[Senate Hearing 110-1170]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1170
OVERSIGHT OF TELEMARKETING PRACTICES AND THE CREDIT REPAIR
ORGANIZATIONS ACT (CROA)
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JULY 31, 2007
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska, Vice Chairman
Virginia JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas
BARBARA BOXER, California OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
Christine D. Kurth, Republican Staff Director and General Counsel
Kenneth R. Nahigian, Republican Deputy Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on July 31, 2007.................................... 1
Statement of Senator Klobuchar................................... 42
Statement of Senator Pryor....................................... 1
Statement of Senator Thune....................................... 46
Witnesses
Cerasale, Jerry, Senior Vice President, Government Affairs,
Direct Marketing Association, Inc.............................. 20
Prepared statement........................................... 21
Faulkner, Joanne S., Attorney, on Behalf of National Association
of Consumer Advocates, National Consumer Law Center, U.S. PIRG,
Consumer Federation of America................................. 28
Prepared statement........................................... 30
Holland, Robin, Senior Vice President, Global Operations, Equifax
Inc............................................................ 25
Prepared statement........................................... 26
Johnson, Richard, Member, Board of Directors, AARP............... 15
Prepared statement........................................... 17
Parnes, Lydia B., Director, Bureau of Consumer Protection,
Federal Trade Commission....................................... 2
Prepared statement........................................... 3
St. Clair, Steve, Assistant Attorney General, State of Iowa...... 37
Prepared statement........................................... 39
Appendix
Faulkner, Joanne S., Attorney, National Association of Consumer
Advocates, supplemental statement.............................. 55
Holland, Robin, Senior Vice President, Global Operations, Equifax
Inc., supplemental statement................................... 53
Response to written questions submitted by Hon. Frank R.
Lautenberg to:
Jerry Cerasale............................................... 57
Richard Johnson.............................................. 57
Lydia B. Parnes.............................................. 55
OVERSIGHT OF TELEMARKETING PRACTICES AND THE CREDIT REPAIR
ORGANIZATIONS ACT (CROA)
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TUESDAY, JULY 31, 2007
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 2:35 p.m. in room
SR-253, Russell Senate Office Building, Hon. Mark Pryor,
presiding.
OPENING STATEMENT OF HON. MARK PRYOR,
U.S. SENATOR FROM ARKANSAS
Senator Pryor. I'll go ahead and call the meeting to order,
and I want to thank our witnesses for being here.
We're going to have some other Senators join us. I
understand we're going to have a number of Senators that will
be coming and going throughout the hearing, and I'd like to
thank Chairman Inouye and Co-Chairman Stevens for holding this
hearing and allowing me to chair this hearing on telemarketing
practices and the Credit Repair Organizations Act, or CROA,
under the FTC.
I'd also like to thank them for their past leadership on
this issue, in allowing these issues to come before the
Committee on previous occasions. Both of these topics are very
important to American consumers and important in the American
marketplace.
I'm a sponsor of the legislation to reauthorize the Do Not
Call Registry, I'm particularly interested in the testimony of
the witnesses that are here today to offer insight into the
efficacy of the program and how to try to improve that program,
if possible. I'm also concerned about whether CROA is achieving
the intended protections Congress created in 1993, and whether
the Act is preventing consumer access to needed financial tools
and resources.
By analyzing the important issues of these laws and
regulations, I'm optimistic that Congress can create
legislation that is forward-thinking to--and considerate of--
the interested and impacted parties. I believe Congress has a
duty to protect the most vulnerable Americans from scams and
other actions of unscrupulous businesses, and I hope through
careful consideration of the testimony today, and emerging
issues, we can protect consumers from identity theft, and undue
intrusion, while ensuring the stream of commerce as efficiently
as possible.
So, I'd like to go ahead and open the discussion, we may
have other Senators join us here in a few moments, and we may
allow them to make opening statements when they come.
But first, on our panel today--I guess we'll do 5-minute
rounds? We'll allow each of the panelists to have opening
statements of up to 5 minutes. We'll do this in two panels.
Then we'll ask questions of the two panels separately. We'll do
panel one first, and then we'll do panel two and have questions
after each panel.
First, let me introduce Ms. Lydia Parnes; she's the
Director of Bureau of Consumer Protection at the Federal Trade
Commission here in Washington, D.C.
Ms. Parnes?
STATEMENT OF LYDIA B. PARNES, DIRECTOR, BUREAU OF CONSUMER
PROTECTION, FEDERAL TRADE COMMISSION
Ms. Parnes. Chairman Pryor, thank you. I appreciate the
opportunity to appear here today to discuss three of the
Commission's important consumer protection initiatives: Our
longstanding commitment to fight telemarketing fraud, the FTC's
widely used and highly regarded Do Not Call Registry, and our
aggressive enforcement of the Credit Repair Organizations Act.
As part of its mandate to protect consumers, the Commission
devotes significant resources to combating fraudulent,
deceptive and abusive telemarketing practices. We do this by
enforcing Section 5 of the FTC Act, and the Commission's
Telemarketing Sales Rule, both of which prohibit false and
misleading claims, unauthorized billing, and other practices
used by fraudsters to steal money from consumers.
The Commission also implements and enforces the Do Not Call
Registry, which protects the privacy of Americans who have
expressed their wish not to receive telemarketing calls.
The Commission has been pursuing fraudulent telemarketers
for more than 20 years. Since 1991, we have filed more than 350
telemarketing cases, challenging an array of scams, including
bogus investment schemes, business opportunities, and
sweepstakes pitches.
In addition to the strong injunctive relief we obtained in
these cases, the Commission has secured orders providing for
more than $500 million in consumer redress, or disgorgement.
We share your concern about telemarketers targeting the
elderly. The May 20 New York Times article on this issue,
highlighted the role that third parties play in facilitating
telemarketing fraud. Fraudulent telemarketers have always
required the participation of third-party businesses. Lead list
generators and brokers, third-party telemarketing firms,
fulfillment houses, money transmitters, payment processors,
banks and telephone companies are just some of the entities
that telemarketers need to run their business. That is why
Congress, in the Telemarketing Act, gave the Commission the
authority to regulate and challenge practices that assist and
facilitate fraudulent telemarketing, and the Commission has
used that authority.
In addition to its anti-fraud work in the telemarketing
area, the Commission administers the National Do Not Call
Registry. Since its implementation in June 2003, consumers have
registered more than 146 million telephone numbers. The
humorist, Dave Barry, called it ``the most popular Government
program since the Elvis stamp.''
According to a Harris Interactive Survey released last
year, 92 percent of those polled reported receiving fewer
telemarketing calls. The success of the Registry is due, in
part, to vigorous enforcement, and a high rate of industry
compliance. The Commission has brought 27 cases to enforce the
Do Not Call rule, resulting in orders for $17.4 million in
civil penalties and disgorgement.
Reauthorizing the Do Not Call Implementation Act, and with
it, our ability to collect fees from those who access the
Registry, will ensure the continued success of the Do Not Call
Program, and underscore our collective commitment to this
important privacy protection.
We do believe the bill can be strengthened, by statutorily
mandating the fees charged to telemarketers accessing the
registry, and look forward to working with you on this matter.
The Commission also enforces the Credit Repair
Organizations Act by aggressively pursuing businesses engaged
in fraudulent credit repair. CROA was enacted to protect the
public from unfair and deceptive practices by credit repair
organizations.
Together with its Federal and State law enforcement
partners, the Commission has conducted several law enforcement
sweeps against fraudulent credit repair outfits, resulting in
over 100 enforcement actions. We've also engaged in outreach to
businesses and consumers, and have published numerous
educational materials designed to educate both consumers and
businesses about their respective rights and obligations in the
credit area.
The Commission will continue to take aggressive action to
enforce CROA, combat fraudulent, deceptive and abusive
telemarketing practices, and to continue the success of the Do
Not Call Registry.
Again, I appreciate the opportunity to appear before the
Committee, and would be pleased to take any questions you may
have.
[The prepared statement of Ms. Parnes follows:]
Prepared Statement of Lydia B. Parnes, Director, Bureau of Consumer
Protection, Federal Trade Commission
Chairman Inouye, Ranking Member Stevens, and Members of the
Committee, I am Lydia Parnes, Director of the Bureau of Consumer
Protection at the Federal Trade Commission (``Commission'' or
``FTC'').\1\ I appreciate the opportunity to appear before you today to
tell you about the Commission's law enforcement program \2\ to fight
telemarketing fraud and protect consumers' privacy from unwanted
telemarketing calls, as well as our enforcement of the Credit Repair
Organizations Act (``CROA'').
I. Anti-fraud and Privacy Initiatives Under the Telemarketing Sales
Rule
An article in the May 20 issue of The New York Times,\3\ which
included some disturbing allegations about telemarketing fraud
targeting the elderly, has prompted a number of inquiries from Members
of Congress. This article focused on the alleged practices of infoUSA,
a leading purveyor of compiled consumer data. According to the article,
the company marketed lists of elderly consumers and failed to implement
safeguards to ensure that only legitimate companies could purchase its
data. Deplorable actions like the ones described in this article are
among the types of fraudulent practices targeted by the Commission's
telemarketing law enforcement program. The Commission has an extensive
program to battle fraudulent and abusive telemarketing practices
through its vigorous enforcement of the Telemarketing Sales Rule
(``TSR''). The FTC's telemarketing enforcement has two components.
First, the Commission focuses strongly on the anti-fraud provisions of
the TSR. Second, the FTC implements and enforces the requirements of
the National Do Not Call Registry, which protects the privacy of
Americans who have expressed their wish not to receive telemarketing
calls by entering their numbers in the Registry.
A. The Commission's Enforcement of the Telemarketing Sales Rule's Anti-
Fraud
Provisions
The Commission has a strong commitment to rooting out telemarketing
fraud. From 1991 to the present, the FTC has brought more than 350
telemarketing cases. The vast majority of these cases involved
fraudulent marketing of investment schemes, business opportunities,
sweepstakes pitches, and the sales of various goods and services,
including health care products. Prior to 1994, these cases were brought
pursuant to Section 5 of the FTC Act, which prohibits ``unfair or
deceptive acts or practices in or affecting commerce.'' \4\
In 1994, Congress enhanced the Commission's enforcement arsenal by
enacting the Telemarketing and Consumer Fraud and Abuse Prevention Act
(the ``Telemarketing Act'').\5\ This legislation directed the
Commission to issue a trade regulation rule defining and prohibiting
deceptive or abusive telemarketing acts or practices. The Commission
promulgated the TSR in 1995. Since 1996, the Commission has filed more
than 240 cases under the TSR. In most of these cases, the Commission
sought preliminary relief to bring an immediate halt to ongoing law
violations, and in virtually every case ultimately obtained permanent
injunctions to prevent future misconduct. In addition to injunctive
relief, the Commission has secured orders providing for more than $500
million in consumer restitution or, where restitution was not
practicable, disgorgement to the U.S. Treasury. During this same
period, the Commission, through cases filed on its behalf by the U.S.
Department of Justice (``DOJ''),\6\ has obtained civil penalty orders
totaling nearly $17 million.
As an example, just last week the FTC halted the allegedly unlawful
telemarketing operations of Suntasia Marketing,\7\ which, according to
the FTC's complaint, took millions of dollars directly out of tens of
thousands of consumers' bank accounts without their knowledge or
authorization. Suntasia allegedly tricked consumers into divulging
their bank account numbers by pretending to be affiliated with the
consumers' banks and offering a purportedly ``free gift'' to consumers
who accepted a ``free trial'' of Suntasia's products. Once the consumer
divulged his or her bank account number, Suntasia allegedly was able to
debit each consumer's account for initial fees ranging from $40 to
$149. Often, charges between $19.95 and $49.95 recurred on a monthly
basis, and Suntasia allegedly frustrated consumers' attempts to stop
them. According to the complaint, some of Suntasia's calls were
directed to consumers listed in ``full-data leads,'' which already
included consumers' bank account numbers. Practical Marketing, a
company from whom Suntasia purchased such leads, was investigated and
prosecuted by the U.S. Postal Inspection Service and the U.S. Attorney
for the Southern District of Illinois, and pled guilty to one count of
identity theft on November 6, 2006.\8\
Working in cooperation with the U.S. Postal Inspection Service and
state and local law enforcement, the Commission moved aggressively to
stop Suntasia's allegedly unlawful practices. Last week, the Commission
sought and obtained an ex parte court order. At the Commission's
request, the U.S. District Court for the Middle District of Florida
halted the scheme, appointed a receiver, and froze the assets of the
nine corporate defendants and six individual defendants. The
defendants' assets are frozen to preserve the agency's ability to
obtain funds for injured consumers, should the Commission prevail in
this litigation. The Suntasia case is just one example of the FTC's
vigorous law enforcement program--a key feature of which is partnering
with other law enforcement agencies whenever possible--to protect
American consumers from the pernicious practices of fraudulent
telemarketers.
By no means does the Suntasia case stand alone. The FTC frequently
works with various Federal, state, local, and foreign partners to
conduct law enforcement ``sweeps''--multiple simultaneous law
enforcement actions--that focus on specific types of telemarketing
fraud,\9\ and works to promote joint filing of telemarketing actions
with the states.\10\ When the Commission files a lawsuit in Federal
district court, we seek every appropriate equitable civil remedy a
court can grant it to stop telemarketing fraud.\11\ Remedies may
include freezing the defendants' personal and corporate assets,
appointing receivers over the corporate defendants, issuing temporary
and permanent injunctions, and ordering consumer redress and
disgorgement of ill-gotten gains.
A sample of the FTC's recent cases illustrates the range of the
FTC's enforcement program. For instance, one case resulted in a
judgment of more than $8 million against Canadian telemarketers of
advance-fee credit cards.\12\ Another yielded a contempt order banning
a seller of bogus business opportunities from all telemarketing.\13\
Still another case resulted in a permanent injunction against a Canada-
based operation that allegedly telemarketed fraudulent ``credit card
loss protection'' and bogus discount medical and prescription drug
packages.\14\ In one of the Commission's largest actions, which
involved an international ring that allegedly sold advance-fee credit
cards, the agency obtained an order banning 13 individuals and entities
from telemarketing.\15\
Although the Commission does not have criminal law enforcement
authority, it recognizes the importance of criminal prosecution to
deterrence and consumer confidence. Accordingly, the Commission
routinely refers matters appropriate for criminal prosecution to
Federal and state prosecutors through its Criminal Liaison Unit
(``CLU''). Since October 1, 2002, 214 people have been indicted \16\ in
criminal cases involving telemarketing fraud that arose from referrals
made by CLU, including cases where an FTC attorney was designated a
Special Assistant U.S. Attorney to help with the criminal prosecution.
Of those 214 charged, 111 were convicted or pleaded guilty. The rest
are awaiting trial, in the process of extradition from a foreign
county, or fugitives from justice.\17\
As in the Suntasia case, the Commission targets telemarketers who
obtain consumers' personal information under false pretenses. For
example, in Xtel Marketing, the FTC sued telemarketers that masqueraded
as Social Security Administration representatives and claimed that call
recipients risked losing their Social Security payments if they did not
provide their bank account information.\18\ Just last month, based on
information provided by the FTC, a Federal judge sentenced one of the
principals in this scheme to 5 years in prison.
Telemarketers' deceptive and abusive practices often are aided or
made possible by third parties, such as list brokers, who sell personal
information about consumers to disreputable telemarketers, or by
unscrupulous payment processors that enable fraudulent telemarketers to
reach into consumers' bank accounts.
The May 20 New York Times article highlighted the role list brokers
can play in facilitating such fraud. The article described the alleged
practices of infoUSA, leading purveyor of compiled consumer data.
According to the article, the company marketed lists of information
about elderly consumers and failed to implement safeguards to ensure
that only legitimate companies could purchase its data. The FTC has
brought a number of cases challenging the sale of such lists to
fraudulent telemarketers. In 2002, the FTC sued three information
brokers that allegedly knew or consciously avoided knowing that they
supplied lists of consumers to telemarketers acting in violation of the
TSR. The FTC charged that Listdata Computer Services, Inc., Guidestar
Direct Corporation, and NeWorld Marketing LLC knowingly supplied lists
to telemarketers that were engaging in per se violations of the TSR by
engaging in advance-fee loan scams.\19\ Misuse of lists is a practice
specifically addressed in the permanent injunctions the FTC seeks in
its enforcement actions against fraudulent telemarketers. A standard
provision of the FTC's proposed orders bans or severely restricts
telemarketing defendants from selling, renting, leasing, transferring,
or otherwise disclosing their customer lists. The FTC continues to
monitor the practices of list brokers in this area through ongoing,
non-public investigations.\20\
The FTC also has challenged other third-party actors such as
payment processors, without whose assistance telemarketers would not be
able to gain access to consumers' bank accounts.\21\ Generally, the FTC
has alleged that these payment processors knew or consciously avoided
knowing that they were facilitating fraudulent telemarketing operations
in violation of the TSR \22\ and, where appropriate, also has alleged
direct violations of Section 5 of the FTC Act. Two cases brought this
past December illustrate Commission enforcement in this area. In the
first case, FTC v. Interbill,\23\ the FTC alleged that Interbill
debited money from consumer accounts without their authorization, in
violation of the FTC Act.\24\ In the second, FTC v. Global Marketing
Group, Inc.,\25\ the FTC obtained a preliminary injunction to shut down
a payment processor that allegedly provided services to at least nine
advance-fee loan telemarketers.\26\
The Commission's consumer and business education efforts complement
our law enforcement initiatives. The FTC not only publishes compliance
guides for business, but also a wealth of information in English and
Spanish for consumers, including brochures and fact sheets on
telemarketing fraud, sweepstakes and lotteries, work-at-home schemes,
and advance-fee loans, as well as phishing and other Internet-based
frauds. This information is available in print and online. The FTC and
its partners also distribute consumer education information to seniors
groups and other community organizations.\27\ In addition to providing
educational resources to consumers and organizations nationwide, the
FTC partners with other organizations and people who regularly meet
with seniors and send representatives to community events.
B. Enforcement of the Do Not Call Provisions of the TSR
In addition to its anti-fraud work in the telemarketing arena, the
Commission amended the TSR in 2003 to strengthen its privacy protection
provisions by, among other things, establishing the National Do Not
Call Registry.\28\ Consumers have registered more than 146 million
telephone numbers since the Registry became operational in June 2003,
and the Do Not Call program has been tremendously successful in
protecting consumers' privacy from unwanted telemarketing calls. A
Harris Interactive Survey released in January 2006 showed that 94
percent of American adults have heard of the Registry and 76 percent
have signed up for it.\29\ Ninety-two percent of those polled reported
receiving fewer telemarketing calls.\30\ Similarly, an independent
survey by the Customer Care Alliance demonstrates that the National
Registry has been an effective means for consumers to limit unwanted
telemarketing calls.\31\
While the Commission appreciates the high rate of compliance with
the TSR's Do Not Call provisions, it vigorously enforces compliance to
ensure the program's ongoing effectiveness. Violating the Do Not Call
requirements subjects telemarketers to civil penalties of up to $11,000
per violation.\32\ Twenty-seven of the Commission's telemarketing cases
have alleged Do Not Call violations, resulting in $8.8 million in civil
penalties and $8.6 million in redress or disgorgement ordered.\33\
A recent case against The Broadcast Team, filed by DOJ on behalf of
the FTC, illustrates the enforcement of the TSR's Do Not Call
provisions.\34\ The Broadcast Team allegedly used ``voice
broadcasting'' to make tens of millions of illegal automated
telemarketing calls, often to numbers on the National Do Not Call
Registry. The complaint alleged that the company used an automated
phone dialing service to call and deliver pre-recorded telemarketing
messages. When a live person picked up the phone, The Broadcast Team
allegedly hung up immediately or, in other instances, played a
recording. Either course of conduct violates the TSR's restriction on
``abandoning calls''--that is, failing to connect a consumer to a live
sales representative within 2 seconds after the consumer answers the
telephone.\35\ The Broadcast Team agreed to pay a $1 million civil
penalty to settle the charges.\36\
The largest Do Not Call case to date involved satellite television
subscription seller DIRECTV and a number of companies that telemarketed
on behalf of DIRECTV. DIRECTV paid over $5.3 million to settle Do Not
Call and call abandonment charges,\37\ one of the largest civil
penalties the Commission has obtained in any case enforcing a consumer
protection law.
II. Re-Authorization of the Do Not Call Implementation Act
The Do Not Call Implementation Act (``DNCIA''), passed by Congress
on March 11, 2003, authorized the FTC to promulgate regulations
establishing fees sufficient to implement and enforce the Do Not Call
provisions of the TSR. This section first describes generally how the
Do Not Call program works for consumers, telemarketers, and law
enforcement agencies. It then discusses the grant of authority in the
DNCIA for the Commission to charge fees for access to the National
Registry, and the Commission's use of such fees to maintain the
effectiveness of the TSR's Do Not Call provisions. Finally, it
addresses legislative improvements to the DNCIA that would ensure the
continued success of the National Registry and strengthen the
Commission's telemarketing enforcement operations.
A. How the National Do Not Call Registry Works
The National Registry is a comprehensive, automated system used by
consumers, telemarketers, and law enforcement agencies. The Registry
was built to accomplish four primary tasks:
1. To allow consumers to register their preferences not to
receive telemarketing calls at registered telephone numbers;
2. To allow telemarketers and sellers to access the telephone
numbers included in the National Registry and to pay the
appropriate fees for such access;
3. To gather consumer complaint information concerning alleged
Do Not Call violations automatically over the telephone and the
Internet; and
4. To allow FTC, state, and other law enforcement personnel
access to consumer registration information, telemarketer
access information, and complaint information maintained in the
Registry.
Consumers can register their telephone numbers through two methods:
by calling a toll-free number from the telephone number they wish to
register, or over the Internet. The process is fully automated, takes
only a few minutes, and requires consumers to provide minimal
personally identifying information.\38\
Telemarketers and sellers can access registered telephone numbers,
and pay the appropriate fee for that access, if any, through an
Internet website dedicated to that purpose. The only information about
consumers that companies receive from the National Registry is the
registered telephone number with no name attached. Those numbers are
sorted and available for download by area code. Companies may also
check a small number of telephone numbers at a time via interactive
Internet pages.
Consumers who receive unwanted telemarketing calls can register a
complaint via either a toll-free telephone number, an interactive voice
response system, or the Internet. To conduct investigations, law
enforcement officials also can access data in the National Registry,
including consumer registration information, telemarketer access
information, and consumer complaints. Such access is provided to the
law enforcement community throughout the United States, Canada, and
Australia through Consumer Sentinel, a secure Internet website
maintained by the FTC.
B. Fees Collected and Used Pursuant to the DNCIA
The DNCIA gave the Commission the specific authority to
``promulgate regulations establishing fees sufficient to implement and
enforce the provisions relating to the `Do-Not-Call' Registry of the
Telemarketing Sales Rule (``TSR'').'' \39\ It also provided that ``[n]o
amounts shall be collected as fees pursuant to this section for such
fiscal years except to the extent provided in advance in appropriations
Acts. Such amounts shall be available . . . to offset the costs of
activities and services related to the implementation and enforcement
of the [TSR], and other activities resulting from such implementation
and enforcement.'' \40\ Pursuant to the DNCIA and the appropriations
Acts, the Commission has conducted annual rulemaking proceedings to
establish the appropriate level of fees to charge telemarketers for
access to the Registry.
The fees collected are intended to offset costs in three areas.
First, funds are required to operate the Registry. As described above,
the development and ongoing operation of the Do Not Call Registry
involves significant resources and effort.
Second, funds are required for law enforcement and deterrence
efforts, including identifying targets, coordinating domestic and
international initiatives, challenging alleged violators, and engaging
in consumer and business education efforts, which are critical to
securing compliance with the TSR. As with all TSR enforcement, the
agency coordinates with its state partners and DOJ, thereby leveraging
resources and maximizing deterrence. Further, given the fact that
various telemarketing operations are moving offshore, international
coordination is especially important. These law enforcement efforts are
a significant component of the total costs, given the large number of
investigations conducted by the agency and the substantial effort
necessary to complete such investigations.
As noted previously, the Commission considers consumer and business
education efforts important complements to enforcement in securing
compliance with the TSR. Because the amendments to the TSR were
substantial, and the National Registry was an entirely new feature,
educating consumers and businesses helped to reduce confusion, enhance
consumers' privacy, and ensure the overall effectiveness of the system.
Based on the Commission's experience, this substantial outreach effort
was necessary, constructive, and effective in ensuring the success of
the program.
Third, funds are required to cover ongoing agency infrastructure
and administration costs associated with operating and enforcing the
Registry, including information technology structural supports and
distributed mission overhead support costs for staff and non-personnel
expenses, such as office space, utilities, and supplies. In this
regard, the FTC has made substantial investments in technology and
infrastructure in response to the significantly increased capacity
required by the National Registry.
Under the current fee structure, telemarketers are charged $62 per
area code of data, starting with the sixth area code, up to a maximum
of $17,050 for the entire Registry.\41\ Telemarketers are prohibited
from entering into fee-sharing arrangements, including any arrangement
with any telemarketer or service provider to divide the fees amongst
its various clients.
Telemarketers receive the first five area codes of data at no cost.
The Commission allows such free access to limit the burden placed on
small businesses that only require access to a small portion of the
Registry. The National Registry also allows organizations exempt from
the Registry requirements to access the Registry at no cost.\42\ While
these entities are not required by law to access the Registry, many do
so voluntarily in order to avoid calling consumers who have expressed
their preferences not to receive telemarketing calls. The Commission
determined that such entities should not be charged access fees when
they are under no legal obligation to comply with the Do Not Call
requirements of the TSR because it may make them less likely to obtain
access to the Registry, which would result in an increase in the number
of unwanted calls to consumers.
C. Legislative Modifications of the DNCIA
As noted above, the DNCIA allowed the FTC to promulgate regulations
to collect fees for the Do Not Call Registry. The Commission believes
that reauthorizing the DNCIA will demonstrate Congress' continued
commitment to protecting consumers from unwanted intrusions into the
privacy of their homes, and appreciates Senator Pryor's proposed
reauthorizing legislation. The Commission believes that the bill can be
strengthened by statutorily mandating the fees to be charged to
telemarketers accessing the National Registry, and specifically by
mandating such fees in an amount sufficient to enable the Commission to
enforce the TSR. The Commission believes that such an amendment to the
DNCIA would ensure the continued success of the National Registry by
providing the Commission with a stable funding source for its TSR
enforcement activities. The Commission also believes a stable fee
structure would benefit telemarketers, sellers, and service providers
who access the Registry. The Commission looks forward to working with
you on this matter.
III. Credit Repair Organizations Act
The Commission also enforces the Credit Repair Organizations Act
(``CROA'' ) \43\ by aggressively pursuing businesses engaging in
fraudulent ``credit repair.'' CROA was enacted to protect the public
from unfair or deceptive advertising and business practices by credit
repair organizations. In addition to prohibiting false or misleading
statements about credit repair services,\44\ CROA includes a number of
other important requirements to protect consumers, including a ban on
collecting payment before the service is fully performed and a
requirement to provide consumers with a written disclosure statement
before any agreement is executed.\45\
The Commission has conducted several sweeps of fraudulent credit
repair operations, including Project Credit Despair (twenty enforcement
actions brought by the FTC, U.S. Postal Inspection Service, and eight
state attorneys general in 2006); \46\ Operation New ID--Bad Idea I and
II (52 actions brought by the FTC and other law enforcement agencies in
1999); \47\ and Operation Eraser (32 actions brought by the FTC, state
attorneys general, and DOJ in 1998).\48\
The Commission also educates businesses and consumers about credit
repair. Among other outreach efforts, the Commission publishes a large
volume of educational materials designed to educate both consumers and
businesses about their respective rights and obligations in the credit
area. The agency's publications include: Credit Repair: Self Help May
Be Best,\49\ which explains how consumers can improve their
creditworthiness and lists legitimate resources for low or no cost
help; and How to Dispute Credit Report Errors,\50\ which explains how
to dispute and correct inaccurate information on a consumer report and
includes a sample dispute letter.
One issue that has arisen recently is whether CROA should be
amended to exempt credit monitoring services, which are offered by
consumer reporting agencies, banks, and others.\51\ As a matter of
policy, the Commission sees little basis on which to subject the sale
of legitimate credit monitoring and similar educational products and
services to CROA's specific prohibitions and requirements, which were
intended to address deceptive and abusive credit repair business
practices. Credit monitoring services, if promoted and sold in a
truthful manner, can help consumers maintain an accurate credit file
and provide them with valuable information for combating identity
theft.\52\ However, any amendment intended to provide an exemption for
legitimate credit monitoring services must be carefully considered and
narrowly drawn. Drafting an appropriate legislative clarification is
difficult and poses challenges for effective law enforcement. If an
exemption is drafted too broadly, it could provide an avenue for credit
repair firms to evade CROA. Indeed, in enforcing CROA, the Commission
has encountered many allegedly fraudulent credit repair operations that
aggressively find and exploit existing exemptions in an attempt to
escape the strictures of the current statute.\53\ Because of the
drafting difficulties, the Commission urges Congress to continue to
reach out to stakeholders in developing any amendments to CROA.
Endnotes
\1\ While 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.
\2\ The FTC has broad law enforcement responsibilities under the
Federal Trade Commission Act, 15 U.S.C. 41, et seq. With certain
exceptions, the statute provides the agency with jurisdiction over
nearly every economic sector. Certain entities, such as depository
institutions and common carriers, as well as the business of insurance,
are wholly or partly exempt from FTC jurisdiction. In addition to the
FTC Act, the agency has enforcement responsibilities under more than 50
other statutes and more than 30 rules governing specific industries and
practices.
\3\ Charles Duhigg, Bilking the Elderly, With a Corporate Assist,
N.Y. Times, May 20, 2007 at A1.
\4\ 15 U.S.C. 45(a).
\5\ 15 U.S.C. 6101-6108. Among the principal ways the
Telemarketing Act, as implemented by the Telemarketing Sales Rule,
strengthened the Commission's hand is that it provides a predicate for
the Commission, through the Department of Justice, to seek civil
penalties for violations. The Commission is not empowered to seek civil
penalties for deceptive or unfair practices in violation of Section 5
of the FTC Act.
\6\ Civil penalty actions are filed by DOJ on behalf of the FTC. In
general, for those statutes or rules for which the Commission is
authorized to seek civil penalties, under the FTC Act, the Commission
must notify the Attorney General of its intention to commence, defend,
or intervene in any civil penalty action under the Act. 15 U.S.C.
56(a)(1). DOJ then has 45 days, from the date of the receipt of
notification by the Attorney General, in which to commence, defend or
intervene in the suit. Id. If DOJ does not act within the 45-day
period, the FTC may file the case in its own name, using its own
attorneys. Id.
\7\ FTC v. FTN Promotions, Inc., 8:07-cv-1279-T-30TGW (M.D. Fla.
July 23, 2007).
\8\ 18 U.S.C. 1028(a)(7). The plea agreement included a fine in
an amount to be determined at sentencing, a payment of $100,000 to the
U.S. Postal Inspection Service Consumer Fraud Fund, and other costs and
assessments totaling about $13,000. At the sentencing on February 9,
2007, the court imposed a fine of $10,000.
\9\ Some of the sweeps in which the FTC and its law-enforcement
partners have engaged over the past several years include: ``Dialing
for Deception'' http://www.ftc.gov/opa/2002/04/dialing.shtm (a sweep by
the FTC that targeted telemarketing fraud in connections with in-bound
telephone calls); ``Ditch the Pitch'' http://www.ftc.gov/opa/2001/10/
ditch.shtm (a sweep targeting fraudulent out-bound telemarketing
brought by the FTC and 6 States); ``Operation No Credit,'' http://
www.ftc.gov/opa/2002/09/opnocredit.shtm (43 law-enforcement actions,
including criminal indictments, targeting a wide range of credit-
related frauds brought by the FTC, the DOJ, the U.S. Postal Inspection
Service, and 11 State and local authorities); ``Operation Protection
Deception'' http://www.ftc.gov/opa/2000/10/protectdecpt.shtm (a sweep
against telemarketers of fraudulent ``credit card protection'' services
with extensive assistance from 5 States and the Federal Bureau of
Investigation (``FBI'')); ``Senior Sentinel'' http://www.ftc.gov/opa/
1995/12/sen.shtm (a sweep targeting telemarketers who defraud the
elderly coordinated by the DOJ and FBI, with 5 civil cases brought by
the FTC, that led to hundreds of arrests and indictments across the
country); ``Project Telesweep'' http://www.ftc.gov/opa/1995/07/
scam.shtm (nearly 100 cases filed by the FTC, DOJ and 20 States
targeting business opportunity fraud often promoted through slick
telemarketing).
\10\ See, e.g., FTC and State of Maryland v. Accent Marketing,
Inc., No. 02-0405 (S.D. Ala. 2002); FTC and State of Washington v.
Westcal Equipment, Inc., No. C02-1783 (W.D. Wash. 2002); FTC and State
of Illinois v. Membership Services, Inc., No. 01-CV-1868 (S.D. Cal.
2001); FTC, Commonwealth of Virginia, State of North Carolina, and
State of Wisconsin v. The Tungsten Group, Inc., No. 2:01cv773 (E.D. Va.
2001); FTC and State of Nevada v. Consumer Credit Services, Inc., No.
CV-S-98-00741 (D. Nev. 1998); FTC and State of New Jersey v. National
Scholastic Society, Inc., No. 97-2423 (D.N.J. 1997).
\11\ When the Commission seeks relief in its own right, the
Commission's remedies are limited to equitable relief. As noted above,
if the Commission chooses instead to seek a civil penalty for
violations of the TSR, the Commission must refer the matter to DOJ.
\12\ FTC v. 120194 Canada, Ltd., No. 1:04-cv-07204 (N.D. Ill.,
permanent injunction order entered Mar. 8, 2007).
\13\ FTC v. Neiswonger, No. 4:96-cv-2225 (E.D. Mo., second
permanent injunction entered Apr. 23, 2007).
\14\ FTC v. STF Group, Inc., No. 03 C 0977 (N.D. Ill., stipulated
permanent injunction entered Jul. 21, 2006).
\15\ See http://www.ftc.gov/os/caselist/assail/assail.shtm (seven
permanent injunctions entered on various dates in FTC v. Assail, Inc.,
No. W03CA007 (W.D. Tex.)).
\16\ Eight of these indictments are under seal; staff does not know
the precise date of the indictments.
\17\ One defendant was granted a mistrial after suffering a stroke.
He has been reindicted.
\18\ FTC v. XTel Marketing, No. 04c-7238 (N.D. Ill. 2005).
\19\ Section 310.4(a)(4) of the Rule expressly prohibits
``requesting or receiving payment of any fee or consideration in
advance of obtaining a loan or other extension of credit when the
seller or telemarketer has guaranteed or represented a high likelihood
of success in obtaining or arranging a loan or of extension of credit
for a person.'' The orders obtained by the FTC permanently barred the
list brokers from providing lists to telemarketers engaging in illegal
business practices and required them to pay nearly $200,000 combined in
consumer redress. FTC v. Listdata Computer Services, Inc., No. 04-61062
(S.D. Fla., stipulated final order entered Aug. 17, 2004); FTC v.
Guidestar Direct Corp., No. CV04-6671 (C.D. Cal., stipulated final
order entered Aug. 13, 2004); FTC v. NeWorld Marketing LLC, No.
1:04cv159 (W.D. N. Car., stipulated final order entered Aug. 12, 2004);
see also http://www.ftc.gov/opa/2004/08/guidestar.shtm.
\20\ The Commission also has challenged the practice of brokers
selling sensitive customer information to third parties without having
reasonable procedures in place to verify the legitimacy of these third
parties. Last year, the FTC brought a lawsuit against ChoicePoint,
Inc., one of the Nation's largest data brokers, alleging that it
violated the Fair Credit Reporting Act and the FTC Act by failing to
screen prospective subscribers before selling them sensitive consumer
information. U.S. v. ChoicePoint, Inc., CV-0198 (N.D. Ga., consent
decree entered Jan. 30, 2006). The Commission alleged that ChoicePoint
approved as customers identity thieves who lied about their credentials
and whose applications should have raised obvious red flags. Under the
terms of a settlement, ChoicePoint paid $10 million in civil penalties
and $5 million in consumer redress, and agreed to implement new
procedures to ensure that it provides sensitive data only to legitimate
businesses for lawful purposes.
\21\ See, e.g., FTC v. Global Marketing Group, Inc., No. 8:06CV-
02272 (JSM) (M.D. Fla., filed Dec. 11, 2006) (litigation ongoing); FTC
v. First American Payment Processing, Inc., No. CV-04-0074 (PHX) (D.
Ariz, stipulated final order entered Nov. 23, 2004); FTC v. Electronic
Financial Group, No. W-03-CA-211 (W.D. Tex., stipulated final order
entered Mar. 23, 2004); FTC v. Windward Marketing, Ltd., No. 1:06-CV-
615 (FMH) (N.D. Ga., stipulated final order against certain payment-
processors entered Jun. 25, 1996, summary judgment order against
remaining payment-processors entered Sep. 30, 1997).
\22\ 16 C.F.R. 310.3(b).
\23\ No. CV-S-06 (D. Nev., filed Dec. 26, 2006).
\24\ Although the FTC does not have jurisdiction over banks, the
FTC coordinates with the Federal Reserve Board and the other banking
agencies concerning efforts to help banks avoid accepting fraudulent
checks. These entities generally are regulated by the Federal banking
regulatory agencies--the Federal Reserve System, the Office of the
Comptroller of the Currency, the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation, and the National Credit Union
Administration. Notably, the Commission recently authorized FTC staff
to issue an opinion letter to NACHA-The Electronic Payments Association
in support of that organization's proposed rule changes to strengthen
safeguards against fraudulent transactions in the payment processing
industry. The letter is available at http://www.ftc.gov/os/opinions/
070423staffcommenttonacha.pdf.
\25\ No. 8:06CV-02272 (JSM) (M.D. Fla., filed Dec. 11, 2006).
\26\ As noted above, advance-fee loan schemes are per se illegal
under the TSR. 16 C.F.R. 310.4(a)(4).
\27\ While the Commission remains deeply concerned about fraud
affecting older consumers, the FTC's consumer complaint data and the
results of its 2003 fraud survey indicate that the experience of older
consumers is not substantially different than that of the general
population. See http://www.ftc.gov/opa/2004/08/fraudsurvey.shtm. The
results of this 2003 survey indicated that consumers age 65 or older
did not experience more fraud than younger consumers.
\28\ The FTC promulgated the Do Not Call provisions and other
substantial amendments to the TSR under the express authority granted
to the Commission by the Telemarketing Act. Specifically, the
Telemarketing Act mandated that the rule--now known as the TSR--include
prohibitions against any pattern of unsolicited telemarketing calls
``which the reasonable consumer would consider coercive or abusive of
such consumer's right to privacy,'' as well as restrictions on the
hours unsolicited telephone calls can be made to consumers.
\29\ See http://www.harrisinteractive.com/harris_poll/
index.asp?PID=627.
\30\ Id. Discussing the effectiveness of the National Registry just
1 year after the inception of the program, the chairman of Harris Poll,
Harris Interactive stated, ``In my experience, these results are
remarkable. It is rare to find so many people benefit so quickly from a
relatively inexpensive government program.'' http://www.ftc.gov/opa/
2004/02/dncstats0204.shtm.
\31\ See National Do Not Call Study Preliminary Findings, Customer
Care Alliance, June 2004. Customer Care Alliance is a consortium of
companies involved in customer service, dispute resolution, and related
activities. See www.ccareall.org.
\32\ As noted above, civil penalty actions are filed by DOJ on
behalf of the FTC. 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, that provides the agency with civil penalty authority in the
areas of data security, telephone records pretexting, and spyware,
similar to that provided under the Telemarketing Act. Civil penalties
are especially important in these areas because the Commission's
traditional remedies, including equitable consumer restitution and
disgorgement, may be impracticable or not optimally effective in
deterring unlawful acts.
\33\ These Do Not Call cases are included in the 240 TSR cases
noted above.
\34\ United States v. The Broadcast Team, Inc., Case 6:05-cv-01920-
PCF-JGG (M.D. Fla. 2005).
\35\ 16 C.F.R. 310.4(b)(1)(iv).
\36\ See http://www.ftc.gov/opa/2007/02/broadcastteam.shtm.
\37\ United States of America (for the Federal Trade Commission) v.
DirecTV, File No. 042 3039, Civil Action No. SACV05 1211 (C.D. Cal.
Dec. 12, 2005). See also http://www.ftc.gov/opa/2005/12/directv.shtm.
\38\ In the case of registration by telephone, the only personal
information provided is the telephone number to be registered. In the
case of Internet registration, a consumer must provide, in addition to
the telephone number(s) to be registered, a valid e-mail address to
which a confirmation e-mail message is sent. Once the confirmation is
complete, however, the e-mail address is hashed and made unusable.
Thus, only consumers' telephone numbers are maintained in the database.
\39\ Pub. L. No. 108-10, 117 Stat. 557 (2003).
\40\ Id.
\41\ The Commission set the initial fees at $25 per area code of
data with a maximum annual fee of $7,375. See 68 Fed. Reg. 45134 (July
31, 2003). The fees have increased each year to its current level. See
69 Fed. Reg. 45580 (July 30, 2004); 70 Fed. Reg. 43273 (July 27, 2005);
and 71 Fed. Reg. 43048 (July 31, 2006).
\42\ Such exempt organizations include entities that engage in
outbound telephone calls to consumers to induce charitable
contributions, for political fund raising, or to conduct surveys. They
also include entities engaged solely in calls to persons with whom they
have an established business relationship or from whom they have
obtained express written agreement to call, as defined by the Rule, and
who do not access the National Registry for any other purpose.
\43\ 15 U.S.C. 1679 et seq.
\44\ CROA prohibits persons from advising a consumer to make false
and misleading statements about a consumer's credit worthiness or
credit standing to a consumer reporting agency. 15 U.S.C.
1679b(a)(1).
\45\ The written disclosure must explain consumers' right to
dispute inaccurate credit information directly to a credit reporting
agency and to obtain a copy of their credit reports. It also must state
that neither the credit repair organization nor the consumer can remove
accurate, negative information from his or her report. 15 U.S.C.
1679(c). It also requires credit repair organizations to use written
contracts that include the terms and conditions of payment and other
specified information. 15 U.S.C. 1679(d).
\46\ See http://www.ftc.gov/opa/2006/02/badcreditbgone.shtm.
\47\ See http://www.ftc.gov/opa/1999/10/badidea.shtm.
\48\ See http://www.ftc.gov/opa/1998/07/erasstl.shtm.
\49\ Available at www.ftc.gov/bcp/conline/pubs/credit/repair.shtm
(English);
http://www.ftc.gov/bcp/conline/spanish/credit/s-repair.shtm (Spanish).
\50\ Available at www.ftc.gov/bcp/edu/pubs/consumer/credit/
cre21.shtm.
\51\ Legislation introduced in the U.S. House of Representatives
would exempt from CROA's coverage those who provide a broad range of
credit-related services, including credit monitoring, credit scores or
scoring tools, any analysis or explanations of actual or hypothetical
scores or tools. See, ``A Bill to Amend the Credit Repair Organizations
Act to Clarify the Applicability of Certain Provisions to Credit
Monitoring Services, and For Other Purposes'' (H.R. 2885), currently
before the House Financial Services Committee. A previous set of
proposed amendments to CROA, included in the Financial Data Protection
Act of 2006, Sec. 6 (H.R. 3997), was passed by the House Financial
Services Committee on March 16, 2006, but was not passed by the Senate.
\52\ Of course, these services are not the only way for consumers
to monitor their credit file. The Fair and Accurate Credit Transactions
Act gives every consumer the right to a free credit report from each of
the three major credit reporting agencies once every 12 months.
\53\ See, e.g., FTC v. ICR Services, Inc., No. 03C 5532 (N.D. Ill.
Aug. 8, 2003) (consent decree) (complaint alleged that defendant
falsely organized as 501(c)(3) tax-exempt organization to take
advantage of CROA exemption for nonprofits); and United States v. Jack
Schrold, No. 98-6212-CIV-ZLOCH (S.D. Fla. 1998) (stipulated judgment
and order for permanent injunction) (complaint alleged that defendant
attempted to circumvent CROA's prohibition against ``credit repair
organizations'' charging money for services before the services are
performed fully).
Senator Pryor. Thank you, Ms. Parnes, and let me apologize
for mispronouncing your name earlier.
But, let me go ahead and start with Do Not Call questions.
You talk about how the program has been a great success--I'd
like to put some quantifications on that, if I can. How many
people have signed up for it and what can we do to improve it?
Ms. Parnes. Well, there are 146 million separate telephone
numbers that have been registered on the Do Not Call list. Our
experience is that it really is, it really is working, it's
working well. There are--we believe that we have the
legislative tools to pursue those who are violating Do Not
Call, and as I indicated, compliance is generally high. And I
think part of the reason it's high, is because legitimate
businesses know how strongly consumers feel about receiving
unwanted telemarketing calls.
Senator Pryor. You say compliance is ``generally'' high--
have you had some problems on the enforcement side?
Ms. Parnes. We have engaged in some enforcement,
absolutely. We've--since the Do Not Call Registry was adopted,
I believe--I believe we've brought 17 cases, challenging Do Not
Call violations.
Senator Pryor. And have those been concluded successfully,
for the most part?
Ms. Parnes. They have been. They have been. One of the
cases against a telemarketers, DIRECTV, involved--at the time--
the largest civil penalty that we had obtained in the consumer
protection area.
Senator Pryor. Let me ask about Do Not Call, and the
structure of it.
With the advent, and the explosion, really, of cell phone
usage, and Voice-over-Internet Protocol phones, VoIP, service--
are those included in the current Do Not Call Registry, and if
so, are all of those phone numbers included?
Ms. Parnes. Well, cell phones are interesting--every so
often there is an e-mail that goes around on the Internet,
encouraging everybody to register their cell phones on the Do
Not Call List. In fact, telemarketing calls to cell phones
really shouldn't be a problem. The FCC rule prohibits
telemarketers from using automated dialers to call cell phones,
and automated dialers are really the standard in the industry.
So, as a practical matter, telemarketers can't call cell
phones.
But, we do register any phone. So, if a consumer is
concerned, they can go ahead and register their cell phone on
the Registry.
In terms of VoIP, one of the things we find generally, is
that convergence of technologies--Internet and telephone
services, I mean, that poses challenges in the consumer
protection area. We held 4 days of hearings at the Commission
last November, to look at convergence and other emerging issues
in the consumer protection area. So far we haven't seen a
problem, we've actually brought one telemarketing case
involving VoIP technology. But certainly, if we see a problem,
we would--and it raises legislative issues, we would come to
the Committee with that.
Senator Pryor. Thank you.
Ms. Parnes, as you know, the Committee and my staff, and
the Committee staff and the Senators and their staffs have been
working to reauthorize the Do Not Call Registry, and I want to
thank you and your staff for being available, and for helping
in that endeavor. Because you all have provided some very
valuable insight, and I want to thank you for that.
And also, I think you know the reauthorization bill is on
this week's calendar for the Thursday markup in this Committee,
so I want to thank the Chairman and the co-Chairman again for
their assistance on that. And, I understand that you've had a
chance to look at the legislation?
Ms. Parnes. I have looked at it, yes.
Senator Pryor. Do you think it meets the needs of the
program? Do you think it is good legislation?
Ms. Parnes. Well, we--the one recommendation that we had is
that the reauthorization should statutorily set the fees for
accessing the Registry. As the system stands right now, the
Commission engages in an annual rulemaking to set the fees, and
it just seems as if--from the perspective of the industry, as
well as the Commission--having the certainty of a set fee would
be very useful.
Senator Pryor. OK, thank you for that.
Let me also ask this: with the laws that currently exist
there--when you register, you register for 5 years, is that
right?
Ms. Parnes. Yes.
Senator Pryor. So, you're going to start to see the people
who registered initially to sunset here soon. Do you have a
sense of how many will sunset in the first year? Do you know
that number off the top of your head?
Ms. Parnes. I don't.
Senator Pryor. OK.
Ms. Parnes. But I'm certain--I'm actually certain that we
can easily get that----
Senator Pryor. That's really more of a background for my
question----
Ms. Parnes.--for you.
Senator Pryor.--and that is, what will the Federal Trade
Commission do to try to educate consumers that their
registration will expire and that they need to re-register. Do
we have any plans for that?
Ms. Parnes. We do. We were very sensitive to the need to
roll out the Do Not Call Registry very carefully when it was
just implemented. And we--I think--did a very good job of
explaining the Registry, and getting the word out to
consumers--I believe in the first two or 3 days, before people
even, you know, knew how well this was going to work, we
registered over 10 million phones. So, we will put together a
consumer education campaign, and we will definitely reach out
to the media, both local and national, to get the word out
about re-registration.
Senator Pryor. Great. Well, thank you because on that type
of program, consumer information is very critical.
Let me ask now, let me change gears and ask about CROA. I
know that this is something that you're also very familiar
with, and you've been very helpful in providing your insights
to the Committee, and to my staff, and I appreciate that.
You may not know off the top of your head, but how many
cases have you brought under CROA, do you know?
Ms. Parnes. I believe that the FTC alone has brought about
60 cases in the last 9 or 10 years, but working together with
our law enforcement partners on the Federal and State level,
we've participated in sweeps, and in total, we've brought over
100 cases.
Senator Pryor. All right, now, many people--including
yourself--have expressed reservations about credit monitoring
services being subject to specific requirements under CROA. A
number of proposals have been suggested and offered to amend
this aspect of CROA, including carve-outs for specific entities
and carve-outs for specific practices. In this debate, tell us
where you are on those issues, and why?
Ms. Parnes. Of course credit monitoring services, as you
mentioned, can be very useful for consumers. And we understand
the credit reporting agencies have offered these services, and
have expressed concern about coverage under CROA. And while we
are--and have been--very sympathetic about this, it's been very
difficult to come up with some way of crafting an exemption.
We would not favor a status-based exemption for the credit
reporting agencies, because it would certainly give them an
unfair competitive advantage over others that offer credit
monitoring services, and would have to comply with CROA.
And in terms of defining credit monitoring services alone
and just carving that out from the statute--our experience with
credit repair outfits is that they use every exemption to try
and evade the law.
And so, I could easily see your typical fraudulent credit
repair guy, you know, setting up a scam that would take
advantage of a credit monitoring exemption, and that's really
our concern.
Senator Pryor. So tell me what you think the best approach
would be for the new law.
Ms. Parnes. I think that, over the years as we have, as
we've really thought about this, we just, you know--so far we
have not been able to come up with anything that we could
really recommend as carving out an appropriate exemption, and
still providing adequate protection to consumers.
Senator Pryor. OK.
Let's see--you mentioned in your testimony that Congress
should continue to reach out to stakeholders in developing any
amendments to CROA--do you think that we've found some common
ground on changing CROA, or--?
Ms. Parnes. I think the common ground is that, you know, we
all agree that--that credit monitoring offered by--I think we
all agree with the general principles: Credit monitoring
offered by the CRAs doesn't particularly pose a risk to
consumers.
I don't think that we've come up with a solution to carve
out an exemption from the statute. And, it's something that we
will--we would be happy to kind of head to, yet again. But, but
we've certainly tried to--and haven't yet--come up with a fix
there.
Senator Pryor. OK, great.
I'd like to move onto the second panel. I want to thank you
for your responses to questions. I want to leave the record
open for 2 weeks and allow my colleagues to submit questions in
writing. And so, don't be shocked if you receive some written
questions from the Committee. I know that we have a hectic day
in the Senate today, with a lot of things happening on the
floor and other Committees meeting. So, my colleagues are
trying to get here as best they can.
But, thank you. Your statement will be made part of the
record. You're free to go.
Ms. Parnes. Thank you very much.
Senator Pryor. We'll get the second panel up here.
Thank you. Thank you for your time and your testimony.
Now, I'd like to go ahead and introduce the second panel
and call everyone's name. And I'd like to put them in this
order, if possible: Mr. Richard Johnson, Member of the Board of
Directors at AARP; Mr. Jerry Cerasale, Senior Vice President,
Governmental Affairs, Direct Marketing Association; Ms. Robin
Holland, Senior Vice President of Global Operations, Equifax;
Ms. Joanne Faulkner, testifying on behalf of the National
Association of Consumer Advocates; and Mr. Steve St. Clair,
Assistant Attorney General for the State of Iowa.
I want to welcome all of you all to the Committee.
I would like to start with Mr. Johnson and Mr. Cerasale.
We're going to have 5 minutes to make opening statements, and
then we'll have some questions for you. Go ahead.
STATEMENT OF RICHARD JOHNSON, MEMBER,
BOARD OF DIRECTORS, AARP
Mr. Johnson. Thank you. Chairman Pryor, thank you so much
for the opportunity to testify at this important matter.
AARP strongly supported the establishment of the Do Not
Call Registry, or the DNCR. And we thank you for your efforts
in this area. And we also commend the regulators for their
implementation and enforcement of this important consumer
protection.
The DNCR is highly successful. The public overwhelmingly
views telemarketing sales calls as an invasion of privacy. It
is not surprising, then, that as of now, there are 146 million
phone numbers registered with the DNCR. Yet, despite the
success of the program, more can be done to protect the
consumers.
For example, in a 2005 AARP study, 62 percent of the
respondents with telephone numbers registered with the DNCR
indicated that they still receive more telemarketing calls than
they would like.
We urge Congress and regulators do the following:
First, ensure that the DNCR continues to be funded by the
telemarketing industry. Taxpayers and consumers should not have
to pay for the cost of operating the system.
Second, prohibit all unsolicited, pre-recorded
telemarketing calls, including those to establish business
customers. AARP surveys show that customers and consumers
consider pre-recorded telemarketing calls particularly coercive
or abusive.
Third, strengthen call-abandonment rules. Telemarketers
typically abandon calls when predictive dialing reaches more
than one person at the same time. Consumers pick up and hear a
click, and older consumers are especially concerned about who
was trying to call them. Abandoned calls should include
identifying information, in order to remove some of the
uncertainty that currently exists when older persons hear the
click.
Fourth, narrow the definition of established business
relationships. The current definition is too broad. For
example, the consumer who simply inquires about a company's
products and services, should not have to deal with incessant
telemarketing calls from that company. Regulators should change
the definition to require that the relationship be ongoing.
Unfortunately, even these consumer protections cannot stop
thieves from committing telemarketing fraud, which is already
illegal. In our written testimony, we provided statistics to
show that telemarketing fraud is largely targeted at older
Americans, who have a lifetime of savings that the thieves go
after.
Real people behind the statistics bear the burden of this
fraud. Consider a few examples: Richard Guthrie was a 92-year-
old Army veteran, living on just $800 in Social Security
benefits each month. InfoUSA, a company which compiles vast
databases of consumer information, sold Mr. Guthrie's
information to thieves, who defrauded him of $100,000 in a
telemarketing fraud.
In another case, 86-year-old Claire Wilson was desperate
for money when her son-in-law needed a liver transplant. She
was conned out of $8,000 in savings, after receiving a call
that she had won $100,000 in a Canadian lottery.
These are just a few of the thousands of examples of older
Americans who have suffered because of telemarketing fraud.
There are clearly many issues for Congress, regulators and
the states to address. One of the key areas for Congress to
investigate and potentially take action on, relates to how
thieves get money from the victims' bank accounts. Often, this
happens through demand drafts, unsigned paper checks.
Demand drafts are so often connected to fraudulent
transactions, that Attorneys General in 35 states, plus the
District of Columbia and American Samoa, have called for an
outright ban on them. AARP also believes that the FTC should
strengthen the Telemarketing Sales Rule to address problems
that remain, including unauthorized access to consumer bank
accounts, disclosures regarding premiums, and prize promotions,
repeat calling of telemarketing fraud victims, and the
contacting of consumers who have placed their telephone numbers
on the DNCR. Additional civil and criminal penalties should be
imposed for violations of telemarketing laws and regulations,
including prison terms for those who knowingly deceive
consumers.
In summary, the Do Not Call Registry has been largely
successful. But consumers still receive unwanted telemarketing
calls. AARP recommends strengthening the DNCR with additional
consumer protections. Federal and State lawmakers should work
together to establish a strong set of anti-telemarketing fraud
laws and regulations to bring enforcement action against
thieves. Thank you.
[The prepared statement of Mr. Johnson follows:
Prepared Statement of Richard Johnson, Member, Board of Directors, AARP
Chairman Pryor, Ranking Member Sununu, and Members of the
Subcommittee, on behalf of AARP's 39 million members, thank you for the
opportunity to testify on the Do Not Call Registry (DNCR) and
telemarketing fraud.
Do Not Call Registry
AARP's members are among the millions of Americans who have taken
the initiative to place their phone numbers (over 132 million as of
2006) \1\ into the DNCR in an effort to reduce the number of unwanted
telemarketing calls. Survey results show that the Registry has been
very successful from the consumer standpoint. A December 2005 Harris
Interactive survey \2\ found that 76 percent of respondents had signed
up for the Registry, and 92 percent of them had received fewer
telemarketing calls.
---------------------------------------------------------------------------
\1\ ``FTC Annual report to Congress for FY 2006 pursuant to the Do
Not Call Implementation Act on the National Do Not Call Registry,''
page 4. See http://www.ftc.gov/os/2007/04/P034305FY2006RptOnDNC.pdf.
\2\ Note that the survey was conducted online, which may limit the
survey's ability to generalize to the entire (online and offline)
population. For more information on the survey, see http://
www.harrisinteractive.com/harris_poll/index.asp?PID=627.
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AARP's own surveys indicate that an overwhelming number of people
view telemarketing sales calls as an invasion of privacy and have
supported the creation of ``do not call'' lists as a way to stop these
unwanted intrusions.\3\ The DNCR is considered one of the best consumer
programs ever implemented, and regulators should be commended for their
capable implementation and enforcement of this important consumer
protection. There is more that can be done to enhance the protections
of the DNCR, and AARP believes that it should continue to be funded by
the telemarketing industry, rather than by taxpayers or consumers who
place their name on the DNCR.
---------------------------------------------------------------------------
\3\ 2005 AARP Public Policy Institute survey.
---------------------------------------------------------------------------
Notwithstanding the success of the DNCR, consumers still believe
they receive too many telemarketing calls. For example, in a 2005 study
conducted by AARP, 62 percent of respondents with telephone numbers
registered with the DNCR indicated that they still received more
telemarketing calls than they would like. In order to make the DNCR an
even bigger success for consumers, the FTC should adopt additional
rules to further decrease the number of telemarketing calls.
AARP is pleased that the FTC is considering changes in two areas
that could help achieve this outcome: (1) prohibiting all unsolicited
prerecorded telemarketing calls, including those from sellers to
established business customers, and (2) retaining and strengthening
call abandonment measures. AARP recommends that the FTC act to further
relieve consumers of unwanted telemarketing calls from companies with
which they have an established business relationship.
Prerecorded Telemarketing Calls
AARP believes that all unsolicited prerecorded telemarketing calls,
including those from sellers to established business customers should
be prohibited. Consumers consider prerecorded telemarketing calls a
particularly ``coercive or abusive'' infringement on their right to
privacy.\4\
---------------------------------------------------------------------------
\4\ 2005 AARP Public Policy Institute survey.
---------------------------------------------------------------------------
AARP believes that the prohibition on prerecorded telemarketing
calls should apply whether the calls are received by a person, an
answering machine, or a voice mail system. A simple prohibition on
prerecorded telemarketing calls is the best course for consumers. AARP
has submitted comments to this effect to the FTC in its ongoing
proceeding reviewing the Telemarketing Sales Rule.
Retaining and Strengthening Call Abandonment Measures
Telemarketers typically abandon calls when predictive dialing
techniques reach more than one person at the same time; they speak to
one person and drop the call to the others who pick up. Unfortunately,
in far too many cases, the consumer rushes to pick up the phone only to
hear dead air or a click as the phone call is terminated with these
``abandoned'' calls.
For mid-life and older Americans, these calls are more than just a
nuisance. In addition to the inconvenience and risk associated with
rushing to answer the telephone, there is the uncertainty and concern
of the consumer, especially for women living alone. When no one is on
the other end of the line, or a consumer hears a ``click'' when
answering the telephone, a number of different scenarios may begin to
play out in the individual's mind. Is the caller attempting to know if
the consumer is home alone or away from the home? Was this an important
call that the consumer just missed answering? For these reasons,
abandoned calls should be required to include some identifying
information conveyed to consumers in order to remove some of the
uncertainty that currently exists when older persons answer abandoned
calls.
AARP is concerned with proposals by industry to change the rules in
a way that could increase the number of calls abandoned by
telemarketers. A change in the measure for abandoned calls could
provide an opportunity for telemarketers to ``game'' the system and
alter call abandonment rates over the course of each calling campaign.
Instead, we reiterate our recommendation that the rule be retained and
strengthened to provide stronger consumer protections outlined above.
Established Business Relationship Calls
AARP has continually expressed the concern that the current
definition of an ``established business relationship'' is too broad,
increasing the likelihood that consumers get unwanted telemarketing
calls. Specifically, we do not believe every contact between a consumer
and a business should establish a business relationship between them.
For example, a consumer who merely inquires or provides an opinion
about a company's products and services should not be subjected to
subsequent telemarketing calls from the company.
We suggest that the FTC change the definition of ``established'' to
require that the relationship be ongoing, i.e., where the consumer has
completed a transaction (making a purchase or a payment) with a company
within the 12 consecutive months prior to the call. In addition, if a
consumer requests placement on a company's Do Not Call list, that
request should be extended to all of the company's affiliates with whom
the consumer does not have an ongoing relationship.
Telemarketing Fraud
Despite the success of the Registry, and the requirement that
telemarketers review their lists against the DNCR every month,
telemarketing fraud--in particular, fraud targeting older Americans--
remains a major problem. Thieves continue to evade the law to commit
fraud that can potentially wipe out the lifetime savings of
unsuspecting older Americans.
According to the National Consumer League,\5\ 50 percent of
telemarketing fraud victims were 50 or older and 32 percent were 60 or
older. At the other end of the spectrum, people under 30 represented
just 15 percent of all telemarketing fraud reports, and those under 20
just 1 percent. The NCL statistics also show that 46 percent of thieves
initially target people by phone, suggesting that even in the age of
the Internet, telemarketing fraud remains a significant problem. AARP
research sheds light on part of the reason that seniors are targeted in
telemarketing fraud schemes: most older victims do not realize that the
voice on the phone could belong to someone who is trying to steal their
money.\6\
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\5\ See http://fraud.org/stats/2006/telemarketing.pdf.
\6\ Off the Hook: Reducing Participation in Telemarketing Fraud,
AARP Foundation, 2003. See http://assets.aarp.org/rgcenter/consume/
d17812_fraud.pdf.
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In 2005, the average reported loss for telemarketing fraud was
$2,892.\7\ The Federal Trade Commission estimates that consumers lose
$40 billion a year in telemarketing fraud, and the FBI estimates that
there are 14,000 illegal telephone sales operations active each day.\8\
But behind the statistics are real people who are scammed--sometimes
out of their entire life savings. Consider the following:
---------------------------------------------------------------------------
\7\ See http://www.fraud.org/toolbox/2005_Telemarketing_Fraud
Report.pdf.
\8\ See http://www.ftc.gov/os/comments/dncpapercomments/04/
lsap3.pdf.
A recent New York Times story highlighted telemarketing
fraud against Richard Guthrie, a 92-year-old Army veteran
living off of approximately $800 in Social Security benefits
each month. He said that he once enjoyed telemarketing calls
because they helped stem the loneliness he had felt since his
wife's death.\9\ infoUSA, a company which compiles vast
databases of consumer information, sold Mr. Guthrie's
information to thieves who defrauded him of $100,000 through
telemarketing.
---------------------------------------------------------------------------
\9\ ``Bilking the Elderly, With a Corporate Assist,'' by Charles
Duhigg, New York Times, May 20, 2007. See http://www.nytimes.com/2007/
05/20/business/20tele.html?ex=1337313600&en=
38f9ae54aac348d4&ei=5090.
86-year-old Claire Wilson, desperate for money when her son-
in-law needed a liver transplant, was conned out of $8,000 in
savings after receiving a call that she had ``won'' $100,000 in
a Canadian lottery.\10\ The Canadian lottery scam is one of the
Federal Trade Commission's top two scams, costing unsuspecting
Americans $120 million each year.\11\
---------------------------------------------------------------------------
\10\ ``Can't Win for Losing,'' By Carole Fleck, AARP Bulletin,
December 2004. See http://www.aarp.org/bulletin/consumer/a2004-12-09-
cantwin.html.
\11\ For more information on this scam, see http://www.ftc.gov/bcp/
conline/pubs/alerts/intlalrt.pdf.
Patricia Candelaria, 83, fell prey to a similar scam, paying
nearly $200,000 on supposed taxes and insurance for a
sweepstakes prize that did not exist.\12\ The supposed contest
representative, who identified himself as David Sommers of the
National Contest Association, called Ms. Candelaria incessantly
and sent her invoices for past due payments.
---------------------------------------------------------------------------
\12\ ``Scam Alert: Misplaced Trust,'' by Sid Kirchheimer, AARP
Bulletin, July August 2007. See http://www.aarp.org/bulletin/consumer/
scam_alert_misplaced_trust.html.
50-year-old Yvette Jones, a single mother and office worker,
was scammed by someone who identified herself as Lisa James of
the Department of Housing and Urban Development.\13\ Jones had
submitted several applications for what she thought were
government grants to cover the cost of her new roof, and the
fraudster told Ms. Jones that she had been awarded a $5,500
grant that required a $349 application fee. Ms. Jones paid it
but of course never received the grant. She later found out
that she had visited bogus websites that had put her
information into ``sucker lists.''
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\13\ ``Scam Alert: Uncle Sham Wants you,'' by Sid Kirchheimer, AARP
Bulletin, December 2006.
Telemarketing fraud is already illegal, but more can and should be
done. One of the issues we recommend Congress study and potentially
take action on relates to how thieves are able to take money out of
their victims' bank accounts. Often, this happens through ``demand
drafts,'' unsigned paper checks that state ``authorized by drawer'' or
``signature on file'' in lieu of the signature. The FTC addressed the
use of demand drafts to commit fraud in testimony before the Senate
---------------------------------------------------------------------------
Banking Committee:
Demand draft fraud, or the unauthorized debiting of a
consumer's checking account, is a growing problem. Currently,
it is the favorite method of fraudulent actors for taking
consumers' money through fraudulent telemarketing and other
scams. . . .
Many fraudulent actors persuade consumers, either over the
telephone or through the mail, to divulge their checking
account numbers by telling them that their bank account numbers
are needed to verify prizes or to deposit prize money directly
into consumers' bank accounts. In other cases, fraudulent
actors tell consumers that only a small amount will be
withdrawn, but in fact withdraw huge amounts of money from the
consumer's checking account. As a further insult, the
unauthorized demand draft may generate significant overdraft
charges to the consumer if the consumer does not have the
additional money in the first instance or has written
subsequent checks. Little do consumers know that once they give
fraudulent actors access to their bank account information,
their money will disappear.\14\
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\14\ Prepared Statement of Jodie Bernstein, Director, Bureau of
Consumer Protection, FTC, before the Senate Banking Committee on 4/15/
06. See http://www.ftc.gov/speeches/other/ddraft.shtm.
Demand drafts are currently the subject of a case against Payment
Processing Center (PPC) brought by the U.S. attorney in Philadelphia.
According to this lawsuit, fraudulent telemarketers deposited $142
million in demand drafts from PPC into their bank accounts.\15\
---------------------------------------------------------------------------
\15\ ``Bilking the Elderly, With a Corporate Assist,'' by Charles
Duhigg, New York Times, May 20, 2007, at http://www.nytimes.com/2007/
05/20/business/20tele.html?ex=1337313600&en=
38f9ae54aac348d4&ei=5090.
---------------------------------------------------------------------------
Demand drafts, unlike Automated Clearing House (ACH) debits, are
not subject to the rules of the National Automated Clearing House
Association (NACHA). Attorneys General in 35 states plus the District
of Columbia and American Samoa have called for an outright ban on
demand drafts because they are so frequently used to commit fraud
against consumers.\16\ This is clearly an issue ripe for further
consideration by Congress.
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\16\ See complaint in Mary Faloney v. Wachovia Bank, U.S. District
Court for the Eastern District of Pennsylvania, at http://
www.langergrogan.com/LangerGrogan/home.nsf/wachovia.pdf.
---------------------------------------------------------------------------
AARP believes that the FTC should strengthen the Telemarketing
Sales Rule. Rulemaking and enforcement efforts should address problems
that remain in the telemarketing industry, such as online fraud,
unauthorized access to consumer bank accounts, disclosures regarding
premiums and prize promotions, repeat calling of telemarketing fraud
victims, and the contacting of consumers who have placed themselves on
the DNCR. The Department of Justice should also be vigorous in
enforcing efforts to combat telemarketing fraud.
Civil and criminal penalties should be imposed for violations of
telemarketing laws and regulations, including prison terms for those
who knowingly deceive consumers. These penalties should be assessed
based on the degree of fraud committed, regardless of the actual dollar
amount lost. Appropriate investigative and enforcement tools should
also be available to regulators.
States are also key players in this area. Because of the serious
gap in consumer protections in the area of telemarketing, states play
an invaluable role in preventing, deterring, and prosecuting
telemarketing fraud. Reducing the pervasiveness of telemarketing fraud
and obtaining restitution for victims requires strong enforcement by
all levels of government.
Summary
In summary, the Do Not Call Registry has been largely successful,
but AARP recommends additional consumer protections. Such protections
include the prohibition of all unsolicited prerecorded telemarketing
calls and narrowing of the definition of ``established business
relationship.'' We also believe that industry should continue to fund
the DNCR; this cost should not be borne by taxpayers or consumers who
place their name on the Registry.
Despite the success of the DNCR, telemarketing fraud remains a
significant problem for older Americans, who are targeted because of
their higher level of savings than the general population. Federal and
state lawmakers need to work together to establish a strong set of
anti-telemarketing fraud laws and regulations and to bring enforcement
actions against thieves.
Senator Pryor. Thank you.
Mr. Cerasale?
STATEMENT OF JERRY CERASALE,
SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS,
DIRECT MARKETING ASSOCIATION, INC.
Mr. Cerasale. Thank you, Chairman Pryor. Thank you very
much for inviting us here, the Direct Marketing Association is
an association of multi-channel marketers, their suppliers, use
the mail, the Internet, television, radio and telephone to
reach customers, and potential customers. These issues today
are important to them, as they try and reach those customers.
We thank you for your leadership concerning the fees for
the Do Not Call list, which has been very, very successful.
Since its inception in October of 2003, when there were 56
million phone numbers on the list at that time--less than 4
years ago--fees grew from $7,300-plus to $17,000--about 263
percent. If you look at 2002, with the estimated $3,000 fee,
the increase is double that 263 percent.
The DMA has run a Do Not Call Registry, and still does it
for three States, with a cost of $700 a year. Now, granted it
has a smaller number of phone numbers on it. But that $700
would include a supplier purchasing it for all of its
customers, not each customer having to purchase that $700. We
believe that the fees should cover the cost of running the Do
Not Call Registry. It should not be a tax on marketers, to
cover other Federal Trade Commission programs. And we support
your efforts to put a cap--set the fee with a cost-of-living,
or CPI index increase.
Moreover, one other problem with the list is the hygiene of
the list. Our members tell us that 30 to 40 percent of the
phone numbers on the list are not usable--meaning they are
business numbers, they are fax numbers, they are abandoned
telephone numbers that have not been removed from the list, and
they also--as Ms. Parnes said--include cell phone numbers,
which are covered by the TCPA, and can be added on here, but
increase the size of the list, increase the cost of the list to
marketers, to the Government, and increase the probability of
errors, as you have more and more numbers. So, we hope that we
can do something to try and increase the hygiene of this list.
We don't know the specifics underlying the article in The
New York Times which promoted--prompted Senator McCaskill to
write her letter to the Federal Trade Commission. But the DMA
has a longstanding, self-regulatory program, which looks toward
correction--correction of errors in trying to fix it. If there
is no cooperation, the DMA will then publicize the name of the
company, take other corrective actions, such as removing them
from the DMA membership publicly, transferring the information
to the appropriate authorities.
Two years ago, the DMA was concerned with the issue of list
compilers, and trying to clarify its guidelines for them, and
we started a revision process, which we have since completed.
In the area of sensitive information, which we define as
including seniors, we now require--for DMA membership and all
list compilers--examine the promotion for appropriateness, so
that we ensure that the compiler themselves has a duty--an
affirmative duty, in sensitive information--to take a look at
what the offer is. We hope that this will strengthen our
guidelines, and clarify the guidelines for compilers, and try
and help reduce fraud initially, right away, in this process.
These individuals are the customers of our members--or
potential customers of our members. They have to treat them as
such, and that's what our guidelines are meant to do, and try
and push forward ethical business practices.
Thank you, and we're ready for any questions.
[The prepared statement of Mr. Cerasale follows:]
Prepared Statement of Jerry Cerasale, Senior Vice President,
Government Affairs, Direct Marketing Association, Inc.
I. Introduction and Summary
Good morning, Mr. Chairman and Members of the Committee. I am Jerry
Cerasale, Senior Vice President for Government Affairs of the Direct
Marketing Association, and I thank you for the opportunity to appear
before the Committee today to discuss telemarketing registry fees and
responsible practices for compilers of marketing lists.
The Direct Marketing Association, Inc. (``DMA,'' www.the-dma.org)
is the leading global trade association of businesses and nonprofit
organizations using and supporting multichannel direct marketing tools
and techniques. DMA advocates industry standards for responsible
marketing, promotes relevance as the key to reaching consumers with
desirable offers, and provides cutting-edge research, education, and
networking opportunities to improve results throughout the end-to-end
direct marketing process. Founded in 1917, DMA today represents more
than 3,600 companies from dozens of vertical industries in the U.S. and
50 other nations, including a majority of the Fortune 100 companies, as
well as nonprofit organizations. Included are catalogers, financial
services, book and magazine publishers, retail stores, industrial
manufacturers, Internet-based businesses, and a host of other segments,
as well as the service industries that support them.
DMA and our members appreciate the opportunity to present our views
as the Committee considers permanently funding the do-not-call
registry, setting fees for telemarketers to access the registry, and
issues related to the operation of the registry. In addition, we would
like to address issues relating to list compilers raised by Senator
McCaskill and, in that context, describe DMA's list compiler
guidelines.
II. Fees Paid by Telemarketers to Access the Do-Not-Call Registry
DMA strongly supports capping fees imposed on telemarketers to
access the do-not-call registry. We thank Senator Pryor for his
leadership in this area. Current fees are sufficient and, in fact, we
believe, higher than necessary to administer the do-not-call registry.
Fees collected from telemarketers should be used to operate the
registry and not for broader enforcement of the telemarketing rules or
other purposes. Finally, we believe that the operator of the registry
should improve the hygiene of the list to ensure it does not include
changed telephone numbers.
A. Current Fees are Sufficient and, in Fact, Higher than Necessary to
Administer the Do-Not-Call Registry and Should be Capped
The level of increase in do-not-call registry access fees seen in
the last few years makes it clear that Congress needs to establish a
cap on the cost for access. In addition, any necessary fee adjustments
should be tied to a fixed index such as the consumer price index or the
rate of inflation. The Federal Trade Commission (``FTC'' or
``Commission''), in 2002, proposed to cap the maximum annual fee per
telemarketer to obtain access to the entire registry at $3,000.\1\ By
the time the Commission made the registry available in 2003, the cost
for access had already increased to $7,375, a 145 percent increase.\2\
Less than a year later, the Commission increased fees 67 percent to
$11,000.\3\ The following year, the Commission increased fees by 40
percent to $15,400.\4\ In 2006, the Commission increased fees to
$17,050.\5\ That was an 11 percent increase. This amounts to a 263
percent increase in 4 years.
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\1\ Telemarketing Sales Rule User Fees, Notice of Proposed
Rulemaking, 67 Fed. Reg. 37362, at 37364 (May 29, 2002).
\2\ Telemarketing Sales Rule Fees, Final Rule, 68 Fed. Reg. 45134,
at 45141 (July 31, 2003).
\3\ Telemarketing Sales Rule Fees, Final Rule, 69 Fed. Reg. 45580,
at 45584 (July 30, 2004).
\4\ Telemarketing Sales Rule Fees, Final Rule, 70 Fed. Reg. 43273,
at 43275 (July 27, 2005).
\5\ Telemarketing Sales Rule Fees, Final Rule, 71 Fed. Reg. 43048
(July 31, 2006).
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DMA has a great deal of experience in operating its own
telemarketing suppression list, the Telephone Preference Service
(``TPS''), as well as in administering the state lists of Pennsylvania,
Maine, and Wyoming.\6\ This experience also indicates a much less
costly means of running a registry. DMA's entire list was available for
entities to purchase for $700 per year. While the Commission's registry
contains many more numbers than does the TPS, we do not believe that
the $17,050 fee--more than 24 times the cost of the TPS--is justified
by the incremental costs that correspond to the increased amount of
numbers on the registry.
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\6\ While DMA no longer adds new names to the TPS list, we will
continue to operate the list for five more years. DMA, however, does
continue to administer the state lists for Pennsylvania, Maine, and
Wyoming.
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B. Fees Collected from Telemarketers should be Used Solely to Operate
the Registry and not for Broader Enforcement of the
Telemarketing Rules or Other Purposes
DMA believes that fees collected for providing access to the
registry should be used solely to administer the operations of do-not-
call registry. An analysis of the costs to run the registry and the
amounts collected by the Commission suggest that a significant amount
of the money spent is on enforcement and other costs. DMA does not
believe that the registry fees should be used for telemarketing
enforcement based on fraud or other violations of the Telemarketing
Sales Rule, even where there may also be an incidental violation of the
registry. Prior to the establishment of the registry, such enforcement
actions were funded from the Commission's general appropriations. DMA
does not believe that legitimate, law-abiding telemarketers should bear
the burden of funding enforcement against bad actors. This is not the
case for other laws administered by the FTC. For example, Internet
sites that are targeted to children, which are subject to the
Children's Online Privacy Protection Act, do not fund the Commission's
enforcement against entities that violate that law. We are very
supportive of increased budgets for enforcement by the FTC in
telemarketing, as well as other areas such as spam and identity theft.
We believe, however, that such additional funding should come from the
normal FTC appropriations and not in fees collected from users of the
registry.
C. The Operator of the Registry Should Improve the Hygiene of the List
to Ensure it does not Include Changed Telephone Numbers
Finally, DMA would like to bring one additional issue regarding the
``hygiene,'' or accuracy, of the do-not-call registry to the
Committee's attention. We are told by our members that 30 percent to 40
percent of the telephone numbers on the registry are included
incorrectly, such as dropped numbers, fax numbers, and wireless
numbers. We believe that this, in part, results from the fact that
there is a significant time lag from when an individual moves and
changes their telephone number to the time when that number is removed
from the registry. This time period is longer than the amount of time
it takes for the phone company to reassign the number. As a result,
there are telephone numbers on the registry for households that did not
register to be included on it.
This is particularly problematic because many reassigned telephone
numbers are given to subscribers who recently have moved to new
geographic regions and are, therefore, most likely to respond to
telemarketing calls for items such as home security systems, home
insurance, lawn care, and newspaper delivery. For this reason, DMA
believes that telephone numbers should be removed from the registry as
soon as they are dropped by the consumer and before they are
reassigned. This would make for a much more accurate list recognizing
the desires of consumers and preserving the ability to call households
that have not placed their numbers on the registry. We have raised this
issue with the FTC and believe that they understand and appreciate our
concern. We hope that this concern can be addressed going forward.
III. Responsibilities of List Compilers
The Committee has asked us to discuss issues related to list
compilers. In particular, the Committee requested testimony on this
issue in response to a May 23, 2007 letter that Senator McCaskill sent
to the Chairman regarding a May 20, 2007 New York Times article
entitled ``Bilking the Elderly, With a Corporate Assist.'' We
completely agree with the Senator's concerns about the types of
practices alleged in the article.
DMA fully supports responsible practices by compilers of marketing
lists, and has long been a leader in establishing comprehensive self-
regulatory guidelines for its members on important issues related to
telemarketing, among many others. Understanding the importance of
standards and best practices in protecting consumer welfare, DMA, in
June 2007, working with its members, adopted guidelines for database
compilers as part of our Guidelines for Ethical Business Practice
(``Guidelines'').\7\
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\7\ Responsibilities of Database Compilers, DMA Guidelines for
Ethical Business Practice, Article #36, (attached).
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These guidelines were developed over the course of the past year
through the DMA process for guideline establishment. We believe that
these guidelines will go a long way to prevent illegitimate marketing
practices that threaten to undermine relationships between consumers
and marketers. In our experience, industry guidelines are the most
effective way to address evolving marketing practices while being
sensitive to consumer welfare. Such guidelines are flexible and
adaptable in a timely manner so as to address bad practices and not
unintentionally or unnecessarily cover legitimate actors.
In her letter, Senator McCaskill expressed concern about the use of
seniors' personal information for fraudulent purposes to exploit
seniors for financial gain. We could not agree more with the Senator
that seniors and other groups of individuals should not be exploited
based on such vulnerabilities. Our guidelines have always prohibited
such conduct, and we believe that our list compiler guidelines directly
address concerns about seniors by further clarifying that such lists
must only be used for appropriate purposes and defining new duties for
list compilers.
Specifically, as I will describe in more detail below, these
guidelines require that for sensitive marketing data, which includes
data pertaining to children, older adults, health care or treatment,
account numbers, or financial transactions, compilers should review
materials to be used in promotions to help ensure that their customers'
use of the data is both appropriate and in accordance with their stated
purpose.
This list compiler guidelines define additional appropriate
standards for companies that assemble personally identifiable
information about customers for the purpose of facilitating renting,
selling, or exchanging information to non-affiliated third-party
organizations for marketing purposes. These guidelines require, among
other things, as a condition of DMA membership, that companies that
compile and sell marketing lists adhere to the following practices:
establish contractual agreements with customers that define
the rights and responsibilities of the compiler and customer
with respect to the use of marketing data;
suppress the consumer's information, upon request, from the
compiler's database;
prohibit an end-user marketer from not divulging the
database compiler as the source of the marketer's information;
explain to consumers the nature and types of sources they
use to compile marketing databases;
include language in their contractual agreements that
requires compliance with applicable laws and DMA guidelines;
require customers to state the purpose for which the data
will be used;
use marketing data only for marketing purposes; and
monitor, through seeding or other means, the use of their
marketing databases to ensure that customers use them in
accordance with their stated purpose.
* * * * * * *
Thank you for your time and the opportunity to speak before the
Committee. I look forward to your questions, and to working with the
Committee on these issues.
______
Attachment
Responsibilities of Database Compilers
Article #36
For purposes of this guideline, a database compiler is a company
that assembles personally identifiable information about consumers
(with whom the compiler has no direct relationship) for the purpose of
facilitating renting, selling, or exchanging the information to non-
affiliated third party organizations for marketing purposes. Customer
refers to those marketers that use the database compiler's data.
Consumer refers to the subject of the data.
Database compilers should:
Establish written (or electronic) agreements with customers
that define the rights and responsibilities of the compiler and
customer with respect to the use of marketing data.
Upon a consumer's request, and within a reasonable time,
suppress the consumer's information from the compiler's and/or
the applicable customer's database made available to customers
for prospecting.
Not prohibit an end-user marketer from divulging the
database compiler as the source of the marketer's information.
At a minimum, explain to consumers, upon their request for
source information, the nature and types of sources they use to
compile marketing databases.
Include language in their written (or electronic) agreements
with DMA member customers that requires compliance with
applicable laws and DMA guidelines. For non-DMA member
customers they should require compliance with applicable laws
and encourage compliance with DMA's guidelines. In both
instances, customers should agree before using the marketing
data.
Require customers to state the purpose for which the data
will be used.
Use marketing data only for marketing purposes. If the data
are non-marketing data but are used for marketing purposes,
they should be treated as marketing data for purposes of this
guideline.
For sensitive marketing data, compilers should review
materials to be used in promotions to help ensure that their
customers' use of the data is both appropriate and in
accordance with their stated purpose. Sensitive marketing data
include data pertaining to children, older adults, health care
or treatment, account numbers, or financial transactions.
Randomly monitor, through seeding or other means, the use of
their marketing databases to ensure that customers use them in
accordance with their stated purpose.
If a database compiler is or becomes aware that a customer
is using consumer data in a way that violates the law and/or
DMA's ethics guidelines, it should contact the customer and
require compliance for any continued data usage, or refuse to
sell the data and/or refer the matter to the DMA and/or a law
enforcement agency.
Senator Pryor. Thank you.
Ms. Holland?
STATEMENT OF ROBIN HOLLAND, SENIOR VICE PRESIDENT, GLOBAL
OPERATIONS, EQUIFAX INC.
Ms. Holland. Thank you for the opportunity to testify on
behalf of Equifax, and in support of the reform of the Credit
Repair Organizations Act, or CROA. We have submitted written
testimony for the record, but I'd like to take a few minutes to
highlight that testimony.
Let me first say a quick word about Equifax. Equifax is the
oldest, the largest, and the only domestically publicly traded
national credit bureau. Equifax is proud of its history, and
proud of its services, including its credit monitoring
services. We are proud of these services, because they have
proven to help consumers to understand their credit score and
their credit report, to better manage their use of credit, and
to help consumers guard against identity fraud.
Let me emphasize at the outset that Equifax very much
supports CROA and its comprehensive and strict regulation of
credit repair organizations. These organizations routinely make
promises to consumers that they cannot deliver on. They tell
consumers they will help them to improve their credit score, or
their credit report, by removing adverse--but nonetheless,
accurate and timely--information from their reports. This is a
deceptive and fraudulent, and ultimately quite incorrect,
representation, and the victims are both the consumers and the
national credit bureaus, including Equifax.
Ironically, however, CROA has been used wrongly and
inappropriately to attempt to punish consumer reporting
agencies for offering credit monitoring products. Let me be
very clear about the difference between credit monitoring
products and so-called ``credit repair services.''
Credit monitoring products--including the product offered
by Equifax--allow consumers access to their credit reports and
credit scores, provide proactive notifications of changes in
their reports and scores, provide an explanation of scoring
algorithms, and provide consumers with a number of credit
score-related tools. Simply stated, monitoring products are the
very best strategy to promote consumer financial literacy, and
they are also consumers' very best strategy to prevent and
mitigate the cruel impact of identity theft.
CROA's definition of a credit repair service is so broad,
that it can arguably, but wrongly, be interpreted as covering
any of these vital credit monitoring services, because these
services, directly or indirectly, can be used to improve a
consumer's credit record, credit history, or credit score.
CROA defines a ``credit repair organization'' as an entity
which purports--directly or indirectly--to help consumers
improve their credit record. For this reason, Equifax urges the
Senate to enact legislation to make absolutely clear that
credit monitoring is not credit repair.
The FTC has expressed the same sentiment--that there is no
basis for applying CROA to credit monitoring services. If CROA
were to be misapplied to credit monitoring services, it would
mean that consumers would be unable to buy these services on a
subscription basis; that consumers would receive notices and
warnings which are appropriate for consumers faced with sales
pitches for credit repair services, but entirely
inappropriate--indeed, confusing and deceptive--when applied to
credit monitoring service; and it would mean that entities
offering credit monitoring services would potentially be faced
with liability that could include the disgorgement of all
monies paid by all persons in a class action suit, at least.
Quite frankly, this would virtually drive credit monitoring
services out of the marketplace. It is for this reason that we,
very much, appreciate this Committee's interest in CROA reform.
We also appreciate efforts in the House, where bipartisan
legislation has been introduced that makes clear that credit
monitoring activities are not credit repair activities. The
House bill also provides consumers with additional protection,
including a very detailed description of their free report
rights, and ID fraud protections under FACTA and the Fair
Credit Reporting Act. And it further gives the consumer the
ability to cancel a credit monitoring contract with a right to
a pro rata refund.
This is a time when concerns about identity theft are at an
all-time high, and when the need to improve consumers' credit
and financial literacy has never been greater. This is the
time--now is the time--to enact CROA reform.
Thank you for the opportunity to testify, and I'd be happy
to answer any questions.
[The prepared statement of Ms. Holland follows:
Prepared Statement of Robin Holland, Senior Vice President,
Global Operations, Equifax Inc.
Introduction
Mr. Chairman and Members of the Committee, I am Robin Holland,
Senior Vice President, Global Operations for Equifax. I want to thank
you for this opportunity to testify regarding the Credit Repair
Organizations Act, frequently referred to as CROA. I commend your
efforts, Mr. Chairman, the Members of the Committee and your excellent
staff for taking up the long-overdue issue of CROA reform.
In this statement, I briefly describe Equifax; the original reasons
for CROA's enactment; the credit monitoring products that Equifax has
developed since the passage of CROA to assist consumers to understand
their credit histories and to protect their credit histories from fraud
and identity theft; and the CROA reforms that, we believe, should be
put into place to protect these vital credit monitoring services and to
protect consumers.
Equifax
Founded in 1899, Equifax is the oldest, the largest, and the only
publicly traded of the national companies that provide consumer
information for credit and other risk assessment decisions. As one of
the three ``national'' credit bureaus, Equifax's activities are highly
regulated under the Fair Credit Reporting Act (FCRA) and dozens of
other related Federal and state statutes. Equifax is a responsible
steward of sensitive consumer information and, as such, is committed to
consumer privacy. We have been steadfast in working with governments,
consumers, and businesses to forge effective solutions to complex
information and privacy issues. Equifax believes that the marketplace
can offer solutions that enlighten, enable and empower consumers.
Equifax has developed products, such as credit monitoring products,
which directly assist consumers in understanding their credit files and
in empowering them to prevent identity theft and to manage their
financial health.
The Credit Repair Organizations Act (CROA)
In 1996, Congress enacted CROA to address the consumer threat posed
by credit repair organizations, commercial entities which charge
consumers for providing services that purportedly would improve a
consumer's credit record, credit history or credit rating. In our view,
promising to alter or remove negative, but accurate and timely,
information from a consumer's credit report constitutes an unfair and
deceptive practice that ultimately undermines consumer confidence in
the credit reporting system. In order to protect the integrity of the
credit reporting system, consumer reporting agencies, including Equifax
and the other national credit bureaus, urged Congress to enact CROA to
attempt to stop these entities from making false promises to consumers
about their ability to change or alter accurate and timely data
contained in credit reports. CROA imposed a number of appropriately
harsh requirements on credit repair organizations, including consumer
disclosures about the limits of any possible changes to a credit file.
Thus, CROA's intent is to protect consumers from paying money for a
service which, almost by definition, cannot be provided and indirectly,
at least, protect consumer reporting agencies and legitimate consumer
reporting activities from the deceptive and fraudulent actions of
credit repair organizations. Ironically, by crafting an intentionally
broad definition of ``credit repair organization'', CROA' s definition
of a credit repair organization (any entity which, directly or
indirectly, purports to ``improve'' a consumer's credit record) has bee
misread to cover credit monitoring products offered by consumer
reporting agencies--the very entities that originally sought passage of
the legislation.
Credit Monitoring
Accurate credit reports are important to individual consumers and
to the economy. Individual consumers who fall victim to identity theft
can be denied employment or credit and may be forced to expend
significant resources correcting fraudulent credit report information.
Further, identity theft ends up costing financial institutions,
including the national credit bureaus, well in excess of $1 billion
annually. The Federal Trade Commission (FTC) recommends that consumers
regularly review their credit report files to help guard against
identity theft.
As public awareness and concern grows over the risk of identity
theft, the national credit bureaus have developed products to assist
consumers to monitor their credit files and to detect and to prevent
identity theft.
The market for providing credit monitoring products is highly
competitive in both product features and price. Credit monitoring
products offered by the national credit bureaus are widely popular with
consumers and recognized as a highly effective consumer protection
service by Federal and state consumer protection agencies. These
products give consumers a first line of defense against identity theft,
and are routinely made available to victims of security breaches.
Indeed, credit monitoring has become a staple requirement of most state
security breach notification laws. The FTC has explicitly endorsed
credit monitoring as part of a consumer strategy to protect against
identity theft.
Equifax offers several credit monitoring products, including:
Equifax Credit Watch Silver: provides consumers with weekly
credit monitoring of their Equifax credit file, one copy of
their Equifax Credit ReportTM, and identity theft
insurance in the amount of $2,500 per consumer, with a $250
deductible (not available to consumers in New York), to cover
injuries arising from an occurrence of identity theft (subject
to limitations and exclusions).
Equifax Credit Watch Gold: provides consumers with daily
credit monitoring of their Equifax credit file, unlimited
copies of their Equifax Credit ReportTM, and
identity theft insurance in the amount of $20,000 per consumer
(not available to consumers in New York) to cover injuries
arising from an occurrence of identity theft (subject to
limitations and exclusions).
Equifax Credit Watch Gold with 3-in-1 Monitoring: provides
consumers with daily credit monitoring of their Equifax,
Experian and Trans Union credit files, unlimited copies of
their Equifax Credit ReportTM, a 3-in-1 Credit
Report which provides consumers with their credit history as
reported by the three major credit reporting agencies, and
identity theft insurance in the amount of $20,000 per consumer
(not available to consumers in New York) to cover injuries
arising from an occurrence of identity theft (subject to
limitations and exclusions).
Score WatchTM: provides consumers with continuous
monitoring of their FICO credit score and notification when a
change in their FICO score impacts the interest rate they are
likely to receive, detailed explanations for key score changes
and specific tips for understanding their score, daily credit
monitoring of their Equifax credit file, and two free Score
Power (which include the consumer's Equifax Credit
ReportTM and FICO credit score).
The Need for CROA Reform
CROA was enacted before any of these recently developed positive
and popular consumer education and credit file monitoring products were
created. Unfortunately, a broad (and, ultimately, incorrect)
interpretation of CROA could include consumer reporting agencies and
their credit monitoring products under the definition of credit repair
organizations. Inclusion of consumer reporting agencies under CROA
restrictions would inappropriately restrict and complicate consumer
access to credit file monitoring products and to the beneficial
features offered by these products.
Without CROA reform, plaintiffs' class action suits threaten the
viability of credit monitoring products. Under CROA, these suits could
require the disgorgement of all revenues from the sale of the
monitoring products. Several of the first wave of these kinds of
lawsuits has been settled, but this kind of litigation is an ongoing
threat and, if successful, could drive credit monitoring products from
the marketplace or, at the very least, adversely distort their pricing
and delivery.
CROA, quite rightly, prohibits the collection of fees before
completing the promised service. This requirement is appropriate for
credit repair organizations but inappropriate for credit monitoring
products which customarily are sold through instant online delivery and
an annual subscription.
Further, CROA requires that covered entities provide prospective
consumer subscribers with notices that address the inability of credit
repair organizations to remove adverse, but accurate, data from a
credit report. Warnings against the deceptive practices of credit
repair organizations would be confusing and inappropriate if given to a
consumer seeking credit monitoring products.
Further, credit repair organizations are subject to a number of
appropriately harsh and specific penalties, including a requirement to
disgorge all revenues if CROA is violated. These penalties are not
appropriate for credit monitoring products.
Proposed Legislation to Reform CROA
Enforcement authority under CROA was placed with the Federal Trade
Commission (FTC). The FTC staff states that it sees no basis for
subjecting the sale of credit monitoring and similar educational
products and services to CROA.
As you know, the bipartisan House bill (H.R. 2885) being offered by
Representatives Paul E. Kanjorski (D-PA) and Ed Royce (R-CA) provides
that an entity providing legitimate credit monitoring products, and not
credit repair services, would not fall within the definition of a
credit repair organization and, therefore, would not be subject to
CROA. The bill would also provide for a complete and detailed notice to
be sent to consumers on their rights under the Fair Credit Reporting
Act, including a right to a free report.
In addition, the House bill guarantees subscribers to credit
monitoring products a pro rata refund in the event that they cancel
their service.
Conclusion
CROA reform is straight-forward and narrowly tailored to simply
effectuate Congress' intent to apply CROA to credit repair
organizations and not to other products and services that did not even
exist in 1996 and which benefit, rather than harm, consumers. The
fraudulent efforts of credit repair agencies harm consumers and the
safety and soundness of the credit system. The objective of CROA always
was and is to target companies which engage in fraudulent practices
such as promising to delete accurate information from a consumer's
credit report.
CROA reform, as proposed in the House bill, does not provide a per
se exemption from CROA for consumer reporting agencies, based simply on
their status as consumer reporting agencies. Rather, entities are
exempt from CROA only if they do not engage in credit repair
activities. Thus, CROA reform does not, in any way, weaken consumers'
protections from deceptive practices enforced by the FTC and State
Attorneys General which address the activities of credit repair
organizations or address unfair or deceptive practices involving credit
repair services.
Senator Pryor. Thank you.
Ms. Faulkner?
STATEMENT OF JOANNE S. FAULKNER, ATTORNEY ON
BEHALF OF THE NATIONAL ASSOCIATION OF CONSUMER ADVOCATES,
NATIONAL CONSUMER LAW CENTER, U.S. PIRG, CONSUMER FEDERATION OF
AMERICA
Ms. Faulkner. Good afternoon, Mr. Chairman. I'm pleased to
have the opportunity to testify this afternoon about the Credit
Repair Organizations Act for the National Association of
Consumer Advocates and our testimony is joined by the National
Consumer Law Center, on behalf of its low-income clients, by
U.S. PIRG, and by the Consumer Federation of America.
Credit repair clinics prey on consumers with false promises
that they can remove accurate adverse items, such as
bankruptcies, chargeoffs, late payments. It cannot be done.
Based on publicly available information, we estimate that
credit repair clinics are submitting about 4 million meritless
disputes per year to the credit bureaus. That means consumers
are tossing money down the drain based on false promises, it
also means the credit bureaus are diverted from investigating
the real disputes, such as identity theft, or mixed files.
The credit repair scam is over two decades old. I attach to
my testimony an article from 1988, from The New York Times,
involving a scam that is still in use today, and that is,
flooding the bureaus with meritless disputes.
The strong law that was enacted in 1996, the CROA, was
subject to the credit repair clinics immediately looking for
loopholes. We have recommended eight improvements in the Act,
I'm only going to discuss three of them.
The first loophole is in the Act itself, and that is, the
Act says you cannot charge for the credit repair services,
until they have been fully performed. What the credit clinics
are doing is breaking these services down into baby steps, so
that they will charge $75 for a setup file, they will charge
$40 for a monthly report--even though nothing has been done
during that month. So, I think that the CROA needs to be
changed to make it clear that the clinic cannot charge for the
repair services until the requested improvement has taken
place.
The second and third changes we need are external to the
statute, so that consumers can enforce the law better. Like
other scams, many credit repair organizations are inserting
mandatory pre-dispute arbitration clauses in their contracts.
That means, whenever there's wrongdoing, and the consumer wants
to rectify it, it's swept under the rug, because it's in secret
proceedings before some arbitration forum.
The other thing they're doing is imposing distant forum
clauses, which means that a consumer from Connecticut, for
instance, would have to go to Washington State in order to
enforce his or her rights. Those two things are external to the
statute, the statute needs to be amended to protect consumers
to limit those.
Credit monitoring from the consumer perspective should not
be exempt. Credit bureaus already have the grave responsibility
to monitor credit reports, to make sure they are accurate, and
to prevent mixed files and identity theft.
What credit monitoring services do is make the consumer pay
for monitoring their own credit report, even though credit
bureaus are supposed to be doing that for free. We think credit
monitoring should not be exempted, because, mainly because the
credit repair clinics will find another loophole, as sure as
can be.
And second, in my testimony, there are examples of the
Federal Trade Commission going after some of these credit
monitoring services for deceptive practices. No one should be
exempt from the deceptive practices prohibited by CROA.
The credit reporting system is largely broken. And one of
the reasons is the drain on consumer resources, and on credit
bureau resources, caused by these credit clinics. They must be
stopped.
We urge you to strengthen the laws to prevent exploitation
of both consumers, and credit bureaus. Thank you.
[The prepared statement of Ms. Faulkner follows:]
Prepared Statement of Joanne S. Faulkner, Attorney on Behalf of the
National Association of Consumer Advocates, National Consumer Law
Center, U.S. PIRG, Consumer Federation of America
Chairman Inouye, Vice Chairman Stevens and other distinguished
Members of the Commerce, Science, and Transportation Committee, thank
you for inviting me to testify today in this important hearing to
consider the improvements necessary for the effective implementation of
the Credit Repair Organizations Act. I offer this testimony today on
behalf of the National Association of Consumer Advocates, the low
income clients of the National Consumer Law Center, U.S. PIRG, and
Consumer Federation of America. We oppose changing the Act to protect
credit monitoring services since the proposed changes instead
facilitate evasion of the Act's salutary protections by credit repair
organizations. Instead, we offer suggestions for improving the Act to
strengthen its protections against deceptive credit repair services.
I am Joanne Faulkner, a founding member of NACA. A brief
description of my background in consumer protection law, and a
description of the consumer organizations named above, is appended.
I have first hand experience in trying to enforce the Credit Repair
Organizations Act, 15 U.S.C. 1679 et seq. (CROA). Enforcing the CROA
is frustrating, not because of what has been enacted, but because the
targets of the law have devised methods of evasion. While the Federal
Trade Commission has enforcement power, it does not have the resources
to address the burgeoning and emboldened number of entities that prey
on already financially overburdened consumers with false promises of
credit repair.
The law desperately needs to be strengthened to prevent evasive
tactics. If Congress considers watering down the Act by exempting
credit monitoring services, the exemption will simply provide a roadmap
that will be exploited by those seeking to avoid CROA's protections
against deceptive practices.
In order to prevent evasion, and encourage private attorneys to
effectively participate in stemming the abuses and dislocations caused
by credit repair entities, the CROA should be strengthened. The Act
needs:
1. An express prohibition on pre-dispute arbitration clauses,
commonly inserted by credit repair organizations (CROs) both to
insulate them from liability as well as to keep their deceptive
practices out of the public eye and under the rug.
2. A prohibition on distant forum clauses, commonly imposed by
CROs to deter consumer enforcement of their rights under the
CROA.
3. A provision affirmatively allowing the consumer to sue the
CRO in the Federal or state judicial district where the
consumer resides irrespective of any contractual provision to
the contrary.
4. A provision that the consumer may obtain injunctive relief.
5. A prohibition on any contract provision that prevents class
actions, particularly important here because an individual's
damages may not be sufficient to interest competent attorney
representation.
6. An amendment to 1679b(4) of the CROA to effectuate the
intent of Congress to bar unfair and deceptive practices.
Because the word ``fraud'' is used in that subsection only,
some courts are demanding a higher burden of proof and pleading
than normally imposed for unfair or deceptive practices.
7. A provision preventing CROs from evading 1679b(b) by
charging for discrete services (``set up file''; ``monthly
report on progress'' and the like).
8. Non-profits should not be exempt. CROs have set up elaborate
structures whereby the consumer contracts with a non-profit
``educational'' entity but that entity outsources books and
services to profit-making friends, relatives and associates.
Moreover, as discussed below, we strongly oppose weakening the CROA
by enacting the deceptively named ``Credit Monitoring Clarification
Act,'' H.R. 2885, which is virtually identical to last year's Senate
companion bill, S. 3662. This bill would allow almost any business
currently covered by CROA to escape the Act's important protections.
Even a slight change in description from promising to ``improve
credit'' to providing ``access to credit reports, credit monitoring
notifications, credit scores . . ., any analysis, evaluation or
explanation of credit scores . . .'' would mean that CROA's current
strict prohibition against deception would no longer apply to entities
abusing the consumer, deceiving the credit bureaus, and harming the
economy.
Abuses by the Credit Repair Industry continue and cry out for a
stronger CROA
Congress has found that ``the banking system is dependent upon fair
and accurate credit reporting. Inaccurate credit reports directly
impair the efficiency of the banking system, and unfair credit
reporting methods undermine the public confidence which is essential to
the continued functioning of the banking system.'' Fair Credit
Reporting Act, 15 U.S.C. 1681(a)(a). To further that purpose,
Congress enacted the CROA, 15 U.S.C. 1679, finding that ``Certain
advertising and business practices of some companies engaged in the
business of credit repair services have worked a financial hardship
upon consumers, particularly those of limited economic means and who
are inexperienced in credit matters.'' 15 U.S.C. 1679(a)(2). The CROA
was enacted ``to protect the public from unfair or deceptive
advertising and business practices by credit repair organizations.''
1679(b)(2).
``As Americans' reliance on credit has increased, so-called `credit
repair clinics' have emerged, preying on individuals desperate to
improve their credit records. These organizations typically promise
they can have any negative information removed permanently from any
credit report . . . for a fee.'' FTC v. Gill, 265 F.3d 944, 947 (9th
Cir. 2001) (sanctions against lawyer operating credit repair clinic in
violation of CROA). Because of well-known abuses, thirty eight states
have also enacted laws restricting credit repair operations, including
my state of Connecticut, Conn. Gen. Stat 36a-700.
CROs are designed to undermine accurate credit reporting. Despite
the CROA, the CROs have established elaborate ruses to intentionally
profit from obtaining payment before credit repair services are fully
performed. Some intentionally solicit consumers on the representation
that a law firm is involved, and that consumers will benefit by being
represented by a law firm. CROs intentionally and systematically
deceive credit bureaus about the source and nature of the dispute
correspondence, and intentionally deceive consumers before and during
the course of their representation.
The CROs' volume of mailings to the credit bureaus causes harm to
the credit reporting system because of the resources of bureau staff
and time devoted to responding to the volume of letters generated by
CROs, as well as the dislocation of bureau efforts from the disputes of
individuals who have legitimate accuracy complaints, such as victims of
identity theft or of mixed files (similar names). The volume and
spurious nature of the disputes sent by CROs intentionally interferes
with the credit bureaus' business of providing accurate reports. These
practices ultimately cause creditors to extend credit in reliance on
credit bureau reports that are not accurate because the CROs' dispute
volume is intended to force bureaus to delete tradelines that they
cannot investigate within thirty days. The CROs' systematic deception
of the credit bureaus and of consumers undermines the banking system
and harms consumers and creditors alike. Appended to this testimony is
a 1988 New York Times article recognizing the type of abusive practices
that are still taking place today.
Let me quote from the testimony of Stuart K. Pratt, President of
the Consumer Data Industry Association, before the House Committee on
Financial Services (June 19, 2007), showing credit repair is an ongoing
and still significant problem:
Historically credit repair operators would promise to delete
accurate but negative data from a consumer's file for fees that
in some cases exceeded $1,000. Their primary tactic was to
flood the reinvestigation system with repeated disputes of the
same negative data in an effort to ``break'' the system and
cause the data furnisher to both give up and not respond or to
simply direct the consumer reporting agency to delete the data.
Today, operators are savvier and often avoid making false
promises but even now they suggest that they will assist the
consumer with disputing inaccurate or unverifiable information.
In many cases ``unverifiable'' equates to the same practice of
flooding the system and trying to have accurate, predictive
derogatory data removed.
Our members estimate that on average across our members
operating as nationwide consumer reporting agencies, no less
than 30 percent of disputes filed are tied to credit repair.
Repetitive disputes can be particularly harmful to smaller data
furnishers such as community banks, thrifts, credit unions and
retailers. These data sources are often a key to ensuring full
and complete data on all credit-active consumers, but their
ability to absorb costs is limited. In extreme cases, small-
business data sources may simply choose not to report at all if
costs of responding to disputes are too high.
Thankfully, no one data source is usually the target of a
credit repair operator and credit repair efforts most often end
up in failure. But this failure is at a cost to our members and
to consumers. Consumers spend money on a service that cannot
deliver. Industry incurs costs as well when it has to dedicate
resources which could be used to service legitimate disputes,
to disputes that are not likely to be valid.
Thus, consumers and credit bureaus alike are eager to strengthen
the CROA.
The present credit reporting system is broken. Every analysis or
study in this decade, including the FACTA authorized FTC Pilot Study
has found inaccuracies in a significant percentage of the reports
considered. The CROs are one cause of the inaccuracies. The amendments
we suggest are essential to stop them, or at least provide a more
effective means of deterring noncompliance than we have now.
CROA has successfully deterred other deceptive credit services
The CROA should not be watered down because it has also proved
useful against entities other than traditional credit repair
organizations when those entities have made deceptive claims about
improvement of credit history. The Act has been held to apply to:
Credit counseling agencies that promise to improve
participants' credit ratings;
Debt collectors who offer improvement of the debtor's credit
rating in return for payment of the debt (even when the effect
is actually to worsen the credit rating);
A company that generated subprime auto financing leads by
advertising that it could restore consumers' credit.
Payday lenders have also operated under the guise of credit
services organizations in order to evade state interest rate caps.
Strengthen CROA By Adding Important Protections
Rather than weakening the CROA, the Act should be strengthened to
ensure that it will protect consumers from deceptive credit repair
practices.
1. Pre-dispute Arbitration Clauses must Be Prohibited
Arbitration clauses are commonly inserted in contracts by credit
repair organizations to insulate them from liability as well as to keep
their deceptive practices out of the public eye and under the rug. One
court mastered this issue, Alexander v. U.S. Credit Management, Inc.,
384 F. Supp. 2d 1003, 1014 (N.D. Tex. 2005), but others have endorsed
arbitration clauses. Congress can reduce the volume of litigation over
the effectiveness of unilaterally imposed arbitration clauses by
prohibiting them in the CROA.
Mandatory pre-dispute arbitration clauses unilaterally imposed by
creditors and scam artists alike cause significant harm to consumers,
deter and indeed eliminate effective enforcement and keep corporate
wrongdoing under the rug and out of the public's scrutiny.
Although arbitration can be a fair and efficient way to resolve a
dispute when both parties choose it after the dispute arises,
arbitration is particularly hostile to individuals attempting to assert
their rights. High administrative fees, and a lack of discovery
proceedings, jury trials and other civil due process protections, and
meaningful judicial review of arbitrators' decisions all act as
barriers to the fair and just resolution of an individual's claim. When
arbitration is required rather than voluntarily chosen, the likelihood
that these problems will occur and that arbitrators will favor repeat
corporate players over individual claimants is increased.
2. Distant Forum Clauses must Be Prohibited
CROs commonly include a clause in their contracts requiring that
any suit or arbitration be brought in some location distant from the
consumer and expensive to travel to. Plainly, this type of provision
effectively precludes any effort to enforce the CROA. ``Distant forum
abuse is `unconscionable' and `insidious' conduct employing `an
ostensibly legitimate legal process to deprive consumers of basic
opportunities which should be afforded all litigants.' '' Yu v. Signet
Bank/Virginia, 69 Cal. App. 4th 1377, 1389 (1999) (citations omitted).
``[M]isuse of the courts in this manner contributes to an undermining
of confidence in the judiciary by reinforcing the unfortunate image of
courts as `distant' entities, available only to wealthy or large
interests,'' and leads consumers ``to conclude that the legal system is
merely a `rubber stamp' for the improper practices utilized by
predatory agencies.'' Barquis v. Merchants Collection Assn., 7 Cal. 3d
94, 108, 101 Cal. Rptr. 745, 496 P.2d 817 (1972) (filing in a distant
venue for the ulterior purpose of impairing consumer's rights to defend
the suits to coerce inequitable settlements or default judgments is
abuse of process).
In Spiegel, Inc. v. FTC, 540 F.2d 287 (7th Cir. 1976), the practice
of filing collection lawsuits in distant forums was held unfair and
unconscionable. This practice has been attacked successfully in both
private and public enforcement actions. E.g., Schubach v. Household
Finance Corporation, 376 N.E.2d 140, 141-142 (Sup. Jud. Ct. Mass. 1978)
(practice unfair or deceptive even when permitted by venue statute);
Celebrezze v. United Research, Inc., 482 N.E.2d 1260, 1262 (Ohio App.
1984); Zanni v. Lippold, 119 F.R.D. 32 (C.D. Ill. 1988) (class composed
of defendants subject to distant forum abuse certified).
The CRO should not be allowed to sue the consumer in a distant
forum. The consumer should not be required to sue the CRO in a distant
forum.
3. Venue must Be Local
Lack of a venue provision is one obvious gap in the provisions of
the CROA. Venue is the locale where the consumer can sue or be sued.
The CROA should have an affirmative provision, like other subtitles of
the Consumer Credit Protection Act, placing the location of lawsuits at
the consumer's residence, such as: ``An action to enforce any liability
credited by this subchapter may be brought in any appropriate United
States District Court without regard to the amount in controversy, or
in any other court of competent jurisdiction, located in the judicial
district or similar legal entity in which the consumer resides at the
commencement of the action.''
4. Injunctive Relief Is Essential
The CROA allows States and the FTC to obtain injunctive relief. By
omission, there may be an implication that United States District
Courts do not retain their normal injunctive power in individual CROA
cases. While it is likely that Congress did not intend to so divest
Federal courts of their injunctive powers, any judicial confusion can
be corrected with a short addition to the statute expressly
acknowledging such a remedy. This would provide a faster and less
burdensome remedy for consumers and facilitate their ``private
attorneys general'' in obtaining effective relief.
5. Class Action Waivers Should Be Explicitly Disallowed
Another way the CROs reduce their exposure to wrongdoing is by
inserting a clause prohibiting class actions, or prohibiting the
individual consumer from participating in a class action against the
CRO. The CROA allows class actions; it should also override any effort
by the CRO to undermine this salutary provision by attempting to
preclude class litigation.
The Supreme Court has long recognized that without class actions,
claimants with small claims would not be able to obtain relief. See
Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985). ``Class actions
. . . may permit the plaintiffs to pool claims which would be
uneconomical to litigate individually. For example, this lawsuit
involves claims averaging about $100 per plaintiff; most of the
plaintiffs would have no realistic day in court if a class action were
not available.'' Id. at 809. The 1966 Advisory Committee Notes to Rule
23 echo this concern: ``These interests [in individual litigation] may
be theoretical rather than practical: . . . the amounts at stake for
individuals may be so small that separate suits would be
impracticable.'' Similarly, the leading treatise on class actions has
stated:
The desirability of providing recourse for the injured
consumer who would otherwise be financially incapable of
bringing suit and the deterrent value of class litigation
clearly render the class action a viable and important
mechanism in challenging fraud on the public.
Newberg, Class Actions at 21.30. See also Watkins v. Simmons and
Clark, Inc. 618 F. 2d 398, 404 (6th Cir. 1980) (class action
certifications to enforce compliance with consumer protection laws are
``desirable and should be encouraged.'')
6. The Word ``Fraud'' Should Be Deleted from 1679b(4)
The CROA is a broadly worded enactment, a uniquely potent consumer
protection statute that both provides for punitive damages and voids
the violative contract. The type of intentional conduct required by a
fraud standard is taken into account only in determining the amount of
punitive damages. Yet, courts unfortunately have been drawn by the word
``fraud'' in 1679b(4) to impose a higher burden of pleading and proof
on the consumer.
What Congress actually said, and notably the only place the word
``fraud'' was used, does not require a CROA plaintiff to exclusively
plead fraud; the plain language encompasses fraud, but is much broader
than that:
(4) engage, directly or indirectly, in any act, practice, or
course of business that constitutes or results in the
commission of, or an attempt to commit, a fraud or deception on
any person in connection with the offer or sale of the services
of the credit repair organization.
The legislative history shows that the section was meant to
prohibit deceptive and unfair practices, even if they do not amount to
fraud.\1\ The subsection should be reworded to clarify that intent. We
suggest the following:
---------------------------------------------------------------------------
\1\ Section 404, as described in H.R. Rep. 104-486, 103d Cong. 2d
Sess., 1994 WL 164513 *57-58.
Section 404 prohibits credit repair organizations from (1) making
untrue or misleading statements or advising consumers to make such
statements with respect to a consumer's credit worthiness, credit
standing, or credit capacity to a consumer reporting agency or to a
person extending credit to the consumer; (2) making statements or
advising consumers to make statements to consumer reporting agencies or
a person extending credit to the consumer that are intended to alter
the consumer's identification to prevent the display of adverse credit
information that is accurate and not obsolete; (3) making or using
untrue or misleading representations of the services the credit repair
organization can provide; (4) engaging in deceptive acts; and (5)
charging or receiving payment in advance of fully performing services
for the consumer.
(4) engage, directly or indirectly, in any act, practice, or
course of business that INVOLVES ANY FALSE, DECEPTIVE OR
MISLEADING REPRESENTATION OR MEANS constitutes or results in
the commission of, or an attempt to commit, a fraud or
deception on any person in connection with the offer or sale of
the services of the credit repair organization.
7. Close the ``services'' loophole
CROs contract to perform credit repair. However, in order to evade
the statutory prohibition on charging before services are rendered,
they break services down into each step. They separately charge a set-
up fee (setting up the file is a ``service'') and a monthly report fee
(mindlessly transmitted by computer). Another charge is described as
for ``time and expense for commencing the representation of the
client.'' There is a ``rush fee'' for expedited services. This breakout
of each small step in the ultimate service should be prohibited. No
money should change hands, in escrow or otherwise, until the credit
repair itself is actually performed. We request the following
amendment.
1679b(b) Payment in advance.--No credit repair organization
may charge or receive any money or other valuable consideration
for the performance of any service FOR THE EXPRESS OR IMPLIED
PURPOSE OF IMPROVEMENT IN ANY CONSUMER'S CREDIT RECORD, CREDIT
HISTORY OR CREDIT RATING which the credit repair organization
has agreed to perform for any consumer before such service
IMPROVEMENT is fully performed.
8. Non-Profits Should Not Be Exempt
The FTC has sued ``educational'' entities that have nonprofit
status but are structured so that founders and their family and friends
have high-price contracts for goods or services sold to the nonprofit.
Section 1679a should be amended to at least add a qualifying phrase,
``and is not for its own profit or that of any person directly or
indirectly associated with the organization.'' The change would endorse
the thoughtful interpretation limiting the section's exemption to true
nonprofits by the First Circuit Court of Appeals in Zimmerman v.
Cambridge Credit Counseling Corp., 409 F.3d 473 (1st Cir. 2005).
Deceptive Credit Monitoring Services
Although the national credit bureaus are victims of many credit
repair scams, they themselves have also engaged in deceptive practices.
The national credit bureaus have developed another new and lucrative
profit center based on consumer fear of inaccuracies in credit reports.
Each agency markets a credit-monitoring product directly to consumers.
As the agency reported to its shareholders on May 23, 2007:
Consumer Direct [online credit reports, scores and monitoring
Services] delivered excellent growth throughout the period,
with strong demand from consumers for credit monitoring
services, which led to higher membership rates.
In its most recent quarterly filing, the agency reported that its
sale of these reports and its credit monitoring products directly to
consumers had generated no less than 10 percent of its operating
revenue and one-sixth of its credit reporting revenue.
Whether or not their credit monitoring services offer any benefit
to consumers, these services have been marketed in a deceptive way to
induce consumers to pay for reports they are legally entitled to
receive for free, and for fraud monitoring services that the CRAs are
already legally obligated to perform. For example, Experian has branded
and marketed its misnamed service www.freecreditreport.com.
Concerns over these services must be kept in mind because the CRAs
are pushing for an exemption from CROA. We strongly oppose such an
exemption.
Experian has been penalized twice by the Federal Trade Commission
for deceptively linking subscription-based credit monitoring offers to
the Federal free annual credit report on request right established by
the 2003 FACT Act. In August 2005, Consumerinfo.com paid $950,000 to
settle charges by the FTC that Experian offered consumers a free copy
of their credit report and ``30 FREE days of Credit Check Monitoring''
without adequately explaining that after the free trial period for the
credit-monitoring service expired, consumers automatically would be
charged a $79.95 annual membership unless they notified the defendant
within 30 days to cancel the service. Consumerinfo.com billed the
credit cards that it had told consumers were ``required only to
establish your account'' and, in some cases, automatically renewed
memberships by re-billing consumers without notice. The settlement
required Consumerinfo to pay redress to deceived consumers, barred
deceptive and misleading claims about ``free'' offers, and required
clear and conspicuous disclosure of terms and conditions of any
``free'' offer.
Experian then violated this settlement agreement, and in February
2007 was fined a second time by the FTC for $300,000 to settle charges
that its ads for a ``free credit report'' continued to fail to disclose
adequately that consumers who signed up would be automatically enrolled
in a credit-monitoring program and charged $79.95.
Although Consumerinfo.com now contains the disclosures, they are in
fine print, and the website implies that the truly free report is not
``user-friendly'' like the free one that comes with the monitoring
service.
Moreover, the main Equifax, TransUnion and Experian websites all
are worse. All prominently mention free credit reports with links that
lead to a sign up for their paid monitoring service. Although they each
have disclosures somewhere about the price and the distinction between
the truly free report, they are obscure and easy to overlook. All three
websites make it very difficult to learn about how to get a truly free
report, and very easy to respond to a prominent ``get my free report''
link and inadvertently sign up for a paid services.
Beyond the free report, it is not clear what these credit
monitoring services offer beyond the CRA's existing legal duties. The
bureaus have been charged by Congress with maintaining ``maximum
possible accuracy'' in consumers' credit reports. Yet, their credit
monitoring services ask the consumer to pay to review the accuracy of
their credit files. The bureaus should be preventing identity theft,
mixed files, and other errors on their own and without charging the
consumer for so doing.
Resist Efforts to Weaken CROA
The variety of forms that deception can take, the creativity of
those who would exploit consumer's concern for their credit rating, and
the variety of actors involved, are all a strong warning against
creating any loopholes in CROA's protections against deceptive
practices. I have seen a draft of a proposal whose short title is the
``Credit Monitoring Clarification Act,'' (H.R. 2885). NACA, NCLC and
U.S. PIRG and other consumer organizations oppose the bill. The line
between an offer to help ensure that credit reports ``are accurate and
free of fraud,'' as on Equifax's website, and offers to improve a
credit report or credit score, covered by CROA, is a fine one. We
believe that credit monitoring services should comply with CROA's
protections against deception just like other credit repair services.
Unfortunately, H.R. 2885 opens wide, wide loopholes for CROs as
well. The proposed amendment to CROA for credit monitoring activities
includes broad and sweeping exemptions. Anyone who characterizes their
services as providing ``access to credit reports, credit monitoring
notifications, credit scores . . ., any analysis, evaluation or
explanation of credit scores . . .'' would be exempted from coverage
under CROA as long as they provide a new disclosure and cancellation
rights for credit monitoring services. In fact, the business would
remain exempt even if it offered to improve credit scores or modify
credit reports, as long as the offer did not promise to remove accurate
items that are not obsolete.
Yet as Stuart Pratt of the Consumer Data Industry Association noted
in the testimony quoted above, ``Today, operators are savvier and often
avoid making false promises but even now they suggest that they will
assist the consumer with disputing inaccurate or unverifiable
information. In many cases `unverifiable' equates to the same practice
of flooding the system and trying to have accurate, predictive
derogatory data removed.''
In other words, any business that is currently defined to be a
credit repair organization under CROA could simply escape the coverage
of CROA by slightly changing the description of what they do and
offering, for example, to provide analyses and projections of a
person's credit score. CROA's current strict prohibition against
deception and fraud would no longer apply to that business.
Below are some examples of the consumer protections in the current
law that would not be available under H.R. 2885.
When run-of-the-mill credit repair businesses deceptively
advertise their ability to improve consumers' credit scores by
exaggerating what they can accomplish, CROA offers protections
against this deception.
When debt collectors collect debts by deceptively promising
improvement of a consumer's credit rating, CROA's prohibition
against deception can be brought to bear.
Some payday lenders are now advertising themselves as credit
repair specialists to evade state restrictions on interest
rates; activities to which CROA's protections clearly apply.
Moreover, credit monitoring services--which themselves have been
marketed in a deceptive manner--would be completely exempt from CROA's
prohibition against untruthful or deceptive practices. In fact, it is
not even clear that the CRA's need an exemption from CROA. See Hillis
v. Equifax Consumer Servs., 237 F.R.D. 491, 515 (D. Ga. 2006)
(discussing why credit monitoring services do not seem to be within
CROA, but stating ``if a credit reporting firm decides to offer a
service that falls within the purview of the CROA, there is no reason
that the CROA should not apply'').
Thank you for the opportunity to testify. Please feel free to
contact me for any additional information.
______
The New York Times--July 23, 1988
Need Credit? Be Wary Of Clinics Offering Help
By Leonard Sloane
It was the most extreme case of credit-repair abuse ever uncovered:
9,000 people around the Nation defrauded of about $2 million they had
paid Credit-Rite Inc. to restore their eligibility for various forms of
credit. Two of the operators of Credit-Rite, a New Jersey concern, were
sentenced to prison terms this week in Federal District Court in
Trenton, and the third received a suspended sentence.
Credit-repair clinics are profit-making ventures that, by their
very nature, often operate at the edge of the law, thwarting the
maintenance of orderly credit records in behalf of clients who have bad
credit histories.
The clinics promise to help remove derogatory information from
individuals' credit files, and charge as much as $2,000 for the
service. They take advantage of a provision of the Fair Credit
Reporting Act that gives consumers the right to challenge the
information about them that credit bureaus have on file. This provision
requires a credit bureau to verify the information upon request,
generally within 30 days. If verification is not completed on time, the
disputed data must be deleted.
Company Guaranteed Results
Charlie Mae McCray of Cleveland testified at the Credit-Rite trial
that she had paid more than $500 to clear up her credit record. The
company had guaranteed results, but nothing was done. ``I complained, I
wrote letters, but I didn't get any response to my satisfaction,'' she
said. ``I still haven't received any money back.''
Anne C. Singer, the Assistant United States Attorney in New Jersey
who handled the Credit-Rite case, said: ``It's impossible to perform
this service as promised if someone's credit history is correct. The
people involved in running these businesses raise the hopes of low- and
moderate-income people, and then their hopes are dashed.''
In another credit-repair clinic case this week in Los Angeles, the
operator of Wise Credit Counselors was convicted and sentenced to
probation and community service by a Municipal Court judge, who also
ordered full restitution to the 13 victims.
Corrections Without Fees
Individuals who feel their credit records have inaccuracies can go
directly to a local credit bureau and ask that they be corrected. There
are also nonprofit credit counseling services around the country that
will help consumers develop workable budgets and pay off their bills.
Many credit-repair clinics also promise to obtain credit cards for
people who have been refused by card issuers. There are about 30
million such people in the United States, cutoff from such basic
transactions as renting a car or making travel reservations because
they do not have a card. Cards provided through credit-repair clinics
are usually secured by a deposit made by the card holder in the bank
that issues the card.
But some banks offer secured cards directly to consumers without
charging the hundreds of dollars in application and membership fees
exacted by many credit-repair clinics. Beyond that, only 4 out of every
10 applicants who pay fees for secured cards eventually get cards,
according to H. Spencer Nilson, the publisher of the Nilson Report, a
credit-card newsletter in Los Angeles.
But the blizzard of challenges to credit bureaus is the essential
operating method of credit-repair clinics.
``The objective is to overwhelm the established system,'' said
Walter R. Kurth, the president of Associated Credit Bureaus, a trade
association.
Credit-repair operators do not necessarily disagree. ``The credit
bureaus have exercised too much power,'' said Paul Turk, general
manager of City Wide Financial Services, a clinic in Los Angeles.
TRW Information Services, a credit-bureau chain based in Orange,
Calif., refuses to do business with credit clinics. ``We have a
procedure in place when we feel consumers have been involved with a
credit clinic, whereby we notify them we don't deal with third-party
contacts,'' said Delia Fernandez, a spokeswoman. This policy is being
contested in a lawsuit by the American Association of Credit, a
Glendale, Calif., clinic. The case is pending. Equifax Inc., which owns
a chain of credit bureaus, also makes ``every effort to circumvent
dealing with clinics,'' said Annette Aurrecoecher, a vice president of
the Atlanta company. ``But if a clinic has a notarized letter from a
consumer, we feel there is an obligation to deal with it.''
`Fly-by-night' Companies
Bills were proposed in both houses of Congress early last year to
restrict the practices of credit-repair clinics, but no hearings have
been scheduled. Seventeen states have passed laws regulating the
clinics' advertising and business practices, yet residents of those
states are often solicited by clinics in nearby states.
``We continue to be very concerned,'' said Kathleen V. Buffon, the
Federal Trade Commission's assistant director of credit practices.
``These companies tend to be fly-by-night.''
Whether or not consumers use a credit-repair clinic, information
that has been correctly recorded in a credit bureau file cannot be
permanently removed until the problem is corrected or until the time
provided by law has elapsed.
``The only way to acquire a good credit record is to straighten up
your act,'' said Jeanne Hogarth, an assistant professor of consumer
economics and housing at Cornell University. ``There is no magic wand
that these repair clinics can raise.''
Senator Pryor. Thank you.
Mr. St. Clair?
STATEMENT OF STEVE ST. CLAIR,
ASSISTANT ATTORNEY GENERAL, STATE OF IOWA
Mr. St. Clair. Thank you.
I've been asked to address law enforcement efforts
directed----
Senator Pryor. Is your microphone on?
Mr. St. Clair. It should--I think it is.
Senator Pryor. OK, thank you.
Mr. St. Clair. I've been asked to address law enforcement
efforts directed at the facilitators of telemarketing fraud.
Fraudulent telemarketers have been cheating--stealing from
Americans, elderly Americans, in particular--for many years.
That much, sadly, is a constant. But what has evolved are the
techniques, methods, operational details that characterize the
particular scams and schemes of the day. It's been something of
an arms race with law enforcement. The authorities develop
techniques for preventing, detecting, addressing, apprehending
the scammers, and the scammers develop new variations on old
themes, in an effort--a continuing effort--to avoid being
brought to justice.
Now, about 15 years ago, the Iowa Attorney General's office
developed some very effective techniques for capturing on tape
some of the fraudulent pitches that were being directed at
various elderly citizens of our State, and those pitches were
typically being--emanating from other States--Iowa generally
supplies the victims, and other States have--used to supply--
the telemarketers that would harvest the Iowa victims.
But, things have changed, and since then the predatory
telemarketers have moved across international boundaries. So--
where before we could capture pitches on tape, and use those
tapes to charge, extradite, prosecute, and very seriously deter
the telemarketers--fraudulent telemarketers that were calling
from other States, now we've been dealing with international
boundaries, and the challenges in dealing with international
boundaries by State law enforcement, in terms of investigation
and prosecution are pronounced, to say the least.
So, increasingly, we tried to focus our attention on the
stable, U.S.-based operations that provide something of a
platform--or the necessary infrastructure for the telemarketers
to operate. The thinking is that by making the facilitators
answer for the frauds to which they provide support, they will
withdraw that support--in part or in whole--from the dubious
operators, and thus make it more difficult for the perpetrators
to complete their frauds, to claim their victims.
So, attention has been directed, for example, to banks and
to third-party processors that provide the means through which
the fraudulent telemarketers can extract money from the
accounts of victims. And, attention has also been paid to the
list builders, list brokers, list managers that--in effect--
help scammers to identify elderly Americans who would be
especially vulnerable to being cheated by a stranger over the
phone.
List building--list builders, are operations that actually
create lists of people vulnerable to being scammed. And, they
may do it by sending prospecting mailings, screening mailings,
to tens--or hundreds of thousands--of individuals, and they
uniformly, in our experience, these mailings promote vague and
misleading opportunities to win prizes, sweepstakes, and the
like.
So, the prize-oriented mailings ask the consumer to send
back to the mailer, a small check--it might be $20 or so, as an
administrative fee, or an acquisition fee, a transfer fee--
often a fee they designate in such a way as to suggest that
you're paying for processing the prize.
The people who send a check in response to such mailings
are prime candidates for further victimization, which is the
whole point. They're typically older, and they've demonstrated
a willingness to send money to a stranger in a distant place in
response to vague representations regarding a sweepstakes or a
prize--that is the ideal profile, for a fraudulent telemarketer
to pursue.
List-building mailings often ask for information just to
enhance the value of the list in the wrong hands--information
such as telephone numbers and credit card numbers.
And--I see my time is out, so I'll conclude my remarks.
We've continued to focus our attention, as much as possible, as
has the FTC, on these facilitating structures, and we'll take
any questions. Thank you.
[The prepared statement of Mr. St. Clair follows:]
Prepared Statement of Steve St. Clair, Assistant Attorney General,
State of Iowa
Fraudulent telemarketers have been stealing from Americans,
particularly elderly Americans, for many years. That much is constant.
But techniques and operational details have changed over time. It's
been an arms race with the authorities. Law enforcement develops
techniques for catching the scammers, and they in turn develop new ways
to work the scams and avoid being caught.
About 15 years ago the Iowa Attorney General's Office developed an
effective method for capturing fraudulent phone pitches on tape and
criminally prosecuting the telemarketers, who were typically calling
Iowans from another state. But since then, the predatory telemarketers
have moved their operations across international boundaries--to Canada,
Costa Rica, and elsewhere--which makes investigation and prosecution by
state authorities extremely challenging.
So increasingly we've focused our attention on the stable, U.S.-
based operations that facilitate the telemarketing scams. The thinking
is that by making the facilitators answer for the frauds to which they
provide support, they'll withdraw that support from dubious operators
and make it more difficult for the perpetrators to claim victims.
So attention has been directed to banks and payment processing
operations that provide the means for scammers to extract money from
the bank accounts of victims. And attention has also been directed to
the list builders, list brokers, and list managers that help scammers
identify elderly Americans who would be especially susceptible to being
cheated by a stranger over the phone.
List builders are operations that actually create lists of people
vulnerable to being scammed. They may do prospecting mailings to tens
or hundreds of thousands of individuals, promoting vague and misleading
opportunities to win prizes or cash in on a sweepstakes. These prize-
oriented mailings ask the consumer to send back a small check, say $20,
as an ``administrative fee'' or the like.
People who send a check in response to such mailings are prime
candidates for further victimization. They are typically older, and
have demonstrated a willingness to send money to a stranger in a
distant place in response to vague claims regarding a sweepstakes or a
prize.
These list building mailings often ask for information that will
make it easier for fraudulent telemarketers later. They may ask for the
consumer's telephone number, and credit card information. And, of
course, they also obtain access to the consumer's bank account, because
the routing numbers appear at the bottom of the small check the
consumer is asked to send in.
These lists of responsive, sweepstakes-oriented elderly may then be
rented out through the efforts of list brokers and list managers. These
list brokers and managers may be stable, well-established businesses
that deal in a wide variety of customer and prospect lists. Too often
such dealers in lists may exhibit little or no interest in how the
lists were made--that is, whether the people on the list are fraud
victims--and how someone obtaining the list plans to use it.
In summary, law enforcement attention on the facilitators is
continuing, on the part of the FTC, enforcing the Telemarketing Sales
Rule (TSR), and on the part of states, enforcing the TSR as well as
state law counterparts to the FTC Act. We believe that these efforts
are making it harder for scammers to claim victims, elderly and
otherwise, by making needed support structures less available.
Possible Legislative Approaches
Broadly address the standard for imposing liability on facilitators
Under the Telemarketing Sales Rule, a person who is providing
``substantial assistance or support'' to a telemarketer can be held
responsible when that person ``knows or consciously avoids knowing''
that the telemarketer is violating the law. That involves establishing
the mental state of the facilitator, which is very challenging. A
better approach would be to hold a facilitator responsible if he or she
``knows or should know'' that the telemarketer is violating the law.
This is more in the nature of an objective standard--what a reasonable
person should be expected to conclude from the surrounding
circumstances--and would be a helpful change.
Address payment systems and banking abuses
Eliminate ``demand drafts,'' a.k.a. ``remotely created checks,''
which are used by many telemarketing scammers to reach directly into
the bank accounts of their elderly victims--victims who may not know
what happened or know what to do about it.
Lift the preemption constraints that hinder state attorneys general
from enforcing laws against national banks. Some national banks have
neglected any semblance of a gate-keeping function by making their
banking services available to fraudulent operators. Banks in that
position should not be shielded from having to answer to state law
enforcement authorities, as well as to Federal banking authorities.
Addressing the creation and exchange of victim lists
The broadest approach, and perhaps the least realistic in terms of
legislative feasibility, would be to require solicitors that intend to
market their lists to expressly inform consumers, before the
transaction is consummated, that by responding the consumer's name and
other information will be made available to other phone and mail
solicitors. Consumers for whom that was an important consideration
could simply choose not to enter into the transaction, and could thus
stay off the list.
A narrower and presumably more realistic approach would be to
create additional safeguards that apply to lists of the elderly. List
brokers and list managers could be required to make it their business
whether a given list contains a disproportionate number of older
consumers, and, if it does, they should have to determine how the list
was compiled and how it will be used. This would require list dealers
to perform a limited but meaningful gate-keeping function, rather than
turning a blind eye, or worse.
Yet another approach worthy of consideration is the creation of a
``Do Not Mail'' database, a counterpart to the ``Do Not Call'' registry
that has been so popular with consumers. Differences in the two
contexts--receiving mail and receiving phone calls--may require
significant differences in scope and implementation. However, consumers
would likely be grateful for a means of controlling the flow of
unsolicited mail, and it could serve to impede exploitive efforts to
identify and prey upon vulnerable consumers.
Senator Pryor. Thank you.
Mr. Johnson, let me start with you if I may. In general
terms on the Do Not Call Registry--has it made things better
for your members?
Mr. Johnson. I think it's a great improvement, and I think
the Do Not Call Registry has been a great success.
Senator Pryor. Well, thank you for saying that. And does
your organization have an emphasis on educating your members
about the availability of the Registry and the fact that they
will have to re-register?
Mr. Johnson. We've made a great emphasis on the Do Not Call
Registry. We have not started to tell people about the need to
re-register, I think that's something that needs to be done.
Senator Pryor. You know, you probably heard me talk to the
witness from the Federal Trade Commission a few moments ago. In
hearing her answers to this, did you have any concerns about
the FTC's initiative to educate consumers?
Mr. Johnson. I'm not sure that I recall what she said, but
the need for education is something that we're really, always
in favor of.
Senator Pryor. OK, and do you think we should strengthen
the current law that we have on the books?
Mr. Johnson. I think it needs to be strengthened to the
extent that the ability to have fraud perpetrated can be
limited, or removed.
Senator Pryor. OK, let me ask this--I think in your opening
statement, you mentioned the established business relationship
exception, and you expressed some concerns here. Could you run
through that again for the Committee?
Mr. Johnson. What we have found is the business
relationship has to be strengthened, and better identified.
Because if someone merely responds, or asks for information
about a product, that puts them in, in effect, as being in a
business relationship. And so, the relationship has to be
something that's ongoing, rather than just a mere close call.
Senator Pryor. Mr. Cerasale--am I pronouncing your name
right?
Mr. Cerasale. You are correct.
Senator Pryor. Thank you.
I believe in your testimony, I want to make sure I heard
this correctly, but I believe in your testimony you said that
the Do Not Call program had been very, very successful with--?
Mr. Cerasale. Yes, it has been very successful. The FTC has
said it's been overwhelmingly successful.
Senator Pryor. OK, could you explain the impact the Do Not
Call Registry has had on your industry?
Mr. Cerasale. There has been, clearly, closure of some call
centers. So that has changed, changed the industry that way.
Looking for a prospect, trying to find somebody with an offer,
is generally not, cannot be done as well through the telephone.
But all of our members have gone--have gone before, and are
continuing to go forward--with being multi-channel, including
potentially, opening retail stores, but reaching out through
the Internet, reaching out through the telephone, reaching out
through the mail, and coordination with--like that.
For example, you could get a telephone call with--when a
mail piece is supposed to be received. So, there's a greater
emphasis on being multi-channel, with less emphasis on outgoing
telephone calls. This is a significant increase, however, in
telephone calls coming back to companies. And going to consumer
representations, and so forth, increase on the companies.
So that has really, I would say, exploded during this time.
But outgoing telemarketing has had a significant, if not,
dramatic turn.
Senator Pryor. Let me ask this--on the fee structure of the
Federal Do Not Call Registry--tell me how that has impacted the
industry, and how you all deal with that, and how it should be
structured in your view. I think you've touched on this in your
opening statement, but if you could elaborate a little bit.
Mr. Cerasale. Sure. The fees have gone up, significantly.
And we don't have any complaints about how the fee structure is
applied. In other words, if I am a marketer, I have to obtain
the registry. If I'm doing it nationwide, I get a national
list. Also, if I'm a supplier, someone who does calling for
another company--I have to obtain the list, as well as ensure
that my client has, also has permission to use the list. We
have no trouble, problem with that.
What's happened is, that we believe that, the cost of the
contract with AT&T to run the Do Not Call Registry, I think, is
$3.5 million. The fees that are coming into the Federal Trade
Commission amount to approximately $18 million. So, we think
that that's too much. Our view is that we should use the fees
to cover the cost of the Government running the list, and that,
that's where it should be. But, in any event, going up 263
percent, since 2000--October 2003, is a little bit too high an
increase. So, therefore we support your efforts to put a--to
set the fee, statutorily--so the FTC doesn't have to go
forward, every year, with rulemaking, and to them put--we
agree--cost go--sadly, costs go up not down, to put an CPI
index to it.
Senator Pryor. Thank you.
Senator Klobuchar?
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you very much, Senator Pryor.
Thank you for the work, chairing this Committee, and for your
work in guiding us as we go forward with these important
issues. I must say, that I was involved in these issues as a
prosecutor and, in fact, worked with AARP on a State level. We
did a series of forums for seniors around the State on identity
theft and fraud that were very successful.
I most remember, Mr. Johnson, one of your most diligent
members in Rochester, Minnesota, in front of 400 seniors,
suggesting to them that it's not just enough to shred
documents, that he took his dog out for a walk, and then placed
the dog droppings on top of the shreddings in the garbage can--
--
[Laughter.]
Senator Klobuchar.--so potential thieves would not break
in. I then said, at that moment, ``You're not suggesting, sir,
that everyone in this room,'' as they diligently took notes,
``do that?'' It's an example of how people make their own
decisions in their own lives? And he said, ``Well,
unfortunately, Senator, my dog is no longer with us, but I now
use maple syrup.''
[Laughter.]
Senator Klobuchar. That memory is strong in my mind, as we
have these discussions in terms of making sure that we make
things available, Mr. Cerasale, and at the same time, that we
protect people. I'm a big fan of the Do Not Call List, and I
appreciate the work that's been done in the Senate before my
time, and I believe that we need to do everything we can to
keep that in place, and make it stronger than ever.
And I guess, I'm first interested, Mr. Johnson, in any
ideas that you would have about involving more seniors in this,
in the Do Not Call List. I know that we encountered some issues
of people not knowing how to get on the registry, and that was
a lower--correct me if I'm wrong--a lower percentage of some of
them registering on the Do Not Call list than other demographic
age groups?
Mr. Johnson. The thing that we've established is the
original emphasis on the Do Not Call Registry, and the Do Not
Call listing. We now have State offices, in every one of the
States in the United States, and the Virgin Islands, and so we
have an ability to get a better emphasis through to our
members, and we will do this again through the members'
gatherings and forums, and utilization of our State offices.
Senator Klobuchar. OK, thank you.
And, Mr. St. Clair, in your prepared remarks, you talked
about how some of the telemarketing issues that are plaguing
seniors and others have, in fact, become a global enterprise.
And, I certainly encountered that, where we would have people--
either by e-mail or by phone--calling from all over the world,
and it was very hard, as a local prosecutor, to go after those
cases.
Could you talk a little bit about your experiences, and
what law enforcement tools are available for you to investigate
these offshore criminals, and how you think it best be done?
Mr. St. Clair. Well, it is extremely difficult for local,
State law enforcement authorities to deal with international
boundaries. And we have certainly cooperated, passed
information to Federal authorities, who may be better situated,
and we've worked closely, as far as passing information to the
Canadian authorities. And, I think, when the telemarketing
fraud was just getting started in Canada, for example, it was a
little slow--the authorities there, I dare say, were a little
slow--in recognizing the scope of the problem, and for the most
part, victims were not being claimed within Canada.
But after, perhaps, this slow start, we've seen great work
by Canadian authorities, and what--part of what we've had to
do, given the limitations for an Attorney General's office in a
state like Iowa, dealing with international boundaries, is
again to turn our attention to the U.S.-based facilitators to
try to make a difference there.
Senator Klobuchar. Thank you.
I know one of the things we would always recommend for
victims of identity theft is that they check with the credit
bureaus. So, I am concerned about what I hear about them being
overburdened and not being able to get at some of the major
issues here because I always thought of identity theft as the
crime that keeps on giving. Once your identity's stolen,
because you've given the Social Security number out to someone,
it takes you, sometimes years, to get it back, and to correct
your credit rating.
And so I was listening to Ms. Faulkner, and my question for
you, Ms. Holland, is about what this difference is, between the
free credit reports that you're required to provide and the
company's paid monitoring service?
Ms. Holland. The free credit report, which is available
through annualcreditreport.com, is simply a copy of their
report that outlines all of the items in their credit report.
A credit monitoring service, or credit monitoring product,
is a bit different. The credit monitoring product sends them
alerts as soon as there's a change in their credit report.
So, for example, you obtain your credit report, the free
report from annualcreditreport.com, and that's just a one-time
snapshot based upon the time you picked it up. When you
subscribe to a monitoring service, you're going to be alerted
every single time that there is a change to your credit report,
and that has proven to be beneficial to detect and guard
against identity theft.
So, what would happen is, if there's a change in my file, I
would be alerted--depending upon the service or the product
that I purchased. And it would say that there has been a change
in my report, and then I would be able to investigate what that
change is. So, there is a clear distinction between just
getting a free report, at that one period in time, versus
having a monitoring service that's going to look at that
report, and notify you every time there's a change.
Senator Klobuchar. And again, my interest is making sure
that consumers have easy access to these credit reports since
we kept telling them you can just easily use one of these
credit agencies. If I were to access your website right now,
would it be easy for me to see where I could access my credit
report for free without a fee? Or would I be directed directly
to your company's fee-based credit monitoring?
Ms. Holland. You would be--it would, it would--up front,
you would know that you could get a free report, because it
states it there, and we actually link you to the free credit
report site, at annualcreditreport.com. So you are keenly aware
that you can get the free report. And in our educational
portion of our website, we talk a lot about being able to
obtain that free credit report.
Senator Klobuchar. Ms. Faulkner, do you want to add
anything to this?
Ms. Faulkner. I disagree that the credit monitoring service
is useful to consumers. And, basically it's because credit
reports change almost every day, as creditors report. So, I had
one client with, actually, Equifax's credit monitoring service,
and she was a nervous wreck, because every third day, she would
get a notice that something had changed on her credit report.
And she was making me a nervous wreck, because I had to tell
her, ``Well, this is just a creditor updating something, nobody
is stealing your credit, there's no more adverse information
than there was before in it.
So, I think that the consumers are, perhaps, overwhelmed by
the credit monitoring services, and I think checking once or
twice a year is sufficient. Particularly when, in Connecticut,
you can get a copy of your credit report for $7.00. Whereas, if
you're paying nine or ten dollars a month for your credit
monitoring service, that's costing a lot more.
Senator Klobuchar. Ms. Holland?
Ms. Holland. Yes, I'd just like to state, in my role at
Equifax, I talk to consumers every single day. That's my job,
and I'm very passionate about making sure consumers are aware
of what they can do to protect themselves. And I would simply
say to you that I--we see, we get numerous accolades about
consumers thanking us for being vigilant, alerting them when
they subscribe to those services. They're very thankful that
they were alerted, because they realize by being notified early
that there has been a change. And remember--they can look at
that change. If that change is simply an update to their
balance, there's no problem there, and they close--they log
off, and they go on about their business. So, I don't know that
I--I don't agree with Ms. Faulkner's characterization, because
we have consumers--and I talk to them--and they say that the
credit monitoring product has been very, very helpful to them.
Senator Klobuchar. All right. Thank you very much. Does
anyone want to add anything to that discussion?
[No response.]
Senator Klobuchar. All right, well thank you. We look
forward to working with you as we go ahead with both of these
areas, in terms of perfecting the legislation, and making it
easier for consumers to access their information.
Senator Pryor. Thank you, Senator Klobuchar.
Let me go ahead and ask you a few more questions, if I may.
Mr. Cerasale, are there any changes out there in the
marketplace, or changes occurring in your industry that we need
to know about as we're crafting a new Do Not Call law? In other
words, we talked a little bit about Voice-over-Internet
Protocol phones, we talked a little bit about cellular phones.
Are there changes in the industry or changes in the marketplace
that we need to take into consideration?
Mr. Cerasale. Well, I think that the first one, of course,
is that one-eighth of the American public does not have a
landline that they--their only form of telephone is a cell
phone. The FCC--the Federal Communications Commission, under
the Telephone Consumer Protection Act--it is, you cannot use
those predictive dialers to make any solicitation call to them,
unless you have express permission. So that, I think, if you
look at the Do Not Call Registry, and the idea of having cell
numbers on it, that's a repeat. That's a cost to the
Government, and eventually a cost to the marketer that's
already covered through another--even greater than the Do Not
Call Registry, through the Telephone Consumer Protection Act.
Because, even if you have an established business relationship,
you cannot call someone on a cell phone, unless you get their
permission.
Looking at--I think the idea of being able to contact your
customers is an important one to preserve. And, so the
established business relationship has worked, and works well.
And there is a difference between someone who has purchased
something, or someone who has made an inquiry. Even under the
current law, an inquiry--you have 3 months to try and contact
someone, and then that business relationship expires, whereas
you have 18 months from the time that you completed the
transaction, if you have a subscription to Sports Illustrated,
for example, when the subscription ended is when the 18 months
clock starts. That is a difference between a customer, and
someone who has made an inquiry, and that has worked. I mean,
overwhelmingly, the Federal Trade Commission thinks that this
is a product that has worked well.
Senator Pryor. Thank you.
Let me move, if I may, very quickly. I want to acknowledge
Senator Thune here, in just one moment, but let me move, if I
can, to Mr. St. Clair. First I want you to please tell your
boss I said hello. I served with him as Attorney General, and
he's great. Tell him I said hello.
But second, let me ask about something you said in your
opening statement about list builders. Can you explain to the
Committee what they do, who they are, how the lists are built,
and how they're used?
Mr. St. Clair. Well, perhaps--perhaps one of the better
ways to do that would be an example. In Iowa, we discovered
that a local commercial mail drop was receiving about,
ultimately, it was about 20,000 pieces of mail, all addressed
to different--some nine different businesses. And we ultimately
seized the mail, and upon examining it, we determined that it
was coming all from a place in South Carolina, and what they
were doing, basically, is mass-mailing to a very extensive
list, mailers that were on their, on their face--in our view--
on their face, deceptive, and they were focused on winning
prizes, winning sweepstakes, and so forth. And, they asked the
person to send a small check, as small as, say, sometimes, $10,
or $20. And, what this permitted the recipient, in South
Carolina--of course all of the mail was ultimately just to be
forwarded to South Carolina--what this would have permitted the
recipient of all of the mail to do, is--in addition to
receiving the modest checks, which was undoubtedly welcome, and
helped pay for the mailing--is to create a very hot list of
highly vulnerable people. The people we checked with that were
responding to these mailings were predominantly elderly. And
again, they were self-selecting for their vulnerability, in
effect, as willing to send off money at a distance, to a
stranger in response to vague representations about winning
prizes.
And, we ultimately determined, in that case, that some of
the same mailings were later followed by telemarketing calls
that referred back to the mailings. And, so some of the same
people who had responded, you know, sent off only $10 or $20,
you know, not a great loss, had, in effect, put themselves on
the list, and then that list was made available to predatory
telemarketers, who were after thousands of dollars.
So, that's what we mean by list builders, and there are a
lot of enterprises out there, right now, that appear to be
engaged in those sorts of activities.
Senator Pryor. Senator Thune?
STATEMENT OF HON. JOHN THUNE,
U.S. SENATOR FROM SOUTH DAKOTA
Senator Thune. Thank you, Mr. Chairman. And I want to thank
the witnesses for being here today, and sharing your insights.
We've got 146 million telephone numbers that were
registered with the Do Not Call list which has been, I think,
by and large a win for consumers. Families now can choose to
rid themselves of many of those calls that all seem to come
during dinnertime, but there are, of course, still millions of
Americans who are not listed, and still receive telemarketing
calls for one reason or another, and as some have already
pointed out--often lonely, elderly Americans enjoy receiving
telemarketing phone calls during the day. It's important, Mr.
Chairman, that this Committee continue in its oversight duties
to ensure that telemarketing regulations and policies we have
in place are effective.
I just have a couple of, I guess, quick questions, if I
might, for Mr. Cerasale, is that--did I say that correctly?
Mr. Cerasale. You said it correctly, Senator.
Senator Thune. All right. It's my understanding that list
brokers--those companies who collect and sell lists of names
and phone numbers, that are members of the Direct Marketing
Association are required by DMA to screen list buyers for
suspicious activity. And, I guess I'm just--maybe if you could
explain to us what that entails, and if you think there is more
that could be done to stop bad actors from getting these lists
to begin with?
Mr. Cerasale. The--the members of DMA--the list builders
that Mr. St. Clair talked about, that's illegal from the start.
I mean, these are people getting names, and with that mailing,
and asking for a check on a sweepstakes, which is illegal under
postal regs, and I'm sure illegal under most State regulations,
making it a lottery, as opposed to a sweepstakes--anyway. So,
that's illegal activity. So, I want to just make a change, a
switch from that, from a list broker, someone who obtains
information from public records, from purchased records, and
compiles those lists. Or even the list of--I subscribe to one
magazine, and therefore I exchange or share my list with
another magazine. Or, for example, a maker of a golf ball,
who's trying to get the list of subscribers to Golf Magazine to
try and send out an offer.
If our--we've clarified our guidelines in the testimony. If
you're a list compiler--someone who gathers the list together,
you have sensitive information--that would be financial
information, also defined as seniors. You have to screen the--
as a compiler--screen the promotion that the list is going to
be used for, for appropriateness.
For example, let's use the example that Mr. St. Clair
raised. If you get the script of the telemarketing, or the
piece that was sent through the mail that says, ``Here's a
chance to win some money, and please send us a $10 check.''
Well, you don't do that, that's illegal. So, that kind of
obligation is now upon those list compilers, to know with whom
they are dealing. And, I think that's the important part in
making--it's a stronger guideline, is to ensure that our
members know with whom they're dealing. In other words, know
the reputation of those with whom you're dealing. And, if it's
sensitive information, absolutely ensure that you've seen the
script. You see the piece of mail, you see the e-mail.
Senator Thune. Mr. Johnson?
Mr. Johnson. The only information I have about list
builders is the article in The New York Times which referred to
infoUSA. And some of the things that they've cited were that
these lists are comprised of names that they've obtained--as
Mr. Cerasale has said--by various means, magazine
subscriptions, or whatever. But they've compiled these, and put
them into categories, which are particularly aimed at seniors.
And, not only seniors, but groups. There's a listing that is
headed as ``oldies but goodies.'' And these are folks that they
found were gamblers, and that they would send them out, to
people with the recommendation that ``these folks are
gullible.''
Now, I think that it's something that must be done to say
that these list compilers, who put this kind of a caveat, it's
almost targeting the seniors, who have already been found that
50 percent of the folks that are subject to this kind of fraud,
are over 50 years of age.
Senator Thune. Just as a followup, if I might, Mr. Johnson,
we've got a high percentage of elderly citizens in South
Dakota, many of whom live in rural parts of the state, and may
enjoy receiving calls from telemarketers, and therefore not
want to put their name or their number on a Do Not Call list.
Do you have any suggestions for what we can do to help protect
these elderly Americans who want to continue receiving
telemarketing calls?
Mr. Johnson. I think the only thing we can do is try to
educate them that this is not a friendly call. We've had
reverse border rooms, when we've tried to put these things in
evidence, and that gives a ``chump list'' that we receive from
the Attorney General's office. And we call those folks to alert
them that they're on a list of folks that have been designated
to receive telemarketing calls--and principally, telemarketing
fraudulent calls.
So, the only thing I can suggest, is what we used to do. We
would make a lot of effort to tell the folks that, just hang up
when you get this. It's not a person on the other end that's
trying to be your friend, it's someone that's trying to take
your livelihood.
Mr. Cerasale. Enforcement. Most of this stuff is illegal.
As a senior, many times you are more of a shut-in, can't get
out as much, so that there, these are means to keep you in
touch with commerce, in part too. So, it's not all--I think the
impression here might be that every call to a senior, every
piece of mail that comes to a senior is fraudulent--there are
many, many legitimate marketers out there, and this is the, the
touch for many seniors to reach commerce in the United States.
The key is to go after enforcement. The fraud--it's illegal
already. And we need more enforcement--both on the State level,
the local level, the Federal level, to go after and protect. I
think the laws are there, and the choices are there, I mean,
even on the Do Not Call Registry, as seniors go further and
further--I mean, I'm one of them. As they say, as you go
further and further down the way, maybe my children can come in
and take over, too. And there are means for that, there's--to
try and keep my dignity, but also allow children guardians to
try and come in and protect, if that's necessary.
And, so I think the key is, is laws--not the laws, but the
enforcement of current laws. And, we're--we encourage that.
Senator Thune. Is that primarily a State function, law
enforcement--we've got a former Attorney General here?
Senator Pryor. I think to a large extent it is. We have an
Assistant Attorney General here who might want to take a stab
at that. But I think States generally will enforce those types
of laws.
Mr. St. Clair. Yes, I believe--well, as I think was
mentioned, postal authorities have a lottery prohibition, but I
think each State has some version of a lottery prohibition.
Sometimes the sort of mail building efforts, or list building
efforts we were talking about are not clear lottery cases. It's
not a matter, always, of just sending $10 in order to be buying
the equivalent of a ticket in a lottery. If it were, that would
be a fairly straightforward lottery violation.
But, sometimes what they are selling are, for example,
sweepstakes reports. So that, that permits the mailer to talk
heavily about sweepstakes, and prizes, and large amounts of
money, in a confusing fashion, and then ask for an
administrative, or a transfer fee. But the fee, in fact, is
just--they would say, the mailer would say--is just a payment,
a straight-up payment for a sweepstakes report, that they then
send out, and the sweepstakes report just identifies different
publicly accessible sweepstakes.
And so, so it wouldn't be so easy to just simply go after
them as a lottery. But, it still has the intended list building
function, and some of the deceptive aspects are fairly subtle.
But yes, it's often a State function.
Senator Thune. Thank you, Mr. Chairman.
Thank you all very much.
Senator Pryor. Thank you.
And to follow up on that, the Arkansas law is called the
Deceptive Trade Practices Act, which is just a big umbrella law
that we use. We had other, more specific, acts, but it seems
like you could always plug something into the Deceptive Trade
Practices Act.
Let me ask, if I may, Ms. Holland, about CROA. I understand
that you and Ms. Faulkner disagree, or your organizations
disagree on some of this.
But, for clarification, Ms. Holland from your standpoint,
how does credit monitoring safeguard against identify theft, or
mitigate the impact of identity theft?
Ms. Holland. Well, credit monitoring products provide
consumers with a proactive first line of defense against
identity theft. And so, depending on the product, notices and
alerts can be sent directly to that consumer, whenever changes
are made to the consumer's credit report. So, this early
detection of a problem through credit monitoring can save a
consumer the time and expense that otherwise is spent trying to
correct fraudulent activity after the fact, or fraudulent
credit reporting information. So, what it does is that, instead
of you checking your credit report annually, at Equifax, we
recommend you check your credit report three or four time a
year. But at the end of the day, fraudsters are always looking
to commit fraud. So, a consumer who has a monitoring service
that's going to alert them every time that change comes,
they're going to be more aware of a change versus someone who
gets a report three or four times a year.
And so, we believe that's the biggest distinction, in that
you are notified every time there's a change to the report, a
relevant change.
Senator Pryor. Right, again, for clarification, we've
talked about repair services and monitoring products, which are
two distinct products, or two distinct services, I guess you
might say,----
Ms. Holland. Correct.
Senator Pryor.--that can be offered to consumers. Do you
think that these should be treated differently under the law?
Or should they both be under CROA?
Ms. Holland. Well, I think if you behave like a credit
repair organization, then you should be subject to CROA. The
heart of a credit repair scam, Chairman Pryor, is to remove
accurate and timely--but adverse--credit information from a
credit report. Well, that not only harms the individual
integrity of the credit report, but it has the potential to
undermine the entire credit reporting system.
So, if you're going out as a credit repair organization,
making promises about how you're going to have accurate
information removed, then you should be subject to CROA. A
credit monitoring service is a benefit to a consumer, as it
helps them not only have a defense against identity theft, but
it also gives them the tools and gives them the ability to
manage their credit report themselves, and helps them learn and
change behaviors about improving their credit score through
personal management of their financial health. And that's the
key about empowering, enlightening, and enabling consumers, to
take control of their credit. A credit repair organization
simply behaves and tells consumers untruths about being able to
remove information, and they should obviously be subject to the
harsh penalties of CROA.
Senator Pryor. Let me ask you another question, Ms.
Holland. It's my understanding that the credit bureaus, the
consumer groups and the Federal Trade Commission have been
working together for some time to address this issue. And, it
seems that, as much as you've tried, recent efforts have not
been able to create a legislative product that everybody is
happy with. Is that a fair assessment?
Ms. Holland. I believe that is a fair assessment, Chairman.
Senator Pryor. And does your organization have language
that you would like to see in legislation? Have you all--has
your organization gotten that far?
Ms. Holland. Well, I think we've worked very closely--and I
think that's an important question, and rather than speculate,
I'd like to get back to you and give you that in writing.
Senator Pryor. Great, I appreciate that.
Ms. Faulkner, I know that, again, you disagree with some of
the answers you just heard just a moment ago, but have either
you personally, or your organization, been part of these
discussions to try to find language that we can put in a bill
that will satisfy all of the parties? Have you been part of
that?
Ms. Faulkner. I have. And we have been literally wracking
our brains, and we have not been able to come up with something
that would exempt just credit monitoring, without making a
loophole for credit repair.
I can tell you there has been case law recently, in
particular, the Hillis case, where one of the Federal judges
made a really good distinction between credit improvement--
credit monitoring, and credit repair organizations, just based
on the language of the statute. So, it may be that no amendment
is needed for the distinction to be made between credit
monitoring and credit repair. But, we would just hate to see
anything done that gives the credit clinics one more way to
scam consumers.
Senator Pryor. OK.
Ms. Faulkner, let me ask you another last question, and
that is something that you mentioned in your opening statement,
but you didn't really dwell on it, and it's not the subject of
this hearing, but you mentioned arbitration clauses----
Ms. Faulkner. I did.
Senator Pryor.and distant forum clauses. Is it your
experience that you see arbitration clauses, and distant forum
clauses in--what did you say--in credit monitoring?
Ms. Faulkner. In the credit clinics.
Senator Pryor. OK.
Ms. Faulkner. In the credit clinics, yes.
Senator Pryor. And from your standpoint, how do those
disadvantage consumers?
Ms. Faulkner. With arbitration clauses, it means the
consumer cannot go to court to get his or her rights, and to
enforce his rights under the CROA. It means they have to go to
a private arbitration organization. It means that the hearing
is secret. It means that the wrongdoing never gets publicized.
So, the wrongdoing is swept under the rug in a private manner.
And, the distant forum clauses are just to make it more
expensive for the consumer to do anything at all. If you have
to go from Connecticut to California, in other words, even for
arbitration, it's cost-prohibitive. So, essentially what these
two clauses do is evade liability completely, because no
consumer can afford either arbitration, or going to a distance
forum. We would like to see a local, Federal--right to go to
your local Federal court.
Senator Pryor. All right, now, I know this is a little bit
beyond the scope of the hearing, but while we're on that
subject, are you seeing these type of clauses in other consumer
contracts?
Ms. Faulkner. Yes. Yes, they are spreading like the plague.
Senator Pryor. Then, from your standpoint, they're
increasing out there in the----
Ms. Faulkner. Yes, definitely.
Senator Pryor. With that, hold on, let me ask the staff if
I missed anything. Are we square?
What we'll do is, we'll keep the record open for 14 days,
for 2 weeks. And I just want to thank everybody for being here.
Your testimony was appreciated and very helpful.
And with that, like I said, we'll leave the record open for
Senators, if they choose, to submit questions in writing, and
the Commerce Committee staff will forward them to you. And, if
you all have opening statements, et cetera, that you want to
submit for the record, we'll take care of that, just let us
know.
But again, thank you all for being here, and thank you for
being involved in the process.
The hearing is adjourned.
[Whereupon, at 4 p.m., the hearing was adjourned.]
A P P E N D I X
Supplemental Statement of Robin Holland, Senior Vice President,
Global Operations, Equifax Inc.
Introduction
I want to thank you for this opportunity to respond to a question
raised by Chairman Pryor during the recent hearing on the Credit Repair
Organizations Act (CROA) reform. Specifically, this Supplemental
Statement will address the type of CROA reform necessary to combat
credit repair organizations, while protecting legitimate credit
monitoring products and services.
Subsequent to the enactment of CROA, credit monitoring has been
developed to give consumers a first line of defense against identity
theft and to increase consumer literacy regarding credit matters. The
credit bureaus seek statutory reforms that conclusively establish that
credit monitoring and similar credit information products and services
are not subject to CROA. As indicated by Joanne Faulkner's testimony at
the hearing, consumer groups fear that such reforms would open the door
for credit repair organizations (CROs) to evade the requirements of
CROA. For the reasons set forth below, Equifax believes that such fears
are unfounded.
Defining Credit Repair
CROs are defined as entities that use any instrumentality of
interstate commerce to sell, provide, or perform (or represent that
they can perform) services or advice for the express or implied purpose
of improving a consumer's credit record, credit history, or credit
rating in return for a fee.\1\ As noted by Ms. Faulkner in her written
statement, CROs intentionally and systematically deceive not only
consumers, but the credit bureaus. In contrast, credit monitoring and
similar credit information products and services were developed to help
improve consumer understanding about their credit history.
---------------------------------------------------------------------------
\1\ Sec. 403(3) of the Credit Repair Organizations Act, Public Law
90-321, 82 Stat. 164, 15 U.S.C. S. 1679a (2006).
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CROA was originally enacted to stop CROs from harming consumers and
the credit reporting system through credit repair activities. Looking
to the legislative history,\2\ Congress did not seek to place
limitations on all products and services that pertain to credit, but
instead sought to target narrowly those specific harmful activities
performed by CROs. Congress did not intend for the definition of a CRO
to sweep in products that offer only prospective credit advice to
consumers or provide information to consumers so that the consumers can
take steps on their own to improve their credit in the future. Credit
monitoring and similar credit information products and services should
not be swept into the definition of CRO, because such products provide
information that empowers rather than harms consumers.
---------------------------------------------------------------------------
\2\ See H.R. Rep. No. 103-486, at 57 (Apr. 28, 1994), and see also
Hearing on the Credit Repair Organizations Act (H.R. 458) Before the
Subcommittee on Consumer Affairs and Coinage of the House Committee on
Banking, Finance, and Urban Affairs, 100th Congress (Sept. 15, 1988).
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CROA is enforced by the Federal Trade Commission (FTC). The FTC
staff has stated that there is no basis to subject the sale of credit
monitoring and similar educational products to CROA's specific
prohibitions and requirements, which were intended to rein in
fraudulent credit repair. The FTC staff has even commended credit
monitoring products--if promoted and sold in a truthful manner--as a
way to help consumers maintain an accurate credit file and provide them
with valuable information for combating identity theft.
A Behavior-based Solution
CROA can be amended to prevent the type of abusive practices that
Congress originally intended to address by taking a behavior-based
approach to the application of CROA's requirements. By applying CROA to
only those entities engaged in the potentially fraudulent activities
known as credit repair, CROA can be reformed in a way that continues to
protect consumers from those activities and permits the provision of
legitimate credit monitoring products and similar credit information
products and services outside of the technical provisions of CROA. The
nature of the activity performed by the entity would trigger
application of CROA, rather than the characterization those entities
assign to their products and services. An example of this approach can
be seen in a House bill (H.R. 2885), introduced by Rep. Paul Kanjorski,
which sets out in detail the type of credit monitoring activities that
would not be covered by CROA.
Through this behavior-based approach, CROA would be able to reach
credit repair services regardless of whether the entity claims to be a
CRO or a provider of credit monitoring. Improperly characterizing
either the product being sold or the entity making the offer will not
achieve the purpose of evading CROA. Credit repair organizations that
purport to offer legitimate services, but actually engage in credit
repair operations will still be subject to CROA. Conversely, if an
entity offers legitimate and beneficial products, such as credit
monitoring, then the activity-based approach to CROA enforcement would
permit such activities to continue without being subject to CROA.
Through such reforms, no entity could escape the consumer protection
requirements of CROA, but consumers would benefit from the increased
availability of other legitimate products, such as credit monitoring.
To the benefit of consumers, the FTC has developed extensive
expertise in investigating entities engaged in unfair or deceptive
trade practices through Section 5 of the FTC Act. See 15 U.S.C.
45(a). The FTC specializes in distinguishing between what companies say
they do and what those companies actually do. Given a clearly
established definition of credit repair activity, with specific
exceptions in place for credit information products and services such
as credit monitoring products, and the FTC's expertise with respect to
deceptive practices, the FTC should easily be able to recognize any
attempt to mischaracterize an illegal credit repair service as a
legitimate credit monitoring product. To the extent a credit repair
organization falsely purported to offer CROA-exempt products or
services to evade CROA coverage, they could be in violation of both
CROA and Section 5 of the FTC Act.
The Hillis Case
Ms. Faulkner suggested during the hearing that reforms to CROA are
unnecessary because a judge in a recent case, Hillis v. Equifax
Consumer Services, Inc., 237 F.R.D. 491 (N.D. Ga. 2006), was able to
distinguish between credit repair and credit monitoring under existing
law. The judge in the Hillis case rejected a broad interpretation of
the definition of CRO, and concluded that ``Congress could not have
intended these terms to encompass all credit-related advice.'' Hillis,
p. 512.
However, Ms. Faulkner's argument that taking no legislation action
is the proper solution in light of this decision misses the mark. The
court in Hillis recognized that if providers of credit monitoring are
considered CROs, it will be highly impractical for those entities to
comply with the technical provisions of the CROA and still provide the
type of credit information being sought by consumers. Not every court
is the same, and not all judges will necessarily have the wisdom of the
Hillis judge. Without reforming CROA to definitively establish that
credit monitoring and similar credit information products and services
are not credit repair activities, similar litigation could result in
significant harm to companies that offer credit monitoring.
The total cost of the Hillis settlement will be well over $4
million. Equifax and Fair Isaac will pay up to $4 million in attorney's
fees and costs to the Hillis class counsel, and the two named
plaintiffs will each receive up to $7,500. Additionally, the more than
6 million putative members of the Hillis class are eligible to receive
either three or six free months of Score WatchTM (depending
on whether they purchased an eligible product from only one or both of
Equifax and Fair Isaac), a product which provides monitoring of the
consumer's FICO Credit Score and two free Score Power reports. The
retail value to each putative class member of this free product benefit
is at least $24 (for 3 months) or $48 (for 6 months). Equifax and Fair
Isaac also agreed to pay for the costs of printing and mailing postcard
notices to class members, a settlement website with the terms of the
agreement, a telephone assistance program, as well as other settlement
administrative expenses. Without CROA reform, new lawsuits could be
brought which would push litigation costs even higher.
Ironically, the Hillis court approved the settlement in part
because Equifax and Fair Isaac agreed to provide a disclaimer stating
that it is not a credit repair organization and that Equifax does not
offer credit repair advice to consumers. This has always been the
position of Equifax, a position we seek to have established
conclusively through reform of the CROA statute.
Conclusion
CROA should be reformed so that it is clear that entities that
offer credit monitoring and similar credit information products and
services are not subject to the requirements and restrictions placed on
CROs. These products and services benefit consumers in a way that can
be easily distinguished from the harmful credit repair activities
performed by CROs. By reforming the CROA statute to take a behavior-
based look at an entity's activities, credit monitoring and similar
credit information products and services can remain available to
consumers without throwing open the door for CROs to evade the consumer
protections put into place by CROA.
______
Supplemental Statement of Joanne S. Faulkner, Attorney, on Behalf of
the National Association of Consumer Advocates
Senator Pryor left the record open for 2 weeks. At the end of the
hearing, he asked whether I had seen mandatory predispute arbitration
clauses and distant forum clauses in credit monitoring services. I now
have.
My own bank, Bank of America, offered Bank of America Privacy
Assist PremierTM (Trademark of FIA, Inc.). The service
includes ``automatic alerts when certain changes occur in your credit
files from 3 major credit reporting agencies; unlimited online access
to your 3 credit reports; ID theft recovery assistance from trained
specialists, and identity theft insurance.''
The agreement also includes binding arbitration before the American
Arbitration Association in Washington, DC, together with other clauses
limiting consumer remedies.
The Equifax website would not reveal the terms of the contract
until after I filled out an enrollment form including much personal
information (which I would not do). However, a report on the Internet
reveals that an Equifax credit monitoring service ``agreement also
specifies that users are forced into binding arbitration if they have
any disputes with the service, rather than pursue litigation, except in
small claims court.'' http://www.consumeraffairs.com/news04/2006/05/
paypal_equifax.html.
Contrary to the testimony of Ms. Holland, the website for Equifax
Personal Solutions does not mention the free credit report. It may be
found by typing Equifax Credit Monitoring into a search engine and
selecting Personal Solutions, or at
http://www.equifax.com/cs
______
Response to Written Question Submitted by Hon. Frank R. Lautenberg to
Lydia B. Parnes
Question 1. Do Not Call telephone number registrations will expire
during the summer of 2008 for all consumers who registered their
telephone numbers in 2003. At the hearing, you indicated that the
Commission will conduct a consumer education campaign to inform
consumers of the need to re-register. Can you please provide more
details about the Commission's plans for educating consumers about the
need to re-register and how to do so?
Answer. The FTC will conduct a consumer education campaign
beginning in early 2008 to explain the registry and that some numbers
will need to be re-registered. The campaign will be modeled on the
highly successful, award-winning marketing campaign for the registry in
2003. The FTC will provide focused messages for consumers and the
media, as well as products such as web buttons and banners, articles,
and short videos that can be disseminated by the agency's
communications partners--including industry associations, non-profit
groups, government agencies, and congressional offices. There is a high
level of interest in the registry among consumers and the media, and
the FTC will provide plain-language information for consumers about how
to take advantage of the registry.
Question 2. The need to re-register could lead to confusion among
consumers who do not know when they registered for the Do Not Call
list, and, as a result, will not know whether they need to re-register
in 2008 or at some later date. How can consumers determine when they
need to re-register?
Answer. Consumers can access the National Registry at any time to
confirm that their telephone numbers are registered and when the
registrations will expire by visiting our website at www.donotcall.gov
or calling our toll-free numbers 888-382-1222 (TTY 866-290-4236).
Consumers also can re-register their telephone numbers at any time
through the same website or toll-free numbers. They do not need to wait
until their registration expires. Telephone numbers remain on the
registry for 5 years from the date of the most recent registration. We
will include this information in our consumer education campaign
planned for early 2008.
Question 3. Some credit monitoring companies advertise ``free
credit reports'' to consumers who subscribe to their pay credit
monitoring services. Often, these companies' websites have only a
small-print link to information about receiving the free annual credit
report to which every consumer is entitled by law. Has the FTC received
complaints from consumers who unwittingly subscribed to pay credit
monitoring services when all they wanted was to get their free credit
report?
Answer. Since the annual free credit report program went into
effect in September 2004, the FTC has received a number of complaints
from consumers about ``imposter'' free report websites that mimic the
FACT Act-required website, www.annualcreditreport.com. These sites
typically use URLs that are common misspellings of
annualcreditreport.com or are sound-alike names. In many cases, the
imposter sites offer free reports in conjunction with the purchase of a
credit monitoring service. The credit monitoring typically is sold on a
``free-to-pay conversion'' basis, i.e., the service is free for a short
period, but converts to an automatically-renewing paid service unless
the consumer affirmatively cancels within the free period. This type of
promotion is a variation on the more general category of ``continuity''
or ``negative option'' plans, whereby consumers are automatically sent
products and billed on a periodic basis until they cancel.
The FTC carefully monitors impostor sites and has sent warning
letters to operators of more than 130 such sites explaining that
attempts to mislead consumers are illegal.\1\ Most of these sites have
been taken down. The FTC also takes enforcement action in appropriate
cases.
---------------------------------------------------------------------------
\1\ Press Release, Federal Trade Commission, Marketer of ``Free
Credit Reports'' Settles FTC Charges (Aug. 16, 2005), available at
http://www.ftc.gov/opa/2005/08/consumerinfo.shtm.
---------------------------------------------------------------------------
For example, in 2005, the Commission charged Consumerinfo.com, a
subsidiary of Experian and the operator of the ``freecreditreport.com''
site, with deceptively marketing ``free credit reports.\2\ The
Commission alleged that Consumerinfo deceived consumers by not
adequately disclosing that consumers who took advantage of the free
credit report offer automatically would be signed up for a credit
monitoring service and charged $79.95 if they did not cancel within 30
days. The Commission's complaint further alleged that Consumerinfo
misled consumers by promoting its ``free reports'' without disclosing
that it was not associated with the official annual free credit report
program. In settlement of those charges, the FTC required Consumerinfo
to pay redress to deceived consumers, barred deceptive and misleading
claims about ``free'' offers, required clear and prominent disclosures
of the terms and conditions of any ``free'' offers, required clear and
prominent disclosures that its promotion is not affiliated with the
FACT Act free report program, and required the defendant to disgorge
$950,000.
---------------------------------------------------------------------------
\2\ Id.
---------------------------------------------------------------------------
Earlier this year, the FTC charged Consumerinfo with disseminating
advertisements after entry of the settlement that violated the
disclosure requirements.\3\ Consumerinfo was required to pay $300,000
in additional ill-gotten gains.
---------------------------------------------------------------------------
\3\ Press Release, Federal Trade Commission, Consumerinfo.com
Settles FTC Charges (Feb. 21, 2007), available at http://wwwftc.gov/
opa/2007/02/cic.shtm.
---------------------------------------------------------------------------
The FTC also has engaged in extensive outreach efforts to warn
consumers about imposter free credit report promotions. The Commission
maintains a micro-site on its website devoted to the free annual credit
report program.\4\ The micro-site links directly to
annualcreditreport.com so that consumers can be sure they are not
misdirected to an imposter site. The micro-site also links to
educational materials for consumers about the free annual report
program and how to avoid imposters.\5\ Additional materials available
through the micro-site advise consumers about avoiding deceptive
``trial offers'' and other types of continuity promotions.\6\ The FTC
also has produced radio public service announcements warning about
imposter free report sites.\7\ In addition, the FTC mails copies of its
education materials to consumers who call the FTC's toll-free complaint
hotline.
---------------------------------------------------------------------------
\4\ Free Annual Credit Reports, http://www.ftc.gov/bcp/conline/
edcams/freereports/index.html.
\5\ FTC Consumer Alert, Want a Free Annual Credit Report? (May
2006), available at
http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt156.shtm; Facts for
Consumers, Your Access to Free Credit Reports (Sept. 2005), available
at http://www.ftc.gov/bcp/conline/pubs/credit/freereports.shtm.
\6\ Facts for Consumers, Trial Offers: The Deal is in the Details
(June 2001) available at
http://www.ftc.gov/bcp/conline/pubs/products/trialoffers.shtm.
\7\ Free Annual Credit Reports, Radio PSAs, available at http://
www.ftc.gov/bcp/conline/edcams/freereports/psa.html#onesource; Free
Annual Credit Reports, Radio PSAs, available at http://www.ftc.gov/bcp/
conline/edcams/freereports/psa.html#solicitations.
---------------------------------------------------------------------------
______
Response to Written Question Submitted by Hon. Frank R. Lautenberg to
Richard Johnson
Question. Next summer, every consumer who registered on the Do Not
Call list in 2003 will have to re-register. What is your organization
doing to prepare for the re-registration?
Answer. AARP shares the concern of Members of Congress regarding
consumers' need to re-register for the Do Not Call Registry next year.
The DNCR is one of the most successful consumer programs initiated by
the government. With over 140 million telephone numbers registered on
the list, consumers have realized a substantial decrease in the number
of unwanted telemarketing calls they receive in their homes. Consumers
will most certainly want to continue to participate in this valuable
program.
AARP will use its resources to inform its 39 million members about
the re-registration process through a number of communication avenues
that could include AARP publications, outreach materials, the Web, our
call center, and AARP's state offices and volunteer network. AARP will
work closely with the Federal Trade Commission and the Federal
Communications Commission to ensure that consumer information about
this process is clear and non-misleading.
______
Response to Written Question Submitted by Hon. Frank R. Lautenberg to
Jerry Cerasale
Question. Next summer, every consumer who registered on the Do Not
Call list in 2003 will have to re-register. What is your organization
doing to prepare for the re-registration?
Answer. Approximately one third of the numbers on the National Do
Not Call Registry will need to be re-registered by October 2008. The
remaining two thirds of the numbers will need to re-register over the
course of the next 5 years. As in 2003, the Federal Trade Commission
will be using publicity, mainly through the press, but also on its
publications, on its website and in its announcements, to promote the
need for citizens to re-register their telephone numbers after 5 years.
Since the initial publicity in 2003 was very successful, the DMA
expects the 2008 campaign to meet similar success.
As I testified, 30 percent to 40 percent of the telephone numbers
on the Registry are not useful for marketers following either the
Federal Trade Commission or Federal Communications Commission
regulations. They are abandoned numbers, business numbers, cell numbers
and fax numbers that clutter the registry increasing costs to all. We
hope that the new contractor for the Do Not Call Registry will take
advantage of the 5 year timing to improve the hygiene of the list--
making it more effective and less costly.
DMA is telling its members to be mindful that the telephone numbers
placed on the Registry in 2003 were done so by consumers wanting to
limit telephone solicitations. Therefore, after the 5-year period ends,
many of those consumers may want to re-register their telephone
numbers, and marketers should provide them the time to do so before
presenting any marketing offers via telephone.