[Senate Hearing 111-1034]
[From the U.S. Government Publishing Office]
S. Hrg. 111-1034
PROTECTING CONSUMERS FROM DECEPTIVE
DEBT SETTLEMENT SCHEMES
=======================================================================
FIELD HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
AUGUST 12, 2010
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii KAY BAILEY HUTCHISON, Texas,
JOHN F. KERRY, Massachusetts Ranking
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California JOHN ENSIGN, Nevada
BILL NELSON, Florida JIM DeMINT, South Carolina
MARIA CANTWELL, Washington JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas GEORGE S. LeMIEUX, Florida
CLAIRE McCASKILL, Missouri JOHNNY ISAKSON, Georgia
AMY KLOBUCHAR, Minnesota DAVID VITTER, Louisiana
TOM UDALL, New Mexico SAM BROWNBACK, Kansas
MARK WARNER, Virginia MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
Ellen L. Doneski, Staff Director
James Reid, Deputy Staff Director
Bruce H. Andrews, General Counsel
Ann Begeman, Acting Republican Staff Director
Brian M. Hendricks, Republican General Counsel
Nick Rossi, Republican Chief Counsel
C O N T E N T S
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Page
Hearing held on August 12, 2010.................................. 1
Statement of Senator McCaskill................................... 1
Witnesses
Linda Robertson, Consumer, Odessa, Missouri...................... 4
Prepared statement........................................... 5
David Angle, Assistant Attorney General, Office of the Missouri
Attorney General............................................... 6
Prepared statement........................................... 8
Alice Saker Hrdy, Assistant Director, Division of Financial
Practices, Federal Trade Commission............................ 9
Prepared statement........................................... 11
PROTECTING CONSUMERS FROM DECEPTIVE DEBT SETTLEMENT SCHEMES
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THURSDAY, AUGUST 12, 2010
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Kansas City, MO.
The Committee met, pursuant to notice, at 9:30 a.m. in
Kansas City Public Library, Helzberg Auditorium, 14 West 10th
Street, Kansas City, Missouri, Hon. Claire McCaskill,
presiding.
OPENING STATEMENT OF HON. CLAIRE McCASKILL,
U.S. SENATOR FROM MISSOURI
Senator McCaskill [presiding]. I want to thank Crosby and
the entire team here at the library. I grew up in a family that
my mother was so smart that when we got in trouble, our
punishment was she would say, ``You cannot go to the library
this week.'' So, I was brought up learning that the library was
a reward for good behavior, and therefore we all loved going to
the library. And what he has done and what his team have done
with this location has really enhanced, not just the greater
Kansas City region, but clearly downtown, and has made this a
spot to be very proud of in the Kansas City landscape, and I
congratulate you on that work. I told him when I got here,
``This is a great fit for Crosby Kemper.'' He was a good
banker, but there has always been a part of Crosby Kemper that
was a renaissance man, as opposed to a numbers man. So, I think
he has found a great fit for his skill set and Kansas City is
the better for it.
I want to welcome everyone to this hearing. This is a
hearing of the U.S. Senate Commerce Committee, and we are
holding this hearing here in Kansas City because I think it's
important for us to do hearing work outside of Washington. And,
if we were in Washington, every seat in this room would be
full. And the reason it would be full is because they would all
be lobbyists. There is never a hearing at the Commerce
Committee in Washington that isn't a full house, because so
much of the work of the Commerce Committee deals with commerce,
and therefore it has to do with money, and therefore a lot of
lobbyists are involved in the work of the Commerce Committee
when we're in D.C. How refreshing it is to look out and
realize, I bet we don't have a lobbyist in the group, at all.
So, that's another good reason to have field hearings for the
Commerce Committee.
Let me briefly give an opening statement, and then I will
introduce the witnesses that we have this morning, and we'll
get into their testimony and questions of them on this subject
that we're going to deal with today.
This is a hearing that's going to examine the impact to
consumers from the business of debt settlement companies. We're
going to examine the debt settlement industry and the scheme it
runs to take money from consumers, and the efforts that need to
be made to combat these abuses.
The Commerce Committee in Washington held a similar hearing
on this subject back in April, and since then I've introduced
legislation, and the FTC--who is represented today--has issued
a rule to address abuses in the debt settlement industry. I
believe it's a great time to have an additional hearing,
especially in light of the rule that has now been proposed by
the FTC.
Consumers today in America are very vulnerable to the
marketing techniques of debt settlement companies. People are
having a difficult time paying their bills. Many people do not
know where to turn for help. So when you hear that
advertisement on the radio, or you see that advertisement on
television that says, ``Call us, and we can take care of your
debts,'' that is a seductive call.
Many, many, many people in America have absolutely fallen
victim to what these companies are doing. There are 2,000 debt
settlement companies now operating in this country. They
promise to get people out of debt by negotiating with the
consumer's creditors. And there are a few companies that do it
right. But most rarely deliver on the claims they make in their
marketing.
They target the most vulnerable--those with low incomes,
high debt, unemployed, fixed incomes, and seniors. They falsely
advertise what they can do, and they give people false hope.
They are on the lowest level of the food chain. Their sole goal
is to take advantage of people who are hurting.
We have a victim, here, from Odessa who has a story to tell
and who has bravely told her story to national news outlets,
and what happened to her, and the fact that she was taken
advantage of.
A lot of these debt settlement companies, in fact, are
ponzi schemes. They say to someone who's in debt, ``Give us
your money up front, and we will help you.'' They promise to
deliver a product at a later date, but they collect all of the
money up front. They claim they're building capital to help
with creditor negotiations. Instead, they usually sit on the
money and do nothing for months. That's because they would
rather have the consumers pay them, as opposed to going out
immediately and beginning negotiating. Debts pile up, and the
consumer is worse off than before. Credit card interest piles
up, and one of the things that happens, that is probably most
disillusioning, is that the consumers are told not to pay their
credit cards. ``Quit paying your credit cards and pay us
instead.'' What people don't realize at that point in time, is
that that doesn't stop the credit cards from trying to collect
their money. And we'll hear about that from our witness here
this morning.
The consumer often ends up owing more than they started out
owing when this whole process began. In other words, they pay a
company to help them, the company doesn't help them, and they
end up more in debt than they were when they began the process.
Debt settlement uses false claims to lure people in. They
claim that 40 to 70 percent of the debt is retired. They claim
that it will only take 12 to 36 months to get out of debt. In
reality, most consumers drop out of the program, because they
don't see results.
The industry's own trade association states that two-thirds
of the enrollees drop out of the program. They admit that only
two-thirds of the people that they are signing up see enough
benefit to even continue in the program. And most everyone ends
up owing more than they did when they started.
Along with Senator Chuck Schumer, I have introduced
legislation, S. 3264, to address the abuses. It will ban the
up-front fees, it will allow no collection of fees until the
debt is settled, it will cap the overall amount that the
company can collect, it will allow cancellation with full
refund, it will increase disclosure requirements, and it gives
the FTC and the States clear enforcement authority over these
companies.
We asked that--the Government Accountability Office do an
investigation; this is the large group of auditors that work on
behalf of the U.S. Government, looking at programs and figuring
out whether they work, and whether or not they're wasting
money. The GAO did an undercover investigation, looked at 20
companies. They testified about those findings in April. They
found that most companies charged up-front fees, most companies
told consumers to stop paying their debts, and that most of
them were making fraudulent claims.
The FTC is also represented at the hearing this morning.
They have issued a final rule that institutes many of the same
provisions that are contained in my legislation. The rule bans
up-front fees, it says no collection of fees until debt is
settled, it also requires more disclosure. It is clear that the
industry is going to challenge this rule in court. That's why
the FTC needs the full statutory authority that the legislation
that I have offered provides.
In Missouri, there have been some great efforts by the
Attorney General's Office. We have seen a tripling of the
complaints, and the Attorney General has pending litigation
alleging fraud by one debt settlement company, and are pursuing
other cases. Forty-one Attorneys General across the State have
supported the FTC rule.
The goals we have this morning are very simple. We want to
expose the debt settlement industry for what it is, we want to
talk about the ways to put the bad ones out of business, we
want to discuss the proposals that are out there to protect
consumers, and we want to talk about the combined efforts of
State enforcement, FTC enforcement, and the work of the U.S.
Senate in this regard.
Now, let me introduce the three witnesses we have today.
First, I want to thank each of you for coming. Our first
witness today is Linda Robertson. Linda Robertson just got off
the night shift at her job and went home and cleaned up and
came to the hearing. We really appreciate her making an effort
to be here. She's a resident of Odessa, Missouri. Today, she's
going to share her experiences that she had from a personal
standpoint with a debt settlement company.
She has told her story before, in fact, her story was
featured in a front-page article in The New York Times several
months ago. Thank you very much, Linda, for being here today.
Dave Angle is also here. Mr. Angle is an Assistant Attorney
General with the Missouri Attorney General's Office. He has
been an Attorney for 20 years, and has served as a Public
Defender, a Civil Rights Advocate, and a Consumer Protection
Advocate. He has worked extensively on recent debt settlement
cases; he joined the Consumer Protection Division of the
Attorney General's Office in 2007.
And, finally, we have Alice Hrdy. Ms. Hrdy is an Assistant
Director of the Division of Financial Practices at the Federal
Trade Commission in Washington, D.C. In her current position
she supervises enforcement and policy matters relating to debt
relief services and other financial products and services. She
joined the FTC in 1994 as a Staff Attorney. She was in charge
of the final rule that the FTC issued last month to crack down
on the debt settlement industry.
I thank you for traveling here, Ms. Hrdy, all the way from
Washington.
And, with that, I will ask the witnesses to begin their
testimony. And we will begin with you, Ms. Robertson. Feel free
to take all of the time that you need, and if there is any
further testimony that any of you all would like to put into
the hearing record, you certainly can submit that, anything in
writing that you would like to be added to the record of this
hearing.
Ms. Robertson?
STATEMENT OF LINDA ROBERTSON, CONSUMER,
ODESSA, MISSOURI
Ms. Robertson. Thank you, Senator McCaskill, for giving me
the opportunity to share my experiences with debt settlement. I
want to share my story so that others will learn about the debt
settlement schemes that are out there. And I hope my testimony
helps other people who are in the situation that I was in.
In 2008, I was working as a real estate appraiser in
Phoenix, Arizona when the slow economy forced me to give up
that work. At the same time, there was an illness in my family,
so I began having a hard time keeping up with bills. When my
credit card debt became too high, I turned to a debt settlement
company. I had seen advertisements for debt settlement on
television, which made promises about helping people settle
their debt without declaring bankruptcy. So, it seemed like the
right option.
In February of 2009, I signed up with a debt settlement
company called Financial Freedom of America after seeing one of
its television advertisements. I called their toll free number
and their representative told me the company would get me out
of debt within 3 years without taking bankruptcy. I was made to
feel confident that they would handle my credit cards and
settle for up to 50 percent of the original balance.
I sent every correspondence from the credit card companies
to FFOA, as was instructed, and felt secure in the fact that
they were handling these accounts. Their representative also
informed me to stop paying my credit card bills, so I thought
FFOA was taking care of it.
My monthly payment to Financial Freedom of America was
$428.97 per month. It was automatically taken from my checking
account. And that was a lot of money to me, while I was making
around $11.00 an hour at the time, but I wanted to avoid
bankruptcy.
After making payments to FFOA for 10 months, I was served
with court papers and informed that Capital One was suing me in
court. I was surprised, because I thought FFOA was handling
this for me. I immediately called them and was told I did not
have enough money in my account to settle with Capital One. I
had paid approximately $4,000 by this time, and was told I only
had about $1,900 in my account. They stated that they had no
control on what a credit card company could do and that I did
not have enough money to settle this account.
I learned, at this time, that FFOA had taken over $2,000 in
``up front'' fees out of what I had paid. This did not make
sense to me, as they didn't even know what the credit card
companies would settle for. It did not make sense that would
they take the money up front; they were making money off of me,
even though they had done nothing to earn it, yet. I called
back and canceled the account and was then told I only had
$1,400 in my account. There were several phone conversations
back and forth before I received a check for around $1,100. I
was just sick about this. Once the New York Times interviewed
me, FFOA decided to return another $1,200 to me. However, I
still have not received all of my money back from them--I'm
sorry, I lost my place. And companies like this are taking
advantage of people who are desperate for help and trying to do
the right thing. This is a scam and a rip-off, and I told them
that.
And I thank you that I was able to testify on this today,
and I hope that it helps other people.
[The prepared statement of Ms. Robertson follows:]
Prepared Statement of Linda Robertson, Consumer, Odessa, Missouri
Thank you, Senator McCaskill, for giving me the opportunity to
share my experiences with debt settlement. I want to share my story so
that others will learn about the debt settlement schemes that are out
there. I hope my testimony helps other people who are in the situation
I was in.
In 2008, I was working as a real estate appraiser when the slow
economy forced me to give up that work. At the same time, there was an
illness in my family, so I began having a hard time keeping up with
bills. When my credit card debt became too high, I turned to a debt
settlement company. I had seen advertisements for debt settlement on
television, which made promises about helping people settle their debt
without declaring bankruptcy. So, it seemed like the right option.
In February of 2009, I signed up with a debt settlement company
called Financial Freedom of America after seeing one of its television
advertisements. I called their toll free number and their
representative told me the company would get me out of debt within 3
years without taking bankruptcy. I was made to feel confident that they
would handle my credit cards and settle for up to 50 percent of the
original balance. I sent every correspondence from the credit card
companies to FFOA, as was instructed, and felt secure in the fact that
they were handling these accounts. Their representative also informed
me to stop paying my credit card bills, so I thought FFOA was taking
care of it.
My monthly payment to Financial Freedom of America was $428.97 per
month. It was automatically taken from my checking account. That was a
lot of money to me, while I was making around $11.00 an hour at the
time, but I wanted to avoid bankruptcy.
After making payments to FFOA for 10 months, I was served with
court papers and informed that Capital One was suing me in court. I was
surprised because I thought FFOA was handling this for me. I
immediately called FFOA and was told I did not have enough money in my
account to settle with Capital One. I had paid approximately $4,000 by
this time and was told I only had about $1,900 in my account. They
stated that they had no control on what a credit card company could do
and that I did not have enough money to settle this account.
I learned at this time that FFOA had taken over $2,000 in ``up
front'' fees out of what I had paid. This did not make sense to me as
they didn't even know what the credit card companies would settle for.
It did not make sense that would they take the money up front. They
were making money off of me, even though they had done nothing to earn
it yet. I called back and canceled the account and was then told I had
only $1,400 in my account. There were several phone conversations back
and forth before I received a check for around $1,100. I was just sick
about this.
Once the New York Times interviewed me, FFOA decided to return
another $1,200 to me. However, I still have not received all of my
money back from FFOA. Companies like this are taking advantage of
people who are desperate for help and trying to do the right thing.
This is a scam and rip-off.
I thank you for being able to testify about what has happened to me
and hope it will help other people.
Senator McCaskill. Thank you very much, Linda. It's great
that you've come and----
[Applause.]
Senator McCaskill.--and I think the hardest thing about
this is when you're vulnerable, and you feel badly about the
situation you're in and then to have someone take advantage of
that is the worst. And you've done the right thing by coming
forward and talking about it, even though I know it's an
invasion of your privacy. We appreciate you being willing to
allow us to take a peek into your personal life in regards to
this, and it has been very helpful.
Mr. Angle?
STATEMENT OF DAVID ANGLE, ASSISTANT ATTORNEY
GENERAL, OFFICE OF THE MISSOURI ATTORNEY GENERAL
Mr. Angle. Thank you, Senator. And thank you for bringing
this hearing to Kansas City. It is a potential powerful
partnership that we are discussing and engaging in, here, with
Federal legislators, Federal regulators, and myself as a
representative of the Missouri Attorney General's Office.
Attorneys General across the country have been addressing
debt settlement issues for a number of years, now. It has been
an ever-increasing problem. In our office, alone, we have had
an ever-increasing number of complaints. In 2009, we
experienced more than double the complaints that we had in
2008, and in 2010, we're on track to experience even more than
that as compared to 2009.
Ms. Robertson's situation, unfortunately, is not unique.
And if you listened to what she had to say, she mentioned that
this debt settlement company had done nothing to earn the fees
that they had appropriated from her. And, in our view, under
this particular set-up, there's nothing that they can do to
earn those fees because they're not earned, they're just taken.
The debt settlement structure is such that it is designed
not to reduce consumer debt, but to drain fees from
financially-vulnerable consumers, while the debt ever increases
that they sought help from, and then the consumers are left out
in the cold. The structure has been discussed ad nauseum. In
your hearing in April, my colleague, Phil Lehman, from the
North Carolina Attorney's General Office, I think, laid out
quite ably what the problem is.
Debt settlers, not only will they instruct their
``clients'' to stop paying, but they also instruct them to stop
communicating. That is a strategy that is designed, absolutely,
to increase the fees, to increase the interest rate, and
indeed, as Ms. Robertson experienced, oftentimes it ends up
getting the consumer sued on the very accounts that they
thought they were getting help on. And the lack of
communication not only flows from the consumer to their
original creditors, but the debt settlers themselves are
notorious for a lack of communication to their clients or to
their creditors.
This is an inherently deceptive industry. It's inherently
unfair, and it's structurally predatory because it's designed
to do nothing other than drain fees from financially-vulnerable
consumers.
Thank you very much for the opportunity to testify here and
discuss some of these things. I thought, because we're in a
policy-oriented environment, that it might be important to
discuss some of the ways that this legislation adds, and could
add, to the tool chest that the regulators and enforcers have
in this industry.
State Attorneys General are responsible for enforcing laws
that prohibit unfair acts and deception in the marketplace; the
FTC is the primary Federal regulatory agency that exists on
behalf of consumers to protect them from predatory conduct in
the marketplace. Anything that increases the tools that we have
available is a very welcome benefit to our office, to the FTC
and to the consumer population, as a whole.
One of the things that hasn't necessarily been discussed or
emphasized is, that there are third-parties out there who
enable the debt settlement companies to accomplish the tasks
that they accomplish. The primary debt settlement model
involves not only the debt settlement entity, but payment
processors to the debt settler's bank. Generally speaking, when
a consumer signs up for a debt settlement program, they are
introduced to a payment processing entity that is distinct from
the debt settler, and the debt settler has his own bank account
that the consumer's money goes into. This creates layers of
obstruction that the consumers are unaware of when they enter
into the program, and it allows the debt settlers, with a
third-party entity, to automatically withdraw money from their
primary bank account into a mysterious bank account that they
had never heard of, that the debt settlement entity has equal,
if not more, control over than the consumer does.
If the legislation you are considering could encompass
those who materially aid the debt settlers, I think that would
be a very valuable tool, not only for the Federal regulators,
but for the State consumer protection officials, as well.
The FTC has issued a very strong rule: prohibition on
advanced fees. If there is enough manpower out there to enforce
it, we'll drive this business out of business. The additional
tools that we could use would be those that would encompass
those that materially aid the debt settlement entities, and
your legislation currently has a very strong cap on fees: 5
percent will take these folks out of business, too. And they
deserve to be out of business. They deserve the attention that
this committee has paid to it, and we thank you for that. They
deserve the attention that the FTC has paid to it, because
they're predatory by their nature. I would urge you, Senator,
to stay strong on the 5 percent cap, and to consider, also,
widening the sweep so that we can get some of the other third
parties into the scope of this regulatory and policymaking
conduct, and that we'll just stamp these folks out, for good.
Thank you very much for your time.
[The prepared statement of Mr. Angle follows:]
Prepared Statement of David Angle, Assistant Attorney General,
Office of the Missouri Attorney General
Chairman Rockefeller, Senator Hutchison, and members of the
Committee, thank you for allowing me the opportunity to appear before
the Committee and testify concerning the conduct of debt settlement
industry participants and the impact this predatory industry has had on
consumers in Missouri and across the country. I would also like to
thank the Committee, and in particular Senator McCaskill, for bringing
this hearing to Missouri. Although we are not alone in this regard,
many Missourians have been deceptively lured into the debt settlement
scheme. In my capacity as an Assistant Attorney General, I have
responded to numerous complaints from Missourians who thought they had
found a way to honorably reduce their debt burdens by enrolling in
these so-called programs, only to find themselves in worse financial
shape than before signing up for relief. I applaud your efforts to
address the unfairness and deception inherent in this industry and am
honored to share my thoughts and experiences today.
At the Committee's April 22, 2010 hearing, my colleague from the
North Carolina Department of Justice, Phil Lehman, provided an
excellent overview of the deception and unfairness inherent in the debt
settlement industry. Additionally, 41 Attorneys General voiced their
support for the FTC prohibition on the collection of advance fees by
debt settlers. This was due in no small part to the efforts of our
colleagues in the Illinois Attorney General's Office. Many additional
consumer protection groups have also provided their valuable insights,
including the Center for Responsible Lending and the National Consumer
Law Center. As has been clearly demonstrated by the collective
experience and wisdom of the consumer protection community, the debt
settlement industry is a menace.
While many consumers can benefit from legitimate financial
counseling, debt settlement practices are not aimed at reducing
consumer debt. The objectives of debt settlers are to instill a false
sense of hope in consumers mired in financial struggles while draining
their limited resources.
The debt settlement scheme is fairly consistent. Advertisements
reach consumers claiming a given entity can reduce that consumer's debt
by 40-50 percent or more.\1\ This message reaches consumers through
television, radio, print, and Internet media. Stressed consumers are
naturally drawn in by the possibility of living ``debt free.''
Consumers' hopes are heightened upon making contact with the debt
settler and being informed the settler has a special program, based on
unique creditor relationships, that will allow debts to be magically
reduced. The consumer is sent a package and signs up for this
``program.'' In many instances, this includes setting up a stand-alone
bank account, purportedly for the purpose of paying off reduced debt.
What the consumer ultimately discovers is that this account is
primarily a vehicle for payments to be made to the debt settler. In the
process, the consumer is introduced to two additional entities--the
payment processor and the debt settler's bank. As noted by Mr. Lehman
in his April 22, 2010 testimony, numerous states enacted prohibitions
on debt settlement conduct but in many states these prohibitions only
apply if the debt settler directly receives consumer funds. The modern
debt settlement scheme would likely not be as prevalent without the
participation of these processing and banking parties.
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\1\ See e.g., www.creditsolutions.com (``Put us to work for you and
settle your unsecured debt by up to 50 percent.'')
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Upon setting up the debt settlement bank account, automatic
withdrawals from this account then take place. Payments are withdrawn
first for the benefit of the debt settler. In my experience, any actual
negotiation with creditors occurs, if at all, only after significant
fees are extracted by the debt settler. In one recent example involving
a Missouri consumer on a fixed income, the debt settlement company
withdrew $1,278.84 as fees before any settlement activity took place.
While these fees were being extracted, this consumer was sued on an
account she thought was being negotiated. A judgment was lodged against
this consumer and we are now working to obtain restitution on her
behalf. Unfortunately, this is not an isolated instance. Complaints to
the Missouri Attorney General's Office concerning debt settlement
practices more than doubled from 2008 to 2009. Complaints in 2010 are
on pace to more than triple the number from 2008.
The debt settlement ``program'' is premised on the debt settlers'
claim that a consumer who ceases all payments on unsecured debt will be
in a better negotiating position with creditors.\2\ The debt settler
will also claim to have developed special relationships with creditors
that facilitate reduction of debt. These claims are inherently
deceptive. Indeed, many large creditors and/or the collection attorneys
who work for them refuse to negotiate with debt settlement entities, a
fact that is omitted from debt settlement advertisements.
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\2\ See e.g., www.netdebt.com (``When your accounts are past due,
your creditors become very willing to accept significantly less than
the balance owed and will settle the account.'')
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Even where creditors may deal with a debt settler, the structure of
the ``program'' operates to the detriment of the consumer. The approach
of defaulting on unsecured debt and ceasing communication with
creditors inevitably causes the debtor to incur additional charges that
increase the consumer's debt load. These charges can be substantial,
including late fees, higher interest rates, attorney fees, and other
litigation costs. The debt settlement industry's claims of debt
reduction, while deceptive from a macro level, are also unfounded when
one looks at any debt they claim to have reduced. In making these
claims, debt settlers include the additional, default-related charges
incurred by a consumer in calculating the percentage of ``reduction''
purportedly achieved on behalf of a consumer. For example, a consumer
may go into a debt settlement ``program'' with $5,000 in debt to a
given creditor; cease payments and communication with this creditor;
incur additional fees and charges of $2,500; and the debt settler would
claim a 33 percent ``reduction'' by negotiating the consumer's debt to
the original $5,000 balance but only after the consumer had paid the
debt settler hundreds or thousands of dollars in fees. This practice is
predatory and inherently deceptive.
Not surprisingly, and in spite of their claims to the contrary,
debt settlement entities do not have track records of settling debts
that even approach legitimacy. In one of the cases that illustrate this
point, the FTC pursued the National Consumer Council for bogus claims
regarding its claimed success rate in reducing consumer debt.\3\ The
court appointed receiver reported that only 1.4 percent of consumers
actually completed the debt settlement ``program.''
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\3\ FTC v. National Consumer Council et al., case no. 04-0474, U.S.
District Court, Central District of California.
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Enforcement actions against debt settlement entities and principals
are effective in dealing with the targeted entity. Unfortunately, where
one entity's conduct is addressed by enforcement action, many others go
unaddressed because enforcement offices do not learn of each entity
operating within its jurisdiction; because resources do not allow for
prosecution of every entity and/or its principals; and because the
industry model is lucrative for its participants to the extent that the
market is filled with new entrants.
One method of addressing the deceptive nature of this industry has
been issued in the FTC's recently enacted rule prohibiting the
collection of advance fees. The FTC has issued a strong rule in this
regard. Additional protective action could include instituting a cap on
the total amount of fees that may be collected when negotiating debts
on behalf of consumers. Truly comprehensive measures would also address
the participation of processing and banking entities. Debt settlement
is an unfair and deceptive scheme, the perpetration of which is
dependant on individuals and entities that are willing to process the
transactions and deliver consumers' money to the scammers.
The debt settlement industry is deserving of the attention this
Committee is paying to it. Any action by the Committee that supplements
the tools and resources available for the Attorneys General, consumers,
and society is welcome.
Senator McCaskill. Thank you very much, Mr. Angle.
Ms. Hrdy?
STATEMENT OF ALICE SAKER HRDY, ASSISTANT DIRECTOR,
DIVISION OF FINANCIAL PRACTICES, FEDERAL TRADE
COMMISSION
Ms. Hrdy. Thank you, good morning. And thank you, Senator
McCaskill, for holding this hearing and inviting the Federal
Trade Commission to participate. I am honored to be here, in
Kansas City. As a native Ohioan it's always wonderful to travel
west from Washington. And you've brought us together today to
discuss this critical issue facing Americans: credit card debt
and the very problematic practices in the debt relief industry.
The millions of Americans who are struggling with credit
card debt, like Ms. Robertson, need realistic solutions that
are tailored to their individual, particular situation. And, as
you noted, there are some legitimate debt relief service
providers who can provide valuable assistance. But, in far too
many cases, consumers are paying large, up-front fees for
nothing but empty promises.
The FTC is working on several fronts to stop these
deceptive and abusive practices by this industry. First, of
course, is enforcement. Over the last decade, the Commission,
State Attorneys General, including the Missouri Attorney
General, have brought a combined 259 actions against these
types of firms and their principals to halt the illegal
practices and, wherever possible, to return money to victims.
But enforcement--case-by-case enforcement, alone, is not enough
to address illegal practices that harm consumers.
And so, as you noted, 2 weeks ago, the Commission announced
its final amendments to the Telemarketing Sales Rule. These new
rules, which include an advance fee ban, will aid significantly
in our efforts to tackle this industry's most harmful
practices. And our education initiatives--for both businesses
and consumers--will, of course, continue.
This burgeoning industry of debt settlement has come under
particular scrutiny for good reason. Using dramatic claims,
extensive advertising, and high-pressure sales tactics, many
debt settlement services claim the company will negotiate with
consumers' creditors to achieve deep reductions in their debt,
and ultimately to eliminate consumers' debt. Relying heavily on
telemarketing sales pitches, they convince consumers to enroll
in their services.
Often we've seen that the companies track the latest
headlines, and some of the worst actors lie--just outright
lie--by claiming there's a government bailout for credit card
debt. Or they simply claim they are the government.
Consumers who enroll must pay hundreds--or even thousands--
in fees before the company even starts contacting their
creditors. As a result, hard-pressed consumers face what is
often an impossible task: paying the fees--which, often, the
consumers don't even know they're paying to the debt settlement
company--saving money for the settlements, and trying to pay
their monthly bills for groceries and other things that they
need. And not surprisingly, most consumers can not sustain this
level of expenditures, and so they drop out before getting the
savings that they were promised. After all, these are the
consumers who were struggling to pay their bills in the first
instance, before piling on the fees of the debt settlement
company. And, in the cases that we've brought, and the State
Attorneys General have brought, we've seen that those who do
have to drop out forfeit almost all, if not all, of the fees
that they've paid, unless they complain. And obviously, we know
that it is so important for consumers to complain. Not only can
it help to get the company to do right by the consumers, but it
helps law enforcers to spot trends and to know which companies
deserve a close look, or more.
So, these new rules under the Telemarketing Sales Rule set
clear standards for the debt relief industry, and will make our
enforcement efforts more effective. Through these rules, we've
strengthened protections for consumers in three key ways.
First, the advance-fee ban; it will prohibit debt relief
companies from taking any money from consumers until they
achieve results. This pay-for-performance model is intended to
align incentives of both the industry and consumers, so that
consumers are paying for actual results, not unfulfilled
promises of results.
The second key protection afforded by the new rules are new
disclosures specific to debt relief. Consumers must be told,
clearly and conspicuously, before they pay for the service, and
not in fine print after the fact.
The contracts will need to provide key information,
including how long it will take to get the promised results,
how much it will cost, and the negative consequences to your
credit score that could result if you stop paying your
creditors.
And third, the new rules prohibit specific
misrepresentations that are common to debt settlement
telemarketing, including deceptive claims about the amount of
debt relief--that is, the debt reductions they can achieve.
Our statement of basis and purpose--which is very
extensive, and accompanies the final rule, provides extensive
guidance about the type of evidence these marketers must have
before they make these dramatic claims of 40 to 60 percent
reduction, or more. They have to have that evidence before they
make claims that, in fact, most consumers are getting those
results.
To assist industry members in their efforts to comply with
the new rules, we've published this plain-English Business
Education Guide, available online and by mail. We, of course,
have other education materials geared to consumers on this
topic, on the full range of debt issues, in English and in
Spanish, online and in print.
And as we plan our future enforcement efforts of this rule,
it's important to highlight the importance of continued joint
FTC/State efforts. And to that end, we feel the TSR, in
particular, is an excellent enforcement tool. The rule
authorizes both the FTC and State Attorneys General to enforce
its provisions in Federal court. You can be assured we'll be
vigilant in our enforcement efforts to make sure that consumers
across the country receive the benefits of these new rules.
Thank you, Senator, and I look forward to our discussion
today.
[The prepared statement of Ms. Hrdy follows:]
Prepared Statement of Alice Saker Hrdy, Assistant Director,
Division of Financial Practices, Federal Trade Commission
I. Introduction
Senator McCaskill and members of the Committee, I am Alice Saker
Hrdy, Assistant Director in the Division of Financial Practices at the
Federal Trade Commission (``FTC'' or ``Commission'').\1\ I appreciate
the opportunity to appear before you today, and the Commission thanks
this Committee for its interest in the work of the FTC to protect
consumers from deception and abuse in the sale of debt relief services.
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\1\ The views expressed in this statement represent the views of
the Commission. My oral presentation and responses to any questions you
may have are my own, however, and do not necessarily reflect the views
of the Commission or any Commissioner.
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The Commission has a long history of protecting consumers of
financial products and services offered by entities within the agency's
jurisdiction. With Americans continuing to feel the effects of the
economic downturn, the Commission has stepped up its efforts to stop
fraudulent financial schemes that exploit consumers who are
particularly vulnerable as a result of financial distress.\2\
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\2\ Since the beginning of 2009, the FTC has brought more than 40
cases to stop scams that prey on consumers suffering from the financial
downturn. See, e.g., Press Release, FTC, FTC Cracks Down on Con Artists
Who Target Jobless Americans (Feb. 17, 2010), available at www.ftc.gov/
opa/2010/02/bottomdollar.shtm; Press Release, FTC, FTC Cracks Down on
Scammers Trying to Take Advantage of the Economic Downturn (July 1,
2009), available at www.ftc.gov/opa/2009/07/shortchange.shtm.
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Stopping deceptive debt relief practices is one of our highest
consumer protection priorities. Providers of debt relief services
purport to help people who cannot pay their debts by negotiating on
their behalf with creditors. Debt settlement companies, for example,
market their ability to dramatically reduce consumers' debts, often by
making claims to reduce debt by specific and substantial amounts, such
as ``save 40 to 60 percent off your credit card debt.'' In many
instances, consumers pay hundreds or thousands of dollars for these
services but get nothing in return.
The FTC utilizes its four principal tools to protect consumers of
debt relief services: law enforcement, rulemaking, consumer education
efforts, and research and policy development. To halt deceptive and
abusive practices and return money to victimized consumers, the
Commission has brought 23 lawsuits in the last 7 years against credit
counseling firms, debt settlement services, and debt negotiators.\3\
These cases have helped over 500,000 consumers harmed by deceptive and
abusive practices.\4\ The Commission continues to actively investigate
debt relief companies and pursue aggressive enforcement in this arena.
As the Commission's law enforcement experience has shown, victims of
these schemes often end up more in debt than when they began.
Especially in these difficult economic times, when so many consumers
are struggling to keep their heads above water, this is unacceptable.
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\3\ A list of the Commission's law enforcement actions against debt
relief companies is attached as Appendix A.
\4\ In addition to consumers who lost money to fraudulent debt
relief companies, millions of consumers have been harassed by automated
robocalls pitching services in violation of the Do Not Call provisions
of the Telemarketing Sales Rule. The Commission has charged companies
engaging in these robocalls with violations of the Rule. See, e.g., FTC
v. Asia Pac. Telecom, Inc., No. 10C3168 (N.D. Ill., preliminary
injunction issued June 17, 2010); FTC v. JPM Accelerated Servs. Inc.,
No. 09-CV-2021 (M.D. Fla., preliminary injunction issued Dec. 31,
2009); FTC v. Econ. Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga.,
preliminary injunction issued Dec. 17, 2009).
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Over the past decade, the Commission and state enforcers have
brought a combined 259 cases to stop deceptive and abusive practices by
debt relief providers that have targeted consumers in financial
distress. Despite these sustained efforts, consumer complaints
continued to increase as did problematic advertising and telemarketing
of these services. To strengthen the agency's ability to stop deception
and abuse in the provision of debt relief services, the Commission
proposed amendments to the Telemarketing Sales Rule (``TSR''). On July
29, 2010, after a thorough and careful review of the rulemaking record,
the Commission announced its final amendments to the TSR. The Rule now
bans debt relief providers from collecting fees in advance of
performing promised services, prohibits them from making
misrepresentations, and requires them to make several important up
front disclosures.
This testimony provides an overview of the three common types of
debt relief services, as well as the Commission's law enforcement
efforts with respect to each. The testimony then describes the
Commission's amendments to the TSR \5\ and discusses the FTC's ongoing
efforts to educate consumers about debt relief options and how to avoid
scams.\6\
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\5\ Telemarketing Sales Rule; Final Rule, 75 Fed. Reg. 48,458 (Aug.
10, 2010) (to be codified at 16 C.F.R. 310).
\6\ With respect to its research and policy development in this
area, in September 2008, the Commission held a public workshop entitled
``Consumer Protection and the Debt Settlement Industry,'' which brought
together stakeholders to discuss consumer protection concerns
associated with debt settlement services. Workshop participants also
debated the merits of possible solutions to those concerns. An agenda
and transcript of the Workshop are available at www.ftc.gov/bcp/
workshops/debtsettlement/index.shtm. Public comments associated with
the Workshop are available at www.ftc.gov/os/comments/
debtsettlementworkshop/index.shtm.
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II. The Commission's Authority
The Commission enforces Section 5 of the FTC Act, which prohibits
unfair or deceptive acts or practices in or affecting commerce,\7\ as
well as the Telemarketing and Consumer Fraud and Abuse Prevention Act
(``Telemarketing Act'') \8\ and the associated TSR that prohibit
certain deceptive and abusive telemarketing practices.\9\ The
Commission has used this authority to challenge debt relief providers
within its jurisdiction \10\ who have engaged in deceptive or abusive
practices. In addition, the Commission works to protect consumers from
a wide range of other unfair and deceptive practices in the
marketplace, such as credit-related and government grant scams,
mortgage loan modification scams, deceptive marketing of health care
products, deceptive negative option marketing, and business opportunity
and work-at-home schemes. The FTC works closely with many state
attorneys general and state banking departments to leverage resources
in consumer protection.\11\
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\7\ 15 U.S.C. 45.
\8\ 15 U.S.C. 6101-6108. Pursuant to the Telemarketing Act's
directive, the Commission promulgated the original TSR in 1995 and
amended it in 2003, 2008, and 2010.
\9\ The Commission also has law enforcement authority and, in some
cases, regulatory powers under a number of other consumer protection
statutes specifically related to financial services, including the
Truth in Lending Act, 15 U.S.C. 1601-1666j; the Consumer Leasing
Act, 15 U.S.C. 1667-1667f; the Fair Debt Collection Practices Act,
15 U.S.C. 1692-1692o; the Fair Credit Reporting Act, 15 U.S.C.
1681-1681x; the Equal Credit Opportunity Act, 15 U.S.C. 1691-1691f;
the Credit Repair Organizations Act, 15 U.S.C. 1679-1679j; the
Electronic Funds Transfer Act, 15 U.S.C. 1693-1693r; the privacy
provisions of the Gramm-Leach-Bliley Act, 15 U.S.C. 6801-6809; and
the Omnibus Appropriations Act of 2009, Pub. L. No. 111-8, 626, 123
Stat. 524 (Mar. 11, 2009).
\10\ The FTC Act exempts banks and other depository institutions
and bona fide nonprofits, among others, from the Commission's
jurisdiction. 15 U.S.C. 44, 45(a)(2). These exemptions apply to the
FTC's jurisdiction under the Telemarketing Act and the TSR as well.
\11\ See, e.g., FTC, Press Release, Federal and State Agencies
Target Mortgage Foreclosure Rescue and Loan Modification Scams (July
15, 2009), available at www.ftc.gov/opa/2009/07/loanlies.shtm
(announcing sweep targeting mortgage assistance relief scams, including
FTC v. US Foreclosure Relief Corp., No. SACV09-768 JVS (MGX) (C.D.
Cal., final order March 11, 20 10) (State of Missouri, State of
California, and FTC filed joint case alleging violations of FTC Act and
TSR against defendants purporting to provide mortgage assistance relief
services)); Press Release, FTC, FTC Announces ``Operation False
Charity'' Law Enforcement Sweep (May 20, 2009), available at
www.ftc.gov/opa/2009/05/charityfraud.shtm (including four cases brought
by the Attorney General of Missouri).
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III. Overview of Debt Relief Services and FTC Law Enforcement Efforts
Debt relief services have proliferated over the past few years as
greater numbers of consumers struggle with debts they cannot pay. A
range of nonprofit and for-profit entities--including credit
counselors, debt settlement companies, and debt negotiation companies--
offer to help consumers facing debt problems. As detailed below,
consumers have complained of deceptive and abusive practices in all of
these services, and in response, the FTC and state enforcement and
regulatory bodies have brought numerous cases.\12\
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\12\ The Commission has addressed similar problems with respect to
companies offering to resolve consumers' mortgage debts. The Commission
has engaged in an aggressive, coordinated enforcement initiative to
shut down companies falsely claiming the ability to obtain mortgage
loan modifications or other relief for consumers facing foreclosure. In
the past year alone, the FTC has brought 10 cases targeting foreclosure
rescue and mortgage modification frauds, with other matters under
active investigation. In addition, state enforcement agencies have
brought more than 200 cases against such firms in recent years.
Further, as directed by Congress under the Omnibus Appropriations Act
of 2009, Pub. L. No. 111-8, the Commission has initiated a rulemaking
proceeding addressing the for-profit companies in this industry. Under
the proposed rule, companies could not receive payment until they have
obtained for the consumer a documented offer from a mortgage lender or
servicer that comports with any promises previously made. Mortgage
Assistance Relief Services, 75 Fed. Reg. 10707 (Mar. 9, 2010).
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A. Credit Counseling Agencies
Credit counseling agencies (``CCAs'') historically were nonprofit
organizations that worked as liaisons between consumers and creditors
to negotiate ``debt management plans'' (``DMPs''). DMPs are monthly
payment plans for the repayment of credit card and other unsecured debt
that enable consumers to repay the full amount owed to their creditors
but under renegotiated terms that make repayment less onerous.\13\
Credit counselors typically also provide educational counseling to
assist consumers in developing a manageable budget and avoiding debt
problems in the future. Beginning in the late 1990s, however, some CCAs
registered as nonprofit organizations with the Internal Revenue
Service, but in reality were operating as for-profit companies and
engaging in aggressive and illegal marketing practices. Other CCAs
incorporated and openly operated as for-profit companies.
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\13\ To be eligible for a DMP, a consumer generally must have
sufficient income to repay the full amount of his or her debts,
provided that the terms are adjusted to make such repayment possible.
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Since 2003, the Commission has filed six cases against credit
counseling providers for deceptive and abusive practices.\14\ In one of
these cases, the FTC sued AmeriDebt, Inc., at the time one of the
largest CCAs in the United States.\15\ On the eve of trial, the FTC
obtained a $35 million judgment as part of a settlement agreement. Thus
far, the Commission has collected and distributed $12.7 million in
redress to 287,000 consumers.\16\ In AmeriDebt and other credit
counseling cases, the FTC charged that the agencies engaged in
deceptive conduct in violation of Section 5 of the FTC Act and the TSR,
including:
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\14\ See Appendix A (items 15, 16, 17, 18, 20, and 21).
\15\ FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md., final order
May 17, 2006).
\16\ See Press Release, FTC, FTC's AmeriDebt Lawsuit Resolved:
Almost $13 Million Returned to 287, 000 Consumers Harmed by Debt
Management Scam (Sept. 10, 2008), www.ftc.gov/opa/2008/09/
ameridebt.shtm. The FTC expects to make another distribution of
consumer refunds this year.
misrepresentations about the benefits and likelihood of
success consumers could expect from the services, including the
savings they would realize; \17\
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\17\ See FTC v. Integrated Credit Solutions, Inc., No. 06-806-SCB-
TGW (M.D. Fla., final order Oct. 16, 2006); United States v. Credit
Found. of Am., No. CV 06-3654 ABC(VBKx) (C.D. Cal., final order June
16, 2006); FTC v. Debt Mgmt. Found. Servs., Inc., No. 04-1674-T-17-MSS
(M.D. Fla., final order Mar. 30, 2005).
misrepresentations regarding fees, including false claims
that the CCAs did not charge up-front fees; \18\
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\18\ See FTC v. Leshin, No. 06-cv-61851-WJZ (S.D. Fla., final order
May 5, 2008); FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md., final
order May 17, 2006).
deceptive statements regarding their purported nonprofit
nature; \19\ and
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\19\ See FTC v. Leshin, No. 06-cv-61851-WJZ (S.D. Fla., final order
May 5, 2008); FTC v. Integrated Credit Solutions, Inc., No. 06-806-SCB-
TGW (M.D. Fla., final order Oct. 16, 2006); United States v. Credit
Found. of Am., No. CV 06-3654 ABC(VBKx) (C.D. Cal., final order June
16, 2006); FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md., final order
May 17, 2006); FTC v. Debt Mgmt. Found. Servs., Inc., No. 04-1674-T-17-
MSS (M.D. Fla., final order Mar. 30, 2005). Although the defendants in
these cases had obtained IRS designation as nonprofits under Section
501(c)(3) of the Internal Revenue Code, they allegedly funneled
revenues out of the CCAs and into the hands of affiliated for-profit
companies and/or the principals of the operation. Thus, the FTC alleged
that the defendants were ``operating for their own profit or that of
their members'' and fell outside the nonprofit exemption in the FTC
Act. 15 U.S.C. 44.
violations of the TSR's provisions that require certain
disclosures and prohibit misrepresentations, as well as the
requirements of the TSR's Do Not Call provisions.\20\
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\20\ See FTC v. Leshin, No. 06-cv-61851-WJZ (S.D. Fla., final order
May 5, 2008); United States v. Credit Found. of Am., No. CV 06-3654
ABC(VBKx) (C.D. Cal., final order June 16, 2006).
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In addition, over the last several years, in response to abuses
such as these, the IRS has challenged a number of purportedly nonprofit
CCAs--both through enforcement of existing statutes and new tax code
provisions--resulting in the revocation, or proceedings to revoke, the
nonprofit status of 41 CCAs.\21\ In addition, state authorities have
brought at least 21 cases against CCAs under their own statutes and
rules.
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\21\ Eileen Ambrose, Credit Firms' Status Revoked; IRS Says 41 Debt
Counselors Will Lose Tax-Exempt Standing, Baltimore Sun, May 16, 2006.
To enhance the IRS's ability to oversee CCAs, Congress amended the IRS
Code in 2006, adding Section 501(q) to provide specific eligibility
criteria for CCAs seeking tax-exempt status as well as criteria for
retaining that status. See Pension Protection Act of 2006, Pub. L. No.
109-280, 1220 (Aug. 2006) (codified at 26 U.S.C. 501(q)). Among
other things, Section 501(q) of the IRS Code prohibits tax-exempt CCAs
from refusing to provide credit counseling services due to a consumer's
inability to pay or a consumer's ineligibility or unwillingness to
agree to enroll in a DMP; charging more than ``reasonable fees'' for
services; and, unless allowed by state law, basing fees on a percentage
of a client's debt, DMP payments, or savings from enrolling in a DMP.
In addition, as a result of changes in the Federal bankruptcy code, 158
nonprofit CCAs, including the largest entities, have been subjected to
rigorous screening by the Department of Justice's Executive Office of
the U.S. Trustee. Finally, nonprofit credit counseling agencies must
comply with state laws in 49 states, most of which specify particular
fee limits.
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B. Debt Settlement Services
Debt settlement companies purport to obtain from consumers'
unsecured creditors lump sum settlements for significantly less than
the full outstanding balance of the consumers' debts. Unlike a
traditional DMP, the goal of a debt settlement plan is to enable the
consumer to repay only a portion of the total debt owed. Debt
settlement providers heavily market through Internet, television,
radio, and print advertising. The advertisements typically make claims
about the company's supposed ability to reduce consumers' debts to a
fraction of the full amount owed, and then encourage consumers to call
a toll-free number for more information.\22\ During the calls,
telemarketers repeat and embellish many of these claims.
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\22\ See, e.g., FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) (C.D.
Cal., final order Oct. 2, 2008); FTC v. Edge Solutions, Inc., No. CV-
07-4087 (E.D.N.Y., final order Aug. 29, 2008); FTC v. Debt-Set, Inc.,
No. 1: 07-cv-00558-RPM (D. Colo., final order Apr. 11, 2008); FTC v.
Jubilee Fin. Servs., Inc., No. 02-6468 ABC (Ex) (C.D. Cal., final order
Dec. 12, 2004).
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Most debt settlement companies charge consumers hundreds, or even
thousands, of dollars in up-front fees, in many cases with the entire
amount of fees due within the first few months of enrollment and before
any debts are settled. An increasing number of providers spread their
fees over a longer period--for example, 12 to 18 months--but consumers
generally still pay a substantial portion of the fees before any of
their payments are used to pay down their debt. Most consumers drop out
of these programs before completion, and they typically forfeit all of
the money they paid to the debt settlement company, regardless of
whether they received any settlements from their creditors.\23\
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\23\ Telemarketing Sales Rule; Final Rule, 75 Fed. Reg. at 48471-72
(citing commenters).
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Since 2004, the Commission has brought nine actions against debt
settlement providers, alleging that they deceived consumers about key
aspects of their programs.\24\ The defendants' misrepresentations
included claims that:
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\24\ See Appendix A (items 2, 6, 11, 12, 13, 19, 20, 22, and 23).
the provider will, or is highly likely to, obtain large
reductions in debt for enrollees, e.g., a 50 percent reduction
or elimination of debt in 12 to 36 months; \25\
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\25\ See, e.g., FTC v. Edge Solutions, Inc., No. CV-07-4087
(E.D.N.Y. , final order Aug. 29, 2008); FTC v. Innovative Sys. Tech.,
Inc., No. CV04-0728 GAF JTLx (C.D. Cal., final order July 13, 2005).
the provider will stop harassing calls from debt collectors
as well as collection lawsuits; \26\
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\26\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D.
Colo., final order Apr. 11, 2008); FTC v. Better Budget Fin. Servs.,
Inc., No. 04-12326 (WG4) (D. Mass., final order Mar. 28, 2005); FTC v.
Jubilee Fin. Servs., Inc., No. 02-6468 ABC (Ex) (C.D. Cal., final order
Dec. 12, 2004).
the provider has special relationships with creditors and is
expert in inducing creditors to grant concessions; \27\
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\27\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D.
Colo., final order Apr. 11, 2008); FTC v. Better Budget Fin. Servs.,
Inc., No. 04-12326 (WG4) (D. Mass. 2005). Some providers are also
misrepresenting that their service is part of a government program
through the use of such terms as ``government bailout'' or ``stimulus
money.'' See, e.g., FTC v. Dominant Leads, LLC, No. 1:10-cv-00997
(D.D.C., preliminary injunction issued July 8, 2010).
the consumer will not have to pay substantial up-front
fees,\28\ and
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\28\ See, e.g., FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo.,
final order Apr. 11, 2008).
the consumer will be able to obtain a refund if the provider
is unsuccessful.\29\
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\29\ See, e.g., FTC v. Innovative Sys. Tech., Inc., No. CV04-0728
GAF JTLx (C.D. Cal., final order July 13, 2005).
The Commission also has alleged that debt settlement companies
encouraged or instructed consumers to stop paying their creditors,
while not disclosing that failing to make payments to creditors may
actually increase the amount owed (because of accumulating fees and
interest) and would harm their credit rating.\30\ In addition to the
FTC cases, state attorneys general and regulators have filed over 125
law enforcement actions against debt settlement providers under state
statutes that, among other things, ban unfair or deceptive
practices.\31\
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\30\ See, e.g., FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) (C.D.
Cal., final order Oct. 2, 2008); FTC v. Jubilee Fin. Servs., Inc., No.
02-6468 ABC (Ex) (C.D. Cal., final order Dec. 12, 2004).
\31\ See, e.g., Minnesota v. American Debt Settlement Solutions,
Inc., No. 70-CV-10-4478 (Minn., 4th Dist., filed Feb. 18, 2010);
Illinois v. Clear Your Debt, LLC, No. 2010-CH-00167 (Ill. 7th Cir.,
filed Feb. 10, 2010); Press Release, Colorado Attorney General, Eleven
Companies Settle with the State Under New Debt-Management and Credit
Counseling Regulations (Mar. 12, 2009), available at
www.ago.state.co.us/press_detail.cfmpressID=957.html; Texas v. CSA-
Credit Solutions of Am., Inc., No. 09-000417 (Dist. Travis Cty, filed
Mar. 26, 2009); Florida v. Boyd, No. 2008-CA-002909 (Cir. Ct. 4th Cir.
Duval Cty, filed Mar. 5, 2008).
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C. Debt Negotiation
Debt negotiation companies assert that they can obtain interest
rate reductions or other concessions from creditors to lower consumers'
monthly payments. Such companies often market debt negotiation services
through so-called automated ``robocalls.'' Like debt settlement
companies, many debt negotiation providers charge significant up-front
fees and promise specific results, such as a particular interest rate
reduction or amount of savings.\32\ In some cases, the telemarketers of
debt negotiation services refer to themselves as ``card services'' or a
``customer service department'' during calls with consumers in order to
mislead them into believing that the telemarketers are associated with
the consumer's credit card company.\33\
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\32\ See FTC v. Asia Pac. Telecom, Inc., No. 10 C 3168 (N.D. Ill.,
preliminary injunction issued June 17, 2010); FTC v. JPM Accelerated
Servs. Inc., No. 09-CV-2021 (M.D. Fla., preliminary injunction issued
Dec. 31, 2009); FTC v. Econ. Relief Techs., LLC, No. 09-CV-3347 (N.D.
Ga., preliminary injunction issued Dec. 17, 2009); FTC v. 2145183
Ontario, Inc., No. 09-CV-7423 (N.D. Ill., preliminary injunction issued
Dec. 17, 2009); FTC v. Select Pers. Mgmt., No. 07-0529 (N.D. Ill.,
final order May 15, 2009); FTC v. Group One Networks, Inc., No. 8:09-
cv-352-T-26-MAP (M.D. Fla., final order March 19, 2009); FTC v. Debt
Solutions, Inc., No. 06-0298 JLR (W.D. Wash., final order June 18,
2007).
\33\ See cases cited supra, note 32.
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The FTC has brought nine actions against defendants alleging
deceptive debt negotiation practices.\34\ In each case, the Commission
alleged that defendants: (1) misrepresented that they could reduce
consumers' interest payments by specific percentages or minimum
amounts, (2) falsely purported to be affiliated, or have close
relationships, with consumers' creditors,\35\ and (3) violated the
TSR's Do Not Call provisions, among other TSR violations.\36\
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\34\ See Appendix A (items 1, 3, 4, 5, 7, 8, 9, 10, and 14).
\35\ See cases cited supra, note 32.
\36\ See cases cited supra, note 32.
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Our law enforcement colleagues at the state level also have focused
attention on bogus debt negotiation companies. The states have brought
at least 14 cases against such firms, and the FTC will continue to work
closely with our state partners on these and related issues.
IV. The Commission's Amendments to the Telemarketing Sales Rule
On July 29, 2010, the Commission announced final amendments to the
TSR governing providers of debt relief services (``Final Rule''), based
on its determination that such revisions to the TSR are necessary to
protect consumers from deceptive and abusive practices in the
telemarketing of debt relief services.\37\ The Commission developed the
Final Rule after considering an extensive rulemaking record, including
over 300 public comments,\38\ and information gathered during a
November 2009 public forum. At that forum, representatives of all the
major stakeholders discussed the key consumer protection issues and
problems that are present in the debt relief industry and possible
solutions for them.\39\ The Final Rule:
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\37\ Press Release, FTC, FTC Issues Final Rule to Protect Consumers
in Credit Card Debt (July 29, 2010), available at www.ftc.gov/opa/2010/
07/tsr.shtm. Commissioner Rosch dissented from the Commission decision.
\38\ Comments were submitted by: 35 industry representatives, 10
industry trade associations and groups, 26 consumer groups and legal
services offices, six law enforcement organizations, three professors,
two labor unions, the Uniform Law Commission, the Responsible Debt
Relief Institute, the Better Business Bureau, and 236 individual
consumers. The public comments are available at www.ftc.gov/os/
comments/tsrdebtrelief/index.shtm.
\39\ A transcript of the forum is available at www.ftc.gov/bcp/
rulemaking/tsr/tsr-debtrelief/index.shtm. After the forum, Commission
staff sent letters to industry trade associations and individual debt
relief providers that had submitted public comments, soliciting follow-
up information in connection with certain issues that arose at the
forum. The letters are posted at www.ftc.gov/os/comments/tsrdebtrelief/
index.shtm. Sixteen organizations responded and provided data.
prohibits any telemarketer or seller of debt relief services
from requesting or receiving payment until it produces the
promised services and provides proof documenting this fact to
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the consumer;
mandates certain additional disclosures and prohibits
misrepresentations in the telemarketing of debt relief
services; and
extends the existing protections of the TSR to inbound debt
relief calls, i.e., those where consumers call a telemarketer
in response to a general media or direct mail
advertisement.\40\
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\40\ Outbound calls to solicit the purchase of debt relief services
are already subject to the TSR.
As to its scope, the Final Rule covers telemarketers of for-profit
debt relief services, including credit counseling, debt settlement, and
debt negotiation services. Because the FTC Act exempts nonprofit
entities from the agency's jurisdiction under that Act, and the
Telemarketing Act incorporates the FTC Act exemptions, the TSR
generally does not apply to such entities. However, companies falsely
claiming nonprofit status are subject to both the FTC Act and the TSR.
The Final Rule specifies that fees for debt relief services may not
be collected until:
the debt relief provider successfully renegotiates, settles,
reduces, or otherwise changes the terms of at least one of the
consumer's debts;
there is a written settlement agreement, debt management
plan, or other agreement between the consumer and the creditor,
and the consumer has agreed to it; and
the consumer has made at least one payment to the creditor
or debt collector as a result of the agreement negotiated by
the debt relief provider.
To ensure that debt relief providers do not front-load their fees
if a consumer has enrolled multiple debts in one debt relief program,
the Final Rule specifies how debt relief providers may collect the fee
for each settled debt. First, the provider's fee for a single debt must
be in proportion to the total fee that would be charged if all of the
debts had been settled. Alternatively, if the provider bases its fee on
the percentage of what the consumer saves as result of using its
services, the percentage charged must be the same for each of the
consumer's debts.
Another new provision of the Final Rule will allow debt relief
companies to require that consumers set aside their fees and savings
for payment to creditors in a ``dedicated account.'' However, providers
may only require a dedicated account as long as five conditions are
met:
the dedicated account is maintained at an insured financial
institution;
the consumer owns the funds (including any interest
accrued);
the consumer can withdraw the funds at any time without
penalty;
the provider does not own or control or have any affiliation
with the company administering the account, and
the provider does not exchange any referral fees with the
company administering the account.
In addition, the Final Rule requires that providers must make
several disclosures when telemarketing their services to consumers.
Before the consumer signs up for any debt relief service, providers
must disclose how long it will take for consumers to obtain results,
how much it will cost, the negative consequences that could result from
using debt relief services, and key information about dedicated
accounts if they choose to require them. In addition, the TSR mandates
general disclosures for all telemarketers, including the total cost and
any material restrictions or limitations of the service.
The Final Rule also prohibits misrepresentations about any debt
relief service, including savings rates and whether the provider is a
nonprofit entity. The Commission's Statement of Basis and Purpose,
which accompanies the Final Rule, provides extensive guidance about the
evidence providers must possess before they make specific claims about
the amount of debt reduction they will obtain for consumers. First,
providers must account for the additional debt and costs consumers
incur as a result of interest, late fees, and other charges imposed by
the creditors or debt collectors during the course of the program.
Second, providers must account for the fees consumers pay to the
provider in calculating the savings. Third, providers must include in
their calculation of savings those consumers who dropped out or were
otherwise unable to complete the program. Finally, providers must
account for individual accounts that were not settled successfully.
Thus, providers may not exclude debts that they have failed to settle--
including those associated with consumers who dropped out of the
program--from their calculations of the average savings percentage or
amount of consumers' debt reduction.
The amendments become effective on September 27, 2010, except for
the advance fee ban, which becomes effective on October 27, 2010. To
help businesses comply with the new debt relief rules, the FTC staff
issued a compliance guide describing the key changes to the TSR
affecting debt relief services.\41\
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\41\ The guide is available at www.ftc.gov/bcp/edu/pubs/business/
marketing/bus72.pdf.
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V. Efforts to Educate Consumers
To complement its law enforcement and rulemaking, the Commission
has made significant efforts to educate consumers about debt relief
services and alert them to possible deceptive practices. This past
spring, the agency released a brochure entitled ``Settling Your Credit
Card Debts,'' which offers struggling consumers tips on seeking
assistance with their debts and spotting red flags for potential
scams.\42\ This brochure, along with additional educational materials
on debt relief,\43\ is available at an FTC web page, www.ftc.gov/
MoneyMatters.\44\
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\42\ The brochure is available at www.ftc.gov/bcp/edu/pubs/
consumer/credit/cre02.shtm. Since its release in March 2010, the agency
has distributed 20,400 print copies, and consumers have accessed it on
the Internet over 13,700 times.
\43\ Fiscal Fitness: Choosing a Credit Counselor (2005), available
at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm; For People on
Debt Management Plans: A Must-Do List (2005), available at www.ftc.gov/
bcp/edu/pubs/consumer/credit/cre38.shtm; Knee Deep in Debt (2005),
available at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm. In
the last 2 years, the FTC has distributed more than 271,000 print
versions of these three publications combined, and consumers have
accessed them online more than one million times.
\44\ Over the last 6 months, the Money Matters website has received
approximately 60,000 hits per month.
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In addition, the Commission has conducted numerous educational
campaigns designed to help consumers manage their financial resources,
avoid deceptive and unfair practices, and become aware of emerging
scams. For example, the FTC has undertaken a major consumer education
initiative related to mortgage loan modification and foreclosure rescue
scams, including the release of a suite of mortgage-related resources
for homeowners.\45\ Moreover, the agency has focused outreach efforts
on a number of other issues faced by people in economic distress,
including stimulus scams, rental scams, church ``opportunity'' scams,
offers for bogus auto warranties, and solicitations for phony charities
that exploit the public's concern for the welfare of our troops and
public safety personnel in a time of crisis.
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\45\ NeighborWorks America, the Homeowners Preservation Foundation
(a nonprofit member of the HOPE NOW Alliance of mortgage industry
members and U.S. Department of Housing and Urban Development-certified
counseling agencies), and other groups distribute FTC materials
directly to homeowners.
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The Commission encourages wide circulation of all of its
educational resources and makes bulk orders available free of charge,
including shipping. We provide FTC materials to state attorneys general
and other local law enforcement entities, consumer groups, and
nonprofit organizations, who in turn distribute them directly to
consumers. In addition, media outlets--online, print, and broadcast--
routinely cite our materials and point to our guidance when covering
debt-related news stories.
VI. Conclusion
The FTC appreciates the opportunity to describe its work to protect
consumers from deceptive and abusive conduct in the marketing of debt
relief services. Stopping the marketers of debt relief services who
prey on consumers facing financial hardship is among the FTC's highest
priorities, and we will continue our aggressive law enforcement and
educational programs in this area.
Appendix A
FTC Law Enforcement Actions Against Debt Relief Companies
1. FTC v. MCS Programs, LLC, No. 09-CV-5380 (W.D. Wash., final
order July 19, 2010) (debt negotiation), available at www.ftc.gov/os/
caselist/0823216/index.shtm
2. FTC v. Dominant Leads, LLC, No. 1:10-cv-00997 (D.D.C.,
preliminary injunction issued July 8, 2010) (debt settlement and
mortgage assistance relief services), available at www.ftc.gov/os/
caselist/1023152/index.shtm
3. FTC v. Asia Pac. Telecom, Inc., No. 10-C-3168 (N.D. Ill.,
preliminary injunction issued June 17, 2010) (debt negotiation),
available at www.ftc.gov/os/caselist/1023060/index.shtm
4. FTC v. Advanced Mgmt. Servs. NW, LLC, No. 10-148-LRS (E.D. Wash.
filed May 10, 2010) (debt negotiation), available at www.ftc.gov/os/
caselist/0923187/index.shtm
5. FTC v. Group One Networks, Inc., No. 09-CV-00352 (M.D. Fla.,
final order March 19, 2010) (debt negotiation), available at
www.ftc.gov/os/caselist/0723230/index.shtm
6. FTC v. Credit Restoration Brokers, LLC, No. 2:10-cv-0030-CEH-SPC
(M.D. Fla., final order Mar. 11, 2010) (debt settlement and credit
repair), available at www.ftc.gov/os/caselist/0823001/index.shtm
7. FTC v. JPM Accelerated Servs., Inc., No. 09-CV-2021 (M.D. Fla.,
preliminary injunction issued Dec. 31, 2009) (debt negotiation),
available at www.ftc.gov/os/caselist/0923190/index.shtm
8. FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill.,
preliminary injunction issued Dec. 17, 2009) (debt negotiation),
available at www.ftc.gov/os/caselist/0923183/index.shtm
9. FTC v. Econ. Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga.,
preliminary injunction issued Dec. 14, 2009) (debt negotiation),
available at www.ftc.gov/os/caselist/0923118/index.shtm
10. FTC v. Select Pers. Mgmt., Inc., No. 07-CV-0529 (N.D. Ill.,
final order May 15, 2009) (debt negotiation), available at www.ftc.gov/
os/caselist/0623215/0623215.shtm
11. FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal., final
order Oct. 2, 2008) (debt settlement), available at www.ftc.gov/os/
caselist/0523091/0523091.shtm
12. FTC v. Edge Solutions, Inc., No. CV 07-4087-JG-AKT (E.D.N.Y.,
final order Aug. 29, 2008) (debt settlement), available at www.ftc.gov/
os/caselist/0723025/index.shtm
13. FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo., final order
Apr. 11, 2008) (debt settlement), available at www.ftc.gov/os/caselist/
0623140/index.shtm
14. FTC v. Debt Solutions, Inc., No. CV06-0298 (W.D. Wash., final
order June 18, 2007) (debt negotiation), available at www.ftc.gov/os/
caselist/0523002/0523
002.shtm
15. FTC v. Leshin, No. 0:06-CV-61851-WJZ (S.D. Fla., final order
May 5, 2007) (credit counseling), available at www.ftc.gov/os/caselist/
0523146/index.shtm
16. FTC v. Integrated Credit Solutions, Inc., No. 8:06-CV-00806-
SCB-TGW (M.D. Fla., final order Oct. 16, 2006) (credit counseling),
available at www.ftc.gov/os/caselist/0323244/0323244.shtm
17. United States v. Credit Found. of Am., No. CV06-3654 ABC (VBKx)
(C.D. Cal., final order June 16, 2006) (credit counseling), available
at www.ftc.gov/os/caselist/0423044/0423044.shtm
18. FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. Md., final order
May 17, 2006) (credit counseling), available at www.ftc.gov/os/
caselist/0223171/0223171
ameridebt.shtm
19. FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 (C.D. Cal.,
final order July 13, 2005) (debt settlement), available at www.ftc.gov/
os/caselist/0323006/0323006.shtm
20. FTC v. Nat'l Consumer Council, Inc., No. ACV04-0474CJC (JWJX)
(C.D. Cal., final order Apr. 1, 2005) (credit counseling and debt
settlement), available at www.ftc.gov/os/caselist/0323185/0323185.shtm
21. FTC v. Debt Mgmt. Found. Servs., Inc., No. 8:04-CV-1674-T-17MSS
(M.D. Fla., final order Mar. 30, 2005) (credit counseling), available
at www.ftc.gov/os/caselist/0423029/0423029.shtm
22. FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4) (D.
Mass., final order Mar. 28, 2005) (debt settlement), available at
www.ftc.gov/os/caselist/0412326/0412326.shtm
23. FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC(Ex) (C.D.
Cal., final order Dec. 12, 2004) (debt settlement), available at
www.ftc.gov/os/caselist/jubilee/jubilee.shtm
Senator McCaskill. Thank you very much.
Thank you to all of the witnesses.
Let's talk a little bit about some of the details on this.
When you were finally sued, Ms. Robertson, by Capital One, did
Financial Freedom of America offer you any assistance,
whatsoever, at the point in time that you received the lawsuit?
Ms. Robertson. They said that, like, you know, Capital One
would win the lawsuit and say I had to pay them $100 a month,
well, they'd deduct that off their payment. Well, that's, how
do I want to say--contradicting what I was trying to do.
Senator McCaskill. Right.
Ms. Robertson. And they just said, ``Well, we can't help
that they sued, we don't have any control over the credit card
companies.'' And I was--I sent all of the paperwork, they knew
what was going on. And I just felt, this is where I should have
done my due diligence, and checked this company out before I
ever went with them.
Senator McCaskill. Was there anything at all that the
company accomplished on your behalf?
Ms. Robertson. Nothing, nothing.
Senator McCaskill. And it cost you--even with you
complaining and being on the front page of The New York Times,
it still cost you a net--how much are you out-of-pocket for
what happened to you, total?
Ms. Robertson. I paid them almost $4,000 and I believe I've
gotten around $2,200 back from them.
Senator McCaskill. OK.
Ms. Robertson. And I wouldn't have got the last back if
they didn't know I was being interviewed by The New York Times.
Senator McCaskill. Let's talk about how big a problem this
is. I know, Ms. Hrdy, that the FTC has brought numerous
separate actions against debt settlement companies over the
past 2 years, and it's my understanding, Mr. Angle, that you
have a current lawsuit that you all are actually pursuing.
First, to you, Mr. Angle, do you have more than one
lawsuit, currently, against debt settlement companies in
Missouri, and if not, are there others that are pending? Have
you seen an increase in the complaints? How big a problem is
this?
Mr. Angle. It's a big problem. The landscape is changing
with the enactment of the FTC rule and with your efforts. So,
hopefully, the landscape will be changing in the other
direction.
We have one case pending against Credit Solutions of
America----
Senator McCaskill. There is not going to be a movie.
[Laughter.]
Mr. Angle. I didn't bring a Power Point presentation.
We have one case pending in St. Louis City Court against
Credit Solutions of America. We have, probably, a dozen more
investigative files that have been elevated to the enforcement
level because of the groundswell of complaints. We've seen a
doubling of complaints each year regarding consumers who were
taken in and it's natural that they're taken in, because these
claims are hitting them, as you said, when they're most
vulnerable; they're looking for a way to honestly reduce their
debts. And we see, probably, a minor percentage of the
consumers in Missouri who are actually impacted by this because
if it--and I have no reason to believe it doesn't--if it
correlates with other consumer complaint activity, we only get
a small percentage of folks to actually complain to our office.
Senator McCaskill. And so, one of the things we should talk
about in this hearing today is making sure that consumers know
that if they have signed up with a debt settlement company,
they need to call the Attorney General's Office.
Mr. Angle. Yes, ma'am.
Senator McCaskill. The more people that call the Attorney
General's Office, and there's a hotline number that is
available at the Attorney General's Office for consumer
complaints and we should certainly encourage consumers to do
that. Because I think a lot of people are embarrassed, and
don't know that there's strength in numbers--the more we know
about, the more we can take action to try to help them.
What about from your perspective throughout the whole
country? Are there any regions of the country that have fallen
more victim to this than others? And how big is--I know we were
up to 2,000 companies, now. How big a problem is it?
Ms. Hrdy. Based on the advertising, the pervasiveness of
the advertising and the consumer complaints that we get, and
that we get from the Better Business Bureaus, I think that this
is a growth industry. We've just seen a real explosion in the
advertising and increasing complaints as have the Attorney
Generals.
And, in terms of whether it's more local or national--
generally speaking, these are nationwide telemarketers that are
saturating, I think, the airwaves across the country with ads,
and getting consumers to sign up across the country.
In the mortgage foreclosure relief area, we've seen
consumers principally in California, Florida, Arizona, Nevada--
where we've seen the very worst of the market crash in the
mortgage market really hit those consumers. So, I would project
that where the foreclosure crisis is really hitting hardest is
also where consumers are also being targeted for these credit
card relief services.
Senator McCaskill. Let's talk about the claims that they
make. I know that there's a principal and consumer law called
substantiation. That is the notion that if you're, you know,
it's like, ``Buy this product, it will make you rich, famous,
and thin,'' those kind of outlandish claims that are made,
there are actually laws against that--making claims that cannot
be substantiated.
The debt settlement industry often makes representations
about their success. Tell us what the reality is of those
claims that they're making, Ms. Hrdy, and what can be done to
shut them down in terms of the false claims that they're using
to trick people, like Ms. Robertson, into giving them their
money?
Ms. Hrdy. Yes, Senator. I think we all are very troubled by
these, just, unqualified blanket claims, ``We'll reduce your
debt by 40 to 60 percent, or more.'' And, they're not
qualifying them in the broadcast ads, and so they're leaving it
all to the telemarketers to explain, ``What does that mean?'' A
reasonable consumer is going to think, ``OK, if I owe $10,000
now, and they're saying they're going to reduce it by 50
percent, I'm only going to have to pay $5,000 when it's all
over.'' But we know from stories like Ms. Robertson's and other
consumers that we've interviewed, that they're not counting the
fees and penalties that the credit card companies will charge
you as the program goes on, and especially if you're not paying
on the debt, and the fees that the debt settlement company will
charge you. So, it's not a 50 percent reduction; it's often far
less.
And the debt settlement companies will often say that
they're not taking that reduction based on the amount of debt
you owed when you signed up, they're waiting until that debt
balloons and saying, ``Oh, no, but if you could see, the 50
percent reduction is after, you know, you've paid all of
these--you have all of these fees and charges,'' and the debt
has actually increased. So again, that's a smaller percentage.
Senator McCaskill. Well, and isn't it true that oftentimes
these companies are not counting the people who dropped out?
Ms. Hrdy. Oh, yes. And that's exactly right, Senator. So,
when a consumer hears a claim, ``We will reduce your debts by
50 percent,'' the law says, most consumers have to get that
result. The average consumer has to get that result in order
for that claim to be true and substantiated. And so when, as
you cited, the industry data itself says that only a third of
consumers get results based on that one data sample, you can't
say--make that blanket claim. That's a false claim.
Senator McCaskill. Up-front fees. I think that in the
hearing in April some of the industry representatives said that
banning up-front fees would decimate the industry, and I said,
``That--well, that's a good thing. Nothing wrong with that.''
The ban is very important and does the industry model work? Can
these companies even be profitable if we are successful in
doing away with the up- front fees?
Ms. Hrdy. Well, it's interesting, Senator, during our
rulemaking proceeding, we did hear from a small--very small
minority--but there were, there are for-profit debt settlement
companies who say they are operating under what would be this
advance-fee ban model. Whether they can make it----
Senator McCaskill. There are companies out there who are
not charging up-front fees?
Ms. Hrdy. Yes, a handful. I mean, not many.
Senator McCaskill. A handful out of 2,000?
Ms. Hrdy. Exactly. That have come forward, and told us that
they are trying to do this model. I mean, they have to
capitalize, like any other business, in order to stay in
business. But, that's what companies have to do.
The problem is, they're marketing these services like, you
know, ``Just go to your grocer's freezers and pull out your
debt settlement.'' They're not engaging in what, we think, is
the stringent, suitability requirement before they sign
consumers up. Because for most--for many consumers, this is
probably not possible. That's why they have these overwhelming
dropout rates.
So, if they want to try to screen consumers and enroll
consumers who, for whatever reason, can save for settlement--
and save for fees, because, you know, if they do get a
settlement then they should be able to get a fee--then there
should be some companies who should be able to follow that
model.
But, if the whole model is built on just on-boarding every
consumer and just taking the fees up front, regardless of what
happens afterwards, you know, we don't see that as a model that
should succeed.
Senator McCaskill. Hasn't Missouri, Mr. Angle, already
banned up-front fees by companies who assist with mortgage
foreclosure?
Mr. Angle. Yes, that's true and there is also a statute on
Missouri's books that deals with debt adjusters. And it, in
some ways, is a permissive statute with regard to up-front
fees, but as my colleague, Mr. Lehman, noted in the hearing in
April, Missouri, like many States that have such statutes, they
carve out the most prominent debt settler model, and basically
the Missouri statute--which is in Chapter 425--says that you're
not a debt adjuster unless you directly receive the money from
the consumer.
So, we have an up-front ban that could be looked to in the
mortgage modification industry, but we also have this other
statute that's sort of a relic of times past in terms of what
the modern debt settlement model is.
Senator McCaskill. I see.
Mr. Angle. Which is part of why I think it's important to
look at the other actors who enable the debt settlement
companies.
Senator McCaskill. Yes. And we're going to get to the
third-parties in a minute, because I'm interested in that.
This notion that they're telling consumers to stop paying
their bills. Now, the industry group, the association which is
called The Association of Settlement Companies, TASC, their
member companies supposedly are told they cannot direct
potential or current clients to quit paying their bills.
Obviously, there's a good reason you shouldn't encourage people
to quit paying their bills. But, according to the testimony we
heard--and I need both of you to comment on this--that's just
not happening. That, in fact, I mean, Ms. Robertson, you were
told to quit paying your bills, correct?
Ms. Robertson. Yes, ma'am.
Senator McCaskill. That was the advice that you were given
by the company you thought you had hired, was the best thing to
do was to quit paying them and start paying Financial Freedom
of America?
Ms. Robertson. Well, I couldn't pay both.
Senator McCaskill. Right.
Ms. Robertson. So, you know, I just thought that this was
the way that I could get out of debt.
Senator McCaskill. And you assumed they were doing
something----
Ms. Robertson. Yes, I did.
Senator McCaskill.--with your creditors, and your creditors
knew that you were in the process of working things out and
that somehow they were going to hold in abeyance any efforts to
collect the money that you owed to them.
Ms. Robertson. Yes, but now listening to the other
witnesses talk, with the fees going up, with the credit card
and the late charges and all of that, how can they guarantee
that your debt will be paid off in 3 years, because the
estimations they made are not going to be the same?
Senator McCaskill. Right.
Ms. Robertson. The credit cards are going to be more.
Senator McCaskill. Right.
Ms. Robertson. So----
Senator McCaskill. It's like--it's like trying to get out
of a hole and you keep digging deeper.
Ms. Robertson. So, after 3 years, I can just hear them
telling me, ``Oh, we need a couple of more thousand dollars to
settle this.''
Senator McCaskill. Right, right.
Third-party processors--I'm trying to understand exactly
how this works. The third-party processors are the people, is
the institution that holds, ``holds'' the customer's money.
Now, are these financially--are these financial institutions
insured? Are these chartered financial institutions? Are these
entities that are made up by the debt settlement companies for
the purposes of holding, ``holding'' this money?
Ms. Hrdy. The major player in this space is a company
called Global Client Solutions, and they commented during our
rulemaking. We understand about 80 percent of debt settlement
companies use Global Client Solutions. Global is not a bank. It
has an account--it's called a Special Purpose Account--at an
FDIC-insured institution--probably more than one. And what
Global does is it's the account--it holds the Special Purpose
Account, and then has all of these sub-accounts where it holds
money for each consumer enrolled in a debt settlement company.
So, the good news is, that consumers that are putting their
money into this account with Global Client--the account is
FDIC-insured. So that--consumers' money is protected.
The less good news, and the concerns that we've had, is
that Global Client Solutions is a third-party provider to the
debt settlement company. And so, when the debt settlement
company wants to get paid, it turns to Global and says, ``See
my contract with the consumer, I should get paid, now. And so
the consumer, again, given our concerns about the prevalence of
the deceptive advertising about the fees, they don't know that
Global Client is sending money to the debt settlement company,
because they don't even know that that money isn't being saved
for settlement, it's being taken by this up-front fee.
So, some of the benefits of using the Telemarketing Sales
Rule is that it has assisting and facilitating liability. So,
these third-party providers, such as Global, if they are found
to have knowledge of the violations that a debt settlement
company is engaging in, they can be held liable under the
Telemarketing Sales Rule. And, we intend to visit with Global,
and any of the other major third-party providers and give them
a copy of our compliance guide, and make sure that they
understand what their responsibilities are under the law.
Senator McCaskill. Well, what is the purpose of Global?
Ms. Hrdy. The purpose of Global is----
Senator McCaskill. I mean, because, why don't these
companies just open----
Ms. Hrdy.--bank accounts----
Senator McCaskill.--open bank accounts directly in an FDIC-
insured financial institution? Why is this layer in here?
Ms. Hrdy. Well, we--there are some, we think, who do
directly open those FDIC-insured bank accounts. But, as we've
seen in our cases, part of the telemarketing sales pitch is,
``Don't worry, we're not going to hold your money,'' we, the
debt settlement company. ``We have this third-party, it's an
arms' length transaction, your money's in an FDIC-insured bank
account,'' true, ``you can look at your account online,'' true,
``don't worry, it's all taken care of. We're not taking your
money.'' So, it fits within this whole idea that, ``Don't
worry, consumer, this is a good way to go, and we've got this
third-party who will take care of your money, and it will sit
there and grow, and so it won't be in your account, it won't be
in our account, it'll be somewhere safe, saving for
settlement.''
Senator McCaskill. But, I guess, the advantage to the debt
settlement companies is it's easier for them to pull the money
out?
Ms. Hrdy. Yes.
Senator McCaskill. Because there are not as many hoops to
jump through as there would be if they put the money directly
in a bank.
Ms. Hrdy. Well, obviously, if the debt settlement company
is the account holder, that's the easiest way to take the
money, but it sort of raises a level of suspicion with the
consumer if they're just giving all of this money into the debt
settlement account.
Senator McCaskill. Right.
Ms. Hrdy. So, in our--consumers that we've interviewed have
said they felt very comforted by this representation that,
''Oh, this Global Client Solutions, they're going to hold my
money, and it's going to be safe.``
Senator McCaskill. OK, here's the $64-dollar question--how
much is Global Client Solutions making on this?
Ms. Hrdy. That is a very good question and I don't think
they told us what their revenues were in their public comment.
I can check it, and let you know. But, they represent that they
are holding millions and millions of dollars in these Special
Purpose Accounts.
Senator McCaskill. And so, do we know what the debt
settlement companies are paying--there has never been any
information that you all are aware of, of what the debt
settlement companies are paying Global Client Solutions for
this?
Ms. Hrdy. I don't think we know how much the debt
settlement company is paying Global. We do know--and we've seen
it in the consumer contracts--that the consumers are paying to
use Global Client Solutions. It can be anywhere between $10 or
$20 a month. Again, if this is a 36-month program, that monthly
fee will add up. So, the consumers are paying to use Global
Client Solutions.
Senator McCaskill. Well, does Global Client Solutions do
anything else?
Ms. Hrdy. No. That's it. They have a proprietary----
Senator McCaskill. This is it?
Ms. Hrdy. This is it. As far as we know.
Senator McCaskill. Do you know who owns it?
Ms. Hrdy. Yes. And we've interviewed them as part of the
rulemaking process----
Senator McCaskill. Are they a debt settlement business?
Ms. Hrdy. They were.
Senator McCaskill. Ah.
Ms. Hrdy. And then they realized that----
Senator McCaskill. Somehow that doesn't surprise me.
Ms. Hrdy.--there was a business model--yes. And they
developed this proprietary software that is, basically houses
these Special Purpose Accounts so that it splices out all of
these consumer accounts. And as part of our rulemaking, we did
reach out to the FDIC, because they have examined both the
FDIC-insured banks that are holding this money, and they've
been onsite at Global, to ensure that--and again, the good news
is that, consumers who are putting their money into these FDIC-
insured accounts, the money is insured.
Senator McCaskill. The problem is, it's not insured against
the debt settlement company taking it.
Ms. Hrdy. Exactly. Which is where the TSR comes in.
Senator McCaskill. They're insured against the problem that
if the bank had some kind of structural issue in terms of
solvency, but they're not protected, because the debt
settlement companies can get access to as much of it----
Ms. Hrdy. Right.
Senator McCaskill.--as they want, essentially, at any time.
Ms. Hrdy. Right.
Senator McCaskill. OK. So, we probably need to look at the
legislation as it's currently drafted and see if we've gone far
enough to get at the aiding and assisting to get a company like
Global Client that clearly has been created for the purpose of
assisting in the marketing of debt settlement product----
Mr. Angle. And the facilitation of taking the consumer's
money, that--the consumer will often see an automatic--a line
item on their primary bank account statement, that an automatic
withdrawal has taken place, and it says Global Client Solutions
on it. That, to us, is also another level of deception that the
consumer has to punch through, it's just another actor in this
scheme.
Senator McCaskill. I think we also ought to reach out as a
committee and ask some specific questions of Global Client, and
get their responses for the record. Because I think we need to
at least find out whether they're willing to talk to us.
You know, one of the interesting things is, I asked this--
getting information from these companies, it is ridiculously
difficult to get these companies to tell us things. In fact,
the representative of the industry at the April hearing
actually said, on the record, that they would provide to me a
list of their members. And they were supposed to have done that
by August 1. We have not received that. Have you all had any
more success than the Commerce Committee has had in actually
getting important information in terms of profitability,
ownership, you know, how many clients they actually have--do
you all feel that you have, either at the State level or at the
Federal level, as people who are trying to enforce the law,
that you've been able to get information that you need from
these companies?
Mr. Angle. No. We'll get it, though. Thus far, in our
investigative and enforcement activities, the first line of
defense is to delay. But we'll get it. We won't just stand on
non-responsive or obstructive answers. So, the process is
sometimes slow of enforcing our investigatory subpoenas, or
going through the discovery process, and seeking a motion to
compel information that we've asked for. And oftentimes,
industry will hide behind this model and say, ``Well, we don't
hold any money, so we can't tell you how much we've taken from
X or Y consumer,'' well, that's baloney. So, we have to punch
through that.
Senator McCaskill. Isn't the information--don't they market
that it's available online?
Mr. Angle. Yes. We have to--it's a circle of deception that
you just have to keep punching through as an enforcement
officer.
Senator McCaskill. Right.
Ms. Hrdy?
Ms. Hrdy. We've had the same enforcement experience as Mr.
Angle, in terms of getting information in specific
investigations and litigation, but we will pursue and get it.
And there are--in terms of the rulemaking, it was a real
challenge to get them to provide us the information that we
needed to asses the business model. And our requests go back to
September of 2008, when the Commission held a public hearing,
and we put out questions to the industry, ''Tell us, what is
your model like, what are your success rates? How do you
substantiate your advertising claims?`` And we got nothing in
response; very little. And--nothing meaningful. And it wasn't
until we issued the Notice of Proposed Rulemaking that we
started to get a little something more. But, the best of their
data shows that two-thirds of these consumers who enroll, drop
out.
Senator McCaskill. The FTC rule, I know, you've used your
authority under the telemarketing statutes. Which is terrific,
and I think it's great that you all did the rule. As I said
before, many things in the rule mirror the legislation. We go a
little farther, in terms of capping the fees. The other thing
that the legislation does that you can't do--you can only get
at the telemarketing. And, I'm assuming that since this
marketing model has been so successful, and since we've seen
this as such a growth industry, preying on vulnerable people,
I'm assuming that some of this is being marketed directly over
the Internet?
Ms. Hrdy. Yes, I think there is some of that. I mean, we're
going to be watching that very carefully because the channel is
really critical. And I think we'll--I would project that the
Commission will be very vigilant and very aggressive in
pursuing cases where it's clear that they're trying to get
around the telemarketing aspect of it.
Senator McCaskill. Marketing rule.
Ms. Hrdy. We always have Section 5, if they are completely
not using phones. And if they----
Senator McCaskill. Why don't you explain what Section 5 is?
Ms. Hrdy. Thank you. Section 5 of the FTC Act prohibits
unfair, deceptive acts or practices. Very broad grant of
authority--it's channel-neutral. No matter how you market, if
you make a deceptive claim or engage in an unfair practice,
you've violated Section 5. Under the TSR, telemarketing does
have to be involved. So, if they move away from that model,
that will be a concern. And, although we do have Section 5,
that's definitely an area where your legislation would fill in.
Senator McCaskill. The GAO investigation, I want to put in
the record some of the specifics of the investigation that was
done. The GAO investigators called 20 well-known debt
settlement companies and posed as consumers. The GAO did this
so we could learn what the industry was actually doing. It is
these undercover investigations where you really expose what is
happening to people like Ms. Robertson.
Here's what happened when these auditors posed as
consumers. Of the 20 companies GAO called, 17 of them collected
up-front fees before ever making any attempt to settle any
debt. Nearly all of the companies advised the consumers to stop
paying their credit card bills, including their accounts that
were current. So, they not only were telling them to quit
paying the ones they're behind on, we're going to instruct you
to get behind on every account. In other words, give us all the
money you have for as long as we can get it from you, and then
we'll leave you to deal with the wreckage left behind. That's,
essentially, the model that GAO found.
The GAO also found that they made fraudulent and deceptive
claims about their success rates, and some made claims, as you
indicated earlier that they were linked to government programs,
like we're, ``This is a government program, we can help bail
you out.'' And, do you think that with the findings that GAO
found, is that actually in sync with what FTC has found, and
with what you have seen on the State level?
Ms. Hrdy. Yes.
Senator McCaskill. And, Mr. Angle?
Mr. Angle. It certainly is. Our consumer complaints which
are our primary vehicle for learning what consumers are told by
these entities are very consistent along that line. ``Quit
paying, quit communicating,'' that's a very important piece of
it, too. Because the creditor--this is an industry that abuses
debtors as well as creditors. That's a pretty unique
combination. And, when you quit paying, there are consequences,
and when you quit communicating, those consequences are
enhanced. And the deceptive things that are told to consumers,
as reflected in our complaints, include the litany of what was
listed in the GAO investigation, too. ``We'll improve your
credit score,'' well, that's not true. ``We'll get you out of
debt in 3 years,'' that's not true. ``All of the major
creditors work with us.'' That's a key piece of material
information that is omitted from their advertisements and
communications frequently, is there are a number of major
creditors who just won't deal with these people. And if they
were told that up front, consumers would say, ``Well, wait a
minute, all of my credit card accounts are with creditors who
won't deal with you, so I'm not going to sign up with you.''
The layers of deception are very consistent, the model itself,
regardless of the debt settlement entity is generally the same,
and that's reflected in our complaint information.
Senator McCaskill. You know, in the Commerce Committee we
have--and I know in your every day work--both of your work,
your life's work now is looking after consumers. And there are
so many places that consumers are taken advantage of--so many
places where they have deceptive marketing techniques that are
used on them. But there really is a special place in hell for
people who prey on the most vulnerable. Who have found a
business model that takes advantage of people when they are at
their most desperate state, in terms of trying to pay their
bills, keep food on the table, and provide for their families.
I know that the industry thinks that they're going to be able
to somehow wiggle through the efforts that are ongoing to clamp
down on these practices. This hearing just reaffirms, in my
mind, that we've got to be tenacious about this. And we should
not be afraid of their claims that we are going to ``put them
out of business.'' Well, that would probably be a good day's
work. If we could put them out of business. Because there are
ways that you can help people who are in financial trouble.
There are credit counseling agencies that work, in good faith,
on a model that is not front-loaded with the consumers' money.
I can imagine that the credit card companies can't stand these
guys, because all of the money they're collecting is, in fact,
the very money that could be used to begin to pay down on
significant debt that so many Americans now are facing.
I want to thank all of you. Is there anything else that you
want to add to the record that I have not asked today, or
anything else that we need to add to the record before we
conclude the hearing?
Ms. Robertson. No, I don't have anything.
Senator McCaskill. Anything else that needs to be added?
Mr. Angle. Just thank you very much, Senator, for your
attention to this issue. It is a very powerful moment when
State, and Federal agencies and legislative bodies can get
together. Thank you.
Senator McCaskill. It is a special moment when we can have
a Federal hearing at a local level with the Federal Government
and the State Government both represented, with everyone on the
same page, with everyone trying to accomplish the same goal.
And I have a feeling, if we stay focused on this--because these
are bad guys, and we need to clean this up--I think that we're
going to be able to get it done.
We will keep the record of this hearing open. We will reach
out to the third-party entities that are a player in this that,
clearly, I don't think, maybe have gotten the scrutiny they
deserve. I thank you for that suggestion, Mr. Angle, and we'll
look at the legislation to see if we need to add any provisions
in the legislation to deal with these third-party entities.
And, I'm optimistic about the passage of this legislation.
Probably not during the silly season--we are now in the silly
season where we can't even agree on motherhood and apple pie in
Washington at this point, but once we get past the elections,
we'll get back down to work, hopefully, and we'll quit playing
political games that seem to be ongoing right now. And I think
that there's a chance that we can add this legislation to a
number of different legislative vehicles that will be moving
through the Senate.
So, thank you all for being here today, and the hearing is
concluded.
[Whereupon, at 11 a.m., the hearing was adjourned.]