PANEL DISCUSSION: Credit Promotions

MR. MEDINE: Good afternoon. Thank you all for coming to the panel on credit promotions. My name is David Medine and I am the Associate Director for Credit Practices at the Federal Trade Commission.

Let me begin with a question: why are we having a credit discussion at all here. There are a couple of reasons. One is credit advertising is a highly regulated area. Carole Reynolds will be talking about the Truth in Lending Act later, but this is an area where there is, at least in some contexts, strict guidance about what can and should be in an advertisement.

Credit advertisements, on their face, can violate the law. That is, you don't have to know anything more than what the advertisement says to determine, at least in part, whether it's in compliance with federal law; and that makes screening, in some senses, a lot easier, at least for those issues where you would otherwise have to conduct an investigation or make an inquiry. It shifts the burden back to the advertisers and to the media as to are they or should they be screening those ads where they can tell on the face of the ad that there's a problem.

And, lastly, consumers clearly rely heavily on credit advertisements to distinguish between offers of credit. The commodity of credit is pretty similar across the board. The question is what specific terms, payments, interest rates are involved. Consumers carefully read the advertisements and oftentimes use those to distinguish between dealers or lenders. And so it's all the more critical that those advertisements be technically accurate, truthful, and nondeceptive.

We have a distinguished panel here today to represent at least two sets of interests. The government is a little bit more heavily represented than the private sector, but the private sector is more than adequately represented. Robyn Motley is the manager of credit and collections at the Washington Post. Julie Brill, who will speak after her, is with the attorney general's office in Vermont, and then Carole Reynolds is at the Federal Trade Commission.

I'll add now, to get it out of the way, that any comments that Carole and I make today do not necessarily represent those of the Commission or any of its Commissioners.

MS. MOTLEY: That's the right advertising disclaimer. Good afternoon. I'm happy to be here to talk to you a little bit about what the Washington Post does to try to screen the advertising that runs in our paper.

First of all, why do this? I think it was mentioned earlier this morning that it's just a business. I certainly don't want to be in the business of subscribers and readers calling me to complain about ads that run in our paper. To a large extent, whatever runs in the paper reflects on the integrity of the paper, so monitoring the advertising that runs in the paper is just good business. We try to help maintain the public's confidence by screening those ads.

However, to a great extent, we do feel that screening the nondiscriminatory nature, the truthfulness, and the deceptive-nature ads that run in the paper is the advertiser's duty. We try and keep them honest, and the way we try to keep them honest is we reserve the right to edit, revise, and reject any advertising. And, believe me, the Washington Post does reject advertising, not only for ad copy, but if there any other problems, certainly, if there are credit problems.

We have an advertising standards book that all of our sales reps get when they come on board. In addition, the folks that type in ads at our classified system have these standards on line. When they are putting in an ad for a certain classification, it's very easy to go to what's called the "standards basket" to see if the ad is in compliance.

Of course, you can't account for every kind of ad copy that might come across your desk because there are always folks out there thinking up new schemes and new ways to defraud the public. We ask that if an ad looks suspicious and it's not necessarily covered in an advertising standard, they bring it to management's attention so we can make a determination whether or not we want this ad to run in the paper.

Specific guidelines, with regard to credit promotions, are very similar to the standards that we apply to business opportunities, as well as financial advertising. The advertiser must fill out a Washington Post Compliance Form. Filling out the form doesn't mean that you're going to get in the paper. You have to be pre-approved -- that is, resident in the ad-taking system. We only take this type of advertising for businesses. No individuals are allowed to run these kinds of credit-promotion advertising.

We have strict requirements with regard to the phone number. We find that if we know who the phone number is listed under, we have a better sense that fraud is not being committed because we can go back, check the address, and know that it's listed. It tends to make for more legitimate businesses. They must use that phone number as a billing phone number and it must also be used in the ad.

They can use an 800 number, but again, we verify the number. This is an area in which we've run into problems because if you have an 800 number with AT&T, the listing is free, but you have to pay for an 800 number listing with MCI or Sprint. That's an area where our advertisers have said that our standards aren't quite fair because we're forcing them to pay for a listing, but we haven't come up with any way to get around that. We do require that the 800 number be listed, and we can call to verify that.

They can also use unlisted numbers, but it must be in addition to a listed number. The 900 numbers can be used, but we only let certain classified reps take ads with 900 numbers. We do that because we want the sales reps to call the 900 number, listen to the recording to try and determine whether there is fraud involved.

Q: Do you have some specialists?

MS. MOTLEY: Yes. The whole advertising/classified floor can take ads in this area, but, if there's a 900 number involved, we'd like the business opportunities desk to review it. They are most familiar with the kinds of frauds that are perpetrated on the public.

An additional requirement is that these advertisers must have an office in our local billing area. For the Washington Post, that's not only D.C., Maryland, and Virginia, but also West Virginia and Delaware.

They must be specific -- and state -- any fees or rates that they are requiring from the consumer. If there are no fees involved, we make them state that there are no fees. They can't get around saying whether or not there are fees involved. Also, we ask for copies of any brochures that they send to consumers.

After all that, we review the ad copy. If there's anything deceptive in the ad copy we reject it. The form that I was talking about asks very specific questions. I think someone earlier today said asking the right questions helps you prevent fraud. We're not in the business of verifying all of this information, but at least it gives us a comfort level, and there are always people who know how to get around the system.

We ask simple questions: the name of the business; the address, to make sure it's not a P.O. box or a mail drop; the names of the principals of the business as well as the officers. We ask what other businesses these folks have been involved with in the past. We ask how the company is organized and if it is a corporation, a partnership, or a sole proprietorship. If it is incorporated, we want to know the state in which it's incorporated. We ask them if there are licenses involved or registrations with the state or the city and we ask for those license numbers.

In addition, we ask if they are commercially rated and if they are a member of the Better Business Bureau. Are there any complaints currently against them? Have any of the officers been found guilty or have any court or government actions pending against them?

Potential advertisers send in this form along with all the information that we've asked for, and if everything looks kosher on the surface, then we put them in an approved queue. Those are the advertisers whose ads we will accept when they call in. I'm not saying that we're as good as we should be, but we try to update this information on a yearly basis by sending out new forms and asking for updates.

What is nearest and dearest to my heart as a credit manager is advertising that runs in this classification on a prepaid basis, so the Washington Post is not being scammed; but, again, we go through the other regulations to protect the folks that are reading our paper.

I think it's obvious, that if someone can't pay for advertising, there's probably a high correlation that they're running away with the consumer's money, too, especially if there is an up-front fee. So we try and watch for that as well.

MS. BRILL: Good afternoon. I'm Julie Brill from the Vermont Attorney General's Office. I'm here to give you the perspective of law enforcement, along with Carole and David, of course. It's wonderful to hear Robyn talk because it's nice to see how a newspaper can set up a system to catch as much as they can up front. Unfortunately, in Vermont, I don't think we have newspapers that have a screening system in place that's similar to the system that the Washington Post has.

We have been trying to work with our local newspapers, both the dailies and the weeklies, to get them to become aware of obvious ads that are fraudulent and deceptive or unfair and deceptive. We started this endeavor after looking at our Vermont Consumer Fraud Act, which is our enactment of the Unfair and Deceptive Acts and Practices Act in Vermont. The general rule that exists at the state level as well as at the federal level, under the Federal Trade Commission Act, is that unfair and deceptive acts and practices are prohibited.

Section 2452 of the Vermont law provides for a limitation on liability for newspapers, magazines, and other publications as well as radio and television stations. It says that the prohibition on unfair and deceptive acts and practices shall not apply to the publisher, owner, or operator of a newspaper, magazine, or a radio or television station which disseminates an advertisement or offer to sell when the publisher, owner, or operator has no knowledge of the fraudulent intent, design, or purpose of the advertiser.

As time went on, our office continued to see the same types of ads appearing over and over again in the same newspapers, despite the fact that our office would call the newspaper and request that these ads be pulled because they are obviously fraudulent. We felt that it was important to try to get behind the potential argument that the newspaper or other media director would have that they had no knowledge of the fraudulent scam.

We began to engage in an educational effort with our newspaper advertising directors. We met with them and we reviewed typical scams and typical advertisements that were obviously fraudulent. We are now about to follow up that effort with a letter which will go to, hopefully, all advertising directors for both daily and weekly newspapers, in the State of Vermont.

This letter is intended to outline eight of the areas where the most scams appeared in the State of Vermont, and I would venture to guess probably appeared in other states as well. The letter gives the advertising directors examples of obvious problems in these areas so that they can develop an understanding of what our office considers to be an obviously fraudulent ad.

The first area is automobile ads. We produced the Vermont Automobile Advertising Guideline, which was a joint effort by our office and the Vermont Auto Dealers Association, and it outlines a number of the requirements for auto advertising in the state.

The next area that has produced many, many problems in our state is the business opportunities ad. Generally speaking, the rule of thumb that we use is that if somebody claims that you're going to earn over $100,000 a year by purchasing a franchise or other business opportunity, it's just not going to happen, and it's more than likely fraudulent. These claims of grossly exaggerated earnings or potential earnings should be a trigger to anyone who's doing any kind of screening of advertising.

Credit repair is an area where consumers get ripped off all the time. The basic problem with credit repair advertising is that it is almost impossible to repair someone's credit if they have a bad credit history. You might be able to do it temporarily, meaning for a period of three to six months, maybe as much as a year, but the consumer will end up putting up $300 to $600 or $700 in order to obtain credit repair services, and after a year goes by, typically speaking, the bad information will reappear because it is accurate.

So the problem with credit repair is that it is almost impossible to repair somebody's credit on a long-term basis. But most of these ads simply state: "Bad credit, we'll help you, give us a call", or "Bad credit, we'll solve the problem." You can't erase bad credit information from credit bureau reports. It just doesn't happen unless you act in a fraudulent manner.

The other areas that we think are obviously fraudulent and should be stopped, through some kind of screening mechanism at the newspaper, are contests where the consumer has to pay in order to play. That's a violation of Vermont law and probably a violation of other state laws.

Another area that concerns us are 800 numbers that are not free. We found one ad for an 800 number adult sex-line service, and in the ad it says it's going to cost you $3 per minute. So they're advertising an 800 number at the same time they're telling you it's going to cost money for the service. There's something wrong there and someone should have caught that.

"Going-out-of-business" sales must be what they claim. We have a regulation in Vermont which requires liquidation sales to actually be liquidation sales and not a moving sale or simply some other kind of promotion. In point of fact, the advertiser has to go out of business within a certain amount of time in order for that ad not to be fraudulent.

What does all this mean -- the fact that we're now notifying newspapers of these potential scams? What will we do about it? Well, if an appropriate case were to come along, we would probably, at the staff level, suggest that our attorney general authorize us to sue a newspaper where we believe the newspaper did have prior knowledge. That is, prior knowledge resulting from our conversations with them, our education efforts, our letters, and the number of complaints that we have sent over to that newspaper dealing with similar types of advertising. We would probably reserve that kind of action for a case where we had no alternatives or we felt that the newspaper had acted in an egregious manner by simply ignoring the obvious.

I think there are newspapers who already satisfy those criteria. There are newspapers who, over and over and over again, will publish the same type of ads, despite the complaints that they hear from us. I think I'll end on that happy note.

MR. MEDINE: That's a provocative note on which to end. Now, I'd like to introduce Carole Reynolds from the Federal Trade Commission.

MS. REYNOLDS: Let me say how much of a pleasure it is to have each and every one of you here with us today. With all the scams you've been hearing about, you may wonder if it's possible for anything else to go wrong with an ad. But, indeed, there is.

In the credit and lease area, there can be misrepresentations that go to an issue that is sometimes the most crucial to consumers, and that is affordability itself. Federal law establishes very specific requirements for both credit and lease advertising, and many of you may be involved in screening for these very requirements. There are media groups and there are industry voluntary groups that do just that, and all of you who are involved in that yeoman's work are a very big help to enforcement agencies.

The Commission has a manual, entitled How To Advertise Consumer Credit, which can help you in this regard. It is an overview of those requirements. Additionally, you should be aware of another publication we have called, Radio Advertisements for Consumer Leases: Some Facts for Business. Last fall, Congress changed the rules slightly regarding radio ads for leases and this brochure covers those new requirements. It, in general, allows an abbreviated disclosure if certain criteria are met. And, again, it's only radio ads that will be for leases.

It's important to remember in this area that the advertising rules apply to anyone who advertises consumer credit. As opposed to some of the other requirements in the credit field, this covers anyone. That could be real estate agents, builders, developers, automobile dealers, advertising agencies, and many others who advertise.

The media, however, is specifically exempt under the Truth in Lending Act, which is the primary statute in this area. However, the media is very active in screening. Someone called this week and said they had an ad that the advertiser had assured was fine, but they had the FTC book, and there was no way they were going to run that ad.

The advertising environment is very closely tied to the economy. As interest rates rise, the necessity for careful screening of ads becomes paramount, particularly for the issue of accuracy in advertising. In this regard, federal law has a very specific requirement. That is, any terms -- be they credit or lease terms -- that are placed in an ad must, in fact, be actually available. None of this, "Well, I thought it was going to be available" or "Well, it's our intent that they be available." Those terms must, in fact, be available now, or there must be a specific time in the future when they will be available for consumers.

This sounds like a pretty obvious proposition, but, unfortunately the Commission found a mortgage broker that was advertising rates about four percentage points below market and was taking tidy sums of several hundred dollars in application fees. The only problem was when these consumers got to closing, the low-rate deals never materialized. They were not, in fact, available.

This problem offends both the Truth in Lending Acts "Actually Available Rule" and the Federal Trade Commission Act which prohibits unfair or deceptive acts or practices. That company settled the charges in that case, and there is a consent agreement now in the United States District Court.

If you are screening ads, there are some other things that you need to keep very clearly in mind in today's environment. First of all, whether the ad is promoting credit or lease terms; and, secondly, what those specific terms are.

The L.A. Times reported this week that the average price of a new car has now reached $20,000. In that context, and also in the context of rising interest rates, there may be some advertisers who are tempted to obscure the true costs and terms of what those deals are.

Let's take a look at some of the particular additional problems that the Commission has found and enforcement actions that have been brought. In Collins Buick, the company advertised in print, on radio, and television only $125 down and $125 a month.

Now, the print ads included a very small -- so small, you almost can't read it -- disclosure at the bottom, which stated 12 percent APR, after 12 months, and the customer has the option to refinance or pay off. I might add that the radio and television ads did not even have that disclaimer.

What does that mean? What the company failed to tell you was, after 12 months of very low payments, you were required to make a balloon payment of many, many thousands of dollars. You had to sign an agreement up front not just for 12 months at $125, but for the whole amount that was required. And if you didn't want to make the balloon, the only other thing you could do was pay 48 monthly installments of many, many hundreds of dollars in excess of $125. Indeed, some of them were over $600 a month for 48 additional months. None of this is disclosed anywhere in the ad.

These practices very clearly offend both the Truth in Lending Act, which requires, among other things, clear disclosures about payment obligations, as well as the Federal Trade Commission Act's prohibition against unfair and deceptive acts and practices. This, in particular, is an extremely misleading advertisement.

Let's look at Ad Number Two, entitled, "Car Show." This ad promoted $149 a month on in-stock used cars. The interesting thing is it seems to have quite a few of the disclosures that are required. It says 10 percent down, up to 60 payments, 14.9% APR. But it has something else in that ad. It says the last payment may vary.

Now, that phrase is usually used to mean the last payment may be slightly different. There may be rounding in here. It could be a few cents off; it could be a few dollars different. And how different was it in this particular transaction? Well, there's a clue in this ad. If you look all around the borders on this ad, you'll see a small print, "more than you expected." And, indeed, it was more than you'd expect, because on those terms, that Park Avenue, for $21,900, left you with a balloon payment of over $25,000, which appears nowhere in the ad, and even that little Skylark at the bottom left you with a balloon payment of over $4,000, also nowhere in the ad.

These problems are very serious. This company is now under order. They did not, of course, admit liability, but they did settle the charges. And for future violations, both the company and CEO -- who, I would add, was put under order; not just as a company CEO and president, but also individually -- now face liability of up to $10,000 per ad, which means each ad is potentially a separate violation.

There are a few other things to keep in mind in this area. I mentioned credit and lease ads previously. We now see credit and lease promotions being included in the same ad. It's very important that the ads be clear as to which terms are for credit and which terms are for leases. This problem also happened with the Collins Buick case, by the way.

Earlier, I mentioned that there is a brochure for radio advertisements of consumer leases, and under some circumstances, shorter and more abbreviated disclosures permitted in radio lease ads. I would add, by the way, that the full disclosures have to be included, either through a toll-free telephone number or in a print ad, and there are specific requirements as to what must be included to qualify.

Some advertisers are trying to extend this rule, which applies only to radio lease ads, to credit advertising. I would mention that the regulations in this area are promulgated by the Federal Reserve Board. Regulation M applies to leasing; Regulation Z applies to credit. The Federal Reserve Board is reworking Regulation M, and we expect new and much clearer rules for leasing in the future.