Federal Trade Commission Chairman Deborah Platt Majoras today presented testimony before the U.S. House Financial Services Committee on the FTC’s efforts to combat unfair, deceptive, and other illegal practices in the consumer financial services industry.
“Protecting consumers of financial services from harm is an important and growing priority for the Commission,” the testimony stated. “The FTC will continue to target deceptive and unfair practices by actors in the financial marketplace.”
The agency enforces Section 5 of the FTC Act, which prohibits unfair or deceptive business practices, as well as a number of special statutes related to financial acts and practices. Banks, savings and loan institutions, and federal credit unions are exempt from the FTC’s jurisdiction, but the Commission has jurisdiction over nonbank financial companies, including nonbank mortgage companies, mortgage brokers, finance companies, and others.
The testimony highlighted FTC enforcement actions that have targeted deception and illegal practices in mortgage lending and servicing, as well as nonmortgage lending and leasing, gift card sales, advance-fee credit scams, debt collection practices, credit and debt counseling services, and credit reporting.
For example, the testimony emphasized that the agency has targeted deceptive or unfair practices in all stages of mortgage lending – from advertising and marketing through loan servicing. The Commission has brought 21 such actions in the past decade, focused particularly on the subprime market. In these actions, the Commission has returned more than $320 million to consumers.
With mortgage brokers now originating up to 70 percent of mortgage loans, the testimony noted, the FTC has brought several recent enforcement actions against mortgage brokers that deceived consumers about key loan terms, such as the existence of a prepayment penalty or a large balloon payment due at the end of the loan. Last year, the FTC also sued a broker for allegedly misrepresenting key loan terms to Hispanic consumers, speaking almost entirely in Spanish about loan terms but providing loan documents in English with less favorable terms.
The Commission also has challenged allegedly deceptive and unfair practices in the servicing of mortgage loans, the testimony continued. For example, in November 2003, the FTC and the Department of Housing and Urban Development (HUD) announced a settlement with Fairbanks Capital Corp. (now called Select Portfolio Servicing, Inc.) and its parent company. The Commission alleged that Fairbanks failed to post consumers’ payments upon receipt, charged unauthorized fees, used dishonest or abusive tactics to collect debts, and knowingly reported inaccurate consumer payment information to credit bureaus. The defendants paid more than $40 million in consumer redress and agreed to change their business practices.
Policy Research and Development
In addition to law enforcement, the testimony noted, the Commission engages in broad-based research and policy development concerning financial services. Last year, for example, following an FTC public workshop concerning nontraditional mortgage products, the Commission filed comments with the Federal Reserve Board emphasizing that consumers must obtain all of the relevant information needed to make an informed choice at each stage of the mortgage process, especially for nontraditional mortgage products.
The testimony cited today’s release of a study by the FTC’s Bureau of Economics that confirms the need to improve mortgage disclosures to help consumers understand the costs and terms of their mortgages, noting that the Commission would be pleased to work with the Federal Reserve Board and HUD as they work to improve mortgage disclosures.
According to the testimony, the study examines how consumers search for mortgages, how well they understand mortgage cost disclosures and the terms of their own recently obtained loans, and whether better disclosures could improve their understanding of mortgage costs, shopping for mortgage loans, and ability to avoid deceptive lending practices. The study found that current federally required disclosures fail to convey key mortgage costs to many consumers, and that better disclosures can significantly improve that deficiency; both prime and subprime borrowers failed to understand key loan terms when viewing the current disclosures, and both benefitted from improved disclosures; and better disclosures provided the greatest benefit for more complex loans, for which both prime and subprime borrowers had the most difficulty understanding loan terms.
“The study also suggests that, in actual market transactions, subprime borrowers may face even greater difficulties understanding their loan terms than found in the study, and may benefit the most from improved disclosures,” the testimony stated.
The FTC will continue to develop policy responses on financial services issues, and will hold a public workshop in October to examine changes in the debt collection industry and their impact on consumers and competition, according to the testimony.
The testimony also related the agency’s cooperative consumer protection efforts with federal banking agencies, the Department of Justice, HUD, state attorneys general, and state banking departments, noting that representatives of federal and state agencies are currently discussing how to improve complaint sharing among law enforcers.
The Commission vote authorizing the presentation of the testimony and its inclusion in
the formal record was 5-0. A copy of the testimony can be found on the FTC’s Web site and as a link to this press release.
Copies of the testimony are available from the FTC’s Web site at http://www.ftc.gov and from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint in English or Spanish or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov/ftc/complaint.shtm. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to more than 1,600 civil and criminal law enforcement agencies in the U.S. and abroad.