WASHINGTON, D.C. -- Chuck Bell, the programs director for Consumers Union (CU), the nonprofit publisher of Consumer Reports magazine, testified today at a Senate Commerce Committee hearing about how to protect consumers against scams and fraud during the current economic downturn. 

 “When the economy falters, it’s a prime time for scams,” Bell said.  “Con artists target people who are desperate for quick help with their money problems.  You see scams when the economy is up or down, but recessions inspire con artists to expand their marketing efforts, and they come up with very clever angles to attract new victims.”

Bell said these scams demonstrate the need for a Consumer Financial Protection Agency, which would provide stronger consumer protection in financial services.  Congress is now considering the creation of such an agency, for which CU has long advocated.

“A Consumer Financial Protection Agency would greatly help to protect consumers in good times and bad, and ensure that laws against deceptive practices and fraud are effectively enforced,” Bell said.  “Consumers need to be very skeptical of offers of financial help and extra income, particularly when those offers come from businesses they don’t know.  At the same time, financial firms should provide better disclosure and protections for customers, and those that sell products with high fees and financial traps built into them should withdraw or redesign them.”

In his testimony Bell described five types of costly traps that target financially-stressed consumers during troubled times:

1. Foreclosure Rescue Scams: Public notices of foreclosure proceedings can trigger mail, phone, and even door-to-door solicitations. Bell says consumers should steer clear of any company that initiates such contact, demands a fee before providing services, or advises cutting contact with the mortgage company. Consumers anticipating problems making mortgage payments should seek legitimate free or low-cost help by contacting a housing counseling agency certified by the Department of Housing and Urban Development (www.hud.gov/foreclosure or 800-569- 4287). Help is also available at the Homeowner's Hope Hotline at 888-995-4673 and the Institute for Foreclosure Legal Assistance (www.foreclosurelegalassistance.org). CU supports state and federal legislation to prevent foreclosure rescue scams by creating additional protections for consumers who pay fees for rescue and loan modification services. 

2. Hard-sell reverse mortgages: TV ads are encouraging seniors to take equity out of their homes through reverse mortgages.   But a reverse mortgage should be a last resort. When homeowners use it to pay off credit cards or splurge on hobbies and travel, they lose an important safety net that might be needed for an emergency.  A lawsuit against one firm claims that the company advised its business partners to encourage seniors to take out as much money as possible in reverse mortgages so the fees and interest paid to lenders would be maximized.  The complaint says the firm trained partners to sell insurance products to seniors with the money gained from the reverse mortgage, so the firm could collect additional interest on the extra money borrowed.  CU recommends that consumers considering tapping home equity can contact a HUD-approved counselor (800-569-4287 or www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm). Those who opt for a reverse mortgage shouldn't sign any documents until they have been reviewed by a trusted lawyer. CU believes that sellers of reverse mortgages should be required to make sure the loan is suitable for the borrower, and there should be one-on-one premortgage counseling for all reverse mortgages.  Sen. Claire McCaskill has proposed legislation aimed at preventing fraud, and requiring that ads for government-backed mortgages present a balanced view of their risks and benefits. 

3. High-fee debt settlement: In the past two years, the state of West Virginia has charged nine debt-relief companies with violating state law by charging excessive fees for their services, along with other violations.  "Most consumers end up quitting these programs within the first two years after being subjected to constant collection calls and paying fees that can run into the thousands while receiving none of the benefits they were promised," an assistant attorney general in West Virginia told Consumer Reports. Bell says consumers struggling with credit-card debt should first consider negotiating directly with creditors. People needing help can find a nonprofit credit counselor through the National Foundation for Credit Counseling (www.debtadvice.org). CU is urging the FTC to undertake a vigorous enforcement program against debt collection abuses.

4. A credit card for anyone: People who have been turned down for credit because of low credit scores are being pitched credit cards that offer them a “second chance.”  But these cards come with fees galore. The nonprofit National Consumer Law Center calls them “fee harvester” cards. A better alternative for consumers seeking to rebuild poor credit histories is a secured credit card, which requires a cash deposit of at least $200 to $300 as collateral. The amount of cash deposited will typically be the initial credit limit. Making timely payments should boost the credit score, so consumers should look for a card that reports to the three major credit bureaus and has no application fee.

5. Uninsured savings accounts:  Some firms are offering so-called “premium” certificates of deposit (CDs) that promise an “alternative” to the relatively low rates offered by U.S. banks, plus a guaranteed rate of return to avoid market fluctuations.  But this “guarantee” is not necessarily a federal guarantee. Some CDs, money-market accounts, and other savings alternatives might not be FDIC-insured, so consumers need to be careful and shop around. Bankrate.com, which publishes online bank data, lists federally insured banks, along with a "Safe & Sound" rating assessing overall financial stability.