging consumers 
and giving more market power to the companies. The reports I 
have seen recently suggest that refiners--I'm talking about the 
refinery capability in this country--are taking a larger share 
of the profits of oil. The Wall Street Journal noted, and I'll 
quote, ``Lately, American refiners have made a pretax profit of 
roughly $30 on each barrel of oil they use to produce gasoline, 
more than three times the margin in Singapore, a major Asian 
refining center.'' If refiners are making twice as much on a 
gallon today, versus a few years ago, does that not suggest to 
someone in your position in the Federal Trade Commission, that 
there is market power being exercised in a way that 
disadvantages consumers, coming from, and stemming from, 
substantial mergers?
    Ms. Majoras. That's not what we've concluded in the various 
investigations and studies that we've done into this industry, 
Senator. I mean, the fact of the matter is that, in refining in 
particular, if you actually look at it from concentration 
standpoint, it's still a very unconcentrated marketplace. The 
problem we have is that demand continues to grow year after 
year, and refining capacity, while it has grown--some people 
say, ``Well, all these refineries have closed, how could it 
have grown?'' Well it's grown through expansion, and we now 
have some bigger refineries, and a lot of the smaller and less 
efficient refineries have gone away. We also have better 
technologies and can refine more gasoline out of one barrel of 
oil. So, there has actually been an expansion in capacity, but, 
nonetheless, demand has continued to grow, and so, we're now 
importing, actually, refined gasoline into this country, 
because we have not--because the refiners and their capacity 
hasn't kept up with the demand.
    Senator Dorgan. But if, in fact, it is the case that 
refiners are making twice as much now on a gallon of gasoline 
as they made previously, wouldn't that suggest that the market 
power exists there because of mergers to impose that upon 
consumers? And wouldn't that encourage the Federal Trade 
Commission to take a skeptical look at it?
    Ms. Majoras. Well, the--a couple of things--it doesn't 
suggest that they have market power that comes from mergers. I 
mean, it could suggest that, but we've looked at it, and that's 
not what we believe it suggests. The second thing is that, you 
know, we've brought three cases this year in the energy area; 
indeed, we brought one to challenge the merger between two 
refiners, because we felt that, in that part of the country, 
that would--that could, potentially, give the remaining refiner 
market power. And the District Court disagreed with us and 
said, ``No, we're not concerned about that, there's plenty of 
competition here,'' and denied our request for an injunction. 
So, surely we are being very vigilant and looking at mergers 
very, very closely, and identifying those that we think will 
inhibit competition, going forward.
    Senator Dorgan. But, in many ways, the mergers are already 
completed. I mean, we've had dramatic consolidation, and that 
consolidation, it seems to me, just intuitively, provides much 
greater muscle in the marketplace, and the consumers, at this 
point, are the victims at the end of the process. Is that not 
the case?
    Ms. Majoras. We actually don't--we actually don't believe 
it is, because--I mean, obviously, you're referring to the 
mergers that occurred in the 1990s, the very large mergers. 
Interestingly, if--I mean, we look at the market in different 
pieces. If you look at upstream, for example, exploration and 
production of actual oil--there, consolidation has almost no 
effect; OPEC sets the price at that level. Exxon Mobil, indeed, 
has about a--just over, I think--last stats I saw were, maybe, 
a 3 percent market share--in the exploration and production of 
oil. So, you know, hard to see how a merger hurts consumers, 
when you have numbers that low. OPEC is clearly setting the 
price of oil, and the price of oil--is the greatest determinant 
of what we're going to pay--of what we're going to pay at the 
pump. Moving down the chain of distribution, obviously you get 
to the refining and wholesale levels. It's true that, after 
years of very low profits, which probably contribute to having 
less investment in more refineries, over the last couple of 
years we have seen the profits for the refiners go up, as I 
said, as we've--as we've--it isn't that the mergers have given 
us fewer--less refinery capacity, it's--again, it's--we have--
we have more capacity now than we had 10 years ago. The problem 
is that we also have greater demand. And even as we hear 
consumers really feeling the pain at the pump; nonetheless, we 
look at the figures and the demand continues to go up.
    Senator Dorgan. But it seems to me, with all due respect, 
that that rationalizes a set of facts, to the best extent one 
can, with a conclusion one has already developed. It seems to 
me that here's the case. As the large oil companies merge and 
our country waves a green light or a green flag or something, 
and says, ``Go right ahead''--as they merge and become stronger 
and have more muscle in the marketplace, they, in many cases, 
have eliminated refineries. I would guess you would agree with 
that. We have more refining capacity, yes, but many of those 
mergers have resulted in refineries closing. And, in fact, it 
seems to me they have opportunities, through market power, to 
decide refining capacity in a way that maximizes their profits. 
And the refinery industry is not, as you suggest, widely 
dispersed in ownership; there is a substantial amount of 
ownership of the refining capacity by the major integrated 
companies.
    And I think you said that OPEC has a prominent influence in 
setting the price of oil. You're right about that. There are 
three things that tell me there is no free market at all. The 
three things are: first, the OPEC ministers sitting in a closed 
room, making judgments; second, bigger, stronger, merged oil 
companies with more economic muscle in the marketplace; and 
third, a futures market that has become an orgy of speculation. 
Those three things tell me there's not a free market. I mean, 
we talk about all this ``free market'' stuff. There's no free 
market here. And if, in fact, that's the case, there is no free 
market, then it means it is much, much more important to have 
your agency be the watchdog to make certain that consumers are 
not gouged.
    Ms. Majoras. Well, thank you, Senator. I mean, I disagree 
with you that there's not a free market in gasoline. We see the 
workings of the market, constantly. And--but where I absolutely 
agree with you is, regardless--I mean, you and I could agree to 
disagree on that point, but, nonetheless, where I absolutely 
agree with you is, we still have to be the watchdog in this 
area. And we are the watchdog. And, as I said, we've brought 
three energy cases this year; early last year, we were pushing 
on a merger that Chevron was trying to do. They abandoned the 
merger. They said it was because of concerns of the FTC. So, 
performing that watchdog function, we absolutely are doing.
    As far as closing refineries as a result of mergers, you 
know, I wasn't--I have to say, of course, I wasn't here in the 
1990s, but, while there may have been some of that, there were 
a number of other things that happened. One is, the FTC did not 
allow these mergers to go through without significant 
divestitures. And some of those divestitures, as I understand 
it, occurred in the refining area. So, what we have today is, a 
lot of the largest refiners are not the Exxon Mobils in this 
country, they're companies like Valero and others, who have--
who bought refineries from the bigger companies and now are 
significant players in that. So, you actually have some 
relatively new players in the refining business, as well.
    We did do a study--we did do an investigation, in 2006 and 
the early part of 2007, to see whether, in fact, we could find 
evidence that refiners were using capacity in making decisions, 
particularly jointly, to keep the price--to keep the price 
high; and we just didn't find any evidence of that.
    Senator Dorgan. North Dakota has the second highest price 
of gasoline in the country, next to Hawaii, today. We are the 
sixth largest energy-producing state in the country, with oil, 
natural gas, and coal. I mean, I would say that there are a 
whole lot of folks out there that have real questions about how 
these prices are set. I don't suggest this is the case with 
what is happening with oil or gas, but I would tell you that I 
chaired the hearing in this room--Ken Lay sat where you were 
sitting--the former CEO of Enron. And I also, on the Energy 
Committee, on another committee, sat at a dais when the Federal 
Energy Regulatory Commission sat at the table; and they weren't 
watchdogs, they were lapdogs. The fact is, we were told--those 
of us that said, ``What's happening on the West Coast?''--we 
were told, ``You're wrong.'' The Vice President said we were 
wrong, ``It's a free market. The free market system is 
working.'' Turns out, it wasn't, there was grand theft going 
on. I'm not suggesting that that is the case here, but what I 
am suggesting is, the role of a watchdog and the role of a 
referee is a very important role in this country, especially if 
we have decided to allow substantial numbers of mergers, where 
you have increased concentration. That has been the case in 
this industry. And I want the industry to succeed. It's 
certainly succeeding beyond most people's dreams these days. 
But I also want the consumers to have a watchdog that gives 
them a voice, to determine whether there is market 
manipulation.
    Let me go to a couple of other things that I want to talk 
to you about.
    One is, as you might imagine, subprime loans. There's an 
enormous consequence to this country's economy with respect to 
what is happening with the consequences of subprime loans now. 
Tell me your impression of what kind of deceptive advertising, 
if any--or deceptive lending--existed that has caused this 
problem. Some will say, ``Well, look, this is the fault of 
those that lent the money to people that shouldn't have gotten 
it, and it's the fault of the people that borrowed the money, 
who should have known better.'' So, everybody's at fault. But 
is there not a case to be made here that there has been 
substantial deceptive advertising?
    Ms. Majoras. Just yesterday, we announced that--earlier 
this summer, we did a--an Internet and other advertising sweep, 
and, just yesterday, sent letters to 200 advertisers of 
mortgage loans, to tell them that we believe that they may be 
violating Federal law by deceptively advertising loans on 
their--particularly on the first page; you go to the second 
page and get fine print--but teasing consumers into believing 
that they could get loans at 1 percent and the like. So, 
definitely, as, you know--the FTC has been active in this 
space, in terms of deception in mortgage loan advertising, for 
years, before this even became a big problem, and we've brought 
a number of cases, and we've gotten back $320 million for 
consumers. So, this is something that's not a fad for us at 
all; we've been on--we've been on this. And I do think that 
deception played a role.
    I also, though, think that, even and, obviously, we 
wouldn't be doing this work if we didn't think it was extremely 
important, but there's another thing, Senator, that we're 
worried about, that I'd like to bring to your attention, and 
that is, even for those who weren't deceived, and even for 
those who are getting loans--you know, both in the subprime 
arena, but also not--consumers just are not understanding what 
they're getting in their mortgage. And we published a study 
earlier this summer that our economists did, which showed that, 
across the board, the mortgage disclosures, even when the law 
is being followed, are just not explaining to people what their 
mortgage means. And so, I think we should look at both parts of 
this, the deception part, which we're working on, but we're 
also concerned about, even if honest disclosures are given, are 
our consumers understanding what their mortgage means and what 
they're getting?
    Senator. Dorgan. So, first of all, I appreciate the work 
that you have done for some while in this area, but--Warren 
Buffet said, ``Every bubble will burst.'' We forget that as the 
bubble builds. We always forget that. And it seems to me that 
we were in this period for some years, where we had all these 
advertisements for subprime loans and credit cards: ``Have no 
income, have no job, have bad credit, come to us.'' I mean, you 
see it and hear it on radio and----
    Ms. Majoras. Yes.
    Senator Dorgan.--television and so on. And have you--during 
this period, have you put together initiatives that are more 
aggressive, that reach out? I mean, you describe what you've 
just done, and I appreciate that, but have we gone through a 
period where you weren't very active? Or should the Commission 
have been more active during the period that the bubble was 
being created? And, if so, what can we learn from that, and how 
can we be more aggressive now to make sure this doesn't happen 
again?
    Ms. Majoras. Well, I--no, you raise a good point. 
Obviously, it's part of my job and my commissioners' job and 
our other managers to always evaluate how we're using our 
resources. We've--we certainly brought--have brought a number 
of cases in this area over the last few years. Should--could 
we, and should we, have been more active? That's entirely 
possible. Our staff that works on this particular area was 
swamped, over this same period, with identity theft and data 
security issues. And we were sometimes, you know, the ones in 
the Federal Government who needed to deal with those issues.
    I was so concerned that we needed to be spending more time 
on some lending and other traditional financial issues that I 
split apart our financial services division last year, and 
said, ``You focus on data security and identity theft, and 
these others--you need to redouble your efforts in the area of 
lending, other credit issues, and debt collection issues.'' And 
we've now done that.
    Senator Dorgan. Let me read to you a couple of ads that I 
know you're aware of. There's an ad from probably the largest 
mortgage lender in the country, one that has had to go borrow 
$11 billion to meet a shortfall. Here's the ad that they were 
running: ``Homeowners, do you want to refinance, get cash? We 
have a great reason to do it now. No cost to refinance, no 
points, no application fee, no credit reporting, no third-party 
fees, no title, no escrow, no appraisal fees, no closing costs. 
You wind up with a lot more cash.''
    I've got a whole list of them here--``Easy mortgage.'' All 
of these are seductive advertisements to consumers, to say, 
``You know what, need money, fast bucks? Come here.'' I mean, 
it reminds me of a different kind of industry that used to be 
operating in the shade someplace. While all of this was going 
on, did we intercept any of it, did we take action, at this 
point, to say, ``Wait a second, this doesn't sound right, 
doesn't seem right''?
    Ms. Majoras. Well, we did. We certainly brought cases. We 
got consumer complaints in. We continue to monitor those 
complaints. We brought cases.
    Senator Dorgan. But you said you were swamped. And that 
gets back to the first question I asked you. If we're going to 
increase by ten people a year, what's that, 100 years before we 
get to 1,000 people? And how long to add back what we used to 
have, some years ago at the FTC?
    Ms. Majoras. Well, I think the FTC was a very different 
place in 1980, and did a lot of things that most people would 
agree it shouldn't have been doing. So, it's----
    Senator Dorgan. Like what?
    Ms. Majoras.--it's not a perfect----
    Senator Dorgan. Like what?
    Ms. Majoras.--comparison. Like industrywide rulemakings on 
things that were not very helpful to consumers, as opposed to 
some enforcement. And--no, look, I mean, the resource--the 
resource question is a fair one, but the thing to remember in 
this area is that we're sharing--I mean, we have a piece----
    Senator Dorgan. I understand.
    Ms. Majoras.--and we're sharing with the banking agencies, 
and with all the states, who have, actually, greater powers 
than we have in this area. And so, we're not the only players. 
Now, there's just no--all I'm trying to admit to you, Senator, 
is that, of course, when there's an economic crisis of some 
sort, or a bubble bursts, it's part of my job to look back on 
it and say, ``Yes, of course, if we had had more resources, we 
would have--we would have done it even more.'' And, of course, 
that's the case in almost everything we do.
    Senator Dorgan. I understand. But when you say, ``We were 
swamped,'' and we see an agency that went from 1,700 to 1,000 
people, and we now see not just this--in this particular area, 
which is going to have significant consequence to our whole 
economy and to a lot of the American people--but in addition to 
this, the toys coming in from China. I want to talk about that 
a little bit; I know that that relates to the Consumer Product 
Safety Commission, as well. But when you say, ``We're 
swamped''--look, my interest is in having an enforcement agency 
that's a referee and that represents us in going after 
deceptive advertising and issues of concentration and 
competition that you have the resources you need. That's why--
that's the first question I asked you. I don't want you to be 
too swamped to wake up in the morning and see an ad, or to have 
your people peruse all these ads, and say, ``We're going after 
it. This is wrong. Consumers are being bilked. This is 
unfair.'' I mean, I want you to have the resources necessary. 
And as you know--there are people who believe that there ought 
to be a minimalist role here, ``If someone gets stung by bad 
business practices, tough luck. They'll just understand, 
they'll learn, you don't do business with that kind of 
situation any more, you don't do business with that company.'' 
There are people with that minimalist attitude.
    Ms. Majoras. And----
    Senator Dorgan. I don't want that. I want an FTC with teeth 
and with aggressiveness.
    Ms. Majoras. That is absolutely not my attitude. It's not 
that it's minimalist. The difficulty for a small agency, 
though, is that I can't absorb 50 people every year. I mean, 
it's--the hiring cost that it takes just to get that done, the 
absorption of people into the agency, the training--I think we 
should grow, and--look, we'll grow as fast as we can and I 
agree that we should grow. My only point is, having worked in 
this organization and others, it's very difficult to suddenly--
when you're small, to begin with--grow by leaps and bounds----
    Senator Dorgan. Right.
    Ms. Majoras.--all at once.
    Senator Dorgan. A fair point. I accept the point. And my 
only point is that whatever the level should be at the Federal 
Trade Commission to protect us in the manner that we want to be 
protected, to protect consumers, we want that level to exist 
with respect to resources.
    And I want to come, now, to this issue of the products that 
we read about on the pages of our newspapers. Someone buys a 
set of tires, to discover that the tires are faulty, bad 
products; and someone's on the road, driving 70 miles an hour, 
and has a problem with a tire, and somebody dies. A young boy 
swallows a heart-shaped charm--a small heart-shaped charm that 
comes with a pair of tennis shoes. Turns out it's 99 percent 
lead, and the 4-year-old boy is dead. You know, the list is 
endless of trinkets and toys, Elmo and Big Bird, coming in from 
overseas now in this galloping global economy. And we 
discover--you know what?--we not only exported the jobs, we 
exported minimal requirements to attend to the production, and 
we don't have the foggiest idea of the conditions under which 
these products are being produced.
    So, describe to me your role and the role of the Consumer 
Product Safety Commission, as well, with respect to product 
safety and what we're now seeing with respect to the global 
economy and products coming in that are unsafe.
    Ms. Majoras. The Consumer Product Safety Commission, 
Senator Dorgan, has almost the entire responsibility for this 
current problem. We obviously have the ability to go after 
deceptive and unfair practice--and unfair practices. But as far 
as product safety has gone, that has been the province of the 
CPSC. Obviously, in food and pharma and so forth, that has been 
FDA. And we work with those agencies, as appropriate. But, in 
fact, we haven't even worked much with CPSC, because we just 
don't have much overlap with them.
    Senator Dorgan. The CPSC was originally an outgrowth of the 
Federal Trade Commission, is that----
    Ms. Majoras. That's my----
    Senator Dorgan.--correct?
    Ms. Majoras.--understanding. And that----
    Senator Dorgan. You have no relationship at this point, 
really?
    Ms. Majoras. Oh, no, we have--we have a relationship. 
Occasionally--to tell you the truth, we overlap more in the 
international arena, because some agencies overseas have the 
same--still have both functions in their agencies; and so, 
sometimes they want to meet with both of us, and we may be 
consulting. And there may be the occasional issue on which we 
consult with them. But I can't think of anything official I've 
had to consult with them on anytime recently.
    Senator Dorgan. I'm going to send you a list of questions 
about this area, because I think there needs to be closer 
consultation. And I also want to explore the issue of whether 
the Federal Trade Commission should retain some kind of a role 
here, working in cooperation with the Consumer Product Safety 
Commission.
    It's clear to me that, with the global economy these days, 
and substantial outsourcing of production, we now insource 
products from all around the world, and, in many cases, we 
don't have the foggiest idea what the conditions of production 
were. And now we discover that Elmo and Big Bird have lead 
paint which exceeds the amount of lead that we would allow 
American children to be exposed to. This is not new. I mean, 
Benjamin Franklin warned us about that. So, it's not as if 
we've discovered some new phenomenon, except that we have just 
outsourced production, and we have plants operating in parts of 
the world where they want to reduce costs, so they use lead--
fast-drying, cheap, bright. The problem is, it can kill 
children.
    Ms. Majoras. Yes.
    Senator Dorgan. And so----
    Ms. Majoras. Yes.
    Senator Dorgan.--I want to explore some of that with you, 
with some written questions.
    Let me ask, if I might, about network neutrality. I'm sure 
you expected I would want to ask you about your statement.
    Ms. Majoras. Yes.
    Senator Dorgan. The Federal Trade Commission has made some 
statements--you have made some statements--about the issue of 
network neutrality, or net neutrality. Tell me your impression 
of these issues.
    Ms. Majoras. Well, it's a broad issue, but I'll try to give 
you a summary.
    We--when I first was trying to figure out what my 
impression of the issues were, probably back in the summer of 
2006, my impression was that there wasn't enough--there wasn't 
enough out there in the marketplace that I could read, that 
could fully educate us on the issue. We were being asked a lot 
of questions about whether competition laws are sufficient to 
deal with these issues as they come up. And I just--I felt 
there wasn't enough good information out there, so I asked my 
staff to go out and get some. And they did. They spoke to 
dozens and dozens of folks with an interest in this area, and 
then we held a couple of days of public hearings, which went 
over extremely well, because I think people were very happy to 
get together and talk about this issue honestly.
    We then issued a report, in--I believe it was June--in 
which what we concluded was that, in thinking about acting in 
this area, legislators or other policymakers should exercise 
caution, because there's so much that we still don't know about 
what's happening in this marketplace, what's going to happen in 
this marketplace. There's no question that people on both sides 
of the issue say, ``These Internet service providers are going 
to have this incentive or that incentive.'' ``No, they're not. 
They're going to have this incentive or that incentive.'' That 
could be--either side could be right. Variations on what either 
side believe could be right. And because this is such a dynamic 
area, where we don't want to squelch the innovation that's 
going on, squelch the development as we move forward, we are 
concerned that regulating prematurely, and perhaps on such a 
broad basis, as opposed to trying to take care of problems that 
we know are occurring, really could serve to squelch this 
market in a way that's harmful to consumers.
    Senator Dorgan. Can I ask what you mean by ``regulating''? 
Because my understanding is that, prior to a recent decision by 
the FCC, we had nondiscrimination rules in place, which do not 
now exist. But were those nondiscrimination rules what you 
define as ``regulation''?
    Ms. Majoras. They're part of regulation, yes.
    Senator Dorgan. And so, a regulatory framework that 
requires nondiscrimination, you think that's inadvisable?
    Ms. Majoras. That's not what the report says. What the 
report says is that, ``Here are the things that one needs to 
think about before you do it.'' And we don't think there's 
enough--first of all, we don't think there's evidence that 
discrimination is occurring, or even that it surely will occur. 
We don't think--if it does occur, we think there are certainly 
possible economic scenarios in which, if it did occur, it would 
not be harmful to consumers, necessarily. And so, if you have 
an inflexible rule that prevents it, we're concerned that that 
may--that may prevent business models from developing that 
would actually be helpful.
    Senator Dorgan. Let me ask you--there was an op-ed piece a 
while back by a local telephone company that provides broadband 
service, and so on, in a region, and the manager of that 
company said, ``You know, we need some additional revenue, and 
one way that I hope to get that revenue is to take a look at 
some of the big folks that are on the Internet and say to them, 
`You've got to pay a toll charge to get to the people I'm 
serving.' '' That seems to be classically what we exactly want 
to prohibit in this country. And yet, if that telephone company 
decided to do that on their Internet service, to say to a large 
or a small site out there, ``You've got to pay money to us in 
order for us to move your site--or make your site accessible to 
our customers,'' that would, under current circumstances, that 
would be all right, wouldn't it? Because there's no 
nondiscrimination requirement, and it would be fine for that 
company to do that. I think that's a horrible thing to have 
happen. My guess is that your philosophy is, ``Well, if it 
happens, there's going to be some other alternatives, and 
competition will solve the problem.'' Is that your position?
    Ms. Majoras. Well, I have to--I have two positions. First 
of all, I don't know whether it will be completely awful for 
that to happen. I know that companies like Google and Microsoft 
don't want to have to pay for it. They like the--they like--
they like the fact that they're not. So, I understand, you 
know, that perspective. I certainly understand the perspective 
of small content providers, and we do want to make sure that 
there are lots of--that we have lots of content on the 
Internet. But I do think that--a couple of things. One, I think 
competition takes--does--likely takes care of a lot of it, 
because the fact of the matter is--I can't imagine consumers 
tolerating not getting the content that they want. I mean, 
there has just never been a medium that consumers have believed 
was their own like the Internet. So, I think that these telecom 
providers have if they haven't gotten the message, they 
probably will, that this won't be tolerated. But, moreover, I'm 
not suggesting that if you start to see something that really 
is harmful to consumers, that there might not be a time when 
some new rules are necessary. That's--you know, that's 
obviously part of what----
    Senator Dorgan. Well----
    Ms. Majoras.--regulators do, and what you do. But I just--
to do it now, we think--we think--we just have to realize--
could create more problems.
    Senator Dorgan. But, you see, this gets back to the 
questions I've asked about some previous issues. You say, 
``Well, don't worry. If there becomes a problem, we'll deal 
with it later.'' I'd like us to prevent a problem from existing 
here. And let me give you an example. When Ed Whitaker, the 
former CEO of AT&T, then with BellSouth, said, quote, ``They 
don't have any fiber out there, they don't have any wires, they 
don't have anything. They use my lines for free. That's bull. 
For a Google or a Yahoo! or a Vonage or anybody to expect these 
pipes for free is nuts.'' It's quite clear what the interest 
is, and it's clear to me where we're headed. We're headed 
toward a circumstance where big providers that have a lot of 
muscle and will be able to make it stick, will set up different 
kinds of lanes and freeways here, some toll, some not. And 
consumers will not know what they don't have. That's just a 
fact.
    Ms. Majoras. And I just don't--I just don't completely 
agree with that.
    Senator Dorgan. Well, I know you don't agree with it, but 
I'm right.
    [Laughter.]
    Senator Dorgan. Let me tell you why. Consumers won't know 
what they don't have, because there will be providers out 
there, there will be sites out there--I'll give you an example. 
I don't have a big thing for Google. I don't have any contact 
with Google. But Larry and Sergey, just 9 years ago, were 
moving to a garage with a garage-door opener, and had nine 
employees. That's 9 years ago. And they had an idea. Nine years 
later, they have a company that exceeds the combined valuation 
of Coca Cola, Ford Motor, and General Motors. Now, would two 
guys in a dorm room or a garage have access to the consumers in 
X, Y, or Z city if the big interests said, ``Oh, by the way, 
you get a shot to go on our toll road if you can pay the 
toll''? I don't know. I don't think consumers will ever know 
what they miss. We created this Internet system through 
innovation. Innovation was available to everybody under every 
circumstance, and it was able to be accessed by everybody under 
every circumstance. If we get to a point where we say, ``Now 
there's no nondiscrimination rules, there's no rules against 
discrimination, you can discriminate,'' we won't know what we 
miss. We won't know what innovation we squelch. And I would 
hope that the philosophy at the Federal Trade Commission is not 
to say, ``You know what, let's wait and see what develops. 
We'll respond to it like a catcher responds to a foul ball 
here.'' Let's--how about deciding that what we've built, we 
built with nondiscrimination requirements. That's the 
regulatory framework in which we built this successful venture.
    Ms. Majoras. But what I don't--what I don't want to see 
happen--Senator, you and I would not have been able to predict 
where we are--5 years ago, we would not have been able to 
predict where we are today. That makes it very difficult for us 
to predict where the Internet is going, or probably even where 
we want it to be 5 years from now, and we just have to remember 
that if we put rules into place here, there will be some 
unintended consequences. That's just part of what we're 
pointing out. There always are. And, again, I think that this 
medium is so dynamic that--no way is Verizon or any of these 
other companies powerful enough to squelch it. The amount of 
consumer-generated content that's out there, if they suddenly 
start putting a stop to that, there will be a hue and cry in 
this--across this Nation like no tomorrow, and they'll lose--
you know, they'll lose a lot of customers. So, I just--I don't 
disagree with you. I don't want the bad result that you're 
talking about. I think that there just may be a difference in 
how we get there.
    Senator Dorgan. I fail, ever, to see a downside from 
nondiscrimination. I mean, I can't think of a detrimental 
impact of nondiscrimination. Maybe----
    Ms. Majoras. May I----
    Senator Dorgan.--you can.
    Ms. Majoras. May I offer one?
    Senator Dorgan. Sure.
    Ms. Majoras. OK. Today there are certain types of content 
that require faster speeds. And, unfortunately, because 
there's--you know, I--I'm not always great at technical terms, 
forgive me, Senator--but you're--where we're running out of 
space, almost--when we look at prioritization and who should go 
first, in terms of transmittal, if, for example, you don't 
prioritize certain things, like movies or VoIP or these other 
things that consumers are really starting to want on the 
Internet, over things that, sure, you're going to transmit, but 
they don't need to go as quickly or with greater priority, then 
you're going to lose those--the functions, the capability, at 
least in the short run.
    Senator Dorgan. Well----
    Ms. Majoras. So, to be able to prioritize those--that's a 
form of discrimination.
    Senator Dorgan. We see a different landscape, I guess. I 
think both the lack of informed public policy and the lack of 
effective competition means that we have \1/20\ the speed at 
twice the price for the same Internet service that many of our 
foreign competitors have. If you're living in Japan or Korea, 
you have a whole lot better speed--a whole lot more speed and 
at a lot less cost.
    What I see in virtually every area of telecommunications is 
galloping concentration, and I would encourage you, Madam 
Chair, to take a look at the bills you pay every month for your 
services. Most Americans do the same, and they understand there 
is not robust competition to drive prices down, which would be 
the effect of robust competition.
    But we'll save that for another day. My hope is that you 
will agree with me that, rather than wait for bad things to 
happen, we might want to preserve the same nondiscrimination 
rules that we have always had with the growth of the Internet. 
I see no downside to nondiscrimination. But you and I will have 
more back and forth, on this issue.
    Because we have another panel, let me thank you for coming, 
and say this. I think the discussions we've had about energy 
prices, about the subprime loans, about staffing at the FTC, 
about deceptive advertising, and about foreign products coming 
into this country, tainted products and so on, all of these 
things are really very important, and the Federal Trade 
Commission, I think, is in a position to play a very, very 
important role. I don't ask you to come up here today to 
denigrate a lot of good people that serve in the Federal Trade 
Commission. I do have heartburn, from time to time, that, 
especially in recent years, almost anybody that wants to merge 
gets a shot at merging without any oversight. And I know you've 
told me today of some circumstances where you have been an 
impediment to these mergers, and I appreciate that, because I 
think there are times when mergers clearly are not in the 
public interest. I want the Federal Trade Commission to be an 
aggressive and an active advocate on behalf of competition and 
on behalf of American consumers. My own belief is that, given 
the world we live in, we need to add resources to the Federal 
Trade Commission, and give the Federal Trade Commission the 
capability and the resources that it needs to do the job that 
is required of it by law.
    So, I thank you for coming today, and let me ask you to 
thank the other Commissioners for the Committee. We will be 
trying to report a bill out of the Committee, a reauthorization 
bill, to finally get this through the U.S. Senate and through 
Congress. Thank you very much.
    Ms. Majoras. Thank you for your support, Chairman Dorgan, 
we appreciate it.
    Senator Dorgan. Thanks for being here.
    Let me call the next panel up: Dr. Mark Cooper, Mr. Chris 
Murray, Mr. Michael Calhoun, Mr. Ari Schwartz, and Mr. Marty 
Abrams.
    I want to indicate that your entire statement will be made 
a part of the permanent record, and I would ask that you 
summarize. I've had a chance to review your testimony.
    And we will begin, today, with Dr. Mark Cooper, who 
represents the Consumer Federation of America.
    Dr. Cooper, welcome, to you. You've appeared before this 
Committee on a number of previous occasions, and we appreciate 
your appearance today. You may proceed.

STATEMENT OF DR. MARK N. COOPER, DIRECTOR OF RESEARCH, CONSUMER 
                     FEDERATION OF AMERICA

    Dr. Cooper. Mr. Chairman, thank you.
    There are certainly some areas where the FTC has done a 
good job, but, for oil and high-speed broadband Internet 
access, it has failed consumers badly. Here, the FTC asserts 
that there is vigorous competition, when there is not; and has 
claimed that there is no harm, when there is a great deal. The 
FTC has allowed refining markets and wholesale gasoline markets 
to become highly concentrated through lax merger review. The 
resulting tight oligopoly imposes severe pain at the pump and 
in the pocketbook, hundreds of billions of dollars of 
overcharges. The FTC's analysis of recent price spikes ignores 
fundamental structural problems of its own making in oil 
markets.
    If the subject of the FTC's 2006 price gouging 
investigation, mentioned earlier, had been the first price 
spike in the petroleum industry in recent years, then the 
report might be plausible. But, as every gasoline consumer 
knows, the 2006 spike was the sixth in a string of seven that 
have occurred in the last 8 years. Given the ever-lengthening 
list of events--fire, flood, hurricane, lightning, rust, demand 
surges--that Federal agencies use to excuse these price spikes, 
the only way one can characterize the FTC's analysis is that 
the price spikes are not the result of a conspiracy, they are 
the result of stupidity. The industry is simply unable to cope 
with any event that is out of the ordinary, or even do routine 
spring cleaning, without driving the price through the roof.
    What are some of the surprises the FTC identified in the 
2006 price spike? Seasonal effects of summer driving, increased 
consumer demand for gasoline, refinery outages resulting from 
hurricane damage, other unexpected or external events, and 
required maintenance.
    Surprise, surprise--consumers drive more in the summer, and 
we drive more as we grow in population and wealth. These two 
facts have been in evidence since Mr. Ford first mass-produced 
the Model T, but they still somehow seem to have snuck up on 
the oil industry.
    Surprise, surprise--refineries need to be maintained, and 
they break. How could the industry not have noticed? Worse 
still, why is there so little spare capacity that the industry 
has to run at such high levels of utilization that they are 
much more prone to accidents? Accidents don't just happen, they 
happen because you overuse your facilities.
    Why is there a deficit of over 3 million barrels a day in 
domestic refining, more than twice what it was a decade and a 
half ago? Why have stockpiles been cut in half so they are 
inadequate to deal with any small blip in supply and demand?
    In fact, five of the six excuses that the FTC gave for the 
price spikes of 2006 are the result of strategic 
underinvestment in capacity and management mistakes that have 
created a tight market in which you don't need collusion to put 
prices up. True competitive markets expand capacity. Tight 
oligopolies increase prices and profits.
    Let me turn to broadband. When Congress passed the 
Telecommunications Act of 1996, the U.S. was a global leader in 
the Internet. Virtually all Internet traffic in this country 
traveled on telecommunications networks that were obligated to 
provide nondiscriminatory interconnection and carriage under 
Title II of the Communications Act. But the FCC abandoned the 
principle of nondiscrimination, allowing a cozy duopoly of 
telephone and cable companies to dominate the broadband 
marketplace without any obligation to provide nondiscriminatory 
access.
    Chairman Majoras was dead wrong in her example. Ed Whitaker 
is not being prevented from prioritizing movies. What he wants 
to do is discriminate in favor of his movie and against the 
other guy's movies. Establishing priorities for categories of 
service is differentiation, not discrimination. She got that 
absolutely wrong.
    The FTC and the DOJ have cheered this decision by the FCC 
to allow this cozy duopoly to come into existence, claiming, 
``Two's enough for consumer protection.'' But theory and 
empirical evidence contradict that plan. The cozy duopoly in 
America dribbles out bandwidth at 10 to 20 times the--what 
other people pay around the world.
    We have fallen from third, 6 years ago, to at least 15th, 
maybe 24th, depending on how you counted. Consumers pay too 
much for too little in this country, and other nations with 
consumer-friendly and competition-friendly policies have become 
the focal point of innovation. We can see what we're missing, 
Mr. Chairman, by looking at those who have less--left us in 
their dust.
    Efforts to explain away the declining state of the U.S. by 
population density, market concentration, household size, 
income levels, income inequality, education, and age, among 
other things, do not negate the fact and the finding that the 
U.S. has fallen behind at least a dozen other nations. The 
success of the Internet, as you pointed out, was built on 
communications networks that were operated in an open and 
nondiscriminatory manner so that vigorous competition between 
applications and service providers was free to provide 
innovation and consumer-friendly services that drove demand. 
The way to break out of the current quagmire is not to claim 
that a duopoly is all you need, but to return to the successful 
procompetitive policies of open communications that made the 
Internet possible and allowed the U.S. to be the world leader 
in the first generation of the digital age.
    The nations that have passed us by have relied on that very 
policy that we used 30, 20, 10 years ago to achieve leadership. 
We need to get back to that simple policy of nondiscrimination 
in communications.
    Thank you.
    [The prepared statement of Dr. Cooper follows:]

    Prepared Statement of Dr. Mark N. Cooper, Director of Research, 
                     Consumer Federation of America
    Mr. Chairman and Members of the Committee,
    Thank you for the opportunity to testify. My name is Mark Cooper 
and I am Director of Research at the Consumer Federation of America 
(CFA).\1\
---------------------------------------------------------------------------
    \1\ The Consumer Federation of America (CFA) is a non-profit 
association of 300 consumer groups, with a combined membership of more 
than 50 million people. CFA was founded in 1968 to advance the 
consumer's interest through advocacy, research, and education.
---------------------------------------------------------------------------
    In my comments today I address two areas where the antitrust 
authorities, the Federal Trade Commission (FTC) in particular, have 
dropped the ball, failing to protect consumers from the abuse of market 
power. While the two sectors I address--the oil industry \2\ and high-
speed, broadband Internet access \3\--would appear to be dramatically 
different, the underlying problem that afflicts consumers in each of 
these markets is the same--inadequate competition and the failure of 
antitrust authorities to act to promote competition or prevent anti-
consumer, anti-competitive behavior by the industry. Federal 
authorities have allowed a tight oligopoly in oil and a cozy duopoly in 
broadband to engage in strategic under-investment in facilities, 
creating artificial shortages that allow them to overcharge consumers.
---------------------------------------------------------------------------
    \2\ ``The Failure of Federal Authorities to Protect American Energy 
Consumers from Market Power and Other Abusive Practices,'' Loyola 
Consumer Law Review, 19:4 (2007); The Role of Supply, Demand, Industry 
Behavior and Financial Markets in the Gasoline Price Spiral (Prepared 
for Wisconsin Attorney General Peggy A. Lautenslager, May 2006); Record 
Prices, Record Oil Company Profits: The Failure Of Antitrust 
Enforcement To Protect American Energy Consumers (Consumer Federation 
of America, Consumers Union, September 2004).
    \3\ This testimony draws on Mark Cooper, ``The Importance of Open 
Networks in Sustaining the Digital Revolution,'' in Thomas M. Lenard 
and Randolph J. May (Eds.) Net Neutrality or Net Neutering (New York, 
Springer, 2006); Open Architecture as Communications Policy (Stanford 
Law School, Center for Internet and Society: 2004); ``Open 
Communications Platforms: Cornerstone of Innovation and Democratic 
Discourse In the Internet Age,'' Journal on Telecommunications, 
Technology and Intellectual Property, 2:1, 2003, first presented at The 
Regulation of Information Platforms, University of Colorado School of 
Law, January 27, 2002.
---------------------------------------------------------------------------
    There are other areas where we think the FTC is doing a good job, 
including certain aspects of consumer protection, merger review in 
other industries, and anticompetitive, anti-consumer practices in the 
drug industry. But the oil industry and the broadband industry are 
extremely important and they are real weak spots.
    The FTC has allowed refining markets and wholesale gasoline markets 
to become highly concentrated through lax merger review. The result is 
a tight oligopoly and severe pain in the pocketbook--hundred of 
billions of dollars in overcharges and excess profits. The FTC's 
analysis of recent price spikes ignores fundamental structural problems 
of its own making in oil markets.
    The FCC has allowed a cozy duopoly of telephone and cable companies 
to dominate the broadband access market, without any obligation to 
provide nondiscriminatory access. The FTC \4\ and the DOJ \5\ have 
cheered this decision claiming that market forces in a duopoly will 
protect consumers, but theory and empirical evidence contradict that 
claim. As a result, the cozy duopoly dribbles out bandwidth at prices 
that are 10 to 20 times as high as in other nations around the world. 
The reliance on this cozy duopoly has been disastrous for the United 
States. In a short half decade, we have fallen from third in the world 
in broadband penetration and now are behind at least a dozen nations 
(15th) and, by some counts almost two dozen. Consumers pay too much for 
too little and the economy suffers as other nations with consumer and 
competition-friendly policies become the focal point of innovation.
---------------------------------------------------------------------------
    \4\ Federal Trade Commission, Report on Spring/Summer 2006 
Nationwide Gasoline Price Increases.
    \5\ ``U.S. Department of Justice Ex Parte Filing,'' In the Matter 
of Broadband Industry Practices, WC Docket No. 07-52,
---------------------------------------------------------------------------
Oil Prices
    If the subject of the recent FTC oil price gouging investigation 
had been the first price spike in the petroleum industry in recent 
years, then the report on the 2006 price spike might be plausible, but 
as every gasoline consumer knows, it was not the first price spike by 
any stretch of the imagination. In fact, the 2006 spike was the sixth 
in a string of seven that have occurred in the last 8 years.
    Given the ever lengthening list of unnatural events--fire, flood, 
hurricane, lightening, rust, demand surges--that Federal agencies use 
to explain recent price spikes, the only way you can characterize the 
FTC conclusion is that the price spikes are not the result of a 
conspiracy--they are the result of stupidity. The industry is simply 
unable to cope with any event that is out of the ordinary and even deal 
with routine spring cleaning without driving prices through the roof. 
When there are surprises and unexpected events for which the industry 
is unprepared, prices go up and oil companies just happen to make a lot 
more money. Its all quite innocent; dumb, but innocent--stupid like a 
fox.
What are these surprises and unexpected events that the FTC identified 
        in the 2006 price spike? ``Seasonal effects of the summer 
        driving season . . . and increased consumer demand for gasoline 
        beyond the seasonal effects.''
    Surprise, surprise--consumers drive more in the summer and more as 
the population and economy grow. Those two facts have been in evidence 
since Mr. Ford first mass produced the Model T, but they still seem to 
have snuck up on the oil industry. As Exhibits 1 and 2 show, the long 
term growth trend and seasonal driving patterns predict the gasoline 
demand in 2006 almost perfectly.
Exhibit 1




    Source: Energy Information Administration, Database, Petroleum 
Consumption.
Exhibit 2



    Source: Energy Information Administration, Database, Petroleum 
Consumption.
    Even if there were a bit of a surprise, why is there no spare 
capacity or stockpiles to deal with it? In competitive industries, when 
there is a seasonal pattern, producers build systems to respond without 
having to raise prices dramatically, for fear that they will lose their 
customers. Prices fluctuate, but competition drives seasonal sectors to 
shave the peaks. In the oil industry they don't work that way, they 
just put the prices up. Over the past couple of decades the oil 
industry has systematically under-invested in storage (see Exhibit 3), 
reducing the amount of gasoline on hand, thereby creating a tight 
market with little capacity to respond not only to genuinely unexpected 
shifts in demand, but even to routine seasonal patterns.
Exhibit 3: Gasoline Stocks above Minimum Operational Levels



    Source: Energy Information Administration, Petroleum Database.
What are these surprises and unexpected events? ``Refinery outages 
        resulting from hurricane damage, other unexpected problems or 
        external events, and required maintenance.''
    Surprise, surprise--refineries need to be maintained and they 
break. How could the industry have been so stupid as not to notice? 
Never mind that in a competitive industry each individual producer 
would carry more spare capacity for fear that he might get caught short 
if he had an outage or have to raise prices, which would cost him his 
customers (see Exhibit 4). In the oil industry they don't work that 
way, they just put the prices up. Worse still, the stupidity of the oil 
industry makes matters worse. When you don't build enough refineries 
and you run them at high levels of capacity, they break more often. 
Over the past couple of decades the oil industry has systematically 
under-invested in refining capacity--closing dozens of refineries and 
refusing to build new ones--thereby creating a system that not only 
cannot respond to accidents, but that cannot even provide routine 
maintenance without causing price spikes. There is now a shortfall of 
over 3 million barrels a day of refining capacity (see Exhibits 5 and 
6).
Exhibit 4: Spare Capacity in Refining v. All Industry



    Source: Calculated from Board of Governors of the Federal Reserve 
System, Federal Reserve Statistical Release, Industrial Production and 
Capacity Utilization; Energy Information Administration, U.S. 
Department of Energy, U.S. Percent Utilization of Refinery Operable 
Capacity.
Exhibit 5



    Source: Energy Information Administration, Database, Petroleum 
Consumption, Refining.
Exhibit 6



    Source: Energy Information Administration, Database, Petroleum 
Consumption, Refining.
What are these surprises and unexpected events? ``Increased price of 
        ethanol . . . capacity reductions stemming from refiners' 
        transition from methyl tertiary-butyl ether (MTBE) to 
        ethanol.''
    That summer fuels require oxygenates has been known for well over a 
decade. That everyone in the industry switched to ethanol at the same 
time creating a temporary shortage was dumb. They did not have to 
switch, they chose to, en mass, even though they had not arranged for 
adequate supplies. They switched without making sure that alternatives 
would be available. The result is a most remarkable pattern of 
behavior. When ethanol is cheap they don't use it, when it is expensive 
they all want it.
    Thus, five of the six excuses that the FTC gave for the price 
spikes of 2006 are the result of strategic under-investment in capacity 
and management mistakes that have created a tight market and exploit 
that tightness. If the cost of inputs, like crude and ethanol, and the 
need to bring expensive imports to market were the cause of increases 
in prices at the pump, then one would not expect the domestic spread 
and refinery margins and oil industry profits to be increasing, but 
they are (see Exhibits 7 and 8).
Exhibit 7



    Source: Energy Information Administration, Database, Petroleum 
Consumption, Retail Gasoline (excluding taxes) minus refiner 
acquisition cost of crude.
Exhibit 8: Major Oil Company Return on Equity is Far Above Historic 
        Levels
        

        
    Source: FRS Companies: Energy Information Administration, Form EIA-
28 (Financial Reporting System). All Manufacturing Companies: U.S. 
Census Bureau Quarterly Financial Report, All Manufacturing Companies.

    The simple fact of the matter is that this pattern of behavior was 
made possible by the merger wave of the past decade (see Exhibit 9). It 
has created a situation in which the industry does not have to collude 
to increase prices and profits. It just waits for the inevitable 
driving season to arrive, leavened by inadequate capacity and excuses, 
to put prices up.
Exhibit 9: Mergers have severely reduced the number of refiners



    Source: http://tonto.eia.doe.gov/FTPROOT/financial/mergers/
dwnstream.pdf.

    The FTC adopts a very consumer unfriendly definition of price 
gouging. The domestic spread on gasoline was 49 cents per gallon higher 
in 2006 than the average for 1990-1999 (see Exhibit 9). However, the 
FTC assumes that the inflated prices of 2001-2005 as the base, so it 
concludes that the ``extraordinary'' increase in 2006 was only 16-21 
cents. Because the market is too tight, it estimates that prices could 
have risen by as much as $1.35 to $2.21, so consumers should take 
solace in the fact that the industry left a lot on the table. When it 
looks at price gouging for individual companies, it assumes that if all 
the companies raise prices at the same time, then none is gouging, even 
though profits are going through the roof.
Broadband Internet
    The FTC and the Department of Justice have made precisely the same 
mistakes in analyzing the broadband market place that have afflicted 
the FTC's analysis of the oil industry. They see vigorous 
competition,\6\ where there is little; they see little harm,\7\ where 
there is a great deal of damage.
---------------------------------------------------------------------------
    \6\ FTC Staff Report, Broadband and Connectivity Competition 
Policy, June 2007, p. 10; DOJ, Ex Parte Filing, p. 1.
    \7\ FTC Staff Report, p. 11; DOJ, Ex Parte Filing, p. 24.
---------------------------------------------------------------------------
    The decision to abandon the principle of open communications 
networks after the Telecommunications Act of 1996 (the 1996 Act) 
resulted in a cozy duopoly of the telephone and cable companies that 
has failed to accomplish the most fundamental goals of the 
Telecommunications Act of 1996. In comparison to at least a dozen other 
nations, the closed proprietary networks of the cozy duopoly have:

   Failed ``to make available to all people of the United 
        States . . . adequate facilities at reasonable charges,''

   Failed to ``encourage the deployment on a reasonable and 
        timely basis'' of a two-way communications network, with 
        advanced telecommunications capabilities, with ``high-speed, 
        switched, broadband telecommunications capability that enables 
        users to originate and receive high-quality voice, graphics, 
        and video telecommunication,'' and

   Threatened the vibrant and competitive Internet that 
        Congress sought to preserve in the 1996 Act.

    The failure of the closed, proprietary, and cozy duopoly is evident 
in a multidimensional context. This model has

   Failed to deliver any broadband services to substantial 
        numbers of American households (around 9 percent, according to 
        the GAO);

   Failed to deliver bandwidth with data transfer rates 
        comparable to the broadband networks which are deployed in 
        other industrialized nations.

   Failed across the board to deliver facilities that afford 
        two-way communications at full broadband functionality and at 
        reasonable prices.

    In addition,

   Where last-mile broadband networks are available, the prices 
        charged for broadband are excessive when compared with the 
        price per megabit available in other industrialized nations;

   The target recipients of advanced broadband facilities, 
        which are capable of providing bandwidth on par with the higher 
        speeds available in other industrialized nations, are 
        households with high incomes, reflecting pricing practices 
        which demand extremely high charges for access.

    When Congress passed the Telecommunication Act of 1996, virtually 
all Internet traffic originated by or delivered to the public traveled 
on telecommunications networks that were obligated to provide 
nondiscriminatory interconnection and carriage under Title II of the 
Communications Act. The U.S. was the global Internet leader by far. But 
the FCC abandoned the principles of nondiscrimination, first for 
broadband provided by cable companies, then for telephone companies.
    Half a decade latter we have fallen far behind many other nations 
(see Exhibits 10, 11 and 12). When it comes to truly broadband 
communications that Congress envisioned in the 1996 Act, compared to 
many other nations, most of which strengthened their commitment to open 
communications networks,

   Americans pay over ten times more for far less service than 
        the leading broadband nations (see Exhibit 13) and

   The communications networks being deployed in America 
        relegate the public to the role of passive listeners and 
        restrict their opportunity as producers of content and speakers 
        to fully utilize the immense functionality of broadband 
        technologies in civic discourse (see Exhibit 14).
Exhibit 10: The U.S. Is Falling Behind On Broadband: 3 OECD Nations 
        Were Ahead Of The U.S. In 2001, 14 Nations Are Now Ahead of the 
        U.S.
        

        
Exhibit 11: The U.S. Ranks 15th on Broadband Penetration by Households 
        and Per Capita
        

        
Exhibit 12: 60% of U.S. States have lower broadband penetration than 
        Spain, 40% have lower broadband penetration than Portugal

% of Nation/State

HH


80.9 South Korea

71.1 Iceland

64.2 Netherlands

63.6 Denmark

63.4 Norway

61.4 Switzerland

61.1 Hawaii

60.7 New Jersey

59.9 Connecticut

57.3 Massachusetts

57.2 Canada

56.8 New Hampshire

56.8 California

53.9 Finland

53.3 Maryland

52.6 Rhode Island

51.8 New York

51.4 Delaware

50.5 Japan

50.4 Nevada

49.5 Sweden

48.2 Belgium

48.2 Florida

47.9 Washington

46.9 Kansas

46.6 France

46.3 United Kingdom

46.1 Virginia

45.7 Luxembourg

  45 Australia

  45 DC

  45 Arizona

44.6 United States avg.

44.5 Spain

44.4 Alaska

43.8 Texas

42.9 Nebraska

42.8 Minnesota

41.6 Maine

41.1 Utah

40.8 Pennsylvania

40.2 Ohio

40.2 Vermont

39.7 Austria

  39 Wisconsin

38.9 Missouri

38.3 Portugal

37.9 Italy

37.6 Indiana

  37 Oklahoma

36.8 Michigan

36.1 Louisiana

35.6 Wyoming

34.6 Germany

34.5 South Carolina

33.5 Tennessee

33.4 Montana

33.3 North Carolina

32.5 Iowa

31.7 Kentucky

31.6 Ireland

31.4 Idaho

30.9 New Zealand

30.8 West Virginia

30.1 Arkansas

29.8 New Mexico

29.4 Alabama

28.8 Czech Republic

21.3 South Dakota

20.4 North Dakota

20.2 Mississippi

19.6 Czech Republic

18.3 Hungary

15.3 Poland

13.6 Turkey

 9.2 Mexico

 8.8 Greece

 8.4 Slovak Republic

Exhibit 13:



    Derek Turner, Broadband Reality Check II, Free Press, August 2006.
Exhibit 14: The U.S. Ranks 14th in Average Speed



    Source: Information Technology and Innovation Foundation

    The root cause of this failure is the abandonment of the commitment 
to open communications networks and the reliance on feeble competition 
between, at best, two closed proprietary networks that possess and 
abuse market power. With inadequate competition and little public 
obligation, the cozy duopoly dribbles out capacity at high prices and 
restricts the uses of the network, chilling innovation in applications 
and services and causing a much lower rate of penetration of broadband 
in the U.S. than abroad.
    Efforts to explain away the declining status of the U.S. by 
population density, market concentration, household size, income 
levels, income inequality, education, age, among other factors do not 
negate the finding the U.S. is well behind a dozen or more developed 
nations (see Exhibits 15 and 16).
Exhibit 15: Controlling for Urbanicity, Income and Industry 
        Concentration, the U.S. is outperformed by 15 OECD Nations
        
        
    Source: Scott Wallstein, Everything You Hear about Broadband in the 
U.S. is Wrong, Progress and Freedom Foundation, June 2007
Exhibit 16: Lowering expectations does not improve the picture: The 
        U.S. ranks 14th on performance and 11 of the 14 nations ahead 
        on broadband are also outperforming the U.S.
        
        
    Source: Phoenix Center, The Broadband Performance Index, July 2007; 
OECD rankings

    The demonstrated failure of the cozy duopoly model to achieve the 
goals of the 1996 Act, the flawed theory of the benefits of 
discrimination, the clear initial signs of anti-competitive and anti-
consumer practices, as well as the extremely dim prospects for vigorous 
competition in facilities, combine to create a very dismal future for 
broadband consumers in America. The Federal antitrust agencies have 
turned a blind eye to the problem. The only way to break out of this 
quagmire is to return to the successful policies of open communications 
that made the Internet possible and allowed the U.S. to be the world 
leader in the first generation of the digital age. The success of the 
Internet was built on communications networks that were operated in an 
open and nondiscriminatory manner so that the vigorous competition 
between applications and service providers was free to provide 
innovations and consumer-friendly service that drove demand.

    Senator Dorgan. Dr. Cooper, thank you very much. As always, 
you seem to have had breakfast and have a lot of energy.
    [Laughter.]
    Senator Dorgan. And we appreciate your being here.
    Mr. Michael Calhoun, the president of the Center for 
Responsible Lending.
    Mr. Calhoun, welcome.

          STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, 
                 CENTER FOR RESPONSIBLE LENDING

    Mr. Calhoun. Thank you, Chairman.
    My testimony today will address the Federal Trade 
Commission's regulation of the mortgage market, with focus on 
the subprime market, looking at how they can be more effective 
in protecting the integrity of that market.
    I'm the President of the Center for Responsible Lending, 
which is a nonprofit research organization that studies the 
mortgage market. Equally important, the Center is an affiliate 
of Self-Help, which is a lender for first-time homebuyers, and 
we have provided over $5 billion of financing for first-time 
homebuyers across the country. This participation in the 
subprime market has given us a front-row seat for the mess that 
we now face in the current crisis.
    I'll focus my testimony on two key points. First, what is 
the status of the crisis in the mortgage market? And, second, 
how could the FTC be more effective in reducing or preventing 
this problem?
    We are now painfully aware of the subprime mortgage market, 
which is, I think, bad news for a lot of people, because of the 
large number of families losing their homes, and, equally, the 
ripple effects throughout the whole mortgage market and the 
whole economy. When you look at the features of the mortgages 
that families were sold, it's no surprise that we have a major 
problem. The typical subprime mortgage that families have today 
has a payment that, after 2 years, increases by 35 to 50 
percent, even if market interest rates do not increase at all. 
Few families can absorb that kind of payment shock. To compound 
matters, lenders sold these loans to families based only on 
their ability to make the initial payments, and those payments 
could be more than 50 percent of their borrower's gross income, 
before taxes. When the payment increases take effect, we often 
see monthly mortgage payments that are equal to 80 percent or 
more of a family's take-home income. To make matters even 
worse, over half of these loans were provided without 
documentation of the family's income, and lenders and brokers 
typically, in over three-fourths of these loans, did not 
include any escrow for taxes or insurance, in order to make the 
monthly payments look lower, but creating, again, further 
financial shock.
    To be clear, these were junk loans, not loans made to junk 
borrowers. And that's shown by the fact that, even in the 
subprime market, borrowers and families who received fixed-rate 
subprime mortgages have been able to keep up their payments on 
those loans. In contrast, these exploding ARM loans could 
continue only as long as home values increased by double digits 
each year so that the families could refinance the loans and 
pay them, in effect, out of their home equity.
    This reckless lending is taking a heavy toll on American 
families, costing more than 2 million families their homes. And 
since most subprime loans are refinancings of existing homes, 
only about 10 percent of these loans were loans to first-time 
homebuyers. That's a common misconception.
    This crisis is driving families out of homeownership and 
out of the middle class. It is particularly devastating in 
communities--for example, half of all African-American and 
Latino loans are subprime loans. And these impending 
foreclosures are the greatest threat to their family wealth in 
a generation. And all observers of the market agree, the worst 
is yet to come.
    This market has not been able to correct itself, as the 
lack of substantive standards has rewarded the least 
responsible practices. Families, but also lenders and 
investors, have been hurt by this lack of market integrity. 
Federal and State regulators have moved, recently, to enact 
some modest protections, such as the common sense idea that 
they should check to see if families can repay the loans after 
the initial low payments expire. The FTC has taken action to 
protect consumers in some ways. Much more action is needed by 
the FTC, and more authority and resources are needed for the 
FTC.
    The announcements and consumer information brochures are 
helpful, but more is needed to protect families in their 
largest financial transactions. The FTC needs to establish 
substantive standards, as it has done with other credit 
practices and in other fields, previously. Mere case-by-case 
enforcement means that most cases are never addressed when you 
have an agency of very limited resources.
    More tools for the agency are also needed, including joint 
authority for the FTC and Federal depository regulators, 
standard rulemaking procedures are needed so the FTC can act in 
a timely fashion. And a private right of action is needed so 
that violations of the FTC Act are enforceable by consumers. 
Perhaps most importantly, there have been suggestions to 
preempt existing authority that the states have in the mortgage 
area, and that would make things only far worse. We need as 
many cops on this beat as possible.
    In conclusion, most families rely on their homes not only 
for the physical and emotional shelter, but it's a repository 
of most of a families' hard-earned wealth. Over the past few 
years, we've seen unscrupulous mortgage brokers and lenders 
seize that wealth for their own gain, at great cost to our 
communities, families, and the Nation as a whole. The FTC, the 
Fed, and Congress need to act to help provide families with the 
means to safeguard their homes in what now are perilous 
transactions when they take out a mortgage.
    Thank you.
    [The prepared statement of Mr. Calhoun follows:]

         Prepared Statement of Michael D. Calhoun, President, 
                     Center for Responsible Lending
    Chairman Dorgan, Ranking Member DeMint, and Members of the 
Subcommittee, thank you for holding this hearing and considering this 
reauthorization in the context of the current turmoil in the subprime 
mortgage market. I serve as the President of the Center for Responsible 
Lending (CRL) (www.responsiblelending.org). CRL is 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 also have direct experience as a subprime lender. CRL is an 
affiliate of the Center for Community Self Help (www.self-help.org), 
which consists of a credit union and a non-profit loan fund. For the 
past 26 years, Self-Help has focused on creating ownership 
opportunities for low-wealth families, primarily through financing home 
loans to low-income and minority families, those often targeted for 
subprime loans. Self-Help has provided over $5 billion of financing to 
55,000 low-wealth families, small businesses and nonprofit 
organizations in North Carolina and across the country. Our loan losses 
have been less than 1 percent per year.
    Through this lending experience, I understand the benefits of 
subprime loans that contribute to sustainable homeownership. 
Unfortunately, when it comes to fair, affordable mortgages and 
opportunities for lasting homeownership, the subprime market's record 
is sorely lacking. The Center for Responsible Lending estimates that 
2.2 million families have lost or will lose their homes as a result of 
abusive subprime loans made in recent years. That is one in every five 
subprime loans made in 2005 and 2006, a rate unseen in the modern 
mortgage market. When we consider the subsequent loans subprime 
borrowers have been refinanced into, the probable foreclosure rate 
jumps to over one-third of all subprime borrowers.
    My main messages to you today are these:

        1. Problems caused by the subprime market are severe and 
        widespread.

        2. Abusive loans led to today's devastating foreclosures, and 
        we need to keep reckless lenders off the streets.

        3. The FTC could play a vital role in restoring integrity to 
        the subprime market and reducing abusive home loans.
         I. The Current Situation: An Epidemic of Foreclosures
    Last December, the Center for Responsible Lending published a 
report that represents the first comprehensive, nationwide research 
projecting foreclosures in the subprime market. The report, ``Losing 
Ground: Foreclosures in the Subprime Market and Their Cost to 
Homeowners,'' is based on an analysis of over six million subprime 
mortgages, and the findings are disturbing. Our results show that 
despite low interest rates and high housing appreciation during the 
past several years, the subprime market has experienced high 
foreclosure rates comparable to the worst foreclosure experience ever 
in the modern prime market. We also show that foreclosure rates will 
increase significantly in many markets as housing appreciation slows or 
reverses. As a result, we project that 2.2 million borrowers will lose 
or have lost their homes and up to $164 billion of wealth in the 
process. That translates into foreclosures on one in five subprime 
loans (19.4 percent) originated in recent years.\1\
    Since we issued that report, the condition of the subprime market 
has deteriorated rapidly, and subsequent events have shown our 
projection to be conservative. A recent study by the investment bank, 
Lehman Brothers, shows that the number of 2006-originated loans likely 
to face foreclosure is 30 percent.\2\ Headlines appear daily in the 
news detailing the negative ripple effects of bad subprime loans that 
have extended to investors and financial interests in many places 
throughout the world.
    At the same time, many in the lending industry still fail to 
acknowledge the scope of the problem, the damage caused by reckless 
lending practices, and the need for more than cursory solutions. As 
recently as last month, the Mortgage Bankers' Association denied that 
subprime foreclosure rates are of concern for the economy.\3\
    Yet, the Mortgage Bankers' own figures show that the problem is 
severe and widespread. Last week, the MBA released the ``Second Quarter 
National Delinquency Survey,'' the latest figures available on the 
performance of home loans. The survey shows that mortgage loans 
entering foreclosure have increased in 47 states since this time last 
year. On average, the increases were 50 percent higher. Only four 
states--North Dakota, South Dakota, Utah and Wyoming--did not 
experience increases in new foreclosures. Less than 2 percent of the 
American population lives in those states.
    While the rate of subprime foreclosures is alarming today, the 
worst is still ahead. With 1.7 million foreclosures predicted to occur 
in the next two to 3 years, it is imperative that Congress take action 
to assist homeowners struggling today, not just protect future subprime 
borrowers.\4\
    Several factors have driven massive home losses, including 
dangerous products, loose underwriting, broker abuses, investor 
demands, and Federal neglect. In the context of today's hearing, I will 
focus on reckless lending, dangerous loans, and the need to strengthen 
protections on the Federal level.
                    II. The Role of Reckless Lending
    Under typical circumstances, foreclosures occur because a family 
experiences a job loss, divorce, illness or death. However, the 
epidemic of home losses in today's subprime market is well beyond the 
norm. Subprime lenders have virtually guaranteed rampant foreclosures 
by approving risky loans for families while knowing that these families 
will not be able to pay the loans back. Subprime lenders flooded the 
market with high-risk loans and made them appealing to borrowers by 
marketing low monthly payments based on low introductory teaser rates.
    One of the key findings in our research on subprime mortgages is 
that subprime mortgages typically include characteristics that 
significantly increase the risk of foreclosure, regardless of the 
borrower's credit.\5\ Since foreclosures typically peak several years 
after a family receives a loan, we focused on the performance of loans 
made in the early 2000s to determine what, if any, loan characteristics 
have a strong association with foreclosures. Our findings are 
consistent with other studies: increases in mortgage payments and 
poorly documented income substantially boost the risk of foreclosure. 
For example, even after controlling for differences in credit scores, 
these were our findings for subprime loans made in 2000:

   Adjustable-rate mortgages had 72 percent greater risk of 
        foreclosure than fixed-rate mortgages.

   Mortgages with ``balloon'' payments had a 36 percent greater 
        risk than a fixed-rate mortgage without that feature.

   Prepayment penalties are associated with a 52 percent 
        greater risk.

   Loans with no documentation or limited documentation of the 
        applicant's income were associated with a 29 percent greater 
        risk.

    Lenders and mortgage insurers have known for decades that these 
features increase the risk of foreclosure, yet these characteristics--
adjustable-rate loans with prepayment penalties, made with little 
documentation--describe typical subprime mortgage loans made in recent 
years.
    A significant culprit in today's foreclosure was the proliferation 
of hybrid adjustable-rate mortgages (``ARMs,'' called 2/28s or 3/27s), 
which begin with a fixed interest rate for a short period, then convert 
to a much higher interest rate and continue to adjust every 6 months, 
quickly jumping to an unaffordable level. Commonly, this interest rate 
increases by between 1.5 and 3 percentage points at the end of the 
second year, and such increases are scheduled to occur even if interest 
rates in the general economy remain constant.\6\ This type of loan, as 
well as other similar hybrid ARMs (such as 3/27s) have rightfully 
earned the name ``exploding'' ARMs.
A. Loose Qualifying Standards and Business Practices
    The negative impact of high-risk loans could have been greatly 
reduced if subprime lenders had been carefully screening loan 
applicants to assess whether the proposed mortgages are affordable. 
Unfortunately, many subprime lenders--as well as lenders writing ``non-
traditional'' mortgages such as ``payment option ARMs'' and interest-
only loans--have been routinely abdicating the responsibility of 
underwriting loans in any meaningful way.
    Lenders today have a more precise ability than ever before to 
assess the risk of default on a loan. Lenders and mortgage insurers 
have long known that some home loans carry an inherently greater risk 
of foreclosure than others. However, by the industry's own admission, 
underwriting standards in the subprime market have become extremely 
loose in recent years, and analysts have cited this laxness as a key 
driver in foreclosures.\7\ Let me describe some of the most common 
problems:
    Not considering payment shock: Lenders who market 2/28s and other 
types of high-risk mortgages often do not consider whether the 
homeowner will be able to pay when the loan's interest rate resets, 
setting the borrower up for failure. Subprime lenders' public 
disclosures indicate that most are qualifying borrowers at or near the 
initial start rate, even when it is clear from the terms of the loan 
that the interest rate can (and in all likelihood, will) rise 
significantly, giving the borrower a higher monthly payment. For 
example, as shown in the chart below, publicly available information 
indicates that these national subprime lenders, who were prominent in 
recent years, do not adequately consider payment shock when 
underwriting ARMs:

       Sample Underwriting Rules For Adjustable Rate Mortgages \8\
------------------------------------------------------------------------
              Lender                          Underwriting Rule
------------------------------------------------------------------------
OPTION ONE MORTGAGE CORP            Qualified at initial monthly
                                     payment.
FREMONT INVESTMENT & LOAN           Ability to repay based on initial
                                     payments due in the year of
                                     origination.
NEW CENTURY                         Generally qualified at initial
                                     interest rate. Loans to borrowers
                                     with FICO scores under 580 and loan-
                                     to-value ratios of more than 80
                                     percent are qualified at fully
                                     indexed rate minus 100 basis
                                     points.
------------------------------------------------------------------------

    These underwriting rules indicate that lenders routinely qualified 
borrowers for loans based on a low interest rate when the cost of the 
loan is bound to rise significantly--even if interest rates remain 
constant. In fact, until very recently, it was not uncommon for 2/28 
mortgages to be originated with an interest rate 4 percentage points 
under the fully-indexed rate. For a loan with an 8 percent start rate, 
a 4 percentage point increase is tantamount to a 40 percent increase in 
the monthly principal and interest payment amount.
    Failure to escrow: The failure to consider payment shock when 
underwriting is compounded by the failure to escrow property taxes and 
hazard insurance.\9\ In stark contrast to the prime mortgage market, 
most subprime lenders make loans based on low monthly payments that do 
not escrow for taxes or insurance.\10\ This deceptive practice gives 
the borrower the impression that the payment is affordable when, in 
fact, there are significant additional costs. Given that the typical 
practice in the subprime industry is to accept a loan if the borrower's 
debt is at or below 50 to 55 percent of their pre-tax income, using an 
artificially low monthly payment based on a teaser rate and no escrow 
for taxes and insurance virtually guarantees that a borrower will not 
have the residual income to absorb a significant increase whenever 
taxes or insurance come due during the first year or two, or certainly 
not when payments jump up after year two.
    A study by the Home Ownership Preservation Initiative in Chicago 
found that for as many as one in seven low-income borrowers facing 
difficulty in managing their mortgage payments, the lack of escrow of 
tax and insurance payments were a contributing factor.\11\ When 
homeowners are faced with large tax and insurance bills they cannot 
pay, the original lender or a subprime competitor can benefit by 
enticing the borrowers to refinance the loan and pay additional fees 
for their new loan. In contrast, it is common practice in the prime 
market to escrow taxes and insurance and to consider those costs when 
looking at debt-to-income and the borrower's ability to repay.\12\
    Low/no documentation: Inadequate documentation also compromises a 
lender's ability to assess the true affordability of a loan. Fitch 
recently noted that ``loans underwritten using less than full 
documentation standards comprise more than 50 percent of the subprime 
sector. . . .'' \13\ ``Low doc'' and ``no doc'' loans originally were 
intended for use with the limited category of borrowers who are self-
employed or whose incomes are otherwise legitimately not reported on a 
W-2 tax form, but lenders have increasingly used these loans to obscure 
violations of sound underwriting practices. For example, a review of a 
sample of these ``stated-income'' loans disclosed that 90 percent had 
inflated incomes compared to IRS documents, and ``more disturbingly, 
almost 60 percent of the stated amounts were exaggerated by more than 
50 percent.'' \14\ It seems unlikely that all of these borrowers could 
not document their income, since most certainly receive W-2 tax forms, 
or that they would voluntarily choose to pay up to 1.5 percent higher 
interest rate to get the ``benefit'' of a stated-income loan.\15\
    Multiple risks in one loan: In addition, regulators have expressed 
concern about combining multiple risk elements in one loan, stating 
that ``risk-layering features in loans to subprime borrowers may 
significantly increase risks for both the . . . [lender] and the 
borrower.'' \16\ Previously I described a brief overview of the 
increased risk associated with several subprime loan characteristics, 
including adjustable-rate mortgages, prepayment penalties, and limited 
documentation of income. Each of these items individually is associated 
with a significant increase in foreclosure risk, and each has been 
characteristic of subprime loans in recent years; combining them makes 
the risk of foreclosure even worse.
B. Broker Abuses and Perverse Incentives
    Mortgage brokers are individuals or firms who find customers for 
lenders and assist with the loan process. Brokers provide a way for 
mortgage lenders to increase their business without incurring the 
expense involved with employing sales staff directly. Brokers also play 
a key role in today's mortgage market: According to the Mortgage 
Bankers Association, mortgage brokers now originate 45 percent of all 
mortgages, and 71 percent of subprime loans.\17\
    Brokers often determine whether subprime borrowers receive a fair 
and helpful loan, or whether they end up with a product that is 
unsuitable and unaffordable. Unfortunately, given the way the current 
market operates, widespread abuses by mortgage brokers are inevitable.
    First, unlike other similar professions, mortgage brokers have no 
fiduciary responsibility to the borrower who employs them. 
Professionals with fiduciary responsibility are obligated to act in the 
interests of their customers. Many other professionals already have 
affirmative obligations to their clients, including real estate agents, 
securities brokers and attorneys. Buying or refinancing a home is the 
biggest investment that most families ever make, and particularly in 
the subprime market, this transaction is often decisive in determining 
a family's future financial security. The broker has specialized market 
knowledge that the borrower lacks and relies on. Yet most mortgage 
brokers deny that they have any legal responsibility to refrain from 
selling inappropriate, unaffordable loans, or to put their own 
financial interest ahead of their clients'.\18\
    Second, the market, as it is structured today, gives brokers strong 
financial incentives to ignore the best interests of homeowners. 
Brokers and lenders are focused on feeding investor demand, regardless 
of how particular products affect individual homeowners. Moreover, 
because of the way they are compensated, brokers have strong incentives 
to sell excessively expensive loans. They earn money through up-front 
fees, not ongoing loan payments. To make matters worse for homeowners, 
brokers typically have a direct incentive to hike interest rates higher 
than warranted by the risk of loans. In the majority of subprime and 
similar transactions, brokers demand a kickback from lenders (known as 
``yield spread premiums'') if they deliver mortgages with rates higher 
than the lender would otherwise accept. Not all loans with yield-spread 
premiums are abusive, but because they have become so common, and 
because they are easy to hide or downplay in loan transactions, 
unscrupulous brokers can make excessive profits without adding any real 
value.
    Experts on mortgage financing have long raised concerns about 
problems inherent in a market dominated by broker originations. For 
example, the chairman of the Federal Reserve Board, Ben S. Bernanke, 
recently noted that placing significant pricing discretion in the hands 
of financially motivated mortgage brokers in the sales of mortgage 
products can be a prescription for trouble, as it can lead to behavior 
not in compliance with fair lending laws.\19\ Similarly, a report 
issued by Harvard University's Joint Center for Housing Studies, 
stated, ``Having no long term interest in the performance of the loan, 
a broker's incentive is to close the loan while charging the highest 
combination of fees and mortgage interest rates the market will bear.'' 
\20\
    In summary: Mortgage brokers, who are responsible for originating 
over 70 percent of loans in the subprime market, have strong incentives 
to make abusive loans that harm consumers, and no one is stopping them. 
In recent years, brokers have flooded the subprime market with 
unaffordable mortgages, and they have priced these mortgages at their 
own discretion. Given the way brokers operate today, the odds of 
successful homeownership are stacked against families who get loans in 
the subprime market.
C. Abusive Loan Terms: Prepayment Penalties and Yield-Spread Premiums
    Prepayment penalties--an ``exit tax'' for refinancing or otherwise 
paying off a loan--are a destructive feature of the subprime market 
that lock borrowers in to high-cost loans, and make it difficult for 
responsible lenders to refinance them into lower-cost loans. Today 
prepayment penalties are imposed on about 70 percent of all subprime 
loans,\21\ compared to about 2 percent of prime loans.\22\ This 
disparity belies any notion that subprime borrowers freely ``choose'' 
prepayment penalties. All things being equal, a borrower in a higher-
cost loan, or in an unpredictable, adjustable rate loan with a very 
high margin, would not choose to be inextricably tied to that product 
by a high exit tax.\23\ With common formulations of 6 months' interest, 
or amounts of approximately 3 percent of the principal, the amount of 
equity lost is significant. For a $200,000 loan, a 3 percent prepayment 
penalty costs borrowers $6,000, eating almost entirely the median net 
worth for African American households.\24\
    It has long been recognized that prepayment penalties trap 
borrowers in disadvantageous, higher cost loans. Indeed, this is the 
penalty's purpose--in industry parlance, to ``build a fence around the 
borrower'' or ``close the back door.'' Less well known is the fact that 
these penalties also increase the cost of the loan at origination 
because they are linked to higher rates on loans that pay higher so-
called ``yield-spread premiums'' to brokers.\25\ Thus, contrary to the 
claims of some lenders, prepayment penalties do not decrease, but, 
rather, frequently increase the cost of subprime loans.
    Yield-spread premiums are a bonus paid by the lender to the 
mortgage broker as a reward for placing the borrower into a higher cost 
loan than the borrower qualifies for. Lenders are willing to pay the 
premium only where they are sure that the borrower will remain in the 
higher-cost loan long enough to enable the lender to recoup the cost of 
the premium from the borrower.
    It is important to note that the lender does not allow the broker 
to get any yield-spread premium if the loan has no prepayment penalty, 
a result that is common in the subprime sector. Yield-spread premiums 
and prepayment penalties are intertwined in a way that is harmful to 
consumers and detrimental to competition. For a fuller discussion of 
these issues, please refer to our recent comment letter to the Federal 
Reserve Board, submitted on August 15.\26\
D. Racial Steering
    Eliminating the practice of steering borrowers to pricier and 
riskier loans is also critical to assuring a fair marketplace that does 
not impose a discrimination tax on borrowers of color. We know that for 
borrowers of color, the odds of receiving a higher-cost loan are 
greater, even after controlling for legitimate risk factors, such as 
credit scores.\27\ We are long past the time when we can--or should--
close our eyes to this. Tax cuts are popular in Washington. Ending the 
discrimination tax on mortgage lending is a tax cut that is long 
overdue, and prohibiting steering is the way to do it.
    It serves the interest not only of homeowners, but of the world 
economy, to assure that all families seeking loans who qualify for 
lower-cost prime mortgages should receive a prime mortgage, not a 
subprime loan. We know that far more people have been placed in high-
cost loans than should have been.\28\ Since it is now abundantly clear 
that ``risky loans,'' as much or more than ``risky borrowers,'' are a 
threat, market professionals--loan originators, whether brokers or 
retail lenders--should be required to assure that borrowers are put 
into the rate they qualify for. Market incentives that encourage 
originators to put as many people as possible into the priciest (and 
most dangerous) loans possible helped make this problem; prohibiting 
those incentives is a necessary part of the solution.
    The subprime market has long cited ``riskier borrowers'' or 
``credit-impaired borrowers'' as its justification for the higher 
prices on these loans. The argument is that investors need the higher 
prices to justify their risk, yet that extra price burden for the 
subprime loan puts credit-strapped borrowers that much closer to the 
edge.
         III. Federal Neglect and the Potential Role of the FTC
    Policymakers have long recognized that Federal law--the Home 
Ownership and Equity Protection Act of 1994 (HOEPA)--governing 
predatory lending is inadequate and outdated. Although the Federal 
Reserve Board (hereinafter, the ``Board'') has the authority to step in 
and strengthen relevant rules, they have thus far refused to act in 
spite of years of large-scale abuses in the market, though they will 
reportedly propose some regulations this year. Other Federal regulators 
with relevant authority, such as the Office of the Comptroller of 
Currency, have done very little enforcement, and they have been slow to 
enact rules. The result: For the majority of subprime mortgage 
providers, there are no consequences for making abusive or reckless 
home loans.
    On July 25 this year, we joined the Consumer Federation of America 
and other concerned groups in presenting testimony before the U.S. 
House Committee on Financial Services.\29\ In part of that testimony, 
we discuss the important role the Federal Trade Commission could play 
in eliminating abusive lending practices in the home loan market. The 
FTC brings two particular strengths:
    First, the FTC is the agency with long experience in interpreting 
and enforcing the law against unfair and deceptive acts and practices 
(UDAP) in commerce, having been in that business for well over half a 
century. This experience contrasts sharply with that of the banking 
regulatory agencies, who only recently even gave thought to utilizing 
such authority.\30\ In addition to longer experience with UDAP 
concepts, the FTC is also the agency whose chief job is to protect 
consumers from unfair and deceptive acts in commerce, and to protect 
the integrity of the marketplace for honest and ethical competition. 
Though the agency, like several others, could have done more to prevent 
the current subprime debacle, it makes little sense to prevent the 
agency with the most experience.\31\
    Second, the FTC is also the agency with the fewest conflicts of 
interest since, unlike the bank regulatory agencies, there is no 
structural conflict of interest--it is not dependent upon assessments 
for its funding, does not need to compete with other regulators for 
entities to regulate, and its primary role is to protect consumers, not 
bank profitability.
    With these strengths in mind, we offer two recommendations:
1. Enhance the power of section 5 of the FTC Act by expanding the rule-
        making and enforcement authority of the agency.
    Section 5 of the Federal Trade Commission Act prohibits unfair and 
deceptive acts and practices in trade and commerce. Expanding the 
regulatory and enforcement authority of the Federal Trade Commission 
related to mortgage lending--and many other aspects of consumer 
financial services--would enhance the capacity for appropriate Federal 
regulatory response, as the Consumer Federation of America, we at CRL, 
and others recommended in earlier Congressional testimony.\32\ The FTC 
is the agency charged with primary interpretive and enforcement 
authority under Section 5, but the Act places that authority as to 
federally chartered depositories institutions with the Federal 
financial regulators.\33\ Though the FRB, NCUA and OTS have rule-making 
authority under the FTC Act, and others have enforcement authority as 
well, removing limits on the FTC's capacity to act makes sense.
    While more could have been done with their rule-making authority, 
the FTC has promulgated two rules that have been effective in curbing 
abuses in the consumer finance area. The first, the ``anti-holder 
rule,'' abrogates the holder in due course rule for credit sales where 
the seller refers the borrower to the lender or arranges or assigns the 
sales financing.\34\ (A ``holder in due course'' is any subsequent 
owner of a check, note or other financial instrument of value.) That 
rule is based on the principle that, after the interest in a debt 
obligation is transferred, it is fundamentally unfair to separate the 
borrower's obligation to pay for a good or service if the provider of 
that good or service failed in its legal and contractual obligations to 
the borrower.
    The anti-holder rule provides an important object lesson for the 
current foreclosure crisis. It recognized that when the ultimate owner 
of the obligation sought payment from the consumer, the consumer's 
``right'' to seek redress against the originator while still obligated 
to pay the current holder was largely theoretical. It further 
recognized that those who were in the business of buying up credit 
obligations were in a far better position to police the marketplace of 
originators than consumers. That model demonstrates that accountability 
up the chain is workable, and the FTC should be commended for 
recognizing that.
    Another FTC rule that brought significant reform to the market is 
the Credit Practices Rule, which eliminated abusive contractual 
remedies that were standard practices in the finance company 
industry.\35\ This rule was aimed at contracts that provided powerful 
remedies to finance companies in non-negotiated contracts that denied 
due process and other legal rights to borrowers. Though vociferously 
opposed by the industry, the FTC recognized that industry wide 
practices can be--and sometimes are--inherently unfair or deceptive, 
and should be simply banned. Their authority to do so has been upheld 
by the courts,\36\ and the practical sense of doing so without doing 
harm to the marketplace has been upheld by history.
    Finally, states should be permitted parallel enforcement authority 
under Section 5 or their state analogues. It adds considerably to the 
available resources--more ``cops on the beat''--and, like the FTC, they 
have experience, and are less subject to conflicts.
2. Create a private right of action under Section 5 of the FTC Act.
    Currently, harmed consumers have no right to enforce the Federal 
FTC Act: only public enforcement is possible. Even absent the intrinsic 
conflicts of interest, enforcement agencies such as the FTC have 
limited resources. When problems become the rule in an industry, rather 
than the exception, as is the case recently, public resources will 
simply never be adequate. Regulatory investigations are also very time 
consuming, and hold no remedy for homeowners who face foreclosure 
today. It is imperative that consumers be able to wield their own tools 
when they need them.
    Though consumers in many states can invoke their state unfair and 
deceptive acts and practices law, there are significant gaps, such as 
exclusions for ``regulated entities.'' Further, with the overly 
expansive assertion of preemption of state law by Federal banking 
regulators, it is unclear whether we are about to see a constriction in 
the ability of consumers to use their state UDAP laws.\37\
                             IV. Conclusion
    The mortgage industry has argued for years that regulation of 
subprime lending would have the unintended consequence of restricting 
credit, but it is now apparent that the current tightening of credit 
has been caused by the lack of adequate regulation and the reckless 
lending that followed. If subprime lenders had been subject to 
reasonable rules--the kind of rules that responsible mortgage lenders 
have always followed--we wouldn't have the problems we're seeing today.
    Common-sense protections would prevent this catastrophe from 
happening again. We need a combination of sensible state laws backed by 
a strong Federal floor. In recent years, many states have taken action 
to curb specific predatory lending practices, but Federal regulators 
have remained largely passive until recently, and still have a ways to 
go. These recommended changes to the FTC Act will help protect families 
from abusive financial practices and help restrain the market from the 
excesses of recent years in the future.
Endnotes
    \1\ A full copy of the ``Losing Ground'' foreclosure study and an 
executive summary appear on CRL's website at http://
www.responsiblelending.org/issues/mortgage/reports/page.jsp?itemID=
31217189.
    \2\ Mortgage Finance Industry Overview, Lehman Brothers Equity 
Research, p. 4 (December 22, 2006).
    \3\ Comment letter from the Mortgage Bankers Association to the 
Board of Governors of the Federal Reserve Board, p. 4, dated August 15, 
2007.
    \4\ Moody's Economy.com, ``Into the Woods: Mortgage Credit Quality, 
Its Prospects, and Implications,'' a study incorporating unique data 
from Equifax and Moody's Investors Service (2007).
    \5\ See note 1.
    \6\ Here we are describing the 2/28 because it is by far the most 
common product in the subprime market, but the concerns are the same 
with the 3/27, which differs only in that the teaser rate remains in 
effect for 3 years.
    \7\ See e.g., Office of the Comptroller of the Currency, National 
Credit Committee, Survey of Credit Underwriting Practices 2005. The 
Office of The Comptroller of Currency (OCC) survey of credit 
underwriting practices found a ``clear trend toward easing of 
underwriting standards as banks stretch for volume and yield,'' and the 
agency commented that ``ambitious growth goals in a highly competitive 
market can create an environment that fosters imprudent credit 
decisions.'' In fact, 28 percent of the banks eased standards, leading 
the 2005 OCC survey to be its first survey where examiners ``reported 
net easing of retail underwriting standards.'' See also Fitch Ratings, 
2007 Global Structured Finance Outlook: Economic and Sector-by-Sector 
Analysis (December 11, 2006).
    \8\ See Option One Prospectus, Option One Mortgage Loan Trust 2006-
3 424B5 (October 19, 2006) available at: http://www.sec.gov/Archives/
edgar/data/1378102/000088237706003670/d581063_424b5.htm; Fremont 
Investment and Loan Prospectus, Fremont Home Loan Trust 2006-1 424B5 
(April 4, 2006) available at: http://www.sec.gov/Archives/edgar/data/
1357374/000088237706001254/d486451_all.htm; Morgan Stanley Prospectus, 
Morgan Stanley ABS Capital I Inc. Trust 2007-NC1 Free Writing 
Prospectus (January 19, 2007) available at: http://www.sec.gov/
Archives/edgar/data/1385136/000088237707000094/d609032_fwp.htm; Best 
Practices Won't Kill Production at New Century, p. 3 Inside B&C Lending 
(November 24, 2006).
    \9\ See, e.g., ``B&C Escrow Rate Called Low,'' Mortgage Servicing 
News Bulletin (February 23, 2005) ``Servicers of subprime mortgage 
loans face a perplexing conundrum: only about a quarter of the loans 
include escrow accounts to ensure payment of insurance premiums and 
property taxes, yet subprime borrowers are the least likely to save 
money to make such payments . . . Nigel Brazier, senior vice president 
for business development and strategic initiatives at Select Portfolio 
Servicing, said only about 25 percent of the loans in his company's 
subprime portfolio have escrow accounts. He said that is typical for 
the subprime industry.''
    \10\ See, e.g., ``Attractive Underwriting Niches,'' Chase Home 
Finance Subprime Lending marketing flier, at http://www.chaseb2b.com/
content/portal/pdf/subprimeflyers/Subprime_AUN
.pdf (available 9/18/2006) stating ``Taxes and Insurance Escrows are 
NOT required at any LTV, and there's NO rate add!'' (suggesting that 
failing to escrow taxes is an ``underwriting highlight'' that is 
beneficial to the borrower). `Low balling' payments by omitting tax and 
insurance costs were also alleged in states' actions against 
Ameriquest. See, e.g., State of Iowa, ex rel Miller v. Ameriquest 
Mortgage Co. et al, Eq. No. EQCE-53090 Petition, at  16(B) (March 21, 
2006).
    \11\ Partnership Lessons and Results: Three Year Final Report, p. 
31 Home Ownership Preservation Initiative, (July 17, 2006) at 
www.nhschicago.org/downloads/82HOPI3YearReport_Jul17-06.pdf.
    \12\ In fact, Fannie Mae and Freddie Mac, the major mortgage 
investors, require lenders to escrow taxes and insurance.
    \13\ See Structured Finance: U.S. Subprime RMBS in Structured 
Finance CDOs, p. 4 Fitch Ratings Credit Policy (August 21, 2006).
    \14\ Mortgage Asset Research Institute, Inc., Eighth Periodic 
Mortgage Fraud Case Report to Mortgage Bankers Association, p. 12, 
available at http://www.mari-inc.com/pdfs/mba/MBA8thCaseRpt.pdf (April 
2006); see also 2007 Global Structured Finance Outlook: Economic and 
Sector-by Sector-analysis, Fitch Ratings Credit Policy (New York, N.Y), 
December 11, 2006, at 21, commenting that the use of subprime hybrid 
ARMS ``poses a significant challenge to subprime collateral performance 
in 2007.''
    \15\ Traditional Rate Sheet effective 12/04/06 issued by New 
Century Mortgage Corporation, a major subprime lender, shows that a 
borrower with a 600 FICO score and 80 percent LTV loan would pay 7.5 
percent for a fully-documented loan, and 9.0 percent for a ``stated 
wage earner'' loan.
    \16\ See Interagency Guidance on Nontraditional Mortgage Product 
Risks, note 42.
    \17\ MBA Research Data Notes, ``Residential Mortgage Origination 
Channels,'' September 2006.
    \18\ About one-third of the states have established, through 
regulation or case law, a broker's fiduciary duty to represent 
borrowers' best interests. However, many of these provisions are 
riddled with loopholes and provide scant protection for borrowers 
involved in transactions with mortgage brokers. In other states, the 
question has not been specifically addressed.
    \19\ Remarks by Federal Reserve Board Chairman Ben S. Bernanke at 
the Opportunity Finance Network's Annual Conference, Washington, D.C. 
(November 1, 2006).
    \20\ Joint Center for Housing Studies, ``Credit, Capital and 
Communities: The Implications of the Changing Mortgage Banking Industry 
for Community Based Organizations,'' Harvard University at 4-5. 
Moreover, broker-originated loans ``are also more likely to default 
than loans originated through a retail channel, even after controlling 
for credit and ability-to-pay factors.'' Id. at 42 (citing Alexander 
2003).
    \21\ See, e.g., David W. Berson, Challenges and Emerging Risks in 
the Home Mortgage Business: Characteristics of Loans Backing Private 
Label Subprime ABS, Presentation at the National Housing Forum, Office 
of Thrift Supervision (December 11, 2006). According to MBA data, there 
was a 69.2 percent penetration rate for prepayment penalties on 
subprime ARMs originated in 2006. Doug Duncan, Sources and Implications 
of the Subprime Meltdown, Manufactured Housing Institute, (July 13, 
2007). A recent CRL review of 2007 securitizations showed a penetration 
rate for prepayment penalties averaging over 70 percent.
    \22\ See Berson, id. A recent MBA analysis shows that 97.6 percent 
of prime ARMs originated in 2006 had no prepayment penalty, and 99 
percent of 2006 prime FRM had no penalty. Doug Duncan, id.
    \23\ Marketing jargon in the industry is more honest about the role 
of prepayment penalties, along with high- LTV loans: ``Build a fence 
around the customer:'' or bring them in and ``close the back door'' are 
phrases that surfaced during regulatory investigations of subprime 
lenders in which one of the authors of this Comment was involved.
    \24\ Indeed, according to one study, it would exceed the median net 
worth in 2002 for African American households ($5,988). And it drains 
almost 7 percent of the median net worth for white households that year 
($88,651). Rakesh Kochhar, The Wealth of Hispanic Household: 1996-2002 
p. 5, (Pew Center for Hispanic Studies), http://pewHispanic.org/files/
reports/34.pdf.
    \25\ Christopher A. Richardson and Keith S. Ernst, Borrowers Gain 
No Interest Rate Benefits from Prepayment Penalties on Subprime 
Mortgages, Center for Responsible Lending (January 2005).
    \26\ Comment letter from the Center for Responsible Lending to the 
Board of Governors of the Federal Reserve Board (August 15, 2007).
    \27\ Debbie Gruenstein Bocian, Keith S. Ernst and Wei Li, Unfair 
Lending: The Effect of Race and Ethnicity on the Price of Subprime 
Mortgages, Center for Responsible Lending (May 31, 2006). Study finds 
that African-American and Latino borrowers are at greater risk of 
receiving higher-rate loans than white borrowers, even after 
controlling for legitimate risk factors. For example, African-American 
borrowers with prepayment penalties on their subprime home loans were 6 
to 34 percent more likely to receive a higher-rate loan than if they 
had been white borrowers with similar qualifications.
    \28\ Mike Hudson and E. Scott Reckard, More Homeowners with Good 
Credit Getting Stuck in Higher-Rate Loans, L.A. Times, p. A-1 (October 
24, 2005). For most types of subprime loans, African-Americans and 
Latino borrowers are more likely to be given a higher-cost loan even 
after controlling for legitimate risk factors. Debbie Gruenstein 
Bocian, Keith S. Ernst and Wei Li, Unfair Lending: The Effect of Race 
and Ethnicity on the Price of Subprime Mortgages, Center for 
Responsible Lending, (May 31, 2006) at http://
www.responsiblelending.org/issues/mortgage/reports/
page.jsp?itemID=29371010; See also Darryl E. Getter, Consumer Credit 
Risk and Pricing, Journal of Consumer Affairs (June 22, 2006); Howard 
Lax, Michael Manti, Paul Raca, Peter Zorn, Subprime Lending: An 
Investigation of Economic Efficiency, 533, 562, 569, Housing Policy 
Debate 15(3) (2004).
    \29\ Testimony of Travis Plunkett, Improving Federal Consumer 
Protections in Financial Services, Hearing Before the House Financial 
Services Committee, (July 25, 2007).
    \30\ The FTC has had UDAP authority to protect consumers for nearly 
70 years. Though the bank regulatory agencies were granted parallel 
enforcement authority in 1975, it is only since 2000 that they have 
recognized that. Even so, they have been parsimonious in utilizing it 
in the context of mortgage lending, for example, the OCC's action 
against a small bank, Laredo National Bank, # 2005-142. In contrast, 
the FTC took enforcement action against a non-depository subprime 
lender that was at the time among the top originators of subprime 
loans, the Associates, FTC v. Associates First Capital, (http://
www.ftc.gov/opa/2002/09/associates.shtm#) and other major predatory 
lenders, such as First Alliance Mortgage Company (FAMCO) and Delta 
Funding, in cooperation with other agencies. Abusive practices in 
servicing is another major problem in the mortgage context, and the FTC 
brought an action against Fairbanks, a major subprime servicer, (The 
FTC has a list of predatory lending cases on its website, 
http://www.ftc.gov/opa/2002/07/subprimelendingcases.shtm.
    \31\ It has been suggested that Congress may need to make clear to 
the FTC that it will gain this authority only if it commits to using it 
in an appropriate fashion. See Test. of Travis Plunkett, note 30.
    \32\ See note 30.
    \33\ 15 U.S.C. Sec. 45, 12 U.S.C. Sec. 57a(a), 57a(f). See also 
Julie L. Williams & Michael S. Bylsma, On the Same Page: Federal 
Banking Agency Enforcement of the FTC Act to Address Unfair and 
Deceptive Practices by Banks, 58 Bus. Law. 1243 (2003).
    \34\ 16 C.F.R.433.
    \35\ 16 C.F.R. 444.
    \36\ American Financial Serv. Ass'n v. Federal Trade Commission, 
767 F.2d 957 (D.C. Cir. 1985).
    \37\ For example, given the OTS' position that its rules ``occupy 
the field,'' what will be the impact if it promulgates UDAP rules, as 
it has recently proposed? (OTS Adv. Notice of Proposed Rule Making , 
Unfair or Deceptive Acts or Practices, Dkt. ID OTS-20007-0015 (http://
www.ots.treas.gov/docs/7/73373.pdf).

    Senator Dorgan. Mr. Calhoun, thank you very much for your 
testimony.
    Next we'll hear from Chris Murray, the Senior Counsel of 
Consumers Union.
    Mr. Murray?

   STATEMENT OF CHRIS MURRAY, SENIOR COUNSEL, CONSUMERS UNION

    Mr. Murray. Thank you, Subcommittee Chairman Dorgan, for 
the opportunity to represent Consumers Union this morning, the 
nonprofit publisher of Consumer Reports magazine.
    I want to touch on a few different areas focused in the 
media and telecom sectors, and note that the FTC does serve as 
a critical first line of defense for anticompetitive practices, 
as well as unfair and deceptive behavior.
    The first thing we would strongly urge Congress to do is 
eliminate the constraints of the common carrier exemption. This 
exemption from FTC jurisdiction was created for a bygone era, 
that--we no longer have a single monopoly provider that's 
tightly regulated by the Federal Communications Commission. 
Unfortunately, the Commission has been steadily walking away 
from regulating the full bundle of communications, and Congress 
needs to provide the authority for the FTC to fill this 
critical void.
    We see carriers using aggressive bundling tactics. They're 
advertising unlimited services that are sharply limited, and 
promoting plans that are not reflective of actual costs. But 
what happens when a telephone company advertises a misleading 
promotion that bundles a service that's, today, exempt, such as 
landline telephone service, with a service that is not, such as 
broadband Internet? We would argue that the agency has the 
authority to deal with the problem, but that's not clearly 
settled. Conversely, we see areas where the FTC already has 
clear authority and needs to do more to prosecute unfair and 
deceptive practices. I would note recent examples of cable 
companies who are terminating consumers because they're using 
too much bandwidth. If a consumer buys a particular Internet 
plan, companies can cap them at that bandwidth, no more and no 
less than what they purchased. We're not arguing that consumers 
should get unlimited bandwidth, just that they should get 
whatever bandwidth they've been sold. A spokesman for the cable 
company that was terminating these subscribers wouldn't even 
tell people what the real limit of their plans were. If that's 
not unfair and deceptive practices, I'm not sure what is. I 
don't understand how a company can advertise a particular high-
speed capacity, and then refuse to tell subscribers what they 
bought.
    So, I would, again, argue that it's critical, not just in 
the area of common carrier services, but, now that we see these 
full bundles, we need to eliminate the common carrier 
exemption, and we need to have an expectation that the FTC is 
going to deal with truth in broadband advertising across the 
full bundle.
    Turning to the digital TV transition, we need the FTC to 
help defend against the digital up-sell. As the Committee is 
aware, in 2009 consumers' analog television sets will no longer 
work for over-the-air broadcast without a digital converter 
box. Consumer awareness of the transition is low, and it's 
confusing even for those consumers who are aware of it. What 
equipment will they need? Will cable and satellite subscribers 
need a converter box? Will they need a high-definition 
television set? Will they need a digital cable-ready television 
set? Or will an analog set with this converter box that we're 
going to see a coupon for, will that be sufficient?
    Alongside this confusion are the inevitable incentives to 
up-sell. You've got cable companies who want to get people to 
buy their service. You've got consumer electronics 
manufacturers who want to get people to buy new televisions. 
The incentives are various, and the combination of low consumer 
awareness, technological complexity, and financial incentives 
to up-sell creates a situation ripe for deceptive practices. We 
would ask that the FTC pay special attention to advertising 
during this transition period, to make sure that consumers are 
given the whole truth.
    On identity theft and privacy, I'll note briefly that the 
FTC has conducted numerous workshops to explore privacy issues. 
One important workshop is planned this fall regarding online 
collection of consumer behavioral data for marketing uses. 
Consumers are paying an increasing price for the convenience of 
shopping online, as marketers, data-mining companies, are 
creating near-complete profiles of consumer behaviors, matched 
with public data on zip codes and incomes. We commend the FTC 
also for evaluating the important privacy issues raised by the 
Google-Doubleclick merger, and the growing concern over 
behavioral tracking.
    Finally, I'll remind the Committee that the National Do Not 
Call Registry is required to purge its numbers every 5 years, 
meaning that everybody who signed up for this list is going to 
have to sign up for it again, unless Congress takes action. 
Consumers who joined this enormously popular program will again 
encounter the annoyance of advertising at the dinner table, 
beginning in June 2008. With this annoyance will also come 
another round of expenditures for the Federal Government to 
publicize the availability of the list and the necessity of 
signing up again. Congressman Doyle announced, this week, that 
he will introduce a vehicle in the House to make the Do Not 
Call Registry permanent, and it's my hope that Members of this 
Committee might introduce a parallel bill and pass it 
expeditiously.
    I can't help actually just to note, in passing, one of our 
deep disappointments with the Federal Trade Commission has, 
indeed, been this net neutrality report. The notion that 
markets are going to discipline the right player here is 
curious. I was on the inside of Madison River, one of the few 
incidents where we've seen documented blocking, and what we saw 
there--it was sheer dumb luck that we discovered the blocking 
in the first place, because we had a network engineer as one of 
the customers who was blocked. He ran a trace route, and he 
called the company up, and the company told him they were 
blocking our packets because they wanted to make more from 
their own service. That is not going to repeat itself. We 
believe we've seen blocking in other instances. It's just 
incredibly difficult to document. And the problem is, the 
market disciplines the wrong player. If somebody has trouble 
with their Internet phone service, who do they call? Do they 
call their Internet service provider and say, ``Hey, you should 
sign a better deal with AT&T''? No, they call their Internet 
phone provider and say, ``Why is your service junk?''
    And the notion that competition is going to prevent this 
behavior, I think, is also a little bit laughable. I live 2 
miles north of the White House, in Washington, D.C., and I have 
a choice of precisely one provider. I'm not able to get cable 
modem service in my neighborhood. And so, I'm not quite sure 
how I, as a consumer, would do anything. And, while I hear, 
``Ninety percent of consumers have a choice between two,'' I 
just find that really difficult to believe those numbers, when, 
you know, here I am, in downtown Washington, D.C., in a 
relatively affluent neighborhood, and I don't have a choice of 
two providers.
    I thank you for the opportunity to testify today.
    [The prepared statement of Mr. Murray follows:]

  Prepared Statement of Chris Murray, Senior Counsel, Consumers Union
    Subcommittee Chairman Dorgan, Ranking Member DeMint, and Members of 
the Subcommittee, I am grateful for the opportunity to testify before 
you today representing Consumers Union, the nonprofit publisher of 
Consumer Reports magazine.\1\
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    \1\ Consumers Union is a nonprofit membership organization 
chartered in 1936 under the laws of the State of New York to provide 
consumers with information, education and counsel about goods, 
services, health, and personal finance. Consumers Union's income is 
solely derived from the sale of Consumer Reports, its other 
publications and from noncommercial contributions, grants and fees. In 
addition to reports on Consumers Union's own product testing, Consumer 
Reports (with approximately 4.5 million paid circulation) regularly 
carries articles on health, product safety, marketplace economics and 
legislative, judicial and regulatory actions that affect consumer 
welfare. Consumers Union's publications carry no advertising and 
receive no commercial support.
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    The Federal Trade Commission (FTC) serves as a key line of defense 
against unfair and deceptive practices and anti-competitive behavior. 
Today I will highlight some of the barriers in the Commission's 
authority and enforcement powers that hinder its ability to protect 
consumers as well as note a few priority areas in which the FTC could 
do more.
    Given the FTC's broad authority to protect consumers, Consumers 
Union intersects with the FTC in many ways. One notable area in which 
the FTC has led is in the area of ``Exclusion Payments,'' or ``pay for 
delay'' settlements, where generic drug manufacturers are paid by brand 
name drug makers to keep generic drugs out of a market. The agency 
prevailed on cases to end the practice of paying off drug competitors 
not to compete, until it was reversed by the 11th circuit in the 
Schering case.\2\ We support legislation to end these anti-consumer 
practices and applaud the FTC for conducting more investigations with 
an eye toward bringing more cases. These ``pay for delay'' deals cost 
consumers billions every year. I hope Congress will also act 
expeditiously to end this practice.
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    \2\ Schering-Plough Corp. v. Federal Trade Commission, 2005 U.S. 
App. LEXIS 3811, (11th. Cir. 2005).
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    Today I'll turn my attention primarily to the telecommunications 
and media sectors, and what can be done to improve the FTC's ability to 
protect consumers in these areas.
Eliminating the Common Carrier Exemption, Policing Truth in Broadband 
        Advertising
    First, Congress should eliminate the constraints of the common 
carrier exemption, as it was crafted for a time when a single monopoly 
telephone provider was tightly regulated by the Federal Communications 
Commission (FCC). As the marketplace evolves with a broader array of 
services, and the FCC steadily backs away from regulating the full 
bundle of communications that consumers are buying, there is a void 
that is critical for the FTC to fill--and Congress should provide the 
FTC authority to fill it.
    What happens when a telephone company advertises a misleading 
promotion that bundles a service that is today exempt, such as landline 
telephone, with a service that is not, such as broadband Internet? We 
would argue that the agency has authority to deal with the problem, but 
this would likely be litigated before it is settled, consuming already 
scarce agency resources.
    For example, in the Verity case, the agency brought an action 
against an overseas firm billing illegally for ``adult videotext'' 
services that consumers didn't even know had been accessed through 
their phone lines. The company attempted to evade FTC jurisdiction by 
claiming the common carrier exemption. While the FTC eventually 
prevailed, it required litigation at the district and appellate court 
levels, and Verity even attempted an appeal to the Supreme Court, but 
the case was not accepted.
    When we see carriers using aggressive bundling tactics, advertising 
``unlimited'' services that are sharply limited, and promoting plans 
that are not reflective of actual costs, the case for FTC jurisdiction 
could not be more clear.
    And the FTC should prosecute ``unfair and deceptive'' practices 
wherever they may lurk, especially where the agency already has clear 
authority. We saw recent examples of cable companies offering high-
speed Internet to their customers, and terminating those who use ``too 
much'' bandwidth. We're not arguing that consumers should have 
unlimited bandwidth by any means, just that they should get whatever 
bandwidth they've been sold. If a consumer buys a certain amount of 
connectivity, then cap them at amount--no more, no less than what was 
advertised. In a Washington Post article,\3\ a spokesman for this 
particular company wouldn't even disclose to its subscribers how much 
is ``too much''! They argue that if limits were disclosed, then 
subscribers would use right up to that maximum capacity.
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    \3\ Hart, Kim. ``Shutting Down Big Downloaders,'' Washington Post 
(September 7, 2007).
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    I simply don't understand how a company can advertise a particular 
high-speed capacity, and then refuse to tell subscribers what they 
really bought. If that's not an unfair and deceptive practice, I can't 
imagine what would be.
    The agency needs to act to ensure that consumers get truth in 
broadband and communications advertising, and Congress needs to give 
the FTC clear, concurrent jurisdiction with the FCC to deal with the 
full range of communications services, whether common carrier or 
otherwise.
Digital Television Transition--Defending against the ``Digital Upsell''
    The digital television transition creates unique vulnerabilities 
for consumers and therefore unique opportunities for businesses to 
mislead them. Not only is consumer awareness of the transition low, the 
transition is confusing for even those consumers who are aware of it--
consumers lack clarity on what equipment they'll need under what 
circumstances. Will cable subscribers need a converter box? For those 
who need a new television now, do they need a digital television? A 
digital cable-ready television? An analog set with a converter box?
    Along with these complexities are strong incentives by a variety of 
market players to upsell to consumers. Cable companies have an 
incentive to encourage non-subscribers to purchase their service, and 
to upsell current subscribers to digital cable. Retailers and 
manufacturers have an incentive to sell high-end HDTVs rather than more 
affordable lower definition, smaller-screen digital sets. And they have 
no incentive to inform consumers that their analog sets will continue 
to receive digital broadcasts as long as they have a converter box.
    The combination of low consumer awareness, technological 
complexity, and financial incentives to upsell creates a situation ripe 
for deceptive practices. For vulnerable populations--such as the 
elderly or low-income households--the potential for being misled, 
intentionally or unintentionally, is significant.
    Last week the cable industry launched a $200 million ad campaign to 
educate consumers about the DTV transition. The ads, which urge cable 
customers to relax because ``cable will take care of them'' in the 
digital transition, fail to indicate whether cable will convert all 
digital broadcast signals, or whether consumers will need to pay more 
for a set top box or other services that make it possible for consumers 
to continue using their analog cable services.
    The cable industry has made a voluntary commitment to offer both 
digital and analog signals to their customers for 3 years--but they 
have not committed to do this nationwide. Their public statements 
indicate that they would not provide these signals to customers in a 
significant part of the country, including rural areas. After this 3 
year dual carriage period ends, it is not clear that consumers will not 
have to purchase new equipment or pay more for digital cable service.
    Congress and the FTC should take an aggressive stance to ensure 
that consumers are not taken advantage of. In the last Congress, this 
Committee reported (in the Communications Opportunity Promotion and 
Enhancement Act) an amendment offered by Sen. Nelson of Florida that 
imposed on retailers the duty to adequately inform consumers, and made 
it a violation of law to fail to adequately inform consumers about the 
availability of digital-to-analog converter boxes or to provide 
misleading information about the availability and cost of such 
converter boxes. Consumers Union supported that provision and 
encourages Congress to make such failure a violation of Section 5 of 
the FTCA subject to civil penalties.
Rulemaking and Enforcement Authority
    Despite its broad jurisdiction to take action against unfair and 
deceptive practices by most types of businesses and its broad 
rulemaking authority to issue specific trade rules, the Commission 
faces significant procedural and judicial hurdles in proposing and 
adopting new rules and in taking enforcement action against unlawful 
practices.
    Preventative Rules: The Commission faces significant statutory 
restrictions in proposing and adopting rules to prevent unfair and 
deceptive practices before they occur. First, rulemaking is encumbered 
by significant procedural requirements, including judicial review 
according to a higher review standard than most agencies face. Second, 
in order to propose such rules, the Commission must make a showing that 
the practice it seeks to correct is prevalent or widespread. The 
apparent internal Commission policy not to issue such rules, coupled 
with its theoretically broad but practically cramped authority, means 
that consumers cannot rely on FTC rules to prevent unfair and deceptive 
practices before they occur. Thus, Congress must be more aggressive in 
ensuring that consumers are protected by mandating that the Commission 
develop rules that protect consumers from unfair and deceptive 
practices in the emerging priority areas, some of which are outlined 
below.
    Enforcement Authority: The Commission's enforcement authority is 
likewise constrained. Section 5 of the FTCA empowers the FTC to take 
action against those who engage in unfair and deceptive practices. For 
example, the Commission has authority to seek civil penalties against 
those businesses and individuals that violate Section 5, but only after 
it has issued a cease and desist order, a court has enjoined a practice 
and the order or injunction has been violated.\4\ This slap on the 
wrist approach sends a clear message: ``It's OK to break the law until 
you get caught, and when you do, just don't do it again.''
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    \4\ Although the Commission's Section 13(b) authority allows it to 
avoid the lengthy administrative enforcement process by filing a case 
directly in Federal district court, except where explicitly authorized 
by statute, rule or court decree, the Commission cannot seek civil 
penalties for initial violations.
    Examples of these enforcement difficulties abound. When the 
Commission filed its complaint against ChoicePoint for its security 
breach, it was able to seek civil penalties against the company only 
because they were authorized under the Fair Credit Reporting Act.\4\ 
Had the complaint been premised solely on the company's Section 5 
violations, the Commission could have sought only equitable and 
monetary relief--damages suffered in cases where the breach caused ID 
theft. Without the threat of FCRA-based civil penalties, it is unlikely 
that the Commission would have successfully achieved its record-setting 
$15 million settlement agreement. And in some cases, the actual 
monetary damages to consumers may be limited, difficult to assess and 
prove or otherwise inadequate to provide for a strong deterrent to 
unlawful actions. One such example is telephone pretexting, an issue 
which this Committee attempted to address in the 109th Congress. The 
Commission has sought explicit civil penalty authority from Congress to 
enforce violations of this type of deceptive practice.\4\ Such 
authority is important because when consumers phone records are 
obtained through pretexting, although there may be a severe privacy 
invasion (as in the case of the Hewlett-Packard board members whose 
phone records were obtained), monetary damages may be scant. In such 
cases, Section 13(b) provides little deterrence effect and thus is as 
limited as FTC's administrative enforcement options. Borrowing the 
words of Commissioner Liebowitz in his dissent in FTC's DirectRevenue 
case, in such cases, FTC enforcement action becomes merely ``a cost of 
doing business.'' \4\
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    The combination of few preventative rules and enforcement 
limitations encourage those who engage in unfair or deceptive practices 
to roll the dice in hopes that FTC resources and enforcement 
limitations will limit their financial exposure, assuming they are ever 
caught. Congress must step in to ensure that at least for high priority 
issues, the Commission is fully empowered to prevent consumer harm by 
mandating that FTC issue tough regulations or making explicit that 
certain practices violate Section 5 explicitly and by strengthening 
FTC's enforcement powers by authorizing it to seek strong civil 
penalties for initial violations.
Identity Theft and Privacy
    The FTC plays an important role in preventing identity theft, 
encouraging improved data security measures, and enforcing elements of 
some key privacy laws.
    FTC has conducted numerous workshops to explore privacy issues; one 
important workshop is planned this fall regarding online collection of 
consumer behavioral data for marketing uses. Consumers will pay an 
increasingly heavy price for the convenience of shopping for goods and 
services online as marketers, researchers and data-mining companies 
grow ever closer to creating near-complete profiles of consumer 
behaviors, easily matched with public data on zip codes and incomes. We 
also commend FTC for evaluating the important privacy issues raised by 
the Google-Doubleclick merger, and the growing concern over behavioral 
tracking.
    The Commission also manages the Identity Theft Data Clearing House 
and conducts important consumer education on prevention of ID theft and 
mitigation of its harms. We are pleased that the FTC has updated its 
website to provide information about state ``security freeze'' laws--
state laws giving consumers the right to freeze access to their credit 
files--that 39 states have now enacted. The security freeze is a key 
tool in preventing new account fraud. Given the essential nature of 
this protection, more prominent placement of freeze rights information 
would strengthen FTC educational efforts. And finally, the Commission 
has taken enforcement action under Section 5 against databrokers, 
retailers and other businesses who fail to live up to their privacy 
promises to protect and secure consumers' personal information, or who 
fail to employ reasonable and appropriate security practices.\5\
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    \5\ For an accounting of FTC's actions against companies that fail 
to comply with their own privacy policies, see http://www.ftc.gov/
privacy/privacyinitiatives/promises_enf.html.
---------------------------------------------------------------------------
    While the Commission's action to date to improve data security and 
deter deceptive privacy disclosures is laudable, more must be done to 
protect consumer privacy both by the Commission and by Congress. 
Continued reliance of FTC's Section 5 authority, with its significant 
enforcement limitations (discussed above), leave consumers vulnerable 
to deceptive and unfair practices that put them at significant risk of 
ID theft.
    Unfortunately, currently the Commission has explicit authority to 
issue data security rules only for those entities regulated under the 
Gramm-Leach-Bliley Act. Except under its general rulemaking authority--
which, as noted above, the Commission is reluctant to use--the FTC does 
not have an explicit Congressional mandate to issue rules governing the 
privacy and data security practices of non-GLBA entities.
    We urge Congress to provide the FTC with new enforcement authority 
for new Federal data security mandates for any business operating in 
interstate commerce that collects, stores, or otherwise uses consumers' 
sensitive personal information. S. 1178, reported by the Senate 
Commerce, Science, and Transportation Committee earlier this year, 
takes an important first step in applying FTC's GLBA data security 
rules adopted by FTC to all such businesses. If the rule is violated, 
the Commission will have authority to seek civil penalties for the 
initial violation, creating greater incentives to secure data. 
Unfortunately, despite the generality of the data security requirements 
under S. 1178 and FTC's GLBA data security rules, the legislation also 
displaces state data security safeguard rules that require stronger or 
more explicit security measures. We urge the Committee not to displace 
stronger state protections in this area, or to significantly strengthen 
data security safeguard mandates.
    But data security requirements are not enough. Consumers also 
deserve notice when the security of their sensitive personal 
information held by others has been breached so they can take steps to 
protect themselves. Consumers Union strongly supports the security 
freeze provisions of S. 1178 and urges their adoption. We urge, 
however, that Congress strengthen the notice of breach requirement in 
the bill. Under the legislation, notice obligations are not triggered 
unless the breached entity determines that there is a reasonable risk 
of identity theft. Such ``trigger'' notice will leave consumers in the 
dark when there is inadequate data for the breached entity to evaluate 
the level of risk. Moreover, the legislation weakens existing 
protections because it displaces far stronger state notice laws that 
now protect more than half of all American consumers. The more consumer 
protective approach to notice of breach provided in S. 495 better 
ensures that businesses cannot evade notice when the security of 
sensitive consumer data has been breached.
    Finally, it is essential that both Congress and the FTC step up 
protection of consumers Social Security Numbers (SSNs). SSNs provide 
the key to a consumer's financial identity. As a result, the widespread 
availability and use of SSNs by the private and public sector increases 
consumers' vulnerability to ID theft by making it easier for thieves to 
obtain the information.
    In comments filed last week by CU before the Commission as part of 
its inquiry regarding private sector use of SSNs, CU reported that in 
its recent national consumer survey, nearly four in five adults 
reported that they had been asked for their SSN by a business or 
government entity in the last year. Most consumers clearly understood 
the dangers of providing the number but feared the consequences of 
refusing to provide it. And nearly all survey respondents supported new 
laws that would restrict the use, sale, purchase, and solicitation of 
their SSNs.
    Consumers Union encourages adoption of laws creating new Federal 
protections for SSNs to reduce consumers' vulnerability to identity 
thieves. The SSN protection provisions of S. 1178 provide a starting 
point, but we have strong concerns that the numerous exceptions 
provided to prohibitions on solicitation, sale, purchase and display 
swallow the rule and leave consumers unprotected. We also urge the FTC 
take more aggressive action under its existing Section 5 authority to 
prevent collection, use, sale and purchase of SSNs except for credit, 
investment, tax and employment purposes.
Spam/Spyware
    Consumers Union, in its 2007 ``State of the Net'' survey found that 
more than 34 percent of survey respondents reported a spyware infection 
in the prior 6 months. The chances of being infected with spyware is 
one in three. One of every eleven consumers infected suffers serious 
damage. In addition to hardware and software damage, spyware poses 
grave risks to consumer privacy.
    Consumers will pay an increasing personal price for the convenience 
of shopping for goods and services online as marketers, researchers and 
data-mining companies grow ever closer to creating near-complete 
profiles of consumer behaviors, easily matched with public data on zip 
codes and incomes. Badware at best assaults consumers computers with 
unwanted pop-up advertising and, at worst, may unknowingly render their 
computers a tool for cybercriminals who use thousands of infected 
machines to steal identities, rob banks, and even cripple the Internet 
with malicious denial-of-service attacks.
    We commend FTC for its aggressive stance on spyware, bringing at 
least eleven actions in the past 2 years, although some settlements 
have produced disappointingly low fines. But more must be done to 
protect consumer privacy.
    In addition to new authorities for FTC, the agency, despite its 
good work, can take yet a more aggressive stance beyond enforcement of 
Section 5 violations. It should investigate the online marketplace in 
light of new developments in the field, expose marketing practices that 
compromise user privacy, issue the necessary injunctions to halt 
current practices that abuse consumers, and craft policies and 
recommend Federal legislation that prevents such abuses in the future.
National Do Not Call Registry
    Finally, I'll note that the National Do Not Call Registry is 
required to purge its numbers every 5 years, meaning all consumers who 
signed up for it will have to sign up for it again, unless Congress 
takes action. Consumers who signed up for this enormously popular 
program will again encounter the annoyance of advertising at the dinner 
table, beginning in June 2008. And with this will come another round of 
marketing expenditures for the Federal Government to publicize the 
availability of the List and necessity of signing up yet again.
    132 million citizens put their home and mobile telephone numbers on 
the list, and I'm confident those voters will be distressed to find out 
that they are again facing telemarketing calls unless Congress acts.
    Congressman Doyle announced this week that he will introduce a 
vehicle in the House to make the Do Not Call Registry permanent; it is 
my hope that members of this Committee will introduce a parallel bill, 
and seek its expeditious passage.
    The Federal Trade Commission is a critical line of defense against 
unfair and deceptive practices and anti-competitive behavior. The 
Committee should act to improve the agency's ability to accomplish its 
mission, especially by eliminating the common carrier exemption. We 
look forward to supporting the agency's efforts on consumer privacy, 
spam and spyware, the Do Not Call List, and would urge the agency to 
take a closer look at advertisements concerning the Digital Television 
Transition to ensure that consumers are not misled.
    Thank you Chairman Dorgan.

    Senator Dorgan. Mr. Murray, thank you very much.
    Finally, next we will hear from Mr. Schwartz. Mr. Schwartz 
is representing the Center for Democracy and Technology.
    Mr. Schwartz, you may proceed.

          STATEMENT OF ARI SCHWARTZ, DEPUTY DIRECTOR, 
              CENTER FOR DEMOCRACY AND TECHNOLOGY

    Mr. Schwartz. Thank you very much, Chairman Dorgan. Thank 
you for holding this public hearing today and inviting CDT to 
participate.
    As more consumers' services move online, consumer 
protection agencies are facing new challenges. The Federal 
Trade Commission has played a leadership role to meet these 
challenges, including overcoming such difficulties as locating 
the perpetrators of online schemes, keeping up with the rapid 
pace of technological evolution, and following the increasing 
financial motivation of Internet fraudsters.
    In particular, the FTC has been the lead law enforcement 
agency in the world in the fight against spyware. Spyware has 
become one of the most serious threats to the Internet's 
future. Consumer Reports magazine estimates that consumers will 
lose $1.7 billion this year to spyware attacks alone. The 
magazine estimates that almost 1 million consumers simply gave 
up fixing their spyware-riddled computers and had to throw them 
away.
    The good news is that consumer losses are down dramatically 
from 2006, when they peaked at $2.6 billion. The main reasons 
for this decrease in the spyware threat are, first, the 
improvement in anti-spyware technology; second, the public 
pressure on companies advertising with nuisance or harmful 
adware; and, finally, the enforcement of consumer protection 
law, led by the work of the FTC and some State attorneys 
general.
    The FTC recognized the profound threat posed by the rising 
tide of spyware early, and actively moved to limit its spread. 
The Commission has been the leading enforcer against spyware, 
pursuing 11 cases to fruition in the past two and a half years, 
including three based, at least in part, on the petitions 
brought my organization, the Center for Democracy and 
Technology. CDT has learned, through our own research, that, as 
consumer fraud increases, the FTC's ability to work 
internationally becomes more important. Congress passed the 
SAFE WEB Act late last year to provide the FTC powers to 
promote international cooperation. The FTC's ability to use 
this new law, and staff resources that it will need, will be 
very important to monitor.
    In fact, in general, the Commission staff has not grown in 
equal proportion to its new responsibilities, such as SAFE WEB, 
the FACT Act, Gramm-Leach-Bliley, CAN-SPAM, and more.
    Mr. Chairman, you mentioned, earlier, that, according to 
its own statistics, in 2008 the FTC will only be about three-
fifths of the size that it was almost 30 years ago, in 1979, 
well before the Internet explosion, and decades before the 
growth of online fraud. For online consumer protection to be 
truly effective in the future, Congress will need to 
appropriate resources commensurate with the FTC's new 
responsibilities.
    Finally, CDT would like to impress upon the Committee the 
important role that the FTC has played in promoting good 
privacy practices online. While progress has been made by many 
of the good actors in the industry in this regard, CDT 
continues to actively urge Congress to take a more 
comprehensive approach to privacy to ensure that consumers are 
protected in the new networked economy.
    Last year, we were joined in this effort not only by 
privacy advocates, but also by 14 major companies, including 
eBay, Microsoft and HP. The FTC's experience on privacy will be 
essential as this effort moves forward. In particular, the 
Commission will need adequate resources to participate in the 
discussion to implement whatever legislation emerges from this 
process. We hope that this committee will be the leader on the 
general privacy issue, and will continue to promote the urgency 
of privacy matters with the Commission and on the rest of the 
Congress, moving forward.
    Thank you for your attention, and I look forward to your 
questions.
    [The prepared statement of Mr. Schwartz follows:]

         Prepared Statement of Ari Schwartz, Deputy Director, 
                  Center for Democracy and Technology
    Chairman Dorgan, Ranking Member DeMint and Members of the 
Committee, thank you for holding this public hearing on the 
Reauthorization of the Federal Trade Commission (FTC). The Center for 
Democracy and Technology (CDT) is pleased to have the opportunity to 
participate. CDT is a nonprofit public interest organization dedicated 
to preserving and promoting privacy, civil liberties and other 
democratic values on the Internet. CDT has been a widely recognized 
leader in the policy debate about spyware, phishing and related privacy 
threats to the Internet.\1\ As we have worked to build trust on the 
Internet, we have worked closely with the Consumer Protection Bureau at 
the Federal Trade Commission. The Bureau's work is essential to the 
protection of consumer privacy online.
---------------------------------------------------------------------------
    \1\ See, e.g., CDT leads the Anti-Spyware Coalition (ASC), a group 
of anti-spyware software companies, academics, and public interest 
groups dedicated to defeating spyware; In 2006, CDT Deputy Director Ari 
Schwartz won the RSA Award for Excellence in Public Policy for his work 
in building the ASC and other efforts against spyware; ``Eye Spyware,'' 
The Christian Science Monitor, Apr. 21, 2004 [``Some computer-focused 
organizations, like the Center for Democracy and Technology, are 
working to increase public awareness of spyware and its risks.'']; 
``The Spies in Your Computer,'' The New York Times, Feb. 18, 2004 
[``Congress will miss the point (in spyware legislation) if it 
regulates specific varieties of spyware, only to watch the programs 
mutate into forms that evade narrowly tailored law. A better solution, 
as proposed recently by the Center for Democracy and Technology, is to 
develop privacy standards that protect computer users from all programs 
that covertly collect information that rightfully belongs to the 
user.'']; John Borland, ``Spyware and its discontents,'' CNET News.com, 
Feb. 12, 2004 [``In the past few months, Ari Schwartz and the 
Washington, D.C.-based Center for Democracy and Technology have leapt 
into the front ranks of the Net's spyware-fighters.''].
---------------------------------------------------------------------------
Summary
    The FTC's consumer protection mission with respect to the Internet 
is expanding and becoming increasingly complex. The Commission's 
jurisdiction over Internet-related laws has expanded including new laws 
to fight spam, identity theft and more. At the same time, the rapid 
pace of technological change, the increasing financial pay-off for 
malicious actors and complicated nature of international cooperation 
has increased the complexity of enforcement and the need for adequate 
resources. Five years ago, CDT foresaw these emerging issues when we 
urged this subcommittee to reauthorize the FTC and, in doing so, to 
``use its new resources to stop unfair information practices as well as 
deceptive ones.'' \2\ While the Commission has not been reauthorized 
since 1996, it has, under Chairman Majoras, begun to bring more cases 
using its unfairness powers and has assumed a lead law enforcement 
agency role in online consumer protection.
---------------------------------------------------------------------------
    \2\ Testimony of Ari Schwartz, Associate Director, Center for 
Democracy and Technology on ``Reauthorization of the Federal Trade 
Commission'' before the Senate Committee on Commerce, Science, and 
Transportation Subcommittee on Consumer Affairs, Foreign Commerce and 
Tourism,'' July 17, 2002.
---------------------------------------------------------------------------
    In particular, the FTC has taken the lead law enforcement role in 
fighting spyware, one of the most serious threats to the Internet's 
continued usefulness, stability and evolution. The Commission should be 
commended for recognizing early on the profound threat posed by the 
rising tide of spyware and for actively moving to limit its spread.
    As consumer Internet fraud increases, the FTC's ability to work 
with its international counterparts becomes ever more important. At the 
request of the Commission and with support from groups like CDT, 
Congress passed the SAFE WEB Act late last year to provide the FTC with 
powers to promote international cooperation. Yet, while the Commission 
clearly recognizes the importance of the new law, we will need to 
closely monitor the Congressional reporting on the law to see if those 
powers are being used effectively to improve international cooperation.
    CDT would also like to impress upon the Committee the important 
role that the FTC has played in promoting good privacy practices 
online. In particular, the Commission has promoted industry best 
practices and also shown that it will take action when laws are broken.
    For the last decade, CDT has actively urged Congress to take a more 
comprehensive approach to privacy. Last year, we were joined in the 
call for comprehensive privacy legislation, not only by privacy 
advocates, but also by 14 major companies. CDT urges this Committee to 
take up general consumer privacy legislation and make it clear that the 
FTC's unfairness jurisdiction includes violations of the privacy rights 
of American consumers. As the discussion about privacy legislation 
moves forward, the FTC's expertise and experience on privacy will be 
essential.
    Finally, it is important to note that while the Internet revolution 
and the growth of digital technologies have heightened the FTC's 
importance to consumer protection, the resources available to the 
Commission have declined. When adjusted for inflation, the Commission's 
staff in 2008 will only be 62 percent of the size that it was almost 30 
years earlier in 1979, well before the Internet explosion.\3\ For 
online consumer protection to continue to be effective, Congress will 
need to appropriate resources commensurate with the FTC's new 
responsibilities.
---------------------------------------------------------------------------
    \3\ According to the FTC, the Commission had 1,746 FTEs in 1979 
(see http://www.ftc.gov/ftc/oed/fmo/fte2.htm) and requested 1,019 FTEs 
in 2008 (see http://www.ftc.gov/ftc/oed/fmo/budgetsummary08.pdf).
---------------------------------------------------------------------------
      I. Growth of Internet Commerce Has Led to New Roles for FTC
    The exponential growth of Internet commerce has delivered enormous 
benefits to consumers. With low barriers to entry and a profusion of 
tools for comparing various sellers, e-commerce has lowered prices and 
expanded consumer choice. Users also benefit from the enormous 
convenience e-commerce provides, conducting transactions from their 
home offices, laptop computers and increasingly even mobile devices 
like PDAs and phones.
    These benefits, however, are being undermined by the rise in 
privacy intrusions, fraud and abuse. An entire shadow industry has 
arisen with the sole purpose of gathering personal information on 
Internet users--often surreptitiously through invasive means such as 
spyware. Most of this information ends up being used to bombard users 
with unwanted marketing, but in the wrong hands it also may be used for 
more malicious purposes, such as identity theft, the fastest growing 
crime in the United States.
    Consumers also are subjected to a constant barrage of annoying and 
frequently offensive spam e-mail. Some of this spam is sent by 
fraudsters posing as legitimate e-commerce sites and financial 
institutions, These ``phishing'' e-mails typically try to dupe 
consumers into visiting fake websites where they are prompted to submit 
passwords and personal information, such as a Social Security numbers, 
which can, in turn, be used for identity theft. Making matters worse, 
many of these scams originate overseas, out of reach of U.S. law 
enforcement.
    Consumers are increasingly alarmed about these kinds of scams, 
Internet privacy intrusions, fraud and abuse. In an April 2006 poll 
conducted by the Center for American Progress, 69 percent of 
respondents indicated they were very or somewhat worried about having 
their identities stolen, making it the most widely cited risk category 
from a list that included getting cancer, being victimized by violent 
crime, and being hurt or killed in a terrorist attack.\4\
---------------------------------------------------------------------------
    \4\ Poll conducted April 13-20, 2006, by Greenberg Quinlan Rosner 
Research for the Center for American Progress; Center for Responsible 
Lending; National Military Family Association; and AARP.
---------------------------------------------------------------------------
    The FTC is the lead Federal agency responsible for protecting 
consumers against spam, spyware, identity theft and other Internet 
fraud and is responsible for enforcing the:

   Children's Online Privacy Protection Act

   CAN-SPAM Act

   Fair and Accurate Credit Transactions Act

   Do Not Call List

   Gramm-Leach-Bliley Act

    The Commission also plays a lead role in addressing the growing 
threats related to:

   Identity theft

   Spyware

   Phishing

   General Internet fraud

    The FTC is also engaged in evaluating and developing responses to 
changes in the online marketplace that may affect consumer protection. 
One example is behavioral advertising, which involves the compilation 
of detailed profiles of consumers' online activities for the purposes 
of serving targeted advertising. Although this practice is not new, the 
FTC has recognized that the evolution of technology and the online 
marketplace require that the Commission take a fresh look at behavioral 
advertising's privacy and consumer protection implications. The FTC has 
scheduled a town hall meeting in November to address the issue. In this 
and many other areas, the FTC is constantly looking to educate itself 
and the public about developing threats online.
    When we take into account the scope of the FTC's responsibilities 
it becomes obvious that maintaining aggressive enforcement and 
comprehensive consumer education requires additional resources for the 
FTC. The online marketplace will become both more complex and more 
essential over time. The FTC has been and will continue to be a 
critical force in maintaining consumer trust in the Internet. Increased 
resources are a vital part of making that happen.
     II. New Challenges in Investigating Malicious Internet Actors
    In the early days of Internet crime, a vast number of offenses 
amounted to little more than virtual vandalism. Hackers would often 
circumvent Internet security as a way of showing off to their friends 
and proving their skills. That trend has long been on the decline, as 
malicious actors on the Internet are increasingly going after financial 
gain first and foremost.\5\ This means that more consumers are losing 
more money than ever before either as a direct or indirect result of 
malicious activity online, and that malicious hackers have more 
financial resources than ever before. As a result, the FTC's consumer 
protection mission is at its most vital moment. Compensating consumers 
who have been harmed and putting a stop to fraudulent schemes becomes 
ever more important as fraud and monetary loss become more widespread.
---------------------------------------------------------------------------
    \5\ Krebs, Brian, ``The Computer Bandit,'' The Washington Post 
Magazine, Feb. 19, 2006.
---------------------------------------------------------------------------
    As the FTC's role in fighting new fraud increases, its job becomes 
more complicated. One of the great paradoxes of the Internet is that 
while most Internet users are having their movements tracked and traced 
in ways never before imagined, those that are willing to take the time 
and energy can hide the tracks of their online activities in ways that 
make them very difficult to find. While this is a huge boon for free 
expression around the world, it also can help criminals and malicious 
Internet operations to evade the grasp of law enforcement. Using just a 
few simple tools, criminals and scammers can quickly and easily cloak 
their identities and locations. Tracking them down may require the 
assistance of multiple network operators, applications providers and 
technical experts to unravel a complex web of online identities and 
cloaking services.
    Tracking individuals online is made more complicated by the fact 
that many malicious Internet schemes involve groups of companies, 
affiliates, and individuals acting together to defraud consumers. Not 
only must the identities and locations of all of these actors be 
traced, but the business arrangements and relationships between them 
must also be sorted out before law enforcers can act. The Internet's 
distributed nature lends itself to arrangements wherein multiple 
parties each contribute to form a complete operation or business plan. 
This characteristic has helped to provide a wide range of new services, 
but it may be exploited just as easily for malevolent purposes as for 
benevolent ones. The complexity of these arrangements will likely 
continue to grow as malicious Internet users realize that working with 
many different parties complicates enforcement and spreads liability to 
multiple entities.
    The global nature of the Internet further complicates the task of 
apprehending malicious online actors. Internet scams are increasingly 
based overseas or in multiple countries at once, adding a whole new 
dimension to enforcement investigations. Law enforcers must cultivate 
relationships with their foreign counterparts in order to increase 
cooperation when it comes time to conduct investigations. The same is 
true for domestic enforcement across multiple states. The FTC has 
always had the authority and the willingness to cooperate with state 
attorneys general on enforcement matters, and the Internet makes these 
cases ever more likely since consumers from many different states may 
be affected by a single online scam.\6\ In order to be fruitful, this 
cooperation requires all parties to expend extra resources.
---------------------------------------------------------------------------
    \6\ See, e.g., ``FTC, Washington Attorney General, Sue to Halt 
Unfair Movieland Downloads,'' Federal Trade Commission, Aug. 15, 2006, 
http://www.ftc.gov/opa/2006/08/movieland.htm.
---------------------------------------------------------------------------
    Because of the rapid changes involved with Internet scams, 
investigations of Internet fraud are becoming increasingly 
technologically intensive. Although vast resources may not have been 
required when the FTC first began investigating online scams, 
technological advances over the past few years have heightened the 
level of sophistication necessary for successful investigations. If the 
FTC is to continue as a leader in online enforcement, it must keep pace 
with these changes. The Internet revolution also complicates FTC 
oversight of completed cases. Before digital technologies became 
pervasive, it was much easier for the FTC to monitor whether former 
defendants were complying with the provisions of their settlement 
agreements or court orders. The Internet provides simple means for such 
actors to quickly and easily setup new schemes under new monikers in 
new locations, making it difficult for the FTC to draw links to former 
businesses or identities and determine compliance.
    All of this technological evolution impacts FTC resources in four 
ways:

   Training and consultations with outside experts may be 
        necessary in order to strengthen the knowledge base of FTC 
        investigators.

   Sophisticated equipment may be needed in order to track and 
        understand the intricacies of online schemes, and also for the 
        purposes of evidence gathering.

   The amount of time necessary to conduct investigations may 
        increase due to the technical complexities of determining and 
        proving how a particular malicious enterprise works and who is 
        behind it. The same is true for oversight, where monitoring 
        functions may become increasingly resource-intensive.

   The pool of resources dedicated to consumer education must 
        be expanded. Frequent and rapid changes in technology can be 
        difficult for consumers with minimal technical expertise to 
        comprehend, and the FTC is a major source of guidance for 
        consumers looking to protect themselves online.

    In all of these ways, the fast pace of technological change 
demonstrates the need for the FTC to expend new resources in order to 
stay up to speed.
            III. FTC's Leading Role in Spyware Enforcement: 
                   Setting An Example for the Future
    Five years ago, very few people were familiar with the term 
``spyware.'' Consumers were just beginning to witness the effects of 
unwanted software that appeared unexpectedly on their home computers. 
Since that time, consumers have been increasingly deluged with programs 
that they never knowingly installed on their computers. Often these 
programs make themselves difficult to remove, expose users' personal 
data, open security holes, and undermine performance and stability of 
their systems. The FTC was one of the first law enforcement bodies to 
take note of this menace. Since then, the Commission has been leading 
the charge in the spyware fight in three key ways: engaging in 
enforcement actions, developing guiding principles for enforcers, and 
establishing industry standards.
    The Commission filed the Nation's first spyware lawsuit by a law 
enforcement agency in late 2004 against a network of deceptive adware 
distributors and their affiliates.\7\ This case struck at the heart of 
one of the most nefarious spyware schemes on the Internet. The scammers 
involved were secretly installing software that left consumers' 
computers vulnerable to hackers, and then duping those same users into 
purchasing fake security software to help repair their systems. Not 
only did the FTC succeed in the case--obtaining a $4 million order 
against the primary defendant and over $300,000 in disgorgement from 
the other defendants--but the investigations in the case opened up 
several additional leads that contributed to the FTC's pursuit of other 
malicious software distributors. In the 3-years since launching this 
first suit, the FTC has engaged in a total of 11 spyware enforcement 
actions, all of which have ended with settlements or court orders that 
benefit consumers.
---------------------------------------------------------------------------
    \7\ FTC v. Seismic Entertainment, Inc., et al., No. 04-377-JD, 2004 
U.S. Dist. LEXIS 22788 (D.N.H. Oct. 21, 2004).
---------------------------------------------------------------------------
    In prosecuting these cases, the FTC has used its broad authority to 
challenge unfair and deceptive practices, recognizing that many spyware 
behaviors are illegal under existing law. However, the FTC has not been 
haphazard in choosing which cases to pursue. As the common 
characteristics of spyware began to reveal themselves, the FTC 
established three principles to guide its spyware enforcement efforts: 
\8\
---------------------------------------------------------------------------
    \8\ Remarks of Deborah Platt Majoras, Chairman, Federal Trade 
Commission, Anti-Spyware Coalition Public Workshop, Feb. 9, 2006, 
http://www.ftc.gov/speeches/majoras/060209cdtspy
ware.pdf.

   A consumer's computer belongs to him or her, not to the 
        software distributor. This means that no software maker should 
        be able to gain access to or use the resources of a consumer's 
---------------------------------------------------------------------------
        computer without the consumer's consent.

   Buried disclosures do not work. Communicating material terms 
        about the functioning of a software program deep within an End-
        User License Agreement (EULA) does not meet high enough 
        standards for adequate disclosure.

   Consumers must be able to uninstall or disable software that 
        they do not want. If a software distributor places an unwanted 
        program on a consumer's computer, there should be a reasonably 
        straightforward way for that program to be removed.

    In addition to serving as a guide for the FTC, these principles 
have helped to direct state law enforcers who have begun to take on 
spyware cases. The spyware space is fraught with gray areas--software 
behaviors that may be perfectly legitimate in one circumstance may be 
considered highly malicious in another. Some states have passed 
specific spyware statutes to help clarify these distinctions, but 
several of the states that have been most active in spyware enforcement 
have no such laws in place. The FTC's guiding principles provide a 
simple, understandable baseline for current and future law enforcers as 
they wade into spyware issues with which they may be unfamiliar. In 
this way, the leadership of the FTC has been a vital component in 
expanding the nationwide pool of law enforcement resources dedicated to 
combating spyware.
    The FTC has also played an integral role in establishing standards 
for the software industry as a whole. In two of its most recent 
enforcement efforts, the FTC reached settlement agreements with adware 
distributors that required the distributors to clearly and 
conspicuously disclose material terms about their adware programs 
outside of any End-User License Agreement (EULA).\9\ With these 
requirements the FTC has set a disclosure guideline that can be applied 
across the software industry, for the benefit of consumers. Not only 
were the adware distributors themselves forced to abandon deceptive or 
nonexistent disclosures, but software vendors throughout the industry 
were also put on notice about what constitutes legitimate behavior. The 
FTC's leadership in this respect has helped to curb uncertainty in the 
software industry while creating a better online experience for 
consumers.
---------------------------------------------------------------------------
    \9\ See In the Matter of Zango, Inc., formerly known as 
180solutions, Inc., Keith Smith, and Daniel Todd, FTC File No. 052 3130 
(filed Nov. 3, 2006), available at http://www.ftc.gov/os/caselist/
0523130/index.htm; In the Matter of DirectRevenue LLC, DirectRevenue 
Holdings LLC, Joshua Abram, Daniel Kaufman, Alan Murray, and Rodney 
Hook, FTC File No. 052 3131 (filed Feb. 16, 2007), available at http://
ftc.gov/os/caselist/0523131/index.htm.
---------------------------------------------------------------------------
    The FTC has also played key roles in other areas that have helped 
to quell the rise of spyware infections. For example, Chairman Majoras 
has been actively supportive of the adoption of user-control 
technologies such as anti-spyware programs.\10\ The Commission, under 
the leadership of Commissioner Liebowitz, has warned companies about 
advertising with nuisance or harmful adware programs.\11\
---------------------------------------------------------------------------
    \10\ I applaud the efforts that industry has made to develop and 
deploy new technologies to combat spyware, and I hope that these 
efforts are just the beginning.'' Chairman Majoras, ASC Public 
Workshop, Feb. 9, 2006.
    \11\ Cindy Skrzycki, ``Stopping Spyware at the Source,'' Washington 
Post, March 6, 2007, D01.
---------------------------------------------------------------------------
    Consumers have already seen the benefits of the FTC's action 
against spyware working in concert with improved anti-spyware 
technology, self-regulatory programs and work by other law enforcement 
officials such as the state attorneys general. Consumer Reports 
magazine estimates that consumers will lose $1.7 billion from spyware 
in 2007 as opposed to $2.6 billion in 2006.\12\ While these figures are 
still astoundingly large and consumers are still very much at risk, 
spyware is one of the few areas of Internet fraud that is clearly 
headed in the right direction.
---------------------------------------------------------------------------
    \12\ ``State of the Net 2006,'' ConsumerReports.org, Sept. 2006, 
http://www.consumer
reports.org:80/cro/electronics-computers/online-protection-9-06/state-
of-the-net/0609_online-prot_state.htm, and ``State of the Net 2007,'' 
ConsumerReports.org, Sept. 2007, http://www.consumerreports.org/cro/
electronics-computers/computers/internet-and-other-services/net-
threats-9-07/overview/0709_net_ov.htm.
---------------------------------------------------------------------------
    The effectiveness of the FTC's spyware enforcement program in all 
of these regards--pursuing spyware purveyors, developing guiding 
enforcement principles, and establishing industry standards--has been 
made possible by two important characteristics of FTC consumer 
protection operations. The first is that the Commission had the freedom 
to delve into uncharted territory when the threat of spyware first 
became apparent. This flexibility allowed the FTC to build its 
knowledge of spyware early enough to keep pace with the evolution of 
the threat that it posed. Second, the FTC was afforded sufficient 
resources to engage in the complex, technology-intensive investigations 
that were necessary to identify unfair and deceptive practices and 
track down the perpetrators of those practices. Having the training and 
technological expertise to identify and locate spyware purveyors has 
been critical to the FTC's success in this area.
    Freedom to chart a new course and sufficient resources to engage in 
technology-intensive investigations will undoubtedly be essential to 
the FTC's consumer protection mission as new online threats arise. 
Internet scams are increasingly complex, multi-national, and 
financially motivated. This makes enforcement an even greater challenge 
that will require the FTC to think, act, and use its resources in new 
ways. The success of the FTC spyware enforcement program shows what a 
strong leader the Commission can become when it is afforded the 
flexibility and resources necessary to tackle an emerging enforcement 
problem. As the FTC budget and performance plans are set for the coming 
years, these two aspects of FTC consumer protection operations should 
be fully supported and augmented as necessary to ensure that future 
enforcement efforts may be as successful as the spyware program has 
been.
               IV. International Cooperation is Essential
    The profusion of global commerce over the Internet complicates 
enforcement of online consumer protections. A victim of Internet crime 
might reside in the United States, but the perpetrator might be 
overseas, outside the reach of U.S. law enforcement. To protect against 
global fraud, the FTC was recently granted special authority to work 
with its counterparts in other countries by the U.S. SAFE WEB Act.
    Collaboration with other countries requires a staff that is 
knowledgeable about cross-border issues, foreign legal regimes and 
processes, and broader international issues pertinent to resolution of 
fraud questions. Building this knowledge base may necessitate staff 
exchanges, so that staff become familiar with foreign operations and 
build relationships with overseas counterparts. Domestically, the FTC 
will need to develop similar partnerships with U.S. investigative 
organizations--including the Department of Justice--that work on cross-
border fraud.
    It is important to note that these partnerships also can be applied 
to address privacy violations that occur both within and outside of the 
United States. Privacy principles developed by the Asia Pacific 
Economic Cooperative (APEC), for example, anticipate the resolution of 
privacy violations that occur between the United States and countries 
in Asia.\13\ The resources, authority, and staff expertise required to 
address cross-border fraud will be similarly required to address 
privacy violations across international borders.
---------------------------------------------------------------------------
    \13\ APEC Privacy Framework, 16 APEC Ministierial Meeting, Nov. 
2004, http://www.apec
.org/apec/news_media/2004_media_releases/
201104_apecminsendorseprivacyfrmwk.html.
---------------------------------------------------------------------------
    The U.S. SAFE WEB Act requires the FTC to undertake a comprehensive 
reporting plan and deliver updates to Congress within 3 years of the 
Act's passage. Because there has been no public reporting of the 
Commission's use of the Act to date, these Congressional reports will 
be essential in understanding how these powers are being used and if 
they are effective.
     V. Increased Privacy Threats Will Require Congressional Action
    Privacy is at the heart of online consumer protection. Since the 
advent of widespread computing, the Internet and distributed databases, 
it has become far easier for businesses to collect, store and exchange 
information about their customers. Frequently, the information 
collected includes sensitive or personally identifying data, which, if 
not properly secured, can become a tool for identity theft. Companies 
also may use this data to track consumer preferences and behavior, 
often without the consumer's knowledge or permission.
    Despite this unprecedented threat, there is still no single 
comprehensive law that spells out consumer privacy rights. Instead, a 
confusing patchwork of distinct, and sometimes inadequate or 
nonexistent, standards has developed over the years, producing more 
than a few oddities. For example, we reserve our strongest privacy 
protections for cable and video records, while travel records and 
online purchasing data are left disturbingly vulnerable, financial 
privacy laws have major exceptions, and some important uses of ``public 
records'' are left unregulated.
    Over the past 9 years, CDT has urged Congress to enact a single 
consistent regime, based on fair information practice principles. 
Specifically, consumers should be able to:

   know which companies are collecting information from them;

   provide only information necessary for a transaction;

   find out what companies are doing with this information 
        beyond the original transaction;

   know who else might have access to their personal data;

   check to ensure that the data held about them is timely, 
        accurate and complete; and

   obtain assurance that their information is held securely by 
        all third parties.

    We believe that these protections are crucial to address the new 
threats faced by online consumers. Consumers need to be put back in 
control of their personal information, so that privacy is preserved and 
fraud and abuse prevented.
    We urge the Senate Committee on Commerce, Science, and 
Transportation to once again take up this issue to ensure that 
consumers are adequately protected. The FTC will need greater resources 
to take the lead on implementing such legislation, but first Congress 
will need to provide the Commission with the backing authorization to 
move forward.
              VI. Addressing the Common Carrier Exemption
    Another issue of growing concern that CDT raised at the last FTC 
reauthorization hearing has also remained unaddressed.
    The FTC for many years has asked that the exemption that prevents 
the Commission from exercising general jurisdiction over 
telecommunications ``common carriers'' be rescinded. The idea of 
creating a level playing field is appealing, particularly when some 
communications services fall within the jurisdiction of the FTC. In 
particular, lifting the restriction in certain areas--such as billing, 
advertising and telemarketing--would ensure that the agency with the 
most expertise in these areas is taking a leading role.
    However, rescinding the exemption completely could lead to 
duplication of government regulation and/or confusion for consumers in 
certain areas. For example, telecommunications companies are already 
subject to the Customer Proprietary Network Information (CPNI) rules 
administered by the Federal Communications Commission, which limit 
reuse and disclosure of information about individuals' use of the phone 
system including whom they call, when they call, and other features of 
their phone service. At this point, we are not sure it would be wise to 
take this issue away from the FCC. Similar questions may arise with 
other issues: Which agency would take the lead? By which rules would a 
complaint about deceptive notice be addressed? How will these decisions 
be made?
    The FTC has been thoughtful in these areas in the past, so it is 
likely that any concerns could be addressed. If this proposal should 
move further, the Commission would need to be able to have a detailed 
examination and plan for dealing with similar areas of overlap 
including the kind of resources needed to dispatch its newly expanded 
duties in the telecommunications space. Congress should also take part 
in studying this issue further.
                            VII. Conclusion
    CDT strongly urges the Congress to finally reauthorize the Federal 
Trade Commission.
    The Internet has touched every sector of the FTC's consumer 
protection mission, and although digital innovations have simplified 
some tasks, they bring their own new challenges in training, education, 
oversight, and--perhaps most intensely--enforcement. The Commission has 
aptly demonstrated its leadership in online consumer protection, and 
yet it is surviving with pre-Internet staffing.
    As privacy threats increase and become more international, demands 
on the Commission will only grow. The Committee's oversight of the 
FTC's consumer protection mission increases in importance as more 
individuals move their activities online and we thank the members of 
the Subcommittee for recognizing its importance and inviting us to 
address these issues today. We look forward to working with you on 
these issues in the near future.

    Senator Dorgan. Mr. Schwartz, thank you very much.
    Next we will hear, finally, from Martin Abrams, who is the 
Executive Director of the Center for Information Policy 
Leadership.
    Mr. Abrams, thank you very much.

 STATEMENT OF MARTIN E. ABRAMS, EXECUTIVE DIRECTOR, CENTER FOR 
      INFORMATION POLICY LEADERSHIP, HUNTON & WILLIAMS LLP

    Mr. Abrams. Thank you, Mr. Chairman. I am honored to be 
asked to testify on FTC reauthorization.
    I lead the Center for Information Policy Leadership, a 
think tank that develops policy solutions in an information 
age. We are located at the law firm of Hunton & Williams, and 
supported by 40 leading companies. My comments, though, are my 
own, and do not necessarily reflect the views of the Center's 
members, Hunton & Williams, or its clients. And we will be 
looking forward to the questions.
    Mr. Chairman, information policies' complexity will 
accelerate over the next 5 years like a race car on the first 
lap of the Indianapolis 500. And if we start now in developing 
governance structures, we will be lucky to catch up. We will 
collect more data in ways we never anticipated, just yesterday. 
More of that data will be usable by analytic systems, and those 
analytic systems will be used by more people in more places to 
answer more questions than we ever thought possible. Business 
analytics will be critical to business success, international 
competitiveness, and meeting consumer expectations. Global 
teams will use the same data set in 15 different locations all 
at the same time without worry about national borders, and 
consumers need to be protected in this information-driven 
economy.
    The FTC, without explicit mandate from Congress, has done a 
laudable job over the past decade as the government's 
information policy development agency. They have anticipated 
issues, held hearings, workshops, town halls, and requested 
comments necessary to assure a fair market where consumers' 
privacy and security is protected. Mr. Chairman, we can no 
longer develop information policy as an inferred responsibility 
related to a consumer enforcement mandate. Information policy 
in an information age is as important as monetary policy in a 
capitalist society. The FTC reauthorization must include 
information policy development as an explicit responsibility 
for the agency. It must be funded at a level proportionate to 
its importance to our economy.
    Information policy needs to be staffed by a mixture of 
expertise necessary to work with the best and the brightest in 
business, civil society, and academia. And, last, the function 
needs Congressional oversight to assure the FTC does the job 
necessary to protect consumers while maintaining a platform for 
successful commerce. This policy development function needs to 
look at new enforcement models where the FTC gives oversight to 
bodies empowered to resolve consumer issues. This function 
needs the stature to interface with foreign officials on equal 
footing. This function is critical to a safe and growing 
economy over the next 10 years.
    Thank you, and I would be pleased to respond to questions.
    [The prepared statement of Mr. Abrams follows:]

Prepared Statement of Martin E. Abrams, Executive Director, Center for 
          Information Policy Leadership, Hunton & Williams LLP
    Distinguished Chairman, honorable Committee Members, I am Martin E. 
Abrams, Executive Director of the Center for Information Policy 
Leadership. I am honored to testify on information policy, and the 
opportunities and risks to maintaining a safe marketplace for American 
consumers raised by new developments in the information economy.
    The Center for Information Policy leadership was founded in 2001 by 
leading companies and Hunton & Williams LLP. The Center was established 
to develop innovative, pragmatic solutions to privacy and information 
security issues that reflect the dynamic and evolving nature of 
information intensive business processes and at the same time respect 
the privacy interests of individuals. Since its establishment, the 
Center has addressed such issues as conflicting national legal 
requirements, cross-border data transfers, and government use of 
private sector data, with a view to how the future direction of 
business practices and emerging technologies will impact those issues.
    The Center and its forty-one member companies believe that 
difficult information policy issues must be resolved in a responsible 
fashion if we are to fully realize the benefits of an information age. 
Center experts and staff, however, speak only for themselves. My 
comments today reflect my views, and do not necessarily reflect the 
views of the Center's member companies, Hunton & Williams LLP, or any 
firm clients.
I. Summary
    The Federal Trade Commission is charged with many responsibilities 
as it carries out its mission of maintaining a safe marketplace for 
American consumers. The Center has been privileged to work with the FTC 
on issues related to consumer protection and information policy 
development, and my comments today focus on that aspect of the 
Commission's work.
    The FTC is to be applauded for undertaking serious work to helping 
policymakers and the public understand issues around information 
privacy and security and for its thoughtful, rigorous enforcement that 
improves the safety of the digital marketplace. The FTC has taken on 
complex, fast-emerging issues and taken important steps to address 
those issues through policy development and consumer education. Going 
forward, however, information privacy and security issues will only 
become more complex and surface more quickly.

   The FTC must be equipped to address issues related to 
        information security and privacy that are more challenging than 
        ever. Emerging technologies for data collection, rapid advances 
        in business analytics, and the international nature of data 
        flows challenge traditional frameworks of governance and make 
        new demands on enforcement mechanisms.

   FTC's role in enforcing legal requirements for privacy and 
        information security remains critical. Moreover, to foster 
        consumer trust, the FTC must be prepared to undertake oversight 
        of alternative methods of enforcement that respond to immediate 
        consumer complaints regarding information use and resolve 
        consumer disputes with companies.

   The FTC activity in development of information policy 
        internationally is key to the protection of American consumers 
        in the global marketplace. The Commission's work in this area 
        should be recognized and supported.

    Congress' Reauthorization of the FTC should specifically 
acknowledge the growing importance of the Commission's information 
policy development mission, and fund its expansion to match the 
complexity of the information marketplace. As part of that mission, it 
should encourage FTC work on alternative mechanisms to address consumer 
disputes related to information misuse as an adjunct to its traditional 
enforcement role. Congress's Reauthorization should recognize and 
encourage the FTC's prominent role in international information policy 
development. Having charged the agency with this mission, Congress 
should also provide oversight to ensure that it is successfully carried 
out.
II. The FTC must be equipped to address increasingly complex and 
        challenging issues related to information security and privacy 
        that arise from rapid developments in technology, business 
        analytics and international data flows
    The Commission plays a key role in the enforcement of laws 
governing the privacy and security of information and in the 
development of forward-looking public policy--both domestically and 
internationally--to address emerging information governance issues. The 
FTC has done an admirable job in helping policymakers and the public 
understand and respond to issues surrounding information privacy and 
security through its enforcement actions and through its extensive work 
in workshops, requests for comments and hearings to explore how best to 
act on these questions. It has provided clear guidance to the market 
while still allowing time for the market and self-regulation to 
respond.
    In this role, the FTC has taken on difficult issues related to 
companies' compliance with privacy policies, data security and data 
breach, emerging technologies such as RFID, and how to write privacy 
notices that effectively communicate to consumers.
    The complexity of these issues, however, will pale in comparison to 
those on the horizon, when digital personally identifiable information 
is ubiquitous, the marginal cost of collecting and aggregating it 
approaches zero, and society relies even more heavily on it for 
business, government, education, and health care.
    This complexity is driven in large part by three developments: the 
emergence of new technologies for data collection, the rapid advances 
in business analytics, and the international nature of data flows.
A. The Emergence of New Technologies for Data Collection
    The collection of information about people is not new. Companies 
have collected data by phone, at points of sale, online, and through 
credit applications. Public record information collected and sorted by 
the government is used by companies; businesses and organizations also 
purchase information compiled by other companies about consumers.
    New data collection technologies, however, dramatically change the 
way and the places from which information about consumers is gathered. 
They vastly increase the amount of information available to businesses. 
Radio devices such as mobile telephones, global positioning systems, 
radio frequency identification tags and wireless sensor networks 
collect information about an individual's location, and often their 
activity when they are at that location. Data accessed through search 
engines from social networks identify relationships between people, 
their interests and other individuals. Information collection often 
occurs in ways that do not involve the active engagement of the 
consumer, through highway toll tags, keystroke monitoring, and security 
cameras.
    In many cases these technologies make it unnecessary for businesses 
to engage in collection, compilation and organization of data as we 
traditionally think about it. Rather, information can be immediately 
useful as it is accessed through the search of online, publicly 
available resources and websites. The search, matching and use of this 
information can occur dynamically and in real time.
    This ability to gather information in new environments, in real 
time, and without consumer engagement significantly changes the 
interaction between the data collector and the individual, and strains 
our traditional notions of how best to protect the privacy interests of 
individuals in information that pertains to them. Increasingly the FTC 
will need to understand this new dynamic and to consider creative, more 
effective approaches to protecting the consumers' interest in the 
privacy of their personal information.
B. The Rapid Development of Business Analytics
    The application of analytics enables businesses to use information 
to create value. Business analytics includes data warehousing, data 
mining, business intelligence, enterprise performance, management and 
data visualization. The analysis applied by credit reporting 
organizations to the data they received was an early application of 
data analytics about people, allowing credit grantors to offer credit 
to consumers of more widely varied credit backgrounds while still 
managing and making appropriate decisions about risk.
    Today, businesses of all sizes use information analytics to predict 
response, profitability, return visits, and price tolerance. Government 
agencies use analytics to predict risk and evaluate passengers for 
flight security and safety, and to manage fraud related to health care 
reimbursement.
    In his paper, ``The Future of Business Analytics,'' Bruce McCabe 
\1\ describes a 10-year view of emerging analytics technologies and how 
they will impact industries, organizations and the workplace. The paper 
offers detailed predictions about the way in which we will analyze and 
use data to predict consumer behavior, enhance marketing, and meeting 
consumer needs. He predicts that analysis of the information gathered 
through location tracking devices will enable organizations to gain 
entirely new insights about their assets, staff, customers, and 
products. Analysis of information gathered through audio and video will 
quickly grow in importance. Business analytics systems will be able to 
take advantage of new algorithms to draw inferences from material in 
discussion forums, customer feedback, and e-commerce and auctions 
sites, to infer overall positive or negative sentiment about companies 
and products.
---------------------------------------------------------------------------
    \1\ Bruce McCabe is the managing director of S2 Intelligence Pty 
Ltd, a company he founded in 2002 to research technology issues for 
Australian executives and policy-makers. Before founding S2, McCabe 
held senior research positions at Gartner and IDC. His paper, sponsored 
by Business Object Australia, is attached for the Committee's review.
---------------------------------------------------------------------------
    McCabe asserts that analytic applications--now only in their 
infancy--will grow significantly because of three factors. First, the 
cost of technology will continue to go down as its power increases. 
Second, the volume of data available for analysis will continue to 
grow. Finally, unstructured data that is not usable today, such as 
digital pictures, will feed analytic engines as a result of 
improvements in natural language processing, search, inference and 
categorization.
C. The International Nature of Data Flows
    Almost all business processes have become international. Consumer 
services are supplied out of India, accounts payable out of Costa Rica, 
software development is conducted in the Ukraine, and clinical trials 
are conducted in as many as twenty countries all at the same time. One 
global team meeting might require twenty professionals to an look at 
the same data sets originating from servers in twenty different 
countries. Industries as diverse as pharmaceuticals, automotive, 
software development and cosmetics all rely on global teaming and 
global sourcing. These business processes require massive flows of data 
across international borders in order to work.
    All of this data must be protected from loss and alteration, and 
all of it must be used appropriately no matter where in the world it is 
accessed. The FTC has applied the Gramm-Leach-Bliley safeguards rule 
\2\ to global sourcing whether managed by the company or outsourced to 
a third party company.
---------------------------------------------------------------------------
    \2\ 15 U.S.C.  6801 through 15 U.S.C.  6809.
---------------------------------------------------------------------------
    The U.S. SAFE WEB Act \3\ passed by the last Congress gives the FTC 
authority to work with privacy enforcement agencies in other countries 
to protect American consumers. Criminals in other countries use the 
Internet to prey on American consumers, and the SAFE WEB Act gives the 
FTC the authority to pursue those criminals.
---------------------------------------------------------------------------
    \3\ Pub. L. No. 109-455.
---------------------------------------------------------------------------
    Because of the international nature of these data flows, the FTC 
must be involved in development of international frameworks for data 
protection. It must be empowered within those frameworks to protect 
American consumers when their data is overseas.
    The FTC's international office and FTC Commissioners have also 
participated in meetings at the Asia Pacific Economic Cooperative 
(APEC) and the Organization for Economic Cooperation and Development 
(OECD). This will be a growing function for the FTC if the Commission 
is to effectively promote American interests in providing balanced 
protections for information and ensure that consumers have redress when 
their privacy has been compromised.
III. The FTC must continue its enforcement under Section 5 of the FTC 
        Act, and begin to undertake an oversight role for alternative 
        consumer 
        complaint and dispute resolution mechanisms.
    The FTC has a well deserved reputation in the United States and 
around the world as a tough enforcer of privacy and information 
security requirements. The Commission has used its power under the 
Federal Trade Commission Act,\4\ as well as specific laws such as CAN-
SPAM,\5\ Fair Credit Reporting Act,\6\ and the Gramm-Leach-Bliley-
Act.\7\
---------------------------------------------------------------------------
    \4\ 15 U.S.C.  41-51.
    \5\ 15 U.S.C. 7701., et seq.
    \6\ 15 U.S.C.  1681 et seq.
    \7\ 15 U.S.C. Sec. 6801-6809.
---------------------------------------------------------------------------
    This enforcement role is key to fostering consumer trust in the 
marketplace. Using its authority under these laws, the FTC protects 
consumers by enforcing the law against bad actors for their specific 
illegal practices. In doing so, it sends a clear message about 
appropriate business practices related to information privacy and 
security, encouraging the reliability and trustworthiness of the 
information marketplace. However, as a fairly small agency with limited 
resources, the FTC cannot investigate every occurrence of market abuse. 
Moreover, it has neither the authority nor the resources to resolve 
individual consumer complaints.
    However, trust in the marketplace remains an important issue to 
consumers and critical to the health of the information-fueled market. 
Research conducted by Yankelovich in 2004 \8\ about consumer attitude 
toward industry information practices demonstrates that consumer trust 
in the information-driven marketplace is limited. At the core of these 
trust issues is the consumer's inability to resolve disputes about 
instances of misuse or mishandling of their personal information.
---------------------------------------------------------------------------
    \8\ Yankelovich, Re-building the bonds of trust: state of consumer 
trust, crisis of confidence Presented to: 10th Annual Fred Newell 
Customer Relationship Management Conference 2004 available at 
www.compad.au/cms/prinfluences/workstation/upFiles/
955316.State_of_Consumer_
Trust_Report_Final for Distribution.pdf.
---------------------------------------------------------------------------
    While the FTC is not the place to bring consumer complaints, it is 
well positioned to oversee market mechanisms to resolve consumer 
complaints about information practices. In the future accountability 
agents--entities to oversee business practices and assist consumers who 
are unable attain satisfactory resolution of complaints--will likely 
fill the gap of consumer dispute resolution. For example, industry safe 
harbors, will incorporate mechanisms not only to enforce safe harbor 
provisions, but also to resolve complaints brought by consumers related 
to inappropriate use or failure to protect their information.\9\ This 
new FTC role as a regulator of accountability agents could be 
substantially similar to the oversight of the Securities and Exchange 
Commission for self-regulatory bodies that enforce securities 
regulations.
---------------------------------------------------------------------------
    \9\ Accountability agents will likely be very similar to self-
regulatory enforcement bodies that currently exist for securities 
regulation and that are overseen by the Securities and Exchange 
Commission.
---------------------------------------------------------------------------
    This Commission's role is anticipated in the APEC Privacy 
Framework, adopted by APEC leaders in 2004. The APEC Framework calls 
for the transfer of data in the Asia Pacific region based on corporate 
cross-border privacy rules. Under the current vision for the 
Framework's implementation, rules would be approved by accountability 
agencies in the various APEC economies, including the United States. 
The FTC and other privacy regulating agencies in the United States 
would oversee these accountability agencies. In the context of the APEC 
discussions, the FTC has been considering how it would best execute 
that role.
IV. The FTC must continue its role in policy development, both 
        domestically and internationally
    The FTC plays a key role in the development of effective, forward-
thinking information policy in the United States and around the world. 
The FTC embraced this role when it held its first workshop on privacy-
related issues more than a decade ago. Its domestic policy development 
work continues with its recent request for comments on the issue of 
public sector use of the Social Security number and the town hall 
meeting on behavioral marketing on the Internet scheduled for November 
1 and 2.
    While policy development is not explicitly articulated in the FTC 
Act as a role for the Commission, continued FTC involvement in this 
work is critical to the successful development of sound public policy 
and effective, efficient consumer protection related to information 
issues.
    This policy development role is especially necessary as the United 
States and the world economy continues to move more deeply into an 
economy fueled, structured and motivated around the collection, use, 
analysis and sharing of information. This transition fundamentally 
challenges application of laws and regulations originally enacted to 
respond to the demands of an industrial economy and the early years of 
computerization. The FTC has become, and should continue to be, a key 
venue for development of policies to address new developments in the 
information economy.
    The FTC has been significantly involved in the development of 
global processes to protect consumers in global markets. Just as data 
flows and valuable uses of data occur across borders, criminals also 
can act regardless of national boundaries. The FTC has been actively 
participating in alliances to develop international governance 
structures for international data flows. Led by Commissioner William 
Kovacic, it works through the OECD Working Party on Information 
Security and Privacy (WPISP) to develop protocols to enable cooperation 
between law enforcement bodies of various countries to promote privacy 
protection. The FTC also works with the Canadian Federal Privacy 
Commissioner to foster cooperation with this leading trade partner.
    Additionally, the Commission has been deeply involved in 
development of the APEC Global Framework. The FTC is an active 
participant in the APEC Data Privacy Subgroup, and part of the 
Subgroup's Working Party on Cross-border Privacy Rules. Ministers of 
APEC countries, including the United States, approved a project to 
develop protocols for approving corporate rules covering the transfer 
of data across borders just 2 weeks ago. Once developed, these 
mechanisms would protect American consumers as data that pertains to 
them moves throughout the Asia Pacific region. Under Commissioner 
Pamela Harbor's leadership, the FTC has taken a leadership role in 
developing these protocols, demonstrating to other APEC economies the 
serious commitment of the United States to ensuring the privacy and 
security of its citizen's data and the APEC Privacy Framework.
    To facilitate these efforts, the FTC restructured its staff this 
year to merge all international activities into a common office that 
reports to the Office of the Chairman. The FTC's work in international 
forums should be acknowledged as part of the reauthorization and 
supported in future FTC budget requests.
V. Conclusion
    The challenges raised by the fast approaching developments in the 
information economy cannot be met with yesterdays solutions. Protecting 
the privacy and security of consumers' information will require robust 
information policy that responds quickly and effectively to the issues 
raised by emerging technologies, business analytics and international 
exposure. The FTC began the information policy process in the United 
States over a decade ago. That effort has been an adjunct to its 
consumer protection mission, and while admirably carried out, not 
sufficient for tomorrow's challenges.
    Development of solid information policy guidance requires a better-
funded FTC with a defined mission to develop information policy 
guidance for the United States and to participate in international 
policy development related to privacy and security. It also requires 
research into new, creative mechanisms for enforcing privacy and 
security requirements in a rapidly evolving marketplace. It means 
staffing with technologists and other experts who will work with 
academia, industry and civil society to develop tomorrow's answers. The 
FTC must find ways to delegate and oversee mechanisms to resolve 
consumer disputes. Finally, this mission must include participation in 
international policy forums in a capacity co-equal to international 
data protection authorities. Congress' role in this effort is to 
clearly charge the FTC with this mission and encourage its success 
through regular oversight.
    Thank you again for the opportunity to testify. The Center looks 
forward to working with the Committee and the Commission to develop 
innovative, balanced solutions to information privacy and security 
issues that foster a vital, safe marketplace.
                                 ______
                                 
                               Attachment

                       S2 Intelligence--May 2007

                    The Future of Business Analytics

                              Bruce McCabe

    The rate at which digital information is being produced is 
increasing exponentially. At the same time, computer scientists are 
making it possible for machines to navigate new information landscapes, 
conduct deeper and more sophisticated analysis of what they find, and 
deliver the results in more usable and timely ways to managers. This 
paper looks at how business analytics will change over the next 10 
years, the impact of these changes on organisations, and how this will 
lead to new opportunities and challenges in the workplace.
Introduction
    In recent years, business analytics has become a topic of 
particular interest for managers; the combination of new software 
capabilities and large amounts of usable data has been delivering 
consistently good results for organisations in every industry. A study 
of IT projects delivering greatest value in Australia identified 
business analytics as one of three dominant themes \1\ and global 
companies such as Amazon, Capital One, Marriot International, UPS and 
Proctor & Gamble have secured substantial competitive advantages 
through superior analysis of their data assets.\2\ Analytics solutions 
(there is usually more than one) can be found in every corporation and 
every major government agency, and IT managers are discovering, to 
their surprise, that the investment needed is often relatively modest 
compared to the value returned. Common applications of analytics in 
organisations are listed in Table 1.
---------------------------------------------------------------------------
    \1\ McCabe, B., 2003, High Value Projects in Australian 
Enterprises, S2 Intelligence.
    \2\ See Davenport, H., 2006, ``Competing on analytics,'' Harvard 
Business Review, vol. 84, no. 1, pp. 98-107.

           Table 1.--Common Applications of Business Analytics
------------------------------------------------------------------------

------------------------------------------------------------------------
Sales trends and forecasts              Production scheduling
Cross-sell/up-sell recommendation       Inventory optimisation
Marketing campaign effectiveness        Supply chain bottlenecks
Product mix in stores                   Product quality analysis
Retail layout, shelf allocation         Predictive machine maintenance
Contextual placement of advertising     Manufacturing process costing
Website structuring and linking         Asset deployment/utilisation
Shopping patterns, purchasing triggers  Human resource benchmarking
Capacity utilisation in airlines,       Salary/productivity benchmarking
 hotels
Service priority in call centres        Warranty trends
Call centre efficiency                  Network security/threat
                                         detection
Frequently asked questions generation   Assessing operational risk
Expense budgeting                       Fraud detection
Procurement optimisation                Money laundering detection
Distribution channel selection          Credit risk for loan approvals
Logistics modelling                     Loss risk in insurance
Scheduling and routing of vehicles      Likelihood of future illness
------------------------------------------------------------------------

    This paper sets out to examine the future and answer the question: 
How will emerging technologies shape the way analytics are used in 
business over the next 10 years? It is written for business people. The 
main focus, therefore, is on business outcomes, not IT projects; all 
managers can use it as they plan for emerging opportunities, challenges 
and changes through to 2017.
Sponsorship
    The publication of this paper was kindly sponsored by Business 
Objects Australia Pty Ltd, a supplier of business analytics solutions. 
More information can be found at www.australia.businessobjects.com.
Using this document
    The discussion in this paper is presented in two parts. Part I 
describes the key technology trends shaping the future of analytics. 
Part II describes how analytics will shape the future of business.
    Predictions are made throughout this paper. Predictions are 
valuable for planners because they force the researcher to distil 
complex ideas into best guesses, based on what is known now, and give 
the lay person a single crystallised picture of a likely future. They 
offer a point that can be communicated and debated, and which can 
trigger new ideas.
    To get the most out of this document, managers are encouraged to 
discuss these predictions with colleagues in the context of the 
products, services, markets, competitors and goals applicable to their 
own organisation.
    While the predictions are written as if factual statements about 
the future, they are, of course, nothing of the sort. Many 
assumptions--about the pace of technology development, commercial 
value, social acceptance and rate of deployment--lie behind each. The 
only prediction that can be made with absolute certainty is that real 
outcomes will vary in scale, detail and timing--especially timing.
    Managers are encouraged, therefore, to also read through the 
underlying technology trends described in Part I. By being conscious of 
these trends, they can equip themselves to adjust their plans when they 
encounter new technologies and hear about new breakthroughs.
Terminology
    The most useful way to discuss the future is to set boundaries 
broadly enough to capture everything that matters. For the purposes of 
this document, therefore, S2 Intelligence defines business analytics as 
computer analysis of information to assist managers with business 
decisions.
    This definition includes data warehousing, data mining, business 
intelligence, enterprise performance management, date visualisation, 
executive dashboards, supply-chain analytics and many other themes 
current in business today. It is also broad enough to include future, 
yet to be seen analytics methods and applications.
    When the word routine is used in predictive statements (e.g., 
``managers will routinely track online sentiment ratings'') it refers 
to when a technology or practice has been adopted by a wide range of 
organisations (i.e., not just leaders and early adopters) for everyday 
use.
    A knowledge worker is a person that works primarily with 
information (as opposed to applying physical or manual skills) in their 
day to day activities.
    When referring to the size of organisations, the following 
Australian Bureau of Statistics derived conventions are used: small 
enterprises employ 1-19 people; medium enterprises employ 20-200 
people; large enterprises employ 200 or more people.
Methods
    The primary source of data for this report was the repository of 
approximately 700 face-to-face and telephone interviews conducted by S2 
Intelligence with computer scientists, IT practitioners, researchers, 
business executives, policy-makers and technology leaders since 2005.
    Secondary sources include academic journals, conference 
proceedings, websites relating to emerging analytics products and 
services, and previous S2 Intelligence research where business 
analytics has emerged as a theme. These are referenced in the text.
    On completion, a draft copy of this paper was sent to 18 computer 
scientists, researchers and product managers with expertise in various 
aspects of business analytics. Feedback received from them was 
incorporated into the final version before publication.
Feedback
    S2 Intelligence continuously revises and updates its forecasts: all 
comments, ideas and alternative viewpoints on this document are warmly 
welcomed and can be sent to [email protected].
                       Part I: Technology Trends
    The key technology trends shaping the future of business analytics 
relate to the information that can be analysed, the sophistication of 
analysis that can be performed, and improvements in how results can be 
delivered. These may be thought of as analogous to the same three 
themes that define the capabilities of all computer applications--
input, processing and output.
1. Processing and storage hardware
    The cost of processing power and computer storage will continue to 
fall steadily. This is a fundamental trend that underpins advances in 
all types of computer applications. It will be driven in part through 
continuing advances in design sophistication and manufacturing 
processes. It will also be driven by increasingly efficient use of 
hardware as organisations move to server and storage farms and apply 
new techniques to allocate workload more evenly across these assets.
2. Information volume
    The volume of digital information being produced will continue to 
grow at an extremely rapid rate. No-one can quantify this exactly, but 
we can get some sense of scale from a 2003 study that estimated the 
amount of new information being created every year, and stored on 
print, film, magnetic, and optical storage media, to be 5 exabytes per 
annum--an amount equal to the information contained in 37,000 libraries 
the size of the U.S. Library of Congress.\3\ The majority of this is 
stored on hard disk drives, and annual production is estimated to be 
growing by 30 percent year-on-year. These calculations, it should be 
noted, apply only to new information-they exclude duplication of 
existing information.
---------------------------------------------------------------------------
    \3\ See How much information? 2003 at http://
www2.sims.berkeley.edu/research/projects/howmuch-info-2003/.
---------------------------------------------------------------------------
    Wherever new pools of business information are created in digital 
form, new analytics opportunities will follow closely. An example of 
this has been in the creation of purchasing data. Early adopters of 
electronic requisitioning and procurement systems reported their 
biggest financial benefit came not from efficient use of supplier 
discounts or fewer purchasing errors, but from analysing the new data 
they had on their purchasing.\4\ Other new pools of data include audio, 
video and spatial data, described in the pages below.
---------------------------------------------------------------------------
    \4\ McCabe, B., 2003, Supplier Relationship Management in Australia 
and New Zealand, S2 Intelligence.
---------------------------------------------------------------------------
    Not all digital information, however, is analysable by computers. 
We can think of this in terms of the illustration in Figure 1. The 
outer cloud represents the total pool of digital information-growing 
fast but much of it off limits to computer-based analysis. The inner 
cloud represents the pool of analysable information, which is expanding 
as (a) software gets better at dealing with unstructured data, and (b) 
machine-friendly structure is added to some types of information.
3. Unstructured information
    Most new digital information exists in the form of text, images, 
audio and video that has little structure or organisation. While it is 
relatively easy for humans to analyse small portions of it (by browsing 
the web, reading through documents and making notes, for example), 
computers run into difficulties because they are best at processing 
information that is highly structured (organised, for example, using 
standardised formats, fields, records, labels and hierarchies).
    An especially important trend, therefore, will be steady 
improvement in the ability for computers to navigate and process 
unstructured information through natural language processing, search, 
inference and categorisation.\5\
---------------------------------------------------------------------------
    \5\ GeneWays is an example of natural language processing applied 
to analyse unstructured research articles (in this case to identify 
molecular pathways for healthcare, bioinformatics, and pharmaceuticals 
purposes). See http://geneways.genomecenter.columbia.edu/.
---------------------------------------------------------------------------
4. Structured information
    Separately, more structure is being added to various information 
landscapes through wider application of machine-readable labels, tags 
and rules (metadata) that act as signposts for computers, enabling them 
to contextualise the information that they find.
    Adding structure data in this way is powerful, but it also requires 
agreement on labels, tags and rules by all interested parties. 
Consequently, industry wide standards initiatives--which must factor 
for competing needs across thousands of organisations--will remain 
slow. Faster progress will be concentrated where there is especially 
strong value in undertaking this work, and where a few dominant players 
can force the pace. Where industry wide initiatives gain traction (the 
strongest candidates are health and life sciences) they will 
significantly boost the possibilities for computer-based analysis.\6\
---------------------------------------------------------------------------
    \6\ The Semantic Web is an important set of initiatives aimed at 
applying more structure to the web to make it easier for computers to 
navigate. See http://www.w3.org/2001/sw/ for information on current 
activities.



5. Location
    Location-based (spatial) digital information will increase 
exponentially. Much of this will be accompanied by time-based 
information. A key driver is the proliferation of spatially aware radio 
devices--mobile telephones, WiFi, GPS, radio-frequency identification 
(RFID) tags, wireless sensor networks--as the costs of these 
technologies fall. Other drivers include the dramatically improved 
usability of online location-based services (especially via spatial 
browsers such as Google Earth/Maps). These enable businesses to ``mash-
up'' information, services and maps and publish these to any employee 
or customer that has access to a browser, for almost no cost. As 
location-aware devices and services proliferate, so too will the amount 
of useful data stored within organisations, most of it in a structured 
form that lends itself well to analytics.
6. Images, audio and video
    The ability to interpret the contents of digital images will 
improve steadily. Analytics software will move beyond mining textual 
metadata associated with images (i.e., the descriptions and tags stored 
with them) to analysing the content of many images on the 
fly.\7\,\8\
---------------------------------------------------------------------------
    \7\ See Polar Rose, www.polarrose.com, for an application of 
analytics to online images today.
    \8\ A recent paper about the cutting edge of image search and 
retrieval is Carneiro, G., Chan, A.B., et al, 2007, Supervised Learning 
of Semantic Classes for Image Annotation and Retrieval, IEEE 
Transactions on Pattern Analysis and Machine Intelligence, Vol 29, No 
3, pp 394-410.
---------------------------------------------------------------------------
    Continuous media, in the form of audio and video files, are 
extremely rich in information. At the same time, however, they are 
notoriously difficult for computers to navigate and interpret. Business 
analysis is typically limited to what human operators can watch/listen 
to and write up in reports. For most businesses this means audio and 
video is excluded from computer-based analysis.
    Steady progress is being made in technologies to navigate and 
analyse continuous media files. The quantity and value of this 
information, especially collected via the call centre, and posted on 
the web, provides a strong imperative to apply it in business.
    Developments in the application of natural language technologies to 
transcribe the speech found within continuous media files are 
especially important. When soundtracks are converted to text they can 
be much more easily searched and analysed. A ready benchmark for 
progress here is the quality of current online services for searching 
video.\9\
---------------------------------------------------------------------------
    \9\ See, for example, www.blinkx.tv.
---------------------------------------------------------------------------
    Structure is also being added to continuous media files. 
Researchers have developed new languages for describing and time-
stamping events within clips, and new containers for keeping 
descriptions with the audio or video component.\10\ As these mature, 
continuous media files will be transported across the web with fully 
transcribed, time-sequenced audio tracks, and will become as easy to 
analyse as ordinary text.
---------------------------------------------------------------------------
    \10\ An important example is www.annodex.org.
---------------------------------------------------------------------------
7. Social links
    Social networks are important targets for analysis. Identifying 
relationships between people, their interests, and other people is 
extremely valuable in business, and the proliferation of websites 
offering services built around sharing, collaboration and networking, a 
phenomenon sometimes labelled ``Web 2.0'' is driving an exponential 
increase in information relating to connections between people.
    This type of information is already associated with structures that 
can help computer navigation, including e-mail directories, links 
through citations, dates on blog entries, and common membership of 
online communities \11\ and business workgroups. Semantic web 
initiatives will play a role in providing structure as well.\12\
---------------------------------------------------------------------------
    \11\ E.g., LinkedIn and MySpace at www.linkedin.com and 
www.myspace.com.
    \12\ See, for example, The Friend-of-a-Friend (FOAF) Project, 
www.foaf-project.org.
---------------------------------------------------------------------------
    Computer scientists are making rapid progress in analysing this 
type of data for business purposes. An example is conflict of interest 
detection, where experimental systems are detecting potential conflicts 
by analysing multiple online social networks together.\13\
---------------------------------------------------------------------------
    \13\ See, for example: Alaman-Meza, B., Nagarajan, M., et. al,, 
2006, ``Semantic Analytics on Social Networks: Experiences in 
Addressing the Problem of Conflict of Interest Detection,'' Proceedings 
of the 15th international conference on the World Wide Web, pp 407-416, 
Edinburgh.
---------------------------------------------------------------------------
8. Search
    The link between developments in search technologies and 
developments in business analytics will get stronger. Computers must be 
able to find data before they can analyse it. Each step forward in 
refining the outputs of search engines also represents an improvement 
in the data that can be sourced for analytics engines. Specialist audio 
mining tools already allow, for example, keyword searches of news 
clips, earnings announcements and recorded briefings. This also applies 
to search within organisations: enterprise search is rapidly improving 
in scale and sophistication and soon every knowledge worker will have 
the contents of their PC indexed by a desktop search engine. The 
parallels with search extend to interfaces, with analytics software 
progressively adopting the flexibility and familiarity of search 
interfaces to improve accessibility by non-specialist employees.
9. Broader, deeper insights
    Computer scientists are pushing ahead in a range of fields--machine 
learning, data modelling, simulation, categorisation, abstraction, 
inference engines, heuristics and constraint programming--that will 
make computer analysis deeper, more accurate, and more useful.
    Analytics systems will be able to consider more variables when 
producing recommendations. Advances in constraint programming will see 
business computer systems consider more variables when producing 
recommendations. The quality of analysis of the complex, multivariate 
problems common in logistics, scheduling, and rostering will improve 
steadily.
    The emphasis in analytics systems will steadily shift from 
measuring to modelling business trends and processes. Machine learning 
methods will help computers generate their own data models, instead of 
being constrained to human-generated models when trying to identify 
correlations and relationships.\14\ Analytics systems will 
progressively incorporate the ability to identify gaps in their own 
knowledge.
---------------------------------------------------------------------------
    \14\ The STaRControl project exemplifies advanced modelling and 
machine learning in the context of traffic analysis. See http://
nicta.com.au/director/research/projects/s_to_z/star/starcontrol.cfm.
---------------------------------------------------------------------------
10. Presentation and usability
    In business situations, timely approximations can be invaluable, 
while analysis that arrives after a decision has been made is 
worthless. As the scale and complexity of information fed into business 
analytics increases, so too will the importance of abstraction, 
summarisation, delivery and presentation. The most valuable systems 
will be those that distil data from many sources into simple pictures 
that managers can digest and act on quickly. Technology developments 
will produce systems that become progressively better at:

   Producing simpler and more visual data views and reports.

   Allowing data views and reports to be generated by non-
        specialist employees.

   Abstraction and summarisation, to give managers more concise 
        output and more specific recommendations.

   Learning from previous requests so that information is 
        displayed in the order and priority that individual users 
        prefer.

   Assessing timing, so that software fades into the background 
        during ``business as usual'' periods but actively pushes 
        information to users when it is of high relevance or urgency.

   Tailoring output to suit the device (e.g., phone, PDA, 
        laptop, web browser) and context (static, mobile, making a 
        tactical decision or preparing a strategic plan).

   Being easily accessible from familiar and everyday 
        applications such as Microsoft Office.
11. Software as a service
    An increasing proportion of all business software will be provided 
to customers in the form of a service that is accessed over the web, as 
opposed to a product installed in the customer's business. This is a 
gradual, but fundamental IT trend. The important technical drivers are 
improvements in software architecture, integration technologies (see 
Section 12) and network infrastructure.
    Economic drivers are equally important. Decision makers are 
attracted to the notion of no upfront investment, predictable annual 
costs, and leaving the management of software, including upgrades and 
patches, to providers. Pricing and service models will mature rapidly 
through the next 5 years.
12. Web services
    Global take-up of web services--ubiquitous web based standards for 
software integration--will make connecting software applications within 
and between organisations dramatically more cost effective. As the cost 
of integration falls, and major software suppliers gradually move to 
supply their products in more modularised form, it will become easier 
to connect analytics engines with financials, office productivity 
software, specialised purchasing software, planning and collaborative 
tools, CRM packages other analytics systems and any number of 
applications and information services available on the web.
    This trends applies to individuals as well as organisations: it 
will become steadily easier for any individual to put together and 
publish their own integrated combinations of web applications, as we 
are seeing with mash-ups of mapping services today.
13. Privacy preserving technologies
    The maturation of technologies that allow rapid analysis of 
distributed data will make it much easier for organisations to analyse 
shared information. Shared analysis will get easier for individuals, 
collaborating workers, and public communities of interest.\15\
---------------------------------------------------------------------------
    \15\ Swivel and Many Eyes are examples of open websites for shared 
exploration and analysis of data. See www.swivel.com and http://
services.alphaworks.ibm.com/manyeyes/home.
---------------------------------------------------------------------------
    An especially important driver will be privacy preserving 
technologies that automatically strip identifying data from customer 
records. These are already being applied in the healthcare domain to 
help researchers locate, aggregate and simultaneously analyse patient 
data residing in many different hospitals, institutions and 
laboratories.\16\ Advances in software integration (Section 12) will 
also be important.
---------------------------------------------------------------------------
    \16\ See the Health Data Integration project at http://e-hrc.net/
hdi/ and the CSIRO's Privacy Preserving Analytics at http://
www.csiro.au/science/ps59.html.
---------------------------------------------------------------------------
    There is a strong imperative to do this better: shared analysis is 
important between trading partners that collaborate closely (between 
big retail chains, for example, and their suppliers of fast moving 
consumer goods), but is slowed by negotiations and manual data 
preparation and cleaning procedures.
14. Human inputs
    Analytics systems will incorporate more inputs directly from 
humans. When workers combine on-the-spot observations with what they 
know about the global picture their personal analysis is very valuable. 
Steady improvements in interfaces, machine learning and inference-
making will see more of this captured by systems to refine reports, 
forecasts and recommendations. Community effects, as pioneered in 
blogs, wikis and other collaborative models on the web, will also be 
harnessed this way.
    Sophisticated combinations of human and machine analysis are 
already found in hybrid share trading systems that combine algorithmic 
trading with decisions made by human brokers in the securities 
industry. Specialist solutions are also emerging to analyse 
combinations of objective and subjective data for human resource 
management.\17\
---------------------------------------------------------------------------
    \17\ An example of this combination is found in the Mentor system 
(www.corporate
knowhow.com).



15. Affordability
    Research and development of new analytics technologies will 
continue to be driven in sectors where there is highest value. As with 
most information technologies, broader adoption will follow as 
technologies mature, fall in price, and become available from more 
providers.
    The very large relative research and development investments mean 
that defense and healthcare in particular will continue to provide 
leading indicators for technologies that will eventually find their way 
into all businesses.
    New technologies will generally follow a top-down progression from 
initial adoption by corporations to adoption by medium and then finally 
small businesses. Some will become consumer technologies. A similar 
progression will apply within organisations as it becomes cost 
effective to deploy analytics to more departments, employees and 
devices.
16. An expanding ecosystem
    Based on many of these trends, we can picture analytics systems as 
ecosystems, as illustrated in Figure 2, that are accepting inputs from 
an ever wider range of sources, and producing outputs for an ever wider 
range of destinations.
                       Part II: Business Impacts
    This section describes how analytics will shape the future of 
business. The discussion moves back and forth between three levels: 
industry--changes to interactions between organisations; organisation--
how organisational capabilities, routines and norms will change; and 
individual--changes that individual workers will experience.
17. Embarrassment of riches
    Through 2017 the data coming online and made available for 
businesses will outstrip the capacity to analyse it.
    All organisations will continue to balance infrastructure 
investments against the analytics capabilities they would like to 
build. Falling costs in storage, servers and network bandwidth will be 
insufficient to keep up with demand to perform complex analysis more 
often, on more data, by more employees. Companies will constantly be 
surprised by the sheer volume of data they are generating and 
collecting.
    By 2010, the notion of the information lifecycle, with limits 
placed on how long some types of information should be retained, will 
become very important.
    Today, on average, companies only utilise 42 percent of internal 
data that relates to their customers.\18\ In 2010, because the data 
pool is so much larger, they will struggle to improve on this figure.
---------------------------------------------------------------------------
    \18\ CIO Insight, The 30 most important IT trends for 2007, 
November 17, 2006, www.cioinsight.com.
---------------------------------------------------------------------------
    By 2011, almost all large organisations will have dispensed with 
``keep everything'' strategies for business data. Managers will 
routinely consider one of their major IT challenges to be choosing what 
data to throw away, lest they use up storage capacity too rapidly.
    More and more companies will turn to service providers (see Section 
18) so they can access storage and processing power on an on-demand 
basis.
    Through 2013, at least one in two organisations that invest in 
business analytics as a key corporate strategy will experience problems 
with projects that attempt too much too fast.
    By 2014, industry leaders will be defined as much by the data they 
choose not to use as by the data that they use.
    In 2017, even leading proponents of business analytics will rarely 
exploit more than 10 percent of the quality business data that is both 
available and relevant to their context.
18. The analytics economy
    We will see rapid shifts as businesses capitalise on opportunities 
to provide data services, and perform data analysis, on behalf of other 
companies. Many of these ``analytics service providers'' will aggregate 
data and translate it between formats as part of the value they 
deliver.
    The most successful analytics service providers will offer access 
to deep expertise, specialist skills and experience. Their value 
proposition will be further enhanced by superior IT infrastructure and 
the processing power they can bring to bear on a problem, and they will 
invest in (or partner with providers of) large-scale server and storage 
facilities.
    Through 2009, most online analytics services will be aimed at 
people who will manually navigate to them and access their analysis 
using browsers.
    By 2011, significant online data brokers will be found in every 
industry sector. Many will have a background in market research, 
consulting or finance where they built up rich repositories of 
specialist data. Online retailers will also be pioneers in online 
analytics services.
    By 2012, most specialist research companies (e.g., automotive, 
demographic, building, real-estate research firms) will be online 
analytics service providers.
    By 2013, almost all analytics services with business value will be 
computer accessible, where customers can connect their software 
directly to the service over the web. Very sophisticated services will 
have emerged. All competitive market research, news, media and 
advertising businesses will be analytics service providers. Leading 
finance companies will have adapted in-house market analysis systems to 
make them available externally as online services to customers. Much of 
the value provided by advertising companies will be in pre and post 
advertising analysis.
    By 2015 there will be a substantial global economy built up around 
merchants that buy, sell and rent out their accumulated data on the 
web.
    At this time, dominant trading partners in every industry will make 
healthy profits from providing analytics services for other 
organisations. Specialist insurers will sell data and risk analysis 
services to companies in other sectors. Transportation companies will 
sell data and analysis to other companies for logistics planning 
purposes.
    By 2016, organisations will routinely blend collections of internal 
analytics engines and hosted analytics services in such a way that the 
sources are indistinguishable to users.
19. Collective insights
    Organisations that work closely together in partnerships and 
alliances will steadily find themselves pooling more of their data for 
combined analysis. These networks will be underpinned by commercial 
arrangements that specify rental fees and reciprocal rights. These will 
lead to additional revenues for data-rich companies and new costs for 
data poor companies.
    Through 2011, data sharing arrangements will expand between large 
retail chains and manufacturers with strong consumer brands. Early 
adopters of multi-organisational analytics will also be found in the 
insurance industry (e.g., sharing across insurance alliances), finance 
(e.g., sharing between finance companies and mortgage brokers), and 
business services (e.g., sharing between providers of complementary 
services).
    By 2013, conducting cross-organisational data analysis will be as 
routine as conducting cross department data analytics is today.
    By 2014, data sharing networks will exist that span industries, and 
facilitate aggregated analysis of information owned by hundreds of 
organisations at a time. Manufacturers will analyse data owned by 
retailers, airlines will access datasets distributed across many travel 
agents, and automotive manufacturers will access datasets distributed 
across car dealerships. Allied groups of insurance brokers will 
generate significant new business through the combined analysis of 
their social networks.
    By 2016, data sharing will be taking unusual forms and coming from 
unexpected places. Taxi companies, toll operators and courier 
companies, for example, may pool analysis of vehicle movements to gain 
deeper insights.
    By 2017, industry networks will exist that routinely analyse data 
stored in more than a thousand small businesses.
20. From microscopes to telescopes
    Although the customer data owned by an organisation will remain one 
of its most valuable assets, the vast amounts of external information 
available, and increased capacity for systems to analyse it, means that 
the external data pool will quickly outstrip the internal one in scale. 
All businesses will end up analysing significantly more data residing 
outside their organisations.
    By 2011, managers in leading organisations will understand that 
competitive business insights depend more on how they interact with an 
ecosystem of external service providers than on how they process 
internal data.
    By 2013, managers in large enterprises will routinely receive 
computer generated recommendations based on a thousand times more 
external than internal data.
    By 2017, managers in large enterprises will routinely receive 
computer generated analysis and recommendations based on a million 
times more external than internal data.
    At this time, companies in the travel industry will monitor cost 
trends for all destinations they service by crawling massive numbers of 
web-based data points on room prices, vacancy rates, retail prices and 
bus and train fares.
21. David becomes Goliath
    Medium and small businesses will rarely own as much information as 
large corporations. Nor will they be interested in the same types of 
analysis because there is less scope for optimisation in less complex 
organisations.
    Many kinds of analysis will be valuable, however, regardless of 
business size, including customer profiling, sentiment analysis and 
market trends analysis. Smaller businesses will also have access to the 
same data ecosystems, and the same tools as these become accessible as 
services over the web.
    New opportunities for small businesses will also come from 
``scaling down'' the cost and complexity of systems that are only 
practical for large organisations today.
    By 2010, managers in one in five mid-sized companies will access 
computer analysis of customer and sales data on a daily basis.
    By 2013, managers in mid-sized companies will routinely access 
computer analysis of sales, production, and supply-side information on 
a daily basis.
    At this time, managers in a third of small businesses will 
routinely access at least one online analytics service on a weekly 
basis.
    By 2014, small business managers will routinely reference 
benchmarks developed by pooling data from hundreds of their peers. 
These benchmarks will typically be accessed from within their regular 
accounting software.
22. Location-aware enterprise
    The explosion in location-aware chips, tags and devices will see 
organisations gain entirely new insights on their assets, staff, 
customers and products.
    By 2010, analysis of real time spatial data for mobile and in-the-
field assets such as vehicles and heavy equipment will be routine in 
transportation, logistics, mining and agriculture.
    By 2013, medium and large manufacturers will routinely analyse data 
on the location, distribution and utilisation of containers, palettes 
and roll cages.
    By 2015, organisations in supply chains for big retail chains will 
routinely analyse the movements of hundreds of thousands of fast moving 
consumer goods.
    By 2017, asset managers in large finance and business services 
companies will routinely analyse, from a single console, the 
distribution and movement of all corporate assets worth more than ten 
dollars.
23. Walls have ears
    Audio and video will quickly grow in importance. Sources will come 
from within the organisation as well as from outside. An especially 
widely used source will be audio data from the call centre.
    Images will begin to constitute an important source of business 
data, especially where they are associated with identifying events or 
changing conditions in a building or commercial environment, or with 
identifying people and places.
    By 2009, insurance companies will routinely use systems that 
analyse speech for stress and produce real-time risk indicators during 
calls into claims processing centres. These systems will substantially 
reduce fraud rates.
    By 2011, personal voice risk analysis will be routinely used by 
sales representatives in all industries to help verify customer buying 
intentions over the phone. Many of them will do this without the 
knowledge of clients or their managers.\19\
---------------------------------------------------------------------------
    \19\ AVS is an example of a commercial voice risk analysis solution 
(www.digilog.com), and Kishkish is another, available as a downloadable 
plug-in for Skype users (www.kishkish.com).
---------------------------------------------------------------------------
    By 2014, more than half of large businesses will routinely analyse 
recorded audio in call centres to zero in on anomalies, problem 
products and customer gripes.
    By 2015, the automated analysis of foot traffic via CCTV, once only 
available to managers in casinos and supermarket chains, will be 
available as a cheap webcam plug-in and routinely used by small 
retailers routinely to optimise window and shelf displays.
    By 2016, audio data mining will be used by one in two large 
organisations to tune the methods of tele-sales and over-the-counter 
sales people.
    By 2016, large organisations will routinely use software that 
recognises voice patterns to produce rich insights on when and how 
customers contact them.
24. Sentiment tracking
    Business analytics systems will be able to take advantage of new 
algorithms to draw inferences from material in discussion forums, 
customer feedback, e-commerce and auction sites, news clips and analyst 
reports to infer overall positive or negative sentiment about companies 
and products.
    As sentiment analysis develops and becomes more realistic, it will 
turn into a key metric that is monitored daily in all businesses and 
industries. Investors and consumers will change their behaviours based 
on the sentiment analysis available to them.
    By 2010, online sentiment analysis will be routinely offered as a 
service by market research and advertising companies.
    By 2012, sentiment analysis will be routinely used by companies to 
analyse customer feedback and recorded audio from the call centre, to 
improve customer service outcomes.
    By 2013, managers working in companies with high profile consumer 
brands will routinely perform sentiment analysis of audio, video and 
textual news feeds. During periods of adverse publicity (e.g., product 
recalls) they will benchmark impact against preceding months, and 
monitor progress as public relations campaigns try to repair the 
damage.
    By 2014, corporate sentiment analysis will incorporate continuous 
crawling of blogs, product rating websites, news services and social 
networking websites for mentions of the company and its products, 
scoring relevant comments as they go. Managers will routinely monitor 
changes in goodwill and market sentiment on a weekly basis, not only 
for their company but also for their biggest competitors.
    At this time, brokers will routinely use sentiment analysis in 
valuations and share trading. Sentiment analysis will be widely applied 
by individuals to score online feedback posted about hotels, 
restaurants, airlines and travel destinations.
    By 2015, high profile professionals and executives will routinely 
monitor ``personal brand awareness'' based on how frequently their name 
is mentioned and in what context.
    By 2016, random online searches for information on products will be 
returned with customer satisfaction ``meter readings'' for both the 
target item and nearest equivalent products from alternative suppliers.
    By 2017, executives and company spokespeople will routinely face 
shareholders that call up, with a few mouse clicks, an overall analysis 
of everything they have ever said publicly on a topic.
25. Reputation wars
    The developments described above will lead companies to move beyond 
monitoring to using technology to actively manage and influence online 
sentiment.
    By 2014, companies in the public relations industry will routinely 
offer automated services to help skew online sentiment results and 
boost online reputations.
    By 2015, the ``reputation wars'' between reviewer and reviewed will 
take on the resemblance of a subtle but ongoing arms race. Leading 
providers of sentiment analysis services will be continuously refining 
their methods for detecting manipulated data, and for assessing the 
trustworthiness and integrity of online sources. They will routinely 
exploit social networking data to detect relationships between the 
reviewer and the reviewed.
26. Knowing who you know
    Managers will get very powerful outcomes from social network 
analysis. Early applications will continue to have an inward facing 
flavour, but sophisticated online tools will also open up a world of 
new insights. This will produce new social challenges.
    By 2009, large organisations will routinely analyse the structured 
information in e-mail and internal directories to help find people with 
specialised knowledge, or social connections relevant to a task.
    By 2010, a variety of services will be available online that 
automatically produce social network analyses on any person for anyone 
that wants it--for free.
    By 2011, entrepreneurs will routinely use web-profiling to find 
social connections to secure deals. Sales reps will automatically 
profile prospects before calling. Managers and employment companies 
will profile job candidates as a matter of course.
    At this time, managers in companies of all sizes will routinely use 
online tools to mine people and associations from news stories, blogs 
and company websites.
    By 2012, online conflict of interest detection will be undertaken 
routinely and automatically during legal disputes, company 
acquisitions, hiring and selecting contractors.
    By 2013, online social network analysis will routinely incorporate 
information on the identity of people that appear in digital 
photographs.
    At this time, job candidates will often find themselves confronted 
with interview questions about associations with ``undesirable'' people 
or organisations, even if these associations were made accidentally.
    By 2017, large companies will routinely mine digital recordings of 
internal seminars, training sessions and planning meetings to improve 
the mapping of social networks and knowledge associations between 
employees.
    The analysis of social network and unstructured data within 
organisations will produce new workplace challenges. Many organisations 
will experience disruption as employees object to having their e-mail 
archives mined for associations. Other challenges will come from 
increased scrutiny of personal activities and connections. Companies 
that execute well will be careful to preserve privacy and give 
individuals strong personal control over information sources that are 
analysed.
27. ROI-per-customer
    The notion of being able to quantify the value of individual 
customers, something that already exists in many organisations, will 
become much more comprehensive. Analytics systems will produce insights 
on cost, risk and profitability for individual customers, taking into 
account such things as call volumes, preferred communication channels, 
product mix, location and sentiment analysis.
    By 2011, dashboards used by customer service and sales personnel in 
banks will routinely emphasise predicted customer value over current/
historical value.
    By 2013, large organisations will routinely use data from their 
customer base to model projected take-up, rate of return and 
profitability for new products and services.
    By 2017, businesses will routinely use projected ROI-per-customer 
as inputs to their long term planning.
    These developments will create new social challenges as ROI-per-
customer metrics change the behaviour of service and contact centre 
personnel. Many organisations will experience customer backlash and 
adverse publicity as the service levels begin to mirror customer 
scores. Advanced organisations will quickly learn to accompany 
deployments with new procedures and significant training and education 
programs.
28. Bottom-up optimisation
    Local analytics systems will connect and collaborate with one 
another across complex supply chains and business networks. Such 
arrangements will allow managers to make decisions based not only on 
rich local information, but also armed with insights about the impact 
of their decisions on other links in the chain. By empowering local 
decision-makers this way, connected analytics systems will help 
optimise trading systems from the ``bottom up.''
    By 2012, supply networks in transportation, fresh food 
distribution, and fast moving consumer goods will routinely employ 
distributed analytics systems that interact and exchange information 
with one another. Businesses in these networks will significantly 
improve profit outcomes during adverse events and changeable 
conditions.
    By 2016, distributed analytics systems will be deployed in all 
types of collaborative trading networks (including in services sectors) 
that are complex or changeable and cannot be modelled from the top 
down.
29. People meters
    While human resources (HR) management will remain a domain 
dominated by subjective assessments of factors such as morale, job 
congruence, performance, skill levels, leadership and peer 
collaboration, computer analysis will play a growing role.
    By 2009, managers in large organisations will routinely reference 
computer analysis when reviewing sales performance, salaries and 
expenses.
    By 2012, comprehensive H.R. analytics solutions will be routinely 
deployed by management consulting companies as part of their 
organisational change methodologies.
    By 2013, managers in large enterprises will routinely use 
dashboards that combine quantitative and qualitative human resource 
metrics for individual departments and projects. These will provide 
actionable insights on where to invest in training, where reporting 
structures are inefficient, and where changes to work allocation and 
staff roles need to be made to address bottlenecks.
    By 2016, as H.R. benchmarking becomes more sophisticated, and 
bigger datasets are collected, large enterprises will build whole-of-
company models to analyse human resources allocation and performance, 
and senior managers will routinely access cost versus return estimates 
for individual employees.
    In organisations where these tools are applied well, employees will 
find themselves in a more attractive workplace where managers are armed 
with new and creative ideas, where there is a feeling of constant 
refinement of management practices, and where individual strengths are 
better recognised and utilised.
    Considerable learning will be required, however, and many 
organisations will apply these metrics poorly. In these workplaces, 
employees will find themselves stifled by managers that frequently 
defer to standardised benchmarks at the expense of a deeper 
understanding of individual strengths and motivations.
30. 360+ performance reviews
    Performance reviews will progressively become more realistic. The 
notion of scoring performance and paying bonuses based solely on 
targets set at the beginning of the year will disappear. This will 
impact the way performance is measured for all managers and employees, 
but through the next 10 years the main focus will be on sales 
representatives and senior executives.
    As these practices become more common they will transform 
expectations. Top performing executives and sales people, for example, 
will only want to work for organisations where performance is analysed 
realistically.
    By 2015, sales representatives will be routinely compensated for 
performance against a basket of metrics that include the performance of 
peers, competitors, and the market as a whole.
    By 2018, customer service personnel will be routinely compensated 
for performance against a basket of metrics including indices of 
customer satisfaction before and after calls, overall satisfaction 
across the client base, and an online sentiment index.
31. Latency and velocity
    Analysis will become more tightly linked to information sources 
over time, with fewer instances of people having to manually write-up, 
summarise or reenter information.
    The automation of information collection will be one factor. 
Examples include palettes and containers broadcasting their location 
and status in warehouse, loading bays or trucks via RFID chips, and 
moisture, salinity and temperature data feeds from distributed sensor 
networks in agriculture. Additionally, as integration becomes easier 
and cheaper, we will see more connections between machines that supply 
information and machines that analyse information.
    Managers will receive insights that are progressively more timely. 
By exploiting information much sooner after it is created, they will 
make earlier and more effective decisions. Delays in critical business 
information will, however, remain a fact of life.
    Outside the organisation, shareholders and analysts will receive 
increasingly timely analysis and will also embed this in their 
decisionmaking. A side effect will be a further shift toward ``day 
trading'' and some increased volatility in financial markets.
    By 2009, executives in the mining sector will routinely access, on 
a daily basis, accurate analysis of the profitability of each mine 
site. This will be calculated from continuous monitoring of data on 
input costs, deployment of assets and personnel, excavation rates and 
processing yields.
    By 2012, managers will routinely access analysis on the status of 
manufacturing, warehousing, transportation and direct sales operations 
that is accurate to within 5 minutes.
    By 2013, more than 65 percent of Australian Stock Exchange trades 
will be executed by autonomous and semi-autonomous dealing systems.
    By 2015, leading organisations will see more than half of the 
digital information created in an organisation imbedded in analysis 
used by senior managers within 48 hours of it being created.
    In 2017, near real-time analytics will be widely available in 
specific operations, but no large organisation will have achieved a 
capability where senior managers can access up-to-the minute 
assessments of financial position for the business.
    Much is made of the goal of the ``real time enterprise,'' so why 
won't it happen? Some of the inhibiting factors have been described 
below in Section 34. Additionally, it will be impossible to eliminate 
human delays--in updating information like progress reports, new hires, 
expense claims, etc--and also delays in receiving information from 
channel partners and contractors. More importantly, the imperative to 
have real time access to the ``big picture'' is imaginary. Senior 
managers don't need (and won't pay for) systems that tell them the 
financial status of a business on an hourly basis: at that level of 
granularity they cannot distinguish between fluctuations and trends, 
and the organisation is incapable of reacting that quickly to 
decisions.
32. Bottlenecks within
    As speed of information becomes an ever greater competitive 
necessity, analytics will increasingly be applied to the efficiency of 
information systems themselves.
    By 2010, businesses will routinely benchmark the time it takes for 
sales and service staff to access key information (including analytics 
outputs) while in the field.
    By 2011, large enterprises will routinely use computer analysis to 
isolate unnecessary/problematic traffic to improve e-mail practices and 
reduce ``e-mail overload'' problems.
    By 2014, top-100 companies will routinely embed analytics in 
business process outsourcing arrangements. Software will continuously 
monitor request and response times. Partner managers will review 
service performance metrics on a daily basis. The same metrics will be 
mirrored to the customer relationship manager working for the 
outsourcer.
33. Goodbye to budgets
    Organisations will move slowly toward budget-less management, where 
fixed annual budgets are abandoned and replaced by continuous analysis 
of spend versus return. This will progressively free personnel from 
onerous bottom-up budgeting, and will make organisations more adaptable 
and responsive to change.
    By 2011, large companies will routinely analyse whole-of-enterprise 
procurement data to identify opportunities to consolidate purchases and 
get additional discounts ``on the fly.'' These insights will be 
imbedded in requisitioning systems and accessed by purchasing officers 
when they place orders.
    By 2014, at least a quarter of large businesses will routinely use 
budget-less management in selected projects.
    By 2017, at least a quarter of large businesses will routinely use 
budget-less management in one or more business units. In advanced 
organisations, accounting departments will morph into support services, 
spending most of their time providing on-demand ROI projections to 
managers.
34. Cultures of confidence
    Data quality, and ensuring managers can trust the outputs of 
analytics systems, will continue to be an important challenge.
    A contributing factor will be the continuous addition of new 
sources of information (especially external sources where there will be 
duplication, and big variations in quality and consistency). Mergers 
and acquisitions will play a role as well.
    At the same time, analytics systems will become better at 
calculating and communicating confidence levels and probabilities 
associated with their outputs. Greater transparency of confidence 
levels in computer analysis will build trust in them, which will in 
turn accelerate adoption.
    By 2009, large services organisations will routinely offer company-
wide training on best practices in information management.
    By 2011, many businesses will have simple, organisation-wide, terms 
for describing quality and confidence levels associated with reports 
and forecasts.
    By 2013, these will be routinely institutionalised in policies and 
decision processes. Certain product decisions will only be allowed, for 
example, if predictions reach a ``Level 1'' (high) confidence level, 
while market communications will be adjusted mid-campaign on ``Level 
3'' recommendations if they are the best available.
    By 2013, the proliferation of external analysis services being used 
by different departments will make selecting and quality controlling 
external data resources a key focus in large businesses.
    By 2014, specialist knowledge workers will routinely look up the 
confidence and quality levels for their business reports with a few 
mouse clicks.
    Managers in retailers, logistics centres and mine sites will 
routinely click through reports to see archived CCTV and web cam 
footage that provides a deeper understanding of the causes of changes 
or adverse events.
    By 2016, senior executives will routinely view aggregated 
confidence levels for top-level financial analysis with a few mouse 
clicks.
    In 2017, large companies will still be striving for, but never 
achieving, ``one version of the truth'' where everyone in the 
organisation references the same analytics derived from the same high-
quality and universally consistent sources.
35. Silicon and cerebrum
    Organisations will get steadily better at combining analysis made 
by people with analysis made by computers. Human inputs will become an 
important way to improve quality of analysis. Analysis and 
collaborative planning tools will merge. Differentiating between human 
and machine contributions will become impossible.
    By 2011, knowledge workers will routinely share insights with one 
another by posting ad hoc analysis, data visualisations and comments on 
web pages. Popular, useful creations will then be adopted widely within 
organisations.
    At this time, organisations will routinely link software to 
websites that exploit ``wisdom of crowds'' principles via popular 
tagging or voting, or facilitate analysis mash-ups, to create new 
sources of business intelligence.
    By 2013, when managers get together to make quarterly sales 
projections, they will not only take into consideration computer 
predictions, but their projections will also become inputs to the 
analytics system. Each will inform the other to improve accuracy over 
time.
    By 2015, managers in leading organisations will routinely submit 
new monthly reports in forms designed to be read as easily by machines 
as by people.
    By 2016, workers will routinely note any discrepancies between what 
computer analysis is telling them and what they are actually seeing. 
Their inputs, along with comments on likely causes, will be used to 
continually refine quality of analysis. A point of sale manager in a 
retail chain may note that sales of some items go up when it rains and 
others only when petrol prices are high; shortly afterwards, an 
administrator will be prompted to add 24-hour weather and fuel price 
data feeds into the system.
    By 2017, top level managers will routinely use combined human and 
machine projections to model industry scenarios for long term strategic 
planning.
    By 2018, one in five large enterprises will combine the management 
of human and computer knowledge in the organisation into one strategy.
36. Knowing what you don't know
    Self-learning capabilities will be progressively incorporated into 
mainstream business systems, moving them beyond predictions based on 
static models.
    By 2012, managers in telecommunications companies will routinely 
access systems that become better at predicting profitability for 
handset/plan combinations by self modelling handset cost, network cost, 
call volumes, call times, mix of local and long distance, use of non-
voice services, credit risk, handset upgrades, and network upgrades.
    By 2013, managers in transportation, logistics and distribution 
companies will routinely use systems that automatically accumulate 
knowledge about the effects of urgency, loading times, different types 
of goods, traffic congestion, vehicle reliability and weather.
    By 2017, analytics systems will routinely send suggestions to the 
IT department for trials, experiments and new data sources that can 
fill knowledge gaps, produce deeper insights and generate better 
predictions.
37. Securing information experts
    The new opportunities presented by business analytics will have an 
effect on roles and responsibilities at all levels in the organisation.
    The role of the most senior IT executive will progressively see 
more emphasis on information over technology, making the title of 
``Chief Information Officer'' a more accurate reflection of the role. 
We will see a trend toward multiple senior technology managers, each 
specialising in either strategic innovation, systems operations, and 
information management.
    Although systems will become vastly more usable by non-specialist 
personnel, demand for specialist skills will still rise. Information 
and knowledge management experts will enjoy a higher status as the 
quality and relevance of computer analysis becomes more business 
critical. The responsibility for finding, evaluating, selecting and 
managing external data services will grow in importance, as will the 
need to institutionalise procedures to continuously improve data 
quality.
    At all levels we will see growing emphasis on analytical, 
mathematical and software skills associated with managing information. 
The average knowledge worker will not be asked to become a 
statistician, but experience relating to information management will 
become more valuable on any resume.
    Like their counterparts in larger organisations, small business 
managers will also find that new skills are required to compete 
effectively. The ability to bring together diverse information sources 
quickly and effectively will become a more significant asset.
    By 2011, most large companies will have established competency 
centres to help business units extract more value from analytics.
    By 2013, the analytics capabilities of a large organisation will be 
limited more by its ability to find and keep suitable staff than by its 
ability to maintain quality data and software.
    At this time, analytics experts will rank among the highest paid IT 
specialists employed by large organisations.
    By 2014, competition for people will see senior analytics roles 
most often filled by crossing traditional boundaries. Services 
companies will hire logistic specialists from transport companies, 
retailers will employ spatial information experts from mining 
companies, and manufacturers will source social network analysts from 
media companies. Experts in defence intelligence and health analytics 
will find lucrative career paths in mainstream business.
    By 2016, organisations will routinely employ experts in knowledge 
management, collaboration and human-computer interaction as they try to 
blend human and computer knowledge practices, achieve continuous 
quality improvements, and promote a culture of good information 
practices at all levels.
38. Insights at your fingertips
    Analytics applications will become a factor in all aspects of 
business operations. At the same time, however, they will not be an 
intrusive or dominant part of working life. They will become 
progressively better blended into the everyday working environment and 
hidden behind the scenes.
    Workers will use analytics more often in their personal decision-
making, although they will not always be aware of it. Websites will 
provide richer analysis to support buying, financial planning and 
career decisions, and social analytics will help careers by connecting 
them to more people and communities with the same interests.
    Life will be as complicated as ever: 10 years from now, knowledge 
workers will still be complaining about ``information overload'' and 
will rate the inability to manage information as one of their most 
significant challenges.
    Some organisations will fail to appreciate the importance of 
blending analytics into the background. A common mistake will be 
promoting ``metatag cultures'' by encouraging employees to add 
descriptive tags to everything they produce--documents, spreadsheets, 
web pages, bookmarks, images and e-mails. This onerous approach will 
produce poor results. More advanced organisations will concentrate on 
using software to scan documents, monitor how they are used, and 
automatically append meaningful metadata.
    By 2009, sales representatives will routinely call up customer 
analysis while working onsite.
    By 2011, one in ten knowledge workers, in all businesses and 
industries, will access analytics software on a daily or weekly basis.
    By 2013, sales representatives will routinely access customer 
analysis as they are driving to meetings, and more than two-thirds of 
analytics queries in organisations will be made from within the 
familiar environments of the spreadsheet, browser or word processor.
    By this time, instead of always working to make computer analysis 
more accessible, leading organisations will be spending equal time 
assessing where analytics are distracting or counterproductive.
    By 2014, one in five knowledge workers will access analytics 
software on a daily or weekly basis.
    By 2016, nineteen out of every twenty analytics queries will be 
made with free form text entered into interfaces that are as simple as 
Google's is today. Workers will retrieve even highly structured reports 
by entering a few keywords--enough for systems to suggest a likely 
match.
    By 2017, senior executives will routinely access analysis that has 
been distilled into one line recommendations (e.g., ``initiate a 
clearance sale to run down inventory on Product A'') with the option to 
drill down to the metrics underneath.
39. Ministry of metrics
    Developments in analytics technologies will impact governments as 
much as businesses. Dominant themes will remain improving service 
delivery (in all types of services, but healthcare will continue to 
merit special focus), making government operations more efficient, 
reducing welfare and tax fraud, and national security.
    Information boundaries will gradually come down between departments 
and between levels of government. Whole of government analytics will 
eventually become routine. Despite public concerns, citizen data will 
be routinely analysed across departments and this will produce new 
challenges.
    By 2012, hospitals will routinely offer services that blend 
continuous home health monitoring with analysis capabilities hosted at 
the hospital.
    By 2013, the government will be an important player in the 
provision of external analytics services for businesses. Agencies with 
trade, customs and industry development responsibilities will routinely 
offer hosted online services relating to markets, trends, 
opportunities, environmental monitoring, social and economic data.
    At this time, most agencies will institute strong internal access 
policies for analytics systems because of new exposures relating to 
privacy and unauthorised/illegal use.
    By 2014, computer analysis of e-health records will produce 
dramatic improvements in early diagnosis and early outbreak detection, 
and will be applied intensively to improve quality of care.
    At this time, a variety of online services will continuously track 
public sentiment relating to policy and politicians. Changes to 
baseline metrics (e.g., after new policies are announced, interest 
rates rise, etc.) will be monitored on a daily basis in government. 
These services will compliment, but not replace, formal polling of the 
electorate.
    Purchasing officers will routinely access whole-of-government 
analytics to improve sourcing and procurement practices.
    By 2016, workers in security agencies and police forces will 
routinely generate automated risk profiles for individual citizens 
based on data in the public domain.
    By 2017, a national health network will exist that allows 
researchers to routinely analyse pooled health data sets spanning all 
public and private hospitals, all health research institutions and all 
government health departments.
40. Environmental analytics
    An important new application for businesses will be environmental 
sustainability reporting, involving measurement and analysis of 
information relating to such things as energy utilisation, water usage 
and carbon emissions.\20\
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    \20\ An early example of a carbon tracking and reporting tool is 
CarbonView. See www.supply-chain.com.au.
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    Governments will steadily raise the bar for detailed and timely 
reporting. Environmental analytics systems will be increasingly direct-
connected to regulatory authorities and energy companies.
    By 2010, agricultural businesses will routinely use computer 
analysis to optimise water use and distribution across land assets.
    By 2012, analytics systems drawing upon distributed sensor networks 
will be adopted by a wide range of government agencies, councils, 
farmers and manufacturers.
    By 2014, all types of organisations will routinely use combinations 
of analytics, sensors and smart meters to monitor and optimise energy 
use in office buildings.
    By 2016, governments will consolidate and standardise the 
electronic sustainability reporting requirements for businesses across 
state, local and Federal jurisdictions.
                               Conclusion
    The value of analytics systems will continue to rise rapidly 
through the next decade. This will be driven by new data sources, 
continuing improvements in computer methods and the development of 
richer and more convenient ways of accessing the outputs.
    For large businesses, the application of analytics to sales, 
finance, operations, purchasing, quality control and even human capital 
is already a universal competitive necessity. Within a few years, 
sophisticated analysis will be equally indispensable in medium sized 
companies, and before long to many small businesses. At the same time, 
business analytics will become an enterprise-wide phenomenon where all 
types of managers and knowledge workers benefit from richer methods of 
analysing digital information.
    A strange and exciting new world awaits. By 2017, audio, video, 
image and spatial information will be incorporated in mainstream 
business analysis everywhere. Social network information will be 
aggressively mined for patterns and relationships, and the vast pool of 
commentary and news found on the web will be trawled daily by machines 
that benchmark sentiment and monitor reputations. Many companies will 
have taken steps toward eliminating annual budgeting altogether.
    An analytics economy will spring up. Data rich organisations will 
enjoy lucrative revenues from renting out their information assets, and 
combined analysis of customer data will be routine between business 
partners in every sector. In complex supply chain networks, analytics 
solutions will communicate across company boundaries to help optimise 
the ebb and flow of products from the bottom up.
    These shifts will mean that some aspects of IT management will be 
turned upside down. Managing information will itself become much more 
critical than managing the technology that processes it, and the volume 
of data sourced externally will dwarf the amount owned by the 
organisation. By 2017, it will become quite impossible, in many 
business situations, to distinguish between human and computer 
generated insights.
    The future of business analytics will bring with it new human, 
social and cultural challenges. The detailed insights about us that can 
be gleaned from public data will often make us uncomfortable. Roles and 
workplace routines will everywhere need to adapt to accommodate and 
exploit new capabilities. For organisations, having the right skills 
will be most critical, and leading companies will always stand out more 
for the qualities of their people than the raw power of their 
information systems.
    Analytics leaders will do a lot of learning. This learning will 
define competitive advantage because it will be context specific and 
impossible to buy. Late starters may be able to tap into vast 
quantities of external data, and will certainly access powerful 
solutions, but they will find no short cuts to building a culture that 
understands data quality, knows the limitations of machine analysis, 
and strives to continuously improve how the outputs are used to support 
everyday business decisions.

    Senator Dorgan. Mr. Abrams, thank you very much.
    All of you have provided interesting and, in some cases, 
provocative, and certainly useful information to us.
    The task of reauthorizing the Federal Trade Commission 
requires us to take a look at what works and what doesn't, what 
kinds of things might be necessary to add to the 
responsibilities of the Federal Trade Commission. I started, 
today, asking about the resources. I think the resources are a 
problem we need to resolve, this is clear from the testimony 
that some of you have provided. And with respect to the common 
carrier exemption, we do need to respond, because times have 
changed, and there is no reason to prevent the Federal Trade 
Commission from working and being aggressive in those areas.
    I think much of the success of an agency, whether it is 
FERC, as I've described it earlier, or the Federal Trade 
Commission, or any number of agencies, has a lot to do with the 
interest that they have in pursuing issues aggressively. 
Frankly, I've been here long enough to see some people assume 
the leadership of certain organizations who don't believe in 
the organizations, don't like government, believe there should 
be no referee or no regulatory authority, and all of a sudden 
they're appointed to head the agency. So, what happens? The 
agency dies from the neck up, does nothing except collect 
paychecks and strut around and act like it's important. And 
especially given these days and these times, I think we need 
something much, much more. The Federal Trade Commission is a 
commission under the jurisdiction of this Committee, and--I'm 
not asserting, by the way, that my example was the FTC, but I 
am saying that I think it's very important that the regulatory 
authority be exercised aggressively and with some impatience 
toward practices that disadvantage and injure our consumers.
    Mr. Calhoun, the point you've made is really pretty 
stunning, about subprime lenders not disclosing, and not 
required to disclose, the escrow requirements that will have to 
be borne by the consumer. I mean, that clearly, it seems to me, 
is deceptive. Would you agree?
    Mr. Calhoun. Yes. And it's also counterintuitive, because, 
for example, if you look in the prime market, Fannie Mae and 
Freddy Mac typically require escrows on prime loans, unless 
there is a very large downpayment, and prime borrowers usually 
have a greater capacity to absorb payment----
    Senator Dorgan. Right.
    Mr. Calhoun.--shocks. In the subprime market, these would 
be the last loans where you would not escrow. But we talk to 
brokers and lenders, and they say, ``Well, if we do include the 
escrow, other people come out and deceptively undercut us by 
excluding the escrow.''
    Senator Dorgan. Let me ask--because I am not as 
knowledgeable about this area as perhaps you are, you've done a 
lot of research--for a company like Countrywide, which I think 
was the largest lender--is that the case?
    Mr. Calhoun. They're the largest mortgage lender----
    Senator Dorgan. Yes.
    Mr. Calhoun.--in the country.
    Senator Dorgan. And if they're engaged in the subprime 
area--and I understand they were--you're saying that a large, 
established company is presenting mortgage information to 
consumers and is not describing the escrow requirements? And I 
think you also testified they are not actually ascertaining or 
proving the income of the potential borrower. Is that correct?
    Mr. Calhoun. In the subprime market, almost half of those 
loans were so-called ``no-doc'' stated-income loans. And doubly 
deceptive is that the borrowers typically did not realize that 
they would pay a full interest point extra for having it a 
``no-doc'' loan, that they could save a full 1 percent on their 
loan just by bringing in their W-2 statement.
    Senator Dorgan. ``No-doc'' means no documentation?
    Mr. Calhoun. I'm sorry, yes, no documentation of your 
income, no verification of your income. You just state what 
your income is, and that's used to qualify you for the loan.
    Senator Dorgan. So, one would, as a consumer, appear 
before--or make known your interest to the largest mortgage 
company in our country and say to them, ``I'd like to get a 
loan. Here's my income,'' with no verification of the income, 
and, for no verification, you pay a higher rate. And, when they 
tell you what this mortgage is going to cost, they're free to 
tell you what it will cost without your monthly payment, which 
would include escrows and other matters. It seems to me, that, 
on its face, is deceptive.
    Mr. Calhoun. And it becomes even more so, because these 
loans were typically sold--the majority of the subprime loans 
are originated by a mortgage broker initiating the contact with 
the borrower, rather than the borrower, for example, calling 
Countrywide. Countrywide does a lot of direct solicitation, 
themselves. And so, the broker is coming in, saying, ``You can 
borrow X dollars. Here's what the payment will be,'' not 
telling you that it doesn't include your taxes and insurance, 
the payment's going to go way up----
    Senator Dorgan. Right.
    Mr. Calhoun.--and that you could save $1,000 or more a year 
just by bringing in your W-2 statement.
    Senator Dorgan. It's just almost unbelievable that this 
bubble could be created by people who felt that somehow this 
would work out in the end. You indicated that 35 to 50 percent 
increases in payments would ensue, notwithstanding the escrow 
issues. But, in several years--2, 3, 4 years--you're going to 
see your payments jacked up 35, 50 percent, because your 
interest rate is going to substantially increase. Your written 
testimony doesn't describe it quite as clearly. It's not at 
variance with what you've just said. But what you said, I 
think, is clear as a roadmap to what are clearly, to me, 
deceptive practices by some very large companies.
    Others of you have talked about the telecommunications 
areas, about net neutrality, about other related issues--the 
oil and gas industry. Dr. Cooper, you have previously testified 
before this committee on related issues. Your testimony is very 
helpful to remind us that there's a need to have some passion 
in pursuing truth here with respect to big interests. Big is 
not always bad, and small isn't always beautiful, but it is the 
case that, the clogging of the arteries of this marketplace is 
a serious problem for consumers, and we see that clogging of 
the arteries through mergers in virtually every area, but none 
really any more aggressively than in the oil industry, although 
perhaps telecommunications is a close second. Both industries 
are substantially concentrated. And I appreciate very much your 
testimony on these matters. As we think through how we 
structure and write a reauthorization bill trying to provide 
additional authority to the FTC, but also trying to stimulate 
and encourage additional activity I will certainly consider 
your testimony, as well.
    Dr. Cooper. Frankly, Mr. Chairman, the other parts of this 
body and this Committee have actually done the--taken the most 
important steps to start to deal with this problem. As you've 
pointed out, the--it's fascinating, the big mergers are gone. 
The double name--and you heard about a few small local mergers 
that the agency actually tried to stop. Of course, in a certain 
sense, the horse is out of the barn. The only way that we will 
restore some sanity to this market is by delivering to the 
President an energy bill that contains what this body passed, a 
dramatic increase in the supply of non-oil alternatives, a 
dramatic reduction in the demand for gasoline. That's the only 
way we're ever going to seize back this market from the 
domestic oil companies. And also, in the long run it's 
fascinating, from OPEC, the--the Chairwoman pointed out that 
OPEC sets the price of oil. That may be the case, but they get 
an awful lot of help, these days, from the domestic oil 
companies.
    And let me briefly explain why, because it really does 
reinforce a point. Three years ago, OPEC was defending $40 a 
barrel. When they met, as they just did recently, they were 
talking about $40 a barrel. In the intervening 3 years--and you 
quoted from the article in The Wall Street Journal that made 
the point--in the intervening 3 years, domestic U.S. refiners 
increased their margins dramatically, showing that there was 
more rent to be had. As an economist, you know that term. There 
was more money to be taken out of consumers' pocketbooks. And 
OPEC is a rent-seeking cartel. And so, when OPEC sees the price 
of gasoline lose touch with the price of crude oil, they know 
that the American consumer can be made to pay more, and they 
want a larger share of that rent. And The Wall Street Journal 
article explicitly said that. This is competition between 
American refiners and OPEC crude oil producers over the rent 
that they want to extract from American consumers.
    And so, there's a very real sense in which what happens in 
the domestic U.S. oil market influences, dramatically, the 
price of crude oil. The Chairwoman can no longer say, ``OPEC 
sets the price,'' because what we do here--we consume one-
quarter of the gasoline in the world--what we do in this 
market, what domestic refiners do, actually sends a strong 
signal to OPEC about where the price of oil can go.
    Senator Dorgan. Dr. Cooper, thank you very much.
    Because we started nearly an hour late, I have an inability 
to ask as many questions of this panel as I had wished to ask. 
I have to be somewhere at 12 o'clock. I hope you will 
understand.
    I, again, regret the inconvenience to all of you, but I do 
want to tell you that, as we put together a reauthorization 
bill, your testimony, your comments, your thoughts about how we 
do that, about the Federal Trade Commission, about what is 
happening in our economy, and the role of its regulatory 
authority are going to be very helpful to us.
    So, I appreciate your being here today. And this hearing 
will now adjourn.
    [Whereupon, at 11:55 a.m., the hearing was adjourned.]
                            A P P E N D I X

    Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
    I would like to thank Chairman Majoras and all the witnesses for 
being here today. This is the Committee's second opportunity this year 
to hear from the FTC Chairman concerning the Commission's current 
activities.
    I appreciate the Chairman's willingness to testify today, and know 
that the entire Committee is grateful for the Commission's hard work on 
the recent ``Broadband Connectivity Competition Policy Report'' and the 
``2006 Spring and Summer Nationwide Gasoline Price Increase Report.''
    In addition to the written testimony provided to the Committee, I 
trust that all the witnesses will provide their vision for the FTC and 
how best the Commission can protect consumers.
    Practical recommendations on how best the Committee can assist the 
FTC in fulfilling its mandates will benefit the members of this 
Committee when the FTC reauthorization legislation is taken up.
    By working in a bipartisan fashion the Committee will have the best 
opportunity to reauthorize the FTC since its authorization expired in 
1998. Once again, I thank the witnesses for being here.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Daniel K. Inouye to 
                       Hon. Deborah Platt Majoras
    Question 1. The Commission has recently updated its identity theft 
website to include information about state ``security freeze'' laws, 
which give consumers the right to freeze access to their credit files 
to prevent new account fraud. Thirty-nine states have now passed such 
laws. The state laws usually require consumers to pay a small fee to 
freeze, temporarily lift, or remove the freeze. In addition to state 
freeze rights, under Federal law, consumers have the right to opt-out 
from pre-approved credit card offers; to place, at no cost, a temporary 
fraud alert on their credit files; and to receive a free credit report 
annually from each of the three credit bureaus.
    The Committee is aware of new web-based businesses providing 
identity theft prevention services that offer to provide consumers with 
the above services (freeze, fraud alert, opt-out, and annual credit 
reports) as part of a bundle of prevention services, without disclosing 
that consumers may on their own access these services at lower or no 
cost.
    Is the Commission examining whether such services and promotions 
comply with Section 5 of the Federal Trade Commission Act? Has the 
Commission evaluated whether state laws allow the placement of a 
security freeze through intermediaries? Has the Commission evaluated 
whether these intermediaries can properly assure the identity of their 
clients seeking to place a freeze? What information should these 
businesses disclose In order to ensure that consumers are not led to 
believe they can only receive services, such as a security freeze, by 
using such businesses' services?
    Answer. As consumer concerns about identity theft have 
proliferated, a number of products and services intended to help 
consumers avoid being victimized have become available. Some of these 
prevention products and services are mandated by state or Federal law. 
For example, under the Fair and Accurate Credit Transactions Act of 
2003 (FACT Act),\1\ which amended the Fair Credit Reporting Act, 
consumers have a number of new rights, including the right to place a 
fraud alert on their credit files, thus signaling creditors and other 
potential users of the report to exercise caution in verifying the 
identity of an applicant. Consumer also have the right to a free annual 
credit report from each of the nationwide consumer reporting agencies 
(CRAs). Other prevention products and services are not mandated by law, 
but are sold commercially by CRAs and other businesses. For example, 
the nationwide CRAs and others sell credit monitoring services, which 
alert consumers to changes in their credit reports that might indicate 
the presence of identity theft.
---------------------------------------------------------------------------
    \1\ Pub. L. 108-159, 117 Stat. 1952 (December 4, 2003).
---------------------------------------------------------------------------
    The Commission is aware of the potential for consumer confusion 
about which of these products are available by law and which are 
commercial products, and about the cost of the products. The Commission 
actively monitors the practices of businesses selling these products to 
ensure that they are not deceptive or unfair. In August 2005, the 
agency filed a complaint in Federal district court against 
Consumerinfo.com, Inc., a subsidiary of Experian and creator of the 
``freecreditreports'' promotion.\2\ The complaint alleged that 
Consumerinfo deceptively marketed ``free credit reports'' without 
disclosing that its reports were not associated with the FACT Act free 
annual report program. The complaint also alleged that Consumerinfo 
deceived consumers by not adequately disclosing that consumers who 
ordered the ``free report'' were automatically enrolled in a credit 
monitoring service, and that those who failed to cancel the service 
within 30 days would be charged an annually renewing membership fee of 
$79.95. To settle the charges, Consumerinfo agreed to a court order 
requiring them to make clear and prominent disclosures (i) that their 
free reports are not affiliated with the FACT Act program, and (ii) of 
all of the material terms and conditions of the offer. In addition, 
Consumerinfo agreed to offer refunds to deceived consumers, and to pay 
an additional $950,000 as disgorgement of ill-gotten gains.
---------------------------------------------------------------------------
    \2\ FTC v. Consumerinfo.com, Inc., No. SACV050-801 AHS (MLGx) (C.D. 
Cal. August 15, 2005).
---------------------------------------------------------------------------
    In February 2007, the Commission alleged that Consumerinfo had 
violated the terms of the court order by not making sufficient 
disclosures about the terms of the offer, and the company agreed to pay 
an additional $300,000.\3\ The Commission also sent warning letters to 
over 130 Internet firms that purported to be offering ``free'' credit 
reports, many of which used common misspellings or variants of the 
approved free annual credit report website, annualcreditreport.com. In 
addition, to help consumers avoid deceptive ``free report'' promotions, 
the Commission has published a number of educational materials that are 
available in print and on the FTC website. For example, the Commission 
has disseminated two consumer alerts warning consumers about 
``imposter'' free report websites.\4\
---------------------------------------------------------------------------
    \3\ FTC v. Consumerinfo.com, Inc., No. SACV050-801 AHS (MLGx) (C.D. 
Cal. January 8, 2007).
    \4\ See http://wvvw.ftc.gov/bcp/edu/pubs/consumer/alerts/
alt156.shtm; http://www.ftc.gov/bcp/conline/pubs/alerts/fakealrt.shtm.
---------------------------------------------------------------------------
    With respect to ``credit'' or ``security'' freezes, as you note 39 
states have enacted laws giving some or all consumers the right to 
freeze their credit file to prevent access by third-parties. In 
addition, the three nationwide CRAs recently announced plans to offer 
credit freezes to consumers nationwide. The laws and programs differ in 
many respects, including who is eligible (all consumers or only 
identity theft victims), the means by which consumers can place a 
freeze, and the fees charged for placing, temporarily lifting, and 
removing a freeze.
    As you know, President Bush issued an Executive Order on May 10, 
2006, establishing an identity theft task force.\5\ Comprised of 17 
Federal agencies, the mission of the task force was to develop a 
strategic plan to marshal the resources of the Federal Government in a 
comprehensive effort to combat identity theft. On April 11 of this 
year, the Task Force issued its strategic plan, with 31 recommendations 
on actions that should be taken to prevent identity theft, ameliorate 
its impact on victims, and prosecute the criminals.\6\ I am pleased to 
note that most of these recommendations have already been implemented 
or are well along in the process of being implemented.
---------------------------------------------------------------------------
    \5\ Executive Order 13402 (May 10, 2006).
    \6\ The President's Identity Theft Task Force, Combating Identity 
Theft: A Strategic Plan, available at www.idtheft.gov.
---------------------------------------------------------------------------
    Among the recommendations of the Task Force was that the FTC, with 
support from other member agencies, conduct an assessment of the impact 
and effectiveness of state credit freeze laws and report the results in 
the first quarter of 2008.\7\ The Commission staff has made substantial 
progress in carrying out the assessment and is on track to report its 
results in early 2008.
---------------------------------------------------------------------------
    \7\ Id. at 52.
---------------------------------------------------------------------------
    In response to your question about the propriety of intermediaries 
offering to place security freezes on behalf of consumers, the 
Commission is not aware of any state law that would prohibit such 
practices, so long as they are offered in a nondeceptive manner. The 
Commission will continue to monitor the marketplace for these products 
and services, and is prepared to investigate and act against businesses 
that make false or misleading claims. In addition, the Commission has 
and will continue to educate consumers on their FACT Act and credit 
freeze rights so that they can make informed decisions about whether to 
seek the help of an intermediary in exercising those rights.

    Question 2. According to recent press reports, unscrupulous olive 
oil producers have been branding oils as ``extra virgin olive oil,'' 
the highest and most expensive grade, even if it is of lesser quality 
or not even olive oil. In February 2006, Federal marshals seized about 
sixty-one thousand liters of what was supposedly extra-virgin olive oil 
and twenty-six thousand liters of a lower-grade olive oil from a New 
Jersey warehouse. Some of that oil turned out to be mostly soybean oil 
even though it was labeled olive oil. Consumers are willing to pay a 
significant premium for ``extra virgin'' olive oil for perceived health 
and taste benefits. Bad actors should not be able to take advantage of 
this by fraudulently marketing soybean oil or lesser grades of olive 
oil as ``extra virgin olive oil'' in order to overcharge consumers. 
What steps is the Commission taking to examine whether manufacturers 
and retailers are violating Section 5 of the Federal Trade Commission 
Act when they market oil as ``extra virgin olive oil'' when it is not? 
Does the Commission intend to take enforcement action if it determines 
that manufacturers and retailers are acting in violation of Section 5?
    Answer. Issues of adulterated or misbranded food products are 
primarily within the jurisdiction of the Food and Drug Administration 
(FDA), rather than the Federal Trade Commission.\8\ Manufacturing and 
labeling of olive oil must comply with FDA's general provisions on 
misbranding and adulteration. Under the Federal Food, Drug, and 
Cosmetic Act, olive oil is adulterated if another oil is substituted 
for the olive oil in whole or in part.\9\ In addition, the FDA has 
issued specific regulations governing the common or usual name 
permitted for olive oil and other vegetable oils and requiring that 
mixtures of oils must be labeled to show all oils present in order of 
predominance.\10\ To enforce these standards, FDA has the authority to 
conduct field investigations of manufacturing facilities. When FDA 
identifies olive oil products that are adulterated or mislabeled, the 
agency can pursue a seizure action or product recall.
---------------------------------------------------------------------------
    \8\ The FTC shares jurisdiction with the FDA over the marketing of 
food products pursuant to a regulatory scheme established by Congress 
through complementary statutes. Under a longstanding liaison agreement 
governing the division of responsibilities between the two agencies, 
the FTC has primary responsibility for claims in advertising and the 
FDA has primary responsibility for claims on product labeling. Working 
Agreement Between FTC and Food and Drug Administration, 4 Trade Reg. 
Rep. (CCH)  9,850.01 (1971).
    \9\ Federal Food, Drug, and Cosmetic Act, Sec. 402(b)(2). 21 U.S.C. 
 342(b)(2).
    \10\ 21 C.F.R.  101.4(b)(14).
---------------------------------------------------------------------------
    The FDA has taken repeated action to recall or seize adulterated 
olive oil products over the past several years. The Federal seizure in 
New Jersey in February 2006, to which you refer, was the outcome of an 
FDA investigation. In addition, in 1996, FDA obtained a consent decree 
for the destruction of misbranded olive oil that had been adulterated 
with canola oil.\11\ The agency also took seizure action in 1997 
against Krinos Foods for using sunflower oil in place of olive oil, and 
in 2000 against Cheney Brothers Inc. for using sunflower and soybean 
oil in place of olive oil.\12\ FDA staff has advised us that the agency 
continues to follow up as resources permit on specific instances in 
which it has received information that ``olive oil'' products are 
adulterated with other vegetable oils.
---------------------------------------------------------------------------
    \11\ See Greco-Roman, Inc., Civil Action No. 96-1834 CIV-Davis 
(S.D. Fla. 1996).
    \12\ See FDA Enforcement Report for October 12, 2005, available at 
http://www.fda.gov/bbs/topics/enforce/2005/ENF000921.html.
---------------------------------------------------------------------------
    We recognize that the passing off of other vegetable oils as olive 
oil raises issues of economic harm to consumers and competition. It may 
also present potential health implications. We believe, however, that 
the FDA has the investigatory tools and enforcement powers best suited 
to address this problem. As in all matters involving our overlapping 
authority, the two agencies will coordinate closely to ensure effective 
enforcement.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Byron L. Dorgan to 
                       Hon. Deborah Platt Majoras
    Question 1. As we look to reauthorization legislation, can you tell 
me what your priority would be to include in the legislation? What 
would be the priorities of your fellow Commissioners?
    Answer. As noted in the Commission's September 12 testimony, the 
Commission continues to support the repeal of the telecommunications 
common carrier exemption to address the consumer protection challenges 
posed by technology convergence.
    Currently, the FTC Act exempts common carriers subject to the 
Communications Act from its prohibitions on unfair or deceptive acts or 
practices and unfair methods of competition. This exemption dates from 
a period when telecommunications were provided by government-
authorized, highly regulated monopolies. The exemption is now outdated. 
Congress and the Federal Communications Commission (``FCC'') have 
dismantled much of the economic regulatory apparatus formerly 
applicable to the industry, and in the current world, firms are 
expected to compete in providing telecommunications services. 
Technological advances have blurred the traditional boundaries between 
telecommunications, entertainment, and information. As the 
telecommunications and Internet industries continue to converge, the 
common carrier exemption can frustrate the FTC's ability to stop 
deceptive and unfair acts and practices and unfair methods of 
competition with respect to interconnected communications, information, 
entertainment, and payment services.
    Additional legislative priorities include: prohibiting brand name 
drug companies from paying generic companies not to compete at the 
expense of consumers, while allowing exceptions for those agreements 
that do not harm competition; ensuring that the Commission has 
authority to impose civil penalties in cases in which the Commission's 
traditional equitable remedies are inadequate, such as spyware and data 
security cases; and reauthorizing the National Do Not Call Registry 
and, if necessary, allowing for the permanent registration of phone 
numbers on the Registry.
    Commissioner Harbour states that her legislative priorities 
include: repeal of the common carrier exemption, in recognition of the 
convergence dynamic of today's high-tech economy, so the Commission can 
make even better use of its unique combination of competition and 
consumer protection expertise for the benefit of American consumers; 
legislation that would repeal the Leegin decision, to the extent it has 
created per se legality for vertical minimum price fixing agreements, 
and clarify the application of the rule of reason to distribution 
restraints in the wake of Leegin; legislation to ensure that consumers 
reap the full benefits of competition by generic drugs, including 
generic pharmaceuticals as well as follow-on biologics or biosimilars; 
and legislation granting authority over cigarette testing to one of the 
Federal Government's science-based public health agencies, and 
prohibiting the use of claims based on the inaccurate Cambridge Filter 
Method (also known as the ``FTC Method'') for testing tar and nicotine.
    Commissioner Leibowitz states his legislative priorities include 
consideration of the following: increasing FTC resources by ten to 
fifteen percent annually for the next 5 years, including adding fifty 
or more full-time equivalent employees (``FTEs'') each year; \1\ 
enhancing civil penalty authority, including authorizing the FTC to 
represent itself in civil penalty cases and authorizing the agency to 
seek civil penalties for certain violations of Section 5 of the FTC Act 
(where the FTC's equitable remedies are often inadequate to deter 
malefactors engaged in fraud); authorizing the FTC to promulgate rules 
under the Administrative Procedure Act to prohibit nonbank subprime 
mortgage brokers and financial service providers from engaging in 
unfair or deceptive acts or practices (the FTC Act's current ``Magnuson 
Moss'' rulemaking procedures are much more cumbersome and time-
consuming than APA procedures); repealing the FTC Act's exemption for 
telecommunications common carriers; authorizing the FTC to initiate 
civil actions under the FTC Act against ``aiders and abettors'' of 
consumer fraud (the FTC may prosecute those who knowingly assist and 
facilitate Telemarketing Sales Rule violations, such as electronic 
payment processors and lead list brokers, yet in some instances it can 
be more difficult to pursue enforcement action against similar aiders 
and abettors outside the telemarketing context); amending the FTC Act 
to limit appeals of Commission administrative orders to jurisdictions 
where respondents reside or have their principal place of business, or 
to the U.S. Court of Appeals for the D.C. Circuit (to prevent the 
rampant ``forum shopping'' that all too often occurs when a party 
appeals a Commission decision); and modifying the requirement for 
reports on concentration in the ethanol markets from annually to every 
5 years (all studies so far have shown that there is no market 
concentration). In addition, outside of the reauthorization, 
Commissioner Leibowitz's highest legislative priorities include: 
prohibiting brand name drug companies from paying their generic 
competitors to delay entering the market (such anti-competitive 
agreements cost both consumers and the Federal Government billions of 
dollars annually); and reauthorizing the Do Not Call Implementation 
Act, including providing for permanent registration of telephone 
numbers on the National Do Not Call Registry.
---------------------------------------------------------------------------
    \1\ Today, the FTC has only 1,074 FTEs, far fewer than 25 years 
ago. Yet in the last few years alone, Congress has passed a variety of 
important new laws that the FTC is charged with implementing and 
enforcing, e.g., the CAN-SPAM Act, the Fair and Accurate Credit 
Transactions Act, the Children's Online Privacy Protection Act, the 
Gramm-Leach-Bliley Act, and the U.S. SAFE WEB Act.
---------------------------------------------------------------------------
    Commissioner Kovacic states that his legislative priorities include 
legislation prohibiting reverse payments from brand name drug companies 
to generic companies and legislation to repeal the common carrier 
exemptions, particularly the telecommunications exemption.
    Commissioner Rosch states that he considers the following his 
legislative priorities: elimination of the requirement that consumers 
re-register for the Do Not Call Registry; enhanced civil penalty 
authority that would allow the Commission to pursue civil penalties 
under more circumstances and without providing a referral to the 
Department of Justice; elimination of the common carrier exemption; and 
prohibition of anticompetitive pharmaceutical patent settlements in 
which a brand drug effectively pays a generic drug to stay out of a 
market.

    Question 2. You say in your testimony that you ``would like to work 
with the Committee to help ensure that [your] reauthorization includes 
appropriate increases in resources to meet these growing challenges.'' 
In your testimony you do not state a specific number of employees that 
would be necessary for the FTC to be fully effective, and at the 
hearing you stated that it's difficult to bring in a large number of 
new staff. Could you not grow on an incremental basis over a number of 
years?
    Answer. In my testimony, I highlighted the difficulties that a 
small agency like the FTC faces when it seeks to absorb a large number 
of new employees at one time, in addition to replacing FTE lost due to 
normal attrition and retirement. There are, of course, significant 
costs associated with such hiring, including the expenses related to 
recruitment and interviewing, training, facilities, furnishings, 
desktops, and equipment. With the addition of programmatic FTE comes 
the necessary increase in human resources, technology, facilities and 
records management staff to support those new hires. Nonetheless, I 
believe the FTC can, and should, grow incrementally, and I anticipate 
that the agency will need an additional approximately 100 FTE over the 
next five fiscal years to meet workload demands.
    The FTC continues to face a demanding merger review workload as the 
volume of merger activity has increased significantly since FY 2004. 
Based on current trends, the FTC expects the high volume of merger work 
to continue to FY 2009 and beyond. The FTC needs to ensure that it has 
sufficient staff and resources to meet an increasing number of merger 
investigations. Identifying and stopping anticompetitive conduct also 
is a priority, and the FTC will continue to pursue aggressively 
nonmerger matters, particularly in the health care, pharmaceutical, 
energy, technology, and real estate sectors. The FTC also is committed 
to promoting convergence in competition policy so that foreign 
enforcement practices do not unfairly burden U.S. businesses and 
consumers participating in foreign markets. In sum, the FTC wants to 
make sure that it has the authority, personnel, systems support, and 
resources needed to ensure that it can vigorously protect American 
consumers and promote a robust and vibrant marketplace free of 
anticompetitive mergers and anticompetitive business practices. It also 
must have the necessary resources to educate consumers and businesses 
about the importance of competition and to conduct research and studies 
on complex legal and economic issues used in developing antitrust 
policy.
    On the consumer protection side, over the course of the past few 
years, Congress has enacted a number of new laws that charge the FTC, 
at least in part, with their implementation and enforcement, including 
the CAN-SPAM Act, the Fair and Accurate Credit Transactions Act, the 
Children's Online Privacy Protection Act, the Gramm-Leach-Bliley Act, 
and the U.S. SAFE WEB Act. The FTC needs sufficient staff to meet these 
added obligations, as well as its continuing strategic goal to prevent 
fraud, deception, and unfair business practices in the marketplace. The 
FTC is committed to protecting consumers from unfair and deceptive 
practices in the financial services sector (mortgage lending and debt 
collection), the burgeoning area of ``green'' marketing, and with 
respect to the marketing and advertising of food to children. The 
agency will work hard to fight spam and spyware, and to understand and 
anticipate other high tech tools fraudsters have yet to exploit. The 
FTC wants to ensure that consumers are fully protected in the areas of 
privacy and identity theft and with respect to deceptive and unfair 
practices in mobile marketing. The agency intends to exploit the tools 
it has been afforded under the U.S. SAFE WEB Act to work with its 
foreign partners in combating cross-border fraud and to improve 
compliance with FTC orders. Finally, history has proven the value of a 
robust consumer education program to support each of our consumer 
protection enforcement initiatives. Accordingly, the FTC expects to 
expand dramatically efforts to keep U.S. consumers abreast of the many 
challenges posed by unscrupulous marketers in the marketplace.
    Each of these programmatic areas and the many agency-wide 
initiatives described more fully in my testimony before the Committee, 
of course, require support in the areas of information technology, 
human resources, financial management, facilities expansion, equal 
employment opportunities, and records management.
    I believe the FTC can meet these new and ongoing challenges with 
incremental staff growth and an overall staff increase over the next 
five fiscal years of approximately 100 FTE. The FTC will also need 
significant investment in information technology to: (1) support a more 
fully developed disaster recovery plan; (2) modernize large segments of 
FTC network infrastructure; (3) provide for increased computer storage 
capacity for e-filing and e-discovery; (4) upgrade litigation support 
tools and contract for forensic acquisition support; and (5) modernize 
FTC business systems components to improve financial management. With 
any increase in FTE, of course, comes a concomitant increase in cost 
for space/rent, furnishings, desktops, and equipment.

    Question 3a. I have seen reports about Comcast cutting off the 
service of some of its customers who it alleges have used too much 
bandwidth, despite the fact that they advertise unlimited service. This 
sounds like a case of deceptive advertising (and a poor business 
practice). Is this something the FTC will be investigating?
    Answer. Without commenting on the practices of a particular 
company, I can assure you that if an Internet service provider 
misrepresents, or fails to disclose, material aspects of its services 
in advertising or marketing to consumers, it would be liable for 
violations of Section 5 of the Federal Trade Commission Act, which 
prohibits unfair and deceptive acts and practices.
    For over a decade now, the FTC has enforced the consumer protection 
and antitrust laws in numerous matters involving Internet access. In 
particular, the FTC has investigated and brought enforcement actions 
against ISPs for allegedly deceptive marketing, advertising, and 
billing of Internet access services. The FTC will continue to work to 
protect consumers in the important area of Internet access.

    Question 3b. If this were a phone company classified as a common 
carrier, and not Comcast, could the FTC have trouble taking action due 
to the common carrier exemption?
    Answer. That is entirely possible. On the one hand, there should 
not be any jurisdictional obstacle to enforcement of the FTC Act 
against a telephone company that is offering broadband Internet access, 
because an entity is a common carrier only with respect to services 
that it provides on a common carrier basis. Because broadband Internet 
access provided by a wireline, facilities-based entity, such as a 
telephone company (as in your example in part (b) above), is not 
provided on a common carrier basis, such access is subject to the FTC's 
general competition and consumer protection authority. On the other 
hand, in practice, as a result of the common carrier exemption, the 
issue of jurisdiction is often raised and litigated--even when FTC 
jurisdiction appears to be clear.\2\ In such cases, the FTC is forced 
to expend substantial time and resources litigating a jurisdictional 
question, rather than enforcing the FTC Act, potentially at the expense 
of consumers.
---------------------------------------------------------------------------
    \2\ See, e.g., Federal Trade Commission Staff, Broadband 
Connectivity Competition Policy 40-41 (June 2007) [hereinafter 
Broadband Report], available at http://www.ftc.gov/reports/broadband/
v070000report.pdf (discussing enforcement difficulties posed by the 
common carrier exemption).

    Question 4. Do you believe the FTC should investigate whether the 
broadband providers' advertised speeds are the actual speeds or if 
consumers are getting overcharged and deceived?
    Answer. As noted above, for more than a decade, the FTC has 
monitored the practices of Internet service providers and brought cases 
where we believe ISPs have engaged in deceptive marketing, advertising, 
and billing practices. As increasing numbers of U.S. consumers have 
chosen to subscribe to broadband services, the FTC has been closely 
monitoring the claims made by broadband providers in marketing their 
services to consumers. With respect to the issue of speed claims, last 
spring we issued a staff report on Broadband Connectivity Competition 
Policy, which noted that ``speed is one of the primary qualitative 
features on which broadband providers are competing.'' \3\ Therefore, 
it is important that any claims about speed made by Internet service 
providers be truthful and accurate. The FTC will investigate whether 
broadband providers are making claims about speed that violate FTC 
consumer protection laws.
---------------------------------------------------------------------------
    \3\ Id. at 131.

    Question 5a. Verizon has been cutting their copper wire after they 
switch their customers to fiber. This ensures that another competing 
company cannot offer service over this old wire. Would the FTC 
investigate this anti-competitive practice?
    Answer. Again, without commenting on the practices of a particular 
company, the FTC will continue to enforce the antitrust and consumer 
protection laws in the Internet access area. Whether Verizon's alleged 
practices are anti-competitive under the Federal antitrust laws is a 
question that I cannot answer in the abstract. As a general matter, the 
antitrust laws do not require a company to provide access to its 
proprietary facilities to its competitors.\4\ In any case, the FTC will 
continue to enforce the antitrust laws in the Internet access area--as 
it does in other areas within its jurisdiction--by carefully analyzing 
the competitive effects of particular conduct and business arrangements 
within properly defined relevant markets.
---------------------------------------------------------------------------
    \4\ See, e.g., Verizon Communications Inc. v. Law Offices of Curtis 
v. Trinko, LLP, 540 U.S. 398 (2004).

    Question 5b. Would the common carrier exemption prevent the FTC 
from handling this?
    Answer. As indicated in my response to number three above, the FTC 
has jurisdiction over the provision of broadband Internet access. 
However, the FTC may encounter enforcement difficulties in this 
situation due to the fact that, as a result of the common carrier 
exemption, the FTC would have jurisdiction to address potential 
consumer ha= resulting from this practice in the provision of broadband 
Internet access but not in the provision of common carrier voice 
service, both of which may be transmitted over the same copper wire.

    Question 6. You argue, along the talking points of the incumbent 
broadband providers, that nondiscrimination rules are not necessary 
because the broadband market is so competitive. Does the FTC currently 
have sufficient tools to even accurately determine whether Americans 
have access to broadband?
    Answer. In the report, Broadband Connectivity Competition Policy, 
FTC staff observed that, on a national scale, the broadband market 
appears to be moving in the direction of more, not less, competition, 
as evidenced by fast growth in consumer demand for broadband, 
increasing access speeds, declining prices (particularly speed- or 
quality-adjusted prices), and new entrants poised to challenge the 
incumbent cable and telephone companies.\5\ The report, however, did 
not conclude that any particular local broadband market regardless of 
how such market may be defined--is competitive.\6\ In any case, the 
report acknowledged the existence of substantial agreement on the part 
of both proponents and opponents of network neutrality regulation that 
increased competition in the broadband area would benefit consumers. 
Based in part on this and other factors suggesting that the broadband 
marketplace remains a dynamic, unsettled environment, the report 
counseled caution in evaluating proposals to enact regulation at this 
time.
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    \5\ See Broadband Report, supra note 757, at 155-56.
    \6\ Id. at 156 (``This Report and the findings herein do not 
reflect a case-by-case analysis of the state of competition in each of 
the localities that may represent relevant markets under the antitrust 
laws.'').
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    The FTC has not engaged in a broad inquiry into the state of 
broadband infrastructure deployment throughout the United States. 
However, in implementing its statutory mandate, the Federal 
Communications Commission periodically assesses and reports on the 
state of such deployment. I understand that you are cosponsoring 
legislation that would, among other things, require the FCC to revise 
its methods for assessing broadband deployment.\7\
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    \7\ Broadband Data Improvement Act, S. 1492, 110th Cong. (2007).
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    Regarding the application of the antitrust and consumer protection 
laws to specific conduct and business arrangements, the FTC currently 
has sufficient tools to investigate and determine whether violations of 
such laws may be occurring. In fact, the FTC will work to ensure 
competition and protect consumers in the broadband Internet access 
marketplace.

    Question 7. I understand the Consumer Product Safety Commission is 
overwhelmed right now with unsafe products and recalls. Can you tell me 
the history of how the Consumer Product Safety Commission grew out of 
the Federal Trade Commission? And are there areas where the FTC has 
Jurisdiction and could step in to help to ensure consumers are not 
being deceived or that products are accurately labeled?
    Answer. Following a report by the National Commission on Product 
Safety, in 1972, Congress created the CPSC with the specific mission of 
protecting consumers against unreasonable risk of injury from hazardous 
products.\8\ In so doing, Congress transferred authority from a number 
of existing Federal agencies, including the then-Department of Health, 
Education and Welfare, the Department of Commerce, the Environmental 
Protection Agency (``EPA''), as well as the FTC, to the CPSC.\9\ From 
the FTC specifically, the CPSC received only the Commission's authority 
relating to flammable fabrics and refrigerator safety.\10\
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    \8\ Consumer Product Safety Act, Pub. L. 92-573 (1972), H.R. Conf. 
Rpt. No. 92-1593 (1972), reprinted in 1972 U.S.C.C.A.N. 4596; see also 
www.cpsc.gov/about/faq.html (visited Oct. 18, 2007); Testimony of Hon. 
Nancy A. Nord, Acting Chairman, U.S. Consumer Product Safety 
Commission, before the Senate Subcommittee on Consumer Affairs, 
Insurance, and Automotive Safety, Oct. 4, 2007 (available at http://
commerce.senate.gov/public/index.cfm?FuseAction=Hearings
.Testimony&Hearing_ID=1902&Witness_ID=4134).
    \9\ Consumer Product Safety Act, Pub. L. 92-573,  30, reprinted in 
1972 U.S.C.C.A.N. at 4621-4622.
    \10\ Id. at  30(c), (d), 1972 U.S.C.C.A.N. at 4621.
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    Congress directed the CPSC to protect the public against physical 
injury and harm. The CPSC's tools are directly focused on ensuring that 
products introduced into the stream of commerce and used by consumers 
are not unreasonably hazardous. These tools include issuance and 
enforcement of mandatory safety standards, product bans where adequate 
safety standards cannot be developed, and recalls of products already 
in the marketplace or purchased. Its jurisdiction applies specifically 
and strictly to consumer product safety.\11\
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    \11\ See www.cpsc.gov/about/faq.html (visited Oct. 18, 2007).
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    Although the FTC also works to protect consumers, it plays a 
different role than. the CPSC. The FTC is primarily a law enforcement 
agency whose statutory authority allows us to take action against 
``unfair or deceptive acts or practices in or affecting commerce.'' 15 
U.S.C.  45(a) (``Section 5''). A representation, omission, or practice 
is deceptive if (1) it is likely to mislead consumers acting reasonably 
under the circumstances; and (2) it is material--that is, likely to 
affect consumers' conduct or decisions with respect to the product at 
issue.\12\ An act or practice is unfair if the injury to consumers it 
causes or is likely to cause (1) is substantial; (2) is not outweighed 
by countervailing benefits to consumers or to competition; and (3) is 
not reasonably avoidable by consumers themselves.\13\
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    \12\ Stouffer Foods Corp., 118 F.T.C. 746, 798 (1994); Kraft, Inc., 
114 F.T.C. 40, 120 (1991), aff'd and enforced, 970 F.2d 311 (7th Cir. 
1992), cert. denied, 113 S. Ct. 1254 (1993); Cliffdale Assocs., 103 
F.T.C. 110, 164-65 (1984); see generally Federal Trade Commission 
Policy Statement on Deception, appended to Cliffdale Assocs., 103 
F.T.C. at 174-83.
    \13\ 15 U.S.C.  45(n); see also generally Federal Trade Commission 
Policy Statement on Unfairness, appended to International Harvester 
Co., 104 F.T.C. 949, 1070-76 (1984).
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    Accordingly, the FTC has taken action against deceptive advertising 
and labeling \14\ of products, including deceptive claims that a 
product is safe.\15\ In addition, in particular factual circumstances, 
the Commission has challenged the failure to disclose safety risks as 
an unfair practice.\16\ The Commission's actions can result in 
consumers' receiving accurate and important information. However, the 
CPSC is the agency tasked with addressing products that pose 
unacceptable safety risks and keeping them out of the hands of 
consumers.
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    \14\ With respect to certain products, the FTC shares jurisdiction 
over labeling with other agencies. For example, for more than 30 years 
the FTC and FDA have operated under a Memorandum of Understanding that 
gives primary responsibility over the advertising of food, over-the-
counter drugs, medical devices, and cosmetics, to the FTC, and primary 
responsibility over labeling of these products to FDA.
    \15\ See, e.g., FTC v. National Urological Group, Inc., Civ. No. 
1:04-CV-3294 (N.D. Ga. Nov. 10, 2004) (challenging safety claims for 
dietary supplements containing ephedra and yohimbine, which in fact 
create safety risks by increasing blood pressure); FTC v. Christopher 
Enterprises, Inc., Civ. No. 2:01 CV-0505ST (D. Utah Nov. 29, 2001) 
(challenging safety claims for products containing comfrey, when in 
fact internal use or application to external wounds can cause serious 
liver damage; consent order required warning to consumers); Panda 
Herbal Intl, Inc., C-4018 (F.T.C. 2001) (consent order) (challenging 
marketing claim that dietary supplement could be used safely to treat 
diseases such as HIV/AIDS, when in fact St. John's Wort ingredient has 
potentially dangerous interaction with drugs used to treat HIV/AIDS; 
settlement required warning on product); FTC v. Figgie, Inc., 994 F.2d 
595 (9th Cir. 1993) (challenging representations that heat detectors 
provided sufficient warning in residential fires to allow occupants to 
escape safely, and responded more quickly than smoke detectors to hot, 
flaming fires).
    \16\ E.g., Consumer Direct, Inc., 113 F.T.C. 923 (1990) (consent 
order) (challenging failure to disclose that ``Gut Buster'' product, a 
spring-tension exercise device, could break and cause serious injury to 
user; requiring marketer to notify purchasers regarding serious safety 
risk); International Harvester Co., 104 F.T.C. 949, 1056 (1984) 
(challenging failure to disclose risk that fuel caps on tractors could 
result in geyser of hot fuel and severe injury or death to tractor 
operator).

    Question 8. The FTC identified ads with claims for very low monthly 
payment amounts or interest rates, without adequate disclosure of other 
important loan terms. And the FTC is now advising more than 200 
advertisers and media outlets that some mortgage ads are potentially 
deceptive or in violation of the Truth in Lending Act. Your letters are 
a good step, but I wonder what more the FTC could have done or could do 
in the future.
    Answer. The Commission takes deceptive mortgage advertising very 
seriously, and has undertaken several initiatives to address it. Of 
course, the FTC can and will do more to address deceptive mortgage 
advertising. We continue to monitor the marketplace and will take 
enforcement action as appropriate.
    The FTC has developed a multi-pronged approach to address mortgage 
deceptive advertising concerns. First, as you note, the Commission 
recently advised over 200 advertisers and media outlets that some 
mortgage ads with claims for very low monthly payment amounts or 
interest rates, without adequate disclosure of other important loan 
terms, are potentially deceptive or in violation of the Truth in 
Lending Act. Letters to advertisers are advising them to review their 
ads, and to read business and consumer education materials on the FTC's 
website to learn about relevant laws and requirements. Letters to media 
outlets are advising them about the potentially deceptive advertising, 
with guidance on screening ads for questionable claims.
    Second, the Commission has brought and will continue to bring 
appropriate cases against mortgage advertisers who violate Section 5 of 
the FTC Act or the Truth in Lending Act. In the last decade, the agency 
has brought 21 actions alleging deceptive or unfair practices against 
companies in the mortgage lending industry, focusing in particular on 
the subprime market. Several of these landmark cases have resulted in 
large monetary judgments, collectively returning more than $320 million 
to consumers. We are continuing our law enforcement activity, with 
several non-public investigations involving mortgage advertisers who 
may have violated the FTC Act or the Truth in Lending Act.
    Third, to help consumers recognize deceptive mortgage ads, the 
Commission has published a Consumer Alert, ``Deceptive Mortgage Ads: 
What They Say; What They Leave Out.'' The brochure alerts consumers 
about mortgage ads that offer low rates or payments without disclosing 
the true terms of the deal as the law requires. In addition, this June, 
the Commission issued a brochure for consumers facing the possibility 
of losing their home because they cannot make their mortgage payments, 
and warning them about foreclosure scams. These new publications, as 
well as several previously released materials are available online at 
www.ftc.gov.\17\
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    \17\ See, e.g., Mortgage Servicing: Making Sure Your Payments 
Count, available at http://www.ftc.gov/bcp/edu/pubs/consumer/homes/
rea10.shtm. Home Equity Loans: Borrowers Beware!, available at http://
www.ftc.gov/bcp/edu/pubs/consumer/homes/rea11.shtm.

    Question 8a. Mr. Calhoun testified of no disclosure of escrow 
requirements and no disclosure of the penalty for not showing a proof 
of income. How can the FTC help in this area?
    Answer. The Commission believes that it is critical for consumers 
to understand the terms of their loans and the implications of these 
terms. Subprime borrowers can make better-informed decisions if they 
are made aware that their mortgage payments will not include an amount 
to be placed in escrow for taxes and insurance and that therefore they 
will have to pay these amounts themselves. Subprime borrowers similarly 
can make better-informed decisions if they understand that their 
mortgage payments are higher than they otherwise would have been 
because they have not been required to document their income.
    The FTC uses two primary means to help subprime borrowers who do 
not receive this information. First, in some factual circumstances, a 
lender's failure to disclose information related to escrows and no-
documentation loans may be an unfair or deceptive act or practice in 
violation of Section 5 of the FTC Act,\18\ and the FTC can commence a 
law enforcement action to challenge those acts and practices. For 
example, the FTC has brought enforcement actions against brokers and 
lenders who represented to consumers that their monthly payment 
included amounts for a tax and insurance escrow, when it did not.\19\ 
More generally, the Commission has been aggressive in challenging 
unfair or deceptive acts and practices in mortgage lending, focusing in 
particular on the subprime market.\20\ Second, the FTC engages in 
substantial consumer education efforts to assist subprime borrowers in 
understanding the terms of their loans and the implications of these 
terms so that they can make better-informed decisions.
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    \18\ An act or practice is deceptive if (1) there is a 
representation or omission of information that is likely to mislead 
consumers acting reasonably under the circumstances; and (2) that 
representation is material to consumers. See generally Federal Trade 
Commission Policy Statement on Deception, appended to Cliffdale 
Assocs., 103 F.T.C. 110, 174-83 (1984). An act or practice is unfair if 
(1) it causes, or is likely to cause, substantial injury to consumers; 
(2) the injury is not reasonably avoidable by consumers; and (3) the 
injury to consumers is not outweighed by countervailing benefits to 
consumers or to competition. 15 U.S.C.  45(n).
    \19\ FTC v. Mortgages Para Hispanos.Com Corp., No. 06-00019 (E.D. 
Tex. 2006); 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).
    \20\ The Commission's June 13, 2007 testimony before the House 
Committee on Financial Services described in detail the agency's 
activities in the financial services sector. The Commission's statement 
is available at www.ftc.gov/os/2007/06/070613statement.pdf.
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    The Commission also notes that the Federal Reserve Board (FRB) is 
considering escrow and no-documentation loans issues in its ongoing 
rulemaking under the Home Ownership and Equity Protection Act.\21\ The 
FRB has said that it intends to take action by the end of the year. The 
FTC will monitor developments in this area, and will consider what 
changes, if any, should be made to its strategy to help subprime 
borrowers make better-informed choices in this context.
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    \21\ Home Equity Lending Market; Notice of Hearings, 72 Fed. Reg. 
30380 (May 31, 2007).

    Question 8b. If you had the authority to create rules of disclosure 
in this area, what could you do?
    Answer. Federal agencies other than the Commission currently have 
the authority to promulgate rules specifying mortgage disclosure 
requirements. These rules are for the entire industry and are 
enforceable by all relevant agencies. The FRB has responsibility for 
disclosure of certain loan costs under the Truth in Lending Act.\22\ 
The Department of Housing and Urban Development (HUD) also has 
responsibility for disclosure of settlement costs under the Real Estate 
Settlement Procedures Act.\23\ I believe that the public interest would 
be best served if the FRB and HUD continued in their role of 
promulgating and implementing mortgage disclosure rules, including any 
reforms that are needed, rather than having the FTC impose additional 
mortgage disclosure requirements.
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    \22\ 15 U.S.C.  1604.
    \23\ 12 U.S.C.  2603-04.
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    It has been recognized for many years that federally-required 
mortgage disclosures need to be improved. In 1996, Congress directed 
the FRB and HUD to simplify and improve mortgage disclosures and create 
a single mortgage disclosure form.\24\ The FRB and HUD provided 
Congress with formal recommendations for mortgage disclosure reform in 
1998.\25\ Since that time, various parties have advanced other 
proposals for improving mortgage disclosures, including substantial 
efforts to develop a single mortgage disclosure form.
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    \24\ Economic Growth and Regulatory Paperwork Reduction Act of 1996 
(Pub. L. 104-208, 110 Stat. 3009), Section 2101.
    \25\ Joint Report to the Congress Concerning Reform to the Truth in 
Lending Act and the Real Estate Settlement Procedures Act (July 1998).
---------------------------------------------------------------------------
    Nevertheless, the Commission has a role to play in mortgage 
disclosure reform. Building on prior work, the FTC staff has used its 
expertise in consumer research methodology to test mortgage disclosures 
to determine which convey to consumers the information they need to 
make better-informed decisions. In particular, the Commission's Bureau 
of Economics (``BE'') recently conducted a study of mortgage lending 
disclosures that examines how consumers search for mortgages, how well 
consumers understand current mortgage cost disclosures and the terms of 
their own recently obtained loans, and whether better disclosures could 
improve consumer understanding of mortgage costs, consumer shopping for 
mortgage loans, and consumers' ability to avoid deceptive lending 
practices. The BE research included thirty-six in-depth interviews with 
recent mortgage customers, and quantitative testing with over 800 
mortgage customers to explore their understanding of mortgage costs and 
terms disclosed in both current forms and a prototype disclosure form 
developed for the study.
    The BE study found that: (1) the current federally required 
disclosures fail to convey key mortgage costs to many consumers; (2) 
the prototype disclosures developed by the FTC staff significantly 
improved consumer recognition of mortgage costs; (3) both prime and 
subprime borrowers failed to understand key loan terms when viewing the 
current disclosures, and both benefited from improved disclosures; and 
(4) improved disclosures provided the greatest benefit for more complex 
loans, for which both prime and subprime borrowers had the most 
difficulty understanding loan terms. The study also suggests that, in 
actual market transactions, subprime borrowers may face even greater 
difficulties understanding their loan terms than found in the study, 
and may benefit the most from improved disclosures. The study results 
are consistent with the FTC's view that consumer testing often is 
critical in the development and evaluation of consumer disclosures.
    Comprehensive mortgage disclosure reform is needed. The best role 
for the FTC in enhancing the mortgage disclosures consumers receive is 
not to issue more mortgage disclosure rules but to assist the Federal 
agencies who have issued such rules in revising and developing better 
disclosures. In particular, the FTC can assist in providing its 
expertise to determine whether proposed disclosures under development 
would be effective. The Commission would be pleased to work with the 
FRB and HUD in their efforts to improve mortgage disclosures.

    Question 8c. Do you agree with Mr. Calhoun that Section 5 of the 
FTC Act should be expanded related to mortgage lending? He believes 
this would enhance the capacity for appropriate Federal regulatory 
response. What expansion would you seek?
    Answer. Mr. Calhoun testified that Section 5 of the FTC Act should 
be expanded so that the FTC had jurisdiction over banks. While the 
Commission has an important role in ensuring compliance with the FTC 
Act for financial services companies that are not banks, it does not 
have experience in applying Section 5 to banks themselves. The Federal 
banking regulators, which closely supervise the banks, thrifts and 
credit unions under their respective jurisdictions, have broad 
expertise with respect to those depository institutions. I believe the 
public interest is best served if the Federal banking agencies continue 
to have jurisdiction over those institutions under Section 5.

    Question 9. In May, this committee passed important price gouging 
legislation. One of those tools would give the President the authority 
to declare a national energy emergency and makes it illegal for any 
supplier to sell, or offer to sell, crude oil, gasoline, or petroleum 
distillates at an excessive price for use in the emergency declared 
area. I understand that the FTC opposes that additional authority. Why?
    Answer. Federal antitrust law is designed to prevent the abuse of 
private market power that may empower sellers to charge prices other 
than those that they would charge in a competitive market. This is 
based on the long-standing premise that competition--and market 
prices--provide the best choices in quantity, quality, and prices of 
goods and services for consumers. Thus, law makers should hesitate to 
make it illegal for sellers to charge a price that results from the 
interplay of market conditions--even if that price may seem high.
    During times of unusual product shortage--such as occurred in many 
parts of the country after Hurricanes Katrina and Rita, and undoubtedly 
will occur in a period of any significant emergency--market prices will 
rise as demand temporarily outstrips supply. These rising prices help 
clear the market--that is, equalize supply and demand--without the need 
to resort to long lines or other inefficient methods of product 
allocation. Indeed, high or rising prices provide the incentive for 
suppliers to take the financial risk to bring extra product into the 
affected market--as the petroleum companies did by shipping additional 
supplies of gasoline from Europe and other foreign locations into the 
United States after the 2005 hurricanes--while encouraging consumers to 
conserve gasoline by forgoing or postponing unnecessary automobile 
trips while product is short. Any price gouging law runs the risk of 
dulling both of those incentives and exacerbating and prolonging the 
emergency conditions.
    I would anticipate especially serious consequences from any price 
gouging legislation that failed to take account of factors addressing 
costs and market conditions. Such legislation would severely restrict 
price flexibility in times of market disruption stemming from a natural 
disaster. This could extend the period of supply/demand imbalance 
beyond what it would have been if businesses were able to price 
according to market conditions. In addition, some price increases by 
firms in the face of temporary product shortages are reasonable or even 
necessary for the firms; even some advocates of price gouging 
legislation have recognized that a wholesaler or retailer needs to 
recover its increased costs and must be able to respond to unusual 
market conditions. Any legislation that prohibits ``excessive'' prices 
without allowing for increased costs (including reasonably anticipated 
replacement costs) or temporary market dislocations may have especially 
harmful effects in emergency conditions.
    Another problem raised by price gouging legislation is how to 
define the offense clearly so that wholesalers and retailers can comply 
with the law--especially when such firms face potential criminal 
penalties for violating the prohibition against gouging. Because price 
flexibility is crucial for the efficient functioning of the economy 
(perhaps even more so during emergency disaster periods), defining an 
offense of price gouging has proved particularly challenging. Price 
gouging legislation would entail the difficult policy decision of how 
to draw a line between legal and illegal conduct--particularly conduct 
subject to criminal sanctions--in an area where any line is difficult 
to discern and where it is important not to discourage conduct that 
ultimately is benign or procompetitive, and in particular where such 
conduct may help to alleviate shortage conditions.
    Although it is impossible to predict exactly how affected 
businesses may react, price gouging legislation that does not define 
the violation clearly or does not account for increased costs or market 
conditions may impel firms--especially small businesses lacking 
sophisticated legal counsel, such as many gasoline retailers--to shut 
down temporarily or stay out of the affected market rather than risk 
violating the price gouging statute, especially if the offense is 
punishable as a serious crime and offenders are subject to imprisonment 
and large fines. That result would benefit no one.

    Question 10. I have noted in Mr. Cooper's testimony an interesting 
line of argument from this Administration and from industry. Prices go 
up because of a list of seemingly reasonable unnatural events. This 
includes fires floods, hurricanes, and other events. Other surprises 
include a larger than expected driving season, increased consumer 
demand, refinery outages, the increased price of ethanol, and more.
    a. If industry continues to consolidate to capture a larger and 
larger share of the market and then we experience consistent 
``surprises'' that impact prices, is there not something about this 
situation that is more systemic that the FTC needs to investigate and 
act on?
    b. What is it about the nature of this oil and gas industry that we 
simply accept these price fluctuations due to ``surprises'' as 
business-as-usual?
    Answer. In addition to reviewing all major petroleum industry 
mergers, Commission staff has looked at both merger and nonmerger 
issues at all levels of the petroleum industry and published their 
findings in a series of reports that help explain the workings of the 
industry.\26\ The empirical work contained in these reports forms a 
picture of an industry that has restructured substantially in recent 
years, as well as an FTC program of vigorous antitrust enforcement that 
has maintained competition as that process unfolded.
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    \26\ In 2004, the FTC's Bureau of Economics published the third in 
a series of reports on mergers in the petroleum industry. In 2005, the 
Commission issued a report on the factors that determine the prices of 
gasoline. In May 2006, the Commission delivered its report to Congress 
on its investigation of possible gasoline price manipulation and the 
pricing of gasoline following Hurricane Katrina. And in August 2007, 
the Commission delivered to the President a report on the causes of 
gasoline price increases during the spring and summer of 2006. In 
addition, the Commission's economists have conducted several petroleum 
industry merger retrospectives and have engaged in individual research 
on pricing and other competition issues in the industry.
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    Our economists' work demonstrates that, despite some increases over 
time, concentration for most levels of the U.S. petroleum industry has 
remained low to moderate, and there is compelling evidence that the 
industry has become more efficient in recent years, to the ultimate 
benefit of consumers. For example, economies of scale have become 
increasingly significant in shaping the petroleum industry. The United 
States has fewer refineries than it had 20 years ago, but the average 
size and efficiency of refineries have increased, along with the total 
output of refined products. Overall crude oil distillation capacity in 
the U.S. petroleum. industry increased from 15.3 million barrels per 
day in 1996 to 17.1 million barrels per day in 2005--equivalent to the 
addition of approximately 15 average-sized refineries. Moreover, today 
the petroleum industry is less vertically integrated than in past 
years. Several significant refiners have no crude oil production, and 
integrated petroleum companies today tend to depend less on their own 
crude oil production, while a number of independent retailers purchase 
refined products on the open market. Finally, some significant 
independent refiners have built market share by acquiring refineries 
that were divested from integrated majors pursuant to FTC enforcement 
orders.
    Despite these efficiency gains, there are two fundamental reasons 
why unpredictable market disruptions--such as fires, floods and 
hurricanes may cause large swings in the prices of refined petroleum 
products. First, consumer demand for gasoline and other petroleum 
products is highly inelastic. That means that, on average, consumers do 
not reduce demand much when prices for these goods rise, particularly 
in the short run, because many consumers lack adequate short-run 
substitutes for gasoline to power their cars. This facet of consumer 
demand can lead to sharply higher prices during periods of market 
disruption. Illegal conduct does not have to be present for this 
phenomenon to occur. Moreover, in the case of refined petroleum 
products, variability in the prices of key inputs--crude oil since the 
1970s, and ethanol more recently--has contributed significantly to 
fluctuations in the prices of gasoline and other refined products. 
Refiners, however, have no significant control over crude oil and 
ethanol markets.
    Second, the supply of refined products also is inelastic in the 
short run. Therefore, over a short period of time, it is costly or 
difficult to increase output significantly in response to higher 
prices. Redundant facilities and systems are expensive to build and 
maintain, and modem business practice is to keep inventories low in 
order to enhance efficiency (thereby keeping prices lower because 
maintaining inventory is expensive). These factors sometimes impose 
limitations on the responsiveness of supply all along the distribution 
chain immediately following market disruptions. Thus, when an 
unexpected contingency occurs--such as a pipeline break, a disruption 
in the supply of crude oil from a foreign country, or an extreme 
weather event--it may take some time for the distribution system to 
adjust and supply product in alternative ways so as to bring prices 
down. Similarly, when demand is stronger than anticipated, it takes 
time for refiners to readjust their output slates and production 
schedules in response to higher prices, for additional shipments to 
flow from one part of the country to another, or for imports to arrive 
from abroad. For example, it takes several weeks for pipeline shipments 
from Gulf Coast refineries to reach the Midwest. One way to eliminate 
this problem might be to require building additional capacity, or to 
require higher inventory levels that would be available during 
disruptions even if they sat idle during normal times. But these would 
be expensive strategies, particularly because, even if there are many 
unexpected contingencies every year, they do not occur in a smooth and 
predictable pattern; rather, they tend to affect different areas, have 
differing effects, and last different lengths of time. To be sufficient 
to eliminate price spikes stemming from all of these contingencies, 
additional capacity or inventory levels would need to be adequate to 
handle all possible events at all locations and times. Thus, in return 
for a damping of price spikes during emergencies, consumers would 
experience higher prices over the longer term stemming from the need to 
cover the costs of these redundancies.
    Of course, the fact that supply and demand conditions in the oil 
and gas industry can give rise to significant price fluctuations in 
response to a natural disaster, other potential disruptions, or input 
cost changes does not necessarily mean that pricing in this industry 
uniformly results from competitive forces. Nevertheless, previous FTC 
studies of specific periods of relatively high gasoline prices, or of 
possible price manipulation more generally, did not uncover evidence of 
conduct that might be actionable under the antitrust laws or of 
inappropriate conduct that might have arisen from industry 
consolidation. Although the results of those past studies do not 
guarantee that future examinations of pricing in the industry would 
reach the same conclusions, there is no question that a careful 
investigation will always be a prerequisite to properly ascertaining 
the causes of unusual price movements.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                       Hon. Deborah Platt Majoras
    Question 1. The National Do Not Call Registry has been incredibly 
successful. However, this success hasn't really migrated over to other 
areas under the FTC jurisdiction--primarily with identity theft and 
SPAM e-mails. Approximately 15 million Americans were victimized by 
some sort of identity-theft related fraud during a twelve month period 
ending in mid-2006. And an estimated 12.4 billion spam e-mails are sent 
a day, which clog our inboxes and waste our time due to reading and 
deleting them.
    Why this disparity--why has the DNC registry been so successful in 
curtailing unwanted telemarketing calls but yet other laws in place and 
the enforcement of those laws have not produced similar results with 
identity theft and SPAM e-mails?
    Is it primarily the Commission's limited ability to seek civil 
penalties as you mention in your testimony or are there additional 
factors that exist?
    What additional resources are necessary to curtail the growing 
trends of these activities--the number of identity theft victims has 
increased 50 percent over a 3 year period and SPAM e-mails are expected 
to increase over 60 percent from 2006 to 2007?
    Answer. The National Do Not Call Registry has significantly reduced 
the number of unwanted telemarketing calls received by consumers. Its 
success hinges on high compliance rates and effective enforcement 
against those who illegally place calls to registered telephone 
numbers. Unfortunately, spam and identity theft present far more vexing 
problems for which there is no simple solution.
Spam
    Unlike in telemarketing, where the Commission can more readily 
identify the telemarketer or seller responsible for a telephone call, 
spammers use a variety of techniques to hide their identities, 
including spoofing (the falsification of an e-mail's header 
information), open relays (unsecured mail servers through which 
spammers can have their messages forwarded), open proxies 
(misconfigured servers that permit unauthorized users to send mail as 
if it is originating from the misconfigured server), and zombie drones 
(computers infected with malware that causes the computers to become 
part of a botnet through which spam can be sent). Each of these 
spamming techniques makes it difficult, if not impossible, to identify 
spammers through e-mail headers and significantly impedes law 
enforcement.
    To combat the threat of spam, the Commission has been a leading 
advocate of domain-level authentication technologies that would help 
ISPs and law enforcement identify the domain from which an e-mail was 
sent. While not a panacea, these technologies could vastly improve the 
effectiveness of other anti-spam technologies (such as reputation and 
accreditation services) and hold significant promise in reducing the 
effectiveness of phishing campaigns. The Commission is encouraged that 
these technologies are beginning to be widely deployed.
    In addition, spam can be sent from anywhere in the world to 
anywhere in the world. This international nature of spam often presents 
challenges for law enforcement. Congress enacted the U.S. SAFE WEB Act 
last year to give the FTC additional tools to combat cross-border 
fraud, including spam, spyware, and other online threats. Among other 
things, the U.S. SAFE WEB Act makes it easier for the FTC to cooperate 
and exchange information with foreign counterparts in combating spam 
and other cross-border consumer problems. The Commission is actively 
using the tools provided by the U.S. SAFE WEB Act in its fight against 
spam.
    The Commission is also doing its part to combat spam through law 
enforcement and consumer education, as outlined in its September 12 
testimony. CAN-SPAM added civil penalties to the Commission's arsenal 
in spam enforcement actions. 15 U.S.C.  7706(a). This authority has 
proven especially useful in spam cases where the Commission's 
traditional equitable remedies would have provided inadequate relief. 
For instance, in seven cases alleging violations of CAN-SPAM and the 
Adult Labeling Rule, 16 C.F.R.  316.4, the Commission obtained more 
than $1.1 million in civil penalties. Civil penalty authority enabled 
the Commission to obtain significant monetary judgments without having 
to demonstrate and attempt to monetize the intrusion suffered by 
consumers who received pornographic e-mail.
Identity Theft
    Unlike telemarketers who are often legitimate marketers trying to 
comply with the law, identity thieves are criminals who deliberately 
flout it. Further, identity theft is a far more complex problem than 
receiving telemarketing calls. Indeed, because identity theft can be 
committed in a variety of different methods, can be tremendously 
lucrative, and can go undetected for significant periods, its 
eradication requires nothing short of major changes in how we tackle 
this devastating crime. Although the Commission itself does not have 
criminal prosecutorial authority, I served as co-chair of the 
President's Identity Theft Task Force,\1\ which released several 
recommendations this spring to improve criminal prosecution of identity 
theft. FTC staff is involved in the implementation of some of these 
recommendations. For example, one of the Plan's major recommendations 
is to increase coordination among law enforcement agencies to 
facilitate identity theft investigations and prosecutions. The 
Commission will continue to support that goal through its Identity 
Theft Data Clearinghouse, the Federal Government's central repository 
of identity theft victims' complaints. The Commission is also 
participating in several training sessions for law enforcement such as 
regional identity theft training seminars for local police and 
investigators on victim assistance and identity theft investigations 
and the development and expansion of training for Federal prosecutors 
on how to develop an effective identity theft prosecution. For example, 
just last month, the FTC worked with DOJ, the Secret Service, the U.S. 
Postal Inspection Service, and the American Association of Motor 
Vehicle Administrators to provide training for local law enforcement in 
the Chicago area; in December, we will conduct similar training in 
North and South Carolina. In addition, the Identity Theft Task Force 
forwarded legislative recommendations to Congress that seek to close 
existing loopholes for the prosecution of some types of identity theft.
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    \1\ Established by Executive Order in May, 2006. Exec. Order No. 
13,402, 71FR27945 (May 10, 2006).
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    In addition to criminal prosecution, the Identity Theft Task 
Force's recommendations focused on identity theft prevention through 
improved data security and victim recovery. The FTC is also leading 
efforts to develop a comprehensive record on the use of Social Security 
numbers in the private sector, with the goal of developing 
recommendations on how we can limit the availability of this valuable 
information to criminals, while at the same time preserving the many 
beneficial purposes for which SSNs are collected, used, and shared. The 
Commission solicited and received more than 300 public comments on this 
issue and will hold a workshop on SSN usage on December 10 and 11. In 
addition, this past spring, the Commission hosted a workshop on 
authentication, bringing together academics, business groups, consumer 
advocates, and others to explore new developments in the rapidly 
changing field of identity management. FTC staff is working on a report 
that will describe what we learned at this workshop, such as 
information about technological and policy requirements for developing 
better authentication processes, which will assist all policymakers 
addressing this pernicious crime.
    With respect to victim assistance, the Commission has already 
implemented many of the Task Force recommendations, including 
publishing a ``Victims' Statement of Rights,'' and launching a standard 
police report http://www.idtheft.gov. for identity theft victims. The 
FTC and DOJ are coordinating with the American Bar Association to 
support more victim assistance through pro bono programs and are 
developing a training curriculum for victim assistance counselors in 
the court system.
    Your question asks about civil penalties. Currently, the Commission 
does not have authority to seek civil penalties in data security cases 
unless a special statute, such as the Fair Credit Reporting Act, has 
been violated. The Commission recommends that Congress pass legislation 
to provide the Commission with civil penalty authority in data security 
cases. We believe the threat of civil penalties will serve as an 
important incentive for companies to maintain data security, thus 
deterring identity theft.
    In terms of resources, the Commission has requested 10 additional 
FTE for FY08 to work on data security and identity theft issues.

    Question 2. Last year, the FTC published the ``Business Opportunity 
Rule'' as a Notice of Proposed Rulemaking. It is my understanding that 
the Commission will report later this year on the NPRM's status and 
likely make recommendations regarding next steps. The proposed rule 
would eliminate some existing requirements as well as many of the 
current disclosures. However, it would then propose new waiting periods 
and disclosure requirements for sales of ``business opportunities.'' 
Some concerns have been voiced regarding these new rules. Primarily, 
that the new waiting period might delay legitimate business efforts and 
apply a cumbersome administrative process to business's recruiting 
efforts. Also additional privacy concerns have been raised regarding 
the new disclosure requirements. Can you elaborate on the current 
status of the regulation and how the FTC plans to address the concerns 
that have been voiced?
    Answer. Currently, FTC staff is carefully considering the many 
thoughtful comments received in response to the NPRM for the business 
opportunity rule--including several from Members of Congress--on all 
the issues implicated by this rulemaking proposal.
    Among the issues under careful consideration is whether the 
proposal goes too far in its attempt to curb abuses inflicted on the 
public by pyramid schemes that purport to be business opportunities, 
and whether this proposal, if adopted, would result in unintended and 
unnecessary compliance burdens on legitimate multilevel marketing 
companies. The concerns about the proposed waiting period and privacy 
concerns implicated by the disclosure of prior purchasers have been 
articulated clearly and in detail in the comments the Commission 
received.
    While it would be premature to comment on the Commission's views on 
these issues, the Commission's aim has been to craft a business 
opportunity rule that is narrowly tailored to address the abusive 
practices of business opportunity promoters that result in substantial 
consumer injury. The goal is to reduce unnecessary compliance costs by 
having a narrowly-focused rule that requires only the most essential 
material disclosures and that prohibits the unfair or deceptive 
practices identified over the course of the FTC's many years of law 
enforcement against bogus business opportunity sellers.
    The Commission staff is giving careful consideration to the 
concerns articulated by legitimate MLM companies and Members of 
Congress as it formulates recommendations to the Commission on the next 
steps in this rulemaking proceeding. Rulemaking under authority of the 
FTC's special rulemaking statute, 15 U.S.C. 57a, provides numerous 
opportunities for public comment and oral participation with respect to 
any rulemaking proposals. Further, without prejudging this matter in 
any way, it should be noted that the final rule adopted at the end of 
an FTC rulemaking proceeding is often considerably refined, as compared 
to the initial proposal put forth at the start of the proceeding.

    Question 3. There is growing concern about a form of identity 
theft, phishing--where a fraudulent e-mail is sent in order to deceive 
the recipient into giving personal or financial account information.
    Consumer Reports found in 2006 that approximately 2.4 million 
Americans have been victims of phishing attacks and the total losses 
associated with phishing is more than $600 million, just in 2006 alone. 
A report from ICONIX indicates that approximately 59 million phishing 
e-mails are sent a day and the number one country were most of the 
phishing e-mails/websites originate is the U.S.
    There was even a recent account of one phishing attack that 
fraudulently utilized the name of the FTC, which is a tad ironic since 
the Commission is responsible for prosecuting e-mail fraud. What can 
the government do to curtail this e-mail and website based fraud? Could 
current law be changed to better address this issue in providing more 
explicit tools for law enforcement to prosecute the bad actors that are 
behind these phishing schemes?
    Answer. Phishing spam--e-mail that attempts to trick recipients 
into providing personally identifiable information to scam artists 
posing as legitimate businesses--has increased significantly in recent 
years. To combat phishing, the Commission has maintained an aggressive 
anti-spam and anti-phishing program by hosting public workshops to gain 
new insights from experts, disseminating consumer education, spurring 
the development of industry-driven technology, and pursuing law 
enforcement actions.
    This summer the Commission hosted a workshop, ``Spam Summit: The 
Next Generation of Threats and Solutions,'' to examine how spam has 
evolved and what stakeholders can do to address it. Workshop 
participants described how spam is being used increasingly as a vehicle 
for more pernicious conduct, such as phishing and the delivery of 
viruses and spyware. This spam goes beyond mere annoyance to 
consumers--it can result in significant harm by shutting down 
consumers' computers, enabling keystroke loggers to steal identities, 
and undermining the stability of the Internet. The Spam Summit 
illustrated that criminal law enforcement, industry-driven 
technologies, public/private partnerships, and international 
cooperation are paramount for managing the spam problem.
    The FTC also fights phishing by maintaining a vigorous consumer 
education program. The Commission's consumer education materials 
(located at www.onguardonline.gov) aim to inform consumers of the 
dangers of phishing and urge them not to reply to an e-mail or pop-up 
message that asks for personal or financial information, use anti-virus 
and anti-spyware programs and a firewall, and forward suspected 
phishing messages to the FTC at [email protected]. The FTC's consumer alert, 
``How Not to Get Hooked by a Phishing Scam'' has been visited over 1.1 
million times since 2003, and the OnGuard Online article on phishing 
has received over 600,000 unique visits in the last 2 years.
    The Commission is redoubling its efforts to stop illegal spam and 
phishing schemes. First, in the upcoming months, we plan to convene a 
half-day anti-phishing roundtable with the goals of identifying 
opportunities for outreach and securing commitments from key 
stakeholders in the anti-phishing community, including consumer and 
industry groups. Second, we plan to produce a video with important 
information about phishing. Third, we are working with the anti-
phishing community to mobilize members of the financial sector and 
revitalize consumer education outreach efforts, including promotion of 
the OnGuard Online materials. Working with the financial sector will be 
critical, given that financial services is the industry sector most 
targeted by phishers.\2\
---------------------------------------------------------------------------
    \2\ According to the Anti-phishing Working Group, the financial 
services sector was the most targeted industry sector at 95.2 percent 
of all attacks in the month of June.
---------------------------------------------------------------------------
    Finally, we continue to encourage the industry's adoption of 
domain-level e-mail authentication as a significant anti-spam and anti-
phishing tool. Domain-level authentication would ensure that a message 
that purports to be from an e-mail address at a domain actually came 
from an address at that domain. In other words, if a phishing message 
purported to be from a financial institution's domain, but actually 
came from an IP address not associated with the financial institution, 
the message would not be properly authenticated. As a result, the 
message would not reach the consumer's in-box. At our Spam Summit this 
summer, we learned that industry has made great strides with e-mail 
authentication--50 percent of legitimate e-mail is now 
authenticated.\3\ A recent study indicates that Internet Service 
Providers are now applying negative scoring to unauthenticated 
messages.\4\ We look forward to working with industry as they continue 
to advance in their e-mail authentication efforts.
---------------------------------------------------------------------------
    \3\ See http://www.ftc.gov/bcp/workshops/spamsummit/
draft_transcript_day2.pdf. At 85.
    \4\ See http://www.dmnews.com/cms/dm-news/e-mail-marketing/
42251.html.
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    The Commission has not recommended any modifications to current law 
to cover phishing e-mails. The FTC already has the necessary legal 
authority to pursue civil actions against phishers. On the underlying 
behavior in phishing scams is often criminal and covered by criminal 
statutes.

    Question 4. With respect to consumer education about identity theft 
and how to avoid becoming a victim, the FTC has distributed close to 3 
million brochures and tens of thousands of educational kits as well as 
created the OnGuard Online website, which has received some 3.5 million 
visits to date. Have you been able to gauge the success of your 
outreach and educational efforts? Are you performing surveys on 
consumer knowledge about identity theft and ways to protect themselves?
    Answer. Education and outreach are core elements of the FTC's 
campaign against identity theft. The FTC's product distribution figures 
are one measure of the success of the FTC's educational campaigns. As 
you allude to in your question, the FTC has distributed more than 2.6 
million Deter, Detect, Defend brochures since 2006, recorded more than 
3.2 million visits to the program's website, and disseminated 55,000 
kits. The Commission, which directs its education efforts to businesses 
as well, introduced a new data security guide in March 2007 to help 
businesses secure customers' sensitive personal information. The 
Commission has distributed more than 120,000 copies of the guide. In 
fact, it's initial printing (22,000 copies) was exhausted in 5 days. 
The guide also has been accessed 25,000 times online since its release.
    The FTC develops its advice for consumers based on its enforcement 
experience, information it collects during FTC conferences and 
workshops, and consultation with industry representatives, consumer 
advocates and academics. The FTC occasionally conducts original 
research, such as its fraud survey, which informs its messages for 
consumers.
    Another measure of the success of FTC efforts is how many consumers 
it reaches. The Commission receives about 15,000 to 20,000 contacts 
each week from consumers seeking information on how to recover from 
identity theft or how to avoid becoming a victim. We provide these 
consumers with important educational information.
    A third way to gauge the Commission's outreach efforts is to 
consider the willingness of the private, public, and non-profit sectors 
to use the campaign materials without changes. Hundreds of industry, 
consumer advocacy, law enforcement, and community groups distribute the 
Commission's identity theft materials. Several prominent national 
groups, including the National Association of Realtors and the Direct 
Marketing Association, have co-branded and reproduced copies of the 
materials to distribute among their members.
    We have also conducted surveys on identity theft generally. In 
September 2003, the FTC released a survey which described the extent of 
identity theft in the United States and detailed the Commission's ID 
Theft program from its inception in 1998. See http://www.ftc.gov/opa/
2003/09/idtheft.shtm. The FTC expects the results of a follow-up survey 
to be released later this year.

    Question 5. In a recent survey, 80 percent of Internet users voiced 
concern about being victims of online identity theft. But yet, most 
identity theft actually takes place offline through the stealing of 
paper bills, account statements, credit cards, etc. and only about 9 
percent of identity theft crimes occur online. In fact, many recommend 
that utilizing online banking and bill paying services would reduce the 
threat of identity theft given the encryption and authentication 
technologies used, as well as the lack of any paper billing or 
statements to steal.
    How can we effectively make sure people protect themselves online 
but at the same time assuage their concerns and reluctance about 
conducting business with or purchasing products online from legitimate 
businesses? Or is this concern of online identity theft not a major 
hindrance to the growth potential of e-commerce?
    Answer. Identity thieves use various techniques to steal consumer 
data in order to commit identity theft.\5\ With respect to the online 
environment, certainly, consumer concerns about online identity theft 
can be a potential obstacle to the growth of e-commerce. Our message to 
consumers has been that computers and the Internet offer tremendous 
benefits in terms of choice, convenience, and competition. They should 
continue to take advantage of these benefits, while exercising caution 
to secure their information and their money. Our consumer education 
contains action-oriented advice in plain language. Our goal is to 
educate consumers about sound computer security practices, and we 
believe that this goal is best accomplished with a positive message 
that empowers consumers, rather than one that scares them. Indeed, all 
of the materials we discuss in our September 12 testimony, adopt this 
approach--from our nationwide Deter, Detect, Defend campaign to our 
materials on OnguardOnline.
---------------------------------------------------------------------------
    \5\ Some have suggested that consumers have a greater risk of 
identity theft in the paper environment. In most surveys, including 
those conducted by the FTC and Javelin Research, roughly half of all 
victims do not know precisely how their data was captured by the thief. 
(See www.ftc.gov/bcp/edu/microsites/idtheft/downloads/
synovate_report.pdf; www.javelinstrategy
.com/products/99DEBA/27/delivery.pdf.) Among those who do know how 
their data was obtained, most of them can point to a specific incident 
where their purse, wallet, or postal mail was taken.
---------------------------------------------------------------------------
    In addition, our business outreach efforts recognize that identity 
theft undermines consumer trust in the marketplace. Part of our 
outreach message to industry has been that safeguarding consumers' 
information from identity theft is simply good business. If businesses 
do not protect such information, they will lose consumer trust. We 
continue to promote this message in encouraging businesses to implement 
sound data security procedures.

    Question 6. The 2006 FTC study on the price of gasoline and price 
gouging in the aftermath of Hurricane Katrina concluded that market 
forces were exclusively the drivers in price increases. Since that time 
the U.S. Senate's Permanent Subcommittee on Investigations as well as 
report from the Attorney Generals of Illinois, Iowa, Missouri and 
Wisconsin have concluded that derivatives trading activity placed 
upward pressure on energy prices. Do you believe that the two separate 
reports, the Permanent Subcommittee on Investigations and the State 
Attorneys Generals were accurate?
    Answer. I understand that this question refers to the June 27, 
2006, report by the staff of the Senate Homeland Security Permanent 
Subcommittee on Investigations entitled ``The Role of Market 
Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on 
the Beat,'' and to the report entitled ``The Role of Supply, Demand and 
Financial Commodity Markets in the Natural Gas Price Spiral,'' prepared 
in March 2006 by Dr. Mark N. Cooper for the Midwest Attorneys General 
Natural Gas Working Group. Although FTC staff reviewed those reports 
when they were issued, I am not in a position to opine on their 
accuracy. Both reports appear to address issues largely outside of the 
FTC's primary areas of expertise, and any questions regarding the 
accuracy of those reports should be addressed to their authors or to 
the CFTC and FERC, which have the relevant expertise.

    Question 6a. Does the FTC work in conjunction with CFTC to ensure 
that the futures markets are not manipulated?
    Answer. The FTC does not work regularly in conjunction with the 
CFTC on questions of futures market manipulation. The two agencies have 
significantly different missions: the FTC is an antitrust and consumer 
protection law enforcement agency, while the CFTC is a sectoral 
regulatory agency with a different statutory mandate. To the extent 
that issues within the purview of the CFTC also indicate that there may 
be a violation of the laws that the FTC enforces, we would, of course, 
seek relevant information from the CFTC and, as appropriate, would 
provide the CFTC with information relevant to that agency's mission. 
With regard to manipulation of the futures market, however, the FTC 
generally lacks regulatory or law enforcement authority with particular 
reference to futures trading. If it appears that arguably 
anticompetitive conduct may affect, or may be affected by, futures 
trading--for example, an anticompetitive merger that impedes the proper 
functioning of futures markets--the FTC itself would conduct any 
appropriate investigation pursuant to the antitrust laws that it 
enforces. I note, for instance, that our 2006 report to Congress on our 
investigation of possible gasoline price manipulation included a 
chapter that considered manipulation of futures prices through the use 
of physical assets and also considered possible manipulation of bulk 
spot futures prices through the inappropriate reporting of transactions 
to price reporting services.

    Question 6b. Does the FTC need additional authority to ensure that 
these markets are being fairly conducted?
    Answer. Congress entrusted the CFTC with the authority to police 
manipulative and other unlawful conduct in commodity futures markets. I 
note that the CFTC has brought enforcement actions recently involving 
alleged manipulation in markets for propane, and the Department of 
Justice obtained a guilty plea from an official of BP for manipulation 
of propane futures. I do not believe that the FTC, which does not have 
substantial familiarity with futures markets, should duplicate or 
intrude on the CFTC's mandate.

    Question 6c. Will the role of speculation be considered in future 
reports?
    Answer. The FTC's May 2006 report to Congress on our 
``Investigation of Gasoline Price Manipulation and Post-Katrina 
Gasoline Price Increases'' considered whether control of certain 
physical assets, such as product storage facilities, might be used to 
manipulate gasoline futures prices by creating ``squeezes'' in the 
related commodity markets. Such squeezes could force short sellers to 
offset their futures contracts at inflated prices. In fact, this 
concern was one reason why the FTC challenged BP's acquisition of ARCO 
in 2000 and obtained relief to address the specific concern about the 
transaction's possible adverse effects in crude oil futures. Although 
future FTC reports may revisit this type of futures market 
manipulation--particularly insofar as mergers might enhance the 
potential for such behavior--we are unlikely to address purely 
speculative behavior in futures markets. Rather, we would defer on that 
topic to agencies such as the CFTC, which has more expertise and a 
direct enforcement interest in that area. Similarly, as the FTC's case 
involving the BP/ARCO merger illustrates, the FTC would take prompt and 
strong action if any attempt to manipulate futures markets constituted 
an antitrust violation (including a referral to the Department of 
Justice if we uncovered evidence of criminal conduct). Absent evidence 
of an antitrust violation, however. I would expect the CFTC--the agency 
with primary jurisdiction in this field--to continue as the appropriate 
regulator of commodities futures markets. I also would expect the 
Federal Energy Regulatory Commission (``FERC'') to continue to play an 
important role in markets for natural gas. For example, in ``High 
Natural Gas Prices: The Basics,'' issued in 2006, FERC outlined what it 
is doing to prevent manipulation in natural gas markets, including 
implementation of a Memorandum of Understanding between FERC and the 
CFTC to facilitate the detection of such manipulation. See http://
www.ferc.gov/legal/staffreports/high-gas-prices.pdf.

    Question 7. There has been substantial debate over the proper 
definition of ``price gouging.'' In your written testimony last year, 
Ms. Majoras stated that ``although widely understood to refer to 
significant price increases (typically during periods of unusual market 
conditions), the term ``price gouging'' similarly lacks an accepted 
definition. It is not a well-defined term of art in economics, nor does 
any Federal statute identify price gouging as a legal violation.'' The 
Senate passed an energy bill that included a price gouging law. 
Specifically, the language of the bill makes it a Federal crime to sell 
energy products at ``unconscionable levels.'' The bill also stipulates 
in section 604 that it is unlawful for any person, directly or 
indirectly, to use or employ any manipulative or deceptive device, in 
contravention of such rules and regulations as the FTC may prescribe as 
necessary for the public interest. How would the FTC define 
``unconscionable levels'' if given authority by Congress?
    Answer. ``Unconscionable levels'' has no established legal or 
economic meaning. The FTC would be guided first by the provisions of 
the enacted statute, and I note that legislation under consideration in 
both Houses sets forth a number of elements and factors to be 
considered.
    Section 602(4)'s definition of ``unconscionably excessive price,'' 
for example, requires reference to increased wholesale and operational 
costs, the prices charged by other firms in the same geographic market, 
and the impact of local, regional, national, and international market 
conditions. These are important considerations. I expect that, if the 
FTC were charged with defining ``unconscionably excessive'' pricing in 
the absence of other guidance, we also would take account of not only 
actual increases in replacement costs, but also the supplier's 
reasonable anticipation of rising costs as an emergency persists, as 
well as the risks that a supplier might take on in order to bring 
additional supply to the affected region.
    Moreover, in determining whether price gouging has in fact occurred 
and should be prosecuted, the Commission likely would consider, among 
other factors, the elements currently set forth in Section 603(b), 
including whether the price at issue would reasonably exist in a 
competitive and freely functioning market, and whether the supplier 
actually increased the amount of gasoline supplied to the area during 
the emergency period.

    Question 7a. Under section 604 what regulations or rules do you 
envision the FTC ratifying with this additional authority?
    Answer. The Commission would consider carefully how best to 
implement whatever legislation is enacted. Although it may be premature 
to suggest any specific plan or conclusions at this point, I anticipate 
that the agency would begin implementing Section 604, if enacted, by 
identifying practices that might be viewed as market manipulation and 
examining the likely effects of a prohibition of such practices on 
prices, markets, and consumers. I anticipate that the FTC's approach 
would be informed in part by its examination of various possible forms 
of manipulation addressed in the above-referenced report that we 
submitted to Congress in May 2006. That report discussed, for example, 
practices related to gasoline production, transportation, inventory, 
spot pricing, and futures markets. Given the key roles that the CFTC 
and FERC play with respect to potential market manipulation, I would 
anticipate working closely with those agencies during this process. If 
the Commission identified any practices that manipulate, rather than 
respond to, markets to consumers' detriment, and if such practices were 
not already illegal, those practices presumably would be the focus of 
any regulation.

    Question 7b. Do you believe that a Federal price gouging law should 
be enacted?
    Answer. For the reasons discussed in my testimony last year, I 
remain unpersuaded that such legislation would produce a net benefit 
for consumers. Because prices play such a critical role in a market-
based economy, attempts to cap or control prices can lead to the 
misallocation of resources to the detriment of consumers. In a period 
of shortage--particularly with a product, like gasoline, that can be 
sold in many markets around the world--higher prices create incentives 
for suppliers to send more product into the market, while also creating 
incentives for consumers to use less of the product. I f price signals 
are not present or are distorted by legislative or regulatory command, 
markets may not function efficiently and consumers may be worse off.
    If Congress proceeds with price gouging, then I believe it should 
consider several factors in order to enact a statute that will be most 
likely to attack unwarranted price increases while having the smallest 
adverse impact on rational price incentives. Any price gouging statute 
should define the offense clearly. A primary goal of a statute should 
be for businesses--as well as law enforcers and courts--to know what is 
prohibited. An ambiguous standard would only confuse consumers and 
businesses and would make enforcement difficult and arbitrary.
    The challenge in crafting a price gouging statute is to be able to 
distinguish gougers from those who are reacting in an economically 
rational manner to the temporary shortages resulting from the 
emergency. It seems beyond dispute--and acknowledged by those on all 
sides of the debate about price gouging legislation--that standards 
governing price gouging should incorporate important mitigating 
factors, such as an allowance for increased costs (including 
anticipated costs) that businesses face in the marketplace. Enterprises 
that do not recover their costs cannot long remain in business, and 
exiting businesses would only exacerbate the supply problem. 
Furthermore, cost increases should not be limited to historic costs, 
because such a limitation could make it uneconomic for retailers to 
purchase new product at the higher wholesale prices. There also should 
be consideration of local, national, and international market 
conditions that may be a factor in the tight supply situation. 
International conditions that increase the price of crude oil naturally 
will have a downstream effect on retail gasoline prices. Local 
businesses should not be penalized for factors beyond their control.

    Question 8. There was a recent article in The Washington Post about 
Comcast and how the company disconnected broadband service to some its 
heaviest users. The company cited that these high usage customers were 
draining network capacity therefore slowing down the network and 
degrading Quality of Service of others customers. Yet it seems as if 
Comcast didn't utilize the best process or disclosure of its policy 
regarding this matter, given that some customers were unclear as to 
what the specific download limits were and the company continues to 
decline to reveal these limits. While this seems to be limited to just 
Comcast, does this type of business practice concern the Commission 
given the lack of appropriate disclosure as to what the bandwidth and 
download limits are for customers?
    Answer. Without commenting on the practices of a particular 
company, I can assure you that if an Internet service provider 
misrepresents, or fails to disclose, material aspects of its services 
in advertising or marketing to consumers, it may be liable for 
violations of Section 5 of the Federal Trade Commission Act, which 
prohibits unfair and deceptive acts and practices.
    For over a decade now, the FTC has enforced the consumer protection 
and antitrust laws in countless matters involving Internet access. In 
particular, the FTC has investigated and brought enforcement actions 
against ISPs for allegedly deceptive marketing, advertising, and 
billing of Internet access services. The FTC has devoted and will 
continue to devote significant resources to the important area of 
Internet access.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Byron L. Dorgan to 
                           Michael D. Calhoun
    Question 1. Did FTC drop the ball on deceptive advertising due to 
lack of resources?
    Answer. Congress has recognized that the FTC has insufficient 
resources to combat abusive and deceptive practices.\1\ While we would 
prefer that the FTC do more, the simple fact is that the FTC is hard-
pressed to address all of the widespread abuses in the mortgage market 
with its limited resources and current constraints of the FTC Act. 
Moreover, it must be remembered that it is also responsible for 
enforcement oversight of all other financial practices by all non-
depositories: fair credit reporting, debt collection practices, 
``credit card cramming'' to name a few. And of course, its charge is 
not just in the financial practices sector in any event. Telemarketing 
fraud, health and food advertising--it is expected to do much with 
relatively little. Congress could help the FTC do more on mortgage 
abuses by providing the agency with increased funding to carry out the 
task.
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    \1\ FTC had ``insufficient resources to combat the abusive and 
deceptive telemarketing practices by itself'' and the FTC ``will 
continue to need the states' resource assistance in combating 
telemarketing fraud.'' H.R. Rep. No. 103-20, at 3 (1993).
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    To its credit, the FTC has been active in challenging lenders who 
are engaged in abusive lending practices with the limited resources it 
has. These efforts include filing complaints and consent orders for 
alleged violations of the Home Ownership and Equity Protection Act 
(``HOEPA''), the Truth in Lending Act (``TILA'') and its implementing 
regulation, Regulation Z, and the FTC Act.\2\ The Commission has also 
worked with states to increase and coordinate enforcement efforts. 
Additionally, the FTC has implemented consumer education efforts to 
help consumers avoid potential abuses.
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    \3\ See FTC v. Capital City Mortgage Corporation (D.D.C.) 
(announced 1998); FTC v. Cooper (C.D.Cal.);, FTC v. Capitol Mortgage 
Corp. (D.Utah), FTC v. CLS Financial Services, Inc. (W.D.Wash.), FTC v. 
Granite Mortgage, LLC (E.D.Ky.), FTC v. Interstate Resource Corp. 
(S.D.N.Y.), FTC v. LAP Financial Serv., Inc. (W.D.Ky.), and FTC v. 
Wasatch Credit Corp. (D.Utah) (Announced on July 29, 1999, these cases 
were part of ``Operation Home Inequity,'' an FTC enforcement and 
consumer education campaign seeking to curb abusive practices in 
subprime mortgage lending); United States v. Delta Funding Corporation 
and Delta Financial Corporation (E.D.N.Y.) (Settlement by national 
subprime lender for asset-based lending, announced on March 30, 2000), 
FTC v. Nu West, Inc., et al., (W.D.Wash.) (2000), FTC v. First Alliance 
Mortgage Co., et al (C.D.Cal.) (2000), FirstPlus Financial Group, Inc. 
Docket No. C-3984 (deceptive advertising consent agreement, 2000); FTC 
v. Citigroup Inc., et al., (N.D.Ga.) (misleading and deceptive 
statements and claims case, 2001).
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    The FTC should expand its efforts to eliminate deceptive 
advertising in the mortgage market, in part by compelling mortgage 
brokers not only to cease deceptive advertising, but also to engage in 
corrective advertising: (1) to dispel the residual effects of deceptive 
advertisements; (2) to help restore competition to the state that 
prevailed before unfair practices and deceptions influenced the market; 
and (3) to deprive lenders from falsely obtained gains to which 
advertising may have contributed.
    Additionally, the FTC Act should be expanded and funding should be 
provided so that the FTC has the legal authority and the resources to 
do more.
    However, as we discuss in connection with disclosures, below, 
deceptive advertising is only a part of the problem. Advertising that 
does not include deceptive statements do not protect consumers from 
deceptive statements at closing, nor from practices that are unfair, 
though not technically accompanied by deception. As we discuss below, 
certain acts should be specified to be unfair and deceptive--period. 
That makes a ``bright line'' that lenders have long claimed to want, 
reduces uncertainty, and makes compliance and enforcement much simpler.

    Question 2. The FTC identified ads with claims for very low monthly 
payment amounts or interest rates, without adequate disclosure of other 
important loan terms. And the FTC is now advising more than 200 
advertisers and media outlets that some mortgage ads are potentially 
deceptive or in violation of the Truth in Lending Act. These letters 
are a good step, but I wonder what more the FTC could have done or 
could do in the future.
    a. You testified of no disclosure of escrow requirements and no 
disclosure of the penalty for not showing a proof of income. How can 
the FTC help in this area?
    b. What are other disclosure problems the FTC should address?
    c. If the FTC had the authority to create rules of disclosure in 
this area, what could they do?
    Answer. CRL supports the FTC's efforts to require lenders to be 
more accurate in advertising mortgage loan products. In too many cases 
involving abusive loans, mortgage lenders initially used an illusory 
and deceptive monthly mortgage payment to lure in borrowers and 
convince them to accept loans with terms that were actually much more 
costly. However, increased disclosure will not be sufficient to address 
abusive lending practices. The FTC has extensive experience in 
addressing unfair and deceptive practices and we would recommend 
enhancing the FTC's power to address deceptive practices like the 
failure to escrow for taxes and insurance or the failure to document 
income directly, in addition to what it is already doing to address 
advertising and disclosure concerns.
    A common fallacy is that borrowers consciously choose and accept 
the loan terms they get because they read and sign an array of 
disclosure documents during the loan closing. In fact, most terms on a 
standard mortgage contract are buried in pre-printed loan documents, 
and are dictated by the lender, not negotiated by consumers. Further, 
the documents outlining critical loan terms are typically only three to 
five documents out of dozens in a standard loan closing.
    As former MBA President Robert M. Couch has explained, ``Consumers 
rarely use these forms and disclosures to compare prices or identify 
the terms of the transaction because, quite simply, they cannot 
understand what they read nor what they sign. In addition, the mandated 
forms lack reliable cost figures, a fact that impedes prospective 
borrowers from ascertaining true total cost.'' \3\
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    \3\ Robert Couch testimony before the U.S. House of Representatives 
Financial Services Subcommittee (November 2003), cited in ``Financial 
Education: No Substitute for Predatory Lending Reform,'' Issue Paper 
No. 7, Center for Responsible Lending (September 13, 2004).
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    Other issues that hinder disclosures from being effective include 
the complexity of many mortgage products and the difficulty of 
comprehending many disclosure forms that are allegedly in ``plain 
English.'' For example, according to the commonly used Flesch 
Readability Score, the Truth in Lending form disclosures are comparable 
to reading The Wall Street Journal or Harvard Business Review. In 
short, improved disclosures are not likely to help borrowers, and in 
some cases they may make the situation worse.
    Another factor is simply that people tend to trust professionals 
with whom they deal (and, of course, they should be able to do that). 
When there is an express or implied conflict between what is 
``disclosed'' in a mass of papers and what the professional tells the 
consumer, it is the oral information that most consumers rely on. 
Disclosure has not proven to be an effective way to prevent this 
deceptive practice--many subprime loans do include a warning that 
escrows are not included in the monthly payment, but brokers have been 
effective at focusing borrower attention on the loan and away from 
additional costs that will arise later. While it is already a deceptive 
practice to mislead or deceive people with oral statements, or 
contradict written statements, that becomes a much more difficult case 
to prove. Typically, only after many consumers have been harmed--enough 
to establish evidence of a pattern and practice--can an enforcement 
action be brought.
    Rather than disclosure, simple and easily enforced prohibitions are 
the preferred alternative. As you note in your question, two common 
subprime practices that contributed to the current high rate of 
subprime foreclosures were the failure to escrow property taxes and 
hazard insurance and the failure to properly document income in 
underwriting the borrower's ability to repay a subprime loan. Both of 
these deceptive practices should be prohibited for subprime and 
nontraditional mortgages.
    Failure to escrow: Less than a quarter of subprime loans include 
escrows for taxes and insurance.\4\ This deceptive practice gives the 
borrower the impression that the monthly payment is affordable when, in 
fact, there are significant additional costs that are not included in 
the loan payments. When lenders include escrow funds as part of the 
borrower's monthly house payment, they ensure that these funds are 
available when due, and they also make the true cost of the loan more 
transparent. Responsible lenders have always understood that 
establishing an escrow account is even more important for lower-income 
borrowers or those with high debt burdens and less disposable income. 
Yet, in stark contrast to the prime mortgage market, most subprime 
lenders make loans based on low monthly payments that do not escrow for 
taxes or insurance.\5\
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    \4\ See, e.g., ``B&C Escrow Rate Called Low,'' Mortgage Servicing 
News Bulletin (February 23, 2005), ``Servicers of subprime mortgage 
loans face a perplexing conundrum: only about a quarter of the loans 
include escrow accounts to ensure payment of insurance premiums and 
property taxes, yet subprime borrowers are the least likely to save 
money to make such payments . . . Nigel Brazier, senior vice president 
for business development and strategic initiatives at Select Portfolio 
Servicing, said only about 25 percent of the loans in his company's 
subprime portfolio have escrow accounts. He said that is typical for 
the subprime industry.''
    \5\ See, e.g., ``Attractive Underwriting Niches,'' Chase Home 
Finance Subprime Lending marketing flier, at http://www.chaseb2b.com/
content/portal/pdf/subprimeflyers/Subprime_
AUN.pdf (available 9/18/2006) stating, ``Taxes and Insurance Escrows 
are NOT required at any LTV, and there's NO rate add!'', (suggesting 
that failing to escrow taxes is an ``underwriting highlight'' that is 
beneficial to the borrower). `Low balling' payments by omitting tax and 
insurance costs were also alleged in states' actions against 
Ameriquest. See, e.g., State of Iowa, ex rel Miller v. Ameriquest 
Mortgage Co. et al, Eq. No. EQCE-53090 Petition, at  16(B) (March 21, 
2006).
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    When homeowners are faced with large tax and insurance bills they 
cannot pay, the original lender or a subprime competitor can benefit by 
enticing the borrowers to refinance the loan and pay additional fees 
for their new loan. In contrast, it is common practice in the prime 
market to escrow taxes and insurance and to consider those costs when 
looking at debt-to-income and the borrower's ability to repay.\6\
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    \6\ In fact, Fannie Mae and Freddie Mac, the major mortgage 
investors, require lenders to escrow taxes and insurance.
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    Low/no documentation: Inadequate documentation also compromises a 
lender's ability to assess the true affordability of a loan. Fitch 
Ratings, the international ratings firm, recently noted ``loans 
underwritten using less than full documentation standards comprise more 
than 50 percent of the subprime sector. . . .'' ``Low doc'' and ``no 
doc'' loans originally were intended for use with the limited category 
of borrowers who are self-employed or whose incomes are otherwise 
legitimately not reported on a W-2 tax form, but lenders and brokers 
have increasingly used these loans to inflate borrower incomes and put 
the borrower into an unaffordable loan.
    The unwarranted, unnecessary, and widespread use of stated income, 
and lo- or no-doc loans facilitated the epidemic of unsustainable 
lending. Lenders may evaluate the risk of a loan before approving it, 
but without adequate documentation of income, a lender's approval of a 
loan is meaningless. Even as the problem became undeniable, too many 
loans continued to be made on this basis into 2007. Based on one CRL 
review of 10 mortgage-backed securities, we found that, on average, 
more than one-third--37 percent--of these recently securitized subprime 
loans were approved based on stated income or reduced documentation 
standards for verifying the borrower's income.\7\ The vast majority of 
borrowers have readily documentable W-2 income; by putting them in low-
doc loans, lenders are either charging them up to 1 percent higher 
interest for no reason, or inventing non-existent income in order to 
make them a loan that is doomed to fail.
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    \7\ See, e.g., Testimony of Michael D. Calhoun, Before the U.S. 
Senate Committee on Banking, Housing and Urban Affairs; Subc. on 
Transportation, Housing and Urban Affairs, Ending Mortgage Abuse: 
Safeguarding Homebuyers, Appx. 1, (June 26, 2007), available at http://
www.responsiblelending.org/pdfs/senate-testimony-m-calhoun-june-26-
2007.pdf.
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    As Comptroller of the Currency, John Dugan, has stated, ``Sound 
underwriting--and, for that matter--simple common sense--suggest that a 
mortgage lender would almost always want to verify the income of a 
riskier subprime borrower to make sure that he or she has the means to 
make the required monthly payment. Most subprime borrowers are salaried 
employees for whom verifying income by producing copies of W-2 forms is 
just not that difficult.''
    We see no justification for lenders failing to use readily 
available data on a borrower's income, and do not believe that it would 
be sufficient for lenders to simply disclose to borrowers that other 
options are available. The financial incentives for lenders to offer 
and encourage borrowers to accept no- or low-doc loans are simply too 
great to see disclosure as a significant counter. After filing for 
bankruptcy, the CEO of one mortgage lender explained it this way to The 
New York Times, ``The market is paying me to do a no-income-
verification loan more than it is paying me to do the full 
documentation loans,'' he said. ``What would you do?''

    Question 3. How should Section 5 of the FTC Act be expanded to 
mortgage lending?
    Answer. Give the FTC enforcement authority for all matters arising 
under the FTC Act, and give consumers the power to protect themselves.
    The FTC Act should be expanded in several ways. First, Congress 
should provide the Federal Trade Commission concurrent and independent 
rulemaking and enforcement authority over national banks and thrifts 
for all matters covered by the FTC Act. This would empower the FTC to 
bring enforcement actions against national banks and thrifts for unfair 
and deceptive practices. The FTC has nearly 70 years of extensive 
experience protecting consumers from unfair and deceptive practices by 
non-bank entities. But the FTC Act denies the FTC the essential 
authority to protect consumers from regulated financial institutions.
    All four of the primary banking regulatory agencies have an 
inherent conflict-of-interest that has resulted in limited enforcement 
of those institutions within their regulatory authority. All four 
receive significant funding from industry sources, and no appropriated 
funds from Congress. The FTC Act already authorizes three Federal 
financial regulators (the OTS, the FRB and NCUA) to issue regulations 
prohibiting unfair or deceptive acts or practices. Perhaps due to the 
conflict-of-interest, the regulators have failed to issue such 
regulations and to exercise their authority under the FTC Act, except 
in the one instance where the law mandated it.\8\ Indeed, the OCC did 
not even acknowledge the authority to bring enforcement actions against 
their regulated banks committing unfair and deceptive acts and 
practices until 2000. After waiting 25 years to bring any enforcement 
action, that agency has still done little with it.\9\ In view of the 
obvious conflict of interest in supervising the same institutions that 
fund their budgets, they should not be vested with sole enforcement 
power with respect to consumer protection matters.
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    \8\ Under 15 U.S.C. 57a(f), when the FTC issues a rule on a topic 
that relates to financial institutions, each of the agencies authorized 
to promulgate UDAP rules under that section must issue follow-up rules 
applying the FTC rule to its institutions, unless the agency finds that 
such acts or practices are not unfair or deceptive, or the Board of 
Governors of the Federal Reserve System finds that implementation of 
similar regulations with respect to banks, savings and loan 
institutions or Federal credit unions would seriously conflict with 
essential monetary and payments systems policies of such Board, and 
publishes any such finding, and the reasons therefor, in the Federal 
Register. This authority has been exercised only once only--in 1985, 
when the Federal Reserve Board adopted a version of the FTC's Credit 
Practices Rule and made it applicable to banks and thrifts. See 12 CFR 
 227.
    \9\ Williams, Julie L. and Michael S. Bylsma, On the Same Page: 
Federal Banking Agency Enforcement of the FTC Act to Address Unfair and 
Deceptive Practices by Banks, 58 Bus. Law. 1243 (2003). According to 
one 2004 Congressional report, state banking agencies and state 
attorney generals' offices employ nearly 700 full time examiners and 
attorneys to monitor compliance with consumer laws, more than seventeen 
times the number of OCC personnel allocated to investigate consumer 
complaints. See Comm. on Fin. Servs., 108th Cong., Views and Estimates 
on Matters to Be Set Forth in the Concurrent Res. on the Budget for 
Fiscal Year 2005, at 16 (Comm. Print 2004), available at http://
financialservices.house.gov/media/pdf/FY2005Views
_Final.pdf, cited in Wilmarth, supra note 10, at 316 & n.359. In the 
area of abusive mortgage lending practices alone, State bank 
supervisory agencies initiated 20,332 investigations in 2003 in 
response to consumer complaints, which resulted in 4,035 enforcement 
actions. By contrast, the OCC's record of consumer protection 
enforcement is an embarrassment. The agency lists only eight actions in 
a section on its website captioned ``[a]ctions the OCC has taken 
against banks engaged in abusive practices.'' See OCC, Consumer 
Protection News: Unfair and Deceptive Practices, http://
www.occ.treas.gov/Consumer/Unfair.htm (last visited Aug. 28, 2006). The 
OCC stayed its hand for more than a quarter century before bringing its 
first action in 2000 to address unfair and deceptive practices under 
Section 5 of the Federal Trade Commission Act. Even then, the action 
came only after a decade in which the target bank ``had been well known 
in the . . . industry as the poster child of abusive consumer 
practices'' and after ``[a] California state prosecutor . . . 
embarrassed the OCC into taking action.'' See Duncan A. MacDonald 
(former General Counsel, Citigroup Inc.'s Europe and North American 
card business), Letter to the Editor, Comptroller Has Duty to Clean Up 
Card Pricing Mess, Am. Banker, Nov. 21, 2003, at 17; See also 
Frontline: Secret History of the Credit Card (PBS television broadcast 
Nov. 23, 2004) (transcript available at http://www.pbs.org/wgbh/pages/
frontline/shows/credit/etc/script.html).
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    Unlike the banking agencies, the FTC lacks the inherent conflict of 
interest that paralyzes the banking regulatory agencies. The FTC has no 
responsibility to protect the profitability of financial institutions. 
Its sole mandate is to protect consumers from the unlawful and 
deceptive practices prohibited by the FTC Act. As such, it is 
appropriate for the FTC to be vested with full authority under the FTC 
Act over all entities that engage in unfair and deceptive practices. 
The FTC should be given concurrent and independent enforcement 
authority with regard to all matters arising under the FTC Act, in the 
same way that state attorneys general have independent authority to 
enforce applicable state laws against state banks.
    Concurrent rule-making authority, however, would also require a 
change to the FTC's own UDAP rule-making authority. Since 1975 
Congressional amendments, the FTC's own UDAP-rule-making process has 
been made much more cumbersome, time-consuming, and resource-intensive 
than the standard ``notice-and-comment'' rule-making procedures that 
the bank regulatory agencies could use. Concurrent rulemaking would 
require that the procedures be harmonized, and permitting the FTC to 
use the notice-and-comment process permitted the banking agencies is 
the most sound.\10\
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    \10\ Because the FTC has a much broader portfolio for enforcement--
it has enforcement authority over the vast majority of actors in 
commerce doing business with consumers except for those expressly 
carved out, like financial institutions--and because it is primarily 
funded by appropriations, new responsibilities must be accompanied by 
additional resources if the agency is to be able to do its job 
properly.
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    Giving authority to the FTC will be an imperfect solution: the 
FTC's record in recent years with respect to non-bank entities is less 
than perfect. As such, we recommend a third change to the FTC Act. 
Consumers, who currently have no right to enforce the Federal FTC Act, 
should be provided a private remedy under Section 5 of the Act. 
Currently, the Act permits only public enforcement. While state and 
Federal agencies must protect consumers, it is imperative that 
consumers not be denied the ability to protect themselves with a 
private right of action. Although consumers in many states can invoke 
their state unfair and deceptive acts and practices law, many state 
laws have significant gaps, such as exclusions for ``regulated 
entities.'' Additionally, Federal banking regulators' overly aggressive 
assertion of preemption may hamstring consumers' ability to resort to 
their state UDAP laws. Because the FTC cannot pursue an action on 
behalf of any individual consumer, consumers should be allowed to 
protect themselves.

                                  
