[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
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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
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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.
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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.
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\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.''].
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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.
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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.
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\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).
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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\
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\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.
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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.
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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.
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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.
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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.
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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.
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\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\
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\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.
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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\
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\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.
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\18\ CIO Insight, The 30 most important IT trends for 2007,
November 17, 2006, www.cioinsight.com.
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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.
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\1\ Pub. L. 108-159, 117 Stat. 1952 (December 4, 2003).
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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.
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\2\ FTC v. Consumerinfo.com, Inc., No. SACV050-801 AHS (MLGx) (C.D.
Cal. August 15, 2005).
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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\
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\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.
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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.
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\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.
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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.
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\7\ Id. at 52.
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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.
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\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).
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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.
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\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.
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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.
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\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.
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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.
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\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.
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\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.
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\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).
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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\
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\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.
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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.
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\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.
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\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.
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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.