[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

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

55-982 PDF                       WASHINGTON : 2010 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001 



















       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

                              ----------                              
                                                                   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

                              ----------                              


                         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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \10\ FTC v. John Beck Amazing Profits, LLC, No. 09-CV-4719 (C.D. 
Cal. June 30, 2009) (complaint).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \11\ FTC v. Freedom Foreclosure Prevention Services, LLC, No. 09-
CV-1167-PHX-PJM (D. Ariz. June 1, 2009) (complaint).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \12\ FTC v. Infusion Media, Inc., No. 2:09-CV-01112-RCJ (June 22, 
2009) (complaint).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \14\ FTC v. Paul Navestad, No. 09-CV-6329T (W.D.N.Y. June 25, 2009) 
(complaint).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \15\ FTC v. In Deep Services, Inc., No. EDCV-09-1193-SGL (PGWx) 
(June 22, 2009) (complaint).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \16\ FTC v. Group One Networks, Inc., No. 8:09-CV-0352-T-26-MAP 
(M.D. Fla. Feb.25, 2009) (complaint).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \17\ FTC v. MCS Programs, LLC, No. C09-5380RBL (W.D. Wash. June 25, 
2009) (complaint).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \25\ 74 Fed. Reg. 26,118 (June 1, 2009).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \26\ Telemarketing Sales Rule, 16 C.F.R. Part 310; Business 
Opportunity Rule, 16 C.F.R. Part 437.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \35\ Available at http://www.ftc.gov/multimedia/video/scam-watch/
fraud-inside-look.shtm.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \37\ Panelists and presenters at the Fraud Forum included 20 
representatives from 16 Federal, state, and international law 
enforcement or consumer protection agencies.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \39\ Available at http://www.ftc.gov/opa/2009/06/chicagoround.shtm 
(press release).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \2\ Nocera, Joe. ``From Treasury to Banks, An Ultimatum on Mortgage 
Relief,'' The New York Times, July 11, 2009.
    \3\ Ibid.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \4\ Stern, Linda. ``Personal Finance: Beware Scams and Sales 
Pitches,'' Reuters.com, July 8, 2009.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \5\ Consumer Reports. ``Financial Traps are Flourishing,'' March 
2009.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \7\ WLKM News, Detroit, MI, June 16, 2009.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
        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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \5\ Unisys Corporation. ``Unisys research Shows Economic Crisis 
Causing Increased Worldwide Consumer Fears about Fraud and Security 
Risks,'' Press Release. April 20, 2009.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \9\ National Consumers League. ``National Consumers League 2009 
Pyramid Scheme Survey: Key Findings,'' February 2009. Online: http://
www.fraud.org/pyramids/survey_findings.pdf.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \11\ Jenkins, Janet. Administrator of DATCP Division of Trade and 
Consumer Protection. Telephone interview. July 9, 2009.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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#.
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \16\ Reuters. ``Recession likely to end in Q3 2009-Blue Chip 
survey,'' July 10, 2009. Online: http://www.reuters.com/article/
bondsNews/idUSN1051292120090710.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \1\ 15 U.S.C.  45.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \12\ Prepared Statement of The Federal Trade Commission Before the 
Senate Committee on Commerce, Science, and Transportation, U.S. Senate, 
July 31, 2007.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.'').
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.

                                  
