[Senate Hearing 117-586]
[From the U.S. Government Publishing Office]
S. Hrg. 117-586
PROTECTING CONSUMERS FROM FINANCIAL FRAUD AND SCAMS IN THE PANDEMIC
RECOVERY ECONOMY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION
OF THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE FINANCIAL SCAMS FOLLOWING THE COVID-19 PANDEMIC AND THEIR
IMPACT ON FAMILIES AND CONSUMERS IN THE RECOVERING ECONOMY
__________
AUGUST 3, 2021
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
__________
U.S. GOVERNMENT PUBLISHING OFFICE
51-115 PDF WASHINGTON : 2023
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
______
Subcommittee on Financial Institutions and Consumer Protection
RAPHAEL WARNOCK, Georgia, Chair
THOM TILLIS, North Carolina, Ranking Republican Member
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana TIM SCOTT, South Carolina
MARK R. WARNER, Virginia MIKE ROUNDS, South Dakota
ELIZABETH WARREN, Massachusetts BILL HAGERTY, Tennessee
CATHERINE CORTEZ MASTO, Nevada CYNTHIA LUMMIS, Wyoming
CHRIS VAN HOLLEN, Maryland JERRY MORAN, Kansas
KYRSTEN SINEMA, Arizona KEVIN CRAMER, North Dakota
Annie Wang, Subcommittee Staff Director
Ryan Adams, Republican Subcommittee Staff Director
(ii)
C O N T E N T S
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TUESDAY, AUGUST 3, 2021
Page
Opening statement of Chairman Warnock............................ 1
Opening statements, comments, or prepared statements of:
Senator Tillis............................................... 3
Chairman Brown............................................... 5
WITNESSES
Liz Coyle, Executive Director, Georgia Watch..................... 6
Prepared statement........................................... 21
Responses to written questions of:
Senator Cortez Masto..................................... 42
John Breyault, Vice President of Public Policy,
Telecommunications, and Fraud, National Consumers League....... 7
Prepared statement........................................... 21
Responses to written questions of:
Senator Cortez Masto..................................... 42
Rachel Greszler, Research Fellow, The Heritage Foundation........ 9
Prepared statement........................................... 29
(iii)
PROTECTING CONSUMERS FROM FINANCIAL FRAUD AND SCAMS IN THE PANDEMIC
RECOVERY ECONOMY
----------
TUESDAY, AUGUST 3, 2021
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Financial Institutions and Consumer
Protection,
Washington, DC.
The Subcommittee met at 2:34 p.m., via Webex and in room
538, Dirksen Senate Office Building, Hon. Raphael G. Warnock,
Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN RAPHAEL WARNOCK
Chairman Warnock. This hearing will now come to order.
Welcome to the first hearing of the Subcommittee on Financial
Institutions and Consumer Protection in the 117th Congress.
This hearing is in a hybrid format. Our Members are in
person, but we will have witnesses testifying both in person
and by video. We are grateful for their presence.
For those joining remotely, just a few reminders: Once you
start speaking, there will be a slight delay before you are
displayed on the screen. To minimize background noise, please
click the mute button until it is your turn to speak or ask
questions. You should have one box on your screens labeled
``clock'' that will show how much time is remaining.
As we are all here in person, our speaking order will be as
is traditional, that is, by seniority of the Members here when
the gavel came down and then by seniority of Members arriving
later, alternating between Democrats and Republicans.
I am deeply honored to chair the Subcommittee and to work
with Ranking Member Tillis to ensure stability in our banks,
credit unions, and other financial institutions that serve
families and communities in Georgia and all across our country
and to ensure that consumers are protected from unfair,
abusive, and deceptive acts and practices in our financial
system, including financial scams and fraud.
And this brings me to the topic of our very first hearing
today, which will examine financial scams following the COVID-
19 pandemic and their impact on families and consumers in the
recovering economy. Needless to say, the economic turbulence of
the last year has pushed working American families to the
brink, forcing them to choose sometimes between their health
and their livelihoods. According to the Federal Reserve, one in
four Americans reported at the end of last year that they were
financially worse off than they were the prior year. This is
the highest level since 2014.
Compounding these economic setbacks has been the rise of
scammers shamelessly seeking to take advantage of working
families trying to navigate the pandemic, including already
vulnerable populations like senior citizens, communities of
color, our servicemembers, and veterans. For instance, when I
held a tele-town hall a few weeks ago with AARP, one woman from
Georgia told me that she was receiving three to five scam
callers per day. Scammers target these populations because they
know that families are desperate, clawing their way back from a
pandemic.
And despite the help provided by the American Rescue Plan
Act, many families still face limited economic opportunities
during this recovery as they watch their debt pile up.
Naturally, they are looking for help.
And here are just a couple of examples of how scammers are
stepping in to take advantage of these vulnerable moments of
economic uncertainty: Just a month ago, the CFPB and the
Georgia Attorney General's Office took action against the
Burlington Financial Group, a company that falsely promised its
services would eliminate credit card debt and improve credit
scores. The company charged monthly fees that amounted to as
much as 40 percent of the debt owed, collecting thousands in
fees from desperate Georgians trying to grapple with mounting
credit card debt.
And what did consumers get in return for all of those fees?
They only got generic form letters to send to their creditors,
thousands of dollars in fees for a useless piece of paper. Many
customers never got a dollar of their debt reduced, and in some
cases they ended up in a worse financial position than before.
In another case from just 2 weeks ago, the CFPB took on a
Georgia-based corporation, GreenSky, that took advantage of
families trying to make necessary repairs to their homes. This
loan app was supposed to help families access loans for home
repair services. Instead, it allowed businesses to take out
loans on behalf of customers without their permission or
knowledge. GreenSky was operating before the pandemic took
place, but the group of consumers that they exploited, who
lacked access to traditional credit markets and relied on
digital tools to conduct financial transactions, was a
population that grew dramatically during the pandemic.
Additionally, we know Federal benefits are often prime
targets for crooks and scammers have set their sights on
struggling families receiving Federal help from the American
Rescue Plan. One scam we have seen frequently in the last year
occurs when scammers actually impersonate Government officials
and claim that consumers need to hand over personal information
to access Federal support, like their COVID-19 relief check or
child tax credit. These scammers sometimes falsely claim that
consumers need to, quote, refund the Government for their
benefits.
And coupled with these increased opportunities for scamming
are new tools and financial platforms that enable these scams.
Due to the pandemic, more and more Americans are engaging in
financial transactions on new peer-to-peer, online payment
platforms like Cash App, Venmo, whose terms are often unclear
and lack critical protections for consumers. Unlike traditional
debit or credit cards, many of these platforms offer only
limited protections against scams, leaving many users caught
unaware that they have been defrauded. These platforms make it
easier for scammers to swindle consumers out of thousands of
dollars, with little to no mechanism to hold their scammers
accountable. In some cases, a consumer could simply put in one
wrong number or hit one wrong button and their money is gone
forever.
Collectively, these frauds swindle countless dollars from
the most vulnerable members of our society: seniors,
marginalized communities of color and other communities that
are marginalized, our veterans, members of the military. And
most heartbreaking of all, many individuals who fall prey to
these sophisticated criminals face barriers in reporting these
crimes and holding the perpetrators accountable. Not only are
consumers often embarrassed to admit that they have been
victimized, but they may also not know what resources are
available to remedy their losses, and even then, investigations
can take years to deliver justice.
Here is what I believe: I believe that Congress, and this
Subcommittee in particular, has a role to play in protecting
these consumers and preventing scammers from taking advantage
of more Americans. And so I am looking forward to hearing from
our witnesses today to learn more about today's financial fraud
and scams, and how financial institutions, Congress, and
Federal regulators, including the Consumer Financial Protection
Bureau, can take action to curb financial fraud and scams. That
is our work, particularly scams involving companies, payment
platforms, and other financial institutions that are under this
Subcommittee's jurisdiction. That is what this hearing is
about.
This hearing is about helping people. Hardworking American
families have already suffered enough from the pandemic, and as
their economic situation recovers, we cannot allow their hard-
earned dollars to be siphoned off by scams and cons. Thank you.
And I will now turn to Ranking Member Tillis for his
opening statement.
OPENING STATEMENT OF SENATOR THOM TILLIS
Senator Tillis. Thank you, Chairman Warnock, and for
holding this hearing, and thanks to the witnesses present in
the chamber and connecting remotely.
I absolutely believe that fraud is despicable and illegal
and should be pursued vigorously and relentlessly. I have seen
countless hearings when I was on the Aging Committee about how
seniors were being exploited. I am sure many other committees
will hear the same thing.
But I do want to be clear. Some of what we are going to
hear today lies outside of the Committee's jurisdiction and the
jurisdiction of financial regulators. The understandable desire
to bring bad actors to justice should not be an excuse to
further broaden the scope of Federal regulators' purview. Not
all fraud is financial services fraud. Given the CFPB's history
on overreach, I believe that is worth pointing out.
I also believe that any conversation regarding protecting
consumers from fraud and scams must include unemployment
insurance fraud, UI fraud. Recent reporting is beginning to
shed light on the size, the scope, the implications of this
fraud although the full toll is likely not to be known for some
time. And, Mr. Chairman, I would like to seek unanimous consent
to put forth an article from ProPublica that gives you jaw-
dropping numbers on just the extent of the UI fraud.
Chairman Warnock. Without objection.
Senator Tillis. Thank you. The Department of Labor's Office
of Inspector General placed the prepandemic and proper payment
rate for Federal UI system at 10 percent. It is one of the
highest rates in the entire Federal benefits system.
Extrapolating this rate out to all Federal dollars spent on UI,
which is expected to be about $873 billion by program end, it
gives a total of $87.3 billion of improper payments during the
COVID era. $87.3 billion is roughly 4 times the annual NASA
budget.
If $87.3 billion was the full extent, this would be a
problem, a major one, but not necessarily a scandal. But DOL's
Inspector General acknowledges the $87.3 billion is likely far
too conservative. Analysis of the total number of UI claims
compared to the number of unemployed individuals in the U.S.
during COVID led researchers to place the amount of UI fraud
far higher, at $357 billion or 40 percent of the entire
program. Even worse, a unit for research in news corporation
Thomson Reuters believes 40 to 50 percent of claims they
analyzed are highly suspect for fraud.
And I do want to maybe deviate from my comments for a
moment. We are not talking about individuals, fraudulently. We
are talking about organized crime and a number of organizations
who have bilked the Federal Government and are going to create
disastrous consequences for what would ostensibly be the
recipients of the UI benefit.
If one adds the $166 billion that States contributed to UI
during the pandemic, the estimated total for the entire program
surpasses $1 trillion. A fraud rate on this total, similar to
the Thomson Reuters projection, would mean somewhere between
$400 and $500 billion in fraud or between 50 to 65 percent of
the entire annual Defense budget. That is a scandal. It is one
of epic proportions.
But aside from the egregious waste of taxpayer dollars, why
should the average American be concerned? Because there is a
real change their identity was stolen and used to file
fraudulent claims. Many experts see online hacking and identity
theft as foundational to any conversation of COVID-era UI
fraud. Over the past several decades, hackers have
systematically stolen personally identifiable information, PII,
from the Government and private data bases alike. The Privacy
Rights Clearinghouse identified nearly 2,300 verified hacks
from 2010 to 2019, which disclosed almost 6.9 billion personal
records.
And while the availability and the ease or procurement of
stolen PII has accelerated over the past several years, it
increased exponentially during the pandemic. During 2020, the
Federal Government saw a 2,900 percent increase in consumer
complaints filed that someone's identity had been stolen and
used to file fraudulent Federal benefits.
This rise in fraud is driven by bad actors and, as I said
earlier, criminal organizations and individual actors. Research
into dark web forums found at least 25 different platforms with
users compiling and/or selling private information. Several
have thousands of participants, and they offer stolen
identities for sale, tips for bypassing the antifraud
protections of State UI system and how to do it, and often
including feedback on which States are easiest to scam.
In 1 month in Vermont, they determined--the State of
Vermont determined 90 percent of UI claims--I am sorry, these
were independent investigators--were likely fraudulent, 90
percent, likely the result of identifying the States that are
the easiest targets. Likewise, a single State working with
Thomson Reuters' fraud detection group received fraudulent
claims from IP addresses that were traced back to nearly 170
countries around the world.
Analysis reveals digital footprints that indicate foreign
workers, mostly commonly in China, Brazil, Mexico, and West
Africa, have been hired by sprawling and often highly organized
criminal enterprises to systematically and repeatedly and
effectively use stolen American identities to claim UI
benefits.
America needs to be made aware of the fraud--of this fraud,
and Congress must work to carefully craft policies in the
future that do not jeopardize Americans and their personal
information. It is imperative that we examine this fully to
ensure that Government programs, without necessary programs, do
not become a windfall for scammers and fraudsters alike again.
And when I get in my questions, I want to talk about some
of the impacts, Mr. Chairman, I think many Americans are going
to have next year when they are filing taxes or they get
audited a year or two from now for having not claimed income
that they had no earthly idea was claimed in their name. Thank
you.
Chairman Warnock. Thank you very much, Ranking Member
Tillis.
The Chairman of our Committee is here. Chairman Brown will
offer remarks.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. Thanks and I will be brief. And thank you,
Mr. Chairman, Senator Tillis. Thanks for doing this hearing.
You said the first hearing of your Subcommittee, so
congratulations.
The COVID-19 pandemic has claimed the lives of more than
600,000 Americans. We have made great progress getting shots in
arms, but we are experiencing surges in areas across the Nation
we know that have low vaccination rates. It is important we
continue to provide families with the resources they need to
protect themselves and their loved ones, both medical
resources, like vaccines that will save their lives, and also
economic resources as the economy continues to fully recover.
While we all hope to avoid, and must work to prevent, a
future pandemic, we also need to protect American families from
those who would use a public health emergency and use an
economic crisis as an opportunity to defraud and exploit them.
We have seen Americans reach out to the Consumer Financial
Protection Bureau in record numbers with complaints about
credit reporting companies and banks and debt collectors. We
have also heard from CFPB and other Federal agencies that
scammers are targeting student loan borrowers and homeowners
and working families who are receiving advanced payments of the
child tax credit.
I look forward to working with my colleagues from both
parties to highlight what we can do to protect workers and
their families. No one should have their financial future
ruined because of a global pandemic. Thank you, Mr. Chairman.
Chairman Warnock. Thank you very much, Chairman Brown. Let
us now turn to our witnesses. Testifying today will be:
Ms. Liz Coyle, the Executive Director of Georgia Watch.
Founded in 2002, Georgia Watch is the State's leading
nonprofit, consumer advocacy organization. Georgia Watch
advocates for policies that open doors to the financial
mainstream, increase individual and family economic security,
improve access to affordable health care, and lower the energy
burden on struggling families.
Also testifying is Mr. John Breyault. Is that correct?
Mr. Breyault. Yes, sir.
Chairman Warnock. I want to pronounce your name correctly.
A nationally recognized consumer advocate with more than 18
years of experience championing the rights of consumers and the
underserved.
Finally, our last witness is Ms. Rachel Greszler, a
research fellow at the Heritage Foundation, and she focuses on
retirement and labor policies.
We appreciate your testimony, and we look forward to our
discussion. Ms. Coyle, who is testifying virtually, I will now
turn things over to you.
STATEMENT OF LIZ COYLE, EXECUTIVE DIRECTOR, GEORGIA WATCH
Ms. Coyle. Good afternoon. Thank you, Chairman Warnock,
Ranking Member Tillis, for inviting me to speak before this
Subcommittee today. I am truly honored to have this
opportunity.
As Members of this Subcommittee know, our country still is
facing significant health risks tied to COVID-19 and recovery
from the pandemic economy remains challenging for many and
fraught with obstacles and dangers for the most vulnerable
among us. Today, we are here to talk about protecting consumers
from scams and fraud in the pandemic recovery economy. I am
grateful to the Committee for shining a light on this issue.
I would like to share with you today some of my concerns as
a consumer advocate from Georgia. Every day, we work to help
Georgians with the issues that impact their lives and
livelihoods. The pandemic public health and economic crises
further heightened what we already knew. Those already
struggling to access needed health care, keep the lights on,
pay off debts, and live in stable housing would be much more
significantly impact by the challenges suddenly confronting all
of us. Our toll-free consumer hotline started ringing on day
one of this crisis, and we continue to hear regularly from
people needing assistance. This especially is the case among
our seniors on fixed incomes, veterans, lower-income
households, and communities of color, who have long been
disparately impacted in times of crisis.
We knew many consumers in Georgia were facing--were feeling
desperate and vulnerable. Bad actors definitely knew that, too.
From the early days, scammers and fraudsters plotted to benefit
substantially from these conditions, and as we have learned
from Federal and State regulators, they did.
While many of today's scams look a lot like yesterday's, a
new kid on the economic block may be having an outsized
influence on the current shape of fraud. Emerging financial
technology tools certainly offer convenience and, for some
under- and unbanked Americans, access to the mainstream
economy, which is good. However, these fintech offerings may
also be used by bad actors to facilitate scam-based theft. For
example, a mobile lending technology developed by a company
from Georgia has been used by home repair scammers as the
perfect vehicle to steal from unsuspecting, vulnerable
homeowners. And Chairman Warnock touched on this in his opening
remarks.
We also have heard from consumers who have been scammed
when using a common social media platform, Facebook, that has
been around for a very long time. We know that scammers use
Facebook to steal money from unsuspecting consumers. Someone
might see an ad while using this platform and be tricked into
purchasing a product from a fake company. When the merchandise
does not come, they are left with nothing more than a web
address and maybe an email address to a fraudulent, nonexistent
company.
In closing these remarks, I want to acknowledge the vitally
important role played by the Georgia Attorney General and
Department of Law and the Consumer Financial Protection Bureau
in alerting us to emerging scams, and there are new ones that
we are alerted to practically every day. Notably, these
regulators both launched investigations and initiated
enforcement actions related to those home improvement scams you
have already heard about today.
I recommend that policymakers ensure our State and Federal
regulators have the authority and the tools they need to
regulate effectively and enforce rules as necessary to protect
consumers and keep the emerging fintech marketplace safe for
all. And I want to thank you again, Chairman Warnock and
Ranking Member Tillis, for inviting me to speak before this
Committee today.
Chairman Warnock. Thank you so very much, Ms. Coyle.
Next, we will hear from Mr. Breyault.
STATEMENT OF JOHN BREYAULT, VICE PRESIDENT OF PUBLIC POLICY,
TELECOMMUNICATIONS, AND FRAUD, NATIONAL CONSUMERS LEAGUE
Mr. Breyault. Good afternoon, Chairman Warnock, Ranking
Member Tillis, and Members of the Subcommittee. My name is John
Breyault, and I am the Vice President of Public Policy,
Telecommunications, and Fraud for the National Consumers
League. Founded in 1899, NCL's nonprofit mission is to advocate
for social and economic justice for consumers and workers in
the United States and abroad. I appreciate the opportunity to
speak to you today about how fraud linked to the COVID-19
pandemic and recession has affected vulnerable consumers and
the role that peer-to-peer, or P2P, payment technologies have
played in exacerbating that harm.
To put it bluntly, the COVID-19 pandemic has been a perfect
storm for scams. By almost any measure, rates of fraud related
to the pandemic have mushroomed. In 2020, the Federal Trade
Commission received 4.8 million fraud complaints, more than at
any time in its 106-year history. Consumers reported $3.4
billion in fraud losses to the FTC, with a median loss of $306.
These numbers are widely acknowledged to be only the tip of a
massive iceberg when it comes to fraud perpetrated during the
pandemic. And just as deaths, illnesses, and job losses related
to COVID-19 have fallen hardest on historically marginalized
communities, so too has the impact of fraud linked to the
pandemic fallen disproportionately on consumers of color.
The ultimate goal for fraudsters is stealing money.
Scammers routinely take advantage of new financial technologies
to facilitate the transfer of funds. While no financial
institution wants to be used as a vehicle for crime, there is
often tension between businesses' desire to secure a particular
payment vector from fraud while still allowing for legitimate
transactions to be processed quickly. This tension is clear
when it comes to the rapid growth of P2P payment platforms such
as PayPal's Friends and Family and Venmo services, Square's
Cash App, and Zelle, which is owned by a consortium of major
banks.
These services have attracted tens of millions of users by
allowing for free or very low-cost payments to be sent between
consumers or from consumers to businesses. Even before the
pandemic, roughly four in five Americans had used mobile
payment apps by one estimate. By 2023, it is estimated that
more than $1 trillion will be transacted by P2P apps annually.
Unfortunately, the same features that are fueling the rapid
growth of P2P apps, namely, low-cost, instantaneous payments
made via smartphone have made P2P a payment method of choice
for scammers. Analysts estimate that fraud rates on these
platforms are three to four times higher than for traditional
methods such as debit or credit cards.
Despite the platforms' efforts to educate users about the
risks of sending money via their platforms, more than half of
consumers surveyed by AARP incorrectly assume that their
payments would be protected if there is an error or fraud
associated with the transaction. While no financial service is
immune from fraud, protections for consumers who lose money to
scammers on P2P apps are sorely lacking. A big reason for this
is the loophole in the Electronic Fund Transfer Act that
excludes payments initiated by the consumer from the protection
for unauthorized charges. This is also known as ``fraud in the
inducement'' or ``victim-assisted fraud.'' This allows P2P
services and banks to avoid liability for payments sent from
consumers to scammers even when such payments are induced by
fraud.
The end result of this loophole is that the liability risk
for fraud is transferred from the platforms and banks to
consumers themselves. The only recourse for many victims of
fraud committed via these apps is to throw themselves at the
mercy of the banks or platforms and beg to be made whole.
Unfortunately, thanks to the lack of legal protections, it is
far too easy for the banks and P2P apps to simply tell fraud
victims that they are out of luck. And, Senator, we hearing
from these consumers with these stories every day at NCL.
To ensure that P2P apps are secure for their users and do
not continue to be powerful tools for fraudsters, action by
Congress is urgently needed. My written testimony includes a
number of legislative actions to strengthen protections for
consumers using P2P apps. In particular, I would like to urge
the Members of the Subcommittee to work to enact legislation
that expands the EFTA's definition of unauthorized electronic
fund transfer to cover fraudulently induced payments, with
ultimate liability resting with the institution that received
the fraudulent payment. Doing so would give consumers the
confidence that they would be made whole if they are induced to
send money to scammers via P2P services. It would also create a
strong incentive for all stakeholders in the P2P payment
ecosystem to make security a priority just as it is in the debt
and credit card space.
In conclusion, Chairman Warnock, Ranking Member Tillis, on
behalf of the National Consumers League, thank you for
continuing your work to protect consumers and for holding
today's hearing. I look forward to your questions.
Chairman Warnock. Well, thank you so very much for your
work in this sector and for bringing that experience to your
testimony.
Ms. Greszler will testify in person.
RACHEL GRESZLER, RESEARCH FELLOW, THE HERITAGE FOUNDATION
Ms. Greszler. Good afternoon and thank you for the
opportunity to testify today. Having closely followed the
expansion in unemployment insurance benefits since the
pandemic, I would like to focus my remarks today on some of the
unintended consequences of those expansions, which serve as a
caution against future expansions and also a caution against
the creation of new Government benefit programs.
It was clear from the outset that certain components of the
unemployment expansion were problematic, including the $600 and
now $300 weekly bonus payments, that both prolonged
unemployment and also contributed to the current labor market
shortage by making it advantageous for some people to be
unemployed as opposed to employed.
But what was not anticipated was the massive increase in
fraud in these UI programs. Unemployment benefits are supposed
to be reserved for individuals who lose their job through no
fault of their own, and employers are supposed to verify that
individuals have lost their jobs. But the expansions
effectively required States to base eligibility determinations
on self-certification information, which made it relatively
easy for criminals to steal information and Government
benefits. And it certainly did not help that many Government
benefit programs operate on decades-old technology that makes
it hard for them to adapt quickly and also to prevent fraud.
In a single year, the number of identity theft reports
filed with the FTC by individuals who had their information
used to obtain Government benefits or Government documents
increased 27-fold. It went from 23,000 identity theft reports
the year prior to the pandemic to 637,000 the year after the
pandemic, and that is only the people who know that their
identity was stolen and who actually filed a report because of
it.
Instead of just helping individuals who lost their jobs and
incomes, much of the UI expansions have instead fueled fraud.
My analysis of the Department of Labor's data shows that the
total number of UI benefits sent out between April 2020 and May
2021 was 1.36 billion checks. But had the programs simply
covered 100 percent of unemployed workers, which was an
ambitious goal, 807 million checks would have been needed. That
means that 557 million benefit checks, equal to $357 billion
worth of taxpayers' money, went to individuals, mostly
criminals, who were not actually unemployed.
While States have undertaken efforts to update their
technology and to prevent fraud, some States' actions have
instead fueled fraud. For example, California's Employment
Department sent out 38 million pieces of mail containing
individual Social Security numbers since the start of the
pandemic, and this was after a 2019 State auditor report
advised them to stop that practice.
And unfortunately, Government programs themselves are not
immune to compromise. Massive data breaches across State
revenue departments, within military medical systems, and at
the Office of Personnel Management have resulted in tens of
millions of Americans having their personal information
compromised.
UI expansions were supposed to last for about 5 months, but
instead they are track to last for about 18 months. And despite
these unintended consequences and the surge in fraud, many
policymakers want to make parts of these UI expansions
permanent and also to add new Government programs, but these
things would simultaneously up the ante for criminals and also
create new avenues for individuals' and children's personal
information to be exploited.
Even prior to the pandemic, Government benefit programs had
incredibly high rates of fraud and improper payments, including
12 percent in the child tax credit and 24 percent in the earned
income tax credit. Creating child payments that are worth up to
$3,600 per year, while eliminating the income requirements and
converting them into monthly benefits, will almost certainly
increase errors and fraud. And other benefit programs, like a
Federal paid family leave program, childcare subsidies, would
add new privacy concerns. Along with the creation of these
programs would be new data bases, and there would be
requirements for employers, and for private childcare and
medical providers, to collect and to transmit personal
information such as health records, children's Social Security
numbers.
So rather than requiring individuals to pay higher taxes
and disclose their personal information to multiple Government
agencies, in order to receive what politicians think they need
to provide for their families, instead, lawmakers should let
Americans keep and freely save more of their own money so that
they can use it on the things that they want and need without
the restrictions of Government programs and without putting
their personal information at risk. Allowing individuals to
save in universal savings accounts is just one measure that
would help this goal. Thank you.
Chairman Warnock. Thank you very much. We will turn now to
questions. We are grateful to all of the witnesses for their
testimony.
Last month, thanks to the American Rescue Plan, over 2
million Georgia children began receiving the $300 per month
child tax credit. Experts tell us that this will cut child
poverty up to 50 percent in our country. Eradicating childhood
poverty is an issue that touches me deeply. It emerges from my
own experience and my own faith. And championing this tax cut
has been one of my proudest moments in the Senate. I think
ordinary folks, working class people, poor people deserve a tax
cut.
The child tax credit not only helps give working families
financial stability and peace of mind; it boosts the economy
for all of us. But unfortunately, cybercriminals have been
targeting this benefit as they target all benefits. The IRS
recently warned parents of fraudulent phone calls, emails, and
text messages asking for their personal information. Other
scammers have pretended to be the IRS, and even parents, for
payment via gift cards, wire transfer, or cryptocurrency to
receive the benefit.
Mr. Breyault, what can lawmakers do to protect families
from these types of phishing scams?
Mr. Breyault. Senator, thank you for the question. What can
happen is that the Senate could consider legislation and other
protections that would better secure the payment technologies
that scammers are relying on to--when money is sent from them--
from consumers to the scammers. So for example, I mentioned
changes that could be made to better secure P2P payment apps. I
will tell you that, for example, Cash App, which is one that I
mentioned and I believe you mentioned in your opening remarks,
is now being used to buy cryptocurrency. From a scammer's point
of view, this is almost the perfect tool for them to use. So
considering legislation that would better protect those
vulnerable payment vectors is one way to go about better
protecting consumers when they are eligible for these types of
benefits that you described.
Chairman Warnock. Thank you so much. As families continue
to receive the child tax credit, I think it is important for us
to monitor these types of fraud reports and to work to ensure
that families who deserve the tax cut, for whom it was
determined, are actually receiving the tax cut.
I have got a couple more minutes. I am proud to say that
Georgia has long been a national leader in the fight against
predatory lending. Georgia imposes a strict 10 percent usury
limit on small-dollar loans. Almost 1 in 10 Georgians is a
veteran. Every one of them deserves protection against
predatory mortgage lending markets.
Last year, the CFPB issued a civil penalty against a
company that was found to have consumers' mailers for mortgage
lenders guaranteed by the Department of Veterans Affairs that
contained false, misleading, and inaccurate information. This
is not the first company doing things like this, and sadly, it
probably will not be the last.
Ms. Coyle, what can be done to ensure that Georgia's
veterans and veterans all across our country, servicemembers,
military families do not fall victim to scams like this one,
who prey on those in uniform?
Ms. Coyle. To----
Chairman Warnock. Ms. Coyle, you are on mute. If you could
start again.
Ms. Coyle. Our nice technical helper, Mr. Moffat, has
gotten me out of trouble once again.
Thank you, Chairman Warnock, and I only--I have a minute to
say that, yes, we are the proud home to many veterans,
servicemembers, and their families. And we know, tragically,
that some of these predatory, bad actors prey on them. We know
that car title lenders, for example, cluster around military
bases. And we are very pleased that the Department of Defense a
couple of years ago updated the Military Lending Act. The
Consumer Financial Protection Bureau is a great resource for
our servicemembers.
Right now, we are concerned about scammers who are going
after veterans and their surviving spouses, trying to get not
only their pension but, in some cases, their Aid and Attendance
benefits. And they will try to trick them into thinking that
they can get you your money faster or get you more benefits.
And so it is just so important that we rely on our regulators
and organizations like Georgia Watch to provide educational
resources and, when we hear about scams, to alert the
authorities as quickly as possible so that they are shut down
and enforcement happens.
Chairman Warnock. Thank you so much, Ms. Coyle.
Ranking Member Tillis.
Senator Tillis. Thank you, Mr. Chairman, and once again
thanks to the witnesses for being here.
Ms. Greszler, the Department of Labor Office of the
Inspector General wrote, ``The unprecedented infusion of
Federal funds into the UI program gave individuals and
organized criminal groups a high-value target to exploit. That,
combined with easily attainable, stolen, personal, identifiable
information and continuing UI program weaknesses identified by
the OIG, over the last several years, allowed criminals to
defraud the system.'' Do you agree with that topline
assessment?
Ms. Greszler. Yes.
Senator Tillis. Can you explain how the UI system design
allowed for both individual and organized criminal elements to
exploit it using PII?
Ms. Greszler. Yes. And you know, part of it had to do with
the nature of the program at the time being outdated, and part
of it had to do with all of these expansions that were thrown
onto these systems very quickly.
You know, the reason that Government benefit programs will
be utilized for criminals to steal money is that, first, an
individual's information, which is fairly readily available out
there, has to have a value on it. And so what this UI program
did is it increased basically the price tag on individuals'
personal information.
Prior to the pandemic, maybe you could use somebody's home
address and date of birth and name to sell to a telemarketer
for a very small sum of money. If you were lucky, then you got
credit card information. You could go charge some money on it
for a short period of time.
But after the pandemic, you effectively tied $1,000 a week
UI benefit to every individual's personal information, and so
you are increasing the price tag and thus attracting more
criminals. The more Government benefit programs you have, then
more dollar value you tie to those. And unfortunately, a lot of
Government benefits programs are targeted toward lower-income
individuals. A lot of the ones that are being proposed now
would be means-tested or income-limited, and so the criminals
go after those populations that have the highest dollar value
on them.
But, second, the programs themselves can be a source of
compromised information. Some of these State unemployment
insurance systems were running non COBOL, which was designed in
the 1960s. Universities stopped teaching it in the 1980s. So
they were incredibly outdated, and they were not able to adapt
quickly. And they did not have the authority like a private
company, to say, ``Hey, we need to slow things down. We are not
going to do this until we know it is safe and we can protect
our customers' information.'' They were required to start
delivering the benefits as soon as the legislation was enacted.
Senator Tillis. Yes, Mr. Chairman, I think this is--one of
the reasons why I am highlighting it is I think the storm on
the horizon with all these benefits that were fraudulently
obtained. I am thinking about households that are going to be
completing their taxes next year, or the year after next, and
somehow being surprised by the idea that they have received
several thousand dollars in taxable benefits, Federal and,
where applicable, State taxes.
And then what are they going to have to go through to
reconcile it? They may have to hire an attorney. They have got
to file a fraud complaint. They could potentially get some
concession on not having to pay it, pending the fraud
complaint. But I think this is going to be a huge issue that we
may have to play a role.
I was trying to sort out this morning how, you know, maybe
we can sync up the Department of Labor system, which
administered the UI benefit, and banking, which could
potentially swim into our--or I should say IRS, so that we can
try and identify before they get the big surprise a year from
now or 2 years from now, if they were subject to an audit and
this information somehow intersects.
Ms. Coyle, I want to ask you a question. We are talking
about--in your opening Statement, you made a comment about
stepping up, providing more tools for prosecution. What advice
would you give us on more work that Congress should do in the
area of prevention and financial literacy? What more should we
be doing on that front?
Ms. Coyle. Thank you. This time I did it. Thank you,
Ranking Member Tillis, for that question. You know, the
conversation that has been about theft of benefits is certainly
one that we are concerned about. I can tell you that in June I
heard from a Georgia consumer whose identity was stolen and
found--and used to apply for unemployment benefits. And he had
an incredibly difficult time navigating the system of having
this issue resolved. So the more we can help the States
untangle some of those challenges that are in place, to make
sure that those Georgians needing help when they have been
scammed, or when their identity has been stolen, would be one
of the primary recommendations I would make.
Senator Tillis. Thank you. Thank you, Mr. Chair.
Chairman Warnock. Senator Cortez Masto.
Senator Cortez Masto. Thank you, Mr. Chair and Ranking
Member. Thank you to the panelists.
Let me just start by saying I agree with Senator Tillis. I,
listen, as a former attorney general, dealt with fraud and
identity theft. And they are interconnected, and it is a
reality, and we have not done anything to address really the
rampant identity theft.
But I agree with him that we have to put additional
resources into the enforcement mechanism against fraud for the
IRS as well as Labor, wherever we can, and we have the ability
to do that. We have done that in the past. And I think it is
going to be important for us to continue, as we look at
providing essential resources to individuals, to guard against
the predatory nature of fraud which is going to happen.
And so my question to--let me start with Ms. Coyle and to
all the panelists. Really, what we are talking about, the
essential piece of all of the fraud, is the identity theft that
is associated with it.
And, Ms. Coyle, let me start with you. What can be done to
address identity theft and/or educate the consumer so that they
can guard their personal information or protect against
identity theft? Is it too late, or are there things that the
individual consumer can do? And let me start with Ms. Coyle,
and I will go down the panel, if you----
Ms. Coyle. I sent a message to Mr. Moffat, who is providing
technical support. I can--I am unmuted, but unfortunately I was
not able to hear that last question directed to me. May I ask
that you repeat it? And I hope I will be able to hear it this
time, and perhaps Mr. Moffat can fix the technology on his end.
Senator Cortez Masto. Yes, not a problem. Let me then start
with Mr. Breyault.
Ms. Coyle. I am sorry I am not able to hear your sound.
Senator Cortez Masto. No, that is not a problem. I am just
asking a question. Yes, I am asking the question about----
Ms. Coyle. I am hoping Mr. Moffat can help.
Senator Cortez Masto. Can you hear me now?
[Technical difficulties.]
Senator Cortez Masto. For the sake of the time, let me just
then go to Mr. Breyault. The question, same question, with
respect to identity theft, is it too late, or are there things
that we should be doing or can be doing that consumers can use
to guard against, to protect themselves?
Mr. Breyault. Yes, Senator. Certainly, the information the
information that identity thieves need to defraud millions of
consumers is readily available on the dark web thanks to the
number of data breaches that Senator Tillis alluded to earlier.
What can be done is to do things like better data security
standards so that the supply of information from banks and
other institutions that hold sensitive personal information is
cutoff, so it is harder for the scammers to get it in the first
place.
Other things that can be done is to follow the money.
Scammers ultimately, end of the day, want to be paid. And so
making sure that banks or State UI insurance agencies, who
detect this kind of fraud, can claw that money back before it
gets lost to the consumers.
And certainly, working with financial institutions who are
facilitating the transfer of this money to make sure that they
are making security a priority in addition to the speed at
which these transactions can be processed. So right now, the
Federal Reserve is considering a new money transfer service
called FedNow that would allow nearly instantaneous money
transfers in competition with the banks' Zelle program.
Unfortunately, the regulations that have been put out there for
FedNow we and many other consumer advocates do not feel
properly prioritize security. And so we are worried that in the
name of convenience and speed that the ability of fraudsters to
continue to commit identity fraud and ultimately get paid will
only become easier.
Senator Cortez Masto. Thank you. I appreciate that.
Ms. Greszler, any thoughts on how we can address the
identity theft?
Ms. Greszler. Yes. I would just like to add that after
somebody actually has the information it is still possible to
make it more difficult for them to use that information to
obtain Government benefits. And the GAO has identified three
sources of improper payments, and while there are some
administrative and process errors, the bulk of it comes down to
insufficient documentation to determine whether or not somebody
is eligible and what the proper amount of the payment should
be. And so if you have more documentation and more requirements
to actually verify that this is the person that they say they
are, that would help. It is going to slow the process down a
little bit, but I think that it is still something that is
necessary to ensure the integrity of the programs.
Senator Cortez Masto. Thank you. And is there--this is my
last question, but I think this is also the challenge that I
have found in the past is educating the consumer. To what
extent should we be putting resources into educating the
consumer to beware of potential scams and how to protect
themselves?
Mr. Breyault. Senator, consumer education is vital to any
fraud prevention program, but as I have said in many other
instances, this is a problem that we cannot consumer-educate
our way out of. The genie is out of the bottle when it comes to
identity fraud. And putting the responsibility on consumers
alone to protect their information, when they are fighting back
against highly sophisticated, criminal rings of identity
thieves, who are often beyond the reach of U.S. law
enforcement, is far too much to--a responsibility to put on
individual consumers. It has to be an effort that includes
banks, that includes software companies, and the Government to
try and get a handle on this program.
Senator Cortez Masto. The enforcement is key.
Mr. Breyault. Yes, ma'am.
Senator Cortez Masto. Thank you.
Chairman Warnock. Ms. Cortez Masto, we had a technology
glitch. If you need more time?
Senator Cortez Masto. No.
Chairman Warnock. OK. Senator Tester.
Senator Tester. Thank you, Mr. Chairman and Ranking Member.
I am Chairman of the Veterans Affairs Committee. Senator Tillis
sits on that Committee. I am interested in how we are
protecting the men and women who have protected us. And so this
is question is for you, Mr. Breyault, and that is: How has
fraud during the pandemic and economic crisis impacted our
veterans?
Mr. Breyault. Senator Tester, thank--is my mic on?
Senator Tester. Yes.
Mr. Breyault. Senator, thank you for the question. Members
of the military, their families, and others in the military
community are uniquely vulnerable to fraud because of the
nature of their job. They have a guaranteed income stream. They
are often moving around, on a frequent basis, as they move from
posting to posting. They are often targeted by fraudsters.
And so the solutions that try and better protect them have
to be unique, and those solutions have to come from not only
within the Department of Defense, to give these military
servicemembers the resources they need to spot and avoid these
scams in the first place, but it also have to come from
enforcement agencies, like the Department of Justice, the
Federal Trade Commission, and banking regulators to crack down
on predatory lenders who may target them, on fraudulent direct
sellers who may target military families, or other fraudsters
who are specifically trying to take advantage of the unique
nature of members of the military community.
Senator Tester. So you are talking about active military. I
am talking about the folks who went from active military to the
civilian life, that are now civilians or veterans because they
have served our military. Are the same challenges--the same
solutions to their challenges the same as active military?
Mr. Breyault. Well, I think military veterans are certainly
deserving of special attention when it comes to fraud
protection. As with active military, military veterans often
have a guaranteed income stream.
Senator Tester. True.
Mr. Breyault. And that makes them very attractive to
scammers. So, yes, I do believe they deserve special attention.
Senator Tester. So the question becomes: As these scammers
that are out there stealing information and using it in a way
that deprives people who need the benefits that are out there
for them, whether it is unemployment insurance or whether that
is in benefits that they get through a disability, so how do we
protect them? I mean, how do we actually get to the bottom of
this? Is this an issue?
The lady who is here in person talked about old computer
systems. And, look, computer systems in the 1960s probably
should have been replaced 30 years ago, but the truth is: What
do we need to do? Where do we need to put our focus?
Mr. Breyault. Senator, I wish there was one silver bullet
that could address this bullet, but there just is not. There
needs to be a layered approach to better protecting consumers,
including veterans, from identity fraud. And that is going to
require work by credit reporting bureaus----
Senator Tester. OK.
Mr. Breyault ----by banks, by software companies, by State
unemployment insurance programs to update their technology. It
is something that is going to take a long time and is going to
require investment at all of those levels that I just
described.
Senator Tester. OK. Ms. Coyle, can you hear me?
She cannot. Well, then there is no need asking her any
questions.
We are going to go over to the testimony. Let me get your
name because I do not want to botch it up too bad. It is not so
bad. Ms. Greszler, OK? In your testimony, you talked about--and
you talked about this in your opening Statement, too--that
there is about 557 million checks that were not actually
employed; 807 million went to people who were actually employed
and 557 million did not. Those are pretty stark statistics. How
confident are you that those are correct?
Ms. Greszler. Well, what I did is to tabulate the entire
number of checks that went out and then to tabulate the entire
number of weeks that people were actually unemployed. You know,
traditionally, about 40 percent of people who are unemployed
will collect an unemployment insurance benefit.
And so what I said is, well, what if actually 100 percent?
If the programs perfectly got everybody that was unemployed and
they all got a check, what would that total be? And that is
where you have the 807 million benefit checks would have gone
out if you were simply covering 100 percent. And so the excess
above that is 557 million.
Now because we do not have a match to see those----
Senator Tester. Yes, I got you.
Ms. Greszler ----we do not know exactly. But it is kind of
a conservative estimate, to say, that these people were not
unemployed and they were receiving benefits.
Senator Tester. So have you been able to do any research to
determine how much of that 557 million was collected by
organized crime or organized criminals, however you want to put
it, versus people who are just crooked and applied for
unemployment benefits when they were not unemployed?
Ms. Greszler. I think given the magnitude of it--and you
know, the company ID.me that is working with some of the States
to increase their fraud protection has estimated it is a $400
billion sum. Given how large that is, I think the overwhelming
majority of this is criminal activity as opposed to just
individual-level fraud and abuse.
Senator Tester. OK. I appreciate that. Thank you very, very
much.
Chairman Warnock. Senator Warren.
Senator Warren. Thank you, Mr. Chairman. This is a very
important Subcommittee, and I am glad to be part of it under
your leadership.
So I would like to talk today with you all about mobile
apps. You know, these allow people to instantaneously transfer
money to friends or family or merchants with just a few taps on
their phone. They have proved to be a valuable resource in our
socially distanced, pandemic economy, but along with the
benefits of instant and contactless payments, these apps have
made it easier for scammers and fraudsters to reach more people
faster.
A recent report using data from the CFPB shows that
consumer complaints about digital payment apps steadily
increased over the last few years before skyrocketing during
the pandemic. The number of consumer complaints about these
apps increased more than 300 percent in just the first 4 months
of the pandemic, reached a peak in April of this year at nearly
double the previous high back in 2020.
So, Mr. Breyault, I see you nodding as we go through this.
Your organization has done a lot of good work to protect
consumers from scams and fraud and abuse, including the scams
that they face on mobile apps. So I just want to ask you, when
a consumer wants to use their Venmo or Cash App account to pay
a friend for lunch, but they make a mistake, say by sending the
money to another person who happens to have the same name as
their friend, are they usually able to get the money back?
Mr. Breyault. No, Senator.
Senator Warren. Yes. In fact, I understand that if you go
to Venmo's help center to figure out what to do when you have
been paying the wrong person, the first thing it tells you is
ask the person you accidentally paid to send the money back.
And if that person is not very nice, I take it you are just
kind of out of luck.
Mr. Breyault. Yes, that is correct, Senator.
Senator Warren. All right. So let us just push this a
little further, Mr. Breyault. Let us say a consumer is tricked
into sending money to someone who pretends to be a coworker
collecting money for a gift or to a scammer who promises to
flip that money into a bigger payday but never makes good on
the deal. In your experience, are consumers likely to get their
money back then?
Mr. Breyault. No, Senator, they are not.
Senator Warren. So money in these accounts are more like
cash in your wallet than like money in a bank account. Once it
is gone, I take it is probably gone for good. Not only does
that leave consumers extremely vulnerable to scam artists and
to fraudsters, it also leaves them vulnerable to being hounded
by the apps themselves. Venmo has deployed predatory debt
collection tactics against consumers whose accounts have been
drained into the red by scammers, and it has not let up during
the pandemic.
So, Mr. Breyault, do you believe that mobile peer-to-peer
payment apps should face greater scrutiny from regulators to
ensure that they provide consumers with stronger protections
against scam and fraud and, frankly, even simple mistakes?
Mr. Breyault. Yes, Senator, I do. And I have detailed a
number of the steps that this Committee can take to better
protect those consumers in my written testimony.
Senator Warren. Yes. And thank you for that testimony and
for the suggestions. You know, I agree with you on this, and
that is why I am very glad to see that the CFPB has begun
taking steps to strengthen and to clarify consumer protection
rules for payment apps.
These apps are helping to fill gaps in a payment system
that is too slow; it is too expensive, and it is too
inconvenient. And there is no doubt that these apps have played
an important role in our pandemic economy. But we cannot leave
consumers to fend for themselves on a level playing field that
is making it even easier for scammers and fraudsters to use
these apps to do harm. That means that if we really do want to
level the playing field we have got to make the rules stronger
and we have got to make sure there is adequate enforcement, to
ensure that mobile payment apps take responsibility for
protecting their customers.
I want to say thank you, Mr. Chairman, for holding this
hearing, giving us a chance to look at this and so many other
aspects of where fraudsters have figured out pandemic is a good
time for them to make money and to step up their efforts to
cheat everyone else. I look forward to our continuing to work
on this, and I look forward to your next hearing.
Chairman Warnock. Thank you so much, Senator Warren, for
your work in this area for such a long time.
I see that Senator Van Hollen is present and just in time
to ask your question.
Senator Van Hollen. Well, thank you, Mr. Chairman, Ranking
Member Tillis, for conducting this hearing. I thank all of you
for your testimony. And, Ms. Coyle, thank you for all the work
that you do in Georgia.
I have a question related to medical debt because on this
Committee, you know, we have learned over the years that many
Americans are burdened by all sorts of debt. We obviously have
student loan debt, household debt. The debt that is most under
collection and most responsible for personal bankruptcies
continues to be medical debt. Despite improvements many of us
think we have made in the health care system and affordability,
we have a long, long way to go on that front, but in the
meantime, we have people who are being just buried with medical
debt.
And so my question is--I do not know if Ms. Coyle is
remote, but is, what are you doing in Georgia, because my
understanding is that you have some programs underway to try to
address this. So what are you doing, but what is the longer-
term solution based on your experience?
Ms. Coyle. Thank you, Senator, so much for that question,
for your work in this space. Right now in Georgia, some 30
percent of adults have medical debt and 48 percent lack access
to a rainy day fund. It is those emergencies, whether it is an
unexpected, surprise medical bill, which thanks to hard work in
our legislature over a few years we now have a ban on surprise
billing in Georgia. But people do not have that even $500 saved
up if they have another problem, a very high utility bill or a
car that need repaired.
And so with medical--with medical debt, we have put
together a comprehensive guide, and Georgians call us for
advice all the time. It is our number one call to our consumer
hotline. We know that medical debt is actually a barrier to
health care itself. We know that because of the fear of the
potential cost of a procedure, and the lack of transparency
about what a procedure might cost, many people forego getting
needed care until they are even sicker and the care will be
even more costly.
In Georgia, we have not yet expanded Medicaid, and we do
know that the number of uninsured in Georgia as of 2019 is over
13 percent.
Medical debt puts an incredible strain on people's
financial health. Thirty-seven percent of people with medical
bills' issues used up all their savings to pay for those bills.
We call on our health systems, our hospitals, and health care
providers to be much more transparent and up-front about
offering financial assistance. Many of the Georgians and
Americans trapped in medical debt are being hounded by
hospitals or other--or third-party debt collectors, and those
same individuals would have qualified for financial assistance
if it had been offered. So we want to see much more robust
spending in that space and a much better job of working with
consumers to offer payment plans and to make sure that the cost
of care is transparent and that we do everything we can to
ensure, as we do, that people know where they can get free and
reduced care. Thank you for that question.
Senator Van Hollen. Well, thank you for what you are doing.
Senator Chris Murphy and I and others have introduced
legislation during this pandemic to, at least on an emergency
basis, you know, prevent some of the debt collectors, some of
these worst practices from being implemented because people are
being chased down even as they are experiencing other
hardships.
But clearly, we need a long-term solution. Part of it is,
of course, more affordable health care, but there are other
things we can be doing here. I do not know about some of my
colleagues. We have a number of churches and other faith-based
institutions in our State, who are raising money and paying off
people's medical debt. That is a great and kind thing for them
to do, and I applaud them for doing, but we should not have a
health care system that depends on, you know, people passing a
hat at services as the primary mechanism to keep people from
experiencing bankruptcy.
And as we see from the figures, despite all their efforts,
there is still lots of people who are going into personal
bankruptcy and then losing their homes and other things.
So I hope that we will find a way to address this because,
as you pointed out, Ms. Coyle, so many times it is like, well,
you have this hospital bill, and you are--you know, someone hit
the back of your car. You have got to replace your fender. You
have got to spend $400 on a car breaking down or whatever it
may be, and then you do not pay your medical debt. Then you get
hounded. Then you get a bad credit rating. And then you have
this cycle. And since medical debt is the number one cause of
personal bankruptcy, I really hope we will take a look at it.
Thank you, Mr. Chairman and Ranking Member, and thank all
the witnesses.
Chairman Warnock. Thank you very much, Senator Van Hollen.
And with that, all questioning is concluded.
Thanks again to our witnesses for taking the time to be
with us today and to provide your testimony.
Today's hearing on frauds and scams is an important step
toward protecting consumers during the pandemic recovery
economy, and I look forward to working with my colleagues on
both sides of the aisle on this issue. And as I said at the
outset, this topic is about helping American families and
ensuring that they are not swindled out of their hard-earned
dollars.
For Senators who wish to submit questions for the record,
those questions are due 1 week from today, on Tuesday, August
10th. And for our witnesses, you have 45 days to respond to any
questions. Thank you again. And with that, this hearing is
adjourned.
[Whereupon, at 3:41 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF LIZ COYLE
Executive Director, Georgia Watch
August 3, 2021
Good afternoon. Thank you Chairman Warnock and Ranking Member
Tillis for inviting me to speak before this Subcommittee today. I am
truly honored to have this opportunity.
As Members of this Subcommittee know, our country still is facing
significant health risks tied to COVID-19, and recovery from the
pandemic economy remains challenging for many and fraught with
obstacles and dangers for the most vulnerable among us. Today, we're
here to talk about protecting consumers from scams and fraud in the
pandemic recovery economy. I am grateful to the Subcommittee for
shining a light on this issue.
I would like to share with you today some of my concerns as a
consumer advocate from Georgia. Every day, we work to help Georgians
with the issues that impact their lives and livelihoods. The pandemic
public health and economic crises further highlighted what we already
knew. Those already struggling to access needed health care, keep the
lights on, pay off debts, and live in stable housing would be much more
significantly impacted by the challenges suddenly confronting all of
us. Our toll-free consumer hotline started ringing on day one of this
crisis and we continue to hear regularly from people needing
assistance. This especially is the case among our seniors on fixed
incomes, veterans, lower income households and communities of color,
who long have been disparately impacted in times of crisis. We knew
many consumers in Georgia were feeling desperate and vulnerable. Bad
actors definitely knew that, too. From the early days, scammers and
fraudsters plotted to benefit substantially from these conditions. And
as we've learned from Federal and State regulators, they did.
While many of today's scams look a lot like yesterday's, a newer
kid on the economic block may be having an outsized influence on the
current shape of fraud. Emerging financial technology tools certainly
offer convenience, and for some under- or unbanked Americans, access to
the mainstream economy. However, these fintech offerings may also be
used by bad actors to facilitate scam-based theft. For example, a
mobile lending technology developed by a company from Georgia has been
used by home repair scammers as the perfect vehicle to steal from
unsuspecting, vulnerable homeowners.
We also have heard from consumers who've been scammed when using a
common social media platform, Facebook. Scammers use Facebook to steal
money from unsuspecting consumers. Someone might see an ad while using
the platform and be tricked into purchasing a product from a fake
company. When the merchandise doesn't come, they're left with nothing
more than a web address and maybe an email address to a fraudulent,
nonexistent company.
In closing these remarks, I want to acknowledge the vitally
important role played by the Georgia Attorney General and Department of
Law and the Consumer Financial Protection Bureau in alerting us to
emerging scams. Notably, these regulators both launched investigations
and initiated enforcement actions related to the home improvement scams
I just referenced. I recommend policy makers ensure our State and
Federal regulators have the authority they need to set and enforce
rules that protect consumers and keep the emerging fintech marketplace
safe for all. Thank you again.
______
PREPARED STATEMENT OF JOHN BREYAULT
Vice President of Public Policy, Telecommunications, and Fraud,
National Consumers League
August 3, 2021
Summary
The COVID-19 pandemic has been a boom time for scammers and a
nightmare for their victims. By almost any measure, rates of fraud
related to the pandemic have mushroomed. In 2020, the Federal Trade
Commission received more fraud complaints than at any time in its 106-
year history. The House Select Subcommittee on the Coronavirus Crisis
estimates that potential fraud involving the Small Business
Administration's Paycheck Protection Program (PPP) and Economic Injury
Disaster Loan (EIDL) programs could cost taxpayers $84 billion. The
impact of this fraud has fallen disproportionately on historically
marginalized communities, already suffering from high rates of COVID-
related illnesses, deaths, and economic hardship.
We are pleased to contribute to the Subcommittee's examination of
the role that insecure peer-to-peer (P2P) payment platforms are playing
in the transfer of funds from fraud victims to scammers during the
pandemic. Unfortunately, the same features that are fueling these
services' explosive growth--low cost, nearly instantaneous payments
made via a mobile app--have made P2P an increasingly popular payment
method for scammers. Analysts estimate that fraud rates on these
platforms are three to four times higher than for traditional payment
methods such as debit and credit cards.
The lack of consumer protections for victims is a significant
reason why fraud rates are so high. Scammers are unlikely to abandon
P2P platforms as long as they can be used to easily obtain fraudulent
payments. To address this, we recommend that Congress consider
extending existing limited liability protections for debit and credit
card transactions to cover fraudulently induced payments, requiring
more stringent investigations of potentially fraudulent transactions,
pushing regulators to enforce error resolution responsibilities for
consumer errors and fraudulently induced payments, and mandating more
responsive customer service by P2P platforms.
Introduction
The National Consumers League appreciates the opportunity to
provide the Subcommittee with our views on protecting consumers from
financial fraud and scams as America begins to emerge from the COVID-19
pandemic.
Founded in 1899, the National Consumers League (NCL) is the
Nation's pioneering consumer and worker advocacy organization. Our
nonprofit mission is to advocate on behalf of consumers and workers in
the United States and abroad. \1\ For more than 20 years, NCL has
worked, via our Fraud.org campaign, to educate consumers about the
warning signs of fraud and promote public policies that protect the
American public from scams of all kinds.
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\1\ For more information, visit www.nclnet.org.
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The COVID-19 Pandemic Has Been a Perfect Storm for Fraudsters
The last 16 months have been boom times for scammers and a
nightmare for their victims. To put this in context, in 2020 the
Federal Trade Commission (FTC) received 4.72 million complaints from
consumers, a 45.7 percent increase over 2019 and by far the largest
year-over-year increase in the FTC's history. \2\ The median loss
reported by victims of these scams was $374, though many victims lost
far more. A consumer who contacted NCL's Fraud.org campaign lost
$15,000 to a scammer. \3\ What is clear is that even these sobering
numbers are only the tip of a gigantic iceberg when it comes to COVID-
linked fraud.
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\2\ Federal Trade Commission. ``Consumer Sentinel Data Book
2020''. February 2021. P. 6. Online: https://www.ftc.gov/system/files/
documents/reports/consumer-sentinel-network-data-book-2020/csn-annual-
data-book-2020.pdf.
\3\ Fraud.org. ``Cash App Scams on the Rise'', June 1, 2021.
Online: https://fraud.org/cash-app-alert/.
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For example, the Department of Labor recently estimated that one
type of fraud alone--unemployment insurance fraud--will have cost
taxpayers more than $87 billion over the course of the pandemic. \4\
Other estimates have put the amount of unemployment fraud during the
pandemic as high as $400 billion. \5\ Fraudsters are having a heyday.
One Bronx man received $1.5 million in 10 months, a California real
estate broker stole more than $500,000 over 6 months, and a Nigerian
Government official was recently accused of fraudulently obtaining over
$350,000 in less than 6 weeks. \6\ Even high-profile politicians are
not immune. The personal information of Senator Diane Feinstein \7\ and
Ohio Governor Mike DeWine \8\ was reportedly used by unemployment
insurance fraudsters to try and improperly obtain benefits.
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\4\ United States Department of Labor Office of Inspector General.
``DOL-OIG Oversight of the Unemployment Insurance Program'', June 10,
2021. Online: https://www.oig.dol.gov/doloiguioversightwork.htm.
\5\ Salmon, Felix. ``Half of the Pandemic's Unemployment Money May
Have Been Stolen'', Axios. June 10, 2021. Online: https://
www.axios.com/pandemic-unemployment-fraud-benefits-stolen-a937ad9d-
0973-4aad-814f-4ca47b72f67f.html.
\6\ Podkul, Cezary. ``How Unemployment Insurance Fraud Exploded
During the Pandemic'', ProPublica. July 26, 2021. Online: https://
www.propublica.org/article/how-unemployment-insurance-fraud-exploded-
during-the-pandemic.
\7\ White, Jeremy. ``Californian Allegedly Obtained UI Benefits
Using Feinstein's Identity'', Politico. December 17, 2020. Online:
https://www.politico.com/states/california/story/2020/12/17/
californian-allegedly-obtained-ui-benefits-using-feinsteins-identity-
1348423.
\8\ Bischoff, Laura. ``Unemployment Fraud So `Widespread' It Even
Happened to DeWine and Husted'', Dayton Daily News. January 19, 2021.
Online: https://daytondailynews.com/local/unemployment-fraud-so-
widespread-it-even-happened-to-dewine-and-husted/
XRDFXUC7EFHKVD2C54SEJGFCCQ/.
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The statistics are equally sobering for fraud involving other
pandemic relief programs. A recent analysis by the House of
Representatives' Select Subcommittee on the Coronavirus Crisis
identified nearly $84 billion in potential fraud involving the Small
Business Administration's Paycheck Protection Program (PPP) and
Economic Injury Disaster Loan (EIDL) programs. \9\
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\9\ House Select Subcommittee on the Coronavirus Crisis.
``Lowering the Guardrails: How the Trump Administration Failed To
Prevent Billions in Pandemic Small Business Fraud'', March 25, 2021.
Online: https://coronavirus.house.gov/sites/
democrats.coronavirus.house.gov/files/2020-03-25-Staff-Memo-Small-
Business-Fraud.pdf.
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The variety of scams linked to COVID-19 is staggering. Fraudsters
have run advance fee scams targeting consumers' stimulus checks. \10\
They have committed identity fraud linked to the sharing of COVID-19
vaccination cards online. \11\ Imposter scams have preyed on consumers'
fears about Federal Deposit Insurance Corporation-backed bank accounts.
\12\ Scammers even taken advantage of grieving families by targeting
the Federal Emergency Management Agency's COVID-19 Funeral Assistance
Program. \13\
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\10\ Leonhardt, Megan. ``5 Common Stimulus Check Scams Experts Are
Warning Consumers To Watch For'', CNBC.com. December 29, 2020. Online:
https://www.cnbc.com/2020/12/29/stimulus-check-scams-here-are-red-
flags-to-watch-for.html.
\11\ Gressin, Seena. ``Social Media Is No Place for COVID-19
Vaccination Cards'', Federal Trade Commission. February 5, 2021.
Online: https://www.consumer.ftc.gov/blog/2021/02/social-media-no-
place-covid-19-vaccination-cards.
\12\ Federal Deposit Insurance Corporation. ``FDIC: Insured Bank
Deposits Are Safe: Beware of Potential Scams Using the Agency's Name''.
Press Release. March 18, 2020. Online: https://www.fdic.gov/news/press-
releases/2020/pr20032.html.
\13\ Gressin, Seena. ``Scammers Target Loved Ones of COVID-19
Victims''. MilitaryConsumer.gov. April 20, 2021. Online: https://
www.militaryconsumer.gov/blog/scammers-target-loved-ones-covid-19-
victims.
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The Department of Justice and other enforcement agencies have done
yeoman's work to try and crack down on this wave of criminality,
particularly scams targeting taxpayer-funded COVID-19 relief programs.
\14\ Unfortunately, given the scale of fraud linked to the pandemic,
these efforts are likely to be little more than temporary setbacks for
the armies of sophisticated and well-organized criminal rings.
---------------------------------------------------------------------------
\14\ United States Department of Justice. ``Justice Department
Takes Action Against COVID-19 Fraud''. Press release. March 26, 2021.
Online: https://www.justice.gov/opa/pr/justice-department-takes-action-
against-covid-19-fraud.
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Many factors have contributed to the historic increase in fraud
during the pandemic. Rampant misinformation and disinformation about
the virus have been fertile ground for scammers peddling all manner of
COVID-prevention pills, testing kits, and treatments. Unprecedented
economic distress has created ample opportunities for scammers to run
imposter schemes threatening dire consequences if payments aren't made.
Scammers can easily contact victims over the phone, text message,
email, or over the Web, putting millions of potential victims at their
fingertips. These transactions happen with speed and anonymity through
gift cards, peer-to-peer (P2P) payment apps, cryptocurrencies, and
other money transfer services. Cashing out is easy and relatively risk-
free for the criminals.
Taken together, these factors have created a perfect storm of fraud
during the pandemic.
The Impact of Fraud Linked to COVID-19 Has Fallen Disproportionately on
Marginalized Communities
Consumers' vulnerability to fraud increases during times of
economic uncertainty. The COVID-19 pandemic has been no exception. High
unemployment, the threat of eviction, and social isolation brought on
by social distancing measures have all contributed to high rates of
fraud.
While fraud affects consumers of all races, ages, and income
levels, consumers from historically marginalized communities have been
at particular risk of scams. According to a 2017 FTC survey, 19.2
percent of African Americans and 17.3 percent of Hispanic consumers
reported being a victim of fraud compared to 15.9 percent of consumers
overall and 14.9 percent of non-Hispanic Whites. \15\ The same survey
found that 20.4 percent of consumers who have experienced a serious
negative life event (e.g., death of a family member or close friend, a
serious injury or illness in the family, or the loss of a job) reported
being victims of fraud, compared to 13.1 percent of consumers who had
not experienced such an event. \16\
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\15\ Anderson, Keith. ``Mass-Market Consumer Fraud in the United
States: A 2017 Update''. (Staff Report of the Bureau of Economics,
Federal Trade Commission.) Table 11. October 2019. Online: https://
www.ftc.gov/system/files/documents/reports/mass-market-consumer-fraud-
united-states-2017-update/p105502massmarketconsumerfraud2017report.pdf.
\16\ Ibid. P. 106.
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Specific data on the intersection of COVID-19 fraud and minorities
is lacking. However, given what we know about the vulnerability of
consumers of color to fraud and the high toll that COVID-19 has taken
on their communities in terms of deaths, illnesses, and economic harm,
\17\ we can conclude that fraud linked to the pandemic is taking a
similarly disproportionate toll on historically marginalized consumers.
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\17\ Zamarripa, Ryan, and Roque, Lorena. ``Latinos Face
Disproportionate Health and Economic Impacts From COVID-19''. Center
for American Progress. March 5, 2021. Online: https://
www.americanprogress.org/issues/economy/reports/2021/03/05/496733/
latinos-face-disproportionate-health-economic-impacts-covid-19/.
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Anecdotal evidence supports this conclusion. This spring, the FTC
and the State of Arkansas sued the operators of a ``blessing loom''
pyramid scheme that allegedly targeted African Americans struggling
financially during the pandemic. According to the FTC, the scammers
behind the scheme defrauded thousands of consumers of tens of millions
of dollars by promising investment returns as high as 800 percent. \18\
The National Caucus and Center on Black Aging has also reported an
increase in fraud cases targeting cash-strapped or unemployed older
African Americans since the pandemic began. \19\
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\18\ Federal Trade Commission. ``FTC and the State of Arkansas
Charge Operators of `Blessing Loom' With Running an Illegal Pyramid
Scheme''. Press release. June 17, 2021. Online: https://www.ftc.gov/
news-events/press-releases/2021/06/ftc-state-arkansas-charge-operators-
blessing-loom-running-illegal.
\19\ NAACP. ``Elder Abuse: Another COVID-19 Evil'', March 1, 2021.
Online: https://naacp.org/articles/elder-abuse-another-covid-19-evil.
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Scammers Are Exploiting a Lack of Protections for Payments Made via
Peer-to-Peer Services
The ultimate goal for fraudsters is stealing money. This can take
the form of direct payments from the victims to the scammers or
stealing information that can then be used to obtain money through
identity fraud or other schemes. Scammers routinely take advantage of
new financial technologies to facilitate the transfer of funds. While
no financial institution wants to be used as a vehicle for crime, there
is often tension between businesses' desire to secure a particular
payment vector from fraud while still allowing for legitimate
transactions to be processed quickly.
This tension is clear when it comes to the rapid growth of P2P
payment platforms such as PayPal's Friends & Family and Venmo services,
Square's Cash App, and Zelle, which is owned by a consortium of major
banks. These services have attracted tens millions of users by allowing
for free or very low-cost payments to be sent between consumers or from
consumers to businesses. \20\ Even before the pandemic, roughly 4 in 5
Americans (79 percent) has used mobile payment apps, by one estimate.
\21\ Social distancing regulations put in place during the pandemic
have supercharged consumers' embrace of these services, with the volume
of payments expected to grow by roughly 37 percent in 2021. \22\ The
explosive growth of these services is not expected to end any time
soon. By 2023, it is estimated that more than $1 trillion will be
transacted via P2P platforms. \23\
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\20\ Kunst, Alexander. ``Statista Global Consumer Survey''.
November 19, 2020. Online: https://www.statista.com/forecasts/997123/
peer-to-peer-payments-in-the-us.
\21\ El Issa. ``Most Americans Go Mobile With Payment Apps--Here's
How They Roll'', NerdWallet.com. February 26, 2020. Online: https://
www.nerdwallet.com/article/banking/mobile-payment-app-survey.
\22\ Ho, Justin. ``P2P Payment Apps Are Booming, Thanks to the
Pandemic'', Marketplace.org. March 15, 2021. Online: https://
www.marketplace.org/2021/03/15/p2p-payment-apps-are-booming-thanks-to-
the-pandemic/.
\23\ Kats, Rimma. ``In 2023, More Than $1 Trillion Will Transact
via Mobile P2P Apps'', Insider Intelligence. April 19, 2021. Online:
https://www.emarketer.com/content/breaking-down-mobile-p2p-payments-
biggest-players.
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Unfortunately, the same factors that are fueling the rapid growth
of P2P payment platforms during the pandemic--low-cost, nearly
instantaneous payments made via a mobile app--have made P2P a payment
method of choice for scammers. In 2020, the FTC received nearly 62,000
complaints from consumers who sent money to fraudsters via payment apps
or similar services, with a total reported loss of $87 million. \24\
Consumer complaints to the Consumer Financial Protection Bureau (CFPB
or Bureau) tell a similar story. A recent MASSPIRG Education Fund
analysis found that more than 5,200 complaints about mobile or digital
wallets were filed with CFPB over the 12-month period preceding April
2021. Three companies--PayPal (which owns Venmo), Square (which owns
Cash App), and Coinbase (a platform for buying and selling
cryptocurrency)--accounted for more than two-thirds of all digital
wallet complaints to the Bureau through April 2021. \25\ The Better
Business Bureau has reported a similar increase in complaints involving
P2P services. \26\
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\24\ Federal Trade Commission. ``Consumer Sentinel Network Data
Book 2020''. February 2021. P. 11. Online: https://www.ftc.gov/system/
files/documents/reports/consumer-sentinel-network-data-book-2020/csn-
annual-data-book-2020.pdf.
\25\ Mierzwinski, Ed, et al. ``Virtual Wallets, Real Complaints''.
MASSPIRG Education Fund. June 2021. P. 2. Online: https://masspirg.org/
sites/pirg/files/reports/MA-wallets.pdf.
\26\ Zamost, Scott. ``Criminals Launder Coronavirus Relief Money,
Exploit Victims Through Popular Apps'', CNBC.com. November 18, 2020.
Online: https://www.cnbc.com/2020/11/18/criminals-launder-coronavirus-
relief-money-exploit-victims-through-popular-apps.html.
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A complaint NCL received recently from a consumer in Pennsylvania
is typical of the experience for far too many consumers who are induced
to send money to fraudsters via P2P payment apps. In the process of
trying to activate her Cash Card debit card for Square's Cash App
service, the consumer's wife was directed to a phishing website where
she inadvertently gave a scammer access to her Cash App account. The
fraudsters quickly drained more than $5,000 from the consumer's
account. When the consumer contacted his bank and Cash App to address
the fraud he was told there was nothing that could be done because he
his wife had given her permission for the transaction to the scammer.
Another consumer from Massachusetts sent us a similar story last
year. She thought she had booked a vacation rental in Provincetown and
she was instructed by the ``owner'' of the property to send a $1,150
deposit via PayPal. When she arrived at the address on the listing, she
found that no such property existed. ``The neighbor told me he'd heard
of many such scams in Provincetown,'' she wrote. \27\ She contacted
PayPal twice to dispute the transaction, but was told that there was
nothing that could be done to get her money back.
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\27\ See, e.g., Martin, Sean. ``Vacationers Continue To Be Fooled
by Rental Scams'', Provincetown Banner. August 15, 2019. Online:
https://provincetown.wickedlocal.com/news/20190815/vacationers-
continue-to-be-fooled-by-rental-scams.
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P2P services are aware that fraudsters use their services to obtain
funds from their victims. An NCL review found that all of the major P2P
platforms make some effort to educate their users about how to avoid
scams. However, voluntary disclosures or consumer education alone are
not terribly effective by themselves. Despite the platforms' efforts to
educate users about the risks of sending money via P2P platforms, more
than half of consumers surveyed by AARP incorrectly assumed that their
payments would be protected if there is an error or fraud associated
with the transaction. \28\
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\28\ AARP. ``AARP Survey Finds Majority of Americans Using Payment
Apps Unaware of Danger Posed by Scammers''. Press release. May 12,
2020. Online: https://press.aarp.org/2020-5-12-AARP-Survey-Finds-
Majority-of-Americans-Using-Payment-Apps-Unaware-of-Danger-Posed-by-
Scammers.
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While P2P services do employ technological measures to stop
fraudulent transactions, there is a business incentive not to introduce
too many security roadblocks in the payment process. This is because
P2P payment platforms, and their sky-high valuations, \29\ \30\ are
dependent on maintaining large transaction volumes. P2P platforms'
desire to reduce ``friction'' in the payments experience is in direct
tension the need to prevent fraud. \31\ Yet if these platforms are
making the decision to skew their services towards speed and
convenience at the expense of safety and protection, they must take
responsibility for those choices.
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\29\ Hale, Kori. ``Hip-Hop's Role in Square's $40 Billion Cash App
Business Success'', Forbes. September 22, 2020, Online: https://
www.forbes.com/sites/korihale/2020/09/22/hip-hops-role-in-squares-40-
billion-cash-app-business-success/?sh=10d7f8ee7489.
\30\ Rudegeair, Peter. ``Cash App's Surge During COVID-19 Pandemic
Fuels Square Stock'', Wall Street Journal. September 2, 2020. Online:
https://www.wsj.com/articles/cash-apps-surge-during-covid-19-pandemic-
fuels-square-stock-11599039003.
\31\ Doyle, Ciaran. ``Removing Friction and Fraud From P2P
Payments'', IBM RegTech Innovations. December 6, 2018. Online: https://
www.ibm.com/blogs/regtech/removing-friction-and-fraud-from-p2p-
payments/.
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What is clear is that existing efforts to secure P2P payments are
falling far short of what is needed. Major P2P platforms operators like
Square, PayPal and Zelle do not publicly disclose their fraud rates.
They should be required to do so. Analysts estimate that fraud rates on
these platforms are three to four times higher than traditional payment
methods such as debit and credit cards. \32\ Javelin Strategy and
Research recently found that P2P services saw a 733 percent increase in
fraud from 2016 to 2019. \33\ The popularity of P2P payments during the
pandemic is also evident from conversations among fraudsters themselves
on the Dark Web. In August 2020 alone, analysts noted that Cash App was
mentioned more than 10,500 times, an increase of 450 percent from the
previous year. Listings mentioning Venmo and Zelle increased by around
50 percent in the same period. \34\
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\32\ Popper, Nathaniel. ``When Your Last $166 Vanishes: `Fast
Fraud' Surges on Payment Apps'', New York Times. October 11, 2020.
Online: https://www.nytimes.com/2020/10/11/technology/fraud-payment-
apps.html.
\33\ Javelin Strategy and Research. ``Identity Fraud Losses
Increase 15 Percent as Consumer Out-of-Pocket Costs More Than Double,
According to 2020 Identity Fraud Report''. Press release. May 13, 2020.
Online: https://www.javelinstrategy.com/press-release/identity-fraud-
losses-increase-15-percent-consumer-out-pocket-costs-more-double.
\34\ Popper, Nathaniel. ``When Your Last $166 Vanishes: `Fast
Fraud' Surges on Payment Apps'', New York Times. October 11, 2020.
Online: https://www.nytimes.com/2020/10/11/technology/fraud-payment-
apps.html.
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While no financial service is immune from fraud, protections for
consumers who lose money to scammers on P2P apps are sorely lacking.
When scammers obtain a consumer's bank account information and use it
to initiate a preauthorized payment through the ACH system, or obtain
debit card information and use it to initiate payment for fraudulent
purchases, the consumer typically has limited liability for such
transactions, thanks to the Federal Electronic Funds Transfer Act
(EFTA), implemented through the Federal Reserve's Regulation E. \35\
Similar consumer protections exist for fraudulent credit card
transactions exist under the Fair Credit Billing Act (FCBA). \36\
Thanks to these measures, consumers are protected, and credit and debit
card issuers and participants in the ACH system have strong incentives
to implement stringent antifraud countermeasures. The benefits to
consumers of these regulatory incentives is clear. Today, it is not
uncommon for a credit card holder whose account has been compromised to
be notified by her bank before she even notices a fraudulent charge on
her statement.
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\35\ Federal Deposit Insurance Corporation. ``Laws and
Regulations: Electronic Funds Transfer Act''. February 2019. Online:
https://www.fdic.gov/news/financial-institution-letters/2019/
fil19009b.pdf.
\36\ 15 U.S.C. 1666-1666j.
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Unfortunately, while P2P platforms are covered by the EFTA, victims
of fraud committed via P2P platforms are often unable to take advantage
of the protections afforded. A big reason for this is a loophole in the
EFTA that excludes payments initiated by the consumer from the
protection for unauthorized charges (also known as ``fraud in the
inducement'' or ``victim-assisted fraud''). \37\ This allows P2P
services and banks to avoid liability for payments sent from consumers
to scammers, even when such payments are induced by fraud. \38\
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\37\ Cornell Law School Legal Information Institute. ``Fraud in
the Inducement''. June 2020. Online: https://www.law.cornell.edu/wex/
fraud-in-the-inducement-Fraud-in-the-inducement-occurs-damages-or-
terminate-the-contract.
\38\ Mierzwinski, Ed, et al. ``Virtual Wallets, Real Complaints''.
MASSPIRG Education Fund. June 2021. P. 9. Online: https://masspirg.org/
sites/pirg/files/reports/MA-wallets.pdf.
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The end result of the loophole for fraudulently induced payments
made via P2P platforms is that the liability risk for fraud is
transferred from P2P platforms and banks to consumers themselves. Yet
it is the platforms that have designed systems that encourage this type
of fraud and who set the level of fraud they are willing to tolerate.
Moreover, institutions are far more able to handle the costs of
protecting consumers from small amounts of fraud in the system, whereas
a single instance of fraud can be devastating to a consumer.
Unfortunately, the only recourse for many victims of fraud committed
via P2P platforms is to throw themselves at the mercy of the banks or
P2P platforms and beg to be made whole. Unfortunately, thanks to the
lack of legal protections, it is far too easy for the banks and P2P
platforms to simply tell fraud victims that they are out of luck.
Indeed, another problem is that most financial institutions are
taking an unduly narrow view of their error resolution responsibilities
under the EFTA. When consumers call to complain about a fraudulently
induced payment, or about a mistake such as entering the wrong amount
or wrong cell phone number for the recipient, many institutions are
refusing to treat that as an error and refusing to investigate or to
try to resolve it. Yet there is nothing in the EFTA or Regulation E
that excludes consumer errors from the definition of ``error.'' Even if
a consumer might ultimately be liable for a payment because it was
initiated by the consumer and thus is not ``unauthorized,'' that does
not mean that institutions do not have a duty to investigate and try to
resolve the matter. A refusal to take these fraud reports and to pass
them on to the receiving institution also deprives that institution
that holds the scammer's account (or that of a money mule who
themselves may be a victim of fraud) of the information needed to put a
hold on the funds or shut down that account to prevent further fraud.
Difficulty in obtaining appropriate customer service is especially
acute with app-based services that rely on automated communications and
do not make live customer service available or adequately staff
customer service lines. Problems that consumers have experienced with
neo-bank accounts like Chime show the importance of making human beings
available to address problems when things go wrong. \39\
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\39\ Kessler, Carson. ``A Banking App Has Been Suddenly Closing
Accounts, Sometimes Not Returning Customers' Money''. ProPublica. July
6, 2021. Online: https://www.propublica.org/article/chime?utm-
source=sailthru&utm-medium=email&utm-campaign=dailynewsletter&utm-
content=feature.
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The Federal Reserve Should Ensure That FedNow Is Safe for Consumers
Before the System Is Launched
The Federal Reserve Board (FRB) is in the middle of building a new
faster payment system called FedNow, which will be an alternative to
Zelle and other private systems. \40\ The FRB has recently proposed one
set of rules governing the system. \41\
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\40\ Tahyar, Margaret et al. ``FedNow: The Federal Reserve's
Planned Instant Payments Service'', Harvard Law School Forum on
Corporate Governance. August 31, 2020. Online: https://
corpgov.law.harvard.edu/2020/08/31/fednow-the-federal-reserves-planned-
instant-payments-service/.
\41\ FRS-2021-0214-0001. Online: https://www.regulations.gov/
document/FRS-2021-0214-0001.
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We see the value in the FRB's decision to build a real time payment
system. It is imperative, however, that the inadequacies in consumer
protection with regards to fraudulent P2P payments not be exacerbated
as the FRB continues development of its FedNow service. \42\ The rules
proposed to date do not address the problems discussed in these
comments.
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\42\ Letter from Americans for Financial Reform Education Fund, et
al., to Board of Governors of the Federal Reserve System. November 7,
2019. Online: https://www.nclc.org/images/pdf/cons-protection/
coalition-letter-interbank-settlements.pdf.
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As a public body, the FRB has an especially great responsibility to
make sure that a system it designs and runs is safe. Protections in the
FedNow system can be a model for other P2P systems. Congress has a
critical role to play by insisting that the FRB meets this challenge.
Now, during its design phase and before it is deployed to the public,
these challenges must be addressed.
New Protections Are Needed To Protect Consumers From Fraud and Errors
on P2P Payment Platforms
The lack of consumer protections for users of P2P payment platforms
must not be ignored. It is clear from their explosive growth that P2P
payment apps are here to stay. It is equally clear that absent
regulatory incentives, effective self-regulation by the P2P services
will be stymied in the name of protecting transaction volume growth.
NCL has spoken with P2P platforms and urged them to offer far more
robust fraud protection, but so far we have seen little improvement.
The P2P services will continue to rely on marginally effective warnings
and disclosures to consumers--an old-fashioned tactic--rather than
embracing their responsibility to design systems for safety and using
modern artificial intelligence, machine learning, data analytics, and
other methods to prevent and remedy fraud.
To ensure that P2P platforms are secure for their users and do not
continue to be powerful tools for fraudsters, action by Congress is
urgently needed.
Specifically, we urge Congress to:
Enact legislation to expand the definition of
``unauthorized electronic fund transfer'' in the Electronic
Funds Transfer Act to cover fraudulently induced payments, with
ultimate liability resting with the institution that received
the fraudulent payment;
Push regulators to require P2P platforms to investigate
errors and fraud, even in cases where the consumer sent a
payment erroneously or as a result of fraud in the inducement;
Urge bank regulators to emphasize fraud prevention and
remediation as part of financial institutions' know-your-
customer duties;
Enact legislation to require P2P platforms to prominently
display warning about fraudulent use of P2P payments and how to
avoid scams;
Require P2P platforms to provide and prominently display a
customer service telephone line and respond to customer service
inquiries in a timely manner; and, \43\
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\43\ Note: The California legislature is currently considering AB-
1320, which contains similar requirements. Online: https://
leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill-
id=202120220AB1320.
Insist that the Federal Reserve promulgate rules for the
design of the FedNow payments service that prioritize safety
and security of payments.
Conclusion
Chairman Warnock, Ranking Member Tillis, and the Members of the
Subcommittee, we thank you for your continuing work to protect
consumers and for holding this hearing. On behalf of the National
Consumers League, thank you for including the consumer perspective as
you consider these important issues.
______
PREPARED STATEMENT OF RACHEL GRESZLER
Research Fellow, The Heritage Foundation
August 3, 2021
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM LIZ COYLE
Q.1. What are the risks of wire transfer fraud schemes
connected to real estate closings?
A.1. New payment system technologies enabling faster payments
directly from the payer to the payee offer potential benefits
to consumers, but also may increase the risk of fraud or simply
very costly mistakes. These increased risks are exposing
consumers to fraudulent schemes tied to real estate closing
transactions. Scammers hack into lenders' computers to access
email addresses tied to pending transactions and send
fraudulent emails tricking home buyers into wiring funds to the
scammers' accounts rather than the intended financial
institution. According to the National Credit Union
Administration (NCUA), wire transfer scams involving real
estate closings are increasing, based on a 2016 report of the
Federal Bureau of Investigations.
Q.2. What can financial institutions do to alert their
customers to suspicious transactions?
A.2. Federal and State regulators, financial institutions,
payment system developers and other impacted or interested
stakeholders should prioritize the development and
implementation of cybersecurity, notification, fraud detection
and prevention, and consumer awareness systems and regulations.
Financial institutions should install stronger fraud and error
resolution protections for their customers, including requiring
the use of two-factor authentication. In 2021, the Federal
Financial Institutions Examination Council (FFIEC) issued
guidance titled Authentication and Access to Financial
Institution Services and Systems ``to provide financial
institutions with examples of effective risk management
principles and practices for access and authentication.''
Q.3. How can financial institutions help people get their
stolen funds returned?
A.3. Financial institutions should prioritize prevention to
mitigate risk. Institutions should be held responsible for
returning fraudulently stolen funds to customers. The Cyber
Crime Support Network is an excellent resource for the
industry, regulators, and victims of cybercrime.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM JOHN BREYAULT
Q.1. What are the risks of wire transfer fraud schemes
connected to real estate closings?
A.1. Wire transfer fraud during real estate closings is a real
risk to consumers that can be financially and emotionally
ruinous. According to the Internet Crime Complaint Center,
there were 13,638 victims of wire fraud in the real estate/
rental sector in 2020 (a 17 percent increase over 2019), with
losses of more than $213 million. \1\ According to a recent
survey by the American Land Title Association, cybercriminals
attempted to trick employees into wiring funds to a fraudulent
account in a third of all real estate and mortgage
transactions. Full recovery of lost funds was only possible in
29 percent of cases involving wire fraud targeting title
agencies. In 40 percent of the cases, less than 10 percent of
the funds were recovered. \2\
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\1\ Federal Bureau of Investigation Internet Crime Complaint
Center. ``Internet Crime Report 2020''. March 17, 2021. Online: https:/
/www.ic3.gov/Media/PDF/AnnualReport/2020-IC3Report.pdf.
\2\ American Land Title Association. ``Survey: Title Professionals
Targeted for Wire Fraud in a Third of all Transactions''. April 20,
2021. Online: https://blog.alta.org/2021/04/survey-title-professionals-
targeted-for-wire-fraud-in-a-third-of-all-transactions.html.
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Wire fraud targeting real estate closings affects
participants in all phases of the closing, including title
companies, law firms, real estate agents, buyers, and sellers.
A typical scenario begins with a hacker gaining access to a
title company's or lender's email server and searching for
upcoming real estate closings. \3\ Fraudsters may also search
Multiple Listing Service websites such as Trulia or Zillow to
identify pending home sales and the associated parties in those
transactions. \4\ The fraudsters then send spoofed emails to
participants in one or more closings. The emails may appear to
come from a transaction participant and typically contains
instructions directing the recipients to change the payment
type and payment location so that payments go to accounts
controlled by the fraudsters. If the funds are sent to a
fraudulent account, they are typically quickly obtained by the
scammers via cash or check withdrawals. Because the
disbursement of funds from the fraudulent accounts tend to
occur so quickly, it is often difficult or impossible for the
payment to be canceled or for lost funds to be recovered when
the fraud is discovered. \5\
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\3\ National Credit Union Administration. ``Wire Transfer Scams
Involving Real Estate Transactions Are Increasing''. 2018. Online:
https://www.ncua.gov/newsroom/ncua-report/2018/wire-transfer-scams-
involving-real-estate-transactions-are-increasing.
\4\ Bay National Title Company. ``Real Estate Wire Fraud: How To
Stay Protected When Buying a Home''. Online: https://www.bntc.com/wire-
fraud/.
\5\ Federal Bureau of Investigation. ``Public Service
Announcement: Business E-mail Compromise the 12 Billion Dollar Scam''.
July 12, 2018. Online: https://www.ic3.gov/Media/Y2018/PSA180712.
Q.2. What can financial institutions do to alert their
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customers to suspicious transactions?
A.2. Consumer education at the beginning and repeated warnings
throughout the closing process can help increase consumer
awareness of this scam. For example, financial institutions
should provide alerts to borrowers to educate them about the
warning signs of real estate wire fraud at multiple points
during the home-buying process. Financial institutions should
also work with borrowers, title agents and other participants
in the real estate closing process to verify that wire
transfers are not being sent to fraudulent accounts. Resources
such as the American Land Title Association's ``Outgoing Wire
Preparation Checklist'' and ``Rapid Response Plan for Wire
Fraud Incidents'' are valuable resources for helping
participants in real estate transactions reduce their risk of
wire fraud. \6\
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\6\ American Land Title Association. ``Protect Your Money''.
Online: https://www.alta.org/business-tools/wirefraud.cfm.
Q.3. How can financial institutions help people get their
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stolen funds returned?
A.3. Financial institutions should make consumer education
about what do when wire fraud is suspected a regular part of
their interactions with borrowers. Acting quickly when wire
fraud occurs is a key factor in increasing the chances that
funds sent via fraudulent wire transfers can be recovered.
Congress should also consider legislation that would redefine
the Federal Reserve's definition of ``unauthorized
transactions'' to cover incidents where consumers are induced
to send money for fraudulent purposes.
Q.4. How can financial institutions monitor accounts for
suspicious activities?
A.4. Financial institutions should ensure that their fraud
detection systems are as up to date as possible. While no
system is foolproof when it comes to detecting and preventing
wire fraud, financial institutions must make it a priority to
invest in antifraud controls that reduce the risk of wire
fraud.
Q.5. Financial institutions know that multiple transactions
under $10,000 may be suspicious; should multiple transactions
of smaller amounts also be flagged for fraud if they seem
suspicious?
A.5. Yes. Multiple multithousand-dollar transactions over a
short period of time, particularly if the source is an account
that does not typically engage in such transactions, should be
a signal of potential fraud. While transactions smaller than
$10,000 may not be indicative of wire fraud associated with
real estate closing, fraudsters are known to request payment
via wire transfer for many other types of fraud. Such
transactions may also indicate that the sending account in
engaged in activity consistent with ``money mules'' or other
accomplices (witting or otherwise) in fraud.
Q.6. What are the responsibilities for financial institutions
to question their customers on suspicious withdrawals?
A.6. Financial institutions often train their frontline
employees to question customers when the customer makes
suspicious withdrawals. However, fraudsters are known to
quickly adapt to such tactics, even coaching victims on what to
say in response to questioning by financial institution
employees. We would also encourage financial institutions to
consider whether certain customers are at high risk of engaging
(knowingly or not) in fraudulent transactions and develop
systems to appropriately challenge suspicious transactions by
those who are at high risk.
Q.7. Are there transactions where a second person, like a
spouse or adult child, should be contacted to verify
withdrawals?
A.7. For customers who are at high risk of being victims of
fraud, we believe it is appropriate for financial institutions
to contact trusted parties such as spouses or adult children to
verify withdrawals before such withdrawals are processed.
Q.8. Do financial institutions flag overseas withdrawals for
accounts that do not typically have them, especially for people
over 65 years of age?
A.8. I am not aware of specific financial institutions that do
this or regulations that would require financial institutions
to flag such withdrawals. However, I believe that this is an
area that would be ripe for further investigation by the
Committee and regulatory agencies.
Q.9. What kind of holds should financial institutions have for
overseas transactions that seem unusual?
A.9. A key benefit for fraudsters engaged in wire fraud is that
received funds can often be obtained quickly, with little
recourse for the sending party if fraud is discovered or
suspected after the fact. For high-risk accounts, we believe
that controls should be put in place that would place holds on
overseas transactions that have indices of potential fraud.
This would give customers and sending institutions additional
time to investigate and verify suspicious transactions before
fraudsters are able to obtain the funds.
Q.10. How can financial institutions flag fraud where the
scammer has misled the victim and the victim thinks the
transactions are legitimate?
A.10. Financial institutions should be willing to place holds
on transactions that have indices of fraud, even if the
customer thinks that the transaction is legitimate. However, we
believe that a comprehensive solution should also include new
protections that would place more liability on financial
institutions when account holders are induced to authorize
sending money to fraudsters. Such liability shifting would not
only make it more likely that defrauded consumers can be made
whole, it would also create a powerful incentive for financial
institutions to invest in systems that would reduce the risk of
fraud occurring in the first place.
Q.11. What legal assistance is available for victims of fraud?
How do victims know they can--and should--file complaints with
local governments, legal aid, the Federal Trade Commission, the
Consumer Financial Protection Bureau, etc.?
A.11. It is too often incumbent on fraud victims themselves to
seek out legal assistance. Fortunately, agencies like local
police departments, State Attorneys General, legal aid service
providers, and Federal resources from the Federal Trade
Commission and the Consumer Financial Protection Bureau do a
relatively good job at making their services findable online.
However, given the significant number of consumers who either
lack access to the Internet or who are uncomfortable with or
unable to use technology, there is always the need for
providers of legal assistance for fraud victims to proactively
reach out to victims and potential victims of fraud.