[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
CONSUMER CREDIT AND DEBT: THE ROLE OF THE FEDERAL TRADE COMMISSION IN
PROTECTING THE PUBLIC
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COMMERCE, TRADE,
AND CONSUMER PROTECTION
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 24, 2009
__________
Serial No. 111-19
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
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COMMITTEE ON ENERGY AND COMMERCE
HENRY A. WAXMAN, California, Chairman
JOHN D. DINGELL, Michigan JOE BARTON, Texas
Chairman Emeritus Ranking Member
EDWARD J. MARKEY, Massachusetts RALPH M. HALL, Texas
RICK BOUCHER, Virginia FRED UPTON, Michigan
FRANK PALLONE, Jr., New Jersey CLIFF STEARNS, Florida
BART GORDON, Tennessee NATHAN DEAL, Georgia
BOBBY L. RUSH, Illinois ED WHITFIELD, Kentucky
ANNA G. ESHOO, California JOHN SHIMKUS, Illinois
BART STUPAK, Michigan JOHN B. SHADEGG, Arizona
ELIOT L. ENGEL, New York ROY BLUNT, Missouri
GENE GREEN, Texas STEVE BUYER, Indiana
DIANA DeGETTE, Colorado GEORGE RADANOVICH, California
Vice Chairman JOSEPH R. PITTS, Pennsylvania
LOIS CAPPS, California MARY BONO MACK, California
MICHAEL F. DOYLE, Pennsylvania GREG WALDEN, Oregon
JANE HARMAN, California LEE TERRY, Nebraska
TOM ALLEN, Maine MIKE ROGERS, Michigan
JAN SCHAKOWSKY, Illinois SUE WILKINS MYRICK, North Carolina
HILDA L. SOLIS, California JOHN SULLIVAN, Oklahoma
CHARLES A. GONZALEZ, Texas TIM MURPHY, Pennsylvania
JAY INSLEE, Washington MICHAEL C. BURGESS, Texas
TAMMY BALDWIN, Wisconsin MARSHA BLACKBURN, Tennessee
MIKE ROSS, Arkansas PHIL GINGREY, Georgia
ANTHONY D. WEINER, New York STEVE SCALISE, Louisiana
JIM MATHESON, Utah PARKER GRIFFITH, Alabama
G.K. BUTTERFIELD, North Carolina ROBERT E. LATTA, Ohio
CHARLIE MELANCON, Louisiana
JOHN BARROW, Georgia
BARON P. HILL, Indiana
DORIS O. MATSUI, California
DONNA CHRISTENSEN, Virgin Islands
KATHY CASTOR, Florida
JOHN P. SARBANES, Maryland
CHRISTOPHER MURPHY, Connecticut
ZACHARY T. SPACE, Ohio
JERRY McNERNEY, California
BETTY SUTTON, Ohio
BRUCE BRALEY, Iowa
PETER WELCH, Vermont
(ii)
Subcommittee on Commerce, Trade, and Consumer Protection
BOBBY L. RUSH, Illinois
Chairman
JAN SCHAKOWSKY, Illinois CLIFF STEARNS, Florida
Vice Chair Ranking Member
JOHN SARBANES, Maryland RALPH M. HALL, Texas
BETTY SUTTON, Ohio DENNIS HASTERT, Illinois
FRANK PALLONE, New Jersey ED WHITFIELD, Kentucky
BART GORDON, Tennessee CHARLES W. ``CHIP'' PICKERING,
BART STUPAK, Michigan Mississippi
GENE GREEN, Texas GEORGE RADANOVICH, California
CHARLES A. GONZALEZ, Texas JOSEPH R. PITTS, Pennsylvania
ANTHONY D. WEINER, New York MARY BONO MACK, California
JIM MATHESON, Utah LEE TERRY, Nebraska
G.K. BUTTERFIELD, North Carolina MIKE ROGERS, Michigan
JOHN BARROW, Georgia SUE WILKINS MYRICK, North Carolina
DORIS O. MATSUI, California MICHAEL C. BURGESS, Texas
KATHY CASTOR, Florida
ZACHARY T. SPACE, Ohio
BRUCE BRALEY, Iowa
DIANA DeGETTE, Colorado
JOHN D. DINGELL, Michigan (ex
officio)
C O N T E N T S
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Page
Hon. Bobby L. Rush, a Representative in Congress from the State
of Illinois, opening statement................................. 1
Prepared statement........................................... 3
Hon. George Radanovich, a Representative in Congress from the
State of California, opening statement......................... 5
Hon. Henry A. Waxman, a Representative in Congress from the State
of California, opening statement............................... 6
Hon. Joseph R. Pitts, a Representative in Congress from the
Commonwealth of Pennsylvania, opening statement................ 7
Hon. Doris O. Matsui, a Representative in Congress from the State
of California, opening statement............................... 8
Prepared statement........................................... 9
Hon. Joe Barton, a Representative in Congress from the State of
Texas, opening statement....................................... 10
Hon. Janice D. Schakowsky, a Representative in Congress from the
State of Illinois, opening statement........................... 11
Hon. Phil Gingrey, a Representative in Congress from the State of
Georgia, opening statement..................................... 12
Hon. Betty Sutton, a Representative in Congress from the State of
Ohio, opening statement........................................ 12
Hon. Steve Scalise, a Representative in Congress from the State
of Louisiana, opening statement................................ 13
Hon. Gene Green, a Representative in Congress from the State of
Texas, opening statement....................................... 14
Hon. Cliff Stearns, a Representative in Congress from the State
of Florida, opening statement.................................. 15
Hon. John D. Dingell, a Representative in Congress from the State
of Michigan, prepared statement................................ 123
Witnesses
Jon Leibowitz, Chairman, Federal Trade Commission................ 16
Prepared statement........................................... 18
James Tierney, Lecturer-in-Law, Columbia Law School.............. 65
Prepared statement........................................... 68
Christopher Peterson, Professor of Law, S.J. Quinny College of
Law............................................................ 83
Prepared statement........................................... 85
Ira Rheingold, Executive Director, National Association of
Consumer Advocates............................................. 99
Prepared statement........................................... 101
Nathan Benson, Chief Executive Officer, Tidewater Finance
Company, Inc., for The American Financial Services Association. 109
Prepared statement........................................... 111
CONSUMER CREDIT AND DEBT: THE ROLE OF THE FEDERAL TRADE COMMISSION IN
PROTECTING THE PUBLIC
----------
TUESDAY, MARCH 24, 2009
House of Representatives,
Subcommittee on Commerce, Trade,
and Consumer Protection,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 10:07 a.m., in
Room 2123 of the Rayburn House Office Building, Hon. Bobby L.
Rush (chairman) presiding.
Members present: Representatives Rush, Schakowsky, Sutton,
Stupak, Green, Barrow, Matsui, Waxman (ex officio), Radanovich,
Stearns, Whitfield, Pitts, Terry, Myrick, Gingrey, Scalise, and
Barton (ex officio).
Staff present: Anna Laitin, Professional Staff; Christian
Fjeld, Counsel; Michelle Ash, CTCP Chief Counsel; Valerie
Baron, Legislative Clerk; Brian McCullough, Minority Senior
Professional Staff; Will Carty, Minority Professional Staff;
Sharon Weinberg, Minority Counsel; and Sam Costello, Minority
Legislative Analyst.
OPENING STATEMENT OF HON. BOBBY L. RUSH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS
Mr. Rush. The Subcommittee on Commerce, Trade and Consumer
Protection will come to order. Today's hearing is a hearing
that we are anxiously awaiting to conduct. It is a hearing on
Consumer Credit and Debt, the Role of the Federal Trade
Commission in Protecting the Public. The chair would yield
himself 5 minutes for the purposes of a opening statement.
Three weeks ago, the Subcommittee on Commerce, Trade, and
Consumer Protection held a hearing on abusive credit practices
in the used-car industry. Today, I want to expand our inquiry
into the world of consumer credit and debt in general. For the
past decade, if not longer, American consumers, particularly
low-income Americans, have been swimming in shark-infested
waters.
Whether it is sub-prime mortgages, auto loans, or pay-day
loans, too many companies have had a free reign to saddle
Americans with debts they simply cannot afford. They sold their
snake oil by taking advantage of the people's circumstances, or
with outright deception. Unfortunately, there wasn't a strong
enforcement or regulatory authority at the federal level
protecting consumers from these abusive practices. The result
has been a wrecked economy, and, I might add, wrecked lives.
The purpose of today's hearing is twofold. First, I want us
to examine the actions taken by the Federal Trade Commission in
cracking down on abusive credit practices. The FTC has broad
authority under the FTC Act to enforce against ``unfair or
deceptive acts of practices.'' How was this broad authority
exercised is one question that we may ask. If the Commission
took insufficient action in the past, then why was that the
case is another looming question. Was it political will or was
it because the Commission lacks sufficient statutory authority
and resources is the third question that we should explore.
Second, in this hearing, I want members of the subcommittee
to deliberate on reforms that Congress can initiate to make the
FTC as effective as possible in protecting consumers from
abusive credit and debt practices in the marketplace. I am
working on legislation that will better equip the Commission to
aggressively address abusive lending practices. How can we
utilize the Commission's historical authority to prohibit and
enforce against unfair or deceptive acts or practices to our
advantage? The FTC is America's foremost consumer protection
agency, and we need to take advantage of its historical
authority by enhancing the Commission's underlying regulatory
and enforcement powers.
I believe the basic cornerstones of the Consumer Credit
Protection Agency are already in place but some reforms are
more than likely necessary. Does the Commission need more
resources? Should the Commission be given regulatory or
rulemaking authority under the Administrative Procedures Act to
replace its current, burdensome rulemaking process under
Magnusson-Moss? Should the Commission be given additional civil
penalty authority? If the FTC has one hand tied behind its
back, I believe that we should untie that one hand, but if we
do so, we must be assured that the Commission will aggressively
utilize these tools to protect consumers to the fullest extent.
Today, I want to explore how the FTC can be equipped to
adequately deal with not only today's abusive practices, such
as sub-prime mortgages and pay-day loans, but also tomorrow's
unforeseen snake oil that will be sold to consumers in the
future. I want to congratulate and welcome the new chairman of
the FTC, Mr. Jon Leibowitz. I have had the opportunity to meet
with him, and I find him an outstanding and fine gentleman and
a dedicated public servant. And this is his first appearance on
Capitol Hill as chairman of the FTC. And I hope that this
hearing today will be first in a series of constructive
hearings. As chairman of this subcommittee, I want to have a
constructive relationship with Chairman Leibowitz and with our
friends at the Commission to ensure that both Congress and the
FTC are doing everything we can to protect the American
consumers, particularly poor American consumers, from the
unfair, deceptive, and abusive practices that are far too
prevalent in the American economy. With that, I yield back the
balance of my time.
[The prepared statement of Mr. Rush follows:]
[GRAPHIC] [TIFF OMITTED] T7816A.001
[GRAPHIC] [TIFF OMITTED] T7816A.002
Mr. Rush. And now I recognize my friend, the ranking member
of this subcommittee, the gentleman from Georgia, Mr.
Radanovich, for 5 minutes for the purposes of an opening
statement.
OPENING STATEMENT OF HON. GEORGE RADANOVICH, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Radanovich. Thank you, Mr. Chairman. I want to thank
you so much for holding today's hearing on the FTC's role in
financial consumer protection. Given the current economic
downturn and the slow thawing freeze in the credit markets,
this discussion is particularly timely. Abuses must have the
disinfectant of sunlight shone brightly on them, and it is our
responsibility as representatives of our constituents to
examine the protections afforded to consumers by the law. Any
credit scam that takes advantage of innocent consumers is
deplorable and we must have our regulators pursue all those
responsible for this kind of despicable crime behavior with
vigor.
My district is located in California San Joaquin Valley,
which is suffering from one of the Nation's highest foreclosure
rates due to the easy availability of credit, unfortunately, so
the easy money was available to consumers because of deception
and fraud. These were cases of mortgage fraud, appraisal fraud,
and income fraud that all played a part in creating the current
mess that we are in. It is reprehensible that people who may
have been taken advantage of when they bought their house could
now be victims in their time of need. Today, we focus on the
Federal Trade Commission's efforts. The FTC deals with matters
that affect the economic life of all our constituents. The
Commission's consumer protection mission is to ensure consumers
are protected from unfair and deceptive practices in or
affecting commerce. That Herculean task puts the Commission in
the position of overlooking a multitude of industries, and the
Commission's responsibility to protect consumers of financial
service products are a critical part of this work.
The Commission helps to protect consumers at every stage of
the consumer credit market from the advertising and the
marketing of financial products to debt collection and debt
relief. However, the Commission's legal authority does not
extend to all entities that provide financial services to
consumers. The FTC Act and the statutes the Commission enforces
specifically exempt banks, thrifts, and federal credit unions.
The FTC, however, had jurisdiction over non-bank financial
companies including non-bank mortgage companies, mortgage
brokers, and finance companies.
As the lead consumer protection agency, it has the
expertise and the experience that was recognized by our
colleagues on the House Financial Services Committee last
Congress. They developed legislation to improve the existing
framework of the consumer protection regulations to better
coordinate banking regulators rulemakings with those of the
Commission, and while avoiding duplicative efforts in the
government this coordinated approach to protect consumers of
financial services is essential. The same rule should apply
regardless of what entity sells the product. I am anxious to
hear about the FTC's recent activity in this area, the
cooperative efforts among agencies, and whether these efforts
are effective.
I do have concerns about some of the reforms that have been
discussed over the years that would change how the Commission
operates. As I mentioned, the FTC's jurisdiction is enormous.
Except for the few exempted entities, the Commission's
authority to promulgate regulations impacts nearly our entire
economic spectrum. Unlike some other agencies who promulgate
rules using the procedures of the Administrative Procedures
Act, the FTC's rulemaking process is laid out in the Magnusson-
Moss FTC Improvement Act. Congress established the Magnusson-
Moss rulemaking procedures in the 1970's specifically to be
more rigorous than the APA process, in part, to provide
affected industries the opportunity to present arguments in an
evidentiary hearing.
The FTC must base any rule on that hearing record and
substantial evidence must be presented to justify it. I am
concerned that any significant change to this process would not
allow for such careful consideration before rules are
finalized. Congress set up the Magnusson-Moss process to be
intentionally deliberative, but Congress also has been highly
effective in enacting consumer protection legislation on
specific issues and providing the Commission with APA
rulemaking authority in those cases where it is warranted, such
as the Do Not Call Act.
I want to thank all our witnesses for being here today, and
I look forward to their insight and expertise on how consumers
can be best protected. I am particularly interested in hearing
if there are any holes in the current law which prevent the FTC
from pursuing bad actors and whether or not additional
regulations would be effective in deterring unscrupulous
lenders and others. If the testimony and the evidence we
receive lead to the conclusion that the Commission should be
doing more, including regulating entities that it currently
does not, I stand ready to work with you, Mr. Chairman, to
develop the appropriate legislation. Thank you, Mr. Chairman,
and I yield back.
Mr. Rush. The chair thanks the gentleman. Now it is my
privilege to recognize the chairman of the full committee for 5
minutes for the purposes of opening statements, the gentleman
from California, Chairman Waxman.
OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Waxman. Thank you very much, Mr. Chairman. I want to
commend you for holding this hearing, and the fact that your
subcommittee is taking a close look at consumer protection in
the area of credit and debt. This committee has an important
role in ensuring that consumers are protected from unfair,
abusive, and deceptive practices throughout the marketplace,
including the credit market, and I am pleased to join you in
welcoming the chairman, the new chairman, of the Federal Trade
Commission, Jon Leibowitz. Congratulations on your appointment.
I look forward to working with you on this and other issues
before our committee.
The current financial crisis has brought to light a host of
schemes that have hurt both individual consumers and the
economy as a whole, mortgages have required no money down and
no proof of income or assets, pay-day lenders who charge 500
percent interest for a short-term loan, companies that take
money from individuals based on false offers or they offer to
fix a credit report or save a home from foreclosure. These are
schemes, and they are allowed to happen because of a fierce
anti-regulatory ideology that was prevailing at least in the
last 8 years. The philosophy was the government was the source
of the problem, that it posed obstacles to success and that it
should be slashed wherever feasible. This was the ideology that
led to FEMA's failure during Hurricane Katrina, billons of
dollars of contracting abuse at the Defense Department, and a
food safety system that could not keep unsafe peanuts and
spinach off the grocery shelves.
The agencies of government responsible for protecting our
financial system and Americans' hard-earned assets also
suffered under this ideology. There was a feeling that
government should step aside and markets should be allowed to
work with little or no regulatory intervention. Now we have an
opportunity to move beyond the flawed system of the previous 8
years and strengthen consumer protections across the financial
system. Today's hearing focuses on the Federal Trade Commission
which plays an essential role in overseeing consumer credit. An
aggressive and rejuvenated FTC could prevent unfair and
deceptive practices before they become commonplace, and it
could use its enforcement authority to deter fraudulent
schemes.
I look forward to working with you, Mr. Chairman, and the
members of this committee to making sure that the FTC has the
authority, the resources, and the will to be an aggressive
consumer protection agency. I yield back the balance of my
time.
Mr. Rush. The chair thanks the chairman, and now recognizes
the gentleman from Pennsylvania for 2 minutes for the purposes
of opening statement, Mr. Pitts from Pennsylvania.
OPENING STATEMENT OF HON. JOSEPH R. PITTS, A REPRESENTATIVE IN
CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA
Mr. Pitts. Thank you, Mr. Chairman. Thank you for holding
this important hearing on the role of the Federal Trade
Commission and protecting consumers of credit and debt. I think
we all agree that we need to ensure that strong consumer
protection measures are in place. The recent housing and the
credit crises our country has faced has made that abundantly
clear. We must do this prudently though, avoiding duplicity and
jeopardizing processes that work well, and this is why we
should examine legislation already in place to see if it has
been successful in protecting consumers. While there may be
room for improvements in our consumer protection laws, we
should also consider that a complete overhauling of legislation
may actually force negative and overly burdensome requirements
on those who are being truthful and honest.
Again, we all desire effective and efficient enforcement of
consumer protection laws, and it is my hope that this committee
moves forward in a wise, careful, and deliberative manner, and
I look forward to hearing our distinguished witnesses today.
Thank you, and yield back.
Mr. Rush. The chair thanks the gentleman. And the chair now
recognizes the gentlelady from California, my friend, Ms.
Matsui, for 2 minutes for the purposes of opening statement.
OPENING STATEMENT OF HON. DORIS O. MATSUI, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Ms. Matsui. Thank you, Mr. Chairman. Thank you very much
for calling today's hearing. I applaud your leadership on this
issue. I would also like to thank Chairman Leibowitz for being
here today with us and congratulate him also. In today's
economic recession, many families in my home district of
Sacramento are really struggling to make ends meet. I have
heard countless stories about people struggling to keep their
homes, their jobs, and their way of life. As we all know, the
housing crisis has had an unprecedented effect on our economy.
The rising unemployment will cause even more Americans to face
foreclosure. California, and in particular my home district of
Sacramento, has been greatly impacted by the foreclosure
crisis. Many of my constituents were victims of predatory
lending and were steered into high cost, bad loans. Now many of
these homeowners are seeking assistance in modifying their
loans to more affordable loan terms.
However, that has been a serious issue for many. In some
cases, their original loan company is not a business or in some
cases their lenders or services are not being responsive
leaving struggling homeowners feeling desperate to save their
homes. As a result, many have been tricked into contacting scam
artists posing as so-called foreclosure consultants or the so-
called agencies to save their homes. These scams are costing
thousands of dollars and false promises to struggling
homeowners.
I am a member of the Sacramento District Attorney's
Foreclosure Task Force, which is charged with cracking down on
mortgage fraud. Many of these unfortunate scams have been well
documented in my district. It is clear that consumers are not
being properly protected from these shameful, unacceptable
practices. We are here today to determine what more the
government can and should do to stop these abuses from
occurring today and in the future. I think you once again, Mr.
Chairman, for holding this important hearing today, and I yield
back the balance of my time.
[The prepared statement of Ms. Matsui follows:]
[GRAPHIC] [TIFF OMITTED] T7816A.003
Mr. Rush. The chair thanks the gentlelady. The chair now
recognizes the ranking member of the full committee, my friend
from Texas, Mr. Barton, for 5 minutes for the purposes of
opening statements.
Mr. Barton. Thank you. And I haven't forgotten about that
cowboy hat, Mr. Chairman.
Mr. Rush. I thank you very much.
Mr. Barton. It is on order.
Mr. Rush. All right.
Mr. Barton. The hat is in the mail.
Mr. Rush. The hat is in the mail. All right.
OPENING STATEMENT OF HON. JOE BARTON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS
Mr. Barton. Thank you for this hearing today, Mr. Chairman.
Its title, Consumer Credit and Debt: The Role of the Federal
Trade Commission in Protecting the Public, is an important one.
As you know, the subcommittee in the past has explored a
multitude of consumer protection issues. We have looked into
data security, spyware, spam, and children's on line privacy.
We have inquired about how Social Security numbers are abused.
We have investigated calling cards and also telemarketing.
These areas are important and it is fitting that today we are
considering consumer protection particularly given our current
economic environment.
The fraud in consumer credit is considerable, its
ramifications beyond those suffered by the victims. The fall
out often damages the businesses with whom the consumer
interacts and it nearly always harms consumers at large. Losses
reach into the millions of dollars every year and the cost is
borne by all of us. We know that the FTC is a strong advocate
for consumers policing that activity of those fraudsters who
seek to take advantage of consumers in a most repugnant way. I
am interested today to learn what the chairman, Mr. Leibowitz,
has to say about the tools that his agency has in its toolbox,
how it complements the actions of sister agencies with similar
authority and the state attorneys general and what additional
tools, if any, the Commission needs.
Let me add a cautionary note, however. I support efforts to
strengthen the Commission's authority where necessary. I am
aware too that several stakeholders believe the Commission's
authority must be strengthened by eliminating the rulemaking
requirements of the Magnusson-Moss Act in 1975 in favor of the
Administrative Procedures Act. As we move forward in this
debate, I would ask yourself, Mr. Chairman, and the members of
this subcommittee, to remember the reasons that Congress
imposed the Magnusson-Moss requirements in the first place. The
FTC oversees an enormous jurisdiction. Its rules reach into
enumerable industries and affect every commercial main street
in the country. Given the breadth of that impact, Congress
believes that the Commission should take more than 180 days so
that it could carefully consider its broad sweeping rulemakings
and the comments generated by that consideration. We still have
the power here to permit the FTC to side step the Magnusson-
Moss Act when necessary and permit rulemaking under APA where
it is appropriate and necessary.
This is an ability this committee has never had a problem
utilizing when we found a situation that warrants it. Again,
thank you, Mr. Chairman, for holding the hearing. I want to
thank our witnesses, and I look forward to reviewing their
testimony.
Mr. Rush. The chair thanks the ranking member. Now the
chair recognizes the gentleman from Georgia for 2 minutes for
the purposes of opening statement of Mr. Barrow.
Mr. Barrow. I thank the chair. I will waive an opening.
Mr. Rush. The gentleman desires 2 minutes in addition to
the 5 minutes that he is granted for questioning. So granted.
The chair now recognizes my friend and vice-chair of the
subcommittee, the gentle woman from Illinois, Ms. Schakowsky,
for 2 minutes for the purposes of opening statement.
OPENING STATEMENT OF HON. JANICE D. SCHAKOWSKY, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Ms. Schakowsky. Thank you, Mr. Chairman, for holding this
hearing. And congratulations to you, Mr. Leibowitz. We are glad
to have you here. The repercussions of years of irresponsible
mortgage lending continued to unfold. According to the Center
for Responsible Lending, there have been nearly 550,000 new
foreclosure filings since 2009 began, 6,600 each day or 1 every
13 seconds. We were trying to calculate how many since this
hearing began. It is more than 100, in every 13 seconds yet
another. In my State of Illinois more than 100,000 families are
projected to lose their homes to foreclosure this year, and
this Administration and this Congress are obviously taking
steps to mitigate this crisis and ensure it never happens
again.
But to do that, I really think we have to ask how did we
get here. We are here not just because the banks were a
problem, and it is not just bank lending that is responsible
for billions of dollars worth of bad loans that now must be
dealt with in order to put our economy back on track. Lending
by non-bank entities has exploded in recent years and a major
factor in today's financial crisis Country Wide and other non-
bank mortgage lenders are responsible for 40 percent of the
home loans made in 2007 and 55 percent of the sub prime loans.
It was the Federal Trade Commission's responsibility to
exercise oversight of these mortgages where abusive practices
have hurt consumers. Clearly, they missed something.
The FTC's authority extends to, it is my understanding,
auto loans, pay-day loans, car title loans, and other non-
traditional forms of credit that often flows to non-bank
entities and currency exchanges. We have those in Chicago big
time. It is a vital role of this subcommittee to exercise
oversight over FTC and its rulemaking enforcement actions over
non-bank lenders, and I look forward to working with you, our
committee does, to make sure that these improvements are made
as we move forward. I thank you again, Mr. Chairman.
Mr. Rush. The chair thanks the gentlelady. The chair now
recognizes the gentleman from Georgia, Dr. Gingrey, for 2
minutes for the purposes of an opening statement.
OPENING STATEMENT OF HON. PHIL GINGREY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF GEORGIA
Mr. Gingrey. Mr. Chairman, I thank you for calling the
hearing today on such an important issue. It hadn't been
examined in depth by this committee since 106th Congress. I
join with my colleagues in congratulating the new chairman of
the FTC, Jon Leibowitz, and I look forward to his testimony. I
think one of the most important things as we go forward is to
strike a balance. And we heard testimony from our distinguished
chairman a little bit earlier in regard to, and I paraphrase,
the government during the past 8 years, at least the past 8
years, has taken sort of a hands-off or soft approach to
regulation to the detriment of consumers. Well, in the first 60
days of the current Administration very aggressive intervention
by the government led to over $200 million of egregious loans
to AIG executives, so this is I think a perfect example of why
we need to strike a balance.
No doubt both lenders and borrowers can share the blame for
elements of the current credit climate within the economy, and
as the economy begins to work toward recovery one of the basic
ways in which we can work in a bipartisan manner to prevent
these problems from occurring again is through consumer credit
reform. Unfortunately, there will always be bad actors within
the financial and credit markets, and this committee hopefully
will play a role in mitigating this in the future. First and
foremost, credit scams that take advantage of innocent
consumers are absolutely shameful. However, before we look to
expand the role and the duties of the FTC, it is imperative
that we examine how the FTC could be more effective given its
current and very broad set of responsibilities.
Mr. Chairman, moving forward, we must ensure that there
continues to be strict scrutiny and transparency within the
rulemaking process of the FTC. The Magnusson-Moss rulemaking
structure is unique because in order to ensure transparency it
was specifically designed in the 70's to be difficult to make
sporadic whimsical changes. As we are about to begin this
hearing and future deliberation on the legislative changes to
the FTC, I am reminded of the words of Speaker Pelosi when she
took the gavel at the start of the 110th. She guaranteed that
it would be the most open and honest Congress in the history of
our Nation. I hope that this subcommittee takes heed of these
words as we begin to modify the role.
Mr. Chairman, transparency is everything, and with that I
look forward to the testimony of the Honorable Jon Leibowitz,
and I thank you so much for holding the hearing.
Mr. Rush. The chair thanks the gentleman. The chair now
recognizes the gentlelady from Ohio, Ms. Sutton, for 2 minutes
for the purposes of opening statement.
OPENING STATEMENT OF HON. BETTY SUTTON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OHIO
Ms. Sutton. Thank you so much, Mr. Chairman. Thank you for
holding this hearing. It is extremely important to the people
that I represent in Ohio. You know, time and time again we have
learned that sometimes the people who are hurt the most by what
is going on out there are the ones who need our help the most.
Today there are a wide range of financial products advertised
to assist consumers in paying off debt and emerging from debt
from pay-day lending to car title loans, short-term loans with
incredibly high interest rates all but ensure that individuals
remain in debt, and these individuals, many of them, are my
constituents. The American people expect their government to
rein in unscrupulous and unfair lending. Last November, voters
in Ohio overwhelmingly improved a referendum on pay-day lenders
to end predatory loans.
Our referendum capped interest rates provided borrowers
with more time to pay back loans and prohibited new loans to
pay off old ones which will help to break that cycle of debt.
However, we are now learning that these lenders are exploring
new loopholes and operating under different licenses and adding
new fees such as inflated check cashing fees for checks they
have just printed and even as our Attorney General, Richard
Cordray, and our state legislature and our governor are working
to address this situation, the Federal Trade Commission must
aggressively act as the American people expect. While I used
Ohio as an example, this is a problem that severely impacts
people in need throughout our country and if the Federal Trade
Commission does not have the tools or the authority to
aggressively protect Americans, then it is our responsibility
to strengthen the Commission and restore Americans' confidence,
and I look forward to being a part of making that happen.
Mr. Rush. The chair thanks the gentlelady. And now it is my
pleasure to recognize the gentleman from Louisiana, Mr.
Scalise, for the purpose of 2 minutes of opening statement.
OPENING STATEMENT OF HON. STEVE SCALISE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF LOUISIANA
Mr. Scalise. Thank you, Mr. Chairman. I appreciate you
holding this hearing. Fraudulent and deceptive practices that
prey upon consumers are deplorable and shameful especially
during these tough economic times because consumers are even
more vulnerable to unethical scams. We need to make sure that
the FTC is fully utilizing the tools they already have
available to them and also ensure that the FTC is working with
our local, state attorneys general, those people that are
closest in many cases to the practices of those illegal and
unethical practices that are going on where we would have the
ability to actually go and get prosecutions and root out the
things that are being done to take advantage of our consumers
in this country.
Another critical issue that we need to look at is the
coordination with other federal agencies like the FBI, who are
also involved in some of these investigates themselves as well
as local attorneys general that were not duplicating the scarce
resources that we do have, so I look forward to hearing from
Chairman Leibowitz of the Federal Trade Commission, and yield
back the balance of my time.
Mr. Rush. The chair thanks the gentleman. The chair now
recognizes my friend, my colleague, my classmate, the gentleman
from Texas, Mr. Green, for 2 minutes for the purposes of
opening statement.
OPENING STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS
Mr. Green. Mr. Chairman, thank you for your friendship over
the last 17 years. I thank you for holding this hearing on the
consumer credit and debt protection and to look at the role
that the FTC should play. I would like to welcome our new FTC
chairman, Jon Leibowitz, and congratulate him on the new
position as the chair of the Commission. I look forward to
working with you. The FTC is important all the time but in this
day and time it is even more so. As the primary federal agency
that enforces consumer credit laws at entities other than
banks, the thrifts and federal credit unions, the FTC has broad
responsibility regarding consumer financial issues in the
mortgage market including those involving mortgage lenders,
brokers, and services.
The FTC enforces a number of federal laws governing
mortgage lending, Truth in Lending Act, the Home Ownership and
Equity Protection Act, and the Equal Credit Opportunity Act.
The Commission also enforces Section 5 of the Federal Trade
Commission Act which more generally prohibits unfair and
deceptive acts or practices in the marketplace. That is
probably one of the most important that we can deal with. In
addition, the Commission enforces a number of other consumer
protection statutes that govern financial services including
Consumer Leasing Act, Fair Debt Collection Practice Act, the
Fair Credit Reporting Act, the Credit Repair Organization Act,
and the privacy provisions of the Gramm-Leach-Bliley Act.
I also have a particular concern about non-traditional
loans such as pay-day loans and car title loans, which can
carry enormous interest rates and fees. In 2006, Congress
enacted to cap the pay-day loans made to military personnel to
a 36 percent annual percentage rate after pay-day loans grew 34
percent to reach a total of 500 million the previous 2 years.
That figures has doubled since 2002. In an economic climate
such as the one we are in today where credit availability is
shrinking consumers may be more inclined to turn to these
options which are much less regulated and therefore the
potential for predatory practice is much greater. In recent
months, the FTC has taken significant steps to protect
consumers and crack down on scam artists by going after
Internet pay-day lenders, alleged mortgage foreclosure rescue
companies, and companies claiming they remove negative
information from the consumers' credit reports.
I look forward to hearing what other actions the FTC is
making to protect consumers, what tools it may need from
Congress, and what the rest of our witnesses believe could be
done better to protect consumers in today's volatile economic
environment. All told, this gives the FTC broad authority to go
after those predatory practices. The Congress may need to act
particularly to give FTC authority to issue rules under the
Administrative Procedures Act. Again, Mr. Chairman, thank you
for calling the hearing, and I appreciate the opportunity.
Mr. Rush. The chair thanks the gentleman. The chair now
recognizes my friend from Florida, Mr. Stearns, for 2 minutes
for the purposes of an opening statement.
OPENING STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA
Mr. Stearns. Good morning, and thank you, Mr. Chairman.
Welcome the new chairman. Mr. Leibowitz had been on the FTC as
commissioner, I think, since September, 2004, so we have
someone, Mr. Chairman and members, who is experienced and can
help us out. He has seen some of the problems and some of the
accomplishments. Obviously, as members have talked about, the
current financial situation and housing crisis has brought a
lot of relevant consumer protection issues to the forefront and
we need to see how much more authority we should give the
Federal Trade Commission. Something that no one has mentioned
is perhaps giving them more jurisdiction over the banks to
credit unions and the thrifts that my colleague from Texas
mentioned they do not have jurisdiction, and of course that is
75 percent of the credit cards, so I think the people across
the hall here will probably not like that, but it would fall in
their jurisdiction. I think it is something that we should not
not discuss.
The FTC has authority, but as I pointed out earlier, it is
sort of limited because 75 percent of the credit cards go
through credit union, banks, and thrifts. But they can issue
and prohibit unfair and deceptive acts, particularly dealing
with advertising. The FTC's stated goal is to protect consumers
at every stage of the credit life cycle by both the FTC and
consumer protection groups acknowledge that more can be done to
protect consumers. And I think with his over 4 years experience
as a commissioner he will certainly have some ideas that bring
it to bear on this problem. The FTC has taken more aggressive
action, I think, more recently against companies such as
Internet pay-day lenders and credit repair companies who
purposely deceive consumers, but the issue of whether the FTC
should expand its jurisdiction, as I mentioned earlier, is
still up in the air. It should be something of consideration.
But I look forward, Mr. Chairman, in a bipartisan manner to
see what we can do to help the Federal Trade Commission, and I
appreciate you having this hearing. Thank you.
Mr. Rush. The chair thanks the gentleman. Now all the
members of the subcommittee have had an opportunity to issue
opening statements. And it is now my distinct honor and
privilege to welcome the new chairman of the FTC, Mr. Jon
Leibowitz, to this committee. I want to say, Mr. Liebowitz, we
are excited about your chairmanship. We look forward to working
with you and look forward to having a meaningful and productive
relationship on behalf of the American people. First of all, it
is the practice of the subcommittee beginning with this
Congress to swear in all witnesses so would you please stand up
and raise your right hand?
[Witnesses sworn.]
Mr. Rush. Let the record reflect that the witnesses all
answered in the affirmative. Chairman Leibowitz, you are now
recognized for 5 minutes for purposes of an opening statement.
TESTIMONY OF HONORABLE JON LEIBOWITZ, CHAIRMAN, FEDERAL TRADE
COMMISSION
Mr. Leibowitz. Thank you, Mr. Chairman, Mr. Radanovich, Ms.
Schakowsky, members of the subcommittee, I am Jon Leibowitz. I
am the chairman of the Federal Trade Commission, and I really
do appreciate the opportunity to appear before you today to
discuss the FTC's role in protecting consumers from predatory
financial practices. This is my first hearing of several you
mentioned, and let me just say this. You are an authorizing
committee. We want to work with all of you. We will not be
successful agency unless we can work together, and I hope that
we will be doing that over the coming weeks and months. The
Commission's views are set forth in the written testimony which
was approved by a vote of the entire Commission, though my
answers to your questions represent my own views.
Mr. Chairman, during these times of difficulty for so many
American consumers, the FTC is working hard. Whether Americans
are trying to stave off foreclosure, lower their monthly
mortgage payments or deal with abusive debt collectors the FTC
is on the job enforcing the law, offering guidance, and in the
process of issuing new regulations. The written testimony
describes in great detail the Commission's enforcement,
education, and policy tools and how we have used those tools to
protect and advocate for consumers of financial services. We
brought about 70 cases involving financial services since I
came to the Commission 4-1/2 years ago, and we have gotten $465
million in redress for consumers over the past 10 years in this
area alone.
But let me highlight just a few recent cases. In the fall,
Bear Stearns and its EMC subsidiary paid $28 million to settle
Federal Trade Commission charges of illegal mortgage servicing
practices. For example, they misrepresented the amounts
consumers owed. They collected unauthorized fees. They made
harassing and deceptive collection calls. In January we sent
out more than 86,000 redress checks, 86,000, to reimburse
consumers who were harmed. And today the FTC announced two more
cases against so-called mortgage rescue operations that
allegedly charged thousands of dollars in upfront fees but
failed to provide any assistance in saving people's homes.
Even worse, these scurrilous companies Hope Now and New
Hope gave consumers false hope by impersonating the HUD-
endorsed Hope Now alliance, which helps borrowers with free
debt management and credit counseling services, mostly low
income consumers. I am pleased to report that the courts have
issued temporary restraining orders stopping these fraudulent
claims and freezing the company's assets. We are announcing a
third action today against yet another rogue rescue scam. Less
than 2 weeks ago, FTC investigators discovered a foreclosure
rescue web site that was impersonating the HUD web site itself.
The HUD inspector general had the site taken down. Last week,
however, we were told that the same site had popped up again on
a differed ISP.
Within hours, we filed a complaint against the unknown
operators of the site, and armed with a court order we shut it
down. Let me assure you, particularly in this economic climate
the FTC will continue to target fraudulent mortgage rescue
operations, but we can do better and we will. Mr. Chairman, you
mentioned the lack of statutory authority, the one hand tied
behind our back. First, we are going to vigorously enforce new
mortgage rules issued by the Federal Reserve Board that go into
effect this fall that will prohibit a variety of unfair,
deceptive, and abusive mortgage advertising, lending,
appraisal, and servicing practices such as banning sub-prime
buyer's loans.
Second, the 2009 Omnibus Appropriations Act gave us
authority to find violators in this area for the first time.
And, third, we are going to use the regulatory authority given
to use by the Omnibus to issue new regulations that will
protect consumers from other predatory mortgage practices. We
expect these rules to address foreclosure rescue scams and
unfair and deceptive mortgage modification and servicing
practices. At the same time, we are going to focus more
attention on empirical research about how to make mortgages and
other disclosures more effective so that consumers have
accurate, easily understandable information about a mortgage's
terms.
We have put a prototype disclosure form on your desks. It
is clearly better, and we have copy tested this, than what
people are using under current law. But we could use more help.
FTC law enforcement would be a greater deterrent if we were
able to obtain civil penalties for all unfair and deceptive
acts and practices related to financial services beyond
mortgages, for example, in-house debt collection and debt
negotiation. The FTC could also do more to assist consumers if
it could use streamlined APA rulemaking procedures to
promulgate rules for unfair acts and practices related to
financial services other than mortgage loans. These steps, of
course, would require congressional action. They may perhaps
require some more resources.
Will all these measures be enough? Well, they could
certainly help to ensure that we are never in this kind of
economic mess again. Finally, Mr. Chairman, as you know, right
now jurisdiction is balkanized between the FTC and the banking
agencies about who protects American consumers from deceptive
financial practices. Several bills have been introduced that
call for an overall federal consumer protection regulator of
financial services. As discussions about these proposals
continue, we urge you to keep this in mind. The FTC, the
Commission, has unparalleled expertise in consumer protection.
That is what we do.
We are not beholding to any providers of financial
services, and we have substantial experience effectively and
cooperating working with the states, especially cooperatively
working with the states. In short, if your committee and if
Congress determines that such an overall federal regulator is
needed, if you do, we ask that the FTC be an integral part of
the discussion about how to best protect the American public.
Thank you, Mr. Chairman, for the opportunity to speak today
about what the FTC has done and what we are going to do. We
look forward to working with this committee, and I am pleased
to answer your questions. Thank you.
[The prepared statement of Mr. Leibowitz follows:]
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Mr. Rush. The chair thanks the chairman. The chair
recognizes himself for 5 minutes for the purposes of
questioning our witness. Chairman Leibowitz, during the housing
boom the FTC had clear jurisdiction over many of the worse
predatory lenders with the most objectionable practices, but
the Commission arguably didn't do much to address any of these
activities. As a matter of fact, it was the states that
successfully brought actions against lenders such as
Countrywide and AmeriQuest when there are abusive lending
practices in the sub-prime mortgage market. In the second panel
Attorney Jim Tierney will talk about these and other issues a
little more.
But to begin with, I want to ask a simple question to you.
What happened at the FTC? Why did the FTC not take aggressive
action against mortgage lenders in the earlier part of this
decade?
Mr. Leibowitz. Well, Mr. Chairman, I would say sometimes
the simple questions are the most difficult ones to answer, but
let me try to respond. First of all, I think, as you know, we
are a tiny agency by Washington standards. We have 270
attorneys doing consumer protection. And, as Mr. Radanovich and
others mentioned, we cover the entire waterfront of the economy
with a few exceptions like common carriers. So we have to--and
we spent a lot of time doing things like stopping fraud, going
after spyware, you know, because we talked about that together.
Having said that, I think we did a pretty good job. You know,
we brought 75 cases in the last 5 years. We have gotten in the
last 10 years $465 million in consumer redress, and that is
just in this area of financial services alone.
Could we have done more? Yes, I think we could have done
more. Will we do more in the future? Yes. And do we need to
work with the state attorneys general? Yes, and we do it all
the time. We are part of several regional task forces. The
director of or Atlanta office or southeastern regional office
has actually set up a task force with state AGs, and they are
going after predatory lending. But, yes, we can do more. I have
been exchanging phone calls with Attorney General Holder about
resurrecting something called the Executive Working Group,
which involved the Federal Trade Commission, the state AGs, and
the Justice Department. And it was something that was used in
the 1990s and the 1980s to sort of coordinate efforts. I think
we are going to resurrect that, and I think that would be--you
can ask Attorney General Tierney, but I believe that that will
be something that is welcome by all the state AGs, and it will
allow us to help coordinate even more.
Mr. Rush. You asked for new authority for the FTC such as
additional rulemaking authority, the ability to seek civil
penalties, and possibly additional authority over banks and
other depository institutions. But there are critics, and some
of them are on this panel, or the next panel rather, and they
argue that the Commission hasn't been aggressively using the
authority it already has. My question is given the FTC's record
over the past 8 years, why should we give this authority to you
now? How can you assure us that you will use these authorities
to aggressively protect American consumers?
Mr. Leibowitz. Well, I think, you know, you raise a very
fair question, but I would say this. We are hamstrung, speaking
for myself, we are hamstrung by the Magnusson-Moss rulemaking
process. When you pass laws like Can-Spam, Gramm-Leach-Bliley,
FACTA, you have given us APA rulemaking authority so that we
can do rules more quickly. But in a Mag-Moss rule, and I think
Mr. Radanovich raised the rationale for making rulemaking, and
Congressman Stearns too, we are making rulemaking more
complicated under Mag-Moss. It is a legitimate argument. But
what we have found is that sometimes it takes 6 or 8 years to
do rulemakings, and when it takes 6 or 8 years to do
rulemakings, it is impossible to do a rulemaking in a timely
manner to stop or to respond to a crisis.
So, for example, 2 years ago we did a sweep of Internet
advertising for mortgages, and we found facially deceptive ads,
over 200 different companies on the Internet. And the
commissioners had discussions about what should we do about
this. Well, we ended up bringing some cases against the worse
malefactors. We wrote letters to everybody. Some people cleaned
up their work. But we couldn't do a rulemaking because under
Mag-Ross rules by the time we started or finished the
rulemaking, we knew that Congress would legislate in this area,
as they should. And so if we could have some relief from Mag-
Moss, I think we can be more effective in helping consumers.
And it is a legitimate debate. I think when you reach
reauthorization, which I know you want to do this year, we will
have a discussion about the broader--about broader Mag-Moss
rulemaking relief and finding malefactors. But again you can be
much more effective if you have fining authority, which we
don't have for violations of Section 5. You can be much more
effective if you can do some sort of streamline rulemaking
authority too.
Mr. Rush. My time is up, but I want to inform the members
of the subcommittee if the chairman will indulge us, we want to
go through a second round of questioning. The chair now
recognizes the gentleman from California for 5 minutes, Mr.
Radanovich.
Mr. Radanovich. Thank you, Mr. Chairman. And welcome, Mr.
Leibowitz, to this subcommittee. Congratulations on your recent
appointment. I did want to ask a couple questions. This first
one, I am going to ask about five questions to the subject
matter about why would you like the FTC to have an APA notice
and comment rulemaking to define unfair deceptive acts for
financial services. Why isn't the current Section 5 authority
sufficient?
Mr. Leibowitz. Well, it is two things. First of all, in the
Omnibus Act we have a fining authority for the rules that the
fed issued under the FTC Act and rulemaking authority. We are
going to use that to go after deceptive and unfair mortgage
servicing and in some other areas. Why do we want expanded
rulemaking authority? Because we think when you write rules,
you can set standards for an entire industry, and here where
you have--where you have many, many actors it is better to try
to set standards, and also we have seen a pattern and practice
of bad behavior by many companies. Not all, but many. And so we
think it would be helpful. It would make us a more effective
agency.
Mr. Radanovich. Do you have thoughts on what kind of rules
you would like to propose for the activities that are not
already covered under existing statutes?
Mr. Leibowitz. We do. I think debt negotiation would be one
area. We would want to work with the committee in thinking
about other areas, but, yes, we do and we can get back to you
with some more thoughts on that.
Mr. Radanovich. OK. What would be the most prevalent
consumer fraud violations in financial services that you think
the FTC should be pursuing that it currently can't?
Mr. Leibowitz. Well, I mean I guess I would say this. We
found a fair amount of fraud in the entire life cycle of the
mortgage instrument, and when you have an economic downturn as
severe as the one that we are in now, I think there is more of
an incentive to see more of this, so we are--in the mortgage
area we now have that rulemaking authority that was given to us
in the Omnibus. We think that is going to be helpful. We think
we are going to be able to find malefactors and write good
rules, but I think--and we have deployed more resources. We
have really doubled our resources in the last 2 years to go
after predatory financial practices.
Having said that, there is just no shortage of bad acts
that we could look at in this area. Most companies, of course,
do the right thing but there are a lot of people who have just
been ripping off consumers and the cases that we brought today
sort of attest to that.
Mr. Radanovich. Right. Yes. And I will get on to those
cases that you brought in just a second. One more quick
question though. Why can't the Commission use your existing
authority to propose rules defining unfair acts and practices
for financial services? Why can't you use what you have now?
Mr. Leibowitz. Well, again, we could do it, but if they are
not--if it is not under APA rulemaking, notice and comment
rulemaking, then it takes us literally years to do the
rulemaking. I don't think that serves the American people well.
I don't think it effectuates what you want us to effectuate on
this committee.
Mr. Radanovich. OK. Thanks. Now with regard to the cases
that you mentioned that you have presented a very good record
of the cases that the Commission has brought under a multitude
of laws that you already have to enforce but unscrupulous
actors continue to violate the law. Will more laws or rules
reduce that fraud?
Mr. Leibowitz. I think, look, and we will have some of this
discussion going forward when you look at our reauthorization,
and growing the agency would be something that would be
enormously important. We have about 1,100 employees. We do
anti-trust and consumer protection. In 1980, we had 1,800
employees and the population of the United States was a third
smaller than it is now. So part of it is more resources, but I
also think part of it is the ability to have--the ability to
have rulemaking authority.
Mr. Radanovich. And you have to balance this idea of
dealing with the bad actors and there may be more of them out
there, you know, during this financial crisis or not. I don't
know how you measure how many bad actors are out there, but the
other side of over enforcement is higher compliance costs, and
where do you find the balance to where you are regulating so
much that, you know, we have higher cost of goods out there as
a result of it?
Mr. Leibowitz. Well, Congressman, you are right. We have to
strike the right balance, and reasonable people can disagree
about exactly where that balance should be. But, look, we have
brought 68 cases in the last 5 years in the financial services
area against malefactors. We have no fining authority. Forty-
seven attorneys general, I believe, have fining authority to go
after people who violate the law, and so fining authority is
something you get for violating a rule and that would make us
much--that would be an very important tool in our arsenal. And,
by the way, when you pass pieces of legislation like Can-Spam,
which came out of this committee, you have given us that fining
authority, at least for specific matters. So it is a discussion
we want to have with you going forward but that would be one
thing that would make us more effective, I think.
Mr. Radanovich. All right. Thank you for your answers. And
thank you, Mr. Chairman. I yield back.
Mr. Rush. The chair thanks the gentleman. The chair now
recognizes the gentlelady from California, Ms. Matsui, for 5
minutes for questioning.
Ms. Matsui. Chairman Leibowitz, as I mentioned in my
opening statement, the issue of loan modification scams is a
growing problem, particularly in California where we have the
highest number of homes going into foreclosure. We hear
individuals and companies advertising on radio and television
with a simple message that they can lower your mortgage
payments, stop your foreclosure. And many of these people are
calling themselves foreclosure consultants or in some cases
acting like they were government agencies like HUD. They make
guarantees and promises to homeowners seeking help to save
their home, but this help usually comes with a price tag in the
form of an advanced fee between $1,500 up to $9,000.
That being said, I would like to hear what the FTC is doing
to crack down on these fraudulent loan modification scams. In
your written testimony, you announced two new cases targeting
mortgage foreclosure rescue scams bringing the total to eight
such cases. Is enforcement the right approach to ending this
type of fraud? You initiated 8 cases. Will those cases serve as
a deterrent to other scammers and other steps that the FTC can
take to end these practices?
Mr. Leibowitz. Well, that is a great question, and we do
think that these--and, by the way, I should mention that we are
also members of the Sacramento Task Force and many task forces
in your districts around the country. Well, I do think that the
cases against Hope Now and New Hope, which are two entities
that are claiming to be affiliated with the Hope Now alliance,
are ones that will be helpful as a deterrent but we also think
that rulemaking authority and fining authority will make our
ability to deter more effective. And again we want to do rules
because they are needed in the mortgage servicing area, in the
mortgage modification, and rescue area, and going after rescue
scams. So we would like to be able to use the whole arsenal. We
have been given some authority in the Omnibus Appropriations
Act that will be helpful. We are looking for more authority
from this committee and we want to move forward with that if
the committee believes it is appropriate.
Ms. Matsui. OK. Some examples of fraudulent schemes are, as
we mentioned, advance fee scams where, you know, consumers are
charged for services that are never rendered, and in exchange
for this fee, it is up from $1,500 to $9,000, homeowners are
promised guarantees to save their homes. In some cases,
consumers usually pay these fees with a credit card, which
should make it easier to track the payment and help the
consumer recoup their money. What is the government doing to
help recoup these advance fees to make consumers whole again,
and is there a mechanism in place to help consumers recoup
their advance fees?
Mr. Leibowitz. Sure. I mean when we bring these cases, and,
by the way, the Hope Now case is a case that involved an
advance fee of $1,000 to $1,500. My understanding is that when
consumers--consumers got no help whatsoever or very little
assistance. When they asked for their money back, it was done.
So when we bring these cases, we try to ask for a disgorgement
of profits. We try to get redress to consumers. In the case we
brought against Bear Stearns as a subsidiary, EMC we got 86,000
redress checks issued. But it is tough because sometimes these
assets dissipate and sometimes it is hard to determine, you
know, not in these cases but in other cases which ones were
fraudulently made or which advertisements were deceptive and
which ones weren't and that is why a penalty authority will be
very helpful to us if we can get it.
Ms. Matsui. Well, do you think Congress should ban these
advance fees?
Mr. Leibowitz. I would want to come back--I would want to
think about that. I would want to think about that. We
certainly see experience--we certainly had experience with
these advance fee scams including advance fee credit card scams
that make us think that certainly the practice of a lot of
companies should be prohibited. But as far as advance fees
generally in the financial services area, I would want to think
about that because there may be some value when legitimate
companies are doing some things with advance fees.
Ms. Matsui. So would you think then that the FTC should
declare its view that it is an unfair practice to charge an
advance fee for services that do nothing to save a home?
Mr. Leibowitz. Well, I would certainly think that we could
look at that in the context of our rulemaking and some states,
I believe, so ban advance fees in the financial services area
so it is something we can take a look at. I think we probably
should in the context of any rulemaking authority we have been
given in the Omnibus or that you give us additionally.
Ms. Matsui. Well, thank you very much, and I see my time is
up. Thank you.
Mr. Rush. The chair now recognizes the gentleman from
Nebraska, Mr. Lee Terry.
Mr. Terry. Thank you, Mr. Chairman. I appreciate this. The
gentlelady brings up, I think, several good points, and I think
really gets to the heart of the matter, and that is if we are
going to stream line rules, the procedures for the rules, we
want to make sure that it is going to be effective in
protecting consumers and that you will be able to use the FTC's
authority. But the argument here about advance fees begs the
question of who is ultimately going to be able to decide what
is deceptive and what is not. Sometimes it is obvious where you
can put 100 people together and they will say that practice is
deceptive. There are other things like maybe advance fees that
some people will say are deceptive or that are wrong, but they
are not deceptive.
And so how are we going to split those hairs if you are
coming to us and asking us to streamline the rules or the
procedures to make your rulemaking. Who should have the
authority in there to determine which specific practice is
deceptive or not deceptive?
Mr. Leibowitz. Well, I think that is right and in some
practices maybe deceptive as practiced by some companies
whereas other companies may do them in a legitimate way.
Mr. Terry. That is why it is really----
Mr. Leibowitz. Right. It is a good question and whether we
have--whether we are bringing cases or whether we are enforcing
rules that we promulgated, we have to go before a federal
judge, so there is that mechanism as a check and balance
against any excesses of the FTC, but I don't believe anybody
has suggested at least in the last 25 years that we have
engaged in any excesses at our agency. I think people think
that we are a pretty good--I think people think that we are a
pretty good agency and we try to do the right things with our
limited resources and leverage of resources.
Mr. Terry. In specific about streamlining the rule process
so you can be more nimble, do you have specifics for us or is
that just kind of a general statement that would be helpful for
you?
Mr. Leibowitz. Well, I think it is both in the sense that
if we have a--if we have more agile rulemaking, something
closer to APA rulemaking, we can respond more quickly. I do
think that we are going to, you know, use the APA rulemaking
authority given to us in the Omnibus Act to address foreclosure
rescue scams where we know there are very, very serious
problems, mortgage modification where we know there are
problems. We know that both because we have testified to it and
others have, and also because of the Bear Stearns case where we
saw lots of embedded fees that consumers just didn't know about
and are being hit with.
Mr. Terry. Yes, those get to be fairly obvious.
Mr. Leibowitz. And let me just add my point to that that
advance fees are prohibited under CROA. We prohibit the under
the telemarketing sales rules which is an FTC rule, and in some
instances, not in every, but in some instances it has really
sort of helped clean up bad practices that harm consumers.
Mr. Terry. All right. And those were developed within your
own rules? You decided in those instances----
Mr. Leibowitz. The telemarketing sales rules were
promulgated by us pursuant to legislation enacted by Congress
in the early 1990's, I believe.
Mr. Terry. Right. But for those specific instances with the
specifics of advance fees, that was something that you did
within the FTC by rulemaking?
Mr. Leibowitz. Yes, that is exactly right.
Mr. Terry. And that is the point that I am getting to. I
guess there are two sides of the coin that we can look at here
and one is we can criticize the FTC over the last 8 years for
not being aggressive enough. Eight years from now are we going
to look back at the FTC when we streamline your rules and say
you were overly aggressive and without specific congressional
approval defining general practices as deceptive practices
thereby freezing trade?
Mr. Leibowitz. Look, it is a fair question but I think in
these times of, you know, where we have seen so much harm to
consumers by deceptive acts and practices, you might want to--
given that we are an agency that has a track record for being
aggressive but balanced, you might want to err on the side of
giving us more authority. Believe me, in the 1960's and 70's
Congress was always able to pare us back when they thought we
were going a little bit too far. But, again, you know, in areas
like debt collection, in-house debt collection where we have
seen problems including in the Bear Stearns case and debt
negotiation, those would be areas not covered by the Omnibus
where we think we could do----
Mr. Terry. In my last 14 seconds, I am just very curious,
in the last several years in the financial services area you
have brought 40 or 60----
Mr. Leibowitz [continuing]. Sixty-eight cases.
Mr. Terry [continuing]. Sixty-eight complaints. Generally
what were those? What is the major area?
Mr. Leibowitz. It is really a combination of different
areas. It is 7 mortgage advertising, 5 pay-day loan cases--6
pay-day loan cases, a couple of fair lending cases, mortgage
servicing cases, 9 foreclosure rescue scam cases, and 12 credit
counseling cases, and 11 debt collection cases. Those are the--
and, sorry, 17 credit repair cases as well. So it is a
combination of--it is different areas mostly within our
financial services group, and then we have had our regions. We
have 7 regional offices around the country doing more in this
area because it is a high priority for us.
Mr. Rush. The gentleman's time is up. The chair now
recognizes the vice chair of the subcommittee, Ms. Schakowsky,
for 5 minutes.
Ms. Schakowsky. Thank you. Chairman Leibowitz, since 2001,
state attorneys general have been active, often aggressively
pursuing the bad actors in the field of consumer credit. They
took the lead on cases like Household Finance, AmeriQuest,
Countrywide, and uncovered extensive abusive practices,
inflated appraisals, fabricated income statements,
misrepresentations to borrowers, illegal and deceptive fees,
and rates. Was the FTC approached to participate in these
activities?
Mr. Leibowitz. You know, some of those cases took place
before I came to the Commission. I believe in AmeriQuest, which
is a terrific case by the state AGs, we approached them about
whether they needed our help because we are always happy to
help with cases and we work a lot with state AGs, and I think
that they were--I think that they demurred on that, that they
were----
Ms. Schakowsky. But my understanding that in fact the
Commission has often opted not to participate. In fact, a
former attorney general, James Tierney, who will be sitting on
our second panel, in his testimony he states that the past 8
years have been a time of limited cooperation between the FTC
and state attorneys general with respect to enforcing consumer
protection in the areas of consumer credit, and so would you
agree with this assessment?
Mr. Leibowitz. Well, I would say this. I can't speak for
the first four--from 2000 to 2004. I wasn't at the Commission.
From 2005 through now, we have been working fairly often with
the states. We are involved in regional task forces. But, look,
we can certainly step it up and we certainly will. And one of
the things I am very heartened about is our very positive
conversations with Attorney General Holder about resurrecting
the executive working group, which had sort of--which was very
active in the 1990's and sort of was flailing in the last 8
years. It is a way for us to help coordinate with the Justice
Department and with state AGs through regular meetings, regular
consumer protection activities, so I think that will be a big
plus.
Ms. Schakowsky. Wonderful. Let me talk about a different
area. Under Section 18 of the FTC Act whenever the Commission
promulgates a rule on unfair or deceptive acts of practices
dealing with consumer credit matters the Federal Reserve and
other banking agencies are required to promulgate a similar
rule for depository institutions or explain why such a rule is
unnecessary. So were we to give the FTC speedier APA rulemaking
under Section 18 of the FTC Act, would this not ameliorate at
least somewhat the lack of functional or regulatory parity
because of the reciprocal requirements under Section 18 whereby
banking agencies have to consider the FTC's lead?
Mr. Leibowitz. Well, Congresswoman, it might very well be
helpful but I think what your question touches on, and I know
you know this, is the sort of incredible balkanization, right?
Ms. Schakowsky. Right.
Mr. Leibowitz. Consumers don't know whether they got--
consumers don't care whether they got a mortgage from a bank or
whether it came from a mortgage, a non-bank mortgage.
Ms. Schakowsky. Right.
Mr. Leibowitz. If it is deceptive, if it is, you now, a
sub-prime loan or a non sub-prime loan with hidden fees that
they don't know about, it is hurting them. So we have a sort of
balkanization of authority here. There are three or four
different banking entities or banking agencies that have some
jurisdiction over the 60 percent of the mortgages that are
issued by banks. We have jurisdiction over the others. And I
think that is why Elizabeth Warren and the professor at Harvard
and a variety of folks on the hill are thinking, you know, that
it may be time to have one single entity that protects
consumers from predatory financial instruments. And certainly I
know people on this committee are thinking about that, and I
want to make sure that you know from our perspective we are a
consumer protection agency.
Ms. Schakowsky. So you could do banks as well is what you
are saying?
Mr. Leibowitz. We could do banks as well, I would say with
this qualification. The banking agencies, you know, they are
mostly concerned with safety and soundness. We don't do safety
and soundness. We are not those kinds of bank regulators but if
you want an entity to do consumer protection for consumers who
have financial instruments, we can do that really, really well.
Ms. Schakowsky. Let me ask the final thing.
Mr. Leibowitz. Sure.
Ms. Schakowsky. There was a colloquy on the Senate floor
that clarified the authority that is this trigger under Section
18 was not under Section 18 and only applied to non-banks. Do
you see this if it goes forward as a missed opportunity?
Mr. Leibowitz. Well, you know, do I personally see this as
a missed opportunity? I certainly think Congress needs to look
at the notion of a single entity whether it is housed in the
FTC or whether it is a new one to protect consumers from
predatory financial instruments, deceptive and unfair ones. I
see this as actually an opportunity for us because the language
in the Omnibus Appropriations Act gives us rulemaking
throughout the entire life cycle of a mortgage only of course
for non-bank issued mortgages. But that is a real opportunity
to do rulemaking, and after we do rulemaking to actually be
able to have standards, get those from rules, and to find
malefactors who fall below those standards.
So I see your point, and we are very supportive of Congress
having a discussion about creating an entity to protect
consumers here, but I also think we have been struggling for
this legislation for quite some time. It is going to be helpful
to us.
Mr. Rush. The chair now recognizes the gentlelady from
Ohio, Ms. Sutton, for 5 minutes.
Ms. Sutton. Thank you so much, and thank you, Mr. Chairman,
for your commitment to look after the entire life cycle of
credit. There are so many questions that I have, I am going to
probably going to need to follow up after the course of this
hearing to try and unravel exactly what is going on out there
because I can tell you that my constituents are feeling the
effects of all of this confusion. It is kind of confusing for
anyone who is watching this hearing to figure out who has
authority over what, and who has the responsibility to protect
them let alone, you know, know where to turn. So in the last
line of questioning from my distinguished colleague,
Representative Schakowsky, we are talking about the new
opportunity you have within limits for rulemaking.
But if I was to ask you this question, it sounds to me like
you have limited opportunity for rulemaking that will provide
some people protection but there is whole other category of
people out there who may be suffering from the very same thing
and the same practices over which you have no ability to help
them, is that correct?
Mr. Leibowitz. That is correct.
Ms. Sutton. Let me go on record as saying I don't think
that makes any sense.
Mr. Leibowitz. That makes a lot of sense, and again in
going back to Ms. Schakowsky's questions, one of the other
things that is sort of peculiar about this rulemaking is that
the fed can enact, promulgate rules under the FTC Act by notice
and comment rulemaking, APA rulemaking, the simple rulemaking
that we can then enforce for over non-bank mortgage companies,
over non-bank issued mortgages. But if we want to do that
rulemaking right now, it would have to be under Magnusson-Moss
and it would never get done because contested rulemakings under
Magnusson-Moss just don't get done, so we are glad that they
promulgated these rules. We are glad we can enforce them.
We think those rules are going to be helpful in curbing bad
advertising and things like liar's loans but it is like trying
to--even for the Commission, and all the commissioners are
very, very hard working, you know it is like running through a
rabbit warren to try to figure out how these laws interact and
regulations interact with each other.
Ms. Sutton. Well, again, I appreciate that very much
because it seems like we should be able to inject some more
sense into the process and into this puzzle. In your testimony
on page 8 you talked about suing a credit card marketing
company. Obviously, you can reach the credit card marketing
company. Can you tell me what exactly is a credit card
marketing company?
Mr. Leibowitz. Well, we can't reach--as you know, we can't
reach bank issued credit cards, which is about, I think someone
said 75 percent. I think it is now probably up to about 95
percent. So a credit card marketing company is simply a non-
bank affiliate or surrogate that markets the credit card, and
what we found with some of our advance fee cases is they will
say you can have a credit card, give us $500, and then when you
give them $500 some of it is taken away by fees, by prohibitive
monthly costs or you can only use the credit card to buy from
their catalog, so those are some of the types of cases we have
brought.
And then we had a major case involving a company called
CompuCredit, which we brought jointly with the banking agencies
where they had--and it was a credit card company that actually
targeted sub-prime borrowers, people who couldn't otherwise get
credit, so that is sort of laudatory at some level. But the
credit card limit was $300, and the first month had $185 in
fees, which weren't accurately disclosed we alleged, and we had
a settlement for $115 million for consumers just the end of
last year. That was very, very important for us.
Ms. Sutton. OK. So the question that I have though is if a
bank is engaging in the exact same activity, can you do
anything about it?
Mr. Leibowitz. You know, we could run across the hall to
the banking agencies where they are testifying and tell them
they should take a look at it. We can go talk to them, but we
can't do anything about it.
Ms. Sutton. That is my point, and that is my concern. OK.
Mr. Chairman, I will hold my questions at this point until the
next round.
Mr. Rush. The chair thanks the gentlelady. The chair now
recognizes my friend, the gentleman from Pennsylvania, Mr.
Pitts, for 5 minutes.
Mr. Pitts. Thank you, Mr. Chairman. Mr. Leibowitz, as an
overwhelming number of mortgage fraud cases began to surface in
2007 the FBI formed a financial crimes task force and has had
more cases than it can handle, and these are largely criminal
fraud cases. Does the FTC have a role in investigating these
cases? If so, would you elaborate?
Mr. Leibowitz. I want to get back to you on those cases. We
do a lot of work with the postal inspectors. We do some work
with the FBI, of course, but when we see something that is
criminal we generally refer it to the Justice Department, and
if they will take it they have more appropriate sanctions than
we do. We generally can only get redress and disgorgement and
stop the bad conduct, so sometimes we are sort of the fallback
entity for going after fraudulent behavior in this area, but I
will get back to you on whether we have worked with the FBI
task force specifically.
Mr. Pitts. OK. Thank you. The Commission has conducted
research on ways to improve mortgage disclosure. If the
disclosure documents were simplified in a manner that provided
relevant information similar to the prototype disclosure
developed by the Commission, would that have prevented any of
the fraud that occurred in the home mortgage loan market in
your opinion or might fraudsters simply find a way around that
simplified uniform disclosure?
Mr. Leibowitz. Well, I would say this. Fraudsters, you
know, can often find a way around even simplified disclosures,
and I hope all of you have the draft disclosure form on your
desk. If not, we will make sure we get you copies. But
sometimes what is happening is that consumers don't see
imbedded fees, and what we have done with our sort of
disclosure form, it is simple. We have copy tested it. In other
words, we have asked consumers to look at this and compare it
to the existing HUD, RESPA and TILA forms that they use. And
those forms have both--they are both over inclusive and under
inclusive. They have too much information so consumers don't
know what to focus on, and they don't focus on some specific
aspects of information.
So can I say to you that it would prohibit--it would have
stopped a specific fraud? I don't think so. But would it have
sort of helped some consumers make more informed decisions when
they are dealing maybe not with deception but more with
unfairness? We think it might have. And even, by the way, for
consumers these forms or this draft form and others like it, it
doesn't just help the consumer who is being ripped off. It
helps the consumer who wants to be able to make informed
choices, and say, well, here, you know, the fees are going to
be more and here the fees will be--here the fees and the
overall cost of the loan will be less. So that is just helping
consumers like all of us make choices from among competitors.
Mr. Pitts. The FTC prohibits both unfair and deceptive
practices.
Mr. Leibowitz. That is correct.
Mr. Pitts. Unfair is defined as any act that causes or is
likely to cause substantial injury to consumers which is not
reasonably avoidable by consumers themselves and not outweighed
by countervailing benefits to consumers or to competition.
Bringing an enforcement action for violation of a deceptive
practice is much more common for the FTC. Why are unfair cases
brought so infrequently?
Mr. Leibowitz. Well, I think, you know, you articulated--I
think you read directly from the statutory authority we have.
It is harder to show unfairness. Unfairness is sometimes a more
amorphous term, so when we see--when we are going after a
typical bottom feeder who is ripping off consumers, we just see
it is clear deception. But sometimes, for example, in our
spyware cases and in a variety of our other cases involving
data security and Internet-related problems, we will use
unfairness. We have been using it actually more in the last
several years because we think it is important.
Mr. Pitts. Should unfair acts be better defined to provide
greater certainty to make enforcement easier?
Mr. Leibowitz. I would say certainly if we had a little
more leverage in our unfairness standard, we might be able to
bring unfairness cases more often. We had a much broader
standard in the 1960s and 1970s, and through the late 1970s,
and then Congress asked us to modify first of our own volition
and then it put it in the statute, I think, in 1992, our
unfairness authority. So this has been the subject of some
debate going back and forth about whether we should have a
little more flexibility here. We would love to work with you on
this.
Mr. Pitts. Thank you. My time is up. Thank you, Mr.
Chairman.
Mr. Rush. The chair now recognizes the gentleman from
Texas, Mr. Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, an issue
came up just now, and I was going to ask you, is there any
numbers that the FTC could share with the committee on the
number of criminal prosecutions it referred to the Justice
Department that actually are taken by the Justice Department
because I think that is something we would like to see.
Mr. Leibowitz. Yes, we will get you--we will get you that
information. We do have Tim Yuris, who is the first chairman
under Chairman Bush, set up a criminal liaison unit and which
we still have and which takes some of the cases that are
clearly of a criminal nature where we started investigations
and sends it over to the Justice Department or to certain other
prosecutors, so we can get you that information. Some of it--
with the caveat that I have to go back and look. Some of it may
be confidential. And then sometimes, again, as you know from
the cases because you know our agency----
Mr. Green. We just need the numbers.
Mr. Leibowitz. Yes, we will get them.
Mr. Green. The percentages, and if there are cases that are
definitely not controversial, it would be interesting to see
what type of cases may not be accepted and what type would be.
Mr. Leibowitz. Right. I can just tell you as a general
matter sometimes the cases don't rise to the level of ones that
the Justice Department wants to prosecute so we do it
ourselves.
Mr. Green. OK. And you have the ability to do it yourself?
Mr. Leibowitz. Not as a criminal matter but as a civil
matter so to stop ongoing harm.
Mr. Green. Our office has been hearing from constituents
concerned that the free credit reports do not list all the
information that credit lending entities have access to. Do you
know if there is a case and, if so, do you believe consumers
should have access to all this information? It seems that
consumers should have access to all the credit information
available to them. Have you heard of that or has that been an
issue with the FTC?
Mr. Leibowitz. Yes. We brought a case, I think in 2002-2003
before I got to the Commission freecreditreport.com. I think I
am summarizing it but I believe they are actually charging
fees. There is a place where consumers can go to get a free
credit report without entering into a contract, a monthly
contract, and I think that is called annual credit report. And
we actually, not to make light of this, but we actually put out
a spoof of freecreditreport.com that got picked up by You Tube
and by a variety of other media outlets just 2 weeks ago. So
this is an area of some concern to us, and I know the
consumers--we do get complaints on this.
Mr. Green. That is what I was going to say. There may be
things that the consumer may not--that is not on that report
that is being used for their credit rating.
Mr. Leibowitz. Credit source, are you talking about credit
source? Yes, they are included in the free credit report.
Mr. Green. And is there any restriction on what can be
considered to go into your credit score either by practice or
by rule or statute?
Mr. Leibowitz. Let me, Congressman, get back to you on
that. It is a legitimate question and I want to give you the
right answer.
Mr. Green. I know I only have a minute left, but there are
many varieties of mortgage foreclosure rescue fraud but in each
case the perpetrator makes misleading promises that the
consumer's home will be safe from pending foreclosure
permanently. Most consumers end up losing their home, however,
as well as the money they paid to these scammers. I am aware
the FTC took action in February to sue a company operating one
of these scams, and I commend you for that. How widespread is
the problem and does the Commission have the tools and
resources to go after a lot of bad actors, not only the ones
you see but it seems like some of it may be cottage industries
that we are seeing in regional areas and not maybe national.
Mr. Leibowitz. Right. Well, with the entity that we just
brought an action against today that is impersonating HUD, we
are having sort of a whack-a-mole problem with them because we
found the site. We found the site. The HUD inspector general
took it down. Then it popped up again under a web site from
Germany, registered in Germany, and then we have taken that
site down, so we have a little long arm problem in terms of
asserting our jurisdiction. The other thing is that if we can
find these malefactors which the Omnibus Appropriations Act
will let us do or provision that Senator Jorgen got into the
Omnibus Appropriations Act will let us do, I think that would
be very, very helpful, and we will do a rulemaking on
foreclosure rescue scams and also deceptive modifications.
Mr. Green. If you would share that with us even though we
are not a writer of the appropriations bill and maybe not rise
to the need for an authorization, but some of us could help
with getting the encouragement of the appropriators to include
that.
Mr. Leibowitz. We would love to work with you. We would
love to help.
Mr. Green. Thank you.
Mr. Rush. The chair now recognizes the gentleman from
Michigan, Mr. Stupak, for 5 minutes.
Mr. Stupak. Thank you, Mr. Chairman. Chairman Leibowitz,
thanks for being here. The Commission, as you have indicated,
has authority under Section 18 of the Federal Trade Commission
Act, and I understand it is particularly cumbersome. Instead of
promulgating rules under the APA, the Commission must go
through a far more difficult process known as the Magnusson-
Moss Act. So my question is since you have been chair, has the
Commission considered promulgating the rule under the
Magnusson-Moss Act or have you just sort of disregarded the
whole process?
Mr. Leibowitz. We have a few rules that we are in the
process of promulgating outside of this area under Mag-Moss,
but they are generally sort of not good government rules but
non-controversial rules because under Mag-Moss if you want to
promulgate a rule and there is an opposition to that rule they
get to require an independent referee, multiple rounds of
submissions, and it takes a really long time.
Mr. Stupak. Do you think Congress should just repeal that?
Mr. Leibowitz. I would say this. There are probably some
legitimate reasons why Congress gave us this cumbersome
rulemaking.
Mr. Stupak. Can you give me one reason why they would give
you such a burdensome procedure if our purposes----
Mr. Leibowitz. Off the top of my head, no, but I would say
this. I certainly think some relief from Magnusson-Moss would
be justified. I think the original--look, we are an agency that
Congress wanted to give us when they created us in 1914
enormously broad jurisdiction but fairly limited remedies, as
opposed to the Justice Department where they have to go after
more specific crimes and they put people in jail. They have
fining authority. And so the rationale for Mag-Moss, I suppose,
is that it sort of slows things down because we have such broad
jurisdiction. I do think over time what we found is that some
relief to Mag-Moss would be helpful in allowing us to have
leverage over the bad guys.
So, for example, I think 47 attorneys--when you promulgate
a rule, you can get a fine for a violation of a rule.
Otherwise, when we use our Section 530, you can't do that, and
so if we can find malefactors as 47 attorneys general can do,
that would make us more effective in doing what you want us to
do, which is protecting consumers.
Mr. Stupak. In order to protect consumers, you have to move
quicker. I mean we don't want you to be the Justice Department,
you indicated you don't have fines and all that, but isn't
really your power is to look for that unfair and deceptive
practices and act quickly to cease and desist. Isn't that
really the role of the FTC? It seems like Magnusson-Moss is
just the opposite. It slows you down so you cannot be nimble
and react to current trends.
Mr. Leibowitz. That is exactly right. In a controversial
rulemaking, you know, in a rulemaking where there is
opposition, and many good rulemakings have opposition, you
know, we would always look to see what all stakeholders want.
Of course we are going to do that, and we are going to do that
in the rulemakings that we got in the Omnibus Appropriations
which will be APA rulemakings.
Mr. Stupak. Right, but even that is limited in the Omnibus.
Your rulemaking authority, that is somewhat limited, is it not?
Mr. Leibowitz. It is limited. It applies to mortgages but
not other financial instruments not issued by banks, and of
course it only goes to non-bank issued mortgages, but it is
still better than what we had so we are very grateful for it
and we thank this committee for protecting it in the Omnibus.
Mr. Stupak. Well, let me ask you this. Since 2001, the
attorneys general have been active and very aggressive in
pursuing bad actors in the field of consumer credit. They took
the lead on cases against Household Finance, AmeriQuest and
Countrywide, and uncovered extensive abuse of practices,
inflated appraisals, fabricated income statements,
misrepresentations of borrowers, and illegal and deceptive fees
and rates. Was the FTC approached to participate with the AGs
in their----
Mr. Leibowitz. In some cases we have, and we have
participated with them. In some cases, they have done it on
their own, and I believe demurred when we offered help. And
then probably there are some cases again in hindsight that we
should have been involved in earlier but they took the lead.
The attorneys general have been terrific in protecting
consumers. I don't think we have been slackers at all. I think
we have been pretty good but on a going forward basis we are
going to work more with the attorneys general.
Mr. Stupak. OK. So how do you envision working closer
relationship between the states as you are now the newly
appointed chairmanship because I think it is important while
the states bring forth but sometimes they look to you for
resources and to help them with these investigations, and I
would think what goes on in one part of the country is probably
going on in the other part of the country and therefore the FTC
should be more involved and should have a closer working
relationship with the state AGs.
Mr. Leibowitz. Well, I absolutely hear that, and of course
we can have--it is easier for us to get remedies that apply
across all states, and so many of the bad acts in the mortgage
industry----
Mr. Stupak. Well, have you reached out to the AGs?
Mr. Leibowitz. Yes. We have reached out to the AGs, and we
have also reached out to the attorney general. You may not have
been here when I talked about this, but we are in the process
of trying to resurrect something called the Executive Working
Group which was very active in the 1990's, sort of stopped in
the last 8 years, that involves Justice, the attorneys general,
and the Federal Trade Commission having regular meetings to
coordinate activities. That is going to be very, very helpful
going forward.
Mr. Stupak. You are right. I didn't hear that earlier
testimony but I am glad to hear it and urge you to continue
that progress. Thanks.
Mr. Rush. The chair thanks the gentleman. The chair now
recognizes himself for 2 minutes of additional questions.
Chairman Leibowitz, if this Congress would enhance your
authority, can the Commission set up a separate office to
regulate and enforce consumer abuses and, if so, would this
cover other substance of the FTC?
Mr. Leibowitz. Well, I would say this. As you know, Mr.
Chairman, we are a small agency with a pretty large mission and
we have to leverage our resources all the time, so if you give
us that authority, and I think a majority of the Commission
would be willing to embrace that authority and I think we could
do good things for consumers, we will need more resources. I
don't know that we need to grow to the level we were at in
1980, which was 1,800 FTEs, but I think to discharge--what you
don't want us to do is to take people from spyware cases and
other types of fraud cases and then simply move them to the
newest, most problematic area and forget about all the other
things we do.
So I think we need more resources. I do know the
appropriations committees are interested in giving us more
resources and have given us small plus ups over the last couple
of years because they like what we are doing, but we probably
need additional resources on top of that.
Mr. Rush. I have less than 1 minute, and I just want to ask
another question on pay-day lending. I believe that pay-day
lenders have a role in our economy but there are far too many
abuses. Does the FTC have authority to crack down on pay-day
lending practices such as rollover fees and the specific
statutory language leading to direct the Commission to
adequately deal with certain abusive pay-day lending features?
Mr. Leibowitz. Well, I would say yes and no. We have
brought about a half dozen pay-day lending cases in the last 5
years. We don't have obviously--Congress set a cap, I believe,
for pay-day loans outside of military bases at 36 percent a
couple of years ago. We obviously don't have the authority to
set a cap but one thing we found in our pay-day loan cases is
the imbedded--is that malefactors have sort of imbedded fees
that consumers don't know about, and so they will pay off their
loan in 2 weeks but it will be a day late, and so then there
will be a fee that pops up and then it is compounded and then
they are sort of in a worse circle of debt. So we have the
authority to do that.
I think if you gave us the authority to go--if you gave us
the authority to do rulemakings, we would look at ways to
promulgate rules that would require better behavior by a lot of
the pay-day lenders.
Mr. Rush. The chair recognizes Mr. Radanovich for 2 minutes
for additional questioning.
Mr. Radanovich. Thank you, Mr. Chairman. Mr. Leibowitz, you
had mentioned that the commissioners decided not to initiate a
rulemaking on deceptive Internet advertising, and the reason
was because Congress would eventually act on the issue which
you would have if you could proceed under the APA. And it
sounds like, and we can have a discussion about this, that you
are suggesting that the FTC APA rulemaking would obviate the
need for legislative body at all. And adding to that question,
I think I would ask isn't the Magnusson-Moss process
intentionally deliberate similar to the congressional
legislative process? I mean the founding fathers set this whole
thing up so that legislating was difficult, and should your job
be made easier or should you have to deliberate with us for a
proper approach----
Mr. Leibowitz. All of us think our jobs should be made
easier, but I don't mean to suggest that we would have obviated
the need for congressional legislation if we had been able to
do a rulemaking. And I don't mean to say that we wouldn't have
stopped, you know, the economic mess that we all know we are
in, but I do think we could have cleaned things up more quickly
if we had APA rulemaking or something close to APA rulemaking,
but again these were just discussions among commissioners
because we knew that under APA--we knew that under Mag-Moss
rulemaking it would be very, very hard to do a rule in a timely
manner.
And that is the problem with Mag-Moss rulemaking. I don't
mean to say--I don't know if you were here when I was having a
conversation with Mr. Stupak. There is a rationale for having
us make rules more slowly, and certainly among folks who follow
the FTC and have for years and decades there might have been
some excesses perceived or real in the 1970's that led to some
of the restrictions. For example, the restriction on unfairness
that makes, as Mr. Pitts pointed out, makes it difficult for us
to bring an unfairness case. But having said that, I think it
is worth, and I know you are interested in just discussing this
issue further about whether it makes sense to give us some
relief from Mag-Moss. It doesn't necessarily mean it has to go
all the way over to APA rulemaking, but I do think in some
areas, you know, you want us to be able to act more nimbly,
more agile and more quickly, maybe not in every area but in
some.
And when you pass new rules or new laws like Can-Spam, you
have given us that APA rulemaking, and we have that APA
rulemaking in the Omnibus for mortgages, for everything in the
mortgage life cycle. So one thing is watch to see how we do in
the mortgage with the rulemaking authority we have. If we do a
balanced job, maybe it makes sense to give us just a little bit
longer leash.
Mr. Radanovich. Thank you.
Mr. Rush. The chair now recognizes the gentlelady from Ohio
for 2 minutes.
Ms. Sutton. Thank you, Mr. Chairman. You heard some
discussion here about the state attorneys general, and in my
opening statement I talked about some of the actions that we
have taken in Ohio, but even after all that we have done, I am
going to read to you the headline of a report from the Housing
Research and Advocacy Center that is in Cleveland. The headline
reads pay-day lenders operating in 81 Ohio counties charging up
to 680 percent interest. Lenders avoiding the 28 percent APR
cap passed by legislature and voters, and that is at the state
level, in 1,020 stores statewide. And just to give you an idea
of what is happening here despite legislation passed in 2008
aimed at lowering interest rates on short-term loans pay-day
lenders are operating, as the headline reads, in 81 of Ohio's
88 counties making loans in some cases that carry that
extraordinary annual percentage rate, 24 times more the rate
that was approved by the legislature for such lending.
And they have avoided the 28 percent cap by using other
laws, so they are very crafty and they are very quick making
the necessary adjustments to continue to reap what they reap. I
guess my question just is what can you do to help or what can
we do to help?
Mr. Leibowitz. Well, I mean there is no magic bullet for
solving these problems, as I am sure you know. I was asking my
staff about usury laws in different states yesterday as I was
preparing for the hearing, and someone pointed out that in
Missouri the cap is 2000 percent, so you borrow $100, you
forget about it, the next year you owe $2,000. Look, one part
is working with attorneys general because we have to leverage
our limited resources, and that is a part of it. Another part
is consumer education. We have a terrific consumer education
group and that is a part of it. You know, I wish I could tell
you there is a particular answer to this problem but it is--
there just isn't, and we all have to sort of pull--and, by the
way, as more people are unemployed as the economy continues to
spiral down, you are going to see more of these problems. You
are going to see more people borrowing from pay-day lenders.
Now Congress made the determination that outside of
military bases pay-day lenders should be capped at, I think, 36
percent. I suppose Congress could make the determination that
pay-day lenders should be capped at 36 percent and limited in
fees, but that is a decision for you to make. I will say this.
If you give us more authority to do rulemaking in this area, we
will take a look at pay-day loans.
Ms. Sutton. With the chair's indulgence, I appreciate that,
and thank you for bringing up the issue about loans near
military bases, and I would like to follow up with you about
that as well because I understand that still problems remain,
and I would like to talk about how we actually aggressively go
after that.
Mr. Rush. The chair thanks the gentlelady, and the chair
thanks the chairman again for the extensive use of his time. We
know that you are quite busy and we certainly thank you for
your enlightening commentary to this committee. We do intend to
work with you on these and other matters as we proceed. And we
just want to let you know that we appreciate your presence
here.
Mr. Leibowitz. Thank you.
Mr. Rush. The chair now calls the second panel to the
witness table. The chair wants to welcome this extraordinary
panel before the committee, and we want to introduce you
individually, and then we will ask that you all stand after
your introduction so that we can swear you in. To my left, Mr.
James Tierney. He is a Lecturer-in-Law at Columbia Law School,
and he is the former attorney general of Maine. Welcome, Mr.
Tierney. Next to Mr. Tierney is Mr. Christopher Peterson,
Professor of Law at the S.J. Quinny College of Law. Welcome,
Mr. Peterson. Next to Mr. Peterson is Mr. Ira Rheingold. He is
the Executive Director of the National Association of Consumer
Advocates. Mr. Rheingold, welcome. And next to Mr. Rheingold is
Mr. Nathan Benson. He is the CEO of the Tidewater Finance
Company, Inc., and he is testifying on behalf of the American
Financial Services Association. Welcome, Mr. Benson. And now I
would like to swear the witnesses in. Will the witnesses please
stand and raise your right hand?
[Witnesses sworn.]
Mr. Rush. Let the record reflect that the witnesses all
answered in the affirmative. The chair recognizes Mr. Tierney
for 5 minutes for the purposes of an opening statement.
TESTIMONY OF JAMES TIERNEY, LECTURER-IN-LAW, COLUMBIA LAW
SCHOOL; CHRISTOPHER PETERSON, PROFESSOR OF LAW, S.J. QUINNY
COLLEGE OF LAW; IRA RHEINGOLD, EXECUTIVE DIRECTOR, NATIONAL
ASSOCIATION OF CONSUMER ADVOCATES; AND NATHAN BENSON, CHIEF
EXECUTIVE OFFICER, TIDEWATER FINANCE COMPANY, INC., FOR THE
AMERICAN FINANCIAL SERVICES ASSOCIATION
TESTIMONY OF JAMES TIERNEY
Mr. Tierney. Thank you, Mr. Chairman. My name is Jim
Tierney. I am the Director of the National State Attorney
General Program at Columbia Law School, and in that capacity I
work closely with the men and women who serve as your attorneys
general and your staff, all of whom are deeply committed to
rooting out fraud in the area of credit. My testimony is
obviously my own, but I have discuss it with a number of
attorneys general, including your own, Mr. Chairman, Lisa
Madigan, and I think I broadly reflect the views of those
attorneys general who are committed to this important issue. I
think if there is one thing that is clear is that we have
insufficient consumer protection in the field of credit. That
is the bottom line. We are not doing enough. The crisis is real
and it is growing. And if there is one single lesson that has
to be received in the halls of Congress and the halls of
federal regulators, including the Federal Trade Commission, is
that the states got it right and the states got it first.
Speaking bluntly, until we have effective state regulation
from state attorneys general and state banking commissioners,
we will never get ourselves out of this hole. The question is
how do we get from here to there, and that is a challenge.
There is a long history of relationships between the federal
and state approach to working with these issues. The federal
government has a number of very narrow federal statutes
enforced by not the Federal Trade Commission but enforced by
banking regulatory agencies whose first job is to assure the
safety and soundness of the banking community, and we see how
well they have done that.
But in addition to that, it is their responsibility
allegedly to deal with consumer protection and they just don't
do it. It is not their highest priority. It never will. On the
state side you have broader laws, state unfair, deceptive and
trade practices act, which are flexible, and state attorneys
general get it right and get it first not because of--although
they show great leadership and great courage they get it
because they are structured to do it. They live in communities.
Like you, they have constituents. They are able to move and
move quickly, and they are able to move on a national basis and
on a bipartisan basis so that they are able to achieve some
very specific and concrete results.
Now get to the hearing of the Federal Trade Commission.
There is a long history between the Federal Trade Commission
and the state attorneys general. Sometimes it is very positive.
In the 1970s federal funding with the help of the Federal Trade
Commission actually went to the states to get states more
involved in consumer protection. Again, during the terms of the
first President Bush and President Clinton, again we had warm
and solid relationships with the Federal Trade Commission and
the states were on the same side. The last 8 years have been
very cold years. And I commend our new chairman. Our new
chairman did the best he could to explain the facts as he found
them, but the bottom line is that the Federal Trade Commission
has been on the sidelines on a number of very, very important
cases, and this is very unfortunate.
Not only were they not involved in the cases but even
informally they never called up an attorney general and said
what did you learn? What are you seeing about the patterns of
fraud? And this is a serious problem. I commend the chairman
for reinstituting the Executive Working Group, which I called
for in my formalized testimony. It is extraordinarily
important. There are some regional directors of the FTC who
work with the states, there are some who not. Certainly, the
FTC are bringing cases but are these the biggest cases or is
the FTC showing an instinct for the capillary. Are they
striking at the major issues or are they grabbing onto low
hanging fruit when they go after a case? We don't know. We
don't know because people are not sitting down in the same work
and discussing how do we put together a systematic,
sophisticated process by which we can root out consumer fraud,
and that requires a lot of work because there will never be
enough lawyers in the Federal Trade Commission, never, never,
never, to track down the kind of consumer fraud we are seeing.
The FTC has to work with the states, state banking
commissioners, the private bar, consumer advocacy groups, in
other words, all the people that the states work with every day
as they fashion the kind of priority prosecutions that are
absolutely necessary to make this happen. Now not only have the
states brought the cases that have been alluded to in the
earlier testimony, the Household, the AmeriQuest, and the
Countrywide, but they had to do it with one hand tied behind
their back because they are litigating with the same federal
agencies who are trying to pre-empt them from bringing these
cases at all. That case is back before the United States
Supreme Court again in April. It is a serious issue. The
Banking Committee has held hearings on this. It is
extraordinarily important that the Federal Trading Commission
and the chair of the Federal Trade Commission stand up as has
the chair of the FDIC, Sheila Bare, and said this is not a time
to pre-empt states. We have a problem. We need more consumer
protection, not less, and the timing is of extreme importance.
So with that, Mr. Chairman, thank you for giving me this
opportunity, and I look forward to answering any questions that
you might have.
[The prepared statement of Mr. Tierney follows:]
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Mr. Rush. Thank you. The chair now recognizes Mr.
Christopher Peterson. Mr. Peterson, you are recognized for 5
minutes.
TESTIMONY OF CHRISTOPHER PETERSON
Mr. Peterson. Thank you, Mr. Chairman, ranking member. It
is an honor to be here today and share a few thoughts. I would
like to start with two quick statistics, if I could, about the
sub-prime and alternative mortgage product crisis. The first is
roughly 6 million foreclosures coming through the pipe
according to Credit Suisse, and then foreclosure rescue scam
cases brought by the Federal Trade Commission, 6. According to
their testimony in the Senate last month, they brought 6
foreclosure rescue scam cases for 6 million foreclosures. That
is 1 in a million. Where I come from that is sort of a cliche
you talk about when you said he is not doing anything, right?
In my view, honorably, the Federal Trade Commission is a good
agency that does their best but they are not doing anything. We
are talking about taking teacups of water out of an ocean. It
is just not even close to the sort of magnitude of problems
that we are talking about.
And so if I could just quickly, you talk about the rule of
the law. We all have been talking about all these
generalizations about separating good loans from bad loans.
Just talk about the laws for a second. There is equal credit--
they have four titles of the Consumer Credit Protection Act,
and then they have their deceptive trade practices authority.
The Equal Credit Opportunity Act is designed to prevent
discrimination in awarding credit. It doesn't do anything in
the way of preventing bad loans from being made. The Fair
Credit Reporting Act tries to clear up inaccurate credit
information, but that is not the problem that we had here. Lots
of people had prime credit histories and were still getting
non-amortizing loans that have gone in waves into foreclosure.
The Fair Debt Collection Practices Act is a nice gesture
but it generally doesn't apply to home mortgage loan servicers
and it comes too late. I mean at the point where the loan is
already in default and there is debt collection problems, it is
too late at that point. Then the Truth in Lending Act is a nice
idea but it is too late. The disclosures are confusing. People
generally just don't read them. They ignore the disclosures.
And even if that was a great strategy the statute that is
designed to promote honesty in origination of loans doesn't
apply to mortgage brokers who are the people that actually talk
to consumers. What sort of a truth in lending idea doesn't
apply to the people who talk to the borrower?
And then in addition to those four statutes, they also have
two significant regulations that they have done under their
deceptive trade practices authority. The holder in due course
notice rule which doesn't apply to home mortgages, and that was
back in 1975 and it has never been updated. And, second, the
credit practices rule which bans about 5 different problematic
contractual provisions including confessions of judgment and
pyramiding late fees, but it hasn't been updated since 1984.
And this regulation doesn't talk about any of the non-
amortizing products and sub-prime products that we are talking
about in the past few months.
And that is it. I just did it. In 3 minutes I summed up
their entire regulatory structure, and it really doesn't do
much of anything to try and prevent home mortgage fraud. And
what are the barriers that prevent more stuff from taking
place? Well, it is true that they have this inefficient
regulatory rulemaking process, and it seems to me it would be
helpful to speed that up. But the real problem is the
fragmented federal regulatory system. On my hand I can count 11
different agencies that are supposed to be dealing with this
problem, the Federal Reserve Board of Governors, the Office of
the Comptroller, the Office of Thrift Supervision, FDIC, the
National Credit Union Administration, the new Federal Housing
Finance Administration, if I am getting that right, the new
OFHEO, HUD, SEC, the FBI and Justice at the same time, and then
finally the Federal Trade Commission.
In this fragmented system, the capital flows to the weakest
regulator like water going down into the basement. And the
result is that there is very, very little actual rulemaking to
try and deal with the problematic practices that are actually
in our industry. So I have been coming up with a list of all
the things that I think needs to get done, and I have this
gigantic list of problems in our statutory system. It is a big
list. We are talking a lot of changes that need to be made.
Congress could do that but it is going to be a long and
complicated bill. It is going to be very controversial. You
could give it to a federal agency to try and do it but which
one would you choose? The only plausible existing candidates
are the Federal Reserve, which already have that authority
under the Home Ownership and Equity Protection Act or the
Federal Trade Commission, which is a good choice but has
nowhere near the resources and has a too expansive mission.
In my view, respectfully, it is time for a new regulatory
agency that deals exclusively with this issue and has authority
to pursue protection of consumers on consumer finance issues.
And if you are not talking about that, if you are just talking
about more tinkering then you are just kind of kidding yourself
and you are not really going to fix anything.
[The prepared statement of Mr. Peterson follows:]
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Mr. Rush. The chair thanks the gentleman. The chair now
recognizes Mr. Rheingold for 5 minutes.
TESTIMONY OF IRA RHEINGOLD
Mr. Rheingold. Thank you, Chairman, and thank you, Ranking
Member Radanovich. It really is quite a honor to testify before
you, Congressman Rush. I started my career as a consumer
advocate in Chicago where I began a legal assistance foundation
foreclosure prevention project, and I worked through the mid-
90's dealing with all the mortgage crises that we had in Austin
and Roslin, all over Chicago. And the things that we saw in
Chicago in the 90's, we are seeing nationwide today. What I
think disappoints me most about today's hearing is I am going
to go through a litany of things that we consumer advocates saw
in the 90's, saw in the early 2000's, and we see the exact same
thing today. Nothing has changed except that things have gotten
worse, and there has not been a federal response to it,
including the FTC.
I think about the world I see. I run an organization called
the National Association of Consumer Advocates. We are the
private attorneys, the legal service attorneys across this
country who actually do the consumer advocacy work. We are on
the ground every single day representing consumers who are
losing their houses or having their car repossessed or being
harassed by debt collectors. We see what is going on there but
the federal regulatory agencies and the FTC have not talked to
us. So what do we have out here? Oh, I should mention I also
run a project called the Institute for Foreclosure Legal
Assistance, so I am in contact and talk daily with all the
private attorneys, the legal service attorneys in the community
who are actually fighting foreclosures. We are on the ground.
We know who the bad actors are. We see the bad practices, and
we see what is going on out there.
So what do we have? We have a completely broken mortgage
lending industry. There is no question about it. Unfairness
runs rampant. Bad lending practices are everywhere. We have a
broken mortgage servicing system, completely broken. It is
unaccountable. They can't figure out how much money people owe.
They can't modify a loan to save their lives. We have seen,
Chicago is a perfect example of it, a dual credit market. If
you are middle income or rich, you have banks. If you are poor
or you are low income, what do you have? You have currency
exchanges and you have pay-day lenders, and you have rent to
own, and you have refund anticipation loans. It is stealing
wealth out of the communities that we care about most, and it
has gone on unabated for the last decade with nobody really
taking any real action and it is only getting worse.
We have a debt collection industry that is completely out
of control. We have growth of a debt buying industry that is
sort of mind boggling in the way they go about collecting debts
without actually even knowing--not having the contract that the
person actually had that debt originally from. They don't have
any proof that that is owed, yet they are using our nation's
court and using our nation's private arbitration system to
collect debts against people. We have a broken credit reporting
system where consumers can't get real access to their credit
reports. They don't get the information necessary and they
can't fix those reports once they are broken.
All of those things is what our credit market looks like
today. And I went and talked with consumer advocates who I talk
with every single day in this country. I asked them about the
FTC and their role over the last 8 years and the last 10 years
in protecting consumers. I will just pick some of the
adjectives that I got responded, passive, antagonistic,
irrelevant, disengaged, counterproductive, stuck in a world
that doesn't regulate. They have not been part of the ballgame
here. They can cite statistics. They can talk about some cases
that they brought. In the scheme of things, it is mostly
irrelevant. Now to be fair to them, they are under resourced,
and there are good career attorneys there who do their best.
But the fact is they have been disengaged.
I have been in Washington now 7 years after I left Chicago,
and some day I hope to return. And on one hand I can count the
conversations I have had with the FTC. We are the people out
there doing this kind of work. We are out there on--it really
is sort of mind boggling to me that we sit here today with the
problems that existed 10 years ago and we have had federal
regulatory agencies who have done nothing except exacerbated
the problem. The Federal Trade Commission, as Chris said, was
using the spoon to clean out an ocean. They simply did not do
the job. There is a number of things that can be done to
improve them. Hopefully in the new Administration they will be
more assertive and more aggressive. They have been completely
passive in using their unfairness authority. They need to use
it. They need to declare things--we know when things are
unfair.
When you give somebody a loan that they can't afford to pay
back, that is unfair. It is not a really hard thing to figure
out. They do need greater rulemaking authority. It is crazy.
Six to 8 years to make a rule to protect consumers, that is
just not the way it should work. Hopefully, they will have
leadership, and I hope Chairman Leibowitz will demonstrate some
leadership in terms of being assertive and aggressive in this
area. They should have concurrent authority over the banks.
There is a special place in regulatory hell for the federal
bank regulators over the last 8 years and their complete
failure to what has happened here. So hopefully the FTC can use
of their consumer protection powers. I will stop there but be
happy to answer any questions you might have about the FTC and
the credit crisis we are facing.
[The prepared statement of Mr. Rheingold follows:]
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Mr. Rush. Thank you. The chair now recognizes Mr. Benson
for 5 minutes.
TESTIMONY OF NATHAN BENSON
Mr. Benson. Good morning, Chairman Rush, Ranking Member
Radanovich, and members of the subcommittee. My name is Nathan
Benson, and I am the CEO of Tidewater Finance Company, which
was established in 1992 to purchase and service retail
installment contracts. The company is based in Virginia Beach,
Virginia, and has two lines of business, Tidewater Credit
Services for consumer goods and Tidewater Motor Credit for auto
services. I am here today in my capacity as a board director of
American Financial Services Association, AFSA, whose 350
members include consumer and commercial finance companies, auto
finance companies, card issuers, mortgage lenders, industrial
banks and other firms that lend to consumers and small
businesses. AFSA appreciates the opportunity to provide
testimony to the members of the subcommittee.
Today, I will focus my testimony on the role that the
Federal Trade Commission has played, and continues to play, in
helping to restore confidence in the financial services
industry. I will also address the installment loan industry's
importance in providing access to credit to millions of
Americans. The FTC is the effective regulator. The FTC has been
very successful in enhancing consumer protection under its
current authority. It has addressed the economic crisis in two
ways, first, by using its enforcement authority under Section 5
of the FTC Act to pursue bad actors in the sub-prime mortgage
industry, and, second, by setting federal policy through
guidance and public comment. I will start by providing some
examples that fall into the first category.
The FTC successfully negotiated a $40 million settlement
with Select Portfolio Services in November 2003 for engaging in
unfair and deceptive practices in servicing sub-prime mortgage
loans. The settlement was modified in August 2007 to provide
additional protections to borrowers, including mandatory
monthly mortgage statements, a 5-year prohibition on marketing
optional products such as home warranties and refunds for
foreclosure attorney fees for services that were not actually
performed. The FTC has entered into a $65 million settlement
with First Alliance Mortgage Company for making deceptive sub-
prime mortgage loans. The FTC distributed the $65 million to
nearly 20,000 affected borrowers.
The FTC has successfully pursued other sub-prime mortgage
lenders engaged in what the Commission deemed to be
inappropriate conduct, including Capital City Mortgage
Corporation and Quicken Loans. I want to just move on to the
installment lending and its role in providing credit to
consumers. At the outset, let me say that AFSA shares Congress'
concern about predatory lending. We support the goal of
protecting consumers from unfair, abusive, or deceptive lending
and servicing practices while preserving access to responsible
lenders.
The installment lending industry was born in 1916 out of a
need to provide credit to working men and women. The Russell
Sage Foundation worked with lenders to develop a set of
principles by which they would abide in their lending
activities. Lenders agreed to make the cost of their loans
transparent so that borrowers understood the true cost of the
loan. Loans would be structured over a period of time allowing
a repayment schedule that was long enough to match the earning
power of the borrower. Finally, the lender would price the loan
based on the character of the borrower, which was defined as a
combination of the borrower's employment stability and previous
history of handling credit.
Today's installment lenders are a key element in improving
the socio-economic status of poorer citizens and supporting our
company's economic health. They do this by adhering to basic
principle of economics, that people should borrow so they can
consume based on their permanent income, and that such
consumption is the fuel of our economy. Typically, the middle
and upper class borrow through traditional banking and
financial services relationships. However, average wage earners
with few financial assets often cannot borrow in this way.
Traditional banks simply are not equipped to offer products and
services to these consumers in a manner that is profitable for
the enterprise. As a result, these consumers need access to
safe forms of small-sum credit. These are the very products the
installment loan industry, an industry fully and completely
regulated and examined at the state level, have been providing
successfully for decades.
Certainly, people turn to installment lenders for multiple
reasons. Key among these, however, is the need to access small
sums to deal with unforeseen circumstances. I could go on but
if there are any questions.
[The prepared statement of Mr. Benson follows:]
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Mr. Rush. Thank you. I certainly want to thank the panel
for their excellent testimony. The chair now recognizes himself
for a round of questioning for 5 minutes. I want to address my
first question to the entire panel, and each one of you can
take a few seconds to answer the question as you will. Most of
you have testified this morning that the FTC has not done
enough to address consumer credit issues over the past years,
particularly over the last 8 years. And let me just ask each
one of you, do you believe that this has occurred because of a
lack of action, political or structure in nature? In other
words, do you believe the Commission has failed to act because
of a lack of will or because of some underlying obstacles such
as the lack of statutory authority, the lack of resources,
burdensome procedures, or all of the above? If you could
explain to me in your answer why you believe the FTC has failed
to act. Mr. Tierney.
Mr. Tierney. Well, we can go in the same order,
Congressman. I think it is clear that the leadership of the
Federal Trade Commission at the very highest level in the last
8 years, very highest level, shared the de-regulatory
philosophy that was predominant at the time, and the philosophy
was clearly stated to state attorneys general on a regular
basis that you were vicious intermeddlers, you were denying
credit to people who need it, you are applying the wrong
standards, that we should let the marketplace prevail and it
will be a self-regulatory procedure. And although time and
again attorneys general would expressly predict, it turned out
conservatively, a million home foreclosures they were
characterized as alarmists, not necessarily by the Federal
Trade Commission but by the tone of the times and by the
interest groups that surrounded the Commission, so the
Commission at the top reflected the reality.
I would also make another smaller point that our past two
presidents have persisted in naming people to the Commission
with an anti-trust background, not a consumer protection
background, and that is a bipartisan characterization of our
past three presidents actually. And that it would be a really
good idea if the Federal Trade Commission had someone on the
Commission who had a consumer protection background, and,
secondly, actually had worked with the states and did not come
from a large law firm or from the Hill. And I don't mean the
personal characterization, but I really do believe that the FTC
is lacking that kind of background and experience at the very
highest level.
Mr. Rush. Does the other panel want to weigh in on this?
Mr. Peterson. I do. I would like to say that in the past 12
years it has been primarily a political or lack of willpower
issue, but going forward it is more likely to have something to
do with the structural issues. I think that there are
structural problems but even if 12 years ago we had cleared out
all those structural problems they still wouldn't have done
anything. Going forward, I think they are going to try and do
some things now, and it is going to be harder for them to do it
than it should be because of the structural barriers and it
would probably help if we cleared some of those out. But even
still, I think we are still talking about tinkering with
things. We are not talking about the magnitude change that
needs to happen in order to help facilitate more efficient and
effective commerce.
Mr. Rheingold. I would concur with my fellow panelists, I
think a lot of it was ideological. I think there was this
notion that self regulation would work and the FTC should not
interfere in the commerce of credit, so I think that is part of
it without a doubt. And in part that is why a lot of consumer
advocates did not engage with the FTC and the AGs didn't engage
with the FTCs because we fear that the work we did would
actually be undercut by their philosophy. I do think that
resources are a significant problem there. They have an awful
lot of jurisdiction. They have very limited resources. They
have very little rulemaking, and I also agree that if they had
that authority over the last decade nothing would have changed,
but I think going forward we have some opportunity to do
something.
Mr. Rush. Mr. Benson, I have 30 seconds so please.
Mr. Benson. Yes. We felt that through those cases that they
have done anything about, that has affected over 10,000 people,
and when they pick on an entity in an industry that has helped
everyone that is tied to that industry, so it is not just that
entity that is being affected. It is everyone in that
environment that gets cleaned up pretty quick, so we think they
have been pretty effective. When they pick on one entity it
goes through to the whole industry doing the same things, so we
think so far they have been effective.
Mr. Rush. Thank you very much. The chair now recognizes the
ranking member, Mr. Radanovich, for 5 minutes.
Mr. Radanovich. Thank you, Mr. Chairman. Mr. Benson,
welcome to the subcommittee. I appreciate your testimony. I
want to start off with you on a couple of questions. Do you
believe the FTC needs APA procedures in order to be effective
or can it use the existing authority that it has to effectively
regulate the industry?
Mr. Benson. We believe that it can use its existing
authority that it has.
Mr. Radanovich. Let me ask you, how can regulation be used
to reduce fraud without adding unnecessary compliance costs
that are inevitably passed on to the consumer?
Mr. Benson. Well, most of our members through AFSA are
state regulated so we are controlled by them. We are in favor
of disclosure with all our members, so we work with those
people so we believe with full disclosure and with obviously
the regulations with the state, we believe that fraud will come
out as long as it is monitored.
Mr. Radanovich. I was looking at the new sample disclosure
form by the FTC, which I thought was kind of interesting. Can
you tell me your opinion of it? It seems it is easy to read.
Have you seen it?
Mr. Benson. No, we haven't seen it.
Mr. Radanovich. OK. OK. My first glance at is it is
something that looks kind of positive. I was curious to know
what your thoughts would be on it.
Mr. Benson. As I said earlier, our view is more disclosure
and the simpler it gets, a lot better it is.
Mr. Radanovich. OK. One last question. The FTC has proposed
disclosure simplification forms for mortgage--I think you have
already answered that one. Thank you, Mr. Benson. I appreciate
that. Mr. Rheingold, can I ask you, you testified that the
FTC--that had the FTC had the will to actively engage in
oversight much of the current credit crisis could have been
avoided. We are talking about increasing authority through the
APA and we are discussing that additional authority. Isn't that
kind of a duplicative entry statement?
Mr. Rheingold. I don't think so. I actually think there are
two things happening here, and I think to be fair the FTC was
not the controlling regulatory agency. The OCC and the OTS
really failed and they had a lot of things that they could have
done to prevent the disaster we have today. I think the OCC
through its enforcement powers, if they in fact had been
effective enforcers and using those decisions, I think the
perfect example of a strong enforcement agency can do is what
the Massachusetts AG did in the Freemon case where they brought
a case against the mortgage company who was engaged in unfair
practices, where they were making loans that people could not
afford, and using the unfairness authority that court declared
that these practices, A, B, C, and D, making a loan at a teaser
rate that explodes and people can't afford it is unfair.
Making a loan to people over 50 percent of their gross
income is per se unfair. If the FTC would have taken some of
those actions, even in the Fairbanks case there was an
opportunity to declare certain practices that the service
industry does as unfair, it could have had a real impact on the
type of practices that exist throughout the mortgage industry.
Mr. Radanovich. Using that example, where was the problem
then? Was it in the lack--was it in the application of
Magnusson-Moss or was it----
Mr. Rheingold. Well, I am talking about their enforcement
power. There is a difference between rulemaking--there are a
couple of ways that they can set the law. By bringing in--if
the FTC brings an action and gets a court order that declares
as part of their court-agreed order that this practice is
unfair, that will have a pretty large impact in terms of the
rest of the industry because it will send a clear signal that
this is an unfair practice and hopefully would stop it. That is
one way they could do it, through their court enforcement
procedures.
I think the easier thing they could have done if they, in
fact, had normal every day authority to make rulemaking is they
could have done that without having to bring court cases. And
the fact is, as someone who has been a veteran of dealing with
a lot of the rulemaking that is done through all sorts of
regulatory agencies, industry and consumer groups have ample
opportunity through the APA procedure to get their voices heard
and influence that process. And the notion that they need 6 to
8 years with this lengthy, excuse me, cockamamie system of
developing a way of rulemaking really it is counterproductive
and useless, and anything that they could do with the current
system that we have in place if it takes 6 to 8 years by the
time you get a decision the problems out there would have
evolved to something completely different.
Mr. Radanovich. All right. Thank you very much, Mr.
Rheingold. I yield back, Mr. Chairman.
Mr. Rush. The chair thanks the gentleman. The chair now
recognizes the gentlelady from Ohio, Ms. Sutton, for 5 minutes.
Ms. Sutton. Thank you, Mr. Chairman. We have heard
repeatedly here today about some of the shortcomings of what we
are trying to accomplish in the process that now exists. A
couple of those, of course, revolve around the fact that the
FTC, we hear over and over again, doesn't have the authority
over banks that it has over other entities, and we also hear
about the rulemaking process being too cumbersome, but I guess
one of the questions for this committee and for the Congress
and for all of us here is if the FTC had rulemaking authority
that was more streamlined, APA rulemaking authority, and they
had greater authority over the banks, and they had resources to
do the job, is it better for the FTC to be the agency that
deals with this or some of you have suggested there should be a
new entity to do so. If you could just answer those questions
for me, I would appreciate your opinion.
Mr. Tierney. I guess I would say, Congresswoman, I, like
many of us, was studying the proposal by Professor Warren. It
has been called the so-called Durbin-Delahunt bill. I have not
taken a position on it yet but it has a lot to it. But, if I
may, to go back to your earlier point about pay-day lending,
and remember the name of the song, If You Can't Be With the One
You Love, Love the One You're With, we have enough authority
now between the states and the trial lawyers and the
legislatures and the Federal Trade Commission. If we just want
to do something and focus on the problem such as pay-day, take
the resources we have, set a national strategic goal, and just
go do it.
And my concern about discussion of the larger institution
is that while we play that huge congressional effort that goes
on for so long, that we have millions of people suffering every
day, and we should do something right now.
Mr. Benson. I believe that the way you regulate it, and I
am the only, I think, business person here, is you got to have
some skin in the game, you got to have some money in the game,
so if you are going to securitize you got to have--someone has
got to hold a portion of the securitization on the books. If
you are going to have loans out there, you got to have the risk
factor, that you shouldn't be able to go and draw on someone's
back account. You should be able to analyze the person's
credit, make the loan that they can afford over time, payments
over time, equal payments. That would solve the problem rather
than the risk factor. When you have got nothing at risk, the
issues come out.
Mr. Peterson. If I could, I think that a new agency is the
way to go. That is my honest opinion. The second choice would
be the Federal Trade Commission. I don't think you should give
it to the Federal Reserve Board. They have demonstrated that
they are bankers at their heart and soul, and they have the
authority to pass--they have extensive authority under the 1994
Home Ownership and Equity Protection Act. You passed that
statute and gave them all the power that they needed and they
did nothing. The Federal Reserve Board could have stopped this
easily with their rulemaking authority under HOEPA, and they
didn't do anything, so what is to think that that is going to
change now?
And what is more with the Federal Reserve Board, they have
so much political autonomy. It is so hard to exercise oversight
over them because of their justified and needed monetary policy
independence. I just don't think that it is a good political
entity that is going to be at the beck and call of Congress and
will be responsive to the people. It is time for a new consumer
finance regulator that deals with these types of questions, and
if you can't get that passed the Federal Trade Commission is
the next best choice. But the problem is that the FTC has a lot
of other important stuff to do. It needs to be out there on the
anti-trust watchdog beat. It needs to be dealing with privacy
issues, telemarketing issues, all very important issues, and
very different than the consumer finance problems that we are
talking about now. If this is ever going to happen, it is now,
and if you don't do it now it will never happen, and we will
continue to suffer from these systemic problems for the next 50
to 100 years.
Mr. Rheingold. I agree.
Ms. Sutton. Is that an I agree, Mr. Rheingold?
Mr. Rheingold. I absolutely agree.
Ms. Sutton. OK. Thank you, and I yield back.
Mr. Rush. The chair thanks the witnesses. We don't intend
to go into a second round of questioning. I think that we have
been well served by both panels today, and the chair really
again--we are most grateful to this panel for the extensive use
of your time. And we want to commend you on your patience with
us through this particular issue. I just want to note that all
witnesses should be prepared to receive and answer written
questions from members of this subcommittee. And with that,
thank you very much.
Mr. Benson. Could I ask that my complete statement be
included in the record?
Mr. Rush. So ordered. And I would like to request unanimous
consent to enter into the record a statement from the
organization, Public Citizen. Without objection, so ordered.
[The information was unavailable at the time of printing.]
Mr. Rush. This subcommittee now stands adjourned.
[Whereupon, at 12:30 p.m., the subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
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