[Senate Hearing 111-647]
[From the U.S. Government Publishing Office]
S. Hrg. 111-647
FINANCIAL SERVICES AND PRODUCTS:
THE ROLE OF THE FEDERAL TRADE COMMISSION
IN PROTECTING CONSUMERS
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HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 4, 2010
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
U.S. GOVERNMENT PRINTING OFFICE
57-887 PDF WASHINGTON : 2010
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20402-0001
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii KAY BAILEY HUTCHISON, Texas,
JOHN F. KERRY, Massachusetts Ranking
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California JOHN ENSIGN, Nevada
BILL NELSON, Florida JIM DeMINT, South Carolina
MARIA CANTWELL, Washington JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas GEORGE S. LeMIEUX, Florida
CLAIRE McCASKILL, Missouri JOHNNY ISAKSON, Georgia
AMY KLOBUCHAR, Minnesota DAVID VITTER, Louisiana
TOM UDALL, New Mexico SAM BROWNBACK, Kansas
MARK WARNER, Virginia MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
Ellen L. Doneski, Staff Director
James Reid, Deputy Staff Director
Bruce H. Andrews, General Counsel
Ann Begeman, Acting Republican Staff Director
Brian M. Hendricks, Republican General Counsel
Nick Rossi, Republican Chief Counsel
C O N T E N T S
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Page
Hearing held on February 4, 2010................................. 1
Statement of Senator Rockefeller................................. 1
Statement of Senator Johanns..................................... 17
Statement of Senator Begich...................................... 20
Statement of Senator Dorgan...................................... 21
Statement of Senator Wicker...................................... 29
Statement of Senator Klobuchar................................... 33
Witnesses
Hon. Jon Leibowitz, Chairman, Federal Trade Commission........... 4
Prepared statement........................................... 6
Appendix
Hon. Kay Bailey Hutchison, U.S. Senator from Texas, prepared
statement...................................................... 41
Letter, dated February 22, 2010, to Hon. Jay Rockefeller from
Michael C. Dillon.............................................. 42
Hon. Jon Leibowitz, additional prepared statement................ 45
Response to written questions submitted to Hon. Jon Leibowitz by:
Hon. Byron Dorgan............................................ 48
Hon. Claire McCaskill........................................ 48
Hon. Kay Bailey Hutchison.................................... 54
Hon. John Ensign............................................. 57
Hon. John Thune.............................................. 58
Hon. Roger F. Wicker......................................... 60
Hon. David Vitter............................................ 64
FINANCIAL SERVICES AND PRODUCTS: THE
ROLE OF THE FEDERAL TRADE COMMISSION
IN PROTECTING CONSUMERS
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THURSDAY, FEBRUARY 4, 2010
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 2:28 p.m. in room
SR-253, Russell Senate Office Building, Hon. John D.
Rockefeller IV, Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
The Chairman. Ladies and Gentlemen, this hearing will come
to order. I should say at the beginning that I will give my
statement and then Mr. Leibowitz gives his at which point there
will be two votes. So the masses gathered here on the dias will
disappear.
[Laughter.]
The Chairman. For a brief period of time then we'll be
right back to have questions and answers or question and
answers whatever/however it works out to be.
Mr. Leibowitz. Mr. Chairman, I'll stay.
The Chairman. OK. Today American consumers are hurting.
Many have lost their jobs. Foreclosures are up and in tough
economic times family budgets get very, very tight. And in the
midst of all this pain, unscrupulous business practices
continue to target consumers directly when they can least
afford it.
It's difficult for the average consumer to know who to
trust. And we need to change that. I've actually got to the
point in watching television when somebody is peddling a
product and then I start out with a sense I don't trust this.
Is there something behind this?
It's true. I mean the experience of what we've done here in
the Commerce Committee just makes me very skeptical about the
way people present their wares. So we are doing everything we
can to weather these storms. People are beginning to find work.
And Congress is fighting to create more jobs. So we'll see how
that turns out.
I believe we cannot forget how we got here. Many of the
enormous economic problems we face today are a direct result of
weak consumer protections in the financial sector. President
Obama has proposed creating a new agency to better regulate the
financial sector and better protect consumers. And today's
hearing is our chance to look closely at the Federal Trade
Commission, in particular, and its role as top cop on the beat.
In fact, this hearing will be a little bit different than
usual because there is really a chance for our witness to
describe what he's doing, what he's thinking of doing and talk
about it. It's not so much a, you know, beat you over the head
or you beat us over the head. That's not the style of this.
Trying to find out what your plans are.
So we've got to identify the enforcement and the oversight
tools that the FTC needs to most effectively protect consumers
in our complicated world. I firmly believe the FTC must remain
a cornerstone of our consumer protection system. And will do
everything in my power to make sure that remains the case.
For too long deceptive financial products, criminal
investigation schemes and a reckless faith in the industry's
ability to regulate itself, a mantra for some, have
significantly undermined our economy. The world of financial
products is extraordinarily complex and getting more so every
day. Consumers are overwhelmed by countless choices
indecipherable fine print and grand and glorious claims. And as
more and more of these products are created beyond the domain
of local banks our current regulatory structure simply cannot
oversee them.
And so therefore, too often, financial regulators overlook
financial products, outside of traditional banks and ordinary
Americans have paid the price. This is where the FTC can and
should play a leading role. Over the last 5 years the agency
has brought more than 100 cases to protect consumers from abuse
of financial practices. I'd be interested in hearing about
those. These cases have run the gamut from routine settlements
with fly by night, payday, loan operators to resource intensive
litigation with major mortgage servicing companies.
The common thread that runs through each investigation is
an unwavering focus that, from our point of view, is an
unwavering focus on the American consumer. Now even as our
government responds and adapts to the frequently changing
realities of our tremendously difficult modern economy, we can
never lose that focus, never forget who comes first. As any
consumer activities continue to surge and this has stunned me,
just what's happened in this Committee, what's come upon this
Committee, what people offer up for various segments of, you
know, evil practices and deceptive practices.
I don't like to think of America that way. And so that's
one of the reasons that we're here and you're there, Mr.
Leibowitz. So the Federal Trade Commission's acts, long
standing, general prohibition against ``unfair or deceptive
acts or practices'' has become the bedrock of consumer
protection laws in the United States. Now it is time to shore
up that foundation.
I want to close by saying that when I took over this
Committee, just one year ago, I vowed to make this Committee
focus more on protecting the consumer. We have lots and lots
and lots of work that we have to do in many, many fields. But
it was, I thought, time to crack down a bit and we have.
We have investigated a number of scams from online
merchants who share their customer's credit card information
without first receiving real consent, to insurance companies
putting profits before people. We went through that at some
length. For all the companies out there looking to rip off the
hard working people of this country, I say to them that this
Committee is only getting started in its effort to safeguard
the people from these misleading practices. We will not stop
until consumer protection is the cornerstone of our thriving
economy as I know it can and should be.
Finally, I want to recognize the importance of quickly
confirming Julie Brill and Edith Ramirez, both of whom I met
with, it seems like to me, a long, long time ago, the
President's recent nominees to join Chairman Leibowitz as
Commissioners of the FTC so they can get to work.
Thank you, Chairman Leibowitz, for your work to make the
FTC the strong agency consumers need. We need to hear from you
how we can better equip the FTC to protect the American people.
And I look forward to your testimony.
I note the presence of the Senator from Nebraska, who
appears to be the only Republican here. So, you are Kay Bailey
Hutchison. Do you have a statement you'd like to make?
Senator Johanns. No, I'll take a pass. I walked in. It was
just you and I and I wondered, Mr. Chairman, whether we had
succeeded in chasing all of our colleagues away or something.
The Chairman. It's possible.
[Laughter.]
The Chairman. It is possible.
Senator Johanns. So much of what you said I agree with and
I won't take the time of the Committee for the statement. I
know we've got a vote coming up here. So maybe----
The Chairman. No, no, no, no. That's not for 25 minutes.
Senator Johanns. 25 minutes. Well, we'll--I'm more than
content to let the witness proceed.
The Chairman. What about Mr. Begich over here? He's
looking--he's so far down I can barely see him.
[Laughter.]
Senator Begich. You know I'm lucky they promoted me from
there to here, so I'm----
The Chairman. So that is true. You're sort of coming into
my focus here.
Senator Begich. I want you to know my 40-page speech I will
not give. And I will sit back and relax.
The Chairman. And you won't give it to the Committee to
have to record somewhere either?
Senator Begich. No, because my staff hasn't seen it. I
wrote it myself.
[Laughter.]
The Chairman. Ah, ok.
Senator Begich. Please know, Mr. Chairman, all the staff
laughed at that in nervousness.
[Laughter.]
The Chairman. Alright. Mr. Chairman?
STATEMENT OF HON. JON LEIBOWITZ, CHAIRMAN,
FEDERAL TRADE COMMISSION
Mr. Leibowitz. Thank you, Chairman Rockefeller, Senator
Johanns, Senator Begich and I also, by the way, put my 23-page
written statement into the record.
I'm Jon Leibowitz, Chairman of the Federal Trade
Commission. And with discussions of financial regulatory reform
ongoing let me thank you for inviting me to testify about the
FTC's work in protecting consumers, including consumers of
financial services, and urge you to ensure that the Commission
can continue doing this critical work. Let me also thank you
for mentioning the nominations of Julie Brill and Edith
Ramirez. We certainly appreciate the Committee for moving their
nominations rapidly. And we hope to have confirmation soon.
I'll first discuss our highest consumer protection priority
and that's targeting financial frauds that take the last dollar
out of the pockets of ordinary Americans.
Then I'll offer our views on how financial regulatory
reform, done properly, could strengthen our ability to pursue
those who take advantage of the hardest hit Americans.
But before getting into those details let me emphasize one
fact. Although many Federal agencies have some authority over
different aspects of the financial services industry, the FTC
is the only agency whose sole objective is to protect
consumers. The Commission has a long bipartisan history of
accomplishing this objective. And in fact in the last decade,
as you alluded to, Mr. Chairman, we have recovered nearly a
half billion dollars for consumers who lost their money to
financial frauds.
Mr. Chairman, as these types of scams have proliferated
during the current economic downturn, we have stepped up our
efforts to stop them. With the State Attorneys General, we've
brought sweeps of hundreds of cases to shut down unscrupulous
businesses that offer fraudulent mortgage modification and
foreclosure rescue services, fake jobs, or phony access to
Federal stimulus money. And in this poster you can see a
picture of President Obama and Vice President Biden offering
stimulus money, I believe in this case they claimed on one of
their websites that you could use the money for things like
education, paying off a mortgage and leisure travel. And so,
you know, there are a lot of scammers out there.
All told in the last year the FTC----
The Chairman. I'm looking at it and the way it's set up it
kind of looks like the President has done a $15 billion scam.
And I want you to clear that up very promptly.
Mr. Leibowitz. No, I don't--you can disagree with his
policies. I happen to support them. But I don't believe that
the President is involved in this issue.
The Chairman. It's juxtaposition.
Mr. Leibowitz. It's just an unfortunate juxtaposition
designed to rip off consumers. So in the last year, the FTC has
brought 40 cases against 200 defendants engaged in fraud
targeting financially distressed consumers. But I want to point
out that our efforts aren't just about abstract statistics.
They're also about helping real people with real problems.
So let me just give you a couple of examples.
Jaime L. lives in California. And last year Jaime was
facing foreclosure on his home. He paid $3,000 to a company
that told him they could get his loan modified. In fact, they
told him not to pay his mortgage company while they reworked
the mortgage.
After months passed with no action, he contacted the
company which assured him, assured him, that his modification
would be completed by the following week. But that same day,
the bank repossessed his home, telling Jaime that it had tried
to reach the modification company but had never received a
response. In other words, the company took Jaime's money, but
did nothing for him or his family.
In fact and sadly, the day after Thanksgiving, Jaime and
his family were evicted from their home. The FTC sued the
company. And the case is currently in litigation.
Another victim is Angela B. from New Hampshire, who is
disabled and lives on a fixed income because she needed help
paying off her mortgage. She visited a website that advertised,
falsely, free government grants. She agreed to pay $1.99 to
receive a CD with instructions about how to obtain those
grants. What she wasn't told was that she was being enrolled in
a negative option plan and charged a recurring fee of 95
dollars. The Commission shut down that operation, which
targeted Angela B. and so many other Americans.
The Commission's law enforcement isn't limited to stopping
boiler room type frauds. We also prosecute nationally known
companies that engage in unfair, deceptive practices. For
example, the Commission recently obtained a $28 million
settlement from the subprime mortgage servicer, EMC, a
subsidiary of Bear Stearns, for hiding fees from consumers.
Just last fall, we finished mailing out redress checks to
86,000 Americans.
And tomorrow--in a case we won against a bottom-feeding
debt collector, one who is now in jail, because we referred the
case over to the Justice Department--we're going to start to
mail out $25,000--I'm sorry, 25,000 more redress checks to
Americans. And we obtained a $114 million settlement from a
subprime credit card marketer named CompuCredit, again for
charging hidden fees, in this instance to poor, mostly minority
consumers.
Now in addition to our law enforcement and with critical
leadership from you, Chairman Rockefeller, and of course from
you, Senator Dorgan, the Commission has stepped up our use of
rulemaking to stop unfair and deceptive financial practices.
Today, we announced a proposed rule that would ban advance fees
by mortgage modification and foreclosure rescue companies. As
we've seen in our law enforcement actions far too often,
consumers pay thousands of dollars in advance for these
services, but they get nothing in return.
The proposed rule would prohibit misrepresentations as well
and require that providers disclose critical information to
consumers. Our rulemaking efforts will continue. We plan to
issue proposed rules in the near future covering mortgage
advertising and servicing, two areas where we've also seen
problematic practices.
The Commission has also developed a wide variety of
creative education materials to help consumers avoid financial
scams. I think examples are on your desks. And you can see the
poster for our DVD, ``Real People, Real Stories.''
Demand for these materials is very, very high. We've
literally distributed hundreds of thousands of copies to
consumers through neighborhood organizations, through HUD,
through consumer groups and through state attorneys general.
Mr. Chairman, the FTC has done a lot to protect consumers, yet
we acknowledge that we can and that we should do more.
In his proposal for the Consumer Financial Protection
Agency, President Obama emphasized giving us the consumer
protection tools and resources we need. As all of you know, the
FTC is a relatively small agency with a very, very broad
mission. Our workforce today is about 1,100 people. That is 700
fewer than it was 30 years ago even though our responsibilities
have grown dramatically during this period, as has the American
population. I think it's gone up from about 205 million in 1979
to--about 230 million in 1979 to about 305 million today.
And in this context there are additional tools as you
alluded to Senator Rockefeller, that would allow us to be more
effective with fewer personnel.
One is the authority to seek civil penalties against those
who engage in unfair or deceptive acts or practices. That's an
idea that was originally espoused by Caspar Weinberger when he
was Chairman of the Commission in the early 1970s.
Another is the ability to promulgate rules using the same
notice and comment procedures that virtually all other agencies
use. Right now we are under something called the Magnuson-Moss
Rule rulemaking approach, which is a kind of medieval form of
rulemaking. It can take eight to 10 years to do a rule. And
clear authority to prosecute those who knowingly aid or albeit
violations.
Finally I just want to say a few words about financial
services reform and proposals to establish a Consumer Financial
Protection Agency. The Commission supports, I think, the
fundamental objective of elevating protection for consumers of
financial services. And I support the CFPA as a means to
accomplish that goal while some of my colleagues would prefer
other approaches. Nonetheless, we all agree that if such an
agency is created, the FTC needs to remain an active and
effective cop on the beat in both financial and non-financial
matters.
To my mind, at least, the bill that was passed by the House
late last year would both give us critical new tools and
preserve our ability to help consumers. So we look forward to
working with this committee as legislation moves ahead. Please
be assured though, that whether or not Congress passes
financial reform that includes the CFPA, we at the FTC will
continue our work to protect financially distressed consumers.
Thank you so much.
[The prepared statement of Mr. Leibowitz follows:]
Prepared Statement of Hon. Jon Leibowitz, Chairman,
Federal Trade Commission
I. Introduction
Chairman Rockefeller, Ranking Member Hutchison, and members of the
Committee, I am Jon Leibowitz, Chairman of the Federal Trade Commission
(``FTC'' or ``Commission''). I appreciate the opportunity to appear
before you today,\1\ and the Commission thanks this Committee for its
interest in preserving and strengthening the ability of the FTC to aid
consumers in financial stress during these difficult economic times.
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\1\ Except as noted, the views expressed in this statement
represent the views of the Commission. My oral presentation and
responses to questions are my own and do not necessarily reflect the
views of the Commission or any individual Commissioner. Commissioner
Kovacic dissents from portions of the testimony as explained in notes
45 and 47. Commissioners Kovacic, Harbour, and Rosch offer separate
views in note 54.
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This testimony first describes the FTC's law enforcement,
rulemaking, and consumer education efforts. These efforts have helped
protect millions of consumers of financial products and services from
unscrupulous businesses that engage in unfair, deceptive, and other
unlawful practices. Although the FTC has long played an active role in
prosecuting financial fraud and deception, the agency has stepped up
its efforts in recent months in response to the economic downturn. For
example, in 2009 alone, the FTC and the states, working in close
coordination, brought more than 200 cases against firms that peddled
phony mortgage modification and foreclosure rescue scams.
The testimony next explains the rationale for granting the
Commission appropriate resources and remedial tools to enable it to be
even more effective in protecting consumers. Finally, the testimony
provides the Commission's perspective on recent proposals to create a
new consumer financial protection agency as part of a broader reform of
the financial services regulatory system.
II. The FTC's Authority over Financial Services
Although many Federal agencies have authority over different
aspects of the financial services industry, the FTC is the only such
agency whose sole objective is to protect consumers. The Commission can
bring law enforcement actions to enforce Section 5 of the FTC Act,
which prohibits unfair or deceptive acts or practices in or affecting
commerce.\2\ The agency also can bring law enforcement actions to
enforce rules that the Commission issues \3\ to implement the FTC
Act.\4\ The FTC Act, however, exempts banks, savings and loan
institutions, and Federal credit unions from the Commission's
jurisdiction. Thus, the Commission's authority encompasses the conduct
of non-bank entities, such as non-bank mortgage companies, mortgage
brokers, creditors, and debt collectors.
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\2\& 15 U.S.C. 45(a).
\3\ The Commission issued the Credit Practices Rule in 1984, to
restrict the use of certain remedies in consumer credit contracts. 16
C.F.R. Part 444. In 1975, the Commission issued the Holder in Due
Course Rule, 16 C.F.R. Part 433. This Rule preserves the ability of
consumers to raise claims and defenses against purchasers of consumer
credit contracts.
\4\ In addition, under the FTC Act, the Board of Governors of the
Federal Reserve (``FRB''), Office of Thrift Supervision, and National
Credit Union Administration have the authority to promulgate rules
prohibiting unfair or deceptive practices engaged in by banks, thrifts,
and Federal credit unions, respectively. See 15 U.S.C. 57a(f).
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The Commission also has law enforcement and, in some cases,
regulatory powers under a number of consumer protection statutes that
specifically relate to financial services, including the Truth in
Lending Act (``TILA''),\5\ the Home Ownership and Equity Protection Act
(``HOEPA''),\6\ the Consumer Leasing Act (``CLA''),\7\ the Fair Debt
Collection Practices Act (``FDCPA''),\8\ the Fair Credit Reporting Act
(``FCRA''),\9\ the Equal Credit Opportunity Act (``ECOA''),\10\ the
Credit Repair Organizations Act (``CROA''),\11\ the Electronic Funds
Transfer Act (``EFTA''),\12\ and the privacy provisions of the Gramm-
Leach-Bliley Act (``GLB Act'').\13\ These statutes, like the FTC Act,
do not give the FTC jurisdiction over banks.\14\
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\5\ 15 U.S.C. 1601-1666j (mandates disclosures and other
requirements in connection with consumer credit transactions).
\6\ 15 U.S.C. 1639 (provides additional protections for consumers
entering into certain high-cost mortgage loans).
\7\ 15 U.S.C. 1667-1667f (requires disclosures, limits balloon
payments, and regulates advertising in connection with consumer lease
transactions).
\8\ 15 U.S.C. 1692-1692p (prohibits abusive, deceptive, and
unfair debt collection practices by third-party debt collectors).
\9\ 15 U.S.C. 1681-1681x (imposes standards for consumer
reporting agencies, information furnishers, and consumer report users).
The Fair and Accurate Credit Transactions Act of 2003 amended the FCRA,
primarily establishing rights and obligations relating to identity
theft. Pub. L. No. 108-159, 117 Stat. 1952 (2003).
\10\ 15 U.S.C. 1691-1691f (prohibits creditor practices that
discriminate on the basis of race, religion, national origin, sex,
marital status, age, receipt of public assistance, and the exercise of
certain legal rights).
\11\ 15 U.S.C. 1679-1679j (mandates disclosures and other
requirements in connection with credit repair organizations, including
a prohibition against charging fees until services are completed).
\12\ 15 U.S.C. 1693-1693r (establishes the rights and
responsibilities of institutions and consumers in connection with
electronic fund transfer services).
\13\ 15 U.S.C. 6801-6809 (requires financial institutions to
provide annual privacy notices; provides consumers the means to opt out
from having certain information shared with nonaffiliated third
parties; and safeguards customers' personally identifiable financial
information).
\14\ Most of these statutes grant rulemaking authority to one or
more of the agencies with enforcement responsibility under the
statutes. The FTC has rulemaking authority for certain financial
services under the FTC Act, for certain specified purposes under the
FCRA and GLB Act, and with respect to mortgage loans under the Omnibus
Appropriations Act of 2009, as amended.
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III. FTC Activities to Protect Consumers in Financial Distress
The Commission has a long history of protecting consumers at every
stage of their relationship with financial services companies. As the
economic downturn has taken hold, fraudulent schemes exploiting
consumers in financial distress have proliferated. Accordingly, the
Commission has stepped up its efforts to stop these frauds and protect
vulnerable consumers, using its four primary tools: law enforcement,
rulemaking, consumer education, and research and policy development.
A. Law Enforcement
The FTC is primarily a law enforcement agency, and it has used its
authority proactively to protect financially distressed consumers. In
many of these cases, the Commission has used its powers to seek
temporary restraining orders, asset freeze orders, and other immediate
relief to stop financial scams in their tracks and preserve money for
ultimate return to consumers. Even prior to the economic downturn, the
Commission acted aggressively to stop financial fraud and assist
consumer victims. For example, the agency brought a series of cases
against a number of the Nation's largest subprime mortgage lenders and
servicers challenging a variety of unfair and deceptive practices.\15\
Over the past 5 years, the FTC has filed over 100 actions against
providers of financial services, and in the past 10 years, the
Commission has obtained nearly half a billion dollars in redress for
consumers of financial services.
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\15\ See, e.g., FTC v. Associates First Capital Corporation, No.
1:01-CV-00606-JTC (N.D. Ga. 2002) ($215 million returned to deceived
consumers); see also, e.g., FTC v. EMC Mortgage Corp., No. 4:08-cv-338
(E.D. Tex. Sept. 9, 2008) ($28 million in redress to 86,000 consumers);
U.S. v. Fairbanks Capital Corp., No. 03-12219 DPW (Nov. 12, 2003) ($40
million in consumer redress), judgment modified in U.S. v. Select
Portfolio Servicing, No. 03-12219-DPW (D. Mass. 2007) (stipulated
judgment).
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Most recently, the Commission's highest priority has become
targeting frauds that prey on consumers made vulnerable by the economic
crisis. For example, the FTC launched an aggressive, coordinated
enforcement initiative to shut down mortgage loan modification and
foreclosure rescue scams perpetrated on homeowners having difficulty
making their mortgage payments. Heavily advertised in mainstream media
and on the Internet, these schemes purport to assist consumers in
avoiding foreclosure or renegotiating mortgage terms with their lenders
or servicers. Typically, the fraudsters promise that, in exchange for
an up-front fee in the thousands of dollars, they will obtain a loan
modification or prevent foreclosure; in fact, they do little but
collect their fee. Taking advantage of the widespread publicity about
government mortgage assistance programs, such as the Making Home
Affordable program, many of these firms use copycat names or look-alike
websites to falsely suggest that they are affiliated with those
programs.\16\ In some instances, the businesses impersonate private,
nonprofit programs or claim to be affiliated with the consumer's lender
or servicer.\17\
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\16\ Recent FTC cases have targeted fraudulent programs such as
``bailout.hud-gov.us'' and ``bailout.dohgov.us.'' See, e.g., FTC v.
Thomas Ryan, Civil No. 1:09-00535 (HHK) (D.D.C. filed March 25, 2009).
\17\ See, e.g., FTC v. New Hope Property LLC, No. 1:09-cv-01203-
JBS-JS (D.N.J. filed Mar. 17, 2009); FTC v. Hope Now Modifications,
LLC, No. 1:09-cv-01204-JBS-JS (D.N.J. filed Mar. 17, 2009); FTC v.
Kirkland Young, LLC, No. 09-23507 (S.D. Fla. filed Nov. 18, 2009); FTC
v. Loss Mitigation Servs., Inc., No. SACV-09-800 DOC(ANX) (C.D. Cal.
filed July 13, 2009).
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In the past 9 months, the FTC has brought 17 cases (against more
than 90 defendants) targeting foreclosure rescue and mortgage
modification frauds,\18\ with other matters under active investigation.
In addition, the Commission has leveraged its resources by partnering
with numerous state and Federal law enforcement agencies, especially
state attorneys general that have brought cases under their own
statutes. In two nationwide sweeps during the Summer and Fall of 2009,
``Operation Stolen Hope'' and ``Operation Loan Lies,'' the Commission
joined with many states and other Federal agencies to collectively file
more than 200 lawsuits against loan modification and foreclosure rescue
providers.\19\
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\18\ A full list of these law enforcement actions is attached to
this testimony as Appendix A.
\19\ FTC, Press Release, Federal and State Agencies Target Mortgage
Relief Scams (Nov. 24, 2009) (announcing 118 actions by 26 Federal and
state agencies), available at http://www.ftc.gov/opa/2009/11/
stolenhope.shtm; FTC, Press Release, Federal and State Agencies Target
Mortgage Foreclosure Rescue and Loan Modification Scams (July 15, 2009)
(announcing operation involving 189 actions by 25 Federal and state
agencies), available at http://www.ftc.gov/opa/2009/07/loanlies.shtm.
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The Commission has targeted a variety of other deceptive and
fraudulent schemes aimed at consumers in financial distress, including
the following:
1. Mortgage servicing. In September 2008, the FTC settled
charges that EMC Mortgage Corporation and its parent, The Bear
Stearns Companies, LLC, violated Section 5 of the FTC Act and
the FDCPA in servicing mortgage loans, including debts that
were in default when EMC obtained them.\20\ The EMC settlement
required the defendants to pay $28 million in consumer redress,
and the Commission has sent checks to more than 86,000
consumers. The settlement also barred the defendants from
future law violations and required EMC to establish a
comprehensive data integrity program.
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\20\ FTC v. EMC Mortgage Corp., No. 4:08-cv-338 (E.D. Tex. Sept. 9,
2008).
2. Debt relief services. As consumers struggle to make payments
on their credit cards and other unsecured debt, they are
vulnerable to the claims of purveyors of deceptive debt
settlement, debt negotiation, and other for-profit debt relief
services. These heavily-advertised services promise to
renegotiate debt terms with consumers' creditors to reduce
their debt, often by specific, substantial amounts. Over the
past several years, the Commission has brought 19 lawsuits
against for-profit debt relief companies, including five in the
past year, halting deceptive practices and returning money to
consumers.\21\
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\21\ See, e.g., FTC v. JPM Accelerated Services Inc., No. 09-CV-
2021(M.D. Fla. filed Dec. 11, 2009); FTC v. Economic Relief
Technologies, LLC, No. 09-CV-3347 (N.D. Ga. filed Dec. 8, 2009); FTC v.
2145183 Ontario Inc., No. 09-CV-7423 (N.D. Ill. filed Dec. 8, 2009);
FTC v. Edge Solutions, Inc. of New York, No. CV-07-4087-JG-AKT
(E.D.N.Y. Aug. 7, 2008) (stipulated order and judgment for permanent
injunction). In addition, as described below, the Commission is engaged
in a rulemaking to amend its Telemarketing Sales Rule to cover debt
relief services.
3. Credit repair. Consumers who are late or in default on their
debt payments may suffer serious harm to their credit ratings,
making it all the more difficult for them to obtain credit,
insurance, employment, or housing in the future. Many credit
repair outfits misrepresent their ability to remove negative
but accurate information from consumers' credit reports in
violation of Section 5 of the FTC Act and the Credit Repair
Organizations Act. In the last 5 years, the FTC has taken
action in 17 cases to stop fraudulent credit repair scams, many
of these in partnership with state law enforcers.\22\
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\22\ For example, in October 2008, the Commission coordinated a law
enforcement sweep that included ten FTC actions and 26 state actions
against credit repair operations. See FTC, Press Release, FTC's
Operation ``Clean Sweep'' Targets ``Credit Repair'' Companies (Oct. 23,
2008), available at http://www.ftc.gov/opa/2008/10/cleansweep.htm.
4. Economic stimulus scams. Over the last year, the Commission
has also focused its efforts on responding to new scams that
try to capitalize on the economic downturn by falsely promising
grants ostensibly associated with the U.S. Government to
consumers facing financial hardship.\23\
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\23\ See, e.g., FTC, Press Release, At FTC's Request, Court Halts
Deceptive Claims for Free Government Grants (Aug. 20, 2009), available
at http://www.ftc.gov/opa/2009/08/grantconnect.shtm; FTC, Press
Release, FTC, Three States Charge Scammers with Falsely Promising
``Guaranteed'' $25, 000 Government Grants as Part of the Economic
Stimulus Package (July 23, 2009), available at http://www.ftc.gov/opa/
2009/07/gwi.shtm; FTC, Press Release, FTC Cracks Down on Scammers
Trying to Take Advantage of the Economic Downturn (July 1, 2009),
available at http://www.ftc.gov/opa/2009/07/shortchange.shtm.
5. Debt collection. Unpaid debt has reached unprecedented
levels; as a result, the number and amount of debts pursued by
third-party debt collectors and debt buyers \24\ has
skyrocketed. The Commission has maintained an aggressive
program to enforce Section 5 of the FTC Act and the Fair Debt
Collection Practices Act against collectors who deceive,
harass, or abuse consumers.\25\
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\24\ Debt buyers purchase unpaid debt from creditors or debt
collectors, typically for pennies on the dollar, and collect it on
their own behalf. Debt buyers, like debt collectors who collect debt on
behalf of creditors, are subject to the Fair Debt Collection Practices
Act, 15 U.S.C. 1692-1692p.
\25\ See, e.g., U.S. v. Academy Collection Service, Inc., No.:
2:08-cv-01576-KJD-GWF (D. Nev. Jan. 7, 2010) (consent decree); U.S. v.
Oxford Collection Agency, Inc., No.: 2:09-cv-02467-LDW-AKT (E.D.N.Y.
July 2, 2009) (consent decree).
6. Advance fee loans. Consumers unable to qualify for credit
from traditional sources may turn to marketers of advance fee
credit cards or loans. In the last 5 years, the FTC pursued 19
cases against marketers who promised credit in exchange for the
payment of an advance fee, but failed to deliver the credit as
promised.\26\
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\26\ See, e.g., FTC v. Group One Networks, Inc., No. 09-CV-00352
(M.D. Fla. filed Mar. 3, 2009); FTC v. Integrity Financial Enterprises,
LLC, No.: 8:08-cv-914-T-27 MSS (M.D. Fla. Dec. 10, 2008) (stipulated
judgment and order); FTC v. Financial Advisors & Associates Inc., No.:
8:08-cv-00907-T-26 TBM (M.D. Fla. Sept. 22, 2008) (stipulated judgment
and order). The FTC's Telemarketing Sales Rule (``TSR'') prohibits
telemarketers from requesting or receiving payment of any advance fee
for credit, when they have represented a high likelihood of success in
obtaining or arranging the extension of credit. 16 C.F.R.
310.4(a)(4).
7. Payday lending. Cash-strapped consumers may also look to
payday loans for financial assistance. Payday loans are high-
cost short term loans, usually repaid by a check post-dated to
correspond to the consumer's next paycheck. The Commission
recently has brought a number of cases against payday lenders
for failing to disclose key loan terms and other law
violations.\27\
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\27\ See, e.g., FTC, Press Release, Internet Payday Lenders Will
Pay $1 Million to Settle FTC and Nevada Charges; FTC Had Challenged
Defendants' Illegal Lending and Collection Tactics (Sept. 21, 2009),
available at http://www.ftc.gov/opa/2009/09/cash.shtm; FTC, Press
Release, Payday Loan Lead Generators Settle FTC Charges (June 24,
2008), available at http://www.ftc.gov/opa/2008/06/wegiveloans.shtm;
FTC, Press Release, FTC Charges Three Internet Payday Lenders with Not
Disclosing Required APR Information in Ads (Feb. 27, 2008), available
at http://www.ftc.gov/opa/2008/02/amercash.shtm.
8. Credit card marketing. In December 2008, the FTC settled a
case with a subprime credit card marketer, CompuCredit, for
making deceptive representations to consumers while marketing
subprime credit cards to sub-prime borrowers. CompuCredit
allegedly misrepresented the amount of credit that would be
available immediately to consumers, failed to disclose up-front
fees, and failed to disclose that certain purchases could
reduce a consumer's credit limit. Under the settlement,
CompuCredit must pay redress to injured consumers and it is
estimated that the redress program will result in more than
$114 million in credits to consumer accounts. \28\
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\28\ FTC v. CompuCredit Corp., No. 1:08-CV-1976-BBM-RGV (N.D. Ga.
2008) (settled in December 2008). The Commission worked closely on this
case with the Federal Deposit Insurance Corporation, which brought a
parallel action challenging this deceptive conduct.
9. Other scams targeting the financially distressed. In recent
months, the Commission has filed lawsuits against a variety of
other operations for preying on consumers suffering financial
hardship, including those offering fake get-rich-quick schemes,
work-at-home offers, and job hunting aids.\29\
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\29\ See, e.g., FTC, Press Release, Court Jails Promoter of Work-
At-Home Scam; Envelope- Stuffing Scheme Deceived Spanish-Speaking
Consumers (Dec. 23, 2009), available at http://www.ftc.gov/opa/2009/12/
intermarketing.shtm; FTC, Press Release, FTC Cracks Down on Scammers
Trying to Take Advantage of the Economic Downturn (July 1, 2009),
available at http://www.ftc.gov/opa/2009/07/shortchange.shtm.
In sum, the Commission believes its extensive law enforcement
efforts have stopped numerous fraudulent operations from preying on
consumers hard hit by the economic crisis.
B. Rulemaking
To complement its law enforcement, the Commission, with critical
assistance from this committee, has stepped up its use of rulemaking in
the financial area. Such rules enhance both compliance with the laws
and the Commission's ability to prosecute wrongdoers, for example, by
specifying violative practices and enabling the agency to obtain civil
penalties from violators. The FTC's recent rulemaking proceedings
include the following:
On June 1, 2009, pursuant to the Omnibus Appropriations Act
of 2009 (as clarified by the Credit CARD Act of 2009) \30\ the
Commission commenced rulemaking proceedings on unfair or
deceptive mortgage-related practices: \31\
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\30\ Omnibus Appropriations Act of 2009, Pub. L. No. 111-8, 626,
123 Stat. 524 (Mar. 11, 2009); Credit CARD Act of 2009, Pub. L. No.
111-24, 511(a)(1)&(2), 123 Stat. 1734 (May 22, 2009). Chairman
Rockefeller and Senator Dorgan played key roles in obtaining this new
rulemaking authority for the FTC.
\31\ 74 Fed. Reg. 26,118 (June 1, 2009); 74 Fed. Reg. 26,130 (June
1, 2009).
This week, the Commission issued a notice of proposed
rulemaking, seeking public comment on a proposed rule
covering loan modification, foreclosure rescue, and other
mortgage assistance relief services. The rule would ban
providers from collecting fees prior to delivering the
promised results, prohibit misrepresentations in the
marketing of these services, and require certain
affirmative disclosures about the nature and terms of the
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service.
The Commission anticipates publishing a second notice of
proposed rulemaking in the near future addressing mortgage
advertising practices, followed by a third proposed
rulemaking addressing mortgage servicing.
On August 19, 2009, the Commission published in the Federal
Register proposed amendments to the Telemarketing Sales Rule
(``TSR'') \32\ designed to curb deception and abuse by
providers of for-profit debt relief services.\33\ The amended
rule proposed by the Commission would, among other things,
prohibit debt relief service providers from charging consumers
a fee until they have delivered the promised results. The
Commission staff is considering the public comments the agency
received in response to the proposed rule and has begun
drafting a final rule.
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\32\See 16 C.F.R. Part 310.1.
\33\ TSR; Notice of Proposed Rulemaking; Announcement of Public
Forum, 74 Fed. Reg. 41988 (Aug. 19, 2009). Commission staff hosted a
public forum on the proposed rule on November 4, 2009, which included
participants representing the debt relief industry, consumer groups,
state law enforcement, and other interested parties. See http://
www.ftc.gov/bcp/rulemaking/tsr/tsr-debtrelief/index.shtm.
The Commission, in conjunction with the Federal bank
agencies, also has promulgated rules to protect the privacy of
consumers' sensitive information, including financial and
credit report information, under the GLB Act and the FACT Act
amendments to the Fair Credit Reporting Act.\34\
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\34\ In addition, the Commission and the Federal banking agencies
recently announced rules and guidelines expanding the obligations of
the entities that furnish information to consumer reporting agencies to
provide accurate information. See Procedures To Enhance the Accuracy
and Integrity of Information Furnished to Consumer Reporting Agencies
Under Section 312 of the Fair and Accurate Credit Transactions Act;
Final Rule; Guidelines for Furnishers of Information to Consumer
Reporting Agencies; Proposed Rule, 74 Fed. Reg. 31,484 (July 1, 2009).
Consumers with inaccuracies in their credit reports may be denied
credit or other benefits, or be forced to pay a higher rate. In
addition, the FTC and several other Federal agencies recently issued a
consumer-friendly model notice that financial institutions can use to
disclose their privacy practices to their customers, as required by the
GLB Act. See FTC, Press Release, Federal Regulators Issue Final Model
Privacy Notice Form (Nov. 17, 2009), available at http://www.ftc.gov/
opa/2009/11/glb.shtm.
By setting clear standards and making violations easier to prove,
the Commission believes that these rules will result in significantly
greater protections for consumers of financial services.
C. Consumer Education
The FTC complements its rulemaking and law enforcement actions with
consumer education. The Commission has conducted numerous education
campaigns designed to help consumers manage their financial resources,
avoid deceptive and unfair practices, and be aware of emerging scams.
For example, the FTC recently has undertaken a major consumer education
initiative related to mortgage loan modification and foreclosure rescue
scams, including the release of a suite of mortgage-related resources
for homeowners. These resources are featured on a new web page,
www.ftc.gov/MoneyMatters. The FTC encourages wide circulation of this
information: consumer groups and nonprofit organizations distribute FTC
materials directly to homeowners, while some mortgage servicers are
communicating the information on their websites, with their billing
statements, and on the telephone.\35\
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\35\ In addition, the FTC has worked with community organizations,
state attorneys general, and other partners to distribute copies of a
new video featuring the stories of real people who are working with
legitimate housing counselors to save their homes. The video is
available at http://ftc.gov/multimedia/video/credit/mortgage/hope-
now.shtm.
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D. Research and Policy Development
Another means by which the FTC helps protect consumers of financial
services is through its role in conducting consumer research and
developing and advocating for pro-consumer policies. For example, in
recent years, the Commission has taken the lead in developing and
testing consumer disclosures in several financial contexts. In 2007,
for example, the Commission released a staff report on a study
conducted by the agency's Bureau of Economics on the effectiveness of
mortgage disclosures.\36\ The study examined how consumers search for
mortgages, how well they understand cost disclosures and the terms of
their own loans, and whether better disclosures could help them shop
for mortgage loans and avoid deceptive lending practices. The study
found that mortgage disclosure forms in current use fail to convey key
mortgage costs and terms to many consumers, and that more effective
disclosures can be created to help consumers make better-informed
decisions.\37\
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\36\ See, e.g., FTC, Bureau of Economics Staff Report, Improving
Consumer Mortgage Disclosures: An Empirical Assessment of Current and
Prototype Disclosure Forms (June 2007), available at http://
www.ftc.gov/os/2007/06/P025505mortgagedisclosurereport.pdf.
\37\ The FTC also is carrying out a series of studies of the
accuracy of credit reports, pursuant to the FACT Act. See FTC, Press
Release, FTC Issues Third Interim Report to Congress on Results of
Studies Required by FACT Act (Dec. 23, 2008), available at http://
www.ftc.gov/opa/2008/12/factareport.shtm.
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The Commission also has engaged in efforts to identify and promote
effective consumer protection policies with respect to debt collection.
In 2009, for example, FTC staff conducted a series of public
roundtables across the United States on the consumer protection issues
raised by debt collection litigation and arbitration practices.\38\ The
roundtables followed a 2009 Commission report \39\ recommending changes
in the FDCPA to reform and modernize the debt collection regulatory
system. Other recent FTC research and policy development initiatives in
the financial area include a public workshop to examine consumer
protection problems related to debt relief services and a two-day
forum, and associated staff report, on developing better methods for
deterring and preventing fraud.\40\
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\38\ See FTC Roundtable, Debt Collection: Protecting Consumers
(Dec. 4, 2009), available at http://www.ftc.gov/bcp/workshops/
debtcollectround/index.shtm.
\39\ In this report, the Commission also recommended that Congress
grant it rulemaking authority under the FDCPA. See FTC, Collecting
Consumer Debts: The Challenges of Change (Feb. 2009), available at
http://www.ftc.gov/bcp/workshops/debtcollection/dcwr.pdf. Additionally,
last month, the Commission ordered nine of the Nation's largest debt
buyers to turn over information about their practices in buying and
collecting consumer debt, which the agency intends to use for a study
of the debt-buying industry and how it might be contributing to
problematic debt collection practices. See FTC, Press Release, FTC
Orders Buyers of Consumer Debt to Submit Information for Study of Debt
Buying Industry (Jan. 5, 2010), available at http://www.ftc.gov/opa/
2010/01/sci.shtm.
\40\ See FTC, Consumer Protection and the Debt Settlement Industry
(Sept 25, 2008), available at http://www.ftc.gov/bcp/workshops/
debtsettlement/index.shtm; FTC, Press Release, FTC Issues Staff Report
on Agency's Fraud Forum (Dec. 29, 2009), available at http://
www.ftc.gov/opa/2009/12/fraud.shtm.
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IV. Enhancing the FTC's Ability to Protect Consumers
Although the FTC has substantially increased its consumer
protection efforts in response to the current economic crisis, the
Commission understands that much more could, and should, be done.
Appropriate resources and certain new enforcement and regulatory tools
would significantly enhance the FTC's ability to anticipate and respond
effectively to the proliferation of financial fraud.
Indeed, in announcing his proposal last summer to establish a new
Consumer Financial Protection Agency, President Obama explained that
``[t]here are other agencies, like the Federal Trade Commission,
charged with protecting consumers, and we must ensure that those
agencies have the resources and the state-of-the-art tools to stop
unfair and deceptive practices as well.'' \41\ The financial services
regulatory reform bill passed by the House of Representatives late last
year includes additional authority that would enable the Commission to
more effectively protect consumers.
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\41\ White House, Office of the Press Secretary, Remarks by the
President on 21st Century Financial Regulatory Reform (June 17, 2009),
available at http://www.whitehouse.gov/the press office/Remarks-of-the-
President-on-Regulatory-Reform/.
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A. Resources
The FTC is a relatively small agency with a very broad consumer
protection and competition mission, ranging from operation of the Do
Not Call registry, to challenging unfair or deceptive marketing and
advertising, to enforcement of the consumer financial protection
statutes with respect to most businesses in the United States, to
challenging anti-competitive conduct that would harm consumers. As the
economic downturn has continued, the Commission has implemented
efficiencies that enable it to ``do more with less;'' at the same time,
the agency has shifted more of its consumer protection resources to
protecting consumers of financial services, while continuing to carry
out its myriad other obligations. The FTC understands budgetary
constraints, but assures both the Congress and the Administration that
any funds the FTC receives will be used to respond more effectively to
the broad range of current and future consumer protection issues and,
specifically, to better protect consumers from financial-related
fraud.\42\
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\42\ See Prepared Statement of the FTC on Leveraging FTC Resources
to Protect Consumers of Financial Services and Promote Competition
before the House Committee on Appropriations Subcommittee on Financial
Services and General Government (Mar. 31, 2009), available at http://
www.ftc.gov/os/2009/03/P064814financialservices.pdf.
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B. Aiding and Abetting Authority
Many individuals and small companies engaged in unlawful practices
rely on the support and assistance of other, usually larger, companies.
This support and assistance often is instrumental to the success of the
scams and allows them to be perpetrated on a much broader scale than
would otherwise be possible. Having the ability to prosecute those who
make fraud possible by assisting others is a key component of an
effective enforcement program. Therefore, the Commission encourages
Congress to clarify the law \43\ and provide explicit authority for the
FTC to take law enforcement action against those who provide
substantial assistance to another while knowing, or consciously
avoiding knowing, that the person is engaged in unfair or deceptive
practices in violation of Section 5 of the FTC Act. \44\
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\43\ Until the 1994 Supreme Court decision in Central Bank of
Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994), which
held that the Securities and Exchange Commission (``SEC'') did not have
aiding and abetting authority under the Exchange Act, it was understood
that there was an implied cause of action under Section 5 of the FTC
Act for aiding and abetting unfair or deceptive acts and practices.
Although in many circumstances the Commission is able to allege that
providing knowing assistance to others in violating the law meets the
standard for unfairness under Section 5, see, e.g., FTC v. InterBill,
Ltd., No. 06-cv-01644-JCM-PAL (D. Nev. filed Jan. 8, 2007); FTC v. Your
Money Access, LLC, No. 07-5174 (E.D. Pa. filed Dec. 11, 2007), it would
be useful for Congress to amend the FTC Act to include an express cause
of action under Section 5 for aiding and abetting unfair or deceptive
acts or practices. Such a change would be comparable to Congress's
restoration of the SEC's aiding and abetting authority shortly after
Central Bank of Denver. See 15 U.S.C. 78(t)(e). Having such authority
clarified would make the FTC a much more effective law enforcement
agency, as demonstrated by the agency's use of the aiding and abetting
authority in the TSR to strike at those who help telemarketers defraud
consumers. See Telemarketing and Consumer Fraud Prevention Act, 15
U.S.C. 6101-6108 (as amended); TSR, 16 C.F.R. Part 310.
\44\ See Prepared Statement of the FTC on the Commission's Work to
Protect Consumers and to Promote Competition, and on a Bill to
Reauthorize the Commission before the Senate Committee on Commerce,
Science, and Transportation (Apr. 8, 2008) (``FTC Reauthorization
Testimony''), available at http://www.ftc.gov/os/testimony/
P034101reauth.pdf. H.R. 4173 would grant this authority.
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C. APA Rulemaking Authority \45\
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\45\ Commissioner Kovacic dissents from the Commission's
endorsement of authority to use, for promulgating all rules respecting
unfair or deceptive acts or practices under the FTC Act, the notice and
comment procedures of the Administrative Procedures Act (``APA'').
While other agencies have the authority to issue significant rules
following notice and comment procedures, the Commission's rulemaking
authority is unique in its range of subject matter (unfair or deceptive
acts or practices) and sectors (reaching across the economy, except for
specific, albeit significant, carve-outs). Except where Congress has
given the Commission a more focused mandate to address particular
problems, beyond the FTC Act's broad prohibition of unfair or deceptive
acts or practices, Commissioner Kovacic believes it prudent to retain
procedures beyond those encompassed in the APA. However, he supports
sector-specific APA rulemaking to promulgate rules that set forth
unfair or deceptive acts or practices relating to all financial
services. Further, he would be willing to consider more generally
whether all the procedures currently required to issue, repeal, or
amend rules issued under the FTC Act are necessary.
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Effective consumer protection requires that the Commission not only
be able to enforce existing statutes and rules, but that it be able to
promulgate in a timely and efficient manner additional rules to respond
to conduct in the marketplace that may harm consumers. The current
rulemaking procedures prescribed by Section 18 of the FTC Act (often
referred to as ``Magnuson-Moss'' rulemaking) are complex, cumbersome,
and time-consuming, resulting in rulemaking proceedings lasting many
years. The procedural requirements for Magnuson-Moss rules are far more
burdensome than the Administrative Procedures Act (``APA'') notice and
comment procedures that most other Federal agencies are authorized to
use. The Commission recently recommended that Congress amend Section 18
to authorize the FTC to use APA rulemaking procedures to address
consumer protection issues.\46\ The Commission believes that such an
amendment would significantly enhance the agency's ability to stop
financial fraud.
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\46\See Prepared Statement of the FTC on Consumer Credit and Debt:
The Role of the Federal Trade Commission in Protecting the Public
before the House Committee on Energy and Commerce Subcommittee on
Commerce, Trade, and Consumer Protection (Mar. 24, 2009), available at
http://www.ftc.gov/os/2009/03/P064814consumercreditdebt.pdf. Congress
has provided APA rulemaking when it has mandated or permitted the FTC
to promulgate some specific rules. See e.g., T1Omnibus Appropriations
Act of 2009, Pub. L. No. 111-8, 626, 123 Stat. 524 (Mar. 11, 2009);
Credit CARD Act of 2009, Pub. L. No. 111-24, 511(a)(1) & (2), 123
Stat. 1734 (May 22, 2009); FCRA, 15 U.S.C. 1681-1681x; GLB Act, 15
U.S.C. 6801- 6809; FCRA Free Credit Report Rule, 16 C.F.R. Part 610;
GLB Privacy Rule, 16 C.F.R. Part 313; GLB Safeguards Rule, 16 C.F.R.
Part 314.
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D. Civil Penalty \47\ and Independent Litigating Authority
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\47\ Commissioner Kovacic dissents from the Commission's
endorsement of across-the-board civil penalty authority. The existing
consequences attendant to a finding that an act or practice is unfair
or deceptive under the FTC Act include an administrative order (whose
violation would then subject the respondent to civil penalties) or a
court-issued injunction (which can contain such equitable remedies as
redress and disgorgement). In his view, these are generally appropriate
remedies, and they are consistent with the goal of developing FTC law
to develop new doctrine and to reach new and emerging problems. The
routine availability of civil penalties, even if subject to a scienter
requirement, would in his view risk constraining the development of
doctrine, much as judicial concerns about the availability of private
litigation with mandatory treble damages appear to be constraining the
development of antitrust doctrine. See, e.g., Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 558-59 (2007). Commissioner Kovacic would prefer
that Congress grant more targeted authority to seek civil penalties,
perhaps including civil penalty authority where financial services are
involved, and particularly including civil penalty authority in matters
where existing remedies are likely to be inadequate. See FTC
Reauthorization Testimony, supra note 44.
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For consumer protection law enforcement to serve as an effective
deterrent of unlawful behavior, the agency must have tough and
effective remedies that can be imposed quickly and without undue
burden. Two remedial powers that the FTC currently lacks--the authority
to seek civil penalties for violations of the FTC Act and the authority
to prosecute civil penalty cases in Federal court in its own name--
would make the agency's law enforcement more effective.
Although the Commission can seek a wide range of equitable remedies
in Federal court, including consumer redress and disgorgement of ill-
gotten gains, in most circumstances it lacks the authority to obtain
civil penalties against violators of the FTC Act.\48\ The Commission
believes that broad civil penalty authority for FTC Act violations
would enable the agency to more effectively deter financial and other
types of fraud, as well as other unfair or deceptive practices,
especially in those cases in which obtaining consumer redress or
disgorgement is impossible or impractical.\49\ Indeed, as far back as
1970, then FTC Chairman Caspar Weinberger advocated allowing the FTC to
assess civil penalties administratively against respondents who
knowingly committed consumer protection violations.\50\
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\48\ Generally speaking, the Commission now can seek civil
penalties only in four types of cases: knowing violations of FTC rules,
violations of certain statutes (such as the FCRA or FDCPA), violations
of a prior order against the defendant, and knowing violations of prior
Commission findings that a specific practice is unfair or deceptive.
See 15 U.S.C. 45 (m)(1)(A), (l), and 45(m)(1)(B).
\49\ Such cases would include those in which measuring consumer
injury or wrongful profits is difficult; this is often true, for
example, in cases involving spyware installation or data breaches.
\50\ See Hearings on H.R. 14931 and Related Bills before the
Subcomm. on Commerce and Finance of the H. Comm. on Interstate and
Foreign Commerce, 91 st Cong. 53, 54 (1970) (statement of FTC Chairman
Caspar Weinberger); Hearings on S. 2246, S. 3092, and S. 3201 Before
the Consumer Subcomm. of the S. Comm. on Commerce, 91st Cong. 9 (1970)
(Letter from Caspar W. Weinberger, Chairman, Federal Trade Commission)
(forwarding copy of House testimony). In 1973, the Senate passed S.
356, which authorized civil penalties for any unfair or deceptive act
or practice in violation of FTC Act Section (5)(a)(1) that was
committed with actual or objective Knowledge. Earl W. Kintner, the
Legislative History of the Federal Antitrust Laws and Related Statutes
5236-37 (1983) (reprint of S. 356 as passed by the Senate).
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Under current law, the Commission must refer to the Department of
Justice (``DOJ'') all cases in which it seeks civil penalties or
involving scammers who harm American consumers from abroad. The DOJ
then has 45 days to decide whether to file the case in its own name or
return it to the Commission. The Commission has previously testified
about the benefits for effective law enforcement of being able to file
and litigate civil penalty cases in its own name--as it now does when
seeking other remedies.\51\ This authority would allow the Commission--
the agency with the greatest expertise in enforcing the FTC Act--to
bring cases more quickly and efficiently.\52\ The Securities and
Exchange Commission and Commodity Futures Trading Commission already
have independent litigating authority to bring civil penalty cases
without referring cases to the DOJ. This authority is critical to our
efforts to fight fraud.
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\51\ See, e.g., Prepared Statement of the FTC on Proposed Consumer
Financial Protection Agency: Implications for Consumers and the Federal
Trade Commission, before the House Committee on Energy and Commerce
Subcommittee on Commerce, Trade and Consumer Protection (July 8, 2009),
available at http://www.ftc.gov/os/2009/07/090708Acfpatestimony.pdf;
FTC Reauthorization Testimony, supra note 44.
\52\ Even under the best of circumstances, the referral process
results in a significant delay in bringing the case. It is also less
efficient; under current practice, once DOJ accepts a referral, the FTC
normally assigns one or more of its staff attorneys, at DOJ's request,
to assist in litigating the case. Despite excellent relations and
coordination between the two agencies, this leads to a duplication of
effort and inefficiency. And for some cases, like illegal robocall
cases, this means that the FTC must make a difficult choice: file a
case quickly to stop ongoing harm but give up the possibility of civil
penalties; or seek civil penalties but wait weeks for the DOJ to
prepare a case, allowing the misconduct to continue and more consumers
to be harmed.
---------------------------------------------------------------------------
V. Reform of Consumer Financial Protection
On June 17, 2009, President Obama announced his proposal to create
a Consumer Financial Protection Agency (``CFPA'') as part of a broader
reform of the Nation's financial regulatory system. On December 11,
2009, the House passed H.R. 4173,\53\ Title IV of which would establish
the CFPA with broad powers to protect consumers with respect to
financial activities. It would transfer many of the consumer protection
functions currently performed by the Federal banking agencies to the
new agency. With respect to the FTC, Title IV would transfer to the
CFPA the FTC's rulemaking authority under certain enumerated statutes
with respect to businesses engaged in financial activities. Title IV
also would retain the FTC's authority under the FTC Act and its
enforcement authority under the enumerated statutes, concurrently and
in coordination with the CFPA.
---------------------------------------------------------------------------
\53\ More specifically, H.R. 3126 was incorporated into H.R. 4173
and passed by the House on that date.
---------------------------------------------------------------------------
The Commission supports the fundamental objective of improving the
effectiveness of the current governmental system for consumer financial
protection. However this is accomplished, whether through the creation
of a new agency or otherwise,\54\ the Commission believes that at a
minimum, Congress should ensure that the FTC's authority and ability to
protect consumers is neither eroded nor made unclear. The Commission
has a unique combination of institutional capabilities and has achieved
an excellent record of law enforcement, rulemaking, research, and
consumer education in the financial services field. It should remain an
active and effective consumer protection agency with respect to both
financial and nonfinancial products and services.
---------------------------------------------------------------------------
\54\ Commissioner Kovacic and Commissioner Rosch recommend, perhaps
as an alternative to creating a new agency to perform the Federal
banking agencies' current consumer protection functions, that the
Committee consider a model by which consumer protection with respect to
banks and other depository institutions would be enhanced by providing
the Commission with a role in protecting consumers of depository
institutions. Such expansion of the Commission's consumer protection
role would require a concomitant increase in the Commission's resources
to ensure the continuing excellence of its enforcement record. See
generally William E. Kovacic, The Consumer Financial Protection Agency
and the Hazards of Regulatory Restructuring, Lombard Street (Sept. 14,
2009), available at http://www.ftc.gov/speeches/kovacic/
090914hazzrdsrestructuring.pdf.
Commissioner Harbour takes no position on whether the current
regulatory environment justifies the creation of a new consumer
financial protection agency. If a new agency is established,
Commissioner Harbour feels strongly that, at a minimum, the FTC should
retain its current jurisdiction. Given the FTC's core expertise in
consumer protection enforcement in financial services, Commissioner
Harbour believes that it is important that the FTC continue to
represent the interests of consumers.
---------------------------------------------------------------------------
VI. Conclusion
The FTC appreciates the opportunity to update the Committee on its
actions to help consumers who are suffering economically and offer
thoughts on the possible impact of financial services regulatory reform
legislation on the Commission's consumer protection work. With
sufficient resources and authority, the FTC would be even more
successful in protecting consumers of financial products and services.
The FTC looks forward to working with the Committee on financial
services regulatory reform.
______
Appendix A--List of FTC Law Enforcement Actions Against Loan
Modification and Foreclosure Rescue Entities in 2008-2009
FTC v. First Universal Lending, LLC, No. 09-CV-82322 (S.D. Fla.
filed Nov. 24, 2009)
FTC v. Truman Foreclosure Assistance, LLC, No. 09-23543 (S.D. Fla.
filed Nov. 23, 2009)
FTC v. Debt Advocacy Ctr, LLC, No. 1:09CV2712 (N.D. Ohio filed Nov.
19, 2009)
FTC v. Kirkland Young, LLC, No. 09-23507 (S.D. Fla. filed Nov. 18,
2009)
FTC v. 1st Guaranty Mortgage Corp., No. 09-DV-61846 (S.D. Fla.
filed Nov. 17, 2009)
FTC v. Washington Data Resources, Inc., No. 8:09-cv-02309-SDM-TBM
(M.D. Fla. filed Nov. 12, 2009)
FTC v. Federal Housing Modification Dep't, No. 09-CV-01753 (D.D.C.
filed Sept. 16, 2009)
FTC v. Infinity Group Servs., No. SACV09-00977 DOC (MLGx) (C.D.
Cal. filed Aug. 26, 2009)
FTC v. Loan Modification Shop, Inc., No. 3:09-cv-00798 (JAP)
(D.N.J., amended complaint filed Aug. 4, 2009)
FTC v. Apply2Save, Inc., No. 2:09-cv-00345-EJL-CWD (D. Idaho filed
July 14, 2009)
FTC v. Loss Mitigation Servs., Inc., No. SACV09-800 DOC(ANX) (C.D.
Cal. filed July 13, 2009)
FTC v. Sean Cantkier, No. 1:09-cv-00894 (D.D.C., amended complaint
filed July 10, 2009)
FTC v. LucasLawCenter ``Inc. `', No. SACV-09-770 DOC(ANX) (C.D.
Cal. filed July 7, 2009)
FTC v. US Foreclosure Relief Corp., No. SACVF09-768 JVS(MGX) (C.D.
Cal. filed July 7, 2009)
FTC v. Freedom Foreclosure Prevention Specialists, LLC, No. 2:09-
cv-01167-FJM (D. Ariz. filed June 1, 2009)
FTC v. Data Medical Capital, Inc., No. SA-CV-99-1266 AHS (Eex)
(C.D. Cal., contempt application filed May 27, 2009)
FTC v. Dinamica Financiera LLC, No. 09-CV-03554 CAS PJWx (C.D. Cal.
filed May 19, 2009)
FTC v. Federal Loan Modification Law Ctr., LLP, No. SACV09-401 CJC
(MLGx) (C.D. Cal. filed Apr. 3, 2009)
FTC v. http://bailout.hud-gov.us, No. 1:09-00535 (HHK) (D.D.C.
filed Mar. 25, 2009)
FTC v. Home Assure, LLC, No. 8:09-CV-00547-T-23T-Sm (M.D. Fla.
filed Mar. 24, 2009)
FTC v. New Hope Property LLC, No. 1:09-cv-01203-JBS-JS (D.N.J.
filed Mar. 17, 2009)
FTC v. Hope Now Modifications, LLC, No. 1:09-cv-01204-JBS-JS
(D.N.J. filed Mar. 17, 2009)
FTC v. National Foreclosure Relief, Inc., No. SACV09-117 DOC (MLGx)
(C.D. Cal. filed Feb. 2, 2009)
FTC v. United Home Savers, LLP, No. 8:08-cv-01735-VMC-TBM (M.D.
Fla. filed Sept. 3, 2008)
FTC v. Foreclosure Solutions, LLC, No. 1:08-cv-01075 (N.D. Ohio
filed Apr. 28, 2008)
FTC v. Mortgage Foreclosure Solutions, Inc., No. 8:08-cv-388-T-
23EAJ (M.D. Fla. filed Feb. 26, 2008)
FTC v. Nat'l Hometeam Solutions, Inc., No. 4:08-cv-067 (E.D. Tex.
filed Feb. 26, 2008)
FTC v. Safe Harbour Foundation of Florida, Inc., No. 08-C-1185
(N.D. Ill. filed Feb. 27, 2008).
The Chairman. Thank you very much. It happens that the
votes are going to start at 2:45. So it's now 2:45, so they
haven't started.
So why don't I call on myself to ask the first question.
And that's simply going to be for you to explain something
which you just referred to. And that is, I think, what at least
we want to do, some of us, is to allow you to be able to use
the Administrative Procedures Act. And please don't count me as
being totally familiar with those instead of the Magnuson-Moss
Act to promulgate rules under the FTC Act.
Can you please explain? You referred to it as being 13th
Century which is a definite characterization. I'd just like to
know a little bit more about that.
Mr. Leibowitz. The Magnuson-Moss Act. Under the Magnuson-
Moss Act, when we do a rulemaking rules, can take literally 8
to 10 years. Entities that are opposed to the rules can ask for
a sort of regulatory time out. They can ask for referees.
As a result it's essentially a--it's almost an insurance
that when we want to move nimbly or agilely on an issue of some
importance, and again, where there's some opposition. And many
rules that we try to do have some opposition. It's almost
impossible to do that.
And so our hope is that as legislation moves forward we get
a clearer standard that is closer to or like the APA standard
which is notice and comment rules. When we do those notice and
comment rules, by the way, we take them very seriously. And we
try to use--and we try to do them very judiciously.
So for example, in the Omnibus Appropriations Act, Mr.
Chairman, you and Senator Dorgan put a provision in that gave
us authority to do APA rulemaking, specifically, for mortgages.
And we have just announced the first prong of our mortgage
modification rule. That's the ban on advanced fees. But it has
taken us pretty close to a year to do that.
So we're pretty thorough when we do these rules. We're
pretty bipartisan. We're very bipartisan. But we do believe
that if we have easier rulemaking we could move more nimbly on
behalf of consumers.
The Chairman. The vote has started. Can I just say that
it's occurred to me just going through this material that most
everything takes a long time?
Mr. Leibowitz. That's right.
The Chairman. I mean I was reading 10 years, 15 years. Is
this the Department of Justice? Is this the nature of America
or what?
Mr. Leibowitz. Well, I would say when you're making--when
you're doing a rulemaking, I don't know that it always takes 10
or 15 years. But you want to do it right. Now ten or 15 years,
it seems to me, is an excessive amount of time.
In a year, 18 months, we can pretty much take comments from
all the stakeholders; move forward where it's appropriate to do
a rule. Of course, you can't solve every problem with a Federal
Trade Commission rule, nor would we intend to. And try to move
forward on behalf of consumers.
So we think that with a little help from Congress, we can
compact that timeframe. And we can continue to do good work.
And set broad standards that make it easier to bring cases and
easier for some companies that want to do the right thing not
to feel like they're at a competitive disadvantage.
The Chairman. Alright. Thank you.
Mr. Leibowitz. Thank you.
The Chairman. Senator Dorgan, would you Chair this? And a
couple of us could go down and vote. The order of appearance is
there.
Senator Johanns, you'd be the first person to ask a
question. So if you want to ask a question, here's your time.
Right now.
STATEMENT OF HON. MIKE JOHANNS,
U.S. SENATOR FROM NEBRASKA
Senator Johanns. I will keep this fairly short. But tell me
the policy reason, originally, for why the FTC must use
Magnuson-Moss instead of APA?
Mr. Leibowitz. Well I think that's a really good question.
And I'm not saying reasonable people can't disagree about this.
Tim Muris, who was a terrific Chairman, the first Chairman
under President Bush, believes that we shouldn't have APA
rulemaking broadly. So does one of the Commissioners, who I
respect enormously.
But I think the original intent was that because we had
broader--the original intent was that we were supposed to have
very, very broad jurisdiction and limited remedies and since we
covered so much of the waterfront of the economy that you
wanted to place some restrictions on us. Now just by way of
background, we have jurisdiction over unfair methods of
competition which is actually broader than the antitrust laws,
but having said that, I would make two points.
One is that distinction has broken down over the years
because we have been given APA rulemaking authority in many
contexts, whether it's CAN-SPAM or whether it's Do Not Call or
whether it's Children's Online Privacy Protection Act.
And then two is in the economy we live in now and in the
society we live in now, we need to move, I think, much faster
than we did 95 years ago.
And so that's why, on behalf of consumers, and so again, I
think if you entrust us with the responsibility for being able
to have APA rulemaking authority, I think we'll use it pretty
judiciously.
And the only other point I want to make is in the 1970s,
particularly, because I know the 1970s history of our agency,
when we were perceived to be doing things that Congress did not
like. Congress understood exactly how to take away some of our
jurisdiction. It wasn't in the rulemaking capacity.
And so, I think if you give us this authority we'll have to
use it very prudently because if we don't use it prudently and
appropriately, we know it's not going to be there much longer.
Senator Johanns. One thing I might ask and this would be
just my last comment here. As you know the consumer piece of
the proposed legislation is, the object of a big policy debate
and how best to do it.
Mr. Leibowitz. Sure.
Senator Johanns. And I think it's a fair policy debate,
personally. But one thing I would be very interested in is what
you would like to do to help consumers, you know, maybe just a
list of items that you can't do today or you feel you can't do
today, that might aid us on this committee in trying to figure
out next steps.
Mr. Leibowitz. Alright. So that's a great--I mean, I'd like
to get back to you with an answer.
Senator Johanns. Yes.
Mr. Leibowitz. I can give you a very short answer now, if
you want.
Senator Johanns. Yes.
Mr. Leibowitz. So one thing we'd like to be able to do is
have fining authority. You'd have to go to court to ask for it.
Most state attorneys general, Senator Pryor knows, have this
kind of authority because much of what we do is go after people
who are engaging in fraud.
We're bringing the case. It could be the Justice Department
that brings it. It could be a state agency that's bringing it.
But it's fraud. And although not everyone we go after has money
at the end because we can get restitution for consumers or
disgorged profits. But it is critical, I think, if we want to
have a really strong deterrent to be able to propose fines if
we bring a case.
In terms of APA rulemaking, if you ask me what rules would
we do, I could think of one that we would have done faster
which is the mortgage rulemaking to which we're indebted to
Senator Dorgan. I think we would have done that faster because
we have had some discussions among commissioners about whether
we could do rulemaking. We decided well, it's not APA
rulemaking. It would take 10 years to do. It's not worth doing.
Let's wait for Congress to do something.
Maybe something I think we would consider and sometimes we
would use is an advanced notice or notice of inquiry. I think
we would consider doing a negative option rule because there
are so many consumers who are being ripped off in small
amounts, but in the aggregate, it's a huge amount of money on
negative options. And then I'd say we'd really want to think
and, you know, think for a while if we got this authority about
what we wanted to do and what we wouldn't want to do because
again, I tend to believe, I suspect you do to, you can't solve
every problem by regulation. And you don't want to.
Senator Johanns. No and yet as you were talking about the
mortgage scams that are out there. It just so happens that
probably every Senator could talk about this. It just so
happens I have a friend, who needed money, had some equity in
the house and you know what happened. And it's just a mess. I
mean, it's just a mess.
It's hard for us to figure out how to help. So it would be
helpful if you'd give that some thought. Appreciate the answer
you gave today. But give it some thought. Maybe supply the
Committee with some additional thoughts.
Mr. Leibowitz. Happy to do that, Senator.
[The information referred to follows:]
Although the Commission has a number of effective tools for
stopping bad actors, certain holes in our authority make it more
difficult--unnecessarily, in my opinion--to carry out our mission. The
following four enhancements to the agency's authority would help
substantially to fill those holes.
APA Rulemaking: Because the Commission may not use the
ordinary Administrative Procedures Act (``APA'') notice-and-
comment rulemaking procedures that most of our sister agencies
use, the Commission must do one of two things to promulgate a
rule: either obtain from Congress a specific grant of APA
rulemaking authority for a particular issue or use the
cumbersome and time-consuming Magnuson-Moss procedures. In my
view, either option is an inefficient and uncertain process for
addressing serious problems in a timely fashion, especially
those that can arise from emerging technologies or new
marketing practices. The Commission needs APA-style rulemaking
authority to be able to issue rules, when needed, in a
reasonable time and with a reasonable expenditure of resources.
Civil Penalty Authority: The FTC currently lacks the
authority to seek civil penalties for violations of the FTC Act
itself. Although the Commission currently may seek penalties--
through DOJ--in certain specified situations (e.g., for a
defendant's violations of an existing enforcement order or of
certain FTC rules), the ability to seek civil penalties for
knowing violations of the FTC Act itself would give the agency
an important tool for deterring unfair or deceptive practices.
This is especially important for cases in which obtaining
equitable remedies such as consumer restitution, rescission, or
disgorgement is impossible or impractical--because, for
example, victims cannot be identified or consumer injury and
wrongful profits cannot be quantified.
Aiding and Abetting: The absence, outside of the
telemarketing context, of explicit authority to hold liable
those who aid and abet law violators hampers the Commission's
ability to take action against entities that do not themselves
deceive consumers, but supply knowing and substantial support
to those who do. In many cases, the aiders and abettors, by
providing essential services that the primary fraudsters could
not efficiently provide themselves, allow frauds to occur on a
much broader scale than would otherwise be possible.
Independent Litigating Authority for Civil Penalty Actions:
It is anomalous that while the FTC is authorized to try its own
cases for a wide swath of remedies, including consumer redress
and disgorgement, it may not do so when seeking penalties.
Instead, the agency must refer cases to DOJ, wait up to 45 days
for DOJ to determine whether to take a case, and allow DOJ
staff time to learn the case and prepare. This requirement thus
entails duplication of efforts and slower enforcement. In
addition, it results at times in the agency having to choose
between obtaining early injunctive relief (for example, to halt
the violative practices and preserve assets for eventual
redress) or seeking penalties. Having the authority to litigate
civil penalty actions independently would allow cases to be
brought more quickly and effectively, without the disadvantages
occasioned by the referral obligation.
Senator Johanns. OK.
Mr. Leibowitz. Absolutely.
Senator Johanns. Thank you.
Senator Dorgan [presiding]. Senator Begich?
STATEMENT OF HON. MARK BEGICH,
U.S. SENATOR FROM ALASKA
Senator Begich. Mr. Chairman, I'll be very brief, just kind
of a general question. These folks that you are able to collect
fines from, that you haven't processed, that you've gotten
restitution from. If I turned on your page and went to the
front page of it, is there a list of these companies and
individuals that own or are a part of these companies that is
in a way that I can easily access it?
Mr. Leibowitz. You mean as sort of a black list
essentially?
Senator Begich. Yes. I'll tell you an example because I
belong to a group, it's Angie's List, which is a list of
subcontractors. I'm a member. And they put in there, here's the
people, don't do business with them.
Do you do that?
Mr. Leibowitz. Well, when we have a settlement or when we
bring a case it goes up on our website.
Senator Begich. I know. But it's never legal.
Mr. Leibowitz. No, no, no. And I--let me go back and let us
think about that. It's a really--it's an interesting idea.
You know, I'd have to talk to the other Commissioners about
it. I think there's also the sort of notion on the other side,
as I'm sure you know, that once you've paid your debt to
society . . . But I also think consumers deserve notice and
we're about notice in almost every context.
Senator Begich. That's right. Because that record will
always be in the court files. So all I'm saying is make the
list.
Mr. Leibowitz. Yes.
Senator Begich. If you're going to do business, because
I'll tell you one thing that changes businesses habits is when
they're suddenly publicly noticed, not through a legal fine
that most consumers will never go to the courthouse, but if
they're going to the FTC because you've got some good
educational materials here which I think are fantastic.
Mr. Leibowitz. Yes, and let me tell you and just in a
different context we used the same approach when we were
starting to bring spyware cases and nuisance adware cases, the
kind of adware that pops up on your computer.
Senator Begich. Right, right.
Mr. Leibowitz. You know, and you can't figure out how to
uninstall it. We started going around talking about it and I
thought, this is wonderful that we were going to publish the
names of companies that whether knowingly or not knowingly paid
the money that went to a company that went to an affiliate that
went to another affiliate that ended up with someone being paid
to put spyware in your computer. And that was very, very
helpful in cleaning up that problem.
Senator Begich. Could you get back to at least me and maybe
the Committee just so----
Mr. Leibowitz. Sure.
[The information referred to follows:]
You asked whether there is a list on the FTC's website of all the
companies and individuals against whom the Commission has taken action
that consumers could utilize in deciding with whom to do business.
First, consumers can pull up on the website our extensive alphabetical
list of all FTC cases since 1996. A second, and easier, way for
consumers to locate relevant information is to search for the name of
any company with which they are considering doing business. For
example, if a consumer was considering hiring Hope Now Modifications to
do a loan modification, he or she could quite easily put the phrase
``Hope Now'' into our search function at www.ftc.gov, and the first
link that appears is a press release titled ``Court Halts Bogus
Mortgage Loan Modification Operations.'' We are considering additional
ways to post the names of defendants in FTC actions.
I would caution, however, against the description of our case list
as a blacklist. Most FTC cases are settled, with no admission of
liability on the part of the defendant and no formal finding of
wrongdoing by the Commission or a court. Also, there are legitimate
companies that the FTC has charged with violating the law in some
respect, but that subsequently change their business practices to
comply with the law.
The best strategy to warn consumers about bad actors is through
consumer education about bad business practices. That is why the FTC's
multi-media consumer education campaigns give consumers the tools and
information they need so that they can independently assess each
company's marketing practices, spot red flags, and stop before paying a
bad actor for any promised service that may not be provided.
Senator Begich.--What your thought is? I just know when I
was mayor we put the list of the people who owed money. And it
was such an amazing thing when we not only did a press. It
crashed the system because people were interested if they were
on it, but they also wanted to see if anyone they knew was on
it.
Mr. Leibowitz. Well we've upgraded our computer system just
recently.
Senator Begich. OK. It's good to know that. Well I would be
very interested as I've cut my time short only because of
votes, but I would be very interested in this. I think it gets
people to focus.
Mr. Leibowitz. Yes, sir.
Senator Begich. And it helps consumers. But just some
feedback, that would be great.
Mr. Leibowitz. We will do that. I'll go back and talk to my
colleagues.
Senator Begich. Great. Thanks.
Mr. Leibowitz. Thank you.
STATEMENT OF HON. BYRON DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Chairman Leibowitz, we're going to have to
recess in a few minutes. But let me say first of all that your
announcement today is an enormous breath of fresh air. When I
put the provision in the Appropriations bill that gives you the
authority to direct you to take action on mortgage, it only
gives you the authority to truncate that rulemaking process
some.
I'll tell you in the conference, trying to get this through
conference, there were people having an epileptic seizure
fighting like the devil to try to drop this provision. And we
saved it. But, you know, this provision is a provision I put in
because I wanted you to do exactly what you're doing and that
is find the bad guys and take action.
And I think what has happened in this country is
unbelievable. There is unbelievable bottom feeding by greedy
people who have gotten by with it for far too long. And it's
also interesting to me today to see your agency taking action.
I mean, I call some of these regulatory agencies the
grateful dead, grateful that they get paid and dead from the
neck up because they don't do a thing. And we've watched that
for years and years and years. And you have decided to finally
take some action in an area that desperately needs it. People
have been fleeced for years and years and years now in these
areas. So thanks for the work.
Now let me just ask a quick question because I don't want
to miss this vote. But my understanding is that probably up to
80 percent of these mortgage relief groups are non-profits. Is
that right? Non-profit status, so called non-profits?
Mr. Leibowitz. Not in mortgage----
Senator Dorgan. Which doesn't mean very much.
Mr. Leibowitz. Not in mortgage modification.
Senator Dorgan. OK.
Mr. Leibowitz. Probably debt modification.
Senator Dorgan. Debt modification.
Mr. Leibowitz. And there's a--I don't know the percentage
that that may well be right. And it's certainly high. Yes, it's
certainly high.
Go ahead, Senator.
Senator Dorgan. Well----
Mr. Leibowitz. It could be half. And it could be more.
Senator Dorgan. You're right, probably debt relief.
Obviously they are advertising, marketing aggressively,
enrolling consumers into plans and so on. So it's a--I mean,
non-profit status in those circumstances doesn't mean much to
be in many cases. Some cases it probably does.
But you work with many other Federal agencies I know in
coordination on these issues. Can you describe your
relationship with other agencies? I know there are some turf
issues out there, but----
Mr. Leibowitz. We're generally good. We're not perfect, but
we're generally good at trying not to have too many turf issues
in trying to work cooperatively. We play well with others I
think is our reputation.
And so for example, we're consulting on our mortgage
modification rules and our mortgage rules both formally and
informally with the Fed and with the banking agencies on the
issue. By the way, on the issue of the rulemaking, we're
keeping an open mind. We have a proposed rule. We're taking
comments for 45 days that would prohibit advance fees.
What I was struck by was that almost no one disagreed with
this approach. And in fact I think even the American Bankers
Association, I'll go back and check this and get back to you,
called for a ban on advance fees.
[The information referred to follows:]
The American Bankers Association (``ABA'') submitted a comment that
was supportive of the proposed Mortgage Assistance Relief Services
rule. On review of the record, however, it appears that the ABA did not
expressly state a position with respect to a ban on advanced fees. The
only concern raised by the ABA was that ``the rules [the FTC]
promulgates must be drawn so that they do not restrict the legitimate
loss mitigation efforts of financial institutions and their affiliated
mortgage servicers.''
The following commenters expressly supported the ban on advanced
fees: American Financial Services Association; California Reinvestment
Coalition; Consumer Mortgage Coalition; Chase Home Finance, LLC;
Housing Policy Counsel; Massachusetts Office of the Attorney General;
National Association of Attorneys General; National Consumer Law
Center; National Council of La Raza; New York City Department of
Consumer Affairs; Office of the Minnesota Attorney General; Ohio
Attorney General; and Sargent Shriver National Center on Poverty Law.
Mr. Leibowitz. And that's comforting to us because you
know, you want to be--you want to make sure that you bring
stakeholders along and keep them company as we do it.
Senator Dorgan. It's probably important to say there are
some legitimate people.
Mr. Leibowitz. Sure.
Senator Dorgan. And interests that are doing good work for
some vulnerable folks out there.
Mr. Leibowitz. Oh, of course.
Senator Dorgan. There are a lot of people that are preying
on vulnerable folks and end up fleecing them. And so let me
just say Senator Rockefeller, as you know, has had this
committee investigating deceptive online charges and so on. I
really appreciate what the Chairman has done.
He's hired some folks that have the capability. Honest
investigations. And I think that's very, very important. And as
we look at E-commerce as a growing area for potential consumer
harm and some of that exists. The question for us is what tools
does the FTC need to be able to combat online fraud?
What I would like you to do if you would, would be submit
to this committee the kinds of tools you think are necessary.
We'll determine what we think we can provide.
Mr. Leibowitz. Of course.
[The information referred to follows:]
Since the emergence of the Internet as a channel of commerce, the
Commission has conducted a vigorous and aggressive law enforcement
program against online scams. The Commission shares your concern about
the abundant and novel opportunities E-commerce presents for fraud. The
Commission has targeted a broad spectrum of bad actors that use the
Internet to victimize consumers. It has brought scores of cases against
Internet scams, including on-line pyramid schemes, bogus ``government
grant'' schemes, employment scams, and rogue Internet service providers
whose primary activity was to provide an Internet portal for overseas
fraud operators, pornographers, and identity thieves. Using both
Section 5 and the CAN-SPAM Act, the FTC has pursued numerous deceptive
spammers. This developing sector of the Nation's economy remains a high
priority for the Commission in its enforcement and consumer and
business education efforts.
The following tools would assist in fighting online fraud:
APA Rulemaking: Because the Commission may not use the
ordinary Administrative Procedures Act (``APA'') notice-and-
comment rulemaking procedures that most of our sister agencies
use, the Commission must do one of two things to promulgate a
rule: either obtain from Congress a specific grant of APA
rulemaking authority for a particular issue or use the
cumbersome and time-consuming Magnuson-Moss procedures. In my
view, either option is an inefficient and uncertain process for
addressing serious problems in a timely fashion, especially
those that can arise from emerging technologies or new
marketing practices. The Commission needs APA-style rulemaking
authority to be able to issue rules, when needed, in a
reasonable time and with a reasonable expenditure of resources.
Civil Penalty Authority: The FTC currently lacks the
authority to seek civil penalties for violations of the FTC Act
itself. Although the Commission currently may seek penalties--
through DOJ--in certain specified situations (e.g., for a
defendant's violations of an existing enforcement order or of
certain FTC rules), the ability to seek civil penalties for
knowing violations of the FTC Act itself would give the agency
an important tool for deterring unfair or deceptive practices.
This is especially important for cases in which obtaining
equitable remedies such as consumer restitution, rescission, or
disgorgement is impossible or impractical--because, for
example, victims cannot be identified or consumer injury and
wrongful profits cannot be quantified.
Aiding and Abetting: The absence, outside of the
telemarketing context, of explicit authority to hold liable
those who aid and abet law violators hampers the Commission's
ability to take action against entities that do not themselves
deceive consumers, but supply knowing and substantial support
to those who do. In many cases, the aiders and abettors, by
providing essential services that the primary fraudsters could
not efficiently provide themselves, allow frauds to occur on a
much broader scale than would otherwise be possible. Online
scams often have multiple players playing discrete roles--e.g.,
advertisers, affiliate networks, affiliates, and search
consultants--most of whom have no direct contact or dealings
with the victims of the scam, but without whom the fraud could
not happen. Aiding and abetting authority would enable the
Commission to reach key players in these schemes who provide
knowing and substantial assistance.
Independent Litigating Authority for Civil Penalty Actions:
It is anomalous that while the FTC is authorized to try its own
cases for a wide swath of remedies, including consumer redress
and disgorgement, it may not do so when seeking penalties.
Instead, the agency must refer cases to DOJ, wait up to 45 days
for DOJ to determine whether to take a case, and allow DOJ
staff time to learn the case and prepare. This requirement thus
entails duplication of efforts and slower enforcement. In
addition, it results at times in the agency having to choose
between obtaining early injunctive relief (for example, to halt
the violative practices and preserve assets for eventual
redress) or seeking penalties. Having the authority to litigate
civil penalty actions independently would allow cases to be
brought more quickly and effectively, without the disadvantages
occasioned by the referral obligation.
Senator Dorgan. But I think all of us on this committee
want the Federal Trade Commission to be active and aggressive
on behalf of consumers. We're not interested in smothering
people with regulations and all these. But we're interested in
finding the bad people out there and making sure they are
exposed.
You mentioned a moment ago, I think, was it a $28 million
settlement?
Mr. Leibowitz. Yes.
Senator Dorgan. And tell me the company involved?
Mr. Leibowitz. The company involved was EMC. It's a
subsidiary of Bear Stearns. Although in fairness to Bear
Stearns, it bought the company, I think, after our
investigation started.
We alleged that they hid fees to consumers and late fees
and other fees. And consumers didn't know about paying them.
And then they were hit with multiple fees for not paying the
fees they hadn't seen.
We got a settlement for, I think 28,000 consumers. Now they
each got about $350. But, you know, for a middle class family,
that's meaningful.
And again, you know, we believed, the company may still
dispute this. I don't know if they do. But we believe they were
ripped off. Because there were these embedded fees no one knew
about and then they were compounded. And that's exactly what
you don't want businesses to do.
Senator Dorgan. Let me just say that I don't know Bear
Stearns. I mean, I know the name of the company and the
reputation, but if Bear Stearns buys a company I assume they do
due diligence in who they're buying.
Mr. Leibowitz. Sure.
Senator Dorgan. And what the business practices are. And
that's exactly what Senator Begich was talking about. I think
people ought to have someplace where they can go and see who
has been doing what. Who are the good actors and who are the
bad actors out there?
So, I encourage you to look into the recommendation and
suggestion by Senator Begich.
Mr. Leibowitz. We'll do that.
Senator Dorgan. I'm going to have to go vote. We're going
to--the Committee will be standing in recess. This vote will be
about ending now and the second vote will occur immediately.
So I think within 20 minutes the Committee will reconvene.
The Committee is now in recess.
[Recess.]
The Chairman [presiding]. I apologize for the delay. There
were two votes concerning confirmation. And I'll say no more.
Let me ask you about your authority over financial products
and services. In these very bad times it's obviously crucial
that we're all doing everything we can to protect consumers who
are struggling financially. It's particularly important that
the FTC continue with aggressively enforcing laws within its
jurisdiction to protect consumers.
I mentioned within its jurisdiction part. I want you to
explain that as you now see it. Since you became Chairman how
has the FTC increased its enforcement activities, if you have,
if you are able to? If there are others who are competing to
try and take it from you? I want to know that and in the area,
particularly, of financial practices and services.
And also what else has the Commission done to make sure
that consumers are protected during this economic downturn and
beyond? In a sense what I really want you to talk about is what
you want to do, what you can do, what you would like to do that
you can't do, what you'd like to do that maybe you could do?
Mr. Leibowitz. Right. And what we're doing now that we
don't want to be taken away from us.
The Chairman. That could be part of the question.
Mr. Leibowitz. So let me just talk. I'll talk about each of
those.
So first, in terms of helping consumers who are victims of
predatory financial instruments, we had been pretty good, I
think, over the last few years about focusing on this. But,
consumers are suffering, as we all know. And you know, if
you're a victim of the economic downturn, we want to ensure
that you're not also the victim of some scammer.
So we have done--we've ratcheted up the level of activity
in this area. We dedicated more attorneys. We've brought in the
last, I think 10 months alone, about 40 cases involving 200
defendants.
And then we partner with state attorneys general which is
critical because we're all under resourced. They are. We are.
But when you work together you can be more effective. And you
can also get the word out.
So you do a press conference in Los Angeles--some of the
worst malefactors in this area are actually based in Orange
County. And you know, it's alerting consumers. And that's part
of what we want to do.
In terms of--and so we're going to keep on making this a
major, major focus because predators, con artists, they go
where the money is, right? I mean, the money now is on things
like mortgage modification scams and credit card settlement
scams. And so it's really important that we continue activity
in this area.
To make us more effective, we believe that things like APA
rulemaking authority which you gave us for this specific
purpose, but which we could use more broadly.
The Chairman. How?
Mr. Leibowitz. Judiciously. How? Well, I would say this.
If we had APA rulemaking authority 2 years ago we probably
would have, I believe, hindsight is always 20/20. But I believe
we would have done a mortgage foreclosure rescue scam rule,
like we've done now, sooner. And I think that would have been
helpful to consumers.
And then it just gives us the agility when the next
problem----
The Chairman. Right.
Mr. Leibowitz. --for consumers comes up to move quickly.
The Chairman. Right. And let me just put pressure on this
point.
Mr. Leibowitz. Definitely.
The Chairman. Because you're underfunded. That's always
going to be. When I said my opening statement that you'd
brought 100 cases I was saying to myself as I was saying that,
is that a lot of cases or is that very few cases?
And so what I want to know is when you do work with an
attorney general in Orange County or wherever, or where you
enter, make your presence felt, it can either be known to a
discreet audience which are those parties which are affected.
Mr. Leibowitz. Right.
The Chairman. And those who were working on it on both
sides or it can have a larger effect. And what I want, of
course, is to have a larger effect. But I don't know if that
works in the real world. And I'm not a lawyer.
Mr. Leibowitz. Well, I mean, here's how it does. And this
is why rulemaking can be a critical tool in our arsenal.
Because if you make it clear that here is the standard and you
cannot fall below it, then I think a lot of companies that--and
most companies are legitimate. But a lot of companies in the
areas where we're seeing rip- offs of consumers will say, ok,
we're not going to go below the standards that the FTC set. And
they certainly won't feel like they're being dragged down by
their competitors who are engaging in clearly unfair and
deceptive acts or practices.
The other thing is when you do a rule oftentimes our rules,
and including the proposed ban on advanced fees, also has
provisions that require clear disclosure. Now that's an area
you've looked at in the negative option context, right, where
consumers just don't know that these fees are embedded in their
credit card bills. And so if you can force things like
disclosure, you have a much wider effect because you educate
consumers at the point of sale.
The Chairman. But you can't make writing larger if it's
literally small print.
Mr. Leibowitz. Well, I would say if we pass a rule that
says your disclosure has to be, as we--your disclosure has to
be this large in this font. It can't be in a smaller font, a
minute font compared to what your advertising is or your teaser
rate of 1 percent mortgage for 15 years which we know is
virtually, almost mathematically impossible. Yes, we can tell
them you can't do that.
And then if we see someone doing that, it's very easy to go
to court to stop them. Assuming we can find them which usually
we can. And so that's the kind of thing that our staff will
consider doing.
And then the other thing, of course, is we work with the
stakeholders here, right? We work with industry to try to craft
rules that aren't too burdensome on companies, but also protect
consumers. And so rulemaking can be very, very helpful.
The other thing I would say, and again, this is a--this was
Caspar Weinberger's idea when he was the FTC Chairman. But I
think it's a great one, is to have fining authority for
violations. If we want to have real deterrent effect and if all
we can do is disgorge profits then a company gets two shots,
two bites at the apple.
So, if we can say we're not only, to those companies that
have money, we're not only going to get disgorgement for
consumers, we're also going to ask for a fine from the court. I
think that that gives us better leverage to protect consumers.
And it's also a potential sanction that businesses will be
aware of before they engage in questionable behavior.
The Chairman. So that Senator Wicker, who is Ranking, can
both make a statement if he wants and ask questions, I want to
finish on this particular point because we're on it. And that's
the so called rulemaking or reforms. There are proposals and at
least--to make four significant changes in your act.
One, it's rulemaking under the Administration--no, one
there's a proposal to change the FTC's rulemaking authority to
make it easier for the FTC to adopt rules prohibiting unfair,
deceptive acts or practices. Do you think that reform is
necessary? If so, how will it help consumers?
Mr. Leibowitz. Yes, I think it will be very, very helpful.
I think----
The Chairman. Tell me why it will help and why it will help
what you have.
Mr. Leibowitz. It will help because under the Magnuson-Moss
Act it sometimes takes us 8 to 10 years to do a rule.
The Chairman. Ah ha.
Mr. Leibowitz. By the time, you know, you fit--if it's a
contested rule and most of--many rules are contested by one
entity or another or a group. And so it would be very helpful
to be able to do the rules in a year and a half. Again, it's
notice and comment rulemaking.
If you look at the mortgage rules that you and Senator
Dorgan secured for us, we're doing a very deliberate, thorough
job. We're bringing in stakeholders and so it's not willy-nilly
overnight that we change the rule. We really listen to people.
It takes a while. But you don't want rules to take eight to
10 years. That's a glacial amount of time. And in the meanwhile
bad guys might be ripping off consumers. So that's why APA
rulemaking would be very helpful.
The Chairman. Alright. Second, the Administration has
proposed giving the FTC the authority to seek civil penalties
for violations of the FTC Act, its prohibition against unfair
and deceptive acts or practices. You don't have that now? How
would that change the effect?
Mr. Leibowitz. We have it under a few specific statutes
like CAN-SPAM, Children's Online Privacy Protection Act,
telemarketing sales or also Do Not Call. What we'd like it for
or a majority of the Commission would like it for, is to be
able to have a strong deterrent for violations of our bread and
butter statute which is a prohibition on unfair or deceptive
acts or practices. And the reason it will be helpful, speaking
for myself and for a majority of the Commission, the reason it
will be helpful is because sometimes you're not deterred if
there's not a penalty.
And again, sometimes we're really bringing fraud cases that
could be brought criminally. If there's not a penalty, there's
not a strong enough deterrent. And so we want that stronger
deterrent.
Again, Caspar Weinberger was the original author of this
proposal. He testified before this Committee in the early
1970s. It came out of this Committee.
The Chairman. These are all on the House bill, I think.
Mr. Leibowitz. What?
The Chairman. These are all in the House bill.
Mr. Leibowitz. And these are in the House bill and it has
passed the House. That's exactly right.
The Chairman. OK, third and Senator Wicker, I'm trying to
hurry here. Currently you have to refer civil penalty cases to
the Department of Justice.
Mr. Leibowitz. Right.
The Chairman. Which I generally think of as this giant mall
from which you will emerge or not emerge ten or 15 years from
now. No, you don't have to comment on that. There is a proposal
to give the FTC independent authority to litigate civil penalty
cases. Do you think this reform is necessary?
Mr. Leibowitz. Oh, I think this is an absolutely critical
reform. I don't believe there are many objections to it. But
right now the Justice Department, it doesn't take ten or 15
years, it maybe takes a few months to ramp up to speed.
But if we're going after someone who is say, violating the
Do Not Call rule, which is one of those rare instances where we
can get fining--where we have fining authority. But there's
also ongoing harm because this malefactor is calling people up
all the time using predictive dialers, calling tens of
thousands of people up a day. We have a choice right now. We
can either go to court and shut them down very quickly,
sometimes with a temporary restraining order or we can give it
to the Justice Department and wait 6 weeks or 3 months or
longer to have them take the case.
Now the FCC already--so we should be able to do both. The
FCC has this authority. The CFTC has this authority.
I don't believe anyone opposes it. I think in the past the
Justice Department might have. I don't believe they oppose it
now. So we're hoping, I think, that there will be unanimity to
move forward with independent litigating authority.
The Chairman. And that too is in the House bill.
Mr. Leibowitz. And that too is in the House bill, that's
correct. It passed the House.
The Chairman. And that will--actually those are, I think I
skipped one.
Mr. Leibowitz. You might have--it might have been the
aiding and abetting.
The Chairman. Yes, it is. To give you the authority to
bring enforcement actions against entities for aiding and
abetting, others who are engaged in unfair and deceptive
practices, explain the need for that. That's also in the House
bill.
Mr. Leibowitz. And that's also in the House bill. And
again, this one has stirred up some small amount of controversy
or push back. I sometimes think that the push back comes from
the Washington people rather than the companies themselves, but
the folks in DC who are in the business of raising concerns
about issues here.
First of all, we already have this authority in the
telemarketing sales rule. So if someone aids and abets a Do Not
Call violation, we can go after those folks. We used to have
this authority for everything else up until the 1997 decision
called Denver Bank. And then Congress restored this authority
for the SEC but not for the FTC.
And the reason we want it is this. A lot of times there's a
malefactor, someone who is a bad actor, who is ripping off
consumers. But someone like a credit card processor, not a
credit card company, but a credit card processor is
facilitating it because consumers are charging back 40 percent
or 50 percent or more of all the charges. And the credit card
processor which makes money on each processing, doesn't do
anything about it.
Now if we have aiding and abetting authority, that's the
kind of instance in which we would use it. And there are plenty
of good credit card processors, but we've certainly seen some
bad apples.
The Chairman. I apologize to my colleagues, but it is
interesting the way in certain parts of your jurisdiction you
have authorities and in certain parts you don't have
authorities and that's all kind of disturbing to me as I try to
learn more about it.
I call now on Senator Wicker.
STATEMENT OF HON. ROGER F. WICKER,
U.S. SENATOR FROM MISSISSIPPI
Senator Wicker. Well thank you very much, Mr. Leibowitz and
Mr. Chairman.
Well let me ask about the litigation authority. As I
understand it there are two things we're talking about.
One is going in and getting an immediate injunctive relief,
a TRO.
Mr. Leibowitz. Yes.
Senator Wicker. And you could do that now.
Mr. Leibowitz. We can do that now.
Senator Wicker. And then on the civil penalties and I think
you mentioned for example, the Do Not Call rule.
Mr. Leibowitz. Right.
Senator Wicker. As an example. You would like to have
independent authority to go in and sue for civil penalties
without consulting the Department of Justice.
Mr. Leibowitz. Right, just as the SEC does.
Senator Wicker. OK. But now the Chairman was concerned that
the Department of Justice would be this black hole where it
would be lost forever. In your testimony you said, that's not
true. It's a matter of 6 weeks or so.
Mr. Leibowitz. Well it could be a matter of 6 weeks. It
could be a matter of a little bit longer. But the point is and
I'm not saying that they don't do a very good job in their
Office of Consumer Litigation to try to move our cases.
But having said that, if there's ongoing harm and a company
who is flagrantly violating the law, we believe, and this is,
the Commission is unanimous on this, we believe we ought to be
able to go to court as quickly as we possibly can for a TRO.
And then later try to get fines after we litigate the case or
settle the case because fines, as you know, are a way in which
you can effectively deter people from engaging in law
violations.
Senator Wicker. OK. Well it seems to me that,
realistically, you are able to do that now. And I thought it
was a 45 day window after which DO----
Mr. Leibowitz. That's a great question.
Senator Wicker. OK. Well, let's check on that and take that
for the record because I could be corrected also.
But it was my understanding that in order for you to pursue
civil damages----
Mr. Leibowitz. Right.
Senator Wicker. --that there was merely a 45 day window
after which if DOJ had not acted----
Mr. Leibowitz. Right.
Senator Wicker. --the FTC could go ahead.
Mr. Leibowitz. So that's a great question. And some of this
also relates to some of the iterations or versions of the
Consumer Financial Protection Act. So there's a 45 day window
for them to decide whether to take the case.
Senator Wicker. Right.
Mr. Leibowitz. They invariably do. I think I can count one
exception in my 5 years on the Commission. They invariably take
the case, but they don't decide for 45 days. Then the process
moves forward.
We also, almost invariably, once they take the case, we
deploy, we send an FTC person over to the Department of Justice
to help them litigate the case because, of course, we know the
case. We did the investigation. We've been looking at it for a
long time. So it's terribly inefficient.
And one of the things that I think the House corrected in
the CFPA legislation was in the original version as introduced
it required us to, I think, give the proposed new Consumer
Financial Protection Agency 120 days in some circumstances, but
I think 120 days advance notice and let them wait.
Senator Wicker. OK.
Mr. Leibowitz. So that was a problem too for us and the
House corrected that.
Senator Wicker. OK. I'm still not sure that it's something
that egregious that needed to be corrected. But let me get back
to the main point.
Mr. Leibowitz. Sure.
Senator Wicker. And I hope the Chairman will indulge me for
a moment or two.
The FTC has broad jurisdiction over the economy. And this
Magnuson-Moss Act was enacted in an effort to sort of reign in
FTC which at the time the Congress felt had become, some people
would say, a fourth branch of government. So I will tell you,
quite frankly from the outset, I'm concerned about the House
passed bill.
And with regard to the rulemaking you want under the
Administrative Procedures Act, what that does is take you out
from the requirement of proof of substantial evidence in
support of the Commission's action. Is that correct?
Mr. Leibowitz. Let me get back to you on that technical
definition.
[The information referred to follows:]
Should we be fortunate enough to obtain relief from Magnuson Moss's
burdensome procedures, the Commission's fact finding in rulemaking must
remain subject to thorough judicial review, and I would be happy to
discuss with members of the Committee the appropriate standard of
review for FTC rules.
Under the APA, a court can invalidate a rule if it finds that it is
arbitrary and capricious. Under Magnuson-Moss, a court can invalidate a
rule if it finds that it is not supported by substantial evidence. Some
courts have interpreted the standards for review of APA rulemaking and
Magnuson-Moss rulemaking similarly. In Consumers Union of U.S. v. FTC,
801 F.2d 417, 422 (D.C. Cir. 1986), the court (opinion by then-Judge
Scalia) held that the FTC Act's ``substantial evidence'' standard for
judicial review of a Magnuson-Moss rule does not call for a more
intensive review than the ``arbitrary and capricious'' standard for
notice-and-comment rules under the APA, but rather requires the same
degree of evidentiary support; see also, e.g., Eagle Broadcasting
Group, Ltd. v. FCC, 563 F.3d 543, 551 (D.C. Cir. 2009) (explaining that
the ``substantial evidence'' standard for review of ``formal''
rulemaking under the APA--the same language adopted by Magnuson-Moss--
is the same as the ``arbitrary and capricious'' standard for notice-
and-comment rules). Thus, some have posited that if a rule's factual
underpinnings are not supported by substantial evidence, it is
arbitrary.
On the other hand, many who were present at the enactment of the
Magnuson-Moss Act believe the substantial evidence standard should be
higher.
Senator Wicker. OK.
Mr. Leibowitz. I mean you're absolutely right that we have
very broad jurisdiction. I mean, so does the Fed, so does the
FCC and they're not under Magnuson-Moss. But, and my
understanding--and again, when we do a Magnuson-Moss rulemaking
it can take an awful long amount of--it can take a terribly
long amount of time to do a rulemaking. As a result we don't do
a lot of rulemakings.
And when we've done APA rulemaking and you've given us APA
rulemaking for certain things like mortgages, as you did in the
Omnibus bill, we're pretty thoughtful. And we're pretty
deliberative in the way we move forward.
So I certainly believe reasonable people can disagree when
the FTC was created about this issue, and Tim Muris, a terrific
Chairman, first Chairman under President Bush and Bill Kovacic,
who is one of my colleagues on the Commission now, certainly
take the view that you do that because we have broad
jurisdiction we should have limited remedies. But I also
think----
Senator Wicker. Under the APA the burden would simply be
that you not be arbitrary and capricious, that would be the
burden. And that concerns me in an agency that is potentially
as powerful as the FTC.
I'm intruding on my time. And we have another questioner.
But let me ask you this.
Mr. Leibowitz. Sure.
Senator Wicker. This will be my final question, Mr.
Chairman. This eight- to ten-year process that it can take to
do a rule, I think really what you're saying is you don't even
try now to do rules.
Mr. Leibowitz. Sometimes we will.
Senator Wicker. Very rarely.
Mr. Leibowitz. But rarely.
Senator Wicker. I guess there's testimony and comment to
analyze, and that takes staff time. What if you put more staff
on a rule and still had to show to the American people and to
Congress that there's substantial evidence to justify this
rule? And what if we gave you a little more personnel to work
on that? Wouldn't that speed things along also? And still be
satisfied about this burden?
Mr. Leibowitz. We would certainly take more personnel and
you know, in 1979 when the population of the United States was
225 million we had 1,800 employees, maybe a little bit more.
Now we have just about 1,100 and the population is over 300
million. And we've been--because I think we have been a
consistently effective agency, you've made us the lead
enforcement agency on COPPA and CAN-SPAM.
So I do worry that--and I appreciate that the quality of
our work is being strained by the quantity of demands placed
upon us. And I think more personnel would help. But I also
think it's partly the amount of personnel who are doing rules.
It's also partly that under the Magnuson-Moss Act sometimes if
you're in opposition to Magnuson-Moss rule you can call for a
time out. You can call for an independent referee.
Now, yes, Congress, I think at that time when Magnuson-Moss
was passed wanted to design a cumbersome system. But I also
think you ask us to do a lot more now. And I don't think
anyone, even the Wall Street Journal which had an editorial
saying they didn't want to give us most of this authority. They
didn't say that about independent litigating authority, by the
way.
I think they believe that we're a pretty responsible
agency. We're a very bipartisan agency. I'm the only Democrat
at the FTC now. We're hoping to get two more Commissioners
soon.
But we're pretty thorough. We're pretty deliberative. And I
just think for the things that you want us to do in terms of
protecting consumers, some relief from Magnuson-Moss and
something like APA rulemaking would be very, very helpful.
Senator Wicker. On the record, sir, would you supply us
with examples of rules that took too long to make it?
Mr. Leibowitz. Yes, I can.
Senator Wicker. And give us some historic data on the staff
devoted to the rulemaking effort.
Mr. Leibowitz. Yes, be glad to do that. Give me a few days
to get that information back to you. I think that would--I'd be
happy to do that.
[The information referred to follows:]
Three examples of Magnuson-Moss rules that took too long are the
Credit Practices Rule and the Used Car Rules, each of which took almost
9 years, and the Funeral Services Rule, which took more than 7 years.
Other rulemakings that did not ultimately result in rules but
nonetheless went on for many years include: Mobile Homes (almost 12
years); Hearing Aids (over 10 years); Health Spas (over 10 years);
Protein Supplements (almost 9 years); OTC Antacids (over 8\1/2\ years);
and Food Advertising (over 8 years).
With respect to the number of staff devoted to Magnuson-Moss
rulemakings, all of the rulemakings using those procedures to create
new rules were conducted more than 25 years ago.\1\ Also, all of the
rules were initiated prior to the 1980 amendment to the FTC Act
requiring an advanced notice of proposed rulemaking and a determination
that the practice addressed is prevalent. Staff has gleaned from some
of the post-hearing staff reports illustrative staffing information:
---------------------------------------------------------------------------
\1\ Eight Magnuson-Moss rules have been amended, also using
Magnuson-Moss procedures. Building on existing rules, amendment
proceedings involved fewer issues than did the original promulgations,
and they were typically more lightly staffed. In these eight instances,
interested parties generally did not demand hearings to deliver their
oral presentations--although most, if not all, amendment proceedings
involved one or more public workshops to develop a full record.
Mobile Homes: At least 13 staff members worked on the post-
---------------------------------------------------------------------------
hearing staff report.
Used Cars: More than 14 staff members worked on the post-
hearing staff report.
Funeral Industry: At least 16 staff members worked on the
post-hearing staff report.
These numbers do not include the Presiding Officer (who was
obligated to produce a separate report) or his staff, Bureau of
Consumer Protection management reviewers, Office of General Counsel
advisors, or the Commissioners' offices. Staff familiar with the
rulemaking proceedings inform me that these staffing levels were
typical.
The Chairman. Thank you, Senator. And now former
prosecutor, Senator Klobuchar.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you very much.
Thank you, Commissioner Leibowitz for your leadership as
Chair. We've worked together on several things. I really
appreciated the way the FTC pursued the Ovation case in
Minnesota when I brought it to your attention at a hearing
about the price jacking up with the drug how quickly the FTC
responded and actually brought a lawsuit that's pending right
now in Minnesota as far as I know. So thank you for that work.
The subject I wanted to follow up a little bit with what
Senator Wicker was talking about. And I would also appreciate
those specific examples.
Mr. Leibowitz. I'll send them back to the Committee.
Senator Klobuchar. OK, very good. And is there something in
between the APA rulemaking and Magnuson-Moss that would be
helpful to you?
Mr. Leibowitz. I am sure there is. And we can think about
that. I believe there are in some areas, types of rulemaking
where you bring the stakeholders together. And I'm sure there
is something between the sort of draconian, medieval Magnuson-
Moss Act and the thorough----
Senator Klobuchar. Do you want to comment more on that?
Mr. Leibowitz. No, no, no. I just--I want to use objective
criteria. I don't want to get too--I don't want to be
subjective about my views on Magnuson-Moss or the Commission's,
the majority of the Commission's views on Magnuson-Moss.
But I'm sure there are ways to modify Magnuson-Moss
rulemaking to make it more useable for the Commission while
ensuring that the rulemaking is thorough. But I'd also say if
you look at the APA rulemakings we've done because you
specifically gave them to us in some instances, we're pretty
thorough in the--when we do it that way as well.
Senator Klobuchar. Very good.
In your testimony you stated that should we decide to
change our current system of consumer financial protection the
FTC's authority and ability to protect consumers should not be
eroded or made unclear. Do you see specific threats on these
fronts from any of the current proposals from Congress?
Mr. Leibowitz. Well I would say that the--and I think that
the Commission believes that the legislation as it passed, the
CFPA, as it passed the House did a very good job in ensuring
that we can still protect consumers. Essentially while it took
away our rulemaking authority for, which is Magnuson-Moss
rulemaking, for financial services, it would leave us with the
authority to bring cases.
And the other area where we were very concerned was the
area--was the notion that we would have to wait, as we have to
do with the Justice Department, 120 days depending on which
duration for the new agency if it's created, to decide whether
to take a case. And of course, if there's ongoing harm like,
you know if there was a bad actor engaging in financial fraud
but doing it by robo calls, we wouldn't want to have to wait
that long. I think that the version as passed by the House as
moved has made a lot of progress in minimizing those concerns,
from the Commission's perspective.
Senator Klobuchar. Thank you.
As a former prosecutor, as Senator Rockefeller mentioned, I
understand the benefit of being able to reach not only the
direct perpetrators, but also those bad actors that support and
enable others to violate the law. I recognize that absent
direct statutory authority to go after these aiders and
abettors, the FTC has developed alternative assistance legal
theories to reach secondary actors. Can you discuss the success
and shortcomings of these alternatives theories and the first
question? Second, how would specific statutory authority
improve the FTC's law enforcement in this area?
Mr. Leibowitz. Well, I would say the specific statutes or
let me answer your second question first. The specific
statutory authority makes it clear that we can do this. And
really all it does is restore the authority that we had before
the Denver Bank case. And make it consistent with the authority
we have under the Telemarketing Sales Rule. Senator Rockefeller
mentioned the crazy quilt patchwork of laws that we're under.
And so we have tried alternative theories. And sometimes
they are successful. I think we had a payment processing case
in which we won in district court and was appealled last year.
But there are people, there are entities that are aiding
and abetting fraud or aiding and abetting unfair and deceptive
acts or practices. And we protect a bunch of consumers by going
after those folks. And I don't understand why there has been
some amount of opposition to this because, you know, we're in
the business of protecting consumers. And we're in the business
of trying to bring actions against people who are ripping off
Americans.
And so I think clarifying the standard would be much better
and much more useful to us and much more useful to consumers
basically.
Senator Klobuchar. Thank you.
The Chairman. Go ahead.
Senator Klobuchar. I have to go back to another hearing.
But I want to thank you for letting me ask questions.
The Chairman. Of course because of your interest.
Senator Klobuchar. Thank you. I'll await the answers about
the specific examples instead of going----
Mr. Leibowitz. That would be great. And we'll also give you
specific examples on alternative theories that we've used.
[The information referred to follows:]
There are instances in which the Commission can allege that those
who assist scammers have violated section 5 of the FTC Act. For
example, the Commission is able to take action against those who
knowingly assist telemarketing scammers. In the Telemarketing and
Consumer Fraud and Abuse Prevention Act, Congress gave the Commission
explicit aiding and abetting authority with respect to telemarketing.
This authority has proven very useful in prosecuting numerous bad
actors, but it does not allow the Commission to reach those who
knowingly assist scammers defrauding consumers over the Internet or
through the mail or other means that do not involve telemarketing.
In some instances, the facts permit the Commission to allege that
the assistor provided the scammer with the ``means and
instrumentalities'' of the fraud scheme. Under the ``means and
instrumentalities'' theory, a person or entity that places in the hands
of another a means of consummating a fraud has directly violated the
FTC Act. This occurs, for instance, when the assistor provides the
scammer with counterfeit products to be sold as genuine goods. The
means and instrumentalities theory is, however, generally limited to
instances in which the fraud assistor has provided an inherently
deceptive thing that is then used to deceive consumers.
In other instances, the facts permit the Commission to allege that
the assistor engaged in ``unfair'' conduct by assisting the scammer. An
act or practice is ``unfair'' if it is proven to: (1) cause substantial
injury to consumers, (2) that they cannot reasonably avoid themselves,
and (3) is not outweighed by countervailing benefits to consumers or
competition. In a case that is currently on appeal, the Commission
alleged that the defendant's payment processing business made
unauthorized debits to consumers' bank accounts on behalf of a scammer.
While we believe that it is appropriate in this instance, the use of
the Commission's unfairness authority in this fashion does not have the
long jurisprudential history associated with the concept of aiding and
abetting and involves proving the unfairness elements described above
rather than focusing on the assistor's relationship with and knowledge
of the fraudster's activities.
Furthermore, in some instances, facts permit the Commission to
allege that an entity is part of a common enterprise with the scammer.
A common enterprise exists where factors such as commingling of assets,
common ownership, shared locations, and other considerations
demonstrate that apparently independent companies are part of the same
enterprise. It is not necessary or even typical, however, for assistors
to be so closely affiliated with scam perpetrators.
Senator Klobuchar. OK, very good. Thank you.
The Chairman. OK. That's the first time in the history of
the Commerce Committee that a Chairman's ever been turned down
for another question.
[Laughter.]
The Chairman. I was just handed a note. Thank you, Senator
Klobuchar, very much.
I was just handed a note which interests me. It says even
at the height of the FTC's resources/staffing, 1975 to 1985
basically, it still took 10 years to pass consumer protection
rules like the ones on credit practices. Can you explain that
to me because I'm really having a hard time between the sort of
45 days things that he's talking about and what----
Mr. Leibowitz. Alright. We do many things and we try to act
holistically, but think of them as different buckets. When we
want to bring a civil penalty case, this is the 45 days, in
those few instances Children's Online Privacy Protection Act,
Telemarketing Sales Rule, Do Not Call, CAN-SPAM, we must go to
the Justice Department.
The Justice Department then has 45 days to decide whether
to take our case. In most instances they take 45 days. And in
virtually every instance they then take the case. So we have to
wait. There's a lag time.
And even though they do a good job, it's not 10 or 15
years. They do a good job of trying to move forward on our
cases. There's a lag time.
Now when we're confronting ongoing harm to consumers, like
someone who is spamming consumers or someone who is violating
the do not call rule and calling up a bunch of consumers or
making robo calls, we want to be able to do both. And we think
we should because we want to stop ongoing harm. And we want to
try to get fines against folks who are deliberately violating
the law.
Now the ten years for rulemaking is when we have to use
Magnuson-Moss. Magnuson-Moss--so rulemaking is different than
fining. And when we use Magnuson-Moss it sometimes, I'd say two
things.
As Senator Wicker mentioned, sometimes we know it's going
to take so long to do a Magnuson-Moss rule that we just don't
do it. And we had talked a lot about mortgage modification
scams among Commissioners, we had actually brought the Fed in
for two meetings and had two Commission meetings to talk about
what we could do in this area in late 2008, early 2009. And we
knew that we could not do a rulemaking here.
So we just hoped that Congress would do something for us.
Fortunately you and Senator Dorgan did.
When we do do rulemakings and again we've done only a few
Magnuson-Moss rules since I've come to the Commission. And I've
been there 5 years. Mostly they had started before I got there.
It takes a really long time.
And you know, when there's opposition and again, I hate to
sound like a broken record, but when you're doing a tough rule
sometimes there is opposition. Sometimes businesses have
entrenched business practices which may not be beneficial to
consumers. Then, you know, it is just very hard to enact a
rule.
And so, you know, as you pointed out we deal with a kind of
a crazy quilt patchwork of statutory authority. We try to do
the best we can. But as we think through and again not, this is
as we think through how we can be more effective, how we can be
more effective with fewer employees than we had.
One of the ways we can do that, Mr. Chairman, is to have
this expanded authority. And we don't take it lightly. And we,
you know, when we do do this notice and comment APA rulemaking
it's not on a whim. It's not a notice and comment for 15 days
and then we're done.
We do workshops. We meet with stakeholders. We take
submissions. We read the submissions. We incorporate thinking
because we know we're not perfect here. We learn about
industries. And then we do our rulemakings.
And so we are not perfect but we believe we can be more
effective this way. And even, I should say, even one of my
colleagues, Bill Kovacic, the former Chairman, now a
Commissioner, believes that it's appropriate to have APA
rulemaking and civil penalty authority on a case by case basis.
So it's not as if anyone thinks we're going to try to change
the world with this rulemaking.
We're going to be very deliberative. We're going to be very
thoughtful if we're fortunate enough to get it.
The Chairman. Alright. Let me switch to a final set of
questions. In comes the President and he suggests the creation
of something called the Consumer Financial Protection Agency,
CFPA. And that is obviously a good idea. I think it's better to
have two cops on the beat than one.
Mr. Leibowitz. Right.
The Chairman. But it also raises potential conflicts,
misinterpretations of jurisdiction, so to speak. So if the CFPA
is created how do you envision the two of you working together?
And then more than that, the Administration proposal gives
the FTC backstop authority, whatever that means, to enforce
various important consumer protection laws currently enforced
by the FTC including the Truth in Lending Act, the Fair Debt
Collection Practices Act and the Fair Credit Reporting Act.
Does it make sense for the FTC to have something called
backstop enforcement authority for those ``enumerated consumer
laws?'' Why don't you?
Mr. Leibowitz. It's a great question. And I would say----
The Chairman. I don't know what enumerated consumer laws
are. I guess it's a variety.
Mr. Leibowitz. --who would be each of the--it would be
specific laws that we enforce beyond Justice.
The Chairman. But again, picking and choosing.
Mr. Leibowitz. Right.
The Chairman. Here you can, there you can't.
Mr. Leibowitz. So, in some iterations, particularly the
earlier draft proffered by the Administration--and this is in
the context of I support the creation of a Consumer Financial
Protection Agency--I agree with you. It's better to have two
cops on the beat, particularly in a critical area where state
agencies and this agency, are picking and choosing which cases
to bring because we don't have enough--we can't put enough--we
can put a lot of people on, in this area during financial
practices cases but, and predatory financial interest cases,
we'll never have enough.
But we were very concerned about what we would call
boundary issues which is would we have to wait?
Would they take away jurisdiction where we're doing a
pretty good job?
Would the new agency--would we have to wait, as we do with
the Justice Department, you know, a certain amount of time for
them to determine whether they wanted to take a case while
there was ongoing harm?
How do we handle these boundary issues?
I think the way the House and my colleagues--I believe,
agree with this--the way the House passed the Consumer
Financial Protection Agency it allowed us to retain our
jurisdiction for the most part and allowed the new agency to
have overlapping jurisdiction. And the way we would work
through that, I think, is the same way we do with the Justice
Department. We'll pick and choose in the--context, we will take
some cases. They will take other cases. And we would work
through a manner in which it's most efficient.
But I agree with you it's better to have two cops on the
beat. We are hopeful that as the Senate moves forward and under
your leadership and the leadership of this Committee, we can
solve the boundary issues or the enumerated statute issues sort
of consistent with the way the House did.
The Chairman. OK. Well, let me----
Mr. Leibowitz. Sure.
The Chairman. I mean what I really want to say is in the
minds of those that have created this new agency do they trump
you? And let me just before you answer, I want you to answer
that. But some of the CFPA's proposal would require the FTC to
give substantial advance notice.
Mr. Leibowitz. Right.
The Chairman. To the CFPA, before bringing in enforcement
action under its backstop authority, again that word. Other
proposals shorten or eliminate the advanced notice requirement
which I guess is more flexible. Again, I'm confused by sort
of----
Mr. Leibowitz. We believe----
The Chairman. --are you equal partners or are you not?
Mr. Leibowitz. Let me just say I like to think that we will
be equal partners if that agency is created. And I certainly
hope it's created. I like to think that the way the House
resolved this issue is a good template for the way perhaps that
the Senate will and ultimately conference committee.
In that instead of having the FTC giving substantial
advance notice to the new agency, each agency would essentially
let the other agency know under symmetrical terms that we're in
the process of investigating this entity or these companies.
And so we would be talking all the time.
And we wouldn't have an overlap of two agencies going after
the same entity. But we would be co-equals. And I think that's
an important component of the way our agency and really the way
both agencies can most effectively serve consumers.
The Chairman. Well, let me ask it another way. In your
judgment, unbiased, why were they created?
Mr. Leibowitz. Why was?
The Chairman. CFPA.
Mr. Leibowitz. Well I think it was created because there--
you know as we saw the economic downturn. And we saw a lot of
the reasons for it. I think there is a real sense that we want
to make sure it doesn't happen again.
And there is a concern by some, I don't know whether it's
accurate or not, that, particularly with respect to the banking
agencies they weren't doing a good enough job to protect
consumers. In part because the banking agencies care primarily
about making sure the economy is healthy to the extent they
can, safety and soundness of banks. And so consumer protection
was sort of an orphan stepchild in the banking agencies.
And also because on the banking side, you know, there are
several different agencies, banking agencies, the Fed, OCC,
that have a piece of this. And then we have jurisdiction over
banks. And then we have jurisdiction over non-bank financial
instruments.
So I think there's a--it is clear that there is a
balkanization of jurisdiction as the law is now. And so I think
the proposal is done for all the best reasons which is really
to make sure that you, that someone focuses entirely on
consumer protection in the financial sector. And I applaud the
President for his leadership there.
But I do think the way to make it--but I also believe
there's a--what is the adage? If it's not broke, don't fix it.
And so, you know, from our perspective as an agency, I think we
do, not a perfect, but a pretty good job in this area. I think
if we get this expanded authority we'll be able to do even
more.
The President in his 2011 budget gave us a substantial
increase which we will use. And it sounds like Senator Wicker
also wants to give us a substantial increase in personnel which
we will use to bring more cases. And so I think the--in
particularly in the financial services area, but not only in
the financial services area--I think the goal of the House is
to make this new agency effective but keep the FTC as an
effective agency as well.
The Chairman. Yes, because the House gave you the full
enforcement authority under financial products and services.
Mr. Leibowitz. That's correct.
The Chairman. Yes.
Mr. Leibowitz. That's correct.
The Chairman. Well, let's watch this closely. And we will.
It's interesting that, I'm just ruminating here, but how little
people out across the country and up until this year, that
included certainly myself, are aware number one of what is
being done to them in HDTV or just regular TV or in all kinds
of other scams that can be done in so many ways. And it never
really makes the headlines very much.
And so they are innocent, sometimes. We're going to be
dealing shortly with a WellPoint issue which is very, very
interesting, how they sort of always ended up as the vendor
although nobody ever asked that they be the vendor. And yet
then beyond the complexity of being tricked or not being
handled fairly the agencies which are/reside in the Federal
Government maybe in state governments to whatever extent that
they're effective on this, how interstitial they are and how
complicated they are in how the rules of authority and the so
called backstop authority which I'll probably dream about
tonight because it just haunts me.
I have no idea what it means. It sounds to me like it's a
put down. You're saying no. We're equal partners.
Mr. Leibowitz. No, no, no. Let me clarify that.
The Chairman. Yes.
Mr. Leibowitz. I think the backstop authority was
problematic. I think it was modified as the House passed it.
Well, hopefully you won't have to dream about backstop
authority because the way the legislation comes out we'll have
co-equal authority.
The Chairman. But I won't know that.
Mr. Leibowitz. It won't become a term of our--what?
The Chairman. I won't know that tonight so I may.
Mr. Leibowitz. You won't know that tonight, that's right.
The Chairman. In any event it's incredibly important what
you do. And this whole subject, for those of us who are non-
lawyers, and I think for all should come much more to the front
because as we're now in an era in this country where we're
really concentrating on huge issues like health care, the
economy, jobs programs, financial restructuring, all the rest
of it. And so there's a real chance for these people to keep
operating in the bliss of darkness because all the space is
being taken up by so called large national problems which
indeed they are. But it makes agencies like yours so much more
important.
So with that I thank you very much.
Mr. Leibowitz. Thank you.
The Chairman. I apologize for the various delays. And I
hope we can get your two colleagues.
Mr. Leibowitz. Thank you so much, Mr. Chairman.
The Chairman. Done. Thank you. Hearing is adjourned.
[Whereupon, at 3:57 p.m. the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Kay Bailey Hutchison,
U.S. Senator from Texas
Thank you for holding today's hearing. The Federal Trade Commission
(FTC) is an important agency charged with protecting consumers from
unfair and deceptive trade practices.
The actions of the FTC have become even more critical during this
economic downturn. Too many vulnerable consumers have been preyed upon
by entities seeking to profit from fraudulent activities masquerading
as offers to assist them with debt and credit issues.
The FTC has worked to provide consumer education and to use its
enforcement authority to compel those engaged in fraud to halt their
activity. I commend Chairman Leibowitz and his fellow commissioners for
their vigilance during these difficult times.
I do appreciate that Chairman Leibowitz would like for Congress to
provide the FTC with expanded authority in a number of areas including
streamlined rulemaking authority and the ability to take action against
individuals and businesses for aiding and abetting fraud and deceptive
practices.
However, I believe we should proceed with extreme caution to ensure
we do not provide an agency with an already extremely broad mission
with authority that is more expansive than necessary.
In the past, Congress has granted the agency streamlined rulemaking
authority and other enhanced enforcement tools in very narrow areas to
address particularly pervasive fraud and consumer harm, rather than
enacting these changes across the agency's entire jurisdiction.
Proceeding in this manner has helped to ensure that the FTC, with
its extraordinarily broad jurisdiction, is taking the time to consider
all of the potential ramifications of new regulations in areas where it
may have limited experience or technical capacity while at the same
time allowing the agency to act quickly where there is a need.
That said, I am concerned about other efforts underway, including
the Consumer Financial Protection Agency legislation, that would remove
aspects of the FTC's current authority and give them to a new agency
that does not have the experience that the FTC does.
Creating a new regulator rather than refining the authority of an
experienced consumer protection agency does not make sense to me. I
think it is important that the FTC retain its existing authority and
continue to pursue bad actors in the areas under its jurisdiction.
Mr. Chairman, I look forward to the discussion and debate on FTC
authority that we will have, and to working with you in the months
ahead to provide additional resources for the FTC and sensible changes
to its enforcement and consumer protection authority.
Thank you again for holding this hearing.
______
February 22, 2010
Michael C. Dillon
Manchester, NH
Senator Jay Rockefeller,
Chairman,
Commerce, Science, and Transportation Committee,
Washington, DC.
Re: Financial Services and Products: The Role of the Federal Trade
Commission in Protecting Consumers
Dear Mr. Chairman:
While I fully applaud and support your commitment and that of the
Committee to the strengthening of consumer protection issues, as a
consumer directly affected by the actions of the Federal Trade
Commission and after watching the Committee proceedings and FTC
Chairman Jon Leibowitz's testimony before the Committee on Feb. 4,
2010, I feel it necessary to bring several concerns to your attention.
To assist in placing my views in perspective, I am one of the
original 281,100 victims of Fairbanks Capital Corp. n/k/a Select
Portfolio Servicing Inc. as certified by the Federal Trade Commission
for USA/Curry v. Fairbanks.\1\ I opted out of that action as I felt
that it simply did not provide adequate protection or relief for me. In
2006, I decided to make my situation with Fairbanks/SPS \2\ publicly
known via the Internet and have since heard from many other Fairbanks/
SPS victims who also either opted out, knowingly opted in or never
received notification of the class action settlement. Those who never
received notification of the settlement were automatically opted in to
the settlement by default thereby giving up any and all legal rights to
either defend themselves against or seek restitution for any action
committed against them by Fairbanks/SPS during the proscribed period of
time covered by the settlement agreement.
---------------------------------------------------------------------------
\1\ See http://www.ftc.gov/fairbanks.
\2\ See http://www.getdshirtz.com.
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The Federal Trade Commission protects American ``consumers'' as
opposed to the American ``consumer.'' The number of Fairbanks/SPS
victims that have contacted the FTC both pre- and post USA/Curry v.
Fairbanks settlement literally begging for help to halt potentially
fraudulent foreclosure actions at the hands of the company is, to my
mind, both heartbreaking and staggering. I say this because I had
virtually the same experience that each and every one of them must have
had when I was first starting down the road of looking for assistance
to help stop what a NH Superior Court ruled a fraudulent
foreclosure.\3\ Upon finally arriving on the FTC's doorstep, borrowers,
including myself, were informed that the FTC ``does not take action on
behalf of individual consumers.''
---------------------------------------------------------------------------
\3\ See http://www.getdshirtz.com/orderonthemerits.html.
---------------------------------------------------------------------------
Apparently, judging from information I have obtained through a FOIA
request, the FTC and associated Federal agencies and entities had been
``investigating'' then Fairbanks Capital Corp. beginning in 1999. And
yet, it took another 4 years to bring only civil action against the
mortgage servicer. I note this specifically because it also appears,
again via FOIA obtained information, that a criminal investigation was
quashed as part of the civil settlement. And for those 4 years of
``investigation'' and each year subsequent to the USA/Curry settlement,
homeowners have been losing their homes to allegedly fraudulent
foreclosures initiated by Fairbanks/SPS. This continues to this day,
despite the Federal Trade Commission re-visiting and modifying the
terms of the USA/Curry v. Fairbanks settlement in 2007--at the request
of Fairbanks/SPS.
I strongly suspect that the Federal Trade Commission had in it's
possession at the time of the settlement of USA/Curry, enough evidence,
including testimony of kickbacks, to actually close the corporation
permanently. I also have in my possession a letter from FTC Inspector
General John Seeba in response to an inquiry sent to his office by NH
Senator Jeanne Shaheen on my behalf in which Inspector Seeba states
that ``The settlement negotiated between the FTC and Fairbanks Capital
Corp. was appropriate given the under-capitalization condition of
Fairbanks Capital at the time.'' Other affidavits and declarations
produced as part of the USA/Curry v. Fairbanks litigation appears to
support the Inspector's opinion.
There are several issues regarding this sentiment that have
concerned me for some time. The vast majority of the settlement funds
recovered by the FTC were guaranteed by either Fairbanks then majority
or minority shareholders. The PMI Group guaranteed $35 million of the
settlement funds and Financial Security Assurance another $10 million.
Ignoring for a moment, that for a corporation at one time pulling in at
minimum $100 million per month, a $55 million ``fine'' is nothing more
than the cost of doing business, with guarantees of $45 million from
it's parent corps., Fairbanks only had to relinquish $10 million of
it's own money. And of the entire $55 million, it is still unknown what
amount, if any was covered by any insurance policies that Fairbanks
and/or it's parent corps. may have had in place for just such a
scenario.
Separately, but directly related, approximately 6 months after the
settlement of USA/Curry v. Fairbanks it became publicly known that
Credit Suisse First Boston intended to purchase Fairbanks Capital Corp,
known as of July 1, 2004 as Select Portfolio Servicing Inc., and on
August 12, 2005 it was announced that CSFB agreed to purchase 100
percent of outstanding stock of SPS Holding Corp. for approximately
$144 million. Upon the finalization of that purchase, SPS obtained
upwards of $6 Billion in servicing portfolios. That said, and given the
fact that the FTC modified the terms of the settlement in 2007, the FTC
could have easily sought additional restitution, or at the very least
made specific provisions in the original settlement to recover
additional restitution for the victims should Fairbanks/SPS ``recover''
financially, but this obviously was not done.
To this day, through my website and other Internet venues, I hear
from both old and new victims of Fairbanks/SPS. Some complain of
identical issues that were supposedly settled in 2004, some bring new
issues to my attention including issues surrounding loan modifications.
Through the FOIA information, I have learned that at least one victim
did not receive their 2004 settlement check until sometime in 2008.
Fortunately or unfortunately, the overall settlement amount of the
check was not enough to affect her life in any major manner either
positively or negatively because if the $40 million specifically
available to the roughly 272,000 victims who were not foreclosed upon
was equally distributed across the class each class member would have
received approximately $147.00 each.
I would also like to note, Mr. Chairman, that in 2003, separate
from any FTC action, a West Virginia court felt it necessary to issue a
temporary injunction for the entire state of West Virginia in order to
protect homeowners of the state from the unscrupulous and fraudulent
actions being perpetrated by then Fairbanks Capital Corp. Regardless of
any past civil action, this corporation is still harming the American
consumer to a large degree, the FTC continues to receive complaints
about the corporation, and no further civil or, more appropriately,
criminal action appears to be forthcoming.
Federal Trade Commission Chairman Leibowitz made it a point to
specifically cite FTC v. EMC Mortgage and Bear Stearns \4\ in both his
oral and written testimony. It was apparent, by his oral testimony,
that Chairman Leibowitz was not wholly familiar with the history of EMC
Mortgage as he stated, at roughly 47 minutes into the hearing, that
Bear Stearns purchased EMC Mortgage after the FTC's investigation
began.'' In fact, EMC Mortgage has been a subsidiary of the Bear
Stearns Corporation since 1990 \5\ when David M. Lehman, a senior
managing director of Bear Stearns founded EMC to service loans procured
from the Resolution Trust Corporation and served as EMC's Chief
Executive Officer.\6\ That notwithstanding, the charges brought in FTC
v. EMC/Bear are virtually identical to those brought by the FTC in USA/
Curry v. Fairbanks. FTC. v. EMC/Bear was settled in September 2008,
nearly 4 years after the settlement of USA/Curry v. Fairbanks but, as
apparent by the necessity for the FTC to bring this action, the
mortgage servicing industry did not learn any lessons despite USA/Curry
and its' ``Best Practices'' guidelines being heralded as a supposed
harbinger for the entire servicing industry.
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\4\ See http://www.ftc.gov/opa/2008/09/emc.shtm.
\5\ See http://www.encyclopedia.com/doc/1G1-46692811.html.
\6\ See http://www.linkedin.com/pub/david-m-lehman/10/287/4a.
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Interestingly enough, I had placed a telephone call to the FTC
several days before the EMC settlement was made public simply to
inquire about the terms of the settlement. I received a return call
from Lucy Morris' office informing me the FTC had settled with EMC for
$28 Million. I then asked how many victims the FTC had certified for
the action and was told that they had not yet certified a class but
expected that there would be ``tens of thousands'' of victims involved.
I immediately asked how it was possible to determine a settlement
amount in a class action when it was not yet possible to determine how
many victims a corporation had negatively affected and was simply given
``I don't know.'' for an answer. Eventually, it was disclosed that
86,000 EMC victims were included in that action, although how many
actually opted in to the action I do not know.
Regardless, once again, even assuming that all 86,000 opted in and
restitution was distributed equally across the class, a whopping
$325.58 would have been returned to each of the 86,000. Most of these
victims most likely suffered far greater financial damage than that
restitution amount simply from any credit reporting executed by EMC let
alone any other financial, emotional, physical or psychological damage
almost certainly incurred. I am aware of one former Fairbanks/SPS
victim whose note was supposedly sold to EMC Mortgage after the
homeowner entered into a settlement agreement with Fairbanks/SPS to
halt a fraudulent foreclosure initiated by Fairbanks/SPS. EMC Mortgage
is currently attempting to foreclose on just the mortgage, as opposed
to the note, as EMC cannot produce the original note. EMC is also
contending that Fairbanks/SPS never had the servicing rights to the
victim's note despite the victim having proof of payment to and monthly
statements from Fairbanks/SPS going back approximately 10 years.
Obviously, the necessity for the Federal Trade Commission to bring
a virtually identical case against a second mortgage servicer within 5
years of their ``largest action against a mortgage servicer'' (USA/
Curry) demonstrates that the civil penalties levied against Fairbanks/
SPS in USA/Curry v. Fairbanks simply were not enough of a deterrent for
other mortgage servicers in the industry to abide by state and Federal
laws and the terms of individual mortgage agreements. Which brings me
to yet another point that Chairman Leibowitz chose to make.
At approximately 84 minutes into the hearing, Chairman Leibowitz
stated that ``Sometimes we're bringing fraud cases that could be
brought criminally. If there is not a penalty there is not a strong
enough deterrent.'' I am in possession of evidence that shows that a
criminal investigation into Fairbanks/SPS' actions was being conducted
at least as far back as 2003. Unfortunately, as part of the civil
settlement, the criminal investigation was terminated despite ever
mounting evidence of potentially criminal wrongdoing by the company. In
my own case, I can demonstrate instances of mail and wire fraud,
fraudulent documents being filed at my county registry of deeds and, if
given access to knowledgeable individuals, quite possibly evidence of
tax, insurance and securities fraud among other charges. To date, I
have found no state or Federal agency or authority willing to even
examine my evidence to make a determination of any kind of fraudulent
action despite being awarded a civil injunction in 2005 and contempt
order in 2006 against Fairbanks/SPS quashing a fraudulent foreclosure.
Many Mortgage Servicing Fraud victims and their attorneys have
repeatedly attempted to bring racketeering charges against mortgage
servicers. To the best of my knowledge, none have been successful to
date despite having mountains of evidence showing that each entity
involved in each case had knowledge--or should have had knowledge--of
the actions complained about in virtually every civil action brought. I
have personally spoken and/or communicated with FBI, Secret Service,
USDOJ, U.S. Postal Inspection, the NH Banking Dept., NH Attorney
General, Office of Comptroller of Currency, Office of Thrift
Supervision, SIGTARP, HUD-OIG, FinCen, FCIC, COP and the Federal Trade
Commission. I am currently awaiting a response from the Financial Fraud
Task Force but have been waiting for that response for several months
and am not at all optimistic.
The bottom line, Mr. Chairman, is that there are, unfortunately,
more than enough legitimate foreclosures taking place across the United
States to allow even a single property owner anywhere in the country to
suffer a fraudulent or manufactured foreclosure at the hands of
unscrupulous and greedy mortgage servicers. As if Fairbanks/SPS and EMC
victims have not already been insulted enough, as of today Fairbanks/
SPS has received more than $900 million and EMC Mortgage more than $1.2
Billion through the HAMP program respectively for loan modifications.
As of the January 2010 Making Home Affordable Report,\7\ Fairbanks/SPS
estimates that 62,041 60+ day delinquent borrowers were eligible for at
least a trial loan modification. To date, only 6,761 modifications have
been made permanent by Fairbanks/SPS. According to the same January
report, no accurate figures are available for EMC Mortgage because EMC
is reported as part of J.P Morgan Chase's figures. So how are these two
corporations using nearly $2 Billion of American taxpayer money to help
homeowners? When will any state or Federal law enforcement or
regulatory entity step up and actually protect the American homeowner?
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\7\ See http://www.financialstability.gov/docs/press/January
percent20Report percent20FINAL percent2002 percent2016 percent2010.pdf.
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Mortgage Servicing Fraud is an extremely serious issue that can and
does affect literally anyone with a mortgage, especially if that
mortgage note has been securitized. Mr. Chairman, if you or any members
of this Committee or any of your family members have mortgaged
properties you could fall victim to this fraudulent scheme just as
easily as any other homeowner in the country. Mortgage Servicing Fraud
does not appear to discriminate. Unfortunately, as recent history has
demonstrated, civil penalties simply are not enough of an incentive for
mortgage servicers to operate within the boundaries of state and
Federal law. The Federal Bureau of Investigation's 2008 Mortgage Fraud
Report ``Year In Review'' \8\ projects that for Fiscal Year 2009,
Suspicious Activity Reports (SARs) will exceed 70,000. That is more
than 70,000 reported incidents of mortgage fraud being committed
against loan originators. When is mortgage fraud and mortgage servicing
fraud committed against the borrower going to be taken seriously by
state and Federal agencies?
---------------------------------------------------------------------------
\8\ See http://www.fbi.gov/publications/fraud/
mortgage_fraud08.htm.
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Mr. Chairman, it is well beyond the time for criminal
investigations to begin and charges to be brought against any servicer
refusing to deal with homeowners fairly and properly. You stated, in
your opening for this hearing, ``When I took over this Committee a year
ago, I vowed to make this Committee protect the consumer.'' I would ask
nothing more of you and the Committee than to continue to make good on
that vow. Please take a hard look at Mortgage Servicing Fraud, how it
devastates the American homeowner, the far-reaching effects that it has
on the mortgage, insurance and securities industries, the overall
economy of the United States and what state and Federal law enforcement
regulators and legislators can finally do to protect the American
homeowner, both civilly and criminally, from fraudulent foreclosures
once and for all. Because while the Federal Trade Commission is now
familiar with and can describe what Mortgage Servicing Fraud can
entail, \9\ after settling civil actions against two national mortgage
servicers within 4 years, involving a collective 367,100 victims and
recovering $83 million in restitution, civil actions and the Federal
Trade Commission are obviously not enough of an incentive for mortgage
servicers to operate within the parameters of state and Federal law.
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\9\ See ``Mortgage Servicing: Making Sure Your Payments Count'',
http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea10.shtm.
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I thank you for your time and attention, Mr. Chairman, and I would
be more than happy to answer any questions that you and/or the
Committee may have to the best of my ability. Please do not hesitate to
contact me.
Sincerely,
Michael C. Dillon
Cc: SIG-TARP
Chris Schloesser
Brandy Messer
______
Additional Prepared Statement of Hon. Jon Leibowitz
A number of questions raised by the Committee touch upon the
differences between the Magnuson-Moss and Administrative Procedures Act
(``APA'') rulemaking processes. Before I address the Committee's
specific questions, I would like to provide an overview of those two
processes.
Magnuson-Moss Rulemaking: There are numerous steps that must be
taken to issue a rule under Magnuson-Moss procedures, including the
following:
prepare an Advance Notice of Proposed Rulemaking (``ANPR'')
describing the area of inquiry under consideration, the
objectives the FTC seeks to achieve, and possible regulatory
alternatives under consideration;
submit the ANPR to House and Senate oversight committees;
publish the ANPR in the Federal Register for public comment;
receive public comments on the ANPR for 30 days or longer;
analyze comments received in response to the ANPR;
determine that the acts or practices at issue appear to be
widespread and prevalent;
prepare an initial Notice of Proposed Rulemaking (``NPR'')
that: (a) summarizes and addresses the comments, (b) sets forth
specific proposed rule text, (c) explains the legal and factual
basis for the proposed rule provisions, (d) includes, if
applicable, an initial analysis under the Regulatory
Flexibility Act (``Reg Flex'') based on the anticipated effects
of the rule on small entities and an analysis under the
Paperwork Reduction Act (``PRA'') of any disclosure, reporting,
or recordkeeping requirements the rule would impose, and (e)
sets forth a preliminary Regulatory Analysis of anticipated
effects of the rule, both positive and negative;
submit the NPR to House and Senate oversight committees 30
days before publishing it;
publish the NPR in the Federal Register for public comment;
receive public comments on the NPR, usually for 60 days or
more;
provide an opportunity for a public oral hearing before a
presiding officer,\1\ and if any member of the public requests
such hearing:
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\1\ In some instances, the FTC has conducted public workshops for
interested parties and the public at large to discuss those issues
arising from the written comments about which there are varying or
conflicting points of view. This does not substitute for providing the
hearing opportunity described with its attendant requirements. However,
in some less controversial matters interested persons participating in
such a workshop have not sought the oral hearing available under the
statute.
---------------------------------------------------------------------------
appoint a presiding officer;
designate disputed issues of fact to be addressed at
the hearing;
decide petitions to designate fact issues as disputed
for the hearing;
accord to (potentially numerous) interested persons
rights to examine, rebut, and cross-examine witnesses;
determine which among those persons have similar
interests;
allow each group of persons with similar interests to
choose a representative;
appoint a representative if the group cannot choose
one;
decide appeals from determinations on which persons
have similar interests;
prepare and publish a second NPR addressing all these
issues;
hold the hearings;
make complete transcripts of all testimony and cross-
examinations available to the public;
analyze the record amassed, and prepare a staff report that
summarizes and analyzes the record and sets forth the final
rule text recommended for adoption by the Commission;
if hearings have been held, the Presiding Officer must
prepare a report with his or her summary and analysis of the
record amassed and recommendations as to adoption of final rule
provisions;
publish a Federal Register notice seeking comments on the
staff report and on the Presiding Officer's report, if any;
receive public comments for 60 days or more;
obtain OMB approval for any disclosure, reporting, or
recordkeeping requirement;
prepare a Final Rule and Statement of Basis and Purpose that
sets forth a summary and analysis of the record, sets forth the
text of the recommended final rule, explains that the practices
addressed by the recommended final rule are prevalent, explains
the legal and evidentiary basis for each provision, includes a
Final Regulatory Analysis, includes a Final Reg Flex, if
applicable, and sets forth an effective date;
publish the Final Rule and Statement of Basis and Purpose in
the Federal Register;
submit a notification to Congress pursuant to the Small
Business Regulatory Enforcement Fairness Act (``SBREFA''),
initiating a period during which Congress can invalidate the
rule by legislation.
issue compliance guides if required under SBREFA.\2\
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\2\ SBREFA requires compliance guides for small businesses for
certain rules; the FTC typically issues compliance guides, for both
small and large businesses, for other rules as well.
Magnuson-Moss rulemaking has frequently taken eight or more years.
(See table page 13, infra).
APA Rulemaking: Although APA rulemaking is certainly less laborious
and time-consuming than the cumbersome and complex Magnuson-Moss
procedures, it still mandates a set of rigorous procedures that are
designed to ensure that interested parties have early notice of the
proceeding and ample opportunity to have their views considered, as
well as to create a comprehensive record for judicial review.
Specifically, APA rulemaking must proceed through the following
steps:
The rulemaking agency must prepare and publish in the
Federal Register an NPR that: (a) sets forth either the terms
or substance of the proposed rule or a description of the
subjects and issues involved;'' \3\ (b) explains the legal and
factual basis for the proposed rule provisions; and (c)
includes, if applicable, a Reg Flex analysis based on the
anticipated effects of the rule on small entities, and an
analysis under the PRA of any disclosure, reporting, or
recordkeeping requirements the rule would impose. In addition,
the proposed legislation would retain the current FTC Act
requirement that, for rules under the Act, the NPR also must
set forth a preliminary Regulatory Analysis of anticipated
effects of the rule, both positive and negative.
---------------------------------------------------------------------------
\3\ As a matter of practice, the NPRs issued by the FTC routinely
propose actual rule text.
The agency then must accept public comments on the NPR for a
---------------------------------------------------------------------------
period of 30 days or more.
The agency must also obtain OMB approval of any disclosure,
reporting, or recordkeeping requirements in the rule.
After considering the comments, the agency then must prepare
and publish in the Federal Register a Statement of Basis and
Purpose, setting forth the final rule provisions and ``a
concise general statement of their basis and purpose.'' This
statement provides a summary and analysis of the record; an
explanation of the legal and evidentiary basis for the rule
provisions adopted; a final Reg Flex Analysis, if applicable;
and an effective date for the rule. Also, under the current FTC
Act requirement that would be retained by the proposed
legislation, the Statement of Basis and Purpose of rules must
set forth a final Regulatory Analysis.
Subsequently, the agency submits a notification to Congress
pursuant to the SBREFA, initiating a period during which
Congress can invalidate the rule by legislation. The agency
also commonly issues compliance guides.
The final rule can be challenged in Federal court and will
be set aside if the court determines that the Commission's
findings are ``arbitrary, capricious, an abuse of discretion,
or otherwise not in accordance with law.''
The FTC has often implemented additional procedural safeguards and
opportunities for public input when Congress has given it APA authority
in specific areas.
First, in many instances, the Commission has published an
ANPR, providing even earlier notice of the proceeding and
opportunity to comment. See, e.g., http://www.ftc.gov/opa/2009/
05/decepmortgage.shtm (ANPR issued by the Commission initiating
its mortgage practices rulemakings). Although they increase the
time it takes to promulgate the ultimate rule, ANPRs have
proven useful in situations where the Commission lacks
sufficient experience or knowledge in a particular area to
formulate a proposed rule.
Second, in some cases, the FTC has held public workshops
during the course of the rulemaking proceeding, enriching the
record and providing additional opportunities for those who
might be affected by the rule to express their views, provide
data, and address the assertions of other participants. See,
e.g., http://www.ftc.gov/opa/2009/08/tsrforum.shtm (announcing
public forum to discuss proposed debt relief amendments to the
Commission's Telemarketing Sales Rule.)
Third, to further ensure that its decisions are fully
informed, the Commission often has conducted informal, but
extensive, outreach to affected parties. For example, the FTC
participated in or conducted a number of rulemakings as
required by the FACT Act. For most of these rules, the FTC
(with its sister agencies in some cases) solicited data and
opinions in addition to the formal request for comments, and
often on multiple occasions, from industry groups, legal
practitioners, consumer advocates, and others.
Fourth, the Commission has an ongoing program of reviewing
all of its rules periodically, seeking public comment on them,
and revising or repealing them as appropriate.
In sum, the legal requirements of the APA, enhanced where
appropriate by these additional FTC practices, accomplish the same
goals as the more cumbersome and time consuming Magnuson-Moss
procedures, without those procedures' built-in time lags and myriad
opportunities to slow down a proceeding.
Finally, there have been substantial changes in the regulatory
picture since Congress originally enacted FTC-specific rulemaking
procedures in the Magnuson-Moss Act; these changes would provide
further assurance that FTC rulemaking under the APA would be carefully
tailored to minimize unnecessary burdens, especially on small
businesses. These changes include:
further refinements in the deception and unfairness
standards, including the Commission's policy statement defining
``deceptive'' acts and practices and a statutory definition of
``unfair'' practices added as Section 5(n) of the FTC Act;
the preliminary and final Regulatory Analyses for FTC Act
rules;
the preliminary and, where appropriate, final Reg Flex
analyses;
the public comment and OMB review of relevant provisions
under the PRA; and
the SBREFA provisions for notice to Congress and opportunity
for it to invalidate a rule.
Standard for review: The standard of review for a rule developed
using either procedure is the same. In Consumers Union of U.S. v. FTC,
801 F.2d 417, 422 (D.C. Cir. 1986), the court (opinion by then-Judge
Scalia) held that the FTC Act's ``substantial evidence'' standard for
judicial review of a Magnuson-Moss rule does not call for a more
intensive review than the ``arbitrary and capricious'' standard for
notice-and-comment rules under the APA, but rather requires the same
degree of evidentiary support. That view stands today; see, e.g., Eagle
Broadcasting Group, Ltd. v. FCC, 563 F.3d 543, 551 (D.C. Cir. 2009)
(explaining that the ``substantial evidence'' standard for review of
``formal'' rulemaking under the APA--the same language adopted by
Magnuson-Moss--is the same as the ``arbitrary and capricious'' standard
for notice-and-comment rules). If a rule's factual underpinnings are
not supported by substantial evidence, it is arbitrary.
______
Response to Written Question Submitted by Hon. Byron Dorgan to
Hon. Jon Leibowitz
Question . In the FTC bill I introduced last Congress, we added
501(c)(3) non-profit entities to the FTC's jurisdiction. I know the FTC
issued a proposed rule last summer to address the sale of debt relief
services. I understand that eighty-eight percent of the debt relief
industry, which advertises, markets, sells and enrolls consumers into
Debt Management Plans (DMPs), consists of non-profit providers. These
entities generate millions of dollars in fees from consumers by selling
debt relief services. As we consider FTC Reauthorization in the context
of financial reform, do you believe the FTC Act should be updated so
that the FTC has the appropriate authority to regulate nonprofit
entities, like those that offer debt relief services?
Answer. Currently, the FTC lacks jurisdiction under the FTC Act
over entities that do not carry on business for their own profit or
that of their members. The Commission can, however, reach ``sham'' non-
profits, such as shell non-profit corporations that funnel profits to
their owner, officers, or others or for-profit entities falsely
claiming to be affiliated with charitable organizations. Further, the
Commission has jurisdiction over organizations such as trade
associations that engage in activities that ``provide [ ] substantial
economic benefit to its for-profit members,'' for example, by providing
advice and other arrangements on insurance and business matters or
engaging in lobbying activities. The Commission also has jurisdiction
over non-profits under certain consumer financial statutes, such as the
Truth in Lending Act and the Equal Credit Opportunity Act.
In April 2008, the Commission testified in support of legislation
to extend its jurisdiction to certain non-profit entities, and I
continue to agree with that position. In health care, an area in which
the Commission takes the lead to maintain competition, the agency's
inability to reach conduct of various non-profit entities has prevented
the Commission from stopping anticompetitive conduct of non-profits
engaged in business. Also, many major data security breaches have
involved nonprofit entities outside of the Commission's jurisdiction;
Commission authority in such circumstances may be valuable.
With respect to the debt relief industry, as you note, there are
both for-profit and non-profit entities. Consistent with the FTC's
current jurisdiction, the proposed amendments to the TSR for the debt
relief industry would not cover true non-profits. Should Congress grant
the Commission authority over non-profits, we would certainly want to
consider whether the TSR amendment should cover those entities as well.
______
Response to Written Questions Submitted by Hon. Claire McCaskill to
Hon. Jon Leibowitz
Question 1. One financial product that I have raised repeated
concerns about is the reverse mortgage. As you know, a reverse mortgage
is secured with a senior's home. The lender extends a lump sum or
monthly payment to the borrower (who must be over 62). The loan must be
repaid when the borrower moves or dies, usually from the proceeds of
selling the house. I have concerns about the program because the
Federal Government insures these loans and is on the hook for any
losses. But I am also concerned about the way they are being marketed
and sold to seniors. There are advertisements that imply a government
endorsement of the product for all seniors. Sometimes they imply that a
reverse mortgage is an entitlement like Social Security or Medicare.
Reverse mortgages are expensive, with big upfront fees and interest
costs that can dwarf the amount the borrower receives over the life of
the loan. Despite legislation Congress enacted in 2008 that prevent
reverse mortgage lenders from cross-selling other insurance or
financial products along with reverse mortgages, there are reports that
insurance agents and financial advisors are now selling reverse
mortgages. The FTC has a very helpful page on its website that explains
reverse mortgages to seniors.
Under the 2009 Omnibus bill, the FTC has been granted
Administrative Procedures Act (APA) authority to issue rules regarding
addressing unfair or deceptive acts or practices by mortgage lenders.
Are you planning to address reverse mortgages? What is the FTC doing to
crack down on aggressive marketing practices? How has it pursued
financial advisors who peddle these products inappropriately?
Answer. The FTC shares your concern about possible unfair or
deceptive practices in the promotion and sale of reverse mortgages, and
the risk these practices pose for elderly consumers. Reverse mortgages
are complex financial products with high fees. A reverse mortgage
entails a lien on an elderly consumer's home, frequently the consumer's
most valuable asset. Some elderly consumers may not understand these
complex products and the fees associated with them, or may be deceived
by claims lenders make about them. Accordingly, the FTC has taken a
number of steps to protect consumers from unfair or deceptive reverse
mortgage practices.
First, pursuant to the Omnibus Appropriations Act of 2009, as
clarified by the Credit Card Accountability Responsibility and
Disclosure Act of 2009, the Commission in June 2009 issued an Advance
Notice of Proposed Rulemaking (``ANPR'') focusing on unfair and
deceptive mortgage practices. The ANPR specifically sought comment on
possible unlawful practices in the promotion and sale of reverse
mortgages. The FTC hopes to publish a Notice of Proposed Rulemaking
(``NPR'') in this proceeding in the near future.
Second, the FTC continues to monitor the reverse mortgage market,
as well as consumer complaints received by our Consumer Response
Center. The Commission is prepared to initiate law enforcement actions
in appropriate cases where reverse mortgage lenders are engaged in
unfair or deceptive practices or are violating the Truth-in-Lending
Act. In particular, the agency on an ongoing basis scrutinizes reverse
mortgage advertising for deceptive claims about the terms and
consequences of the loans, as well as the lender's purported
affiliation with government agencies or programs. It should be noted,
however, that many lenders that offer reverse mortgages, including
banks, thrifts, and Federal credit unions, are outside the Commission's
authority.
Third, the FTC has spearheaded Federal-state efforts to coordinate
and cooperate on reverse mortgage issues. In the fall of 2008, the
Commission organized the Federal-State Reverse Mortgage Law Enforcement
Working Group to strengthen the ability of law enforcers to take rapid,
effective, and coordinated action against instances of reverse mortgage
fraud. The Working Group, which meets on a regular basis, is comprised
of over one hundred representatives from 40 states, the District of
Columbia, and Puerto Rico, as well as several other Federal agencies,
including the Department of Housing and Urban Development (``HUD'') and
the Department of Justice (``DOJ'').
Fourth, the Commission has provided assistance to Federal and state
agencies in developing and implementing standards of appropriate
conduct for providers of reverse mortgages. In late 2009, the Federal
Financial Institutions Examination Council (``FFIEC'') \1\ published
proposed guidance on reverse mortgages, covering, among other topics,
the importance of avoiding deceptive claims. Earlier this month, the
FTC staff filed a comment with FFIEC supporting its efforts to prevent
deception and assist consumers in making better-informed decisions
about reverse mortgages.
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\1\ FFIEC is comprised of the Federal bank regulatory agencies, the
National Credit Union Administration, and three associations of state
supervisors of financial institutions.
---------------------------------------------------------------------------
Fifth, as you mention, the Commission is reaching out to elderly
consumers to educate them about the risks and benefits of reverse
mortgages. The Commission's most recent brochure, ``Reverse Mortgages:
Get the Facts Before Cashing in on Your Home's Equity,'' is available
at http://www.ftc.gov/bcp/edu/pubs/consumer/homes
/rea13.shtm. The FTC also has a new pamphlet for reverse mortgage
housing counselors on how to spot and report potentially deceptive
claims or other unlawful conduct. The pamphlet can be accessed at
http://www.ftc.gov/bcp/edu/pubs/business/alerts/alt158.shtm. The
Commission has distributed this pamphlet throughout HUD's network of
housing counselors.
Finally, your question refers to reports that insurance agents and
financial advisors are selling reverse mortgages, even though Congress
enacted legislation in 2008 prohibiting those who sell reverse
mortgages from cross-selling insurance or other financial products. The
Housing and Economic Recovery Act of 2008 (``HERA'') prohibits cross-
selling insurance and other financial products in connection with
reverse mortgages offered under the Home Equity Conversion Mortgage
program, administered by HUD. HUD, rather than the FTC, enforces HERA's
prohibition on cross-selling.
Question 2(a). As you know, there are conflicting viewpoints about
whether Congress should expand APA rulemaking authority to the FTC,
which would grant the Commission civil penalty authority and other
expanded tools. One of my chief concerns in addressing consumer
protections, whether it be in financial services or elsewhere, is
finding the most efficient ways to do so with little or no overlap
between competing agencies and in a manner where agency authority is
properly utilized. In addition, I have some concerns about whether the
FTC would be able to take on expanded authority given the staff
reductions that have occurred over the years. What do you feel are the
most effective tools and practices that the FTC currently has to
address bad actors? What do you feel is working?
Answer. The FTC has a number of effective consumer protection
tools. Most notably, the Commission can file and litigate cases against
those who engage in practices that are unfair or deceptive, or violate
other statutes or rules enforced by the FTC. In addition, the
Commission's education and outreach programs help empower consumers
with information and tools they can use to avoid scams, and help
achieve compliance by providing guidance to businesses about their
obligations under the law.
Under Section 13(b) of the FTC Act, 15 U.S.C. 53(b), the
Commission is empowered to file and litigate actions in Federal
district court whenever a defendant ``is violating, or is about to
violate, any provision of law enforced by the Federal Trade
Commission'' including rules under those laws. These laws include the
FTC Act, which prohibits unfair or deceptive practices. The Commission
can seek temporary restraining orders and other types of preliminary
relief to halt ongoing violations and preserve the status quo pending a
full adjudication of the case (including freezing a defendant's assets
in appropriate cases). Remedies available to the FTC in such actions
include monetary redress for consumers who incurred injury as a result
of a defendant's violations, as well as other equitable remedies such
as rescission of victims' contracts and disgorgement of defendants'
ill-gotten gains. In the past decade, the Commission has brought over
600 consumer protection law enforcement actions using Section 13(b),
most of which sought consumer redress; through these cases, courts have
ordered approximately $3 billion in redress for injured consumers.\2\
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\2\ The Commission also has, of course, authority to conduct
administrative adjudications, and uses it for consumer protection
matters particularly where it believes its own expert determination is
important to help develop and clarify the law. However, given the
availability of monetary redress remedies and penalties only through a
court action, the Commission more commonly brings its consumer
protection actions in court.
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The Commission's authority to issue rules using APA procedures
under a number of specific laws, such as the telemarketing law, has
itself been a crucial tool for clearly identifying and halting a
variety of harmful practices, providing standards and clarity for
businesses, the agency, and the courts.\3\ The Commission's authority
to issue APA rules relating to home mortgages under the Omnibus
Appropriations Act of 2009, such as with respect to third-party
mortgage assistance relief providers, has the potential to be such a
powerful tool for consumers.
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\3\ Since the promulgation in 1996 of the Telemarketing Sales Rule
(``TSR''), which for the past several years has included the National
Do Not Call Registry, the Commission has filed 271 telemarketing cases
aimed at halting various telemarketing frauds, including the
unauthorized debiting of consumers' financial accounts, as well as the
deceptive marketing of such goods and services as fraudulent work-at-
home opportunities; advance-fee credit cards; phony government grants,
and sweepstakes and prize promotions. Many of these cases have targeted
not only fraudulent telemarketers, but also the third-parties that
assist them, as specifically authorized by the TSR.
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In addition, the FTC's consumer education efforts have been highly
successful in reaching consumers with the information and advice they
need to recognize and avoid fraud. Among many other examples, in
response to the recent economic downturn, the FTC developed several
outreach initiatives to help people manage their financial resources
and spot traditional and emerging scams. We share our consumer
education materials with a multitude of Federal, state, and local
government agencies, and frequently partner with private and nonprofit
organizations to increase the ``reach'' of our educational efforts.
The FTC's robust business education efforts are very helpful in
fostering compliance with the various laws the Commission enforces.
These efforts, which come in many different forms and are disseminated
through many types of media, provide practical, straightforward, and
often industry-specific information and guidance.
Finally, the Commission's authority to conduct workshops, research
and studies, often involving its broad consumer protection,
competition, and economic expertise, is an essential part of developing
appropriate approaches to problems. The information developed through
such activities assists in focusing enforcement efforts, identifying
successful remedies, and formulating appropriate standards, as well as
providing broader knowledge for the business and consumer communities
and for policymakers. For example, the Commission staff recently held a
series of three public roundtable discussions on the consumer
protection problems existing in the system whereby debt collection
cases are litigated and arbitrated. The information we obtained in
those discussions will be extremely useful in determining law
enforcement strategies going forward, and in formulating
recommendations on actions that government and the private sector can
take to ensure that the litigation and arbitration processes function
more fairly for consumers.
Question 2(b). What do you feel is not working?
Answer. Although the Commission has a number of effective tools for
stopping bad actors, certain holes in our authority make it more
difficult--unnecessarily, in my opinion--to carry out our mission. The
following four enhancements to the agency's authority would help
substantially to fill those holes.
APA Rulemaking: Because the Commission may not use the
ordinary Administrative Procedures Act (``APA'') notice-and-
comment rulemaking procedures that most of our sister agencies
use, the Commission must do one of two things to promulgate a
rule: either obtain from Congress a specific grant of APA
rulemaking authority for a particular issue or use the
cumbersome and time-consuming Magnuson-Moss procedures. In my
view, either option is an inefficient and uncertain process for
addressing serious problems in a timely fashion, especially
those that can arise from emerging technologies or new
marketing practices. The Commission needs APA-style rulemaking
authority to be able to issue rules, when needed, in a
reasonable time and with a reasonable expenditure of resources.
Civil Penalty Authority: The FTC currently lacks the
authority to seek civil penalties for violations of the FTC Act
itself. Although the Commission currently may seek penalties--
through DOJ--in certain specified situations (e.g., for a
defendant's violations of an existing enforcement order or of
certain FTC rules), the ability to seek civil penalties for
knowing violations of the FTC Act itself would give the agency
an important tool for deterring unfair or deceptive practices.
This is especially important for cases in which obtaining
equitable remedies such as consumer restitution, rescission, or
disgorgement is impossible or impractical--because, for
example, victims cannot be identified or consumer injury and
wrongful profits cannot be quantified.
Aiding and Abetting: The absence, outside of the
telemarketing context, of explicit authority to hold liable
those who aid and abet law violators hampers the Commission's
ability to take action against entities that do not themselves
deceive consumers, but supply knowing and substantial support
to those who do. In many cases, the aiders and abettors, by
providing essential services that the primary fraudsters could
not efficiently provide themselves, allow frauds to occur on a
much broader scale than would otherwise be possible.
Independent Litigating Authority for Civil Penalty Actions:
It is anomalous that while the FTC is authorized to try its own
cases for a wide swath of remedies, including consumer redress
and disgorgement, it may not do so when seeking penalties.
Instead, the agency must refer cases to DOJ, wait up to 45 days
for DOJ to determine whether to take a case, and allow DOJ
staff time to learn the case and prepare. This requirement thus
entails duplication of efforts and slower enforcement. In
addition, it results at times in the agency having to choose
between obtaining early injunctive relief (for example, to halt
the violative practices and preserve assets for eventual
redress) or seeking penalties. Having the authority to litigate
civil penalty actions independently would allow cases to be
brought more quickly and effectively, without the disadvantages
occasioned by the referral obligation.
Question 2(c). If you had more resources could you issue rules
under the current Magnuson-Moss procedures?
Answer. While more staff on a rulemaking may help, most of the
built-in time lags involved in Magnuson-Moss rulemaking cannot be
eliminated by additional staffing. There are numerous steps that must
be taken to issue a rule under Magnuson-Moss procedures:
prepare an ANPR describing the area of inquiry under
consideration, the objectives the FTC seeks to achieve, and
possible regulatory alternatives under consideration;
submit the ANPR to House and Senate oversight committees;
publish the ANPR in the Federal Register for public comment;
receive public comments on the ANPR for 30 days or longer;
analyze comments received in response to the ANPR;
determine that the acts or practices at issue appear to be
widespread and prevalent;
prepare an initial NPR that: (a) summarizes and addresses
the comments, (b) sets forth specific proposed rule text, (c)
explains the legal and factual basis for the proposed rule
provisions, (d) includes, if applicable, an initial analysis
under the Regulatory Flexibility Act (``Reg Flex'') based on
the anticipated effects of the rule on small entities and an
analysis under the Paperwork Reduction Act (``PRA'') of any
disclosure, reporting, or recordkeeping requirements the rule
would impose, and (e) sets forth a preliminary Regulatory
Analysis of anticipated effects of the rule, both positive and
negative;
submit the NPR to House and Senate oversight committees 30
days before publishing it;
publish the NPR in the Federal Register for public comment;
receive public comments on the NPR, usually for 60 days or
more;
provide an opportunity for a public oral hearing before a
presiding officer, and if any member of the public requests
such hearing,\4\
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\4\ In some instances, the FTC has conducted public workshops for
interested parties and the public at large to discuss those issues
arising from the written comments about which there are varying or
conflicting points of view. This does not substitute for providing the
hearing opportunity described with its attendant requirements. However,
in some less controversial matters interested persons participating in
such a workshop have not sought the oral hearing available under the
statute.
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appoint a presiding officer;
designate disputed issues of fact to be addressed at
the hearing;
decide petitions to designate fact issues as disputed
for the hearing;
accord to (potentially numerous) interested persons
rights to examine, rebut, and cross-examine witnesses;
determine which among those persons have similar
interests;
allow each group of persons with similar interests to
choose a representative;
appoint a representative if the group cannot choose
one;
decide appeals from determinations on which persons
have similar interests;
prepare and publish a second NPR addressing all these
issues;
hold the hearings;
make complete transcripts of all testimony and cross-
examinations available to the public;
analyze the record amassed, and prepare a staff report that
summarizes and analyzes the record and sets forth the final
rule text recommended for adoption by the Commission;
if hearings have been held, the Presiding Officer must
prepare a report with his or her summary and analysis of the
record amassed and recommendations as to adoption of final rule
provisions;
publish a Federal Register notice seeking comments on the
staff report and on the Presiding Officer's report, if any;
receive public comments for 60 days or more;
obtain OMB approval for any disclosure, reporting, or
recordkeeping requirement;
prepare a Final Rule and Statement of Basis and Purpose that
sets forth a summary and analysis of the record, sets forth the
text of the recommended final rule, explains that the practices
addressed by the recommended final rule are prevalent, explains
the legal and evidentiary basis for each provision, includes a
Final Regulatory Analysis, includes a Final Reg Flex, if
applicable, and sets forth an effective date;
publish the Final Rule and Statement of Basis and Purpose in
the Federal Register;
submit a notification to Congress pursuant to the Small
Business Regulatory Enforcement Fairness Act (``SBREFA''),
initiating a period during which Congress can invalidate the
rule by legislation.
issue compliance guides if required under SBREFA.\5\
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\5\ SBREFA requires compliance guides for small businesses for
certain rules; the FTC typically issues compliance guides, for both
small and large businesses, for other rules as well.
Magnuson-Moss rulemaking has frequently taken eight or more years.
Because most of these steps must be taken sequentially in a
specified order, even additional resources would not allow the
Commission to utilize existing Magnuson-Moss rulemaking authority
effectively.
Question 2(d). Or with APA authority?
Answer. APA rulemaking requires significantly fewer resources and
less time than Magnuson-Moss rulemaking. Still, the Commission needs
more resources. Today, the Commission has only about 1,100 full-time
equivalents (``FTEs''). This is considerably fewer than it had at its
peak in 1979, when the Commission had nearly 1,800 FTEs. But in the
past decades, the demands placed on the agency have continued to grow
with the advent of the Internet and e-commerce, and a variety of
significant new laws and regulations that the FTC is charged, at least
in part, with implementing and enforcing, such as the CAN-SPAM Act, the
Fair and Accurate Credit Transactions Act, the Do Not Call provisions
of the TSR, the Children's Online Privacy Protection Act, and the
Gramm-Leach-Bliley Act (``GLB''). In 1979, when the Commission's FTEs
were at their peak, the U.S. population was approximately 225 million.
It is now 30 percent greater, and although the agency is always
striving to do more with less, the size of the agency has not kept pace
with the growth in the population and the sophistication of the
marketplace.
Question 3(a). To follow up, what enforcement and regulation of
financial services activities currently work best at the FTC?
Answer. As described in the answer to Question 2 above, the
Commission has used its existing authority as effectively as possible
to protect consumers of financial services. The available tools include
law enforcement under the FTC Act and several other financial statutes,
consumer and business education, and rulemaking in those instances in
which Congress has mandated or authorized the FTC to use APA
procedures.
The Commission has a long history of protecting consumers at every
stage of their relationship with financial services companies. The FTC
is primarily a law enforcement agency, and it has used its authority
aggressively to seek temporary restraining orders, asset freeze orders,
and other immediate relief to stop financial scams in their tracks and
preserve assets, and then to obtain permanent relief and provide
redress to victims. Over the past 5 years, the FTC has filed over 100
actions against providers of financial services, and in the past 10
years, the Commission has obtained nearly half a billion dollars in
redress for consumers of financial services.
Most recently, the Commission's highest priority has been targeting
frauds that prey on consumers made vulnerable by the economic crisis.
For example, the FTC launched an aggressive, coordinated enforcement
crackdown on mortgage loan modification scams and foreclosure rescue
scams perpetrated on homeowners having difficulty making their mortgage
payments. The purveyors of these schemes purport to assist consumers in
avoiding foreclosure or renegotiating mortgage terms with the
consumers' lenders or servicers, but frequently fail to deliver what
they promise. In the past year, the FTC has brought 17 cases against
more than 90 defendants charging that they were involved in foreclosure
rescue and mortgage modification frauds; and we have partnered with
state and Federal law enforcement agencies that have brought scores of
additional cases under their own statutes. The FTC also is actively
targeting other practices that prey on consumers in financial distress,
including debt relief services, credit repair, advance fee and subprime
credit card scams, payday loans, and abusive debt collection practices.
Commission rulemaking activities, pursuant to specific statutes
authorizing APA procedures, have resulted in a number of valuable
consumer protection rules relating to financial practices, including a
rule under GLB on the safeguarding of sensitive consumer financial
data; a number of rules under the Fair Credit Reporting Act that, among
other things, provide consumers with greater protections against
identity theft and enable them to correct mistakes in their credit
reports; and rules of broader scope that apply to both financial and
nonfinancial firms, such as the TSR.
The Commission augments its law enforcement with far-reaching
consumer and business education campaigns that help consumers manage
their financial resources and avoid fraudulent and deceptive schemes
and help businesses comply with the law. For example, the FTC recently
has undertaken a major consumer education initiative related to
mortgage loan modification and foreclosure rescue scams, including the
release of a suite of mortgage-related resources for homeowners. These
resources are featured on a new web page, www.ftc.gov/MoneyMatters. The
FTC encourages wide circulation of this information: consumer groups
and nonprofit organizations distribute FTC materials directly to
homeowners, while some mortgage servicers are communicating the
information on their websites, with billing statements, and over the
telephone.
Finally, the Commission's research and policy development work
fosters dialogue on important consumer issues and frequently informs
and improves the agency's ability to protect consumers through law
enforcement and rulemaking. For example, a series of landmark studies
conducted by the FTC's Bureau of Economics on mortgage transactions
showed that the disclosures that lenders currently are required to make
to borrowers about the terms of a loan are generally ineffective and
may even be counterproductive. The findings of these studies have not
only helped the Commission formulate its enforcement strategies, but
also have influenced other Federal agencies in their efforts to make
the mortgage origination process more ``consumer-friendly.''
Question 3(b). Conversely, what types of financial services
regulation and enforcement do you struggle with?
Answer. As noted above, the Commission has had a great deal of
success in its efforts to stop deceptive and unfair practices in the
segments of the financial services industry as to which it has
jurisdiction. And, we have worked cooperatively and productively with
the Federal bank regulatory agencies, with whom we share jurisdiction
in the financial services sector, to achieve consistent approaches to
problems arising in both bank and nonbank sectors of the industry.
Certain limitations on our authority have made our job of
protecting consumers more difficult, however. First, the lack of APA
authority for FTC Act rules has, as a practical matter, made it
impossible for the FTC to issue consistent and binding standards for
the financial entities over which it has jurisdiction, except in the
limited situations where Congress has authorized or mandated specific
APA authority. Moreover, the Commission lacks general authority to
promulgate rules under some of the financial statutes it enforces, such
as the Fair Debt Collection Practices Act and Fair Credit Reporting
Act, in some cases despite the fact that the agencies with which the
FTC shares enforcement responsibilities do have such authority.
Furthermore, the Commission's inability to obtain civil penalties for
FTC Act violations, or to bring its own civil penalty cases in those
situations where it does have civil penalty authority, makes it more
difficult in some cases to protect consumers from ongoing harm or to
achieve adequate deterrence. Finally, uncertainties in the Commission's
authority to prosecute aiders and abettors of financial fraud or
deception can lead to difficulties in some cases in getting to the
``root'' of a problem.
Question 3(c). Would it be better to have the latter overseen in
another agency?
Answer. I do not believe that any of the Commission's current
duties for financial services regulation and enforcement would be
better overseen by another agency. Indeed, I believe that limiting the
Commission's current authority over financial services would result in
decreased consumer protection activity in many areas, broad-ranging
jurisdictional disputes and litigation, and more complicated and
potentially conflicting regulation of marketing practices that span
financial and nonfinancial sectors alike. Accordingly, I believe that
the Commission should continue to have at least concurrent authority
over the financial entities now within its jurisdiction.
______
Response to Written Questions Submitted by Hon. Kay Bailey Hutchison to
Hon. Jon Leibowitz
Question 1(a). The FTC has current authority to impose penalties on
fraudulent or deceptive practices when an entity violates a rule or
consent order, yet you are advocating for more expansive authority to
impose civil penalties. If granted this new authority, in what specific
areas or types of cases would the Commission attempt to collect civil
penalties that it currently cannot?
Answer. In many cases involving fraud, the equitable remedies of
redress and disgorgement allow the FTC to reach the defendant's assets
and thus provide some deterrent effect. In other cases, disgorgement or
redress remedies are not practicable. For example, in many privacy-
related cases, including those involving malware/spyware, data
security, and telephone records pretexting, both the harm to consumers
and the ill-gotten gains received by defendants may be difficult to
measure, thus making it difficult or impossible to obtain meaningful
redress or disgorgement. Thus, an appropriately large award of civil
penalties may be the only effective deterrent for these kinds of
misconduct. In still other cases, profits for disgorgement are hard to
calculate because lawful and unlawful conduct is mixed.
Question 1(b). Has the FTC approached Congress and asked for
authority to collect civil penalties for these specific types of cases?
Answer. Yes, on a number of occasions, including:
Prepared Statement of the Federal Trade Commission,
``Federal Trade Commission Reauthorization,'' Before the Senate
Commerce, Science, and Transportation Committee, 110th Cong.,
April 8, 2008 (``As the Commission has previously testified,
however, in certain categories of cases restitution or
disgorgement may not be appropriate or sufficient remedies.
These categories of cases, where civil penalties could enable
the Commission to better achieve the law enforcement goal of
deterrence, include malware (spyware), data security, and
telephone records pretexting.'')
Prepared Statement of the Federal Trade Commission,
``Federal Trade Commission Reauthorization,'' Before the Senate
Commerce, Science, and Transportation Committee, 110th Cong.,
April 10, 2007 (``We believe the Commission's ability to
protect consumers from unfair or deceptive acts or practices
would be substantially improved by legislation, all of which is
currently under consideration by Congress, to provide the
Commission with civil penalty authority in the areas of data
security, telephone pretexting and spyware.'')
Prepared Statement of the Federal Trade Commission, ``Data
Breaches and Identity Theft,'' Before the Senate Commerce,
Science, and Transportation Committee, 109th Cong., June 16,
2005 (``The FTC also would seek civil penalty authority for its
enforcement of these [data security] provisions. A civil
penalty is often the most appropriate remedy in cases where
consumer redress is impracticable and where it is difficult to
compute an ill-gotten gain that should be disgorged from a
defendant.'')
Question 2(a). The FTC currently has the ability to take
enforcement action against entities that aid or abet violations in very
narrow circumstances. One of the concerns expressed regarding the
possible expansion of this authority to the Commission's entire
jurisdiction is confusion about the level of knowledge necessary to
support a charge for aiding and abetting. What is the level of
knowledge that would have to be met for the aiding/abetting provision
to apply? How would the FTC define the following: ``substantial
assistance,'' ``knowing,'' and ``consciously avoiding?''
Answer. Proposed section 5(o) of the FTC Act would establish
liability for an FTC Act violation for anyone who ``knowingly or
recklessly . . . provide[s] substantial assistance'' to another who
violates the FTC Act or any other act enforced by the Commission
relating to unfair or deceptive acts or practices. This standard
derives from similar aiding and abetting authority provided to the SEC
under its statute. See 15 U.S.C. 78t(e). The application of the
proposed standard requires a careful examination of the facts of each
specific case. Over many years, the courts have developed a significant
body of case law to address the substantial assistance and state of
mind requirements imposed under securities law, and the Commission
would anticipate tapping into that case law as guidance for any case
that the Commission might bring in the future under its new aiding and
abetting authority. Similarly, the Commission would look to its
Telemarketing Sales Rule, which prohibits any person from providing
``substantial assistance or support'' to a seller or telemarketer when
the person ``knows or consciously avoids knowing'' that the seller or
telemarketer is violating certain provisions of the rule standards.
These standards draw from SEC law and from tort liability.
Question 2(b). You state in your testimony that the FTC is able to
work around the Supreme Court decision Central Bank of Denver v. First
Interstate Bank of Denver, to penalize those who provide ``knowing
assistance'' to violators. How does the FTC do this, and why is this
ability not sufficient to support the Commission in targeting
individuals and entities that provide affirmative assistance to those
engaged in fraud and deceptive acts?
Answer. Notwithstanding Central Bank of Denver, there are instances
in which the Commission can directly or indirectly allege that those
who assist scammers have violated section 5 of the FTC Act. For
example, the Commission is able to take action against those who
knowingly assist telemarketing scammers. In the Telemarketing and
Consumer Fraud and Abuse Prevention Act, Congress gave the Commission
explicit aiding and abetting authority with respect to telemarketing.
This authority has proven very useful in prosecuting numerous bad
actors, but it does not allow the Commission to reach those who
knowingly assist scammers defrauding consumers over the Internet or
through the mail or other means that do not involve telemarketing.
In some instances, facts permit the Commission to allege that the
assistor provided the scammer with the ``means and instrumentalities''
of the fraud scheme. Under the ``means and instrumentalities'' theory,
a person or entity that places in the hands of another a means of
consummating a fraud has directly violated the FTC Act. This occurs,
for instance, when the assistor provides the scammer with counterfeit
products to be sold as genuine goods. The means and instrumentalities
theory is, however, generally limited to instances in which the fraud
assistor has provided an inherently deceptive thing that is then used
to deceive consumers.
In other instances, facts permit the Commission to allege that the
assistor engaged in ``unfair'' conduct by assisting the scammer. An act
or practice is ``unfair'' if it is proven to: (1) cause substantial
injury to consumers, (2) that they cannot reasonably avoid themselves,
and (3) is not outweighed by countervailing benefits to consumers or
competition. In a case that is currently on appeal by the defendants to
the Ninth Circuit, the Commission alleged that the defendant's payment
processing business made unauthorized debits to consumers' bank
accounts on behalf of a scammer. While we believe that it is
appropriate in this instance, the use of the Commission's unfairness
authority in this fashion does not have the long jurisprudential
history associated with the concept of aiding and abetting and involves
proving the unfairness elements described above rather than focusing on
the assistor's relationship with and knowledge of the fraudster's
activities.
Finally, in some instances, facts permit the Commission to allege
that an entity is part of a common enterprise with the scammer. A
common enterprise exists where factors such as commingling of assets,
common ownership, shared locations, and other considerations,
demonstrate that apparently independent companies are part of the same
enterprise. It is not necessary or even typical, however, for assistors
to be so closely affiliated with scam perpetrators.
Question 2(c). How would industries such as the media be affected
by an aiding and abetting provision? Could a newspaper or magazine be
held liable if the FTC determined it had run a fraudulent
advertisement?
Answer. The purpose of seeking the aiding and abetting provision is
not to pursue the media for disseminating deceptive advertising.
Proposed section 5(o) of the FTC Act would establish liability for
anyone who ``knowingly or recklessly . . . provide[s] substantial
assistance'' to another who violates the FTC Act or any other act
enforced by the Commission relating to unfair or deceptive acts or
practices. This provision (like other provisions of the FTC Act, cf.
Section 12 regarding disseminating or causing the dissemination of
false advertising relating to food, drugs, devices, cosmetics, or
services) could arguably apply to a media outlet such as a newspaper or
magazine, depending on the circumstances. The Commission, however, is
mindful of First Amendment concerns and has never imposed a general
duty upon newspapers, magazines, or other media to screen advertising.
Commission staff has worked with members of the media to encourage
voluntary media screening of facially deceptive advertisements and
published several guidance documents to assist the media. See, e.g.,
http://www.ftc.gov/bcp/edu/pubs/business/adv/bus36.shtm.
Question 2(d). There is a clear distinction between having active
knowledge of a fraudulent and misleading advertisement, for example,
and choosing to run it anyway and running an advertisement you have no
reason to expect is fraudulent or deceptive. Do you believe newspapers,
and to an extent Internet sites, have an obligation to investigate the
veracity of claims made in advertising that they make available in
their papers/sites before publishing them?
Answer. As you say, there is indeed a distinction between a media
outlet running an ad that it actively knows to be fraudulent or
misleading, and running one that it has no reason to believe is
deceptive. Media outlets can play an important role in protecting
consumers from deception by preventing the dissemination of fraudulent
ads in the first place. However, I do not believe that proposed section
5(o) would impose a general obligation on media outlets to investigate
the veracity of claims that they disseminate.
Question 2(e). Would failure to affirmatively investigate and
verify claims made in advertising represent ``consciously avoiding''
knowledge?
Answer. No, section 5(o) would not impose a general duty on media
outlets to investigate the veracity of claims that they disseminate.
Media outlets, however, can play an important role in protecting
consumers from deception by preventing the dissemination of fraudulent
ads in the first place.
______
Response to Written Questions Submitted by Hon. John Ensign to
Hon. Jon Leibowitz
Question 1(a). Mr. Chairman, in your testimony, you mentioned
several ways in which you are asking for Congressional approval to
expand the FTC's authority. Specifically, you mentioned replacing the
Magnuson-Moss rules process with one using the Administrative
Procedures Act (APA); explicit authority to pursue enforcement action
against parties that ``aided or abetted'' a violation of the FTC Act;
the authority to collect civil penalties for violations of the FTC Act;
and independent litigating authority. Congress chose to place those
limits, and others, on the FTC to ensure there are proper checks and
balances on the agency's enforcement and rulemaking power, and I am
concerned that these new powers would result in an overly burdensome
regulatory regime for all industries, financial or otherwise, that fall
within the FTC's especially broad consumer protection mandate.
A number of concerns have been raised with respect to the potential
over-regulatory impact on our economy by a new Consumer Financial
Protection Agency (CFPA), and the corresponding effect it could have on
stifling innovation and costing American jobs. These concerns are
particularly important to me given that the unemployment rate in Nevada
is among the highest in the country. In what ways would the FTC's new
powers, as you've proposed, differ from those proposed for the CFPA?
Answer. The powers sought for the FTC also would be granted to the
CFPA in both the Administration proposal and H.R. 4173. These powers
would enhance the FTC's ability to fulfill its longstanding statutory
responsibility to prevent unfair and deceptive commercial practices,
and would be exercised within the framework of nearly a hundred years
of jurisprudence. Unlike the CFPA, the FTC would not be authorized to
exercise these powers with respect to ``abusive'' practices, but would
continue to operate within the established, carefully-defined
parameters of unfair or deceptive practices.\1\ Also, the FTC would not
be authorized to exercise these powers within a supervisory/examiner
regulatory role such as that anticipated for the CFPA.
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\1\ Under Section 5 of the FTC Act, 15 U.S.C. 45, an act or
practice (usually an express or implied representation or omission) is
deceptive if it is: (1) likely to mislead consumers who are (2) acting
reasonably under the circumstances (3) about a material fact. An act or
practice is material if it is likely to affect consumers' conduct or
decisions with respect to the product or service at issue. FTC Policy
Statement on Deception, appended to Cliffdale Associates, Inc., 103
F.T.C. 110, 174 (1984). An act or practice is unfair if it causes or is
likely to cause injury to consumers that: (1) is substantial; (2) is
not outweighed by countervailing benefits to consumers or to
competition; and (3) is not reasonably avoidable by consumers
themselves. 15 U.S.C. 45(n).
Question 1(b). How would your proposals to increase the FTC's
powers in similar ways to the CFPA avoid or mitigate these same
concerns about the potential negative impact on our economy?
Answer. In answering this question, it is important to provide
context about the function and role of the FTC. The FTC is the only
Federal agency with jurisdiction over the financial sector whose sole
mission is protecting consumers. Moreover, the FTC is unique in its
combination of consumer protection and competition missions, informed
by its economic expertise. These missions work in tandem to protect
consumer sovereignty within our competitive market system. Thus, the
Commission has long-standing experience and expertise in weighing the
impacts of its enforcement and regulatory actions on our economy, and
it would bring that expertise to bear in employing the four
enhancements of authority it seeks.
Aiding and abetting: The proposal to grant aiding and abetting
authority to the FTC is subject to important constraints.
Specifically, aiders and abettors would be liable only if they
provided substantial assistance to a wrongdoer, and only then
if they actually knew that, or acted with reckless disregard
for whether, the practices they were assisting violated the FTC
Act. The proposed provision would give the FTC comparable
authority to that long held by the SEC and the Commodity
Futures Trading Commission over aiding and abetting of
violations.
Civil penalties: The proposed authority to seek civil penalties
for violations of the FTC Act also would be constrained. The
Commission could obtain such penalties only if it proved to a
Federal court that the defendant engaged in unfair or deceptive
practices with actual knowledge or knowledge fairly implied on
the basis of objective circumstances that the conduct violated
the law. This is the same standard that the Commission must
satisfy currently in bringing an action for civil penalties for
violation of an FTC trade regulation rule. In addition, the FTC
Act directs a court determining the amount of any such civil
penalty to take into account the degree of culpability, any
history of prior such conduct, ability to pay, effect on
ability to continue to do business, and such other matters as
justice may require.
APA rulemaking authority: It is important at the outset to
dispel any misimpression that the APA procedures are in any
sense truncated or expedited; in fact, the APA provides for
numerous procedural and substantive safeguards and
requirements, with ample opportunity for all stakeholders to
participate and be heard. (Please see the discussion of APA
Rulemaking in my additional statement). Over the last two
decades the Commission has promulgated numerous rules using APA
procedures pursuant to statutes other than the FTC Act.
Finally, it is worth noting that many other Federal agencies
have authority to issue under APA procedures rules implementing
broadly stated standards that have substantial and widespread
effects on major economic sectors, including the SEC, CFTC,
Federal Communications Commission and the Federal bank
regulatory agencies (three of which may issue APA rules
applying the FTC Act's own deception and unfairness standards).
Independent litigating authority: The proposed authority would
fill a problematic gap in the FTC's long-held, independent
litigating authority. The FTC currently has, and routinely
exercises, the power to initiate litigation in the Federal
courts in its own name and with its own attorneys to pursue
violations of all the laws it is charged with enforcing. The
FTC has this power to carry out its most basic and essential
consumer protection functions under the FTC Act: to obtain
injunctive and other relief, including consumer redress for
violations of the FTC Act. The FTC has used this power
appropriately and effectively. Only if it seeks civil penalties
may the FTC not bring suit independently. Other independent law
enforcement agencies, such as the SEC, currently have the power
to obtain civil penalties on their own in Federal district
court.
Question 2(a). You are proposing a drastic expansion of the FTC's
authority. In fact, former FTC Chairman Timothy Muris has said your
proposals represent ``the most significant expansion of the FTC since
its inception.'' Further, former FTC Chairman Jim Miller has said the
proposals are ``like putting the FTC on steroids.'' This is certainly
not a small request you are asking of Congress. Given the breadth of
your agency's jurisdiction and the significance of the proposed
changes, what specifically has the FTC done to get input from
businesses that could be impacted by the new authority?
Answer. The FTC maintains a continuous and comprehensive dialogue
on matters that affect its stakeholders who might be impacted by FTC
actions, including the business community, consumer advocates, the
private bar, and sister Federal and state enforcement agencies. The
Commission conducts outreach, provides guidance, and seeks input
through a variety of informal channels (such as speeches at
conferences, business and consumer education, and responses to queries
and requests for advice), as well as through more formal processes
(such as public comment periods on regulatory proposals and public,
FTC-sponsored workshops and forums examining specific consumer
protection issues). In addition, although not legally required to do
so, the Commission frequently seeks public comment on proposals for
enforcement policy statements and other types of nonregulatory guidance
it issues.
With respect to the current proposals, FTC officials at every level
have communicated with business representatives and other interested
parties to hear their views and engage in dialogue. It should be noted
that the Commission has recommended iterations of all four proposals in
Congressional testimony and elsewhere since at least 2008.
Question 2(b). With a more streamlined approach under APA
rulemaking, I worry that the parties affected by the rule would not
have a proper opportunity to voice their concerns. Should Congress
agree with your proposals, what steps would you take to ensure that
does not happen?
Answer. Please see the discussion of APA Rulemaking in my previous
statement.
______
Response to Written Questions Submitted by Hon. John Thune to
Hon. Jon Leibowitz
Question 1. Chairman Leibowitz, in your testimony you mentioned
that the FTC would benefit from the ability to use APA-style rulemaking
rather than the Magnuson-Moss rulemaking process that it is currently
required to use. Is this still a priority for the FTC when the CFPA
proposals would take over a significant portion of consumer protection
rulemaking?
Answer. Having the ability to issue rules in a reasonable time with
a reasonable expenditure of resources would greatly improve the
Commission's ability to address common consumer protection problems.
New scams continually emerge that exploit technological advances and
marketplace developments. For example, in the past year or two, frauds
targeting financially-distressed consumers have blossomed, including
mortgage rescue fraud, job scams, and phony government grants. The
dozens of enforcement actions we have brought are making an impact.
Nevertheless, for some types of fraudulent, deceptive or unfair
practices, bringing case after case may not be as useful as
promulgating a rule, which would allow the Commission to establish
clear standards for industry while making enforcement more efficient
and effective. The current requirement to use Magnuson-Moss procedures
effectively precludes the Commission from issuing such rules.
Furthermore, the CFPA's authority would reach only financial
activities and entities. The Commission needs to be able to issue rules
in a reasonable time and with a reasonable expenditure of resources--
that is, APA-style rulemaking--across the broader spectrum of
commercial activities that fall within its jurisdiction, including
practices that are not financial activities (such as negative option
marketing \1\), practices of any entities that may be specifically
excluded from the CFPA's authority (such as the exclusion in the House
bill, H.R. 4173, of the practices of retailers and auto dealers), and
practices involving both nonfinancial and financial aspects or entities
(such as the Commission's Funeral Rule).
---------------------------------------------------------------------------
\1\ ``Negative option marketing'' refers to a category of
commercial transactions in which customers are charged for goods or
services if they do not take an affirmative action to reject an offer
or cancel an agreement.
---------------------------------------------------------------------------
Authority to use APA rulemaking rather than the much more
cumbersome and time-consuming Magnuson-Moss procedures would enhance
the FTC's ability to fulfill its statutory responsibilities more
effectively.
Question 2. If the FTC was forced to defer to the CFPA for 120-days
before litigating any consumer financial protection cases, how would
that affect the FTC's current enforcement efforts? Would this undercut
the FTC's ability to quickly respond to certain deceptive practices and
fraud in areas currently under its jurisdiction?
Answer. For many FTC cases, particularly those involving fraud,
rapid action is often necessary to obtain preliminary relief to stop
the practices quickly and limit the harm, as well as to preserve assets
for possible return to consumers. Having to wait 120 days for a CFPA
decision before filing a case not only would allow the violations to
continue an extra 4 months, resulting in additional consumer injury,
but could seriously hamper the Commission's ability to obtain
preliminary relief, thus weakening our ability to protect consumers in
these circumstances. The approach taken in H.R. 4173, essentially
providing the FTC with concurrent enforcement authority, would ensure
that the Commission's law enforcement efforts to protect consumers
remain effective.
Question 3. Do you believe that the CFPA and FTC can concurrently
manage consumer protection or do you believe that there will be
inherent conflicts with this structure?
Answer. Based on our many years of experience in sharing
jurisdiction with numerous other Federal agencies with respect to large
portions of the Commission's jurisdiction, I am confident that the FTC,
should it have concurrent enforcement authority, would work
cooperatively and effectively with the CFPA.
The FTC, for example, has concurrent authority for stopping unfair
or deceptive practices with respect to the marketing of foods, drugs,
devices, alcoholic beverages, and pesticides (with the Food and Drug
Administration; Department of Agriculture; Bureau of Alcohol, Tobacco,
and Firearms; and Environmental Protection Agency); the securities
industry (with the Securities and Exchange Commission); mail fraud
(with the U.S. Postal Inspection Service); mortgage-related activities
(with the Department of Housing and Urban Development); certain
financial entities (with the Federal bank regulatory agencies); and a
host of others. With respect to its antitrust mission, the Commission's
authority is almost completely co-extensive with that of the Department
of Justice.
In each of these instances, the Commission and its sister agencies
have developed effective methods of coordination tailored to the
individual circumstances. For example, the concurrent jurisdiction of
the FTC and FDA with respect to the marketing of foods, OTC drugs, and
devices is handled through a formal Memorandum of Understanding that,
among other things, makes the FDA primarily responsible for overseeing
product labeling and the FTC primarily responsible for non-label
advertising. In some cases, the FTC defers to another agency, such as
the SEC, when that agency has specialized expertise relevant to the
matter. In other situations, the Commission and other agencies
coordinate through less formal means, including ongoing consultation,
as circumstances dictate.
______
Response to Written Questions Submitted by Hon. Roger F. Wicker to
Hon. Jon Leibowitz
Question 1. If you were granted APA rulemaking authority today,
what rulemaking would you initiate?
Answer. The Commission's record for more than two decades
demonstrates that it views rulemaking as a tool to be used very
judiciously and only where there are clear indications that other
remedial approaches are not effective. The Commission has not made any
decisions about any particular rulemaking it would undertake.
One area I think might be appropriate for rulemaking under APA
procedures is the use of negative option marketing in Internet sales.
Despite the many Commission law enforcement actions targeting schemes
that unfairly or deceptively exploit this sales technique, abuses
persist. It may be possible to benefit both consumers and industry by
developing bright-line standards for how to use this technique fairly
and without deception. Such rules should enable consumers to more
easily identify and avoid sellers that make unscrupulous use of the
technique.
For another, in a 2009 report on debt collection, the Commission
recommended that Congress grant it APA rulemaking authority under the
Fair Debt Collection Practices Act. I continue to believe that a debt
collection rulemaking would be useful.
Question 1(a). If there are any rules you would initiate
immediately under APA rulemaking, please include evidence of your
rationale for expedited rulemaking, including any action taken against
bad actors.
Answer. Let me note initially that notice-and-comment APA
rulemaking is the standard government rulemaking procedure, rather than
expedited rulemaking.\1\ The APA mandates a set of rigorous procedures
that are designed to ensure that interested parties have early notice
of the proceeding and ample opportunity to have their views considered,
as well as to create a comprehensive record to afford thorough judicial
review. Please see the discussion of APA Rulemaking in my additional
statement.
---------------------------------------------------------------------------
\1\ Although the APA does provide for expedited rulemaking without
notice-and-comment when an agency for good cause finds that such a
procedure is ``impracticable, unnecessary, or contrary to the public
interest,'' the courts have construed this exception narrowly. The
Commission has only engaged in such rulemaking to fix minor errors in a
rule or make very non-substantive, technical, or non-discretionary
amendments.
---------------------------------------------------------------------------
As noted above, the Commission has not made any decision about what
rulemakings it would conduct in the event of the elimination of the
cumbersome Magnuson-Moss rulemaking procedures. I would consider
discretionary rulemaking only where unfair or deceptive practices cause
significant harm to consumers, where setting standards would likely
improve industry practices (particularly where law enforcement efforts
have not provided adequate guidance or prevented the practices and
where malfeasance is common), where remedies could be crafted within
the framework of FTC jurisprudence, and where the anticipated burdens
are reasonable in light of the anticipated benefits of the rule.
Question 1(b). You discussed a few instances where APA rulemaking
authority would have benefited the FTC's ability to protect consumers.
Did the FTC request from Congress the specific authority to use
expedited rulemaking for these instances?
Answer. Yes. For example, in a 2009 report on debt collection, the
Commission recommended that Congress grant it APA rulemaking authority
under the Fair Debt Collection Practices Act.
A major problem with needing to seek statutory authority for APA
rulemaking for each specific need is that business practices change
constantly and quite rapidly in response to technological advances and
market innovation. Both consumers and industry members can often
benefit from the establishment of standards that can be revised as
needed to keep current and effective. If a rule is no longer needed, it
can similarly be withdrawn after notice-and-comment under such a
flexible regime. This process is more responsive to a dynamic economy
than enacting new legislation.
Question 1(c). Please detail any requests the Commission made to
Congress for expedited rulemaking on specific rules since 1990.
Answer. When Congress is considering directing the Commission to
conduct rulemaking, FTC staff routinely suggest that any statute
provide expressly for APA rulemaking authority. Unlike Magnuson-Moss
rulemaking, APA rulemaking is an efficient and effective means to
conduct rulemaking proceedings. Examples of legislation that then
provided APA rulemaking authority include:
Telephone Disclosure and Dispute Resolution Act of 1992
Telemarketing and Consumer Fraud and Abuse Prevention Act
The Children's Online Privacy Protection Act
Fairness to Contact Lens Consumers Act
Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003
Omnibus Appropriations Act, 2009
In addition, in a 2009 report on debt collection, the Commission
recommended that Congress grant it APA rulemaking authority under the
Fair Debt Collection Practices Act.
Question 2. Can you please provide data from the Commission related
to the staffing associated with the following stages of rules, for each
rule promulgated under your current rulemaking authority:
staff detailed to assist in the preparation of the advanced
notice,
staff assigned to review comments from the advance notice of
proposed rulemaking,
staff assigned to formulate the determination that unfair or
deceptive acts or practices are prevalent,
staff assigned to draft the notice of proposed rulemaking,
and
staff assigned to draft the staff report required under
Commission Rule 1.13.
Answer. All of the trade regulation rulemaking proceedings using
the Magnuson-Moss procedures to create new rules were conducted over 25
years ago.\2\ Also, all of the rules were initiated prior to the 1980
amendment to the FTC Act requiring an advanced notice of proposed
rulemaking and a determination that the practice addressed is
prevalent.
---------------------------------------------------------------------------
\2\ Eight Magnuson-Moss rules have been amended, also using
Magnuson-Moss procedures. Building on existing rules, amendment
proceedings involved fewer issues than did the original promulgations
and they were typically more lightly staffed. Generally, interested
parties did not demand hearings to deliver their oral presentations--
although most, if not all, amendment proceedings involved one or more
public workshops to develop a full record.
---------------------------------------------------------------------------
The records available do not include information sufficient to
respond to the request in full. Staff has gleaned from some of the
post-hearing staff reports illustrative staffing information:
Mobile Homes: At least 13 staff members worked on the post-
hearing staff report.
Used Cars: More than 14 staff members worked on the post-
hearing staff report.
Funeral Industry: At least 16 staff members worked on the
post-hearing staff report.
These numbers do not include the Presiding Officer (who was
obligated to produce a separate report) or his staff, Bureau management
reviewers, Office of General Counsel advisors, or the Commissioners'
offices. Staff familiar with the rulemaking proceedings inform me that
these staffing levels were typical.
Question 3. Please provide the timing associated with informal
hearings held under 57a(c), by each rule.
Answer. Staff attempted to identify Magnuson-Moss rulemaking
proceedings to promulgate new rules that included hearings held under
57a(c). The table below sets forth those identified, together with the
number of days of hearings themselves; the time taken by all of the
steps associated with the hearing process, and the length of the
proceeding from ANPR or initial NPR until promulgation of a rule or the
closing of the proceeding.
------------------------------------------------------------------------
Time
Year Number of Associated Length of
Rule Initiated Hearing with Hearing Rulemaking
Days Process* Proceeding
------------------------------------------------------------------------
Vocational 1974 44 2 years, 1 4 years, 4
Schools month months**
------------------------------------------------------------------------
Food Advertising 1974 48 3 years, 1 8 years, 1
(nutrition) month month**
------------------------------------------------------------------------
Mobile Homes 1975 40 5 years 11 years, 11
months**
------------------------------------------------------------------------
Credit Practices 1975 51 5 years 8 years, 10
months
------------------------------------------------------------------------
Hearing Aids 1975 58 2 years 10 years, 3
months**
------------------------------------------------------------------------
Funeral Services 1975 52 2 years, 4 7 years, 1
months month
------------------------------------------------------------------------
Protein 1975 26 3 years, 9 over 9
Supplements months years**
------------------------------------------------------------------------
Health Spas 1975 30 3 years, 6 over 10
months years**
------------------------------------------------------------------------
OTC Drugs 1975 23 3 years, 4 5 years, 5
months months**
------------------------------------------------------------------------
Ophthalmic 1975 32 1 year, 2 2 years, 7
Practices months months
------------------------------------------------------------------------
Used Cars 1975 35 2 years, 8 8 years, 10
months months
------------------------------------------------------------------------
OTC Antacids 1976 23 3 years, 5 8 years, 8
months months**
------------------------------------------------------------------------
Insulation (R- 1977 17 7 months 1 year, 9
Value) months
------------------------------------------------------------------------
Children's 1978 30*** N/A 3 years, 5
Advertising months**
------------------------------------------------------------------------
Development/Use 1978 57 N/A**** 2 years, 2
of Standards and months**
Certification
------------------------------------------------------------------------
* The time periods associated with the hearing process start when the
Commission either issued an NPR or first extended the initial comment
period for comments on hearing-related matters, and end when the
Presiding Officer or the staff released a report.
The numerous hearing-related steps include: comment period extensions
relating to designating disputed factual issues to be addressed at the
hearing or to determination of similar interests of interested
persons; designating the disputed issues; grouping interested persons
with similar interests; allowing each group to appoint a
representative; appointing a representative if a group cannot agree;
resolving petitions about disputed issues or representation; preparing
and publishing a final NPR or other notice addressing all these issues
and scheduling hearings; holding hearings, which include examination
and cross-examination by interested persons or their representatives;
making transcripts of all testimony and cross-examinations available
to the public; digesting, summarizing, and analyzing the record
amassed at the hearings; and preparing a staff report and a Presiding
Officer report containing those summaries and analyses.
** Closed without promulgating a rule.
*** This number represents the first round of hearings, which did not
include examination by interested parties. A second round of hearings
for examination by interested parties was planned but had not yet
taken place when the Commission suspended and then closed the
rulemaking proceeding.
**** The staff report and the Presiding Officer's report had not been
completed when the Magnuson-Moss (unfair or deceptive practices)
aspect of the proceeding was closed pursuant to the 1980 amendments to
the FTC Act.
Question 4. I understand that several steps associated with the
Commission's rulemaking authority are required under the Commission's
Rules. Can you please provide the history of adoption of these rules?
Answer. The Commission adopted rules of practice implementing the
requirements of the Magnuson-Moss Act shortly after the law was enacted
in 1975. The Commission issued further rules in 1980 and 1981 after the
passage of the FTC Improvements Act of 1980. There have also been
several revisions of discrete provisions in the late 1970s and in 1989
and 1998. Most of the provisions in the rules are required by these
laws.
In addition to the statutory requirements, the rules provide that
FTC staff shall make recommendations to the Commission in a report on
the rulemaking record, and that the public have an opportunity to
comment on both the staff report and the Presiding Officer's report.
The staff report requirement ensures that the staff's expertise is
provided to the Presiding Officer, the Commission, and the public.
Another provision in the Commission's rules not required by the
statutes establishes a procedure for oral presentations to the
Commission after the close of the hearing record. This procedure is
optional and the Commission, in its discretion, may determine that
``such presentations would not significantly assist it in its
deliberations.'' The Commission adopted these provisions in 1977 in
response to public comments that there should be a procedure for direct
access to the Commission.
Question 4(a). Also, can you please detail the process the
Commission must initiate to amend these rules?
Answer. The Commission's procedural rules implementing the
statutory requirements are rules of agency practice. Under the
Administrative Procedure Act, an agency may issue rules of practice and
any amendments thereto by publication in the Federal Register; a
comment period is not required. See 5 U.S.C. 553(a)(2).
Question 4(b). What steps has the Commission taken to streamline
Commission Rules related to the rulemaking process?
Answer. The statutory requirements limit the Commission's ability
to streamline the procedural steps in its rules. The statutory
provisions allowed some minor streamlining in 1981 that had little
effect on burden or time.
Question 5. Would additional resources allow you the opportunity to
effectively utilize your existing rulemaking authority? If so, has the
FTC made this clear in your recent budget proposals?
Answer. While more staff on a rulemaking may help, most of the
built-in time lags involved in Magnuson-Moss rulemaking cannot be
eliminated by additional staffing. There are numerous steps that must
be taken to issue a rule under Magnuson-Moss procedures. Please see the
discussion of Magnuson-Moss Rulemaking on pages 1 to 2, supra. Because
most of these steps must be taken sequentially in a specified order,
even additional resources would not allow the Commission to utilize
existing Magnuson-Moss rulemaking authority effectively.
Question 6. Do you believe the evidential hearings and opportunity
to cross examine is an unnecessary step in the formal rulemaking
process?
Answer. Input from parties impacted by a proposed rulemaking is
essential in developing a full record and ensuring fairness and
transparency. All FTC rules, whether conducted pursuant to Magnuson-
Moss or APA procedures, have been based on comprehensive records
developed through open and impartial processes that provided ample
opportunities for any interested parties to communicate information or
opinions. The creation of such a record both leads to an informed
decisional process and is integral to satisfying the courts that the
agency fulfilled its responsibilities.
In some cases, it may be useful to supplement the written record by
providing an opportunity for stakeholders to transmit their views
orally. Doing so may be helpful in resolving difficult or contentious
issues that would benefit from having opposing positions discussed and
debated in a public setting. That is why the FTC frequently solicits
oral input during APA rulemakings, either through workshops or outreach
by FTC staff to knowledgeable parties. Indeed, in many of the
Congressionally-mandated APA rulemakings, staff has affirmatively
reached out to stakeholders who for whatever reason did not avail
themselves of the opportunities to provide written comments.
Nevertheless, I do not believe that requiring formal ``hearings''
with a hearing examiner and cross-examination is generally necessary or
beneficial. It is a formal, time-consuming, and rigid proceeding that
delays completion of the rulemaking and may not be conducive to the
free-flowing discussion that may be what is most useful in a particular
case. Less formal mechanisms often are more efficient and helpful.
Question 7. Given the Commission's broad authorities, regulatory
action should be limited to only those areas where substantial evidence
can support the action. The existing FTC rulemaking authority required
proof of substantial evidence in support of the Commission's action,
and this requirement is consistent with the heightened burden of
substantial evidence proof required under judicial review. Is it your
intent that the Commission also adopt the less burdensome arbitrary and
capricious standard of review if provided across-the-board APA
rulemaking authority?
Answer. The standard for judicial review under the two formulations
is the same. Please see the discussion of the standard for review on
page 4, supra.
Question 8. Have you consulted with the Department of Justice (DOJ)
regarding your desire to litigate independently of them? If so, have
they formally supported your proposal?
Answer. There have been informal discussions, but to our knowledge
DOJ has taken no position on the issue.
Question 9. The Commission has the authority to seek an injunction
immediately, on its own behalf, to stop the bad acts. Also, should the
Commission choose to collect civil penalties, the law requires a 45-day
window in which the DOJ can decide whether to act on behalf of the FTC.
If the DOJ chooses not to, then the FTC can file in its own name. In
your testimony you mentioned that you may not be able to pursue the
injunction on your own behalf while working with the DOJ to pursue
civil penalties. Can you please explain why you are unable to seek an
injunction to stop the bad acts immediately, while working through the
DOJ process to collect civil penalties?
Answer. The FTC Act does not currently permit the FTC to commence
an action to seek preliminary injunctive relief, including a temporary
restraining order, if the action will ultimately involve a civil
penalty. The FTC may file for injunctive relief for a claim only if it
is not seeking any civil penalty for it.
Question 9(a). Can you also provide the following information--the
number of times the FTC notified the DOJ of interest in collecting
civil penalties over the past decade?
Answer. From FY 2000 through FY 2010 to date, the Commission has
notified DOJ of 171 matters in which the Commission wished to obtain
civil penalties. This includes both instances in which the Commission
staff had negotiated a settlement calling for payment of civil
penalties prior to issuance of a complaint, as well as instances in
which no settlement was reached but a complaint was approved by the
Commission for referral and filing by DOJ in order to obtain civil
penalties.
Question 9(b). Of these notifications, how often did the DOJ decide
to pursue the action within the 45-day period?
Answer. From FY 2000 through FY 2010 to date, the DOJ decided to
file referred complaints approved by the Commission in all but two
instances.
Question 9(c). When the DOJ chose not to pursue action, how often
did the FTC initiate action?
Answer. In both of the cases when DOJ declined a referred
complaint, the FTC initiated action.
Question 9(d). If the DOJ chooses to pursue the action, do they
cover the costs related to the action?
Answer. Yes, generally. However, much of the work that underlies a
civil penalty action is conducted prior to a referral to DOJ, and then,
after a referral, FTC staff often provides substantial litigation
support and assistance at the FTC's expense.
______
Response to Written Questions Submitted by Hon. David Vitter to
Hon. Jon Leibowitz
Question 1. Chairman Leibowitz, your letter to the House Energy and
Commerce Committee in October 2009 noted that most people regard your
agency as an effective consumer protection agency. I would agree that
we should work to ensure that assertion remains true and that any areas
in which the commission is currently hindered in protecting consumers
should be closely considered. With that mind, I have some questions
about current requirements of the FTC under the Magnuson-Moss
rulemaking procedures and proposals to change how the FTC functions. Do
you believe that public advanced notice of proposed rulemakings, which
provide Congressional committees with an appropriate view into the
FTC's agenda, do not serve a positive function?
Answer. I believe that ANPRs do serve a useful purpose in some
cases. When the agency lacks sufficient law enforcement experience and
expertise in the subject matter of the prospective rule, it often makes
sense to publish an ANPR, without any proposed rule text, to obtain
general input and information about the need for a rule and, if so,
what provisions it should include. Thus, with respect to several of the
FTC's rules promulgated pursuant to specific Congressional grants of
APA authority, the Commission issued ANPRs to commence the proceeding.
In other situations, the FTC has convened public workshops or conducted
informal outreach in lieu of an ANPR to gain the requisite knowledge
and expertise.
Although ANPRs are appropriate and useful in some circumstances,
often the Commission already has the experience and expertise it needs
to draft a proposed rule. In these cases, proceeding with an ANPR first
is unnecessary and duplicative, resulting in what can be a several-
month delay in completing the rule. Of course, whether or not it issues
an ANPR, the Commission's practice is to ensure that stakeholders have
meaningful notice and opportunities to provide information and express
their views for consideration, both formally during the comment period
on the proposed rule and through other means.
Question 2. Do you believe that providing the text of the proposed
rule in notice of proposed rulemaking does not provide value to the
public? Doesn't the inclusion of the text of the proposed rule and any
alternatives provide the public with an opportunity to prepare for
compliance with the new rule, as well as to provide input regarding its
potential effects, possible improvements, and other concerns through
the process and in public meetings?
Answer. Generally speaking, I think there is great value in
providing proposed rule text when publishing an NPR. Indeed, the FTC
routinely includes the text of the proposed rule in its NPRs, including
for APA rulemakings where it is not required. I would anticipate that
we would continue to do so.
Question 3. Particularly in the current economic situation with
many businesses struggling to keep their employees employed, should all
businesses across the U.S. be burdened with the cost of specific
regulation to prevent unfair or deceptive practices that are not
prevalent or that are very rare in the marketplace?
Answer. I cannot imagine a situation in which the Commission would
promulgate a rule addressing practices that are very rare, and I do not
believe it has ever done so. We recognize the importance of using our
rulemaking authority very judiciously, and in a manner that minimizes
compliance costs, to tackle persistent and common problems for which
individual case enforcement may be ineffective or inefficient. My
concern, however, is with the concept of ``prevalence,'' a finding of
which is required for Magnuson-Moss rulemaking. The threshold at which
a practice becomes ``prevalent'' is undefined in the statute or, to my
knowledge, in any case law. Thus, the Commission is faced with the
choice of exhaustively cataloguing the incidence of the challenged
practice, at significant cost in time and resources, or building a less
exhaustive record and risking that the rule would be overturned if
challenged in court.
Question 4. I know we all want to protect consumers effectively.
With that in mind, please explain the details of any situations where
you feel the FTC has been unable to act effectively because of the
current requirements for the FTC's procedures. Please also highlight if
you have seen specific types of harm that the FTC has been unable to
address under its current authority and procedural requirements.
Answer. There are many instances in which the FTC has been hindered
in its ability to protect consumers due to the absence of the four
enhancements to the agency's authority that we are seeking.
The inability to promulgate a rule under the FTC Act without
complying with the unwieldy and burdensome Magnuson-Moss procedures--
procedures that typically lead to 8-10 year proceedings--as a practical
matter has resulted in a virtual absence of FTC rulemaking except in
specific areas in which Congress has authorized or mandated a rule
using APA procedures. Thus, for example, the Commission continues to
attack the problem of deceptive negative option marketing on a case-by-
case basis, rather than through a rule that would establish common
standards and ease our enforcement burden. Moreover, as new forms of
illegal practices quickly become common, it is simply not useful to
initiate an 8-10 year rulemaking proceeding; by the time the rule would
become effective, the illegal practice may have disappeared, only to be
replaced by a new one.
The absence of civil penalty authority in cases involving
violations of the FTC Act has limited the Commission's ability to
establish effective deterrence in certain areas. For example, the FTC
has brought numerous cases against companies that failed to undertake
reasonable measures to protect consumers' sensitive personal
information from possible identity thieves. In these cases, consumer
redress generally is not a practicable remedy, because identifying
injured consumers and determining their loss is frequently impossible.
Similarly, disgorgement of illicit profits may be an unavailable remedy
as the defendant may not have profited from its negligence or profits
may not be calculable. Similar problems arise in cases involving
illegal spyware and malware--the impracticality of obtaining consumer
redress or disgorgement, in the absence of civil penalty authority, has
weakened the FTC's ability to prevent future violations.
The inability of the Commission to litigate its own civil penalty
cases has in some instances limited its effectiveness in stopping
ongoing fraud. For example, in cases where effective consumer
protection depends on obtaining preliminary relief halting ongoing
violations and/or preserving assets for consumers, the Commission may
have to forgo seeking civil penalties in order to avoid the delay
caused by the 45-day referral period to DOJ.
Finally, the lack of clear ``aiding and abetting'' authority has
forced the Commission in some cases either to forgo prosecution of
certain entities, such as credit card processors or billing
aggregators, or undertake the complex and uncertain task of proving
that the entities' practices meet the ``unfairness'' standard in
Section 5(n) of the FTC Act.