chapter 11 financial services and consumer products€¦ · home mortgage lending.....11-18 reverse...

TC-1 FINANCIAL SERVICES AND CONSUMER PRODUCTS CHAPTER 11 AARP POLICY BOOK 2009–2010

Introduction ......................................................................................................................11-1

AARP Principles .............................................................................................................11-3

Financial Services Federal and State Roles ............................................................................... 11-4 Regulation, Monitoring, and Enforcement................................................ 11-5 Banking and Credit ...................................................................................... 11-7 Community Reinvestment Act ...............................................................11-11 Banking and Credit Cards ......................................................................11-12 Consumer Credit Protection ...................................................................11-14 Credit Counseling ..................................................................................11-17 Home Mortgage Lending........................................................................11-18 Reverse Mortgages.....................................................................................11-24 Investment and Securities Industry .............................................................11-27 Maintaining Public Trust in Investment Markets .....................................11-28 Investment Product Disclosure...............................................................11-31 Investment Advice.................................................................................11-32 Investment Fraud and Abuse .................................................................11-33 Insurance ...................................................................................................11-34 Insurance Industry Oversight .................................................................11-34 Unfair Acts and Practices ......................................................................11-38 Terms and Conditions............................................................................11-40 Financial Literacy........................................................................................11-42 Bankruptcy.................................................................................................11-44 Mandatory Binding Arbitration and Alternative Dispute Resolution...............11-45

Unfair and Deceptive Trade Practices ..............................................................11-46

Information Privacy ....................................................................................................11-47

Consumer Products Occupational Regulation and Practices........................................................11-50 Telemarketing........................................................................................11-51 Internet Commerce ................................................................................11-53 Mail Solicitations ...................................................................................11-54 Home Improvement Contractors ............................................................11-54 Deathcare Industry ................................................................................11-55 Hearing Aids..........................................................................................11-58 Medical Devices ....................................................................................11-59

Product Safety in the Home ...................................................................................11-60

Chapter 11 Financial Services and Consumer Products

AARP POLICY BOOK 2009–2010 CHAPTER 11 FINANCIAL SERVICES AND CONSUMER PRODUCTS TC-2

Food Food Safety........................................................................................ 11-60 Labeling and Advertising.............................................................................11-63 Dietary Supplements ..................................................................................11-65

Air Quality in Public Buildings .............................................................................11-66

AARP POLICY BOOK 2009–2010 CHAPTER 11 FINANCIAL SERVICES AND CONSUMER PRODUCTS 11-1

INTRODUCTION

Today’s marketplace is dynamic, expanding, and global. Older consumers now account for more than half of all consumer spending and are an increasingly powerful force in the financial services marketplace, including the credit market. The aversion to debt among the “greatest generation” has given way to a much more expansive use of credit among baby boomers. Today’s growing percentage of people with mortgage debt or credit card balances and in or near bankruptcy is a concern.

Advances in computer and communications technologies such as the Internet have placed powerful tools in the hands of consumers, increasing access to goods and services around the world and opportunities to comparison shop. But consumers also face demanding challenges in negotiating the marketplace and obtaining and protecting financial security.

Less time and more decisions—More consumers, including older people, are working and have more responsibility for critical decisions affecting their current and future financial security. In addition special circumstances, such as disabilities, poverty, discrimination, living alone, and language barriers, often disproportionately affect older people and their roles as shoppers and money managers.

Increasing complexity of products and services—To navigate the marketplace successfully and manage their resources effectively, consumers need to be able to distinguish among a wide range of products, services, and providers; understand key contract terms and conditions and pricing mechanisms; and make appropriate decisions related to diversification and risk. To do this they need to have the best information and tools available. This is particularly true when income is limited. The savings that accrue from effective shopping and financial management can help consumers contend with myriad responsibilities, such as financing their children’s education, caring for older relatives, and preparing for retirement.

Analysis of spending shows large disparities among older consumers, particularly with regard to income and minority status. For example over a third of families age 50 and older and living below the poverty line try to manage their money without a checking account. This often means they rely on more expensive alternative services and lack a means for saving on a regular basis. Furthermore, access to prime credit and services for many older and minority consumers varies widely as mainstream institutions seek more affluent customers while high-cost check-cashing servicers and subprime mortgage lenders thrive in many low-income and minority communities.

There is also disturbing evidence that financial literacy levels are low. To make appropriate choices consumers must have access to and be aware of how spending, saving, and borrowing choices will affect them, in both the short and long terms. An analysis of data from the Federal Reserve Board by the AARP Public Policy Institute highlights the need to increase consumer literacy. It found that nearly four of ten money managers of all ages (38 percent) and those age 50 and older (39 percent) were “lost.” That is, they ranked low on measures of experience with financial product ownership and key money management behaviors. Almost half (48 percent) of money managers age 65 and older fell into the “lost” category.

Increasing personal financial literacy is critical. So too is industry’s role in self-regulating and adhering to standards that contribute to the efficiency and transparency of the marketplace without taking unfair advantage of consumers. Government, likewise, has an important role to play in ensuring a fair playing field for consumers in the marketplace through enactment, oversight, and enforcement of laws that combat fraud and deceptive practices and in intervening when the playing field is not level.

Today’s harried consumers also need reliable aids (financial calculators and cost-comparison tables, for example) and advice to cut through the complexity of the marketplace and facilitate decisionmaking. Too often “expert” advice is unavailable or conflicting. Legally required disclosures may not be provided at the most opportune time or are incomprehensible to many consumers. There is an urgent need to upgrade and improve these important consumer aids in line with changes in the marketplace.

11-2 FINANCIAL SERVICES AND CONSUMER PRODUCTS CHAPTER 11 AARP POLICY BOOK 2009–2010

To meet the challenges of a dynamic marketplace and ensure the economic security of older households in the future, AARP has recommended that the nation—industry, policymakers, and consumers—commit to improving the quality of consumer information in the marketplace; increasing the level of consumers’ financial literacy, particularly among baby boomers, minorities, and low-income people; and increasing consumer choice and financial services options in underserved communities.


AARP PRINCIPLES

The following principles provide a firm foundation for addressing consumer protection issues raised by the global economy and for ensuring that all consumers benefit from technological advances now and in the future.

Choice—The marketplace must be transparent and descriptive to give consumers the opportunity to make informed choices among services or goods.

Safety—Consumers should be able to purchase goods and services that are safe and carry an appropriate warning if they put the user at risk.

Fair play and practice—Contracts, advertisements, sales practices, telemarketing, warranties, mailing envelopes, and other materials or practices should not confuse, mislead, or frighten the public.

Information disclosure—The marketplace must make available to consumers complete and accurate information regarding the goods and services they purchase. Information should be communicated clearly and in plain language to help consumers understand their risks, rights, and remedies.

Redress—When consumers are wronged in a marketplace transaction, appropriate and adequate redress must be available. Clear disclosures identifying how and where aggrieved consumers can complain and seek redress must be provided. The full range of enforcement actions (e.g., administrative enforcement, individual and class action lawsuits, and criminal prosecutions) should be available and used where appropriate by government officials and individuals. Mandatory binding arbitration infringes on a consumer’s ability to seek redress and should be prohibited.

Participation—Consumers have a right to take part in the government decisionmaking process that shapes the marketplace. The exercise of this right requires the creation of consumer advocate positions within government agencies and departments, as well as the restoration of sufficient funding for public participation to ensure meaningful consumer input.

Privacy—Consumers have a right to personal privacy and should be able to reject intrusive marketing practices, communications, and technology and the unauthorized use of personal information and records.

Access—Consumers have a right to affordable access to such basic, necessary services as utilities, telephones, electronic communications, financial products and services, and transportation.


FINANCIAL SERVICES

Federal and State Roles Safeguarding consumers against fraud, deception, and unfair practices is the responsibility of federal, state, and local consumer protection agencies which need sufficient resources and authority to pursue their missions vigorously. Important to this mandate is the ability of consumers to participate in the creation of laws protecting their rights and interests and to challenge violations of these laws. Consumer participation in administrative, legislative, and judicial processes is often valuable for these purposes. And often it is at the state and local levels that consumers have the greatest impact.

States protect consumers through laws that parallel and complement federal protections, in such areas as

antitrust and unfair trade practices, and through regulations that are solely the province of states and localities, such as occupational licensing. Many of the state agencies, consumer affairs offices, and state attorneys general that enforce these laws and regulations have been particularly active in protecting consumer rights.

On many issues in the consumer products and financial services areas, there has been a move on the federal level to preempt state laws. States have long been recognized for their policy innovations, and they currently play an invaluable role in developing important advances in health and safety regulations. In many cases state initiatives ultimately act as the impetus for needed improvements in federal regulation.

FEDERAL AND STATE ROLES: Policy

Federal preemption of

state law FEDERAL

Federal legislation should be the floor, not the ceiling, of consumer protection regulation. When considering proposals that include preemption provisions in federal laws and regulations, policymakers should consider: • the extent to which the federal or state authorities have

identified and focused on the specified problem and addressed the problem satisfactorily;

• potential benefits resulting from additional federal, state, or local laws;

• the possibility of intolerably high compliance burdens resulting from both federal and state regulations;

• unique state or local needs that would be adversely affected; • the capacity of states to respond effectively to emerging issues,

unusual circumstances, or unanticipated consequences; • preserving the role of states as laboratories for policy innovation

within our federal system; and • giving state attorneys general and other state officials concurrent

authority to enforce federal statutes intended to protect consumer and investor rights.

Goals of state regulation

STATE LOCAL

State and local governments should expand and strengthen: • consumer protections through legislation, regulation, and

enforcement procedures; and • consumer service programs, including the targeting of diverse

communities, which are fundamental to ensuring that older citizens are treated fairly in the marketplace. Funding should also be allocated for consumer outreach and education programs, which are vital preventive measures in protecting consumers.


Regulation, Monitoring, and Enforcement

Facilitated by the Gramm-Leach-Bliley Financial Modernization Act, which ended legal separations among various financial institutions, including banks, securities firms, and insurance companies, the financial services industry has undergone dramatic changes in recent years. The industry is increasingly concentrated in large, international firms and the functional lines between banks, securities firms, and insurance companies are increasingly blurred. Banks now sell mutual funds, securities firms offer checking accounts, and insurance companies offer products for investment.

The integration of these services and company functions, such as marketing, has on one hand provided opportunities for new products and efficiencies for consumers. On the other hand it has challenged regulators’ ability to coordinate efforts to oversee the financial services industry effectively. For example five different federal agencies regulate banking, depending on the type of charter the institution holds. State authorities also play a role in regulating state-chartered banking institutions.

While financial services companies have been consolidating and integrating, regulation of financial services has continued largely along functional lines, with few changes in the structure, roles, or responsibilities of regulatory agencies. A 2007 Government Accountability Office report notes that the current regulatory system creates the potential for duplication, inconsistencies, and gaps in consumer protections. Some financial services groups have expressed the concern that the current regulatory structure places US firms at a disadvantage to foreign competitors.

The 2008 meltdown of US financial markets, including the subprime mortgage market, has also raised basic questions about the adequacy of financial regulation in the US on many levels—from oversight

of loan origination practices to the sale of securities backed by those mortgages to the failure to anticipate the broader negative effects on financial markets both at home and abroad.

Federal preemption of state authority to regulate financial institutions is another development that may have a negative impact on consumer protection. The Supreme Court has upheld the authority of the Office of the Comptroller of the Currency (OCC) under the National Banking Act to preempt state regulation of mortgage lending activities of a national bank’s operating subsidiary (Watters v Wachovia, N.A.). Opponents of this position had noted that the OCC rule could give state-chartered banks a way to avoid compliance with state banking laws simply by switching to a federal bank charter. Further, they argued that consumer protections could be weakened because the OCC had fewer resources to handle consumer complaints than the states and had previously brought few enforcement actions against national banks for unfair or deceptive practices.

Congressional hearings have also noted that both the OCC and the Federal Deposit Insurance Corporation lacked authority to adopt rules concerning unfair or deceptive acts or practices for the banking institutions they supervise. Since Watters, federal and state regulators have tried to address the issue by establishing a “one-stop” consumer complaint resolution mechanism and increasing their coordination of enforcement activities.

In March 2008 Secretary of the Treasury Paulson released the report “Blueprint for a Modernized Financial Regulatory Structure,” which provides an analysis of the current regulatory structure and recommendations for reform. In addition the Emergency Economic Stabilization Act of 2008 created a Financial Stability Oversight Board, which is required to complete a review of the financial regulatory system by April 30, 2009.

REGULATION, MONITORING, AND ENFORCEMENT: Policy

Regulatory structure and

standards FEDERAL

Regulatory restructuring should strengthen and enhance consumer protection. Agencies with primary responsibility for specific financial functions should have clear control over the rulemaking, examination, and enforcement actions of those functions, regardless of where they occur (for example, a consolidated bank regulator should retain authority over banking transactions, whether they are conducted in a brokerage firm or a bank). Functional regulation should protect consumers against unfair, misleading, or deceptive practices, as well as ensure safety and soundness, regardless of the type of institution with which they are conducting business.


Regulatory structure and

standards (cont’d.)

FEDERAL

A centralized complaint reporting and resolution mechanism should be established covering banking institutions, regardless of their charters. Regulators must make sure that banks engaging in other financial functions maintain the fundamental safety and soundness of traditional banking activities, clearly separating insured from uninsured activities. Depositors’ funds must be protected from inappropriate risk. Adequate supervision of any nontraditional activities in which banks engage must be ensured. Rigorous standards of examination must be developed and enforced as new products are introduced into the marketplace. Regulators should have an affirmative duty to assess continuously the risks of such products to consumers’ financial well-being and initiate oversight and enforcement activities consistent with the risks such products may present to the public. An agency should be created, such as a Financial Products Safety Commission or Business Practices Regulator, charged with establishing guidelines for consumer disclosure, business practices, collecting and reporting data about the uses of different financial products, reviewing new products for safety, requiring modification of dangerous products before they can be marketed to the public, and rigorously enforcing market conduct activities. Any restructuring of financial services regulation should also consider the effect of key court cases concerning preemption and whether legislative modifications are needed to ensure that strong consumer protections are available.

Disclosures and transparency

FEDERAL STATE

The Federal Trade Commission, all federal banking regulators, and states should be authorized to bring enforcement actions against national banks and thrifts for unfair or deceptive practices. The risk assessment methodologies of third-party ratings agencies, as well as accounting and legal professionals, must be made transparent. Depository institutions should be required to provide lifeline banking services for low-income consumers. Financial institutions, especially banks, should be required to clearly and conspicuously inform consumers, before sale, that nondeposit products are not insured by the Federal Deposit Insurance Corporation and therefore may carry a higher risk. Uniform and appropriate disclosures should be provided for various financial products (e.g., insurance products should disclose the solvency rating of the company or availability of a state guarantee fund), regardless of whether they are being offered by a bank, insurance company, brokerage firm, or other financial services company. Banks should provide enhanced disclosures using rating systems and default features that help inform consumers and investors about potential product risks. Consumers should receive annual disclosures about a financial institution’s health, as well as information detailing consumer rights in the event an institution fails and is taken over by regulators. The financial service industry’s Freedom of Information Act exemption, which broadly prevents consumer and community groups from obtaining adequate information about the regulation of


Disclosures and transparency

(cont’d.)

FEDERAL STATE

financial institutions, should be repealed or sharply narrowed. Under no circumstances should consumer privacy regarding accounts be compromised.

Deception FEDERAL

Financial institutions should be prohibited from misrepresenting the insured status of or risk associated with any product. Protections against unfair and deceptive practices should be enhanced.

Privacy FEDERAL Disseminating consumers’ confidential financial information without their permission should be prohibited.

Enforcement FEDERAL

Where circumstances warrant, authorities should pursue vigorous criminal prosecution when a financial institution fails. They should also pursue civil actions against organizations and individuals when they conceal or misrepresent information about an institution’s health or otherwise undermine the solvency status of a financial institution. Consumers should have remedies to obtain financial recovery for violations of the law.

Deposit insurance ceilings FEDERAL

An appropriate deposit insurance ceiling must consider an individual’s needs (e.g., a reasonable number of accounts that one person may have), major events (e.g., life insurance payments; sale of a home, farm, or business; and lump-sum pension payments), and the fact that many older consumers rely on current deposit insurance levels to protect their savings.

Additional protections and

reforms FEDERAL

Banks should be subject to anticoercion requirements to prevent them from using their role as lenders to pressure consumers into purchasing nonbanking products. Financial institutions, including banks and insurance companies, should be required to adhere to suitability/sustainability requirements to ensure that all sellers of financial products are required to recommend to individuals only those products appropriate for their financial situation. Regulators must have enhanced access to information about market developments and activities to detect and correct problems that pose systemic threats, as well as to help prevent or mitigate the effects of an individual institution’s failure. The risk-assessment methodologies of third-party rating agencies, as well as accounting and legal professionals, must be made transparent. The advising and rating functions of credit-rating agencies should be separated. There should be greater clarity in comparing ratings across asset classes, and information on the track record of credit agencies, as well as disclosure of the limitations of ratings, should be made available to investors, regulators, and the public.

Banking and Credit Access to the banking system and credit are essential to an individual’s financial independence and ability to save and invest. The banking industry’s consolidation, the greater use of technology, and the increasing importance of noninterest revenue—e.g.,

service fees on checking and savings accounts, overdraft fees, and charges for using automated teller machines (ATMs)—have dramatically changed the industry. Some of these developments are raising costs to the point of putting banking services beyond the reach of some low- and moderate-income people, many of them older Americans. In addition


to the growth of electronic banking, some banks are discouraging the use of personalized teller services, and this also creates problems for elderly Americans, who may be intimidated by or do not trust electronic banking.

Fees—Bank fees and charges can be assessed without the consumer’s knowledge. For example many banks aggressively market overdraft “privileges” or “bounce protection” services. A 2007 study from the Center for Responsible Lending found that bank customers pay more than $17.5 billion annually in overdraft fees, which may be charged even when the overdrafts result from deposited funds being unavailable to the depositor. In some cases the “available balance” that shows up when a consumer uses an ATM may include the amount of overdraft protection offered by the bank. As a result the consumer may not be aware that the account has a negative balance and is subject to an overdraft fee.

In addition to the increasing fees at banks, the closing of bank branches, especially in low-income and minority neighborhoods—along with stagnant incomes, a large number of households in poverty, discriminatory lending practices, and growing credit card debt and personal bankruptcies—has caused increasing numbers of households to use high-cost alternative financial services such as check-cashing outlets, payday lenders, pawnshops, and consumer finance companies (see also this chapter’s section Consumer Credit Protection—Alternative financial services).

Garnishment—Another problem arises when creditors and debt collectors try to garnish, place a lien on, or otherwise freeze bank accounts in order to collect money they claim they are owed. Federal and some state laws or rules prohibit garnishment of Social Security, Supplemental Security Income, and veteran’s benefits, but when creditors ask banks to garnish a customer’s account, the banks often do so without checking to see if the account contains such exempt funds. As a result freezes are placed on older people’s accounts that consist primarily or solely of exempt funds, and they lose access to the money in those accounts. Customers frequently do not know right away that an account has been frozen and continue to write checks. They do not learn of the problem until their checks are returned for insufficient funds and the banks assess overdraft and other charges against their accounts.

Electronic banking—Electronic banking (e.g., the use of direct deposit, ATMs, and debit cards) is growing. The Federal Reserve (known as the Fed) reported in 2004 that electronic payments were roughly equal in numbers to check payments in 2003.

However the Fed’s 2007 Payments Study found that more than two-thirds of all US noncash payments were made electronically in 2006. Nearly all of the growth in retail payments is on the electronic side, while the use of paper checks is declining by 4.3 percent annually. Debit card payments rose by 17.5 percent per year from 2003 to 2007, and credit card payments rose by 4.6 percent per year, but check payments declined by about 6.4 percent per year during the same period. Currently nearly two-thirds of all employees in the US and four-fifths of Social Security recipients have wages and benefits electronically deposited into a bank account.

The 1978 Electronic Funds Transfer Act (EFTA) establishes the basic rights, liabilities, and responsibilities of participants in electronic fund transfer (EFT) systems and is implemented by the Fed’s Regulation E. Examples of transfers covered by the act and regulation include those initiated through an ATM, point-of-sale terminal, automated clearinghouse, telephone bill-payment plan, or remote banking service. The EFTA and Fed regulation require banks to disclose the terms and conditions of an EFT service, document EFTs by means of terminal receipts and periodic account activity statements, limit consumer liability for unauthorized transfers, create procedures for error resolution and certain rights related to preauthorized EFTs, and restrict the unsolicited issuance of ATM cards and other access devices. Most recently the Fed amended Regulation E for payroll card accounts, ruling that institutions are not required to provide periodic paper statements to consumers if the institution makes account transaction information available by telephone, electronically, or, upon the consumer's request, in writing.

Technological advances in electronic banking can make banking more convenient for consumers and more cost-effective for financial institutions. Consumers, even older consumers, seem to be increasingly comfortable using electronic banking. A recent AARP survey found that almost half of consumers 50 and older have an ATM (54 percent) or check/debit card (48 percent). Yet the study found that a small percentage (6 percent) of people 65 and older who do not have an ATM card said they prefer to interact with a bank teller. However some bank policies discourage the use of personalized teller service, and this is a problem for many elderly Americans living in older, less affluent neighborhoods. Such customers may need services from bank staff because of personal safety, disability, literacy or language barriers, or a lack of familiarity with or trust in electronic banking.


Another facet of electronic banking that has been under scrutiny lately has been bank and gift (stored value) cards. In 2006 the Office of the Comptroller of the Currency (OCC) issued new guidelines on the disclosure and marketing of these cards. The guidelines include key disclosures including when and how to use the bank card (e.g., its expiration date, recurring fees, and customer service instructions) and disclosures to accompany stored-value cards (e.g., of the issuing bank’s name; fees; replacement information; where the card can be used; the issuer’s obligation to authorize, refuse, and change terms; the

importance of tracking the balance; split-payment and small-balance provisions; and how to resolve problems).

Consumers’ ability to make informed decisions depends on the availability of clear, comprehensive, and comparable information about fees, conditions, requirements, options, and service-provider performance. Consumers who establish personal trusts administered by banks, for example, often lack adequate information about the experience, performance, and stability of bank trust departments.

BANKING AND CREDIT: Policy

Providing basic banking services

FEDERAL STATE

All depository institutions should be required to provide at minimum an adequate level of banking services to individuals. These services should include basic checking or savings accounts; a small minimum balance requirement for opening and maintaining the account; a set number of free transactions, including checks and automated teller activities; reasonable charges beyond the number of allowable free transactions; reasonable charges for other services; and a monthly, easy-to-understand statement that details account activity and is available on request. Depository institutions should be required to continue to make personalized tellers or an equivalent service available to their customers at no cost and should not be allowed to charge their customers to use automated teller machines (ATMs) owned or leased by the institution. Depository institutions should be required to provide lifeline banking services for low-income consumers. All depository institutions that routinely cash checks should be required to cash federal or state government checks without charge to their own customers and for a reasonable fee for noncustomers. However, to prevent fraud, the institution should not have to cash the check unless it is made out to the person who presents it and that person is registered for check-cashing privileges with the institution. In deciding whether to approve banking mergers, regulators should ensure that adequate levels and quality of services (e.g., availability of teller and ATM services, availability and affordability of loans) are maintained in affected communities. Another goal in deciding whether to approve banking mergers should be maintaining a strong system of community banks.

Compliance with state banking laws FEDERAL

In deciding whether to approve banking mergers, regulators should consider as key factors the institutions’ compliance with state basic-banking laws and participation in the electronic transfer account program.

Regulating bank fees and overdraft

charges

FEDERAL STATE

Overdraft charges should be defined as finance charges under the Truth-in Lending Act, and written consent should be required before enrollment in overdraft protection programs. Financial institutions should be required to warn a customer when an electronic


Regulating bank fees and overdraft charges (cont’d.)

FEDERAL STATE

transaction will trigger a fee and allow the customer to cancel the transaction in order to avoid the fee. Consumers should be given a reasonable opportunity to rectify their accounts before any additional charges or similar adverse actions are assessed. Depository institutions should clearly state whether a fee will be charged and should not be permitted to charge duplicative fees for use of ATMs. Depository institutions should be required to clear checks and other payment instruments in the order in which they are received; they should be prohibited from delaying posting deposits if doing so would result in an overdraft. Depository institutions should be prohibited from processing orders to garnish or place liens on customers’ accounts without checking to see if the accounts contain Social Security, Supplemental Security Income, veteran’s or other exempt funds. When accounts consisting primarily or entirely of exempt funds are frozen and this causes customers to overdraw their accounts, the institutions should be prohibited from assessing overdraft and other punitive fees. Fees charged to customers without an account at the bank should be kept to a minimum. Inactive accounts at financial institutions should not be charged excessive fees or escheat (revert) to the state until sufficient time has passed, public notice has been given, and a reasonable effort has been made to find the account’s owners or heirs.

Direct deposit FEDERAL STATE

Direct deposit of government benefit checks should be strongly encouraged but left to individual choice. The Electronic Funds Transfer Act (EFTA) should be strengthened to ensure that financial institutions promptly notify consumers when direct-deposit payments are received, to provide mechanisms for prompt and effective resolution of problems, and to inform consumers more accurately about how and where to complain if problems with direct deposits are encountered.

Protection of electronically

processed checks FEDERAL

Congress should amend the EFTA to apply its consumer protections to all electronically processed checks.

Privacy FEDERAL STATE

The federal government and the states should ensure that technological advances in bank products and services incorporate consumer safeguards such as privacy protections, complete disclosures (including necessary warnings about how to use new products and services), and provisions addressing the loss or theft of such products as smart cards and stored-value cards.

Making information about banks accessible

FEDERAL STATE

Financial services providers should be required to publish information that permits consumers to compare factors such as fees and options. Consumers should be able to obtain rating information prepared by bank regulators on the comparative performance of bank trust departments. Congress and the states should require full disclosure in plain language for checking, savings, and money market accounts and all


Making information about banks accessible

(cont’d.)

FEDERAL STATE

other financial products. The information should be written in a legible format and cover each type of account the institution routinely offers. Advertisements, announcements, and solicitations for interest- or dividend-bearing accounts, including window or outside signs, also should disclose all significant terms or conditions in clear and complete language.

Community Reinvestment Act The Community Reinvestment Act (CRA) reaffirms the concept that banks are granted charters to help meet the needs and convenience of the communities where they are located, including low- and moderate-income neighborhoods. The CRA requires financial institutions (credit unions are not currently subject to the act) to invest a portion of their deposits in the community from which those deposits come. People who live and own businesses in economically depressed neighborhoods are often older and greatly benefit from the strong presence of a federally insured financial institution. According to a 2005 study by the National Community Reinvestment Coalition, since the passage of the CRA in 1977, lenders and community groups have signed 446 CRA agreements resulting in more than $4.5 trillion in home mortgage and small business loans flowing to minority and low-income communities.

Despite the benefits the CRA has delivered to underserved communities, some gaps remain. Several

types of financial institutions are not subject to the CRA. In addition national banks can receive a “satisfactory” rating even if they continue to benefit from high-interest payday loans as a result of forming partnerships with major check-cashing firms.

Another area of weakness is that current interpretations of federal banking law by the Comptroller of the Currency do not require national banks and their affiliates to comply with state laws governing payday lending, basic banking, and consumer protection. Numerous organizations, including AARP, have advocated that compliance with state consumer protection statutes be included in the criteria for obtaining a “satisfactory” CRA rating.

Recent research also indicates that the evaluations of the banks under the CRA are often inconsistent and lack performance-driven measurements. More consistent and thorough evaluations could help improve the availability of fairly priced financial services in many low-income communities.

COMMUNITY REINVESTMENT ACT: Policy

Expanding Community

Reinvestment Act (CRA)

compliance

FEDERAL

Bank regulators should ensure that all banks comply with the Community Reinvestment Act (CRA). Small banks should not be exempt from CRA requirements, and each bank should be required to disclose annually its CRA compliance rating. Congress should extend CRA coverage to other industries that offer financial products.

Compliance with state regulations FEDERAL

Regulators, at minimum, should consider an institution’s compliance with state usury or other statutes regulating check-cashing, payday lending, and state basic-banking laws in determining whether it should receive a “satisfactory” rating. Assessment areas should coincide with the market for an institution’s products.

Community service test

requirements FEDERAL

Every bank should be expected to receive a “satisfactory” score on the lending and community development service portions of the CRA test. Standardized data should be developed for community service test requirements. Banks should be examined to determine whether they effectively market affordable savings products to low-income


Community service test

requirements (cont’d.)

FEDERAL

consumers and to assess the services they provide to attract unbanked households. CRA regulations should require that regulators assess the activities of affiliates engaged in banking, lending, and investment activities. Incentives for increasing prime lending should be incorporated into the performance standards for financial institutions under CRA regulations.

Banking and Credit Cards Credit cards are more and more a fixture of US economic life. For consumers who use a credit card simply for convenience and pay off the balance in full each month, credit cards generally work well. The main problems occur when a consumer cannot pay off the full amount due, carries forward a balance, and gets caught in a downward spiral of high interest rates, excessive fees and penalties, and other billing practices that keep consumers mired in debt.

A growing number of older Americans find themselves deep in credit card debt—or even filing for bankruptcy. According to the Federal Reserve Board, credit card debt grew from $712 billion in 2002 to $944 billion in 2007. In 2004, 61 percent of American families headed by people age 55 or older had debt, almost five percentage points higher than in 2001. More troubling is the fact that it is the oldest seniors who incurred sharply higher debt; the number of families in debt that were headed by someone 75 years or older increased substantially, from 29 percent in 2001 to 40.3 percent in 2004.

Much of this increased debt is attributable to credit cards. According to a 2005 Demos survey, the average credit card debt of low- and middle-income indebted households was $8,650; the median was $5,000. One-third of low- and middle-income households had credit card debt over $10,000. A May 2008 AARP survey found that of those members who have been stressed by their financial situations in the last six months, 44 percent consider credit card debt to be a “major concern.” The survey also found that 27 percent of AARP members reported having difficulty paying off credit card debt.

Indeed unmanageable debt is causing a record number of seniors to seek bankruptcy court protection. A recent study conducted for AARP found that in 2007 more than one in five debtors were over the age of 55, compared with one in ten back in 1991. The study also found that the rate of personal bankruptcy filings among those ages 45 to 54 had jumped by more than 48 percent from 1991 to 2007. For those ages 55 to 64, the rate rose by 150 percent—and for those ages 75 to 84, by 433

percent. Credit card debt is one of the top reasons seniors file for bankruptcy, according to some reports.

Deregulation of the credit card marketplace, in which state laws limiting interest rates and fees were nullified by two Supreme Court decisions in 1978 and 1996, drastically changed the way issuers market and price credit cards to consumers of all ages. It is clear that in recent years credit card companies have become far more aggressive in imposing questionable fees and interest rate practices. The result is that penalty interest rates, high and accumulating fees, and interest on fees can push consumers over the financial edge. In fact consumers in debt trouble sometimes owe as much or more in fees and penalty interest charges as in principal. For the growing numbers of seniors who are unable to make more than the required minimum monthly payments on their cards, industry practices can lead them into unmanageable credit card debt.

Complex and fast-changing terms of debt—The initial and contract terms in credit card applications are complicated and frequently written in small print and complex legalese not easily understood by consumers. In addition expansive change-in-terms provisions that give credit providers the discretion to revise key contract terms simply by sending notices to their customers greatly weaken the usefulness of initial disclosures and contract terms in making wise credit choices. Current federal law requires only a 15-day advance notice before companies can change terms such as annual fees, late-payment fees, grace-period lengths, and the method used for calculating finance charges. A 15-day notice may not provide sufficient time for consumers to determine what actions to take before the increased costs take effect.

Credit card interest rates and charges are increasingly complex and volatile. Low introductory rates may change dramatically over a short period of time and quickly rise to more than 20 percent, in spite of record low interest rates in the US. When US interest rates increase, many credit card companies convert cards with fixed interest rates to cards with variable interest rates. The calculation of annual fees, fees for cash advances, rebates, minimum finance


charges, over-the-limit fees, and late-payment fees also makes it difficult for some consumers to estimate what they will owe each month. Two-cycle billing (calculating the average daily balance from two billing cycles rather than one) effectively eliminates the grace period for cardholders carrying a balance. If the bill is not paid in full at the first billing, interest becomes retroactive back to the purchase date.

Problems with transparency— “Universal default,” or the practice of raising a consumer’s interest rate or fees due to something unrelated to the consumer’s payments to the credit card company, is a troubling industry practice that continues despite assurances to the contrary. Interest rate increases can be triggered when a consumer’s profile (i.e., credit report or

score) has changed because of the addition of a mortgage or car loan or a missed payment on an entirely different card.

The Federal Reserve (known as the Fed) has proposed rules (Regulation AA) prohibiting unfair practices regarding credit cards and overdraft services. Among other provisions, the rules would protect consumers from unexpected increases in the rate charged on pre-existing credit card balances. The Fed also is reviewing its Regulation Z, which implements the Truth-in-Lending Act, and addresses nonmortgage open-end credit. AARP submitted comments supporting proposed Regulation AA and on the proposed Regulation Z, urging the Fed to adopt rules that strengthen credit card disclosures, such as including all fees in the finance charge.

BANKING AND CREDIT CARDS: Policy

Disclosure of fees and terms

FEDERAL STATE

Disclosures must be clear, accurate, and informative (e.g., each monthly statement should reflect year-to-date interests costs and provide a summary of annual costs for each card) so consumers can make more meaningful credit card purchase decisions. All fees, charges, and other costs of credit should be included in the finance charge so consumers will know the total cost of their credit and can make accurate comparisons among cards. The periodic statement should clearly identify the smallest dollar amount that the consumer can pay and still amortize the credit balance. Federal law should require that consumers receive at least 30 days’ notice before the effective date of material changes in the terms of their credit card agreements, such as increases in late-payment fees or new methods of calculating finance charges.

Capping interest rates

FEDERAL STATE

A floating interest rate cap should be established as a maximum. This cap should be adjustable to a widely recognized independent index and reasonable in relation to prevailing lending rates. The cap also should protect consumers against potential cost shifts (e.g., increased annual fees, reductions in or elimination of grace periods, and limited access to credit).

Unfair or deceptive

business practices

FEDERAL STATE

The practice of “universal default” should be prohibited. Consumers should not be assessed higher interest rates or fees for activities unrelated to the credit card. The use of two-cycle billing, which inflates consumer costs, should be prohibited. Payments should not be treated as late for any purpose unless the consumer has been given a reasonable period of time to make the payment. Payment allocation rules should require creditors to more fairly apply payments to balances with different interest rates, paying higher interest balances first. Increases in the annual percentage interest rate on an outstanding balance should be prohibited.


State regulation of credit cards

FEDERAL STATE

States should provide uniform guidelines to protect consumers against deceptive or usurious credit practices and to ensure access to credit, with provisions on advertising, disclosure, and reasonable interest rates, and protections against unreasonable tightening of credit availability and unwarranted cost shifts (through an increase in the annual fee or reduction or elimination of the grace period). The dual state-federal system of regulating credit card issuers must be preserved. States should be free to further strengthen minimum federal disclosure requirements and other consumer protections.

Consumer Credit Protection A number of federal laws protect consumers when they obtain credit:

• The Equal Credit Opportunity Act protects consumers from discriminatory credit practices, including age discrimination.

• Billing dispute protections are provided in the Fair Credit Billing Act.

• The Fair Credit Reporting Act (FCRA) grants consumers access to and input into their credit files.

• The Fair Debt Collection Practices Act (FDCPA) protects consumers from the unscrupulous and unreasonable tactics of debt collection agencies, including law firms and lawyers that regularly engage in the collection of debts. The FDCPA offers no safeguard against the in-house collection activities of the original creditor (e.g., a department store).

• The Truth-in-Lending Act requires accurate disclosure of a loan’s annual percentage rate (APR) and the total dollar amount of the finance charge.

Nearly all states have usury and small-loan laws that limit the interest rates lenders can charge, but the laws vary greatly in scope and there are many gaps in consumer protection. More than 30 states, for example, allow finance companies to charge interest rates of 36 percent or more, four allow rates above 100 percent, and several have no rate ceilings. Many states also allow a variety of fees that significantly raise the effective interest rate of a loan without requiring these fees to be incorporated into the calculation of the APR. Most states exempt payday lending from small loan laws, enabling these lenders to charge an APR that typically averages close to 400 percent.

Some states allow lenders to use a mathematical formula known as of the “Rule of 78s” to estimate refunds of prepaid interest and insurance charges

when a loan is repaid early. Use of the Rule of 78s typically results in a smaller refund to the borrower. Federal law prohibits use of the Rule of 78s, but exempts non–real estate finance company loans with terms of less than 61 months, effectively negating this protection for most consumer loans.

In addition the Supreme Court dealt a serious setback to the borrowers’ ability to challenge interest rates when the loan transaction involves a national bank. In a 1978 landmark case (Marquette National Bank of Minneapolis v. First of Omaha Service Corp.), the court ruled that under the National Bank Act, national banks can charge the interest rate allowed by their home state to borrowers who live in states with lower interest rate limits. In 2003 the court ruled in Beneficial National Bank v. Anderson that when a national bank is involved, the National Bank Act provides the only cause of action, completely preempting claims under state usury laws. The ruling means that when a check-cashing outlet establishes a relationship with a national bank to make payday loans, borrowers cannot sue under state usury law even when the interest rate far exceeds the rate allowed in the state in which they live.

The Fair and Accurate Credit Transactions Act (FACT) of 2003 substantially amended the FCRA and contains additional consumer provisions. Under the law all consumers may obtain one free copy of their credit report every year from each of the three national credit bureaus. This is important because credit scores are increasingly used to evaluate consumer credit risk and are a significant factor in determining whether a consumer obtains credit and how much credit is made available and on what terms.

Industry sources, in fact, estimate that credit scores are a determining factor in 90 percent of all consumer credit decisions in the US. According to a 2004 AARP study consumers see both advantages (such as convenience and speed when loan shopping) and disadvantages (privacy, difficulty in correcting errors) in the use of credit scores.


Consumers must be able to ensure their credit reports are accurate. Because not all creditors report data to credit-reporting agencies, relevant credit information may not be included in the reports.

Alternative financial services—The alternative financial services (AFS) industry is a major source of credit services for low-income and working-poor consumers, residents of minority neighborhoods, and people with heavy debt burdens or less favorable credit histories. It includes payday lenders, pawnbrokers, automobile title pawnbrokers or lenders, rent-to-own stores, and tax preparation companies that make loans on the basis of anticipated tax refunds. Generally the industry lies outside the system of federally-insured (i.e., traditional) financial lenders, and its charges are often many times higher than traditional lenders’. Hidden fees, exceedingly high interest rates, prepayment penalties, extreme default penalties, “packing” expensive credit insurance onto loans, and multiple rollovers are among the deceptive and unfair lending practices often associated with the industry.

According to the 2004 Federal Reserve Board (the Fed) Survey of Consumer Finances, 10.6 percent of families do not have a checking account, nor do 7.9 percent of families headed by people age 50 and older—approximately 4.1 million older families. Currently only seven states (Illinois, Massachusetts, Minnesota, New Jersey, New York, Rhode Island, and Vermont) have laws creating lifeline banking accounts. In addition the impact of these state laws is limited by federal banking law that preempts their application to national banks doing business in those states.

An AARP survey indicates that almost one-fifth (19 percent) of people age 50 to 64 have cashed a check at a check-cashing outlet. Significantly usage was higher among people with annual incomes below $20,000. Although these establishments are often conveniently located and open late, the fees that

outlets and other AFS providers charge for cashing a check or making a small loan are generally higher than at traditional institutions.

Credit insurance and excessive refinancing—Older borrowers are often the target of aggressive sales pitches for lump-sum credit and noncredit insurance products: life, accident, disability, unemployment, nonfiling, and property insurance. These products are often packaged into a loan without the borrower’s knowledge or consent. A recent study by Purdue University found that 69 percent of credit customers over age 45 had purchased credit life insurance, compared with only 59 percent of borrowers age 45 and younger. The study also found that 17 percent of all respondents who said they had not purchased credit insurance had in fact done so, and that many lenders failed to inform borrowers that credit insurance is optional. Lenders frequently receive commissions on the sale of lump-sum insurance products, which may be added to the loan amount and generate additional interest income for the lender.

Solicitation for frequent refinancing of existing debt is a practice that has been aimed at lower-income consumers. Such frequent refinancing is inappropriate and results in higher costs than if the consumer had initially received a longer-term loan or obtained a separate loan for additional funds. For example in states that require data reporting by payday lenders, studies show that payday customers average more than ten loan rollovers per year. In addition many consumer finance companies concentrate their marketing efforts on encouraging refinancing by current borrowers.

The Defense Authorization Act of 2007 includes a provision capping payday loans to military personnel at 36 percent (the same cap many states impose in their usury laws). Support for the law came from a Department of Defense finding that payday loans were hurting military preparedness.

CONSUMER CREDIT PROTECTION: Policy

Strengthening existing

protections

FEDERAL STATE

States should not be prohibited from strengthening the minimal federal protections established in the Fair Credit Billing Act, the Fair Debt Collection Practices Act (FDCPA), and the Fair Credit Reporting Act. The protections of the FDCPA should be extended to creditors’ in-house collection activities. States should adopt legislation or strengthen existing laws to license lenders, ensure compliance with federal and state consumer disclosure laws, ensure compliance with state small-loan interest rate


Strengthening existing

protections (cont’d.)

FEDERAL STATE

caps or usury laws, eliminate or strictly limit loan rollovers, require lenders to disclose that the criminal justice system cannot be used for collections, provide consumers with a private right of action, and eliminate unfair, abusive, or deceptive practices.

Interest rates FEDERAL STATE

The federal government should either prohibit national banks and their subsidiaries from making payday loans or limit loan rates, and require banks and their subsidiaries and lending partners to comply with the laws of the state where the consumer receives the loan’s proceeds. In the case of refund anticipation loans, the federal government and the state (to the extent applicable) should regulate tax preparers and their financial partners regarding interest charged. States should establish reasonable interest rate ceilings that either correspond to prevailing Treasury bill rates or are based on the amount of funds borrowed and the need to maintain the availability of credit for disadvantaged customers.

Loan prerequisites FEDERAL STATE LOCAL

Federal legislation should ensure access to credit on fair and reasonable terms. Oppressive conditions or prerequisites, such as excessive collateral requirements or tie-in financial relationships with lending institutions, should be banned.

Age and gender discrimination FEDERAL

The Equal Credit Opportunity Act (ECOA) should be aggressively enforced and expanded to include investigations into existing credit practices and the availability of commercial credit for older women. The ECOA should prohibit indirect discrimination against older people by removing distinctions between retirement and employment incomes.

Rule of 78s FEDERAL STATE

The use of the Rule of 78s in calculating refunds of interest and insurance charges when a loan is repaid early should be prohibited.

Credit reporting FEDERAL

Strong enforcement is needed for both the Fair Credit Reporting Act and the Fair Credit Billing Act. Practices of credit-reporting agencies must be reformed to protect consumers against erroneous information, provide greater consumer access to credit files, enable consumers to correct erroneous information more easily, and require that credit reports be more user-friendly. Creditors (as defined in ECOA Section 702) should be required to report credit information to agencies to provide a more complete and accurate measure of consumers’ credit history.

Credit insurance FEDERAL STATE

Lenders should be prohibited from selling credit and noncredit insurance products and insurance substitutes that are paid for with a lump sum out of the loan’s proceeds. States should require lenders to inform borrowers, both orally and in writing, that the purchase of credit insurance is strictly optional. States should prohibit lenders from receiving commissions on the sale of credit insurance or from selling credit insurance to their borrowers through an affiliate or a subsidiary insurer.


Refinancing STATE

States should place limits on the refinancing of consumer loans by requiring lenders to disclose the cost of refinancing compared with the cost of obtaining a separate loan and by restricting the number of times and frequency with which loans can be refinanced.

Credit Counseling

Increasing numbers of consumers who find themselves overwhelmed with credit card debt are turning to companies that provide credit counseling, debt management, or debt settlement. There are reportedly more than 1,000 credit counseling agencies in the US. One study suggests that approximately nine million consumers turn to credit counselors each year, and the industry estimates that between 15 percent and 18 percent of them are older consumers.

Debt management companies, through frequent advertising and phone solicitations, claim to be nonprofit entities offering help to consumers with high amounts of credit debt by counseling them about their debt, consolidating debt loads, and working with credit card companies to work out debt payment plans. Increasingly these companies rely on fees in addition to payments from creditors. Debt settlement businesses, in contrast, are mostly for-profit. They claim to help consumers settle debts for less than the full amount of the outstanding debt and offer limited counseling. There are other businesses, mainly for-profit, such as debt termination and debt elimination companies, which also market to consumers with debt problems.

A number of large, prominent national firms have been investigated, sued, or sanctioned by state or federal authorities for deceptive practices, excessive fees, or abuse of nonprofit status. In 2006, for

example, one credit counseling agency that agreed to settle with the Federal Trade Commission (FTC v Integrated Credit Solutions Inc., et al.) was charged with deceptively marketing itself as a nonprofit enterprise to entice financially distressed consumers to enroll in debt management plans and failing to deliver on promises of personalized credit counseling and dramatic and immediate interest rate reductions. This was after related settlements with state attorneys general in California, Florida, Massachusetts, and Vermont.

Several states have enacted legislation to regulate fees, limit the debt management industry to nonprofit agencies, set bonding requirements, prohibit deceptive practices, and require that services be suitable for all consumers. However current federal and state regulation is generally inadequate to curb abusive practices.

The Bankruptcy Abuse Prevention and Consumer Protection Act, enacted in 2005, requires consumers seeking bankruptcy to get credit counseling from a government-approved organization within six months of filing for bankruptcy protection. The National Foundation for Credit Counseling found that only 10 percent of these counseling sessions were conducted in person, while 90 percent were conducted over the telephone or the Internet. A 2006 study by the National Association of Consumer Bankruptcy Attorneys found that only 3 percent of people counseled were in a position to undertake a debt management plan; the other 97 percent found it necessary to continue bankruptcy proceedings.

CREDIT COUNSELING: Policy Licensing of debt

management companies

STATE Debt management companies should be required to register with, or obtain a license to conduct business in, each state in which they operate.

Deceptive practices

FEDERAL STATE

Legislators must enact stronger prohibitions that protect consumers from fraudulent “credit-repair” practitioners. Debt management companies should provide information such as the total and average fees they charge consumers, including voluntary contributions received from consumers, and the impact of participation on consumers’ credit reports and scores. Deceptive practices, including false advertising, should be prohibited.


Deceptive practices (cont’d.)

FEDERAL STATE

Debt management companies should be required to evaluate and ensure that their services are suitable for the customer. Debt management companies should be required to allow consumers to cancel agreements.

Debt management

plans

FEDERAL STATE

Debt management companies should be required to provide written contracts to consumers that among other provisions include: • an individual financial analysis; • an initial debt management plan with specific actions the

consumer should take; • disclosures regarding conflicts of interest, including the

percentage of provider revenue from creditors; and • the availability of other options to deal with debt, including

bankruptcy.

Home Mortgage Lending Homeownership, a key to building wealth, increased dramatically in the past decade, peaking at 69 percent of all Americans in 2004. By 2008 homeownership rates were at about 68 percent, the same as in 2003. Homeownership rates continued to fall during 2008.

Rather than pay down debt, owners increasingly carry mortgage debt into their retirement years. By 2007, 53 percent of all home-owning households headed by someone age 50 or older had a mortgage, up from 34 percent just two decades ago. More than 3.5 million owners with a head of household age 50 or older devote more than 50 percent of their income to housing.

Since 2007 delinquency and foreclosure rates have soared in the home mortgage market. The percentage of loans in foreclosure at the end of the second quarter of 2008 was 2.75 percent, an increase of 1.35 percentage points from one year ago. Moreover, 6.41 percent of mortgage loans on one- to four-unit residential properties were delinquent at the end of the second quarter of 2008. These problems have spread to the rest of the economy: Neighboring homeowners have lost home equity, state and local governments have lost tax revenue, and investors in the US and abroad have taken severe losses.

According to AARP research, about 684,000 homeowners age 50 and over were delinquent on their mortgage, in foreclosure, or had lost their home during the last half of 2007. Of these, nearly 50,000 were in foreclosure or had already lost their homes. Older Americans represent about 28 percent of all mortgage loans that were delinquent or in

foreclosure. The crisis has been particularly severe for older African-Americans and Hispanics, who have higher foreclosure rates than whites of all ages. Older Americans appear particularly vulnerable to house price declines and to subprime loans.

The mortgage market now generally follows an “originate to distribute” model, where originators (commercial banks, mortgage banks, finance companies, and others) sometimes hold mortgage loans on their books, but more often sell them into pools with other mortgages. Securities issued against these pools of mortgage loans are called mortgage-backed securities (MBS). These MBS may themselves be pooled, with securities issued against the new pool known as collateralized mortgage obligations (CMOs). It has been estimated that 75 percent of outstanding first-lien residential mortgages have been securitized. This market structure, which separates originators and brokers from the ultimate investor, has created problems in mortgage markets that are described in more detail below. First, originators may relax their underwriting standards if they are not going to hold the loans in their own portfolios. Second, the unregulated servicers who work as intermediaries between borrowers and investors, by collecting mortgage payments and distributing profits to investors, have incentives that may be at odds with the goals of both borrowers and investors.

Subprime lending—Efficient access to fair and affordable mortgage financing has been vital to homeownership, especially for those traditionally underserved, including low-income and minority communities. But now a tidal wave of foreclosures on homes financed with subprime mortgages may threaten these gains.


Subprime mortgages have grown rapidly in recent years, rising from 8 percent of the dollar value of originations made in 2003 to 20 percent of loans in both 2005 and 2006. Interest-only and payment-option mortgages rose from 2 percent of mortgage originations in 2003 to 20 percent in 2005. Most refinancings are subprime loans.

One in 33 current homeowners will face foreclosure as a direct result of subprime mortgages made in 2005 and 2006, according to research from the Pew Charitable Trusts. Research from the Center for Responsible Lending shows that minority borrowers were more than 30 percent more likely to receive a higher-rate loan than white borrowers, even after accounting for differences in risk.

Aggressive lending practices target both young and old homeowners. Older homeowners have been targeted because they are equity-rich but cash-poor.

Subprime loans have a number of features that make it difficult to build equity in a home and service the mortgage. In addition to having higher interest rates and fees than prime loans, they are much more likely to have features like prepayment penalties, which research has shown are strongly associated with greater risk of foreclosure because they make it more difficult to exit a loan. In addition subprime lenders typically do not escrow for real estate taxes and insurance, which can increase the risk of default for borrowers. Additional factors exacerbate these problems, including unfair and inaccurate underwriting practices; a lack of rules, regulatory oversight, and enforcement; broker abuses and predatory practices; inflated appraisals; perverse incentives regarding the sale of mortgage loans to the secondary market; and mortgage product terms that increase the risk of default and foreclosure. As housing prices decline, subprime and other foreclosures continue to rise as fewer delinquent borrowers have the equity needed to refinance or sell their homes.

Fannie Mae and Freddie Mac have been criticized for their roles in the subprime mortgage lending crisis. These government-sponsored enterprises (GSEs) argue that they were under pressure from the industry to accept subprime loans or lose market share and relevance. The GSEs’ risk management methods have also come under criticism.

Questionable lending practices—Once identified as products for the sophisticated and wealthy, alternative mortgage products (AMPs) have been marketed to a broader spectrum of borrowers, with an endless variation of terms that makes it extremely

difficult to compare products. AMPs such as interest-only and payment-option adjustable-rate mortgages (ARMs) offer comparatively lower and more flexible monthly mortgage payments for an initial period. According to the Government Accountability Office, AMP originations grew threefold, from fewer than 10 percent of residential mortgage originations in 2003 to about 30 percent in 2005—with far greater increases in higher-priced regions of the country. However, these products, particularly the dominant “2/28” type, produce a massive “payment shock” at the end of the initial two-year teaser-rate period, the report says. Subsequent rate increases from these “exploding ARMs” can increase the monthly payment by as much as 40 percent, it adds.

Many subprime lenders routinely extend loans without verifying borrowers’ incomes. The fact that subprime lenders approve such loans without considering whether the borrower will be able to afford the payments after the teaser rate expires has led to the current high default and foreclosure levels. Further, securitizers paid more for so-called “no- doc” loans than for fully documented loans, creating a perverse incentive for additional sales of such loans and contributing to the recent market meltdown.

During the recent mortgage boom, mortgage brokers and loan officers have also received incentives, known as “yield spread premiums,” to sell consumers riskier and often higher-priced products. Recent national surveys indicate that many borrowers falsely believe that lenders and brokers are required by law to provide the best rate on loans.

Mortgage brokers account for more than half of all mortgage originations. Yet much of the regulation of broker-originated loans occurs outside the regulatory structure for traditional bank-originated loans, thus providing inadequate consumer protections. According to a 2003 AARP study, older borrowers with broker-originated loans were more likely to receive loans with less favorable terms, such as prepayment penalties and points paid up front, than borrowers with lender-originated loans.

Federal regulation—Federal efforts to regulate and monitor subprime mortgages have been mixed and sometimes slow to develop. The Home Ownership and Equity Protection Act of 1994 (HOEPA) strengthened consumer protections in high-cost loans in a number of ways. Among other provisions, the act: • requires that single-premium credit insurance and

similar products be included in the HOEPA trigger for points and fees,


• prohibits due-on-demand clauses in contracts, • prohibits refinancing of HOEPA loans by the

same lender into another HOEPA loan within a one-year period unless it is in the borrower’s best interest,

• creates a presumption that a lender has a pattern and practice of making a loan without regard to the borrower’s ability to repay if the lender does not verify and document that ability, and

• prohibits the practice of making an open-end loan in order to evade HOEPA.

Not all congressional actions have benefited consumers. A year after HOEPA was approved, Congress passed legislation weakening the right of rescission (i.e., the right to cancel a loan) under the Truth-in-Lending Act, the major legal mechanism to protect against unscrupulous loan practices.

A number of regulatory agencies have considered steps to address the mortgage crisis, but few practical reforms have resulted. The Federal Reserve recently amended HOEPA regulations to further restrict abusive practices in the mortgage market. The Department of Housing and Urban Development also recently issued major revisions to the Real Estate Settlement Procedures Act regulations. The revisions include changing the good-faith estimate of settlement costs and enhancing disclosure of yield spread premiums.

Bankruptcy treatment of foreclosure—Currently the Bankruptcy Code forbids any modification of mortgage loans secured by the debtor’s principal residence. However, loans on vacation homes, investment properties, and yachts may be modified. In order to allow homeowners in financial stress to keep their homes, some reform proposals would allow bankruptcy courts to modify loans on principal residences. The mortgage banking industry argues that this would raise the cost and lower the availability of mortgage credit. Recent research suggests, however, that effective mortgage interest rates, private mortgage insurance rates, and secondary mortgage market pricing are all indifferent, in terms of pricing, to whether the property is a primary residence or vacation home, and cost premiums for investment properties may reflect risks distinct from bankruptcy modification.

Some proposals would “strip down” or “cram down” debts secured by home equity to the equity’s value. An alternative would create a “soft second” lien from the remaining loan amount. Under this alternative the

borrower would not be required to make payments on the soft second lien; however, if and when the borrower sells the house, the sale proceeds would be applied to the first and soft second liens (for more on bankruptcy see this chapter’s section on the topic).

Mortgage modification—Modification of mortgage loans that are delinquent or in foreclosure is frequently in the interests of both borrowers and investors. However the structure of the mortgage market frequently makes this difficult. As noted above, servicers are intermediaries in the mortgage market; they collect payments from homeowners and distribute the proceeds to investors in the mortgage pools. Servicers may be reluctant to modify mortgage loans because modification may be costly in terms of servicer staff time and resources, delinquency charges and fees are a source of income to servicers, and in some cases investors may sue servicers for making modifications to which they didn’t agree. Servicer reluctance to modify mortgage loans that are delinquent or in foreclosure has been a source of frustration to borrowers and foreclosure counseling groups.

The Emergency Economic Stabilization Act of 2008 (popularly referred to as the financial bailout plan or package) requires the Treasury secretary to implement a plan that maximizes assistance for homeowners and “encourage” servicers to take advantage of the Hope for Homeowners Program (see below) or other available programs to minimize foreclosures. It also gives the secretary authority to use loan guarantees and credit enhancements to facilitate loan modifications “to prevent avoidable foreclosures.” The Treasury is further required to consent to “reasonable” requests for loss-mitigation measures, including term extensions, rate reductions, principal write downs, increases in the proportion of loans within a trust or other structure allowed to be modified, or removal of “other limitations on modifications.”

Many questions remain as to how the Treasury will implement this legislation, including how it will buy back loans from investors, address accounting and tax issues, and develop and apply criteria for loan modifications. A major problem with the law’s foreclosure prevention provisions is that the secretary and federal entities are mandated only to “encourage” servicers to modify loans, even though the Treasury would own the underlying mortgages outright.

Under the Hope for Homeowners Program, established by the National Housing Act of 2008, the


Federal Housing Administration (FHA) can guarantee up to $300 billion worth of new loans to refinance troubled loans. To be eligible for FHA-guaranteed refinancing, a borrower must be unable to pay a loan secured by their primary residence and originated before January 1, 2008. The borrower also must have a mortgage debt to income ratio higher than 31 percent (there is some administrative discretion to modify this figure as conditions warrant), must sign a certification that they have not intentionally defaulted or furnished false information to obtain an eligible mortgage, agree to share some portion of their future equity and equity increases with the federal government, and must be able to repay the new loan. The amount of the new loan is determined by the amount the borrower can reasonably be expected to repay, not to exceed 90 percent of the appraised value of the residence.

The Hope Now program was implemented in July 2007 by a consortium of counselors, servicers, investors, and other participants in the mortgage market. The program relies on voluntary participation from borrowers, servicers, and investors. Hope Now claims to have prevented 2.3 million foreclosures from July 2007 through August 2008. However a recent study of some of these cases shows that one-quarter of the mortgage modifications did not change the borrower’s monthly payment; in another fourth, the payments actually increased. Some have argued that the program postpones rather than solves the foreclosure problem.

Some observers, including Representative Barney Frank, chairman of the House Committee on Financial Services, cite the mortgage modification program administered by the Federal Deposit Insurance Corporation (FDIC) as a possible model that might be used more widely as the government begins to acquire mortgages under the provisions of the financial rescue plan. The FDIC, in conjunction with its takeover of IndyMac Federal Bank, has begun to implement a program to modify troubled mortgages. Streamlined loan modifications will be available for most borrowers who have a first mortgage owned or securitized and serviced by IndyMac and are seriously delinquent or in default. The program is only for mortgages secured by the borrower’s primary residence. Eligible mortgages would be modified into sustainable mortgages capped at the current Freddie Mac survey rate (currently about 6.5 percent). Modifications would be designed to achieve sustainable payments at a 38 percent payment (principal, interest, taxes, and insurance) to income ratio. To reach this level of

affordable payment, modifications could include any or a combination of interest rate reductions, extended amortization, and principal forbearance. There are no fees or charges for the modifications, and all unpaid late fees are waived.

A growing number of states are taking action to address the foreclosure problem. Ohio’s governor reached agreement with nine mortgage servicers to modify the terms of adjustable-rate subprime mortgages in that state. Michigan has launched a state-wide education campaign and has two loan funds to help homeowners facing foreclosure. California regulates mortgage brokers and high-risk loans and has also called on loan servicers to agree to loan adjustments. Maryland passed legislation to extend the foreclosure process from 15 to 150 days, criminalized mortgage fraud, and banned prepayment penalties. Massachusetts provides borrowers with a 90-day workout period and has dedicated $2 million to foreclosure education, prevention, and counseling. Nine states require mortgage brokers to consider or represent the interests of the borrower when recommending mortgages.

State regulations—States have played an active role in addressing predatory lending practices. In 1999 North Carolina was the first state to enact a comprehensive lending law prohibiting such practices as lending without consumer counseling, lending without regard to the borrower’s ability to repay, and financing loan fees as part of the loan amount. Additionally the law prohibits prepayment penalties for all home loans of $150,000 or less. Other states and municipalities have also enacted legislation targeting predatory mortgage lending.

As noted above some state efforts to regulate mortgage lending have been preempted by federal regulators—particularly the Office of Thrift Supervision and the Office of the Comptroller of the Currency (OCC)—which has issued a series of rules establishing the OCC as the exclusive regulator of both national banks (which it charters) and their operating subsidiaries (which states charter). Whether these rules preempt state consumer protection laws aimed at preventing unfair or deceptive acts and practices is still being decided in the federal appellate courts. In the meantime a number of states have enacted laws, known as “second wave” bills, regulating practices not explicitly covered under the new federal rules, including those that involve a borrowers’ ability to pay, prepayment, negative amortization, income verification, and broker responsibilities.


Foreclosure scams—The prospect of foreclosure can be stressful to homeowners, who often try desperate measures to stay in their homes. Scam artists using titles such as “foreclosure consultant” have taken advantage of this by convincing homeowners to transfer the titles to their homes to third parties, with the promise that these third parties

will work with the lender and make payments to keep the owners in their homes. Often scam artists will take the equity from the home and leave the homeowner facing eviction following a foreclosure. (For related policies, see Chapter 9, Livable Communities: Housing Affordability.)

HOME MORTGAGE LENDING: Policy

Mortgage lending FEDERAL STATE

Congress and federal regulators should adopt a range of tools to address the mortgage crisis. These tools should be complementary. Congress should: • enact effective measures to ensure that mortgages are safe and

sustainable and for policing unscrupulous loan origination and servicing practices that typically target older homeowners with low incomes;

• create a duty of care, good faith, and fair dealing for lenders, mortgage brokers, servicers, and originators;

• require that mortgage servicers be subject to federal supervision and licensing—Legislation should define servicers’ duties to include loss mitigation and adequate loan modifications where appropriate; and

• offer liability protection for servicers who effect meaningful loan modifications that allow a homeowner to remain in their home over the long term.

Mortgage lenders should be required to comply with fair lending rules that address, among other issues, interest rates, fees, marketing, service areas, and application acceptance procedures. The Bankruptcy Code should be modified to permit modification of mortgage loans secured by a primary residence. To the extent that the federal government owns or acquires distressed mortgages, it should develop a streamlined system to facilitate meaningful mortgage modifications. The streamlined system should include transparent eligibility and modification guidelines. A lead agency should be created or given authority to develop policies and procedures for rapidly modifying mortgage contracts, managing rental conversions, and leasing, selling or demolishing vacated homes. States and the federal government should create a foreclosure deferral period to allow homeowners to workout existing mortgages or refinance into new mortgages in order to help avoid foreclosure. Conflicts of interest in the current system of rating mortgage-backed securities should be eliminated. The process used by credit-rating agencies to rate mortgage-backed securities should be more transparent. Oversight of Fannie Mae and Freddie Mac should be strengthened and their purposes and roles clarified. States should prohibit lenders, brokers, mortgage servicers, and all mortgage-related (including title insurance) professionals from engaging in unfair, deceptive, or unconscionable practices in connection with mortgage transactions.


Home Ownership and Equity

Protection Act (HOEPA)

FEDERAL

Congress should strengthen the Home Ownership and Equity Protection Act of 1994 (HOEPA) by lowering current trigger mechanisms (interest rate, points, and fees) and providing additional protections and remedies so that the act applies to more loans and a broader range of abusive practices. Congress should amend HOEPA to cover open-end credit and purchase money loans.

Disclosure of loan terms FEDERAL

Federal laws governing mortgage loan transactions should require enhanced consumer disclosures of mortgage terms, conditions, and fees, and enhanced consumer protections and remedies. Congress should modify the Truth-in-Lending Act to incorporate a clear and more inclusive measure of finance charges that covers the full cost of credit. Such a measure could use the “total annual loan cost” approach under reverse mortgages as a model for full disclosure. Congress should also expand the reporting requirements under the Home Mortgage Disclosure Act to include age, and thus aid regulatory agencies and the public in analyzing patterns of predatory lending pricing. The Federal Reserve Board should amend Regulation Z of the Truth-in-Lending Act to require lenders to explain more fully and clearly in mortgage disclosures the key terms and risks of complex mortgages such as alternative mortgage products. Department of Housing and Urban Development (HUD) regulations should require that consumers agree to the amount and source of mortgage broker fees before the broker provides any services. Consumers, not lenders, should decide how to pay fees: upfront, through the term of the loan, via the interest rate, or a combination.

Loan applications and

administration

FEDERAL STATE

Lenders should be required to provide a binding offer of mortgage terms and costs at or shortly after application that would be good for a set time after issuance. The binding offer would include the principal amount of the loan; the interest rate, points, and other costs; the type and term of the mortgage; a consolidated rate or price tag similar to an annual percentage rate; and the amount of the monthly payment. The terms (as reflected in the binding offer) should lock in once the consumer applies for the loan. Federal law should require companies servicing loans to credit payments promptly and should prohibit the charging of duplicative and unnecessary fees. Mortgage servicers should credit payments first to the loan itself and then to fees, insurance premiums, and other ancillary costs. The Department of Housing and Urban Development (HUD) should revise the Real Estate Settlement Procedures Act regulations to clarify the closing process and protect consumers from inappropriate fees and charges, as well as changes in loan terms. Congress should require lenders to provide borrowers with their HUD-1 settlement statement and to disclose all disbursements of loan proceeds at least three days prior to the loan closing.


Loan applications and

administration (cont’d.)

FEDERAL STATE

Underwriting criteria based on the true cost of homeownership to the borrower—principal, interest, property taxes, and hazard insurance—should be established. Underwriting should cover the term of the loan, not just the first few years. Riders on Home Ownership and Equity Protection Act (HOEPA) loans that change the terms of the loan should be abolished. Borrower certification of lender compliance with the HOEPA advance disclosure requirement should be prohibited.

Unfair lending practices

FEDERAL STATE LOCAL

Governments should prohibit: • unfair and deceptive practices, such as undisclosed balloon

payments and hidden charges when a home serves as collateral for a loan;

• special premiums or other kickbacks paid by lenders to mortgage brokers for steering customers to higher-yield loans;

• lenders from falsifying income verification; • the sale of lump-sum credit and noncredit insurance products; • repeated refinancing of home loans (a practice known as

flipping), unless there is a tangible net benefit to the borrower, considering all circumstances; and

• binding mandatory arbitration of consumer claims. Governments should restrict or prohibit balloon payments and the amount of closing costs or other fees that a creditor can finance. Prepayment penalties should be restricted. Creditors should be required to take into account a consumer’s ability to repay over the life of the loan.

Preemption of state regulations FEDERAL

Congress should allow states to adopt laws and regulations that may be necessary to protect homeowners from abusive loan origination and servicing practices and from property-flipping schemes.

State regulations STATE

States should license mortgage brokers and originators and require them to act in the best interest of the consumer. States should establish minimum notice standards for foreclosures and regulate the activities of foreclosure consultants and similar professions. In addition states should enact legislation on high-cost home loans that restricts unfair prepayment penalties and prohibits or limits lending without independent homeownership counseling.

Reverse Mortgages The use of reverse mortgages is growing rapidly. The number of federally insured reverse mortgages, which account for more than 90 percent of the market, grew from 43,000 in fiscal year (FY) 2005 to more than 107,000 in FY 2007. Although this financial instrument has been beneficial for some older Americans in need of additional income, three aspects of the program bear watching: excessive upfront fees that eat into the borrower’s equity, unscrupulous selling of insurance or investment

products to be paid for with a reverse mortgage, and failure to provide required counseling on the ramifications of reverse mortgages.

Federally insured reverse mortgages, also known as home equity conversion mortgages (HECMs), are insured by the Department of Housing and Urban Development (HUD). Since the program began in 1990 HUD has insured about 450,000 HECMs. Most of the privately insured and uninsured reverse mortgages that had been offered in the US since the mid-1980s are no longer available.


In FY 2008, the average age of a HECM borrower was 73; the average property value was $240,000. Almost half (44 percent) the borrowers were single females, 36 percent were couples and the rest (21 percent) were single males.

High fees—HECM interest rates tend to be somewhat lower than those on comparable traditional (i.e., forward) mortgages, but upfront and monthly fees are much greater. For a 74-year-old female borrower who lives in a $255,000 home until age 86 (her median life expectancy), the total lifetime noninterest costs of a HECM can be about $25,000. For younger borrowers or those living in more valuable homes, total noninterest costs can be substantially greater.

The way HUD calculates the origination fee limit paid to HECM lenders adds to the costs of the loan. Legislation enacted in 2008 (The Housing and Economy Recovery Act of 2008) set the limit at 2 percent of the first $200,000 of the home’s appraised value, with an additional 1 percent of home value above that, up to a maximum of $6,000. In contrast origination fees for traditional mortgages are generally calculated at 1 percent of the loan amount. As a result HECM origination fees can be about two to four times greater than those for traditional mortgages. Further if HECM borrowers do not use all of the loan funds available to them, the origination fee alone can exceed 10 percent of the loan amount. In 2006 HUD permitted HECM lenders to charge the same origination fee on HECM refinances which are likely to cost less to originate.

Allowable loan amounts in the HECM program are actuarially based on the borrower’s age, as well as current interest rates. The 2008 law established a single national loan limit of $417,000 that will allow the owners of higher-valued homes to borrow larger amounts. However the higher loans will also come with higher mortgage insurance premiums, so the total upfront costs remain high despite the caps on origination fees.

If HECMs were less costly, homeowners with disabilities might be more interested in using them to

pay for long-term care services and equipment. These homeowners as a group may constitute less risk to the HECM program because, actuarially, their life expectancies are presumably shorter. There are several proposals for a federal demonstration program to determine the extent to which HECM costs could be reduced for this population and to evaluate the actuarial impact of such cost reductions.

Mortgage counseling—The statute establishing the HECM program requires that all HECM borrowers receive independent counseling about how the loans work, what they cost, their financial implications, and the availability of lower-cost alternatives. But HUD does not require individual HECM counselors to demonstrate their knowledge of this complex subject matter. (A national competency examination for HECM counselors was designed and is now administered by the AARP Foundation under funding from HUD. Qualification on this examination, now voluntary, is expected to become mandatory in early 2009.) The 2008 legislation also forbids lenders from paying for the counseling, which had been a common practice. The law permits HUD to use a portion of the mortgage insurance fee to pay for counseling, but HUD has indicated that it will not do so.

Federal statute establishes the number of HECM loans that HUD may insure. But if Congress does not increase the limit before it is reached, HUD will be unable to insure more loans. As a result the continuity of the HECM program is not guaranteed.

Scams—Scams involving HECMs surface from time to time. Some involve bogus counseling services or questionable investment offers. Others link reverse mortgages to high-cost, poorly rated, and poorly disclosed annuity sales. In the 2008 law, Congress prohibited lenders from originating HECMs, and counselors from providing their services, if they have a financial interest in selling investments, long-term care insurance, annuities, or other financial products. These provisions do not, however, forbid insurance agents and investment sales agents from selling products to older homeowners that are not in their interest and that would be paid for with a reverse mortgage.

REVERSE MORTGAGES: Policy

Statutory limits on home equity

conversion mortgages (HECMs)

FEDERAL

To guarantee the continuity of the home equity conversion mortgage (HECM) program, Congress should remove the statutory limit on the number of such loans that the Department of Housing and Urban Development (HUD) may insure.


Lower costs FEDERAL STATE

HUD should: • establish a lower origination fee limit for HECM refinances, • carefully review all other HECM costs (including servicing and

mortgage insurance premiums) to determine if they can be reduced without affecting the availability of HECMs or the actuarial soundness of the HECM program, and

• insure loans with lower mortgage insurance premiums for borrowers who accept a lower loan limit.

States should limit fees and interest rates associated with reverse mortgages.

Protecting home equity loan payments

STATE

States should: • enact legislation to protect older homeowners’ equity in

transactions such as reverse mortgages, • require that reverse mortgages be nonrecourse loans to

borrowers and their heirs, and • prohibit reduction of payments and any requirement that

consumers repay loans before they sell, die, or permanently move from the home.

Disclosure of loan terms

FEDERAL STATE

HUD and the Federal Reserve Board should explore the potential of new types of disclosures involving computer technology that can help consumers compare various reverse mortgage products. States should require full disclosure of all projected reverse mortgage costs and benefits, of all loan documents and related information, and of the costs, benefits, and risks associated with using a reverse mortgage to purchase investments or an annuity.

Loan counseling FEDERAL STATE

HUD should vigorously prosecute violations of the Real Estate Settlement Procedures Act of 1974 if lenders or others violate anti-kickback laws. HUD should use its authority to permit a portion of mortgage insurance premiums to fund counseling. If HUD does not, Congress should provide sufficient funding to pay for the HECM counseling required by federal law and make such funding available only for HECM counseling provided by counselors with demonstrated competency in reverse mortgages and related alternatives. States should fund housing counseling programs to help older people plan for housing needs in later years and evaluate housing options, particularly with regard to home equity conversion. States should require counseling by independent, knowledgeable counselors on all reverse mortgages.

Homeowners with disabilities

FEDERAL STATE

Congress should establish a demonstration program to lower the cost of HECMs for homeowners with disabilities. States should supplement any federal demonstration to lower the costs of reverse mortgages for homeowners with disabilities through additional subsidies, information and referral services, care management services, fiscal intermediary services, and other services to enable older homeowners with disabilities to live independently. States may also lower fees by creating state-administered reverse mortgages specifically for homeowners with disabilities.


Scams FEDERAL

HUD should investigate and deter scams, such as bogus counseling services and questionable investment and annuity practices that undermine the credibility of the Federal Housing Administration program.

Refinancing FEDERAL HUD should establish an origination fee limit for refinances that takes into account any lower origination costs for lenders on such loans.

Related benefits issues

FEDERAL STATE

LOCAL

Proceeds from reverse mortgages should not affect homeowners’ eligibility for means-tested state or local public benefit programs or be considered income for tax purposes. Reductions in state benefits should be prohibited when an older person is living in an alternative housing arrangement like homesharing or has used a home equity conversion mortgage. The benefits from such arrangements should not be counted as income or in-kind contributions in determining eligibility for Medicaid or other benefit programs.

Investment and Securities Industry As more and more traditional defined benefit retirement plans are replaced with defined contribution plans, stocks and other investments have become an increasingly important component of an individual’s retirement assets, either owned directly or through mutual funds or retirement plans. This gives individual investors greater control over their retirement assets but also greater responsibility to make appropriate investment choices. The need for objective advice and information to make those choices and for safeguards against abusive practices is more important than ever.

According to the 2004 Federal Reserve Board Survey of Consumer Finances, the percentage of households that owned stocks, either directly or indirectly, increased from 32 percent in 1989 to 49 percent in 2004. This increase was largest among investors age 55 to 64, and about half of all stockholders are baby boomers. According to a 2007 Investment Company Institute survey, 51 million US households (44 percent of all US households) own mutual funds. About 60 percent of mutual funds are owned by households making between $25,000 and $99,999 annually. More than 54 million households hold mutual funds through tax-deferred plans such as employer-sponsored retirement plans, individual retirement accounts, and variable annuities.

This combination of greater individual decisionmaking responsibility and the large number of first-time investors increases the potential for investor abuse or fraud. The variety and increasing complexity of investment products can be

intimidating and confusing. Prospectuses and other written materials, such as account statements, are often indecipherable or fail to disclose key information enabling investors to assess the risk and cost of an investment product. Further industry practices in areas such as broker compensation, mutual fund governance, and audit, accounting, and reporting standards have created actual or potential conflicts of interest that make it more difficult for investors to obtain objective advice and information, and often allow insiders to profit at their expense.

Finally the rapid growth in investment activity over the past decade has severely taxed the resources of the Securities and Exchange Commission (SEC) and state securities agencies. According to the North American Securities Administrators Association, there are at least 25,500 investment adviser firms in the US. Approximately 11,000 of these are larger firms that register with the SEC because they have more than $25 million in assets under management or are active in at least 30 states. The remaining, smaller firms are registered with the states; some 258,000 individuals hold state licenses to act as investment adviser representatives.

Under the National Securities Markets Improvements Act of 1996, states can address fraudulent activities that elude federal law enforcement. Several states have enacted the Uniform Securities Act to advance uniformity across states, clarify state and federal regulation (especially with regard to hybrid products such as variable annuities), and increase the efficiency of regulation and enforcement activities. The Financial Industry


Regulatory Authority, the industry’s self-regulatory authority, adopted suitability standards for variable annuities sold by entities subject to its regulation. The

National Association of Insurance Commissioners has done likewise for variable, index, and fixed annuities.

INVESTMENT AND SECURITIES INDUSTRY: Policy

Informed choice FEDERAL STATE

Disclosures of risks and costs should be comprehensive, accurate, timely, and easily understood. Annuity suitability guidelines should be in place, and annuity sales should meet those guidelines.

Investment advisers

FEDERAL STATE

People holding themselves out to the public as investment advisers and financial planners must meet high standards of professional competence and integrity.

Investor protection laws

FEDERAL STATE

The nation’s investor protection laws should be enforced strongly, with funding adequate to ensure the safety of securities markets and fairness in the sale and marketing of investment products. Investors should have a greater ability to obtain adequate redress for violations of the law and recovery of irreplaceable assets lost because of fraud, negligence, incompetence, or other practices. States should enact the Uniform Securities Act, including the provision defining “variable annuities” as a securities product.

Maintaining Public Trust in Investment Markets The pervasive fraud, conflicts of interest, and extraordinary failures of corporate governance evident in the collapse of Enron and WorldCom, the scandals at the New York Stock Exchange and within the mutual fund industry, and the downturn in the global financial markets seriously diminished public trust and confidence in corporate and marketplace practices. Perhaps even more damaging was the failure of both public and private watchdog agencies to detect questionable practices and take decisive action to prevent massive losses by the investing public. If safeguards and enforcement against conflicts of interest and fraudulent collusion among the supposed agents of investors—accountants, analysts, brokers, company directors, and executives—are not rigorous and vigilant, investors, particularly small investors, and the financial markets will suffer massive damage. The increasing dependence of future retirees on investments for their financial security makes the prevention of such calamities even more imperative.

The implosions of Enron and WorldCom sparked an extensive reexamination of investment market regulation and corporate governance. The centerpiece of this effort was the Public Company Accounting Reform and Investor Protection Act of 2002 (the Sarbanes-Oxley Act). Passed by Congress to restore confidence in the nation’s capital and

investment markets, the act created an independent board, the Public Company Accounting Oversight Board, to oversee auditors of public companies. The board has authority to prohibit accounting firms from providing certain consulting services to public companies they are hired to audit; to require chief executive officers and chief financial officers to be personally responsible for the accuracy of their company’s financial reports; to increase the accountability of audit committees of public company boards; and to establish safeguards against conflicts of interest involving investment analysts.

Some commentators and Securities and Exchange Commission (SEC) members question whether large fines are enough to deter companies from wrongdoing or whether they merely hurt investors. Further some in the business community complain that a number of the internal financial controls required by the Sarbanes-Oxley Act are too costly, particularly for smaller companies, and should be revised.

The SEC has taken steps to increase transparency and ensure confidence in investment markets. These include: • requiring major investment firms to separate

their research and investment banking activities—as part of a “global settlement” of conflict of interest cases against the firms—and issuing new rules governing initial public offerings;


• adopting more than a dozen rules imposing new oversight and disclosure requirements on mutual fund companies and their boards of directors;

• cracking down on lax corporate reporting and requiring the expensing of stock options;

• adopting a new rule for disseminating market information and providing investors with increased price protection for their stock trades; and

• initiating a risk-based management structure and stepping up enforcement activities at the agency, including collecting some $13.8 billion in penalties and disgorgements from fiscal year (FY) 2003 through FY 2007.

Hedge funds, which are privately offered managed pools of capital, have operated largely outside the authority of securities regulators. Initially investment vehicles for extremely wealthy and sophisticated investors, hedge funds are increasingly attracting investments from pension and retirement funds containing the savings of less-affluent investors because of their promise for high return rates. They are becoming a force in the marketplace, with an estimated $1.2 trillion invested in some 8,000 hedge funds. More than 2,000 new hedge funds were created in 2005 alone. The SEC is taking an increasing number of enforcement actions against hedge fund advisers for insider trading and other illegal acts. The commission has also curbed some hedge fund practices, particularly short selling in specified financial stocks and “naked short selling.” Short selling is the act of borrowing a stock to sell and then buying it later at a lower price; naked short selling involves selling the stock without having borrowed it.

New investment products—The recent financial crisis has presented the average investor with a whole list of derivatives and other exotic investment products that present market risk, including credit default swaps, mortgage-backed securities, and collateralized debt obligations. These products were designed to spread the risk of investment. When the underlying investments of these products proved unsound, as was the case with mortgage-backed securities based on subprime mortgages, losses were spread across industries and affected institutional and individual investors alike. Many of these products are not well understood by investors or regulators but present a high possibility of risk to the market.

Some products seemingly skirt regulatory oversight. Credit default swaps, for instance, share qualities of both insurance and a security. Credit default swap

contracts insure investors against losses, but there is also a trading market for the swaps themselves. There is little transparency in these transactions because they occur over-the-counter, i.e., not on any exchange. Neither securities regulators nor state insurance regulators have clear authority over them. The New York Insurance Department has asserted regulatory authority over some credit default swaps but it has hedged its assertion. The SEC has asked Congress for authority to regulate the swaps. While most of the investment in these vehicles occurs through institutional investors, the risk has reached the individual investor through pension funds, mutual funds, and investments by financial institutions in which, or through which, individuals have invested.

Mark-to-market accounting—When the Financial Accounting Standards Board, a private nonprofit entity, issued Statement 157 in 2007, it formalized a definition for “fair value measurements.” Statement 157 includes the so-called “mark-to-market” accounting standard, in which an asset’s value on a company’s books is pegged to its current market value. This accounting method has been criticized by some because it does not adequately address instances in which there is no market for an asset, as in the case with some collateralized debt obligations. In response to industry complaints of excessive regulation, the Emergency Economic Stabilization Act of 2008 authorizes the SEC to suspend mark-to-market accounting when it is “necessary or appropriate in the public interest and is consistent with the protection of investors.” The act also requires the SEC to study the effects of mark-to-market accounting on financial institutions and the role it may have played in the bank failures of 2008.

Stock options—A stock option is the right to purchase a specified number of stock shares at a later time and at a stated price, presumably at a price that is lower than the shares would be worth at that later time. Stock options can be an important part of employee compensation, especially for highly paid employees; however companies are not required to disclose them in their filings with the SEC.

Special-purpose entities—A special-purpose entity, or vehicle, is a legal entity a company sets up to fulfill a specific objective or perform a temporary task. It can protect the company by taking on the ownership of riskier assets. Some jurisdictions restrict or specify ownership interests in special-purpose entities. Problems with these entities can arise when companies use them to make it seem as if they are in better condition financially than really they are.


MAINTAINING PUBLIC TRUST IN INVESTMENT MARKETS: Policy

Strengthening watchdog agencies

FEDERAL

Congress should appropriate the full amount of funding authorized for the Securities and Exchange Commission (SEC) under the Public Company Accounting Reform and Investor Protection Act (the Sarbanes-Oxley Act) and permit conversion of the SEC to a self-funded basis similar to that of federal banking agencies. Appointments to the Public Company Accounting Oversight Board should include individuals of high integrity with significant knowledge of the informational needs of individual investors and a strong commitment to the fair and effective implementation of the Sarbanes-Oxley Act. Similarly individuals selected for appointments to fill vacancies on the SEC should be of high integrity, have significant knowledge of the informational needs of individual investors, and be committed to effective investor protection.

Disclosure FEDERAL

Congress should preserve the protections of the Sarbanes-Oxley Act, including its disclosure and reporting requirements. The SEC, Public Company Accounting Oversight Board, and the Financial Accounting Standards Board (FASB), in issuing rules and regulations under the Sarbanes-Oxley Act, should strengthen transparency and disclosure with respect to public companies’ accounting standards and financial reporting. The SEC should require analysts to disclose their ratings performance based on their stock choices and forecasted earnings. SEC rules should ensure greater accountability of fund managers and disclosure of management fees and commissions. The FASB should require public companies that issue stock options to disclose this activity in their quarterly SEC filings. The FASB also should strengthen guidelines governing the use and funding of special-purpose entities.

Conflict of interest FEDERAL

The SEC should issue rules that separate investment banking from research activities and prohibit tying analysts’ compensation to their generating investment banking business. The Public Company Accounting Oversight Board should carefully monitor the provision of nonaudit services by auditors and use its authority under the Sarbanes-Oxley Act to prohibit such practices where they represent a conflict of interest. Conflicts of interest in the current system of rating debt-backed securities should be minimized.

Hedge funds FEDERAL The federal government should require the registration of hedge fund managers.

Derivatives and other exotic investment

vehicles

FEDERAL STATE

Federal and state regulators should be given authority to regulate derivatives, including credit default swaps and other exotic investment vehicles. State insurance regulators should regulate credit default swaps to the extent they represent insurance contracts.


Initial public offerings FEDERAL

The SEC should review the process for initial public offerings to examine the feasibility of establishing an auction system to promote fair pricing and open access.

Corporate boards FEDERAL

Congress should tighten the definition of “independent director” under the Investment Company Act of 1940. SEC regulations under the Sarbanes-Oxley Act should ensure the independence of public company audit committees and strengthen the role of independent members of corporate boards of directors.

Investment Product Disclosure In 2008 assets invested in mutual funds totaled approximately $11.6 trillion. According to the Investment Company Institute, 34 percent of households with a person age 65 or older owned mutual funds in 2007; among baby boomers the ownership rate is 45 percent. With approximately 8,000 mutual funds now available, compared with 564 funds in 1980, clear and full disclosures of information such as fees, future tax burdens, risks, and administrative costs are essential if investors are to make choices consistent with their financial goals and risk tolerance.

Federal securities laws set certain technical standards for published information on securities, leaving the individual investor with a considerable amount of highly technical information. But the Securities and Exchange Commission (SEC) and Government Accountability Office recently found that the information currently provided on investor

statements is insufficient for making investors aware of the level of fees they pay. Moreover a bewildering array of charges makes comparison difficult, and current rules do not require complete and timely disclosures of certain types of fees (such as revenue sharing or self-space fees). The SEC has proposed rules that would enhance point-of-sale and transaction confirmation disclosures for mutual fund purchases.

Many investors are confused or uninformed about whether investments are federally insured. A 2003 North American Securities Dealers survey found that 62 percent of investors did not know that there is no insurance for stock losses. And AARP research has shown that older consumers are often unaware that investment products sold by banks are not insured by the Federal Deposit Insurance Corporation. These sales account for as much as one-third of banks’ retail income, according to a 2000 Community Bankers Association survey.

INVESTMENT PRODUCT DISCLOSURE: Policy

Fund prospectus FEDERAL STATE

Mutual fund prospectuses and other literature should clearly and fully disclose information such as the fund’s yield, before-tax and after-tax performance returns, and administrative costs and the risks of investing. This information should be provided in plain language and a standardized format to allow comparison. The Securities and Exchange Commission (SEC) and the states should work with the securities industry to develop simplified, understandable prospectuses and standardized disclosures and make more detailed documents available on request. To the greatest extent possible, disclosures to investors should be made prior to or at the point of sale so they receive real help in making investment decisions.

Fund performance and

safety

FEDERAL STATE

Mutual fund advertisements should not mislead investors about the safety of a particular fund and should disclose the total rate of return and prior fund performance during both adverse and favorable market conditions.


Fund performance and safety (cont’d.)

FEDERAL STATE

Investment instruments such as derivatives (products that can be speculative) should be explained and disclosed clearly, so that investors understand the nature of the product. An easily understood standard should be established to measure the risk of mutual funds. Sales practices that compromise the suitability of a broker’s recommendation to a customer should be banned or restricted. In any case if a broker receives a special commission or incentive for the sale of a particular product, this should be disclosed to the customer at the time of sale and on the account statement. Bank sales of mutual funds and annuities must be properly regulated to prevent consumer confusion about the uninsured status of these products and their attendant fees, costs, and risks.

Fees and costs FEDERAL STATE LOCAL

The SEC and the states should require broker-dealers to disclose detailed information to investors regarding the total amount of fees and commissions investors will pay for investing in a particular product. These disclosures should be made in a clear, standardized format so investors can compare the fees, commissions, and rates of return among various investment products. Account statements provided to investors should also clearly state the current value of the investments, the commissions paid at the time of each sale, and the cost of fees on an ongoing basis.

State regulation FEDERAL STATE

The authority of state officials to review new securities issues should not be further weakened.

Investment Advice With nearly half of US households invested in stocks or mutual funds—and many older investors in the market for the first time—the role of investment adviser has taken on increasing importance. Unfortunately many of these advisers lack the skills, experience, and training to offer advice suitable to their clients’ risk tolerance and financial goals.

Moreover a study by the Consumer Federation of America found that only 26 percent of investors surveyed knew that a broker’s primary function is to execute transaction orders, while 53 percent looked to their brokers for advice.

Many people using titles like “financial planner” and “personal financial consultant” are unregulated and have met no minimum standard requirements. Yet investors are often unaware of this. For example only a person who completes the training and testing requirements set out by a certification organization such as the Institute of Certified Financial Planners Board of Standards can use the title “certified financial planner.” Similarly “chartered financial

consultant” may be used only after meeting specified standards. Obtaining credentials and titles is not required by federal or state law, and the only term currently subject to federal regulation is “investment adviser.”

In general investment advisers who manage $25 million or more in client assets must register with the Securities and Exchange Commission (SEC); those who manage less than $25 million must register with the state securities agency in the state where they have their principal place of business. In 2005 the SEC required fee-based brokerage programs to comply with the more rigorous fiduciary and disclosure standards of the Investment Advisers Act if they provide financial planning advice. Brokers are exempt only if they do not have discretion over assets and advise investors that they are providing only brokerage services.

These problems are likely to become more acute as many financial services companies, such as brokerage firms, banks, and insurance companies, seek to enter the market for investment advice, particularly for 401(k) plan participants.


INVESTMENT ADVICE: Policy

Regulation and licensing of investment

advisers

FEDERAL STATE

Congress and federal agencies should extend their oversight of investment advisers and others who provide financial services to individuals and firms or institutions offering financial advisory services. Registration as an investment adviser under the Investment Advisers Act (IAA) should be mandatory and not limited by the type of investment advice or nature of the advising entity. States should prevent abuses in financial advising, counseling, and planning by unqualified people or organizations and by unethical or incompetent professionals. State laws should regulate people who hold themselves out as investment advisers and the use “senior adviser” designations. States should require training, testing, and registration of advisers.

Performance standards FEDERAL

Advisers should be required to meet established standards of performance and agree to adhere to a code of ethics. Enforcement should apply to advisory firms as well as to their employees.

Consumer redress of losses

FEDERAL STATE

Individuals should be given a private right of action under the IAA to seek restitution through the civil courts for losses they sustain if their adviser violates the act. State laws should provide more effective consumer redress, and better public education on how to seek redress, of financial malfeasance.

Penalties FEDERAL STATE LOCAL

State laws should provide for criminal penalties against those who commit securities fraud. State laws should strengthen and enforce existing laws on truth in advertising and other consumer protection laws. States should provide adequate resources for state enforcement.

Disclosure FEDERAL

Individuals who work for broker-dealers and sell investment products should be required to disclose their employment history, educational background, and any disciplinary actions taken against them (i.e., the information contained in the U-4 form, which must be on file with the Financial Industry Regulatory Authority). State laws should mandate disclosure of self-interest and conflicts of interest (e.g., the amounts of commissions).

Investment Fraud and Abuse The Federal Trade Commission estimates that Americans lose $10 billion a year in fraudulent investments. Older people are attractive targets because they often have sizable assets. Even when the investment is not outright fraudulent, investors may be unfairly manipulated or their money seriously mismanaged. The Securities and Exchange Commission (SEC) received 77,174 complaints and questions from investors in fiscal year 2007.

Federal and state governments have the authority to protect investors against fraud and abuse and to

enable injured consumers to seek redress, but legislation has severely curtailed that protection. For example the Private Securities Litigation Reform Act of 1995 shields companies from liability even if they make deliberately false or reckless projections in their forward-looking statements, as long as they include “cautionary language.” It also fails to make those who aid and abet fraud fully liable for their actions and raises the level of proof required for investors to show that they were defrauded.

Technological advances, such as the Internet, give perpetrators of investment fraud new ways to contact


potential victims directly. Yet the SEC and state enforcement agencies do not have the resources to respond adequately to Internet fraud. The global nature of the Internet also raises jurisdictional issues for establishing consumer protections.

Investors are required to use arbitration procedures established by the Financial Industry Regulatory Authority to obtain redress, but the system has produced inconsistent benefits for consumers. An independent 2007 study of how investors fare in

mandatory securities arbitration found that investors win awards of any kind in approximately 50 percent of the cases brought. The study also found that, on average, investors are awarded approximately half of the amount claimed when an award is made. The study concludes that, overall, investors can expect to receive only a fourth of the amount of damages they have sought. The study also finds that an investor has a lower expected recovery percentage at the larger brokerage firms.

INVESTMENT FRAUD AND ABUSE: Policy

Redress for victims

FEDERAL STATE

Victims of investment fraud should have adequate federal and state statutory remedies in order to obtain financial redress. Statutory or common law remedies available to defrauded investors in federal or state court should not be limited.

Criminal penalties FEDERAL STATE

Congress and the states should consider adding criminal penalties to the civil sanctions now imposed on brokers and dealers who commit fraud. Government agencies should perform thorough investigations into investment fraud and abuse cases, pursue enforcement actions, and promulgate regulations and initiate rulemakings that protect consumers against investment scam artists.

Telemarketing FEDERAL Telemarketing practices regarding investment opportunities that pressure, mislead, deceive, or defraud consumers should be prohibited.

Enforcement of antifraud

regulations and laws

FEDERAL STATE

The Securities and Exchange Commission (SEC) should adopt stronger regulations and increase enforcement activities to eliminate fraudulent, deceptive, or unfair practices with respect to investment sales, accounting methods, disclosures, and market structure. State enforcement agencies and the SEC should be provided with adequate resources to address securities fraud, including Internet fraud.

Insurance Insurance is an essential financial product intended to protect individuals, their families, and their property against significant financial loss. Its purchase is often a legal or contractual prerequisite for access to or purchase of other important products and services such as health care, a car or home, and credit. In addition the complexity of insurance contracts and the need to ensure the solvency of companies to meet future obligations has traditionally justified a substantial role for government regulation of the insurance industry.

The most recent Consumer Expenditure Survey (2006) indicates that insurance expenditures (for home, vehicle, health, life, and other personal insurance) represented roughly 7.8 percent of total

annual consumer expenditures and 14.2 percent of annual expenditures by consumers age 65 and older.

Insurance Industry Oversight

Insurance regulation is primarily a state function. States approve the prices and contents of insurance policies, monitor marketing practices and enforcement activities, handle consumer complaints, issue licenses to underwrite or sell policies, and promote consumer education and information activities. State regulators face a number of challenges due to the emergence of an integrated financial services marketplace in the 1990s and passage of the federal Gramm-Leach-Bliley Financial Modernization Act of 1999 (particularly Title III, which required a majority of states to enact uniform laws governing licensure of individuals and entities to sell and solicit the purchase of insurance).


In addition Congress and the states are grappling with a number of insurance-related problems resulting from natural disasters such as Hurricane Katrina.

Regulatory issues—Many insurers are seeking parity with competing banks and securities firms to introduce new products into the marketplace and are pressing for more uniform standards and filing procedures to speed that process. While a majority of states use some form of flexible or competitive rating system for property and casualty insurance, some industry groups and companies favor total rate deregulation. Further various bills introduced in Congress at the request of financial services industry groups have proposed establishing a dual regulatory and optional federal charter system for insurance. Like the federal preemption of state banking regulation, these proposals could weaken consumer protection currently afforded under state law.

States have responded with the Interstate Insurance Product Regulation Commission (IIPRC), a multistate system to develop uniform national standards for asset-protection insurance products such as annuities and life, disability, and long-term care insurance. The requisite majority of 26 states have approved the compact establishing the IIPRC, and the IIPRC held its first meeting in 2006. A major potential benefit for consumers is that pooling resources for product approvals and filings may free additional state resources to review market conduct and undertake other consumer protection measures.

Restoring the federal investigatory role—The McCarran-Ferguson Act of 1945, which gave states sole authority to regulate insurance, also granted insurance companies an exemption from federal antitrust laws outlawing anticompetitive practices, such as colluding to set rates. Although the Federal Trade Commission (FTC) is prohibited from prosecuting antitrust or consumer protection violations related to insurance, it was permitted to investigate and study problems in the insurance industry and make enforcement recommendations to state regulators. The FTC Improvements Act of 1980, however, restricted even that authority and allowed the FTC to conduct studies of the industry only if a congressional committee specifically requested one. Consumer advocates have argued that this provision is unduly restrictive and the FTC’s authority to investigate should be restored.

There is likely to be continued discussion at the federal level about national oversight of the insurance industry, though the enormity of the issue makes passage of comprehensive legislation unlikely in the near future.

Coping with major disasters—Recent natural disasters, like the hurricanes that struck the Gulf region, have revealed major shortcomings in and put major strains on the country’s insurance system. Many homeowners all along the Gulf Coast and coastal areas along the eastern seaboard are now experiencing sharp insurance rate hikes, cutbacks in coverage, and nonrenewals; low-income households and retirees living on fixed incomes are particularly hard hit. As companies enforce stricter underwriting standards to limit their exposure in high-risk areas or limit the types of properties they insure, many insurers have been forced to leave the market altogether. Further continuing growth in the number of people living near earthquake faults, floodplains, and coastlines guarantees that no area of the country will be exempt from similar insurance cost increases and lack of coverage.

States have taken a number of actions to improve the availability and affordability of insurance in coastal areas. Many have created state catastrophe funds to provide additional insurance capacity by allowing private insurance companies to set aside money tax-free for covered losses, and many have set up state-run “wind pools” as insurers of last resort. States have also taken steps to make buildings better able to withstand the impact of major storms by: • adopting and enforcing risk-based building codes

and strengthening land-use planning; • providing home inspections to identify potential

storm-resistance improvements; • implementing programs to reinforce existing

structures, including financial assistance for low-income owners; and

• mandating premium discounts for homeowners who implement approved mitigation measures.

While such actions help reduce the effects of recent storms on the insurance market, the rising cost of reinsurance has put insurance out of reach for many former policyholders. One of the proposed measures to deal with this problem includes modifying the Internal Revenue Service code to allow insurance companies to defer taxes on reserves set aside for catastrophic losses and having the Treasury Department implement a reinsurance program for state catastrophe funds in the event of a major disaster. A recent report by the Government Accountability Office notes that the efficacy of such approaches is uncertain. Further the federal government’s record with regard to administration of the National Flood Insurance Program has raised concerns about cost and


effectiveness. Given the complexity of the problem, the National Association of Insurance Commissioners has proposed that a national

commission be established to study the issue and make recommendations to Congress for a natural catastrophe risk plan.

INSURANCE INDUSTRY OVERSIGHT: Policy

Federal preemption FEDERAL

Congress should not pass legislation that creates federal standards as the ceiling rather than the floor for insurance regulation, thus preempting state authority to strengthen consumer protections at the state level. Congress should not pass legislation that creates conditions conducive to regulatory competition between the federal and state governments that would weaken government oversight and consumer protections for insurance customers. Congress should not pass legislation that removes or weakens state laws that guarantee consumer protections, given the long-term nature of insurance products. Congress should amend the Federal Trade Commission (FTC) Improvements Act of 1980 to allow the FTC to investigate and study problems in the insurance industry and make recommendations.

Consumer protection STATE

States should: • establish a full-time, independent insurance consumer advocate

office funded by a nominal charge per insurance policy; • consider statutory changes that would bring reinsurers under the

scope of state regulatory authority and require documentation of their financial status; and

• set up and publicize a consumer appeals process.

Conflicts of interest STATE

States should establish strong conflict-of-interest regulations for insurance commissioners, and their staff, and any independent contractors hired by the insurance departments. Commissioners and key staff should be restricted from obtaining employment with or consulting for regulated companies after leaving or retiring from public service, for a period long enough to ensure that conflicts of interest are avoided.

Maintaining solvency to cover

claims STATE

States should strengthen regulatory oversight of the safety and soundness of insurance companies, particularly as it relates to the protection of consumer funds held by insurers and the availability of coverage in the event of insurance company failure. State guarantee funds should be created and given adequate resources. Funds should be interest-generating to ensure payment to consumers. States should conduct studies of closed claims to establish how legal settlements and awards figure into insurance costs.

Strengthening regulation STATE

States should authorize their insurance commissioners to regulate insurance companies conducting business in the state, whether or not the companies have a physical presence within state borders.


Strengthening regulation (cont’d.)

STATE

States should increase the authority and resources of their insurance commissioners and departments in order to establish (in appropriate lines of insurance) experience-based rates by type of business, require and analyze essential financial information, conduct studies and investigations of insurance problems, institute consumer protections, and publicize complaint procedures, with special efforts to reach diverse communities. States should give their insurance commissioners the power to review insurance rates before they are implemented. Although prior approval should be the goal, at a minimum states should develop a system allowing rates to be set within specified ranges and disapproved by the state regulator.

Developing uniform state

regulatory standards

STATE

The Interstate Insurance Product Regulation Commission (IIPRC) and National Association of Insurance Commissioners (NAIC) should give priority to identifying a common set of standards (procedures for conducting market analysis and coordinating market conduct examinations, for example) for a uniform market oversight program. The NAIC should create an information clearinghouse for insurance statistics and information, particularly with regard to claims and payouts; develop uniform reporting requirements; and provide technical assistance to state insurance departments. The IIPRC and the NAIC should provide adequate resources for consumer representation.

Mitigating the impact of natural

disasters FEDERAL

Congress should establish a national commission to examine and make recommendations on various approaches to mitigating the effects of natural disasters on insurance availability and affordability. To reduce the effects of natural disasters on insurance availability and costs, states should consider creating catastrophe funds and should ensure fair claims handling by requiring insurers to itemize outstanding claims and insurance departments to monitor progress toward their resolution.

Building codes in high-risk areas

STATE LOCAL

States and local governments should adopt strong and uniform enforcement of risk-based building codes, land-use planning, and programs designed to reinforce existing structures. Programs can include home inspections and financial assistance for low- and fixed-income owners and purchasers. States should mandate and publicize insurance premium discounts for people who implement approved mitigation measures. States should develop and implement storm-resistance labeling programs to encourage market demand for homes meeting higher construction standards. State housing and housing credit programs should encourage the purchase of homes that meet stringent code standards, particularly in high-risk areas.


Unfair Acts and Practices Insurance companies commonly use demographic factors to determine risk in setting rates, coverage, benefits, and eligibility, and the effect on availability and affordability can be substantial. Furthermore the use of a demographic factor can reflect or reinforce past or present patterns of discrimination. Nevertheless there are signs that social values and civil rights may be beginning to influence the equation. Discrimination based on race has been illegal for a number of years, but several states have also passed laws that ban or reduce the use of rate classifications based on age, gender, and marital status.

Identifying good predictors of risk that do not rely on group or immutable characteristics is a challenge. The criteria used must be reliable and verifiable, administered efficiently and effectively, and as accurate as demographic factors in predicting losses, but with less prejudicial effect. For example actual continued employment may be more significant as an indicator of health than passing the traditional retirement age of 65. The number of miles driven and a person’s driving record may be better predictors than gender in determining auto insurance risks.

Because they are fast and relatively efficient to use, credit scores are increasingly being relied on to set premiums. There is debate, however, about their fairness for individual policyholders, particularly within ethnic minorities and for lower-income people. A 2004 AARP study found that approximately 15 percent of respondents age 50 and older believed the use of credit scores was appropriate for homeowners insurance and auto insurance, but 84 percent of respondents also supported state insurance commissioners making credit-scoring models public.

Models used to project losses from hurricanes and other natural disasters can also have a big impact on insurance rates. However third-party vendors (risk-modeling companies) that develop and sell information from such models are often not subject to state insurance department oversight.

In the wake of natural disasters, homeowners and other policyholders are often subject to arbitrary and unfair policy cancellations or interpretations. Additional protections are needed as well. For example in 2006 a federal court ruled in Paul and Julie Leonard v Nationwide Mutual Insurance Co. that an anti-concurrent causation clause in the plaintiff’s

homeowners policy was ambiguous and invalid. Such clauses, common in homeowners policies, have been used to deny coverage altogether if a small portion of damage can be attributed to a cause other than the covered peril. In the Leonard case, the defendants denied a claim for hurricane damage from wind and water because it did not fall under the policy’s wind insurance coverage. A Louisiana statute that prevents policy cancellations if a policyholder has had insurance from a provider for at least three consecutive years and has experienced no more than two non-act-of-God events was noted in testimony before Congress by the National Association of Insurance Commissioners (NAIC) as having a stabilizing effect on the market.

Another area of growing concern involving older American is annuity sales. As these sales have risen, consumers and regulators are reporting numerous instances of unfair and deceptive sales practices, particularly with deferred annuities. According to the NAIC, 33 states have adopted some form of its model suitability regulation for annuity transactions. In some of those states, suitability requirements apply only to individuals of a specified age, generally 65 or older. The terms used in annuity contracts may also be confusing. Insurance companies often use different terms for similar benefits under the contracts, which can make product comparison difficult.

Developed in the 1980s, viatical settlement products enable terminally ill individuals to receive a portion of their life insurance benefits prior to death. The typical seller of an insurance policy in a viatical settlement transaction is a terminally or chronically ill individual with less than two years’ life expectancy. The practice of settling (or selling) life insurance policies has since grown into a multimillion dollar industry, with healthy individuals settling life insurance policies they no longer need or want. Some of the settled policies are bundled into securities or bonds and sold in global financial markets. Policies for which a market has developed are typically whole life with a cash surrender value. The policies are sold for more than their cash surrender value but less than the life insurance benefit. The practice has the possibility for fraud and misrepresentation for both the person who invests in the product and the person who provides the insurance policy. Life insurance policyholders may not be aware that selling their policies can have consequences, including effects on their ability to obtain subsequent life insurance and on their income taxes.


Insurance companies are concerned that healthy, older people are being encouraged to allow strangers to purchase (or originate) insurance policies on their lives with the intent to sell the policies. These transactions, known as stranger-originated life insurance (STOLI), may pose risks for the life insurance marketplace and generally violate state insurable interest laws. Persons encouraging STOLI transactions frequently give misleading information, including about how the premiums will be paid, to an individual to encourage him to consent to the policy. The National Conference of Insurance Legislators and the NAIC have each adopted a model law governing life and viatical settlements. Although the

two models take different approaches, each addresses the STOLI issue.

Prepaid, or preneed, funeral insurance is frequently sold by funeral home directors and others in the deathcare industry. These policies are purchased by individuals who have made specific funeral arrangements and want to ensure that they are carried out. The policies can cover such things as coffins, memorial services, cemetery plots, and headstones. While such policies can be beneficial, the potential for scam artists and abuse exists. (See this chapter’s section, Consumer Products—Deathcare Industry.)

UNFAIR ACTS AND PRACTICES: Policy

Availability of coverage

FEDERAL STATE

Congress and the states should prohibit insurance companies from denying access to insurance coverage, particularly to people with disabilities, preexisting conditions, or chronic illnesses. Legislation and regulation should prohibit companies from refusing to insure people, canceling or failing to renew policies, raising premiums, reducing death benefits, or limiting coverage based on age alone or in an arbitrary or unfair manner. Redlining (the practice of refusing to insure), raising costs unfairly, or severely limiting service in certain geographic areas because of their racial or income composition must be outlawed.

New risk-classification

systems

FEDERAL STATE

Research is needed to establish risk-classification systems that accurately and fairly reflect the risks associated with the individual characteristics of each insured person. Information on risk-classification models used to set rates relating to homeowners and property insurance should be made available to the public, and states should establish appropriate oversight over the third-party venders of such models.

Disclosure STATE

States should require and enforce effective disclosures of life insurance premium costs, including costs of long-term care policies. State departments of insurance should make credit-scoring models available to the public. Such disclosures are important if consumers are to make rational decisions in the marketplace. In their review of insurance policy filings, state insurance departments should give particular attention to identifying and removing ambiguous and unfair wording and definitions.

Unfair or fraudulent marketing practices

STATE

States should take swift, effective disciplinary action against unfair market practices and discriminatory pricing and service. States should pass legislation that imposes heavy fines and other penalties on insurance agents or companies that knowingly sell policies or replacement policies that are worthless or fraudulent. States should prohibit insurance companies from selling life insurance to older people if, after a ten-year period, the premiums


Unfair or fraudulent marketing

practices (cont’d.)

STATE

required in aggregate are expected to reach or exceed the death benefits paid. Death benefits should always exceed premiums paid by at least the expected annual interest rate per year for each year in which premiums were paid. Any life insurance policy with a provision for accelerated benefits must sufficiently protect the insured against deceptive and misleading practices and must provide a fair formula for accelerating benefits to prevent unjust enrichment of the company providing the benefit. States also should require filing of replacement clauses to help prevent the practice of churning policies. State licensing and regulatory boards should monitor industry compliance with laws addressing the marketing and offering of prepaid funeral insurance by funeral directors, cemetarians, and third-party salespeople. In the case of long-term care insurance, age-based practices should not result in exorbitant or unfair pricing.

Annuity sales STATE

States should strengthen prohibitions against unfair and deceptive practices in the sale of equity-indexed annuities and other annuity products and should implement needs-based sales requirements for all insurance products. States should adopt strong suitability requirements for annuity products that apply regardless of the purchaser’s age.

Life/viatical settlements STATE

States should pass laws regulating life and viatical settlements. Such laws should include requirements on licensing, record retention, and disclosures for both ends of the transaction. Such laws should not limit the authority of securities regulators over the secondary sale of life or viatical settlements as investments.

Terms and Conditions Before buying an insurance product consumers need clear, comprehensive disclosures in order to understand its scope, nature, and cost. Further these disclosures should be easy to understand and compare so consumers can evaluate policy benefits across providers (for information on home- and community-based care, see Chapter 7, Health; for long-term care, see Chapter 8, Long-Term Services and Supports). Too often, however, the complexity of insurance contracts places the average consumer at a disadvantage in the marketplace. This is especially evident in homeowners and automobile insurance.

Experience from recent natural disasters shows that many policyholders who expected their residential policy to cover most of the damage to their homes regardless of cause were surprised as to what was or was not covered. Further the need to purchase

separate policies for various hazards (flood, wind, and others) and to deal with separate adjusters in the event of an incident was cumbersome and inefficient. The National Association of Insurance Commissioners has recommended that as part of a national catastrophe risk plan, an all-perils policy be developed to reduce consumer confusion.

Auto insurance is essential for everyone who owns a car. Some policies, however, drastically raise premiums or drop coverage once policyholders reach a certain age, regardless of driving record. Coverage also can be very expensive even though it may be difficult to recover losses from accidents, particularly with “tort-based” auto insurance, which requires policyholders to go to court to recover claims if there is a dispute over fault. It can be tough to find auto insurance that is affordable, has some flexibility in coverage amounts, and is offered on fair, nondiscriminatory terms.


TERMS AND CONDITIONS: Policy

Insurance pricing STATE

States should require insurance companies to make their products available at fair and reasonable rates to people with disabilities, preexisting conditions, or chronic illnesses. States should enforce a minimum loss ratio of 60 percent for credit life insurance.

Understandable policy terms and

language STATE

Insurance companies should be required to provide clear, informative outlines of coverage before customers purchase policies and to reduce the complexity of consumer decisionmaking through such mechanisms as an all-perils homeowners policy. In particular companies must be required to disclose fully the limitations and exclusions in their individual and group health plans and auto and homeowners policies. State insurance departments and insurance companies should be required to issue, post, and/or disseminate—particularly on the Internet—objective, usable, and comparative consumer information on costs and coverage and provide postsale disclosure of paid-up life insurance options. Insurance companies should be required to notify and explain cancellation decisions to subscribers before cancellation occurs. States should develop standard disclosures for the sale of dread-disease insurance and other limited-benefit plans, clearly explaining the terms, including portability, before the sale.

Consumer education STATE

Consumers, as well as organizations, agencies, and small businesses, should be educated about insurance-related complaint procedures and on issues such as the need for loss control and risk management in the liability area. States should establish and publicize government- or industry-funded hotlines that would answer consumers’ insurance questions. States should study closed claims to establish how legal settlements and awards figure into insurance costs.

Long-term care STATE

Providers of long-term care insurance should fully disclose the benefits to be covered, as well as the terms and conditions regarding eligibility, renewability, preexisting conditions, nonduplication of coverage provisions, coverage of dependents, termination, continuation or conversion, limitations, exceptions, reductions, and elimination periods. Insurers should disclose whether a policy provides coverage for less-than-skilled nursing home care and the extent of home- and community-based care benefits. The state insurance commissioner should also require insurers to include specific information on long-term care benefits under public and private insurance programs.

Automobile insurance STATE

Policyholders should be compensated for claims resulting from auto accidents, without having to litigate, except in unusual cases involving damages for pain and suffering or in which the driver’s conduct was extremely culpable. True no-fault automobile insurance programs should be enacted, covering bodily injury and requiring reasonable survivor benefits,


Automobile insurance (cont’d.)

STATE

unlimited medical and rehabilitation benefits, and a threshold level high enough to minimize litigation. States should promote the development of true group auto insurance coverage. Insurance companies should be prohibited from canceling or failing to renew auto insurance policies or raising rates on the basis of age alone. States should avoid enacting a “choice” automobile insurance law (which allows consumers to choose between no-fault coverage and traditional liability coverage) that would lower benefits or result in insufficient protection. States should support reduced automobile liability insurance rates for drivers upon successful completion of state-approved driver improvement courses. Measures that will help reduce the cost of auto insurance, such as tougher drunk- and drugged-driving laws, enhanced enforcement of traffic laws, mandatory seat belt laws, and antitheft and fraud programs, should be adopted. Auto insurance rates should be kept in line with actual insurance costs. Rental companies should be required to clearly and conspicuously disclose that collision damage waivers in car rental agreements are optional and that renters may already be covered through individual automobile insurance policies or credit cards.

Mental health coverage STATE

Insurance companies should be encouraged to improve benefits and coverage for mental illness treated by a licensed mental health practitioner.

Liability insurance STATE

States should explore new options to guarantee the availability of liability insurance to those who need it. States should consider expanding beyond traditional insurance to create new forms of risk-sharing, such as market-assistance plans and joint underwriting associations. If these prove insufficient, states should establish mandatory risk-sharing or assigned-risk programs. Legislation may be needed to authorize the formation of risk-sharing pools and captive insurance companies. These alternatives must be regulated as carefully as regular insurance companies are in order to protect policyholders. The cancellation of liability policies before the expiration date should be allowed only for good cause, such as failure to pay premiums. Even then, reasonable notice should be provided. Refusals to renew should require a written explanation and an even longer notice period. There must be protections against nonrenewals for certain types of insurance, such as medical malpractice.

Claims service STATE States should require high standards for claims performance by all commercial and subscriber insurance service organizations.

Financial Literacy Financial literacy is an increasingly critical skill for consumers in an increasingly complex financial marketplace. Globalization, technological advances,

and deregulation have given consumers access to an endless variety of products and services. Consumers trying to make informed decisions often need unprecedented levels of sophistication and knowledge to sift through massive amounts of


complicated product information (for example, investment prospectuses and mortgage paperwork).

In today’s market individuals have greater responsibility in financial decisionmaking. Poor credit management may result in late payments and reduced savings and affect credit history for years to come. Ill-conceived investment decisions with regard to defined contribution retirement plans may have profound effects on a retiree’s financial well-being and independence. For midlife and older people with fewer years of earning potential prior to retirement, the impact of such decisions can be even more acute and the need for financial literacy even more crucial.

The nation’s changing demographics have also resulted in an increasing number of people unfamiliar with US financial markets. People born in other countries, for example, may find it difficult to navigate the complex marketplace and access the mainstream financial system. They may rely on more expensive alternative financial services (e.g., payday lenders and check-cashing outlets), which seldom provide savings accounts and related money management services that are key to building wealth for retirement.

Many consumers, particularly older people, are also unaware of their rights as consumers. Legal documents and consumer disclosures are often incomprehensible to many consumers. In addition such disclosures have failed to keep pace with changes in products and practices.

Financial literacy programs in the US are growing and diverse. Providers include financial institutions, employers, the military, state cooperative extension services, community colleges, faith-based groups, and community-based organizations. Programs vary greatly in content, audience, and goals. While it is difficult to measure the effectiveness of these programs in increasing knowledge and, more importantly, increasing sound financial behaviors, the Federal Reserve Board has found that increased knowledge may lead to improvements in financial management.

The federal government is addressing financial literacy on several fronts: • The Treasury Department established an Office

of Financial Education (OFE) in 2002. The OFE works to promote access to the financial education tools that can help Americans make wiser choices in all areas of personal financial management, with a special emphasis on saving, credit management, home ownership, and retirement planning.

• The Financial Literacy and Education Commission was established in 2003 to improve financial literacy and education in the US. Legislation named the Treasury secretary head of the commission and mandated that it include 19 other federal agencies and bureaus. The commission coordinates the financial education efforts throughout the federal government, supports the promotion of financial literacy by the private sector, and encourages the synchronization of efforts between the public and private sectors.

• The President’s Advisory Council on Financial Literacy was created in 2008. Each council member represents an industry involved with the delivery of financial education to people in the US. The council works with the public and private sectors to help increase financial education efforts for youth in school and for adults in the workplace, increase access to financial services, establish measures of national financial literacy, conduct research on financial knowledge, and help strengthen public- and private-sector financial education programs.

Some states have also enacted legislation to promote consumer financial literacy. In general these either focus on specific requirements related to academic performance prior to high school graduation or establish statewide interdepartmental councils to assess state resources and existing programs and create goals and guidelines for financial literacy.

FINANCIAL LITERACY: Policy

Target audience FEDERAL STATE

Financial literacy initiatives should focus on increasing the financial literacy of all people. Special efforts should target students, midlife and older people, foreign-born people, and people with cultural, language and other barriers that make it more difficult to access the traditional financial services system.


Understanding financial

documents

FEDERAL STATE

The clarity and accuracy of product information, and of legal and disclosure documents, should be improved to help consumers understand and compare products. Financial literacy could be improved by the development of a financial “facts box” across all financial products and services that defines basic terms such as “benefits,” “risk,” and “expenses.”

Fraud and financial abuse

FEDERAL STATE

Financial literacy programs should include information on financial fraud and abuse issues for all consumers, as well as on technological advances (such as online banking) that may be of particular value to older consumers.

Development of research tools

FEDERAL STATE

Research tools that accurately measure the effectiveness of financial literacy programs, specifically through behavioral outcomes, should be developed. Other issues to assess include program impact, sustainability, content, location, delivery method, and audience.

Coordination of state programs

FEDERAL STATE

Federal and statewide interagency councils should be established to coordinate existing efforts to increase financial literacy in the states. Councils should include representatives from the financial services industry, consumer groups, and government agencies that represent older people.

Bankruptcy In 2008 over one million bankruptcy cases were filed. Americans age 55 and older have experienced the sharpest increase in bankruptcy filings of any age group, while the highest rates of bankruptcy are found among people age 35 to 54, according to research by Thorne, Warren and Sullivan. The median age of filers in 2007 was 43, compared with 36½ in 1991. The findings show increasing financial pressure on families as they age.

A number of studies have shown that consumer debt is a predominant factor in personal bankruptcies and that bankruptcies usually rose in periods when consumer debt increased faster than income. The Federal Reserve Board Survey of Consumer Finances shows that debt burdens for the poorest families are growing, along with the rise in loans from subprime lenders, the fastest-growing credit issuers.

Job loss and high medical costs are primary contributors to the rise in bankruptcy filings. According to the National Conference of Bankruptcy Judges, younger and older debtors alike cite employment-related problems as the most common cause for the financial difficulties.

Personal bankruptcies are generally filed under Chapter 7 or Chapter 13 of the Bankruptcy Code. A Chapter 7 bankruptcy, the most prevalent, allows an individual to discharge unsecured debt after selling nonprotected assets to pay creditors. In a Chapter 13 bankruptcy individuals seek to restructure their debt

so they can catch up on their home mortgage, car loan, or similar secured debt over a period of three to five years with the goal of restoring their financial stability and keeping their home and other vital possessions.

In 2005, after eight years of debate, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The law includes a number of restrictions that make it more difficult to file Chapter 7 bankruptcy, in effect leaving debtors little choice but to enter repayment agreements with creditors through a Chapter 13 bankruptcy. The act also requires credit card companies to offer customers some information about the potential impact on debt burden of making only minimum monthly payments.

The BAPCPA does not address the lack of homestead protection for residents of manufactured housing—which is more prevalent among lower income groups and older Americans—and seems to exacerbate the hardship. The law limits the ability of Chapter 13 filers to receive a court-ordered reduction of a mortgage when it is larger than the appraised value of the manufactured home (also known as cramming down) by requiring that the collateral property be a certain age before the debt may be paid less than in full and expanding the definition of “debtor’s principal residence.” Furthermore the act takes away a bankruptcy judge’s discretionary authority to reduce the petitioner’s indebtedness by the amount of the purchase price of their


manufactured home but to use the market value at the time of filing. Manufactured homes generally depreciate in value over time (see Chapter 9, Livable Communities).

Under the BAPCPA assets held in qualified retirement plans (such as 401(k), profit-sharing, thrift money purchase, employee stock ownership, and defined benefit plans), 403(b) plans, and 457(b) plans of state and local governments are entirely protected since they are expressly excluded from the bankruptcy estate. The BAPCPA also protects traditional and Roth individual retirement accounts (IRAs) of up to $1 million without regard to rollover amounts. It also protects various employer-provided plans such as Keogh plans, savings incentive match plan for employees (SIMPLE) plans and simplified employee pension (SEP) plans, which are used by smaller business or the self-employed. The act sought to clarify what protection these savings received when an employee was in transition into retirement or changing jobs.

The law also excludes amounts withheld from wages by an employer, or received from an employee, as a

contribution to a benefit plan subject to the Employee Retirement Income Security Act or to a government plan, deferred compensation plan and tax-deferred annuities under the Internal Revenue Code (IRC), or health insurance plan regulated by state law. Rollovers from one IRC qualified account to another do not affect the account’s exempt status.

Predatory lending practices and declining real estate markets threaten hundreds of families with the loss of their homes to foreclosure. One way to mitigate the effects of the current crisis would be to give consumers on the brink of losing their homes more flexibility to restructure their loans in bankruptcy. Bankruptcy courts are currently prohibited from modifying terms of loans on primary residences. But by permitting courts to write down the principal balance of a mortgage loan to the value of the mortgaged property, many families would be able to stay in their homes and lenders would recover at least the same value they could obtain through a foreclosure sale, only at a much lower cost. Legislation has been introduced in Congress to provide such authority to bankruptcy courts.

BANKRUPTCY: Policy

Maintaining fairness in

bankruptcy courts

FEDERAL STATE

Federal bankruptcy law should maintain access to bankruptcy protection for legitimate petitioners, especially those with low and middle incomes. Bankruptcy courts should not be a forum for creditors to enforce unfair or abusive loan terms. Bankruptcy courts should have the authority to modify mortgage loans on primary residences, particularly in areas where property values are depreciating or where fraudulent appraisals have occurred.

Protecting retirement funds

FEDERAL STATE

Private pensions, including individual retirement accounts and other forms of retirement savings, must be protected in bankruptcy from creditors to ensure that petitioners have adequate income later in life.

Manufactured housing

FEDERAL STATE

Calculations of indebtedness under bankruptcy law should take into account the unique depreciation and loan-rate circumstances of manufactured housing.

Mandatory Binding Arbitration and Alternative Dispute Resolution Increasing numbers of financial institutions and companies are including standard contract language that requires consumers to submit future disputes to

binding mandatory arbitration as a necessary condition for gaining access to services. Such clauses severely limit consumers’ redress options because consumers must agree to such conditions or forgo doing business with the institution (see also Chapter 12, Personal and Legal Rights).


MANDATORY BINDING ARBITRATION AND ALTERNATIVE DISPUTE RESOLUTION: Policy

Binding mandatory arbitration

FEDERAL Binding mandatory arbitration should be prohibited.

UNFAIR AND DECEPTIVE TRADE PRACTICES

The Federal Trade Commission (FTC) has authority to prohibit unfair and deceptive trade practices. During the 1970s it relied heavily on its authority to promulgate industry-wide rules to set industry behavior standards. In the 1980s the FTC largely rejected this rulemaking approach and opted primarily to pursue case-by-case enforcement. The result has been a hit-and-miss approach to enforcing laws against unfair and deceptive trade practices, since only the most apparent violations are prosecuted.

Since 1980 the FTC has been prohibited from

promulgating regulations regarding unfair advertising. The circumstances that led Congress to impose this restriction have changed. The FTC needs this authority to deal effectively with pressing public health matters such as advertisements for cigarettes and alcoholic beverages.

State laws on unfair and deceptive acts and practices are among the most effective tools in fighting consumer fraud and abuse. These statutes provide remedies for consumers, encourage merchants to resolve disputes fairly, and deter misconduct.

UNFAIR AND DECEPTIVE TRADE PRACTICES: Policy

Federal Trade Commssion

(FTC) rulemaking FEDERAL

The Federal Trade Commission (FTC) should adopt the rulemaking approach that sets industry-wide standards of behavior. Such standards would help to ensure that consumers are adequately protected against unfair and deceptive trade practices because all industries under the commission’s jurisdiction would be subject to the standards. Congress should allow the FTC to exercise its full authority to prohibit unfair and deceptive practices through enforcement actions and rulemaking in other areas including advertising.

State consumer laws STATE

States should ensure that all appropriate consumer protection laws related to specific industries (for example, home improvement contractors and preneed funeral contracts) include provisions specifying that state laws on unfair and deceptive acts and practices apply when violations occur. States should adopt laws that prohibit unfair and deceptive acts and practices in trade or commerce.

State jurisdiction FEDERAL STATE

Congress should ensure that states have enforcement authority over unfair or deceptive practices. State consumer laws should not exempt certain types of merchants, such as insurance companies and utilities. State consumer laws should not limit violations to situations in which the merchant acts with an evil intent.

Redress for damages STATE

Consumers should be authorized to bring a private cause of action for treble damages.


Redress for damages (cont’d.) STATE

State law should allow for a minimum recovery of at least $2,000 per consumer for each offense. A seller should be required to pay a consumer’s attorney’s fees if the consumer prevails in the action.

INFORMATION PRIVACY

Businesses and government alike can make use of today’s technology to collect volumes of personal information about an individual’s financial transactions, retail buying patterns, and use of telecommunications and medical services. The increasingly common incidents of fraudulent activities such as “phishing” (using spyware to gather personal information from a consumer’s computer) and identity theft have heightened public apprehension about information privacy. In 2005 the Federal Trade Commission (FTC) estimated that 8.3 million Americans were the victims of identity theft, resulting in the loss of billions of dollars for businesses and consumers.

According to a 2004 survey by Forrester Research, privacy and security concerns were so acute that 61 percent of consumers surveyed were reluctant to give credit card information online. Such concerns were a large reason for the lower participation rates among older Americans in some online commercial activities. An AARP survey found that 43 percent of respondents age 50 to 64 do “not at all” trust companies providing information or services on the Internet; only 19 percent either “mostly” or “completely” trust such companies.

Federal and state legislators have passed laws to combat identity theft. At the federal level the Fair and Accurate Credit Transactions (FACT) Act of 2003, which amended the Fair Credit Reporting Act, contains measures to help prevent identity theft and help its victims restore their credit. The law also requires that debit card, credit card, and Social Security numbers (SSNs) be truncated; fraud alerts be placed in a victim’s credit file; credit bureaus block a victim’s affected accounts from being included in credit reports; and all consumers have one free annual credit report from the national credit bureaus.

The FACT Act also preempts state law in a number of areas. These include the sharing of information among affiliated companies. Other state laws are not preempted. For example 47 states and the District of Columbia have passed laws allowing consumers to place a security freeze on their credit reports.

Getting access to sensitive personal information as the result of a security breach is another area of growing concern. A 2006 AARP analysis of 244 known security breaches between January 2005 and May 2006 estimates that the names of 89.8 million people were potentially exposed to identity theft. And 40 percent of those breaches—involving the information of 50 million individuals—involved hackers or insiders specifically targeting the personal information contained in the breached databases. Thirty-three states have passed laws requiring covered entities that maintain electronic personal information to advise consumers publicly of any computer security breaches that involve their personal information.

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLBA) contains a number of consumer privacy protections. It requires financial institutions to develop and disclose privacy policies to consumers in writing and puts some restrictions on what information companies can share with referral services, direct marketers, and other third parties. The affected information includes “credit header” data (nonfinancial information from credit reports, including a consumer’s name, address, phone number, SSN, and age). GLBA regulations also establish standards for safeguarding customer information held by financial institutions—a provision particularly important to preventing pretext calling (i.e., pretexting) and identity theft. The GLBA allows states to enact stronger protections against the sale or sharing of personal financial information than those in federal law.

The widespread use of SSNs in both the public and private sectors give identity thieves great opportunities to gain access to the estimated 227 million SSNs currently active. Because both government agencies and private businesses use SSNs for a wide range of non–Social Security purposes, the SSN has become the de facto national identifier. For this reason SSNs are much sought after by identity thieves, who use them to assume the


identity of another individual and commit fraud. Lists of names and SSNs can be readily purchased online. Often these SSNs have been obtained through pretexting. In addition the use of SSNs on eligibility and identification cards by federal and state agencies, as well as universities and insurance companies, places the cardholder at risk if the card is lost, stolen, or seen by the wrong person. Finally many public records that contain SSNs are available on the Internet. A 2004 Government Accountability Office report estimates that up to 48 percent of the population lives in a county that makes SSNs contained in public records accessible via the Internet.

The federal Real ID Act of 2005 established specific standards, procedures, and requirements for states to follow when issuing driver’s licenses and identification cards if they are to be accepted as valid identity documents by the federal government. Cards that do not meet these standards cannot be used as

identification for boarding a commercial aircraft, entering a federal building, or accessing federal services. States are required to validate and document proof of name, gender, birth date, SSN, principal residence, and signature. The act requires states to replace all 240 million existing licenses and ID cards that have been issued nationwide with cards that comply with the Real ID Act.

Because the act will entail major changes in the way states operate their motor vehicle agencies, there is a great deal of concern that the Real ID Act will place an undue burden on state resources to meet the law’s December 31, 2009 deadline (with a possible extension to May 10, 2011). There is also concern that the required creation of an interstate network of databases containing the personal information needed to establish and verify an individual’s identity poses a considerable security risk should any of these databases be breached (for more on identity theft, see Chapter 12, Personal and Legal Rights).

INFORMATION PRIVACY: Policy

Sharing financial data

FEDERAL STATE

Governments should provide individuals with effective protections against the unauthorized dissemination of information about their use of financial, credit, retail, and communications services.

Consumer control over information

sharing

FEDERAL STATE

Consumers should not have to pay to block information sharing about their use of financial, credit, retail, and communications services nor forced to comply with burdensome procedures to ensure that protection. Consumers should have the opportunity to determine whether their nonpublicly available and personally identifiable information should be used or disclosed for purposes other than those for which the information was originally provided. Customer consent should be obtained before personally identifiable information gathered or developed online or through electronic coupon and other discount programs (such as supermarket member cards) is shared or sold. The principle of informed consent should govern the disclosure or sharing of all sensitive nonpublicly available and personally identifiable information (see Chapter 7, Health, regarding the privacy of medical records, and Chapter 10, Utilities: Telecommunications, Energy and Other Services, regarding privacy in telecommunications).

Privacy protection FEDERAL STATE

Congress should ensure, in cooperation with private-sector self-regulatory initiatives if possible, that individuals and companies collecting or purchasing and using information on consumers adhere to the privacy principles of the US Advisory Council on the National Information Infrastructure. Privacy notices under the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 should be written in plain English,


Privacy protection (cont’d.)

FEDERAL STATE

clearly state the purpose of the notice, and provide choices that are convenient and easy for consumers to use. Businesses that maintain customer databases should be required to mark the files of customers who do not want their information disseminated and to notify them of the opportunity to prevent such distribution. At a minimum this notification and opportunity should be renewed when new data are collected or added, as well as in instances of business mergers or acquisitions.

Legislation should be enacted to ensure that privacy is consistently protected online and off-line, based on the Federal Trade Commission’s fair information practice principles of notice, choice, access, security, and enforcement.

Consumer access to personal information

FEDERAL STATE LOCAL

Consumers should be provided with reasonable access to their nonpublicly available and personally identifiable information for the purpose of correcting inaccurate information. Databases that compile employment records should be required to meet a standard for consumer access and privacy similar to that currently applied to consumer credit reports.

Integrated financial services

databases

FEDERAL STATE LOCAL

The Fair Credit Reporting Act should be extended to include integrated financial services databases.

Consumer profiling using

electronic coupons

FEDERAL STATE LOCAL

Consumers should receive clear information about how consumer profiles compiled online, through electronic coupon and other discount programs (such as supermarket member cards), or by other means will be used. Disclosures should be provided before consumers begin participating in these programs.

Protection of Social Security

numbers (SSNs)

FEDERAL STATE LOCAL

Companies, government agencies, and individuals should not be allowed to post or publicly display Social Security numbers (SSNs), print them on cards, transmit them over the Internet, or mail them without safety measures. The sale and purchase of SSNs in the private sector should be limited by requiring an individual’s affirmative consent before his or her SSN can be sold. Unnecessary or inappropriate collection of SSNs when consumers purchase goods or services should be restricted. Entities that maintain SSNs and other personal data should be required to establish internal policies that ensure the security and confidentiality of such records. Federal and state governments should enhance criminal and civil penalties for SSN misuse.

Information security

FEDERAL STATE LOCAL

Consumers should be notified of all security breaches involving their unencrypted sensitive personal information. Consumers whose information is put at risk as a result of the breach should receive any necessary assistance.

Real ID Act FEDERAL STATE LOCAL

When implementing the Real ID Act, federal and state authorities should ensure that the physical, technical, and administrative security of records containing sensitive personal information is maintained.


Real ID Act (cont’d.)

FEDERAL STATE LOCAL

Implementation of the act should also provide states with sufficient time and resources to create appropriate procedures and systems to protect consumers’ personal information.

Identity theft FEDERAL STATE LOCAL

The federal government should strengthen protections and enforcement against identity theft, particularly with regard to information and database security in federally regulated financial institutions and other businesses that maintain large databases of consumer information.

Legislation should strengthen protections against identity theft, for example, by enabling all consumers to place a security freeze on their credit files. States should strengthen protections against identity theft in areas not clearly preempted by federal law.

States should enhance penalties for identity theft to encourage enforcement and prosecution.

States should allow victims to make reports of identity theft at convenient locations.

Greater resources and training should be provided for state and local law enforcement to improve their response to victims and increase inter-jurisdictional cooperation in investigating identity crimes and apprehending perpetrators.

CONSUMER PRODUCTS

Occupational Regulation and Practices Older consumers disproportionately use the services of certain regulated professionals: physicians, physician assistants, nurses, optometrists, funeral directors,

hearing aid vendors, and pharmacists. Consequently the effectiveness of such regulation is of particular interest to this population. The scope of occupational regulation, which occurs exclusively at the state or local level, varies by profession. It usually takes one of three forms: licensing, certification, or registration.

OCCUPATIONAL REGULATION AND PRACTICES: Policy

Occupational regulation

FEDERAL STATE LOCAL

Occupational regulation should enhance consumer health and safety and provide consumers with meaningful benefits, including fair play, adequate information and disclosure, and redress. Occupational regulation that protects the regulated entity should not do so at consumers’ expense. States should reject laws and regulations that restrict certain business practices of professionals but have no bearing on the quality of service and often result in increased prices. Examples include prohibitions on practicing under a trade name or in a mercantile establishment and restrictions on the number of branch offices that an individual licensed professional may operate. States should conduct a thorough analysis and substantiation of the need to license or regulate individuals working in unregulated professions or trades before establishing new regulatory programs.


Consumer participation on regulatory and

licensing boards

STATE

States should ensure adequate consumer representation on regulatory and licensing boards. In the absence of a statutory or regulatory mandate, officials should exercise appointment discretion to achieve balanced representation. States should require, by means of effective sunset legislation, that state agencies and regulatory bodies justify their continued operation through open, well-publicized hearings to ensure their responsiveness to consumers.

Advertising STATE Laws and regulations that prohibit or restrict advertising to the public by members of a licensed profession or occupation should be rejected.

Disciplinary actions STATE

States should enact laws and regulations that require regulatory agencies to disclose clearly through the media any disciplinary actions against regulated individuals for negligence, incompetence, or deception.

Telemarketing Telemarketing allows many legitimate companies, including charities, to offer their products or services. Computers, credit cards, and toll-free telecommunications have made at-home shopping convenient for many people, especially older consumers and consumers with disabilities. Such technology, however, also enables fraudulent telemarketers to efficiently reach a vast pool of potential victims. The National Consumers League estimates that telemarketing fraud costs consumers $40 billion to $60 billion a year. The average loss per victim rose from $1,504 in 2003 to $2,892 in 2005. Unscrupulous telemarketers sell inferior merchandise, misrepresent and fail to deliver goods, and bill for fraudulent charges.

Several federal laws and regulatory rulings deal with telemarketing fraud. The 1994 Telemarketing and Consumer Fraud and Abuse Prevention Act and the Telemarketing Sales Rule, issued by the Federal Trade Commission (FTC) in 1995, provide tools for both law enforcement and consumers to use in reducing telemarketing abuses and obtaining redress for fraud. States are allowed to enforce the FTC rule in federal court and seek remedies against telemarketing fraud nationwide. The rule addresses only certain practices, however, and fails to prohibit many abuses, such as courier pickups and online fraud. The Telemarketing Fraud Prevention Act of 1998 addresses some of the jurisdictional problems involved in combating telemarketing fraud originating beyond US borders.

Courts have generally supported efforts to deal with fraudulent telemarketing. In 2003 the US Supreme Court unanimously ruled in Illinois ex rel. Madigan, Attorney General of Illinois v Telemarketing Associates, Inc.

that states can bring fraud actions against telemarketers that make false or misleading representations about how charitable donations will be used. The court previously ruled that high fund-raising costs alone do not necessarily indicate fraud but rejected claims by telemarketers and charities that prosecutions based on misrepresentations violate the First Amendment.

In 2003 the FTC, joined by the Federal Communications Commission (FCC), established the National Do-Not-Call Registry. By the end of fiscal year 2005, the registry contained 107 million telephone numbers. Because of the combined jurisdiction of the two agencies, nearly all sales calls placed to US customers are covered (exemptions include political organizations, charities, telephone survey companies, and companies with which a consumer has an existing business relationship). Effective February 2008, consumers no longer have to renew their registration every five years.

Under the registry rules, telemarketers must screen (or “scrub”) their call lists against the FTC’s registry every 31 days or face fines of up to $11,000 for each call to a registered number. As of September 2005, the FTC had received 1.2 million complaints from registered consumers and had filed suit against 14 telemarketers, winning a total of $5.9 million from ten of the companies.

In 2004 the US Court of Appeals for the Tenth Circuit rejected claims that the National Do-Not-Call Registry violates the First Amendment by allowing consumers to restrict commercial sales calls but not charitable or political calls (Mainstream Marketing Services, Inc., et al. v FTC, et al.). The court found that the registry “targets speech that invades the privacy of the home, a personal sanctuary that enjoys a


unique status” in constitutional law and that “commercial calls were more intrusive and posed a greater danger of consumer abuse” than charitable and political calls. The court denied the industry’s request to review the lower court decision, so that ruling—and the national registry—remain in effect.

Currently 34 states have implemented their own do-not-call lists, and many states have added their registered numbers to the national roster. State registry laws are not preempted by the National Registry and may include additional consumer protections; they may exempt additional organizations and include stronger enforcement provisions.

Telephone solicitors registered under the federal do-not-call list have challenged the authority of states to have stronger laws than the federal Telephone

Consumer Protection Act. In 2005 AARP filed comments with the FCC opposing a petition by 33 groups representing telemarketers and related industries asking the FCC to preempt state laws regarding telemarketing sales practices, including state do-not-call lists.

The protections available to consumers when they purchase goods and services over the telephone are not comparable to those that apply to purchases made through the mail or door-to-door. In addition consumers may be charged long-distance fees when telemarketers call their cell phones. Because of the serious gaps in consumer protection, states can play an invaluable role in preventing, deterring, and prosecuting telemarketing fraud. Reducing the pervasiveness of telemarketing fraud requires strong enforcement at all levels of government.

TELEMARKETING: Policy

Fraud STATE States should enact meaningful legislation that will provide government oversight and consumer protection against telemarketing fraud.

Operational guidelines

FEDERAL STATE

All telemarketing calls to consumers must immediately state the true purpose of the call in plain language, provide the name and location of the company being represented, and explain all terms, conditions, costs, and refund or cancellation policies before money is requested. Prize promoters must state that no purchase is necessary to win and explain how to enter a contest without making a purchase. All courier pickups associated with telemarketing sales should be banned, unless the goods are delivered with the opportunity to inspect them before any payment is collected. No consumer’s bank, savings, trust, stock, or bond account should be directly accessed by a telemarketer as a form of payment for goods or services without the consumer’s express prior written authorization.

Registration and bonding STATE

All telemarketing businesses and their agents that operate in the state must be registered. If a state allows any exemptions to the registration requirement, the entity must still be subject to the state’s telemarketing and consumer fraud laws. All telemarketers must be bonded, so they can compensate consumers they defraud.

No-call list FEDERAL STATE

Consumers who place their name on a federal or state do-not-call registry should be protected from wireless phone charges triggered by telemarketing calls.

Enforcement of antifraud measures

FEDERAL STATE

The Federal Trade Commission should strengthen the Telemarketing Sales Rule. Rulemaking and enforcement efforts should address problems that remain in the telemarketing industry, such as online fraud, unauthorized access to consumer bank accounts, disclosures regarding premiums and prize promotions,


Enforcement of antifraud

measures (cont’d.)

FEDERAL STATE

repeat calling of telemarketing fraud victims, and the contacting of consumers who have placed themselves on a do-not-call registry. The Department of Justice also should be vigorous in enforcing efforts to combat telemarketing fraud. Civil and criminal penalties should be imposed for violations of telemarketing laws, including prison terms for those who knowingly and willfully deceive consumers. These penalties should be assessed based on the degree of fraud committed, regardless of the actual dollar amounts lost. Appropriate investigation and enforcement tools should be available to regulators, including one-party consent for electronic monitoring, to combat telemarketing fraud.

Internet Commerce

The rapid increase in the number of Internet users and the greater availability of high-speed Internet connections have led to substantial growth in e-commerce. A sharp increase in Internet fraud and a tidal wave of unsolicited commercial e-mails (UCEs or spam) have followed.

A recent industry report leaves little doubt on the magnitude of the market: • 85 million people age 42 and older are frequently

online, including 42 million who go online daily. • Approximately 44 million people age 42 and

older have shopped online previously—30 percent of online baby boomers (20 million) and 15 percent of people age 60 and older are reported to shop online at least a few times per month.

• Almost 30 million baby boomers conduct one or more of the following activities online: bill paying (35 percent), online banking (35 percent), and investment tracking and transactions (15 percent).

• Approximately 10 million people age 60 and older conduct those same financial activities online.

The Census Bureau estimates that retail e-commerce sales reached $87.7 billion in 2005 (representing 2.7 percent of total retail sales that year), a 25 percent increase from the previous year.

The use of online financial services is also mushrooming. For example the Census Bureau estimates that in 2004 the securities brokerage industry garnered $6.9 billion in Internet revenues (or 2.7 percent of total revenue in that industry). According to industry data 36 percent of all US households (40 million) had signed up for online banking by the end of 2005, a 27 percent increase over 2004.

The amount of money consumers are losing to Internet fraud is increasing as well. According to the National White Collar Crime Center and the Federal Bureau of Investigation (FBI), during 2005 overall losses from Internet fraud reached $183 million; the median loss per case was $424. Furthermore the FBI estimates that only one in ten Internet fraud cases are being reported, so the actual amount is probably much higher. The Internet’s global reach complicates the situation.

Spam is a growing concern for consumers and businesses. It is now estimated that up to 60 percent of all e-mail traffic is spam. E-mail users are frustrated with the lack of reduction in spam since the passage of the 2003 Controlling the Assault of Non-Solicited Pornography and Marketing Act. According to industry research the total financial cost to US businesses in lost productivity as the result of spam is conservatively estimated to be $21.2 billion. In addition the FBI reports that consumers lost $700 million from online fraud facilitated through increased amounts of spam.

INTERNET COMMERCE: Policy

Anti-spam legislation

FEDERAL STATE

Legislation on unsolicited commercial e-mail (UCE) or spam should include such consumer protections as making it unlawful to misrepresent the sender, subject, or content of e-mail; implementing do-not-spam lists; and requiring reliable contact information and opt-out systems.


Anti-spam legislation (cont’d.)

FEDERAL STATE

UCE legislation should impose criminal penalties for violations of the law, including such practices as fraudulent transmission and routing information. Federal legislation should not preempt states’ right to strengthen their anti-spam protections.

Regulatory options for

controlling spam FEDERAL

The Federal Trade Commission should make it unlawful to misrepresent the sender, subject, or content of a UCE, fail to provide reliable contact information or a reliable opt-out system, or violate a prior opt-out request.

Mail Solicitations With the wide use of computerized mailing lists, unscrupulous marketers can target specific market segments for scams or questionable products. Older people are often the target of scams involving misleading information that appears to be from a government agency or of offers that appear to be free but are actually part of a profit-making scheme.

For example acceptance of an offer for free information about Medicare may result in an unsolicited visit from an insurance agent.

In some instances services that the government provides at no cost may be offered for a fee. Some charitable solicitations are also disguised efforts by telemarketers to gouge consumers, with little of the collected money distributed to the charity.

MAIL SOLICITATIONS: Policy

Misleading mailings

FEDERAL STATE

Congress and the states should pass legislation to deter solicitors from using mailings that appear to come from the government. They should also enact laws that eliminate deceptive and misleading games-of-chance mailings, including sweepstakes.

Charities FEDERAL STATE

In order to deter fraudulent use of charity look-alike names for solicitation and to better inform consumers, all charities, and all people and entities soliciting on behalf of charities, should be required to disclose what portion of public contributions is spent on activities related to the group’s charitable purpose.

Enforcement FEDERAL STATE

The Federal Trade Commission, state attorneys general, the US Postal Service, and other regulatory officials should vigorously enforce applicable laws and regulations and intensify efforts to increase consumer awareness of fraudulent tactics.

Home Improvement Contractors According to the Census Bureau, in 2004 Americans spent more than $215 billion on improvements to owner- and renter-occupied housing. Home repair is necessary for preserving both the safety and value of property. While most contracted home repairs are completed professionally and satisfactorily, tens of thousands of homeowners annually receive inadequate, unprofessional, or fraudulent home-repair work.

Prevention of home improvement fraud is a critical concern for older homeowners, who are more likely than younger people to own a home, have no mortgage, and live in an older home that needs

repair. Additionally as homeowners age they are less likely to undertake home repairs themselves and more likely to require the services of a contractor. The latest American Housing Survey (2005) reports that 74 percent of homeowners age 75 and older who reported having home repairs done did not do the work themselves.

The financial and psychological effects of home improvement fraud can be severe. Older people may lose all or a significant part of their life savings and be left with shoddy or incomplete repairs and no legal resources or remedies. Licensing requirements in most states are inadequate. There are often no minimum standards with regard to a home


contractor’s skills, knowledge, or financial resources, and no required personal background checks.

The lack of requirements for a written contract and for specificity in contract provisions frequently

makes it impossible to determine what the homeowner and contractor agreed. In addition state enforcement agencies often lack sufficient authority and resources to tackle the sweeping nature of contractor fraud.

HOME IMPROVEMENT CONTRACTORS: Policy Licensing,

insurance, and bonding

STATE States should require that home improvement contractors are licensed, insured, and/or bonded.

Contracts STATE

States should require written home improvement contracts and specify required and prohibited contract provisions. Criminal penalties and civil remedies should be established.

Redress of grievances STATE

States should: • provide consumers with a private right of action, • establish a home improvement consumer recovery fund, and • create protections for home improvement borrowers claiming

contractor malfeasance or nonfeasance. This would safeguard consumers from deceptive practices when securing a mortgage or home equity loan to finance the transaction.

Deathcare Industry

For many older consumers a funeral is their third-largest expenditure, behind the purchase of a home and an automobile. According to industry reports, the current average cost of a traditional funeral is $6,500 (not including cemetery charges).

The deathcare industry is undergoing change as it consolidates and as distinctions between the funeral directors, who traditionally sold funeral goods and services, and cemetarians, who handled goods and services for burials, continue to blur. In addition more third-party vendors (people who sell funeral and burial goods such as caskets and headstones and are neither funeral directors nor cemetarians) and crematories are providing goods and services.

A relatively new facet is the burgeoning interest in cremation and environmentally friendly burials (i.e., without such traditional items as steel caskets, formaldehyde embalming, and vaults) as alternatives to traditional funerals and burials. The Cremation Association of North America states that 32 percent of deaths resulted in cremation in 2005, up from 26 percent in 2000, and a mere 6 percent in 1975. The Green Burial Council has established the deathcare industry’s first certification program to help consumers locate professional providers and assist conservation groups in developing burial grounds

that protect natural areas and further their long-term stewardship objectives.

Industry consolidation—Commercial chains now own many funeral homes. The Government Accountability Office (GAO) reported that large chains owned 11 percent of funeral homes in 2003. Consumers may be unaware of such ownership, since a chain may purchase an independent home yet continue to advertise under the name of the local business. In June 1999 the second-largest funeral home chain declared bankruptcy, and many consumers with preneed contracts did not realize that their funeral home was owned by the bankrupt chain.

Large chains are extremely active in marketing preneed agreements, a $25 billion business. A recent AARP survey found that two in five people age 50 and older reported they had been contacted about the advance purchase of funerals or of burial goods and services. Fraud, bankruptcy, and violation of fiduciary responsibility place these contracts at risk. AARP and other consumer organizations encourage preplanning funeral arrangements but urge caution when paying through a preneed contract or other formal arrangement.

Industry regulation—Some funeral, cremation, and burial providers bill service and finance charges that are unconscionably high and anticompetitive. Intercity and interstate burials, which usually involve


two funeral providers, prompt many complaints about excessive charges. Standardized price information, which would allow comparisons among funeral providers in a selected area, is not widely available to the public.

One of the major rules promulgated by the Federal Trade Commission (FTC) is the Funeral Rule, which governs disclosure of price information by funeral directors. The Funeral Rule became effective in 1984, but a number of protection gaps remain.

It applies only to businesses that provide both funeral goods and services. Businesses that provide only one type of service (e.g., cemeteries, crematories, and third-party sellers) are exempt. In addition the rule does not cover direct purchases of burial goods from third-party sellers, such as Internet merchants and storefront casket vendors. The FTC’s practice of allowing violators to make voluntary payments to the Treasury Department in lieu of fines, other types of

enforcement actions, or public disclosure of violations weakens the rule’s deterrent effect. In 1994 the FTC announced a continuation and expansion of the rule, adding a prohibition against third-party casket-handling fees.

State regulation of the deathcare industry is a patchwork of laws, with enforcement responsibilities spread among multiple state agencies, commissions, and boards. A recent GAO study identified 29 states that have multiple organizations responsible for regulating all or most of the five deathcare industry segments (funeral homes, crematories, cemeteries, sellers of preneed plans, and third-party sellers). The powers and authorities of these agencies vary greatly. The regulation of preneed contracts in such areas as vendor licenses, funds held in trust, contract provisions, and consumer protection (or guarantee) funds also varies widely among states in scope, approach, and requirements.

DEATHCARE INDUSTRY: Policy

Strengthening the Federal Trade Commission

(FTC) Funeral Rule

FEDERAL STATE

The current protections in the Federal Trade Commission (FTC) Funeral Rule should be retained, and the rule should be expanded to cover cemeteries, crematories, and third-party sellers. The rule should require standardized formats for price lists and contracts for funeral and burial goods and services. The rule should require that all price lists and contracts include information on how to file complaints (including the phone number of the agency to contact). The FTC should continue to monitor compliance with the Funeral Rule and should investigate other aspects of the industry, including the costs and charges for transporting bodies, fraud and abuse in cemetery sales, tie-in arrangements, the effects on competition and prices of major funeral and burial chains, and cremation practices. Violators of the Funeral Rule should not be offered an option to make a voluntary payment and retain anonymity under the Funeral Rule Offenders Program. States should adopt the FTC Funeral Rule in order to strengthen their ability to enforce it.

Prepaid funeral contracts

FEDERAL STATE

The FTC should adopt minimum standards for preneed funeral contracts. States should regulate and require portable, written contracts for all preneed funeral and burial arrangements. All preneed contracts should be written in plain language and large type; the contract’s material provisions should be prominently disclosed. All rights, duties, and obligations of the preneed provider and the consumer should be disclosed in the contract (these include itemization of goods and services purchased; cancellation,


Prepaid funeral contracts (cont’d.)

FEDERAL STATE

modification, and revocation procedures; funding mechanisms; handling of escrowed funds; fees related to the transaction; whether the contract is guaranteed or nonguaranteed; and distribution requirements).

Ensuring availability of funds under

preneed contracts

STATE

States should protect consumers from misappropriation of preneed funeral and cemetery funds and ensure consumer restitution. Insurance-funded preneed contracts and trust arrangements should be state-regulated. States should give the purchasers of preneed contracts a statutory lien so that consumers have priority over unsecured creditors with claims against the seller. States should establish guarantee funds to provide a source of recovery for preneed consumers harmed by a seller’s or provider’s theft, fraud, or bankruptcy. Independent audit reports of all trust funds should be submitted regularly to the state enforcement agency. States should apply sound actuarial principles to ensure that consumers’ preneed funds will be available to purchase the funeral and burial goods and services selected.

Sales tactics STATE

State laws and regulations should prohibit abusive, deceptive, and unfair practices in the sale and maintenance of burial spaces and other goods and services and in the disposition of remains. States should require registration of all preneed providers. State law should prohibit the addition of finance charges and interest on installment contracts for preneed goods and services unless they are delivered to the consumer. States should prohibit the direct or indirect solicitation of consumers in hospitals, retirement facilities, nursing homes, group homes, or health care facilities without having been expressly requested to do so by these consumers or their representatives. States should require that advertisements for funeral and burial services disclose the ownership of the entity offering the service.

State regulatory practices and enforcement

STATE

States should encourage efforts to coordinate the regulations of the various state departments that oversee funerals, crematories, cemeteries, third-party sellers, and preneed goods. A single, toll-free number should be established for consumers to call when they incur problems with any deathcare provider. States should provide adequate authority and funding for a state enforcement agency to perform periodic field audits and investigate complaints. States should establish civil remedies and criminal penalties for unfair, deceptive, and fraudulent practices by preneed providers. States should enact laws on preneed funeral and burial contracts to ensure a level playing field between consumers and sellers.

Cemeteries STATE Cemeteries should be required to establish escrow accounts designed to ensure that income will always be available for the continued upkeep and maintenance of the cemetery.


Cemeteries (cont’d.) STATE

Cemeteries should be required to offer burial land on equal terms, including price, to all consumers, including preneed and at-need purchasers and consumers who select a third party (other than the cemetery) to provide goods and services, including grave markers and funeral services.

Green funerals STATE

States should establish standards for natural burial grounds that encourage environmentally sustainable and ethical practices. Natural burial grounds should use only plants and vegetation native to the land and prohibit toxic chemicals, vaults, and other items that harm the natural surroundings. Natural burial grounds should have criteria for visitation rights that allow adequate visitation while protecting the environment. States should establish enforcement measures for cemeteries that purport to be natural burial grounds but do not adhere to established ecological standards.

Irrevocable contracts STATE

Irrevocable contracts should be available only for buyers who seek to meet eligibility tests for public benefit programs.

Hearing Aids

With almost 28 million Americans suffering from some form of hearing impairment, hearing loss is one of the country’s most prevalent chronic health conditions. About half of all hearing-impaired people in the US are over age 65. Thirty percent of people age 65 to 74, and 50 percent of people age 75 and over, experience hearing loss. Many hearing-impaired individuals can benefit from the amplification provided by a hearing aid.

Most new hearing devices are brought on the market through the “substantial equivalency process,” which means their safety and efficacy are not subject to

review, even though hearing aid technology has changed substantially over the years. Without documentation such as clinical tests, it is almost impossible to evaluate advertising claims concerning background noise or other features.

Food and Drug Administration regulations require that people buying hearing devices have a written statement from a licensed physician who has evaluated the buyer’s need for the device. Buyers can sign a waiver regarding the exam requirement, an option that many vendors are abusing. In many surveys conducted during the last ten years, buyers reported they had not been told about the need for a medical evaluation.

HEARING AIDS: Policy

Coordination of federal and state

oversight

FEDERAL STATE

The Food and Drug Administration (FDA) should at the very least retain its authority over hearing aids by setting minimum standards for state regulators to follow. The FDA, the Federal Trade Commission, state licensing boards, and state attorneys general should coordinate their regulatory activities in protecting hearing aid consumers.

Labeling FEDERAL The FDA should actively ensure consumer access to reliable and accurately labeled hearing aids.

Safety and efficacy testing

FEDERAL STATE

The FDA should carefully review the safety and efficacy of new hearing devices before allowing them to enter the market. If a manufacturer makes any claims about the user benefits of a hearing aid (such as elimination of background noise), the assertion must be based on controlled clinical studies using valid clinical measures.


Safety and efficacy testing

(cont’d.)

FEDERAL STATE

The FDA should develop new regulations to delineate which tests physicians should conduct with each hearing evaluation.

Sales tactics FEDERAL STATE

The FDA and state agencies should investigate complaints of high-pressure sales tactics that inhibit older people from getting professional counseling before purchasing a hearing aid. Regulators should also conduct public education campaigns on the importance of such screenings before a hearing aid purchase. States should regulate hearing aid dealers and sales practices, including direct response and mail-order solicitations; require advertising bonding of sellers; require consumer protections, such as contracts or sales receipts that spell out the buyer’s rights; and establish regulatory boards to record, hear, and act on complaints.

Trial periods FEDERAL STATE

The FDA and/or states should require, and states should support, a mandatory 30- to 60-day trial period (with a prompt money-back guarantee) during which consumers could return hearing aids for a charge that would not exceed 10 percent of the original purchase price.

Waiver of doctor examination STATE

States should help implement FDA hearing aid regulations, seek an exemption from FDA requirements that permit a waiver of a physician evaluation before a hearing aid purchase, and strengthen prepurchase examination requirements.

Medical Devices

Medical devices are a large class of products that include everything from tongue depressors to heart valves. The authority of the Food and Drug Administration (FDA) with regard to devices includes premarket review, postmarket surveillance, investigation of adverse-event reports, and inspections.

Since the first medical device law was enacted in 1976, the FDA has come under criticism for failing

to approve devices quickly enough. Congress attempted to improve the FDA’s performance in this area with enactment of legislation in 1990 and 2002. The Medical Device User Fee and Modernization Act of 2002 provides for user fees for premarket reviews, allows accredited people (i.e., third parties) to inspect device establishments, and establishes new regulatory requirements for reprocessed single-use devices.

Ongoing agency actions and reorganizations have been aimed at more effective regulation of medical devices.

MEDICAL DEVICES: Policy

Premarket review FEDERAL

The Food and Drug Administration, in enforcing its regulations and implementing the Medical Device User Fee and Modernization Act of 2002, must ensure that only safe and effective medical devices are allowed on the market.

Postmarket review FEDERAL

While the agency focuses its energies on the premarket review process for approving devices, it must not neglect the postmarket surveillance system, which brings device problems to the agency’s attention.


PRODUCT SAFETY IN THE HOME

According to the Consumer Product Safety Commission (CPSC), in 2002 there were numerous injuries among people age 65 and older, with costs of $89.5 billion. That same year there were 3,300 consumer-product-related deaths among people age 65 and older, costing $16.5 billion. Combining these two figures results in an estimated cost of more than $100 billion.

The CPSC has jurisdiction over about 15,000 types of consumer products. Though in 2006 it approved a

new federal standard for mattress flammability that was aimed at reducing one of the most serious types of fire, only a small number of products are governed by mandatory standards.

Current CPSC regulations require companies to promptly report to the commission any safety problems associated with their products, but the commission has inadequate resources to enforce its requirements. Moreover it is the only health and safety agency that limits public access to information.

PRODUCT SAFETY IN THE HOME: Policy Consumer

Product Safety Commission

(CPSC) funding

FEDERAL

Congress should fund the Consumer Product Safety Commission (CPSC) at appropriate levels to ensure that its mission—to prevent the millions of injuries and fatalities in this country caused by unsafe products—is not diminished.

Product safety for older people FEDERAL

The CPSC should focus attention on product safety problems that pose a particular risk to older people, such as those linked to fires.

Public access to product

information FEDERAL

The CPSC should take proactive regulatory measures to prevent consumer injuries and promote public access to information about consumer products.

FOOD

Food Safety According to the Centers for Disease Control and Prevention, 76 million illnesses and 5,000 deaths in the US each year are linked to food-borne pathogens. Older Americans, along with children and people with suppressed immune systems, are particularly vulnerable.

Food-borne pathogens are found in nearly all types of foods: E. coli 0157H7 in ground beef, spinach, and other leafy products; Camphylobacter in poultry; Listeria monocytogenes in ready-to-eat products like bologna; and Salmonella enteriditis (SE) in eggs. These pathogens can exist in both imported and domestic foods.

The incidence of illness associated with many food-borne pathogens has dropped significantly over the past decade, thanks in part to actions by the government and industry. However, illnesses linked to other pathogens—such as SE and Vibrio vulnificus (found in raw shellfish), which are particularly dangerous for older consumers—have not decreased.

The government, at both the federal and state levels, has a responsibility to ensure that the food supply is safe. Two federal agencies have primary responsibility for food safety. The Food Safety and Inspection Service (FSIS) of the US Department of Agriculture (USDA), has jurisdiction over meat, poultry, and egg products; the Food and Drug Administration (FDA) regulates all other foods. Safety problems can arise—and can be compounded—at all points in the food distribution chain: production, processing, and final preparation.

Inspection technologies and techniques—At the processing phase federal resources are concentrated on product inspection. For more than 100 years inspectors relied on the “poke and sniff” or “organoleptic” method for detecting contamination. This method (which uses the senses of smell, sight, and touch) alone, however, is not effective when microscopic organisms are involved. Over the past decade the FSIS and FDA each have implemented a Hazard Analysis and Critical Control Point (HACCP) system to prevent and detect contamination.


This approach requires food processors to develop plans for preventing and controlling contamination. Other measures that eliminate and reduce food-borne pathogens, and which can be used as part of a HACCP system, include antimicrobial rinses and irradiation. Irradiation technology has raised safety concerns among some consumers.

Currently inspection resources are not properly allocated. Meat and poultry products are subject to continuous inspection, but FDA-regulated categories of food products are inspected on average only once every ten years. Moreover inspectors check only 2 percent of all imported foods.

The health threat caused by raw and undercooked shellfish is of particular concern. Yet there is no mandatory inspection system for seafood, which the FDA regulates, and critics argue the FDA is not doing an adequate job of making sure that fish and shellfish processors have fully implemented HACCP plans.

Labeling is another tool the government uses to protect consumers, in particular high-risk consumers, from food-borne pathogens. Currently, unpasteurized juice products, shell eggs, and raw meat and poultry must carry a label informing consumers of the risks these products pose and how to handle and consume these foods safely.

In addition to regulating the food supply, the federal government also plays an important role in funding critical research relating to food safety, as well as in developing and implementing programs to educate consumers about food safety risks and how to minimize them.

States and local authorities play an important role in

ensuring food safety by establishing labeling requirements and inspecting retail stores and food service establishments. The FDA assists states in this area with its Model Food Code, which nearly 3,000 regulatory agencies use as a reference in overseeing food safety in restaurants, grocery stores, and nursing homes and other institutions.

Microbiological contamination is not the only safety risk that threatens the food supply. Naturally occurring toxins, pesticide residues, and residues of antibiotics and hormones administered to animals to increase feed efficiency and weight all pose potential health risks to humans.

Strengthening the food safety system—Critics of the current regulatory system, which involves myriad federal agencies, have urged Congress to centralize all of the authority over food safety into a single, science-based agency. The National Academy of Sciences made a similar recommendation in 1998.

Existing law hampers USDA and FDA efforts to take effective action. The USDA has no authority to levy monetary penalties and is unable to inspect company records to determine compliance with HACCP plans. Neither agency has the authority to mandate a recall of potentially unsafe food products. And while they can monitor product recalls initiated by companies, both have been criticized for failing to determine how promptly and completely recalls are being carried out and to track and manage their recall oversight. In addition 12 states have entered into agreements with the USDA prohibiting state health authorities from making information available to the public about tainted food products that made it into the marketplace.

FOOD SAFETY: Policy

Fresh produce FEDERAL STATE

LOCAL

Federal, state, and local authorities should work together to develop, implement, and enforce effective farm measures to minimize microbiological contamination of fresh produce.

Eggs and shellfish FEDERAL Additional steps should be taken to improve the safety of foods, such as eggs and raw shellfish, that pose a particular health threat to older Americans.

Irradiation and other

technologies FEDERAL

Technologies such as irradiation and antimicrobial treatments should be used as part of a Hazard Analysis and Critical Control Point (HACCP) program but should not take the place of adequate sanitation procedures. Consumers have a right to know whether the foods they are consuming have been irradiated, and labels should be required to disclose this information.


Inspections FEDERAL

The Food Safety and Inspection Service (FSIS) of the US Department of Agriculture (USDA) and the Food and Drug Administration (FDA) should have sufficient resources to effectively inspect the facilities they regulate. There should be adequate numbers of inspectors with full access to all aspects of food production and processing, authority to make random unannounced visits, and whistleblower protection. There should be more inspection of imported foods, and the FDA should inspect food-production facilities more frequently and expand its inspection of seafood. Frequent testing of products to check levels of deadly bacteria is a key component of any HACCP system.

Hazard Analysis and Critical

Control Point (HACCP) plans

FEDERAL

Both the FDA and FSIS must do a better job of ensuring that effective HACCP plans are being developed and implemented, and must vigorously exercise their authority to enforce the law to prevent food safety problems and prosecute safety violations.

Nonpathogen contaminants FEDERAL

The federal government must establish safe levels for all contaminants in food—not only pathogens but pesticides, antibiotics, hormones, and toxins. These levels should consider the particular sensitivities of vulnerable populations, such as children, older adults, and people with immune system deficiencies.

Food product labels

FEDERAL STATE

When appropriate, labels should be required that warn particularly susceptible subpopulations (most often the elderly, young children, and people with suppressed immune systems) of the risks a product poses and describe how to safely consume it. Labels in relevant languages should be made available to communities where a language other than English has significant use in retail transactions. State authority to enact food labeling laws that address issues not covered by federal law and regulations (e.g., freshness dating and seafood warnings) should not be preempted.

Consolidation and strengthening of

regulatory authority

FEDERAL

In order to protect the public better and utilize resources more efficiently and effectively, Congress should carefully consider proposals to consolidate food safety authority into a single agency. Congress should enact legislation providing the USDA and FDA with needed enforcement tools and grant these agencies sufficient resources to ensure the safety of the food products they regulate.

Product recall FEDERAL

Congress should enact legislation that would provide the USDA and FDA with the authority to mandate recalls of potentially unsafe food products. Until such legislation is enacted, both agencies should institute measures to improve their oversight of product recalls. In order to determine the specific food products that are the source of a food-borne illness outbreak, the FDA and USDA should implement effective product-tracing systems.

Food safety research FEDERAL

Congress should continue to provide sufficient funds for important food safety research, especially relating to food production, as well as for consumer education initiatives.


Terrorist threats FEDERAL

The FDA and USDA should continue to implement measures that will protect the food supply from deliberate contamination through terrorism, as well as from risks posed by unintentional microbiological and chemical contamination.

Informing the public of food

safety violations

STATE LOCAL

State and local authorities that inspect retail food establishments should publicize and post any code violations so consumers are aware of them. States should not enter into agreements with the US Department of Agriculture (USDA) that prevent consumers from being informed of the name and location of establishments that may have sold tainted food products to the public. States that have entered into such agreements with the USDA should rescind them.

Specific tough standards FEDERAL

The federal government must establish and enforce the zero-tolerance standards for deadly strains of Listeria and E. coli in foods like processed meats and ground beef. The USDA should set tough standards for Camphylobacter.

Labeling and Advertising The links between diet and health and between obesity and diet-related health problems such as heart disease, hypertension, and diabetes are well established. With adult obesity rates having doubled between 1980 and 2000, about 60 million adults (30 percent of the adult population) are now categorized as obese. Older Americans face a double threat. Not only does the incidence of diet-related health problems increase with age, but the rate of obesity among older Americans continues to grow. And the effects of these problems are particularly life threatening for older minorities.

The need for making sound nutritional decisions at home and when eating out has never been greater. Furthermore total annual costs attributable to obesity are estimated at $122.9 billion, representing $64.1 billion in direct costs and $58.8 billion in indirect costs.

Government laws and policies in the 1990s made great progress in helping consumers receive information through product labeling and advertising so they can follow more healthful diets: • The 1990 Nutrition Labeling and Education Act

(NLEA) requires mandatory nutrition labeling on all products regulated by the Food and Drug Administration (FDA). The FDA now requires information on trans fat content and the presence of major allergens to be added to product packages.

• The NLEA also established standards for health and nutrition claims on food labels. The FDA, though, relaxed its rules and now allows food labels to include “qualified” health claims (those

that are supported by less than the statutory standard of “significant scientific agreement”). Critics of the new policy, including AARP, contend this is inconsistent with the governing law and may confuse consumers, a concern the FDA’s own research supports.

• The US Department of Agriculture (USDA) followed the FDA’s lead and developed requirements for nutrition labeling and standards for claims about meat and poultry products.

• The Federal Trade Commission, which regulates food advertising, issued an advertising enforcement policy in the 1990s that clarifies the commission’s position on nutrient content and health claims.

The FDA and USDA also have been involved in international efforts to harmonize food labeling and safety standards through the Codex Alimentarius Commission. Consumer advocates have sought to use this process to incorporate the strongest features of US standards into international food labeling and safety standards without compromising or weakening domestic requirements.

Americans are eating out more than ever and now consume about a third of their calories and spend nearly half (46 percent) of their food dollars on eating out, nearly double the percentage (26 percent) in 1970. The health consequences are significant. Studies find that when people go to restaurants, they often consume more calories, more fat, and fewer important nutrients, such as fiber. Without realizing it, an individual may consume 50 to 100 percent of an entire day’s recommended caloric intake in a single “supersize” entrée.


Consumers seldom have information about the nutritional content of restaurant offerings or can identify the healthful dietary choices on restaurant menus. In fact people may be mistaken when ordering something they assume to be healthful.

While processed foods sold in supermarkets must carry nutrition information on their product labels, there is no such requirement for restaurant food. Several large fast-food chains voluntarily provide some information on brochures, posters, or websites, but it is not always in plain view or, in the case of the website, not even at the point of purchase. Recent surveys show that approximately two-thirds of Americans support requiring calorie labeling on menus.

A number of other labeling issues still need to be addressed at the federal and state levels: • The USDA issued a proposal in 2001 to require

nutrition information for raw ground beef and

poultry products but it has yet to finalize this proposal and is not proposing that the information be included on the labels of raw meat and poultry.

• Government surveys reveal that consumption of sugar—in particular added sugar from cane, beet, and corn sugar and syrup—continues to rise along with obesity rates. While the USDA advises people to limit themselves to ten teaspoons of added sugars daily, the average American consumes 20 each day.

To capitalize on consumers’ interest in improving their diet, many food companies want to put claims on food labels and in advertisements touting the presence of healthful ingredients, such as whole grains, fruits, and vegetables. These claims are deceptive and misleading when the product in question contains very little of the desirable ingredient.

LABELING AND ADVERTISING: Policy

Nutritional labeling of

restaurant food

FEDERAL STATE

Federal and state policymakers should establish a reasonable requirement for nutrition labeling of restaurant food. Labeling requirements should apply only to restaurants and similar retail food establishments with multiple outlets and to their standard (or regular) menu offerings. Restaurant labels should list key nutrition information (such as calories, saturated and trans fat, and sodium) on menus and menu boards.

Raw meat and poultry FEDERAL

The US Department of Agriculture should require nutrition labels for all raw meat and poultry.

International programs FEDERAL

As part of ongoing efforts to harmonize international food labeling as well as safety standards, the US government should not allow domestic requirements to be weakened.

Label content FEDERAL

In considering what if any revisions should be made to the nutrition label to help consumers achieve and maintain a healthful weight, the Food and Drug Administration (FDA) should sponsor consumer research to determine which label revisions would best convey the key messages about limiting caloric intake. The federal agencies responsible for food labeling and advertising should adopt consistent standards and definitions for terms and claims that appear on food labels and in advertisements. The FDA should require that nutrition labels disclose the amount of added sugars in a serving of food and should establish a daily value for added sugars, which should be included on the nutrition label along with the maximum intakes for fat, sodium, and other nutrients.

Label design FEDERAL Food labels should be written in understandable language and printed in a legible type size, font, and color.


Label design (cont’d.) FEDERAL

Labels in relevant languages should be made available in communities where a language other than English has significant use in retail transactions.

States should ensure that shelf labeling (in particular, unit-price labeling) is legible to consumers, including people with poor vision.

Misleading and deceptive claims

FEDERAL STATE LOCAL

Federal agencies should take aggressive action against misleading and deceptive labels and advertisements. In allowing “qualified” health claims, the FDA must ensure that consumers understand the nature and extent of scientific support for any claim allowed on a food label. When labels and advertisements tout the presence of healthful ingredients such as whole grains, fruit, and vegetables, they should be required to disclose the actual amount of such ingredients per serving.

Pricing FEDERAL STATE LOCAL

States should enact and enforce laws that require item-price labeling for foods and drugs.

Dietary Supplements Many consumers, including a sizable number of older Americans, take dietary supplements to promote general wellness, improve nutrition, combat aging, and treat chronic conditions such as osteoporosis, arthritis, and heart disease. In a 2001 AARP survey of people 50 and older, 52 percent of respondents reported taking dietary supplements on a daily basis. Between 1994 and 2004, annual sales of dietary supplements—vitamins, minerals, herbs, amino acids, and other ingredients—increased from $8.8 billion to more than $20 billion. Concern has also increased regarding the quality, safety, and labeling of supplements as well as consumer access to them.

In 1994 Congress passed the Dietary Supplement Health and Education Act (DSHEA). The act defines “supplements,” establishes safety provisions, specifies supplement nutrition and labeling information, clarifies regulation of health claims and other label statements, sets standards for distribution of third-party literature, and requires the establishment of good manufacturing practices. It also created an Office of Supplements at the National Institutes of Health to oversee research and provide advice on these products.

Critics of the act and its implementation by the Food and Drug Administration (FDA) contend that unsafe supplements continue to be marketed. Public health and consumer groups support actions the FDA has taken against unsafe supplements like ephedra and androstenedione but fault the agency for taking so

long to act. They further argue that the DSHEA makes it too difficult for the FDA to take unsafe supplements off the market.

A series of government reports has criticized current regulation of dietary supplements, noting that the FDA has established no clearly defined safety standards for new dietary ingredients and has failed to investigate adverse events involving supplements. The reports also stated that existing voluntary systems for reporting adverse events detect only a small proportion of events that actually occur. Legislation has been proposed that would establish a mandatory adverse-event reporting system for dietary supplements.

Inadequate safety information on product labels and inappropriate marketing to older consumers are other areas of concern. The 2001 AARP survey found significant support for including information about possible drug-supplement interactions and contraindications on supplement labels. Critics also contend that the FDA could do more to ensure that supplement products are truthfully labeled.

Supplement manufacturers continue to challenge FDA labeling restrictions in court. The most significant of these cases invalidated FDA-imposed limitations on health claims for supplements, thereby allowing the inclusion of “qualified” health claims on supplement labels.

Despite setbacks federal, state, and private entities continue efforts to ensure the consumer safety of these products. The Federal Trade Commission has issued a policy statement clarifying its approach to supplement advertising and continues to monitor


advertisements promoting these products. In 2004 the National Academy of Sciences’ Institute of Medicine issued a report that proposed a systematic process for evaluating the safety of dietary supplements. A number of states have taken action against unsafe supplement products and misleading advertisements.

Over the past few years food companies have been

marketing a new line of products known as “functional foods.” These include fruit drinks, breakfast cereals, snacks, and other conventional foods with added herbs or other dietary supplement ingredients. The law requires that ingredients added to foods must be safe, and the Government Accountability Office has been critical of the FDA’s regulation of the safety of functional foods.

DIETARY SUPPLEMENTS: Policy

The role of the Food and Drug Administration

(FDA)

FEDERAL

The Food and Drug Administration (FDA) should actively ensure consumer access to safe, reliable, and accurately and adequately labeled supplements. The FDA should finalize regulations regarding supplement claims and good manufacturing practices and should be given adequate resources to develop and operate an effective adverse-event reporting system for supplement products.

Product safety FEDERAL STATE

Congress should fund a systematic review of the safety and efficacy of all major dietary supplements, as outlined in the 2004 Institute of Medicine report. Congress should consider changes in the law that would allow the FDA to take action more easily against unsafe supplements.

Adverse-events reporting FEDERAL

Congress should require the FDA to establish a mandatory program for the reporting of adverse events associated with dietary supplements.

Labels FEDERAL The FDA should consider requiring more safety-related information (such as drug-supplement interactions) on supplement labels and if necessary seek additional authority to require such labeling.

Functional foods FEDERAL

The Federal Trade Commission should take aggressive action against misleading advertisements for supplement products and functional foods. The FDA should act to ensure that functional foods are safe and that the claims made about these products are truthful and not misleading.

AIR QUALITY IN PUBLIC BUILDINGS

People spend up to 90 percent of their time indoors, so the health risks posed by indoor-air pollutants are a serious concern. Older people, along with young children and people with respiratory concerns, face the greatest risks. Long-term and chronic effects linked to indoor-air pollution include cancer; asthma, bronchitis, and emphysema; liver and kidney disease; and effects on the central nervous system or metabolic processes.

There are no government standards setting acceptable levels for indoor-air pollutants in the

workplace (see Chapter 9, Livable Communities: Land Use—Connections Among Planning, Public Health and the Environment). Indoor exposure levels for some of these pollutants exceed permissible outdoor standards. Indoor-air pollution is a complex problem because it can originate from a variety of sources, including building materials and furnishings, consumer and commercial products, and combustion appliances.

Tobacco smoke is one of the most pervasive and dangerous sources of indoor-air pollution. The Environmental Protection Agency classifies tobacco


smoke as a class A carcinogen, meaning that it is as deadly to health as asbestos. Other indoor pollutants include asbestos; formaldehyde; methylene chloride from aerosol products and paint strippers;

combustion by-products from fireplaces, wood-burning stoves, and kerosene heaters; and airborne bacteria and other microorganisms. Insulation and reduced ventilation can exacerbate the problems.

AIR QUALITY IN PUBLIC BUILDINGS: Policy

Comprehensive smoking ban FEDERAL

Congress should enact comprehensive legislation on indoor-air quality that completely restricts smoking in all public buildings, except specifically designated areas of residential public buildings, provided they are adequately separated from the rest of the building.

Research FEDERAL

The Environmental Protection Agency and the Consumer Product Safety Commission (CPSC) should continue their research on indoor air and should develop acceptable pollutant-tolerance levels, where appropriate. The CPSC should investigate products that contribute to indoor-air pollution.

Public education FEDERAL STATE

Public education campaigns should be developed to inform consumers about indoor-air pollution and how they can minimize it. Public buildings should be properly ventilated to help eliminate the effects of indoor pollutants.

chapter 11 financial services and consumer products€¦ · home mortgage lending.....11-18 reverse...

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