[Senate Hearing 111-33]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 111-33



                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE


                             FIRST SESSION


                           FEBRUARY 26, 2009


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

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                             FIRST SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas, 
JOHN F. KERRY, Massachusetts             Ranking
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            JOHN ENSIGN, Nevada
BILL NELSON, Florida                 JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey      ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas                 JOHNNY ISAKSON, Georgia
CLAIRE McCASKILL, Missouri           DAVID VITTER, Louisiana
AMY KLOBUCHAR, Minnesota             SAM BROWNBACK, Kansas
TOM UDALL, New Mexico                MEL MARTINEZ, Florida
MARK WARNER, Virginia                MIKE JOHANNS, Nebraska
                    Ellen L. Doneski, Chief of Staff
                   James Reid, Deputy Chief of Staff
   Christine D. Kurth, Republican Staff Director and General Counsel
                  Paul Nagle, Republican Chief Counsel

                            C O N T E N T S

Hearing held on February 26, 2009................................     1
Statement of Senator Rockefeller.................................     1
Statement of Senator Pryor.......................................    51
Statement of Senator Lautenberg..................................    54
    Prepared statement...........................................    55
Statement of Senator Klobuchar...................................    56
Statement of Senator Begich......................................    58
Statement of Senator Warner......................................    62
Statement of Senator Thune.......................................    64


Hon. Pamela Jones Harbour, Commissioner, Federal Trade Commission     3
    Prepared statement...........................................     5
Nancy Dix, Consumer, Ansted, West Virginia.......................    15
    Prepared statement...........................................    16
Prentiss Cox, Associate Professor of Clinical Law, University of 
  Minnesota Law School...........................................    17
    Prepared statement...........................................    19
Travis B. Plunkett, Legislative Director, Consumer Federation of 
  America On Behalf of The Consumer Federation of America, the 
  National Consumer Law Center (On Behalf of its Low-income 
  Clients), and U.S. PIRG........................................    27
    Prepared statement...........................................    29
Bill Himpler, Executive Vice President, American Financial 
  Association....................................................    43
    Prepared statement...........................................    45


Hon. Kay Bailey Hutchison, U.S. Senator from Texas, prepared 
  statement......................................................    77
Letter, dated February 26, 2009, to Hon. John D. Rockefeller IV, 
  Michael C. Dillon..............................................    77
Letter, dated March 23, 2009, to Hon. John D. Rockefeller IV, 
  Hon. Pamela Jones Harbour, Commissioner, Federal Trade 
  Commission.....................................................    80

                          CONSUMER PROTECTION 
                         AND THE CREDIT CRISIS

                      THURSDAY, FEBRUARY 26, 2009

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:03 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Senator John 
D. Rockefeller, Chairman of the Committee, presiding.


    The Chairman. We'll come to order. As I think I've said 
before to Members, I will give an opening statement and Senator 
Wicker will give an opening statement if he wishes to. But that 
will be all because the whole philosophy is to get to the 
witnesses, and to listen to the witnesses and hear what they 
have to say.
    Then we'll go into a period of questions. The questions 
will be based upon first come, first serve, so to speak. The 
people who have statements can work that into their questions. 
Then we'll have as many rounds of questions as we need, except 
for a vote which is coming up at 10:30. And we'll handle that.
    So we're having our first policy and oversight hearing of 
the 111th Congress today in the Commerce Committee. What we're 
going to do is to highlight and to uncover what I think are 
abusive practices that take advantage of American families.
    I decided to hold the first hearing on this topic as the 
new Chairman for a very specific reason. We have a lot of huge 
subjects that we look at in terms of aviation, transportation, 
oceans, atmosphere, climate change, all kinds of things. But 
the most important aspect of what's going on in America right 
now is the suffering of the American people.
    And that's true in my State of West Virginia. It's true in 
your state. It's true in your state, Senator. We have to be 
sensitive to that. We want to expose that and see what we can 
do about that.
    In spite of our broad jurisdiction I want the American 
people to know that what is going to be a big part under my 
Chairmanship is people. People in trouble. People that are 
hurting and how we can help them. We've got to do that as we do 
all the other large NASA-like subjects that we have to do very 
thoroughly as well.
    Families are hurting all across the country. We all know 
that. They're counting on Congress to help them out. I 
sincerely hope that this committee will always focus attention 
on that, on people who are just hurting. There are just so many 
and it's going to get worse before it gets better.
    It sickens me to say that during these extremely difficult 
times there are really some outrageous, from my point of view, 
fraudulent practices happening every single day to people that 
aren't necessarily prepared to combat them. We have identified 
some of the worst offenders operating under the guise of 
providing consumers with assistance, with the intention, in 
fact, of doing anything but that. Deceitful fraudsters are 
aggressively working to attract consumers with false promises, 
offering misleading credit repair, credit counseling, debt 
management and mortgage rescue services. It's really quite 
stunning in fact.
    As the financial crisis increases by the day and families 
do all they can just to survive and individuals, what I would 
say are people with criminal instincts who are looking to make 
big dollars through illegal channels, they also increase. When 
more people are in distress, more people want to take advantage 
of the people in distress. The plummeting markets have 
encouraged many with ill will to create multiple opportunities 
for both sophisticated institutions and criminal, in my 
judgment, activity to take advantage of people in desperate 
situations. Nothing concerns me more than the cold, hard 
reality that hard-working Americans are being swindled.
    Imagine a family where the parents are working two or three 
jobs just to make ends meet. The money coming in just barely 
covers the cost of food, cost of the mortgage, cost of clothing 
while the debt in the meantime is piling up as they struggle to 
pay for prescriptions, the broken appliance or other things 
which they have to do. Can't avoid but doing, but can't do.
    And all of a sudden the phone rings. Someone on the other 
line is promising a chance for a way out. They use slick 
advertising, lots of it, television, radio.
    Confusing language and rushed tactics to lure these folks 
in. But it's all a lie. The family is swindled. Swindled. They 
could lose it all and many do because they're innocent of what 
these tactics entail and how they can counter them. And they 
feel alone and helpless.
    During this period of unfathomable uncertainty families are 
thinking more thoughtfully about their spending habits. They're 
seeking out advice from experts if they know them to help them 
manage their finances. Often these financial services help keep 
families afloat. It works. Sometimes they do not.
    That's why we're here today--to weed out the good from the 
bad and discuss ways that we can protect as many consumers as 
possible in the months and years to come. So we've gathered an 
expert panel of witnesses, as always, to discuss what's 
happening to families once they pay for services to help them 
manage their debt, repair their credit scores or to try to or 
refinance their homes.
    We have a West Virginia witness here today, I'm very proud 
to say, whose testimony will typify the type of abuse that we 
aim to tackle. I look forward to hearing her testimony in 
person and working with my colleagues to consider what steps we 
might take to make sure that these kinds of things don't happen 
    You know, the Committee has the authority to help people 
have real opportunities to participate in the American dream. 
The question is are we using it? Do we wish to use it? Do we 
have the will to use it and to live healthier and safer lives? 
With today's economic circumstances it's even more important 
that the Congress step in, speak up and protect those who need 
it most.
    Ms. Nancy Dix from Ansted is here today to testify about a 
foreclosure rescue scam that nearly cost her, her home. And I'm 
anxious to hear it. Mrs. Dix, thank you for appearing before 
this committee.
    We're also going to hear from Professor Prentiss Cox of the 
University of Minnesota Law School. Where's Professor Cox? OK, 
good. He is one of the preeminent experts in the land on 
mortgage fraud and consumer protection and is the former head 
of consumer protection for the Minnesota State Attorney 
General's Office.
    Following Professor Cox will be Travis Plunkett, 
Legislative Director for the Consumer Federation of America. 
Mr. Plunkett is an expert on issues involving credit counseling 
and the debt management market and has been doing significant 
work in this area.
    Finally, we will hear then from--don't worry, Madam 
Chairperson, I haven't forgotten you. We'll hear from Bill 
Himpler, Executive Vice President of the American Financial 
Services Administration.
    I thank all of you for agreeing to testify.
    First, however, I'd like to call on FTC Commissioner Pamela 
Jones Harbour. The FTC is the Federal Government's agency 
charged with protecting consumers from these scams. I know the 
Commission has been actively trying to protect consumers from 
these abuses. I look forward to hearing what Commissioner 
Harbour's perspective is on the scope of the problem and what 
the FTC is doing about it.
    What I'd like to do is to have all the witnesses come to 
the table. Let's listen to all of the witnesses' testimony; 
there are not so many of them, and they'll be talking about 
things which have common threads. Then we can ask them 
    So Commissioner Harbour, I turn it over to you.

                        TRADE COMMISSION

    Ms. Harbour. Good morning. Thank you, Mr. Chairman, Senator 
Wicker, and Members of the Committee. I am Pamela Jones 
Harbour, a Commissioner at the Federal Trade Commission. And I 
appreciate the opportunity to appear before you today to 
discuss the FTC's efforts to protect consumers in this time of 
financial distress.
    I would first like to emphasize that although the views 
expressed in my written testimony represent the views of the 
Commission, my oral presentation and responses to your 
questions will be my own views and not necessarily those of the 
Commission or any individual Commissioner. As Members of the 
Committee are well aware, many American consumers are now 
struggling financially. With the downturn in the economy the 
national unemployment rate last month was 7.6 percent. The 
highest it has been in many years.
    Consumers also are sinking further and further into debt. 
In the third quarter of 2008, the percentage of borrowers who 
are 60 or more days past due on their mortgage loans increased 
for the seventh straight quarter. Similarly in January 2009 
late payments on credit cards in the United States topped 
record levels. And defaults rose sharply.
    Unfortunately experience teaches that some bad actors will 
seek to take advantage of consumers when they are down. These 
bad actors make false promises to consumers about the credit 
they can obtain, the home foreclosures they can avoid and the 
debt burden they can ease. Our mission at the FTC is to protect 
the consumer from being harmed by these false promises, a 
mission that has increased relevance and poignancy when 
consumers are in financial distress.
    At the FTC we protect consumers at every stage of the 
credit life cycle, from when debt is first advertised to when 
debts are collected. The Commission does this by enforcing 
Section Five of the FTC Act which prohibits unfair and 
deceptive acts or practices as well as by enforcing a number of 
special statutes governing financial services including the 
Truth in Lending Act, the Fair Debt Collection Practices Act 
and the Credit Repair Organizations Act.
    Pursuant to these statutes the FTC investigates and brings 
law enforcement actions against brokers, lenders and others who 
deceptively and unfairly advertise or offer credit, creditors 
and servicers who misrepresent fees and amounts owed and 
abusive debt collectors, credit repair companies, debt 
settlement firms and mortgage foreclosure scam artists who 
target delinquent consumers or those who are in default. 
Responding to the current financial crisis the FTC has 
increased its focus on preventing harm to consumers who are 
already in debt by stepping up its law enforcement activities 
relating to foreclosure rescue scams, debt relief services, 
credit repair and debt collection. We also have created and 
distributed extensive consumer education materials about these 
and other financial services topics to assist consumers in 
taking steps to protect themselves.
    The Commission has conducted cutting edge, empirical 
research on mortgage disclosures as well as engaged in 
comprehensive policy development activities relating to debt 
collection and debt settlement. In particular, the FTC today is 
issuing its debt collection workshop report. This report takes 
a comprehensive look at how the debt collection industry has 
changed in the last 30 years and recommends a number of changes 
in the law to modernize into reform the debt collection 
regulatory system.
    The FTC believes that its past efforts have provided 
important protections to the American consumer in financial 
distress. The Agency recognizes, however, that it must do more. 
To allow the Commission to perform a greater and more effective 
role in protecting consumers in financial distress, the Agency 
recommends that Congress permit the FTC to employ notice and 
comment rulemaking procedures to declare acts and practices 
relating to financial services to be unfair or deceptive in 
violation of the FTC.
    The Chairman. Can you repeat that sentence, please?
    Ms. Harbour. The Agency, the FTC, recommends that Congress 
permit us, permit the FTC, to employ notice and comment 
rulemaking procedures. That's APA rulemaking authority, to 
declare acts and practices relating to financial services to be 
unfair or deceptive in violation of our FTC Act.
    The Agency also recommends that Congress authorize broader 
civil penalty authority for the Federal Trade Commission and 
authorize it to bring, in Federal court, suit to obtain civil 
    The Agency also recommends that Congress authorize the FTC 
to promulgate rules to implement the Fair Debt Collection 
Practices Act.
    And the Agency also recommends that Congress provide us 
with substantial additional resources to assist the FTC in 
increasing its law enforcement activities relating to consumer 
financial services and expanding its critical empirical work on 
the efficacy of mortgage disclosures.
    With your help the FTC can and will do more to help 
consumers in financial distress. I would like to take this 
opportunity to thank you, Mr. Chairman and other Members of the 
Committee for the opportunity to speak today. And I would be 
very pleased to answer your questions.
    [The prepared statement of Ms. Harbour follows:]

    Prepared Statement of Hon. Pamela Jones Harbour, Commissioner, 
                        Federal Trade Commission

I. Introduction
    Chairman Rockefeller, Ranking Member Hutchison, and Members of the 
Committee, I am Pamela Jones Harbour, a Commissioner of the Federal 
Trade Commission (``FTC'' or ``Commission'').\1\ I appreciate the 
opportunity to appear before you today to discuss the Commission's 
efforts to help consumers in financial distress.
    \1\ The views expressed in this statement represent the views of 
the Commission. My oral presentation and responses to any questions are 
my own, however, and do not necessarily reflect the views of the 
Commission or any other Commissioner.
    The Commission protects consumers from harmful acts and practices 
at every stage of the credit life-cycle, from when credit is first 
advertised to when debts are collected. At the early stages of the 
cycle, the FTC protects consumers from the unfair, deceptive, or 
otherwise unlawful acts and practices of brokers, lenders, and others 
who advertise or offer credit. The agency also protects consumers at 
the middle stages of the credit life-cycle from the unlawful conduct of 
creditors and servicers who collect payments from consumers who are 
current on their debts. At the later stages of the cycle, the 
Commission protects consumers who are delinquent or in default on their 
debts from the unlawful acts and practices of debt collectors, credit 
repair companies, debt settlement firms, and mortgage foreclosure scam 
    Although the agency protects consumers throughout the credit life-
cycle, the FTC recently has increased its focus on preventing harm to 
consumers who are already in debt. Consumer debt is now at historic 
levels.\2\ Moreover, the recent economic downturn has made it even more 
difficult for consumers with high debt levels to remain current on 
their mortgages, credit cards, and other types of debts.\3\ In short, 
many American consumers are now in financial distress.
    \2\ Between 1985 and 2007, outstanding household debt in the United 
States increased from approximately 60 percent of annual disposable 
income to more than 125 percent, a jump due mostly to increased 
mortgage debt. See Federal Trade Commission, ``Collecting Consumer 
Debts: The Challenges of Change, A Report by the Federal Trade 
Commission,'' at 16 (Feb. 26, 2009). The ratio of household 
indebtedness to annual disposable income peaked at 126 percent in the 
third quarter of 2007. Since that time, the latest available data 
indicate that, as of the third quarter of 2008, the ratio has declined 
slightly to 123 percent. This remains well above typical indebtedness 
levels in the past two decades. See id.
    \3\ For example, the percentage of borrowers 3 who are 60 or more 
days past due on their mortgage loans increased for the seventh 
straight quarter in the third quarter of 2008, reaching a national 
average of 3.96 percent. Press Release, TransUnion, Mortgage Loan 
Delinquency Rates Rise for Seventh Straight Quarter (Dec. 8, 2008), 
available at http://newsroom.transunion.com/index.php?s=43&item=502. 
This figure is approximately 54 percent higher than the figure for the 
third quarter of 2007. Id. Similarly, in January 2009 late payments on 
credit cards in the United States topped record levels, and defaults 
rose sharply to just below all-time highs. Al Yoon, U.S. Credit Card 
Delinquencies at Record Highs--Fitch, Reuters, Feb. 4, 2009, available 
at http://www.reuters.com/articlePrint?articleId=USN0428871920090204.
    Consumers in financial distress are particularly vulnerable to 
unfair, deceptive, and otherwise unlawful business practices. Some debt 
collectors use unfair, deceptive, or abusive practices such as threats 
of imprisonment or harassing calls to try to compel consumers to pay 
their debts. Some debt settlement firms promise for a fee to negotiate 
settlements with creditors that will result in consumers owing less 
than the full amount of the balance on their credit cards, but in fact 
these firms do not negotiate the promised reductions. Some credit 
repair companies promise for a fee to be able to remove delinquencies, 
bankruptcies, and other negative information from the credit reports of 
consumers, but these companies cannot remove such information if it is 
truthful and accurate. Finally, some scam artists target consumers 
facing home foreclosure and promise that for a fee they will be able to 
negotiate a deal with lenders or servicers that will allow the 
consumers to stay in their homes. However, consumers later learn that 
no one has taken steps to save their homes from foreclosure, resulting 
in many consumers losing both the fee and their homes.
    The Commission has used all the tools at its disposal to increase 
its protection of consumers in the later stages of the credit life-
cycle. The FTC has brought law enforcement actions against those who 
engage in unfair or deceptive acts and practices in violation of 
Section 5 of the FTC Act, as well as against those who violate specific 
credit statutes, such as the Fair Debt Collection Practices Act 
(``FDCPA'') and the Credit Repair Organizations Act (``CROA''). The 
agency has created and distributed extensive consumer education 
materials about debt collection, debt relief services, credit repair, 
foreclosure rescue scams, and other financial services topics to assist 
consumers in financial distress in taking steps to protect 
themselves.\4\ The Commission has conducted cutting-edge empirical 
research on how to improve mortgage disclosures and engaged in 
comprehensive policy development activities related to debt collection 
and debt settlement.
    \4\ The FTC also participates in the governmental Financial 
Literacy and Education Commission and has contributed its expertise to 
the production of MyMoney.gov and Taking Ownership of the Future: The 
National Strategy for Financial Literacy.
    The FTC believes that its past efforts have provided important 
protections to American consumers in financial distress. The agency, 
however, also recognizes that it must do more. To allow the Commission 
to perform a greater and more effective role in protecting consumers in 
financial distress, the agency recommends the enactment of legislation 
that would:

   permit the FTC to employ notice and comment rulemaking 
        procedures to declare acts and practices relating to financial 
        services to be unfair or deceptive in violation of the FTC Act;

   authorize the FTC to obtain civil penalties for unfair or 
        deceptive acts and practices related to financial services, and 
        authorize the FTC to bring suit in Federal court to obtain 
        civil penalties;

   authorize the FTC to promulgate rules to implement the 
        FDCPA; and

   provide additional resources to assist the FTC in increasing 
        its law enforcement activities related to consumer financial 
        services and expanding its critical empirical work on the 
        efficacy of disclosures.

    This testimony will provide an overview of the FTC's consumer 
protection authority related to financial services, describe how the 
Commission has used its consumer protection tools on behalf of 
consumers throughout the credit life-cycle, and recommend changes in 
the law and resources to enable the FTC to do more to protect consumers 
in financial distress.
II. Overview of Commission Authority
    The Commission has law enforcement authority over a wide range of 
acts and practices related to financial services. The agency enforces 
Section 5 of the Federal Trade Commission Act,\5\ which prohibits 
unfair or deceptive acts or practices in or affecting commerce. In 
addition, among other specific financial services statutes,\6\ the FTC 
enforces the FDCPA,\7\ which prohibits unfair, deceptive, or abusive 
debt collection practices by third-party debt collectors. It also 
enforces the CROA,\8\ which prohibits credit repair firms from making 
false statements about their ability to improve the credit rating of 
consumers and from charging an advance fee before providing credit 
repair services. The FTC Act, as well as the FDCPA and CROA, provide 
the fundamental authority that the Commission uses to take law 
enforcement action against those whose acts and practices harm 
consumers in the later stages of the credit life-cycle.
    \5\ 15 U.S.C.  45(a).
    \6\ The FTC enforces numerous consumer protection statutes that 
govern financial services providers, including the Truth in Lending Act 
(15 U.S.C.  1601-1666j), the Consumer Leasing Act (15 U.S.C.  1667-
1667f), the Fair Credit Reporting Act (15 U.S.C.  1681-1681x) 
(``FCRA''), the Equal Credit Opportunity Act (15 U.S.C.  1691-1691f), 
the Electronic Funds Transfer Act (15 U.S.C. 1693-1693r), and the 
privacy and pretexting provisions of the Gramm-Leach-Bliley Act (15 
U.S.C.  6801-6809).
    \7\ 15 U.S.C.  1692-1692p.
    \8\ 15 U.S.C.  1679-1679j.
    Although the Commission has the authority to take action against a 
wide array of acts and practices in the financial services arena, some 
financial service providers are exempt from the FTC's jurisdiction. 
Banks, thrifts, and Federal credit unions are specifically exempt from 
the Commission's jurisdiction under the FTC Act.\9\ The FTC's 
jurisdiction under the FTC Act extends only to non-bank financial 
companies, including non-bank mortgage companies, mortgage brokers, and 
finance companies. Similarly, under the FDCPA and CROA, the Commission 
has jurisdiction over non-bank entities covered by these statutes, 
including debt collectors and credit repair organizations, 
    \9\ See 15 U.S.C.  45(a)(2).
    \10\ See 15 U.S.C.  1692a(4), (6); 15 U.S.C.  1679b(4).
    In conducting its law enforcement and other activities, the FTC 
often cooperates with other agencies, such as the Federal agencies who 
have authority over banks, thrifts, and Federal credit unions. Even 
more significant in the context of assisting consumers in financial 
distress, the FTC has a history of close cooperation with many state 
attorneys general and state banking departments on issues such as debt 
collection, foreclosure rescue scams, and credit repair.
III. The FTC's Protection of Consumers During the Credit Life-Cycle
A. Marketing and Advertising of Consumer Credit
    A consumer's credit life-cycle begins when he or she initially 
shops for a mortgage, credit card, auto loan, or any other form of 
credit. In the area of marketing and advertising of credit, the FTC has 
brought numerous enforcement actions challenging deceptive or illegal 
marketing by lenders, brokers, or other advertisers of consumer credit 
in violation of the FTC Act or the Truth in Lending Act.\11\ In 
mortgage advertising, for example, the Commission has brought actions 
against mortgage lenders or brokers for deceptive marketing of loan 
costs \12\ or other key loan terms, such as the existence of a 
prepayment penalty \13\ or a large balloon payment due at the end of 
the loan.\14\ Most recently, the Commission announced settlements with 
three mortgage lenders charged with using ads that touted low interest 
rates and low monthly payments, but failing to adequately disclose that 
the low rates and payment amounts would increase substantially after a 
limited period of time.\15\
    \11\ See, e.g., FTC v. Mortgages Para Hispanos.Com Corp., 11 No. 
06-00019 (E.D. Tex. 2006); FTC v. Ranney, No. 04-1065 (D. Colo. 2004); 
FTC v. Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004); FTC v. Diamond, 
No. 02-5078 (N.D. Ill. 2002); United States v. Mercantile Mortgage Co., 
No. 02-5079 (N.D. Ill. 2002); FTC v. Associates First Capital Corp., 
No. 01-00606 (N.D. Ga. 2001); FTC v. First Alliance Mortgage Co., No. 
00-964 (C.D. Cal. 2000).
    \12\ See, e.g., FTC v. Associates First Capital Corp., No. 01-00606 
(N.D. Ga. 2001); FTC v. First Alliance Mortgage Co., No. 00-964 (C.D. 
Cal. 2000).
    \13\ FTC v. Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004); FTC v. 
Diamond, No. 02-5078 (N.D. Ill. 2002).
    \14\ FTC v. Diamond, No. 02-5078 (N.D. Ill. 2002).
    \15\ See, e.g, In the Matter of American Nationwide Mortgage 
Company, Inc., FTC Dkt. No. C-4249 (Feb.17, 2009); In the Matter of 
Shiva Venture Group, Inc., FTC Dkt. No. C-4250 (Feb. 17, 2009); In the 
Matter of Michael Gendrolis, FTC Dkt. No. C-4248 (Feb. 17, 2009).
    The FTC has also brought enforcement actions against credit card 
marketers and advertisers. In June 2008, the FTC sued a credit card 
marketing company, CompuCredit Corporation, for allegedly deceptively 
marketing its credit cards to subprime consumers nationwide, primarily 
through solicitations that misrepresented the amount of available 
credit and failed to adequately disclose the cost of that credit.\16\ 
Last December, CompuCredit agreed to settle this case for an estimated 
$114 million in credits as redress to consumers.\17\
    \16\ Although the credit cards were issued by 16 various FDIC-
regulated banks, CompuCredit created, designed, and distributed the 
credit card marketing materials that the Commission alleged were 
deceptive. As discussed above, the Commission does not have 
jurisdiction over banks, which issue nearly all credit cards in the 
United States. The FTC, however, does have jurisdiction over non-bank 
entities that market or advertise credit cards. The Commission worked 
closely on this case with the FDIC, which brought a parallel action 
challenging this deceptive conduct.
    \17\ FTC v. CompuCredit Corp. and Jefferson Capital Systems, LLC, 
No. 1:08-CV-1976-BBM-RGV (N.D. Ga. 2008).
    The Commission believes the CompuCredit case provides valuable 
insight into consumers' experiences in procuring credit and going into 
debt. Deceptively marketing the costs of a credit product can have 
long-lasting consequences for many consumers. In this case, for 
instance, the deceptive marketing led many consumers to believe they 
would receive $300 in available credit, but instead they were charged 
$185 in fees and therefore initially received only $115 in credit. Many 
consumers were pushed over their credit limits almost immediately 
because they did not have as much credit as they thought they would 
have. These consumers were sent into a debt spiral from which they 
could not recover, and as a result, their debts were charged off by 
CompuCredit, in turn worsening their credit scores and further limiting 
their financial options.
    The CompuCredit case also highlights what happens as more and more 
consumers face growing debt. Debt collectors are developing innovative 
approaches to collecting charged-off debt. CompuCredit and Jefferson 
Capital, its debt collection subsidiary, allegedly marketed a credit 
card specifically to consumers with charged-off debt. This type of 
program encourages consumers to enroll in a debt repayment plan in 
order to obtain a credit card. Once a consumer pays down a specific 
amount of his or her outstanding debt, the consumer is eligible for a 
credit card with a minimal amount of available credit. These debt 
repayment offers may be marketed to consumers whose debts were 
discharged in bankruptcy or whose debts are no longer reportable 
pursuant to the FCRA.\18\ As a consequence, consumers who receive debt-
transfer credit card offers may be induced to re-validate an old debt, 
for which collection action might not otherwise have been possible. 
Because of its impact on consumers in financial distress, the FTC will 
continue to monitor the marketplace for this type of debt collection 
    \18\ 15 U.S.C.  1681-1681x. Section 605(a)(4) of the FCRA 
prohibits credit reporting agencies from reporting charge-offs that are 
more than 7 years old. 15 U.S.C.  1681c.
B. Mortgage Servicing
    In the mortgage market, servicers collect payments for lenders and 
other owners of mortgage loans. The FTC has challenged deceptive and 
unfair practices in the servicing of mortgage loans, addressing core 
issues such as failing to post payments upon receipt, charging 
unauthorized fees, and engaging in deceptive or abusive debt collection 
tactics. For example, in September 2008, the FTC settled charges that 
EMC Mortgage Corporation and its parent, The Bear Stearns Companies, 
LLC, violated Section 5 of the FTC Act, the FDCPA, and the FCRA in 
servicing consumers' mortgage loans, including debts that were in 
default when EMC obtained them.\19\ Among other practices, the 
complaint alleged that the defendants: (1) misrepresented the amounts 
consumers owed; (2) assessed and collected unauthorized fees; and (3) 
misrepresented that they had a reasonable basis to substantiate their 
representations about consumers' mortgage loan debts. The complaint 
further alleged the defendants made harassing collection calls; falsely 
represented the character, amount, or legal status of consumers' debts; 
and used false representations and deceptive means to collect on 
mortgage loans.
    \19\ FTC v. EMC Mortgage Corp., No. 4:08-cv-338 (E.D. Tex. Sept. 9, 
2008). See Press Release, Federal Trade Commission, Bear Stearns and 
EMC Mortgage to Pay $28 Million to Settle FTC Charges of Unlawful 
Mortgage Servicing and Debt Collection Practices (Sept. 9, 2008), 
available at http://www2.ftc.gov/opa/2008/09/emc.shtm.
    The EMC settlement required the defendants to pay $28 million in 
consumer redress, barred them from future law violations, and imposed 
new restrictions on their business practices. In particular, it 
required EMC to establish and maintain a comprehensive data integrity 
program to ensure the accuracy and completeness of data and other 
information about consumers' loan accounts before servicing those 
    In addition to law enforcement, the Commission provides mortgage 
borrowers with tools to protect themselves. For example, the FTC 
distributes consumer education materials on mortgage servicing,\20\ 
what to do if you are having trouble making your mortgage payments,\21\ 
and how to manage your mortgage if your lender closes or files for 
bankruptcy.\22\ The Commission also uses innovative approaches to reach 
out to consumers in other ways. This January, the FTC included a 
bookmark, ``Numbers to Know & Places to Go,'' with contacts for more 
information about assistance with financial services along with the 
redress checks sent to over 86,000 consumers as a result of the 
Commission's settlement with EMC.
    \20\ http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea10.shtm.
    \21\ http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea04.shtm.
    \22\ http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea12.shtm.
C. Debt Collection
    Consumer credit is a critical component of today's economy. Credit 
allows consumers to purchase goods and services for which they are 
unable or unwilling to pay the entire cost at the time of purchase. By 
extending credit, however, creditors take the risk that consumers will 
not repay all or part of the amount they owe. If consumers do not pay 
their debts, creditors may become less willing to lend money to 
consumers, or may increase the cost of borrowing money. Creditors 
typically use independent or third-party collectors to try to recover 
on debts to decrease the amount of their lost revenues. Debt collection 
thus helps keep credit available and its cost as low as possible.
    Some debt collection activities, however, also may harm consumers. 
In 1977, Congress passed legislation to protect consumers from harmful 
debt collection practices and to protect ethical collectors from 
competitive disadvantage. The result was the landmark Fair Debt 
Collection Practices Act, which established specific standards of 
conduct for the collection industry. Consumer groups, labor groups, 
state and Federal enforcement officials, and collection industry trade 
associations supported the law's passage. The Commission is the primary 
governmental enforcer of the FDCPA. Consumers also may file their own 
actions against debt collectors.
    The FDCPA prohibits abusive, deceptive, and unfair debt collection 
practices, and specifies numerous practices that are barred. The FTC 
receives more complaints about debt collectors than any other 
industry.\23\ The consumer complaints include demands for payments that 
are not owed or larger than owed, harassment, false threats of legal or 
other action, impermissible calls to the consumer's place of 
employment, revealing debts to third parties, and other law violations.
    \23\ See Federal Trade Commission Annual Report 23 2008: Fair Debt 
Collection Practices Act at 4, available at http://www2.ftc.gov/os/
2008/03/P084802fdcpareport.pdf. Note that, although the FDCPA generally 
does not cover the conduct of creditors collecting on their own debts, 
Section 5 of the FTC Act's prohibition on unfair and deceptive acts and 
practices does apply to such conduct.
    Since 1999, the FTC has brought 21 lawsuits for illegal debt 
collection practices. In these cases, the Commission has obtained 
strong permanent injunctive and equitable relief, including substantial 
monetary judgments and, for some defendants, bans on collecting 
debts.\24\ In addition, the FTC has held more individuals, rather than 
just companies, liable for unlawful debt collection practices. As an 
example of the FTC's current approach to law enforcement, in November 
2008, Academy Collection Service, Inc. (``Academy'') and its owner, 
Keith Dickstein, agreed to pay $2.25 million in civil penalties to 
settle charges that they violated the FDCPA and Section 5 of the FTC 
Act.\25\ This is the largest civil penalty that the Commission has ever 
obtained in an FDCPA case.\26\
    \24\ See, e.g., FTC v. Check Investors, Inc., 2005 U.S. Dist. LEXIS 
37199 (D.N.J. July 18, 2005) (ban on debt collection and $10.2 million 
judgment), aff'd, 503 F.3d 159 (3d Cir. 2007), petition for reh'g 
denied, Nos. 05-3558, 05-3957 (3d Cir. Feb. 6, 2008).
    \25\ United States v. Acad. Collection Serv., Inc., No. 2:08-CV-
1576 (D. Nev. Nov. 18, 2008). See Press Release, Federal Trade 
Commission, Nationwide Debt Collector Will Pay $2.25 Million to Settle 
FTC Charges (Nov. 21, 2008), available at http://www.ftc.gov/opa/2008/
    \26\ Previously, the highest civil penalty judgment in an FDCPA 
case was $1.375 million, entered in United States v. LTD Financial 
Services, No. H-07-3741 (S.D. Tex. Nov. 5, 2007).
    Although the Commission has provided effective protection for 
consumers within the current confines of the law, the FTC recognized 
that the law may need to be modified to provide consumers with even 
stronger protection against abusive debt collectors. In October 2007, 
the Commission therefore hosted a two-day workshop, entitled 
``Collecting Consumer Debts: The Challenges of Change,'' to explore 
changes in the debt collection industry and examine their impact on 
consumers and businesses since the FDCPA was enacted in 1977.
    The FTC is releasing its debt collection workshop report today. 
Based on the workshop record and its experience, the Commission 
concludes that debt collection law needs reform and modernization to 
reflect changes in consumer debt, the debt collection industry, and 
technology. The Report discusses these changes and sets forth the 
modifications to the law the FTC believes are needed to provide better 
consumer protection without unduly burdening debt collection.
    Among other things, the Report concludes that major problems exist 
in the flow of information within the debt collection system. The law 
needs to be changed to require that debt collectors have better 
information, making it more likely their attempts to collect are for 
the right amount and are directed to the correct consumers. The Report 
also recommends that collectors be required to provide consumers with 
better information explaining their rights under the FDCPA.
    The Commission also concludes that debt collection laws must be 
modernized to take account of changes in technology. The Report 
recognizes that the law generally should allow debt collectors to use 
all communication technologies, including new and emerging 
technologies, to contact consumers. However, it is important that the 
law be carefully crafted and applied to avoid collectors' use of 
communication technologies in a manner that causes consumers to incur 
charges, or otherwise subjects them to unfair, deceptive, or abusive 
acts and practices.
    The workshop record also revealed that certain debt collection 
litigation and arbitration practices appear to raise substantial 
consumer protection concerns. Because the workshop record does not 
contain adequate information for the FTC to determine the nature and 
extent of these concerns, the Report announces that the agency will 
convene regional roundtables this year with state court judges and 
officials, debt collectors, collection attorneys, consumer advocates, 
arbitration firms, and other interested stakeholders to obtain more 
information about these concerns and develop possible solutions. The 
participation of state officials in these roundtables will be critical, 
because debt collection litigation and arbitration involve many issues 
of state as well as Federal law.
D. Debt Relief Services and Credit Repair
Foreclosure Rescue Scams
    With the rapid increase in mortgage delinquencies and foreclosures, 
the FTC has intensified its efforts to protect consumers from mortgage 
foreclosure rescue scams.\27\ There are many varieties of mortgage 
foreclosure rescue fraud, but in most cases the perpetrator makes 
misleading promises that a consumer's home will be saved from 
foreclosure and that the consumer's loan can be modified. These scams 
share at least two common characteristics. First, the fraudulent 
schemes target consumers who are facing foreclosure or delinquency on 
their mortgage and who have limited time and resources to save their 
homes. Second, these schemes falsely promise that they can save 
consumers' homes from foreclosure or obtain a loan workout or 
modification chiefly by negotiating directly with the mortgage lender 
or servicer. Many consumers, however, ultimately lose both their homes 
and the money they paid to scammers.
    \27\ On February 13, 2008 the FTC testified before the Senate 
Special Committee on Aging about foreclosure rescue fraud. The FTC's 
testimony is available at http://www.ftc.gov/os/testimony/
    In the past year, the Commission has brought six cases targeting 
mortgage foreclosure rescue scams,\28\ including a case announced 
earlier this month.\29\ In these cases, the Commission alleged that the 
defendants promise to stop foreclosure in exchange for an up-front 
consumer payment, ranging from $500 to $1,200. After a consumer makes 
the payment, the defendants do little or nothing to stop the 
foreclosure. This fraud deprives consumers not only of much-needed 
funds but also of the opportunity to explore realistic options to avoid 
foreclosure, including with the assistance of a non-profit housing 
counselor. In one case, the Commission alleged that the defendants 
enticed consumers into a second mortgage or home equity line of credit 
on very unfavorable terms without fully disclosing the costs, risks, 
and consequences of doing so.\30\
    \28\ FTC v. United Home Savers, LLP, No. 8:08-cv-01735-VMC-TBM 
(M.D. Fla. Sept. 3, 2008); FTC v. Foreclosure Solutions, LLC, and 
Timothy A. Buckley, No. 1:08-cv-01075 (N.D. Ohio April 28, 2008); FTC 
v. Mortgage Foreclosure Solutions, Inc., No. 8:08-cv-388-T-23EAJ (M.D. 
Fla. Feb. 26, 2008); FTC v. National Hometeam Solutions, Inc., No. 
4:08-cv-067 (E.D. Tex. Feb. 26, 2008).
    \29\ FTC v. National Foreclosure Relief, Inc., No. SACV09-117 (C.D. 
Cal. Feb. 2, 2009) (temporary restraining order issued pending hearing 
on FTC's motion for preliminary injunction).
    \30\ FTC v. Safe Harbour Foundation, No. 08 C 1185 (N.D. Ill. Feb. 
25, 2008).
    In tandem with its recent law enforcement actions against alleged 
foreclosure rescue scams, the Commission initiated a stepped-up 
outreach initiative on foreclosure rescue fraud. The FTC is involved in 
Federal, state, and local task forces in several regions where 
foreclosures are most prevalent both to coordinate enforcement and 
develop consumer outreach strategies. In addition, to warn consumers 
about the red flags for scams and inform them about the legitimate 
resources available to them, the Commission has undertaken a variety of 
other outreach initiatives. The FTC submitted a series of radio public 
service announcements, in English and Spanish, to stations in cities 
hardest hit by mortgage foreclosures. The Commission also distributed 
an article adapted from its mortgage foreclosure scam consumer 
education brochure to a national syndicated news service, which in 
turn, sent it to more than 10,000 community newspapers across the 
Nation for inclusion in their publications.
2. Debt Settlement
    With historically high levels of consumer credit card debt, many 
consumers are looking for ways to manage or reduce their debt. For 
decades, credit card debt relief was almost exclusively the province of 
non-profit credit counseling agencies (``CCAs''). Beginning in the mid-
1960s, creditor banks initiated the current model of non-profit credit 
counseling to reduce personal bankruptcy filings. Under this model, 
CCAs work with consumers and creditors to negotiate a repayment plan of 
principally credit card debt (a ``debt management plan'' or ``DMP'') 
and also assist the consumer in developing a manageable budget and 
educational tools to avoid debt problems in the future.\31\ If the 
consumer cannot afford a repayment plan, the credit counselor explores 
other options, including referral to a bankruptcy attorney.
    \31\ To negotiate a DMP, the credit counselor first obtains the 
consumer's full financial profile. Then, the credit counselor contacts 
each of the consumer's creditors. Based principally on the consumer's 
debt load and available income, the creditor then determines what, if 
any, repayment options to offer the consumer. Repayment options, or 
concessions, include reductions of the interest rate on the credit card 
and elimination of late or over-limit fees. After negotiations with all 
of the consumer's creditors, the credit counselor calculates a 
consolidated and reduced monthly payment to enable the consumer to 
repay the balance in full over a period of years, typically three to 5 
years. The consumer sends the payment to the credit counselor, which 
then distributes payments to each of the consumer's creditors.
    The historic levels of consumer debt necessarily have affected the 
services CCAs can provide. Non-profit credit counselors have told the 
Commission that the number of consumers contacting them about debt has 
increased by over a third. However, they also have said that the number 
of consumers who meet the income requirements to enroll in debt 
management plans has decreased substantially, which means that there 
are more consumers in debt who are looking for relief but cannot obtain 
that relief from non-profit credit counseling services. These reports 
from credit counselors are consistent with what the Commission has 
observed in the marketplace as part of its law enforcement activities 
related to debt settlement.\32\
    \32\ Federal Trade Commission, Debt Settlement Workshop (Sept. 25, 
2008), Transcript at 6 (remarks of Lydia B. Parnes, then-Director of 
the Bureau of Consumer Protection), available at http://www.ftc.gov/
bcp/workshops/debt settlement/OfficialTranscript.pdf
    The increased demand for debt relief options resulted in the recent 
growth of for-profit debt settlement companies. The term ``debt 
settlement'' refers to services for-profit companies market that 
promise to obtain lump sum settlements of consumers' unsecured debt--
principally, credit card debt. These companies typically promise that 
they will negotiate with creditors to obtain settlements in amounts 
less than the full balance owed by the consumer. The for-profit debt 
settlement business model typically encourages consumers, even those 
who are current on their payments, to become delinquent on credit card 
debt to encourage creditors to accept less than full payment of 
principal as a form of loss mitigation. Unlike DMPs, debt settlement 
companies do not consolidate credit card debt or arrange a monthly 
payment plan to pay off the debt over a period of years. Rather, the 
goal of debt settlement is to save enough cash, while not paying 
creditors, so that the creditors will offer to take a fraction of the 
balance owed as settlement in lieu of the full debt.
    Since 2001, the Commission has brought 14 cases against both sham 
non-profit credit counseling agencies and for-profit debt settlement 
companies.\33\ In these cases, defendants allegedly deceive consumers 
who are seeking workout options for credit card debt into paying large 
upfront fees for debt relief services which, for many consumers, are 
nonexistent. Other allegations include deceptive promises that debt 
collectors will stop trying to collect from consumers enrolled in their 
programs and that stopping payments to creditors under their program 
will not hurt consumers' creditworthiness.
    \33\ FTC v. Debt-Set, No. 07-558 (D. Colo. 2007); FTC v. Select 
Personnel Mgmt., Inc., No. 07-0529 (N.D. Ill. 2007); FTC v. Dennis 
Connelly, No. 06-701 (C.D. Cal. 2006); FTC v. Express Consolidation, 
No. 06-61851 (S.D. Fla. 2006); United States v. Credit Found. of Am., 
No. 06-3654 (C.D. Cal. 2006); FTC v. Debt Solutions, Inc., No. 06-0298 
(W.D. Wash. 2006); FTC v. Debt Mgmt. Found. Servs., Inc., No. 04-1674 
(M.D. Fla. 2004); FTC v. Integrated Credit Solutions, Inc., No. 06-
00806 (M.D. Fla. 2006); FTC v. National Consumer Council, Inc., No. 04-
0474 (C.D. Cal. 2004); FTC v. Better Budget Fin. Servs., Inc., No. 04-
12326 (D. Mass. 2004); FTC v. Innovative Sys. Tech., Inc., d/b/a Briggs 
& Baker, No. 04-0728 (C.D. Cal. 2004); FTC v. AmeriDebt, Inc., No. 03-
3317 (D. Md. 2003); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 (C.D. 
Cal. 2002).
    Earlier this month, the Commission brought a contempt action 
against an alleged sham non-profit credit counseling company and its 
principal for violations of an order a Federal court entered against 
them in 2008.\34\ The defendants, Express Consolidation and Randall 
Leshin, misrepresented their non-profit status, charged hidden fees, 
and misled consumers about the benefits of enrolling in a debt 
management plan, according to the Commission's underlying action.\35\ 
The 2008 order prohibited them from the illegal conduct and from 
operating in states where they were not qualified to do business. 
Notwithstanding being subject to a Federal court order, the defendants 
continued to do business in states where they were unqualified and to 
collect fees from consumers who had canceled their debt management 
plans. On February 17, 2009, the court found the defendants in contempt 
based on this conduct. The Commission currently is seeking an order 
reimbursing consumers for any fees collected in violation of the 2008 
    \34\ FTC v. Randall L. Leshin d/b/a Express Consolidation, No. 
0:06-CV-61851-WJZ (S.D. Fla. 2008).
    \35\ FTC v. Express Consolidation, No. 06-CV-61851 (S.D. Fla. 
Dec.11, 2006).
    As part of its research and policy development initiatives, the 
Commission convened a public workshop in September 2008 to examine the 
debt settlement industry, including the role of creditors, and the 
consumer protection issues that the for-profit business model raises. 
As a result of this workshop and the FTC's law enforcement experience, 
the Commission is considering what initiatives, in addition to 
continued aggressive enforcement, are needed to further protect 
consumers from deceptive and unfair practices by purported debt relief 
3. Credit Repair
    Another consumer protection challenge exacerbated by the economic 
downturn is the effect of delinquencies, bankruptcy, or other negative 
credit information on a consumer's credit report. Fraudulent credit 
repair companies falsely promise to be able to remove for a fee 
accurate, negative information from consumers' credit reports. This 
false promise particularly appeals to consumers with poor credit 
histories who are seeking a job, a car loan, or a mortgage.
    Consistent with its efforts to combat other types of financial 
fraud, the Commission has acted aggressively against such ``credit 
repair'' scams. Since 1999, the FTC has brought 42 cases against 
defendants that allegedly misrepresented the credit-related services 
they would provide. Most recently, in October 2008, the Commission and 
24 state agencies announced a crackdown on 33 credit repair 
operations--entities that deceptively claimed they could remove 
negative information from consumers' credit reports, even if that 
information was accurate and timely.\36\ The law enforcement sweep 
included ten FTC actions charging companies with violating the FTC Act 
and the CROA by making false and misleading statements, such as 
claiming they could substantially improve consumers' credit reports by 
removing accurate, negative information from credit reports. The agency 
also alleged that the defendants violated the CROA by charging an 
advance fee for credit repair services. The sweep included 26 state 
actions alleging violations of state laws and the CROA. Our 
partnerships with state authorities have increased significantly the 
reach of the Commission's law enforcement efforts to promote broader 
compliance with the law.
    \36\ See Press Release, FTC's Operation ``Clean Sweep'' Targets 
``Credit Repair'' Companies, available at http://www.ftc.gov/opa/2008/
IV. Enhancing FTC Consumer Protection Efforts
    As described above, the FTC has used a vigorous program of law 
enforcement, consumer education, and research and policy development to 
protect consumers of financial services. The current economic crisis, 
however, demonstrates that more needs to be done. As the Nation's 
consumer protection agency, the Commission is well-positioned to 
provide the additional protection that is needed. The FTC can provide 
greater protection to consumers in financial distress through enhanced 
and streamlined authority to promulgate rules, including rules to 
implement the FDCPA, increased monitoring and oversight to assess 
compliance with the law, expanded authority to obtain civil penalties 
against those who violate the law, and increased policy-oriented 
research on financial services subjects. To exercise these 
responsibilities in the robust manner necessary to confer greater 
consumer protection, the Commission will need substantial additional 
authority and resources.
A. Rulemaking Authority
    The Commission would be able to be develop rules concerning 
financial services more quickly and effectively if the procedures 
required for issuing such rules were streamlined; that is, if the FTC 
were permitted to use standard government-wide notice and comment 
rulemaking procedures under Section 553 of the Administrative 
Procedures Act (``APA'') \37\ to declare acts and practices to be 
unfair or deceptive. The FTC currently must use the burdensome, 
complicated, and time-consuming procedures of Section 18 of the FTC Act 
(``Magnuson-Moss rulemaking procedures'') to promulgate such rules.\38\ 
Commission rulemakings subject to Magnuson-Moss rulemaking procedure 
requirements typically take anywhere from three to 10 years to 
complete. For example, the proceeding to promulgate the FTC's Credit 
Practices Rule \39\ took almost 10 years.
    \37\ 5 U.S.C.  553.
    \38\ Section 18, for example, includes requirements that the FTC 
must publish an advance notice of proposed rulemaking and seek public 
comment before publishing its notice of proposed rulemaking; it must 
provide an opportunity for a hearing before a presiding officer at 
which interested persons are accorded certain cross-examination rights; 
and, where there are numerous interested parties, the FTC must 
determine which have similar interests, have each group of persons with 
similar interests choose a representative, and make further 
determinations about representation for those interests in the cross-
examination process. 15 U.S.C.  57a(b).
    \39\ FTC Credit Practices Rule, 16 C.F.R.  444.
    The cumbersome requirements of Section 18 of the FTC Act do not 
apply to other Federal agencies when they promulgate rules to protect 
consumers of financial services from unfair and deceptive acts and 
practices. Most significantly, under the FTC Act itself, the Board of 
Governors of the Federal Reserve System (``FRB''), the Office of Thrift 
Supervision (``OTS''), and the National Credit Union Administration 
(``NCUA'') may use notice and comment rulemaking to promulgate such 
rules for banks, thrifts, and Federal credit unions, respectively.\40\ 
The FTC, by contrast, must use the onerous and lengthy Magnuson-Moss 
rulemaking procedures to address the exact same unfair and deceptive 
acts and practices by financial entities within the Commission's 
jurisdiction. Changing the law to allow the Commission to use the same 
process under the FTC Act as used by the Federal banking agencies would 
promote expedition and consistency in the promulgation of rules to 
protect consumers of financial services.
    \40\ See 15 U.S.C.  57a(f).
    Similarly, expeditiously promulgating rules to address the acts and 
practices of debt collectors would be very beneficial in protecting 
consumers in financial distress. Section 814 of the FDCPA specifically 
prohibits the FTC from promulgating rules concerning the collection of 
debts by debt collectors.\41\ In the debt collection workshop report 
that the Commission is issuing today, the agency concluded that the 
debt collection legal framework should be changed to enable the FTC to 
issue rules to implement the FDCPA to respond better to changes in 
technology and the marketplace. As with the rules under the FTC Act 
that address unfair and deceptive acts and practices related to 
financial services, the Commission would be able to issue rules to 
implement the FDCPA quickly and effectively if the agency were able to 
use notice and comment rulemaking procedures under the APA to 
promulgate them.
    \41\ See 15 U.S.C.  1692l(d).
B. Expand FTC Ability to Obtain Civil Penalties for Law Violations
    Civil penalties and other forms of monetary relief are vital to the 
effectiveness of the Commission's law enforcement program, because they 
punish noncompliance and deter future violations. The FTC, however, 
does not have the authority to seek civil penalties for violations of 
some of the laws that it enforces, most notably, the FTC Act.\42\ Even 
in circumstances in which civil penalties are available to the FTC, the 
agency may not bring an action in Federal court seeking penalties 
without first referring it to the Department of Justice (DOJ) to file 
on behalf of the Commission.\43\
    \42\ Currently, the FTC may seek civil penalties against any entity 
that knowingly violates a trade regulation rule promulgated by the FTC 
or that violates an FTC cease and desist order. See 15 U.S.C.  45(l) 
and (m)(1)(A). In addition, recognizing the importance of civil 
penalties, Congress has specifically authorized the FTC to seek civil 
penalties for violations of certain statutes, e.g., the FDCPA.
    \43\ 15 U.S.C.  56.
    First, in the context of financial services, enhanced civil penalty 
authority would increase deterrence of would-be violators within the 
FTC's jurisdiction.\44\ Equitable monetary remedies, such as redress 
and disgorgement, may not be appropriate or sufficient in certain 
cases, and the availability of civil penalties against the wrongdoers 
would likely achieve greater deterrence.
    \44\ If the Commission brings an action in Federal court seeking 
civil penalties for violations of the laws it enforces, the agency 
should be permitted to obtain injunctive relief in such an action. In 
instances where there is a need to bring ongoing unlawful conduct by a 
financial services provider to a swift halt to protect consumers, and 
where both equitable relief and civil penalties are appropriate, the 
FTC should have the option of directly filing an action in Federal 
court seeking both equitable relief and civil penalties.
    The Commission's recent settlements with mortgage advertisers 
discussed above,\45\ for example, contained no monetary relief. The FTC 
did not seek redress or disgorgement because of the difficulty in 
quantifying and proving consumer injury attributable to the particular 
ads challenged in those cases. Deterrence of unlawful conduct likely 
would be increased in these types of cases if civil penalties were 
available as a remedy.
    \45\ See cases cited supra, n. 15.
    In addition to authorizing civil penalties for violations of all 
consumer protection laws related to financial services, changes to the 
process required to obtain those penalties would make law enforcement 
more effective. Giving the FTC independent litigating authority when it 
seeks civil penalties would allow the Commission--the agency with the 
greatest expertise in enforcing the FTC Act--to litigate some of its 
own civil penalty cases, while retaining the option of referring 
appropriate matters to DOJ.\46\ Conferring this authority on the 
Commission also would increase efficiency. Currently, if DOJ declines 
to participate in the name of the United States or otherwise fails to 
act within 45 days on such a referral, the Commission may file the case 
in its own name. This process requires extra time and delay, even under 
the best of circumstances. Moreover, once DOJ accepts a referral, the 
FTC normally assigns one or more of its staff attorneys, at DOJ's 
request, to assist in litigating the case. Despite excellent relations 
and coordination, the use of personnel at two agencies inevitably 
creates delay and inefficiencies. This is particularly true in cases 
where the FTC is simply referring to DOJ a civil penalty settlement to 
be filed in Federal court.
    \46\ Other independent Federal agencies, such as the Securities and 
Exchange Commission and the Commodity Futures Trading Commission, are 
able to maximize the benefits of their own expertise by independently 
bringing administrative or judicial actions for civil penalties.
    The FTC Act therefore should be amended to expand the agency's 
independent litigating authority to allow the FTC to bring actions for 
civil penalties in Federal court ``in its own name by any of its 
attorneys,'' without mandating that DOJ have the option to litigate on 
the FTC's behalf, as is currently required in most cases.
C. Increase Vital Empirical Research
    One of the most challenging current policy issues in consumer 
protection is under what circumstances the disclosure of information 
allows consumers to make adequately informed decisions about products, 
including financial goods and services. The FTC has long recognized 
that the disclosure of information often can empower consumers, but 
that such disclosures may not be effective in some circumstances. In 
particular, the agency has recognized the challenges of conveying 
information about complex products and topics via disclosures. This 
challenge is an especially important one to address in the financial 
services area, because mortgage and credit products have become much 
more complex in recent years.
    Statutory and regulatory schemes related to financial services 
include a host of requirements mandating that information be disclosed 
to consumers. Some have questioned whether these disclosures provide 
consumers with the information they need to properly understand the 
financial services they are purchasing. Specifically, some have argued 
that current disclosure requirements are inadequate in light of the 
advent and expansion of new financial services, such as alternative 
    The Commission has a long history of conducting empirical tests of 
the efficacy of disclosures in a wide variety of commercial 
contexts.\47\ Most recently, in 2007, the FTC's Bureau of Economics 
published a seminal research report concluding that the current 
mortgage disclosure requirements do not work and that alternative 
disclosures should be considered and tested.\48\ As policymakers assess 
the utility of disclosures for financial products and services, the FTC 
has an opportunity to play a pivotal role in the debate. The Commission 
has the experience needed to conduct reliable studies of disclosures 
and report the results of these studies to policymakers and the public 
to better inform the debate. Focusing more attention on and devoting 
more resources to such vital empirical work is needed so that the FTC 
can foster the development of sound consumer protection policy.
    \47\ In 2004, for example, the FTC released a study showing that 
broker compensation disclosures that the Department of Housing and 
Urban Development had proposed confused consumers, leading many of them 
to choose loans that were more expensive. See Federal Trade Commission, 
Bureau of Economics Staff Report, The Effect of Mortgage Broker 
Compensation Disclosures on Consumers and Competition: A Controlled 
Experiment (February 2004).
    \48\ See Federal Trade Commission, Bureau of Economics Staff 
Report, Improving Consumer Mortgage Disclosures: An Empirical 
Assessment of Current and Prototype Disclosure Forms (June 2007), 
available at http://www.ftc.gov/os/2007/06/
P025505mortgagedisclosurereport.pdf. In this empirical study, the FTC 
staff tested currently required mortgage cost disclosure documents, as 
well as developed and tested a prototype mortgage cost disclosure 
document. The FTC staff study concluded that the current document 
``failed to convey key mortgage costs to many consumers,'' while the 
prototype document ``significantly improved consumer recognition of 
mortgage costs, demonstrating that better disclosures are feasible.'' 
Id. at ES-1 and ES-5. Following up on this research, in 2008 the FTC's 
Bureau of Economics convened a conference to evaluate how mortgage 
disclosures could be improved. See Federal Trade Commission, ``May 15, 
2008 Mortgage Disclosure Conference,'' available at http://
D. Increase in Resources
    The FTC has a broad consumer protection mission that extends far 
beyond the financial services area, protecting consumers from identity 
theft, false advertising, malware, business opportunity frauds, 
telemarketing fraud, and more. Over the past few years, the Commission 
has responded to the need for more financial services enforcement by 
shifting consumer protection resources to the financial services area 
to the fullest extent possible. There is a great deal more that the FTC 
can accomplish in protecting consumers of financial services and we are 
prepared to do more. To accomplish this goal, the FTC needs significant 
additional professional staff.
V. Conclusion
    The Commission is committed to protecting consumers throughout the 
credit life-cycle, including preventing harm to the many American 
consumers who struggle with mortgage, credit card, and other debt. The 
agency has used its traditional consumer protection tools of law 
enforcement, broad-based research and policy development, and consumer 
and business outreach to provide important protections for consumers of 
financial services. However, the Commission must do more. To enable the 
FTC to perform a greater and more effective role protecting consumers 
in financial distress, it recommends changes in the law and resources 
to enhance its authority to promulgate needed rules and prosecute cases 
against law violators. The Commission appreciates the opportunity to 
appear before you today to discuss the FTC's work and your 
consideration of its views.

    The Chairman. Thank you. Thank you very much, Commissioner.

                     ANSTED, WEST VIRGINIA

    I'm very proud that Nancy Dix is here this morning. I 
really want to thank you for coming here, from coming up from 
West Virginia. It's not far away, but it's a long trip, isn't 
    Mrs. Dix. Yes, it is.
    The Chairman. Yes, it is. From what I understand from your 
testimony is that you were in danger of losing your home and so 
you turned to a company called, Mortgage Rescue.
    Mrs. Dix. Right.
    The Chairman. Is that correct?
    Mrs. Dix. Yes.
    The Chairman. Well, it doesn't sound like this company 
rescued you from anything.
    Mrs. Dix. They didn't.
    The Chairman. In fact, it sounds like this mortgage rescue 
company just made your financial situation even worse. You paid 
this company $921 for their services.
    Mrs. Dix. Right.
    The Chairman. And their expert advice to you was to pay the 
lender a $5,000 deposit to stop the foreclosure. Is that 
    Mrs. Dix. Yes.
    The Chairman. Of course they knew that you couldn't afford 
to make this payment.
    Mrs. Dix. Right. They knew it.
    The Chairman. So Mrs. Dix, one of our responsibilities in 
this committee is to protect consumers against fraud, against 
people who call you up. They contacted you on the telephone?
    Mrs. Dix. Through the mail.
    The Chairman. Through the mail and you were looking for 
help and so you kind of, were eager to see what they had to 
    Mrs. Dix. Yes.
    The Chairman. I don't know all of the facts about your 
case, but it sounds to me like this company promised you 
something it knew it could never deliver to you.
    Mrs. Dix. Right.
    The Chairman. Based on your experience can you give this 
Committee any guidance about what we can do to make sure that 
other families don't have to go through what you have gone 
    Mrs. Dix. Yes, sir. If they're not sure about a company 
like that they need to come talk to our Attorney General.
    The Chairman. To the Attorney General?
    Mrs. Dix. Yes, of their state.
    The Chairman. Yes, and in this case that worked out for 
you, didn't it?
    Mrs. Dix. Yes, it did. It kept me from losing my home.
    [The prepared statement of Mrs. Dix follows:]

    Prepared Statement of Nancy Dix, Consumer, Ansted, West Virginia
    Good morning, my name is Nancy Dix. I am sixty-seven years old. I 
live in a double-wide manufactured home in Ansted, West Virginia. After 
my husband died of a heart attack in 2001, I was contacted by lenders 
to refinance my home with promises of saving me money. My husband had 
always handled things like loans so I did not know much about mortgages 
and loans. I trusted the people I dealt with because I thought they 
were professionals looking out for my best interests. I later found out 
that I was actually being taken advantage of by predatory lenders.
    In the spring of 2002 I spoke with a mortgage broker called 
Infinity, which told me it would save me money. Infinity sent an 
appraiser out to my house and valued the property for $97,000. I later 
learned that it was actually worth about $59,000.
    After the appraisal, Infinity told me a man would be coming to my 
home with papers to sign. When the man came, I learned for the first 
time that my payments would be $800 a month. This is higher than what I 
was expecting and a lot for me to afford on my fixed income. I asked 
about the payments and was told that in a few months, they would lower 
my payments to $600. The signing was rushed, and no one explained the 
papers to me. I admit I was confused by all that paperwork and simply 
trusted that I was being treated honestly.
    The loan ended up with a bank called Flagstar. The total amount of 
the loan was for $86,700.00 with an APR of 9.481 percent. Under the 
loan I was required to make payments of over $245,000.00 over thirty 
    After the signing I began making payments. I contacted Flagstar 
after a few months to lower my payments. Flagstar told me that I would 
have to come up with more than $8,000 out of my pocket before they 
would lower my payment--money I did not have. I struggled to make 
payments over the years and was forced ultimately into bankruptcy. When 
I tried to catch up my payments with Flagstar, they wanted me to pay 
large amounts that I could not afford on my fixed income. Flagstar 
wanted me to pay over $1,800 a month when my income was only about 
$2,000. Also, Flagstar force placed expensive insurance on my account, 
which made me further behind and increased my monthly payment.
    In July 2005, Flagstar started sending my payments back to me. 
Eventually, my home was sent into foreclosure, with a sale set for 
December 15, 2005.
    Around this time I was contacted by an outfit from Houston, Texas, 
called Mortgage Rescue. They told me to send them some information 
about my finances and $921 and they would stop the foreclosure. So on 
November 8, 2005, I sent them the information and money. They responded 
to me by a letter I received only days before the foreclosure. The 
letter said for me to call Flagstar and work out a forbearance 
agreement, but I would have to pay the total amount I was behind and a 
$5,000 deposit to Flagstar to stop the foreclosure. Mortgage Rescue 
knew I did not have this money. I could have worked out this deal with 
Flagstar at anytime, without sending Mortgage Rescue $921. Basically 
they took my money for nothing. I later found out that Mortgage Rescue 
was not even licensed to do business in West Virginia. I never got my 
money back from them.
    Luckily, I was able to call the West Virginia Attorney General, who 
had the foreclosure put off. I was then sent to Mountain State Justice, 
a non-profit legal services office, and they worked it out so I could 
keep my home.
    If I had not called the Attorney General or found Mountain State 
Justice, I would have lost my home. I would be in my late sixties, 
retired, widowed, with nowhere to live. I think at times about other 
people who sent their hard-earned money to scam artists like Mortgage 
Rescue. I hope you are able to do something to prevent these crooks 
from taking advantage of people who are desperate, like I was, because 
they are facing loss of their homes. Thank you.

    The Chairman. Let me now go on to Professor Cox before my 
time runs out. Nothing is clicking here. Is the clock running?
    Male Speaker. I think they've reset it, Mr. Chairman.
    The Chairman. Yes, that's not proper. Professor Cox 
according to your testimony, Mrs. Dix's experience is 
disturbingly common. You say it's difficult for consumers to 
get objective information when they fall behind on their loan 
payments. They're in danger of losing their homes.
    Why is it so difficult for people to find the assistance 
that might keep them in their homes?


    Mr. Cox. Thank you, Mr. Chairman. It is difficult because 
they get bombarded with solicitations promising the homeowner 
that the family will be safe from foreclosure by signing up 
with this white knight who is going to take care of the 
    And if you're looking for an area where there's a problem 
with consumer protection? Try to find something where's there's 
lots of money, complexity of a transaction and/or vulnerability 
of the consumer. Foreclosure rescue fraud pins the meter on 
absolutely every one of those items.
    So you've got desperate homeowners who are trying their 
best to save their homes, their largest investment, often all 
they have. And we're dealing with an extremely complex 
transaction. So it's difficult to sort out what's right and 
what's wrong when you're in that position.
    The Chairman. OK. I went out of order there deliberately 
because I wanted to be able to ask Nancy some questions before 
I have to go down and vote at which point I will then turn it 
over to Senator Lautenberg. I will go vote and will come back. 
This happens often on the Committee. And it's not particularly 
wonderful, but it's the way at least we can keep the testimony 
    So maybe what I should do, Mr. Cox, is just to ask you to 
give your testimony.
    Mr. Cox. Thank you, Mr. Chairman. I'll be extremely brief. 
I understand the time pressures.
    The Chairman. No, don't worry about that.
    Mr. Cox. OK.
    The Chairman. We don't have that. We just have a vote. 
That's different. Small pressure.
    Mr. Cox. There are two types of scams here that we're 
dealing with. The one that Mrs. Dix was taken advantage of is 
called a foreclosure consultant and other similar names. That 
has become more popular with the change in the market lately.
    The other kind is called a foreclosure reconveyance. And 
that's where the homeowner is in foreclosure and has equity in 
their home and they are convinced to give a title to the 
property to a scam artist who is going to save the house. The 
scam artist then gives back some sort of interest to the 
homeowner, typically a land sale contract or a lease with 
purchase option. That's called a foreclosure reconveyance scam.
    I had the privilege of doing all the major predatory 
lending cases with the state attorney generals in the national 
leadership, whether it was First Alliance Mortgage, Household 
or Ameriquest, for 10 years. During that time, about 2002-2003, 
we began to see homeowners who were coming in who were in 
foreclosure and didn't know why they were being told that they 
could be evicted from the home they thought they owned. Well, 
these were reconveyance scams.
    The market, if you will, for that kind of reconveyance scam 
in the early 2000s existed because there was a historic, 
incredible appreciation of home values, which meant that the 
majority of people in foreclosure had equity in their homes, 
sometimes really substantial equity in their homes. And these 
scams flourished during that period. Since that time I don't 
think you need to look at the graphs that were attached to my 
testimony to know that home values have plummeted.
    I hope you do look at the foreclosure graph because even 
though you all know it, it is unbelievable. It looks like a 
hockey stick.
    And when you look at it on isolated, regional areas, you're 
just floored. In Hennepin County, which is the county including 
Minneapolis and the suburbs, there was a very steady 20-year 
average. It's up nine times. I mean we're talking an 
unbelievable explosion in foreclosures that has devastated 
    As the market shifted and housing values plummeted, the 
equity disappeared from many of those transactions. So even 
though we have nine times more homeowners than foreclosure, the 
number of people with equity is much lower, but still exists. 
And those reconveyance scams are still going on.
    During the last year or two, there is an increasing 
prominence of the kinds of scams that Mrs. Dix fell victim to, 
which is these foreclosure consultant scam. In 2004 in 
Minnesota, we got ahead of this curve and passed a state law 
dealing with the foreclosure consultants, which was modeled on 
an old California law. And we invented from scratch a law to 
attempt to regulate reconveyance transactions.
    It has been very successful. And it has been adopted in 
almost 20 states now. And another 15 states have it pending.
    These state laws work. In my experience working on 
predatory lending, back when I had to explain to people what 
subprime mortgages were, and back to when I was a really bad 
dinner table conversation because I was saying, you don't 
realize how bad this is, people. This is disaster brewing. It 
was like, yes, yes, shut up.
    Back in those days, at the state level we were doing almost 
all the work on this. We got some support from agencies like 
the FTC. But we actually had to fight the Federal Government 
and particularly the OCC, the Office of Controller of the 
Currency, the OTS--the depository regulatory agencies. In fact, 
I had a case where they filed an amicus brief against us where 
the data was overwhelming about the fraud.
    So the first thing I would say in terms of what the Federal 
Government can do here is don't preempt the states. The states 
are working really hard on this. We were way out in front on 
    We've passed laws. We're attempting to solve the problem. 
Federal preemption on the subprime mortgages was really, really 
not helpful in attacking that problem when we were trying to do 
it at the state level.
    The second thing I would say in terms of what the Federal 
Government can do to help attack these scams is I support 
Commissioner Harbour's testimony. The FTC works very well with 
state attorney generals. In fact when I walked in I saw some 
familiar faces here from the FTC from those days.
    But the FTC, to move quickly to attack scams as opposed to 
more delicate policy questions and established industries, 
needs swifter authority. They need to get more of a cop 
mentality when it's a scam, and it's not a complicated policy 
issue. And they need that APA rulemaking authority and not that 
cumbersome Magnuson-Moss authority.
    And then finally two other quick things. First, fund of 
legal services. At our local level we established a committee 
of people that had a very effective public/private partnership. 
And the legal service attorneys were at the fore in taking 
cases like Mrs. Dix and others and resolving the problems.
    And second, there is a possibility to adopt an analogous 
federal law to the state foreclosure consultant laws that would 
set a floor, not a ceiling, a floor, to protect consumers who 
are subject to that type of solicitation. I appreciate the 
opportunity to testify, Mr. Chairman and Members of the 
    [The prepared statement of Mr. Cox follows:]

  Prepared Statement of Prentiss Cox, Associate Professor of Clinical 
                Law, University of Minnesota Law School

    Thank you, Chairman Rockefeller and Members of the Committee, 
including my home state Senator Amy Klobuchar, for the opportunity to 
testify on the Nation's consumer protection agenda in the wake of this 
great flood of foreclosures. While there is much to say about why we 
have a human-made disaster of this proportion, millions of American 
families are just desperately trying to cope with the reality of 
default or foreclosure on their mortgage loans, or are worried about 
looming difficulties in meeting their mortgage payments. I will try to 
address the unfair and deceptive practices targeting homeowners in 
foreclosure and how government can help protect these families in a 
time of intense distress.
    Prior to joining the University of Minnesota Law School faculty in 
2005, I had the privilege of working as an Assistant Attorney General 
and Manager of the Consumer Enforcement Division in the Minnesota 
Attorney General's Office. A primary focus of my work in that Office 
was combating mortgage fraud and attacking predatory conduct against 
homeowners in foreclosure. Along with my colleagues Giulia Palumbo and 
Julie Aoki-Ralston, I worked with homeowners in foreclosure who had 
succumbed to solicitations promising to save their homes. These 
homeowners often faced eviction as a result of complicated and 
frequently fraudulent transactions. In 2004, we helped draft 
legislation enacted by the Minnesota legislature designed to regulate 
these foreclosure rescue scams. Since that time, I have worked with 
numerous state legislators and consumer advocates seeking to pass 
similar legislation and with legal aid and other attorneys engaged in 
litigation to help foreclosed homeowners.
    I also have been asked to appear before you on behalf of the 
National Association of Consumer Advocates (NACA), a non-profit 
association of consumer law attorneys and consumer advocates. NACA 
members include attorneys from a variety of types of practice, 
including the public sector, legal services, fee-generating attorneys 
and the academy. NACA is a remarkable efficient and strong advocate for 
the protection of consumers in the marketplace.

I. Anatomy of Foreclosure Rescue Scams
    Foreclosure rescue scams target homeowners at their most vulnerable 
moment. Perpetrators of these scams use fraud and false promises to 
take desperately needed cash from these homeowners.

A. Experience of Homeowners Entering Foreclosure
    If you want to find an area ripe for consumer fraud, look for one 
or more of the following three factors: substantial amounts of money at 
stake; complexity of transactions; and vulnerability of the consumer. 
Families in foreclosure present all of these characteristics in one 
place. The largest and most important investment made by the typical 
American family is their home. It is almost impossible to find a 
consumer transaction more complex than the financing and legal 
obstacles facing a family in foreclosure. And these families often are 
desperate to save their homes.
    Foreclosure rescue scams provide a ready-made opportunity for the 
perpetrators of scams because the potential victims appear in the 
public record of foreclosure filings, and critical information such as 
estimated home value and the amount of liens on the property also are 
readily available in the public record or on the Internet. As soon as a 
house enters the foreclosure process, the homeowner in foreclosure 
typically is subject to an avalanche of mail, phone calls and personal 
visits from people promising to help the homeowner.
    It is difficult to describe the desperation felt by many homeowners 
with whom I have worked who were facing the loss of their homes through 
foreclosure. My colleagues and I worked with one family that had three 
small children and their home had been passed through two prior 
generations of the family. I recall another homeowner who had 
personally built most of his home. He and his wife and children were 
evicted by a foreclosure rescue buyer on Christmas Eve. We were 
eventually able to help them regain possession of the home. More than 
one homeowner with whom we worked succumbed to the stress of the 
foreclosure process.

B. Two Types of Foreclosure Rescue Operations
    The individuals and companies that descend on homeowners in 
foreclosure have a common theme of purporting to help the homeowner 
``save your home'' and ending the nightmare of foreclosure. Acquirers 
claim to have special expertise to help the homeowner resolve the 
foreclosure. A typical solicitation letter is as follows:

We lookout for your interests.

We can stop the foreclosure process.

We can help you restore your credit.

We can help you save your homestead.

. . . Let us try and help you figure out solutions so you can sleep at 
    \1\ State v. HJE, No. 03-cv-05554 (D.Minn.) (Complaint filed 
October 16, 2003). For other example solicitations, see Steve Tripoli 
and Elizabeth Renuart, National Consumer Law Center, Dreams Foreclosed: 
the Rampant Theft of Americans' Homes Through Foreclosure ``Rescue'' 
Scams (2005); available at http://www.consumerlaw.org/news/content/

    Many foreclosure rescue operations also rely heavily on affinity 
appeals, such as race or religious similarity.
    Foreclosure rescue operations can be grouped into two broad 
categories: foreclosure reconveyance transactions and foreclosure 

1. Foreclosure Reconveyance Transactions
    Foreclosure reconveyance transactions involve the transfer of title 
from the homeowner in foreclosure to a ``purchaser'' and an alleged 
second transfer, or reconveyance, of an ownership interest back to the 
homeowner. There are several variations of this type of reconveyance 
deal.\2\ In some instances, the ``purchaser'' promises to return 
ownership to the homeowner through a land sale contract or a lease with 
purchase option. Other forms of the reconveyance scheme involve a third 
party ``white knight'' who takes title to the home and promises to 
complete the reconveyance to the homeowner.
    \2\ For a detailed description of the types of foreclosure 
reconveyance scams, see Steve Tripoli and Elizabeth Renuart, supra note 
1; Prentiss Cox, Foreclosure Equity Stripping: Legal Theories and 
Strategies to Attack a Growing Problem, Clearinghouse Review Journal of 
Poverty Law and Policy (Mar.-Apr. 2006).
    A substantial number of these transactions involve outright fraud. 
Forged signatures on deeds, blatantly false representations about the 
character of documents presented for signature by the homeowner, and 
false statements that the deal is really a mortgage refinancing are 
common in these transactions. For example, I worked with a Saint Paul, 
Minnesota family in foreclosure who were told that they would receive a 
mortgage loan refinancing. The person soliciting them referred the 
family to a company representative who gave them a business card 
stating ``loan administrator'' and an appraiser was sent to the home. 
In reality, the person conducting the scam fraudulently obtained a 
warranty deed from the family by telling them that the documents they 
were being asked to sign were paperwork to get the refinancing loan 
started. Without the family's knowledge, the perpetrator of this scheme 
transferred the property to a third party who obtained a mortgage loan 
that provided cash to the perpetrator. The family was told the 
refinancing was complete and they even made a few payments to the 
perpetrator before they received a ``rent'' demand from the third party 
who purportedly held title to the home. After many difficult months for 
the family and countless hours of investigation and litigation, we were 
able to have the title restored to the family.
    Many of these reconveyance transactions, however, do not involve 
such blatant fraud--the foreclosed homeowner knows that some sort of 
reconveyance transaction is occurring. But these deals are designed to 
fail for the homeowner. The perpetrators of the schemes use the 
desperate hopes of the homeowner combined with misleading promises 
about future refinancing opportunities, or the like, to obtain 
agreement to complex transactions that would be hard to grasp for most 
average homeowners even in the best of circumstances. Unlike the type 
of loan modification that makes sense for these homeowners, based on 
the principles of restructuring payments cognizant of the payment 
ability of the homeowner, foreclosure reconveyance almost invariably 
increase the homeowner's monthly payment over the payment amount that 
led to foreclosure. One missed payment means the deal is quickly 
canceled and the home is gone.
    The loss of homeowner equity in these reconveyance transactions can 
be substantial. The typical loss in these deals exceeds $20,000, in my 
experience. Some victims, such as elderly homeowners with modest 
mortgages, have lost in excess of $100,000.
    Foreclosure reconveyance transactions occur partly because these 
deals almost never involve cash investment by the ``purchaser'' in the 
foreclosed property. The ``purchaser'' simply takes title to the 
property from the homeowner, or arranges for a third party to take 
title. Once title is transferred, the ``purchaser'' or third party 
title holder obtains a mortgage refinance loan and pulls cash out of 
the property. So there is an up-front pay-off for these actors. After 
the homeowner is evicted, the perpetrators of the scheme sell the home 
and may profit from a ``back-end'' of the deal, as well.

2. Foreclosure Consultants
    The other type of foreclosure rescue operation involves 
solicitation of foreclosed homeowners by ``consultants'' who promise to 
assist the homeowner in negotiating a resolution of the problem with 
the foreclosing lender. The foreclosed homeowner has to pay a 
substantial advance fee for these services, usually about a thousand 
dollars or more. While the monetary loss to these homeowners is not as 
substantial as with the reconveyance transactions, a four figure sum of 
money usually is a critical amount for homeowners trying to maintain 
control of their homes and pay other debts.
    Unlike foreclosure reconveyance scams, there are many worthwhile 
providers of foreclosure prevention services who offer important help 
to homeowners attempting to evaluate the difficult choices presented by 
the initiation of a foreclosure proceeding. The non-profit 
organizations affiliated with the National Federation of Credit 
Counselors, for example, have an excellent reputation for providing 
advice and services to mortgagors and other consumers in debt.
    Yet deceptive and unfair conduct is pervasive in this area.\3\ As 
discussed below, state attorneys general have brought dozens of actions 
against foreclosure consultants since the onset of the foreclosure 
crisis. Some of these companies just disappear with the money. Even 
when the company is not a complete sham, the services provided often 
are of little use to the homeowner and the outcomes promised at the 
time of solicitation are illusory. Better, affordable services 
generally are available to foreclosed homeowners through legitimate 
non-profit counselors.
    \3\ John Leland, Swindlers Find Growing Market in Foreclosures, New 
York Times (January 15, 2009).
    Foreclosure consultants thus present a very similar regulatory 
problem to debt settlement services. While the underlying service is 
useful, often vitally important, the degree of fraud and misleading 
promises in the industry make it likely that a homeowner who pays up-
front for these services will be losing cash desperately needed to 
manage the foreclosure process or its aftermath.

II. The Changing Reality of Foreclosures and the Market For Rescue 
    Consumer protection regulators and advocates began to see a sharp 
rise in foreclosure reconveyance scams in the early 2000s. A wave of 
problems with foreclosure consultants appeared later, rising 
concurrently with the foreclosure crisis that became apparent within 
the last 3 years. This shifting pattern is largely explained by the 
gyrations in the real estate market.
    Attached as Exhibit A to this testimony is a graph of median home 
prices over the last twenty years. You probably don't have to look to 
know what it shows. Steady but slow appreciation gave way in the late 
1990s to an ahistoric, sharp rise in home prices, followed by a crash 
in values starting in mid-2006. This pattern, likely not 
coincidentally, closely mirrors the explosion and collapse of nonprime 
mortgage lending.\4\
    \4\ Ellen Schloemer, Wei Li, Keith Ernst, and Kathleen Keest, 
Losing Ground: Foreclosures in the Subprime Market and Their Cost to 
Homeowners, Center for Responsible Lending, Dec. 2006, available at 
http://www.responsiblelending.org/pdfs/ CRL-foreclosure-rprt-1-8.pdf.
    The graph of foreclosures attached as Exhibit B, on the other hand, 
looks like a hockey stick. Foreclosures began a slow rise through the 
1980s and 1990s, then rose exponentially starting in 2005. While we all 
understand this pattern, the rapidity and height of this foreclosure 
explosion is startling.
    Putting this information together explains the change in the most 
common type of foreclosure rescue scam. The ``market'' for perpetrators 
of foreclosure reconveyance transactions was as ripe as it may ever be 
in the early to mid 2000s. Foreclosures were slightly higher than the 
historic average, but foreclosed homeowners owned properties that had 
substantially appreciated since the loan in foreclosure was originated, 
and their properties were continuing to appreciate almost by the month.
    Therefore, the number of homeowners in foreclosure with substantial 
equity in the property was at an historic high during the early 2000s. 
This is the necessary condition for a foreclosure reconveyance 
transaction to yield proceeds to the perpetrator of the deal. The 
purchaser obtains an upfront payment from the deal only if there is 
sufficient equity to yield proceeds after the purchaser closes on his 
or her mortgage loan. During the high tide of foreclosure reconveyance 
transactions, the inappropriately loose underwriting criteria of most 
lenders and the failure of self-regulation by appraisers and others 
involved in real estate settlement services contributed to the ease of 
completing foreclosure reconveyance transactions.
    Conversely, the current environment is ideal for foreclosure 
consultant schemes. Foreclosure consultants thrive when the number of 
foreclosures is high and when foreclosed homeowners feel that they have 
few options for dealing with the situation. Plummeting real estate 
values have left the overwhelming majority of homeowners in foreclosure 
with negative equity. Credit markets have tightened in many sectors, 
but have all but disappeared for foreclosed homeowners. Various public 
sector and industry pronouncements about purported loan modification 
programs have added to confusion on the part of foreclosure homeowners 
about their available options. In this situation, foreclosed homeowners 
are ripe for ``consultants'' promising big results while demanding 
upfront payment.

III. Consumer Protection Enforcement with Foreclosure Rescue Scams
    Consumer protection regulation is not a one-size-fits-all 
proposition. It is essential to tailor the regulatory requirements to 
the problem at hand. The problem of foreclosure rescue scams presents a 
challenge of drafting appropriate substantive restrictions on the 
conduct and ensuring that enforcement of those laws is effective and 
efficient. State legislatures and state attorneys general have already 
taken significant steps in addressing these issues.

A. The Right Tool for This Job: State Laws Attacking Foreclosure Rescue 
    The Federal Trade Commission (``FTC'') and multiple states have 
used their broad UDAP (unfair and deceptive acts and practices) 
authority to attack the problem of foreclosure rescue scams. Starting 
in the early 2000s, state attorneys general brought a series of UDAP 
actions against entities engaged in foreclosure reconveyance 
schemes.\5\ When the foreclosure crisis spawned a flood of foreclosure 
consultants, state attorneys general brought UDAP cases against these 
parties.\6\ More recently, the FTC has initiated multiple legal actions 
against deceptive foreclosure consultant conduct.\7\
    \5\ See generally Steve Tripoli and Elizabeth Renuart, supra note 
    \6\ See Testimony of Federal Trade Commission on Foreclosure Rescue 
Fraud, U.S. Senate Special Committee on Aging (2/13/08) at p. 7 n.29; 
infra note 9.
    \7\ Federal Trade Commission v. National Foreclosure Relief, Inc. 
et al., No. SACV09-117 (C.D.Calif 2/2/09), available at http://
www.ftc.gov/os/caselist/0823067/090211nfrcmpt.pdf; Federal Trade 
Commission v. United Home Savers, LLP, et al., No. 8:08 CV 01735 (M. 
D.Fla. 9/3/08), available at http://www.ftc.gov/os/caselist/0723251/
.pdf; Federal Trade Commission v. National Hometeam Solutions, LLC. 
(E.D.Tex 2/29/08), available at http://www.ftc.gov/os/caselist/0823076/
080229nationalfinancialsolutionscmplt.pdf; Federal Trade Commission v. 
Foreclosure Solutions, LLC. (N.D.Ohio 4/28/08), available at http://
    One disadvantage of UDAP cases is that they usually require 
extensive investigation and resources to prosecute. States have tackled 
this problem by enacting legislation to restrict the conduct of 
foreclosure purchasers in reconveyance transactions and restrict the 
behavior of foreclosure consultants. In 2004, Minnesota enacted a law 
regulating both types of foreclosure rescue scams. Maryland enacted 
this law in 2005, followed by New York and Illinois in 2006. 
Massachusetts and the District of Columbia have regulations prohibiting 
foreclosure reconveyance transactions. Today, more than 20 states have 
laws regarding foreclosure rescue scams, the vast majority based on the 
Minnesota model. See Exhibit C (listing state foreclosure rescue scam 
    The key to the Minnesota model law regulating foreclosure 
reconveyance transactions is substantive restrictions on the deals. The 
foreclosure purchaser must have verified proof that the homeowner in 
foreclosure has the ability to pay for the land sale contract or 
purchase option required for the reconveyance end of the transaction. 
If the deal fails to result in the return of title to the property to 
the foreclosed homeowner, the law requires payment by the purchaser to 
the foreclosed homeowner if total consideration paid to the homeowner 
is 82 percent or less of the home's value. The law has numerous other 
protections, including a required formal closing of the transaction and 
an extended right to cancel the deal.\8\
    \8\ Minn.Stat.  325N.10-.18 (2008).
    State foreclosure consultant laws also attack the core of that 
problem. The crucial protection in this part of the state foreclosure 
rescue scam laws is a prohibition on the foreclosure consultant 
receiving ``. . . any compensation until after the foreclosure 
consultant has fully performed each and every service the foreclosure 
consultant contracted to perform or represented he or she would 
perform.'' This requirement obviously provides simple recourse against 
the scammer who just takes money and never promises the service. This 
requirement also puts the homeowner in control of whether to pay 
foreclosure consultants who perform far fewer or less effective 
services than promised.
    These state foreclosure rescue scam laws provide state attorneys 
general and other state enforcement entities with an efficient and 
swift means of attacking the rescue scam problem. States that have 
brought actions against foreclosure rescue scams in the last few years 
have relied primarily on violations of the express requirements of 
these statutes rather than having to prove UDAP violations.\9\
    \9\ See, e.g., Press Release, Missouri Attorney General's Office, 
Madigan Sues Seven Companies For Mortgage Rescue Fraud (11/18/08), 
available at http://www.illinoisattorneygeneral.gov/pressroom/2008_11/
20081118.html; John Rebchock, Suthers Cracks Down on Mortgage Fraud, 
Rocky Mountain News (11/18/08), available at: http://
mortgage-fraud; Press Release, Minnesota Attorney General's Office, 
Lori Swanson Sues Two More Out-Of-State Mortgage ``Foreclosure 
Consultants''--Bringing To A Total Of Ten Such Companies Her Office Has 
Now Sued In This Area, available at http://www.ag.state.mn.us/Consumer/
PressRelease/080821ForeclosureConsultants.asp; Press Release, Maryland 
Attorney General's Office, Attorney General Gansler Announces Consumer 
Protection Division Files Complaint Against Operators of Alleged 
Foreclosure Rescue Scam (7/10/08), available at http://
    Enacting these laws clearly did not eradicate the problem of 
foreclosure rescue scams. Enforcement resources rarely are sufficient 
to stop every violator of the law. Of course, the entities conducting 
these scams purposefully or inadvertently find loopholes in the law, 
which has led states to evolve these laws to adapt to the changing 
patterns of the rescue perpetrators. Yet the laws put the right tools 
in the hands of state consumer protection enforcement authorities to 
efficiently pursue most foreclosure rescue fraud scams. State attorneys 
general retain UDAP authority as a basis for action against any 
exceptional conduct.
    In addition to public enforcement actions, numerous private 
attorneys have contributed substantially to helping foreclosed 
homeowners caught in rescue scams. Most of these laws also include a 
private right of action so that homeowners in foreclosure have remedies 
to recover losses suffered in these transactions. The size of the loses 
with foreclosure reconveyance transactions, combined with the existence 
of an immovable asset that cannot be moved beyond the reach of the 
homeowner's attorney, have made it possible for private attorneys to 
effectively utilize these laws in many cases.\10\ Legal services 
attorneys have been on the forefront of this work. Many of the earliest 
cases attacking foreclosure reconveyance transactions, for example, 
were brought by local legal aid offices attempting to help seniors and 
other homeowners who had lost control of their homes and their home 
    \10\ Kristen Siegesmund and Leah Weaver, Minnesota Statutes Chapter 
325N: A model For Substantive Consumer Protection, 33 Wm. Mitchell L. 
Rev. 223 (2006).
    In Minnesota, we have established a highly successful collaborative 
approach to attacking these scams. The Minnesota Equity Stripping Task 
Force was organized in 2003 by the Volunteer Lawyer's Network (VLN) and 
Mid-Minnesota Legal Services. Task Force membership includes local 
legal services attorneys, pro bono attorneys, private attorneys 
handling cases for a fee and representatives of public agencies. Cases 
are accepted by an appropriate Task Force member based on legal aid 
income eligibility, the potential for fee generation and the concerns 
of public enforcement agencies. The 2004 Minnesota foreclosure rescue 
scam law has been used effectively by attorneys on the Task Force to 
assist homeowners victimized by predatory foreclosure reconveyance 

B. A Lesson from Federal and State Consumer Protection Enforcement 
        Relating to Mortgage Origination
    An analysis of the past failure of the regulatory system to control 
problems in mortgage origination is beyond the scope of this testimony. 
But one lesson from this failure is directly relevant to confronting 
the problems for consumers resulting from the current credit crisis. We 
need to use all the resources, talents and creativity of both state and 
Federal authorities. Accordingly, there is no place for Federal 
preemption of state consumer protections and state enforcement efforts.
    The explosive rise of abusive nonprime mortgage lending in 1998 was 
not accompanied by a substantial enforcement reaction from public 
regulatory authorities. The exception was a small group of state 
attorneys general and state financial regulators who pursued a series 
of cases against the largest of the nonprime mortgage originators--
First Alliance Mortgage Corporation (state actions from 1998-2005), 
Household International (state investigations and action in 2001-2002) 
and Ameriquest Mortgage Corporation (state investigations and actions 
in 2003-2006).
    It is not a coincidence that state entities with a central consumer 
protection focus were the only public agencies that made substantial 
efforts to identify and address rampantly imprudent mortgage lending 
practices in the period from 1998 through 2006. These consumer 
protection enforcement actions typically arise from observations and 
reflected experience of individuals who work closely with consumers who 
are in distress. In the case of nonprime lending, consumer protection 
regulators received complaints showing a pattern of mortgage loans 
whose terms revealed a disconnection between cost and risk, and in 
which homeowners repeatedly expressed misperception of the actual terms 
of the mortgage. These state entities receive and evaluate large 
volumes of complaints by borrowers, and have expertise in analyzing 
such data for patterns of conduct. The more aggressive state agencies 
also have close ties to credit counselors, legal aid organizations and 
other public interest organizations who reflect the experience of an 
even larger number of borrowers. State actions against nonprime 
mortgage lenders were brought despite limited resources, limited legal 
authority, and a wide range of competing consumer protection concerns.
    Federal entities with authority to establish rules for residential 
mortgage origination, especially the Federal Reserve Board, made little 
or no contribution to attacking the problems in nonprime origination. 
Federal banking regulators were worse than idle. They actively impeded 
state actions by expansively interpreting their authority to preempt 
state consumer protection laws and declaring that state agencies had no 
authority to enforce non-preempted state laws as to federally-chartered 
financial institutions or even operating subsidiaries of those 
    \11\ Amanda Quester and Kathleen Keest, Looking Ahead After Watters 
v. Wachovia Bank; Challenges for Lower Courts, Congress and the 
Comptroller of the Currency, 27 Review of Banking and Financial Law 187 
    The FTC, which has a positive history of cooperating with state 
attorneys general in UDAP enforcement, did not take a leadership role 
in confronting mortgage origination abuse by nonbank institutions.
    A constructive Federal role in tackling consumer problems arising 
from the credit crisis should recognize the importance of fully 
empowering state consumer protection enforcement efforts and the 
creative learning potential from allowing states to experiment with 
varied approaches to regulating unfair and deceptive practices.

C. Possible Federal Action on Foreclosure Rescue Scams
    There are numerous options for Federal action related to this 
problem. Examining the problem of foreclosure rescue scams offers an 
opportunity to review the tools and resources available to the FTC. 
While FTC UDAP authority can be and has been brought to bear on the 
problem, the experience of the states is that regulation aimed directly 
at this conduct is more efficient than treating each case as a new UDAP 
investigation. The FTC began to bring actions against these scams 
substantially after state attorneys general had attacked the problem 
and after state legislatures had developed statutory restriction on 
their operation.
    Current FTC rule-making on UDAP matters is restricted to cumbersome 
and slow Magnuson-Moss procedures. Foreclosure rescue scams are 
prolific in number and often rapidly adapt solicitation strategies. 
Reform of FTC rule-making authority to make it more flexible and prompt 
would allow for a stronger and more effective Federal response to this 
and similar consumer protection problems.
    The Federal Government also can support proven, effective work by 
legal services attorneys that have been the front line of defense for 
embattled homeowners. Unwinding or otherwise providing remedies for 
individual homeowners subject to foreclosure rescue scams, especially 
reconveyance transactions, can require substantial legal resources. In 
many situations, these are not cases that fee-generating attorneys are 
likely to undertake. Legal services attorneys have been a reliable 
source of assistance for victims of rescue scams. A substantial number 
of the early warning cases in this area were brought by legal services 
    Congressional legislation could assist with controlling foreclosure 
rescue scams in at least two areas. First, a Federal law patterned on 
the state laws that have addressed these issues could be helpful for 
both FTC enforcement actions and by providing recourse for state 
enforcement agencies and individuals in states lacking a foreclosure 
rescue regulatory scheme. It may prove more difficult, though not 
impossible, to enact Federal foreclosure reconveyance restrictions 
because they are more closely tied to state real property regimes. 
Foreclosure consultant regulation, however, is clearly amenable to 
Federal action. In terms of coordinated Federal and state regulations, 
this type of law could be similar to the relationship between the 
Federal Credit Repair Organizations Act (CROA) and state credit 
services laws. As noted above, it would be crucial to ensure that any 
Federal law sets a floor on the conduct of foreclosure consultants, 
rather than preempting in any way state protections or enforcement 
    Second, and of less current importance, Congress could consider 
clarifying that foreclosure reconveyance transactions, including sale-
leaseback arrangements, are clearly within the scope of the Home 
Ownership Equity Protection Act (``HOEPA''). Current HOEPA language and 
rules make this result possible, but not certain, depending on the 
structure of the reconveyance transaction.

IV. Conclusion
    Foreclosure rescue scams can be constrained by concerted efforts at 
the Federal and state level. Distressed homeowners deserve a government 
response to rescue scams better than the largely unregulated approach 
to mortgage lending that helped create the reality of an extraordinary 
number of foreclosures facing America today.
                               EXHIBIT A
                 HOUSING PRICE APPRECIATION, 1987-2008

    Data from Case-Schiller Index Composite 10 represents the housing 
prices in the following metropolitan areas: Boston, Chicago, Denver, 
Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and 
Washington DC. Composite 20 includes the Composite 10 cities plus the 
following metropolitan areas: Atlanta, Charlotte, Cleveland, Dallas, 
Detroit, Minneapolis, Phoenix, Portland, Seattle, and Tampa.
                               EXHIBIT B
                         MORTGAGE FORECLSOURES

    Graph Source: Center for American Progress, Economic Data for 
September 2008. http://www.americanprogress.org/issues/2008/09/
                               EXHIBIT C
A) Older Laws:
    California: CAL. CIV. CODE  1695.6, 1695.13.
    Colorado: COLO. REV. STAT. ANN.  6-1-1117.
    Georgia: GA. CODE ANN.  44-14-180.
B) Minnesota Model (2004 and after):
    Arizona: ARIZ. REV. STAT.  44-7701
    Delaware: 6 D. Code ch. 24B
    Florida: FL. STAT.  501.1377
    Hawaii: Act 137 (to be codified at title 26)
    Iowa: IOWA CODE ANN.  714F
    Illinois: 765 ILL. COMP. STAT. ANN. 940/50
    Indiana: IND. CODE ANN.  24-5.5.
    Maine: ME REV. STAT ch. 80-B
    Maryland: MD. CODE ANN., REAL PROP  7-310
    Minnesota: MINN. STAT.  325N.10-.18
    New Hampshire: N.H. REV. STAT. ANN.  479-B
    New York: N.Y. REAL PROP. LAW  265-a
    Oregon: HB 3630 (to be codified)
    Rhode Island: R.I. GEN. LAWS  5-80-8.
    Washington: RCW  61.34.020
C) Bans on Foreclosure Reconveyance Transactions:
    Massachusetts: By Order of the Attorney General
    District of Columbia: Act A17-0205
D) Other Recent Laws/Actions:
    Idaho: ID CODE  45-1601
    Nebraska: LB123
    Nevada:--NEV. REV. STAT. ANN.  645F.300
    Arizona: ARIZ. REV. STAT. 44-7701
    Delaware: 6 D. Code ch. 24B
    Florida: FL. STAT. ch. 79
    California: CAL. CIV. CODE  2945(a)(1).
    Colorado: COLO. REV. STAT. ANN.  6-1-1101(4)(a).
    Hawaii: Act 137 (to be codified at title 26)
    Iowa: IOWA CODE ANN.  714E.
    Illinois: 765 ILL. COMP. STAT. ANN. 940.
    Indiana: IND. CODE ANN.  24-5.5
    Maryland: MD. CODE ANN., REAL PROP.  7-305
    Minnesota: MINN. STAT.  325N.01-.09
    Missouri: MO. ANN. STAT.  407.935(2)(a).
    Nevada:-NEV. REV. STAT. ANN.  645F.300
    New Hampshire: N.H. REV. STAT. ANN.  479-B
    Oregon: HB 3630
    Rhode Island: R.I. GEN LAWS  5-79-1(a).
    Virginia  59.1-200.1
    Washington: RCW  61.34.020

    The Chairman. Thank you very much. Mr. Travis Plunkett?

                           U.S. PIRG

    Mr. Plunkett. Thank you very much, Mr. Chairman and Members 
of the Committee.
    The Chairman. Consumer Federation of America, for those 
who've come in.
    Mr. Plunkett. Travis Plunkett. I'm the Legislative Director 
at the Consumer Federation of America. I'd like to move now 
from a discussion about debt reduction scams involving secured 
credit mortgage and home mortgage lending to unsecured credit, 
so primarily credit card loans.
    And of course Consumer Federation of America and many 
others have expressed great concern about irresponsible and 
aggressive lending practices by credit card companies which 
have run up the amount of debt that people have taken on and 
left them vulnerable to these scams. And when we're talking 
about unsecured credit, two primary forms of assistance short 
of bankruptcy, traditional credit counseling and a newer and 
much more harmful variant called debt settlement. So I'll 
mention both of those separately.
    Credit counseling can be very effective if it's delivered 
by legitimate non-profit counselors and credit unions. The good 
news about credit counseling is that thanks to the efforts of 
the Federal Trade Commission and the IRS and state regulators, 
we aren't seeing the kinds of abuses that we saw at the turn of 
the century. Consumers who see a non-profit credit counselor 
can now be pretty certain that the agency isn't going to 
overcharge them, isn't going to try to sell them harmful 
ancillary products and isn't going to try to funnel their fees 
to for-profit affiliates. That's the very good news about 
credit counseling.
    The bad news is that the value of the assistance, the 
effectiveness of the assistance that credit counselors offer 
and this is primarily a consolidated credit card payment plan, 
is less helpful now because creditors, the credit card 
companies, have not been as aggressive as they should have been 
in lowering the interest rates that consumers pay to credit 
counselors in credit counseling. So we have a lot of people who 
are showing up with very high debt loads who simply can't be 
helped in credit counseling. So they're turning elsewhere. And 
this is the great concern.
    You probably have seen advertisements for debt settlement 
outfits that don't offer to help you pay your loan off over 3 
to 5 years like credit counseling. They say that they're going 
to get you a settlement, a one shot, lump sum payment. That 
they're going to bring your credit card companies to their 
knees. And they're going to lower what you owe your credit card 
company by 50 or more percent. If you, like me, occasionally 
are watching late night cable television, you know what I'm 
talking about.
    The business model used for these companies is fatally 
flawed and very harmful to consumers. Let me just tick off a 
couple of problems. They often mislead consumers about the 
likelihood of a settlement.
    Once again, the Federal Trade Commission is out front here. 
They shut down a settlement organization called the National 
Consumer Council in 2004. We discovered that under 2 percent of 
the consumers that were being supposedly helped by this 
company, under 2 percent of those consumers were settling their 
debts, were actually reaching settlements with credit card 
    A second problem. Unlike credit counseling agencies, these 
firms have no arrangements with creditors. In fact some credit 
card companies won't even deal with them. So they can't 
guarantee a settlement despite their advertisements. That puts 
them right on the brink of fraudulent advertising at the very 
beginning of the process.
    Third, settlement firms often mislead consumers about the 
effect on their credit worthiness of the plans they're 
offering. It's a long process. You have to save up money to 
offer a settlement.
    Meanwhile your creditors are still trying to collect. Your 
debts are piling up. They may go to court. Your credit 
worthiness deteriorates.
    And these outfits, these debt settlement companies are 
telling people, don't worry. We're going to take care of this. 
We're going to get you a really good deal. And in the long run 
that will improve your credit worthiness.
    Fourth problem. These firms charge such high fees the 
consumers can't save money. Remember these are people in really 
serious debt trouble.
    Fifth. Consumers targeted by these companies are the least 
likely to benefit. These are the folks facing serious hardship 
with very high debts. They can't afford these high, upfront 
fees or high back end settlement fees. These are the fees they 
charge as a percentage of what they save you.
    So we have a number of policy recommendations, starting 
with some good state laws that aren't being enforced. So our 
first recommendation is the states that have good laws should 
enforce them.
    Second recommendation is that Congress should consider a 
minimum standards law. Sticking with what Mr. Cox just said, 
the states are doing some good work. There are some gaps and 
some states don't have the resources to enforce the law. So 
let's put a minimum standards law on the book that does not 
preempt the deals with a number of these abuses.
    Fourth, we need some help from banking regulators to create 
a legitimate alternative to debt settlement. There clearly is 
demand here. Consumers want something that gives them more 
assistance in credit counseling that stops short of bankruptcy. 
And right now we have some regulatory hurdles that have not 
allowed credit card companies to create that legitimate 
    And finally the card companies themselves have to 
immediately work to provide more benefits, more concessions 
they're called, lower interest rates to consumers in credit 
counseling. So they can get some help and aren't turning to 
these debt settlement firms that can hurt them.
    Thank you very much.
    [The prepared statement of Mr. Plunkett follows:]

    Prepared Statement of Travis B. Plunkett, Legislative Director, 
Consumer Federation of America On Behalf of The Consumer Federation of 
America, the National Consumer Law Center (On Behalf of its Low-income 
                        Clients), and U.S. PIRG

    Chairman Rockefeller, Ranking Member Hutchison and Members of the 
Committee, my name is Travis Plunkett and I am the legislative director 
of the Consumer Federation of America (CFA).\1\ I am testifying today 
on behalf of CFA, the National Consumer Law Center,\2\ on behalf of its 
low-income clients, and U.S. PIRG.\3\ I commend the committee for 
investigating the adequacy of consumer protections for families with 
distressed finances. The number of Americans who cannot afford their 
consumer or mortgage loans is increasing sharply. Many of these 
families are desperately seeking debt reduction assistance short of 
    \1\ The Consumer Federation of America (CFA) is a nonprofit 
association of some 300 pro-consumer groups, which was founded in 1968 
to advance consumers' interests through research, advocacy and 
    \2\ The National Consumer Law Center, Inc. (NCLC) is a non-profit 
corporation, founded in 1969, specializing in low-income consumer 
issues, with an emphasis on consumer credit. On a daily basis, NCLC 
provides legal and technical consulting and assistance on consumer law 
issues to legal services, government, and private attorneys 
representing low-income consumers across the country. NCLC publishes 
and regularly updates a series of sixteen practice treatises and annual 
supplements on consumer credit laws, including Truth In Lending, Cost 
of Credit, Consumer Banking and Payments Law, Foreclosures, and 
Consumer Bankruptcy Law and Practice, as well as bimonthly newsletters 
on a range of topics related to consumer credit issues and low-income 
consumers. NCLC attorneys have written and advocated extensively on all 
aspects of consumer law affecting low income people, conducted training 
for tens of thousands of legal services and private attorneys on the 
law and litigation strategies to deal predatory lending and other 
consumer law problems, and provided extensive oral and written 
testimony to numerous Congressional committees on these topics. NCLC's 
attorneys have been closely involved with the enactment of the all 
Federal laws affecting consumer credit since the 1970s, and regularly 
provide comprehensive comments to the Federal agencies on the 
regulations under these laws.
    \3\ The U.S. Public Interest Research Group (U.S. PIRG) is the 
national lobbying office for state PIRGs, which are non-profit, non-
partisan consumer advocacy groups with half a million citizen members 
around the country.
    Effective assistance that helps some consumers reduce their 
unsecured debts is available from legitimate, non-profit credit 
counselors and credit unions. However, some creditors have reduced the 
value of the ``concessions'' they will allow agencies to offer to 
debtors in credit counseling at a time when debt problems are 
increasing. Meanwhile, scam artists (including some calling themselves 
credit counselors) are promising to quickly and painlessly reduce the 
amount of credit card debt that consumers owe through a variety of 
expensive, harebrained and harmful schemes. Much more needs to be done 
by state and Federal policymakers to stop these abusive debt reduction 
practices and, in conjunction with creditors, create legitimate, 
effective debt management alternatives to these harmful ``services.''
Background: Reckless and Irresponsible Lending Practices Have Caused 
        Household Debt Levels to Skyrocket and Left Consumers 
        Vulnerable to Debt Reduction Scams
    For fifteen years, CFA and many others have warned that credit card 
issuers were irresponsibly pushing cardholders to take on more debt 
than they could afford, and then using unfair and deceptive tactics to 
increase debt loads and issuer profits. There is considerable evidence 
linking the rise in bankruptcy in recent years to the increase in 
consumer credit outstanding, and, in particular, to credit card debt. 
For example, research by Professor Ronald Mann of Columbia University 
has found that an increase in credit card spending in the U.S. and four 
other countries has resulted in higher credit card debt, which is 
strongly associated with an increase in bankruptcy filings.\4\ To make 
matters worse, credit card companies have become far more aggressive in 
implementing questionable fees and interest rate practices in recent 
years.\5\ The upshot of these practices is that penalty interest rates, 
high and accumulating fees, and interest on fees can push consumers 
with high debts into the hands of debt reduction scam artists or into 
bankruptcy.\6\ In fact, consumers in debt trouble sometimes owe as much 
or more in fees and penalty interest charges as in principal.
    \4\ Mann, Ronald J., ``Credit Cards, Consumer Credit and 
Bankruptcy,'' Law and Economics Research Paper No. 44, The University 
of Texas School of Law, March 2006.
    \5\ Testimony of Travis B. Plunkett, Legislative Director, on 
Behalf of the Consumer Federation of America, Center for Responsible 
Lending, Consumer Action, Consumers Union, National Consumer Law Center 
(on Behalf of its Low-Income Clients) and U.S. PIRG before the Banking, 
Housing and Urban Affairs Committee of the U.S. Senate. regarding 
Strengthening Credit Card Protections, February 12, 2009, http://
    \6\ Day, Kathleen and Caroline E. Mayer, ``Credit Card Penalties, 
Fees Bury Debtors,'' Washington Post, March 6, 2005.
    The growth of revolving debt in this country to $964 billion \7\ 
has obviously not affected all Americans equally. The extraordinary 
expansion of the credit card industry in the 1990s was fueled by the 
marketing of credit cards to populations that had not had widespread 
access to mainstream credit, including lower- and moderate-income 
households, consumers with seriously blemished credit histories, 
college students, older Americans and minorities. For example, U.S. 
PIRG reported last year that the amount of debt held by students who 
carry credit card debt more than doubles between their freshman year 
and senior year in college, from $1,301 to $2,623.\8\
    \7\ According to the Federal Reserve Board, the amount of revolving 
debt held by Americans at the end of 2008 was $963.5 billion. In the 7-
year period from the beginning of 2000 through 2007 consumer revolving 
debt grew by 50 percent from $627.5 billion to $941.4 billion. Federal 
Reserve, Statistical Release, ``Consumer Credit Outstanding,'' Table 
G.19. Although this figure is often used as a proxy for credit card 
debt, most experts believe that outstanding credit card debt is 
slightly lower. First, approximately 5 percent of consumer revolving 
credit is not on credit cards. Second, between 4 to 9 percent of the 
debt does not truly revolve. It is repaid to the credit card issuer 
before the next billing cycle starts. Taking these two factors into 
account, outstanding credit card debt at the end of 2008 was between 
$829 and $877 billion.
    \8\ Mierzwinski and Lindstrom, ``The Campus Credit Card Trap: A 
Survey of College Students and Credit Card Marketing,'' March 2008, 
U.S. PIRG, available at http://www.truthaboutcredit.org, last visited 
25 February 2009.
    In a practice widely known as risk-based pricing, creditors charged 
riskier consumers more to cover potential losses, usually in the form 
of higher interest rates. To make the assumption of debt more 
attractive to these households--and to entice them into carrying debt 
for longer periods--creditors lowered minimum payment balances from 
around 5 percent of principal to just over 2 percent. As a result, an 
estimated eighty percent of all households now have at least one 
card.\9\ According to the Federal Reserve Board, about 42 percent of 
cardholding households pay their credit card bill in full every 
month,\10\ which means that the remaining 50 million or so families 
that carry debt owe an average of about $17,000.\11\
    \9\ Cardweb.com.
    \10\ Bucks, Brian K., Arthur B. Kennickell and Kevin B. Moore, 
``Recent Changes in U.S. Family Finances: Evidence from the 2001 and 
2004 Survey of Consumer Finances,'' Federal Reserve Bulletin, vol. 92, 
February 2006, pg. 31.
    \11\ CFA calculation based on estimated credit card (as opposed to 
revolving) debt of $850 billion. If a conservative estimate of 75 
percent of 114.4 million households have credit cards, and only 58 
percent of these households carry debt, then the remaining 49.7 million 
households have an average of $17,103 in debt.
    Moderate and lower income households that are more financially 
vulnerable shoulder a higher level of debt relative to their incomes. 
In the current economic climate, these households are also under 
financial pressure from many external factors, such as flat wages, 
rising unemployment, skyrocketing home foreclosures and increasingly 
unaffordable health insurance. In other words, the ``democratization of 
credit'' has had serious negative consequences for many Americans, 
putting them one unexpected financial emergency away from bankruptcy.
    As the economy has worsened and home foreclosures have increased to 
record levels, consumers are increasingly having serious difficulty 
paying their credit card bills. One widely watched measure of financial 
health, the amount of credit card debt paid off by Americans monthly, 
is now at one of the lowest levels ever recorded.\12\ Credit card 
charge-offs, the percentage of the value of credit card loans removed 
from the books (net of recoveries), or ``written off,'' have been 
persistently high for most of the last thirteen years and are now 
approaching the highest levels on record. During the decade between the 
end of 1995 and the start of 2006, credit card charge-offs were not 
below 4 percent in a single quarter.\13\ They increased to more than 4 
percent in the fourth quarter of 2006 and broke 4 percent again during 
the latter half of 2007. Since then, charge-offs have escalated sharply 
to 5.62 percent in the third quarter of 2008. There is a very good 
chance that charge-offs will keep rising because the number of 
delinquent credit card payments--an early sign of payment difficulty--
are also approaching historically high levels. Thirty-day credit card 
delinquencies are now at their highest point in 6 years, since the last 
economic recession ended.\14\ Moreover, a number of major issuers have 
reported fourth quarter charge-offs that indicate that borrower 
defaults and issuer losses will exceed those of the last two 
recessions.\15\ The difficulty that many families are having affording 
their credit card bills has been exacerbated by the mortgage crisis. As 
home values have dropped sharply, Americans have been unable to use 
home equity loans and home refinancing to pay off their credit card 
debts.\16\ Moreover, some families in financial trouble are continuing 
to use their credit cards to pay for essential purchases and are 
therefore attempting to stay current on their credit card loans but not 
their mortgage payments, a shift in behavior from past economic crises 
that will likely lead to further deterioration of their financial 
    \12\ Chu, Kathy, ``November Credit-Card Payoff Rate Fell Sharply,'' 
USA Today, February 8, 2009. The monthly payment rate fell by 2.5 
percentage points to 16.1 percent in November 2008, according to 
    \13\ Federal Reserve Board, ``Charge-Off and Delinquency Rates on 
Loans and Leases at All Commercial Banks,'' available at 
www.Federalreserve.gov/release/chargeoff. Most experts attribute lower 
charge-offs in 2006 to the surge of bankruptcy filings (and 
corresponding increase in charge-offs) that occurred in the third and 
fourth quarters of 2005.
    \14\ 30-day credit card delinquencies during first three quarters 
of 2008 were between 4.79 and 4.88 percent, the highest levels since 
2002. Federal Reserve Board, ``Charge-Off and Delinquency Rates on 
Loans and Leases at 100 Largest Commercial Banks'' ``U.S. Credit Card 
Delinquencies at Record Highs--Fitch,'' Reuters, February 4, 2009.
    \15\ Terris, Harry, ``Credit Card Losses Seen Surpassing Levels of 
Last Two Recessions,'' American Banker, January 28, 2009.
    \16\ Westrich, Tim and Weller, Christian E., ``House of Cards, 
Consumers Turn to Credit Cards Amid the Mortgage Crisis, Delaying 
Inevitable Defaults,'' Center for American Progress, February 2008.
    \17\ Chu, Kathy, ``More Americans Using Credit Cards to Stay 
Afloat,'' USA Today, February 28, 2008.
       Quarterly Credit Card Charge-Off Rates, All Banks (%) \18\
    \18\ Federal Reserve Board, ``Charge-Off and Delinquency Rates on 
Loans and Leases at All Commercial Banks,'' available at 
www.Federalreserve.gov/releases/chargeoff/chgallsa.htm , accessed April 
14, 2008.

    Growing problems with the affordability of unsecured debt has not 
only led to an increase in the number of consumers who are seeking 
personal bankruptcy protection. Consumer demand for debt reduction or 
debt management assistance has increased too, especially in the last 2 
years as the economy has deteriorated.\19\ Many non-profit 
organizations and for-profit businesses have jumped in to ``help,'' 
including non-profit credit counseling agencies and for-profit debt 
settlement companies.
    \19\ ``Look Out for That Lifeline, Debt-Settlement Firms are Doing 
a Booming Business--And Drawing the Attention of Prosecutors and 
Regulators,'' Business Week, March 6, 2008.
Credit Counseling: Abuses Have Declined, but so has Value of the Debt 
        Reduction Offered
    The credit counseling industry was created in the mid-1960s by 
credit card companies, which saw an opportunity to recover overdue 
debts. Creditors initially provided the bulk of the funding needed to 
keep the agencies in business.\20\ At first, most of the agencies were 
nonprofit. Debt management plans or DMPs were the feature service 
offered by credit counseling agencies, which also provided financial 
and budget counseling and community education sessions. With DMPs, a 
consumer sends the credit counseling agency a lump sum, which the 
agency then distributes to the consumer's creditors. In return, the 
consumer is supposed to receive a break in the form of creditor 
agreements to waive fees and lower interest rates. Consumers also gain 
the convenience of making only one payment to the agency rather than 
having to deal with multiple creditors on their own. Through a creditor 
policy known as ``fair share,'' DMPs provided substantial revenue for 
the agencies. Creditors returned to the agency a set percentage of the 
funds that are disbursed to them. Over the years, creditors have 
reduced the amount of fair share funding they offer or moved away from 
it entirely by distributing grants that are not explicitly tied to the 
amount of DMP funding collected. In response, agencies curtailed some 
free counseling services and raised consumer fees for DMPs.
    \20\ For an excellent history of the credit counseling industry, 
see David A. Lander, Recent Developments in Consumer Debt Counseling 
Agencies: The Need for Reform, American Bankruptcy Institute Journal, 
Feb. 2002.
    The National Consumer Law Center, the Consumer Federation of 
America, and U.S. PIRG were among the first to warn that the nature of 
credit counseling had also begun to dramatically shift in ways that 
were very harmful to debtors. In the late 1990s, a new class of 
agencies emerged that aggressively marketed DMPs and related services, 
dramatically raised consumer fees, and had extensive relationships with 
for-profit vendors and consultants. Complaints about deceptive 
practices, improper advice, excessive fees and abuse of non-profit 
status sharply increased.\21\ Federal and state regulators and 
policymakers, who had largely ignored the rise of these new agencies, 
and the problems they had created, began to investigate.\22\
    \21\ Loonin, Deanne; Plunkett, Travis; ``Credit Counseling in 
Crisis: The Impact on Consumers of Funding Cuts, Higher Fees and 
Aggressive New Market Entrants;'' National Consumer Law Center and 
Consumer Federation of America; April 2003; http://www.consumerfed.org/
    \22\ ``Profiteering in a Non-Profit Industry: Abusive Practices in 
Credit Counseling,'' Report Prepared by the Permanent Subcommittee on 
Investigations of the Committee on Homeland Security and Governmental 
Affairs, U.S. Senate, April 13, 2005, http://frwebgate.access.gpo.gov/
    By late 2006, the IRS had investigated 63 agencies that brought in 
more than half the revenue of the entire credit counseling industry for 
violating their non-profit status.\23\ The Federal Trade Commission had 
begun taking legal action against AmeriDebt and other phony non-profit 
agencies for a variety of deceptive practices (see Addendum B). State 
attorneys general had launched a number of similar investigations and 
state lawmakers were putting new laws on the books to stop deceptive 
practices and prevent excessive charges.\24\
    \23\ http://www.irs.gov/charities/article/0,,id=156827,00.html. The 
IRS has since reported that it has ``revoked, terminated or proposed 
revocation of over half of the organizations examined, representing 41 
percent of revenue in the industry,'' http://www.irs.gov/charities/
    \24\ Some states used the Uniform Debt Management Services Act 
proposed in 2005 by the National Conference of Commissioners on Uniform 
State Laws as a model and others acted independently to adopt standards 
regarding business practices and fees.
    In July of 2006, Congress created a new section 501(q) of the 
Internal Revenue Code that imposed standards on non-profit agencies, 
including the following:

   Agencies may not refuse to provide credit counseling 
        services due to a consumer's inability to pay or unwillingness 
        to enroll in a DMP.

   Agencies must have reasonable fees.

   Agencies must have a governing body that is not dominated by 
        agency employees or those who benefit financially from agency 

   Agencies must not exceed a phased in cap of 50 percent of 
        revenues on creditor fair share contributions by 2011. (The cap 
        for the 2009 tax year is 70 percent.)

    About the same time, the Executive Office of the United States 
Trustees (EOUST) began implementing a requirement of the new bankruptcy 
law that required those who wish to enter personal bankruptcy to 
receive credit counseling prior to filing and a debtor education course 
before being discharged.\25\ Consumer groups have serious questions 
about the efficacy and necessity of a credit counseling session for 
debtors on the verge of bankruptcy, many of whom have suffered a severe 
reduction in income or a sharp increase in medical expenses not covered 
by insurance. However, the EOUST has done a good job of setting 
standards to help ensure that debtors headed to bankruptcy are 
counseled by legitimate, non-profit agencies that will not harm them or 
delay their bankruptcy filing.
    \25\ Bankruptcy Abuse Prevention and Consumer Protection Act of 
2005, 11 U.S.C.  109, 11 U.S.C.  11(c)(2)(E), 11 U.S.C.  111(c)(1).
    An initial phase of research directed by the Consumer Federation 
and American Express has found that credit counseling can be effective 
in helping consumers to improve their credit worthiness over time.\26\ 
Consumer groups often advise consumers that a DMP could be helpful in 
reducing some unsecured debts, depending on whether the financial 
condition of the debtor is stable or deteriorating, and on the interest 
rate reduction offered by creditors.
    \26\ Staten, Michael E., Barron John M., ``Evaluating the 
Effectiveness of Credit Counseling,'' May 31, 2006; http://
www.consumerfed.org/pdfs/Credit_Counseling_Report061206.pdf. Consumers 
who were recommended for a DMP by agencies and chose to start payments 
had a significantly lower incidence of bankruptcy, as well as improved 
bankruptcy and delinquency risk scores, over the two years following 
counseling than did those who were recommended for a DMP and chose not 
to start.
    However, CFA has also found that some major creditors have actually 
increased the interest rate they charge in credit counseling, while 
others have kept these interest rates high for many consumers. For 
example, when CFA surveyed interest rates in credit counseling in 1999 
and 2003,\27\ Bank of America was a model for the rest of the industry, 
charging 0 percent APR for those in a DMP. Now, they have a range of 
interest rates from 1 percent all the way up to 16 percent. There is 
not a single major credit card issuer right now that charges less than 
5 percent APR for all of its clients in DMPs. (JP Morgan Chase comes 
the closest, at 6 percent.) Capital One charges a 15.9 percent rate, 
unless the client enters counseling with a lower rate. Discover charges 
a range of rates that go as high as 15.9 percent as well.
    \27\ Consumer Federation of America, ``Large Banks Increase Charges 
To Americans In Credit Counseling, New Practices Will Hurt Consumers On 
The Brink Of Bankruptcy, July 28, 1999. National Consumer Law Center, 
Consumer Federation of America, ``First-Ever Study of Credit Counseling 
Finds High Fees, Bad Advice and Other Abuses by New Breed of `Non-
Profit' Agencies,'' April 9, 2003; http://www.consumerfed.org/
    As more consumers struggle to continue to pay their credit card 
loans, it is becoming increasingly clear that the DMP is a less viable 
tool in helping consumers significantly reduce their unsecured debt 
because creditors have kept interest rates too high. While some credit 
card issuers appear to have increased the reductions they offer 
customers in individual ``workout'' plans, such reductions can only be 
helpful in stabilizing a consumer's finances if the person does not 
have multiple credit card debts, as many people in debt trouble do. 
Credit counseling executives are now openly acknowledging that creditor 
concessions have not kept pace with growing indebtedness, ``. . . given 
the high levels of unsecured debt outstanding, bankruptcy will be the 
only option available to many of these families--unless the credit card 
industry provides relief through better concessions, so that a greater 
number of consumers can qualify for Debt Management Plans.'' \28\
    \28\ Keating, Susan C., President and CEO, National Foundation for 
Credit Counseling, ``2008 State of the Credit Counseling and Financial 
Education Sector Address.''
    The refusal by credit card issuers to significantly lower interest 
rates for consumers in credit counseling is perplexing because there 
are signs that the industry does realize that if it moves aggressively 
to significantly reduce what consumers owe them, it such assistance 
would likely benefit card issuers in the long run by keeping consumers 
from discharging much or all of their credit card debt in bankruptcy. 
As mentioned above, some issuers appear to be offering greater 
unilateral concessions to customers who enter workout programs. 
Moreover, the Financial Services Roundtable has recently collaborated 
with CFA in an effort to reduce or eliminate regulatory hurdles that 
currently inhibit issuers from authorizing DMPs that significantly 
reduce the principal (not just the interest charges) that consumers 
owe.\29\ CFA hopes to work with Congress and the Office of the 
Comptroller of the Currency (OCC) to quickly create a regulatory path 
that would allow and encourage issuers to offer reduced principal DMPs. 
Such a pathway would also need to eliminate or reduce the tax liability 
that consumers must pay on reduced principal settlements. Reduced 
principal DMPs could not only help many families in debt trouble stay 
solvent, but also create a legitimate, pro-consumer alternative to debt 
settlement scams (see next section.)
    \29\ The OCC and other financial regulatory agencies rejected a 
request made by CFA and the Financial Services Roundtable on October 
29, 2008 to permit a pilot project that would allow some credit 
counseling agencies to offer some consumers reduced principal DMPs over 
a period of up to 60 months. Current guidance requires that reduced 
principal ``settlements'' must generally be paid in full within three 
to 6 months. Multi-year, reduced principal payment plans are not 
allowed unless the issuer charges off the entire loan before offering 
the settlement.
Debt Settlement: Business Model is Inherently Harmful to Vulnerable 
    Debt settlement involves negotiating with creditors to reduce the 
principal amount the consumer owes and to pay this reduced amount over 
a fairly short period, usually in one or two lump sum payments. Unlike 
most credit counseling agencies, debt settlement and debt negotiation 
companies are usually for-profit businesses. Settlement services are 
different from credit counseling (or debt management) mainly because 
settlement companies do not send regular monthly payments to creditors. 
Instead, these agencies generally maintain a consumer's funds in 
separate accounts--or direct consumers to deposit savings in an account 
that they can observe but do not control--until the company believes it 
can settle the consumer's debts for less than the full amount owed. 
Typically, debtors can only afford to pay off their creditors 
sequentially, saving up enough money (after upfront fees are paid) to 
make an offer to one creditor, then saving again until there is enough 
to offer a second settlement, and so on.
    Many companies have advised consumers to stop paying debts as a 
condition of participation in the program. Debtors pay a variety of 
fees for this service, including enrollment fees, monthly maintenance 
fees and a settlement fee, which is usually a percentage of the 
forgiven amount of debt.
    The Federal Trade Commission and attorneys general in at least six 
states have begun legal action against debt settlement firms throughout 
the country. Addendum A provides significant details about the range of 
deceptive, fraudulent, and harmful practices that these companies used 
that the FTC has uncovered, which can be summarized as follows:

        1. Settlement firms often mislead consumers about the 
        likelihood of a settlement. Evidence from debt settlement 
        investigations indicate that a large number of consumers never 
        complete a debt settlement program. One North Carolina 
        assistant attorney general estimates that 80 percent of 
        consumers drop out of debt settlement plans within the first 
        year.\30\ A receivers' report on the National Consumers 
        Council, a purported non-profit debt settlement organization 
        that was shut down by the FTC in 2004, found that only 1.4 
        percent of NCC customers settled with all their creditors. 43 
        percent of their clients canceled the program after incurring 
        fees of 64 percent of the amount remitted to NCC.\31\
    \30\ ``Look Out for That Lifeline, Debt-Settlement Firms are Doing 
a Booming Business--And Drawing the Attention of Prosecutors and 
Regulators,'' Business Week, March 6, 2008.
    \31\ Robb Evans and Associates LLC, ``Report of the Temporary 
Receiver, May 3, 2004-May 14, 2004, First report to the Court.''

        2. Unlike credit counseling agencies, settlement firms cannot 
        guarantee to consumers that the creditor will agree to a 
        reduced payment if certain conditions are met. In fact, some 
        creditors insist that they won't negotiate with settlement 
        firms at all,\32\ or that they will initiate a collections 
        action if they learn that a debt settlement company is 
        negotiating on behalf of a consumer.
    \32\ ``Look Out for That Lifeline, Debt-Settlement Firms are Doing 
a Booming Business--And Drawing the Attention of Prosecutors and 
Regulators,'' BusinessWeek, March 6, 2008.

        3. Settlement firms often mislead consumers about the effect of 
        the settlement process on debt collection and their credit 
        worthiness. Withholding payment to settle multiple debts is a 
        very long process. Meanwhile, additional fees and interest 
        rates continue to buildup, creditors continue to try to collect 
        on unpaid debts, and consumers' credit worthiness continues to 
        deteriorate. Some firms still advise consumers not to pay 
        debts, either implicitly or explicitly. Others firms say they 
        never tell consumers not to pay their debts but only accept 
        clients who have already done so. Moreover, many settlement 
        firms have not followed through with promises that they will 
        stop collection calls. In fact, under the Fair Debt Collection 
        Practices Act, consumers can only request that third party 
        collection efforts stop, not collection attempts by a credit 
        card company on its own behalf.

        4. Settlement firms charge such high fees that consumers often 
        don't end up saving much to make settlement offers, which is 
        why so many drop out of settlement programs. Debt settlement 
        firms typically require consumers to pay fees of between 14 and 
        20 percent upfront (and as high as 30 percent) before they 
        receive a settlement. It is often not made clear to consumers 
        that a hefty portion of the payments they make in the first 
        year will go to the firm, not to their reserve fund or 
        creditors. Many firms also charge monthly fees to maintain 
        accounts as well as a ``settlement fee'' of between 15 and 30 
        percent of the amount of debt that has been forgiven.

        5. As a result of high fees, consumers targeted by debt 
        settlement companies are generally the least likely to benefit. 
        Some firms will work only with insolvent consumers who are 
        unemployed or those in a hardship situation. Many have minimum 
        debt requirements of $10,000 to $12,000. Consumers facing 
        serious hardship with very high debts are, of course, the least 
        likely to be able to afford the hefty payments that are 
        charged. Settlement firms also appear to make no distinction, 
        as a good attorney would, between consumers in these hardship 
        situations who are vulnerable to legal judgments to collect and 
        those who are not.

        6. It is unclear what professional services most debt 
        settlement companies offer to assist debtors while they save 
        money to pay for a settlement. Serious negotiation with 
        creditors cannot commence until a significant settlement amount 
        is saved, which could take years once high fees are paid. A 
        persistent complaint by consumers is that settlement companies 
        do not contact creditors at all in some cases.

    The combined impact on consumers of these practices can be 
devastating. To get a sense of the impact on the many indebted 
borrowers for whom the debt settlement business model does not work, 
CFA examined some of the thousands of debt settlement complaints that 
are on various consumer review websites. Here are a few summaries of 
the stories we found (all from the past 5 months):

   One (anonymous) consumer was convinced by a debt settlement 
        company that it had strong relationships with major creditors 
        and that its services would be a good alternative to 
        bankruptcy. After she signed up with the settlement company, 
        she was instructed to stop making payments to creditors. She 
        later found out that the extent of the settlement company's 
        involvement amounted to sending ``power of attorney'' letters 
        to the creditors. Without help from the company she hired, she 
        is now facing at least two collections lawsuits alone.

   One woman was persuaded to stop paying her creditors and to 
        start paying the debt settlement company over $800 a month with 
        the promise that her creditors would stop their collections 
        calls and that she could reach a good settlement on her credit 
        card balance. The settlement company took the money, but no 
        settlements ever took place, and creditors never stopped 
        calling. After 7 months of no progress with her accounts, she 
        stopped paying the company's fees. Without being able to get a 
        refund of the more than $5,000 she paid in fees, she is now 
        saving money for a bankruptcy lawyer. After a legal firm later 
        acquired her accounts, she discovered that the original 
        settlement company routinely dealt with other customers in the 
        same way.

   After hearing nothing from his debt settlement company for 
        several months, Chris from Maryland attempted to respond 
        personally to a credit card collections letter. The debt 
        settlement company later scolded and threatened him because he 
        contacted the creditor directly. He realized that the company 
        was not keeping up its end of the bargain, and he decided that 
        the $300/month he was paying in fees was not money well spent. 
        He has tried to sever his ties with the settlement company, but 
        they continue to ignore his requests.

   ``T'' from Arizona regularly saw television advertisements 
        for a particular debt settlement company and thought they 
        appeared legitimate. He called the company and was promised 
        that his payments would be only $300 a month. The company 
        collected his personal financial information and instructed him 
        to stop paying his creditors. After 4 months and over $1,500 in 
        fees being automatically drawn from his bank account, the 
        consumer found out that no creditors had been paid. He 
        eventually had to put a ``stop payment'' order on his bank 
        account to prevent the settlement company from automatically 
        withdrawing what they pleased. The consumer is now stuck with a 
        damaged credit report, excessive fees, and no debt settlements.

   Frank from New York was directly contacted by a debt 
        settlement company after visiting the company website. After a 
        promise that the company would settle his debts, he decided to 
        accept the $250 per month fee. Nearly a year later, with no 
        progress in debt settlements, he stopped hearing from them. 
        After many unanswered calls and e-mails, he finally received a 
        response from the company that he would get a partial refund. 
        Since then the company has ignored his efforts to receive the 
        refund and his debts remain unsettled.

    Creditors obviously must share some responsibility for the growth 
of the debt settlement industry. For one thing, some credit card 
issuers are knowingly doing business with these firms. For another, 
there clearly is consumer demand for a legitimate debt reduction 
approach that offers more relief than traditional credit counseling but 
is not as far reaching as bankruptcy. As stated above, creditors have 
not lowered interest rates in credit counseling. On a positive note, as 
mentioned above, creditors have now taken steps to get permission from 
Federal regulators to offer reduced principal, multi-year payment 
plans. The 2005 bankruptcy act attempted to provide an incentive to 
creditors to offer ``60/60'' plans (60 percent of what the borrower 
owes paid off over 60 months.) \33\
    \33\ 11 U.S.C.  502(k).
    Ultimately, it appears clear that the business model for debt 
settlement is structurally flawed. The essential promise made by debt 
settlement firms to the public, that they can settle most debts for 
significantly less than what is owed, is often fraudulent. There is a 
general consensus that credit counseling, if done well, can provide 
significant benefits for some financially distressed consumers. No such 
consensus exists for debt settlement. Debt settlement firms should have 
to prove that, in the face of significant evidence to the contrary, 
their business model can and does actually help more than a few 
financially distressed consumers.

Congress, the Federal Trade Commission, and the States
    Debt settlement is regulated primarily at the state level. Seven 
states have banned debt settlement.\34\ Four more have adopted limited 
restrictions on the practice proposed by the National Conference of 
Commissioners on Uniform State Laws.\35\ A number of other states have 
restrictions on debt management or adjustment that do not explicitly 
pertain to the practice of for-profit debt settlement, but cover it. 
States can also deploy laws regarding credit repair, the unauthorized 
practice of law, and unfair and deceptive practices (UDAP) against 
selected debt settlement practices.\36\
    \34\ ``Look Out for That Lifeline, Debt-Settlement Firms are Doing 
a Booming Business--And Drawing the Attention of Prosecutors and 
Regulators,'' BusinessWeek, March 6, 2008.
    \35\ Uniform Law Commissioners, ``A Few Facts about the Uniform 
Debt-Management Services Act of 2005, http://www.nccusl.org/Update/
uniformact_factsheets/uniformacts-fs-udmsa.asp. The National Consumer 
Law Center and Consumer Federation of America opposed including 
provisions regulating debt settlement firms in the same law that 
regulated debt management and credit counseling because the businesses 
are so different. The highly questionable debt settlement business 
model necessitates a different and more stringent regulatory framework 
that does not legitimize the debt settlement.
    \36\ Loonin, Deanne, National Consumer Law Center, ``An 
Investigation of Debt Settlement Companies: An Unsettling Business for 
Consumers,'' March 2005.
    Regarding laws at the Federal level, some debt settlement firms 
appear to have violated the Federal Credit Repair Organizations Act by 
claiming that they will improve consumers' credit. The Federal Trade 
Commission has used the FTC Act well to pursue settlement firms that 
have used unfair and deceptive practices.
    We recommend that state and Federal policymakers, regulators and 
enforcement offices consider taking the following steps:

        1. The Federal Trade Commission and state attorneys general 
        should continue to enforce UDAP laws. We also urge the FTC to 
        immediately use its subpoena power to examine the records of 
        the largest debt settlement firms in the country to determine 
        if these firms are or are not making fraudulent claims about 
        their ability to deliver large settlements for most of their 

        2. UDAP prosecutions can be time-consuming and costly, so it is 
        essential that state lawmakers in particular begin to more 
        aggressively enforce debt management and other laws that 
        regulate the practice of debt settlement, including tight 
        limits on what firms are allowed to charge.

        3. Congress should consider the enactment of a Federal law 
        setting a strong minimum standard based on the best state laws 
        directed specifically at debt settlement, which states could 
        exceed if local conditions warrant such a move. This would 
        bring the power and reach of the Federal Government in 
        enforcing tough standards throughout the country. At the very 
        least such minimum standards should:

   Prohibit debt settlement firms from collecting any fees from 
        consumers until debts are settled, except for a small 
        enrollment fee.

   Prohibit firms from misrepresenting the settlement process' 
        impact on the credit worthiness of consumers.

   Place a cap on back end settlement fees, based on the 
        settlement services actually rendered rather than the amount of 
        debt that was forgiven.

   Require that any debt serviced by a settlement firm must be 
        settled within 12 months.

        4. In order to help facilitate the creation of a legitimate 
        alternative to third-party debt settlement, banking regulatory 
        agencies should take steps to allow creditors to offer multi-
        year, reduced principal payment plans, consistent with sound 
        accounting principals. If regulators cannot agree on a solution 
        that achieves this goal quickly, Congress should step in to 
        offer one.

        5. As it has done in the mortgage lending context, Congress 
        should consider waiving or reducing the tax liability that 
        consumers must pay for the forgiven amount of any debt 
        settlement (above $600).

    Credit card issuers should act to immediately lower interest rates 
charged to consumers in credit counseling and should continue to 
consider methods that might be acceptable to regulators to allow 
consumers to pay back a reduced amount of principal over a 3 to 5 year 
period of time.

              Addendum A: Recent FTC Debt Settlement Cases

    1. Edge Solutions, Inc. and Money Cares, Inc. aka The Debt 
Settlement Company and The Debt Elimination Center; Pay Help, Inc.; 
Miriam and Robert Lovinger
    Press release on August 5, 2008 at: www.ftc.gov/opa/2008/08/
    Complaint filed on October 3, 2007
    Complaint alleged that the defendants:

   Promised that they could reduce consumers' debts so they 
        would only pay 55 cents for each dollar of debt.

   Told consumers that their payments would cover both 
        negotiated debts and fees.

   Told consumers to stop making payments to and have no 
        further contact with their creditors, and that this would place 
        them in a ``hardship condition,'' making negotiations possible.

   Promised that debts would be begin to be paid to creditors 
        within several weeks and would ultimately be paid in a shorter 
        time, and for a reduced amount, than if consumers continued to 

   Required consumers to set up direct debit from their bank 
        accounts to a bank account controlled by the company, from 
        which their fees and debts would be paid.

   Promised one-on-one financial counseling, which in most 
        cases was never provided.

   Buried in the agreement the fact that consumers must pay 45 
        percent of total fee upfront before any payments would begin to 
        creditors and that this might take several months.

   Failed to negotiate with and pay creditors as promised.

   Caused consumers to incur late fees, finance charges, 
        overdraft charges, and negative information on their credit 
        reports, and to face various types of legal action by 
        creditors, leaving them in worse financial condition than 

    Status: Settlement

    2. Debt-Set, William Riggs, Leo Mangan, Resolve Credit Counseling, 
Inc., and Michelle Tucker Press release on February 14, 2008 at: 
    Complaint filed on March 27, 2007
    Complaint alleged that the defendants:

   Falsely promised that they could significantly reduce 
        consumers' credit card interest rates to between 0 and 9 
        percent or reduce the amount of their unsecured debt to 50 
        percent or 60 percent.

   Encouraged consumers who called in response to ads to enroll 
        in a ``debt consolidation program'' if their unsecured consumer 
        debt was up to 1 month overdue, or in a ``debt settlement 
        program'' if they were overdue by a longer period.

   Misrepresented that they would not charge consumers any 
        upfront fees before obtaining the promised debt relief and 
        buried inadequate fee information in the agreement, when in 
        fact they generally charged 8 percent of the total debt before 
        they would contact the creditors.

   Sent consumers documents to sign that were described as 
        ``not contracts'' but ``just information'' but in fact were 
        agreements that, among other things, authorized the companies 
        to make withdrawals from consumers' bank accounts.

   Misrepresented that participation in their program would 
        stop creditors from calling or suing consumers to collect 

   Failed to negotiate with and pay creditors as promised.

   Caused consumers to incur late fees, finance charges, 
        overdraft charges, and negative information on their credit 
        reports, and to face various types of legal action by 
        creditors, leaving them in worse financial condition than 

    Status: Settlement

    3. Homeland Financial Services, National Support Services LLC, 
United Debt Recovery LLC, Freedom First Financial LLC, and USA Debt Co, 
LLC, Financial Liberty Services, and their principals, Dennis Connelly, 
Richard Wade Torkelson, and Joanne Garneau (doing business as Prosper 
Financial Solutions)
    Press release on September 21, 2006 at: www.ftc.gov/opa/2006/09/
nationwide.shtm Complaint filed on September 21, 2006
    Complaint alleged that the defendants:

   Falsely claimed that, for a non-refundable fee of up to 15 
        percent of a consumer's unsecured debt, they could reduce all 
        of their unsecured debts, including credit card balances and 
        medical bills, by as much as 40 percent to 60 percent.

   Falsely represented that they would contact consumers' 
        creditors immediately.

   Charged a nonrefundable fee of 12-15 percent of the total 

   To the extent that they initiated negotiations with 
        creditors, these settlements typically began only after a 
        consumer paid 30 percent to 40 percent of the fee. This could 
        take up to 3 months after a consumer followed the advice of the 
        settlement firm and stopped making payments to creditors.

   Rarely negotiated settlements with all of a consumer's 
        creditors, and even when they have successfully negotiated an 
        account, in many cases, the settlement amount is significantly 
        more than 60 percent of what consumers owe.

   Caused most consumers, who typically left the program within 
        6 months of enrolling without completing it, to incur larger 
        debt as a result of penalties, fees, interest, and other 

   Failed to adequately disclose the likelihood that consumers 
        would be sued if they took the defendants' advice and stopped 
        making payments to creditors.

   Falsely advised consumers that negative information that 
        appeared on their credit report as a result of participating in 
        the defendants' program would be removed upon completion of the 

    Status: Settlement for some of the defendants, injunctions still in 
place on others.

    4. Innovative Systems Technology, Inc., dba Briggs & Baker; Debt 
Resolution Specialists, Inc., Todd A. Baker; and Jack Briggs, aka John 
    Press release on July 19, 2005 at: http://www.ftc.gov/opa/2005/07/
    Complaint filed February 13, 2004
    Complaint alleged that:

   Innovative Systems Technology, Inc., which did business as 
        Briggs & Baker and Debt Resolution Specialists, Inc., falsely 
        told consumers they could negotiate with their creditors and 
        reduce their debt.

   Consumers were told to end all contact with their creditors 
        and to stop making payments on their accounts.

   However, Innovative Systems Technology, Inc., never did 
        negotiate with the consumers' creditors and consumers often 
        ended up deeper in debt and incurred further damage to their 
        credit ratings.

    Status: Settlement. Both companies are now currently in Chapter 7 
bankruptcy and barred from selling any debt negotiation services in the 

    5. National Consumer Council, London Financial Group; National 
Consumer Debt Council, LLC; Solidium, LLC; J.P. Landis, LLC; Financial 
Rescue Services, Inc.; Signature Equities, LLC; M&L Springfield Trust; 
PC Hailey Trust; Via Lido Trust; and United Consumers Law Group
    Press release on March 30, 2005 at: www.ftc.gov/opa/2005/03/
creditcouncel.shtm Complaint filed April 23, 2004
    Complaint alleged that:

   National Consumer Council, a purported nonprofit 
        organization, solicited customers through an aggressive 
        telemarketing and direct mail advertising campaign that falsely 
        promised free debt counseling.

   In fact, NCC's role in the scheme was simply to generate 
        leads for the other defendants who then charged consumers 
        thousands of dollars in fees to enroll in their debt 
        negotiation programs.

   The defendants deceptively claimed these programs were an 
        effective way to stop creditors' collection efforts and 
        eliminate debts.

   The defendants failed to disclose important information to 
        consumers before they enrolled, including the fact that very 
        few people were able to reduce their debts through the debt 
        negotiation programs; consumers would suffer late fees, 
        penalties, and other charges; and that participation in the 
        program might hurt their credit rating.

   Very few consumers were helped; a court-appointed receiver 
        determined only 1.4 percent of the consumers who enrolled in 
        the defendants' debt negotiation programs--638 out of 44,844 
        consumers--actually completed them. 43 percent of NCC's clients 
        canceled the program after incurring fees of 64 percent of the 
        total amount remitted to NFCC.

    Status: Settlement

    6. Jubilee Financial Services, Jabez Financial Group, Gustavsen 
Learning Centers, Inc., and Debt Relief Counselors of America, P.C. et 
    Press release on January 26, 2005 at: www.ftc.opa/2005/01/
    Complaint filed August 19, 2002
    Complaint alleged that defendants:

   Lured consumers with false promises that consumers who 
        enrolled in their debt negotiation program would be able to pay 
        their debts at a reduced amount of 40 to 60 percent and that 
        consumers would stop receiving collection calls from creditors.

   Told consumers to stop making payments to creditors so that 
        they would be in a ``hardship condition'' that would make it 
        easier to negotiate.

   Misled consumers about the effects of the Jubilee program on 
        their credit report and failed to tell consumers that, as a 
        result of using the defendants' services, negative information 
        would appear on consumers' credit reports and stay there for 7 

   Falsely told consumers that money sent to the Jubilee 
        companies would be held in a trust account to be used by 
        defendants to pay off consumers' debts at a reduced rate, when 
        instead the companies withdrew the funds to pay operating 

   Failed to negotiate with and pay creditors as promised.

   Caused consumers to incur late fees, finance charges, 
        overdraft charges, and negative information on their credit 
        reports, and to face various types of legal action by 
        creditors, leaving them in worse financial condition than 

    Status: Permanent injunctions against defendants

    7. Better Budget Financial Services (BBFS) and its principals, John 
Colon, Jr. and Julie Fabrizio-Colon
    Press release on November 15, 2004 at: www.ftc.gov/opa/2004/11/
    Complaint filed November 15, 2004
    Complaint alleged that the defendants:

   Falsely claimed that they could negotiate with consumers' 
        creditors to reduce their debt by as much as 50 to 70 percent.

   Promised to negotiate with consumers' creditors for a non-
        refundable retainer fee, monthly administrative fees of $29.95 
        to $39.95, and 25 percent of any savings realized by a debt 
        settlement, resulting in consumers paying hundreds or even 
        thousands of dollars in fees.

   Told consumers to stop paying their creditors directly, 
        claiming that consumers' failure to pay their creditors will 
        demonstrate a ``hardship condition'' that will enable BBFS to 
        negotiate on their behalf and instructed them to set a bank 
        account into which to deposit a specific amount each month to 
        cover the fees and negotiated debt amounts.

   Claimed that they would settle each creditor's account once 
        the consumer saves half the amount owed on each debt.

   Told consumers to sign power of attorney forms, claiming 
        that the forms would enable BBFS to contact creditors on the 
        consumers' behalf and instruct debt collectors to stop calling 
        consumers directly.

   Instructed consumers not to talk to any creditors who 
        contacted them directly.

   Told consumers that negative information may appear on their 
        credit reports while they worked with BBFS, but that the 
        information was temporary and that BBFS would direct consumers 
        to a company to get assistance repairing their credit.

   Failed to negotiate with consumers' creditors or to contact 
        debt collectors as promised, even after consumers called to let 
        them know that they had sufficient funds set aside to pay a 

   Caused consumers to incur late fees, finance charges, 
        overdraft charges, and negative information on their credit 
        reports, and to face various types of legal action by creditors 
        or to file for bankruptcy, leaving them in worse financial 
        condition than before.

    Status: Settlement
               Addendum B: Recent FTC Credit Counseling 
                    and Other Debt Management Cases

    1. AmeriDebt, Inc., DebtWorks, Inc., Andris Pukke, and Pamela 
Pukke, also known as Pamela Shuster
    Press release on September 10, 2008 at: http://www.ftc.gov/opa/
2008/09/ameridebt.shtm Complaint filed on November 19, 2003

    Complaint alleged that:

   AmeriDebt falsely claimed they were a non-profit corporation 
        operating for charitable purposes.

   Despite its claims to the contrary, AmeriDebt did not teach 
        clients how to handle debt. Instead, they sold them into ``debt 
        management plans'' (DMPs) which had monthly fees.

   AmeriDebt falsely claimed that there were no up-front fees. 
        When they collected these fees, they held onto them and did not 
        disburse them to creditors.

    Status: Settlement. It was one of the biggest debt management/
credit counseling deception cases brought by the FTC ever, ultimately 
$12.7 million was returned to more than 280,000 customers.

    2. Select Personnel Management, Inc., an Ontario, Canada, 
corporation d/b/a Select Management Solutions, and James Stewart, 
individually and as an officer or director of Select Personnel 
Management, Inc., d/b/a Select Management Solutions
    Press release on August 19, 2008 at: http://www.ftc.gov/opa/2008/
    Complaint filed on: February 2, 2007

    Complaint alleged that:

   The Canadian telemarketer, Select Personnel Management, 
        Inc., falsely told U.S. consumers that they could reduce their 
        credit card interest rates and that they were affiliated with 
        the consumers' credit card companies, violating Section 5 of 
        the FTC Act and the FTC's Telemarketing Sales Rule (TSR).

   The telemarketer promised consumers to effect credit card 
        rates between 4.75 percent and 9 percent, thus saving consumers 
        at least $2,500, and that if consumers did not save that amount 
        their money would be refunded.

   Consumers paid $675 (plus $20 for shipping) for promotional 
        materials that eventually resulted in three-way telephone calls 
        with the telemarketer, consumers and their credit card 
        companies where the companies were asked to lower their 
        interest rates. The requests were usually denied and that was 
        often the extent of the services provided.

   Consumers who did not receive the promised savings, did not 
        receive a refund despite claims to the contrary.

    Status: Ongoing, complaint recently amended.

    3. Randall L. Leshin, Randall L. Leshin, P.A. also d/b/a Express 
Consolidation, Express Consolidation, Inc., Consumer Credit 
Consolidation, Inc., and Maureen A. Gaviola
    Press release on May 8, 2008 at: http://www.ftc.gov/opa/2008/05/
    Complaint filed on: January 8, 2007

    Complaint alleged that:

   Express Consolidation, Inc. illegally tele-marketed millions 
        of consumers under the guise of a non-profit that only charged 
        a monthly administrative fee.

   Instead, Express Consolidation, Inc. charged a fee equal to 
        the monthly payment in addition to a monthly administrative 

   Despite their claims, Express Consolidation, Inc.'s services 
        did not reduce the consumer's total debt and did not provide 
        any services to improve the customer's credit history, record, 
        or rating.

    Status: Settlement. The settlement included a $40 million judgment, 
based on the money the defendants received through the scam. However, 
the payment was drastically reduced because of the defendants' 
inability to pay.

    4. Debt Solutions, Inc., a Florida corporation, also doing business 
as DSI Financial, Inc., and Accelerated Financial, Inc.; DSI Financial, 
Inc., a Florida corporation, also doing business as Accelerated 
Financial, Inc.; DSI Direct, Inc., a Florida corporation; Pacific 
Consolidation Services, Inc., a Washington corporation, also doing 
business as DSI Financial, Inc., and Accelerated Financial, Inc.; 
Kenneth Schwartz, individually and as an officer of Debt Solutions, 
Inc., DSI Financial, Inc., and DSI Direct, Inc.; Jennifer Ruth Whalen, 
aka Jennifer Ruth Krizan, individually and as an officer of Pacific 
Consolidation Services, Inc., and DSI Direct, Inc.; David Schwartz, 
individually and as a manager of Pacific Consolidation Services, Inc.; 
and GREG MOSES, individually and as a manager of Pacific Consolidation 
Services and DSI Direct, Inc.
    Press release on May 23, 2007 at: http://www.ftc.gov/os/caselist/
    Complaint filed on: March 21, 2006

    Complaint alleged that:

   Debt Solutions Inc. charged consumers hundreds of dollars 
        for a ``debt elimination program'' that, despite its claims to 
        the contrary, did not greatly reduce interest rates and result 
        in thousands of dollars in savings.

   Through unsolicited phone calls and online marketing, the 
        defendants falsely told consumers upon enrolling in the program 
        they would be assigned a financial consultant who would help 
        them to greatly lower their interest rates.

   Instead, most consumers who did enroll did not receive lower 
        interest rates and those that did only saw reductions of around 
        1 percentage point.

   Very few consumers received the promised refund.

   Consumers were not told that the promised savings would take 
        decades to achieve and that the majority of savings would 
        result from increasingly paying more every month, not reduced 
        interest rates.

    Status: Settlement

    5. Credit Foundation Of America, a California Corporation; TTT 
Marketing Services, Inc., a California Corporation; Credit Defenders Of 
America, Inc., a California Corporation; Credit Shelter Of America, 
Inc., a California Corporation; Sure Guard Credit Corporation, Inc., a 
California Corporation; ANTHONY P. CARA, individually and as a director 
or officer of Credit Foundation of America and TTT Marketing Services, 
Inc., WALTER F. VILLAUME, individually and as a director or officer of 
TTT Marketing Services, Inc. and Sure Guard Credit Corporation, Inc.; 
TODD A. RODRIGUEZ, individually and as a director or officer of TTT 
Marketing Services, Inc., and Sure Guard Credit Corporation, Inc.; 
ROBERT BROWN, individually and as a director or officer of Credit 
Defenders of America, Inc.; and BRYAN TAYLOR, individually and as a 
director or officer of Credit Shelter of America, Inc.
    Press release on June 15, 2006 at: http://www.ftc.gov/opa/2006/06/
    Complaint filed on June 15, 2006

    Complaint alleged that:

   The Credit Foundation of America, Inc. sold debt management 
        services by falsely claiming that consumers were pre-approved 
        for a service to consolidate their credit card debts to single 
        monthly payment at a much lower interest rate (sometimes as low 
        as zero percent).

   Consumers' individual circumstances were not taken into 
        consideration when they were being recruited to enroll. Many 
        enrollees lost the large enrollment fees they paid.

   Credit Foundation of America, Inc. claimed it was exempt 
        from the do-not-call requirements of the FTC's Telemarketing 
        Sales Rule (TSR) because of its tax-exempt status with the IRS. 
        However, it primarily generated profits for for-profit 

    Status: Settlement. Credit Foundation of America, Inc. ultimately 
agreed to pay $926,754 in consumer redress and civil penalties.

    6. Integrated Credit Solutions, Inc.; Flagship Capital Services 
Corp.; Lighthouse Credit Foundation, Inc.; Mary H. Melcer; and J. 
Steven McWhorter, Defendants, and Jeffrey E. Poorman; and Daniel M. 
Melgar, Sr.,
    Press release on: May 3, 2006 at: http://www.ftc.gov/opa/2006/05/
    Complaint filed on May 3, 2006

    Complaint alleged that:

   Lighthouse Credit Foundation Inc. falsely advertised itself 
        as a non-profit enterprise that could assist consumers with 
        debt management plans.

   The Foundation misled consumers when they told them they 
        could dramatically lower their interest rates, they would 
        provide financial counseling, and that their monthly 
        administrative fee was tax-deductible.

    Status: Settlement. The Lighthouse Credit Foundation Inc. and its 
co-defendants were ultimately ordered to pay more than $2.4 million in 
consumer redress.

    Senator Lautenberg [presiding]. Just for the comfort level 
of the witnesses you are being heard, even though we're looking 
at empty chairs. So don't be discouraged. The work that you've 
done is appreciated.
    And we'll see the testimony is there. I appreciate the fact 
that you've done that. That we have your words in print and I 
have a chance to look it over.
    The situation you describe is of a serious emergency 
nature. And just adds fuel to the fire that this country is now 
in front of us. So please, Mr. Himpler, we'd like to hear from 
    And you don't have to be concerned about where you're 
glancing. It's--I am now the acting Chairman. So I'll try to 
act patiently and listen very keenly. Thank you. Please.


    Mr. Himpler. Thank you, Mr. Acting Chairman. My name is 
Bill Himpler. I'm the Executive Vice President at the American 
Financial Services Association, the national trade association 
for the consumer credit industry protecting access to credit 
and consumer choice.
    We want to commend the members of this Committee for 
convening this important hearing to explore what can be done 
about unscrupulous actors who exploit consumers' fears about 
their debt obligations and worse still, the fear of the 
possibility of losing their home. I appreciate the opportunity 
to testify on consumer protections for people with distressed 
finances who are trying to negotiate to avoid bankruptcy. Let 
me state at the outset that AFSA shares the concerns of 
Congress and the members of this committee about the growing 
number of consumers who are having difficulty making payments 
on a variety of debts and organizations that scam consumers 
with fraudulent credit repair and rescue programs.
    Not only do these scams affect individual borrowers like 
Mrs. Dix. They also affect creditors and the broader market to 
the extent that they promote the removal of accurate and timely 
information from consumer credit reports. This results in 
inaccurate assessments of the true credit standing of consumers 
and thereby undermines the legitimate efforts to assist 
consumers in resolving their credit difficulties.
    We believe instances of these scams can be reduced through 
four measures.
    The continued availability of legitimate counseling and 
hardship plans that Mr. Plunkett testified to.
    Consumer education.
    The enhancement of the FTC's initiatives to crack down on 
bad actors.
    And more widespread enactment of the Uniform Debt 
Management Services Act.
    And I'd like to touch on each of these.
    AFSA member companies routinely cooperate with legitimate 
consumer educators and advocates such as the National 
Foundation for Consumer Credit Counseling Services. In 
conjunction with various CCCS organizations, most creditors 
offer a variety of standardized, in-house hardship plans and 
work out programs to assist troubled consumers in dealing with 
temporary and permanent situations. These programs require no 
third-party involvement and no negotiation. All the consumer 
has to do is contact his or her creditor, explain his or her 
situation and ask what options are available to him or her.
    Getting the consumer to admit that they are in trouble in 
the first place and make the initial call remains our chief 
obstacle. Minimizing this problem requires education of 
consumers about their options and promoting financial literacy. 
Along these lines AFSA is a long-time advocate for personal 
finance education that helps people make informed decisions as 
well as avoid scams.
    Today that need for consumer education is greater than ever 
before as products are more complex. Our association's 
education foundation has developed an array of financial 
literacy brochures in English and Spanish in partnership with 
other trade organizations, regulatory groups and governmental 
agencies. All of these brochures are provided at no cost to the 
    We also want to bring to your attention the fine work of 
the FTC in developing an excellent series of simple, 
informative pamphlets. These pamphlets educate consumers on how 
to help themselves, explain their rights as consumers and 
describe various financial products and how various financial 
products and credit reports operate. These pamphlets also warn 
consumers about scams and specifically advise them on how to 
spot scams and how to avoid become victims of them.
    Equipping consumers with the information they need to 
obtain legitimate help is clearly the most effective method for 
preventing harm to consumers. Yet because some consumers cannot 
resist the promises of easy solutions like the ones that my 
good friend, Travis mentioned on late night cable that are very 
alluring, effective enforcement must also continue.
    AFSA fully supports the government's efforts to crack down 
on fraudulent consumer assistance scams and lauds the FTC's 
work in this area. A prime example is the FTC's Operation Clean 
Sweep announced last October which cracked down on 33 credit 
repair organizations. The FTC partnered with 22 states to 
pursue organizations engaging in activities such as claiming 
the ability to permanently remove negative information from 
consumers' credit reports, even when that information is 
accurate and non-obsolete, requiring advance payment for such 
services and failing to provide the mandated Federal and state 
notices. Operation Clean Sweep sought to enjoin these 
fraudulent and illegal practices and force these organizations 
to repay consumers.
    The FTC has also pursued mortgage foreclosure rescue 
companies which have falsely claimed the ability to stop 
foreclosure in return for a fee. As you can imagine this has 
rarely happened. Instead consumers, like Mrs. Dix, were put in 
worse financial position, deprived of options and made to 
suffer avoidable injury to their credit standing because of 
delays in starting negotiations. AFSA has supported the FTC in 
these efforts and last year the FTC held a workshop entitled, 
``Consumer Protection and Debt Settlement Industry.'' We 
submitted comment letters in response to the FTC noting that 
debt settlement companies often block or discourage consumer 
communication with lenders. However, in many cases a debt 
settlement company can't even be reached leaving lenders 
without a means to resolve the debt with the borrower.
    Additionally AFSA believes that states should be encouraged 
to enact the Uniform Debt Management Services Act. It provides 
the states with a comprehensive act governing these services, 
and will mean a national administration of debt counseling and 
management in a fair and effective way.
    In closing, Mr. Chairman, AFSA believes the availability of 
legitimate credit counseling services and consumer education 
can reduce incidence of scams targeting vulnerable consumers. 
We believe that the FTC in conjunction with state law 
enforcement officials is best equipped to address the need to 
protect consumers against these unscrupulous actors. AFSA 
supports allocating additional resources to the FTC to continue 
its enforcement actions such as Operation Clean Sweep.
    In addition, we encourage the FTC to utilize its authority 
to promulgate a trade rule against deceptive and misleading ads 
that promise secret programs that will reduce a consumer's 
obligation by 60 to 80 percent. With that, Mr. Chairman, I'd be 
happy to answer any questions.
    [The prepared statement of Mr. Himpler follows:]

     Prepared Statement of Bill Himpler, Executive Vice President, 
                American Financial Services Association

    Chairman Rockefeller, Ranking Member Hutchison and Members of the 
Committee, good morning. My name is Bill Himpler, and I am the 
Executive Vice President at the American Financial Services Association 
(AFSA). AFSA is the national trade association for the consumer credit 
industry, protecting access to credit and consumer choice. The 
association encourages and maintains ethical business practices and 
supports financial education for consumers of all ages. AFSA has 
provided services to its members for over 90 years. AFSA's 350 member 
companies include consumer and commercial finance companies, 
``captive'' auto finance companies, credit card issuers, mortgage 
lenders, industrial banks, and other financial service firms that lend 
to consumers and small businesses.
    Mr. Chairman, AFSA commends you and your colleagues for convening 
this important hearing to explore what can be done about unscrupulous 
actors who exploit consumers' fears about their debt obligations, or 
worse still, the possibility of losing their homes. I appreciate the 
opportunity to provide testimony to the Members of the Committee on 
consumer protections for people with distressed finances who are trying 
to negotiate mitigation strategies so that they can avoid bankruptcy.
    Let me state at the outset that AFSA members share Congress' 
concern about the growing number of consumers who are having difficulty 
making payments on a variety of debts and organizations that scam 
consumers with fraudulent credit repair and rescue programs. Not only 
do such scams affect individual borrowers, but they also affect 
creditors and the broader market to the extent that, among other 
things, they promote the removal of accurate and timely information 
from consumer credit reports. This results in inaccurate assessments of 
the true credit standing of consumers, promoting inaction and delay, 
thereby undermining legitimate efforts to assist consumers in resolving 
credit difficulties.
    We believe instances of these scams can be reduced through four 
measures: (1) the continued availability of legitimate counseling and 
hardship plans, (2) consumer education that helps people make wise 
financial decisions, (3) enhancement of the Federal Trade Commission's 
initiatives to crack down on bad actors and (4) more widespread 
enactment of the Uniform Debt- Management Services Act (UDMSA). In the 
time that I have, I'll touch upon each of these areas.

Credit Counseling and Hardship Plans
    Distressed consumers are particularly susceptible to rosy claims of 
fraudulent credit repair and mortgage rescue organizations. They are 
lured by too-good-to-be-true claims of easy solutions to tough problems 
and empty promises of help when they feel overwhelmed. As the Federal 
Trade Commission has observed, ``only time, a conscious effort, and a 
personal debt repayment plan'' can improve a consumer's credit report. 
Similarly, only time, a conscious effort and commitment to a personal 
debt repayment plan can resolve a difficult financial situation.
    AFSA member companies routinely cooperate with legitimate consumer 
educators and advocates such as the National Foundation for Credit 
Counseling (NFCC) and Consumer Credit Counseling Services (CCCS). For 
example, assistance plans are pre-negotiated between individual 
creditors and various CCCS organizations. Distressed consumers can 
easily participate in these plans with little or no negotiation 
necessary. The consumer simply needs to show eligibility by explaining 
the source and extent of distress.
    Most creditors offer a variety of standardized in-house hardship 
plans and workout programs to assist troubled consumers in dealing with 
temporary and permanent situations. These programs require no third-
party involvement and no negotiation. As established programs, again, 
all a consumer has to do is contact his or her creditor, explain his or 
her situation and ask what options are available. Getting consumers to 
admit that they are in trouble and make the first call or engage a 
creditor's customer service or collections personnel can be 
problematic. Minimizing this problem requires educating consumers about 
their options and promoting financial literacy.

Consumer Education
    AFSA is a long-time advocate for personal finance education that 
helps people make informed decisions as well as avoid scams. Today, 
that need for consumer education is greater than ever before, as 
products are more complex with variable rate loans, adjustable rate 
mortgages, credit card loans, various derivatives and the like.
    The AFSA Education Foundation has developed an array of financial 
literacy brochures in English and Spanish in partnerships with other 
trade organizations, regulator groups and government agencies for use 
by adult consumers and AFSA members in the areas of vehicle financing, 
mortgage loans, personal loans, and personal financial management. All 
of these brochures are provided at no cost to consumers upon request, 
as well as downloadable online at www.afsaef.org.
    Each educational piece includes information on what to do if a 
person encounters difficulties in meeting financial obligations. First, 
you should contact your creditor, explain your situation and work out a 
repayment schedule. Second, if your situation requires addition help, 
contact a non-profit budget and credit counseling agency, often called 
a consumer credit counseling service. These agencies can work directly 
with consumers and their creditors to help resolve debt problems.
    We also want to bring to your attention the fine work of the 
Federal Trade Commission (FTC) in developing an excellent series of 
simple, informative pamphlets. These pamphlets:

   Educate consumers on how to help themselves (again, third 
        party involvement is not necessary, even if occasionally 

   Explain consumers' rights; and

   Describe how various financial products and credit reports 

    The pamphlets also directly warn consumers about scams--
specifically advising them on how to spot scams and how to avoid 
becoming victims of them. These resources are freely available from the 
FTC on its Website and can be printed and distributed as educational 
handouts and pamphlets by various organizations. Equipping consumers 
with the information they need to obtain legitimate help and avoid 
becoming victims is clearly the most effective method of preventing 
harm to consumers.

Enhancement of Ongoing FTC Initiatives
    Nonetheless, because some consumers cannot resist promises of easy 
solutions, effective enforcement must also continue. AFSA fully 
supports government efforts to crack down on fraudulent consumer 
assistance scams, and lauds the FTC's work in this area.
    A prime example is the FTC's ``Operation Clean Sweep,'' announced 
last October, which cracked down on 33 ``credit repair'' organizations. 
The FTC partnered with 24 state agencies in 22 states to pursue 
organizations engaging in activities such as: (i) claiming the ability 
to permanently remove negative information from consumers' credit 
reports, even when the information is accurate and not obsolete, (ii) 
requiring advance payment for credit repair services, and (iii) failing 
to provide mandated Federal and state notices. ``Operation Clean 
Sweep'' sought to enjoin these fraudulent and illegal practices, 
prohibit further violations and force these organizations to pay 
reparation to consumers and forfeit ill-gotten gains. Other similar 
efforts were announced before and after this particular operation.
    The FTC has also pursued mortgage foreclosure ``rescue'' companies 
which have falsely claimed the ability to stop foreclosure in return 
for a fee. In many instances, these ``rescue'' companies promised a 
refund of all fees if unsuccessful in avoiding foreclosure. This rarely 
happened. Instead, consumers were put in a worse financial position, 
deprived of options and made to suffer avoidable injury to their credit 
standing because of delays in starting negotiations and poor or 
nonexistent follow-through with negotiations when begun. The FTC's 
actions have sought to prohibit further deceptive behavior and to 
compel such companies to pay consumer redress and forfeit fraudulently 
obtained funds.
    AFSA has supported the FTC in these efforts. In September 2008, the 
FTC held a workshop entitled, Consumer Protection and the Debt 
Settlement Industry, to explore the growth of the for-profit debt 
settlement industry and to analyze how its model is affecting consumers 
and businesses. AFSA submitted two comment letters in response to the 
FTC's request. In the first letter, we noted that many debt settlement 
companies actually do harm to both consumers and creditors by engaging 
in questionable practices, abusing the Fair Credit Reporting Act, 
abusing the power given to them by consumers, perpetrating fraud, 
delaying in remitting payment, engaging in deceitful actions, and 
facilitating false complaints.
    AFSA staff attended the workshop and learned that the FTC was 
looking for specific information from lenders on debt settlement 
companies. In response, we submitted a follow-up letter, which is 
included as part of this testimony. During discussions with its 
members, AFSA learned that debt settlement companies often block or 
discourage consumer communication with the lender. However, in many 
cases the debt settlement company cannot be contacted and no further 
communication is received from them. Thus, the lenders are left without 
a means to resolve the outstanding debt.
    One of AFSA's members noted that, with the exception of one debt 
settlement company, once customers got involved with a debt settlement 
company, generally one of two things will happen: (1) They realize that 
their credit is being affected and the debt settlement company is not 
doing anything but taking their money and they will start making 
payments again; or (2) the lender never hears from the customer again 
and the account is written off to bad debt.

Greater Enactment of the UDMSA
    In addition to the measures I've discussed so far, AFSA believes 
that the states should be encouraged to enact the Uniform Debt-
Management Services Act (UDMSA), which was promulgated by the Uniform 
Law Commissioners. It provides the states with a comprehensive act 
governing these services that will mean national administration of debt 
counseling and management in a fair and effective way. UDMSA also 
provides fairer and better services to debtors. Four states have, to 
date, adopted the UDMSA. In March 2008, several important amendments 
were made to the Act; with these amendments, up to 20 states are 
expected to introduce the Act in 2009.
    In closing, AFSA believes the availability of legitimate credit 
counseling services and consumer education can reduce incidents of 
scams targeting vulnerable consumers. We believe that the FTC, in 
conjunction with state law enforcement officials, is best equipped to 
address the need to protect consumers against these unscrupulous 
actors. AFSA supports allocating additional resources for the FTC to 
continue its enforcement actions, such as Operation Clean Sweep. In 
addition, we encourage the FTC to utilize its authority to promulgate a 
trade rule against deceptive and misleading ads that promise ``secret 
programs'' that will reduce consumer obligations by 60 to 80 percent.
    Thank you, Mr. Chairman. I would be happy to answer any questions.

    The Chairman [presiding]. Mr. Himpler, sorry for the 
inconvenience everybody. People are going back and forth and 
voting, and lots of major committees are meeting right now, so 
it just makes it complicated.
    Mr. Himpler, I would think it would be safe to assume that 
your organization was involved in lobbying for the Bankruptcy 
Abuse Prevention and Consumer Protection Act of 2005?
    Mr. Himpler. That's correct.
    The Chairman. There are several provisions of that 
legislation that bother me greatly. I'd like to ask you about 
them. But I want to discuss one in particular that puts 
consumers at great risk.
    A number of your members offer credit cards with 
significant credit lines to people that have just emerged from 
personal bankruptcy. This makes no sense to me especially when 
you look at the bankruptcy bill which prevents a person 
emerging from bankruptcy from having credit card debt 
discharged again for 8 years. It's the law.
    You now have a truly captive market of consumers who would 
get no relief if they get into trouble again. By not handling 
this credit wisely, no fault of their own, adding to the people 
susceptible to be swindled. So my question is in light of 
predatory behavior engaged in by some of your credit card 
issuers which creates more desperate people susceptible to 
financial fraud, would you support making these card issuers 
bear the risk of their lending decisions and let these debts be 
discharged if the consumer needs bankruptcy protection again?
    Mr. Himpler. I do believe that the Act affords consumers 
that very protection. But obviously we would support that.
    The Chairman. You would support that. Commission Harbour 
and Mr. Himpler both, I would like to ask you both to respond 
to the following questions. Both the FTC and the AFSA, your 
organizations are engaged in education and fraud prevention 
activities where your message has reached limited audiences.
    On the other hand, you know, you're trying to make your 
statements for whatever reason but if people don't have 
Internet, you're targeting fraudulent advertising to people who 
need your help and advice but may not have the means to receive 
it. So my questions are, to each of you, if the fraudsters have 
the ability to reach the broadcast scope of distressed 
consumers why can't your organizations?
    Ms. Harbour. I would like to respond to that. The Federal 
Trade Commission has a three-prong approach to reaching 
consumers and eradicating fraudulent behavior. We have targeted 
law enforcement. We have our consumer education and outreach 
and we have our research and empirical policy studies.
    You're speaking to the education and outreach prong. We 
disseminate information to consumers in many ways. And I 
understand a keen issue of yours, Mr. Chairman, is the digital 
divide. Not everyone has access to high speed broadband. And 
your concern is, is our information reaching your constituents?
    Well, we deliver and disseminate information, not only 
through the FTC website but we send it to consumers who call 
our toll-free help line. We also do it through the media.
    The Chairman. How do they know about that?
    Ms. Harbour. May I go through everything we do to reach the 
American consumer? I believe that we are unparalleled in 
reaching out to the American consumer to inform them about ways 
to help them in this area. We have a network of over 1,000 
community-based organizations that link to our materials or can 
order our materials.
    We do have limited resources. But our strategy is to be 
wholesalers of the information rather than retailers. And 
because of this we work through 10,000 community-based groups 
that distribute information to members, to clients and to 
    We also use very innovative approaches to reach out to 
consumers. For instance in January when we settled the Bear 
Stearns case for $28 million, we sent redress checks back to 
86,000 consumers. And in those redressed checks we put an 
educational bookmark about mortgage servicing in each one of 
those envelopes with checks.
    Another thing that we have done is develop a series of 
educational materials that are unparalleled in this area on how 
to manage a mortgage if the lender files for bankruptcy. We 
have a real estate market glossary on how to talk the talk for 
consumers who may not be as versed in that area. We've 
developed a number of educational materials regarding deceptive 
mortgage advertising.
    The Chairman. Commissioner, I hate to say this, but I've 
    Ms. Harbour. OK.
    The Chairman.--minus 2 seconds left. And I want Mr. Himpler 
to answer also.
    Mr. Himpler. Mr. Chairman, welcome back. Our association 
agrees with you that more needs to be done. The Commissioner 
hit the nail on the head in terms of resources being limited. 
We also, through our Education Foundation, produce pamphlets 
that are similar to the ones that the FTC does. And we like the 
ones that the FTC does that our companies use in terms of their 
transactions with consumers.
    At the end of the day, however, going back to something 
that Mr. Plunkett said regarding in particular cable TV and 
late-night TV where these ads are bombarding consumers. That is 
a heck of a lot of resources to go up against. We would fully 
endorse Congress appropriating additional funds for the FTC to 
increase its enforcement, and to also promulgate a trade rule 
in terms of deceptive and misleading advertising in this area, 
particularly in the state of the economy that we're in right 
    The Chairman. My time is up. And there's nobody else. So 
I'll go right ahead.
    The Chairman. Increase the resources. Now it's sort of my 
impression you've got what, about 1,100 to 1,400 people working 
for you including 40 full-time lawyers.
    Ms. Harbour. We have 1,094 employees at the Federal Trade 
    The Chairman. So the question in my mind is that everybody 
says well, we need more resources. As one of our Senators said 
earlier, maybe what's needed is there has to be a different 
mentality. I mean, there's obviously not a shortage of people.
    If we gave you another 300 people what would be the chance 
or the promise that we would get a big result? I mean, maybe 
being more of a cop and less of a monitor mentality is better.
    Ms. Harbour. When I gave you the figure of 1,094 I believe 
that is lawyers and non lawyers. In the consumer protection 
area, the area we're speaking about now, we have 270 lawyers. 
But in that area we have a very large footprint, and financial 
services is one of our many important areas where we protect 
the American people. We have advertising practices, health 
fraud, Do Not Call, telemarketing, rebates, business 
opportunity scams.
    This is a small, but very important area which we enforce. 
So what we're asking for, Mr. Chairman, is not only additional 
resources, we are asking for streamlined APA rulemaking 
authority so that we can strategically go in there and stop 
this, so that we can have rules and standards so that people 
and fraudsters understand where and what and what they cannot 
    We are asking for expanded civil penalty authority so that 
we can get monies from these wrongdoers. And that would serve 
as a deterrent. We are asking for rules to implement the Fair 
Debt Collection Practices Act.
    We are also asking to expand the authority, independent 
litigating authority, so that we can go into district court and 
ask for our own civil penalties against these wrongdoers. It's 
not just the additional FTEs and funding. It's the additional 
authority so that we can be more effective at what we do.
    The Chairman. OK. How many--there have not been a great 
many cases that you have solved. There's something like, you're 
averaging about 1.5 cases a year. Correct me if I'm wrong.
    Ms. Harbour. The Chairman is never wrong, but that one 
doesn't sound quite accurate to me.
    Ms. Harbour. 1.5 in what area, sir, in?
    The Chairman. 25?
    Ms. Harbour. Let me just say this. In the area of financial 
services, what we're talking about today, we have been active 
in this area for decades.
    Now it is true. I know, Mr. Chairman, you had some concerns 
about the number of cases that have been brought in the 
mortgage rescue foreclosure area. Understand, the--and I want 
to say that we feel that we should be bringing more cases and 
we are bringing more cases. In fact, in the credit repair area 
right now we have nine pending litigations, four confidential 
investigations going on in the mortgage foreclosure rescue 
area. We have 16 confidential investigations going on.
    The Chairman. Aren't there a couple million people out 
there who are facing these kinds of problems? I'm just trying 
to figure out what the bulk of the problem is out there, and 
then how many folks that you're working on.
    Ms. Harbour. It is true. There are millions of consumers 
who are in need of help. And there are many bad actors out 
    But let me put this in context, Mr. Chairman. The downturn 
in the economy happened----
    The Chairman. Yes, that's just going to increase the number 
of people.
    Ms. Harbour. Yes, in 2008, we saw the trends coming. And we 
have been increasing our cases in litigation in this area. But 
what that means when we see that there's more of a need in the 
financial services area, we shift some of our work from the ad 
practices area, from the Do Not Call area, that's necessary. 
And it is being done.
    So there are even more cases in the pipeline now. Last 
year, in 2008, in the area of credit repair we brought nine 
cases. But we now have 13 cases pending. We will have more. We 
are on the lookout. We are being vigilant.
    But what it means is we are moving resources from some of 
the other areas to this very important increase----
    The Chairman. But how do I deal with--you've got 13 cases 
pending. The recession is getting worse. That means there are 
going to be more people in trouble, more people, therefore, 
getting scammed. As the people in trouble go up, the number of 
fraudsters will go up.
    So why am I meant to be impressed by 13?
    Ms. Harbour. Well I'm definitely not trying to impress you 
because I said we certainly could do----
    The Chairman. However you interpret the question.
    Ms. Harbour.--Can do more here. But as I had said earlier, 
we approach these cases in a three-prong manner. We do it by 
targeted law enforcement. We also do it by consumer outreach 
and education. And we try to do it with policy and where the 
law needs to be changed so we can be more prophylactic.
    In the area of foreclosure rescue scams we have a task 
force that we have joined with. We have seven task forces that 
we have either joined or created with state and local 
officials. We are in some of the areas that are hardest hit. 
And we're trying to be strategic in that way.
    We have a task force in Atlanta, Tampa, Cleveland, 
Michigan. We're working with the local enforcers on trying to 
see trends. And work to identify solutions.
    Yes, we will be increasing some of the cases that we bring 
in this area. But as I was saying, this acute downturn in the 
economy happened September 2008. We saw this trend coming. We 
immediately started shifting more resources to this area.
    We have a large footprint. And when we shift resources to 
this area, we bring resources from some of the other areas. 
We're saying we would like a little more resources. And we 
would like greater authority under the law to be more----
    The Chairman. I hear your words. The Chairman of the 
Consumer Protection Subcommittee is here, Senator Pryor. And 
you may have some questions. I'm sure you do.

                 STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Mr. Chairman. Thank you for your 
    The Chairman. Take your time.
    Senator Pryor. Thank you. As you know we all had to rush 
over and vote. And we appreciate the panel for being here.
    Ms. Harbour, let me ask you if I may about the state and 
Federal relationship. It's my understanding, I've been in 
contact with my state's Attorney General, Dustin McDaniel. It's 
our understanding that there is a good working relationship 
    I'd like to get your thoughts on that relationship with all 
the state attorneys general and other state agencies and 
entities out there that you work with. And also would like your 
ideas on how to improve it if it needs to be improved.
    Ms. Harbour. Senator, you're asking the right person. I was 
a state enforcer for 13 years. And I believe I was in the New 
York Attorney General's office when you were Attorney General. 
So I think the Federal/State relationship is just swell.
    We work together very well. In fact in the area of mortgage 
foreclosure rescue scams, as I was telling the Chairman, we are 
working with a number of state attorneys general and local and 
state officials on our task force where we're trying to fight 
mortgage rescue scams. We have done this in some of the areas 
that are hardest hit--Atlanta, Tampa, Cleveland.
    I believe we have a Southeast regional office that is 
working with a state attorney general to investigate and 
prosecute. I think that we should always keep the door open for 
joint, parallel Federal/state investigations. I think it helps 
the American consumer.
    You have more cops on the beat looking out for their 
interests at the state level and at the Federal level. And I am 
in favor of a strong and healthy working relationship between 
state and Federal Government.
    Senator Pryor. Let me ask this. You talked about how when 
you saw the recession and the financial crisis happening in 
late last year you shifted resources. Do you need more 
resources in your agency?
    Ms. Harbour. Absolutely, Senator. Absolutely. As I was 
telling the Chairman, we have a very large footprint at our 
agency. We do quite a bit.
    We have 270 lawyers in the Consumer Protection area. And 
we--financial services is one of many areas that we enforce. 
And just to name a few, telemarketing, business opportunity, 
pretexting, Do Not Call, our data security and identity theft 
cases. We all have--these are very important areas as well.
    But in order to respond to the unprecedented number of 
consumers who are at risk, in harm's way, we just need more 
resources. It is frustrating that we cannot bring 100 cases to 
help consumers in foreclosure. We don't have the resources to 
bring 100. We try to be targeted in--well, maybe I shouldn't 
say that. Maybe we can.
    We're looking. But we know that we want to be even more 
vigilant. And we are looking to bring more cases. And we feel 
that we will do more and we want to do more in this area.
    Senator Pryor. Let me ask on the resource issue. Do you see 
the states as part of your resources, kind of an extension of 
what you can do out there in the states?
    Ms. Harbour. Absolutely. In fact, in the mortgage 
foreclosure rescue area what we've seen is that a lot of these 
companies are local and regional in nature. In fact some of the 
scammers are operating in actual neighborhoods. And the state 
attorneys general, you guys are the cops on the beat. You're 
the closest to the scammers.
    And when we partner I think it provides more effective law 
enforcement to the American consumer. So I would advocate for 
having an even closer relationship with the state attorneys 
general in this area.
    Senator Pryor. You mentioned the task force that you have 
on financial--mortgage foreclosure rescue scams task force. And 
I assume you have a pretty healthy representation of states 
there on that task force. Has that been working well? I mean, 
are there lessons learned there? Things we need to be doing 
    Ms. Harbour. I think the task force is working very, very 
well. As I said it's operating in Atlanta and Tampa, Cleveland, 
Michigan, Northern California, Los Angeles and Illinois. 
Perhaps there is even room to expand it. It is a seven-region 
task force, but if there is interest by the attorneys general 
in other regions. I can say that the FTC would be interested in 
joining those as well. One of the most important things is 
getting the word out to the American consumer about some of 
these scams. Also bringing targeted law enforcement and working 
with the state attorneys general.
    Senator Pryor. The Chairman has mentioned that one of the 
things that the Committee should be working on is the FTC 
Reauthorization bill this year. Do you feel like the FTC needs 
more statutory authority in this area or do you have enough? 
It's just a matter of resources.
    Ms. Harbour. It's both. What we'd like? We would like 
streamlined APA rulemaking authority. We would like expanded 
civil penalty authority. We would like rules to implement the 
Fair Debt Collection Practices Act. And we would also like to 
expand the FTC's independent litigating authority.
    This way we could go into court, district court, and we 
could seek injunctive equitable relief and we could seek civil 
penalties. This would give us more enforcement tools to help 
the American consumer. Even if we were to get a lot more 
resources today without this additional APA rulemaking 
authority and civil penalty authority, we would not be as 
effective as if we got the whole package.
    Senator Pryor. I know that I have other colleagues waiting. 
But I did just have one last question for you Madam 
Commissioner. And that is that, as an example, West Virginia 
and Arkansas and other states have large rural areas. And 
Internet access is hard and sometimes getting information in 
those areas is harder than it is in more urban, densely 
populated areas.
    How do you feel your outreach is going with regard to rural 
areas and with people who don't have access to the Internet or 
can't afford access to the Internet?
    Ms. Harbour. And just to address that question briefly. The 
Commission gets information out to consumers in a number of 
ways. And in states that perhaps are not--where the digital 
divide is in play and there is not high-speed broadband and 
other Internet access for your consumers, we can actually send 
our pamphlets to consumers or they can call our help line, our 
toll-free help line. But we also work with community-based 
groups. 10,000 community-based groups that distribute our 
information to members, to clients and to constituents.
    We also work with libraries all across the Nation. And if 
you have an idea that we haven't thought of to help disseminate 
the word to your constituents and to your consumers, we would 
be very happy to hear it. Our education and outreach at the 
Federal Trade Commission is award-winning. Our information 
reaches consumers and it helps them.
    The Chairman. The Committee appreciates Senator Pryor. I 
want to call on Senator Lautenberg.

                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. Thanks, Mr. Chairman. It's so 
discouraging when we look at what's happening to our people by 
the forces at work in terms of the losses of homes and property 
and assets and spirit. It's a terrible dilemma for us.
    And among the worst things is to perpetuate the abuse by 
having these scoundrels take advantage of our people. And Mr. 
Plunkett, you don't have to just see the tube at night. I don't 
watch a lot of television but during the day we kind of watch 
the news and even there the advertisements really kind of had 
me scratching my head and say how are you going to do it? 
You've got all these things and just one thing and we'll take 
care of it and get you up to date and so forth.
    And Mrs. Dix, we heard what you had to say. It was very 
important that you brought that experience here.
    And Mr. Chairman, I'm delighted to welcome to this panel 
Commissioner Pamela Jones Harbour. We've worked together. And I 
know how concerned and industrious you are about trying to stem 
the tide of these fraudulent happenings.
    So the witnesses were valuable. And it seemed like we 
weren't listening. But we will be reading. And we did listen 
    It's difficult I know, Commissioner Harbour, for most 
consumers to know the difference between a scam and a 
legitimate program. People are desperate. They're reaching out 
for help however they can get it. And to watch their 
obligations mount in front of them while their opportunities 
for income decline. So I'm pleased that the FTC has implemented 
outreach programs to try to tell people about the legitimate 
resources available to them and warning them about these 
possible scams.
    When did the outreach efforts begin? When did the FTC start 
to be alert to this?
    Ms. Harbour. We are always reaching out to consumers. Now 
in the financial services area we have always had educational 
materials. When the scams shift and when we learn about other 
aspects of fraudulent behavior going on out in the marketplace 
then we tailor our educational brochures to those activities.
    In fact, I believe that we are going to update all of our 
relevant written materials, and develop what is called a micro-
site on our website. And this is going to focus on very 
extensive tips on saving, spending, budgeting, dealing with 
debt, debt collection, debt negotiations, settlement repair, 
advance fee loans, and your home. It's going to be very, very 
    Senator Lautenberg. Has the volume of effort picked up 
substantially or has this been an ongoing program that----
    Ms. Harbour. Our consumer education is ongoing. In fact I 
think the more we do it, the better we get at it. And we've won 
awards for this.
    And as I said, we're small but mighty. We only have staff 
in seven states. Yet, we disseminate absolutely nationwide. And 
I think maybe even outside of our borders as well.
    Senator Lautenberg. How effective do you think it's been? 
How do you measure something like that?
    Ms. Harbour. Well I don't have the stats about how many 
awards my staff has won on their education and outreach. But I 
know that they've won some major awards for the substance, the 
effectiveness and the thoroughness of our education and our 
outreach to the American consumer.
    Senator Lautenberg. Your testimony talks about the FTC's 
distribution of educational materials. And it recommends steps 
that consumers can take if they have trouble meeting their 
mortgage payments. How do you distribute these things? How do 
you get widespread coverage?
    Ms. Harbour. Again, we have relationships with 10,000 
community-based groups that will distribute our information to 
members and constituents and clients. In fact we also have a 
relationship with Members of Congress, I believe. We make our 
materials available for your newsletters.
    Senator Lautenberg. I don't want to keep you on this but 
perhaps you could give us, send in a report about how you 
measure effectiveness because those are the things we talk 
about constantly.
    Mr. Chairman, if I might. I have a question for Mrs. Dix. 
May I do that?
    The Chairman. You may.
    Senator Lautenberg. Mrs. Dix, you testified that if you had 
not called your state's attorney general to find a company to 
help you, your home would have been lost?
    Mrs. Dix. Yes, it would have.
    Senator Lautenberg. Had you heard of this company before, 
this Mountain State Justice before calling the attorney 
    Mrs. Dix. No, sir. I didn't.
    Senator Lautenberg. Did you get any material from your 
mortgage lender suggesting that you try to contact a legitimate 
foreclosure rescue company?
    Mrs. Dix. No, I didn't.
    Senator Lautenberg. So you felt like you were left hopeless 
out there?
    Mrs. Dix. Yes, until somebody told me about the attorney 
    Senator Lautenberg. We're happy that you did finally get 
some relief there. I ask unanimous consent that my opening 
statement be included in the record.
    The Chairman. So ordered.
    [The prepared statement of Senator Lautenberg follows:]

            Prepared Statement of Hon. Frank R. Lautenberg, 
                      U.S. Senator from New Jersey

    Mr. Chairman, thank you for holding today's hearing on consumer 
    Let me begin by welcoming our witnesses, particularly Commissioner 
Pamela Jones Harbour, whose home is in New Jersey and understands how 
tough the credit crunch and economic slowdown have been on our state.
    Commissioner Harbour is a strong advocate for consumers at the FTC 
and I want to thank the Chairman for bringing her here to testify 
today. This is clearly a critical time for our government to be 
standing up for consumers.
    The unemployment rate in our country is the highest it's been in 16 
years. And those men and women who do have a job are working longer, 
working harder--and after getting less for their labor. That means more 
Americans are struggling to pay their mortgages, which is one reason 
New Jersey's foreclosure rate increased 75 percent from 2007 to 2008.
    It means more Americans are struggling to pay their expenses, from 
credit cards to utilities, which means bills are piling up and 
collection agencies are calling. And because they're vulnerable and 
will take any help they can get, Americans are more susceptible to 
    Scam artists that have no problem taking advantage of anyone, 
anywhere, anytime--the. people running foreclosure scams, for example--
are coming out of the woodwork. Some companies have demanded illegal 
up-front payments from consumers for their services--and then never 
deliver what they promised or what the cash-strapped consumer paid for.
    We must crack down on these crooks and the scams they are running.
    I know this Committee will do its part. Mr, Chairman, I look 
forward to working with you in partnership with Commissioner Harbour 
and the FTC to protect Americans from these criminal scams.

    The Chairman. Senator Klobuchar?

                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Thank you very much, Mr. Chairman. Thank 
you for holding this hearing. Thank you to all of you for being 
    Thank you, Mrs. Dix, for sharing your story. And 
Commissioner Harbour, it's good to see you again. And Mr. Cox, 
from Minnesota, thank you. He actually has done several forums 
in Minnesota on consumer issues with me. And is a renowned 
expert in our state. So thank you for doing that.
    I actually wanted to ask you, Mr. Cox, as my home state guy 
a few questions about your work. When you look at the 
relationship between the--I know you've done a lot of work in 
the foreclosure area, between foreclosure rescue fraud and 
other types of fraud we've been discussing today such as credit 
repair scams and credit and debt management. What is the 
relationship between those that you see, the foreclosure fraud 
and some of the other kinds of credit repair scams that we see?
    Mr. Cox. Thank you, Senator Klobuchar. I thought as 
Minnesota's only Senator you might get more time.
    Senator Klobuchar. That's right. And I am asking the 
Chairman for 10 minutes. I'm actually considering amending the 
D.C. Voting Rights bill to give me two votes.
    Senator Klobuchar. Because we sort of have taxation without 
representation. But please, go on, Mr. Cox.
    Mr. Cox. Alright. Foreclosure rescue scams really fall into 
two categories. And almost all of them you can put into these 
archetypes and it works. Even though market values are tanking, 
there are people, particularly elderly people, who are still in 
foreclosure who have equity in their homes and the reconveyance 
scams are still occurring.
    That doesn't have much relationship to these debt 
settlement and credit repair problems. That's its own unique 
thing and requires legal services attorneys and others who can 
help individuals as well as these state laws. The foreclosure 
consultant scam is a very parallel problem from a consumer 
protection regulatory perspective to the debt settlement, debt 
management problem.
    It's a vital service. People need foreclosure prevention 
services. And the National Federation of Consumer Counselors 
groups do a fantastic job. I've worked with those people for 
many, many years in helping borrowers in foreclosure.
    The problem is that the complexity of the transaction and 
the difficulty of getting accurate information to people makes 
it so that there's also going to be these scams. So the 
foreclosure consultant scams, and the debt settlement scams are 
very similar. I think that we need the kinds of swift 
rulemaking and standard setting in order to address that.
    Senator Klobuchar. What do you think the best, briefly, 
what are the best provisions you think in Minnesota law or 
other laws around the country that would be helpful for Federal 
    Mr. Cox. Well the foreclosure consultant law has one key 
provision. You don't get to take anyone's money up front. You 
have to provide the service before you can get the money 
because almost all the legitimate counselors are non-profit 
that doesn't affect the legitimate service providers.
    It, however, prevents people from getting their money taken 
because at the end of the process they just won't pay if 
they're in a situation like Mrs. Dix. So that's the key 
    Senator Klobuchar. That's not in the Federal law right now? 
This idea of having--that you wouldn't have to pay up front for 
    Mr. Cox. There is no Federal law specifically related to 
    Senator Klobuchar. Yes. OK. Another idea that you would 
like to see?
    Mr. Cox. Well, there was a provision in the, I believe one 
of the states passed a law that I thought added an interesting 
provision which made these organizations fiduciaries, which 
again makes it easier to bring these legal actions. And also we 
need to redefine what foreclosure is to bring in people who are 
in distress, which those laws did as well which brings more of 
the services within the context.
    Senator Klobuchar. OK. Very good. Thank you. Mrs. Dix, just 
from your practical experience what do you think would be the 
best way to get information out to people both so they're not--
I mean we've heard a lot from our leaders here of how they 
think it should be done. But if you think about your 
circumstance and other people you know, what's the easiest way 
to try to get that information so you call the right person?
    Mrs. Dix. I think maybe going out to the public, TVs, more 
advertising, a little bit more.
    Senator Klobuchar. So that you can actually see it. You're 
watching a show and you see a commercial. Hey, if you're in 
this kind of trouble watch out and call this number?
    Mrs. Dix. Right.
    Senator Klobuchar. Because I haven't seen that much of 
    Mrs. Dix. I haven't either.
    Senator Klobuchar. I've seen a lot of like prescription 
drug commercials, but I haven't seen a lot of this trouble that 
people have. Alright. Good.
    Mr. Himpler, AFSA is the--I know the work that you do, your 
national trade association for the consumer credit industry. I 
believe that my staff talked to you about this before. But 
could you talk about how you're good actor people that work 
with you that haven't done bad stuff, how they've been impacted 
by the bad actors? And how you think you solve that?
    Mr. Himpler. Thank you, Senator. I think everything that 
both Mrs. Dix and the Commissioner and Mr. Cox have mentioned 
is right on the money because when these scam artists take 
advantage of consumers like Mrs. Dix and often times they 
encourage consumers to end all communications with lenders. 
Then as lenders, the lenders can't find these organizations to 
work out anything.
    So the lender is left without any way to do any sort of 
work out with the consumer. Everybody loses. The consumer's 
credit falls into disrepair. And a true accurate depiction of 
what their credit standing is left disabled by this entire 
transaction with credit repair organizations like these.
    So we do need to do a better job of getting the information 
out to the consumers, PSAs, the brochures that the FTC and 
other organizations and our education foundation put out. But 
in these tough economic times, not enough can be done in this 
    Senator Klobuchar. Alright. Very good. Thank you, all of 
    The Chairman. Thank you, Senator. Senator Begich? And then 
Senator Warner.

                    U.S. SENATOR FROM ALASKA

    Senator Begich. Thank you very much, Mr. Chairman. Is that 
on there? There we go.
    Thank you all very much. And I get the bird's eye view 
here. I'm at the little kids table.
    Senator Begich. The Chairman did offer me to move up. And I 
appreciate that.
    The Chairman. Can you see the witnesses?
    Senator Begich. I like this. I feel like I could be a 
witness or ask questions. So it depends on what's going on.
    Senator Begich. So that's a real little kids table. That's 
very good.
    Let me ask. And Mr. Chairman we rode on the train just a 
second ago. And I'm going to give this for the record. This is 
an interesting--this is one of those promotional cards from a 
very reputable organization, a company. And the effective 
annual percentage rate is 51.65 percent.
    I mean, you know, most people would look at this company 
and not consider them, you know part of the scam. But the fact 
is that you have that kind of interest rate is a loan shark 
rate. I mean, it's outrageous.
    So I'll give this if I can to the record. It's just an 
unbelievable, you know, I consider it a scam. But I'm sure the 
company that associated with the credit card company didn't 
think it was. It was a promotional 51 percent.
    The Chairman. The information will be included in the 
    [The information referred to follows:]

    Senator Begich. There we go. Thank you. And I'll give this 
for the record.
    Does the FTC have kind of the, for the financial advisors 
or the people that are helping folks get out of the non-
profits, do you have almost like a Good Housekeeping seal, 
someone that you can turn to? You know, when I buy a toaster I 
know a UL is a good product. Without the UL it's a piece of 
junk. If you have that I'm going to be frank with you, I never 
hear it.
    And so do you have something that a consumer can say, you 
know, if you're not this than I'm not even going to waste my 
time talking to you as a work-out person.
    Ms. Harbour. Senator, you don't hear about it because we 
don't have that. We do not put a Good Housekeeping-type stamp 
of approval on businesses or on brokers or on lenders.
    Senator Begich. I'm more interested in the people that are 
trying to help out folks to get out of the situations they're 
in. You know you hear all the advertisements. Come to us, we'll 
solve all your credit problems then sometimes they're scamming 
you or they're not.
    And then there are some of the good ones, the non-profit 
organizations that I'm familiar with are very good 
organizations. But you know, how does the consumer--I mean, I 
heard an ad a couple days ago. And I thought, wow, this is a 
good company. Then I find out it really is another business 
trying to take your money.
    Ms. Harbour. No, that's an excellent question. And as I was 
preparing for this hearing I asked myself that. As a consumer 
how would the American consumer know whether these companies 
are legitimate or not? And then I thought about it and I went 
over some things and I came up with three ways.
    First is you contact your state attorney general.
    Senator Begich. Assuming that a consumer knows that.
    Ms. Harbour. Assuming, that's right.
    Senator Begich. It's not a high likelihood.
    Ms. Harbour. Or you contact the Better Business Bureau and 
see if there were any complaints about that particular business 
or you could go to your local consumer protection agency. But 
the issue is that we need to educate the American consumer 
about these options. Otherwise they will fall prey to these 
scam artists. And they will fall prey in greater numbers 
because the American consumer really is in financial straits 
    Senator Begich. But do you think that you have a role?
    Ms. Harbour. Absolutely.
    Senator Begich. To create that kind of list? Because the 
    Ms. Harbour. Oh.
    Senator Begich. I mean, you know, the consumer is busy. I 
mean, Mrs. Dix your whole issue. I mean you were dealing every 
minute of your life trying to figure out how to solve this 
problem and by a chance and circumstance you were able to be 
told to call the AG.
    The average consumer----
    Ms. Harbour. Senator, my absolutely was, absolutely we have 
a role, but not absolutely creating that list.
    Senator Begich. Why not?
    Ms. Harbour. I would push back on that.
    Senator Begich. I know more about toys and what's good and 
bad from the Federal Government than I do about what consumer 
    Ms. Harbour. Well how I would answer that question? Through 
our outreach and our education, we can get at that through the 
back door. For instance, with the fraudulent mortgage 
foreclosure rescue scams we have some red-flag pieces of advice 
that we have available to every consumer in America telling 
them what to watch out for. For instance we say avoid any 
business that guarantees to stop foreclosure processes, no 
matter what. Usually they're going to be fraudulent if they say 
100 percent certain.
    We say avoid any businesses that are going to instruct you, 
the consumer, not to pay your lender or your lawyer or your 
housing counselor. Any business, that collects a high, upfront 
fee before they do anything for you between $300 to $5,000, 
that's the way we reach the American consumer.
    Senator Begich. Let me ask you something. I have to watch 
your clock there because I don't have one. So I think I have 
about 30 seconds left.
    So let me try to ask. I know you mentioned the success of 
your education was measured by awards you've received. But how 
do you measure from the consumer end, the real consumer?
    How do you know it's reaching them other than, you know, 
you've got some awards for good advertisements and so forth? 
What data can you show me? What data can you show me that 
consumers who needed this information actually got it in their 
    Ms. Harbour. That's a very good question. And what it 
sounds like you're asking for do we have any empirical research 
that has actually seen the effect of our work. I want to get 
back to you on that.
    That could be a study that we do. How do we measure how 
effective we are? Certainly our desire and our, you know and 
our zeal to help the American consumer is there, but you need 
more of a metric than that.
    Senator Begich. Right.
    Ms. Harbour. And that's a very good question. And let me 
get back to you.
    Senator Begich. OK. I'd be very curious. I know that we do 
a lot of that. I'm a former mayor and we, you know, just figure 
out effectiveness of the products and delivery of information. 
It's all about which consumer group we're trying to hit. And 
then what result we get out of it.
    And again that would be very interesting. I have some other 
questions, but I know my time is up. And I'll just wait if 
there's another round.
    Ms. Harbour. Thank you.
    Senator Begich. Thank you very much.
    The Chairman. Thank you, Senator Begich. Senator Warner?

                   U.S. SENATOR FROM VIRGINIA

    Senator Warner. Thank you, Mr. Chairman. And panel, I'm 
sorry I missed the first half of this hearing. But I want to 
follow up on some of my colleagues' comments, Senator Begich 
and Senator Klobuchar.
    Commissioner Harbour, I understand that you've got a report 
coming out today based off some workshops you've been doing 
about the Fair Debt Collection Practices Act.
    Ms. Harbour. That's correct.
    Senator Warner. And as we talk about how we inform 
consumers of what assistance is out there, the flip side of 
that is oftentimes how do some of these debt collection groups 
actually legally check the box that they've notified the 
consumer? And one of the things I saw or at least referenced to 
in the testimony that you were talking about using new 
technologies. And I've heard some kind of wild stories about 
people saying they've, the debt collection folks have met the 
notification requirements by using Facebook and using, you 
know, some technologies that might not be traditional.
    Have you all thought through from both a kind of an 
outreach-to-consumer standpoint and then how you're going to 
use these new technologies, particularly web-based. And from 
the reverse standpoint of what would qualify as legal notice 
going back out from the debt collectors to the consumer how 
robust these organizations can be in using these new 
technologies on the outward contacting?
    Ms. Harbour. Our report that issued today was a result of a 
two-day workshop that we held last year. And the report 
contains a number of recommendations, legislative 
recommendations to protect consumers. What we found from our 
workshop, we found two problems.
    Well, we found more than that, but the two problems I want 
to identify are that debt collectors have inadequate 
information when they try to collect from consumers. So in our 
report what we're recommending is that the Fair Debt Collection 
Practices Act be amended regarding those validation notices. 
Those are the notices that are required to be sent out by the 
    But what we're recommending is that those notices should 
disclose the name of the original creditor because a lot of 
times there's inadequate information that's being given to the 
consumers by the original creditor. We recommend that the debt 
be broken down by principal, by interest and by any other 
charges. This way the consumer knows what it is that they're 
being asked to provide, we think that this would solve the 
inadequate information problem.
    The second issue that I wanted to talk about that was 
raised in the workshop was that debt collectors generally don't 
provide adequate information to consumers about their rights 
under the Fair Debt Collection Practices Act. So what our 
report is recommending is that the notices that are sent should 
include the two rights that consumers have under the Fair Debt 
Collection Practices Act. And that is, first, and a lot of 
consumers do not know this, the right to demand that the debt 
collector cease communicating with them. And then second, the 
right to be free of attempts until the debt is verified. And 
consumers can--they have to ask for that in writing.
    But as far as the specific part of your question that talks 
about new technologies. We also recommend that the FDCPA is 
amended to prohibit debt collectors from collecting--contacting 
consumers by way of their mobile phones unless the consumer 
says, yes, you may contact me by this way of new technology. 
And the reason we believe this is important is because a lot of 
times the debt collectors will call up or text the consumer and 
the consumers have to pay for the text.
    Senator Warner. Right.
    Ms. Harbour. It doesn't make any sense. So unless a 
consumer wants to be solicited by a debt collector and wants to 
pay for the charge on the mobile phone we're recommending that 
it not happen. And I guess that's with all the other new 
    Senator Warner. Well think about it if you, you know, the 
ramifications if you were to make a posting on Facebook or a 
posting on some of these community-based sites. It seems to me 
that this should be a relationship between the debt collector 
and the consumer. And until it is fully verified, all the debt, 
you don't need it to be, in effect, broadcast widely and 
distributed widely over some of the common shared sites like 
    Ms. Harbour. And also, Senator, the----
    Senator Warner. So have you looked at how you might 
restrict the use of some of these technologies. It might be 
good communication devices but actually might be sharing this 
information on a broader level or a more inappropriate----
    Ms. Harbour. Well, I think that that's an area that we are 
looking at. And if we were able to amend the Fair Debt 
Collection Practices Act that is something that we certainly 
would be giving a lot of thought to and coming up with 
something legislatively.
    Senator Warner. Great.
    Ms. Harbour. Also there are statutory penalties that have 
not been amended since 1977. So we would want to look at that 
as well and recommend that they're upgraded.
    Senator Warner. Great new tools, but they can be abused in 
terms of some of these new technology communication devices.
    Ms. Harbour. Yes.
    Senator Warner. So I'd love to hear back some more on that. 
Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Warner. Senator Thune?

                 STATEMENT OF HON. JOHN THUNE, 

    Senator Thune. Thank you, Mr. Chairman for holding the 
hearing on a topic that's often overlooked and is a consequence 
of the economic recession and that's consumer protection laws 
and how those impact people out there who are struggling. I 
think anybody in this economy whether you're a factory worker 
or a senior citizen, somebody who is trying to live on a 
reduced income, trying to continue to make a mortgage payment. 
Everyone feels the effects of the recession.
    And I think one of the consequences of that or affects of 
that is and we're seeing that is the historically high number 
of home foreclosures, increasing number of consumers and small 
businesses who are filing for bankruptcy. And any time you have 
those kinds of things going on, a record number of consumers 
who are facing financial distress, the risk of fraud and abuse 
is greatly elevated. And so particularly in these times it's 
important that consumer protection laws are in force as 
intended by the Congress.
    I think it's important that consumers be aware of the 
protections that are afforded them under the law. And that 
those who seek debt counseling and financial management 
services are not victim to the fraudulent activities of bad 
actors that are out there in the debt servicing sector. And I 
guess what I would like to come back to is something the 
Senator from Alaska was talking about and that is if there 
isn't this sort of gold-standard list that exists out there of 
good actors is it possible to work with some of the people at 
the table and based on some of the testimony this morning to 
put together a series of sort of voluntary standards?
    Not something that we would necessarily legislate, but that 
people could go to and say, OK, if you meet these certain 
standards you get on this list. You get on this--you become 
someone who is recognized as being a legitimate, high quality 
actor with regard to this industry. And is that something that 
might be considered?
    I mean I think there has been some good testimony this 
morning about some of the suggestions of things that could be a 
part of those included in that list of standards. Is that 
something that would make sense?
    Ms. Harbour. My response to that is I would like to work 
with or speak to the Better Business Bureau. My sense is that 
is more in line with what they perhaps would do. Would that be 
helpful to the American consumer to know, which businesses are 
legitimate and which businesses are not? Absolutely, especially 
in this climate of economic downturn, absolutely.
    And perhaps, you know, that's something we can look into 
and see if it's not our agency who comes up with that list if 
there is an agency that can do that. So we can get back to you 
on that, Senator.
    Senator Thune. OK.
    Well and I don't know. Even if it's not--I'm not saying it 
necessarily, the Better Business Bureau is good too. And they 
maybe can compile some of that type of data already.
    But if the FTC, which is the agency of government that most 
consumers look to for these types of protections were to 
compile a list based upon a sort of agreed upon set of 
standards that are considered to be, the gold standard, so to 
speak and again, based upon recommendations from people like 
those who have testified this morning. That I guess was I'm 
just throwing that out there as an idea because I'm not trying 
to suggest that Congress ought to get in and legislate those 
standards. But that there are things based upon industry input 
that say these are good actors and these are the things that 
good actors do, you know, just a thought.
    Ms. Harbour. So you're saying a best practices list?
    Senator Thune. Yes. Yes. Exactly.
    Ms. Harbour. In a way. That's certainly something that is 
more in our footprint.
    Senator Thune. Right.
    Ms. Harbour. And I will definitely look into that.
    Senator Thune. OK.
    Mr. Plunkett. Senator, could I throw out a thought on your 
question? I'm Travis Plunkett, the Legislative Director of the 
Consumer Federation of America. And I've worked with, in the 
credit counseling area in particular, a number of legitimate 
operators on the issue of voluntary standards.
    And one thing we encountered and one risk I see for the 
Federal Trade Commission there is the question of, you know you 
may be a good actor today. You change your business practices 
and in 6 months you're not. So it's the question of keeping up 
with and monitoring the situation.
    I mean if you're talking about individual companies as 
opposed to general principles you offer to consumers, you know, 
avoid this kind of company. But if you're saying here's the 
list of good guys and if you're not on the list you're a bad 
guy then boy, what an enforcement trick that is to try and keep 
up with month to month. Who's on and who's off and are they 
complying and did they comply 6 months ago, but they're not 
now. That could be an enforcement drain.
    Senator Thune. Well I don't disagree with that. I guess the 
only suggestion I would make is that there are, it is not like 
if you're on the list you fall off the list because you've 
fallen into the bad actor category or you're doing something 
that is fraudulent out there. To me, it would be more of an 
incentive for inducement for companies if you had a set of 
    These are recommendations that you do this, this, this and 
this. And obviously if it's a fairly straightforward list of 
things that companies would do to stay on that list, sure, I 
mean, companies that could fall off the list. I suspect it's 
going to be somewhat self-policing. People are going to find 
that out fairly quickly.
    And it may not be 100 percent, entirely current, 100 
percent of the time. But I think it would at least present for 
a consumer some sort of indication of which companies out there 
are going about this in the right way and following these 
practices and those that aren't.
    Ms. Harbour. Another way to approach that Senator; we had 
asked for rules to implement the Fair Debt Collection Practices 
Act. And if were allowed to implement rules in a sense that is 
best practices and if they fell short we could actually go 
after them.
    So rules in this area might achieve the objective that 
you're speaking of.
    Senator Thune. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Thune. I'm going to ask 
that some graphs be passed out to the witnesses and also to the 
two Senators if they wish to have this.
    [The information referred to follows:]

                                             Total Actions
     Fraud or Scam        Time Interval    Filed by the FTC         Case Example              Case Example
Foreclosure Rescue         Past 2 years                   6                        FTC v. Mortgage           FTC v. United Home
                                                               Foreclosure Solutions,      Savers, LLP--approx.
                                                                  Inc.--approx. 1,000   3,000 affected consumers
                                                                   affected consumers
Credit Repair             Past 10 years                  42                        FTC v. Hargrave &         FTC v. Clean Credit
                                                                 Associates Financial   Report Services, Inc.--
                                                                   Solutions--approx.    approx. 45,510 victims
                                                                       29,600 victims
Credit Counseling/         Past 6 years                  14                        FTC v. AmeriDebt, Inc.--  FTC v. Debt Management
Debt Management                                                      287,000 affected       Foundation--approx.
                                                                            consumers           14,000 affected

    The Chairman. Commissioner, you've been doing most of the 
talking this morning. And that has been a little bit 
frustrating to me because I want to hear from Mrs. Dix, but I 
also want to say, to ask Professor Cox and Mr. Plunkett, who 
haven't had much chance to talk.
    The figures we're looking at here show the FTC total 
actions filed by the FTC over a period on foreclosures over a 
period of 2 years, six. Over a period of 6 years, 14. Over a 
period of 10 years, 42. I mean it's just the credit repair--
well you can see the thing before you.
    You're saying how good things are going and if we had a 
little bit more money and we had some more lawyers and this and 
that, we could have a bigger footprint and do more things. But 
all I'm looking at, unless this is incorrect which I want you 
to tell me. There isn't much happening. There is not much 
happening. There are very few people being helped because I 
assume that, you know, total actions filed by the FTC is a 
fairly heavy statement. Now I'm finished.
    Mr. Plunkett, I want to ask you too and Mr. Cox, if you 
feel that the FTC is as effective as they purport to be in what 
I've listened to this morning or are they not? Be frank.
    Mr. Plunkett. Would you like me start, Senator?
    The Chairman. Sure.
    Mr. Plunkett. My area would be credit counseling and debt 
management. And the sort of model case is the one you cite 
here, the Ameridebt case. And my opinion is they've been 
effective on credit counseling. The numbers don't tell the 
whole game.
    The Ameridebt case was huge. They were the poster child for 
bad credit counseling. And because of this case and the 
simultaneous enforcement efforts by the IRS to drive phony non-
profits out of the business of credit counseling, the 
situation, as I testified to, is better. It's not perfect. 
There are still problems. Better on credit counseling.
    On debt settlement the Federal Trade Commission has been 
playing a catch-up game. This business appears to have exploded 
in the last three, 4 years because there's such incredible 
demand by consumers for these services. They're looking for 
something that helps them more than credit counseling because 
credit counseling can't keep up, but is short of bankruptcy. 
And there really is nothing legitimate, so I'd like to see the 
Federal Trade Commission do more there.
    I know these cases are expensive. But I think there's a lot 
to do. The ultimate problem though is they're playing a catch-
up game and we need to get out front with strong bright-line 
laws that make their enforcement job easier.
    They're not just looking at what's unfair or deceptive. 
They can go in and say, you are not complying with the law 
because you're offering a service and charging for that before 
you deliver on that service. And that's where Congress can 
    The Chairman. Mr. Cox?
    Mr. Cox. Thank you. One of the nice things about being a 
professor is you can say exactly what you think.
    Mr. Cox. I agree with everything Mr. Plunkett said. I'll 
tell you from having worked for more than a decade with the 
FTC, they were truly the shining light of Federal/state 
cooperation. You know, I had relationships with those people. 
You could call them. We'd work together. We'd say, you do this, 
I do that.
    So it was the exact opposite of trying to work with bank 
regulatory agencies that were utterly hostile to consumer 
protection, in my experience, and to state cooperation. Having 
said that, I agree with Commissioner Harbour completely. The 
FTC needs better authority. They need to be able to move 
swiftly and they need to be able to pass rules without 
cumbersome Magnuson-Moss restrictions.
    What I will also say is the FTC needs to differentiate more 
clearly, in my experience, between when they have a scam which 
is what Ameridebt was. I actually started that case and passed 
all our files over to the FTC many years ago in Minnesota along 
with another state. I believe it was Missouri.
    You know, the FTC just needs to move more quickly and act 
like a cop when they need to act like a cop. And for instance 
we're talking about the education materials. Forget brochures.
    I mean, that's really nice. That's fine. But you have to 
think like the bad guy. You have to figure out how you're going 
to get on TV and say, don't listen to the rest of these 
commercials if you want to do effective education.
    So I just think you got to, you know, you've got to have a 
more aggressive mind set when it comes to these kinds of scams. 
And then you have to be sophisticated and understand when 
you're regulating in a more established industry where the 
businesses are mostly credible you have to have a different 
touch. And you have to think about where you are.
    But when it comes to the things on this chart, just get out 
there. And get out in front of it. I mean, we're really, we're 
5 years ahead of the FTC on the foreclosure rescue issues.
    The Chairman. Ok. Thank you. With Senator Begich's 
permission, Mrs. Dix could you just kind of walk us through 
what you went through?
    Mrs. Dix. Yes. I have a statement here. As you know my name 
is Nancy Dix. I'm 67 years old. I live in a double-wide 
manufactured home in Ansted, West Virginia.
    After my husband died of a heart attack in 2001 I was 
contacted by a lender to refinance my home with promises of 
saving me money. My husband had always handled things like this 
one. So I didn't know much about it.
    I trusted the people I dealt with because I thought they 
were professional, looking out for my best interest. I later 
found out that I'd actually been taken advantage of. In the 
spring of 2002 I spoke to a mortgage broker called Infinity 
which told me it would save me money.
    Infinity sent an appraiser out to my house and valued my 
property at $97,000. I later learned that it was actually only 
worth $59,000. After the appraisal Infinity told me a man will 
be coming to my house to sign the papers.
    When the man came I learned the first time that my payments 
would be $800 a month. This is higher than I expected and a lot 
for me to afford on a fixed income. I asked about the payments 
and was told that in a few months they could lower my payment 
to $600.
    The signing was rushed and no one explained anything to me. 
And I signed the papers. And I was confused.
    The loan ended up at the bank called Flagstar. The total 
amount of the loan was $86,700 with an APR of 9.48. Under this 
loan I was required to make payments of over $245,000 over 30 
    After signing I began making payments. I contacted Flagstar 
after a few months to lower my payments. Flagstar told me that 
I would have to come up with $8,000 out of my pocket before 
they could lower my payments. Money I did not have.
    I struggled to make payments over the years and was forced 
ultimately into bankruptcy. When I tried to catch up with my 
payments with Flagstar they wanted me to pay a larger amount 
than I could afford on my fixed income. Flagstar wanted me to 
pay $1,800 a month and my income was $2,000.
    Also, Flagstar forced/placed expensive insurance on my 
account which made me further behind my monthly payment. On 
July 2005, Flagstar said it started sending my payments back to 
me. Eventually my home was sent to foreclosure with a sale for 
December 15, 2005.
    Around this time I was contacted by an outfit from Houston, 
Texas called Mortgage Rescue. They told me to send them some 
information about my finances and $921. They would stop the 
    So on November 8, 2005, I sent them the information and the 
money. They responded to me by letter I received only days 
before the foreclosure. The letter said for me to call Flagstar 
and work out a forbearance agreement, but I would have to pay 
the entire amount I was behind and a $5,000 deposit to Flagstar 
to stop the foreclosure.
    Mortgage Rescue knew I did not have this money. I could 
have worked out a deal with Flagstar at any time without 
sending Mortgage Rescue $921. Basically they took my money for 
    I later found out that Mortgage Rescue is not even licensed 
to do business in West Virginia. I never got my money back. 
Luckily I was able to call the West Virginia Attorney General 
who had the foreclosure put off. I was sent to Mountain State 
Justice, a non-profit, legal service office. They worked it out 
so I could keep my home.
    If I had not called the attorney general or found Mountain 
State Justice I would have lost my home. I would be in my late 
60s, retired, widowed, with nowhere to live. I think at times 
about other people who have given their hard-earned money to 
scam artists like Mortgage Rescue.
    I hope you are able to do something to prevent these crooks 
from taking advantage of people who are desperate like I was 
because they are facing loss of their homes. Thank you.
    The Chairman. Thank you. Senator Begich, I thank you for 
your indulgence. When you have finished your line of 
questioning I'm going to ask Mr. Plunkett and Mr. Cox and Mr. 
Himpler to comment on what Mrs. Dix said because I think it's 
profound. I think it's all over this country. And I think it's 
    Senator Begich. Thank you, Mr. Chairman. And I didn't 
realize that she had not given her testimony. That was very----
    The Chairman. That was my fault.
    Senator Begich. No problem, Mr. Chairman. I read it. I 
thought it was very interesting because I have heard of 
Infinity before and some other actions.
    But let me, I hate to keep banging on this issue. And I 
understand from the consumer folks that it might be difficult 
to manage and so forth. Now I come from the real estate 
industry. We know who the good characters are and the bad 
    When I was Mayor of Anchorage we had people who were 
running B and B operations, (bed and breakfasts) and we sorted 
out the good and the bad. And we created a list. It's not 
complicated. And the consumer needs as much information as 
possible to know who's right.
    So let me reverse it. This list here which, Mr. Chairman, I 
was going to ask a similar question. So thank you for this 
information. And I was asking your staff. I had them screwing 
around and I apologize.
    I was asking another question was out of all these people 
who are still--or these people that have had claims or actions 
or in process of having actions. I'm assuming some of these 
probably are still in business. And that's my point.
    If you've already started issues with them, consumers 
should know that. Because it's one more bit of information that 
they need to know who is--because how do you get information of 
all these folks that you have litigation on. How do you get 
that to the consumer?
    Do you have it on a website that's not in the legalese? I'm 
not a lawyer. And you know, do you have a list that says these 
are the folks that we have pending actions against at this 
time, settled or not.
    Ms. Harbour. We usually have press releases whenever we 
settle matters. It's up on our website.
    Senator Begich. I understand. Do you have a list that a 
consumer could go to your website and say, ah, these are the 
people at the FTC are busy----
    Ms. Harbour. Yes, we do. We do have a list.
    Senator Begich. And are they written in this format, ``FTC 
versus blah, blah, blah'' or is it listed as ``these are 
companies we,'' in very, simple, my language, English, not 
lawyer language, that says----
    Ms. Harbour. Well, I'll get back to you on the lawyer 
language. But I know there are listed. I know it's listed. But 
I will definitely get back to you whether it's listed in 
lawyer-like language or whether it's in plain English.
    Senator Begich. And then those groups that you associate 
with and I forget the numbers, thousands. Do you send them the 
list that says these are organizations that we are currently 
investigating or have had settlements with? So those 
organizations who actually do the work with consumers, do they 
know this?
    Ms. Harbour. I will get back to you on that. I can't answer 
that question right now.
    But if I could just address this paper which I suppose is 
pointing out what the FTC hasn't done enough of. I would like 
to say that we do have in the foreclosure rescue area, we do 
have 16 pending investigations today. In the credit repair 
area, we have 13 matters today. In the debt counseling area, we 
have seven.
    We get it. You know, we shift resources when the need 
occurs. The downturn happened September 2008. It was an acute 
economic downturn. We responded immediately. In fact we had 
been responding anyway because we saw the trend.
    In 2007, credit issues were number 10 on the list of 
complaints in Consumer Sentinel. In 2007, number 10; I'm sure 
most of these cases have been started before then. We are 
always the cop on the beat. We're always pursuing these cases.
    Your quibble with us is we didn't do enough of them. We 
have always been in this game. Once the economic downturn 
occurred we immediately shifted resources and the numbers that 
you don't see are the numbers of what we are doing 
    I even had some push back to even mention what we're doing 
confidentially. But I knew Senator, Chairman, that it was very 
important to you to make sure that we are being responsive to 
the American consumer. So yes, there are 16 investigations 
right now in the foreclosure area. There are 13 in the credit 
area. There are 7 in the debt counseling and there are 10 in 
the Fair Debt Collection Practices Act.
    As far as returning value to the American consumer. In the 
CompuCredit case we returned $114 million. This was settled in 
September 2008. Bear Stearns, $28 million. So this piece of 
paper does not----
    The Chairman. You're using up all the Senator's time.
    Ms. Harbour. Oh, I'm so sorry.
    The Chairman. I mean----
    Senator Begich. Let me--I appreciate it. My point is at any 
level trying to inform the consumer is what I--when I saw the 
hearing on the schedule, to me is very important. It's how the 
consumer, how would someone like Mrs. Dix know what to do and 
not to do, and not. And the first stage is who is a good 
character/bad character. That's my issue.
    And then my flip-back is over to the Association. And I 
know I'm out of time. But to the Association, you have an 
obligation and a responsibility.
    And I don't know what your procedures are. So if you could 
get to me at some point. I know we're going to run out of time.
    The Chairman. No, go ahead.
    Senator Begich. I would just want to know as an 
association, when you have like this, you know, Mortgage Rescue 
which may not have been part of your association. But if you 
have ones that have caused these issues what do you do to get 
them out? And get them out quick? And then how do you notify?
    Mr. Himpler. We represent the lenders, not the debt 
    Senator Begich. Well your assumption is all lenders are 
good. I'm asking the broader question here. Today we have major 
problems. And I tell you in Alaska we just did a huge case 
against several lenders for fraud. So I'm just trying to let me 
broaden it then to lenders.
    As an association how do you clear the deck?
    Mr. Himpler. I think the basic point that both of you 
gentlemen have made--the Commissioner has tried to respond to 
in terms of setting a minimum standard threshold above which 
the FTC and other regulatory agencies can say, these are good 
actors. We, as an association have a best practices voluntary 
standard that all of our companies have to meet to be members 
in good standing. Those are posted on our website.
    Any consumer, any Senator or any regulatory body can take a 
look at those. And that is how we ensure that our lenders are 
above reproach.
    Senator Begich. I will stop, Mr. Chairman.
    The Chairman. What do you do when somebody goes from non-
profit to profit? Do you measure that? Do you say, you can't do 
    Mr. Himpler. I'm not sure I follow you, Senator.
    The Chairman. Well the eight-year rule I was talking about 
in the beginning in my first question to you.
    Mr. Himpler. I apologize. I'm not following you, Senator.
    The Chairman. Alright. Let me get back to what I said I was 
going to do. And that is call on Mr. Plunkett and Mr. Cox and 
you to comment on Mrs. Dix's situation. How did that come to 
be? How could that have been stopped?
    We'll start with you, sir.
    Mr. Plunkett. Senator, we should, the entire consumer 
community and this includes the enforcement community, need to 
do a better job of educating consumers. But I'm appalled at 
what I heard from Mrs. Dix. I heard a lot about these scams.
    And it's a losing battle unless we can get out front with 
strong laws that and good enforcement resources that agencies 
like the FTC can use to stop these scams before they start. 
Otherwise we're just playing catch-up. We're scrambling to 
inform consumers about businesses that they should never have 
had to deal with.
    The Chairman. Please?
    Mr. Cox. Thank you, Mr. Chairman. I agree with Mr. 
Plunkett. You need bright lines because that allows for clear, 
efficient law enforcement. You have to bring everything as a 
UDAP case, it just takes way too long. And you need to get way 
out in front and enforce them.
    And again, when you're dealing with scams, I think you need 
to arrest people and put them in jail. You just have to have a 
more aggressive mentality. Now that's not the FTC's job. But we 
need to, you know, we need to develop a comprehensive 
enforcement strategy where we take the worst of the worst, we 
put them in jail. We put them on TV. And we parade them.
    In 2004-2005, I was screaming we should be doing that with 
subprime mortgage lending companies. And I think I was right 
about that. I mean, we just have to put the fear of God in 
people when they are doing that kind of level of bad practice. 
Mrs. Dix never should have been subjected to that.
    The Chairman. Before I call on you, Mr. Himpler. I so 
relate to what you're saying, Mr. Cox. I think this is an 
``under the radar'' world or an underworld, if you want to call 
it. Nobody knows about it except the victims who get clobbered 
by it.
    In spite of all the words from the Commissioner and you're 
a very good Commissioner. I fully recognize that. I am just 
appalled by these figures. I mean, I'm just appalled by them.
    This is over a ten-year period, six-year period, two-year 
period. And you've got--what do you have? How many do you have? 
Do you have 1,400 people working for you or is it 100?
    Ms. Harbour. 270 consumer protection attorneys.
    The Chairman. I'm not talking about attorneys. I'm talking 
about people.
    Ms. Harbour. Oh, people, 1,094.
    The Chairman. OK. So that's a lot of people. And we could 
give you more people. I don't know whether it would do any 
    I just, I so relate to what you're saying. It's like 
anything which is out of sight, but tremendously damaging to 
people. If you do not hold people accountable. If you do not 
send people to jail. If you do not hold somebody up for 
    I won't get into some things I'd like to, but I think 
that's the only way it works. That's the only way it works 
because then the word begins to get around in that underworld 
that if you do this, you will go to jail. Because there is a 
combination of states who are doing a very good job working 
with the FTC which says it can't do that. States can.
    You know, attorney generals can. I think that's got to 
happen. It has got to happen in order for people like Mrs. Dix 
not to have to go through what she went through.
    It won't stop it because it's unfortunately the nature. 
It's human nature that when the crisis gets worse, more people 
are in trouble. More bad actors jump in to take advantage of 
    I mean America has that side of it which nobody. That's why 
we're having this hearing. We've never had a hearing like this 
before. It makes me very angry. It makes me very upset that 
Mrs. Dix had to go through this.
    She wasn't particularly thrilled about coming up here to 
testify. In fact that was about the last thing in the world she 
wanted to do. And then Mr. Plunkett who has this enormous 
Consumer Federation of America says he shocked by what he 
hears. So we have to do something about that.
    Mr. Himpler, what is your reaction to Mrs. Dix's situation?
    Mr. Himpler. I am equally appalled. And Mrs. Dix, I'm truly 
sorry you faced this. I share the sentiments expressed by all 
of the witnesses.
    But I will return to something that I think, Mr. Cox said. 
As much as we want to utilize written materials to get 
information into the hands of consumers and again, I commend 
the FTC for their fine work in this area, we are at a very 
critical stage with the current situation in our economy.
    We need to get information to consumers on the airwaves, on 
the radio, on the TV. That has just got to happen because 
they're being inundated. And I'm sure going home at night 
listening to the radio, Senator, you probably here four or five 
every time you commute. I know I do. And they're very 
attractive ads.
    But we need to pull out all the stops in this area. And if 
I could beg your pardon for just one moment, not necessarily 
right in the jurisdiction of this committee. But one of the 
things we're working on with the depository regulators that Mr. 
Cox mentioned, there's an effort to do loan modification with 
respect to mortgages.
    We've also got a crisis, if you will, in the auto sector. 
And a number of our members that provide auto financing through 
lines of credit through banks are having trouble keeping those 
lines open, particularly when they try and do the same sort of 
work-outs that are being encouraged on the mortgage side.
    I guess my last comment would be as we are trying to 
encourage lenders to do work-outs with consumers like Mrs. Dix, 
we need to make absolutely clear that working with your lender 
is absolutely important in terms of any sort of loan 
modification, rate reduction, payment reduction and the like. 
Because while folks read about it in the paper all of the fine 
work the Administration and Congress are doing to encourage 
lenders to do work-outs. It gets very confusing if they see ads 
late at night for people encouraging them to follow up on those 
initiatives and they're not the same people.
    The Chairman. I'm not sure Congress is doing any particular 
fine work on that. But it's nice of you to say that.
    Mr. Himpler. I want to be invited back.
    The Chairman. We have a lot of work to do here. Let me ask 
the Commissioner this. Why can't we find a means to send the 
most vulnerable consumers, like consumers who have missed, 
let's say, one or two or maybe even three mortgage payments 
some information about the kinds of fraudsters who may be 
trying to seek and take advantage of them before they come 
under the spell of those fraudsters? There's got to be some 
mechanism to do that.
    Do you keep track of people who are getting in this kind of 
    Ms. Harbour. There are millions of consumers now that are 
probably facing foreclosure. I am trying to think of some way 
we could warn them other than what we are doing. Perhaps 
television advertising, I don't think we've ever done that. 
Maybe that is something we can look into.
    The Chairman. You probably can't afford that.
    Ms. Harbour. Exactly. Let us give some careful thought to 
this and we will get back to you.
    The Chairman. Please, please, please.
    Ms. Harbour. We know how important this is to the American 
consumer and to this committee.
    Mr. Himpler. Senator, to that point starting last fall the 
lending community worked with the Administration and formed a 
group called Hope Now that----
    The Chairman. The former Administration?
    Mr. Himpler. The former Administration. And one of the 
principles was identifying at-risk borrowers who were either on 
the verge of missing a payment or had missed a payment or two 
to take aggressive action in terms of the lenders reaching out 
to those borrowers to work with them to bring them current and 
work out the situation directly.
    The Chairman. Well, you know, I don't know what it's going 
to take. But we're, on this committee, we're going to work. And 
nobody is sacred except you, Mrs. Dix.
    Mrs. Dix. Thank you.
    The Chairman. Nobody is sacred. We're not doing our jobs. 
You say Congress is doing its job. The Congress is not doing 
its job. This committee is not doing its job to be helpful.
    This is a massive problem where people kind of disappear 
under the water silently. I remember watching my son when he 
was 2 years or a year and a half old, a year old or half a year 
old, sitting in a swimming pool, top of the steps, so it was up 
to about his throat. And my wife and I were sitting on opposite 
sides of the swimming pool reportedly each of us keeping an eye 
on him.
    But for a moment we didn't. And then he suddenly just sort 
of floated down underwater. And fortunately I saw him and I 
went in and I got him and he was OK. But it was one of the 
scariest things I've ever been through in my life because you 
tend to love your children. And I have a feeling this is what 
Mrs. Dix brings to this hearing.
    Didn't particularly want to come. Is probably angry as the 
dickens and doesn't know where to turn, happened to get bailed 
out by an attorney general. That might have been lucky.
    How you two got together I don't know. But that was lucky. 
I'm really happy about that. But that is not happening to 
millions of people out there.
    And in the meantime I'm still holding this up. And I'm 
absolutely shocked. And I appreciate the effort, but that 
doesn't count anymore.
    It's like the Stimulus package or the Banking package or 
the Health Care Reform or energy. You've got to do it right. It 
has got to work or else it doesn't mean anything.
    People will just keep slipping underwater and nobody will 
know about it because newspapers won't write about it and the 
press won't cover it because it's not a murder. It is a murder. 
It's just a murder without blood.
    I don't know. So we're going to keep working on this thing. 
I want you to know that. We will be aggressive.
    I thank all of you for coming here today. I think it's, 
frankly I think it's great that the Commerce Committee has this 
kind of committee. Commerce--everybody says well, that must be 
you do the economy of the United States. Well, we do hundreds 
of huge things from oceans to skies to aviation, 
transportation, railroads, all kinds of things. But we've got 
to focus on this too and maybe this foremost.
    So for the information of all Senators who were not here, 
but their staff might be. We'll leave the record open until the 
close of business on Friday, March 6, 2009, for any questions 
or statements.
    In the meantime we're going to try and figure out how we 
can put a fire under the FTC and under the American people and 
maybe get some public service TV going. Everybody's going 
broke. Radios are going broke. TV is going broke. Everybody is 
going broke. It's a great world and that doesn't matter.
    We have an obligation to the Mrs. Dixes, we flat out do. 
And we're not fulfilling it. We're not even noticing it. We're 
not even noticing it.
    And I'm interested in these states. Maybe more of this 
should go to the states. The problem is a lot of states 
wouldn't care. They wouldn't do a thing.
    Minnesota would. A lot of other states wouldn't. So anyway, 
on that tender note, this hearing is adjourned.
    [Whereupon, at 12:10 p.m. the hearing was adjourned.]

                            A P P E N D I X

  Prepared Statement of Hon. Kay Bailey Hutchison, U.S. Senator from 

    Thank you, Chairman Rockefeller, for holding this morning's 
hearing. The effects of the troubled economy are being felt nationwide 
with rising unemployment rates, a distressed housing market, and 
depleted retirement savings. We are witnessing a visible increase in 
the number of consumers who have mounting unpaid bills and they are 
losing their homes. This is alarming in and of itself, but more 
disconcerting is the fact that some individuals may use this 
opportunity for their own gain and prey on those in trouble.
    Financial distress--especially the worry of losing a house--can 
lead to desperation and it is imperative that disreputable companies 
not be allowed to profit from the misfortune of others. There are a 
number of Federal laws aimed at protecting the public from dishonest 
conduct in the financial services industry and the FTC is tasked with 
the responsibility of stopping such practices when the need arises. 
Besides shutting down bad actors, it is essential that consumers be 
knowledgeable from the start so they can make responsible, educated 
financial decisions, and know what their options are if they ever find 
themselves in trouble. They should know how to reach trustworthy help 
and be aware of the warning signs of any fraudulent companies that may 
promise to help them.
    I want to thank all of the witnesses for agreeing to be here today 
and I look forward to a constructive conversation.
Michael C. Dillon,
Manchester, NH.

Hon. Jay Rockefeller,
Commerce, Science, and Transportation Committee,
Washington, DC.

Re: ``Consumer Protection and the Credit Crisis'' February 
                                                   26, 2009

Dear Mr. Chairman,

    Admittedly, I am at somewhat of an advantage in that I have been 
able to study previous testimony and address it at my leisure but I 
feel that I need to rebut some of the Commissioner Harbour's testimony 
given during this hearing.
    I am nothing more than a consumer living in New Hampshire. However, 
I am one of the 281,1000 Federal Trade Commission-certified victims of 
mortgage servicer Fairbanks Capital Corp. n/k/a Select Portfolio 
Servicing Inc. as certified for USA v. Fairbanks in 2003/2004. My 
personal experience with and observance of Federal Trade Commission 
actions differs from the portrait that Commissioner Harbour painted for 
you during her testimony.
    It is my personal experience, and that of many, many other 
Fairbanks/SPS victims, that the Federal Trade Commission did little to 
originally protect homeowners victimized by Fairbanks/SPS or to enforce 
the terms of the settlement of USA v. Fairbanks. While the class action 
was settled back in 2004, I hear from Fairbanks/SPS victims attempting 
to save their homes from illegal foreclosures via my website, 
GetDShirtz.com, literally to this day. Some of these victims have been 
dealing with Fairbanks/SPS' illegal and fraudulent servicing actions 
for ten or more years. One disturbing complaint that I hear more often 
than I care to is that Fairbanks victims never received notification of 
the class action and therefore were unable to preserve their legal 
rights by opting out of it.
    Despite the fact that this has been brought to the Federal Trade 
Commission's attention on more than one occasion, the FTC has taken no 
apparent action. In fact, the Federal Trade Commission has received 
more than 500 pages of complaints from consumers/Fairbanks victims post 
USA v. Fairbanks settlement and, to the best of my knowledge, has only 
taken action to modify the original settlement to the benefit of 
Fairbanks/SPS in September 2007. To this day, no action has been taken 
by the Federal Trade Commission to enforce the original settlement 
terms or protect consumers/homeowners harmed by Fairbanks/SPS' actions.
    The Federal Trade Commission has, in its possession, approximately 
60-100 boxes of information and/or evidence that it has collected 
through its investigation of Fairbanks/SPS. Yet, when asked, it is the 
Commission's position to deny the very victims it portends to protect 
and the public in general access to the vast majority of this 
information despite the fact that this information may very well assist 
homeowners/victims to prove their own cases of illegal foreclosure 
brought by Fairbanks/SPS against them. Through a Freedom Of Information 
Act request I have been granted access to a supposed total of six of 
those boxes of information. Much of what I have been given is simply 
consumer complaints. The remainder of the information is largely media 
coverage of the investigation and several private actions filed by 
consumers that have been redacted to ``protect'' victims' identities. 
How the Federal Trade Commission can legally redact publicly filed 
court actions I am not sure. But the bottom line is that it has been my 
personal experience that the Federal Trade Commission is, in fact, not 
doing everything it can to protect consumers or help consumers protect 
    Commissioner Harbour stated that the Federal Trade Commission 
needed additional authority to bring actions against corporations for 
violations of The FTC Act, FDCPA, TILA, and the CRO Act. The fact is 
that the Commission already has this authority and has used it many 
times in the past against those corporations that choose to violate the 
acts. Unfortunately, for whatever reason, the Commission does not seem 
to want to enforce these laws and regulations to their fullest 
capacity. In 2008 the Commission waived all but $8,000.00 of a $1.2 
million civil penalty levied against a mortgage XXX because of ``the 
defendants inability to pay'' the fine. This is an extremely disturbing 
trend that can be tracked via the Commission's own website at 
www.ftc.gov. A search of the phrase ``defendants inability to pay'' at 
the FTC site reveals approximately 280 instances where defendants have 
been given waivers of civil financial penalties because of the 
defendants inability to pay them. How could civil action from the 
Federal Trade Commission serve as any kind of deterrent of ``bad acts'' 
if corporations can expect to have the financial penalties waived by 
the Commission?
    Commissioner Harbour cites FTC v. EMC/Bear Stearns as one of the 
Commission's ``success stories'' in informing consumers/victims of the 
Commissions actions. Based on my own limited knowledge of the case, 
combined with conversations that I have had and comments that I have 
read by EMC victims, FTC v. EMC/Bear Stearns should be considered an 
embarrassment to the Commission as opposed to anything even remotely 
resembling victory or evidence of the Commission's efficacy in 
protecting consumers. I say this because FTC v. EMC/Bear took place 
more than 4 years after the settlement of USA v. Fairbanks. If USA v. 
Fairbanks had been any kind of deterrent to the mortgage servicing 
industry, the Commission never should have had to bring charges against 
EMC/Bear Stearns to begin with. The fact of the matter is that USA v. 
Fairbanks was viewed by the servicing industry as nothing more than the 
cost of doing business in the United States. The lack of enforcement of 
the Fairbanks/SPS settlement did absolutely nothing to deter other 
servicers from committing virtually identical illegal practices in 
their own business models.
    The Commission brought virtually identical charges in FTC v. EMC/
Bear to those brought against Fairbanks/SPS. There may actually have 
been more charges brought in FTC v. EMC/Bear than were brought in USA 
v. Fairbanks. But, for some reason, the Federal Trade Commission chose 
to settle EMC/Bear for nearly half of the $40 million settlement 
obtained in USA v. Fairbanks. Additionally, EMC/Bear was settled before 
the actual number of victims involved in the case was even determined. 
The day after the EMC/Bear settlement was announced, I received a 
return telephone call from FTC Attorney Lucy Morris' office as I had 
inquired about the number of victims involved in EMC/Bear. I was told 
that that number had not been determined as of that time but the FTC 
was expecting ``tens of thousands'' of victims to be included in the 
action. How could the Commission accurately determine the amount of 
restitution and/or redress that needed to be extracted from EMC/Bear if 
the Commission had no idea how many victims were actually affected by 
EMC/Bears' illegal actions?
    Commissioner Harbour cited the fact that the fact that the 
Commission used the redress checks from FTC v. EMC/Bear as a measure of 
``reaching out'' to the 86,000 consumers eventually determined to be 
victims of EMC/Bear Stearns. There are several serious problems in 
utilizing this method of informing consumers/victims. I have personally 
heard from at least one EMC victim that, to this day, has not been 
notified of the action or received any kind of restitution. This 
despite EMC's attempt to literally rewrite her chain of title at her 
county registry of deeds. This victim has provided evidence of this 
action taken by EMC to me so I do not state this in any kind of 
uninformed or speculative manner. If the Commission failed to inform 
one victim, how many others did the Commission miss?
    Secondly, the 280,000 victims certified in USA v. Fairbanks were 
required to give up any legal rights to pursuer Fairbanks/SPS in any 
further legal action in order to obtain their redress/restitution. In 
providing restitution/redress checks to the 86,000 consumers that the 
Commission deemed to be victims of EMC/Bear were these victims required 
to do so as well? Was this properly explained to the 86,000 victims 
before they cashed their redress/restitution checks? Did the 86,000 
victims fully understand the legal ramifications of accepting the 
redress/restitution checks? Did they, in fact, give up any legal rights 
in accepting those checks?
    Most importantly, we are only now finding out the necessity to have 
servicers, note holders, trustees and others involved in bringing both 
judicial and non-judicial foreclosure actions prove that they have 
legal standing to bring those actions. It is becoming increasingly 
apparent that more and more original notes have been ``lost'' or are 
otherwise unable to be produced by the supposed owners and/or 
foreclosing entities. Such being the case, did the Commission due 
proper diligence in confirming that EMC/Bear had the proper legal 
standing to be servicing each of the 86,000 loans involved in FTC v. 
EMC/Bear Stearns or did the Commission simply assume that EMC/Bear had 
proper legal standing at the time of settlement?
    Mr. Chairman, I am all for laws and regulations that protect 
consumers in any manner, shape and/or form. In my own humble opinion, 
there are already sufficient laws and regulations to protect consumers 
from the ``bad actors'' that Commissioner Harbour and the Federal Trade 
Commission supposedly prosecute. The problem lays in the enforcement --
or more precisely the lack thereof--of these laws and regulations. To 
the best of my knowledge, the Federal Trade Commission is a civil 
enforcement entity. Herein lies the problem. Any ``civil'' penalty 
brought by the Commission has the potential to be waived if a 
corporation is determined ``unable to pay'' the penalty or any portion 
thereof. Even if a corporation is held to the full civil penalty 
imposed by the Commission, in many cases the penalty is so 
insignificant compared to the corporation's income that it is viewed as 
nothing more than the cost of doing business in the United States. In 
the years leading up to the Commission's investigation of Fairbanks, 
Fairbanks was reportedly making upwards of $100 million per month. A 
review of their financial records or The PMI Group's SEC filings may be 
able to confirm this. Fairbanks/SPS ``voluntarily'' settled USA v. 
Fairbanks for between $40 and $55 million. Of that amount, Fairbanks' 
majority shareholder, The PMI Group, guaranteed $35 million. The 
minority shareholder, Financial Security Assurance, provided an 
additional $10 million. Testimony was provided in USA v. Fairbanks 
stating that Fairbanks/SPS was in such poor financial condition that 
defense counsel, plaintiff counsel and the Commission expressed concern 
as to whether Fairbanks would survive beyond the class action. Yet, 6 
months after the settlement was approved, Fairbanks/SPS was purchased 
by Credit Suisse and immediately obtained $6 Billion in servicing 
business. If a corporation cannot provide proper restitution as a 
result of a Federal Trade Commission investigation, settlement or 
verdict, why is that corporation given the opportunity to continue to 
do business via reduced fines or ``waivers'' of monetary penalties as 
opposed to being dissolved? Despite the Commission having the ability 
to seek additional restitution from defendants if/when their financial 
situations improve, the Commission does not always seek to do so, as in 
the case of USA v. Fairbanks/SPS.
    As long as corporations have no fear of any criminal prosecution by 
the Federal Trade Commission or other enforcement body, these 
``penalties'' levied by the Commission will be viewed as nothing more 
than the cost of doing business. It is also my opinion that, as long as 
the Federal Trade Commission is allowed to function in the manner in 
which it has for at least the last 10 years, consumers have no hope of 
being properly protected or compensated for the illegal acts 
perpetrated against them by corporate greed.
    I would be more than happy to attempt to answer any questions that 
the Committee may have at any time.
                                          Michael C. Dillon
                                   Federal Trade Commission
                                     Washington, DC, March 23, 2009
Hon. Jay Rockefeller,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Chairman Rockefeller,

    I am writing to follow-up on questions that were raised during the 
Federal Trade Commission's February 26, 2009 testimony regarding the 
credit crisis and consumer protection and questions for the record that 
were provided by Senator Warner and Senator Boxer. I welcome this 
opportunity to provide the information requested and also to provide 
some additional information about the FTC's consumer protection 

I. The Bureau of Consumer Protection
    As you know, the Commission has two law enforcement missions: 
competition and consumer protection. On the consumer protection side, 
the FTC has 270 attorneys who are responsible for enforcing more than 
forty Federal consumer protection laws and regulations. In Fiscal Year 
2008, the Commission filed 68 new consumer protection law enforcement 
actions in Federal district court, on issues ranging from the financial 
matters we discussed at the hearing, to telemarketing fraud and false 
advertising, data security and violations of the National Do Not Call 
registry. In 2008, Commission staff obtained orders providing monetary 
redress for consumers totaling $215 million, and obtained orders 
requiring an additional $14 million in payments to the U.S. Treasury 
for civil penalties and the disgorgement of ill-gotten gains. In 2008, 
the Commission's law enforcement actions stopped ongoing illegal 
conduct victimizing millions of consumers. In addition to litigating 
cases, attorneys in the Bureau of Consumer Protection are conducting 
numerous ongoing rulemakings, investigating and preparing significant 
reports, such as the 2008 study on food marketing to children and 
adolescents and reports on behavioral advertising and debt collection, 
providing guidance to industry to help them comply with the rules we 
enforce, engaging in outreach to stakeholders through workshops and 
seminars, and providing support to other law enforcement agencies, 
including criminal authorities.
    Unlike other agencies that do not litigate their own cases, FTC 
staff are responsible for investigating and litigating almost all o f 
the consumer protection cases we bring. Investigating fraud cases can 
be quite challenging and resource-intensive, and FTC staff have 
developed the skills needed to track down recalcitrant defendants, 
unravel complex corporate webs, locate bank assets and other hidden 
funds, find witnesses, and develop a sufficient evidentiary record to 
allow us to convince a Federal court to issue injunctions to stop the 
fraud and ultimately redress consumers.
    The consumer protection cases brought by the FTC often proceed to 
litigation, and substantial staff resources are dedicated to litigating 
these cases that do not settle. Indeed, at the moment, the Bureau of 
Consumer Protection is actively litigating approximately 55 cases. Many 
of these cases are complex litigations with sophisticated opposing 
counsel and require the agency to devote substantial resources to 
extensive discovery, motions practice and ultimately trials. To best 
leverage its limited resources, Commission staff work closely with 
other state, local, and international law enforcement agencies and we 
occasionally coordinate law enforcement sweeps with these other 
agencies. Additionally, Commission staff frequently work with criminal 
law enforcement agencies to encourage the criminal prosecution of 
crimes arising from acts investigated by the Commission.

II. Follow-up Requested at the Hearing

A. Is it advisable for the Federal Trade Commission to compile a list 
        of bad actors so consumers know which companies to avoid?
    It would be extremely difficult to compile and maintain an accurate 
and reliable nationwide list of bad actors. In the first instance, it 
would be difficult to create such a list, given the scope of the 
marketplace and the types of businesses under the FTC's jurisdiction. 
Any such list also would be out of date quite soon because bad actors 
committing fraud change their names and lines of business very quickly. 
In addition, there are legitimate companies that the FTC has charged 
with violating the law, and in some instances in very serious ways, but 
nevertheless they later change their business practices and comply with 
the law. Such a company could remain mistakenly on a ``bad actors'' 
list even after it has come into compliance.
    The FTC does inform the public of companies and individuals who 
have been named as defendants in Commission law enforcement actions. 
The agency specifically publicizes and makes available on its website 
the names of companies and individuals that the Commission has named in 
its lawsuits. However, the agency only does so after it has developed 
evidence sufficient to provide at least reason to believe that they 
have violated the law. Consumers may consider this information in 
deciding whether to do business with a company or an individual.
    Overall, however, the best strategy to warn consumers about bad 
actors is through consumer education about bad business practices. That 
is why the FTC's multi-media consumer education campaigns give 
consumers the tools and information they need so that they can 
independently assess each company's marketing practices, spot red 
flags, and stop before paying a had actor for any promised service that 
may not be provided.

B. Why doesn't the FTC engage in television public service advertising?
    Commission staff have not found the production of video public 
service announcements (PSAs) for network or cable TV to be a cost-
effective use of our limited budget. A study by the Kaiser Family 
Foundation, released in January 2008 (see http://www.kff. org/entmedia/
entmedia012408nr.cfm), found that TV stations donate an average of 17 
seconds per hour to public service advertising, and only 9 seconds per 
hour in prime time.
    Much of that PSA time is given to messages produced by the networks 
themselves, on issues they choose. An example of this is the ``The More 
You Know'' campaign by NBC Universal. Nevertheless, many large-scale 
public education campaigns still include a TV PSA component, so there 
is intense competition to get PSAs on the air, even though available 
time slots are not ideal and are ad hoc.
    The Commission has had success with other types of public service 
announcements. We have created PSAs to run in the classified 
advertising sections of newspapers and other print publications, and we 
have created PSAs for magazines on request. We also have produced PSAs 
for radio--both announcer copy and produced spots. We have anecdotal 
evidence that announcers read our public service copy and get it into 
their rotations--and that they download our produced spots from our 
website and use those as well. These radio spots often have led to news 
interviews with FTC staff attorneys. We have created videos for 
distribution on the web that local cable access shows have aired. Cable 
access stations are much more generous than networks at placing PSAs, 
but their viewership is relatively low. Some of the FTC's videos can be 
seen at www.YouTube.com/FTCVideos.
    Video is, nonetheless, a critical component of most successful 
outreach efforts, and I believe that producing informational videos, 
posting them to the web, and releasing them to the press and to 
interested partner organizations is one of the most efficient and cost-
effective ways for us to reach a wide audience. Our recent videos 
illustrate the power and reach of our efforts in this area: we released 
two videos telling people that AnnualCreditReport.com is the one 
authorized source for the free credit reports that the law entitles 
consumers. One week following the release of the videos, we have 
reports indicating they were the subject of almost 100 influential 
blogs as well as news stories in 37 markets. Many of the stories and 
posts included embedded videos, and all included a link to either 
www.FTC.gov/freereports or www.YouTube.com/FTCVideos. At this writing, 
the videos have logged some 40,000 views on the FTC's YouTube channel.

C. How does the FTC measure the effectiveness of its consumer education 
    The FTC produces, promotes, and disseminates educational messages 
and materials to the widest possible audience through multi-faceted 
communications and outreach programs. These efforts involve the use of 
print, broadcast, and electronic media, the Internet, special events, 
and partnerships with other government agencies, consumer groups, trade 
organizations, businesses, and other organizations. We design our 
materials and campaigns to be relevant to the specific audiences most 
affected by the topic at hand.
    Commission staff have developed creative and effective ways of 
reaching all types of consumers to arm them with the information they 
need. Indeed, the form in which the information is presented is 
important to consumer education campaigns and, therefore, the FTC uses 
a variety of products to educate consumers and businesses. For example, 
the FTC uses print materials, mini-CDs containing all of the FTC's 
credit materials, websites, videos, radio public service announcements, 
bookmarks, and signs on public transit vehicles.
    The FTC uses a number of ways to measure the reach of various 
aspects of a consumer education campaign. For example, we track the 
distribution of printed publications--what publications are ordered, 
how many, and by what organizations. We also track visits to the 
websites we host that provide information online. In so doing, we are 
able to monitor the type of information that is of most interest to 
businesses and consumers. The FTC also tracks media usage of its 
consumer education information, and we pay close attention to what 
consumers report to our counselors on our toll-free help line and to 
our website. This information is helpful in tracking trends in fraud 
and other consumer protection issues over time. In addition, the FTC 
has conducted two national telephone surveys about consumer experiences 
with fraud, and other quantitative and qualitative opinion research on 
specific consumer experiences.
    However, the U.S. and global marketplaces are incredibly dynamic--
with many factors at work--so it is difficult to attribute changes in 
behavior and awareness over time to a single factor, such as a specific 
consumer education campaign. Moreover, it is often unclear whether an 
increased number of consumer complaints reflects the fact that a 
practice is becoming more widespread or that consumers have an 
increased awareness about where they should report the unlawful 
practice. Although the FTC can monitor certain aspects related to its 
consumer education campaigns, such as the number of visitors to a 
``branded'' website, the number of publications ordered, the partner 
organizations ordering information to disseminate on our behalf, or the 
media pick-up, it is difficult to extrapolate from those numbers the 
extent to which preventive efforts have been effective.

D. What specific outreach is the FTC doing regarding mortgage 
        foreclosure rescue scams beyond online consumer education?
    In February 2008, the FTC started to use a variety of methods to 
alert people to mortgage foreclosure rescue scams. Working with the 
media, Federal, state and local agencies, partner organizations and 
others--to help us extend our reach and get the biggest bang for our 
buck--the FTC produced and distributed public service announcements for 
print, online and radio; produced brochures that have been distributed 
by law enforcement partners, placed articles in community newspapers 
across the nation, encouraged Congressional staff to run the 
information in their own constituent newsletters; and participated in 
local law enforcement task forces. Indeed, FTC staff sent an article 
adapted from our consumer education materials to a national syndicated 
news service, which, in turn, sent it to more than 10,000 community 
newspapers. The English version of the article generated more than 
1,000 placements in more than 30 states with a readership of more than 
127 million. The Spanish version has generated more than 35 newspaper 
articles in 5 states with a readership of more than 2.6 million.
    Educating consumers about these scams remains a high priority and 
we are working with coalitions of mortgage servicers and others active 
in the mortgage arena to do targeted foreclosure rescue scam prevention 
education throughout the Nation. Additionally, moving forward, our 
outreach plans on foreclosure rescue scams and loan modification scams 
include using public transportation systems to get out the HOPE Now 
telephone number and related websites, and producing videos for the Web 
and for use at events about foreclosure rescue and loan modification 

III. Question for the Record from Senator Warner
    Question. A recent FTC report recommends that reforms to the Fair 
Debt Collection Practices Act are warranted with respect to ``new and 
emerging technologies.'' Specifically, the report recommends that debt 
collectors be permitted to contact debtors by cell phone if they have 
prior consumer consent. However, I've heard about debt collectors using 
social networking websites such as Facebook and MySpace to contact and/
or harass debtors. Other than the issue of contacting debtors by cell 
phone, what are the FTC's plans, if any, to protect debtors from 
overzealous debt collectors with respect to social networking websites 
and other ``emerging'' technologies?
    Answer. In the FTC's Debt Collection Workshop Report, entitled 
``Collecting Consumer Debts: The Challenges of Change,'' the Commission 
stated that third party collectors (``debt collectors'') generally 
should be permitted to use all communications technologies, including 
new and emerging technologies such as social networking sites, to 
contact consumers. The FTC emphasized however, that debt collectors who 
use such new technologies to contact consumers must not engage in 
unfair, deceptive, or abusive acts and practices in violation of the 
Fair Debt Collection Practices Act (FDCPA), and creditors collecting on 
their own debts must not engage in unfair or deceptive acts and 
practices in violation of Section 5 of the FTC Act.
    While the FTC's report concluded that the FDCPA should be 
modernized to adapt to changes in new technology, current law clearly 
prohibits certain practices now. For example, a debt collector would 
violate the FDCPA if it posted information about a consumer's debt on 
the public portion of his or her page on a social networking site. 
Section 805(b) of the FDCPA generally prohibits collectors from 
revealing the existence of a debt to anyone other than the consumer, 
the consumer's spouse, or the consumer's attorney. Section 806(3) of 
the FDCPA also generally prohibits collectors from publicizing lists of 
consumers who allegedly refuse to pay debts. A collector rho posts 
information about a consumer's debt on the public portion of his or her 
page on a social networking site likely would violate one or both of 
these FDCPA provisions.
    The Commission intends to closely monitor the use of new 
technologies by debt collectors to make sure that they are complying 
with the law. With regard to social networking sites, in particular, 
the FTC has received very few complaints about collectors contacting 
consumers via social networking sites or posting information about 
consumers on these sites. State officials who enforce laws similar to 
the FDCPA likewise report an absence of debt collection complaints 
relating to social networking sites. Although there currently appear to 
be few consumer complaints about this topic, because communication 
through social networking sites is likely to continue to increase, the 
FTC will monitor this area to prevent collectors from violating the law 
in connection with using this method of communication to contact 

IV. Questions for the Record from Senator Boxer
    Question 1. Where does the FTC rank combating mortgage foreclosure 
scams on its priority list?
    Answer. Combating mortgage foreclosure scams is a top priority. We 
have brought cases against mortgage foreclosure rescue scams targeted 
at homeowners facing foreclosure, and are now seeing companies make 
deceptive loan modification offers to borrowers who are not yet in 
foreclosure. We are devoting substantial resources to law enforcement 
and consumer education initiatives in this area.

    Question 2. What are you seeing that is new with respect to 
mortgage scams?
    Answer. With the advent of the array of Federal-sponsored or 
supported loan modification programs, marketers are now touting loan 
modification programs in addition to the prevalent foreclosure 
assistance scams. Some loan modification firms recruit unemployed 
mortgage brokers who know the mortgage market and can impress borrowers 
with their technical knowledge.

    Question 3. Is additional legislation needed to address mortgage 
    Answer. The FTC has used its existing authority under Section 5 of 
the FTC to reach unfair or deceptive acts or practices in this area. 
The omnibus budget bill just passed by the Congress directs the 
Commission to initiate a rulemaking regarding mortgage loans. We 
anticipate using this new authority to address unfair or deceptive loan 
modification or foreclosure assistance practices, in addition to other 
practices related to mortgage loans.

    Question 4. The State of California has taken steps to discourage 
mortgage fraud by working to prohibit mortgage brokers and real estate 
agents from collecting fees before rendering services. Would the FTC 
support this type of legislation?

    Question 5. Have you found cases where attorneys are participating 
in mortgage foreclosure rescue fraud? Is there legitimate work being 
performed by either brokers or lawyers that would merit an advanced 
    Answer. In response to questions 4 and 5, I agree that advance fees 
charged by companies purportedly offering mortgage loan modification or 
foreclosure assistance services are extremely problematic as many 
consumers report that, after paying the fee, the companies do little or 
nothing to help consumers as promised. However, we know that some state 
laws, such as California's law, exempt attorneys from coverage of the 
advance fee ban which has led to some companies either adopting ``law 
firm'' in their name or affiliating with a law firm or lawyers to take 
advantage of the exemption. We are discussing the effect of these state 
laws with state enforcers and are exploring uses of the FTC's existing 
authority to determine the best way to address this practice.

    Question 6. Have you seen an increase in cases where homeowners who 
have not received Notices of Default are being targeted in mortgage 
    Answer. Yes, as discussed in response to Question 2, above, 
marketers are now touting loan modification services, particularly in 
light of both private and government-backed loan modification plans 
that are being widely publicized. Generally, based on our enforcement 
experience in mortgage foreclosure fraud, both homeowners in 
foreclosure as well as homeowners who were not in financial trouble 
have consistently been targeted.
    Notices of Default bring up a troubling problem. Some states have 
an expedited non judicial foreclosure procedures (e.g. Georgia) such 
that, when homeowners receive notice of default, it is almost too late 
to do anything to save the mortgage other than pay the entire arrearage 
plus fees. Promises of foreclosure assistance in those instances are 
particularly pernicious given that the chance of averting foreclosure 
is unlikely.

    I appreciate this opportunity to respond to your questions in 
connection with the FTC's recent testimony. If you or your staff have 
additional questions or comments, please contact me or have your staff 
contact Jeanne Bumpus, the Director of our Office of Congressional 
Relations, at (202) 326-2946.
                                      Pamela Jones Harbour,