[Senate Hearing 111-481]
[From the U.S. Government Publishing Office]
S. Hrg. 111-481
THE ECONOMY AND FRAUD:
PROTECTING CONSUMERS DURING
DOWNWARD ECONOMIC TIMES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND INSURANCE
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JULY 14, 2009
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
----------
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED ELEVENTH CONGRESS
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
MARK BEGICH, Alaska
Ellen L. Doneski, Chief of Staff
James Reid, Deputy Chief of Staff
Bruce H. Andrews, General Counsel
Christine D. Kurth, Republican Staff Director and General Counsel
Brian M. Hendricks, Republican Chief Counsel
------
SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND INSURANCE
MARK PRYOR, Arkansas, Chairman ROGER F. WICKER, Mississippi,
BYRON L. DORGAN, North Dakota Ranking
BARBARA BOXER, California OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida JIM DeMINT, South Carolina
CLAIRE McCASKILL, Missouri JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota JOHNNY ISAKSON, Georgia
TOM UDALL, New Mexico DAVID VITTER, Louisiana
C O N T E N T S
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Page
Hearing held on July 14, 2009.................................... 1
Statement of Senator Pryor....................................... 1
Statement of Senator Klobuchar................................... 2
Statement of Senator Wicker...................................... 49
Prepared statement........................................... 49
Statement of Senator Nelson...................................... 52
Statement of Senator McCaskill................................... 53
Article by Cybele Weisser, dated July 20, 2009, from Time
magazine, entitled ``Reverse Mortgages''................... 56
Witnesses
Hon. Chris Koster, Attorney General, State of Missouri........... 3
Prepared statement........................................... 5
David Vladeck, Director, Bureau of Consumer Protection, Federal
Trade Commission............................................... 7
Prepared statement........................................... 9
Charles Bell, Director of Programs, Consumers Union.............. 19
Prepared statement........................................... 21
Sally Greenberg, Executive Director, National Consumers League... 31
Prepared statement........................................... 34
Timothy J. Muris, Foundation Professor, George Mason University
School of Law and of Counsel, O'Melveny & Myers LLP............ 38
Prepared statement........................................... 40
Appendix
Hon. Tom Udall, U.S. Senator from New Mexico, prepared statement. 67
Response to written questions submitted by Hon. Tom Udall to:
Sally Greenberg.............................................. 67
David Vladeck................................................ 69
THE ECONOMY AND FRAUD:
PROTECTING CONSUMERS DURING
DOWNWARD ECONOMIC TIMES
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TUESDAY, JULY 14, 2009
U.S. Senate,
Subcommittee on Consumer Protection, Product
Safety, and Insurance,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:05 a.m. in
room SR-253, Russell Senate Office Building, Hon. Mark Pryor,
Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. MARK PRYOR,
U.S. SENATOR FROM ARKANSAS
Senator Pryor. I call this hearing of the Consumer
Protection, Product Safety, and Insurance Subcommittee of the
Senate Committee on Commerce, Science, and Transportation to
order.
I want to welcome all of our witnesses today and thank you
all for your testimony and your efforts in being here today.
We're here to receive testimony on the trends in consumer
frauds and scams related to the recession. This hearing will
examine a variety of frauds that are exploiting the financial
hardships of consumers during the current economic downturn.
We'll further explore what the FTC is, or should be doing, to
protect and insulate consumers from these trends.
For the last several financial quarters, I've noticed an
increase in the press reports on organized consumer fraud scams
as the recession has deepened. And on July 1, 2009, the Federal
Trade Commission announced a crackdown on scams playing on
consumer fears about the economy. It's called ``Operation
Shortchange.'' And the FTC has initiated 15 actions to stop
consumer fraud, such as Get Rich Quick and Easy Debt Relief
schemes. The FTC partnered with the Department of Justice,
which initiated 44 actions, 13 states and the District of
Columbia.
Clearly, consumers are at risk of being swindled during
this time, and they absolutely cannot afford to be bilked out
of their savings and make disastrous financial decisions due to
deceptive practices and fraud.
Our staff today has put together a great panel. We have the
Attorney General of the State of Missouri, Chris Koster. And
Chris is one of the great leaders in consumer protection from
around the country. And, General Koster, it's great to have you
here today, and thank you.
We also have David Vladeck, who's the Director of the
Bureau of Consumer Protection in the Federal Trade Commission.
We have Chuck Bell, who's the Director of Programs at Consumers
Union. We have Sally Greenberg, who is the Executive Director
of National Consumers League, and Tim Muris, the Foundation
Professor at George Mason University, former FTC Chairman. It's
great to have you all here.
What we're going to do is, we're going to do brief opening
statements. We know at least one of our Senators has to race
back to the Judiciary Committee here momentarily. And then
we'll ask the panel for their opening statements. And we're
going to keep ours to 5 minutes or less, and then we will get
right to the panel, and we'd ask the panel to keep theirs to 5
minutes, if possible.
Senator Nelson, do you have an opening statement?
And, by the way, Senator Wicker is on the way, and should
be here shortly, and he would like to make an opening
statement.
Senator McCaskill?
Senator McCaskill. I will just wait and ask questions.
Senator Pryor. Questions, great.
Senator McCaskill. Thank you, Mr. Chairman.
Senator Pryor. Senator Klobuchar, I know you need to run
back to the Judiciary Committee. Would you like to make an
opening statement?
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Well, yes, I would. And thank you so
much, Mr. Chairman, for holding this important hearing at this
difficult economic time. When I was a prosecutor, something
that a number of us have done up here, one of the things that I
would always notice was, when the economic times were tough,
you'd see more and more scam artists. The other interesting
part was, sometimes people would have been committing scams for
years, but it was only when the economy went down that it was
discovered because people started looking at their bank
accounts or they couldn't make mortgage payments. So, you
actually have this double whammy of people starting to commit
more fraud, and then you also have fraud being discovered that
maybe had been going on for years. So, I think it's very
important that we focus on this.
I did want to start out, Mr. Vladeck, by commending the FTC
for the work that you've done in a case that has been brought
in Minnesota involving a violation of antitrust laws with a
drug company that actually came out of Minnesota. In this case,
the prices for a little baby's heart drug were jacked up 18
times simply because the company could and because they had the
patent for the competing drug. It was an outrageous case. And
at a hearing just like this, I held up a little vial and said
to the now-Chairman of the FTC, ``Well, what should we do about
this?'' I'm brand new at this job, and it just seems
outrageous. And within a few months, the FTC brought a major
fraud action in Federal court in Minnesota. So, I did want to
mention that we're very appreciative of those efforts.
Also, the panel here talks about fraud efforts, I hope
you'll focus some on, of course, the mortgage fraud issue and
anything else that can be done. I know the Administration has a
proposal to set up a special consumer agency to deal with some
of the fraud with financial documents. And, while I may not be
able to stay for questions, I'll submit those for the record
and would like the panel's reaction to that.
I've done a bill that Representative Ellison is carrying in
the House that's very much based on the Minnesota model, what's
worked with mortgage fraud, which is called the Fairness for
Homeowners Act. And I hope you'll look at that, as well.
So, mostly I hope to stay as long as I can. We do have that
other little hearing going on in the other building. But, I
want to thank you for your efforts. I think now is the time,
more than any, that we have to make sure we're enforcing these
laws because people are really suffering out there, and
predators prey on them when there's not enough money to go
around.
Thank you very much.
Senator Pryor. Thank you, Senator Klobuchar. We will be
joined shortly by at least a couple of other colleagues, it
looks like, and maybe even more than that, depending on who's
able to get away from their other committee obligations.
What I'd like to do now is go through the panel. I'm going
to take it a little bit out of order. Since we have a statewide
elected official here, I wanted to recognize General Koster
first and give him 5 minutes to make his opening, and then I'll
come back to you, Mr. Vladeck, and go down the line.
General?
STATEMENT OF HON. CHRIS KOSTER, ATTORNEY GENERAL, STATE OF
MISSOURI
Mr. Koster. Thank you, Mr. Chairman and Members of the
Committee.
I'll focus my comments today on what we are seeing in
Missouri of particular interest and threats to our citizens.
And the threat is this. Companies and individuals who
specialize in servicing or preying upon consumers who have a
significant credit card debt or unsustainable mortgage are
running amuck in our state.
Foreclosure consultants and debt settlement firms claim to
consumers that they can cut principal in half, reduce monthly
payments by hundreds of dollars, or eliminate debt altogether.
And they claim that this process can be virtually pain free.
All that's required of a consumer is a few thousand dollars in
up-front fees so that the companies may utilize their special
expertise. Consumers in our state are led to believe these
settlement companies know the secrets of negotiating away a
consumer's debt.
Unfortunately, the real secret here is that these companies
are offering services that consumers can largely do for
themselves or that nonprofit counselors will perform free or
for a modest fee. Moreover, one of the primary strategies
relied upon by these debt settlement and mortgage companies is
to convince consumers to stop payments altogether and to stop
communications with his or her creditors, which, of course,
leads to long-term damage to the consumer's credit rating and
hundreds, if not thousands, of dollars in additional debt and
fees. In the end, to the extent these companies provide any
service at all, debt settlement and mortgage modification
companies often offer a service that leaves consumers no better
off than where the consumer started. Real people are being
harmed by these companies.
In Missouri, our complaint unit has seen a sharp increase
in the volume of complaints related to foreclosure rescue
scams. In 2007 and 2008 combined, our office had a total of 25
complaints. However, in just the first 6 months of 2009, we've
already received more than three times as many complaints as we
saw in 2007 and 2008 combined. For debt settlement complaints,
there has been a similar spike.
Consumers are being lured by these debt settlement
companies and foreclosure consultants by outrageously deceptive
advertising techniques, including techniques that seek to co-op
the authority of the Federal Government. Tens of thousands of
direct-mail pieces are being distributed that purport to
distribute money from the Economic Stimulus Act of 2008. These
advertisements typically are replete with federal seals from
the Housing and Urban Development or the Federal Housing
Administration and logos that generally appear to be from the
Federal Government. Eagles and flags abound on these
advertisements. Unfortunately, too many consumers are being
fooled by this, and those that are fooled are in the most
desperate financial straits.
Where do we go from here? I would raise for your
committee's consideration the following ideas.
First, most attorney generals would, I believe, support a
federal ban on up-front fees related to mortgage rescue and
debt settlement firms. In Missouri, we've seen so many examples
of settlement companies that either never earn the fees that
they charge up front or simply pocket the up-front fee and
disappear altogether.
Second, do not shy away from applying the same up-front fee
restrictions to lawyers and law firms who specialize in debt
settlement work, although a caveat may need to be drawn around
certain bankruptcy court practices. What is good for the goose
is ultimately good for the gander.
Third, I would continue to provide the FTC with additional
tools against settlement companies that claim the imprimatur of
the Federal Government. The use of government symbols and logos
in ads, the strong inference that these solicitations are
coming from HUD or from the Federal Housing Administration, or
the claim that the solicitation has been sent directly as a
result of the Economic Stimulus Act, should be stopped. These
advertisements are gross deceptions and should be punished as
such.
Finally, continue to restrict advertisements and
solicitations around reverse mortgages, and particularly sale-
leaseback arrangements. In Missouri, advertisements for these
products are increasingly frequent and increasingly bold.
I encourage the Committee to consider bright-line
enforcement measures. And I thank you for your time today.
[The prepared statement of Mr. Koster follows:]
Prepared Statement of Hon. Chris Koster,
Attorney General, State of Missouri
Thank you, Mr. Chairman,
I appreciate your bringing attention to the problems we are seeing
across the Nation from scams and fraudulent activities borne directly
from the recession. I will focus my comments today on what we in
Missouri see as a particular threat to people impacted by the economic
downturn--companies and individuals who specialize in servicing, some
might say preying on, consumers who have significant credit card debt,
and/or an unsustainable mortgage.
Foreclosure Consultants and Debt Settlement Firms offer to cut
principal in half, reduce monthly payments by hundreds of dollars, or
eliminate debt altogether. And, they claim the process is virtually
pain free.
All that is required is a few thousand dollars in up-front fees so
they may utilize their ``expertise'' to ``help'' the consumer--as they
supposedly know the ``secrets'' to negotiating with the credit card
companies.
The unmentioned secret is that these companies are offering a
service that the consumer could do for himself; or that non-profit
credit counselors will perform for free or a modest fee.
And these companies' strategies rely on the consumer stopping all
payments to and communications with his or her creditors.
It is this final aspect that leads to long-term damage to the
consumer's credit rating and hundreds or thousands of dollars in
additional fees. In fact, to the extent that these companies provide
the service at all, they often obtain a debt settlement or mortgage
modification that is no better than where the consumer started, partly
because of these additional fees and interest.
Real people are being harmed by these companies. The Complaint Unit
in my office has seen a sharply increasing volume of complaints
regarding foreclosure rescue scams: from 16 complaints in 2007 to 9
complaints in 2008 to 84 complaints thus far in 2009.
For debt settlement, there has been a similar spike: from 78
complaints in 2007 to 109 complaints in 2008 to 105 complaints thus far
in 2009.
To further complicate matters, both debt settlement firms and
foreclosure consultants are using deceptive advertising. Much of what
we are seeing seeks to co-opt the authority of the Federal Government
and these advertisements are ubiquitous.
Thousands of direct mail pieces are distributed every day across
the country offering debt settlement or foreclosure relief purporting
to use money from the ``Economic Stimulus Act of 2008 [or 2009].'' The
references are to Federal programs that have nothing to do with the
consumer targeted--for example, the Economic Stimulus Act of 2008
increased the size of loans that the Federal Housing Administration
could insure; but this adjustment had nothing to do with whether a
person with a $150,000 loan could refinance.
The advertisements typically are replete with Federal seals from
the Department of Housing and Urban Development and the Federal Housing
Administration, and logos that generally appear to be from the Federal
Government. Eagles and flags grace these advertisements.
In fact, I personally received an offer for enrollment in a
``Payment Reduction Program'' that was ``created in conjunction with
the Government Economic Stimulus Act of 2008.'' The advertisement
looked like it came from the Federal Government in that it was a ``Form
008-S'' and the subject line read ``H.R. 5140 Government Economic
Stimulus Act of 2008.''
Luckily my University of Missouri law school education taught me to
examine the fine print, which was located at the far bottom of the
letter and revealed the letter to be an ``advertisement'' and that the
offer was not ``being made by any agency of the government.''
Unfortunately, too many consumers are fooled by these tactics.
We could afford to be more tolerant of these schemes if they didn't
prey on those with so few resources.
Missouri takes seriously enforcement of laws that were enacted to
address these issues: the Missouri Merchandising Practices Act, the
Missouri Foreclosure Consultant Act, and the Missouri Credit Services
Organization Act. Our state's ban on up-front fees for foreclosure
consultants and credit repair firms represents a particularly effective
enforcement tool.
Missouri polices all manner of fraud, but financial fraud has
become a priority, and for which Missouri has Zero Tolerance.
Missouri has a foreclosure consultant statute that, among other
things, makes it illegal for a foreclosure consultant to take an up-
front fee. This ban has been the most effective tool in fighting
unscrupulous foreclosure consultants.
These services are often only profitable if the company charges a
large up-front fee. A ban on such fees not only discourages companies
with suspect motives from entering the market, but makes proving the
enforcement action quite easy, thereby enabling swift injunctive
relief.
In addition to several ongoing investigations, the Attorney
General's office recently filed the following case:
Gateway Mortgage Modifications, LLC: The Attorney General's
Office filed suit May 26, 2009, against this company for
charging up-front fees for foreclosure relief and mortgage
modifications. In addition, Gateway did not deliver the
services promised, falling short on the promised interest rate
reduction for mortgage modifications it did obtain (in
violation of the Merchandising Practices Act). Gateway had
about 200 clients at the time the suit was filed. A preliminary
injunction has been agreed to and Missouri is seeking
restitution for consumers and possible civil penalties.
Missouri also has a credit services organization statute that makes
it illegal for such individuals to accept an up-front fee. Again, this
is an effective way to police the credit repair markets because it
discourages bad actors from entering the market and is an easily proven
violation.
However, Missouri is also pursuing a deceptive and unfair practices
theory under the Merchandising Practices Act with respect to debt
settlement firms' advertisements and instruction to consumers not to
pay their creditors while the company negotiates with those creditors.
In addition to several ongoing investigations, the Attorney
General's Office recently filed the following case:
Credit Solutions of America, Inc. On May 28, 2009, Missouri
filed suit against Credit Solutions of America, Inc. for
violations of the Missouri Merchandising Practices Act and the
Missouri Credit Services Organization Act. Credit Solutions
claims it can lower consumers' monthly payment, resolve debts
for 50 cents on the dollar, and get consumers out of debt
within 3 years. In addition, Credit Solutions relies on
consumers not paying their creditors during the negotiation.
Finally, Credit Solutions failed to comply with several
portions of the Credit Services Organization Act, including the
ban on up-front fees. Missouri joins New York and Texas in
filing suit against Credit Solutions for similar practices.
Missouri has used its Merchandising Practices Act to crack down on
the deceptive use of Federal Government logos and programs. Missouri
has also targeted companies making misleading references to consumers'
lenders. Missouri has investigated more than a dozen companies, reached
settlement with several, and brought two cases:
Goldstar Home Mortgage: The Attorney General's Office filed
suit April 20, 2009 against this company, which sent direct-
mail letters to consumers with the consumers' own bank name at
the top of the letter, making it appear that the consumers'
bank was encouraging them to refinance.
Oxford Lending Group: The Attorney General's Office filed
suit April 20, 2009 against this company, which made deceptive
representations regarding the ``Economic Stimulus Act of 2008''
in its mailing, to appear that consumers had a special
opportunity to refinance, and using the HUD (U.S. Department of
Housing and Urban Development) label and name to mislead the
recipient that the letter was related to the Federal
Government.
But, the most powerful tool to combat the appeal of the schemes is
education.
The consumer complaint hotline, along with the Attorney General's
website, is where Missouri consumers can let my office know about
unscrupulous practices. In addition to a mediation procedure whereby
investigators seek to resolve individual complaints, the complaint
hotline allows Missouri to stay on the leading edge of what scams are
out there and address them quickly.
Similarly, the Consumer Corner Blog on the Attorney General's
website allows the Attorney General's consumer protection division to
alert consumers as to what scams are out there and what they can do
about them.
My website provides links that allow consumers to sign up for the
no call list, which precludes most telemarketers from calling the
consumer. This can prevent some scammers from ever pitching their
product. The Missouri No Call List is a model for other states.
Further, my website has, on its front page, an Action Center, which
has short-cut buttons for several categories of complaints, including
Mortgage Fraud, Consumer Complaints, No Call, and Search of Complaints
against Businesses. These buttons reflect some of the priorities of the
Missouri Attorney General's office in fighting scams; in fact, the
buttons placed in the action center reflect what Missourians are
telling the Attorney General regarding priorities for enforcement.
In addition, consumers can search businesses on my website to see
whether those businesses have received any consumer complaints. We also
publicize scams with the news media, in an attempt to get out the
warnings as broadly as possible.
Finally, particularly given the foreclosure crisis, consumers need
to know what help is available for free. For those in a distress
position, the Federal Government has a website,
www.makinghomeaffordable.gov, which can answer questions regarding
refinancing or loan modifications. And, the Better Business Bureau or
my office may be able to help direct the consumer to legitimate
organizations that can help them with mounting debt or an adjusting
mortgage.
In my 6 months as Missouri's Attorney General, I have been
continually amazed at the lengths individuals will go in an attempt to
scam innocent people out of their money. I am certain it has always
been so; I saw it in my 10 years as a county prosecutor. But these
tough economic times, with desperate consumers needing help and an
array of new government programs, seem the perfect climate for frauds
and scams to thrive. False hope is notoriously easy to provide.
I encourage your committee to consider any additional enforcement
measures at the Federal level to make people using these fraudulent
tactics think twice, and to give us as strong of tools as possible to
go after them once they have perpetrated their scams. Thank you for
your time.
Senator Pryor. Thank you, General.
Next, we'll have David Vladeck, Director of Bureau of
Consumer Protection, Federal Trade Commission.
Mr. Vladeck?
STATEMENT OF DAVID VLADECK, DIRECTOR, BUREAU OF CONSUMER
PROTECTION, FEDERAL TRADE COMMISSION
Mr. Vladeck. Good morning, Chairman Pryor, Ranking Member
Wicker, and Members of the Subcommittee. I'm David Vladeck. I'm
the new Director of the Bureau of Consumer Protection at the
Federal Trade Commission. I appreciate the opportunity to
appear before you this morning.
We are doing what we can to protect consumers from fraud
during this economic downturn. I want to make clear that,
although the written testimony that we've submitted reflects
the views of the Commission, my oral remarks and any remarks I
make in response to questions set forth my own views and are
not necessarily those of the Commission.
The story nationwide is no different than the one in
Missouri. Rising unemployment, shrinking credit, record-setting
foreclosures, and disappearing retirement accounts are causing
tremendous anxiety among American consumers about their ability
to make ends meet. The downturn in the economy has had a severe
impact on American consumers. The unemployment rate now hovers
around 10 percent, and the national foreclosure rate is now
over 12 percent. To con artists, today's challenging economy
presents a golden opportunity to exploit consumers' fears and
bilk them out of money. The FTC is moving aggressively to stop
them.
For instance, as General Koster mentioned, the troubling
economic times have given rise to unscrupulous home rescue
companies preying on those at risk of losing their homes
through foreclosure. In the last year alone, the FTC has
brought 14 cases to protect consumers from mortgage, loan
modification and foreclosure rescue scams. There is more to
come. We are stepping up our efforts to enforce the law against
opportunists victimizing people facing foreclosure. Tomorrow,
the FTC will announce another sweep, in addition to Operation
Short Change, this one focusing, in part, on mortgage rescue
scams in a coordinated Federal and State law enforcement
effort.
The FTC's mission goes beyond foreclosure fraud. Thousands
of people have been swindled out of millions of dollars by
scammers exploiting the economic downturn. The scams promise
jobs, access to free government money, or the chance to earn
money working from home. These promises deliver nothing. They
raise people's hopes and then drive them deeper into the hole.
Two weeks ago, as the Chairman mentioned, we announced
``Operation Short Change,'' a law enforcement sweep we
undertook, along with the Department of Justice and 14 states,
including, I'm proud to say, the State of Missouri, involving
over 120 law enforcement actions nationwide. The FTC filed 15
cases against scams that preyed on the unemployed, scams that
exploited the entrepreneurial spirit of individuals looking to
start their own businesses, scams that used a false promise of
free government grants, and scams that promised to deliver much
needed creditor debt relief, but instead delivered more debt.
The perpetrators of these frauds used the telephone, the
Internet, the television, and print ads to deceive people about
what they could do for them, what doors they could open, and
how much they could make, and they did it by extracting money
from their consumers' accounts in a variety of ways.
I want to give you just three examples of what we have
alleged in some of our complaints.
Job Safety USA promised job hunters maintenance and
cleaning jobs, but it was the defendants who took the consumers
to the cleaners, tricking them to pay about $100 for a
credential that would entitle them to a job. The credential was
a sham and the jobs did not exist.
Grants For You Now seized on the stimulus package as the
basis of its economic model. It promised access to, or
expertise in, getting free government grants to pay personal
expenses. It lied, plain and simple. I assure you, there is no
free government stimulus money to pay down personal debts or to
remodel homes.
Mutual Consolidated Savings added insult to injury by using
invasive robocalls, which themselves are illegal, to offer
phony lifelines to people hoping to reduce their debt burden by
negotiating lower interest rates with their creditors.
Other defendants in Operation Short Change trick people
into disclosing their personal financial information, resulting
in months of unauthorized charges, or stole money from online
consumers through unauthorized charges and debits for supposed
membership service.
The Commission moved aggressively in these cases, seeking
and obtaining ex parte temporary restraining orders with asset
freezes, where possible. We are seeking a permanent halt to
each of these operations, as well as the return of these ill-
gotten gains to the people who were fleeced.
Now, at the FTC, we're about tough enforcement, but we
would rather have no one fall victim to these scams in the
first place. A critical component of our mission is to reach
out to consumers and to warn them about these scams. An
educated consumer is our first line of defense.
We have produced a video, and I'd like to show you a
portion of it now, which features a former telemarketer of a
fraudulent business opportunity explaining exactly how he was
able to lure people to part with their money. Here's a preview:
[Video presentation.]
Mr. Vladeck. I should point out that Mr. Vitale was
convicted and spent over 3 years in jail for his telemarketing
fraud.
We're grateful to the Committee for its continued support
of our work and our mission. We're doing the best we can with
the tools that are available to us. With greater resources and
stronger statutory authority, we could do even a better job in
protecting American consumers like Beverly Stewart.
Beverly Stewart is a single mother of two who is out of
work and determined to find a job. She fell prey to an
employment scam. Ms. Stewart had the courage to come forward
and report the scam to the Federal Trade Commission, and our
investigation into Job Safety USA, one of the scams I just
mentioned, was launched because of Ms. Stewart's complaint.
Here's her story, in her own words:
[Video presentation.]
Mr. Vladeck. Informed consumers may be our best line of
defense, but consumers who have been scammed, who have the
courage to come speak to us and report these violations are our
best friends. We would not have been able to initiate our
enforcement proceeding against Job Safety USA without
complaints like Ms. Stewart's.
Thank you very much for giving me this opportunity to
testify before you this morning. I'd be glad to answer any
questions you might have.
Thank you.
[The prepared statement of Mr. Vladeck follows:]
Prepared Statement of David Vladeck, Director,
Bureau of Consumer Protection, Federal Trade Commission
Chairman Pryor, Ranking Member Wicker, and members of the
Subcommittee, I am David Vladeck, Director of the Bureau of Consumer
Protection at the Federal Trade Commission (``Commission'' or
``FTC'').\1\ I appreciate the opportunity to appear before you today to
examine the types of fraud the Commission has seen during the economic
downturn, describe the Commission's anti-fraud law enforcement program,
and recommend changes in the law and resources the Commission needs to
enhance the FTC's ability to protect consumers. During these difficult
economic times, the Commission is on the job, enforcing the law, and
working with a heightened urgency. This testimony will highlight
Operation Short Change, a law enforcement sweep the Commission recently
announced that has targeted entities defrauding American consumers hit
by the economic downturn.
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\1\ The views expressed in this statement represent the views of
the Commission. My oral presentation and responses to questions are my
own and do not necessarily reflect the views of the Commission or any
individual Commissioner. Commissioner Kovacic dissents from portions of
the testimony explained in notes 4 and note 43.
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Job losses, foreclosures, and dwindling retirement accounts are
forcing increasingly more Americans to search for ways to make ends
meet. Opportunistic fraudsters have quickly adapted their schemes and
sales pitches to take advantage of consumers during the economic
downturn, with some capitalizing on the economic stimulus package. They
use come-ons that offer the lure of free government grant money,
guaranteed job placement, investments promising recession-proof income,
access to credit cards, or debt relief services. These and other
schemes have defrauded hundreds of thousands of consumers out of
millions of dollars, and have been the focus of the Commission's
ongoing law enforcement program \2\ and consumer outreach efforts. Just
2 weeks ago, the Commission announced Operation Short Change,\3\ a law
enforcement sweep targeting fraudulent schemes designed to profit from
the economic downturn. Together with fourteen state partners, the
Department of Justice, and other agencies prosecuting criminal law
violations, the Commission announced more than 120 law enforcement
actions.
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\2\ The FTC has broad law enforcement responsibilities under the
Federal Trade Commission Act (``FTC Act''), 15 U.S.C. 41, et seq. The
statute provides the agency with broad jurisdiction over most economic
sectors. Certain entities or activities, however, such as banks,
companies engaged in common carrier activity, and companies engaged in
the business of insurance, are wholly or partly exempt from FTC
jurisdiction. In addition to the FTC Act, the agency has enforcement
responsibilities under more than 50 other statutes and more than 30
rules governing specific industries and practices.
\3\ Press Release, Federal Trade Commission, FTC Cracks Down on
Scammers Trying to Take Advantage of the Economic Downturn (July 1,
2009), available at http://www.ftc.gov/opa/2009/07/shortchange.shtm.
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Today's testimony highlights the agency's current experience with
and efforts to combat fraud exploiting the economic stimulus program
and other fraudulent schemes preying on financially-distressed
consumers. The testimony also describes the Commission's anti-fraud law
enforcement program, with an overview of the tools and strategies the
Commission uses to further its critical consumer protection mission.
Finally, the Commission makes four important recommendations to improve
the Commission's ability to protect consumers from scams and deter
would-be fraudsters, including: (1) increasing resources committed to
tackling fraud; (2) authorizing the agency to employ notice and comment
rulemaking procedures for unfair or deceptive acts and practices under
the FTC Act; (3) expanding the FTC's authority to seek civil penalties
in its own right in Federal court; and (4) giving the FTC the authority
to challenge practices that aid or abet violations of the FTC Act.\4\
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\4\ Commissioner Kovacic dissents from the Commission's endorsement
of authority to use, for promulgating all rules respecting unfair or
deceptive acts or practices under the Federal Trade Commission Act, the
notice and comment procedures of the Administrative Procedure Act.
While other agencies have the authority to issue significant rules
following notice and comment procedures, the Commission's rulemaking
authority is unique in its range of subject matter (unfair or deceptive
acts or practices) and sectors (reaching across the economy, except for
specific, albeit significant, carve-outs). Except where Congress has
given the Commission a more focused mandate to address particular
problems, beyond the FTC Act's broad prohibition of unfair or deceptive
acts or practices, Commissioner Kovacic believes it prudent to retain
procedures beyond those encompassed in the APA. However, he would be
willing to consider whether all the procedures currently required to
issue, repeal, or amend these rules are necessary.
Commissioner Kovacic also dissents from the Commission's
endorsement of across-the-board civil penalty authority. The existing
consequences attendant to a finding that an act or practice is unfair
or deceptive under the FTC Act include an administrative order (whose
violation would then subject the respondent to civil penalties) or a
court-issued injunction (which can contain such equitable remedies as
redress and disgorgement). In his view, these are generally appropriate
remedies, and they are consistent with the goal of developing FTC law
to develop new doctrine and to reach new and emerging problems. The
routine availability of civil penalties, even if subject to a scienter
requirement, would in his view risk constraining the development of
doctrine, much as judicial concerns about the availability of private
litigation with mandatory treble damages appear to be constraining the
development of antitrust doctrine. See, e.g., Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 558-59 (2007). Commissioner Kovacic would prefer
that Congress grant more targeted authority to seek civil penalties,
particularly in matters where existing remedies are likely to be
inadequate. See Prepared Statement of the Federal Trade Commission on
the Commission's Work to Protect Consumers and to Promote Competition,
and on a Bill to Reauthorize the Commission before the Senate Committee
on Commerce, Science, and Transportation, Apr. 8, 2008, available at
http://www.ftc.gov/os/testimony/P034101reauth.pdf.
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I. Financial Distress Fraud
The downturn in the economy has had a severe impact on American
consumers. The unemployment rate in the United States is now 9.4
percent,\5\ and the national foreclosure rate is over 12 percent.\6\
With Operation Short Change, the Commission struck back at scams that
are targeting consumers during the current economic downturn. The
Commission's recently filed cases fall into five broad categories of
familiar fraud: (1) phony income-generating opportunities, (2) job
placement scams, (3) government grant scams, (4) credit-related scams,
and (5) mortgage loan modification scams. The Commission's program to
combat these types of fraud centers around its enforcement of Section 5
of the Federal Trade Commission Act (``FTC Act''), which prohibits
unfair or deceptive acts or practices affecting commerce. 15 U.S.C.
45(a).
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\5\See Bureau of Labor Statistics Data (June 5, 2009), available at
http://www.bls.gov/news.release/empsit.nr0.htm.
\6\ See Mortgage Bankers Association, Delinquencies and
Foreclosures Continue to Climb in Latest MBA National Delinquency
Survey (May 28, 2009), available at http://www.mortgage
bankers.org/NewsandMedia/PressCenter/69031.htm. According to the
Mortgage Bankers Association's first quarter 2009 National Delinquency
Survey, 12.07 percent of loans are either in foreclosure or delinquent
by at least one payment. This is an increase over fourth quarter 2008,
and is the highest rate ever recorded in the MBA national delinquency
survey.
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A. Phony Job Placement Schemes
In a time of economic distress with many Americans out of work,
con-artists see the opportunity to take advantage of those seeking
simply to earn an honest day's wage. Recognizing that out of work
Americans can least afford to fall victim to scams, the Commission
aggressively pursues employment scams.\7\ As part of Operation Short
Change, the Commission charged that Wagner Borges, operating as Job
Safety U.S.A., targeted consumers who were searching for jobs as
janitors and/or maintenance workers, using classified advertisements
online and in newspapers.\8\ The complaint alleges that the defendant
told job seekers that the only thing standing between them and a new
job making ``$11-$15/hour + benefits'' was a five-digit ``certificate
registration number'' or ``CRN.'' In truth, the CRN was a ruse used by
Borges, allegedly to trick consumers to pay him $98 for a worthless
credential that did not lead to the job described. The Commission
sought and obtained an ex parte temporary restraining order with an
asset freeze to put an immediate end to Borges's scheme.\9\
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\7\ The Commission has actively pursued cases against fraudsters
who falsely represented that they were affiliated with or endorsed by
the U.S. Postal Service, and that postal jobs were available in areas
where their ads appeared. In one recent case filed against U.S. Work
Alliance, the Commission charged a nationwide marketing operation with
allegedly violating Federal law by deceiving consumers into buying $120
to $140 worth of materials they thought would help them get Federal
postal jobs. FTC v. U.S. Work Alliance, Inc., No. 08-CV-2053-WSD (N.D.
Ga. June 19, 2008) (complaint).
\8\ For a compelling illustration of how this type of scam harms
consumers, see the statement made by Beverly Steward, a consumer who
spoke during the FTC's press conference announcing Operation Short
Change, available at http://htc-01.media.globix.net/COMP008760MOD1/ftc_
web/FTCindex.html#July_1_09.
\9\ When the Commission discovers an entity is engaged in outright
fraud, it uses aggressive law enforcement tools to bring the
perpetrators to justice. After assembling a case against a suspected
fraud, the Commission often applies to a Federal district court for an
ex parte temporary restraining order to halt the deceptive conduct and
an asset freeze to preserve the possibility of returning money to
consumer victims. Indeed, in many of the telemarketing and business
opportunity cases the Commission has brought, such as those described
herein, staff has sought and Federal courts have entered temporary
restraining orders or preliminary injunctions.
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B. Fraudulent Income-Generating Opportunities: Work-At-Home,
Investment, and Business Opportunities
Most Americans are not looking for ways to get rich quick, but in
times of economic distress, they often are looking for ways to
supplement their income. Opportunists are quick to exploit the
entrepreneurial spirit of Americans by hawking expensive business
opportunities that purportedly will generate significant earnings.
Typical business opportunity fraud involves the sale of vending machine
routes or distributorships; medical billing scams; envelope stuffing
scams; jewelry or craft assembly; and countless others. To convince
people that the opportunity is worth the investment, hucksters
sometimes give prospective purchasers the names of shills--phony
references of prior customers who are purportedly experiencing
significant success with the business opportunity.
The economic downturn has presented opportunities for those who
would seek to capitalize on the misfortune of Americans who have seen
their jobs disappear or their incomes slide. As part of Operation Short
Change, the FTC sued two fraudulent schemes using the home foreclosure
crisis as fodder for their scams. First, the Commission alleges that
Family Products, LLC runs infomercials pitching money-making programs
that are supposedly easy for consumers to replicate.\10\ In one of
these, the John Beck Free and Clear Real Estate System, defendants
mention the high foreclosure rate our country has experienced,
exploiting the crisis to pitch a program for acquiring abandoned
properties for ``pennies on the dollar.'' Like many business
opportunity scams, the defendants allegedly used false testimonials to
convince consumers that they could earn substantial sums of money using
their programs. The Commission's June 30 complaint aims to halt the
scheme and return money to consumers, who paid more than $300 million
for the defendants' fraudulent money-making opportunities.
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\10\ FTC v. John Beck Amazing Profits, LLC, No. 09-CV-4719 (C.D.
Cal. June 30, 2009) (complaint).
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Second, the FTC sued an Arizona-based scam taking advantage of
consumers, including unemployed real estate agents and mortgage brokers
trying to earn a living, and homeowners at risk of foreclosure.\11\ The
complaint filed against Freedom Foreclosure Prevention Services, LLC
(``Freedom Foreclosure'') and its principals alleges that they falsely
claimed that business opportunity purchasers--after paying a fee of
approximately $1,500--could easily earn $10,000 per month by referring
homeowners for Freedom Foreclosure's loss mitigation services. In fact,
the Commission charged, homeowners who turned to Freedom Foreclosure
for help routinely lost their homes to foreclosure, and none of Freedom
Foreclosure's 2,500 consultants earned the income they were promised
for purportedly ``helping'' consumers out of foreclosure. On June 1, a
Federal district court granted the Commission's request for an ex parte
temporary restraining order with a freeze on the defendants' assets,
and the Court later entered a stipulated preliminary injunction.
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\11\ FTC v. Freedom Foreclosure Prevention Services, LLC, No. 09-
CV-1167-PHX-PJM (D. Ariz. June 1, 2009) (complaint).
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Other investment scams, such as the one the Commission alleged
against an entity using the name Google Money Tree, simply lure
consumers into divulging their financial account information. Google
Money Tree, the FTC alleges, advertised a low-cost kit ($3.88) that
supposedly would enable consumers to earn more than $100,000 in 6
months.\12\ The defendants allegedly failed to disclose adequately that
the small fee triggered recurring $72.21 monthly charges for consumers.
The Commission charged that by prominently displaying the Google name
and logo, and disclosing only a nominal charge, the defendants
convinced consumers that submitting their credit card or debit card
account information would be a low risk venture. In truth, the
complaint alleges, the defendants' supposed kit does not generate
substantial earnings, defendants have no affiliation with Google, and
they buried material terms and conditions of their offer in fine print
and inconspicuously-placed hyperlinks. On June 23, a Federal court
granted the FTC's ex parte motion for a temporary restraining order to
halt the scheme and freeze the defendants' assets.
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\12\ FTC v. Infusion Media, Inc., No. 2:09-CV-01112-RCJ (June 22,
2009) (complaint).
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C. Government Grant Scams
Con-artists have sought to exploit the American Recovery and
Reinvestment Act of 2009 by selling purported access to or expertise in
obtaining free government grants. The FTC searched the Internet to
identify those websites promoting ways to obtain a piece of the
economic stimulus package, and in March 2009, held a press conference
to warn consumers to beware of such scams.\13\ The event was highly
successful at generating media coverage that reached consumers, as the
story was picked up by national and regional media outlets. The FTC
warned specifically of websites promising government grant money for
any reason, even paying bills, and those that brazenly use the image of
President Obama to add legitimacy to their misrepresentations. These
scams ask consumers simply to provide personal information or send a
very small payment to get information on how to get free government
grant money. But, any financial account information in the hands of
scam artists can be very costly for consumers. The Commission alerted
consumers that whatever a website may say, the Federal Government does
not award grants to individuals to pay personal expenses or bills, and
the official source for information on available Federal Government
grants is at www.grants.gov, a free website operated by the U.S.
Department of Health and Human Services.
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\13\ Press Release, Federal Trade Commission, FTC Warns Consumers
About Economic Stimulus Scams (March 4, 2009), available at http://
www.ftc.gov/opa/2009/03/stimulusscam.shtm.
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As part of the Commission's efforts, it reached out to industry for
help in pulling down ads for such scams. At our request, major online
ad networks have agreed to screen out ads touting the economic stimulus
as providing grant opportunities for individual consumers. For
instance, after being contacted about this problem, Facebook
voluntarily pulled off the offending ads. We want to commend these
networks for their help. The Commission also issued an alert to
consumers to beware of scams relating to the economic stimulus package,
stating particularly that the promise of stimulus money in return for a
fee or financial information is always a scam.
With Operation Short Change, the Commission aggressively targeted
and pursued con-artists making bogus offers of free government grant
money. After a painstaking investigation, on June 25, the Commission
alleged that defendants operating as ``Cash Grants Institute'' \14\
placed robocalls containing prerecorded messages to consumers
throughout the United States, advertising ``free grant money available
from Federal, state and local governments.'' The complaint describes
the numerous techniques the defendants allegedly used to create a false
aura of legitimacy, such as placing pre-recorded calls purportedly
coming from the Cash Grant Institute in Washington, D.C., using a
website which includes images of President Obama and the U.S. Capitol
building, and brazenly advertising a website as the ``source of free
money from the government.'' The Commission charged that the defendants
did not provide grants; instead, they just transferred consumers to
other websites purportedly providing grant-related services.
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\14\ FTC v. Paul Navestad, No. 09-CV-6329T (W.D.N.Y. June 25, 2009)
(complaint).
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Other scams wave the promise of free government grant money as a
lure to obtain consumers' financial account information and initiate
recurring charges. In a case filed June 23, again, after an intensive
investigation, the Commission alleged that website operators, using
names like Grants for You Now,\15\ represented that consumers who
purchased their product would be likely to receive a government grant.
One website, ornamented with the image of a suitcase bursting with
money and boldly identifying specific Federal Government grants for
housing and education, proclaimed that ``anyone who needs money for''
paying off debt, home repair, and personal expenses can ``benefit.''
Instead, the complaint charges, consumers who purchased the defendants'
software program unwittingly enrolled in a negative option continuity
program, subjecting them to recurring monthly charges of nearly $100.
In both cases, the Commission acted aggressively to put an immediate
end to the fraud, seeking and obtaining ex parte temporary restraining
orders and asset freezes from Federal district courts.
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\15\ FTC v. In Deep Services, Inc., No. EDCV-09-1193-SGL (PGWx)
(June 22, 2009) (complaint).
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D. Credit-Related Frauds
With the tightening of credit in the marketplace, telemarketers and
online sellers of advance-fee credit cards are aggressively targeting
consumers. Consumers with poor credit histories are enticed with offers
guaranteeing loans or general-purpose credit cards regardless of their
credit histories. Often, the sales pitch includes false claims that the
seller reports to the major credit bureaus and that the credit program
will help the consumer build his credit. Consumers who pay a fee in
advance to receive the purported credit card often discover that all
they have received in return is either a stored value or debit card or
a catalog card that can be used only to purchase merchandise from a
particular paper or online catalog.
This past February, as part of Operation Short Change, the
Commission sued Group One Networks, a network of companies allegedly
engaged in a telemarketing scheme to trick consumers into paying
hundreds of dollars for credit cards that could only be used to
purchase goods from a limited number of online catalog websites.\16\
The Commission charged that as part of the scheme, defendants allegedly
obtained the financial account information of consumers who filled out
online payday loan applications and, without the consumers' knowledge
or consent, charged them for a worthless credit card membership. Moving
aggressively to halt these alleged law violations, the Commission
sought and obtained an ex parte temporary restraining order, and later
a preliminary injunction.
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\16\ FTC v. Group One Networks, Inc., No. 8:09-CV-0352-T-26-MAP
(M.D. Fla. Feb.25, 2009) (complaint).
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Another scheme affecting consumers with credit problems is debt
relief services. On June 25, the Commission sued Mutual Consolidated
Savings,\17\ a company that allegedly placed pre-recorded or
``robocalls'' to market a supposed ``rapid debt reduction'' program.
The defendants allegedly told consumers they would generate thousands
of dollars in savings by negotiating interest rate reductions with
their credit card companies, and they promised a refund of the $690 to
$899 fee if they failed. The FTC alleged that defendants did fail,
often refusing to refund consumers and leaving them even deeper in
debt. The Commission sought and obtained an ex parte temporary
restraining order and an asset freeze on June 26.
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\17\ FTC v. MCS Programs, LLC, No. C09-5380RBL (W.D. Wash. June 25,
2009) (complaint).
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Debt settlement companies also offer debt relief to consumers,
promising for a fee to obtain a lump sum settlement from the creditor
of the consumer's credit card debt. These companies typically promise
that they will negotiate with creditors to obtain settlements for
amounts less than the full balance that the consumer owes. The FTC has
brought a number of lawsuits against for-profit debt settlement
companies that do not deliver on their promises.\18\ In some of these
cases, the companies allegedly deceived consumers who were seeking help
with their credit card bills into paying large up-front fees for debt
relief services that were never provided. Some of the companies also
falsely promised consumers that not paying their creditors would not
hurt their credit ratings, and that purchasing their services would
stop debt collectors from calling them. In addition to taking these law
enforcement actions, the FTC last year convened a workshop to learn
more about the debt settlement industry and develop solutions to the
consumer protection problems they cause.\19\
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\18\ See FTC v. Edge Solutions, Inc. of New York, No. CV-07-4087-
JG-AKT (E.D.N.Y. Aug. 7, 2008) (stipulated order and judgment for
permanent injunction).
\19\ See Federal Trade Commission, Debt Settlement Workshop (Sept.
25, 2008), Transcript, available at http://www.ftc.gov/bcp/workshops/
debtsettlement/OfficialTranscript.pdf.
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E. Loan Modification and Foreclosure Rescue Services
With the rapid increase in mortgage delinquencies and foreclosures,
the FTC has stepped up its efforts to protect consumers from mortgage
loan modification and foreclosure rescue scams. In a little over a
year, the FTC has brought 14 cases targeting these scams,\20\ and is
currently engaged in additional non-public investigations of providers
of loan modification and foreclosure rescue services.
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\20\ FTC v. Data Medical Capital, Inc., No. SA-CV99-1266AHS (C.D.
Cal. filed May 27, 2009); FTC v. Dinamica Financiera LLC, No. CV09-
3554MMM (C.D. Cal. filed May 19, 2009); FTC v. One or More Unknown
Parties Misrepresenting Their Affiliation With the Making Home
Affordable Program, No. CV-09-894 (D.D.C. filed May 14, 2009); FTC v.
Federal Loan Modification Law Center, LLP, No. SACV09-401 CJC (C.D.
Cal. filed Apr. 3, 2009); FTC v. Thomas Ryan, Civil No. 1:09-00535
(D.D.C. filed Mar. 25, 2009); FTC v. Home Assure, LLC, Case No. 8:09-
CV-00547-T-23T-SM (M.D. Fla. filed Mar. 24, 2009); FTC v. Hope Now
Modifications, No. 1:09-cv-01204-JBS-JS (D.N.J. Mar. 17, 2009); FTC v.
New Hope Property LLC, No. 1:09-cv-01203-JBS-JS (D.N.J. Mar. 17, 2009);
FTC v. National Foreclosure Relief, Inc., No. SACV09-117 (C.D. Cal.
Feb. 2, 2009); FTC v. United Home Savers, LLP, No. 8:08-cv01735-VMC-TBM
(M.D. Fla. Sept. 3, 2008); FTC v. Foreclosure Solutions, LLC, No. 1:08-
cv01075 (N.D. Ohio April 28, 2008); FTC v. Mortgage Foreclosure
Solutions, Inc., No. 8:08-cv388-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); FTC v. Safe Harbour Foundation, No. 08 C 1185 (N.D. Ill.
Feb. 25, 2008).
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The FTC's law enforcement actions in this area typically have
alleged the following: First, the defendants used terms like
``guarantee'' and ``97 percent success rate'' to mislead consumers
about the effectiveness of the services they provide. Second, they
charged up-front fees for their services. Last, after collecting the
fee, the defendants did little or nothing to help consumers obtain a
loan modification or stop foreclosure. Such operations not only defraud
financially-distressed consumers out of desperately needed funds but
also may lead them to forgo viable options to help them with their
mortgage payments, such as getting assistance from a non-profit housing
counselor, or discussing their payment problems with their servicer and
continuing their payments.
Sometimes, the defendants allegedly have used copycat names or
look-alike websites to misrepresent that they are affiliated with a
non-profit or government entity.\21\ The Commission, for example,
recently filed two actions alleging that defendants used similar
sounding names and other claims to misrepresent that they were part of
the legitimate Hope Now Alliance of housing counselors and mortgage
servicers.\22\ Similarly, the Commission recently filed an action
alleging that defendants misrepresented that they were affiliated with
the Administration's ``Making Home Affordable'' programs.\23\
Defendants also sometimes allegedly misrepresent that Members of
Congress or other government officials endorse their services or
products.\24\
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\21\ See FTC v. Thomas Ryan, Civil No. 1:09-00535 (HHK) (D.D.C.
filed Mar. 25, 2009).
\22\ FTC v. Hope Now Modifications, No. 1:09-cv-01204-JBS-JS
(D.N.J. filed Mar. 17, 2009); FTC v. New Hope Property LLC, No. 1:09-
cv-01203-JBS-JS (D.N.J. filed Mar. 17, 2009). In these two cases, the
court issued temporary restraining orders and asset freezes against the
defendants. Both defendants later agreed to stipulated preliminary
injunctions.
\23\ FTC v. One or More Unknown Parties Misrepresenting Their
Affiliation with the Making Home Affordable Program, No. CV-09-894
(D.D.C. May 14, 2009) (complaint).
\24\ See FTC v. Federal Loan Modification Law Center, LLP, Case No.
SACV09-401 CJC (C.D. Cal. filed Apr. 3, 2009). See also Press Release,
Federal and State Agencies Crack Down on Mortgage Modification and
Foreclosure Rescue Scams (Apr. 6, 2009), available at http://
www.ftc.gov/opa/2009/04/hud.shtm.
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In addition to bringing law enforcement actions, the FTC has
commenced a rulemaking to address unfair and deceptive acts and
practices related to loan modification and foreclosure rescue services.
Any proposed rules that the FTC would issue as part of this rulemaking
would apply only to entities within the FTC's jurisdiction under the
FTC Act, which excludes banks, thrifts, and Federal credit unions,
among others. The Commission issued its advanced notice of proposed
rulemaking on June 1, 2009, and the public has 45 days in which to file
comments in response to this notice.\25\ Because of the serious risks
to consumers in the current financial crisis, the FTC will proceed as
expeditiously as practicable in conducting this rulemaking proceeding
as a complement to its vigorous law enforcement efforts.
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\25\ 74 Fed. Reg. 26,118 (June 1, 2009).
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II. Sustained FTC Enforcement and Other Activities Targeting Fraud
In addition to the law enforcement activities described above, the
Commission also targets fraud by enforcing the Telemarketing Sales Rule
and the Business Opportunity Rule.\26\ With these rules, the
Commission's anti-fraud law enforcement program reaches fraud
perpetrated through telemarketing, print advertising, and, with ever
increasing frequency, online.
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\26\ Telemarketing Sales Rule, 16 C.F.R. Part 310; Business
Opportunity Rule, 16 C.F.R. Part 437.
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A. Enforcement of the Telemarketing Sales Rule
The Commission has developed a robust law enforcement program
against fraudulent telemarketers. Since the 1996 promulgation of the
Telemarketing Sales Rule (``TSR''),\27\ which now includes the privacy
protections of the National Do Not Call (``DNC'') Registry,\28\ the
Commission has initiated 271 telemarketing cases aimed at halting
various telemarketing frauds, such as unauthorized debiting of
consumers' financial accounts, as well as the deceptive sales of
various goods and services, including work-at-home opportunities,
advance-fee credit cards, government grants, sweepstakes and prize
promotions.\29\ The Commission's efforts have broadly targeted not only
fraudulent telemarketers, but also the third-parties that assist them.
Many of the Commission's actions have been brought as part of
coordinated law enforcement sweeps of the telemarketing industry, such
as Operation Tele-PHONEY, which included 180 actions by state, Federal,
and international law enforcement agencies to crack down on
telemarketing fraud.\30\ Many cases against deceptive telemarketers
also allege violations of the Do Not Call or related privacy protection
provisions of the TSR. Twenty-eight cases have alleged only violations
of Do Not Call and/or other privacy provisions of the TSR. Ultimately,
almost all of these cases resulted in permanent injunctions against the
defendants which severely restricted or banned defendants' deceptive or
abusive marketing sales practices. The pursuit of these cases by the
Commission has resulted in orders providing for over $540 million in
consumer restitution or, where that was not practicable, disgorgement
to the U.S. Treasury. During this period, through cases filed on its
behalf by the U.S. Department of Justice,\31\ the Commission has
obtained civil penalty orders and equitable monetary relief totaling
nearly $31 million.
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\27\ In 1994, Congress enhanced the Commission's legal arsenal
against fraud by enacting the Telemarketing and Consumer Fraud and
Abuse Prevention Act (the ``Telemarketing Act''), 15 U.S.C. 6101-
6108, which directed the Commission to issue a trade regulation rule
defining and prohibiting deceptive or abusive telemarketing acts or
practices. Accordingly, the Commission promulgated the TSR in 1995,
which is codified in the Code of Federal Regulations, 16 C.F.R. Part
310.
\28\ In December 2002, the Commission adopted amendments to the TSR
that, among other things, established the National Do Not Call
Registry, prohibited call abandonment, required (where feasible)
transmission of Caller ID identifying information, and established
important new safeguards in situations where telemarketers use
preacquired account information. 68 Fed. Reg. 4580 (Jan. 29, 2003). The
TSR also was recently amended to, among other things, bar telemarketing
calls that deliver pre-recorded messages (so-called ``voice blasting''
or ``robo calls''), unless the consumer previously has agreed to accept
such calls from the seller. Those amendments will become fully
effective in September 2009. TSR Final Rule Amendments, 73 Fed. Reg.
51164 (Aug. 29, 2008).
\29\ Prior to the enactment of the TSR, the Commission brought 110
telemarketing cases pursuant to Section 5 of the FTC Act, which
prohibits ``unfair or deceptive acts or practices in or affecting
commerce.'' 15 U.S.C. 45(a).
\30\ ``Operation Tele-PHONEY'' http://www2.ftc.gov/opa/2008/05/
telephoney.shtm. The following is a sampling of some of the sweeps that
the FTC and its law-enforcement partners have conducted over the past
several years: ``Dialing for Deception,'' http://www.ftc.gov/opa/2002/
04/dialing.shtm (a sweep by the FTC that targeted telemarketing fraud
in connections with in-bound telephone calls); ``Ditch the Pitch,''
http://www.ftc.gov/opa/2001/10/ditch.shtm (a sweep targeting fraudulent
out-bound telemarketing brought by the FTC and 6 states); ``Operation
No Credit,'' http://www.ftc.gov/opa/2002/09/opnocredit.shtm (43 law
enforcement actions, including criminal indictments, targeting a wide
range of credit-related fraud brought by the FTC, the DOJ, the U.S.
Postal Inspection Service, and 11 state and local authorities);
``Operation Protection Deception,'' http://www.ftc.gov/opa/2000/10/
protectdecpt.shtm (a sweep against telemarketers of fraudulent ``credit
card protection'' services with extensive assistance from 5 states and
the Federal Bureau of Investigation (``FBI'')); ``Senior Sentinel,''
http://www.ftc.gov/opa/1995/12/sen.shtm (a sweep targeting
telemarketers who defraud the elderly coordinated by the DOJ and FBI,
with 5 civil cases brought by the FTC, that led to hundreds of arrests
and indictments across the country); ``Project Telesweep,'' http://
www.ftc.gov/opa/1995/07/scam.shtm (nearly 100 cases filed by the FTC,
DOJ and 20 states targeting business opportunity fraud often promoted
through slick telemarketing).
\31\ Civil penalty actions are filed by the Department of Justice
(``DOJ'') on behalf of the FTC. In general, under the FTC Act, the
Commission must notify the Attorney General of its intention to
commence, defend, or intervene in any civil penalty action under the
Act. 15 U.S.C. 56(a)(1). DOJ then has 45 days, from the date of the
receipt of notification by the Attorney General, in which to commence,
defend or intervene in the suit. Id. If DOJ does not act within the 45-
day period, the FTC may file the case in its own name, using its own
attorneys. Id.
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B. Enforcement of the Business Opportunity Rule
Like its telemarketing anti-fraud program, since 1981, the
Commission has had a vigorous program to pursue fraudulent purveyors of
business opportunities, scams which can cost individual consumers
thousands of dollars. The Commission uses Section 5 of the FTC Act to
pursue business opportunity fraud, often charging violations of the
Business Opportunity Rule (formerly, the Franchise Rule), as well.\32\
Since 1981, the Commission has initiated over 262 actions to halt
business opportunity schemes promising money through vending machine
routes, medical billing, rack display, Internet kiosk, 900-number
ventures, envelope stuffing, and many other schemes.
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\32\ Until 2007, business opportunities were covered under the
original Franchise Rule, 16 C.F.R. Part 436. In 2007, the Commission
amended Part 436 to apply only to business format franchises, and
created Part 437 to cover business opportunities. Final Rule on
Disclosure Requirements and Prohibitions Concerning Franchising and
Business Opportunities, 72 Fed. Reg. 15444 (March 30, 2007). The
Business Opportunity Rule is identical to the corresponding portions of
the original Franchise Rule except that it deletes the definitional
elements and references regarding business format franchising that are
now covered by the amended Franchise Rule. Id.
The Business Opportunity Rule, Part 437, is currently under
regulatory review and is in the process of being amended. See Notice of
Public Workshop on the Business Opportunity Rule, 74 Fed. Reg. 18712
(April 24, 2009). Among other things, the proposed amendments would
expand the scope of the rule to cover entities that previously were not
covered under the Franchise Rule, such as many work-at-home schemes.
The amendments also would simplify the disclosure document that sellers
are required to provide prospective purchasers.
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The Commission routinely works cooperatively with other Federal and
state law enforcement agencies to combat business opportunity fraud,
often leading sweeps of the industry. Since 1995, the Commission has
conducted more than 15 business opportunity sweeps to combat persistent
business opportunity fraud.\33\ These sweeps bring public attention to
these types of fraud and heighten consumer awareness of how to avoid
losing money in these schemes. Through the Business Opportunity Rule
itself, which requires that sellers make certain pre-sale disclosures
to prospective purchasers, the Commission aims to put material
information into consumers' hands before they make a hefty investment
in a business opportunity.\34\
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\33\ E.g., Project Fal$e Hope$ (2006); Project Biz Opp Flop (2005);
Project Busted Opportunity (2002); Project Bizillion$ (1999); Operation
Money Pit (1998); Project Vend Up Broke (1998); Project Trade Name
Games (1997); Operation Missed Fortune (1996); and Project Telesweep
(1995). In addition to joint law enforcement sweeps, Commission staff
has also targeted specific business opportunity ventures such as
envelope stuffing (Operation Pushing the Envelope 2003); medical
billing (Operation Dialing for Deception 2002, and Project Housecall
1997); seminars (Operation Showtime 1998); Internet-related services
(Net Opportunities 1998); vending (Project Yankee Trader 1997); and 900
numbers (Project Buylines 1996).
\34\ The Business Opportunity Rule requires sellers to make
numerous disclosures to consumers, such as, among other things, the
seller's litigation history, a list of prior purchasers of the business
opportunity, the seller's refund and cancellation policy, and if the
seller makes a claim about likely earnings, the basis for that claim.
16 C.F.R. Part 437.1(a)(4), (7), (16)(iii); 437.1(b)(3).
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The Commission values the cooperative relationships it has fostered
with the states and other Federal agencies. Although the Commission
does not have criminal law enforcement authority, it recognizes the
importance of criminal prosecution to deterrence and consumer
confidence. Accordingly, the Commission routinely refers matters
appropriate for criminal prosecution to Federal and state prosecutors
through its Criminal Liaison Unit (``CLU''). Since October 1, 2002, 349
people have been indicted and 238 have been convicted in criminal cases
that arose from referrals made by CLU, including cases where an FTC
attorney was designated a Special Assistant U.S. Attorney to help with
the criminal prosecution.
C. Consumer and Business Education
In addition to the Commission's law enforcement activities, the
agency reaches out to consumers to give them the tools they need to
recognize and avoid fraud. In response to the recent economic downturn,
the FTC developed several initiatives to help people manage their
financial resources, avoid fraud, and be aware of emerging scams. We
share our consumer education materials with state attorney general
offices and various local organizations to help get the word out to the
public.
For instance, with Operation Short Change, the Commission developed
and released a video to educate the public on business opportunity
fraud.\35\ The video features a former con-artist, Jim Vitale,
describing the tools of the trade, including the techniques he used to
rush consumers into sending their money. It provides a sobering glimpse
into the lives of two individuals who lost money in business
opportunity scams, and it gives consumers concrete advice on what they
should do before investing in a business opportunity.
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\35\ Available at http://www.ftc.gov/multimedia/video/scam-watch/
fraud-inside-look.shtm.
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In conjunction with a Federal-state crackdown on mortgage
foreclosure rescue scam operators, the FTC produced a toolbox of
mortgage-related resources for homeowners in distress; they are
featured on a new web page at www.ftc.gov/MoneyMatters. Indeed, groups
including NeighborWorks America, and the Homeowners Preservation
Foundation--a nonprofit member of the HOPE NOW Alliance of mortgage
industry members and U.S. Department of Housing and Urban Development-
certified counseling agencies--are distributing FTC materials directly
to homeowners at borrower events across the country, on their websites,
in their statements, and even on the phone: when people call the
Nation's major mortgage servicers, they hear about the tell-tale signs
of a mortgage foreclosure scam while they are on hold. Next month, the
agency will distribute to thousands of community organizations, HUD-
certified housing counselors, and state attorneys general across the
Nation copies of a new video featuring the stories of real people who
are working with legitimate counselors to save their homes from
foreclosure.
The agency has focused outreach efforts on a number of other issues
faced by people in economic distress, including stimulus scams, rental
scams, church ``opportunity'' scams, offers for bogus auto warranties,
and solicitations for phony charities that play on the public's concern
for the welfare of our military troops and public safety personnel,
especially at a time when budgets are shrinking.
Finally, in an effort to stem the number of false or misleading
claims that consumers see, the agency has a publication for publishers
and broadcasters to alert them to the kinds of claims--extravagant
earnings promises, for example--that can signal a rip-off. The
Commission also offers sample public service announcements that
newspapers can run in the business opportunity section of their
classified section to remind readers to do their homework before buying
a business opportunity.
D. Research and Policy Development
To complement its law enforcement and educational initiatives, the
Commission regularly conducts research to stay abreast of marketplace
developments, and ensure the agency is best situated to prevent, deter,
and halt consumer fraud. Toward these ends, the Commission has
conducted two consumer fraud surveys, in 2003 and 2005, seeking to
quantify fraud in the United States, and will continue to conduct
research in 2010.\36\
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\36\ Reports of the results of those two surveys, ``Consumer Fraud
in the United States: An FTC Survey, FTC Staff Report,''(Aug 2004)
(``2003 Survey'') and ``Consumer Fraud in the United States: The Second
FTC Survey, FTC Staff Report,''(Oct 2007) (``2005 Survey'') are
available at http://www2.ftc.gov/reports/consumerfraud/
040805confraudrpt.pdf and http://www2.ftc.gov/opa/2007/10/fraud.pdf,
respectively.
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More recently, to examine consumer fraud in depth, the Federal
Trade Commission staff held a two-day Fraud Forum on February 25 and
26, 2009. In addition to Federal, state and international law
enforcers, staff invited consumer advocates, business representatives,
criminologists and sociologists, all of whom share a keen interest in
understanding fraud, and identifying ways to more effectively protect
consumers from fraudulent schemes.\37\ The purposes of the Forum were
both to gain a greater understanding of fraud and the ways that fraud
artists ply their trades, and to harness the collective knowledge and
experience of Forum participants to advance anti-fraud initiatives.
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\37\ Panelists and presenters at the Fraud Forum included 20
representatives from 16 Federal, state, and international law
enforcement or consumer protection agencies.
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The Forum focused on the dynamics of fraud, including common traits
of fraudsters and characteristics of victims in order to develop better
methods of deterrence and prevention. As a reminder to law enforcement
of the threat posed by the economic downturn, Jim Vitale, a former con-
artist who participated in the forum, aptly noted: ``I'd have to say
that the potential for business opportunity fraud is greater now than
it would be in a booming economy . . . If the right marketing is done,
it's [the] perfect storm.'' \38\
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\38\ Federal Trade Commission, Fraud Forum, Panel 1: Becoming a
Scam Artist, Understanding the Victim: Exploring the Psychology of
Scammers and Victims, at 45-46 (February 25-26, 2009), transcript
available at http://htc-01.media.globix.net/COMP008760MOD1/ftc_web/
transcripts/022509_sess1.pdf. Vitale's input at the fraud forum was
leveraged in making the educational video released as part of Operation
Short Change. See supra note 33.
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Looking ahead, the Commission will be hosting a roundtable this
fall to examine consumer protection issues that arise in debt
collection proceedings against individual consumers.\39\
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\39\ Available at http://www.ftc.gov/opa/2009/06/chicagoround.shtm
(press release).
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III. Enhancing the FTC's Fraud-Fighting Tools
The cases discussed in this testimony are only part of the
Commission's continuous efforts to protect financially-distressed
consumers from fraud during the current economic downturn. An effective
program depends on communication with the public to help the Commission
spot fraud, track complaints, and provide Americans with tools that
will help them avoid falling prey to fraud. Fraud investigations are
aided by the Commission's considerable investment in technology, such
as Consumer Sentinel, a database of complaints collected from
consumers. As noted above, the Commission's law enforcement sweeps
provide an opportunity to reach the public through media coverage of
law enforcement crack-downs on fraud. And, through the use of consumer
alerts, such as the Commission's warning to consumers about economic
stimulus grant scams (March 2009),\40\ and consumer education, such as
the FTC's website ``Money Matters'' (March 2009),\41\ the Commission
strives to give consumers the most current resources to help them spot
and avoid financial scams.
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\40\ Available at http://www.ftc.gov/opa/2009/03/stimulusscam.shtm
(press release) and http://htc-01.media.globix.net/COMP008760MOD1/
ftc_web/FTCindex.html#March_4_09 (webcast of press conference).
\41\ Available at http://www.ftc.gov/moneymatters.
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The agency's vigorous pursuit of its consumer protection mission,
however, is hampered by the Commission's insufficient resources and its
limited authority. Increased resources and certain expansions of its
legal authority would improve the Commission's ability to act quickly
to protect consumers from scams and would serve to deter would-be
fraudsters and those who assist them.\42\ To that end, the Commission
first asks Congress to provide the agency with more resources to
increase its law enforcement and consumer protection activities.
Second, the Commission recommends that Congress authorize the agency to
employ notice and comment rulemaking procedures for unfair and
deceptive acts and practices under the FTC Act. Third, the Commission
recommends that Congress authorize the FTC to seek civil penalties for
violations of Section 5 of the FTC Act and, to promote efficiency and
expediency, to seek civil penalties in its own right in Federal court
without being required to refer enforcement of civil penalty
proceedings to the U.S. Department of Justice.\43\
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\42\ These recommendations are discussed in greater detail in the
FTC's April 8, 2008 testimony before the House Committee on Energy and
Commerce, Subcommittee on Commerce, Trade, and Consumer Protection,
which is available at http://www2.ftc.gov/os/testimony/P034101
reauth.pdf.
\43\ Please see Commissioner Kovacic's dissent in note 4.
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Finally, the Commission believes that an expansion of its authority
to include the ability to challenge practices that aid or abet
violations of the FTC Act, could be beneficial to the Commission's
consumer protection law enforcement program.\44\ Effective law
enforcement often requires reaching not only the direct participants in
unfair or deceptive practices, but also those who support and enable
the direct participants to violate the law.\45\ The need for this
authority has become particularly clear in the Internet era, in which
online frauds involve numerous actors with murky and varying roles in
complicated channels of distribution. Making it easier for the
Commission to challenge those who provide assistance to others who are
violating Section 5 of the FTC Act could help the agency attack the
infrastructure that supports Internet fraud, such as in the online
scams described above.
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\44\ Since the Supreme Court's ruling in Central Bank of Denver v.
First Interstate Bank of Denver, 511 U.S. 164 (1994), which cast doubt
on the argument that Section 5 of the FTC Act could reach ``aiding and
abetting'' another person's violation, the Commission's ability to
pursue those who assist and facilitate unfair or deceptive acts and
practices has been compromised. Although the Commission has developed
alternative ``assistance'' theories to reach secondary actors, these
theories may make liability more difficult to prove than if the FTC had
specific statutory authority in this area. See, e.g., FTC v. Winstead
Hosiery Co., 258 U.S. 483, 494 (1922) (establishing the doctrine that
providing the means and instrumentalities by which unfair or deceptive
practices occur is itself an unfair or deceptive practice in violation
of the FTC Act).
\45\ The Telemarketing Act is one statute that specifically gives
the FTC express authority to pursue aiders and abetters. 15 U.S.C.
6102(a)(2). Based on this express authority, Section 310.3(b) of the
TSR prohibits providing ``substantial assistance or support to any
seller or telemarketer when that person knows or consciously avoids
knowing that the seller or telemarketer'' is engaged in certain
practices that violate the Rule. 16 C.F.R. 310(b). The Commission has
included an ``assisting and facilitating'' allegation in at least two
dozen cases since the TSR was adopted. See, e.g., FTC v. Assail, Inc.,
No. W03CA007 (W.D. Tex. final orders entered Jan. 2005); U.S. v.
DirecTV, Inc., No. SACV05 1211 (C.D. Cal. final order entered Dec.
2005); U.S. v. Entrepreneurial Strategies, Ltd., No. 2:06-CV-15 (WCO)
(N.D. Ga. final order entered Jan. 2006).
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IV. Conclusion
The economic downturn has shown how quickly and easily opportunists
adopt schemes to take advantage of individuals in financial distress.
The Commission is committed to using its law enforcement authority
aggressively to bring these schemes to a halt, and to continue
deploying public alerts and educational materials to help consumers
avoid being victimized in the first instance. The Commission supports
legislation that would help it do more to protect consumers by
authorizing it to issue consumer protection rules and obtain civil
penalties for violations of those rules.
Thank you for providing the Commission with the opportunity to
appear before the Committee to describe its efforts in this critical
area.
Senator Pryor. Thank you.
Our next witness will be Chuck Bell, Director of Programs,
Consumers Union.
STATEMENT OF CHARLES BELL, DIRECTOR OF PROGRAMS, CONSUMERS
UNION
Mr. Bell. Good morning, Mr. Chairman and Members of the
Committee. Thank you very much for holding this hearing on ways
to protect consumers, during the current economic downturn,
against deceptive practices, fraud, and scams.
Consumers Union is the independent, nonprofit publisher of
Consumer Reports, with a circulation of 7 million, Consumer
Reports plus ConsumerReports.org subscribers. As part of our
work, we regularly research and report on misleading and
deceptive practices that affect consumers. We report on scams
and fraud, both to alert consumers so they can protect
themselves, and also to alert law enforcement agencies and
policymakers so they can take action to directly curtail and
stop these unethical, deceptive, and fraudulent practices.
Over the last several months, we have reported on a variety
of anticonsumer practices that are affecting financially-
distressed families which we think are worthy of attention by
your committee.
As the Committee is well aware, this is a very tough time
for workers and consumers, and, when the economy falters, it's
prime time for ploys that claim to help consumers get out of
money messes. Consumers are at risk for a variety of get-rich-
quick schemes and financial cons that target them specifically
because they need fast help and are increasingly desperate.
While many such frauds exists in both good and bad times,
the con artists appear to expand their marketing efforts in
recessions and come up with very clever angles to attract new
victims.
In March, Consumer Reports published ``Financial Traps are
Flourishing,'' an article that profiles several very costly
financial traps that prey on financially-distressed consumers.
Some of the financial traps include foreclosure rescue scams,
hard-sell reverse mortgages, and high debt settlement services.
Briefly, the foreclosure rescue scams, we profiled an
Illinois family who lost their home when a company promising
loan modification and rescue services left them high and dry
after receiving an up-front fee of $1,347. More than 200
Illinois consumers experienced the same problems or similar
problems with this firm, according to a complaint by the
Illinois Attorney General. We believe that the collection of
advance fees for loan modification schemes and debt settlement
is a key problem, and we are currently supporting State
legislation in California aimed at prohibiting the collection
of advance fees for foreclosure rescue.
This is a national problem, with a projected 3.5 million
mortgage foreclosures set to take place this year, so Consumers
Union is very pleased that the FTC is now using its powers to
promulgate rules prohibiting or restricting unfair or deceptive
acts or practices concerning mortgage servicing and loan
modification and rescue schemes.
With respect to hard-sell reverse mortgages, our March
article also warned consumers against the dangers of hard-sell
reverse mortgages. Banks and mortgage lenders are targeting
seniors, with a blitz of television ads to entice them to take
equity out of their homes through reverse mortgages. In an
economy when many families' savings have plummeted, such offers
may, indeed, be attractive, but the lenders often bundle high
fees, insurance charges, and commissions into the loan and try
to aggressively cross-sell consumers with other types of
financial products, such as annuities, which may well not be
suitable for them.
Consumers Union believes that the sellers of reverse
mortgages should be required to make sure that the loan is
suitable for the borrower and that there is independent, one-
on-one premortgage counseling. We also believe there should be
caps on origination fees for all reverse mortgages, and better
restrictions on sales practices.
We commend Senator Claire McCaskill, whose proposed
legislation in this area aimed at preventing fraud and reverse
mortgages and requiring that ads for government-backed
mortgages present a balanced view of their risks and benefits.
High fee debt settlement. We profiled a family ensnared by
a company offering these services, who collected the fees, but
provided no significant services. This industry, as we heard
earlier, has expanded rapidly as consumer debt has grown and
changes in Federal laws made it very difficult to file for
personal bankruptcy. Attorney generals in New York and Texas
have filed suit against debt settlement companies for failing
to provide services to customers. We believe that the FTC
should ban the charging of advance fees in debt settlements and
cap fees based solely on a low percentage of the amount of
which the debt is actually and permanent reduced below the
amount owned--owed when the debt settlement contract was first
signed.
In addition, we believe all of these financial problems
could be dramatically reduced if Congress will pass legislation
to create a consumer financial protection agency which would
meet a critical public need for stronger consumer protection
and financial services, both by more carefully reviewing the
financial products that are offered and strengthening
enforcement in response to consumer problems and complaints.
In recent months, Consumer Reports and other consumer
protection officials have also warned about a range of other
recession-related Internet scams related to employment and
work, and these include job search services, unemployment
benefit scams, work-at-home schemes, and websites that promise
access to government grants.
We very much appreciate the efforts of the FTC and other
consumer watchdog groups and regulators to shut down such
practices. We would also encourage media and Internet companies
that accept advertising to carefully scrutinize the
advertisements that make unsupported promises and take
advantage of financially-stressed consumers or ads that make
unethical or questionable claims. We believe that, as a matter
of corporate responsibility, companies that accept advertising
should not be setting consumers up for financial heartbreak.
The diverse financial come-ons and ripoffs described here
today come in a variety of forms and permutations, and,
unfortunately, don't lend themselves to a one-size-fits-all
silver-bullet solution. However, we believe that everyone,
across the board, needs to do more, starting with the consumer,
who has to be ever on their guard, very skeptical of offers of
financial help and extra income, and particularly when those
offers come from businesses they don't know or have an
unfamiliar track record. We also think businesses should
exercise more corporate responsibility, and they should
redesign or withdraw products with high fees or financial traps
built into them.
We think it's also a critical time to provide generous
resources to our State and Federal regulators so that they can
step up the enforcement of companies that deceive and defraud
consumers. Our public agencies are on the front line of
fighting these practices, and they should impose sharp civil
and criminal penalties for companies that violate the law.
We would also urge State and Federal policymakers to
consider new consumer protections against unfair and deceptive
practices. Economic fraud has a high financial and personal
cost for consumers, and it could undermine public confidence in
the marketplace in a renewed economy.
We hope our Nation will lift up our financially-distressed
families, and not push them down with deceptive practices and
drive them further into debt.
Thank you very much, and I look forward to answering any
questions.
[The prepared statement of Mr. Bell follows:]
Prepared Statement of Charles Bell, Programs Director, Consumers Union
Introduction
Mr. Chairman, Members of the Committee:
Thank you very much for the invitation to testify on ways to
protect consumers against deceptive practices, fraud and scams during
the current economic downturn. We commend you for holding this hearing
to focus attention on ways to protect consumers and encourage a safer
marketplace.
Consumers Union \1\ is the independent, non-profit publisher of
Consumer Reports, with circulation of over 7 million (Consumer Reports
plus ConsumerReports.org subscribers). As part of our work, we
regularly research and report on misleading and deceptive practices
that affect consumers. We report on scams and fraud both to alert
consumers, so they can protect themselves; and to alert law enforcement
agencies and policymakers, so they can take action to directly curtail
and stop these unethical, deceptive and/or fraudulent practices.
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\1\ Consumers Union, the nonprofit publisher of Consumer Reports,
is an expert, independent organization whose mission is to work for a
fair, just, and safe marketplace for all consumers and to empower
consumers to protect themselves. To achieve this mission, we test,
inform, and protect. To maintain our independence and impartiality,
Consumers Union accepts no outside advertising, no free test samples,
and has no agenda other than the interests of consumers. Consumers
Union supports itself through the sale of our information products and
services, individual contributions, and a few noncommercial grants.
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Over the last several months, we have reported on a variety of
anti-consumer practices that are affecting financially-distressed
families which we think are worthy of attention by your Committee.
These diverse financial come-on and ripoffs come in a variety of
forms and permutations, and unfortunately do not lend themselves to a
one-size-fits all, silver bullet solution. However, we believe that
given the risks to consumers, everyone must do more:
Consumers must be ever on their guard, and be very, very
skeptical of offers of financial help and extra income,
particularly when those offers come from businesses they don't
know, or have an unfamiliar track record. They should seek
second opinions and advice from knowledgeable and respected
sources of information, including trusted friends, consumer
protection agencies and watchdog groups, government agencies,
attorneys, homeownership counselors and others, prior to
handing over cash, or signing contracts or agreements that
obligate them financially.
Businesses that sell products with high fees or financial
traps built into them should withdraw or redesign such
products, or in other cases provide much better disclosure,
counseling and protections for customers. In addition,
businesses have an important role to play in strengthening the
protection of sensitive customer information, to prevent
security breaches and identity theft.
Media and Internet companies that accept advertising should
carefully scrutinize advertisements for products or services
that make unsupported promises, take advantage of financially-
stressed consumers, or make unfair, unethical or questionable
claims. As a matter of corporate responsibility, companies that
accept advertising should not be setting consumers up for
financial heartbreak. To their credit, some Internet search
companies now specifically warn consumers about websites that
could include spyware or malware. These companies may be able
to do much more to reduce and suppress deceptive ads, and warn
consumers against financial scam websites that receive failing
grades from watchdog groups and/or government regulators.
State and Federal regulators should step up enforcement of
companies that deceive and defraud consumers, and impose sharp
criminal and civil penalties for companies that violate the
law.
State and Federal policymakers should consider new consumer
protections to protect consumers against unfair and deceptive
practices that target financially-distressed households. In
particular, legislation pending before Congress to establish a
Consumer Financial Protection Agency would greatly help to
protect consumers in good times and bad, and ensure that laws
against deceptive practices and fraud are effectively enforced.
Economic fraud has a high financial and personal cost for
consumers, could undermine public confidence in the marketplace
and a renewed economy. Consumer protection should be a pillar
of economic reconstruction, to ensure that people who work hard
and save for the future will not be unfairly deprived of their
income and assets.
Rising Unemployment Fuels Consumer Financial Distress
As the Committee is well aware, this is a very tough time for
workers and consumers. The official unemployment rate is 9.5 percent,
the highest in 25 years. 14.7 million people are unemployed, and
another 9 million people are working part-time because they can't find
a full-time job. This is now the worst recession in post-World War II
history in terms of total jobs losses. Mass layoffs--job cuts of 50 or
more people by a single employer--are at their highest since continuous
tracking began in April 1995, according to the U.S. Department of
Labor.
The bleak employment picture contributes to severe financial
distress for families and individuals throughout the country. According
to Economy.com, 15 million home-owning households are ``under water,''
meaning that the owners' mortgage balance is higher--often considerably
higher--than the value of the homes.\2\ As many as 3.5 million families
may lose their homes to foreclosure this year,\3\ and Consumers Union
estimates that every 13 seconds, another home goes into foreclosure.
Home equity loan and credit card delinquency rates were at record
levels in the first quarter of the year, and tens of millions of
households are struggling with bills they can't pay.
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\2\ Nocera, Joe. ``From Treasury to Banks, An Ultimatum on Mortgage
Relief,'' The New York Times, July 11, 2009.
\3\ Ibid.
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When the economy falters, it's prime time for ploys that claim to
help consumers out of money messes. Unfortunately, as Linda Stern of
Reuters has written, ``. . . stocks and bonds might be down and out,
but there is a bull market in cons.'' \4\ Consumers are at risk for a
variety of get-rich-quick schemes and financial cons that target them
specifically because they need fast help and/or are increasingly
desperate. While many such frauds exist in both good times and bad
times, the con artists expand their marketing efforts in recessions,
and come up with very clever angles to attract new victims.
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\4\ Stern, Linda. ``Personal Finance: Beware Scams and Sales
Pitches,'' Reuters.com, July 8, 2009.
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Five Types of Recession-Oriented Financial Scams
In March 2009, Consumer Reports published ``Financial Traps are
Flourishing,'' an article that profiles five types of costly financial
traps that prey on financially-distressed consumers in troubled
times.\5\ A common theme of these consumer rip-offs is that ``their
financial fine print could leave [consumers] in worse shape than
before.'' Here are some examples of how financially-stressed households
are affected by these practices.
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\5\ Consumer Reports. ``Financial Traps are Flourishing,'' March
2009.
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1. Foreclosure Rescue Scams
First-time homeowners Kari and Roger Mizer of Springfield, Ill.,
faced foreclosure on their home in 2007 after the monthly payment on
their adjustable-rate mortgage hit $1,850. It was just $900 when they
bought their house 2 years earlier.
Frustrated after being turned down for refinancing by more than 40
lenders, the Mizers had hope when they received a letter from a
mortgage-restructuring firm that claimed to have a 95.5 percent success
rate in stopping foreclosures. ``As a member of the Better Business
Bureau, you can trust us and avoid numerous dishonest scams,'' said a
letter they say they received from Augustus, Rae and Reed, based in St.
Marys, PA.
The Mizers checked with the Better Business Bureau and found no
complaints. So the couple said they tapped Roger's 401(k) retirement
plan in May 2007 to pay the firm's up-front fees of $1,347.
``They told us we shouldn't communicate with the mortgage company
anymore because they would do that instead and work out a repayment
plan to save our house,'' says Kari Mizer, a school food-service
worker. When she began getting calls a month later from the mortgage
lender about foreclosure proceedings, she was told that the firm had
never contacted the bank. The Mizers' home was put up for sale by the
court around Christmas 2007 and auctioned off. They are now renting a
house.
``All of the people who we talked to about refinancing or finding
some way to keep our home acted like it was no big deal, that it's just
a house after all. But this was our home, and I cried for days because
losing it was like going through a death in the family,'' Kari Mizer
says. The Mizers' experience with a ``rescuer'' that charges an up-
front fee for help that never comes is a common foreclosure-prevention
trap. In fact the Mizers were among more than 200 Illinois consumers
cited in a complaint against Augustus, Rae and Reed filed by Illinois
Attorney General Lisa Madigan in September 2008.
The complaint contends that the firm violated state law by charging
for services that it did not provide, in many cases failing to
negotiate at all or simply submitting paperwork that consumers easily
could have provided themselves. The state is seeking the return of fees
and the imposition of penalties. In other cases, homeowners are pressed
into signing documents that transfer the title of their home to the
scammer.
Public notices of foreclosure proceedings usually trigger mail,
phone, and even door-to-door solicitations. But consumers should steer
clear of any company that initiates such contact, demands a fee before
providing services, or advises cutting contact with the mortgage
company. That can delay legitimate options for preventing foreclosure
proceedings. If anyone asks for an up-front fee or payment of any kind
for counseling, that's a signal that you're dealing with a possible
pretender.
What consumers should do: Consumers anticipating problems making
mortgage payments should seek legitimate free or low-cost help as soon
as possible. Consumers can contact a housing counseling agency
certified by the Department of Housing and Urban Development
(www.hud.gov/foreclosure or 800-569-4287). Their agents can assess
options and advise you in negotiating with the lender. Advice is also
available at the Homeowner's Hope Hotline, at 888-995-4673 (see box
below). Another good source of help is the Institute for Foreclosure
Legal Assistance, www.foreclosurelegalassistance.org, which funds and
trains groups nationwide that give subsidized legal representation to
families facing foreclosure.
What policymakers and regulators can do: With a projected 3.5
million mortgage foreclosures set to take place this year, the FTC's
current and future investigative and enforcement work in this area is
needed now more than ever. Consumers Union supports proposed state and
Federal legislation that would prevent foreclosure rescue scams by
creating additional protections for consumers who pay fees for rescue
and loan modification services. In addition, Congress could pass
legislation to create a Consumer Financial Protection Agency, which
would meet a critical public need for stronger consumer protection in
financial services, both by more carefully reviewing the financial
products that are offered, and strengthening enforcement in response to
consumer problems and complaints.
2. Hard-sell Reverse Mortgages
Helped along by television ads featuring actor James Garner and
other celebrities, financial firms are enticing seniors to take equity
out of their homes through reverse mortgages. Federally-insured reverse
mortgages allow homeowners 62 and older to borrow against home equity
and receive tax-free cash. The money borrowed plus interest is repaid
only after the homeowner dies or moves out. The industry is expecting
growth of these loans to accelerate since the lending limit has risen
to $417,000.
But a reverse mortgage should be a last resort. When homeowners use
it to splurge on travel or pay off credit cards, they lose an important
safety net that might be needed for an emergency. Lenders, though, are
promoting a wide range of uses for reverse-mortgage cash. Financial
Freedom Senior Funding Corp. of Irvine, Calif., suggests using the
money for ``special things you've always wanted to do, such as travel
or hobbies.'' Financial Freedom is a subsidiary of IndyMac Bank, which
was taken over by the Federal Deposit Insurance Corp. in 2008. A sale
of IndyMac is pending.
The dangers are outlined in a lawsuit filed against Financial
Freedom. The suit claims that the company advised its business partners
to encourage seniors to take out as much money as possible in reverse
mortgages so that the fees and interest paid to lenders would be
maximized. The complaint goes on to say that Financial Freedom
encouraged and trained partners, some of whom were insurance agents, to
sell insurance products to seniors with the money gained from the
reverse mortgage. In turn, Financial Freedom would obtain additional
interest on the extra money borrowed.
The plaintiff, Betty Adcock, 80, says she was persuaded to replace
her home equity line of credit with a reverse mortgage. Her daughter,
Carol Anthony, had already helped her establish a $150,000 no-fee home
equity line for emergency expenses. During the first 3 years, Adcock
had borrowed about $19,000. But her daughter said at a December 2007
Senate Committee hearing that ``in place of the no-fee home equity
loan, she now had a reverse mortgage that charged 18 closing fees.''
The fees totaled a staggering $16,791.23, Anthony said. The salesman,
according to the suit, advised Adcock to choose a reverse mortgage
payment option that required her to take out $1,002.88 monthly,
increasing the amount of interest she would have to pay. The suit
claims that the reverse mortgage required that Adcock immediately make
home repairs of about $5,500 and pay Financial Freedom for monitoring
whether the repairs were done. On the date the loan closed, she owed
$56,741.59. With the help of her daughter, Adcock paid off the reverse
mortgage 6 months later at a final cost of $71,942. Financial Freedom
denies the allegations.
What consumers should do: Consumer Reports recommends that
consumers considering tapping home equity can contact a HUD-approved
counselor (800-569-4287 or www.hud.gov/offices/hsg/sfh/hecm/
hecmlist.cfm). A free session with a trained counselor can help
evaluate all of the choices. If you opt for a reverse mortgage, don't
sign any documents until they have been reviewed by a lawyer you trust.
What policymakers can do: Consumers Union believes that sellers of
reverse mortgages should be required to make sure the loan is suitable
for the borrower, and that is one-on-one premortgage counseling for all
reverse mortgages. There should also be caps on origination fees for
all reverse mortgages and better restrictions on sales practices.
Senator Claire McCaskill has proposed legislation aimed at
preventing fraud, and requiring that ads for government-backed
mortgages present a balanced view of their risks and benefits. At her
request, the GAO is conducting an ongoing investigation of the
federally-insured mortgage program.
Legislation is currently pending in California that would extend
requirements for beefed-up independent counseling and cross-selling
restrictions to lenders who aren't federally-insured. Minnesota
legislators supported a bill requiring lenders to show reasonable
grounds for concluding that a reverse mortgage is suitable for each
borrower, and Vermont has passed a law requiring face-to-face
counseling.
3. High-fee Debt Settlement
Marissa Ruiz, 40, of Pasadena, Calif., was struggling to make
minimum payments on more than $10,000 worth of credit-card debt in May
2007 when she saw an online ad from Debt Settlement USA that persuaded
her to sign up.
``They said they'd work with your creditors to reduce your total
debt and get it all paid off, and that's what I wanted to do,'' says
Ruiz, a single parent supporting four children, ages 11 to 17, on a
modest income as a children's social worker. She says the company told
her to stop sending payments to creditors, a tactic often used by debt-
reduction companies. Instead she was supposed to save $141.80 per month
and tell Debt Settlement when she had at least $1,000 so that the
company could begin negotiating discounted payoffs with lenders.
The company deducted $121.54 from her checking account as the first
of 10 monthly payments required for fees, Ruiz says. She'd handed over
more than $600 by the time she quit the plan 5 months later because she
believed she was getting nothing in return, other than being hounded by
calls from bill collectors.
Debt Settlement USA's President, Jack Craven, says his company
contacted Ruiz's creditors in July 2007 to notify them that she had
granted the company limited power of attorney. He says she was not
advised to stop paying creditors. Ruiz disputes that, and the written
instructions she received from Debt Settlement state: ``Do not speak to
creditors.'' Ruiz says she contacted Debt Settlement to end its
involvement. The company says that it tried to follow up but that she
did not respond.
Ruiz then sought help from Clearpoint, a nonprofit financial-
counseling agency that she had also spotted on the Internet. The credit
counselor didn't require fees to help her develop a budget and
contacted her creditors to discuss a realistic repayment plan. Ruiz
says she negotiated directly with some lenders, such as Washington
Mutual and JCPenney, that would agree to settle her bills for less than
half of what she owed if she could pay the settlement amount in a few
timely payments.
To earn the money to do that, she took on a part-time job. In one
year, she slashed her debt from almost $13,000 to $3,000. ``It hasn't
been easy, and it still shocks me that I did it, but it feels great,''
Ruiz says. ``Now when I hear ads on the radio all the time from these
kind of companies, I get so angry because I don't want anyone else to
get sucked in like I did.'' People using settlement companies could
face problems in the time before debt negotiations usually begin. The
original debt might soar as missed payments lead to penalty fees and
other charges, and the credit rating plunges further.
Regulators say that under the typical arrangement, companies charge
up-front fees totaling 15 percent of the debt to be settled, a monthly
service fee of $50 and if they do reach a settlement, a contingency fee
of 20 percent or more of the amount they've allegedly saved. And the
Internal Revenue Service might consider forgiven debt to be taxable
income.
``Most consumers end up quitting these programs within the first 2
years after being subjected to constant collection calls and paying
fees that can run into the thousands while receiving none of the
benefits they were promised,'' says Googel, the Assistant Attorney
General in West Virginia.
Wesley Young, Legislative Director of the Association of Settlement
Companies, a trade group, says that 40 to 55 percent of consumers
complete the programs but that lack of savings discipline is the most
significant factor in the dropout rate. But in a May 2004 case against
debt-settlement services brought by the Federal Trade Commission, a
court found that less than 2 percent of consumers enrolled in the
defendants' debt-negotiation programs, 638 out of 44,844, completed
them.
In the past 2 years, West Virginia has charged nine debt-relief
companies with violating state law by charging excessive fees for their
services, along with other violations. The companies agreed to stop
doing business with West Virginia residents and to refund $735,000 in
payments collected from 490 residents.
What consumers should do: Consumers struggling with credit-card
debt should first consider negotiating directly with creditors. ``Now
is a better time than ever before to do this because card issuers are
finally realizing that if we, their customers, go under, they will go
down with us,'' says Curtis Arnold, founder of CardRatings.com, a site
that evaluates credit cards. ``So they are reaching out to offer
repayment plans to card members carrying significant debt loads.''
Chase Card Services spokeswoman Tanya Madison says Chase will negotiate
with some debt-settlement companies at a cardholder's request but will
not offer more favorable terms than the customer would receive by
negotiating directly with the bank. People needing help can find a
nonprofit credit counselor through the National Foundation for Credit
Counseling (www.debtadvice.org). Those counselors will divide a set
monthly payment among creditors to pay off the balance in full over
time at reduced interest rates. Based on financial circumstances, the
service might be provided free or for set fees: an enrollment charge of
no more than $25 and a monthly fee of no more than $50.
What policymakers can do: We urge the FTC to undertake a vigorous
enforcement program against debt collection abuses, such as:
Prohibiting debt collectors who pursue debts in court or in
arbitration without evidence of the essential facts of the
debt, or without holding any license required by state law. The
FTC must require that no collection activity can commence
without proof of indebtedness by the consumer, date of the
debt, identity of the original creditor, itemization of all
fees, charges and payments, and itemization of all post-default
charges and credits.
Stopping debt collectors' attempts to collect on time-barred
debts, deceptive settlement agreements, putting old debt on new
credit cards, and cross-debt collection by refund anticipation
lenders.
Restricting debt collectors from accessing a consumer's
financial account. At a minimum, there should be a requirement
for express, informed, written permission.
With respect to debt settlement companies, the FTC's own workshop
showed that these services often don't benefit the consumers who pay
for them. H.R. 2309 would direct the FTC to consider issuing
regulations in the area of debt settlement. The FTC should ban the
charging of advance fees in debt settlement and cap fees based solely
on a low percentage of the amount by which the debt is actually and
permanently reduced below the amount owed when the debt settlement
contract was first signed.
4. A Credit Card for Anyone
The pitch sounds alluring: ``If you have been turned down for
credit recently because of your credit score, Continental Finance is
here to help you with the second chance you have been waiting for.''
But the ``second chance'' provided by Continental Finance Classic
MasterCard could cause cardholders' credit scores to dive further.
Designed for borrowers with subprime credit, commonly defined as a
credit score below 660, the card comes with fees galore. The initial
credit limit is $300, but it is immediately reduced by a $50 annual fee
and a $200 account-processing fee, leaving available credit of only $50
at the outset. In addition, there's a monthly account-maintenance fee
of $15, a $5 fee for online payments, a $25 fee if the credit line is
increased, which can happen after 6 months, a $15 replacement fee if
the card is lost or stolen, and a $35 over-the-limit fee. The annual
interest rate on balances: 19.92 percent.
Issued by First Bank of Delaware, Continental Finance cards are
among those labeled ``fee harvester'' credit cards in a 2007 report
issued by the nonprofit National Consumer Law Center.
In late 2008, First Bank of Delaware agreed to pay $304,000 in
penalties and to overhaul procedures to settle charges filed in June
2008 by the FDIC. The complaint said that marketing for Continental
Finance MasterCards issued from March 2006 through June 2008 and other
cards issued by the bank failed to adequately disclose significant up-
front fees and misrepresented what the consumers' initial available
credit would be.
CompuCredit, an Atlanta financial services and marketing company,
was also named in the complaint. CompuCredit was First Bank of
Delaware's partner in marketing and servicing cards issued under other
brand names such as Imagine MasterCard. Filings with the Securities and
Exchange Commission show how lucrative the credit-card business is. In
2007, CompuCredit reaped $673.9 million in credit-card fees, up from
$436.7 million in 2006. Under CompuCredit's 2008 settlement with the
FDIC, the company has agreed to reverse $114 million in fees charged to
consumer accounts arising from deceptive marketing allegations. The
company also will pay a $2.4 million civil penalty.
The FDIC order requires that the company disclose information about
fees and other restrictions affecting available credit prominently on
the same page in its solicitations. ``No changes in our existing
marketing materials are necessary because in 2006 we made changes in
our solicitations that address the agencies' concerns about placement
of fee-disclosure information,'' says Tom Donahue, a CompuCredit
spokesman. The Federal Reserve Board has approved new rules for credit
cards that limit total security deposits and fees during the first 12
months to 50 percent of the initial credit limit.
What consumers should do: A better alternative for consumers
seeking to rebuild poor credit histories is a secured credit card,
which requires a cash deposit of at least $200 to $300 as collateral.
The amount of cash deposited will typically be the initial credit
limit. Making timely payments should boost the credit score, so look
for a card that reports to the three major credit bureaus and has no
application fee. Interest rates on such cards recently were in the mid-
to-low teens, and annual fees should be no more than $50.
5. Uninsured Savings Accounts
In early December, when the average interest rate on one-year
certificates of deposit offered by U.S. banks was hovering at 3.2
percent, an online bank's offer sounded enticing: rates of 5.5 to 6.5
percent on one-year CDs. The bank says its ``Premium'' CDs are for the
investor who is ``looking for an alternative to the low rates offered
by most domestic banks'' and a guaranteed rate of return to avoid
market fluctuations.
That high rate might be ``guaranteed,'' but there's no Federal
guarantee backing the money you deposit. That's because the offer came
from Millennium Bank in St. Vincent and the Grenadines, in the West
Indies, and the bank is not FDIC-insured. Millennium says it is a
wholly-owned subsidiary of United Trust of Switzerland and devotes
space on its website to describing Swiss banking. It notes that ``the
main reason for Swiss Banking is to keep one's financial status
private, protecting personal assets along with receiving a higher
return.''
Millennium encourages customers to use its secure online banking
services, but it says there is no website providing information about
United Trust of Switzerland because its ``premier private clients''
don't trust the security of public websites.
We checked with the Swiss Federal Banking Commission, which says
that United Trust is registered as a management-consulting firm and
that neither it nor Millennium Bank is supervised by the commission.
The International Financial Services Authority in St. Vincent confirms
that Millennium is registered as an offshore bank operating on the
island but would not comment further.
When we asked Millennium employee Bob Kelty how the bank invested
depositors' money to achieve such high returns, he declined to explain,
saying, ``That's proprietary information.''
What consumers should do: Some CDs, money-market accounts, and
other savings alternatives might not be FDIC-insured, so you need to be
careful and shop around. Bankrate.com, which publishes online bank
data, lists federally-insured banks, along with a ``Safe & Sound''
rating assessing overall financial stability.
Recession-Related Internet Scams
Another big category of consumer frauds that target financially-
distressed households are Internet-related scams relating to employment
and work, including: (1) job search services; (2) unemployment benefits
scams; (3) work-at-home schemes; and (4) websites that promise access
to government grants; and (5) online shopping dangers.
1. Internet Employment Scams
In our June 2009 magazine, in an article entitled ``Boom Time for
Cybercrime,'' Consumer Reports warns consumers to be especially careful
about cyber-crimes during the economic downturn.\6\
---------------------------------------------------------------------------
\6\ Consumer Reports, ``State of the Net: Boom Time for
Cybercrime,'' June 2009, p. 18-21.
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According to the article:
One in five online consumers were victims of a cybercrime in
the past 2 years, according to the latest Consumer Reports
state of the Net survey. . . . The overall rate of cybercrime
hasn't declined much over the 5 years we've tracked it. Crooks
continue to take advantage of new technologies. And consumers,
corporations and the government haven't done all they could for
protection. The problem stands to get worse as rising
unemployment and foreclosures fuel a wave of recession-oriented
Internet scams.
The article profiles Dan and Pat Quigley, a couple from
Woodinville, Washington. When Dan was laid off from his engineering job
with Motorola, he posted his resume on several major job-search sites,
entering personal data such as his name, address, and educational
background. He didn't want to leave anything out, but he also worried
that ``with that info up there, I was essentially painting a target on
myself.'' And soon, Dan began receiving a lot more employment-related
spam.
Trying to help in her husband's job search, Pat Quigley visited a
legitimate-looking site that promised jobs, but it turned out to be
malicious. Then the Quigleys noticed that Pat could no longer access
security software sites. Her computer had become infected. Ultimately,
the couple was forced to erase Pat's hard drive.
According to Washington State's Attorney General, the Quigleys
aren't alone.
``We've seen a big spike in complaints about work-related scams,
and they're often over the Internet,'' Rob McKenna, Washington State's
Attorney General told Consumer Reports. ``What unemployed people,
people in foreclosure, and the elderly all have in common is that
they're more vulnerable, more anxious, and they set aside common
sense.''
Job scams come in a variety of guises, according to the Internet
Crime Complaint Center, a partnership between the FBI, the Bureau of
Justice Assistance, and the National White Collar Crime Center.
Some scams appear to be offers to process payments, transfer funds,
or reship products but are actually fronts for operations that cash
fraudulent checks, transfer illegally obtained funds, or receive stolen
merchandise for shipment to criminals. Even users of well-known
employment sites can be at risk. User IDs and passwords were recently
stolen from the internal databases of job sites Monster and USAJobs.
What consumers can do: Avoid job listings that ask you to pay money
up front. Make sure that online job-search services you use offer
privacy options. Monster, for example, lets you post a confidential
version of your resume that hides your key contact information, among
other things. Never post a resume that includes your Social Security
number. Avoid job offers that claim to pay a lot of money for little
work.
2. Unemployment Benefit Scams
Some Internet frauds directly target the unemployed themselves.
Michigan's Unemployment Insurance Agency has warned unemployed workers
against using websites that charge fees to file their claims for
unemployment benefits, and to be wary of e-mails inviting them to
establish direct deposit accounts for their benefits. These ``file-for-
a-fee'' and direct deposit services ask for personal information,
exposing users to the risks of identity theft. The filing sites
advertise on search engines such as Yahoo and Google, and appear as
sponsored-ad listings when individuals search for information on how to
file for benefits.\7\
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\7\ WLKM News, Detroit, MI, June 16, 2009.
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What consumers can do: Bypass the scam offers, and file for
unemployment benefits directly with the state agency that is
responsible for distributing benefits.
3. Work-At-Home Schemes
The FTC has gone after at least 500 work-at-home schemes in recent
years, and Internet ads for such services are rampant on the web. Such
ads include ads for services that have generated many consumer
complaints to the Better Business Bureau, the FTC and state consumer
protection agencies.\8\
---------------------------------------------------------------------------
\8\ Consumer Reports. ``Beware of Work-At-Home Stings,'' June 2009,
p. 15.
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What consumers can do: It is possible for consumers to work at
home--but deceptive offers are plentiful, so consumers shouldn't expect
to get rich quick. To avoid scams, the Federal Trade Commission and
NASE advise consumers:
Don't pay for materials--Legitimate home product-assembly
businesses are local and never ask you to buy the materials.
Be wary of network building--Stay away from multilevel
marketing schemes that make earnings contingent on your ability
to sign up an ever-growing pyramid of ``distributors'' who are
supposed to do the same and pass sales commissions up the line.
Do some sleuthing--Check the company's Better Business
Bureau rating. Also do a search at www.ripoffreport.com and
www.complaints.com.
Be a skeptic--Don't depend on promises of 100 percent
satisfaction and money-back guarantees. They might be
worthless.
4. ``Free Government Grants''
Numerous web ads claim that large sums of government money are
available to consumers. If you fall for them, you will likely be
enrolled in a grant-search program that could cost up to $90 a month.
``Billions of dollars available in government grants, never
repay!'' claimed an ad recently at FreshGrants.com. The ad is an
enticement for a ``Free Grants Kit'' that the website claims will
explain how to apply for government grants for which you may or may not
be eligible.
As for ``free,'' that's open to interpretation. You're asked to
provide your credit-card info to pay $1.98 for shipping and handling.
By ordering the ``free'' grant kit, you're agreeing to pay fees for
monthly access to Grant Funding Search and a trial membership in the
Ideal Wealth Builder Club, which includes benefits that ``will show you
how to turn your debt into wealth.'' But the ad's fine print said that
if you didn't cancel within the free trial period, your credit card
would automatically be charged $99.90 in combined membership fees every
month. That's how to build wealth, all right, just not for you.
At one such website, consumers were invited to fill out a brief
form asking for their name, income, and the type of grant they are
seeking.\9\ A researcher from Consumer Reports Webwatch filled out the
form several times in March, and received the same answer every time:
---------------------------------------------------------------------------
\9\ The Unsponsored Link (blog), Consumer Reports Webwatch,
available at:
http://blog.consumerwebwatch.org/2009/05/
free_grant_moneya_sham_site_fr.html,
http://blog.consumerwebwatch.org/2009/05/
govenmentgrantsonlineusanother.html,
http://blog.consumerwebwatch.org/2009/03/
no_free_government_grants_at_g.html, and
http://blog.consumerwebwatch.org/2009/05/
stay_away_from_all_grant_instr_1.html.
``Congratulations! You qualify for a free CD (compact disc)!
Use this CD to apply for your cash: $150 billion to start your
own business! $97 billion to go to school! $144 billion to buy
---------------------------------------------------------------------------
a home!''
While the CD is free, there's a $3.95 shipping charge. But what
probably isn't apparent to cash-strapped consumers desperately scouring
the Web for financial aid is the fine print at the bottom of the page
(below the screen), which reads as follows:
``Special Bonus: Order your FREE CD today and receive a free 7
day trial enrollment in the Grant Writing Express Online Help
Center which includes 24 Hour E-mail Access to Grant
Specialists, Funding Instruction Courses, and Grant Sources
Updated Daily. It also gives you access to our Grant Writing
Specialists who are there to Quickly Answer Your Questions
about the Grant Process. This membership continues at the low
monthly rate of only $74.95 for as long as you need the help in
your Grant Search and Application Process. You can stop your
monthly subscription to the help center site anytime in the 7
days and you will not be billed anything. The free trial begins
on the day the CD is ordered.''
The FTC has been warning consumers about scam government grant
sites at least since 2006, and the Better Business Bureau has received
many complaints about these sites. The sites may operate under
literally dozens of similar business names; one website had as many as
30 different business names, acting as ``feeder sites'' to drive more
web traffic to the primary company.
What consumers should do: Avoid website offers that offer easy
money from government grants, and instead visit www.Grants.gov, the
Federal Government's gateway to funding opportunities.
5. Online Shopping Dangers
An estimated 1.7 million households were victims of ID theft
committed over the Internet, Consumer Reports' State of the Net survey
shows. Of the respondents to our survey who fell into that category,
two-thirds said the incident occurred because of an online purchase.
Other sources of ID theft included hacked computers, e-mail scams, and
compromised financial transactions.
In 2008, the Consumer Sentinel Network, a joint project that
includes the Federal Trade Commission, National Fraud Information
Center, Internet Crime Complaint Center, and some Better Business
Bureaus, reported 370,000 consumer-fraud complaints. In 63 percent of
those, the defrauders, which include a variety of businesses, initially
made contact with the consumer via the Internet.
What consumers can do: Be cautious about with whom you do business.
``Someone can set up an e-commerce site in hours,'' says Brent Remai,
Vice President of Consumer Marketing for security software maker
McAfee. ``And even if a site isn't set up by a cybercriminal, it can be
hacked.'' Even when shopping at a site that seems trustworthy, first
check it out with the Better Business Bureau's online division.
Consider using a two-way firewall, which blocks software that's on your
computer from sending outgoing communications without your knowledge.
You can get one free of charge at www.zonealarm.com.
What regulators and policymakers can do about recession-oriented
Internet-oriented scams: Recession-oriented Internet fraud and scams do
not exist in a vacuum, but are part of a much larger policy challenge
reducing Internet-oriented scams, fraud and crime. We have three major
recommendations:
1. Many of the scams identified above are promoted extensively
through online advertising and e-mail, or through fraudulent
shopping sites. This underscores the importance of swift
enforcement and regular sweeps to detect and alert the public
to problems, as have been carried out by the FTC and state
regulators on various Internet issues.
Internet criminals can pivot on a dime to adjust their
messaging to fit an economic downturn, a swine flu epidemic, or
other crisis. Especially when economic times are hard, it is
critical that state and Federal consumer protection agencies be
provided with ample staff and investigative resources to go
after purveyors of fraud, and widely communicate the results of
their investigations to the public.
The FTC's Operation Short Change, announced on July 1, is a
prominent example of how a high-profile enforcement sweep can
expose bad practices, directly halt the operations of specific
companies, and send a clear message that such crimes will not
be tolerated. In the states, many attorneys general have been
active in warning the public about Internet scams and pursuing
companies engaged in foreclosure scams and questionable debt
settlement practices.
2. Media and Internet companies that accept advertising should
carefully scrutinize advertisements for products or services
that make unsupported promises, take advantage of financially-
stressed consumers, or make unfair, unethical or questionable
claims. While we don't know what the exact standard should be
here, we would note that as a matter of corporate
responsibility, companies that accept advertising should not be
setting consumers up for financial heartbreak.
As noted by Dr. George Blackburn in an FTC staff report
regarding weight loss claims, ``In the absence of laws and
regulations to protect the public against dangerous or
misleading products, a priority exists for the media to
willingly ascribe to the highest advertising standards, i.e.,
those that reject the creation and acceptance of advertisements
that contain false or misleading weight loss claims.'' \10\
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\10\ Cleland, R.L., et al., ``Weight Loss Advertising: An Analysis
of Current Trends,'' A Report of the Staff of the Federal Trade
Commission, September 2002, page v.
We would also note that to their credit, some Internet search
companies now specifically warn consumers about websites that
could include spyware or malware. These companies may be able
to do much more to suppress deceptive ads, and warn consumers
against financial scam websites that put them at serious risk,
and/or receive failing grades from watchdog groups and
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government regulators.
3. Consumers Union believes a variety of other new protections
to prevent fraud and promote data security are needed,
including measures to prevent retail fraud and protect
sensitive customer data from security breaches. Businesses
should store sensitive data in encrypted form. Two-factor user
authentication, using a password and a key with a constantly
updated passcode, would provide further protection. Companies
should regularly test the security of their Web applications
and networks. Programmers should be educated about the latest
security measures. Companies entrusted with valuable consumer
information should be certified by Trustkeeper and Verisign.
Web-hosting companies must tighten policies to fight phishing,
including suspending terms-of-service violators and requiring
the collection of accurate information about account holders,
as the Anti-Phishing Working Group suggests.
Conclusion
Mr. Chairman, Members of the Committee, as outlined above, the
diverse financial come-on and ripoffs come in a variety of forms and
permutations, and unfortunately do not lend themselves to a one-size-
fits-all, silver bullet solution. However, we believe that given the
risks to consumers, everyone must do more:
Consumers must be ever on their guard, and very, very
skeptical of offers of financial help and extra income,
particularly when those offers come from businesses they don't
know, or have an unfamiliar track record. They should seek
second opinions and advice from knowledgeable and respected
sources of information, including trusted friends, consumer
protection agencies and watchdog groups, government agencies,
attorneys, homeownership counselors and others, prior to
handing over cash, or signing contracts or agreements that
obligate them financially.
Businesses that sell products with high fees or financial
traps built into them should withdraw or redesign such
products, or in other cases provide much better disclosure,
counseling and protections for customers. In addition,
businesses have an important role to play in strengthening the
protection of sensitive customer information, to prevent
security breaches and identity theft.
Media and Internet companies that accept advertising should
carefully scrutinize advertisements for products or services
that make unsupported promises, take advantage of financially-
stressed consumers, or make unfair, unethical or questionable
claims. As a matter of corporate responsibility, companies that
accept advertising should not be setting consumers up for
financial heartbreak. To their credit, some Internet search
companies now specifically warn consumers about websites that
could include spyware or malware. These companies may be able
to do much more to reduce and suppress deceptive ads, and warn
consumers against financial scam websites that receive failing
grades from watchdog groups and government regulators.
State and Federal regulators should step up enforcement of
companies that deceive and defraud consumers, and impose sharp
criminal and civil penalties for companies that violate the
law.
State and Federal policymakers should consider new consumer
protections to protect consumers against unfair and deceptive
practices that target financially-distressed households. In
particular, legislation pending before Congress to establish a
Consumer Financial Protection Agency would greatly help to
protect consumers in good times and bad, and ensure that laws
against deceptive practices and fraud are effectively enforced.
Economic fraud has a high financial and personal cost for
consumers, could undermine public confidence in the marketplace
and a renewed economy. Consumer protection should be a pillar
of economic reconstruction, to ensure that people who work hard
and save for the future will not be unfairly deprived of their
income and assets.
Thank you very much for the opportunity to testify here today about
this critically important national issue. We look forward to working
with you as you move forward in addressing these issues.
Senator Pryor. Thank you.
Next is Sally Greenberg, Executive Director of the National
Consumer League.
STATEMENT OF SALLY GREENBERG, EXECUTIVE DIRECTOR, NATIONAL
CONSUMERS LEAGUE
Ms. Greenberg. Thank you, Senator Pryor. I'm really honored
to be here this morning. First of all, thank you for holding
this hearing. It's a really important topic, and your--you and
your excellent staff have given all of us here an opportunity
to make some recommendations and describe what we see out
there. And it's not pretty.
One thing I've learned in this job--and I've only been at
the job a couple of years; I was a colleague of Chuck Bell,
here, at Consumers Union, for 10 years, before coming to the
National Consumers League--is that those who perpetrate fraud
have absolutely no qualms about stealing from the most
desperate or destitute consumer. The consumers who fall into
these fraudulent traps are not stupid people. People tell me
that all the time, ``How can he be so stupid?'' Well, I'll tell
you, the people who--Mr. Vitale, here--they're very, very good
at what they do, and they say all the right things to people,
and they're very schooled at it. So, I think it's--the public
education and outreach is just such an important piece of what
we're talking about here today, because once people hear the
kinds of things that we're talking about, I think they'll think
twice.
But, desperate times and tough economies, really make
consumers much more vulnerable. We have certainly found that at
the National Consumers League Fraud Center. The Fraud Center's
been going since 1992. It was really formed--we put it together
as a result of this, just, explosion of Internet fraud. And
what we saw in the last 6 months at the Fraud Center, the first
6 months of 2009, were 6,800 reports of fraud directly from
consumers. We share all of those reports with 90 international,
Federal, State, and local law enforcement officials. We
particularly--we are very interested in bringing together both
law enforcement, consumer organizations, labor groups,
corporations, nonprofits, and government. We have something
called an ``Alliance Against Fraud,'' and we're going to make a
recommendation that we all need to be talking together on a
regular basis and more frequently.
Today, we're pleased to be able to share with you the
results of our 6-month review of complaints received by the
Fraud Center, which covers the period, as I said, January to
June of 2009. Of special note, work-at-home scams moved into
our top-ten categories of most prevalent frauds. They didn't
make the top-ten list last year. Also, most of the frauds that
we--that were reported to our Fraud Center were fake-check
complaints. More than half involved either fraudulent mystery
shopping opportunities or false sweepstakes winnings, with
average losses of $3,000-per-victim. We believe that both types
of fraud are closely linked with the current economic
circumstances. And moreover, in the last 6 months our
statistics show the overall frequency of fake-check complaints
has increased 4 percent.
The examples of consumers who have been scammed--we heard
one very compelling woman speak about her example. What--we
talked recently to a woman named Roxanne. I think her
experience is illustrative. After receiving an advertisement
for a mystery shopper job, Roxanne received a cashier's check
in the amount of $4,665 in the mail. She promptly deposited the
check, and, 3 days later, asked her bank to verify that it was
good. And they did so. She began conducting her mystery
shopping work that was assigned to her. Now, after purchasing
several hundred dollars worth of items, Roxanne was instructed
to wire the remainder of the funds left from the cashier's
check to clients in Canada. She learned, several days later,
that the original cashier's check had been returned to the bank
as counterfeit. Unable to contact the representative, she was
left owing the bank more than $4,000. That's a classic fake-
check scam, and that--those have simply exploded over the last
couple of years.
Her case illustrates that the worsening economy has caused
increasing--increased consumer interest in supplementing their
declining incomes with work-from-home scams, and she's
certainly not alone.
We conducted a survey in February of this year and found
that 31 percent of respondents were more likely to consider
starting a home-based business due to the worsening economic
climate. That same survey found that 33 percent of respondents
were unable to detect a pyramid scheme when it was described to
them. And this trend was particularly pronounced among African
Americans, Hispanics, and low-income consumers.
Adding insult to injury is what's going on out there in the
rest of the country, because so many of the consumer offices
around the country have been either slashed--their budgets have
been slashed or they've been closed down entirely. From Florida
to Wisconsin to Nevada to California, these offices are going
without directors and they're--these offices are really the
boots-on-the-ground protection that consumers have.
Now, we recommend--we're making five recommendations in our
testimony. The first is in support of the great work the FTC is
doing now. We want to point out, the FTC staff is only 63
percent of the size it was in 1979, and we want to ask you, as
Members of Congress, to give the FTC and other Federal agencies
the resources they need to do the job that so badly needs being
done with their--the kind of outreach that we saw here this
morning.
We would also like consumers to have the access to the
FTC's Consumer Sentinel Database so they can quickly search it
for complaints related to suspicious e-mails, telemarketing
calls, and fraudulent businesses. Currently, only law
enforcement has access. We think it's for privacy reasons. But,
we would like to try to get that worked out so the public can
get access to that information.
Third, we'd like to see low-income and minority consumers
really the focus of our--of more efforts to protect them, since
they tend to be the more vulnerable, especially in this
economy. And we have--make some suggestions about reaching out
to those who have applied for unemployment benefits. There's
also work that could be done for those who are accessing
different programs that the FTC has for people who need
assistance in both Internet and landlines.
So, we--with financial support from Congress, we also would
like to ask that the FTC create a grant program for
organizations from State and local government, and nonprofits,
to help fund innovative consumer fraud projects.
And last, we would like to see, as I noted before, more
coordination with all the Federal agencies that do the kind of
work that all of us here at the table do. We think there should
be a more regular coming together of all of us, perhaps a
national conference, to talk about antifraud strategies.
So, thank you, Mr. Chairman, for giving the National
Consumers League this opportunity to talk with you today. We
commend you for focusing on this rampant consumer fraud, and we
thank you, also, for your very pro-consumer record.
[The prepared statement of Ms. Greenberg follows:]
Prepared Statement of Sally Greenberg,
Executive Director, National Consumers League
Introduction
Good morning, Mr. Chairman, and members of the Subcommittee. My
name is Sally Greenberg and I am the Executive Director of the National
Consumers League (NCL).\1\ I appreciate this opportunity to appear
before the Subcommittee on Consumer Protection, Product Safety, and
Insurance of the Senate Commerce, Science, and Transportation Committee
to discuss the issue of fraud connected to the ongoing economic
recession.
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\1\ The National Consumers League, founded in 1899, is America's
pioneer consumer organization. Our non-profit mission is to protect and
promote social and economic justice for consumers and workers in the
United States and abroad. For more information, visit www.nclnet.org.
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Since our founding more than a century ago, the National Consumers
League has sought to protect consumers from fraudulent practices. In
1992, the League established a Fraud Center, enabling us to directly
assist consumers threatened by the rampant proliferation of
telemarketing and online fraud enabled by the growth of global
telecommunications networks and the Internet. Via our online fraud
information portal, Fraud.org, we accept consumer fraud complaints
which we analyze and share with more than ninety international,
Federal, state, and local law enforcement and consumer protection
agency partners including the Federal Trade Commission (FTC), Federal
Bureau of Investigation (FBI), and U.S. Postal Inspection Service
(USPIS). Thanks to the work of the Fraud Center staff, NCL was one of
the first organizations to raise the alarms about the growth in fake-
check scams, which now account for more than forty percent of the
nearly fifteen thousand complaints NCL receives on an annual basis.\2\
Today, we are pleased to be able to share with you the results of our
six-month review of fraud complaints received by the Fraud Center,
covering the period January-June of 2009. Through our Alliance Against
Fraud coalition, NCL also acts as a convener of thirty-nine
organizations from the non-profit, corporate, government, and labor
communities to coordinate anti-fraud activities nationally.
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\2\ According to the FTC's Consumer Sentinel Network Data Book for
January-December 2008, counterfeit check scams were the fifth-most
reported scam, accounting for 3 percent of the total complaints
received.
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The impact of fraud nationally is stunning. According to FTC
estimates, 30.2 million consumers were victims of fraud in a single
year.\3\ The impact of fraud on businesses is equally staggering.
According to the Association of Certified Fraud Examiners, a 50,000
member professional organization, it is estimated that fraud costs
organizations approximately 7 percent of annual organizations revenues,
or approximately $994 billion annually.\4\ Given these sobering
statistics, we believe it is imperative that public policymakers at all
levels of government--and particularly at the Federal level--redouble
their efforts to educate consumers about the threat of fraud and to
vigorously enforce existing statutes and regulations pertaining to
fraud.
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\3\ Federal Trade Commission. Consumer Fraud in the United States:
The Second FTC Survey. Pg S-1. October 2007. Online: http://
www.ftc.gov/opa/2007/10/fraud.pdf.
\4\ Association of Certified Fraud Examiners. 2008 Report to the
Nation on Occupational Fraud and Abuse. Page 4. July 14, 2008. Online:
http://www.acfe.com/documents/2008-rttn.pdf.
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Fraud Linked to the Recession is a Growing Threat
Americans are clearly concerned about the link between the
recession and consumer fraud. According to the Unisys Security Index,
nearly three in four Americans believe that the world financial crisis
will increase the risk of identity theft and fraud.\5\ While detailed
statistics are difficult to obtain, it is clear to us that rising
economic hardship is affecting consumers' vulnerability to fraud. The
story of one victim who contacted the Fraud Center--who we will call
simply Roxanne to protect her privacy--is typical of the complaints we
have increasingly received in recent months.
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\5\ Unisys Corporation. ``Unisys research Shows Economic Crisis
Causing Increased Worldwide Consumer Fears about Fraud and Security
Risks,'' Press Release. April 20, 2009.
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In hopes of finding work, Roxanne was grateful to be contacted by a
company calling itself ``Service Inspection,'' which was purportedly
looking for mystery shoppers. After responding to the offer, Roxanne
received a cashier's check in the amount of $4,665 in the mail. The
company representative encouraged Roxanne to begin work immediately.
Roxanne deposited the check and after three business days contacted her
bank to verify that funds were available. The bank assured her that the
check had ``cleared,'' and she began conducting the mystery-shopping
work ``assigned'' her. After purchasing several hundred dollars worth
of items from the Gap and Wal-Mart, she was instructed to wire the
remainder of the funds left from the cashier's check to ``clients'' (in
reality, associates of the scammer) in Canada via Western Union and
MoneyGram. Several days later, Roxanne was informed by her bank that
the original cashier's check had been returned to the bank as
counterfeit. Unable to contact the ``Service Inspection''
representative (who had likely already absconded with cash from the
wire transfer), Roxanne was left owing her bank more than $4,000.
The sequence of events in Roxanne's story is not atypical. The
majority of fake-check scam complaints our Fraud Center has received
involve either fraudulent mystery-shopping ``opportunities'' or false
sweepstakes ``winnings.'' \6\ For the first 6 months of 2009, fake-
check scams made up more than forty-four percent of the total
complaints NCL received, of which sixty-five percent involved a
fraudulent mystery shopper job or phony sweepstakes winnings, with
average losses of more than $3,000 per victim.\7\ We believe that both
types of fraud are closely linked with economic circumstances. The
worsening economy has caused increased consumers interest in
supplementing their declining incomes with work-from-home
opportunities, in particular. NCL conducted a survey in February of
this year and found that thirty-one percent of respondents were more
likely to consider starting a home-based business due to the worsening
economic climate.\8\
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\6\ For more information on fake-check scams, visit NCL's and the
Consumer Federation of America's fake checks campaign website at
www.fakechecks.org.
\7\ National Consumers League. Analysis of first 6 months of
complaint data from NCL's Fraud Center. July 9, 2009.
\8\ National Consumers League. ``National Consumers League 2009
Pyramid Scheme Survey: Key Findings,'' February 2009. Online: http://
www.fraud.org/pyramids/survey_findings.pdf.
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The impact of recession-related fraud is likely to fall
disproportionately on low-income and minority consumers. As part of
NCL's February 2009 survey of consumer vulnerability to pyramid
schemes, we sought to test whether consumers could differentiate a
legitimate home-based multi-level marketing plan from a fraudulent
pyramid scheme. We found that thirty-three percent of respondents were
unable to detect the pyramid scheme when it was described to them. This
trend was especially pronounced among African-American, Hispanic, and
low-income consumers (48 percent, 35 percent, and 39 percent,
respectively). Given that African-Americans (46 percent) and Hispanics
(48 percent) were also more likely than average (31 percent) to
consider a home-based business due to the economic recession, these
populations are at increased risk of such fraud.\9\
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\9\ National Consumers League. ``National Consumers League 2009
Pyramid Scheme Survey: Key Findings,'' February 2009. Online: http://
www.fraud.org/pyramids/survey_findings.pdf.
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Sweepstakes--many of which are fraudulent--also appeal to consumers
faced with imminent home foreclosure or mounting household debt.
Consumers may fall victim to the promise of unexpected riches as a way
to stave off economic ruin. Fraud complaints involving such scams (but
not including a fake check) have increased in the first 6 months of
2009 versus our 2008 year-end statistics. Other types of fraud linked
to the bad economy are also on the rise. Fraudulent business
opportunity scams (which includes fake franchises and distributorships)
were not among the top ten types of scams reported to the Fraud Center
in 2008. In the first 6 months of 2009, however, they have grown to be
the sixth-most reported scam.\10\ As the unemployment rate nears 10
percent, we expect more out-of-work consumers to explore the option of
starting their own businesses, increasing their exposure and
vulnerability to such business opportunity scams.
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\10\ National Consumers League. ``NCL's Fraud Center: Top 10 Scams
of 2008.'' June 2, 2009. Online: http://www.nclnet.org/news/2009/
2008%20fraud%20stats.pdf.
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Mounting household debt is also fueling a dramatic rise in
fraudulent credit counseling and credit repair services. The story of
one such victim who contacted the Fraud Center--we'll call her
Patrice--is illustrative of these kind of scams. Patrice, anxious to
repair her damaged credit, signed up online with a company going by the
name of ``Advanced Credit Systems'' (ACS). The ACS ``representative''
claimed the company was able to ``guarantee'' its customers that it
could repair their credit by working with lenders and via personalized
credit counseling services. After speaking with the ACS
``representative'' several times by telephone, Patrice was instructed
to make her first payment of $1,200, which she promptly wired to a bank
account specified by ACS. Immediately after Patrice transferred the
funds, she attempted to contact ACS, only to find that the
``representative'' and ACS would no longer answer her increasingly
frantic calls. Patrice never received any services in exchange for her
$1,200.
State and Local Budget Shortfalls Decimating Consumer Protection
Capabilities
At the same time that consumer vulnerability to fraud has increased
due to the economic recession, the abilities of those entrusted with
protecting consumers from scam artists have been severely curtailed.
While Federal agencies such as the FTC, FBI, USPIS, and Office of the
Comptroller of the Currency (OCC) perform a valuable job protecting
consumers from scams falling under their purview, much of the day-to-
day consumer protection work in the United States is performed at the
state and local level. State and local consumer protection agencies,
never a darling of appropriators even before the economic crisis, are
now seeing their budgets cut to the bone or worse.
For example, the Nevada Consumer Affairs Division (NVCAD) has
temporarily suspended all operations for FY2010. The NVCAD was
responsible for accepting consumer complaints and bringing civil
actions against scam artists in Nevada. There is currently no way for
consumers to submit fraud complaints to state consumer protection
officials in Nevada. The Wisconsin Department of Agriculture, Trade,
and Consumer Protection has had to make due with significantly fewer
employees in recent years and has been subject to Governor Doyle's
request that some positions remain unfilled.\11\ The California
Department of Consumer Affairs has been without a Director for more
than 3 months due to budget woes.
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\11\ Jenkins, Janet. Administrator of DATCP Division of Trade and
Consumer Protection. Telephone interview. July 9, 2009.
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The Hillsborough County, Florida Consumer Protection Agency (whose
area of jurisdiction encompasses the City of Tampa) may soon be
eliminated.\12\ In Virginia Beach, Virginia, a city whose population is
in excess of 440,000, the director of the city's Consumer Affairs
program recently resigned her position in an effort to save the agency
from being closed down due to budget issues.\13\ Pasco County, Florida,
one of the top fifty fastest-growing counties in the Nation,\14\
dissolved its Consumer Affairs Office to help make up for its budget
shortfall. The 700 cases that the office took on annually will
presumably also no longer be investigated.\15\
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\12\ Varian, Bill. ``Hillsborough County budget cuts runs deep,''
St. Petersburg Times. June 4, 2009. Online: http://www.tampabay.com/
news/localgovernment/article1007144.ece.
\13\ Moore, Nancy. City of Virginia Beach Consumer Affairs Program.
Telephone interview. July 10, 2009.
\14\ U.S. Census Bureau. Online: http://www.pascoedc.com/
PascoCounty.aspx.
\15\ ``Consumers will lose an advocate,'' St. Petersburg Times.
June 19, 2008. Online: http://www.tampabay.com/opinion/editorials/
article631715.ece?comments=legacy#.
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These are not isolated incidents. Across the country, state and
local authorities are decimating consumer protection agencies' budgets
in an effort to deal with large deficits. State and local consumer
protection organizations are the proverbial ``boots on the ground,'' in
the fight to control fraud. Without action at the Federal level to step
into the gap created by the demise of state and local-level consumer
protection capabilities, consumers will increasingly be left to fend
for themselves against the growing threat posed by professional
fraudsters.
Consumer Empowerment Must Be Paired With an Increased Federal Role
Consumers face a double bind. The economic crisis has made them
increasingly vulnerable to fraud while local agencies that investigate
scams and enforce the laws are shutting their doors, leaving consumers
with fewer avenues to protect their interests. Absent increased action
at the Federal level to investigate and prosecute scam artists and
educate consumers about the threat of fraud, consumers will be caught
between the proverbial rock and a hard place.
We cannot simply wait for the economy to turn around and state and
local budgets to recover. The economic crisis is likely to remain with
us for the foreseeable future. Experts predicted that any recovery in
the U.S. economy in 2010 is likely to be modest.\16\ We expect that
this will mean continued belt-tightening for state and local
governments with commensurate impacts on consumer protection agencies.
Absent direct Federal support of state and local consumer protection
efforts, consumers will need the Federal Government to play an
increased role in protecting them from fraud. To this end, we propose
the following remedies:
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\16\ Reuters. ``Recession likely to end in Q3 2009-Blue Chip
survey,'' July 10, 2009. Online: http://www.reuters.com/article/
bondsNews/idUSN1051292120090710.
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First, we must give the relevant Federal agencies the resources
they need to protect consumers from fraud. In particular, the Federal
Trade Commission remains a critically underfunded and overworked
agency. While the FTC continues to fulfill its traditional antitrust
enforcement and consumer protection missions, its portfolio has grown--
largely thanks to the explosion in Internet-related fraud--to include
implementation statutes related to identity theft, the CAN-SPAM Act,
Do-Not-Call Registry, and USA SAFE WEB Act, among other areas. Despite
this growing mission, the FTC's staff is only 63 percent of the size it
was in 1979.\17\ The lack of resources available to the FTC is perhaps
best illustrated by the number of enforcement actions brought by the
agency in recent years. For the twelve months ending February 2005, the
FTC brought 83 enforcement actions. Every year since then, the number
of actions brought by the agency has shrunk. For the twelve months
ending February 2008, that number had dwindled to 23.\18\ The FTC can
and should do more to protect and educate consumers, but it will
require additional resources to do so. Increasing FTC funding levels,
particularly in the Bureau of Consumer Protection, to levels sufficient
to meet the Commission's growing mission would be a good first step
toward this goal.
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\17\ According to the FTC, the Commission had 1,746 FTEs in 1979
(see http://www.ftc.gov/ftc/oed/fmo/fte2.htm) and requested 1,102 FTEs
in FY2009 (see http://www.ftc.gov/ftc/oed/fmo/budgetsummary09.pdf).
\18\ According to FTC Annual Reports to Congress, the Commission
brought 83 actions for the twelve months ending February 2005, 60
actions for the period ending February 2006, 59 actions for the period
March 2007, and 23 for the period ending February 2008 (see http://
ftc.gov/os/annualreports/index.shtm).
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Second, more resources for enforcement should be coupled with a
renewed focus on consumer education and an embrace of innovative
vehicles for empowering consumers to protect themselves from fraud. We
would like consumers to have access to the FTC's Consumer Sentinel
(CSN) database so that they can quickly search it for complaints
related to suspicious e-mails, telemarketing calls, and fraudulent
businesses. That database, which last year collected more than 1.2
million complaints and now contains over 7.2 million, could be an
extremely valuable tool for consumers.\19\ Currently, only law
enforcement agencies who agree to strict nondisclosure requirements
have access due in part to the availability of personally identifying
information within the complaints.\20\ We would urge the FTC to convene
a series of meetings among its non-profit, law enforcement, and
consumer protection agency partners to determine what information
within the CSN database can safely be made publicly available and
searchable for the benefit of all consumers.
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\19\ Federal Trade Commission. Consumer Sentinel Network Data Book
for January-December 2008. Pg 3. February 2009. Online: http://
www.ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-
cy2008.pdf.
\20\ Complaint data from NCL's Fraud Center is periodically
submitted to the Consumer Sentinel database as part of our partnership
with the FTC.
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Third, as detailed in our testimony, low-income and minority
consumers have proven particularly vulnerable to fraud connected with
the worsening economy. Special attention should be given to fraud
education efforts aimed at these distinct populations. For example,
recently-jobless consumers applying for unemployment benefits could be
provided with educational information related to work-at-home scams and
business opportunity fraud. New applicants for FCC and state-level
Lifeline and Link-Up telecommunications subsidy programs could be
provided with information related to Internet and telemarketing fraud.
This could become particularly helpful as those and other subsidy
programs connected to the Universal Service Fund transition from a
landline telephone-based model to a broadband and wireless telephone-
based model. These materials should be made available in multiple
languages to assist non-English speaking consumers who may also be more
vulnerable to these scams.
Fourth, the FTC should enhance its support of fraud education
efforts undertaken by national, state, and local non-profit partners
working with populations at enhanced risk of fraud via targeted grant-
making. While government agencies are important, non-profit consumer
groups and others play an important role in interacting with consumers.
NCL talks weekly to hundreds of victims of scams. We consider ourselves
to be partners with government agencies in fighting fraud. However, we
have the advantage of being a consumer group and many people tell us
they are more comfortable interacting with us than with a government
agency. NCL--and likely other non-profit members of our Alliance
Against Fraud--would like the opportunity to apply for government
grants to expand our work on fraud and take on innovative anti-fraud
projects. Much like what the Department of Justice does with its grants
program to non-profits, the FTC could do with consumer protection
groups.
Finally, while we support enhanced resources for Federal agencies
to enforce fraud statutes and educate consumers, this is a shared
responsibility with state and local government, business, and on-profit
organizations. What is also needed is increased cooperation and goal-
setting among the myriad Federal agencies that are active in addressing
fraud within their organization's regulatory purview and these external
stakeholders. Agencies like the FBI, FTC, SEC, USPIS, U.S. Secret
Service, State Department and Department of the Treasury all do
excellent work and are experts at detecting and fighting back against
the kinds of fraud affecting their areas of specialization. What is
lacking is broad, sustained inter-agency coordination on anti-fraud
work. This is one reason why NCL is strongly supporting the restoration
of the White House Office of Consumer Affairs which NCL, along with
other national consumer groups, have called upon the Obama
Administration to create.\21\ Such an office should be charged with
organizing a coordinating conference among the Federal anti-fraud
organizations, with input from consumer groups and other third-party
stakeholders, aimed at developing a national anti-fraud strategy.
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\21\ ``Economic Security, Health and Safety of Nation,'' Press
release. Consumer Federation of America et al. December 11, 2008.
Online: http://static.uspirg.org/consumer/archives/
consumerreleaseandplatform10dec2008.pdf.
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Conclusion
In conclusion, the impacts of the economic crisis on consumers have
been dire. Not a day passes without new stories of consumers losing
jobs, homes, and retirement savings to the worsening economy. These
disastrous effects are compounded by rampant consumer fraud. Economic
hardship all-too-frequently leads to the kind of desperation that
fraudsters prey upon, as our fraud statistics clearly indicate.
Vulnerability to such scams is especially acute among those populations
least able to recover from the impact of fraud.
The negative effects of the economic crisis on consumer fraud
protection have been exacerbated by the decline--and in some cases the
disappearance--of state and local consumer protection agencies. With
fewer places to turn to within their communities, victims of fraud will
increasingly look to the Federal Government to fill the void left by
smaller state and local consumer protection budgets.
NCL believes we can and must do more to protect consumers from
fraud in these trying economic times. We believe it is imperative that
the Federal Government give its fraud protection agencies the resources
they need to accomplish this growing mission. We strongly support
efforts by Congress and the Executive Branch to investigate ways that
Federal fraud protection can be enhanced by greater inter-agency
coordination, greater outreach to at-risk populations, and innovative
projects that empower consumers to protect themselves.
Thank you, Mr. Chairman, for giving the National Consumers League
this opportunity to comment on the effect of the recession on consumer
fraud. We commend you for your pro-consumer record and look forward to
working with you and your staff to help protect America's consumers
from the scourge of fraud.
Senator Pryor. Our next witness will be Tim Muris, former
FTC Chair, and now Professor at George Mason University School
of Law.
STATEMENT OF TIMOTHY J. MURIS,
FOUNDATION PROFESSOR, GEORGE MASON UNIVERSITY SCHOOL OF LAW AND
OF COUNSEL, O'MELVENY & MYERS LLP
Mr. Muris. Thank you very much, Mr. Chairman.
I have held four positions at the FTC. I was Chairman from
2001 to 2004, and I am the only person ever to direct both of
the agency's enforcement bureaus, fortunately not at the same
time.
I strongly believe in the FTC as a consumer protection
agency. I'm especially proud of our consumer protection
accomplishments while I was Chairman. We did great work in the
fraud program and in protecting the privacy of Americans,
including creating the National Do Not Call Registry.
Preventing fraud is crucial of the Commission's mission.
Fraud is essentially theft. Fraud distorts market forces and
limits the ability of consumers to make informed choices. Fraud
takes many forms and imposes enormous costs.
Fraud will largely go unchecked without the leadership of
the Nation's Consumer Protection Agency. We created the FTC's
modern antifraud program in 1981, when I directed the Bureau of
Consumer Protection. We used Section 13(b) to halt fraudulent
schemes and to obtain consumer redress and other potent
equitable remedies.
Once launched, the fraud program grew in importance and
success. Each succeeding FTC Chairman has expanded its scope
and improved its operation. While I was chairman, we greatly
increased cooperation with criminal authorities, helping put
bad actors in jail. Further, we expanded the FTC's consumer
protection efforts to Spanish-language media. When I arrived,
the FTC directed very little attention to marketing that
appeared in any language other than English. We corrected the
problem, and that effort continues.
I want to personally thank Senator Nelson, his staff and
the Florida delegation helped us a lot with that effort.
The fraud program is at the heart of what I believe is the
FTC's proper role. In America, we use markets to organize our
economy. Consumers derive vast economic benefits over the long
term from these markets. Consumer protection policy, in turn,
can have profound effects, both for good and ill, on these
markets.
The FTC and other public authorities operate against a
backdrop of important consumer protection institutions; most
notably, the market and private common law. In our economy,
consumers compete to offer the most appealing mix of price and
quality. But, when competition alone cannot punish or deter
seller dishonestly, the common law provides basic rules of the
road, such as ``Don't lie to your customers,'' and ``Keep your
contractual promises.''
Notwithstanding the strengths of the common law, sometimes,
as when court enforcement is not feasible, private law just
doesn't work. When market forces are inefficient and the common
private law is ineffective, a public agency, such as the
Federal Trade Commission, can help preserve competition and
protect consumers. Thus, the FTC has a crucial role as an
umpire in our economy, but it is not, and should not be, a star
player.
Let me make a closely related point. As this committee
considers the Commission's tools to attack fraud, there are
proposals to expand the FTC's rulemaking authority. Although
many do not think of them as such, the common-law principles I
just discussed are rules, providing a crucial part of the
institutional framework that helps our market economy function
to protect consumers. In most circumstances, these common-law
rules provide both clear guidance to the business community and
an adequate basis for FTC enforcement. Although common-law
rules do not provide for civil penalties, there is no need for
such penalties to combat fraud. The FTC already has the
authority to get the money through Section 13(b), as I just
discussed, and the limit is the amount of money available, not
any lack of authority.
Moreover, rules seeking to address fraudulent practices
often are very difficult to write. By their nature, rules must
apply to legitimate actors. Remedies and approaches that are
appropriate for bad actors can be extremely burdensome when
applied to legitimate businesses, and there is simply no
straightforward way to write a rule against fraud.
Rulemaking should not be a substantial component of FTC
consumer protection. The agency went down this road once
before, with disastrous consequences. In the 1970s, the
Commission embarked on a vast enterprise to transform the
American economy. In 15 months, the Commission proposed 15
rules, usually without a clear theory of why there was a law
violation, and, at best, a shaky empirical foundation. As it
did before, the FTC will fail if it seeks to become the second
most powerful legislature in Washington.
The procedures currently required for rules force the
Commission to be clear about its theories and focus its
evidence on the key questions. The ability of rulemaking
participants to designate disputed factual issues and cross-
examine witnesses on those issues is very useful in testing the
Commission's theories. Properly focused, so-called Magnuson-
Moss procedures are workable. They help the Commission create
clear, targeted rules aimed at bad actors without harming
legitimate businesses and consumers.
I would like to discuss, briefly, a final issue. From
personal experience, those with whom we worked in Attorneys
General offices across America are diligent and professional.
Nevertheless, recent problems have arisen in a few states
involving the outsourcing of enforcement. Some want to grant
State Attorneys General greater authority to enforce Federal
regulations. If you, in Congress, choose to extend such
authority, you should add safeguards so that the authority is
exercised in a uniform, transparent, and impartial manner.
Thank you very much, Mr. Chairman. I would be glad--and
members of the Committee--I would be glad to answer any
questions.
[The prepared statement of Mr. Muris follows:]
Prepared Statement of Timothy J. Muris, Foundation Professor, George
Mason University School of Law and of Counsel, O'Melveny & Myers LLP
Chairman Pryor, Ranking Member Wicker, and Members of the
distinguished Subcommittee, my name is Tim Muris. I am Foundation
Professor at the George Mason University School of Law and of Counsel
at O'Melveny & Myers LLP. Most relevant for today's hearing, I held
four positions at the Federal Trade Commission, most recently as
Chairman from 2001-2004. I am also the only person ever to direct both
of the FTC's enforcement arms, the Bureau of Consumer Protection and
the Bureau of Competition. I believe strongly in the importance of the
FTC as a consumer protection agency. Serving as Chairman was the
greatest honor of my professional career, and I am especially proud of
our consumer protection accomplishments, such as our work on the fraud
program and in protecting the privacy of Americans, including creation
of the National Do Not Call Registry. The United States Chamber of
Commerce and United States Chamber Institute for Legal Reform have
asked me to discuss the important subjects of today's hearing, and I
want to thank the Committee for giving me the opportunity to appear
today. The views I express are my own.
I. The Role of the FTC
As a Nation, we use markets to organize and drive our economy. We
derive vast economic benefits from these markets and the competition
that helps markets function properly. These benefits should not be
taken for granted; they are not immutable. The Nation's consumer
protection policy can have profound effects on such benefits by
strengthening the market. The policy also can reduce these benefits,
however, by unduly intruding upon the market and hampering the
competitive process. The Federal Trade Commission has a special
responsibility to protect and speak for the competitive process, to
combat practices that harm the market, and to advocate against policies
that reduce competition's benefits to consumers.
The FTC protects consumers through its responsibility to prevent
``unfair or deceptive acts or practices.'' \1\ The FTC, and other
public authorities, operate against a backdrop of other consumer
protection institutions, most notably the market and private common
law. In our economy, producers compete to offer the most appealing mix
of price and quality. This competition spurs producers to meet consumer
expectations because the market generally imposes strict discipline on
sellers who disappoint consumers and thus lose sales to producers who
better meet consumer needs. These same competitive pressures encourage
producers to provide truthful information about their offerings. Market
mechanisms cannot always effectively discipline deceptive sellers,
however, especially when product attributes are difficult to evaluate
or sellers are unconcerned about repeat business.
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\1\ 15 U.S.C. 45.
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When competition alone cannot punish or deter seller dishonesty,
another institution can mitigate these problems. Private legal rights
provide a set of basic rules for interactions between producers and
consumers, such as do not lie to your customers and keep your
contractual promises. Government also can serve a useful role by
providing default rules, which apply when parties do not specify rules.
These rights and default rules alleviate some of the weaknesses in the
market system by reducing the consequences to the buyer from a
problematic exchange. Notwithstanding the strengths of private legal
rights, in some circumstances--as when court enforcement is impractical
or economically infeasible--they may not be an effective deterrent.
When consumers are vulnerable because market forces are
insufficient and the common law is ineffective, a public agency, such
as the Federal Trade Commission, can help preserve competition and
protect consumers. The FTC's consumer protection and competition
missions naturally complement each other by protecting consumers from
fraud or deception without restricting their market choices or their
ability to obtain truthful information about products or services. The
Commission attacks conduct that undermines competition, impedes the
exchange of accurate information, or otherwise violates the common law
rules of exchange.
Because of its antitrust responsibilities, the agency is well aware
that robust competition is the best, single means to protect consumers.
Rivalry among incumbent producers, and the threat and fact of entry
from new suppliers, fuels the contest to satisfy consumers. In
competitive markets, firms prosper by surpassing their rivals. In turn,
this competitive market has important implications for the design of
consumer protection policies to regulate advertising and marketing
practices.
Without a continual reminder of the benefits of competition,
consumer protection programs can impose controls that ultimately
diminish the very competition that increases consumer choice. Some
consumer protection measures--even those motivated by the best of
intentions--can create barriers to entry that limit the freedom of
sellers to provide what consumers demand. While I was Chairman, for
example, the Commission participated in a court challenge to a state
law that banned anyone other than licensed funeral directors from
selling caskets to members of the public over the Internet. While
recognizing the state's intent to protect its consumers, the Commission
questioned whether the law did more harm than good. In an amicus brief,
the FTC noted that ``[r]ather than protect[ing] consumers by exposing
funeral directors to meaningful competition, the [law] protects funeral
directors from facing any competition from third-party casket
sellers.'' \2\ The synergy between protecting consumers from fraud or
deception without unduly restricting their choices in the market or
their ability to obtain truthful information should undergird all of
the Commission's consumer protection initiatives.
---------------------------------------------------------------------------
\2\ Memorandum of Law of Amicus Curiae Federal Trade Commission,
Powers v. Harris, Case No. CIV-01-445-F (W.D. Okla. Sept. 5, 2002),
available at http://www.ftc.gov/os/2002/09/okamicus.pdf.
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II. The FTC and Consumer Fraud
Preventing fraud is a crucial part of the Commission's support of
the market system and the common law. More than half of the
Commission's budget and staff is devoted to consumer protection, with a
significant focus on fraud. Fraud is essentially theft. Fraud distorts
market forces and limits the ability of consumers to make informed
choices. Fraud leads to inefficiency, causing consumers to allocate
their resources unproductively. Fraud also reduces consumer confidence
and the efficacy of legitimate advertising, thereby further diluting
the amount of useful information to guide consumers' choices. This
effect also raises costs for legitimate competitors, who must offer
more assurances of performance to overcome consumers' wariness.
The costs of fraud to consumers are enormous. Fraud takes many
forms from fraudulent credit repair services, to unauthorized billing,
to deceptive weight loss products. A survey released by the FTC in 2007
showed that an estimated 13.5 percent of U.S. adults, approximately
30.2 million consumers, were victims of one or more of the frauds
covered in the survey, and that an estimated 48.7 million incidents of
these frauds had occurred during the previous year.\3\
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\3\ Consumer Fraud in the United States: The Second FTC Survey, FTC
Staff Report, at s-1 (Oct. 2007), available at http://www.ftc.gov/opa/
2007/10/fraud.shtm.
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The victims of fraud are as varied as the form of the fraud. For
example, the AARP has shown that investment fraud victims are more
likely to be male, 55-61, more financially literate, college-educated,
higher income, and more optimistic.\4\ Lottery fraud victims are more
likely to be female, over 70 years old, less financially literate, less
educated, and have lower incomes.\5\
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\4\ FTC Fraud Forum, Presentation, Day One: Panel 1 (Doug Shadel,
State Director, AARP Washington, Advances in Fraud Prevention
Research), at slide 31 (Feb. 25, 2009), available at http://
www.ftc.gov/bcp/workshops/fraudforum/index.shtm#presentations.
\5\ Id. at slide 32.
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Because fraud is often national in scope, and scarce Federal
criminal law enforcement resources are primarily used against such
matters as drug trafficking and terrorism, fraud will go largely
unchecked without the active leadership of the Nation's consumer
protection agency. We created the FTC's modern anti-fraud program in
1981 when I was Director of the Bureau of Consumer Protection. The
development of a vibrant anti-fraud program at the FTC is a major
success story. Fortunately, the legal tools for such a program already
existed; in 1973, Congress had amended the FTC Act to allow the
Commission to sue in Federal district court and obtain strong
preliminary and permanent injunctive relief--including redress.\6\
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\6\ The Commission uses the ``second proviso'' of 13(b), ``in
proper cases the Commission may seek, and after proper proof, the court
may issue, a permanent injunction.'' Trans-Alaska Pipeline
Authorization Act, Pub. L. No. 93-153, 408(f), 87 Stat. 576 (1973).
---------------------------------------------------------------------------
We began by targeting the fraudulent sale of various types of
unconventional investments.\7\ The double-digit inflation of the period
that made traditional investments relatively unattractive propelled
these ``alternative investment'' scams. The first case involved
defendants that fraudulently sold $300 million worth of diamonds for
investment.\8\ Similar actions against boiler rooms selling advisory
services for the Federal oil and gas lease lottery followed as did
actions against the sellers of worthless oil and gas leases themselves.
In this initial period the Commission brought three cases against
sellers of gemstones and five cases involving oil and gas.\9\
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\7\ See, e.g., John Villafranco, Looking Back on the Muris Years in
Consumer Protection: An Interview with Timothy J. Muris, Antitrust,
Summer 2004 80, 82-83. From the beginning of the 13(b) program, the
Commission has used this tool against a wide variety of scams,
including real estate equity schemes, FTC v. Rita A. Walker & Assoc.,
No. 83-2462 (D.D.C. filed Oct. 5, 1983); business opportunity scams,
FTC v. H. N. Singer Inc., 668 F.2d 1108 (9th Cir. 1982), FTC v. Kitco,
Inc., No. 83-467 (D. Minn. tiled Apr. 9, 1983); and travel scams, FTC
v. Paradise Palms Vacation Club, No. 81-116 (W.D. Wash. filed Sept. 25,
1981).
\8\ FTC v. International Diamond Corp., 1983-2 Trade Cas. (CCH)
65,725 (N.D. Cal.1983). The Commission previously had pursued
administrative cases against unconventional investments. American
Diamond Corp.. 100 F.T.C. 461 (Sept. 28, 1982) (complaint and consent
order).
\9\ In these initial consumer protection 13(b) cases, Commission
staff began the practice, still followed today, of working closely with
other government agencies, such as the Department of the Interior's
Bureau of Land Management, and Federal criminal enforcement authorities
such as the United States Postal Inspection Service and the Secret
Service in developing investigations and litigating cases. Parallel
investigation and prosecution by both the FTC and criminal authorities
have remained an important aspect of the Commission's 13(b) program.
---------------------------------------------------------------------------
Before the shift to Federal court, most of the Commission's
consumer protection work used its administrative process. Most
investigations relied upon voluntary production of requested documents
and information from the investigated targets, who had every incentive
to delay. This process had obvious drawbacks for addressing fraud.
Federal district court cases proved much more effective, enabling the
Commission to bring fraudulent schemes to an immediate halt, to take
the targets by surprise so that money might be available for redress,
and to prevent destruction of records showing the extent of the fraud
and identifying injured parties.
Almost from the inception of the 13(b) program, the Commission
has used this tool not only to obtain court orders halting fraudulent
schemes, but also to obtain consumer redress and other potent equitable
remedies. Very early in the 13(b) consumer protection cases, the
Commission began to seek, as ancillary to issuance of permanent
injunctions, provisional remedies such as a freeze of assets, expedited
discovery, an accounting, and the appointment of a receiver on the
ground that these remedies would insure the effectiveness of any final
injunction ordered.\10\
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\10\ FTC v. H.N. Singer, Inc. 668 F.2d 1108 (9th Cir. 1982) is a
seminal case establishing the Commission's authority to seek, and the
district courts' power to grant, all the traditional equitable remedies
inherent in the authority granted by 13(b) to obtain permanent
injunctions. Singer was the first 13(b) case to attack a business
opportunity scam.
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To make the best use of this approach, the Agency used modern
investigative techniques geared for speed and stealth. The agency also
developed a group of professional investigators trained to uncover
fraudulent schemes, determine ownership and control of such schemes,
trace assets, develop evidence, preserve evidence for trial, and
testify in court. More recently, Commission investigators have become
experts in Internet investigative techniques and have provided training
for thousands of local, state, Federal, and international criminal and
civil law enforcement offices.
Once launched, the fraud program grew in importance and success.
Each succeeding FTC Chairman has expanded its scope and improved its
operation. During the 1990s in particular, the agency formed strong,
working relationships with state and local law enforcement agencies,
leading sweeps against targeted types of fraud, thereby greatly
increasing the program's effectiveness. By 2004, when my tenure as
Chairman ended, there had been a total of 78 sweeps, resulting in 2,200
law enforcement actions.\11\
---------------------------------------------------------------------------
\11\ David R. Spiegel, ``Chasing the Chameleons: History and
Development of the FTC's 13(b) Fraud Program,'' 18 Antitrust 43 (2004).
---------------------------------------------------------------------------
During the late 1990s, the fraud program matured under the strong
leadership of Chairman Robert Pitofsky and Bureau Director Jodie
Bernstein into the flagship of the Commission's consumer protection
program. From Fiscal Year 1983 until Fiscal Year 1995--the first full
13 years that the Commission filed 13(b) actions--the average number
brought was 23 per fiscal year. During the Pitofsky-Bernstein years,
that average skyrocketed to 71 filings per fiscal year. Not
surprisingly, as the number of filings increased, so has the amount of
consumer redress awarded. In Fiscal Year 2003, for example, nearly $873
million in consumer redress was ordered in 98 judgments.
The Commission's ability to protect consumers from these scams was
aided immeasurably by another Pitofsky-Bernstein innovation, the
creation of the Consumer Response Center (CRC)--a central facility with
trained call center staff and an automated call distribution system to
record and respond to consumer complaints and inquiries. The existing
telemarketing fraud complaint database, in operation since the early
1990s, was dramatically upgraded and revamped into Consumer Sentinel, a
system linking law enforcers through a secure Internet site. The
Consumer Sentinel system enabled the CRC staff to enter data from
consumer complaint calls in real time. Initially scores, and ultimately
hundreds, of law enforcement agencies at the state, Federal, and local
levels joined the system, gaining access to the complaint database, as
well as the opportunity to ``cross-walk'' their own complaint data into
the Consumer Sentinel database. Other entities, such as local Better
Business Bureaus, also were invited to contribute complaint data to the
Sentinel database. Consumer Sentinel strengthened the fraud program by
improving the staff's ability to spot emerging trends, to identify bad
actors more quickly, and to locate potential witnesses to support the
Commission's cases.
The Commission also has taken important steps to improve its
cooperation with criminal law enforcement agencies. While I was
Chairman, we established a Criminal Liaison Unit to coordinate with
criminal law enforcement agencies across the country to encourage
criminal prosecution of consumer fraud. The unit identifies criminal
law enforcement agencies that may bring specific types of consumer
fraud cases, educates criminal law enforcers in areas of FTC expertise,
coordinates training with criminal authorities to help the FTC prepare
cases for referral and parallel prosecutions, and provides Special
Assistant United States Attorneys to help prosecute the worst FTC Act
violators. Between October 1, 2002, and July 31, 2007, 214 individuals
were indicted in telemarketing fraud cases resulting from referrals
from the Criminal Liaison Unit.\12\
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\12\ Prepared Statement of The Federal Trade Commission Before the
Senate Committee on Commerce, Science, and Transportation, U.S. Senate,
July 31, 2007.
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I also am especially proud of the expansion of the FTC's consumer
protection efforts to the Spanish language media. Having grown up in
Southern California, and having lived in southern Florida and Chicago,
I was aware of the large and thriving Spanish language media throughout
the United States. Yet, when I arrived in 2001, the FTC directed very
little attention to marketing that appeared in any language other than
English. We corrected that problem, hiring numerous attorneys and other
staff fluent in Spanish, translating the FTC's excellent consumer
education materials into that language, and bringing numerous cases
against fraud and other illegal marketing practices that targeted the
Hispanic community. That effort has continued. For example, in
September 2006, the FTC co-hosted an Hispanic outreach workshop with
the U.S. Postal Inspection Service (USPIS), the U.S. Attorney's Office
for the Southern District of New York, and the Manhattan Hispanic
Chamber of Commerce. During the workshop, the FTC announced three law
enforcement actions against scammers targeting Hispanics with their
unlawful business practices, as well as the results of a Hispanic
Multi-Media Surf conducted by the FTC and 60 partners in the United
States and Latin America.
The FTC's vital role as an antifraud agency continues today.
Earlier this month, for example, it announced the results of a law
enforcement sweep called ``Operation Short Change,'' which included 15
FTC cases and 44 law enforcement actions by the Department of Justice,
and actions by at least 13 states and the District of Columbia. The
Operation targeted scammers seeking to take advantage of the economic
downturn through a variety of schemes from phony debt-reduction
services to promises of nonexistent jobs. In February 2009, the
Commission held a two-day Fraud Forum with representatives from law
enforcement, consumer advocates, business representatives, academics,
and others exploring the problem of fraud and how the FTC can more
effectively protect consumers from fraudulent schemes.
III. The FTC and Rulemaking
As this Committee evaluates policy initiatives aimed at giving the
Commission adequate tools to attack fraud, I would like to comment
specifically on proposals to expand the Commission's rulemaking
authority.\13\ I submit that such proposals should be evaluated
carefully and considered in the historic context of the Commission's
purpose and mission.
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\13\ While my testimony today does not address proposals to codify
third-party liability for FTC Act violations, potential problems could
arise depending on the precise legislative language.
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A. The Role of FTC Rulemaking
As I discussed above, the agency has relied on the development of
common law principles, supplemented with occasional rules and guides.
The cornerstone of the FTC's consumer protection mission is the fraud
program, through which the Commission has returned hundreds of millions
of dollars to defrauded consumers.
Although many do not think of them as such, these common law
principles are rules, providing a crucial part of the institutional
framework that helps our market economy to function. In most
circumstances, these common law rules provide both clear guidance to
the business community and an adequate basis for FTC enforcement
actions. Although common law rules do not provide civil penalties,
there is no need for the civil penalties to combat fraud. The effective
limit on the FTC's ability to recover money in cases of fraud is the
money available, not any lack of authority to recover the funds.
The common law process is well suited to develop new policy. For
example, the Commission has used this process to formulate general
rules to protect the security of sensitive consumer information. Using
both its deception and unfairness authority, the Commission has brought
cases addressing information security, as the growth of the Internet
and technology have created new vulnerabilities. Attempting to write a
rule defining the scope of liability in advance could have stymied the
natural development of this common law process, leading to uncertain
results.\14\
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\14\ Although the FTC promulgated the Safeguards Rule at the same
time as it was initiating information security cases, the rule was
primarily useful in establishing a structure for remedies. Adopted
under GLB, the rule set out a flexible, process-oriented approach to
providing information security. Because Congress had specified
liability for financial institutions that failed to protect sensitive
information, the rule did not require a theory of who was liable under
Section 5 and under what circumstances. Those theories were developed
through the common law process in individual cases, and most of the
Commission cases have involved industries not within GLB's
jurisdiction.
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Rules seeking to address fraudulent or other practices often are
very difficult to write. Unlike the FCC, SEC, or other regulatory
bodies, the FTC is not a sector-specific regulator. Thus, the agency
generally lacks industry-specific knowledge, expertise, and routine
contacts with regulated entities and Congressional committees with
jurisdiction over those industries.\15\ Instead, in its law enforcement
experience, the Commission deals with pathology. It is familiar with
bad actors, who have demonstrated their unwillingness to comply with
basic legal principles.
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\15\ Of course, the agency and its staff have become quite
knowledgeable about certain sectors of the American economy, including,
for example, the downstream parts of the oil industry, certain aspects
of health care, and credit reporting agencies. For credit reporting
agencies, the FTC is the regulator, and pursuant to the FACT Act, has
promulgated numerous rules in the last few years. These rules, and many
others, were promulgated pursuant to Congressional direction.
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By their nature, however, rules also must apply to legitimate
actors, who actually deliver the goods and services they promise.
Remedies and approaches that are entirely appropriate for bad actors
can be extremely burdensome when applied to legitimate businesses, and
there is usually no easy or straightforward way to limit a rule to
fraudulent activities. Rather than enhancing consumer welfare, overly
burdensome rules can harm the very market processes that serve
consumers' interests. For example, the Commission's initial proposal
for the Telemarketing Sales Rule was extremely broad and burdensome,
and one of the first acts of the Pitofsky Commission was to develop a
narrower approach to the rule. More recently, the Commission found it
necessary to repropose its Business Opportunity Rule, because the
initial proposal would have adversely affected millions of self-
employed workers.
Of course, rulemaking can be appropriate. For example, the
Commission sometimes can provide ``rules of the game'' that reduce
consumer harm in the future. The Commission can establish new default
rules and procedures for transference of rights when it is otherwise
difficult to do so. Thus, the Commission's Mail Order rule provides
that unless the parties agree otherwise, the merchandise must be
delivered with 30 days. While seeking to facilitate the exercise of
consumer choice, the agency is also highly cognizant of the need to
avoid unduly shackling market forces.\16\ For example, this balance
undergirds the FTC's approach to unsolicited telemarketing calls,
through which consumers decide whether or not they wish to receive such
calls and express their preferences effectively through the Do Not Call
registry. Once these new rules of exchange are established, if
transaction costs are low, parties can more easily transfer these
rights.\17\
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\16\ See, e.g., Comment of the Staff of the FTC before the
Department of Health and Human Services Food and Drug Administration,
In the Matter of Food Labeling: Health Claims; Dietary Guidance, Docket
No. 2003-0496 (Jan. 2004), available at http://www.ftc.gov/os/2004/
040126fdacomments.pdf.
\17\ See R.H. Coase, The Problem of Social Cost, 3 J. L. & Econ. 1,
15-16 (1960) (``Once the costs of carrying out market transactions are
taken into account it is clear that such a rearrangement of rights will
only be undertaken when the increase in the value of production
consequent upon the rearrangement is greater than the costs which would
be involved in bringing it about.'').
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It would be a major mistake for rulemaking to be a substantial
component of FTC consumer protection. The FTC went down this road once
before, with disastrous consequences. In the 1970s, using its
unfairness authority under Section 5 without meaningful standards, the
Commission embarked on a vast enterprise to transform entire
industries. Over a 15-month period, the Commission issued a rule a
month, usually without a clear theory of why there was a law violation,
with only a tenuous connection between the perceived problem and the
recommended remedy, and, at best, a shaky empirical foundation.\18\ The
enterprise foundered because of the internal inadequacies of the
Commission's procedures and because of intense Congressional
opposition.
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\18\ For similar criticisms of the FTC's rulemaking binge, see the
extensive, contemporaneous studies by Barry Boyer (Report to the
Administrative Conference of the U.S., Trade Regulation Rulemaking
Procedures of the Federal Trade Commission, 1979) and Teresa Schwartz
(Regulating Unfair Practices Under the FTC Act: The Need for a Legal
Standard, 11 Akron L. Rev. 1 (1977)). See also Muris, Rules Without
Reason--The Case of the FTC, 6 Regulation 20 (Sept./Oct. 1982).
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As it did before, the FTC will fail in its mission to protect
consumers if it seeks to become the second most powerful legislature in
Washington. This is surely an unsuitable task for five unelected
representatives, not closely supervised by the White House or a Cabinet
department.
Regardless of the procedures, rulemaking is a resource-intensive
activity that inevitably draws resources away from enforcement. While I
was Chairman, the agency was pursuing subprime lending cases involving
failure to disclose adequately key terms of the transaction. In 2005,
however, as more and more dubious loans were made, the agency diverted
substantial resources to rulemakings to implement the FACT Act. The FTC
asked for rulemaking authority in one narrow area (risk-based pricing);
it ended up with statutory mandates for more than a dozen separate
rules and studies. Whatever their value, those rules and studies
consumed resources the Commission could have productively employed on
cases.
B. Magnuson-Moss Procedures Are Appropriately Tough, But Usable \19\
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\19\ Although within the Commission these procedures are uniformly
referred to as ``Magnuson-Moss,'' in fact, the procedures are contained
within Title II of the Magnuson-Moss Warranty--Federal Trade Commission
Improvement Act of 1975. Only Title I involved the Magnuson-Moss
Warranty Act, but I use here the conventional designation of Magnuson-
Moss procedures.
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Rulemaking is an exercise in generalization. The FTC should
determine whether a problem occurs often enough to justify a rule,
whether the problem has a common cause in a sufficient number of cases
to justify the remedy, and whether that remedy can correct the problem
without imposing excessive costs. Because the FTC cannot generalize
simply from its own experiences or from the horror stories of others,
it should rely on projectable evidence such as surveys of consumers and
econometric studies of industry behavior.
The Magnuson-Moss procedures force the Commission to be clear about
its theories and focus its evidence on the key questions. Otherwise,
the procedures can make the rulemaking almost interminable. The ability
of rulemaking participants to designate disputed factual issues and
cross examine witnesses on those issues is very useful in testing the
Commission's theories. Properly focused, Magnuson-Moss procedures are
workable.
The Commission's recent experience in the Business Opportunity
Rulemaking is a reminder of the useful aspects of the Magnuson-Moss
procedures. The Commission proposed a wide-ranging rule, apparently
aimed at fraud, but that instead would have adversely affected millions
of self-employed workers and the consumers they serve. Based on the
public comments and the need to proceed under Magnuson-Moss, the
Commission has now sensibly proposed a much more targeted rule that
addresses fraud without regulating legitimate businesses. Although the
Commission may have retreated without the threat of hearings and cross
examination, those threats undoubtedly helped to influence the
Commission's deliberations.
The FTC has successfully used Magnuson-Moss Rulemaking in the past.
Several of the rules proposed in the 1970s were eventually promulgated.
Some rules, like the two involving eyeglasses, were well conceived
initially and concluded expeditiously. More recently, the Commission
has used these procedures to amend the Franchise Rule, and is well on
its way to concluding the Business Opportunity Rule successfully.
The Commission's most prominent rulemaking endeavor, the creation
of the National Do Not Call Registry, could have proceeded in a timely
fashion under Magnuson-Moss procedures. It took 2 years from the time
the rule was first publicly discussed until it was implemented.
Although it would have been necessary to structure the proceedings
differently, there would have been little, if any, additional delay
from using Magnuson-Moss.
C. Magnuson-Moss Procedures Should Be Retained \20\
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\20\ The Administration's proposal would do more than just change
the procedures used in rulemaking. It also would eliminate the
requirement that unfair or deceptive practices must be prevalent, and
eliminate the requirement for the Commission's Statement of Basis and
Purpose to address the economic effect of the rule. It also changes the
standard for judicial review, eliminating the court's ability to strike
down rules that are not supported by substantial evidence in the
rulemaking record taken as a whole. The current restrictions on
Commissioners' meeting with outside parties and the prohibition on ex
parte communications with Commissioners also are eliminated. These
sensible and important protections should be retained.
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The problems that resulted from FTC rulemaking in the 1970s are not
just that the agency needed ``better'' regulators. Instead, the problem
is one of incentives and constraints. We are in a period of unusual
government activism. Numerous groups will press the Commission for
immediate action, whether or not the proposal is well thought out. In
the short run, Congress may push hard for action as well. Without the
constraints of the Magnuson-Moss procedures, the potential for mischief
and long run harm to the Commission and to consumers is enormous.
Although Congress and the courts eventually may restrain the
Commission, it would be far better to avoid these costs from the
beginning.
It is true that part of the problem from the 1970s has been
addressed with the Commission's adoption of the Deception Policy
Statement and the codification of the definition of unfairness.
Nonetheless, the Commission's authority remains extremely broad. The
procedural safeguards of Magnuson-Moss create a strong need for the
Commission to develop clear theories and strong incentives to develop a
firm evidentiary base early in the rulemaking proceeding. When these
requirements are met, Magnuson-Moss rulemaking is workable.
In a number of areas, the FTC has engaged in rulemaking, pursuant
to Congressional direction, using APA procedures. Congressional
directives avoid a significant part of the problems that bedeviled the
FTC in the 1970s, as they provide explicit political ``cover'' for the
specific rulemaking at issue. That cover may subside, however, as the
political tides shift or as the specific parameters of the proposal
prompt fierce industry resistance. Moreover, Congressional directives
often remove the question of what constitutes a violation, which proved
to be one of the most contentious issues of many 1970s rulemaking. Even
with congressional authorization, I would retain Magnuson-Moss
procedures when a rulemaking is major and when Congress has not
specifically defined the violation.
IV. Safeguards Should Accompany Any Expansion of State Enforcement
Authority
As discussed above, the State Attorneys General have been important
partners of the FTC in fighting fraud. From personal experience, I can
attest to the diligence and professionalism of those with whom we
worked in Attorneys General offices across the United States.
Nevertheless, it is important to recognize recent problems that have
arisen in a few states involving the outsourcing of enforcement
responsibilities.
Some in Congress want to grant greater authority to State Attorneys
General to enforce Federal law. If you choose to extend such authority
to the states, I respectfully urge the Committee to consider adding
safeguards to ensure that such authority is exercised in a uniform,
transparent, and impartial manner.
In recent years, Congress has enacted several statutes that expand
the authority of state and local governments to enforce Federal laws
into new areas. For example, State Attorneys General are now empowered
to enforce Federal laws governing diverse issues such as telemarketing,
online gaming, and transportation of household goods--to name a few.
Indeed, in the past few months alone, Congress authorized State
Attorneys General to enforce the Federal Health Insurance Portability
and Accountability Act, the Federal Truth in Lending Act, and any
mortgage loan rules promulgated by the FTC.
Delegating Federal enforcement power to state actors gives rise to
two important and related problems. First, Federal regulatory regimes
are at a significant risk of being enforced in an inconsistent and
unfair manner. Numerous safeguards ensure that Federal prosecutorial
efforts are consistent, fair, and free from outside bias or
interference. Those safeguards include statutes prohibiting bribery,
ethics rules governing political activities of anyone retained by the
government to assist in enforcement efforts, and Executive Order 13433,
which limits the use of contingent fee arrangements with private
attorneys retained by the government. By contrast, states are generally
not subject to such safeguards. As a result, granting Federal
enforcement authority to the states can result in haphazard prosecution
efforts and opportunities for public corruption.
Second, state enforcement is likely to result in an increase in
contingency-fee contracts between states and private attorneys.
Contingency fee agreements by their nature often operate to the
detriment of the general public. In the public litigation context,
contingency fee arrangements create significant conflicts of interest.
A basic principle of good government is that public actors should not
participate in decisions in which they have a financial stake.
Deputizing plaintiffs' attorneys with contingent fee contracts to serve
as private attorneys general flouts this fundamental principle, because
those attorneys get paid nothing unless they win--and they have no
chance of winning unless they decide to prosecute claims. Accordingly,
such attorneys have a clear incentive to litigate (and to continue
litigating) even when doing so is not in the public interest.
For all of these reasons, Congress should approach the expansion of
state authority to enforce Federal laws with care--and ensure that any
such expansion is accompanied by some or all of the following sensible
safeguards to ensure that Federal laws are enforced in an open,
impartial, and ethical manner:
Require Disclosure of Private Attorney Retention Agreements.
State officials who retain private attorneys to enforce Federal
law should be required to disclose the arrangement to the
Federal Government for publication in the Federal Register.
Requiring transparency will improve Federal oversight of state
enforcement efforts, which will help ensure the objective,
consistent implementation of Federal laws.
Prohibit ``Pay-to-Play'' Arrangements. Congress should sever
the connection between campaign contributions and ``private
attorney general'' retentions by prohibiting state and local
government officials from rewarding substantial campaign
contributors with potentially lucrative contracts to enforce
Federal laws.
Prohibit Contingent Fee Arrangements Absent Necessity. Under
Executive Order 13433, Federal agencies using private attorneys
to assist in the enforcement of Federal law may use contingent
fee arrangements only where it is cost effective and consistent
with the public interest. Congress should apply these same
standards to state and local governments' efforts to enforce
Federal law.
Although these safeguards would promote transparency and reduce
ethical concerns about the use of contingent arrangements to reward
political donors, they would not diminish the capacity of state and
local governments to make independent, objective judgments about the
best course of action in each case involving enforcement of Federal
law. In short, if Congress wishes to delegate Federal enforcement
authority to non-federal actors, these safeguards increase the
likelihood of obtaining any benefits from such delegation without
incurring adverse consequences.
V. Conclusion
Once again, thank you for the opportunity to testify today. I would
be glad to answer any questions.
Senator Pryor. Thank you.
Again, I want to thank the panel for all of their testimony
today, and your hard work, and the fact that you're here right
now.
Mr. Vladeck, let me start with you, and let me ask about
Operation Short Change. I think you covered some of this in
your opening statement, but tell the Subcommittee here what
prompted you all to do Operation Short Change. I know it's
still fairly new, but please give your sense of how it's
working so far.
Mr. Vladeck. Let me start by explaining the genesis of
these kinds of sweeps. We want to target our enforcement
efforts, particularly these kinds of economic-downturn-related
enforcement cases, to those who are the most vulnerable. And
Operation Short Change focused on those kinds of frauds that
tend to affect the most vulnerable among us--the poor, the
elderly, those deeply in debt. And so, we focused on five
areas: phony income-generating opportunities; job placement
scams, the one that entrapped Beverly Stewart; government grant
scams, the stimulus package grants that General Koster talked
about in his opening statement; credit-related scams; and
mortgage loan-modification scams.
This was a coordinated effort with our partners in the
states and with the Department of Justice. And so, our aim was
to try to send a signal, as loudly and as clearly as we could,
that we intend to target these kinds of scams, going forward,
and, in part, to generate some publicity, because I think, as
Sally Greenberg mentioned, consumer education is a vital part
of our enforcement effort. We need to get the word out to the
American people that these scam artists are trying to pick
their pocket. And so, that was the genesis of the sweep, and
that's why it had the focus that it did.
Senator Pryor. And again, I know it's fairly early in the
process, but, so far--as I understand it, there has been
several TROs and things like that going on around the country.
Can you give us just a quick status? I know it's still a fairly
new----
Mr. Vladeck. In most of the cases in which a defendant has
appeared, we've obtained preliminary injunctive relief; that
is, we've gotten a TRO preventing the scam from moving forward.
In many of the cases, as well, we've gotten an asset freeze.
So, we've grabbed whatever money there is. Hopefully, at some
point we'll be able to use that money to return the money
that's been taken from consumers to the consumers. And consumer
redress, getting money back to consumers who have been scammed,
is an integral part of our enforcement efforts. I don't have
the statistics at ready, but I think that, of the 15 cases that
we brought, we've gotten preliminary relief in virtually all of
them.
Senator Pryor. And I know that when you take on an effort
like this, you have to coordinate with DOJ, and they have an
important piece of this, as well as the states--they have an
important piece of it. From your experience, how is that
coordination going between various Federal and State agencies?
Mr. Vladeck. I would say that it is going well, but we need
to do better. Our job is sort of a biblical one. We need to
take the resources we have and multiply them. And the way to do
that is through strategic partnerships, both within the Federal
establishment, strengthening our ties to the Department of
Justice, with other agencies that have an enforcement role--the
Postal Service, the Food and Drug Administration, on some of
these health scams, and with HHS, their Office of Aging. So, we
need to strengthen those partnerships. We need to strengthen
our partnerships with the State Attorney Generals. We're
delighted that we were able to work with the Missouri AG's
office in Operation Short Change. The sweep that will be
announced tomorrow will reflect very close ties with the
California AG's office and with county offices within
California, and other states. And we need to do a better job
reaching out to the legal services providers, who are often on
the front lines of this. They are part of the team, here, in
terms of combating fraud. We do not have, at the moment,
adequate ties to legal services providers, and we will be
reaching out to them.
And then, there are local law enforcement agencies around
the country, county attorneys offices and so forth, that are
involved in consumer protection efforts. We need to reach them,
as well. We now distribute our materials, our publications, to
over 10,000 organizations, from State Attorney Generals to
counties to extension service programs. We need to do more.
Senator Pryor. Thank you.
Senator Wicker, if you'd like to make an opening statement,
that would be great with the Subcommittee, or if you----
STATEMENT OF ROGER F. WICKER,
U.S. SENATOR FROM MISSISSIPPI
Senator Wicker. Thank you.
Senator Pryor.--have any questions.
Senator Wicker. Thank you, Mr. Chairman.
I think I will ask unanimous consent to enter my opening
statement in the record.
Senator Pryor. Without objection.
Senator Wicker. OK. And I appreciate that. I know we're
trying to carry on several conversations at one time.
[The prepared statement of Senator Wicker follows:]
Prepared Statement of Hon. Roger F. Wicker, U.S. Senator from
Mississippi
Mr. Chairman, I want to thank you for holding this hearing today.
With the downturn in the economy and rise in unemployment rates,
everyone is feeling the effects of our economic crisis. Americans are
working to pay down their debt and clean up their finances.
Unfortunately, some are trying to take advantage of those most in need.
Scammers are using the economic downturn to prey upon those who have
been most affected.
If someone is unemployed, scams offering ``get rich quick'' plans
appear very inviting. For only a small investment in a work-at-home kit
you can make over $5,000 a month from the comfort of your own home.
The opportunity to receive a Federal grant for personal use to pay
off debt or renovate your house sounds appealing even during the best
of economic times. For a small fee you can receive access to available
Federal grants and receive free money.
A phone call alerting you to the process for redeeming your
sweepstakes winnings can also sound enticing. If you just pay the taxes
due on the winnings, you can have the prize monies deposited directly
into your bank account.
Eventually the people who fall for scams like the Federal grant
scams, the ``get rich quick'' schemes, or employment scams don't
realize they've been taken advantage of until it's too late. The small
fees pile up and the victim is left in further debt with their personal
financial information compromised.
Scammers have even used recent public events or government action
to take advantage of Americans. Opportunities to receive your ``Cash
for Clunkers'' rebate over the Internet or to receive your personal cut
of the economic stimulus program appeared online very quickly, even
before the programs became law. Consumers are duped into believing
these online offers are legitimate government programs.
The Federal Trade Commission is actively working to catch these
criminals. The Commission, working with other Federal and state law
enforcement agencies, regularly conducts large sweeps targeting these
scams and other fraudulent activities. I look forward to Mr. Vladeck's
testimony and hope he discusses these efforts in more detail.
Public education relating to these scams and other fraudulent
activities is a good tool to combat these threats. While the
Commission's actions after the scam has occurred are necessary, the
American public would be well served by being better educated to
recognize these scams upon solicitation. I hope our witnesses today
will discuss how we can help increase the public's education on these
frauds.
I also appreciate former Commission Chairman Tim Muris for joining
us today. While the specifics of the scams we will hear about today are
new and relate to current events, such as the stimulus or the housing
market, the way these scams are carried out is not new. His testimony
will help us get a broader understanding of how the Commission has
successfully combated these scams in the past. I also look forward to
hearing his views regarding the Commission's ability to fight these
fraudulent activities.
Thank you again, Mr. Chairman, for holding this hearing.
Senator Wicker. I appreciate the Chair's indulgence. And I
want to say, I also appreciate punctuality, and I didn't
observe that virtue today.
Let me start with Mr. Vladeck, and then perhaps others will
join in.
Clearly, there has been an effort at education, at consumer
awareness programs. We certainly had our share of scams in
Mississippi, following Hurricane Katrina. When these crises or
unfortunate circumstances arise, there are always people there,
as Mr. Muris says, to steal from. Fraud is stealing. Chinese
drywall is a problem that this Congress is looking into. We
need to increase consumers' awareness of these scams. We need
to jump on it as quickly as possible, at the onset of a scam,
so that individuals--vulnerable individuals can get the
message.
I know the FTC and consumer groups are working to get
messages out, but how do we review education programs to see
which ones are working? I mean, something might look good to me
on television, and it might make sense to someone who looks at
this issue every day, but how do we determine best practices
for effectively educating consumers? And how do we measure
effective education?
I'll start with you, Mr. Vladeck.
Mr. Vladeck. Well, that's a great question, and one that we
spend a lot of time thinking about.
With respect to the Internet, our Internet education
efforts, we can track pretty well the people who use them, at
least in terms of the sheer numbers. But, with respect to the
other kinds of information that we disseminate--printed
material and so forth--the only measure that we really have is
the demand for them. That is, when I talk to other State
Attorney Generals--for example, Attorney General Roy Cooper,
from North Carolina, was up for Operation Short Change--the
first thing he said to me was, ``Keep on sending us these
educational materials,'' because in every regional office of
the State, they distribute them. So, one way to do it is just
to take a look and get the feedback from the constituents that
we provide these materials to, and get feedback from them.
The feedback we get is quite good, but I'm not sure how a
newspaper would go about trying to figure out, not simply how
many people get reached, but how many people actually read the
stories and actually took away the right message.
Senator Wicker. I do believe they do that.
Mr. Vladeck. We are looking at ways of measuring that kind
of impact. Of course, unlike a newspaper, our materials are
distributed to every State, through every extension service,
through county attorneys offices, through police departments,
and through universities. The distribution is quite wide. And
I'm not sure that we have the capacity, really, to answer your
question in the concrete way that I think that you want it.
Senator Wicker. Ms. Greenberg, you might want to be next on
this. I believe you hinted at an alliance of groups and
industries to create uniform messages for consumers. So, would
you expand on that? And do you have some suggestions for this
panel today on determining best practices and making sure that
our education efforts actually penetrate?
Ms. Greenberg. Well, one recent example is an effort that
was undertaken by the U.S. Postal Inspection Service to deal
with a fake-check scam. This was in October of 2007. USPIS
launched $12 million, I believe was the figure, outreach
campaign that involved a very sophisticated series of
advertisements. And it really penetrated the airwaves. I think
they found it was quite successful and colleagues of ours and
people that we work with at American Express said that they saw
the number of fake-check problems and complaints go down
significantly during the course of this campaign. And it was
advertisements--it was, like, you take a Vitale guy, and you
have an actor play this guy, and they were doing role playing.
So, he would go in, sit down at a--let's say, on a bus, and
say, ``Hey, would you like to write me a check for $50,000?''
The person says, ``Of course not.'' So, it's that sort of
thing. And then he says, ``Well, why would you do it in any
other context?'' And it was very focused. I'm sure the FTC was
involved in the fake-check campaign, as were a number of other
Federal agencies.
So, what we're talking about is money, a sophisticated
media outreach using Web 2.0 efforts, new media efforts, you
know, all the Facebook and Twitter tools that we have. It takes
money, and it takes a really focused effort. But, I think the
kind of work that David Vladeck is doing at the FTC really
makes a big difference.
I saw an FTC person on CNN. That gets out--she's in the
room--a lawyer. And she was talking about, ``Don't fall for
it.'' I mean, these kinds of outreach efforts are really,
really effective, but if we put the money there, I think that
we can make a dent.
Senator Wicker. Mr. Vladeck, was the FTC involved with the
Postal Service in that specific incident?
Mr. Vladeck. I'm not certain, but I'll get back to you on
that.
Senator Wicker. Thank you.
Mr. Vladeck. Thank you.
Senator Pryor. Thank you.
And next we have, Senator Bill Nelson. And Bill has a very
important Finance Committee hearing to get to, and to
demonstrate his commitment to consumer protection, he stayed in
order to ask questions.
Thank you for being here.
STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Thank you, Mr. Chairman.
The purpose of this hearing is to see if the U.S.
Government is protecting the consumer in these down times. The
FTC labors under a very cumbersome rulemaking process so that
you attack a lot of the problem after the scam has occurred.
So, Mr. Vladeck, what are we going to do to get these rules
in place so that everybody knows, if you cross that line,
immediately you jump on them?
Mr. Vladeck. Well, since 1947, the standard way Federal
agencies make rules is under the Administrative Procedure Act.
It sets forth a notice-and-comment system, it provides the
public an opportunity to weigh in, and provides for judicial
review at the end of the process. The FTC, by and large, may
not use that ordinary mainstream rulemaking process to issue
its rules; we are saddled with a very cumbersome rulemaking
process----
Senator Nelson. So, are you saying that you can't adopt
bright-line rules that, when they cross that threshold, you can
jump them?
Mr. Vladeck. We can adopt those rules, 5 or 6 years down
the road. We cannot use that rulemaking process, in a situation
like this, to respond quickly to emerging problems in the
economy.
Senator Nelson. So, is the FTC impotent to attack these
scams?
Mr. Vladeck. No male is ever going to use that word,
Senator.
[Laughter.]
Mr. Vladeck. We are----
Senator Nelson. Well, I just did.
Mr. Vladeck.--we are hobbled, because, instead of using
rulemaking, we have to proceed, case by case.
Senator Nelson. All right.
Mr. Vladeck. And so----
Senator Nelson. Well, obviously, it isn't working.
What do you think, Mr. Muris?
Mr. Muris. I could not disagree more with the premise of
Mr. Vladeck. These people are crooks. We already have rules
against their behavior. And what we need is strong, aggressive
enforcement.
In one year when I was Chairman, we got over $900 million
back for consumers. We've worked with criminal authorities, as
the Commission does, to this day, and has put hundreds of
people in jail.
Rules are distractions. Let me tell you what happened in
the 1970s. The FTC tried to compete with you, and indeed, be a
legislative body. That does not work. The FTC has five
unelected officials. The rulemaking procedures that Mr. Vladeck
discusses are procedures that were put in place by Congress
because the FTC's jurisdiction is so broad. Rather than wasting
their time writing rules, which would apply to legitimate, as
well as illegitimate businesses, in the fraud area, the
Commission needs to do what it's doing, which is going after
the bad actors. I believe it can do even more.
A final point is, when another committee and then the
Congress passed reauthorization of the Fair Credit Reporting
Act, we asked for one rule. The Congress gave us something like
15 or 16. The people who worked on those rules and studies got
taken away from working on cases. I do believe the FTC needs
the adequate resources, but you just can't go out and hire
people. You need to train them, you need to work with them.
So, I believe the rulemaking effort is a distraction. You
should retain the FTC's current rulemaking authority.
Senator Nelson. Well, Mr. Chairman, if--any other questions
from me would be superfluous. I think we've seen there's an
inability of the system to react to a circumstance to try to
head it off in the first place.
Mr. Vladeck. May I respond briefly to Mr. Muris?
We are currently working on two rules, pursuant to APA
procedures, because Congress authorized us to do this. These
are the mortgage rescue, mortgage foreclosure rules.
We do not have parallel authority for debt. We are doing
debt workshops, we are looking at debt issues. But, it would
have been helpful to be able to jump on some of these issues
more quickly with rulemaking authority.
Mr. Muris is right, in one sense. Rules take time, they can
be distractions. You have to be strategic about the rules that
you want to issue.
Everyone learned the lesson of the 1970s. I don't think
this Commission wants to be a junior legislature. What we want
to do is be able to protect consumers from emerging threats of
the kind that we've seen over the last 2 years, and the
rulemaking authority that we currently have does not permit us
to do that. That is the view of the Commission.
Senator Nelson. Sounds like we've got a lot of work on this
to do, Mr. Chairman, to protect consumers from scams.
Senator Pryor. It does. And we'll----
Senator Nelson. Now, the Attorneys General certainly have
that power. I had that power, as a regulator, as a State
cabinet officer, before I came to the Senate. But, it doesn't
seem like we've got the ability for an immediate response here.
Senator Pryor. I think we'll have a robust discussion about
that as we do our FTC reauthorization over the next several
months. I know there's a difference of opinion and I appreciate
everybody's input.
Thank you for being here, and I know you need to race out
to your Finance Committee hearing.
Senator McCaskill? Thank you.
STATEMENT OF HON. CLAIRE McCASKILL,
U.S. SENATOR FROM MISSOURI
Senator McCaskill. Thank you very much.
I want to, first, on a personal note, say how terrific it
is to see the Attorney General from Missouri here. Chris and I
have known each other a long time, and there are many chapters
to our friendship that goes back to the time that I was the
elected prosecutor in Kansas City and he was the elected
prosecutor in the county immediately south of Jackson County.
And we worked together then, he is a very talented and is going
to be a terrific Attorney General for the State of Missouri. I
couldn't be happier to see him here today.
As you know, Mr. Chairman, and as Mr. Bell referenced, I've
been trying to do a lot of work in the area of reverse
mortgages. We have had a series of three hearings on reverse
mortgages--one in Washington, two field hearings in Missouri.
It is very clear to me that these are complicated, expensive
financial instruments, that, while maybe appropriate, in
limited circumstances for some seniors, with appropriate
counseling and appropriate information, they are being marketed
now in ways that make my blood boil. And one of the things we
discovered in one of the hearings is that there are actually
people out there that are on marketing lists, with titles like
``Lonely Seniors,'' ``They Will Talk to Anyone'' lists--
``People Who Play the Lottery,'' and ``Easy Prey.''
I'm curious, General Koster, in the investigations that you
all have done and that you continue to do in this wide area of
scams against consumers, and particularly the elderly, have you
looked at ways that people are being targeted, in terms of what
information is being gathered and how people are being selected
to receive the mail solicitations, to receive the phony checks?
Have you all had an opportunity to look at that part of it?
Mr. Koster. Candidly, a lot of the information that has
come out in our state has been as a result of the work that you
have done when you brought your committee and conducted
hearings around the state. I was listening to the comments
about, ``How do we raise public awareness?'' And I believe that
the political community, in conjunction with the media, still
does a great job of raising awareness.
So, I am aware of the targeting that is occurring, as
though they were marketing different types of magazines to
seniors. My experience is that nine out of ten of these reverse
mortgages, and increasingly these sale-leaseback arrangements,
which are nothing more than stealing the equity from senior
citizens, largely, and then renting them their house at an
elevated price, have been tremendous advantage-taking
opportunities by scammers.
Senator McCaskill. I know, Mr. Vladeck, at the FTC, that
you are looking into reverse mortgage advertising and
marketing. And it's my understanding that there is a task
force, headed by the FTC, with Treasury and HUD, that is
looking into these advertising practices in this way. And--by
the way, I got a Tweet yesterday from someone who said that
there was a mailing in Illinois that had gone out from one of
these institutions, marketing these reverse mortgages, saying
that this was, in fact, a stimulus benefit, an American
Recovery and Reinvestment Act benefit, similar to what you all
have spoken about this morning; whether it's bailout or
stimulus, those are the scam phrases of the day, but it doesn't
matter what the economic climate is, they always manage to find
a scam phrase.
Tell me, Mr. Vladeck, how is that task force going? And
what, if any, action are you all taking as it relates to the
advertising?
Mr. Vladeck. Well, as you know, we are in the midst of a
rulemaking that will address the entire life cycle of the
mortgage process, including the advertising. So, we're hoping
to address, at least in part, that question through rulemaking.
The rulemaking has already commenced. We're hoping to have this
done as quickly as we can. We're also looking for cases like
these equity-stripping scams, that General Koster described.
So, if you have that Twitter, please forward it to me and we'll
take a look at it----
Senator McCaskill. Well, in fact, I just put out a Twitter
while I was sitting here listening to the testimony----
Mr. Vladeck. Please.
Senator McCaskill.--asking people who follow me to give me
examples--other examples of scam advertising that they may
encounter as it relates to these folks promising government
benefits that--and, by the way, Time magazine had an article
this week on--and I know I'm almost out of time, but I want to
mention this for the record--Time magazine had an article about
reverse mortgages this week, which was great, except they got
one part wrong, and I want to point out the part they got
wrong. If, in fact, these homes lose value, which obviously
none of us thought would ever happen, and it has happened--and,
of course, that is really one of the reasons we are in this
incredible economic crisis right now--if these homes lose
value, and, at the end of this process, when the home is
finally sold, and it is not sufficient money there to pay the
loan, it said in the article that the lenders got left holding
the bag. I want to point out for the record that it's the
taxpayers that get left holding the bag, because we are
insuring 90 percent plus of these loans that are being made
right now, and we just upped the limit of the amount that could
be loaned, and these are increasing by huge margins, and this
is, in fact, potentially the subprime scam--the subprime
problem, 4, 5, 10 years from now, and it won't come due for a
while, because we're not going to know that we're going to be
caught in these loans until these homes are sold. So, I
encourage all of you to continue to be vigilant in that
particular area because these seniors really deserve more
protection than they're getting right now.
And once again, thank you, General Koster, for being here
today. We're--it's terrific you're here, and I hope you come
back often to show off what a great job we do in Missouri,
protecting people.
Thank you, Mr. Chairman.
Senator Wicker. Mr. Chairman, in order to have a complete
record, here, I wonder if Senator McCaskill would join me in
asking unanimous consent that that article be placed in the
record at this point.
Senator McCaskill. Absolutely. Absolutely. And we will put
in the response letter we're sending Time magazine that
corrects that inaccuracy in the article--that it's the
taxpayers that are on the hook for these loans and not the
banks.
Senator Pryor. No objection.
Senator McCaskill. Thank you.
[The information referred to follows:]
TIME Magazine, July 20, 2009
Reverse Mortgages
By Cybele Weisser
While the recession hasn't spared any age group, it's been
particularly brutal for older Americans who were counting on their (now
shrunken) nest eggs to last through their retirement years. To
supplement their stash, an increasing number of seniors are turning to
reverse mortgages, which function essentially as a cash advance on
their home equity, repaid only when they sell their home or die. The
loans are available to those 62 and over, and lenders have to eat the
difference if a home ends up declining in value. In the three months
after February--when a provision in the economic-stimulus package
raised the eligible home-value limit from $417,000 to $625,500--the
number of federally insured reverse-mortgage originations jumped 10
percent compared with the same period last year. Industry experts
predict that reverse mortgages will play an increasingly important role
in the coming years as some 70 million baby boomers hit their 60s--
often with a lot less saved than they'd hoped.
This has some folks in Washington concerned. In June, the
Government Accountability Office said it had uncovered misleading
marketing practices in the reverse-mortgage industry, and Missouri
Senator Claire McCaskill, a longtime consumer advocate, chaired a
hearing to investigate predatory lending tactics. A big no-no is cross-
selling, e.g., trying to persuade a senior to get a reverse mortgage
and use the funds to buy an annuity or other financial product.
Comptroller of the Currency John Dugan recently noted that reverse
mortgages, like some flavors of the infamous subprime mortgages, are
too complex for many seniors to understand. ``Millions of older
Americans still have a lot of equity in their homes, and it's tempting
for them to tap into this pot of money,'' he says.
Still, under the right conditions, these loans can be a sensible
solution to a tough financial situation. So if you or your parents are
considering one, here's what you need to know:
The amount you can borrow is based on interest rates, your age and
the value of your home. (Use the calculator at rmaarp.com for an
estimate.) There are no credit or income requirements to get a reverse
mortgage, but you must be able to keep up with property taxes and
insurance bills--or you could lose your home. The up-front costs are
high. Generally, $10,000 to $15,000 in fees are lopped off the amount
you can borrow. Finally, if someone is pressuring you to take one of
these loans in order to buy something else, that's a huge red flag.
Walk away.
Lenders aren't allowed to close on a federally-insured reverse
mortgage until borrowers meet with a HUD-approved counselor, who is
required to help them explore alternatives such as selling their home
or lowering their expenses. That's because the greatest reverse-
mortgage risk, especially for younger borrowers, may be that they will
live longer than they expected and drain all the available equity from
their home. Says reverse-mortgage specialist Bronwyn Belling: ``If you
borrow the money now, you may not have it when you need it later on.''
______
Letter to TIME Magazine
While I applaud Cybele Weisser's piece concerning reverse
mortgages, I want to take issue with one conclusion stated in the
article: ``Lenders have to eat the difference if a home ends up
declining in value'' [July 20]. Wrong. Taxpayers make up the
difference, not lenders. A little over a month ago, the Department of
Housing and Urban Development (HUD) asked for $800 million to cover
losses on its reverse-mortgage program. That is because HUD insurance
allows lenders to assign loans to HUD once the value of the home has
dropped to nearly the value of the loan. So far, more than $1 billion
in loans has been passed on to HUD. With fluctuating home values and
interest rates, it is difficult to know how much more money HUD will
have to come up with. The more loans it insures, the greater the risk
to taxpayers. Without greater oversight, that initial $800 million will
just be the start. While reverse mortgages can provide financial help
to seniors, they are expensive and complicated, and ultimately,
taxpayers will foot the bill if the loan goes bad. After the subprime
mess, we cannot afford to let history repeat itself.
Claire McCaskill,
U.S. Senator, St. Louis, MO.
Senator Pryor. Senator Klobuchar, welcome back.
Senator Klobuchar. Thank you very much, Mr. Chairman.
When I was out, my staff told me that you, Mr. Bell,
haven't been asked a question yet, so I guess I have to----
[Laughter.]
Senator Klobuchar.--I have to fix that, as well as you, Ms.
Greenberg. So, there we go.
You know, in your testimony, Mr. Bell, I was struck by what
I think is good common sense for financially troubled consumers
facing foreclosure, and that is one of your commonsense ideas,
something that Prentice Cox, from the University of Minnesota,
has talked about. If someone asks for a fee up front for
counseling, it's a probable signal that there may be a possible
predator. Do you want to talk about that? And also, what other
things we can do, and maybe launch a little into what you think
of this idea of setting up a special agency to deal with
financial documents and financial fraud.
Mr. Bell?
Mr. Bell. Thank you very much.
Well, I would just observe that consumers are by and large
a very trusting lot, and when people come forward, often with a
lot of media muscle behind them, offering help and assistance
in a financial downturn where they have credit problems, people
are inclined to trust those sorts of information. So, I think
it's a big job for us to teach consumers to be more skeptical,
to not sign contracts or other agreements without seeking
independent sources of information. One thing that we do have a
lot of in this country are nonprofits, mortgage counseling and
financial counseling agencies, and also HUD foreclosure
counseling centers. We would urge consumers to avail themselves
of those sources of independent information and counseling, and
not just believe what salespeople are telling them.
And I'd also raised the issue of media responsibility in my
testimony. I do believe that an awful lot of money is being
invested in both television and Internet commercials to try to
promote services that are questionable, including many services
that charge advance fees for debt settlement or foreclosure
rescue. We have heard from a lot of enforcement officials on
the ground, in states like California, that an advance fee is
almost a sure indicator of a scam or a service that may be
suspect, so we're trying to get that message out to consumers.
We also believe that we--one of the reasons we have this
profound, deep financial crisis has been sort of disarray at
the Federal level, in terms of the many different regulators we
have, a system that does not provide comprehensive premarket
review of financial products that are introduced and
intensively marketed to consumers. And for that reason, we've
been supporting the Obama Administration's proposal for a
consumer financial protection agency, which we think would
have--would need to have very comprehensive powers to look
across the entire marketplace, including at products that are
competing with each other but right now are often regulated by
different regulators----
Senator Klobuchar. OK, thank you.
Mr. Bell. Yes.
Senator Klobuchar. Ms. Greenberg? Just your reaction to
that proposal?
Ms. Greenberg. The financial safety Product Commission?
Senator Klobuchar. Yes.
Ms. Greenberg. We're--we join with the testimony that--of
the other consumer groups--testified on. I guess they're
testifying today in the Senate. I just--you know, it occurs to
me, I really think, Senator Klobuchar and other members of the
Subcommittee, that--you know, we talked about what happened
with the USPIS spending $12 million, which was actually ill-
gotten-gained money, so it wasn't taxpayer money--that we
really have to go toe-to-toe with these fraudsters. That means
they are spending billions of dollars reaching out--you know,
hundreds of millions of dollars reaching out to get--to entrap
consumers. We have to use the same methods that they use to--
whether it's newspapers, whether it's magazines--to--whether
it's the Internet, whether it's using Twitter or Facebook--
they're very successful at this. And we----
Senator Klobuchar. So, you mean we have to be as
sophisticated as the crooks we're trying to get.
Ms. Greenberg. Absolutely. And we--and once those messages
get out there, people listen. The problem is, they just don't
hear enough from us, but they do hear from the fraudsters.
Senator Klobuchar. Right.
Mr. Vladeck, in your testimony, you talked about scam
artists that have been attempting to exploit the American
Recovery and Reinvestment Act by claiming to offer consumers,
for a price, help with applying for, supposedly, free
government grant funds. And you've mentioned that the FTC has
kind of taken that on. Could you explain that, and also maybe
get at Ms. Greenberg's point about how we're going to be as
sophisticated as they're developing new techniques over the
Internet?
Mr. Vladeck. Well, let me invite you to come look at our
Internet lab which is truly state-of-the-art. We are using that
to try to track and figure out who the proponents of these
scams are, so that we can find them and we can go after them.
As you know, the stimulus money is like honey to scam
artists. They are using, as Attorney General Koster noted, all
of the trappings of government to portray their services as
related to the government. Indeed, there was an Internet scam
that stole people who went to the HUD website and captured that
traffic, and the FTC was able to get an injunction to stop this
scam quite quickly. But, most of the scams that we see are
related to grant money, and so, we've brought a series of
cases, and where we have other investigations ongoing to try to
go after these grant scams that promise people easy access to
government grants to pay off their own debts. And we've been
very successful, so far, in stopping some of the big ones. But,
it's like playing Whack-a-Mole. We go after some of the big
ones, and another one of these scams emerge. And as long as
there is this talk of the government stimulus money, I think
we're going to be in the business of going after these scam
artists.
Senator Klobuchar. OK. Thank you very much.
Senator Pryor. Thank you.
Ms. Greenberg, I'd like to start with you, if I may. And
we'll just do a second round of questions, here. We'll do 5
minutes again if it's OK with the Senators.
But, you had mentioned that you would like access to the
Sentinel database. And I'd like to get your concept of how that
could work and should work.
Ms. Greenberg. Well, this will be a familiar theme for you
since it relates a little bit to how we tried to get into the
Consumer Product Safety Commission database. And you've spent
so much time and done such great work in that area. Really,
it's a tool for consumers to be able to do their own
investigation. Here's a company, let me go check them out and
see, you know, if they appear on this database and whether
they've, you know, been involved in fraudulent activity. We
want to get--we think consumers could benefit from having
access to that information. And right now it's really a law
enforcement tool. So, you know, I'd like to work with the folks
at the FTC and see whether there is a possibility for doing
that.
Senator Pryor. Now, as I asked you that question, I noticed
that Mr. Muris and Mr. Vladeck scrambled for their notepads
there and were jotting down some notes. Did you have any
comments on that, Mr. Muris?
Mr. Muris. The Commission does a great job in creating this
partnership. There are issues that I'm sure Mr. Vladeck can
comment on, in terms of how the partnership works with law
enforcement and some of the sensitivities. These are Freedom of
Information Act and other issues.
I wanted to say, generally, Mr. Chairman, that the points
about reverse mortgages illustrate exactly the point that I'm
making about rulemaking. I don't know the subject matter, but,
if there are, indeed, crooks, the Commission needs to get out
and deal with those crooks now, and rulemaking is a
distraction. If there are legitimate reverse mortgage
businesses, the Commission will have a great deal of difficulty
drafting a rule to separate the two.
A final brief comment. The Commission had a business
opportunities rule. There are 14 million people in all your
districts--Mary Kay, Amway, Avon--and the Commission thought it
was writing a rule about fraud. It turned out to be writing a
rule that would have put many of these people out of business,
and the Commission, of course, has retreated from that. But,
it's a very difficult process. There already are rules. If
indeed these reverse mortgage people are scam artists, there's
an elaborate law of deception, and let's get on with the
business of going after them and not the distraction of
rulewriting.
Senator Pryor. Mr. Vladeck, did you have a comment about
the database? And I do want to ask you about his point on
reverse mortgage.
Mr. Vladeck. OK. Well, let me start with the database. I
share Ms. Greenberg's concerns about public availability, but
there are tremendous practical problems that we need to
overcome. We have personal identifier information in many of
the complaints, and there are deep, entrenched privacy concerns
about letting the database be searched by members of the
general public.
In order to take out the fields that might contain personal
identifying information, we would have to, I am informed,
manually go through the database and block that information
out.
I completely agree with giving the consumers access to
information that might help them make informed choices. At the
same time, we depend so heavily on consumer complaints for our
enforcement efforts. A huge volume of complaints gives us an
indication that this is a widespread scam causing serious
consumer injury. The last thing in the world anyone wants is
for us to deter any individual from filing a complaint or for
any law enforcement agency sharing complaint data with us
because of privacy concerns. And so, I'm always happy to sit
down with Ms. Greenberg and talk about this issue, but I--I'm
fearful that, until we can overcome the legitimate privacy
issues, general public access to our database is not possible.
Senator Pryor. Well, let me--thank you--and let me follow
up on the reverse mortgage issue that he raised. Could you give
the Subcommittee a sense of--or maybe a specific example of
practices that you're seeing out there that you cannot
currently deal with because you don't--because you would need
to make a rulemaking?
Mr. Vladeck. Well, let's take the advance fee issue. I
think there's general agreement among consumer advocates that
these advance fees for foreclosure rescue or mortgage scams or
debt scams--debt counseling scams--are principal indicators of
a scam. We have gone after mortgage rescue scams and credit
repair scams that charge an advance fee. I think that the best
way to have tackled this problem--and we're doing it now
through a rulemaking authorized by Congress--is to set a clear
rule. We cannot, the states cannot, local governments cannot,
go after all of these scammers. If there was a clear rule that
simply said ``no advance fees'' in these mortgage rescue
situations--and some states--my understanding is, many states
are now passing state laws that require that, we would be
better off. And Congress has authorized us to do that, but
we've lost an awful lot of time.
Mr. Vladeck. An awful lot of people have been hurt because
of the delays in our ability to get this rule on the books.
Senator Pryor. Mr. Muris, did you have a follow-up?
Mr. Muris. If there are legitimate businesses here, and Mr.
Vladeck made a speech and said, ``We will attack anyone with
advance fees,'' they would stop doing them. The other people
are crooks, and a rule isn't going to help. The crooks are
crooks to begin with. They know they're crooks, quite frankly,
and you don't need a rule to deal with them. In a speech or a
case, the FTC could--for the legitimate businesses--accomplish
the purpose that he wants.
Senator Pryor. Senator Wicker?
Senator Wicker. Thank you. And I'll observe, Mr. Chairman,
that this hearing is even more interesting than I expected it
to be, and I appreciate the panel dealing with us on this.
We have two items of agreement between Mr. Vladeck and Mr.
Muris. One, that rulemaking is a distraction. Mr. Vladeck, I
believe, would contend that it's a distraction that's worth it
in certain limited instances. The second bit of agreement that
I'd like to ask both of you about is to tell us exactly what
the experience of the 1970s teaches us and how did the FTC
fail? I guess since you brought it up, Mr. Muris, I'll let you
go first.
Mr. Muris. I was there. The first job I had out of law
school, was as a staffer in the Federal Trade Commission. The
Commission took upon itself--and frankly, it was pushed early
in the 1970s by Congress--to transform entire businesses. And,
as I said, it issued a rule a month for 15 months. A big part
of the problem was, obviously, that the rules were not well
thought out. Congress reacted and required the FTC, because it
has such enormously broad jurisdiction and is not an expert
agency on a specific area, like the EPA or the SEC--Congress
said, ``You have to have tougher procedures. And what you need
to do is allow disputed issues of material fact and allow''----
Senator Wicker. Tougher rulemaking----
Mr. Muris. Yes, tougher rulemaking procedures. And those
procedures work, if you use them appropriately. I'm not opposed
to rules. My 15 minutes of fame in life was the creation of the
National Do Not Call Registry. We did that with a rule. We did
it quickly. I believe that we could have used these procedures
and accomplished it. A problem is, if you go ahead with this
reauthorization and it passes the Congress, I predict--and I
suspect that you all may try to stop some of this--but I
predict that it will be like the FACT Act, the Fair Credit
Reporting Reauthorization. It will come with a request for the
Commission to do a dozen rules, and that would be an enormous
distraction and disservice to American consumers. And----
Senator Wicker. Why did Congress react? Were they hearing
from the people----
Mr. Muris. Congress reacted for a variety of reasons--
because the FTC was doing so much, and because the FTC's
jurisdiction is so broad. Again, if you take the EPA or you
take the SEC or you take the FCC, they're expert agencies over
a relatively narrow area. The FTC is an expert, but it's an
expert on consumer protection and how to interpret advertising
and how to go after fraud. In a specific area, like the
mortgage area that Director Vladeck is discussing, the
Commission has exactly a handful of cases dealing with, for
example, mortgage servicing, yet they're going to write a
servicing rule. Instead, the way the law should develop, I
believe, is for the Commission to bring cases and follow the
common-law process of evolution. Because at the beginning,
particularly in an area you don't understand, it's very hard to
start a rule and to do the rule right.
Senator Wicker. Mr. Vladeck, what do you have to tell us
about the failure of the 1970s approach?
Mr. Vladeck. Well, fortunately, I was not really present at
the early days of the FTC. I'm a little younger than Tim. I
think Tim is accurately portraying the lesson, which is that
the agency overreached, and it overreached and was punished by
Congress for overreaching.
I think Congress's punishment did not fit the offense. That
is, we've been saddled with a rulemaking process that is unlike
that used by every other agency. It requires, essentially, a
trial-type proceeding to finalize a rule. And make no mistake,
it would take years to promulgate a rule under those
conditions, which is why the agency, by and large shies away
from rules like that, particularly in areas like the one we're
seeing now, where there is a fast-developing crisis that
jeopardizes consumers. The problem here is that the economic
downturn has given fuel to scammers who prey on the most
vulnerable in our society. And while we can go case by case,
which is what we're doing, it's the difference between being
able to do something wholesale or resale. We're--retail--we're
doing these, case by case by case. We've made inroads. But, the
more efficient, the quicker way to get redress to more
consumers is to place a rule in place which has the force and
effect of law. The simple violation of that gives rise to an
offense, it makes our enforcement much easier. We could do a
far higher volume of cases, and we could do a better job
protecting American consumers.
Senator Wicker. Mr. Muris, during your term as Chairman,
did you have any difficulty bringing enforcement actions
against scammers? Were you limited in your ability to protect
consumers from fraudulent activity?
Mr. Muris. Absolutely not. Two points. These scammers are
already violating rules. We don't think of them as rules, but
these common-law principles against lying, against fraud,
against breaking your contract are rules. And an additional
rule, I don't think would deter the scammers.
Second, you don't need civil penalties. The Commission as
Mr. Vladeck said, can freeze the assets. That gets all the
money that is there to get. I don't think Mr. Vladeck would
spend his time, frankly--I hope he wouldn't--writing rules
against fraudsters. But, the premise that he just made was the
premise of the 1970s: We need to write rules, and then we'll
bring cases enforcing the rules. Because we already have basic
rules of the road, the rules the FTC, indeed, writes--and it
should write some; I believe Do Not Call was a great example--
should be few and far between. The procedures that they have
are adequate.
But, in special cases, perhaps Congress, in its wisdom,
should say, ``Go ahead and use APA procedures.'' The Commission
can already go to Congress to get that done, in the rare case
if the Commission believes it should do a rule.
Senator Wicker. Well, I have one final line of questioning.
And that goes to Mr. Muris's point with regard to private
attorneys--to Attorneys General enforcing State laws. We know
that some of these Attorneys General turn around, then, and
hire private attorneys to litigate claims. Mr. Muris, clearly
you are fearful that further expansion of this authority
presents problems. How has the practice by State Attorneys
General to retain private attorneys affected the implementation
of Federal law? And what needs to be done to ensure that
enforcement in this regard is consistent and fair?
And then, Mr. Koster, as Attorney General, I'd like for you
to weigh in on responding to Mr. Muris's point, then.
Mr. Muris. Well, let's be clear what we're discussing.
First of all, I'm not discussing the day-to-day work of the
Attorneys General with their own staff. My experience has been
spectacular. I could talk for days about the excellent
cooperation in antitrust and consumer protection. We're talking
about a problem that has arisen recently in a few states with
the outsourcing of litigation responsibilities, particularly
coupled with contingent-fee contracts, and some of them to
significant campaign contributors. I think that's a very
dangerous situation. And if Congress--if you, indeed, increase
the authority of State Attorneys General to enforce Federal
laws, you should put in place guidelines for transparency, and
fairness in dealing with outsourcing. That's what I'm
suggesting.
Senator Wicker. Mr. Koster?
Mr. Koster. I've agreed with everything Professor Muris has
said today, with the exception, perhaps, of this point. The
reality is that General Cuomo, in New York, is a different type
of Attorney General because he has so much more power than the
rest of us have out in the states. I have 20--no, I have 17
lawyers in my consumer division. He is able, in New York, to
take on the kinds of cases that you probably think that every
Attorney General in the country can take on just by flipping on
a switch in their AG's office. In many of these cases, the
scope of the litigation is so large that to ask two or three
$42,000-a-year attorneys in the Midwest to take on an auction-
rate securities case against Merrill Lynch or another large
investment bank is nearly impossible. There are a variety of
types of consumer cases that are sort of outside the scope of
what we've been discussing here today, which are smaller-type
cases, but the auction-rate security cases around the country
are just as much a consumer case as these reverse mortgage
cases that affect smaller consumers.
Having a position of strength where you can release power
into the litigation marketplace and accomplish larger consumer
ends, I think, is something that the local political process
should be allowed to work itself through and would be ill-
advised for Congress to constrain.
Senator Wicker. Even in regard to transparency and in this
specific issue of large contingency fees to campaign
contributors? You would rather the Congress be hands-off there
and allow each state to make those decisions?
Mr. Koster. Speaking for my own state, I believe that a
transparent Request for Proposal process should always be
utilized with regard to the awarding of contracts. But, the
local political process does tend to work its way through these
issues, and politicians who give contracts to political friends
without an RFP will have to answer for those actions when it
comes time for elections.
Senator Wicker. And finally--and the Chair has been
indulgent--Ms. Greenberg mentioned that the FTC staff has been
reduced in real numbers. Mr. Muris, did you preside over that?
And are you saying that we don't necessarily need to fund the
staff back up to the 100-percent level that we had years ago
without adequate training?
Mr. Muris. Here's the problem of the 1970s. Congress gave
the Commission so many resources so fast that the supervisors
could not adequately control, and you created individual
fiefdoms of people who were essentially on their own. I
supported an increase in resources when I was chairman. We
increased from 1,000 to something--I think now it's about
1,100. You should recognize that, in normal times, with that
1,100, the Commission will lose something like 100 a year. And
that means you've got to hire a lot of people just to stay
still.
So, I'm not opposed to adequate resources or measured
increases, but I think to repeat the 1970s and throw a bunch of
money at the Commission would be a mistake.
Something that needs to happen, and something we did--and
Do Not Call was a great boon to this involved Consumer
Sentinel. We completely rebuilt Consumer Sentinel, spent a lot
of money to do that, money that we got from Congress. It has
been a few years since that happened, and technology changes. I
don't know if Mr. Vladeck wants that money again, but at some
stage it will need to be rebuilt to keep up with the most
modern enforcement techniques. So, it's not just people; it's
support, as well.
Look, I'm an FTC guy. I've spent my life in and out of the
Federal Trade Commission. I believe strongly in the FTC's
mission and the way the FTC is now. And I certainly believe
that it needs adequate resources.
Senator Wicker. Thank you.
Senator Pryor. Senator McCaskill?
Senator McCaskill. I am just--curious. I want to make sure
I understand. Are you complaining, Mr. Muris, about States
Attorneys General working to enforce Federal law, and worried
about contingent fees and contract lawyers?
Mr. Muris. Yes, that is my point. There should be
guidelines and transparency. There are Federal rules about
contingent fees. The Federal Government occasionally
outsources, and I think only in the dire situations should you
use contingent fees. We certainly ought to have transparency.
The so-called Pay for Play money to campaign contributors,
that's----
Senator McCaskill. We've----
Mr. Muris.--that's the sort of thing that shouldn't happen.
But, again my relationship and the relationship of the FTC
with the states has been--the only word to describe it, again,
has been spectacular.
Senator McCaskill. Well, I'm just--I just am very
reluctant--I always find it ironic when folks start talking
about the situational--of when the Federal Government should
interfere with states. The notion that an elected Attorney
General needs the Federal Government to tell him how to conduct
the business of his office in a way that is going to provide
transparency and accountability to the people he serves, or she
serves, it seems to me the heavy hand of the Federal
Government. And I think that those people--those Attorney
Generals who engage in inappropriate Pay to Play contractual
arrangements with campaign contributors will hear the wrath of
the voters at the ballot box and will hear the wrath of their
constituents at the State level. And frankly, I'm reluctant for
the heavy hand of Federal Government to interfere with those
State officials. I don't think, frankly, that's our place.
Mr. Muris. But that's why the premise of your question is
what I'm discussing. When they have the authority to enforce
Federal regulations is when I would apply the kind of rules
that apply to Federal regulators.
Senator McCaskill. It's just always situational when we
think Washington knows best, and when we don't. So, I think
this is one of these situations where Washington probably
doesn't know best.
Thank you, Mr. Chairman.
Senator Pryor. Thank you.
And I just have a couple of follow-ups just to--in the
spirit of closing the loop on a couple of points.
Mr. Vladeck, with you, you've heard Mr. Muris say, a couple
of times, that we basically--the current law is sufficient; we
have common-law, case-by-case enforcement, and that should be
sufficient. Nonetheless, you still are saying that you need the
ability for rulemaking and to change the Magnuson-Moss
procedures that you live under. Could you just respond to what
Mr. Muris says, and tell us why you think--given what he says,
case-by-case common-law--give a--tell us why you think your
idea is better for the American consumer.
Mr. Vladeck. Let me be intensely practical. Without a rule
in place for each case, we have to prove the elements of a
violation under Section 5 of the FTC Act. If there's a rule in
place, we have to show a violation of the rule. Now, anyone
who's ever litigated a case--and I've spent 33 years as a
litigator--wants to litigate the second case, not the first.
The proofs are quicker. It allows for more orderly dispensation
of justice. It allows us to go after the scammers quickly,
efficiently, and to bring more cases. If we have to go case by
case and prove FTC Act violations each time, we will do it, and
we are doing it. That's why there are long lists of cases of
mortgage foreclosure rescue scams and so forth. But, the nature
of the litigation is very different. And having a rule in
place--and a rule of the kind that we are likely to promulgate
under the mortgages does not simply reflect the rules of fraud,
as Mr. Muris claims, they embellish the rules of fraud. They
clarify and bring into context the rules that we believe ought
to apply. And on this issue, I think there's widespread
agreement that the scam artists who are bilking American
consumers, by and large, do it through up-front fees.
Senator Pryor. Yes.
Mr. Vladeck. So, we can simply adopt a rule--we may or may
not, but we could adopt a rule the way states have done, saying
that any up-front fee is a violation of our rule. And it
simplifies the litigation, frees us to do more of these cases
more quickly, and better protect American consumers.
Mr. Muris. Mr. Vladeck is wrong, on two accounts.
First of all, FTC deception standards, which the fraud
cases apply, are strict liability.
Second, to get civil penalties under a rule, you have to
prove scienter, in any event, because that's what Congress has
required and that's what it should require.
The problem actually is worse than I thought, in hearing
Mr. Vladeck. If he wants the FTC to distract itself and write
rules against fraud, that would be a much bigger mistake than I
thought the FTC had proposed for rulemaking. Again, it's strict
liability already.
Mr. Vladeck. With all respect, we have to prove fraud in
order to get strict liability. We don't have--prove violation
of rule.
Mr. Vladeck. Second, the rule that we are looking at for
mortgages would adopt a rule against advance fees. That is a
rule that would permit us to litigate these cases more quickly.
And third----
Mr. Muris. No.
Mr. Vladeck.--we're not talking about civil penalties,
here. That's a different issue. I don't quite understand why
Mr. Muris wants to conflate the two.
Mr. Muris. Well, I wrote the FTC's deception standard,
David. It is strict liability.
Second, if you have a rule, civil penalties is what you get
under the rule. And civil penalties require scienter.
Senator Pryor. Well, it sounds like we have an honest
disagreement here, and we're not going to solve it today. But,
I really do appreciate your input.
My last question is really more in the form of a request.
And I think everybody on the panel has mentioned the importance
of outreach and educating the public. I would hope that you all
would give us your thoughts as we go forward about how to best
do that and how to be the most effective and get the best bang
for the buck. And also, I think we have to think about--even
though it would be unpopular in some circles--we have to think
about the Internet component to fraud today. There are a lot of
Internet companies that are very legitimate name-brand
companies that are permitting some of these fraudulent schemes
to either pay for advertising on their sites or at least show
up on their sites, one way or another. So, there may be some
Internet component to this that--you know, again, we're not--
none of us, I think, are experts in that. But, I do think it's
something that we need to consider as we move forward.
I want to thank everybody for being here today. This has
been a very, very informative discussion. I know that we had
several Senators that were coming and going for committees.
Thank you very much.
And with that--we'll leave the record open for 2 weeks,
allow members who weren't here to ask questions and do follow-
ups. Appreciate your responses on those.
Senator Pryor. We'll adjourn. Thank you.
[Whereupon, at 11:45 a.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Tom Udall, U.S. Senator from New Mexico
The economic challenges we face as a nation have resulted in
increased fraud and consumer scams. Fraudsters are taking advantage of
consumers, senior citizens, job seekers, and other vulnerable people at
a time of economic hardship for many Americans.
My state, New Mexico, has been especially hard-hit by employment-
related fraud. These deceptive schemes offer New Mexicans easy work,
high wages for unskilled labor, and other attractive opportunities. As
a result of the fraud, New Mexicans lose money, time, and other
valuable resources at a time when they need them most.
The recent Federal Trade Commission (FTC) sweep to crack down on
fraud--``Operation Short Change''--is a promising example of Federal
and state agencies working together to protect consumers against fraud.
But this action is not enough. Americans need more than the
occasional high publicity raid to fully protect them from a wide range
of fraud and consumer scams.
The FTC must develop a sound strategy for protecting consumers that
coordinates efforts among the Department of Justice, state attorney
generals, and state agencies.
Greater cooperation among Federal and state officials will be
necessary to combat those who seek to take advantage of people in this
current economic climate.
This Committee plays an important role in the fight. We must ensure
that the FTC has both the authority and resources to be the ``nation's
consumer protection agency.''
I thank the witnesses for joining us today and look forward to
their testimony and recommendations for how the FTC--and all of us--can
do a better job of protecting Americans against fraud.
______
Response to Written Questions Submitted by Hon. Tom Udall to
Sally Greenberg
Question 1. What is the appropriate level of voluntary industry
self-regulation?
Answer. The development of sound self-regulatory standards for
consumer products and services helps ensure the physical and economic
welfare of consumers. Self-regulation helps industry players know what
the norm is for actions within their industry. It sets parameters that
help to identify bad actors within the industry. It also encourages
industry to condemn bad actors and take action to address the issue.
NCL strongly supports industry self-regulatory models that include
competent consumer contributions to the development of product and
service standards. Such consumer input should be applied in the
development of both mandatory and voluntary industry self-regulation
standards.
With regards to advertising industry self-regulation, NCL believes
the standards and rules set by the industry should reflect the
following core principles:
The goal of self-regulation should be to promote policies
and standards that better inform consumers of product and
service performance characteristics.
There should be an endorsement and support of the role that
strong and effective government regulatory and enforcement
agencies play in overseeing industry.
There should be an acknowledgment that disclosure alone is
never an acceptable substitute for quality safety standards and
careful design and production of the advertised product.
To the specific question of the level of voluntary industry self-
regulation, we support vigorous industry-based review of all
advertising, including in the new media market. Unfortunately, we find
that the advertising industry too often fails to balance the
competitive desires of the standards--making body's members against
need for consumers to understand the true nature of a product or
service advertised.
Time and again, it has been shown that when consumers are presented
with all the facts about a product or service in a clear, easy-to-
understand fashion, they will make an informed choice. This is no less
true in ``new media'' advertising than in traditional advertising.
Unfortunately, it is apparent to our organization that advertisers too
often think first of how their advertisements can give as little
substantive information as possible without running afoul of government
regulators. Instead, they should focus on how to properly inform their
target audience to enable them to make informed choices.
It is illuminative to note that the three goals of the National
Advertising Review Council, a leading advertising industry self-
regulatory body, are as follow:
minimize governmental involvement in the advertising
business.
maintain a level playing field for settling disputes among
competing advertisers.
foster brand loyalty by increasing public Trust in the
credibility of advertising. \1\
---------------------------------------------------------------------------
\1\ National Advertising Review Council. ``About the National
Advertising Review Council (NARC),'' Accessed August 21, 2009. Online:
http://www.narcpartners.org/about/index.aspx.
That effectively informing consumers about the benefits, risks, and
effectiveness of products advertised is not mentioned as a goal
indicates to us that the self-regulatory objectives of the advertising
industry may be insufficient. Further, given the opposition shown by
the advertising industry to even the modest revisions proposed to the
Federal Trade Commission's (FTC) Guides Concerning Use Of Endorsements
and Testimonials in Advertising, we feel that there is a lack of
---------------------------------------------------------------------------
ambition on the part of the industry to set such a goal in the future.
Question 2. Where do we need greater FTC authority and activity to
protect consumers?
Answer. First, the proposed revisions to the FTC's Guides
Concerning Use Of Endorsements and Testimonials in Advertising should
be adopted by the Commission. These changes are long overdue and will
help to stop some of the most egregiously harmful advertising industry
practices, particularly with regards to weight-loss drugs, business
opportunities, and other medical services such as baldness cures.
Second, replacing the FTC's current Magnusson-Moss Act-based
rulemaking authority with Administrative Procedures Act (APA)
rulemaking authority would do much to enhance the FTC's ability to
proactively protect consumers from dishonest advertisers. For example,
under its current rulemaking regime, when the FTC takes action against
a dishonest advertiser, such an action requires a lengthy investigation
that all too often leaves inordinate amounts of time for dishonest
marketers to reap the rewards of their bogus advertisements. We believe
that APA rulemaking authority would allow the FTC to much more quickly
take action against dishonest marketers and thus protect more
consumers, particularly in the ever-evolving new media landscape.
Finally, we would endorse more FTC activity to initiate actions
against deceptive advertisers. Unfortunately, the FTC's stretched
resources have in recent years forced it to only choose high-profile
targets, relying on the media exposure gained from its actions to
attempt to scare other bad actors out of the market. Given the
proliferation of advertising we find to be manipulative at best and
fraudulent at worst, especially online, we do not believe that this
strategy is sufficient to control the problem. While a more vigorous
rulemaking authority would give the FTC the legal tools it needs to
tackle fraudulent advertisers, the agency will also require the
sufficient financial and staff resources to support vigorous
enforcement.
Question 3. Does the FTC need new authority to protect consumers in
a new media landscape that includes Internet videos, web blogs, and
Twitter accounts?
Answer. NCL supports the inclusion of new media content channels
such as blogs and viral video in the Guides Concerning Use Of
Endorsements and Testimonials in Advertising. We believe that consumers
are increasingly relying on such new media outlets to inform themselves
about products and services in the marketplace. The increasing
resources advertisers are devoting to these advertising channels,
suggests that they are of a similar mind on this issue.
Given the complexities of the new media landscape and the evolving
nature of user-generated content we believe the revisions to the FTC's
Guides are a good first step in ensuring that these new advertising
channels do not become a haven for deceptive advertising. We would urge
the Commission to remain vigilant and periodically review the
effectiveness of its policies regarding testimonial advertising in
user-generated content to determine if greater authority is needed in
the future.
______
Response to Written Questions Submitted by Hon. Tom Udall to
David Vladeck
Question 1. Mr. Vladeck, what lessons learned for the FTC have come
from ``Operation Short Change''?
Answer. The lesson learned from ``Operation Short Change'' is that
law enforcement sweeps continue to be highly successful in halting
fraud and educating consumers about how to avoid, prevent, and report
fraud. Operation Short Change brought together Federal and state
partners to demonstrate that law enforcement is actively pursuing scams
that prey on economically-distressed consumers.
The Commission is committed to finding ways to expand its
partnership and cooperation with state and Federal law enforcement and
consumer protection agencies. In particular, the Commission works
closely with the Department of Justice's Office of Consumer Litigation,
the U.S. Postal Inspection Service, and numerous state attorneys
general. These relationships have been fostered and forged through
involvement in past law enforcement sweeps, information-sharing on
specific cases or investigations, communication with the Commission's
regional offices, and ongoing involvement in multi-agency task forces.
In addition, staff routinely works with the National Association of
Attorneys General (``NAAG'') Consumer Protection Project to solicit and
encourage participation from all 50 states in law enforcement sweeps.
The Commission has actively encouraged state and Federal law
enforcement partners to utilize and contribute data to Sentinel, the
FTC's database of consumer complaints. Through Sentinel, law enforcers
can search consumer complaint data, identify targets, track trends, and
create ``consumer alerts'' to warn other Sentinel users about ongoing
investigations of particular targets. Over 1,700 law enforcement
agencies are currently members of Sentinel who may access complaint
information on targets. The Commission is working to expand the number
of law enforcement agencies that contribute complaint data to Sentinel.
Question 2. Is this an effective, coordinated approach that should
be used regularly?
Answer. A coordinated law enforcement sweep like Operation Short
Change is an important tool that has been and will continue to be used
by the Commission to leverage our limited resources to halt and prevent
fraud. This approach not only leads to the initiation of new law
enforcement cases brought as part of the sweep, but generates a great
deal of attention from local and national media outlets, which serves
to educate the public about how to detect and avoid fraud. For example,
161 television news stories about Operation Short Change ran on news
stations across the country, reaching more than 35 million Americans.
In addition, news stories about Operation Short Change were aired on
radio stations and appeared in over 30 print and online media sources.
Question 3. Have we seen changes in the marketplace as a result of
these raids and YouTube video? If not, what follow-up is required or
what else needs to be done?
Answer. The cases initiated by the FTC as part of Operation Short
Change have halted frauds that took in at least $300 million and
injured over 700,000 consumers. It is too soon to determine the general
deterrent effect or changes in consumer behavior as a result of the
announcement of Operation Short Change and the rollout of the
Commission's consumer outreach video. In the meantime, the Commission
will continue to investigate and bring cases against new perpetrators
of fraud, alert the public to emerging scams, and educate consumers on
ways to avoid becoming victims.
Question 4. I would appreciate learning the panelists' thoughts on
how best to help inform non-English speaking populations about how to
avoid fraud. In New Mexico, for example, the state Attorney General now
publishes bilingual ``Foto Novela'' picture pamphlets that illustrate
how to avoid common scams. Foto-novelas have been used in other fields,
such as community health and social work, with success. This format has
proved effective in reaching older Hispanic adults, often the target of
fraud. Are there projects like this currently under development?
Answer. Since July 2002, the FTC has focused on reaching out to
Spanish-speakers to promote consumer education. Bilingual FTC staff has
developed information in print and online for Hispanic consumers who
prefer to receive information in Spanish, as well as those who like
their information in both Spanish and English. The Commission has
launched campaigns for Spanish-speakers on identity theft, online
safety and security, being an informed consumer, managing money, and
more. In addition, staff has developed a Spanish-language web portal
where consumers can access the FTC's complete library of information in
Spanish. See www.ftc.gov/index_es.shtml. In 2008, the Commission's
Spanish-language websites logged almost 1.5 million page views, and
staff distributed more than half a million Spanish-language
publications.
Question 5. Do you have any other ideas or thoughts on how to
improve public outreach to non-English speaking consumers?
Answer. The Commission believes that it is vital to reach out to
non-English speaking consumers using a variety of channels, including
Hispanic media outlets, national Hispanic organizations, as well as
state and local organizations. To that end, the Commission employs two
full-time bilingual staff who regularly appear on nationally televised
morning programs on Univision and Telemundo to deliver consumer tips to
millions of viewers. Staff also conducts interviews for local and
national TV and radio programs, newspapers, and websites. This ongoing
relationship with Hispanic media outlets results in regular coverage of
all our enforcement action announcements and educational campaign
launches.
In addition, the Commission works with national organizations that
serve Hispanic communities to disseminate consumer materials. National
partner organizations include the National Council of La Raza and its
Housing Network Agencies; League of United Latin American Citizens;
Cuban American National Council; Hispanic Chamber of Commerce, Labor
Council for Latin American Advancement; and American GI Forum, among
others. Similarly, staff has actively worked with local consumer
protection agencies and the Hispanic affairs offices of many governors
and mayors, as well as the staffs of the Congressional Hispanic Caucus
Institute and the Congressional Hispanic Leadership Institute.
In order to promote financial literacy among young adults and high
school students, the Commission has worked with community colleges in
Miami, New York, Cleveland, LA, and Phoenix and the New York City
Department of Education to disseminate Getting Credit, in Spanish and
in English.
Using its database of more than 1,500 organizations that serve
Hispanic consumers across the country, the Commission updates community
leaders about the latest issues in consumer fraud so they can pass on
the information of protection to their community members. The
Commission sends out regular notifications of case announcements, new
consumer publications, and Ojo!, the FTC's newsletter for Hispanic
communities that includes articles in Spanish and in English on
relevant and current consumer issues.
These are just a few examples of the new and innovative ways the
Commission is reaching out to the public, including non-English
speaking consumers, to educate them on how to spot the signs of fraud
and report fraud when it occurs.