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1 THE FEDERAL RESERVE BOARD + + + + + HOME OWNERSHIP AND EQUITY PROTECTION ACT (HOEPA) + + + + + PUBLIC HEARING + + + + + Thursday June 14, 2007 + + + + + The public hearing came to order at 8:43 a.m. in the Terrace Level Dining Room of the Martin th Building, 20 and C Streets, N.W., Washington, D.C., Federal Reserve Board Governor Randall S. Kroszner, presiding. PRESENT FROM THE FEDERAL RESERVE: Randall S. Kroszner Governor, Board of Governors of the Federal Reserve System Sandra F. Braunstein Director, Division of Consumer and Community Action Leonard Chanin Associate Director, Division of Consumer and Community Affairs MORNING PANEL: Janis Bowdler Senior Housing Policy Analyst, National Council of La Raza William H. Brewster Director of Anti-Fraud Initiatives, Fannie Mae Alys Cohen Staff Attorney, National Consumer Law Center Susan A. Davis Executive Vice President, National Consumer Lending, Wells Fargo Home Mortgage NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 2 Harry Dinham President, National Association of Mortgage Brokers Martin Eakes Chief Executive Officer, Center for Responsible Lending/Self-Help Ira Rheingold General Counsel, National Association of Consumer Advocates Pablo Sanchez National Mortgage Production Specialist, JP Morgan Chase Faith Schwartz Senior Vice President, Enterprise Risk Management and Public Affairs, Option One Mortgage Corporation AFTERNOON PANEL: Steve Antonakes Commissioner of Banks, Massachusetts Michael Decker Senior Managing Director, Research and Public Policy, Securities Industry and Financial Markets Association Ren Essene Research Analyst, Harvard University Joseph R. Mason LeBow College of Business, Drexel University Tom Miller Attorney General, Iowa Mark Pearce Deputy Commissioner of Banks, North Carolina Lori Swanson Attorney General, Minnesota NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 3 I N D E X Welcome and Opening Remarks .......................5 MORNING PANEL: Faith Schwartz, Senior Vice President, ...........19 Enterprise Risk Management and Public Affairs, Option One Mortgage Corporation William H. Brewster, Director of .................28 Anti-Fraud Initiatives, Fannie Mae Susan A. Davis, Executive Vice President, ........33 National Consumer Lending, Wells Fargo Home Mortgage Harry Dinham, President, National ................37 Association of Mortgage Brokers Martin Eakes, Chief Executive Officer, ...........42 Center for Responsible Lending/Self-Help Ira Rheingold, General Counsel, ..................48 National Association of Consumer Advocates Janis Bowdler, Senior Housing Policy .............54 Analyst, National Council of La Raza Alys Cohen, Staff Attorney, ......................59 National Consumer Law Center Pablo Sanchez, National Mortgage .................68 Production Specialist, JP Morgan Chase NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 4 AFTERNOON PANEL: Tom Miller, Attorney General, Iowa ..............168 Mark Pearce, Deputy Commissioner ................173 of Banks, North Carolina Ren Essene,Research Analyst .....................177 Harvard University Joseph R. Mason, LeBow College of ...............182 Business, Drexel University Michael Decker, Senior Managing .................187 Director, Research and Public Policy, Securities Industry and Financial Markets Association Steve Antonakes, Commissioner of Banks, .........192 Massachusetts Lori Swanson, Attorney General, .................199 Minnesota Open Microphone .................................265 Adjourn NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 5 1 P R O C E E D I N G S 2 8:43 a.m. 3 GOVERNOR KROSZNER: All right, good. 4 Hopefully we won't be getting any feedback. 5 want feedback from you guys, and that's exactly why 6 we're having this hearing today. 7 I really want to welcome But we do everyone for 8 coming, and hopefully we won't be getting too much 9 feedback from the audio problems, but we'll be getting 10 feedback from you. 11 This is an incredibly important topic, and 12 I'm really delighted to see the interest that people 13 have 14 important discussions throughout the day, a lot of 15 good back and forth. with 16 a full house here. We have a We have some superb panelists. lot of We also 17 have an opportunity for the open mike at the end, for 18 people who have 19 panels, to come 20 little bit more in just a moment. not formally forward. I'll participated talk about in the that a 21 Also, I'm Governor Kroszner, and I chair 22 the Consumer and Community Affairs Committee, as well 23 as the Supervision and Regulation Committee. 24 Braunstein is the head of our Consumer and Community 25 Affairs Division, and Leonard Chanin is her key deputy Sandra NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 6 1 on these issues. 2 3 So we're very pleased that they could come here today to participate in this event. 4 Well, as I said, I'm really happy to be 5 able 6 hearing 7 Act, 8 specifically on how the Board might use its rule- 9 making authority under HOEPA to address concerns about 10 to chair under the Federal the so-called Home Reserve Ownership HOEPA. The Board's Equity hearing public Protection will focus home mortgage lending practices. 11 During the course of this hearing, we'll 12 hear from key players in the home mortgage market, 13 lenders, 14 consumer 15 organizations, 16 regulators. brokers, advocacy 17 secondary groups academics, Although they 18 roles, 19 encouraging responsible 20 benefit individual 21 economy as a whole. 22 they of and share The a participants, community development researchers all common Congress market play goal, mortgage very I and HOEPA state different believe, lending consumers enacted and the in for in the American 1994 in 23 response to concerns about abusive lending in the home 24 equity market. 25 broad authority to implement its provisions, and to The Federal Reserve Board was given NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 7 1 adopt regulations to implement its provisions, when 2 the 3 effectuate its purposes. Board finds 4 In it to be addition, necessary the and proper Board has to the 5 responsibility to prohibit acts or practices it finds 6 unfair or deceptive, or otherwise designed to evade 7 HOEPA. 8 responsibility under HOEPA, but is not alone in facing 9 the important task of preventing unfair or deceptive 10 The Board understands is rule-making practices. 11 Other regulators share a responsibility to 12 ensure 13 enforcement 14 regulatory authority and responsibility under their 15 own anti-predatory lending statutes and various other 16 legal 17 industry licensing acts, which give them considerable 18 control over the activities of mortgage brokers and 19 lenders. 20 responsible mortgage powers. authorities, Many The and of the lending states especially states, through have extensive their mortgage including notably 21 those that are represented on this afternoon's panel, 22 have been very active, very, very active in reining in 23 bad actors in the mortgage markets. 24 shares our enforcement responsibility under HOEPA and 25 other federal laws. The FTC also NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 8 1 Finally, the federal financial regulatory 2 agencies each have a duty to enforce federal consumer 3 protection 4 depository 5 regulatory ambits. laws, including institutions HOEPA, under with respect their to respective 6 In light of the sheer magnitude of the 7 task, we're very pleased that these regulators all 8 contribute 9 competitive and responsible mortgage market. to the goal of ensuring a healthy, 10 We are committed to working closely with 11 the other federal and state regulators, to ensure that 12 the laws that protect consumers are enforced. 13 HOEPA also directs the Board to hold 14 hearings, such as the one we're holding today, to 15 assess the effectiveness of regulations and laws in 16 protecting consumers. 17 valuable information. Hearings provide us with very 18 In our most recent prior hearings held 19 last summer in four cities around the country, our 20 goals included assessing the effectiveness of our 2001 21 amendments 22 lending practices while preserving access to credit. to the HOEPA rules, in curbing abusive 23 We also wanted to gather information on 24 the effectiveness of the mortgage disclosures required 25 by our Regulation Z, pursuant to the Truth in Lending NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 9 1 Act, to inform a review of those disclosures, which is 2 now actively underway. 3 Rising foreclosures in the subprime market 4 over the past year have led the Board to consider 5 whether and how it should use its rulemaking authority 6 to address these concerns. 7 must walk a fine line. 8 9 In doing so, however, we We must determine how we can help to weed out abuses, while also preserving incentives to 10 responsible 11 subprime market 12 borrowers with 13 homeowners, to access equity in their homes, or have 14 the flexibility to refinance their loans as needed. 15 lending. A benefits limited robust and consumers, credit responsible by histories allowing to become In this task, we have several tools at our 16 disposal. 17 lenders, 18 principle-based guidance with supervisory oversight, 19 plus formal efforts to work with industry participants 20 to 21 materials. These rules promote 22 best The include that required prohibit practices, Federal and disclosures abusive consumer Reserve by practices, education currently is policies with 23 conducting 24 respect to each of these tools. 25 with the other federal banking regulators, we issued a thorough review of its Last year, together NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 10 1 guidance on so-called non-traditional mortgages. 2 We also have issued proposed supervisory 3 guidance concerning 4 disclosures for subprime mortgages. 5 finishing 6 comments we've received, and expect to issue a final 7 version fairly soon. their underwriting review of these standards to The agencies are comments and the 8 The Federal Reserve produces a range of 9 consumer education materials, including information to 10 help 11 other 12 promote financial education by partnering with outside 13 organizations, as well as doing a number of activities 14 on our own that I've been very heavily involved with, 15 having been an educator for many years. 16 very 17 there. potential borrowers alternative important 18 mortgage to Two under make tools products. sure that adjustable to get we'll rate We and actively I think it's the focus ideas on out today, 19 however, are lending disclosure to consumers and rules 20 that 21 Disclosures provide information that is critical to 22 the 23 principle 24 competitive and therefore more efficient when accurate 25 information is available to all who participate. prohibit effective of or restrict functioning economics is of lending markets. that markets practices. A core are more NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 11 1 Information helps consumers by improving 2 the ability to compare 3 choose the ones that will help meet their best -- best 4 meet their personal goals. 5 We are keenly disclosures and however, that 8 sensitive to the risk that too much information, may 9 be practically of as little value to consumers as no already the the 7 lending of of then substantial mortgage of aware, products 6 10 volume mortgage entails, documents and we are information at all. 11 Accordingly, disclosures we intend consider 12 mortgage 13 towards improving their usefulness to consumers, while 14 remaining 15 industry. mindful of comprehensively, to the total with burden an for eye the 16 Perhaps most importantly, we'll engage in 17 extensive consumer testing of mortgage disclosures, to 18 ensure 19 consumers can really use. 20 that I'm very excited about, that we really use in the 21 credit card area and we're going to be using in the 22 mortgage area. 23 that disclosures provide information that This is one of the things Not just making sure that the information is 24 there; that's necessary. 25 people can understand and that people find useful. But there in a way that NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 12 1 We found a lot of surprising things, things 2 that we wouldn't have thought about without asking 3 real people, going into shopping malls, people who are 4 going to be using their credit cards, to find out 5 well, what's useful? 6 can be helpful? 7 Then What do you want to know? when we actually put this What down on 8 paper, going back to those consumers and saying "Do 9 you understand this? Is this really helpful to you?" 10 That 11 valuable 12 something that is very valuable and useful to empower 13 consumers. sort of in 14 back and turning forth process information can be overload very into We also recognize that disclosures may not 15 always 16 Because 17 additional 18 seriously consider how we might use our rule-making 19 authority 20 restricting consumers' access to beneficial financial 21 options, and responsible subprime credit. 22 be sufficient some bad to lending measures, to In combat the address addition practices Federal abusive to abusive practices. may Reserve practices, improved require will without disclosures, 23 regulations that restrict or prohibit practices that 24 are "unfair and deceptive" may also be necessary. 25 have heard concerns about consumers being We steered NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 13 1 toward products that they 2 repeated 3 strip away a borrower's home equity. refinancings 4 can't involving afford, closing and have costs that Today, we'll gather information on how we 5 might craft rules to stop such abusive practices. 6 also 7 regarding 8 rules that combat predatory lending efficiently and 9 effectively. will seek their 10 information experiences During from with today's state officials drafting hearing, We laws we'll and seek 11 information 12 questions. 13 some of those questions. 14 practices 15 troublesome in the mortgage market, especially in the 16 subprime home equity market. 17 from panelists on certain specific I'd like to close by briefly touching on that They have There are four terms or been most are first, to require frequently cited as prepayment penalties. escrow taxes 18 Second, 19 insurance; third, stated income and low documentation 20 lending; 21 consideration to a borrower's ability to repay a loan. 22 failure and At fourth, least failure some of for to these give and adequate practices can be 23 beneficial at least to some consumers. 24 an 25 prepayment penalty in exchange for a lower interest informed borrower might choose a For example, loan with NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com a 14 1 rate or lower closing costs. 2 On the other hand, prepayment penalties can 3 also be used 4 borrower is unaware that an adjustable rate mortgage 5 loan has a substantial prepayment penalty that will 6 extend 7 interest rate, making it costly or impossible for the 8 borrower 9 interest payments. beyond to in an the abusive first refinance way, such adjustment the loan as of to when the avoid a loan's higher 10 We hope to gather information that helps us 11 to determine whether rules can prevent the abusive use 12 of loan terms or practices, while preserving their use 13 in 14 consumers. instances where they might provide benefits to 15 Given adequate consideration to a borrower's 16 ability to repay a loan obviously benefits both the 17 borrowers and the lenders. 18 other 19 reinforcing our collective belief that the principles 20 of 21 borrower's repayment ability. federal prudent regulatory underwriting Recently, the Board and agencies require issued guidance consideration of a 22 For example, the agencies have provided that 23 lenders should qualify borrowers for non-traditional 24 mortgage 25 payment option adjustable mortgage products, based on products, such as interest-only loans and NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 15 1 the fully indexed rate and fully amortizing payment. 2 Some have urged the Board to adopt this 3 broad principle as a rule, while others have urged the 4 Board to preserve flexibility to exercise judgment in 5 determining the likelihood that a given borrower can 6 repay a loan. 7 Well, it seems self-evident that adequate 8 consideration of repayment ability is necessary. Our 9 experience in crafting guidance has taught us that 10 this principle is far easier to articulate in general 11 terms than it is to put in a detailed prescriptive 12 role, saying which underwriting practice constitutes 13 "adequate consideration." 14 This is especially true in the context of 15 mortgage credit underwriting, which can depend on such 16 a 17 considerations. 18 explore in detail these types of practices, when they 19 can be beneficial and then they might be problematic. great 20 number We of pertinent consumer-specific Today, with your help, we intend to will seek informed suggestions with 21 respect to our four practices I've identified, as well 22 as certainly any others that commenters may identify. 23 24 25 First, practices we should ask be in general prohibited, whether restricted such or NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 16 1 subjected to increased disclosure requirements and if 2 so, why. 3 Second, we ask whether any new regulatory 4 treatment 5 certain types of loans or certain types of borrowers. 6 of such Finally, practices we ask should whether be any limited state to law 7 provisions relating to such practices might serve as 8 models for the Board to adopt at the federal level, 9 and if so, what kind of record these have -- these 10 state laws 11 access to responsible mortgage credit. 12 in Your curbing abuses participation without here and restricting the welcome 13 pertinent 14 panelists and others is very much appreciated and I, 15 the other members of the panel from the Fed here and 16 the entire Federal Reserve Board thank you very much 17 for taking the time to participate. 18 19 information to be contributed by the Now what I'd like to do is turn to the rules of procedure that will govern the hearing for today. 20 Each of the invited panelists will have a 21 maximum of five minutes, and because we have so many 22 panelists and so many people who want to speak, I will 23 have to be pretty draconian in making sure that we do 24 enforce that five minute limit, and we have a timer 25 who will publicly tell everyone what the time is and NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 17 1 publicly shame someone who may go over the limit. 2 That's not because we want to reduce debate, 3 but because we want to have a rich debate, in which 4 everyone has an opportunity to speak. 5 questions and answers to follow the conclusions of all 6 of the opening statements. 7 position out there before we have the Q and A. 8 9 The first There will be We want to get everyone's panel will go we'll have a break at some point. until noon, but So don't worry. 10 This is not going to be a test of will, to make sure 11 that you can make it through to noon. 12 break at some point. 13 We'll take a We'll have an hour long lunch break from 12 14 to 1, reconvene promptly at one. 15 panel of experts from one o'clock to three o'clock 16 with 17 presentations, and Q and A. the 18 same procedures of We'll have a second a maximum five-minute From three o'clock to four o'clock, we then 19 have a so-called open mike. What this will allow us 20 to have 21 invited to the panels, have an opportunity to speak at 22 today's hearings. do 23 is have You people must who sign up not in been advance, 24 There's a table just outside that door. 25 is keeping the sign-up list. formally though. David Evans Each of the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 18 1 presentations at the mike will be limited to no more 2 than three minutes. 3 Once again, unfortunately I'm going to be 4 very tough on enforcing that limit, because I know 5 that we're going to have a lot of people who want to 6 speak, and I want to make sure that we get through all 7 those speakers. 8 9 I mention. have two final points that I want to The panelists, the open mike participants, 10 as well as the members of the general public, and 11 anyone, whether they are here or not, are encouraged 12 and we really look forward to written statements of 13 th any length being provided to us by August 15 , related 14 to the wide variety of topics that we're talking about 15 today. 16 We do look forward to those written 17 statements. 18 presentation short, the written statement they submit 19 will be as long as you wish. 20 panel discussion and the open mike statements will be 21 part of the record, which will be made available on 22 the Board's website. 23 So even though we're keeping the oral Again, thank you A transcript of the very much for 24 participation. 25 first panel with Faith Schwartz, from Option One. your Now I'd like to begin formally the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 19 1 MS. SCHWARTZ: Kroszner Well, thank you very much, 2 Governor and the Fed Board staff, for 3 inviting Option One and myself to participate today in 4 this panel. 5 within five minutes and we'll get to any key points. 6 But I will do my best. 7 I I'll try to get through my introduction am at the Option manager One of Mortgage Enterprise and our Risk 8 Management Public 9 Affairs, and I have been there for four years. I'm 10 currently on the Federal Reserve's Consumer Advisory 11 Committee. 12 Option One Mortgage has been in business 13 since 1992, and is a nationwide non-prime wholesale 14 lender, who originates through a network of brokers, 15 and the leaders that started the company are in place 16 today. 17 Before I get into the introductory paragraph 18 that should get to the key points, I would like to 19 share that I have been in the business for many, many 20 years, over 20, and I've spent ten years in banking. 21 I've spent five years at a GSE, Freddie Mac, where I 22 helped 23 securitization 24 efforts. 25 them manage and their subprime interest their anti-predatory and lending I've been an entrepreneur for six years as NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 20 1 a chief operating officer. We've relied on the 2 capital markets to have nationwide funding to operate 3 in the marketplace. 4 feel I come to this discussion with a pretty informed 5 background on some of the nuances that will be talked 6 about today. I share that with you because I 7 So with that, we recommend that the Board be 8 cautious in exercising its rule-making authority under 9 HOEPA, Section 129. 10 But we do recommend that they use their authority in the following three ways. 11 Pursuant 12 Lending Act 13 disclosures 14 introduced. to (TILA), with Section to 105 of strengthen respect to all the Truth and in simplify four topics 15 Secondly, we recommend pursuant to Section 16 129, 1 and 2 of HOEPA, to craft targeted rules with 17 regard to truly unfair acts and practices that are 18 abusive. 19 Three, pursuant to its supervisory 20 authority, deal with most concerns by issuing further 21 regulatory guidance which provides more flexibility 22 than firm regulations. 23 The effectiveness of this guidance has been 24 seen in the rapid and positive 25 mortgage market in response transformation of the to federal regulatory NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 21 1 agencies' non-traditional mortgage guidance, and to 2 the 3 adopted in over 30 states. 4 that guidance in all 50 states. parallel state-adopted, the guidance that was Option One operates by 5 The market has also reflected that guidance, 6 and you have a lot of courses and actions here which 7 shows 8 judicious mixture of targeted formal rules, together 9 with a broader application of general principles in 10 regulatory guidance and greater transparency through 11 better disclosures, is our recommended approach. that it can be quite effective. Such a 12 This path should better protect consumers, 13 create a more level playing field for lenders, and 14 promote 15 widely available in the communities. 16 conditions that help keep mortgage capital I will touch upon briefly some of the key 17 issues you've asked about. 18 disclosures. 19 current level of disclosures, and in some ways, it 20 gets 21 relevant because no one's reading them. Clearly, people are not happy with the discounted 22 So More timely plain language we in the strongly market, urge the that they're Federal not Reserve, 23 under TILA 105, to adopt plain language disclosures 24 across the board on all four issues. 25 We also think the Board should consider a NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 22 1 DVD video medium forum to get to borrowers who just 2 don't read a one-paragraph plain language disclosure 3 as another alternative to reach the borrowers. 4 At Option One, we have several plain 5 language disclosures. 6 of sale when the borrower is with our customer, the 7 broker, what we do is make sure if we get a loan with 8 a stated income or interest only or an ARM, we don't 9 know how that loan was shopped. 10 Since we are not at the point But what we do is we send out a very plain th 11 language, 8 12 what they've applied for and did they understand what 13 they applied for. 14 grade written paragraph that says exactly That is sent directly to the consumer. With 15 any material changes, we re-issue those disclosures 16 and at closing, we also have those disclosures. 17 like to see the Board act on that further. 18 We'd Prepayment penalties are a key issue in the 19 market. 20 them, 21 through regulatory guidance on some of the issues that 22 surround the prepayment penalty. I think there's been a lot of debate about and we actually think the Board should go 23 As a policy matter, we don't think anyone 24 should have a prepayment penalty that doesn't want one 25 or choose one. We think that there needs to be clear NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 23 1 notice and information around prepayment penalties to 2 the 3 assessment of whether they want one. borrowers, so that they can make the best 4 Clear notice and finally, every borrower who 5 gets one should have a benefit for choosing a loan 6 with a prepayment penalty of either rate or fee, or 7 lower rate or fee. 8 9 We think that that can again go through TILA 105, with clear disclosures on the benefits or 10 lack of benefit of a prepayment penalty. 11 carefully crafted, through Section 129, 1 or 2 that 12 includes substantive requirements that a consumer must 13 have a choice to choose a prepayment penalty. 14 We think They must limit the term of the penalty, 15 maybe to three years, but -- sorry. 16 the sentence or? 17 We believe the Board should do a lot on escrows as 18 well. 19 both 105 and 129, you can make a big impact on a tool 20 that 21 Okay. Okay. And let me jump to escrows. But really through regulation, we do think with is meaningful if well-applied 22 GOVERNOR KROSZNER: 23 MS. SCHWARTZ: 24 GOVERNOR KROSZNER: 25 Should I finish in the market. Thank you very much. You're welcome. And now let's turn to Pablo Sanchez from J.P. Morgan Chase. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 24 1 MR. SANCHEZ: Good morning to all. Pablo 2 Sanchez, the Retail Business executive for J.P. Morgan 3 Chase, and you have an idea of my business is. 4 I think we're fairly serious about the time 5 element here. Matthew has a sign that he holds up, 6 and actually I think I've seen a stun gun or something 7 there. 8 (Laughter.) 9 MR. SANCHEZ: I would like So on behalf of J.P. Morgan 10 Chase, to thank the Board for the 11 opportunity to participate as a panelist on this very 12 important topic. 13 We strongly support the Board's objective to 14 address the concerns that have been raised regarding 15 certain 16 incentives 17 mortgages to a wide array of borrowers, particularly 18 subprime borrowers. 19 mortgage for At practices, responsible Chase, we are while lenders, committed preserving to to provide help our 20 customers achieve, and more importantly sustain home 21 ownership. 22 evaluating our borrowers' ability and willingness to 23 pay their mortgage with us, and I know we will be 24 speaking about that in more detail today. 25 The key to our mission is properly There are four fundamental principles that NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 25 1 we have developed to guide our business practices in 2 home lending. 3 and to be able to make responsible choices based on 4 their individual circumstances. 5 We want our customers to be informed We want to offer a broad array of mortgage 6 products 7 circumstances of our customers, and provide good value 8 at a competitive price. 9 customers suffer a life event and need our assistance 10 that address the financial needs and We want to be there if our to remain in their home. 11 Finally, we want to provide support to 12 strengthen and sustain the communities in which we 13 live and work. 14 around these guiding principles. 15 For Virtually everything we do is designed example, to inform our customers, we 16 have created financial literacy and mortgage-specific 17 tools and training, and we have made it available on 18 paper, in videos and on the Internet. 19 are conducting a four-city tour entitled legacy of 20 home ownership, where we offer educational seminars 21 designed to educate consumers on various aspects of 22 home purchasing and financing. Currently, we 23 We are also in the process of rolling out 24 the new disclosure, which we have been testing, to 25 answer the most important questions about our loans. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 26 1 We refer to it as our nutritional label. 2 make it simple. 3 yet, but we are trying. We aspire to I don't know that we're quite there 4 We want to have products that serve all of 5 our customers, including those who may have suffered 6 financial difficulties that affected their credit, or 7 those whose property may not qualify as performing. 8 We 9 urban markets, because many borrowers are on mixed use 10 see non-performing properties frequently in our property. 11 However, in each case, we based our 12 underwriting on the borrowers' ability and willingness 13 to repay, and when we review refinanced applications 14 from 15 analysis as well. subprime 16 borrowers, We are in the also we conduct currently a net working benefit with our 17 partners 18 suitable for borrowers with ARM resets who may have 19 affordability concerns. 20 on 21 established our Home Ownership Preservation Office, to 22 help our customers in times of financial stress. one 23 directly This agencies with office to design new products, We have always worked on one customers, serves as but a in portal 2004, for we non- 24 profit organizations who are assisting our borrowers, 25 to find their way to the right place at Chase. The NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 27 1 office runs a dedicated help line and also trains our 2 non-profit partners about the programs available to 3 help our clients avoid mortgage foreclosures. 4 More broadly, leaders office housing works community 6 foreclosure 7 closely 8 Works and the Ad Council on the upcoming national 9 foreclosure prevention campaign. prevention with the advocates with 5 10 and the programs, Housing Policy and to develop has worked Council, Neighbor I'm here today to listen, to learn and to 11 provide 12 issues that confront all of us, and I look forward to 13 participating. industry 14 insights wherever I can into the Thank you. GOVERNOR KROSZNER: Thank you very much. 15 Now we're going to turn to William Brewster of Fannie 16 Mae. 17 18 MR. BREWSTER: Thank you. for me to sort of reclaim any of Pablo's time? 19 GOVERNOR KROSZNER: 20 MR. BREWSTER: 21 GOVERNOR KROSZNER: 22 Is it possible No. I didn't think so. Thanks. We'll give it to Pablo when he's answering questions. 23 MR. BREWSTER: 24 everyone. 25 My name is Bill Brewster. Terrific. Good morning, Thank you for inviting me to participate. I'm the Director of Fraud NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 28 1 Issues for Fannie Mae. 2 My unit is responsible for Fannie Mae's 3 mortgage fraud investigations analysis and reporting, 4 as 5 enforcement on mortgage fraud matters. well as 6 outreach Fannie to Mae's the industry regulator, and the our law Office of 7 Federal Housing Enterprise Oversight, defines mortgage 8 fraud 9 misrepresentation simply enterprise fund 11 purchase a mortgage." Over "Material or 10 12 to as omission or the relied purchase past two misstatement, or upon by an to fund or we've seen an not years, 13 increase in mortgage fraud incidents, especially those 14 involving mortgages that are processed in the Upper 15 Midwest. 16 Midwest and Southeast regions each account for about 17 one-third of our fraud findings. For loans originated in 2005-2006, the Upper 18 Income misrepresentation remains 19 common type 20 related to 21 value. 22 investigations 23 consumers 24 into conspiring to commit mortgage fraud. 25 of the fraud we subject find, followed property and the by its most fraud- appraised An alarming number of Fannie Mae's recent and have real Mortgage found estate fraud that otherwise professionals perpetrators are are honest fooled highly NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 29 1 imaginative, and then often involve other organized 2 criminal activity. 3 advantage of unsuspecting individuals. They are highly motivated to take 4 In one case we're currently investigating, 5 an attractive website uses religious overtones to lure 6 consumers with comforting promises of credit repair 7 mandatory to home ownership. 8 is 9 foreclosed properties and flipping them to home buyers operated by an LLC 10 at inflated prices. 11 appraisal documentation. 12 In reality, the website that specializes in buying They use falsified asset and To make matters worse, the LLC is owned by 13 an originating loan officer. 14 officer 15 excessive sales proceeds on each loan. 16 subsequently sold on the secondary market to larger 17 lenders and then sold to Fannie Mae. 18 collects both the Consequently, the loan normal commission and The loans are In this case, the consumers appear to have 19 intentionally 20 payment, in order to qualify for the mortgage loans. 21 But were they aware of how serious those exaggerations 22 were? 23 In exaggerated another their recent assets case, and consumers down were 24 induced to rent their credit to what they were told 25 was an investment club. They attended a meeting at a NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 30 1 local hotel, provided their social security numbers 2 and signed blank documents. 3 In return, they received checks for as much 4 as $5,000. 5 were rejected for a car loan because their credit 6 reports showed significant mortgage delinquencies. 7 it turned out, unbeknownst to them, they were used as 8 straw buyers to purchase multiple properties in other 9 states over 1,000 miles away, and the investment club 10 was actually a property flip scheme used to unload 11 over 100 properties at excessive prices. 12 A few months later, two of the consumers As In such mortgage fraud schemes, it does not 13 matter 14 Perpetrators often go for the most efficient pricing, 15 and easily fabricate whatever documents are needed. 16 Yet the consumers caught up in these schemes are often 17 the most aggrieved victims of the real estate finance 18 system. what the product or the pricing is. 19 Our experience indicates that consumers and 20 all professionals in the mortgage process, including 21 real 22 appraisers, title agents, must become better educated 23 on common mortgage fraud schemes and not inadvertently 24 conspire with the perpetrators of those schemes. 25 estate agents, mortgage brokers, lenders, Clearly, expressed ethical standards applied NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 31 1 consistently make their attractive solicitations of 2 perpetrators 3 Mortgage Bankers Association, for example, recently 4 acknowledged as much when they collaborated on a one- 5 page 6 misrepresenting 7 constitutes mortgage fraud, and we have an example -- 8 there's an example and there's some in the back, too, 9 that you can see. less voluntary 10 In attractive. notice that personal light of these Board 12 education, 13 education and best practices. consider the specifically warns FBI and consumers financial 11 will The that information concerns, we importance related the of to hope the consumer anti-fraud 14 At 15 enforcement, 16 address 17 predatory practices. 18 over 19 18,000 specialized predatory lending reviews, and 98 20 case investigations involving over 7,500 loans. We Mae, education mortgage 25,000 21 Fannie loan also we and fraud, utilize balance of information-sharing to product a suitability and In 2006, Fannie Mae completed filing underwriting referred over 300 reviews, over unacceptable 22 appraisal reports to the appropriate state licensing 23 boards. 24 anti-fraud events since January of 2006, partnering 25 with non-profits, government agencies, trade groups On the education front, we participated in 85 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 32 1 and our lender customers to reach over 10,000 real 2 estate professionals. 3 Our goal with these outreach efforts is to 4 share information 5 collaborate broadly on prevention strategies. 6 In 7 emphasize 8 product 9 whatever 10 closing, that or about please mortgage pricing products fraud allow fraud scheme. are schemes, me knows and to again to no favorite Perpetrators available, and utilize fabricate whatever documentation they need to make deals work. 11 They exploit gaps in the mortgage process, 12 and when 13 Consequently, consumers must approach mortgage loan 14 applications 15 becoming unwitting victims or conspirators. 16 one All gap closes, responsibly they and professionals find honestly, involved another. to in avoid mortgage 17 processing must match the perpetrators' imagination 18 and creativity in order to skillfully prevent their 19 success. 20 much appreciated. 21 participate. 22 more from all the other speakers. 23 24 Whatever the Board can do to help will be Thanks again for the opportunity to I look forward to learning and hearing GOVERNOR KROSZNER: Thank you very much. Now we'll hear from Susan Davis from Wells Fargo. 25 MS. DAVIS: Thank you. Before I start, I NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 33 1 just want to say thanks for all you're doing on the 2 fraud front. 3 That's just huge. Good morning. I am Susan Davis, and I lead 4 the Consumer Real Estate Lending Activities for Wells 5 Fargo Home Mortgage. 6 the general questions the Board has asked, and given 7 the rapidly changing real estate lending environment, 8 Wells Fargo believes guidance is more appropriate than 9 rules, and existing and contemplated guidance should 10 I would like to first address be given the chance to work. 11 Any action taken by the Board should be 12 designed to create uniform standards that apply to all 13 lenders, including federal and state regulated lenders 14 and others. 15 You have asked whether specific terms or 16 practices should be regulated across the board, or 17 just for subprime lending. 18 unfair, 19 eliminated for all mortgage loans. 20 consumers, 21 protected 22 originators who offer irresponsible loan products. 23 deceptive prime from It is and and abusive practices subprime unscrupulous also We believe that truly important be We believe that alike, and should should unregulated to note that be loan the 24 specific loan terms and practices being examined by 25 the Board are not, by themselves, or in isolation, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 34 1 unfair, deceptive or abusive. 2 Lenders who adhere to responsible lending 3 principles can develop responsible loan products that 4 incorporate 5 customers. some of these loan terms for certain 6 At Wells Fargo, we have chosen not to make 7 pay option ARMs or loans with negative amortization. 8 The problem with the loan terms in question is that 9 irresponsible lenders, without a shared interest in 10 the long-term financial success of the consumer and 11 investor, 12 practices. 13 can abuse each of these loan terms and Next, I will address the Board's question on 14 specific loan terms or practices. 15 prepayment penalties, Wells Fargo believes that they 16 are 17 responsible 18 consumers who intend to stay in their homes for an 19 extended period of time the option of a lower interest 20 rate. useful and appropriate fashion. when Prepayment With respect to provided penalties in a allow 21 The existence of prepayment penalties has 22 also contributed to the liquidity of the secondary 23 markets, by assuring a minimum return to investors. 24 We agree that limiting the term of the prepayment 25 penalties to the initial fixed period of an adjustable NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 35 1 rate loan, as Wells Fargo currently does, would be an 2 appropriate standard for the industry. 3 We agree that providing additional 4 disclosures about the nature of prepayment penalties 5 and the availability of loans without such terms would 6 also be appropriate. 7 a clear benefit, such as a reduced interest rate, if 8 she or he chooses a prepayment penalty. 9 On the loans, The consumer should also receive topic requiring 11 disclose the absence or availability of escrows, and 12 regardless of the consumer's choice, should underwrite 13 the 14 interest, taxes and insurance. the lenders full should for subprime assuming believe escrows 10 loan we of amount of clearly principal, 15 Regarding any restriction on stated or low 16 documentation loans, we believe these loans need to be 17 tied to bright line tests that can be consistently 18 documented. 19 implemented such a bright line test when it chose to 20 eliminate 21 products to all consumers whose FICO scores were below 22 620. Several the years availability of ago, stated Wells income Fargo loan 23 With respect to the affordability of credit, 24 there has been a great deal of discussion about how to 25 determine a borrower's ability to repay an ARM loan NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 36 1 and at what rate and payment amount should be used in 2 underwriting an ARM. 3 The FFIEC, in its inter-agency guidance and 4 statements, has recommended that a fully indexed rate 5 be used, except in those cases where because of the 6 interest rate environment, another rate, such as a 7 fixed rate, may be more prudent. 8 9 Wells Fargo strongly believes that the evaluation of a consumer's ability to repay an ARM 10 loan 11 inter-agency guidance. should 12 be determined Capping the debt in accordance to income with ratio the at 50 13 percent does both lenders and consumers a disservice, 14 as 15 mortgage products evolve, and the credit environment 16 changes. 17 appropriate than bright line rules. interest 18 rates This move is an up and area down, where new types guidance is of more The Board should avoid any rule-making that 19 unnecessarily 20 lending products, and it should allow the market to 21 make necessary corrections, and should not overreact 22 to the current wave of concerns. 23 In 24 creating 25 requirements a limits availability conclusion, regimen that of the Board uniform of should consumer consistently applies innovative focus on protection to both NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 37 1 federally regulated lenders and others. 2 the constantly changing mortgage environment, we urge 3 the Board and other agencies to maintain the ongoing 4 dialogue 5 you. with 6 mortgage GOVERNOR market Recognizing participants. KROSZNER: Thank you Thank very much. 7 And now we're going to hear from Harry Dinham of the 8 National Association of Mortgage Brokers. 9 MR. DINHAM: Good morning. I am Harry 10 Dinham, President of the NAMB. 11 invited to participate in this morning's panel. 12 the only trade association devoted to representing the 13 mortgage 14 regulated, independent, small business men and women, 15 that 16 lending practices. broker adhere 17 to industry. a strict Our code We appreciate being members of are ethics We're state- and best Today, we have one of the strongest mortgage 18 financing delivery 19 tremendous growth 20 market has given lenders greater access to capital, 21 lower cost, diversified risk, and increased access to 22 credit for all consumers. 23 Credit systems and in the development scores, in automated world. the The secondary underwriting 24 models, 25 number of originators and therefore competition, which and risk-based pricing have increased the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 38 1 has decreased 2 versus the prime. 3 the Still, relative our cost success has of the not non-prime come without 4 problems, particularly in the non-prime variable rate 5 market. 6 address the problems in this market segment. 7 agree that we need to curb abusive lending practices, 8 but we must be careful not to advance measures that 9 will unintentionally harm consumers. 10 We walk a fine line if we craft measures to I want to clarify before We all discussing our 11 recommendations that we are not convinced HOEPA is the 12 best forum for many of the measures needed to address 13 the abusive lending practices effectively. 14 The intent of HOEPA was to prohibit 15 practices 16 consumers 17 addressed today are the practices that are unfair, 18 deceptive and unethical. 19 leap to say the protections in HOEPA must be expanded, 20 irrelevant of the cost of loans. 21 and of provide high With cost that in a cooling-off loans. What period needs to for be What we believe that it is a mind, NAMB recommends the 22 following best business practices for the industry. 23 NAMB believes regulators can establish and encourage 24 industry-driven 25 professional standards, ethics and financial literacy. best practices that address NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 39 1 We are currently reviewing our best 2 practices, and are willing to work with regulators and 3 other industry representatives to ensure that there is 4 a uniform standard of best practices that applies to 5 everyone. 6 We also recommend that a uniform industry- 7 wide best practice that all mortgage originators 8 conduct their business and operate under a duty of 9 good faith and fair dealing. We do not need to wait 10 for laws and regulations to tell any of us to be 11 ethical, honest and not lie, cheat, steal or commit 12 fraud. 13 Secondly, effective disclosure is the best 14 defense against abusive lending practices. 15 said there are too many pieces of paper now. 16 not 17 streamlining the mortgage process. need 18 more. But NAMB with the agrees, new and complex Some have we We do support mortgages like 19 option ARMs, more disclosure, not less, is warranted. 20 NAMB proposes the creation and industry-wide use of a 21 one page 22 loan 23 shock. payment features and disclosure, deters that the communicates prospect of key payment 24 In addition, we encourage HUD and the Board 25 to update other key disclosures, such as the GFE and NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 40 1 TIL statement. 2 Three, regulate the practices, not the 3 products. Abusive practices relate to people, not 4 products. We should remember that each consumer is 5 unique. 6 personal reasons. 7 Each one chooses a loan for his or her own What was inappropriate for some was perfect 8 for others. For this reason, NAMB does not believe in 9 prohibiting programs, products or loan features. 10 Instead, we support the creation of policies that will 11 prevent abusive practices in the market. 12 Since 2002, NAMB has called for the increase 13 in 14 and background checks for all originators. 15 the only industry trade association calling for this 16 reform. 17 originators must have something to lose if they act 18 unethically. professional In standards, addition, educational NAMB requirements We remain believes mortgage 19 Therefore, NAMB supports the creation of a 20 national registry for all mortgage originators, that 21 will 22 mortgage community. 23 prevent Four bad is actors from moving principle-based within guidance. the The 24 recent Supreme Court case, Waters v. Wachovia, has 25 split the mortgage industry into two camps: those NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 41 1 subject to federal oversight versus subject to federal 2 and state oversight. 3 This split system has created gaps and 4 without appropriate oversight, two things will happen. 5 New business models will develop that exploit the 6 removal 7 federal entities and their subsidiaries. 8 be confusion as to whether a similar level of consumer 9 protection 10 of state can consumer be protection afforded laws consumers for the There will of federally- exempt entities. 11 The federal banking agencies currently do 12 not possess the infrastructure and resources needed to 13 respond to consumer complaints appropriately, and in a 14 timely manner. 15 In contrast, all 50 states have similar 16 elements of consumer protection. They also have well- 17 established handling 18 complaints, 19 individual licensed professionals who interact with 20 consumers. 21 To processes and for create for supervising uniformity, and NAMB consumer handling believes the 22 federal 23 guidance and allocate funds for supervisory oversight, 24 in 25 agencies agencies addition to should delegating currently create principle-based authority providing consumer to the state protections. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 42 1 Thank you. 2 GOVERNOR KROSZNER: Thank you very much. 3 Now we're going to turn to Martin Eakes, Center for 4 Responsible Lending. 5 MR. EAKES: Help, is a I'm the CEO of 6 Self 7 group based in North Carolina. 8 we've been making loans to minority and low income 9 families. 10 which Good morning. community-developed lending For the past 26 years, I say that we're one of the very earliest 11 subprime lenders. 12 helping people. 13 homeowners $5 billion in financing has been under a 14 half a percent each year. 15 making subprime loans, it means you're doing something 16 wrong. 17 I'm We didn't know it. We were just Our loss rate on providing 55,000 also the If you have large losses in CEO for the a non-profit Center for 18 Responsible 19 organization dedicated to protecting home ownership 20 and 21 financial practices. family Lending, wealth by working to research eliminate abusive 22 In November of last year, we issued a study 23 that noted the foreclosures that would occur over the 24 next few years. 25 were number one, that one out of five borrowers who The two facts of note in that study NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 43 1 received a subprime loan during 2005 and 2006 would 2 lose their homes to foreclosure over the coming year. 3 That amounts to about 2.2 million families 4 either that have lost or will lose their homes because 5 of 6 Hurricane 7 Reckless and virtually unregulated subprime lending 8 has created a storm disaster that is at least seven to 9 ten times that magnitude. subprime loans. To Katrina put this displaced in 300,000 perspective, families. 10 But the storm in foreclosures is happening 11 silently all across the country, one home at a time, 12 in 13 across the country. 14 for communities and families of color. neighborhoods that are faceless and unseen all This is particularly devastating 15 Fifty-three percent of all African-American 16 loans made in the United States in 2005 to 2006 were 17 subprime. 18 of lending. 19 serves the majority of African-American and 40 percent 20 of all Latino borrowers. So basically we have two different systems One for white borrowers, and one that 21 Because of foreclosures and loss of equity 22 by persistent flipping of loans, it is likely over the 23 next four or five years we will see the greatest loss 24 of African-American and Latino home wealth that the 25 country has ever seen. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 44 1 Even in the midst of all of these 2 foreclosures, the market forces have really not reined 3 in abusive lending. 4 securitized loans, of subprime loans during the first 5 quarter of 2007, 80 percent were still the exploding 6 ARM loans, even in the first quarter of 2007, once the 7 problem had become so pronounced. 8 9 If we go to a review of the Seventy-two percent had prepayment penalties; 43 percent were stated income loans. We 10 have this sense that the market has been correcting, 11 and yes, there has been some reduction in the investor 12 community. 13 But unfortunately, we have two different 14 markets. 15 the home ownership market. 16 market, there's no correction whatsoever. 17 are losing their homes; the level of correction is 18 happening too late. 19 One is the investment market; the other is In the home ownership Families I will say candidly that the Federal Reserve 20 bears some responsibility for this. 21 ago, 22 mortgage lending acts that are abusive, unfair and 23 deceptive. 24 discretionary action; it was a mandate that said the 25 Board will prohibit these actions. Congress required It wasn't that a the request; Thirteen years Board it prohibit wasn't NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com a 45 1 Seven years that ago, testified House 3 Chairman Leach said the following. 4 passed a law which was very strong in its sense and 5 purposes, 6 lending. HOEPA, was a Committee 1994 Leach in 2 the Chairman I in chairing, and He said "Congress outlawing predatory 7 In effect then, because Congress felt that 8 the subtleties of this were beyond Congress, we gave 9 to the federal regulators, most specifically 10 Federal 11 definitions and to move in this direction." 12 Reserve So Board, the the question authority becomes, if to the make there's a 13 problem out there, and Congress has given very strong 14 authority to regulators and to the Federal Reserve, 15 has and is the Federal Reserve AWOL? 16 I would suggest during the last seven years, 17 the Federal Reserve has made some small steps, but 18 they've been very insufficient. 19 foreclosures and lost homes, the Federal Reserve has 20 not 21 during these seven years. 22 Let's 23 24 25 used problems. this authority talk that about With this tsunami of was some mandated of the at all specific The ability to pay others will talk about. I want to really focus on the escrows for taxes and insurance, and on the prepayment penalties. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 46 1 The dominant practice in the marketplace in 2 subprime loans today is to focus solely on the monthly 3 payment. 4 consumers identify. That's what companies market; that's what 5 So if you have a responsible lender that has 6 a very good product, that's low cost, that would be 7 sustainable 8 foreclosure, they are in this terrible situation where 9 if they get marketed a product that says "I can give 10 you a 20 percent lower monthly payment because we 11 don't have an escrow for taxes and insurance." 12 and It's not a put a totally family in artificial jeopardy market of failure 13 that 14 requiring that escrows be collected for any subprime 15 mortgage loans. the 16 Board could easily correct, by simply On prepayment penalties, the problem with 17 prepayment 18 where people really do have a choice, only two to four 19 percent of borrowers choose prepayment penalties. 20 penalties In the is that subprime in the market, prime where market, borrowers 21 really are given a paper and said "Sign here," it's 22 somewhere near 70 percent of all borrowers are given 23 loans with prepayment penalties. 24 explain 25 It's anti-competitive to have a prepayment penalty, the difference between You can't really those two markets. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 47 1 and most subtly, the prepayment penalties are the glue 2 that enable racial steering to stay in place. 3 4 I'll come back to that if we have time in the question and answer session. 5 Two other issues, just to throw out and I 6 won't talk about them, is that we need to deal with 7 the 60 percent of subprime loans in 2006 that were 8 made 9 percent first and a 20 percent second, which makes it 10 with second mortgages, where you have a 80 impossible for borrowers to get out. 11 If you consider the affordability just for 12 the first 13 problem. 14 loan and Finally, not we the need second, to talk you've about got a mortgage 15 brokers. 16 good, but many of the mortgage brokers are simply a 17 license to put people in loans as quickly and as fast 18 as possible. 19 There is a problem there. Most of them are Thank you. GOVERNOR KROSZNER: Thank you very much. 20 Now we're going to hear from Ira Rheingold from the 21 National Association of Consumer Advocates. 22 working? 23 Is this It sounds like it's working. MR. RHEINGOLD: 24 Ira Rheingold. 25 Counsel of Good morning. My name is I'm the Executive Director and General the National Association of Consumer NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 48 1 Advocates. 2 Our members are the consumer advocates 3 across this country, who on a daily basis speak with 4 and represent the consumers victimized by bad lending 5 practices, and see the very real life consequences of 6 an 7 marketplace. out of control subprime mortgage lending 8 I hope that at today's hearings, you will 9 hear their voices through me, and that after this 10 hearing you will begin to take the necessary actions 11 with 12 mortgage market that actually serves the needs and 13 demands of consumers and communities across our great 14 land. systems 15 As development, my testimony of is a rational based on my subprime personal 16 experience and the collective experience of consumer 17 advocates like me, I'd like to start by sharing a 18 little bit about my background. 19 Since graduating law school in 1986, I've 20 spent my legal career working in some of the poorest 21 rural and urban communities across our nation. 22 seen what it's like to live in a homeless shelter or a 23 rural shack without indoor plumbing, or one of the 24 toxic public housing projects that are a testimony to 25 our nation's failure to provide clean, affordable and I've NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 49 1 safe housing to all our citizens. 2 I understand the dream and promise of home 3 ownership, of living in a safe and decent community 4 where the essential human need of successfully raising 5 a family can be met. 6 understand how these dreams and that great promise can 7 be 8 aspirations of home owners are abused by all of the 9 players in the subprime mortgage marketplace. turned 10 into a Unfortunately, I've seen and now nightmare, when the needs and In the mid-1990's, after I worked on health, 11 welfare 12 running a foreclosure prevention project at the Legal 13 Assistance Foundation of Chicago. 14 and I began meeting with homeowners, I was initially 15 shocked at the mortgage loan documents they would show 16 me. and public rental housing issues, I began As I began that job 17 Astronomical 18 incredibly high APRs. 19 FAMCO loan I saw. 20 credit 21 absurd payments to unknown creditors and home repair 22 companies that never did any work. life and broker and lender fees; I'll never forget the first Ridiculous junk fees and included credit disability insurance, and 23 I remember as it was yesterday, in my first 24 conversation with a mortgage lender, who explained to 25 me, in my ignorance and naivete, that all of these NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 50 1 fees and 2 were absolutely necessary, were in the consumer's best 3 interest, and that any regulation that would limit 4 these fees or restrict interest rates would needlessly 5 cut 6 ownership to my clients and the communities I cared 7 about. off access 8 9 charges, especially to credit the and credit the insurance, dream of home I knew that argument was absurd then, as it is even more so today, and that this has 10 unquestionably been proven over the past decade. Be 11 thankful you don't see credit insurance anymore. The 12 Fed deserves some credit for that, and we really see 13 loans that exceed the homeowner state legislative fee 14 and/or interest limits. 15 Yet no one can argue that the availability 16 of credit has done anything but explode, while these 17 necessary mortgage loan features have been mandated 18 away. 19 products have mostly left the mortgage market, the 20 subprime 21 morph, creating more and better ways to exploit the 22 limited wealth of our nation's most vulnerable home 23 owners and borrowers, left all but unregulated over 24 the past dozen years as Congress and all the federal 25 regulators unthinkingly accepted the false mantra that Unfortunately, while these equity destroying lending industry continues to adapt and NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 51 1 regulation would cut off access to credit. 2 The subprime created 4 consumers. 5 provides real consumer choice and rewards consumers 6 for smart credit decisions and rational aspirations, 7 we have a subprime mortgage market that has recklessly 8 created and sold ridiculously risky mortgage products 9 that have excessively benefitted all of the market 10 players at the expense of middle class and low income 11 homeowners and their communities. place While I of an fear at a completely In marketplace, has 3 12 irrational industry efficient that for least for market that many American 13 homeowners, any regulatory action is too late, I am 14 glad to see that the Federal Reserve is beginning to 15 ask the right questions, and I hope that this will 16 serve as the first step in taking corrective actions 17 to protect future homeowners. 18 While I hope during the course of this 19 hearing 20 recommendations, here are some of my initial thoughts 21 on what the Federal Reserve can and must do under the 22 authority granted to it by Congress under HOEPA. 23 to expand First, require on these common sense thoughts and underwriting. 24 One of the greatest absurdities in the current out of 25 control subprime mortgage marketplace is a consumer's NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 52 1 true ability 2 considered. 3 to repay the mortgage is often not It is absolutely essential that the Federal 4 Reserve create regulations 5 lenders and 6 borrower's repayment ability truly reflect the loan's 7 long-term affordability. underwriters that to force make all mortgage certain that a 8 The Fed must also prohibit subprime mortgage 9 lenders from offering no document or stated income 10 forms. 11 mortgage originator to lie about a borrower's ability 12 to repay, but also allows them to charge a higher 13 interest rate than the borrower would otherwise have 14 to pay. 15 These loans are not only a license for a Prohibit deceptive practices that disguise 16 the real cost of a loan. 17 representing mortgage borrowers, I have never 18 rational reason 19 subprime refinance 20 insurance in the borrower's mortgage payment. 21 I that have, benefits loan on In all of my experience to the the not consumer, include other heard a hand, for taxes a and spoke with believe that 22 countless 23 their new mortgage payment would be lower than their 24 existing mortgage, only to discover, often too late, 25 that the only reason the payment was lower is because borrowers, who were led to NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 53 1 taxes and insurance were not included. 2 The Fed must require taxes and insurance to 3 be included and disclosed as part of their future 4 monthly payment, in all of the prime loan documents. 5 Finally, unfair effective practices. The consumer 6 remedies 7 failure of the subprime marketplace to act rationally 8 towards consumers is caused by the complete lack of 9 accountability between the myriad of actors in today's 10 for establish fundamental mortgage industry. 11 I'll expand on that later, as we get to the 12 question and answer session. 13 GOVERNOR KROSZNER: Thank you very much. 14 Now we're going to hear from Janis Bowdler, from the 15 National Council of La Raza. 16 MS. BOWDLER: Thank you. Am I on? Hello? 17 Can 18 morning. 19 housing policy analyst for the National Council of La 20 Raza. you hear me? Is that better? My name is Janis Bowdler. Okay. Good I'm a senior 21 In my time there, I've published on fair 22 housing issues and predatory lending issues as they 23 affect 24 before the House and Senate and participated in last 25 year's hearing before the Fed in Philadelphia. the Latino community. I've also testified So I NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 54 1 want to thank you for this invitation. 2 The number of Hispanic families entering the 3 mortgage market is going up every year. 4 ownership is at an all-time high, but unfortunately, 5 so is foreclosure. 6 Hispanic home For many of us that are here at the table, 7 though, this really isn't new news. 8 as a surprise. 9 lots of our Latino families were getting bad loans. 10 This didn't come NCLR has been warning for years that We think it's time to call it what it is. 11 The market is broken. 12 unique profiles. 13 earners per household, and these are characteristics 14 that prime lenders that thrive on automation don't 15 find very attractive. 16 Where Many Latino borrowers have Thin credit files, multiple wage prime lenders have neglected our 17 communities, subprime lenders have been quick to fill 18 the gap. 19 Latino loans are subprime. 20 Prime Now, as you heard Martin say, 40 percent of lending to minority families is in 21 disarray, and it's high time the Federal Reserve and 22 other regulatory agencies affirm that commitment that 23 fair 24 principles. All 25 fairly-priced credit lending and equal access families that to should is credit have appropriate laws and access to for their NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 55 1 risk level. 2 It's sad to say, but I don't think that 3 that's where we're at now, and I think the Fed has an 4 opportunity 5 marketplace. 6 narrow my remarks to just a couple of areas, and then 7 expand it in question and answer. 8 9 to restore some balance to the In the interest of time, I'm going to So I'd like to talk about borrower's ability to repay, some deceptive 10 origination, 11 language publications. 12 I and the won't go fair into acts at pre- advertising too much and and post- minority detail, since 13 ability to repay has already been covered. 14 want to say that I think this is one of the most 15 important issues facing us now. 16 repay standard, underserved communities cannot rely on 17 home ownership to build wealth, which is the whole 18 reason that we promote home ownership in the first 19 place. But I do Without an ability to 20 What our home ownership counselors tell us 21 is that over and over, the foreclosure clients that 22 they see have loans that they were never going to be 23 able to repay. 24 25 Now a large part of figuring out a borrower's ability to repay is how you document their NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 56 1 income. This is an issue that is very sensitive in 2 the Latino community. 3 born in the U.S. do not have basic banking accounts. 4 That number goes up to 45 percent when you look at 5 immigrant communities, and many rely on cash income. Thirty-five percent of Latinos 6 Our community is still struggling to connect 7 to products that are flexible and accommodating of 8 these unique characteristics. 9 stated income and low doc loans have been used to take 10 But at the same time, advantage of our families. 11 We need flexibility, So we but recommend we that also the need 12 accountability. Federal 13 Reserve require originators to use the best and most 14 appropriate document available when verifying income. 15 NCLR is also concerned about deceptive ads 16 targeting Latinos, and escrow was already talked about 17 a little bit. 18 I'd be happy to talk about that in Q and A. So I'm not going to go into that, but 19 What I do want to do is take some time to 20 pick up on something that Sandy actually talked about, 21 and I was really glad that they mentioned this, and 22 that is what we're seeing as an uptick in foreclosure 23 rescue scams. 24 Since I'm a big fan of visual aids, I have a 25 stack of solicitations here that are sent to Latinos NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 57 1 in financial crisis at the time of foreclose that I'd 2 be happy to share with you. 3 As you heard foreclosure 5 they're getting refinanced, and actually they've been 6 tricked into handing over the deed to their house. 7 Which 8 mitigation, 9 their home. they and call. lose they lose Families so-called 4 means consultants described, the think opportunity the opportunity to to that do sell 10 We think that one way to get at this would 11 be to call this what it is, which is an extension of 12 credit under TILA and HOEPA, and that might get at 13 some of these issues. 14 One last issue that I want to bring your 15 attention to is we are concerned that little attention 16 is being paid to mortgage advertisements in Spanish 17 language press. 18 language minorities 19 practitioners that speak their language, and who they 20 believe will be more understanding of their credit 21 needs, the unique borrower profiles that I described 22 earlier. 23 Latinos turn and to other ethnic immigrants press to and find I also have a stack of newspapers here from 24 this weekend, I come prepared. 25 papers, I couldn't find one broker advertised loan in In looking through the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 58 1 the English paper. In the Spanish paper, I couldn't 2 find one traditional product, and I couldn't find one 3 TILA disclosure available on that. 4 While we don't think that disclosures are by 5 any means the answer to what we have going on here, 6 fairness in 7 ensuring equal 8 borrowers. advertising access to is an important credit part of to all available 9 We know that where you enter the mortgage 10 market does predict reasonably what kind of product 11 you're 12 recommend 13 oversight agencies, as high as DOJ and the Fed, and 14 we'd 15 misleading 16 deceptive act and practice. 17 18 going to that also end this like to up with. should see advertisements So be that by we'd like investigated the Board third to by declare parties as a With that, I will wrap up, and I will be happy to answer or expand on anything in Q and A. 19 GOVERNOR KROSZNER: Thank you very much. 20 Finally, we're going to hear from Alys Cohen from the 21 National Consumer Law center. 22 23 MS. COHEN: Thank you. Can people hear me? Thank you for having the National Consumer Law Center 24 here today. 25 attorney at NCLC. My name is Alys Cohen. I'm a staff I've been working on predatory NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 59 1 lending issues for more than ten years. 2 I'm sorry to say that from day one, 3 consumers have been calling me about the loans they 4 can't afford, and they continue to call me today. 5 Lawyers who work with Ira and others call up and send 6 us the loan documents. 7 The only thing that has changed really is 8 the details. 9 for a long But basically, this has been going on time, and for a long time, government 10 officials have been hearing about it. 11 finally, serious action can be taken, because nibbling 12 around the edges is not going to solve this problem. We hope that 13 This is about wealth-building, and the cost 14 of not acting is a lot bigger than the cost of acting. 15 What we've seen to date is rhetoric about access to 16 credit when what we really see is access to borrowers 17 by predatory lenders. 18 We want access to credit too. We want 19 access to good and fair credit for everybody. 20 we're 21 primarily 22 there's been a lot of focus on the resets that we're 23 seeing for hybrid ARMs. seeing 24 25 is an refinancings epidemic in the of damaging subprime What loans, market, and But I'd like to also focus you on another problem. Some preliminary data from the Mortgage NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 60 1 Project, which is an analysis of bankruptcy data for 2 homeowners by Catherine Porter and Tara Tummey, and 3 they wanted me to tell you it's preliminary data, 4 shows that 60 percent of ARMs that fail are pre-reset, 5 and that over half of the pool of failed loans are 6 fixed rate loans. 7 So we have a reset problem, but we have a 8 very broad problem that we really need to take a look 9 at. Moreover, the cost to real people here is very 10 serious. 11 the only wealth you have, and in most communities of 12 color that's all there is. There's the cost of losing your home if it's 13 Then there's the question of when you get 14 back into your home. 15 again? 16 for African-American and Latino homeowners, it's 30 to 17 40 percent longer than that. When can you get this wealth For white homeowners, it's over ten years, and 18 So the costs we're talking about are very 19 high, and we'd like to take the risk that's solely on 20 the 21 equitably between industry and borrowers instead. backs 22 of these folks and distribute it more The National Consumer Law Center would like 23 to make several recommendations. 24 then we can go into it more in discussion. 25 just ring a bell? I'll be brief and Did you NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 61 1 GOVERNOR KROSZNER: 2 (Laughter.) 3 MS. COHEN: before, the No. Thank you, Leonard. biggest problem is As you've 4 heard people can't 5 afford their loans. 6 the Federal Reserve to act and to prohibit loans that 7 are unaffordable by requiring an analysis of ability 8 to repay. So we believe it's incumbent upon 9 For us, this doesn't only include a debt to 10 income ratio consideration; it also includes looking 11 at residual income, because poor people need enough 12 money. 13 They don't just need a percentage. It also means including taxes and insurance 14 in 15 although we believe it should be escrowed and that 16 should be mandatory. the 17 analysis, whether or not it's escrowed, The question is whether fully-indexed rate 18 is the right analysis of ability to repay. 19 that goes a long way. 20 enough. 21 higher than the fully indexed rate, and many people 22 who never pay the fully-indexed rate. 23 more. 24 25 We believe We believe it doesn't go far There are people whose initial rates are They pay a lot The question is, are we going to leave those people out in the cold? You need to make loans NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 62 1 affordable not just when they're made, but throughout 2 the 3 insurance 4 illegal unless the homeowner has been denied insurance 5 for a reason other than non-payment. life of a loan. that's 6 That provided means by forced services placed should be If the servicer can provide forced placed 7 insurance, they can provide 8 insurance to their borrowers. affordable homeowners 9 Loss mitigation is also necessary to keep a 10 loan affordable, and to keep someone in their home. 11 Right 12 access to loss mitigation, and it's really a coin toss 13 for the borrower. now, 14 servicers We believe may or loss may not provide mitigation full should be When the 15 required 16 loans are made, the best and most appropriate form of 17 documentation should be provided. 18 19 20 before self-employed this. foreclosure people is should pursued. I want to be clear: not be excepted from I see loans regularly for self-employed people. They are some of the biggest victims of abuse. 21 If you can find an alternative means of 22 credit scoring people, you can find an alternative 23 means of actually evaluating the ability to repay for 24 people who are self-employed. 25 Two last ones. One is we believe the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 63 1 Federal Reserve 2 unfairness 3 across 4 foreclosure. and Board should deception America, to adopt standard homeowners a that who general can are apply facing 5 Right now, we rely on government officials, 6 and the truth is, they can't be everywhere and they're 7 not everywhere. 8 but they don't apply in every state. 9 you are going to lose your house, and the bankers 10 haven't stepped in and the bank regulators haven't 11 stepped in, you cannot protect yourself with a state 12 unfairness or deception standard. 13 have a federal one. 14 In addition, there are state laws, In Virginia, if We think we need to Finally, there are certain terms that need 15 to be limited. 16 points. 17 get a discount. 18 the 19 discount in the rate. Prepayment penalties and also discount Discount points are only appropriate when you subprime I've never seen a discount point in market that was associated with a I'd like to see that. 20 In addition to discount points, we believe, 21 should not be charged when there's a yield spread 22 premium. 23 Finally, 24 American are bleeding. 25 neighbors, but it's happening. We can talk about that more in comments. I just want to say communities across They may not be your next door If we don't fix it, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 64 1 we're never going to be able to. 2 GOVERNOR I thank KROSZNER: all the Thank you. Well, panelists thank you for very 3 much. excellent 4 presentations and also presentations that kept within 5 the time limit, because now we get to the particularly 6 interesting part, when we get to the posed questions. 7 I'm very pleased that the panel has touched 8 on the four key issues that I had wanted to discuss, 9 plus a number of others. So why don't we start with 10 one of the issues that quite a few of you raised, 11 about escrow for taxes and insurance. 12 So I've heard discussions on both sides 13 about the importance of including that, and whether a 14 rule 15 provide 16 panelists about what they think about the importance 17 of taxes and insurance, having the escrow for that 18 included, or having a provision for that included. could be that. fashioned So I that want would to hear be helpful from to different 19 If we were to consider a rule in that area, 20 how, if at all possible, to craft one that would allow 21 for that, but not somehow exclude responsible subprime 22 borrowing. 23 Whoever wants to start with that? MR. RHEINGOLD: I'm happy to start. I think 24 that any rule -- I mean my personal view is that you 25 have to require taxes and insurance. I think it has NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 65 1 to be required for all subprime loans. 2 I think one of the things -- and talking to 3 economists, we all understand that when people shop, 4 the most important fact for people is what is their 5 monthly payment going to be? 6 In my view, the lack of inclusion of taxes 7 and insurance on that payment has everything to do 8 with 9 refinance loan is going to be lower than your existing telling people 10 payment. 11 of that loan is. 12 that your next payment, your It's all about hiding what the real payment I think that it leads to all sorts of 13 problems. 14 We're talking about people with less liquidity, with 15 more credit problems, with less financial savvy. 16 think 17 included will one, prevent sort of that shock; will 18 stop, will prevent hiding the real cost of that loan; 19 and also sort of go a long way to preventing some of 20 the other problems that exist along the way because of 21 non-payment 22 their houses because of non-payment of taxes, or the 23 forced place insurance that Alys talked about, that 24 it's just sort of an incredibly costly thing that has 25 hurt a lot of homeowners as well. We're talking about the subprime market. making of sure that taxes, taxes where and I've insurance seen people I are lose NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 66 1 GOVERNOR KROSZNER: 2 MS. SCHWARTZ: Yes, Faith. We actually -- we agree, in 3 the sense that we believe a loan with escrow is a much 4 better loan than a loan without escrow. 5 very hard to get them on the front end of the market, 6 but as Ira noted, you know, marketing in a market, to 7 try to transform it one lender at a time, it's pretty 8 difficult to do, although escrows have improved in 9 percentage considerably since over the last five to 10 We've worked eight years. 11 Our performance clearly shows it's better to 12 have an escrow loan. 13 Fed can influence the market, to guidance, to offer an 14 opt-out of escrows, not an opt-in. 15 a package of you should require escrowing. 16 So we think there are ways the Almost that it is I know what we do on the back end. We've 17 worked with the National Fair Housing Alliance for 18 years on this. 19 back end to put them on as soon as those loans got 20 loaded into servicing. 21 outbound calls to escrow mortgages and it has improved 22 our percentage of escrowing. 23 We have an innovative pilot on the We have a website, we have But at the end of the day, there are reasons 24 some people don't want to escrow. 25 others wouldn't, but not everyone is always a cash- I don't know why NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 67 1 strapped borrower. 2 in the broad business. 3 In fact, it's a mix of borrowers So I think there probably are people who 4 don't escrow for some reason. 5 if they have to opt-out, you'll get a much higher 6 influence, 7 escrowing in the subprime market. 8 9 and You'd the Board see So I guess the key is should more probably consistency, recommend better loan performance and I don't know many lenders -- I can't 10 speak for the lenders and I don't. 11 pleased to have escrows on our loans, at a higher 12 percentage than we do see. 13 MS. BRAUNSTEIN: 14 it was required for subprime loans? 15 16 MS. SCHWARTZ: But would you be pleased if Well, I believe in guidance. Again, I think there's some choice that has to be 17 there. 18 they have to escrow. 19 escrow if I don't want to escrow. I don't know that you should tell everyone 20 21 22 But we would be I wouldn't want to be told to How do you know I'm not a subprime borrower? There you go. I think we should encourage and influence and improve the market performance. 23 GOVERNOR KROSZNER: 24 of the lenders. 25 lenders. So let me hear from one You said let's hear from one of the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 68 1 MR. SANCHEZ: What I would say is we 2 absolutely have to require the taxes and insurance to 3 be calculated in the monthly payment. 4 believe that escrow should be offered 100 percent of 5 the time to the non-prime borrowers. In fact, we 6 But requiring it, making it mandatory only 7 for that first time home buyer, that hasn't had the 8 experience of having taxes and insurance and escrow. 9 So we think it's absolutely the right thing to 10 pinpoint it at the first time home buyer, to make sure 11 that we take care of it. 12 I think one of the challenges in the whole 13 escrow, today we do it in the prime space all of the 14 time. 15 strapped 16 traditional escrow they don't have the funds to do 17 that. But 18 we also borrower, have who many in times order have to a cash- start the So we've been talking about is there a way 19 that 20 beginning, because it's great to say "Well, you have 21 to escrow, and you know have to bring $800 to the 22 closing table in order to start your escrow." 23 those folks don't have it. we 24 25 can So help to requiring fund it, for I that think, escrow for in the Many of everyone, really puts a limit on who has the ability to do that. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 69 1 MS. BRAUNSTEIN: 2 MS. BOWDLER: you know, Someone else? Yes. 3 that, 4 happens when people have the choice of escrow and they 5 don't take it, or maybe they weren't offered escrow. 6 But we're I would just like to say we've and seen, few of talking especially 8 actually 9 competitive in artificially lower payments. fraud, places, in California outright other about 7 an a kind not Southern where just to what this be is more 10 But if you can get somebody to take a loan 11 that doesn't have taxes and insurance and you know 12 that they're going to be shocked in a few months with, 13 you know, a couple of thousand dollar tax bill, then 14 who does it come back to? 15 their originator was, looking for some help, and now 16 they're in a refinance cycle. They come back to whoever 17 So we've actually seen it as a tool for 18 bringing business back to an originator, and stripping 19 out more equity with fees. 20 requiring escrow to -- and tying it to something very 21 specific, 22 strapped borrowers. 23 subprime, MR. CHANIN: high So we are in favor of LTVs or otherwise cash- Let me follow up on just the 24 lenders. 25 for Alt-A as well as prime loans; that is, what in In terms of escrowing, what your practice is NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 70 1 terms of the data and the number and percentage of 2 people that escrow? 3 you strongly encourage it and so forth? 4 difference 5 non-subprime? 6 on that. 7 8 13 your practices for Do Is there a subprime and Maybe Susan, if you have any thoughts No. No difference between prime and non-prime. GOVERNOR KROSZNER: I'm not sure people can hear you. 11 12 between MS. DAVIS: 9 10 Do you require it for those? MS. DAVIS: Can you hear me? Hello? Okay. No, not in terms of what the policy is in terms of escrows are offered, as opposed to a choice. 14 The one thing I just want to draw a 15 correlation 16 speak, it's dawned on me that there's a very strong 17 correlation about ability to pay and the escrow issue. 18 here is as I'm listening to everybody So to me, it's absolutely critical that that 19 is 20 principal, 21 you're actually looking at all of that. included 22 in the interest underwriting and taxes and calculation insurance, I think that may solve some of it. of that I am 23 also doing a small test here to see should we look at 24 requiring it at certain LTVs for higher risk loans, 25 etcetera. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 71 1 My results are preliminary data that I have 2 actually been looking at before we launched this. 3 We're working towards it. 4 which then told me that a lot of the benefit is really 5 looking at the ability to pay. Did not reflect the gain, 6 If you can pay the taxes, that's critical. 7 So I actually put more emphasis on the ability to pay 8 and 9 insurance linking in principal your and interest, underwriting, as taxes opposed and to a 10 separate escrow, although as I said, I am working on 11 looking for some modeling there. 12 GOVERNOR KROSZNER: 13 MR. DINHAM: Yes, Harry? Well, you know, I've been in 14 this business almost 40 years, and as long as I've 15 known Fannie Mae and Freddie Mac have always required 16 escrow on loans that are over 80 percent LTV. 17 that's a good place to start. I think 18 Another way to look at this would be, you 19 know, some people have compared FHA loans to subprime 20 loans, and no matter what your LTV is on that, you 21 have to have escrows. 22 I think that we need to really look at the 23 fact that these people don't have the ability to pay 24 their bills on time, and for us to think that we can 25 put them out there in this home and maybe look at a NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 72 1 two or three thousand dollar tax bill at the end of 2 the day, is a good thing. 3 thing. I don't think that's a good 4 I think we need to do some type of guidance 5 that's going to help us get it at least to the -- if 6 they're making loans over 80 percent LTV, loan to 7 value, that they need to have the ability to have 8 escrow accounts. 9 go. So I think that's where we need to 10 MS. DAVIS: Can I just make one other -- oh 11 Martin, if you want to comment. 12 MR. EAKES: Yes. I want to just add two 13 things. 14 any loan above 80 percent, because that's a measure of 15 risk. 16 has a higher level of risk than an 81 percent LTV 17 prime loan. Fannie Mae and Freddie Mac require escrows on I would posit that every single subprime loan 18 The second thing I would say is guidance 19 will not work here, and voluntary will not work here. 20 You can't have when it you both are a ways. 21 effective bank 22 supervision over the entities. Guidance regulator is most that has 23 If you want it to apply to all lenders, 24 which it must, if it doesn't apply to all lenders, 25 then the lenders who can offer non-escrow will win in NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 73 1 the marketplace, because it is deceptive and borrowers 2 will be told you have a monthly payment that's 20 3 percent lower than the responsible lender next door. 4 This is one of those ones where you have to 5 go ahead and just have a simple required rule, bright 6 line across the board for everyone. 7 majority of subprime lenders that I have talked to, 8 who have told me we would like to have that as a 9 bright line requirement. 10 actor 11 volume in the next year. 12 13 and act We just can't be the first unilaterally, MS. BRAUNSTEIN: I have had the or we will have zero Would increased and better disclosures help with escrows? 14 MR. EAKES: Disclosures are roughly five 15 percent of the solution to the problem. 16 50 percent of the population, as reported by GAO, that 17 read at the 8th grade level of less, and 23 percent of 18 adult Americans who are illiterate, you cannot through 19 disclosure solve this problem. 20 When you have You need to have as little intrusive across- 21 the-board rules as you can. 22 solve this problem with Disclosure. 23 MS. BRAUNSTEIN: But you know, we can't Well, one of the issues 24 that we're facing in trying to look at all of these 25 issues and structure rules, is that there are some NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 74 1 well-established 2 characteristics are of unfair and deceptive acts and 3 practices, even though it's well-established in the 4 FTC Act. 5 So precedents trying to for associate what some of the these 6 practices with those criteria is not an easy task. 7 I was wondering if you have any guidance for us, in 8 terms of in particular we'll want to talk about this 9 with all the practices, like for escrows. 10 MR. RHEINGOLD: So I think that lack -- I think 11 that was my initial point. 12 not to include escrow, because that -- because the 13 lack of escrow has been used as a deceptive practice 14 to hide the real cost of mortgages for a lot of people 15 in the subprime mortgage market. 16 MR. EAKES: 17 It's fundamentally unfair I mean the FTC definition of deceptive, if we use that prong -- 18 MS. BRAUNSTEIN: 19 MR. EAKES: Remember, the standard here is 20 unfair or deceptive. It doesn't have to be both, but 21 either/or. 22 if it is likely to mislead reasonable consumers, and 23 the misleading representation is material. 24 25 Right. So for deceptive, a practice is deceptive Well, I think we see the entire market failure here, because of responsible lenders not being NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 75 1 able to compete, and borrowers don't understand that 2 this is the cost, or they wouldn't fall into the trap 3 of saying this is really a 20 percent less expensive 4 loan when it really is not. 5 So it's squarely within the deceptive 6 language, even of precedent. 7 have more mandate than that, that the FTC Section 5 8 was in place from '75 on. 9 I would argue that you Congress saw fit in 1994. So in 1994, we 10 still had this problem of predatory mortgage lending, 11 and they went further. 12 already 13 deceptive under the FTC. 14 But had the They didn't say -- because you authority they went to prohibit further, unfair saying we or need 15 something more than that, and we empower the Fed to 16 have independent mandate and authority for mortgage 17 loans in particular, to prohibit abuses and unfair or 18 deceptive. 19 I would suggest that that takes you and 20 gives you strength and authority beyond what the FTC 21 standards are if you needed that. 22 MS. BRAUNSTEIN: One of the main things that 23 gave 24 mortgage transactions, whereas you know, with the FTC 25 Act, you know, we have the ability to affect rules for us was the ability to affect rules for all NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 76 1 banks and those other entities. 2 MR. EAKES: But between you and the FTC, 3 you've had the authority to cover both banks and non- 4 banks. 5 was so severe then, and it's only a fraction then of 6 what 7 mandate to the Fed, of saying "We need you to have 8 something 9 extraordinary piece of 10 extraordinary piece of 11 wealth." Congress still in 1994, because the problem it is 12 now, that they extraordinary, put this because the authority homes American families' are economy, well-being and an an and So I think, you know, I'm sorry I sound 13 shrill 14 testimony in the House and the Senate for almost ten 15 years now. and 16 impatient, but I've been making this So please, find the will -MR. CHANIN: Let's assume, that as Susan's 17 guessed, that lenders underwrite a mortgage based on 18 not 19 insurance; that is, in terms of underwriting. only 20 principal So the and question interest is then but if taxes you and mandate 21 escrow, would you create any ability of the consumer, 22 for example, to opt-out, to deal with, for example, 23 Pablo's suggestion of a consumer -- what if a consumer 24 simply 25 insurance to bring to the table? does not have the two months of taxes and Is that consumer NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 77 1 simply out of luck if the consumer doesn't have the 2 ability to escrow those funds, and cannot get the 3 loan? Is that an outcome that is satisfactory to you? 4 MR. EAKES: The opting out won't work. 5 Someone will have a form that lets you opt out, and 6 everyone will sign it for that lender, and they'll 7 start to dominate the market. 8 If a borrower is lacking only two months of 9 escrow, compared to the closing costs of getting into 10 a loan, which is often eight to ten percent of the 11 loan amount in total, that two months of escrow is not 12 going 13 lender, and I think the person from Chase may have 14 been suggesting, is maybe you can build that into the 15 loan. to be 16 the marginal difference. Maybe the I mean you can have some of the loan amount 17 cover closing costs and cover escrow. 18 if that's what's going to keep you out of a home, you 19 need 20 homeowner. to 21 wait six more months GOVERNOR KROSZNER: before But ultimately, you become a I just want to go back 22 to Pablo on that, because that was an interesting 23 suggestion that you had made, that Martin has picked 24 up on. 25 other costs and fees in, to make sure that the person Is there a way to integrate this -- these NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 78 1 will be 2 facing? 3 able MR. to afford the SANCHEZ: full Well, cost that's they'll what be we're 4 talking about and working on right now, because we 5 really feel that that is a barrier. 6 two months. 7 costs, right, that really people struggle with. 8 I It's not just the It's the two months on top of the other think beyond that, we have to realize 9 that, I think everybody probably in this room knows 10 someone that's had a life event or a hiccup in their 11 life, 12 really down and out economically, right? 13 in the subprime space because something happened, and 14 they have the ability to do these things. 15 that So wasn't we've someone got to that was make illiterate sure or It was there that we're 16 understanding all of the consumers in this space. 17 I think it's prudent for us to make sure that we offer 18 it, number one, across the board. 19 talking about here is there are folks that don't offer 20 it all, and mark it solely payment, and they have a 21 competitive advantage, right, because they do that. But I think what we're 22 But if we mandate the fact that we have to 23 offer it, that we as prudent lenders understand when 24 it is appropriate for someone to have the ability to 25 opt in and opt out, I think that's reasonable. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 79 1 GOVERNOR KROSZNER: I just wanted to say 2 when you said -- what you mean by "it." 3 you mean by "it" and exactly what do you mean by 4 opting out of it? 5 MR. it Then we'll go back to -- SANCHEZ: for certain offering mandating 7 especially that first time home buyer. 8 very 9 understand how all of this stuff works. important, a Well, 6 10 So what do because portion they GOVERNOR KROSZNER: the of escrow; customers, I think it's generally don't So for a first time home 11 buyer, you would suggest a mandate, not an opt -- with 12 no opt-out? 13 MR. SANCHEZ: 14 GOVERNOR KROSZNER: That's correct. 15 have 16 would allow for the opt-out? had 17 18 experience with But for others who may owning homes before, you MR. SANCHEZ: I would allow for the opt-out, MS. BOWDLER: So I was going to comment on - yes. 19 20 - oh yes. 21 comments 22 everybody 23 signing and it's here, one more thing. Okay, I remember. I -- agree, I and mean the the I just wanted to echo opt-in, stack of the opt-out, papers and the 24 People -- I mean that's why we think that 25 disclosures aren't an effective way to regulate the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 80 1 market, because 2 communicate actual risks or decisions to consumers at 3 the closing table, which is the time when people are 4 least 5 train." likely they to are say mean not "Whoa, they've an effective whoa, already whoa, got way stop their to the 6 I boxes 7 packed and everything. 8 idea. 9 of consumers and their ability to determine their cash 10 flow, because that's really what you're talking about. 11 If you're going -- if somebody's going to decide that 12 they don't want to escrow taxes and insurance, it's 13 because they want to cash flow their money somehow. So I don't think that's a good In terms of talking about the financial savvy 14 Well wait. If we look at the prime market, 15 where 16 higher credit scores, escrow's virtually universal. 17 So when dealing with, again I would point to high LTVs 18 and cash-strapped borrowers, this is where it's even 19 more 20 front, are we really -- can we reasonably assume that 21 in six months they will have come up with the $3,000? you have important, 22 arguably because MS. COHEN: more if savvy they consumers can't make with it up I have a couple of things I'd 23 like to add. 24 with the person with the hiccup, who finds themselves 25 in the subprime market? On this question about what do you do NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 81 1 I mean what we're really talking about here, 2 and this is going to come up in a variety of other 3 topics is the rhetoric of freedom. 4 an upper middle class person's freedom needing to be 5 unrestrained 6 otherwise protect themselves? 7 So at the what expense we're of To what extent is someone talking about who can't here is 8 requiring some limited number of people who may not 9 need it to follow a rule, so that huge numbers of 10 people aren't gutted. 11 against the other, and it's very clear what the answer 12 is. So to me, that's weighing one Obviously, from the way I answered the question. 13 (Laughter.) 14 MS. COHEN: But I think that that's what 15 it's about. 16 people 17 cost of not restraining those people. It's not about just helping those few remain unrestrained. It's about what is the 18 I want to get back to Sandy's question about 19 the FTC unfairness standard and how it applies to 20 these various questions. 21 I agree with Martin, that providing include taxes a 22 monthly 23 insurance is deceptive. 24 the unfair standard at the FTC is about whether or not 25 it's reasonably avoidable by the consumer. payment that doesn't and But it's also unfair, because NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 82 1 It's not reasonably avoidable on the part of 2 a subprime consumer, to end up in a hole because of 3 the practice of the lender. 4 think, you can apply either the deception test or the 5 unfairness test, and you're going to end up in that 6 same situation. 7 But what it Over and over again, I requires is looking at the 8 consumer and the shoes they're actually standing in, 9 not the shoes that the median consumer is standing in, 10 but the median subprime consumer is standing in. 11 By the way, NCLC has seen too many prime loans that 12 are abusive. 13 So I'm not saying we should only regulate 14 the subprime market, that a lot of these practices 15 that we're talking about, you ought to start focusing 16 on that. 17 unfairness or deception, you can meet either standard 18 and it's not that hard, unfortunately. So I want to just raise that issue. 19 MR. CHANIN: To me, Alys, let me follow up, and 20 I'll have to borrow the bell. 21 - no. 22 presumably 23 problem in the prime market. I'll retract my other - So as we look at this question of escrow, it's certainly less of an issue or a 24 So part of the question, as we explore this, 25 is how you would define the types of consumers, the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 83 1 types of products, etcetera, that 2 mandating an escrow would apply to? any notion of 3 Earlier, we've heard that you couldn't or 4 shouldn't do it by product, because the market's going 5 to develop. 6 There will be new products and so forth. So what is the standard that might be used in terms 7 of defining the scope of this? 8 MS. COHEN: 9 MR. CHANIN: Are you asking me that? Anyone in the -- 10 (Laughter; simultaneous discussion.) 11 MR. CHANIN: 12 MR. EAKES: 13 14 15 You or anyone else. It needs to be bright-lined, because under the HOEPA standard, there is liability. There is private action liability. So you don't want to have a vague standard that someone trips into. 16 The two most obvious that jump out as 17 definitions to me that are bright line is use the HMDA 18 rate 19 comparable Treasury. 20 what comparable Treasury should be in an ARM loan that 21 resets 22 Treasury should be the shortest reset period, not the 23 30-year Treasury. spread, every which six says 300 basis points above I would argue a little bit about months, that perhaps comparable 24 Or, if you wanted to make sure that you 25 didn't have distortions, which I think we see whenever NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 84 1 there is a Russian meltdown in '98, where you have 2 Treasuries become artificially low, you may not want 3 to tie it to Treasuries, because then you will start 4 capturing loans that are maybe not subprime at all in 5 the market. 6 So the historical standard is the Freddie 7 Mac contract rate plus 150 basis points, is equal to 8 the Treasury plus 300. 9 advantage 10 that it But it would then have the would be insulated from the distortions in Treasury over time. 11 I would use it based on APR, something that 12 says if it's a higher cost, someone has made a 13 decision that this a higher risk loan, which is the 14 justification for having a higher APR. 15 Have it be absolutely bright line, because 16 the last thing you want is people who get, you know, 17 who don't think they're making subprime loans, and all 18 of a sudden have loans that are 60 percent LTV but 19 trigger the subprime. 20 21 22 We want it to be bright line GOVERNOR KROSZNER: guys. I want to hear from you How would something like that work in practice? So let's take Martin's proposal. 23 that 24 problems 25 consequences that we worry about? workable? of Where that, do the you Is something like see the so-called potential unintended NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 85 1 MR. BREWSTER: Well, I can speak to part of 2 that. One of the things we haven't talked about is 3 even 4 generally requires escrow, this is true, there's still 5 the 6 escrow. though it's possibility 7 been of mentioned that even if again you and again, require the So it's not just the -- who gets the escrow, 8 but also how the escrow is calculated. Some of the 9 escrow rules, as far as whether you require the escrow 10 or not, all that's simple. So some of the stated 11 restrictions are out there. So a lender could, even 12 escrowing, 13 especially for a new construction loan. 14 could wind up escrowing much less, That's where we see a lot of the issues, 15 because taxes haven't been established yet. 16 reset then a year later, and all of the sudden your 17 taxes are $6,000 a year, and you've only escrowed for 18 a thousand. 19 Taxes are So now you've got a shortage and it sends 20 you into foreclosure. 21 bright line standard important, but also I think the 22 standard of how to calculate the escrow, and making 23 sure it's sufficient for what the taxes will be. 24 25 GOVERNOR So not only is the eligibility KROSZNER: But I want to hear about, you know, some of -- the kind of proposal that NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 86 1 Martin has put on the table. What do you see as being 2 the challenges if it were to be a rule, to try to 3 fashion this with all this you just said as part of 4 it? 5 Would that help to provide sort of a level 6 playing field for the marketplace, or do you think it 7 would 8 borrowers who otherwise would be able to get loans , 9 but there would be unintended spillover effects. have 10 the MS. consequence SCHWARTZ: I of perhaps think it's excluding a workable 11 option to have bright lines. 12 inadvertent problems because they thought they made a 13 loan that was a prime loan and fell into a high cost, 14 something 15 whatever that might be. 16 that's spread I think no one wants over a certain period, So I think whatever you come up, that makes 17 sure 18 escrowing, is a net positive. 19 can do more than people think you can, because I've 20 seen it. 21 We've done it with the non-traditional. that the majority of the market ends up I just -- I believe you The market has changed, it has reacted. 22 Be thoughtful about it, because if you craft 23 it correctly, and maybe you're very clear about pieces 24 of that guidance, what should be escrowed, I think 25 you'll see a transformation on the escrow issue NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 87 1 without 2 situation if the lender - 3 inadvertent spillover GOVERNOR KROSZNER: into a very costly Can we just pursue it a 4 little bit more, because I want to think about it, 5 especially as we think about having -- obviously, we 6 think about the rules versus guidance. 7 Where would be some of the stress points or 8 lack of clarity that could lead to people pulling out 9 of a market, say responsible lenders pulling out of a 10 market, 11 regulatory action? 12 because of concerns MS. SCHWARTZ: of triggering some I mean I think you either 13 escrow or don't escrow, and a bright line test on that 14 is a very reasonable suggestion. 15 about that as a lender. I mean I don't worry I know people who will worry. 16 So there are issues that could be a lot more 17 vague, that would cause concerns for liquidity and a 18 lot of those other factors. 19 complicated. 20 take into account the impact of taxes and insurance. 21 If they can't afford the loan, it shouldn't be made to 22 them. 23 But this one is not as I think all loans can be underwritten to MR. EAKES: Everything that is put into this 24 requirement, 25 that cannot be taken out, because they are not willing you have two additional prime lenders NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 88 1 to do 2 funds. what 3 4 they know are unsustainable GOVERNOR KROSZNER: non-escrow Any other comments on this, this issue? 5 MS. COHEN: comments I want preferring to respond guidance. to 6 Faith's 7 clear that there's been a sea change because of the 8 proposed and implemented guidance. 9 about just It's I want to go back to the comment that we 10 said earlier about credit insurance. When I got 11 started on predatory lending, that was a really big 12 headline. 13 credit insurance. When they are, they can protect 14 themselves there 15 enforce with regard to credit insurance. But the truth is, people are still charged because are rules that they can 16 But if it's guidance, not only does it not 17 apply to all the lenders, but a borrower who ends up 18 in an experience where the rule was violated in the 19 guidance, but there's no rule that applies to the 20 homeowner, you know, they're stuck. 21 So I would like to see market change. I'm 22 happy to see market correction. 23 help the actual people who are suffering, and there's 24 really no way to do that without a rule. 25 GOVERNOR KROSZNER: But we also have to Well, I think this has NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 89 1 been an extremely helpful discussion on this very 2 important issue, and I think it's been very valuable 3 to have the back and forth of seeing, I think, certain 4 areas of agreement that have emerged with respect to 5 the role of escrows, even though there may be still 6 some differences about guidance versus rules. 7 One of the things we'll be talking about in 8 the afternoon panels is the effectiveness of guidance 9 adopted by the states in general, or whether a rule 10 would 11 important issue that will be coming up again this 12 afternoon. 13 be necessary. So I think that's a But as I promised, we'll take a break. 14 we'll 15 promptly at 10:30. have a break right now, but we will So start Thanks. 16 (Whereupon, a short recess was taken.) 17 GOVERNOR KROSZNER: 18 very We'd like to get started again. 19 (Pause.) 20 GOVERNOR KROSZNER: Once again, I want to 21 thank the panelists for an excellent discussion for 22 the first set of issues, concerning escrows. 23 But now we have three other topics that I 24 had mentioned. 25 stated income as well as no and low documentation One was prepayment penalties; second, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 90 1 lending; and then appropriate consideration given for 2 borrowers' ability to repay. 3 We've got about an hour and a half left, so 4 I'm hoping to spend about half an hour or so on each 5 of those topics. 6 So let's get to prepayment penalty issues, 7 and 8 certain cases they may provide some -- there may be 9 legitimate reasons for use of them. 10 in opening remarks, I talked about how in But there also may be abusive uses of them. 11 12 my So I want to turn to my left, to talk a little bit more about that -- 13 MR. RHEINGOLD: 14 (Laughter.) 15 GOVERNOR Appropriately. KROSZNER: About those -- good. 16 Those people got met, to see what your thoughts are on 17 whether these things are something that need to be 18 just 19 guidance might be appropriate, or whether, you know, 20 whether there could be some opportunities for them to 21 be used in a way that could be helpful to the certain 22 classes of consumers. 23 MR. CHANIN: 24 MS. BRAUNSTEIN: 25 MR. RHEINGOLD: a broad rule against them, or whether the So who wants to start? Ira, please. You want me to start? Okay, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 91 1 I started 2 penalties in the subprime marketplace are probably the 3 most cynical thing to be done, particularly in the 4 last few years when we've seen the 228s and 327s and 5 the adjustable rate mortgages. 6 last Those time. loans In are They are forms. our view, written for prepayment prepayment, 7 period. They're created with the 8 full notion that people are going to prepay those 9 loans. Those prepayment penalties exist merely as 10 extra cash capital for the lender, because they know 11 it's going to pay and people don't know that that cost 12 is there. 13 I see no rational in that reason why prepayment 14 penalties exist 15 mortgage market 16 excluded, and I don't see any real benefit to the 17 consumer. space. subprime I market, think they in that should be 18 I have yet to talk to a consumer who said 19 -- it's funny, because I remember when I refinanced my 20 house, 21 experience in refinancing their houses. because everyone always goes back to their 22 I don't remember going and saying "Hey, can 23 I get a prepayment penalty, because I'm not going to 24 prepay this thing, and I'd like a lower interest rate. 25 Could I get a prepayment penalty?" They said "No, we NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 92 1 don't offer that for the kind of product that you're 2 going to get." 3 4 MR. BREWSTER: So you had a lot of choice, is what you're saying. 5 MR. RHEINGOLD: not true. I I think it's false. 6 it's 7 prepayment 8 lower interest rates. 9 in the subprime marketplace. penalties don't think because consumers they're going I think choose to get I think it's incentive-driven I'll let others talk 10 about, you know, how each structure is eliminated. 11 But I think they're a bad product. 12 MS. BRAUNSTEIN: But Ira, I guess I just 13 want to clarify. 14 see a problem, or is it just in general, or what do 15 you -- 16 Is it only for the hybrids where you MR. RHEINGOLD: If you're talking about -- 17 it's interesting. 18 fixed rate mortgages, fixed rate subprime mortgages, I 19 wish I saw more of those. 20 We're It's an interesting question. not seeing a lot of those in On the 21 marketplace, and maybe an argument can be made that 22 that's 23 sense, the fact that that actually equates to a lower 24 interest 25 That's not what we're saying today. what makes rate, prepayment then maybe penalties, that makes makes some some sense. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 93 1 And again, one, that's not the product 2 they're doing, and two, if it actually serves the 3 lower interest rate and really benefits the consumer, 4 then 5 marketplace 6 mortgage 7 prepayment penalties. 8 I 9 I think that's we're with seeing the was okay. full But now an I at a in adjustable expectation looking think of chart the rate receiving yesterday. Seventy-five percent of all the loans that had a reset 10 in 2006 had the prepayment penalty paid out. 11 doesn't count that 12 percent of those loans that are 12 in default right now. 13 Seventy-five percent of the 2006 That prepays 14 that had a reset rate and an adjustable rate mortgage 15 prepayment. 16 in foreclosure, and 12 percent are far behind. 17 everyone knows those loans are going to be -- those 18 prepayment penalties are going to be charged. 19 Twelve percent of those loans have -- are GOVERNOR KROSZNER: So Let me turn to my right, 20 and see other perspectives on -- essentially, some of 21 the challenges if we were to do a more broad-brush 22 approach, 23 What are some of the unintended consequences that you 24 see there? 25 of MS. just saying SCHWARTZ: these are Well, it's inappropriate. interesting. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 94 1 Prepayment penalties are in the segment of the 2 mortgage market, because they used to refinance every 3 three to six months in the mid-90's and the early 4 90's. 5 prepayment penalties were designed to keep people and 6 loans for two, three -- and back then, and I'd agree 7 with others, to say five years was still way too long 8 for someone who may need to refinance the loan before 9 that. To bring investors and capital into the market, 10 The purpose of a prepayment penalty can be 11 to preserve an investor certainty that they'll give 12 -- money for a loan that stays on the books longer 13 than three or six months, which was the practice in 14 the mid-90's, and we all know it. 15 business, 16 different market. 17 credit life insurance. High rates means It's a very Today, one of three loans falls in the Alt-A 18 or subprime loan market. 19 fell outside of the fixed rate Fannie and Freddie 20 loans. 21 penalties 22 mortgage market. 23 One of three loans last year There are a significant amount of prepayment in So that Ira non-traditional says it's all segment cynical, of the because 24 they're on 228 ARMs or 327s. 25 if they were five year prepay on the 228s, or a three- Well, they'd be cynical NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 95 1 year prepay 2 borrower to have to pay that penalty upon the reset of 3 the mortgage, if they chose to refinance. 4 on a 228, where you would cause that But in fact, if responsibly used, prepayment 5 penalties, 6 fixed rate portion of the ARM. 7 choice, like you had a choice; you still didn't get 8 one. 9 10 programs can match the duration of the If we don't have a MR. RHEINGOLD: They didn't have a choice. MS. SCHWARTZ: They didn't have a choice. 11 They 12 mandated on one. 13 don't have a choice and if you're not getting a lower 14 rate, absolutely that's deceptive. couldn't 15 16 MR. get one, but you weren't They're not the problem. If you RHEINGOLD: at least That's what were these about. 17 MS. SCHWARTZ: Well, I'm with them. 18 with them. 19 regulation, put it in regulation. 20 targeted 21 HOEPA, 22 requirements 23 penalty is used. I'm So I guess my point is I put that in regulation. Section 129, about That's that how the Put it in perhaps a very includes use of serious the that around substantive prepayment 24 I think if you're not seeing that across the 25 board, you'll see market reform on the problem in that NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 96 1 market. 2 MR. RHEINGOLD: Well, I have one response 3 and I'll let others speak. 4 sufficient to make prepayments for a batch of fixed 5 rate term -- 6 7 MS. SCHWARTZ: But I think it's not Or a 30-day before it sets or something, or 60 or whatever that might be. 8 MR. RHEINGOLD: 9 (Laughter.) 10 MR. Or six months or a year. RHEINGOLD: Because again, I think 11 people fall into the trap that in fact that prepayment 12 is not going to happen, if it happens prior to that. 13 That's when the refinance loan comes into play. 14 think it has to be significant before that -- 15 16 MS. BRAUNSTEIN: I Can you suggest what you think an appropriate time period would be? 17 MR. EAKES: Well, it should be no less than 18 six 19 prepayment penalties should be in this subsection, not 20 in every subsection. months. I would make the case for lack of 21 The first thing is every single rate sheet 22 for subprime lending that I know of would show a half 23 percent decrease in the rate, if you accept or choose 24 a prepayment penalty, okay. 25 what on the surface the rate tradeoff looks like. So there's no argument on NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 97 1 It's roughly, for prepayment it's only a half percent. 2 The challenge is, and this was really, I 3 would 4 Carolina predatory lending bill back in 1999, we had 5 all of the bank attorneys, which represented four of 6 the ten largest banks in America were located in North 7 Carolina, what they told us was they said we would be 8 perfectly fine in North Carolina if had a prohibition 9 on prepayment penalties across the board, for all home 10 think, when we were negotiating the North loans that were below $50,000. 11 What they said was we have brokers who bring 12 us a loan and want to be paid premium, because they 13 have sold the borrower a higher rate. 14 paid the premium unless the rate is higher than market 15 rate on the loan. You don't get 16 What the lenders then said to us was we have 17 to have a prepayment penalty, not because we have to 18 keep it for a long time, but we know those loans will 19 be refinanced perhaps by the very same broker within 20 one month, and get another premium down the street. 21 So we have to have at least a prepayment 22 penalty equal to the amount of the premium that we 23 paid to the broker. 24 dawned on me, that really the prepayment penalty is 25 very subtle. It was the first time that it It looks like you have on the rate sheet NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 98 1 that you're going to get a seven percent loan 2 with prepayment penalty, 6-1/2. or, 3 But the way it works in practice is someone 4 brings in a loan that would have qualified for that 5 seven 6 depending on whether they have a prepayment penalty. and 7 6-1/2 tradeoff, that is at 8-1/2 or 8, Without the prepayment penalty, you can't do 8 the racial 9 industry. steering that we see so often in this So I would argue that this segment, and 10 particularly because if you are African-American or 11 Latino, in any marketplace in America for home loans, 12 you are 500 percent more likely to get prepayment 13 penalties in America today, because of the steering 14 between subprime and prime. 15 The prime marketplace where you really do 16 get competition, and people understand it better and 17 there are free riders on the market, have two to four 18 percent of the loans that have prepayment penalties. 19 You can't tell me that the borrowers who have credit 20 blemishes, who have less choice in the market because 21 they're more desperate, choose 70 percent of the time 22 to have that feature. 23 It really 24 offered 25 compensation. to the is something borrowers. What we did It in that is a North is what is mechanism of Carolina is NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 99 1 prohibited prepayment penalties. 2 to restrict overall lending; we allowed the interest 3 rate on subprime loans to float as high as they need 4 it to be. 5 We was just let's transparent take and the move compensation 6 that 7 payments and back into penalty fees, and do away with 8 it. 9 least said We restricted it not it back One other point and I'll be quiet. into I was at 10 a panel discussion with the general counsel for New 11 Century, and he said to me "Why are you so worried 12 about the rate resets, this exploding payment after 13 two 14 anything else, we refinance these loans. 15 them all virtually before we ever get to the two-year 16 period. years, because whether you're fixed rate or We refinance 17 "You shouldn't be worried about the reset," 18 and I'm thinking well, that's a good argument to me 19 about why the reset is irrelevant. 20 But it's a devastating argument about what 21 prepayment penalties are. 22 prepayment penalty in every case in this marketplace 23 is paid out of the equity of the home. 24 25 If you think about it, a The borrower hasn't saved up money in order to pay the prepayment penalty. It is a very NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 100 1 sophisticated way of having asset-based lending, that 2 part of the compensation, the back-end fee. 3 I would argue that under HOEPA, one of your 4 standards is if there is a practice that begins to 5 take loans out of the HOEPA category. 6 premium interest rate, say you're charged an extra one 7 percent, which happens all the time throughout this 8 industry, above what you qualify for, and you put a 9 prepayment penalty on top of that for two years, three 10 If you have a years, you have in essence paid up front fees. 11 You're going to pay it, either in the 12 interest in the higher premium rate, or you're going 13 to pay it in the prepayment penalty at the back end. 14 Why does that not count in calculating the fees that 15 would kick you into a HOEPA loan? 16 offloading that makes no rational sense. 17 It is a method of Most people in America outside of economics, 18 you know, I actually studied economics. 19 guys don't believe that. 20 possible clearly to have a prepayment penalty and have 21 it lower the rate. 22 should do. 23 I know you What we're doing here, it is That's what in economic theory it But all of the studies that we've done, the 24 professor 25 actually look at what happens, the borrowers do not at Harvard did, showed that when you NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 101 1 get a net lower rate, because they come in at a higher 2 rate, 3 penalty, 4 subprime should just simply be prohibited. get 5 deducted and it's a half really percent for pernicious prepayment chain that in The most cynical thing you could do as the 6 Fed is 7 prohibit 8 first reset period. 9 to have a rule prepayment that penalties says that we're last going beyond to the That would give the appearance that you had 10 done something. 11 absolutely nothing, because the borrowers are going to 12 be flipped 70 to 80 percent, as Ira said, before they 13 ever get to that reset period. 14 So But in essence, you would have done whether it's fixed rate or adjustable 15 rate, that really is not adequate. 16 goal has been to work with minority borrowers, the 17 fact that this market is so disproportionate, it ought 18 to be just really repugnant to us that an African- 19 American 20 African-American, get a prepayment penalty, whether 21 they quote "choose it or not," and it's going to be 22 500 percent more likely if you're African-American or 23 Latino. 24 25 borrower, just by the For me, since my fact that they're I find that just appalling. GOVERNOR KROSZNER: Well Martin, I've been an economics professor many years, and it's very clear NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 102 1 that you are very well-schooled in economics. 2 never thought that you were not so well-trained in 3 economics. 4 understanding of those things. 5 MR. EAKES: 6 (Laughter.) 7 GOVERNOR KROSZNER: You have quite a So I sophisticated I've been in the habit. 8 than we could hope for. 9 that? Certainly it is better Any thoughts and response to Yes. 10 MS. DAVIS: I don't want to be cynical, but 11 I do want to be very thoughtful on this issue. 12 think we're all aligned on this panel in terms of 13 being very supportive 14 Fargo, I we 15 success is our vision. 16 success breeds more success through a lot of different 17 ways. mean are of -- the consumer. our consumers' At I Wells financial It's what drives us. Their 18 If they're successful, they're going to do 19 more business with us, which makes us more successful. 20 21 So we all have this same motivation. We all share the same passion. 22 I just want to be very thoughtful that when 23 we do something that we think is well-intended, that 24 there aren't any unintended consequences that create a 25 problem. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 103 1 So when I think about this, what are the 2 impacts in the marketplace, what is the reaction to 3 the investor, the loan is prepaid faster than what has 4 been modeled or what the return that they expect as an 5 investor, then you may pull back on that. 6 I do believe, as Faith said earlier, that 7 there's got to be a clear benefit, you know. 8 got to be able to show it. 9 I do believe, and we can have dialogue or discussion 10 You've They should have choice. relative to what is the appropriate period. 11 At Wells Fargo right now, we currently say 12 it's the adjustable period or the fixed period of the 13 adjustable if you prepay in that period, or the lesser 14 of three years. 15 period and you prepaid at three, then the prepayment 16 penalty would not apply. 17 So So if you had a five year adjustable there's going to be rich dialogue in 18 terms of what is that period. 19 have to look at it in a broad perspective, and look at 20 what are the potential outcomes. 21 MS. BRAUNSTEIN: But I just think you Susan, do your prepayment 22 penalties extend right to the reset date, in the sense 23 like for a 228 or a 327? 24 before that, to give people a chance to get out of 25 that loan without paying it? Or does it end a little NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 104 1 MS. DAVIS: 2 MS. BRAUNSTEIN: 3 MS. DAVIS: 4 Yes. MS. BRAUNSTEIN: If you do refinance with As long as they refinance with you, as opposed to another lender? 7 MS. DAVIS: 8 MR. CHANIN: 9 At the reset? us, we're going to waive it. 5 6 It is at the reset period. Right. Let me follow up on that. I'm not an economist, but I do work for several of them. 10 (Laughter.) 11 GOVERNOR KROSZNER: Whether he likes it or 13 MR. CHANIN: But -- 14 MR. EAKES: He's a lawyer. MR. CHANIN: But it's hard for me to think 12 15 not. Right. That's even worse. 16 17 that if a loan or the market has prepayment penalties 18 in a fairly significant portion of the market, that 19 that's a, you can call it a revenue stream or whatever 20 you like, in terms of if will bring in some degree of 21 funding 22 prepay; that is, it is implemented for some lenders. for lenders, for those consumers who do 23 It's hard for me to believe that if you 24 eliminate it, if you were to ban prepayment penalties, 25 whether by product or subprime and so forth, that NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 105 1 there would not be some implications for pricing. 2 So the question, kind of following up Susan 3 on your comment, as well as others is, you know, it's 4 hard to predict such things. 5 would be some fallout in terms of either higher rates 6 or different terms or something. 7 that, if there were a ban on prepayment penalties? 8 Faith? 9 MS. SCHWARTZ: But I would think there Can you comment on Well, it's a great question. 10 I'm not sure how accurate or relevant this would be. 11 Three years ago or so, we with some other folks 12 commissioned a study on that, some Wall Street entity, 13 Pentalpha Global Capital in fact circulated that study 14 to several people, some on this panel. 15 Since it's dated, it's hard to know. But 16 the thought was well just eliminate all the prepay 17 penalties. 18 change in the borrower's credit, no change in the 19 characteristics of the loan other than removing the 20 prepayment penalty? What would it do to the market, with no 21 At that time, it was suggested the whole 22 non-prime sector could rise 100 to 120 basis points, 23 with no other change. 24 be 25 accurate it is today. poked at now, I suspect, you know, that can because I just don't know how NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 106 1 But that was -- when the discussion kept 2 going on, we were looking for information on well, 3 could we just eliminate them? 4 matter? 5 they would require would be much higher. What would it really Would investors still stay, and the guilt 6 The economists know better than I do, but as 7 you rise in your rates for your required yield, you 8 also worry about loans prepaying rapidly. 9 asymmetrical, that whole argument. It's very But we do have a 10 dated paper that maybe someone could improve upon and 11 create a new paper, just to see is there a market in 12 fact. 13 Then maybe it would settle down and maybe 14 the market would rationalize to get in a different 15 spot, and maybe that's a good thing too. 16 that's information we should all have on this issue. 17 MR. EAKES: But I think There are a number of states 18 that 19 subprime. 20 assumed 21 insurance and prepayment penalties would have a higher 22 interest rate of between a half and one percent. have prohibited penalties for In North Carolina, the General Assembly that 23 prepayment As getting it rid turned of out, single it premium didn't credit occur. We 24 weren't sure, and what we think that meant was that 25 there was overage pricing. So once you took the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 107 1 prepayment penalties out, we actually did not get the 2 increase in interest rates in that sector that we 3 expected, 4 imperfection. which meant that there was some market 5 But you would expect, if there's a half a 6 percent reduction in rates, that it might go up as 7 much as a half percent. 8 MR. CHANIN: Were those -- let me ask you. 9 Before kind of the discounted, if you will, subprime 10 loans like 228s and 327s, because obviously if it's an 11 forming index or a fixed rate subprime loan, then the 12 pricing 13 discounted for the risk of the borrower. 14 is set there. But for the 228s, it's So at least some have argued the prepayment 15 penalty compensates for that risk. 16 Carolina law look at or study, look at those types of 17 products? 18 19 20 21 MR. EAKES: I think the thing is that your point is a really good one. We had this negotiation. I think Faith was part of that four or five years ago with Lehman Brothers. 22 MS. SCHWARTZ: 23 MR. EAKES: 24 So did the North Five years ago. How long ago? I thought it was longer? 25 MS. SCHWARTZ: Longer. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 108 1 MR. EAKES: It was really interesting what 2 came out in this really open discussion, that the 3 investor, 4 said we get, despite the rhetoric, 80 percent of the 5 value of the prepayment penalty is not the change in 6 behavior, 7 rate. 8 people it's representing not Eighty the the investor slowdown percent is the in the cash markets prepayment flow of the 9 penalty, which they know they will receive, because 70 10 to 80 percent of the loans refinance during the prepay 11 period. 12 So they know that. It really is not so much the change. The 13 change in prepayment speed back then, when we were 14 looking at it, was the difference between 20 percent 15 CPR and 17 percent, which is a difference. 16 wasn't a really, truly dramatic difference in speed. But it 17 That meant 20 percent would prepay each year 18 if they didn't have a prepayment penalty, and only 17 19 percent would prepay each year if they did. 20 So I think that if the market is efficient 21 now, if you take one of the measures of cash flow 22 away, which prepayment penalties collected routinely 23 will be, there has to be some increase in rate, or 24 else the market is not efficiently pricing them. 25 MS. SCHWARTZ: You know, I think the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 109 1 question here is about transparency of pricing. 2 many people here have a prepayment penalty on their 3 loans? 4 MR. EAKES: 5 (Laughter; simultaneous discussion.) 6 MS. COHEN: How How many people know? Great. So we've got one. So in 7 the subprime market, it's 70 percent. 8 like credit card pricing. 9 think about your credit card proposal, we can talk 10 This is exactly If you want to know what I about that later. 11 (Laughter.) 12 MS. BRAUNSTEIN: 13 MS. COHEN: A different forum. In the credit card market, some 14 people know what they're going to pay, because they 15 don't really pay late. 16 these fees at the back end. Then a bunch of people pay all 17 Similarly, what we're seeing in the subprime 18 market is some portion of what people are paying they 19 don't know about up front, because they don't really 20 either 21 understand the prepayment penalty, or (c) appreciate 22 how likely it is that they're going to be flipped, 23 because generally it's not their idea to do so. (a) know about the prepayment penalty, (b) 24 So to the extent that you're seeing most of 25 it being about cash flow, don't people have the right NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 110 1 to know what their loan's going to cost, and don't 2 they have the right to have their loan underwritten 3 for that in some appropriate way? 4 GOVERNOR KROSZNER: Well, this raises the 5 important point of disclosure, and obviously, as I've 6 mentioned in my introductory remarks and as you well 7 know, we're reviewing our disclosure proposals. 8 Is this something -- could we at least 9 partially address it, perhaps not completely address 10 it, but at least partially address it through improved 11 disclosure? 12 MS. COHEN: My view is any abuse needs to be 13 addressed by a substantive regulation. 14 supplement it by disclosure, we have plenty of ideas 15 about how disclosures could be improved. 16 don't ever end up getting adopted. 17 provide them again. 18 (Laughter.) 19 MS. COHEN: 20 If you want to Most of them But we're happy to The bottom line here is what people receive, not whether they understand it not. 21 GOVERNOR KROSZNER: Well, no. I do think 22 it's very important that they understand what they're 23 going to pay. 24 other. 25 So that they're not independent of each It is important what they ultimately do pay. But one of the hopes is that we can at least NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 111 1 improve for more people, certainly not for everyone, 2 their ability to understand the type of contracts that 3 they're getting into. 4 MR. SANCHEZ: We'd probably agree that that 5 is right. 6 the 7 didn't understand that I had this right. marketplace 8 9 A lot of the problems that we care about in So I are people think having it up front. the saying issue oh, of my God. I disclosure, and For example, we make it a part of 10 our up front RESPA package, and it is out there in 11 front 12 understand it. for 13 the As we customer drive to that be able more to to see their and decision 14 point, and have a standard by which we all who have to 15 play, I think it's very, very important. 16 that the theory of a prepayment penalty should have a 17 lower cost of entry for the consumer, I think, is 18 right if we make it real. 19 The idea We haven't done a good job of that in the 20 industry, because 21 penalties beyond 22 going to change. we've resets, extended where we these know prepayment people are 23 I think we have to adopt something that says 24 we are not going to go past that first adjustment 25 period, and secondly, to the point of the folks before NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 112 1 me, we have to give the consumer a reasonable period 2 of time before that adjustment sets, so that they 3 don't have a prepayment penalty and they aren't forced 4 to either come back to us, right, and have the ability 5 to be in the open market and have the ability to be a 6 consumer, right. 7 So I think the prepayment penalty exists for 8 a reason. I think we all have an expectation that it 9 should of be mutual benefit, right, both to the 10 consumer 11 reasonable profit and provide liquidity in the market 12 and opportunity for folks. and 13 14 to us, so MS. BOWDLER: oh, sorry. that we can generate a And you're -- just thinking -- Do you want me to -- 15 GOVERNOR KROSZNER: 16 MS. BOWDLER: Go ahead. 17 MS. I COHEN: No, Alys can respond. agree that disclosure and 18 choice are good where they're available. 19 90's, when the first predatory lending hearing was 20 held on the Senate Special Committee on Aging, John 21 Breaux, 22 didn't read the closing papers on his mortgage. 23 Senator Now from maybe Louisiana, he had In the late announced the that privilege of he not 24 needing to understand or read the closing papers on 25 his mortgage. But the people who we see, whether or NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 113 1 not they'd like to understand their mortgage, 2 disclosure is not going to solve their problem. a 3 So we're all in favor of better disclosure, 4 but the question is whether that's the full answer to 5 the problem. I took a cab here this morning from 6 Union Station. My cab driver is a civil engineer from 7 Ethiopia. 8 citizen. He's been here for ten years and is a He's got a bunch of kids, he owns his home. 9 10 I said "Oh, I'm going to the Fed. 11 involved in a meeting. 12 said "Oh, is it about mortgages?" 13 about mortgages." We've got these rules." I'm He I said "Yes, it's 14 He said well, the real problem is, and this 15 is the point I'd like to make, he said "People see an 16 advertisement like in a newspaper, and they come and 17 they find out that rules are different. 18 time they figure out that the rules are different, and 19 that's the part, because disclosures up front are not 20 enforceable, by the time they find that out, they 21 don't feel like they can leave. 22 and they sign the papers anyway. But by the They feel desperate, 23 Now if he understands that, why can't we all 24 implement a rule that appreciates some of this, or you 25 guys implement the rule. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 114 1 GOVERNOR KROSZNER: 2 MS. BOWDLER: 3 Janis. Well, Alys stole a little bit of my thunder. 4 MR. CHANIN: You were in the same taxi? 5 (Laughter.) 6 GOVERNOR KROSZNER: 7 MS. BOWDLER: Well done. What I was going to say is, 8 you know, in the hearing that we had last summer, the 9 panel I was on was looking at consumer choice, and how 10 do consumers make decisions about the products that 11 they get. 12 We know that consumers don't have the tools 13 that they need to shop effectively, and we know that 14 they go to mortgage brokers because they assume that 15 the broker shops for them. 16 So when we talk about whether or not 17 consumers are actually making the choice to get that 18 prepayment penalty, it's very unlikely. 19 as we've already talked about. 20 monthly payment, and that's where all decisions are 21 really made. 22 So just to They come in, They get quoted a answer your question, 23 specifically about looking at the idea of what would a 24 disclosure look like for the prepayment penalty, I 25 think we also need to think about it in the context of NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 115 1 what exactly is it, and how exactly are you disclosing 2 it? 3 Because are we disclosing it as a fee, which 4 is 5 market, or as a potential tool to discount the cost of 6 your mortgage. 7 potential discount to your mortgage if it's actually 8 doing 9 problems of why we think that that's not happening in 10 how it's that, operated functionally acting in the To me, you can only disclose it as a and we've heard already all of the the marketplace. 11 So in thinking what a disclosure would look 12 like, we'd have to think about is it a fee, or is it a 13 discount, and how we talk about that? 14 can we get it to them in time, where they can actually 15 act on the information that they're receiving. 16 MR. CHANIN: Then of course, Martin, I think to follow up on 17 one comment that I think you made, and that is I 18 believe you said that, for example, providing a time 19 frame 20 satisfactory answer to this. before 21 That the reset is, allowing date the would consumer not to be a prepay 22 without a penalty for some time framer before that. 23 If you said that, why is that the case? 24 25 MR. EAKES: bit. Let me hedge my bets a little If you're going to have a limit but not prohibit NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 116 1 prepayment penalties, it needs to be at least six 2 months before the reset period. 3 processing takes time, particularly if you have credit 4 blemishes you have to fix. 5 Because the mortgage If you say within 30 days, it's just a joke, 6 because you then get to the closing table. You are 7 forced to close even if you have a disastrous loan put 8 in front of you. 9 particularly So when I was saying that it's cynical to say that we would have a 10 regulation that said the prepayment penalty can't go 11 longer than the reset period, I just believe that has 12 no impact. 13 What I believe is that the prepayment 14 penalty, we have a market where we see what consumer 15 choice 16 percent 17 judge 18 octogenarian; you know, the one case where it might 19 happen. 20 policy. 21 is in choose our the prime prepayment policy on market, and penalties. what I call roughly We four shouldn't the fertile It might be true, and then let that drive our Well, that's what we're doing when we talk 22 about prepayment penalties. 23 people who really would get a benefit. But for most 24 people, is 25 Nothing else I say is going to be heard, right? the asymmetry of There may be a couple of information dramatic. You NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 117 1 have the image of the -- 2 GOVERNOR KROSZNER: 3 that out of our head. 4 (Laughter.) 5 MR. CHANIN: 6 the pricing 7 functioning properly? We're trying to keep But go ahead. I guess part of it though, is appropriate? That is, is the market That's one issue. 8 The second issue though, and to the extent 9 you can divorce them, is if there's a problem with the 10 way the market is functioning in terms of prepayment 11 penalties, and thus consumers, in a sense, have to pay 12 the penalty or have to roll it over with the lender or 13 have to pay the reset rate, can you address that by 14 having a 15 before the 16 refinance without that? 17 window of reset time, date, MR. EAKES: whatever permitting is the appropriate, consumer to You see, what I'm telling you is 18 this problem is -- this one is not tagged to reset 19 only. 20 a fixed rate, there were no reset whatsoever; we had 21 even 22 refinancing, these are very short term loans, where 23 the borrower assumes they're going to be able to be in 24 the loan for longer than they do. If you had every subprime loan in America with done 25 escrows That's and why they I weren't say it's triggers for asymmetric NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 118 1 information. 2 unless 3 recover, and in many cases it's going to leave a half 4 year of interest times 80 percent. they No one would choose a prepayment penalty thought they would be in the loan to 5 Well, that's true, because the higher your 6 interest rate is, the worse your loan, the more locked 7 into it you are at that point. 8 prepayment penalty today, is the higher your interest 9 rate, the more you need to be able to refinance, the 10 So that's the standard more pernicious it is for you to try to do that. 11 MR. RHEINGOLD: Let me take a crack at this 12 as well, because I'm thinking about the role of abuse 13 prior to the adjustable rate mortgages, and why they 14 were bad even then. 15 But the fact is is that I don't believe that 16 prepayment 17 assumption of the subprime market that consumers are 18 rationally going to choose to get out of that for that 19 matter, and go ahead and get a new loan. 20 penalties In fact, I exist sort of because view it there's as an mortgage 21 lenders protecting themselves from each other, because 22 they 23 people 24 strip. 25 knew it was going to happen, because as soon as the know and there's this continue to voracious refinance appetite them and to flip equity The prepayment penalty existed because they NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 119 1 loan closed, three months later, six months later, 2 they were going to be approached by a new lender to 3 say "We can do this for you and we can do this for 4 you." 5 That prepayment penalty wasn't because a 6 consumer was rationally going to -- because there was 7 a concern that a consumer was rationally going to get 8 out of that loan. 9 of the industry was going to devour that consumer. It was because they knew the rest So 10 that's why prepayment penalties. 11 that short a reset date, it's not going to solve the 12 entire problem. 13 14 GOVERNOR KROSZNER: Even if you create Any response on that? Yes. 15 MR. DINHAM: Not on that particular issue, 16 but I did want to respond to something that Alys said. 17 One of the biggest problems that I've seen in the 18 marketplace 19 estimate, 20 anywhere close to the same. for and years the has HUD-1 been are not the good required faith to be 21 We need to do something to put variances on 22 the good faith estimates, so the consumer will know at 23 that time. 24 that they are required to disclose it at some time 25 prior to the actual closing. In other words, if it increases any more, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 120 1 It's been a hole in our system for as long 2 as I've been doing this. 3 Truth in Lending and RESPA too. 4 come about, and one of the most confusing things is 5 about one of your forms too, is that you continue to 6 put the APR but not the number right on there. 7 consumer really gets upset about that. 8 9 But I would I started before they had really So I've seen it all like to see us The do something that gives the consumer more assurance at 10 the 11 figures that you're going to see, or he's going to be 12 resolicited. 13 the slope is concerned. time 14 of application, that these are actually So I think that that's another issue as GOVERNOR KROSZNER: Any last words? I'm 15 coming to -- we've spent like a half an hour on this, 16 so I want to bring this section to a close. 17 more on this issue? 18 MS. COHEN: Anything Can I just say one quick thing 19 in response to what Harry said? 20 before, and I just want to point out that most of the 21 clients are not required to do so in any way that 22 would have a penalty associated with it. 23 I think it was said So I think those two things would go hand in 24 hand. 25 to get it on the record. That may not be about the people here, but just NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 121 1 2 GOVERNOR KROSZNER: Any further thoughts? Yes. 3 MS. DAVIS: I have thought about what's the 4 right approach, and I am concerned that I believe in 5 choice for customers. 6 that 7 success correlates back to our success. they 8 9 can make I believe in information so good decisions. Again, Markets are very, very efficient. about trying to take actions or create their I worry a change 10 without understanding all of those dynamics, or doing 11 so because you're trying to solve the bad actors or 12 the unregulated. 13 I just have a concern there. MR. EAKES: The last point I wanted to make 14 on it is to say that you should think of a prepayment 15 penalty loan similar to a neg am loan, that you are 16 going 17 payments for the period you hold the loan out of the 18 equity 19 beginning of the loan, to make it more affordable, 20 we're 21 balance of your loan. 22 to in be paying the going So to home, lower that three just your any or as four if payment percent you and protections said add of at to that the the the are 23 appropriate, and I'm not saying that neg am loans are 24 inappropriate and offsetting, but I think in subprime, 25 with borrowers who are vulnerable, there are cautions NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 122 1 that would lead me to say it's okay to do away with 2 prepayment penalties, as eight or ten or more states 3 have done across the country. 4 MS. DAVIS: 5 cautious. 6 loans. 7 8 Again, I just want to be very We've already said we do not do negative am MR. EAKES: But you do prepayment penalties -- 9 MS. DAVIS: And we do. We do offer 10 consumers prepayment penalties with what I believe is 11 good information, choice and abatement. 12 have limits on the period for the prepayment penalty. 13 So I don't correlate those two together in the way 14 And again, we that you have. 15 GOVERNOR KROSZNER: This has been a 16 fascinating discussion of these issues. 17 about exactly are there benefits or are the benefits 18 so strong that the cost of eliminating the practice 19 outweigh any potential unintended consequences. 20 I'm thinking But I think we've had a good discussion back 21 and forth there. 22 the role of disclosure, whether it can or cannot be 23 effective 24 pleased that we had that. 25 in Also, I think a good discussion of this particular area. So I'm very But now, if it's okay, I'd like to move on NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 123 1 to the next topic, which is something I'm sure will 2 generate no controversy at all, stated income or low 3 and no documentation loans. 4 have some different perspectives on this, and this 5 obviously is another thing that's of great interest to 6 us here at the Fed. 7 So 8 rules. 9 issue? thinking My hunch is people will about guidance, any kind of Who would like to start talking about that 10 MR. CHANIN: Oh, we're on the next topic? 11 (Laughter.) 12 GOVERNOR KROSZNER: 13 to the left. 14 Fed is right in the middle. I think we'll start it So why don't we do that? 15 (Laughter.) 16 MS. BRAUNSTEIN: Remember, the No, I would like to -- I 17 could start this by just posing a question actually to 18 the right, to the industry, which is, you know, one of 19 the things we hear often is that we should ban stated 20 income loans, and that there's no good reason in 2007, 21 with technology and information available at people's 22 fingertips, that somebody can't produce something that 23 shows what their income is for a loan. 24 So I'd like to know from your perspective 25 what the implications are of no stated income loans, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 124 1 and where these actually are done responsibly, and 2 where they are necessary and helpful to people. 3 MR. SANCHEZ: Okay, I'll start. I think it 4 would impact all of us, to do away with them. While 5 this is a very complex part, even more complex is the 6 number of ways people earn income, and are able to 7 disclose income. 8 So I think we start with the panel on the 9 left and we're talking about the Latino community, and 10 the different ways in which they earn income, in cash 11 and those type of things. 12 I think what we've got to do as a 13 responsible lender is to make sure that there's some 14 reasonableness to what folks are stating, and that we 15 have tried to get to a level of documentation that is 16 right. 17 wage earner in a very traditional job, to get the 18 paycheck that we need for documentation. 19 It's very easy to do that when we've got a So that's easy for us to do. When that same 20 person also has a job on the side to support them 21 along with other family income, it's very difficult to 22 do. 23 reasonableness standard for stated income, right? So I think it's prudent for us to establish a 24 We shouldn't see a dishwasher come in with 25 an application that says they make $200,000 a year. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 125 1 That's not reasonable. 2 that we've seen happen in the industry, and that is 3 wrong, and we have got to correct that. 4 So I think applying understanding a there reasonableness 5 standard, 6 challenges out there, even in the world of technology 7 today, of people being able to truly document their 8 income, that they've shown us that they've got the 9 ability and willingness to pay. 10 but Those are some of the things are lots of I think that's where we should be. 11 MS. BRAUNSTEIN: 12 that, 13 specificity, 14 reasonableness standard? 15 I mean that's kind of a broad term. 16 is there -- Pablo, just following up on do you actually, of MR. SANCHEZ: have any what ideas you on mean more by a How would you define that? It is, and it's used in a law 17 every single day, that kind of reasonable person test. 18 That's why we have underwriters, and that's why we 19 train the folks to look at these situations. 20 use technology and we go to the Internet, and there 21 are sites out there that say this is an average range 22 of what this person is likely to make. 23 those tools today to figure that out. 24 25 We do We use some of But it is subjective, and we very much rely on somebody's credit and their history. The best NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 126 1 predictor if someone's going to pay is if they've paid 2 before, right. 3 account. 4 5 MS. We have to take all of that into BRAUNSTEIN: Anybody else down there want to comment? 6 MS. DAVIS: I'll add a few comments here. I 7 believe that, you know, if you're going to restrict or 8 make 9 loans, and I think I said this in my opening, was it 10 has to be tied to a bright line test that can be 11 consistently documented everywhere. any restriction on the stated or low income 12 I mean we have done that at Wells Fargo. 13 Anything below a 620 FICO is not a stated income loan. 14 I believe there is. I believe stated income loans 15 have merit. I personally have a stated income loan. 16 I do make money, and I do make my mortgage payments, 17 right? 18 So 19 convenience, 20 underwrote my loan, I'm sure understood what my job 21 is, that hopefully that there's a reasonableness test 22 to that income. 23 I do it it, creates personal, but 25 subprime loan? it, but for efficiency. ease and Whoever So I think -- MS. BRAUNSTEIN: 24 did But can I add, not to get since you brought it up, is yours a NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 127 1 MS. DAVIS: 2 MS. BRAUNSTEIN: 3 MS. DAVIS: 4 No, it's not. No, this one is not. Not right now. 5 (Laughter.) 6 MS. BRAUNSTEIN: 7 MS. DAVIS: 8 Okay. Not yet anyway. Which is why for us we put in that bright line test at FICOs less than 620. 9 MR. CHANIN: Let me follow up on that. One 10 of the things people have asserted, and it's been 11 pretty kind of strident statement, is that certainly 12 there 13 they're paid, may not literally receive a paycheck. 14 So they may not be able to verify it that way. may 15 be individuals who, because of the way But the assertion, at least that I've heard, 16 is 17 assume it's someone who has been employed, if you 18 will, at the same occupation or type of job for two or 19 three years. that "But people file their taxes," and let's 20 So the assertion is why not, if you don't 21 have a statement from an employer or employers, why 22 not simply require or use a tax form? 23 need a response to that or arguments, you know, why 24 that is inappropriate. 25 but people think we ought to use the tax form. So I mean we There may be privacy issues, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 128 1 MS. SCHWARTZ: Well, a couple of things. I 2 mean tax forms are used all the time, in both signed 3 and unsigned loans. 4 that Pablo has talked about or other forms of income 5 or, you know, just cash that's not been reported. 6 It's certainly part of that. It may be that ancillary income 7 I'd like to step back and just say, you 8 know, stated income loans have been a conundrum across 9 the market for years. People have always been a 10 little bit uneasy about them in prime, in Alt-As, and 11 subprime. 12 Yet they seem to be pervasive and in the 13 last maybe four years, much more so across the market, 14 and that's true. 15 they perform quite well. 16 performance. 17 underwrite. 18 So what's interesting about that is They do perform. There's There are other issues in ways people Someone may have a lot of reserves. Someone 19 might have a very good FICO score and I would argue, 20 having all FICOs, it's an interesting idea. 21 are certainly high FICOs in subprime and not because 22 they 23 product 24 market. 25 It's a big part of the Alt-A market. were downstreamed they got was in not the market, available in But there because the the prime That's a big part of the subprime market. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 129 1 Likewise, a lot of great loans that are 2 subprime "cutoff" loans are made in the prime market. 3 Fannie and Freddie do a wonderful job of reaching 4 down where they can, and measuring and layering risk. 5 So I think this is carefully-worded, through 6 the Fed. I think you've got to look at risk 7 layering. 8 there are ways to get at it, and just say if you don't 9 have excessive risk layering, and I guess I heard say Excessive risk layering is a problem. 10 someone did it by, you know, a FICO cutoff. 11 That is a good cutoff. So I'm just suggesting 12 that a risk-basis, versus the market segmentation. 13 always work when they segment markets for one thing. 14 Then I think if you've had a current pay history on a 15 loan, a loan that's in your servicing portfolio, maybe 16 they don't want to document everything, to refinance 17 to a better loan. 18 I'm not sure a good pay history I and a 19 mortgage wouldn't be something that someone could just 20 say just don't even require the income and, you know, 21 make another loan. 22 it certainly can be given. 23 reasonableness 24 performance tests, and it's really quite similar to 25 that of the full doc loans. I mean there are instances where test, some Again, in our firm, that of the other things are NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 130 1 So that's what's made it difficult to just 2 say well, just get rid of them in the market, because 3 the performance over many years for that alone has 4 really been better than expected, I think. 5 MS. BRAUNSTEIN: I hear what you're saying 6 about performance, but would a ban on stated income, 7 are there people, certain profiles of people that just 8 wouldn't be able to get mortgage loans? 9 MS. SCHWARTZ: 10 mean just because 11 mortgage market. 12 would measure it. Oh, I have to think so, I it's so prevalent (Simultaneous discussion.) 14 MS. BRAUNSTEIN: Yes. the 16 it's 17 couldn't, 18 documentation necessary to get a loan? 19 be a rhetorical question. 20 21 or if broad But I just wonder is 15 easy, the I don't know the answer of how you 13 prevalence in because is it they it's there, because were MS. SCHWARTZ: Yes. it's somebody asked to available, really just produce the And that may I don't know the answer to that. 22 GOVERNOR KROSZNER: Janis had mentioned this 23 in her opening 24 this issue, because she said there were many people in 25 the Latin American community in the U.S. who may not remarks, and I want to get back to NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 131 1 have an easy way to document the income that or their 2 family are making. 3 MS. BOWDLER: 4 ownership 5 talked about again. 6 people on the earth not to have heard about it. 7 network, We start with the NCLR home But which last through you guys haven't kind of You might be sort of the last year our we closed 8 mortgages network, 9 organizations working in 21 states. almost 45 3,000 community-based They are working 10 with the population that is going to have the hardest 11 time documenting their income. 12 Ninety percent of our families are below 80 13 percent of the area median income, and a significant 14 portion 15 income, and they all get prime or FHA products. 16 are portfolio products, some are social programs that 17 they've negotiated on the ground. 18 prime products. are even below 50 percent of area median Some But they're getting 19 So we really feel like when it comes to 20 serving the low income, the immigrant community that's 21 going to have the toughest time in this area, we know 22 how to document those loans, how to underwrite them, 23 how to get them into homes responsibly. 24 25 That said, we know that in a lot of areas in the Filipino community, there are challenges NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 132 1 documenting true traditional means. 2 they can't document it by any means, but if we're just 3 talking 4 challenges. pay 5 So stubs my and W-2s, That doesn't mean there recommendation was may get be some the most 6 appropriate documentation available. 7 know, there's probably a hierarchy there. 8 it's hard to say that the market hasn't overreached 9 here. 10 Certainly, you I think I mean, Martin, how many -- what percent did you say? 11 MR. EAKES: Bear Stearns says that 60 12 percent of loans, subprime loans made in 2006 were 13 stated income, and other analysts have said as much as 14 45 to 50 percent. 15 MS. BOWDLER: Okay. It's hard to believe 16 that that percentage of the market doesn't have W-2s 17 or -- 18 MR. RHEINGOLD: 19 MS. BOWDLER: Or proof of social security. Yes, you know, all of these 20 different 21 loans. 22 has overreached here, and then, excuse me. 23 thing is that we know that there's also product out 24 there that accommodate for the moonlighters, as you 25 like to call them. things that you would need to document the I think there's no question that the market The other NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 133 1 There are plenty of prime products out there 2 that allow for a certain percentage of your income to 3 be cash income, up to a certain dollar amount. 4 So I've often seen like 20 percent could be 5 cash income up to $1,200 a month or something like 6 that, you know. 7 that allow you to account for all the numbers. 8 9 So There's plenty of products out there if you babysit on the side, you do construction on the side, you can account for that 10 income. 11 hear a lot from folks working on the ground is that 12 stated income is just a lot easier to put through the 13 system. 14 So what I hear the industry saying and what I But it's also more expensive for the this as pressure 15 consumer. 16 point, where our families have gotten taken advantage 17 of when they can document their income, have no idea 18 what the difference is between a documented loan and a 19 stated income loan, and now they're upsold for a more 20 expensive loan because it's easier to produce. So we've seen a real 21 So from our perspective, what we want to 22 avoid is just because you have multiple wage earners 23 and 24 document your income, and you're just automatically 25 thrown into these loans because they're easier and some cash income doesn't mean that you can't NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 134 1 more profitable. 2 I think it's really a sign of the failure of 3 mortgage lenders to be able to legitimately serve the 4 low and moderate income community. 5 GOVERNOR KROSZNER: be in 7 documentation for people who don't have the pay stubs 8 or W-2 forms? Sure. the of documentation MS. BOWDLER: used sort 6 9 would What non-traditional We've seen, in some 10 cases, letters from employers saying that they receive 11 cash income. 12 use regular check cashing receipts. 13 check cashing, which we know they use. 14 community uses them. You can use bank statements. You can You can use a Certainly our 15 So it can be groups that you regularly cash 16 a certain amount of -- maybe you cash the check, but 17 you don't use a bank or you may not have a full record 18 of that. 19 we encourage through the network is that families open 20 accounts, and that they routinely deposit their cash. 21 There can be other ways as well. But what So that's how we do it, and that's how we 22 try to encourage it. 23 that 24 dangerous. 25 as a whole is informed, but that's something that we may carry a Certainly, our population is one lot of cash, and that can be So underbanks and other bank populations NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 135 1 encourage. 2 GOVERNOR KROSZNER: But of course, that is 3 one of the challenges of being able to try to provide 4 credit 5 other, they don't feel comfortable with them being 6 part of the banking system. 7 products I to think people for who, people for who one are reason part of or the 8 banking system, it's much easier to do the kind of 9 documentation that they've been talking about. But I 10 -- you know, that's why I wanted to explore how can 11 we make sure not to cut off credit to people who've 12 been responsibly borrowing in this area, but they may 13 have, you know, particular challenges in being able to 14 provide appropriate information. 15 MS. BOWDLER: I certainly agree with you, 16 and I think in rural communities, in the colonials, in 17 areas where the banking system is not as developed and 18 not as usually acceptable, it's certainly an issue as 19 well. 20 But people's incomes come from somewhere, 21 and I think that we can be creative and really think 22 through how we can measure that. 23 dialogue there, and that I would certainly be happy to 24 participate in that and give you more of my comments. 25 Perhaps we need more But I do think that it is a very sensitive, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 136 1 and as I said in my comments, sensitive issue for our 2 community, and it's a careful balance, but one that we 3 are willing to come to the table and talk about. 4 MS. BRAUNSTEIN: I have a question. Again, 5 the fly in the ointment question is if you're told up 6 front you're getting a stated income loan and you 7 don't have the documentation, how is that unfair and 8 deceptive? 9 Anybody who wants to answer that. MS. BOWDLER: Well, I think what probably 10 happens. I mean I have the ads here. It says right 11 in there, don't have to document your income, don't 12 have to document your credit history. 13 I think what's deceptive about it is that 14 they don't know they potentially have another option 15 available for them. 16 that they don't have another option available to them 17 is one thing. But certainly, you know, the fact 18 (Simultaneous discussion.) 19 MS. BRAUNSTEIN: 20 How would that meet that standard? 21 MR. RHEINGOLD: Either unfair or deceptive. I'll pick up a little bit of 22 what Janis is saying, is in fact what we're talking 23 about, 24 choice. 25 mean is the that people, this isn't a question of I don't think consumers have actually -- I numbers are -- I mean it's a rhetorical NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 137 1 question 2 answer, is what is the rational explanation that 50 3 and 60 percent of subprime homeowners in the last two 4 years have decided that stated income was better for 5 them. 6 and So at I some point think if I'd you love sort to of have base the this 7 assumption that's what's happened is that consumers 8 suddenly have this great choice, you can have a stated 9 income loan or you can have an income. 10 You don't have to document by documentation. 11 They're all choosing stated income loans. 12 Well, that's not what's happening. 13 if people are given rational choice and said "Hey, you 14 give us your W-2, or you don't give us your W-2 and 15 the cost of your loan is going to be more expensive if 16 you don't give us that documentation." 17 They're going to choose. The fact is that "Oh no, well I'm 18 not going to bother handing you my biweekly W-2 form, 19 because I want to pay more for my mortgage." 20 that's not what's happening in the marketplace. 21 MS. BOWDLER: 22 MR. RHEINGOLD: 23 (Simultaneous discussion.) 24 MS. BOWDLER: 25 I mean And that -- I'm sorry. No, go ahead. What I was going to say is that I think what is actually put to families is look, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 138 1 you want that house? 2 the realtor. 3 you in there quick -- You've already seen my friend, It's going for sale, and if we don't get 4 MS. BRAUNSTEIN: 5 MS. BOWDLER: It's going to be gone. Yes. So I can get you a loan 6 in a couple of weeks, or you can wait, you know, 45 7 days. 8 families to have available for them to be making. That is not the real choice that we would want 9 Again, I would go back to, in an age of 10 information technology and the ability to improve our 11 automated underwriting systems, we should be able to 12 serve 13 communities with the same efficiency that we serve 14 other communities. low and moderate income and immigrant 15 So I would put -- we have been putting a lot 16 of pressure on our friends at the other end of the 17 table, to speed out those processes, so that families 18 do have a real choice, because I think that's the 19 question that's being posed to them, one of ease and 20 efficiency and quickness, not one of documentation. 21 22 GOVERNOR KROSZNER: Although I would -- go ahead. 23 MS. SCHWARTZ: Too much time down at that 24 end. 25 great, and I think, and I would just like to say, and No, not really. I think the points have been NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 139 1 the market has been overexuberant, and we all know it, 2 the last couple of years, the last couple of years. 3 But what I would suggest is it's not 4 perfect. But when you are buying loans or working 5 with brokers, when you're not there, you aren't at the 6 point of sale, and back to the choice, because this is 7 an important aspect. 8 We were also concerned about the same issue. 9 We're worried about fraud in the stated income loan. 10 That's classic. The borrower didn't even know she or 11 he had a stated income loan. 12 than any other issue on stated income, at least for me 13 and for Option One. 14 That was more worrisome So what we did is say well, what can we do 15 to make sure that's not the case? 16 you -- indulge me for just a minute -- just a few 17 bullet points on the disclosure we send the day we get 18 the loan application. 19 "You provided the" I'm going to read -- Okay. "Borrower 20 Acknowledgments. 21 gross income in Section V, Monthly Income and Combined 22 Monthly 23 Loan Application. 24 25 You provided the reported monthly Housing "You Residential Expense have Loan of the carefully Application Uniform reviewed to Residential the confirm Uniform that it NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 140 1 accurately states your income, your assets and your 2 obligations. 3 "You understand that you have the option to 4 apply for 5 which will 6 understand that your qualification for a loan is based 7 in part on stated income documentation. 8 9 a loan result using full in lower a income documentation, interest rate. You "You understand a stated income," in bold, "is not designed to allow for declaring inflated 10 monthly gross income, for the purpose of qualifying 11 for a loan." 12 higher than you actually receive, you may encounter 13 difficulty making your mortgage payments." 14 can go farther. 15 And finally, "if you stated an income MR. EAKES: Okay. 16 disclosure as you can make. 17 are -- So that's as good a How many of your loans 18 (Simultaneous discussion.) 19 MS. SCHWARTZ: It's at 60 percent, in the 20 40's, 21 function of the market. 22 good discussion. 23 type of things that were announced today. 24 25 in the low 40's. I think it But it's high. It's I don't disagree. It's a We do the other income limited doc So I think this is healthy discussion. But I'm just suggesting that there is more to this. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 a WASHINGTON, D.C. 20005-3701 www.nealrgross.com 141 1 MR. EAKES: 2 of stated income. 3 after 4 person's 5 efficient. that, but You know that something's coming if income, 6 Let me a give a strawman defense you the don't closing have to process document can be a more It's less cost, because you just simply take 7 a statement. 8 didn't 9 homeowners So long as that worked, meaning that it create or an catastrophic the losses investors, assumption that for which 10 there's income 11 correlated with loan performance. either basically is no the means longer 12 I mean and during the period of time where 13 housing prices were rising at 15 percent a year, 20 14 percent 15 assumption. 16 investors suffered losses or whether borrowers were 17 going to be foreclosed immediately. 18 another flipping refinance two years down the road. a 19 year in many markets, that was a valid Income was not the determinant of whether There was always In many ways, this issue has taken care of 20 itself 21 community, now that house prices have dropped two and 22 a half percent last year, are predicted to drop as 23 much as three percent this year, the investors are 24 going to be less tolerant of stated income, because it 25 no longer works. in the investor community. The investor That assumption is gone. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 142 1 2 This is simply old style banking. I mean even for us radical -- 3 (Simultaneous discussion.) 4 MS. SCHWARTZ: 5 MR. EAKES: 6 MS. SCHWARTZ: No. You're right, Martin. --to document income. Martin, you're right. The 7 market has reacted that now you're in the 30's. You 8 have probably stated income maybe more appropriately 9 than it's been priced. But I'm just saying that -- 10 and whether it's low documentation or stated income, 11 that's just historically been the fact of why that's 12 been in existence. 13 It's not just the only risk issue. Again, 14 loan to value, FICO, all those other things, people 15 don't make them over 90 percent LTV or whatever that 16 might be. 17 MR. EAKES: Because the estimate is that no 18 more than one to two percent of borrowers do not have 19 W-2s. 20 borrowers -- So that when a very high 21 (Simultaneous discussion.) 22 MR. CHANIN: Let me follow percentage up on of that, 23 because I have had a couple of discussions off the 24 record with some lenders, and it's gone like this, 25 that most people have W-2s; most people have pay stubs NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 143 1 or some form. 2 But there are discussions where the consumer 3 doesn't want to provide the W-2 because they have 4 other 5 additional income to declare, and it puts the lender 6 in an awkward position of putting down something that 7 they know is incorrect, when they've seen the W-2. additional, 8 9 as Faith alluded to, other So I have heard, at least anecdotally, is some part of this market. It goes to kind of Janis' 10 questions or comments. 11 loans, what are you doing for that practice or for 12 reliance on other family members who are not on the 13 note in terms of being obligated on the transaction. 14 MR. EAKES: So if you ban stated income So what I would say to that is 15 if we're going to base our policy on trying to serve 16 tax cheats, that's a challenge. 17 respond is we do a lot of loans with Latino families, 18 and 19 income and pay tax returns. virtually 20 So 21 between low 22 borrowers 23 returns. every I don't income and single or failure want The part that I would borrower declares to an Hispanic to have or declare their association African-American income on tax 24 I just think if we're talking about personal 25 responsibility in the marketplace, that shouldn't be NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 144 1 our first concern, tax cheats. 2 basis for maintaining stated income. 3 MR. CHANIN: No, no. It shouldn't be the It's not a matter of 4 that being the basis. 5 dilemma 6 institution, and the institution says no, we can't do 7 this. 8 to someone who will. 9 when the That's the, if you will, the borrower comes to that financial Then what I've heard is then the borrower goes MR. EAKES: Pay your taxes. That's why if 10 you have a rule that applies to all lenders, they 11 can't find another outlet. 12 MS. DAVIS: Let's take some turns. 13 MS. SCHWARTZ: 14 MS. DAVIS: Okay. I just have to add some clarity, 15 because we've brought up the tax cheat situation, and 16 I want to -- 17 (Laughter; simultaneous discussion.) 18 MS. DAVIS: We do it for other reasons, ease 19 of convenience being one of them. 20 like we're coming at it from different angles, and I 21 still believe we all have this same best interest of 22 the consumer, giving them credit, helping them get in 23 the homes and helping them succeed. You know, we sound 24 In the non-prime loans, there are a lot of 25 people that are in homes and are making payments, and NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 145 1 are doing very fine and that's a very good thing. 2 lot of what has happened over the past three years has 3 enabled them to do that. 4 I still go back to when 5 stated income. 6 things. 7 me is the ability to pay. 8 almost every part of this conversation. you talk A about We've talked about just one of many It's just one factor. We talk about what to We've referred to that in 9 In order to have the ability to pay, you 10 have to have income and you have to have willingness 11 to pay. 12 fact that I can provide a document, does not mean it's 13 real, Okay. 14 On income, we've heard Bill talk about the There is fraud. Anybody can do anything. So as lenders, you have to be very good 15 underwriters. 16 consumers that you're serving. 17 understand what Pablo said, is that reasonableness. 18 Is that reasonable? 19 moderate income job and it disclosing an unreasonable 20 amount of income, does that make sense? 21 factors together in this picture make sense? You have to be able to understand the You need to be able to Is the person that is in a low to Do all of the 22 Not just one in isolation, but all of them. 23 I think we are making more out of stated income than 24 maybe really is necessary. 25 a place for it. I think there is a point, I think there are concerns relative, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 146 1 in terms of our bright line, of where we said we're 2 really 3 support under a 620 FICO. 4 step too far. 5 uncomfortable because there's not enough But I think we're going a GOVERNOR KROSZNER: This might be a good 6 transition, because I think you're right. 7 very close relationship between some of the things 8 we're discussing right now and Janis had mentioned 9 this as an issue. 10 The ability to document may There's a also have 11 something to do with affordability of products that 12 are being offered to people. 13 issues that I want to discuss. That was one of the last 14 Something I did want to make sure that we 15 came back to, because it was mentioned just briefly, 16 is the relationship between risk layering and other 17 affordability 18 because I think that's one of the challenges. or risk layering and documentation, 19 It's not just that, you know, you get the 80 20 percent loan, but it's also when you do the 80-20, and 21 have that other piece on it. 22 challenges to people, when they really have no skin in 23 the game to be doing that. That poses a lot of 24 Then if there's just slight changes in the 25 market, getting back to what Martin was just talking NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 147 1 about, very slight variations in the market can lead 2 to very different behavior, than if you don't have 3 that same kind of risk layering. 4 So there might be some sort of interesting 5 interaction between risk layering and -- affordability 6 issues and risk layering and documentation. 7 just wanted to sort of move in, not say completely 8 move away from the stated income and low documentation 9 ideas, because I think they're related, but to move us 10 a little bit towards the broader ability to pay and 11 affordability discussion. 12 MR. EAKES: But I The risk layering is very hard 13 to 14 examination guidance, because then you can go in and 15 check, line by line. 16 bright 17 possibly bad features, or you can have two of the 18 five. do. It line 19 makes rule, It very sense you work have for a 20 standard. 21 discussion in a different context. 22 to have in It's very hard to say, in a when doesn't good four of bright the line five rule I think risk layering, it's a different MS. COHEN: Well, speaking of risk layering 23 and no doc loans, one of my favorite recent examples 24 of this issue is a self-employed couple. 25 lobstermen in Maine. They're They've got a broker fee of NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 148 1 5,000, and a yield spread premium of 8,000 bucks, an 2 inflated appraisal, an inflated title insurance, and 3 their monthly payment now is more than their income. 4 They're self-employed. So they have to pay 5 for their boat and their, you know, lobster cages and 6 all the other things. 7 can't resolve this through a checklist, as Martin just 8 described, the source of the problem in this loan is 9 that it's a no doc loan. So we have a problem, and if we 10 Because if you actually look at what the 11 people could afford, they never would have gotten the 12 loan to begin with. 13 inflated appraisals, but they're not unrelated. 14 We separately need to resolve What Janis was talking about before makes it 15 extremely 16 income, 17 unconventional 18 falsified. 19 can tell you that on a routine basis, they see Uniform 20 Residential Loan Applications, which by the way is 21 many more words and many more syllables than anyone 22 can 23 disclosure. and You the flip income can document side is of unconventional not that it is documenting regularly There are lawyers around the country who understand. 24 25 clear. Where Maybe income you can compensate is falsified, income, rental income, that is routine. with babysitting So it is NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 a www.nealrgross.com 149 1 incumbent upon the Fed to some way to create a rule 2 that says you have to verify that income. 3 without requiring verification of that income, you're 4 allowing 5 serious problem. qualification 6 of that income, It is and it's a It is universally understood by people who 7 talk to abused 8 serious root of the problem. 9 consumers MR. BREWSTER: that no doc loans are a I'd like to respond to that. 10 I believe that -- I was actually thinking that I was 11 really gratified that people were saying that fraud is 12 Okay. 13 clearly. Everybody was saying take this and focus very You should get fraud. 14 I've seen the if you lie exposure 15 that 16 anything, then that's fraud. 17 for 18 connected, on stated income. says Martin on that on the that's out application there, about I had kind of a question issue, which was somewhat 19 One of the rationales for a stated income 20 loan is that it's easier to do it more efficiently. 21 Doesn't that argue that it should be cheaper? 22 was cheaper to the consumer, would that make it Okay? 23 If it Because I'm hearing two arguments. 24 One is that consumers will be pushed into 25 stated income loans because the price is different. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 150 1 But then what Alys just said, that the stated income 2 loans give consumers a choice, basically, to not tell 3 the truth. 4 And somehow, even though we have rules that 5 say that you shouldn't lie or exaggerate, now you're 6 given the freedom to state your income how you want. 7 It is freedom to lie, and I don't think that that is 8 something we can regulate. 9 10 There's already rules out there that say you shouldn't lie, that it's a crime. 11 MS. COHEN: I'm all in favor of not lying. 12 The question really is who's lying. 13 stated income loans are known as liar loans. 14 the standard description of them in the industry, and 15 it's not because the borrower lies. 16 loan originator. 17 Now no doc loans, That is It's because the That is the standard -- MR. BREWSTER: Hold on for a second. We 18 don't accept liar loans as a standard. 19 it and Fannie Mae certainly doesn't think that that's 20 appropriate. 21 think 22 mischaracterization, because 23 there's there 24 specifically that it's not a liar loan. 25 want to make that clear. that's I know we hear But I understand people say that, but I a lenders mis-definition. out as that I a are think basic it's example, telling people So I just NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 a www.nealrgross.com 151 1 MS. BRAUNSTEIN: Well, my question if it is. 2 So we're not going to make -- 3 MR. EAKES: you think If you really reach a point 4 where income does not correlate with 5 performance, you don't need to have stated income or 6 anything. 7 dealing with income. You just stop having a form of any sort You just do away with it. 8 And if you can save $300 in closing costs, 9 that's $3 million subprime borrowing, you're going to 10 have a billion dollars of potential savings that could 11 pass through to consumers. 12 The problem is that's not how it really 13 works, and without wanting to sound too moralistic, 14 that 15 statistics that I think that 90 percent of stated 16 income loans are exaggerated by 10 to 20 percent. 17 I've heard the statistic of 50 percent stated income 18 are exaggerated by more than 50 percent of income. it is Southern and preachy, I heard the 19 If we have a mechanism in place that when 20 the borrowers or originators or creditors or lenders, 21 that 22 commercial transactions, it's not good for the overall 23 ethical standards within the industry. we 24 25 are I occurred inducing think over people that the that last to lie really three or routinely is what four in has years, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 152 1 particularly in the subprime market. 2 just 3 dishonesty. 4 at, it's not a good thing. not like, it's just a gap. It really it's It's inducing Regardless of who you point the finger 5 If we can say that it is irrelevant, that 6 income is not -- does not add any value over and above 7 a FICO score, then let's do a FICO score because it's 8 so cheap. 9 out, now that price appreciation is starting to level 10 But that's not really what we're finding out. 11 We're finding that income does matter, and 12 the level from these Bear Stearns reports I've seen, 13 we need later 60 percent of the loans that have stated 14 income, 60 percent of the loans in 2006 that have 80- 15 20 16 friends 17 because they were never added up to 100 percent of the 18 value. first and say, second, well, and we as call some them of my industry jokingly 90-20, It's always 110 percent of the value. 19 You get catastrophic results from 40, 50, 60 20 percent. 21 combine those two later. 22 You get huge loans or defaults when you MR. CHANIN: You can't sustain this. Can I follow up on that, just 23 in terms of what income matters, that's kind of a 24 secondary 25 whether income matters. debate. There is some question as to But debt to income certainly NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 153 1 matters, 2 ability to repay and how you address that. 3 and there There is have this been notion some of borrower's suggestions, and I 4 don't recall specific state laws, but certainly bills, 5 that 6 will, debt to income ratio of 50 percent, saying that 7 if the debt to income ratio is 50 percent or less, 8 then that loan is presumptively legitimate. have said a presumptively legitimate, if you 9 Some laws have said the fact that it's over 10 50 percent doesn't mean it's not valid and so forth. 11 But are there, I guess I'd like to get some comments 12 on debt to income ratios, how you measure ability to 13 repay, whether it is feasible to have a standard and 14 what the fallout might be from any such standard. 15 MR. SANCHEZ: Let me jump in here, because I 16 just don't want to let that comment that it's the loan 17 officers out there are the liars, etcetera. 18 we bear a level of responsibility to how we do and how 19 we train our sales people and how we do it. 20 I think But the consumer's part of the transaction 21 too, right? 22 is a stated income problem and it is all because of 23 the lenders and because they're all benefitting from 24 it. 25 And so I think we shouldn't just say this There are folks that do this business the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 154 1 right way, and I just would hate to have that as the 2 last record here, that it's all the lenders' fault 3 that this is happening. 4 MR. EAKES: Harry will tell you that 5 generally, we lenders and advocates join together and 6 beat up on the brokers, right. 7 (Laughter.) 8 MS. COHEN: 9 10 11 Pablo, I appreciate that, and I think there are a lot of -- I like my mortgage broker. I told Harry that. I like my mortgage lender. I've had some questions about some of my services. 12 I want to be very clear with people, because 13 it's been my experience that people don't understand 14 what real human beings experience when they get a 15 subprime loan. 16 So let me tell you. They don't fill out an 17 application. 18 advance. 19 experience. 20 representing legal services lawyers all over America 21 who tell me this. 22 They don't get any documentation in Generally speaking, this is what our clients When I say "our clients," I'm This is standard. They show up at the closing. They don't 23 read any of the papers. 24 experience; that's what happens. 25 the most part, that their income is falsified because They generally have an oral They don't know, for NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 155 1 they haven't read the written or the typed version of 2 the application. 3 They didn't get an estimated TILA, for the 4 most part. If they did, it's a day in advance, and 5 then they sign on the dotted line. 6 the side of the road on top of a car or at a diner, or 7 in their living room where they're busy showing their 8 children's pictures to the broker and the lender who's 9 in their living room. Sometimes, it's on 10 So we need to think about what the real life 11 experience is of somebody when we're talking about 12 what's happening. 13 MR. SANCHEZ: 14 But I will tell you this, right. And I would agree with that. 15 MS. COHEN: 16 MR. SANCHEZ: That's not the preponderance 17 of people's experience. I grew up in this business as 18 a 19 mortgage I ever did was for a person who got into debt 20 a little bit over her head. 21 no, we're not going to help you. 22 consumer finance organization. We consolidated her 23 debts, saved her $750 a month. She baked me a banana 24 bread. 25 pound then; I'm 240 pounds now. non-prime loan And Harry may ask you that. officer, right. The very first All the banks said to her It was part of a I had not done a lot of loans. I was 140 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 156 1 (Laughter.) 2 MR. SANCHEZ: Right, and it was properly 3 disclosed. She knew what she was signing. 4 don't want to paint the whole business as this is the 5 way that it transacts. 6 MR. CHANIN: 7 MS. COHEN: 8 MR. CHANIN: 9 because we don't have much time. Can we move on -Can I ask you a question? No. I'd like to move on, 10 (Simultaneous discussion.) 11 MS. COHEN: 12 MS. BRAUNSTEIN: 13 So I just I'm answering your question. That was your idea of the 50 percent DTIs. 14 MS. COHEN: You know, I think that good 15 people specific question, 16 about whether there should be a cap or not. But there 17 appear to be people who can pay above DTI, and there 18 appear to be people who can pay above 50 percent, and 19 there are people who can't. can disagree about the 20 Whether or not you have a percentage that 21 you're looking at, if they don't have enough cash to 22 pay their exploding energy costs and their child care 23 and their transportation and their medicine, which may 24 not be insured, it's irrelevant what their DTI is. 25 So both of those analyses seem relevant. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 157 1 And then the question is what do you do for people on 2 social security, who are having their income grossed 3 up. 4 228 made to buyer who was on social security. 5 refinancing 6 she's 7 percent of her social security, her take-home income, 8 towards her mortgage. I have in front of me a Wells Fargo loan. over paying 9 $10,000 about 50 in credit percent of card her It's a It's debt, and income, 50 There's something wrong with that picture. 10 So the question is, how can we get at that? 11 a complicated set of -- a list of characteristics, 12 rather than if you go over this number, then it's okay 13 or not okay. 14 It may be Not complicated, but a list. MR. RHEINGOLD: And I think the point, part 15 of that point is when you figure out what that DTI 16 standard is, is that residual income is an important 17 part of that factor as well. 18 have different levels of income. I mean because people 19 So you need to actually factor not only debt 20 to income, but actually how much money is really left 21 in 22 expenses that people have today. 23 just a sort of okay, this is the limit, because it 24 varies based on what people's actual income is, and 25 what income they have. their pocket that can afford to pay all the So I think it's not NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 158 1 MR. DINHAM: I would agree with that 2 statement, because the VA has been doing this for 3 years. 4 I can't remember the exact number. 5 so much for the husband and wife and so much for every 6 child, and you have to have leftover. The VA comes out with a 45 percent ratio plus, You've got to have 7 I don't know how that takes into account for 8 what Alys was alluding to, about the uninsured drugs 9 or anything. But at least you're doing something to 10 be sure that the person does have enough to live on 11 after they get into the home. 12 So I think that is something that we can all 13 learn to live with. 14 have been looking at and we haven't been looking at. I think it's something we should 15 These percentages, you know, we stretched 16 them when the young kids got in in the beginning, 17 where they were doing the 2836 and just starting on a 18 house, and most of them all worked out. 19 But they were still stretching on the 95 20 percent loans. 21 backside, we'll all be a lot better off. 22 MR. So I think that if we look at the EAKES: FHA and VA are really a 23 datapoint that we should look at. Their maximum debt 24 to and 25 residual income that both Alys and Harry are talking income ratio is 41 percent, they do this NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 159 1 about. 2 3 4 They still have a default for any years with the loans. It's somewhere between 15 and 20 percent. So it's relatively high at 41 percent. There's no 5 way, without fixing those other income factors, that 6 you can have a 50 percent debt income limit and have 7 any kind of sustainable number of people make those 8 loans. 9 So somewhere between 41 and 50, you have set 10 debt-income. Here, I wanted to slide away to the 11 lender side. You know, I've got five billion dollars 12 of loans. 13 about ability to repay, I want you to have a debt- 14 income ratio specified bright line in this rule. I'm telling you if you put something in 15 My reason for that is I don't want to slide 16 over and have something that -- I want to be able to 17 know precisely that I've made a good loan, and that 18 you're not going to subject me to liability. 19 I would say that I believe 50 percent is too 20 high. 21 percent. 22 percent debt-income presumption in one direction or 23 the other, is because -- and I was involved in many of 24 those laws across the country -- is because HOEPA had 25 it. However, within HOEPA itself it uses the 50 The reason the different states have 50 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 160 1 HOEPA had in there a 50 percent debt-income 2 presumption. So we triggered off of that around the 3 states. 4 right trigger, but because we didn't feel like we had 5 another 6 really closer to what it should be as a maximum. Not because we really believed it was the federal 7 standard MS. BOWDLER: for 41 percent, which is I also just want to add -- 8 take the time to agree with Harry, because normally I 9 just wanted a little bit of detail which I want to 10 focus on the most and I don't get that opportunity 11 often. 12 But NCLR has been doing a series of 13 roundtables 14 Association of Real Estate Professionals, interviewing 15 mortgage brokers, practicing mortgage brokers. 16 done two cities. across the country with the National We've We've got four more this month. 17 What they are telling me is that exactly 18 what Harry described, the standard best practice for 19 them, something that they would consider important for 20 any originators to be doing, which is to sit down and 21 understand the totality of the consumers' situation. 22 So 23 situation is and what their financial goals are, and 24 then therefore their residual income and what they 25 have available. their understanding of what their financial NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 161 1 So the idea that Alys proposed, of a list of 2 minimum understanding 3 think, is important to this conversation and it also 4 goes to ability to repay as well. 5 of MS. BRAUNSTEIN: a person's situation, I Down at the industry end, 6 I'd just like to hear what you think about bright line 7 standards 8 wasn't in guidance; if it was somehow codified in the 9 national rule. for 10 MR. ability to BREWSTER: repay, There's especially if it just a lot of There's a lot of 11 documents 12 conventional 13 standards. 14 put it in a single standard, unless you take into 15 consideration 16 there. on this subject. documents that have FHA-VA minimum I think it's going to be very difficult to all the other standards already out 17 I mean a couple of years ago, when I started 18 as a loan officer, as Harry mentioned, there's 28 19 versions 20 underwriters are just not going to go past that. 21 business changes. 22 now is not rules-based but it's guidance-based. 23 of 24 nuances than just relying on a bright line standard. it's 25 of the conventional standards, and The A lot of the stuff that's out there automated underwriting. MS. SCHWARTZ: I agree. So there's A lot more I think if you do NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 162 1 anything in rule-making, it has to be clear. 2 just that to be processed, there's a lot of damage 3 that could be done. 4 But it feels like it's such a It's dynamic 5 process to underwrite a loan. There's just so many 6 factors, so many differences that in a sense, the 7 guidance on how to deal with it might be better. 8 Just as an observation, I think if you do 9 any rule-making on it, you're going to have to be very 10 careful, like with that 2836. 11 making, you know, you would have had a far different 12 standard ten years ago. If that were in a rule- Some of us might have -- 13 (Simultaneous discussion.) 14 MS. SCHWARTZ: We have had -- we do have a 15 record of brokers in the market and it's not all bad, 16 that's for sure. 17 MR. SANCHEZ: And I would add that I think 18 we have a fairly sophisticated way of looking at the 19 performance of loans, and I particularly wouldn't want 20 to see a bright line rule around 50 percent. 21 we need to have the flexibility. 22 space, I think that's very reasonable. 23 I think In the non-profit As long as we have to implement this, if we 24 believe 25 consumer, then our prevailing performance, our best this to be true and reasonable for that NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 163 1 performance needs to be measured. 2 just do whatever we want, right. 3 We have folks to answer We don't get to to. We've got 4 profitability standards that we've got to meet, and 5 quite frankly, neither the consumer nor us would want 6 to be in a situation where we're foreclosing or have 7 somebody that's not having the ability to repay their 8 debt. 9 So I think we're fairly sophisticated around 10 being able to decide that for ourselves, as long as 11 the secondary market is for us. 12 sure that the income is real. 13 MR. EAKES: But we've got to make If we give an ability to repay 14 and a debt to income, we must take into account this 15 80-20 problem, the second mortgage. 16 sense to have a first mortgage that is whatever size 17 it took to meet an ability to repay a debt income 18 standard. 19 Yet there's this other It would make no part of the 20 transaction that is somehow behind closed doors still 21 related 22 incorporate what is a dominant practice, at least in 23 2006, of the second mortgage problem. 24 25 to it. So MR. SANCHEZ: somehow you will need to Martin, are you saying that you feel the piggyback second is not factored into the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 164 1 debt to income ratio? Is that what you're saying? 2 MR. EAKES: 3 MS. BRAUNSTEIN: 4 need to be I'm just saying it needs to be. Absolutely, and that would spelled out, is what you're saying? 5 MR. SANCHEZ: 6 MS. BRAUNSTEIN: 7 Right. So that people, that wouldn't be a loophole. 8 9 Yes. MR. SANCHEZ: And that is something we've done and have always done as part of that tradeoff. 10 MR. EAKES: Chase actually, just if I can 11 give you a little plaudit, for at least the last five 12 or six years, has had the lowest delinquency of any 13 subprime lender. 14 tighter 15 lender, and we recognize it. ability So you clearly are underwriting to a to repay than 16 MR. SANCHEZ: 17 GOVERNOR KROSZNER: any It is noon, and that was some agreement, which was good. 19 (Laughter.) 20 GOVERNOR KROSZNER: important 23 panelists for taking the time to come with us. 25 I a number we've 22 and of think really 24 discussion I 21 issues, other Thank you for saying that. 18 robust virtually really of had a extremely appreciate the I really appreciate the honesty and exchange of information that we've had. Let's break for lunch NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 165 1 and we will reconvene promptly at one. 2 MS. BRAUNSTEIN: Can I just -- one note. I 3 just want to remind people, if you're planning to sign 4 up for the open mike session, that there's a table 5 right outside the door, and you should make sure to do 6 that. 7 8 Thank you. (Whereupon, at 12:03 p.m., a luncheon recess was taken.) 9 10 11 12 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 166 1 A F T E R N O O N S E S S I O N 2 1:09 p.m. 3 4 5 GOVERNOR started. KROSZNER: Thank you. All right. We'd like to get We'd like to get started again. So thank you very much for coming back, 6 and it's a few minutes late. What I think we're going 7 to do is go through this panel. 8 approximately two hours and we'll end it around three 9 o'clock. It's going to be We'll take a very, very short break and then 10 go to the open mike session after that and finish 11 hopefully right around four o'clock or a few minutes 12 after four. 13 So this afternoon's panel is thinking some 14 of the perspectives on rule-making initiatives from 15 the state government and researchers' perspective. 16 have once again a superb panel. 17 same ordering as last time, and start down at the end 18 with Tom Miller, who's down there? 19 We Why don't we do the From the attorney general of Iowa, and the 20 same rules. 21 that will leave a good amount of time for some robust 22 discussion. 23 Five minutes for opening statements and Tom? MR. MILLER: 24 much. 25 on Thank you. Thank you very Thank you to the Federal Reserve for embarking this process. I think it's a very important NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 167 1 process and discussion, so hopefully the rules and 2 regulations then comes out of this. 3 Like I said, it's so important for this 4 reason, that there's really been a significant change 5 going forward in consumer protection enforcement in 6 our country, in the financial area, because of the 7 preemption that 8 ultimately supported 9 United States in Waters versus Wachovia. 10 was taken by by the the OCC, Supreme and Court then of the This has given considerably more power, as a 11 practical matter, to the federal agencies. 12 comes 13 responsibility, 14 here, people's finances regarding their homes, cars 15 and other items. responsibility, 16 So because we're at very, of a what very With power very we're important dealing important with point in 17 consumer protection in the United States. 18 federal agencies, the one with the greatest power is 19 the Federal Reserve, for a whole host of circumstances 20 and legislation and history. 21 That's probably a good thing. 22 Reserve 23 staff, tradition. 24 questions, 25 questions. has an has incredible reputation, Among the The Federal incredible It has the ability to resolve these the credibility to resolve these NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 168 1 So in a sense, this is a fitting way to 2 wonder through this maze of preemption, and hopefully 3 come to a very good conclusion. 4 issues that have been identified for discussion in 5 this process are very good issues. I think that the four 6 The one that I'm the most concerned about, 7 as a state attorney general, is the ability to pay. 8 You 9 AmeriQuest case, the Household case before that as know, 10 well. 11 area. 12 I was the lead attorney general in the We've done, we think a lot in the subprime It's very painful to see what has happened 13 in the last couple of years. 14 trigger has been the 228s, with the ability to pay for 15 two years, not the ability to pay for the 28. 16 the prime driver in this enormous foreclosure mess 17 that we find ourselves in, both in terms of the people 18 involved, the borrowers and the people that own the 19 loans. In our view, the biggest That is 20 You know, common sense tells us that if you 21 take out a loan, you should have the ability to pay. 22 Not just for a short time, but over the course of the 23 loan. 24 benefit the lenders, namely in the fee areas. 25 You know, some practices that hurt consumers But in this concept, it works against both. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 169 1 It's bad for the borrower and it's bad for the 2 ultimate investor or lender, because in this context 3 certainly, 4 against their interest, it's also against the interest 5 of the lending side, because the consumer ultimately 6 can't pay. 7 when We consumers have the are abused, marriage of when both it's consumer 8 protection and safety and soundness in this criteria, 9 in this proposal. So I would strongly encourage the 10 Federal 11 regulations concerning the ability to pay. 12 Reserve to Common go sense ahead and supports make it; strong consumer 13 protection supports it; safety and soundness supports 14 it. 15 think 16 important, in my view, is the stated loans. Briefly then on the other three, all of which I 17 are important, probably the second most As a practical matter, am I moving too much 18 here? 19 don't violate the law in terms of stated loans, and 20 there are other companies that violate it very, very 21 often. 22 As a practical matter, there are companies that This is a serious problem. It is 23 potentially a criminal problem. 24 be cleaned up. 25 whether there's tight restrictions that make sure we Stated loans have to Whether they're totally banned or NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 170 1 don't have the problem in the future, it has to be 2 done either way. 3 unacceptable. 4 The current situation is totally I do support also the changes in prepayment 5 penalties. We don't have prepayment penalties in Iowa 6 and consumers and lenders survived just fine, and I do 7 support the escrow. 8 Finally, I want to mention briefly what I 9 mentioned yesterday, and that is that in the subprime 10 market, if the major players were to all work together 11 on an ongoing basis, using our powers and anticipating 12 problems, this industry could be cleaned up. 13 When I say "the players," I mean the Federal 14 Reserve, 15 attorney generals and the state banking regulators. 16 the OTC, the OTS, the FDIC, the state This is an area where the states do still 17 have considerable power. 18 group where we had our most active and knowledgeable 19 people working all the time, consulting all the time, 20 what are you doing, what are the problems, what is 21 your progress, how do we solve it with the principals 22 involved at the appropriate time, we could clean up 23 the subprime market. 24 25 If we developed a working Thank you. GOVERNOR KROSZNER: very much. All right. Thank you Let's move on to Mark Pearce from North NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 171 1 Carolina. 2 MR. PEARCE: Great. Good afternoon, 3 Governor Kroszner and members of the staff of the 4 Federal Reserve Board. 5 I'm Deputy Commissioner of Banks for the State of 6 North Carolina. 7 The and Office My name is Mark Pearce, and of supervises the Commissioner 8 licenses 1,600 mortgage 9 brokers, and 17,000 loan officers. of Banks lenders and Thank you for 10 permitting me the opportunity to talk today with you 11 about 12 HOEPA regulation. 13 opportunities to ban unfair I do not envy your task. practices We are the world's 14 best, 15 delivery system in the world, bar none. 16 forces 17 diligence systems. 18 most have innovative outpaced most competitive regulatory under mortgage Yet control market and due The private market has not prevented abusive 19 lending or improvident lending. 20 led to foreclosures. 21 weigh the pressing need to reduce abusive lending with 22 the recognition that market innovation has helped many 23 homeowners through increased choice and lower costs. Weak underwriting has Thus, the Federal Reserve must 24 So my comments today I'm going to offer you 25 North Carolina's experience with these issues, and my NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 172 1 views on the today's marketplace. 2 Despite the challenges, I believe HOEPA can 3 be updated to address problems in the marketplace, 4 without hampering innovation or access to credit. 5 1999, my home state of North Carolina enacted the 6 first state-level supplement to HOEPA. 7 Over the past eight years, studies In have 8 tried to assess the impact of North Carolina's law, on 9 both abusive terms and on access to credit. 10 question 11 nearly 12 shock, stated income, lack of escrows. is important irrelevant 13 While to is worth today's researchers Why this studying. debate built It about models is payment and while 14 policymakers debated, market participants adapted to 15 North 16 Unscrupulous 17 advantage of vulnerable homeowners. Carolina's law, lenders without developed missing new a tools beat. to take 18 Products designed for high income and more 19 knowledgeable borrowers as an exception, they became 20 the 21 knowledge. norm 22 for borrowers In 2001, with North poor credit and Carolina enacted supervision scheme 23 comprehensive 24 mortgage brokers, lenders and loan officers. 25 interest of licensing time, I'll and refer you to my less a for In the written NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 173 1 statement on our experience in trying to regulate this 2 increasingly fragmented origination system. 3 It's been a work in progress, and it will 4 continue to be a work in progress, as the states work 5 together 6 cooperative efforts. on a national licensing system and other 7 In addition to licensing, North Carolina law 8 sets out duties expected of the mortgage originators. 9 We have principle-based standards that we use to get 10 rid of the bad apples in the marketplace. 11 However, principle-based rules alone do not 12 provide the clarity that's needed to channel 13 origination activity away from abusive loan terms. 14 now it is old news that capital markets' appetite for 15 mortgage securities, coupled with too many mortgage 16 originators chasing too few loans, has led to poor 17 underwriting and to mortgage fraud. By 18 In North Carolina, we've seen the selling of 19 loans based primarily on the initial monthly payment, 20 the use of loan products that lead to payment shock 21 two or three years down the road. 22 Subprime loans without checking borrower's 23 income, and loans with false information in the loan 24 documents. 25 foreclosures While North Carolina has suffered fewer than many other states, our evidence NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 174 1 supports the notion that payment shock and mortgage 2 fraud are built into too many subprime loans. 3 The Federal Reserve can reduce abusive 4 lending that we have witnessed in North Carolina by 5 updating 6 prohibitions, 7 subprime home loans; ban most stated income loans in 8 the subprime market; require the escrow of taxes and 9 insurance its HOEPA such in regulation as the ban subprime with a prepayment loans; few clear penalties and to and require 10 lenders, as Tom Miller said, to consider a borrower's 11 ability to repay the loan. 12 In addition, I encourage the Federal Reserve 13 to 14 mortgage process. 15 of 16 testimony a discussion draft of a model disclosure 17 form that we hope has the effect of providing not too 18 much, not too little, but just the right amount of 19 information to help borrowers make informed choices. fix State 20 the broken Bank system of disclosures in the On behalf of CSBS, the Conference Supervisors, I have included in my Now that being said, good disclosures will 21 not prevent bad loans. Recent problems in the 22 subprime market have exposed both the strengths and 23 weaknesses of relying on markets to ensure responsible 24 lending. 25 for irresponsible lending practices. Lenders and some investors have paid a price NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 175 1 At the same time, irresponsible practices 2 have had a devastating impact on too many families and 3 their 4 protect our most vulnerable homeowners. communities. Market forces alone will not 5 As regulators, we must use the right tools 6 at the right times, to keep pace with changes in the 7 marketplace. 8 1994. 9 HOEPA did not solve predatory lending in The North Carolina predatory lending law in 10 1999 did not solve predatory lending. 11 and the statements that we've been issuing and working 12 together 13 sufficient. on, they're helpful, The guidance but they're not 14 I respectfully urge the Federal Reserve to 15 update HOEPA now, while recognizing that even these 16 measures will 17 lending. Thank you. 18 19 not GOVERNOR be the last KROSZNER: word Thank on you predatory very much. Let's now turn to Ren Essene from Harvard. 20 MS. ESSENE: Thanks. I want to start today 21 by thanking you, Governor Kroszner and of course the 22 Federal Reserve Board, for inviting me here today. 23 I'm a research analyst at the Joint Center for Housing 24 Studies at Harvard University, which is one of the 25 nation's leading sources of information and analysis NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 176 1 on the housing market. 2 My testimony today derives from two 3 recently-released reports. 4 website, that I co-authored with my colleague, Bill 5 Apgar. 6 These You can find them on our studies behavior and explore how very some specifically 7 consumer mortgage market 8 players, some, take advantage of consumer decision- 9 making weaknesses. 10 We also have data that looks at the segments 11 of the marketplace, and suggests that higher-priced 12 loans flow through distinct channels. 13 recent 14 evidence that many families are taking on debt to get 15 mortgages that they don't understand, and that are 16 typically not suitable for their needs. upsurge 17 We in foreclosures, looked at the In light of the there's economics and growing market 18 research, 19 malleable, 20 influence, 21 pricing, 22 consumers find it difficult to shop in the complex 23 marketplace of today. and found consumers consumers and even that consumer are lack some preferences vulnerable an of awareness the most are to outside of mortgage sophisticated 24 Unfortunately, some mortgage providers use 25 this knowledge to aggressively push market specific NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 177 1 products that may 2 borrower. 3 choice, aggressive 4 actually play 5 knowledge. So not be instead of and into a in the interest supporting misleading consumer's an of the informed marketing fear and can lack of 6 Beyond, we look at the incentive structures 7 of mortgage brokers and loan officers, and we see that 8 some 9 Specifically, where 10 features terms, 11 obtaining the best mortgage for which they qualify. of 12 them and create it may additional relates result challenges. to specific in consumers loan not This can really worsen a consumer's economic 13 circumstance. 14 structure 15 regulations have played an essential role in promoting 16 a fair and efficient marketplace, by clearly defining 17 these 18 practices. as ethical 19 Problems well. industry Unfortunately, exist in the Historically, standards some non-bank regulatory the and federal consumer lenders and 20 brokers operate largely outside the federal regulatory 21 structure. 22 the channels is that the most vulnerable borrowers in 23 our country are less likely to benefit from federal 24 consumer protections that are generally present in the 25 prime market. So therefore, what we find in looking at NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 178 1 So this lack of regulatory uniformity 2 actually distorts the market activity, and as less 3 regulated 4 reduced 5 competitors. 6 efficiency in the marketplace right now. market segments regulations exploit over their the advantage more of regulated So we really have kind of a lack of 7 The two Joint Center papers that I mentioned 8 earlier suggest a range of solutions, and I won't go 9 through all of those. But I'll just speak to the 10 consumer point, that letting the consumer decide has 11 distinct limitations, and efforts must be expanded to 12 guide consumers to good loans. 13 So specifically we look at how we changed 14 disclosure regulations to enhance consumer shopping, 15 and knowing that often they come too late. 16 to this in our Q and A, because I'm about to run out 17 of time here. 18 I'll get But we make sure we match it to improve 19 timing. 20 the ability for disclosures to have an impact for 21 consumers in their shopping. We know that the timing issue really limits 22 We also believe and even apply some of our 23 consumer principles to lead consumers to good loans. 24 So I think some of the suggestions around setting 25 defaults, specifically around the escrow, where you NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 179 1 really encourage a consumer to opt-in to the good 2 choice, 3 circumstances. while 4 allowing for opt-outs These are good things. in certain It's what we learn 5 from consumer behaviors for setting defaults, and I 6 think 7 appropriate default solution. that's 8 9 a perfect Lastly, the example federal of how to set government an should establish uniform minimum standards, while allowing 10 room for states to innovate. 11 standing interagency guidance to cover all lenders, 12 including non-banks, to create a floor and create even 13 competition and consumer protection. So whether this is a 14 We also believe that the federal government 15 should assume responsibility for licensing mortgage 16 brokers 17 important 18 problems in the marketplace. and 19 at loan this originators. point. We There's think this clearly is some At the same time, we would want to assure 20 that 21 establish 22 conditions warrant, to allow the states to be the 23 place to kind of test cases, where we can analyze and 24 see how regulations can be done and learn from those 25 experiences. the federal government higher licensing allows for requirements states if to local NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 180 1 As the federal government does so, we should 2 make sure there's enough resources at the state level 3 to 4 happen. support the kind of enforcement that needs to Thank you. 5 GOVERNOR KROSZNER: Thank you very much. 6 Now we'll turn to Joe Mason from Drexel, someone whom 7 I have known since he was in graduate school. 8 MR. MASON: Thank you. Thank you, Randy. 9 Thank you, Ms. Braunstein and thank you to the Board 10 for the opportunity to testify today on this extremely 11 important topic of mortgage terms and regulation. 12 The overall theme of my statement today will 13 be 14 practices 15 borrower 16 suitability for particularly complex loan products, 17 non-price terms like prepayment penalties and escrows 18 are valuable ways to keep borrowing affordable, while 19 stated income and no doc loans play a crucial role for 20 small 21 credit marketplace. that specific loan are not per not always may business 22 The people features se underwriting undesirable. been and remarks and that the best entrepreneurs follow While judge in and the of today's the more 23 detailed handout at the back, pose a challenge to 24 policymakers to improve regulation without hindering 25 new financial product development and borrower NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 181 1 flexibility, while at the same time striking a balance 2 between pursuing fraud and misrepresentation through 3 education and advocacy, and allowing individuals and 4 society to learn from their mistakes. 5 The consumer credit industry has found it 6 extremely lucrative in recent years to market on the 7 basis of payments rather than price. 8 become 9 ownership. 10 comfortable with Non-price temporary terms like Consumers have use rather prepayment than penalties 11 and escrows tend to lower loan payments to levels that 12 are accessible to consumers. 13 for business borrowers to choose from a menu of non- 14 price terms associated with different stated interest 15 rates, those choices are new to most consumers and 16 create new challenges for consumer credit regulation. While it's been standard 17 Standard MBA textbooks teach that the total 18 loan price is a function of the non-price terms, the 19 fee-based terms and the stated interest rate. When 20 the like 21 prepayment flexibility, or maintains something like 22 escrow 23 acting otherwise. borrower 24 25 agrees balances, to they're forego giving something, up the option of Hence, many non-price terms can be valued as a foregone options. Foregone options that reduce NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 182 1 credit risk are valuable to the lender; hence, non- 2 price terms should lower interest rates by the value 3 of the option. 4 A borrower that does not intend to move or 5 refinance during 6 benefit 7 lender, and receive a lower interest rate in return. by the credibly prepayment committing penalty that term intent can to the 8 In such cases, however, the borrower may not 9 pay attention to the size of the prepayment penalty, 10 reasoning that the probability of moving is so small 11 that the feature doesn't pertain to them. 12 Ex-poste however, the borrower may lose during the 13 their 14 prepayment 15 wrong. 16 prepayment 17 predatory has already been offset by a period of lower 18 interest 19 borrower benefitted. job or just penalty want to refinance period. The borrower planned It's important to remember, however, that the 20 penalty that payments up some to allege that to date. be per Hence, se the Escrow elections perform a similar economic 21 function. The credible commitment to timely tax and 22 insurance 23 amount equal to the value of the foregone option. The 24 borrower and 25 insurance payments can credibly commit that to the payments that reduces does not monthly intend to payments miss by tax an NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 183 1 lender, 2 return. and receive an interest rate savings in 3 If the lender or servicer can use the funds 4 in the same manner in core deposits, the interest 5 savings to the borrower should be even greater. 6 new 7 similar tradeoffs between non-price terms and monthly 8 payments. loan 9 features are being State-of-the-art invented products that like Many provide reverse 10 mortgages and new REX mortgages pose risks that are 11 not yet fully understood, and reduce monthly payments 12 to zero and beyond. 13 how to help borrowers understand the value of these 14 non-price features, and decide which loan is right for 15 them. 16 The challenge, therefore, becomes Financial education in the U.S., even at the 17 K-12 level, is woefully inadequate. A handful of 18 banks education 19 immigrant groups, as a way to approach that new market 20 for predominantly no doc and stated income loans. 21 there is virtually no financial education initiative 22 focused towards the elderly, who have the most at 23 stake in very complex reverse mortgage arrangements. have begun providing financial for But 24 Even with education, however, consumers may 25 have difficulty understanding the value and importance NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 184 1 of non-price 2 transaction. 3 transaction itself, combined with the relatively rare 4 incidence of home financing during one's lifetime. 5 terms that are appropriate for their The problem is the complexity of the It may therefore make sense to acknowledge 6 the limits 7 recommending the advice of an independent third party 8 legal 9 standard disclosure does not adequately represent the or to education financial and professional 10 risks 11 prohibit such features outright. of 12 a particular Such a provision 13 product 14 manner beneficial to both. 15 Last, innovation, a loan with brief disclosure, in the event product, may borrower that rather balance No than financial protection, caveat. by in matter a the 16 disclosures or provisions enacted by the Board, some 17 borrowers will borrow no matter what the terms. 18 home price appreciation is again in the double digits 19 and income is rising, borrowers, brokers, originators, 20 investment banks and investors will not take the time 21 to properly understand the risks they're assuming. 22 Willful 23 abrogate or limit contracts. Thank you. 24 GOVERNOR Thank 25 Joe. overborrowing KROSZNER: is not a you When reason very to much, Now we're going to turn to Mike Decker from the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 185 1 Securities Industry and Financial Markets Association, 2 which is now called SIFMA. 3 MR. DECKER: Good afternoon and thank you 4 for the opportunity to be here. 5 mortgage 6 remarkable developments in the financial markets over 7 the last 25 years. 8 securitization The mortgage has been securities The evolution of one of market, the now most the 9 largest sector of the U.S. fixed income market, has 10 brought numerous benefits to investors and especially 11 home buyers, and has reduced risks for banks, thrifts 12 and others engaged in mortgage lending. 13 The rise of subprime lending and the growth 14 in access to mortgage credit for subprime home buyers 15 wouldn't have 16 securitization. been possible without mortgage 17 Millions of eligible families have been able 18 to purchase homes as a result of subprime mortgages 19 and 20 nearly 2.2 million families use subprime financing to 21 purchase their first homes between 2000 and 2006. mortgage-backed 22 However, securities. it has We estimate become clear that that 23 underwriting standards were at times too loose at the 24 peak 25 shouldn't have been made were made. of the housing boom. Subprime loans that Subprime lenders, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 186 1 secondary market 2 borrowers are now paying the price. 3 investors and most importantly The market has clearly and swiftly reacted 4 to correct the excesses. 5 closure 6 increasing 7 mortgages, which were poorly underwritten. of a number loss rates This can be seen in the of on subprime bonds lenders, backed by and subprime 8 Overall, however, the subprime market has 9 worked extraordinarily well, and has served the needs 10 of homebuyers with weak credit. 11 majority of subprime borrowers are able to pay their 12 loans on time, and they have been able to achieve the 13 dream of home ownership. Clearly, the vast 14 The vast majority of subprime mortgages are 15 sold by loan originators into the secondary market, 16 and become collateral for mortgage-backed securities. 17 Participants in the secondary mortgage market 18 generally are not in positions to determine whether 19 the loans in which they invest were originated under 20 illegal, inappropriate or fraudulent terms. 21 It would be inappropriate and unfair to 22 expect mortgage wholesalers or MBS investors to serve 23 as the supervisors of the subprime mortgage market. 24 Indeed, imposing undue obligations or liabilities on 25 secondary market participants would simply drive them NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 187 1 from the market altogether, and dry up funding for 2 subprime originations. 3 Some policymakers at the federal, state and 4 local level have supported imposing such assignee 5 liability on secondary market participants. In some 6 cases, these efforts have resulted in a total shutdown 7 of subprime lending in those jurisdictions. 8 In addition, subprime mortgage regulation at 9 the federal, state and local levels have left the 10 market with a patchwork of different and sometimes 11 conflicting 12 secondary market. 13 laws governing liabilities for the SIFMA opposes the imposition of liability 14 for 15 participants. 16 assignee liability on investors or others, observing 17 several 18 negative, 19 subprime borrowers continue to have access to mortgage 20 loans. illegal 21 key lending on However, secondary if principles unwanted policymakers would effects, mortgage and help market do impose mitigate ensure that an worthy These include, for example, providing for a 22 clearly defined 23 lending, and 24 assignee 25 economic damage suffered by borrowers, among others. national ensuring liability that would standard damages not for subprime associated exceed the with actual NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 188 1 In recent years, some states have imposed 2 assignee liability provisions that have been based on 3 unclear, subjective standards; have imposed uncapped 4 liabilities on assignees; or have otherwise imposed 5 unreasonable burdens on secondary market participants. 6 Perhaps the most egregious example was the 7 2002 Georgia Fair Lending Act, which included several 8 provisions that were onerously difficult to interpret 9 or apply, and which imposed 10 liability on assignees. 11 The result of that potentially action was unlimited a virtual 12 shutdown of the subprime lending business in Georgia, 13 unless the law was amended the next year. 14 to 15 clear, objective and reasonable, SIFMA has views on 16 several other policy responses to current issues in 17 the subprime market. ensuring 18 that assignee liability In addition standards are For example, we encourage loan servicers to 19 employ 20 servicing contracts, and in accordance with applicable 21 law and accounting standards, to help borrowers in 22 trouble avoid foreclosure. 23 flexibility, as provided for in loan and Indeed, we have been promoting steps that 24 can help keep families in their homes. These might 25 include forbearance alternative repayment plans, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 189 1 agreements and loan modifications. 2 No one benefits from foreclosures, and it is 3 in the interest of both borrowers and lenders to try 4 and 5 strongly oppose governmentally mandated forbearance or 6 loan 7 unreasonable 8 responsible for how loans were originated, and would 9 threaten the legal and contractual underpinnings of 10 securitization and reduce the willingness and ability 11 of the secondary market to finance mortgage lending. keep homeowners in modification. 12 their Such penalties on homes. However, actions mortgage would we impose investors, not We also impose the imposition of suitability 13 standards 14 oppose regulatory restrictions on specific mortgage 15 products. 16 would be too difficult to apply in the context of the 17 lender-borrower relationship. 18 applicable to mortgage lending, and we Suitability is inherently subjective, and Restricting particular mortgage 19 could 20 mortgages that best meet their needs. prevent lenders from offering products borrowers 21 SIFMA is committed to helping policymakers 22 at all levels of government address current issues in 23 the subprime market, in a way that preserves mortgage 24 lending for families with poorer credits. 25 Thank you again for the opportunity to be NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 190 1 here. We'll be submitting a written response to the 2 specific questions raised for the hearing topic in a 3 very 4 discussions. short 5 time, GOVERNOR and I look KROSZNER: forward Thank you 6 Mike. 7 the Banking Commission in Massachusetts. very our much, Now we're going to turn to Steve Antonakes from 8 9 to MR. ANTONAKES: Good afternoon Kroszner and Director Braunstein. Governor My name is Stephen 10 Antonakes. 11 the 12 supervises over 260 state-chartered banks and credit 13 unions, and over 2,000 licensed mortgage lenders and 14 mortgage brokers. I serve as the Commissioner of Banks in Commonwealth 15 of Massachusetts. My office The evolution of a subprime mortgage market 16 compounded 17 increasing interest rates, have led to a substantial 18 number of foreclosures. 19 chronicled. by a weakening real estate market and These issues have been well- 20 My goal this afternoon is to focus primarily 21 upon efforts underway in Massachusetts to improve the 22 supervision 23 homeowners 24 briefly upon coordinated efforts among state mortgage 25 regulators of the facing and mortgage industry foreclosure. some actions I I will believe and assist also the touch Federal NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 191 1 Reserve could take under existing authority to further 2 enhance consumer protection. 3 Last year, my office non-bank conducted 400 4 examinations of 5 Examinations include 6 financial safety and soundness, and compliance with 7 Massachusetts and federal consumer protection laws. a lenders over review of and brokers. their overall 8 As a result of our supervisory efforts, my 9 office issued over 100 enforcement actions last year 10 against licensed lenders and brokers. 11 our 12 sweep of 90 mortgage brokers predominantly serving low 13 and moderate income communities, focusing upon stated 14 income loans. normal 15 examination activities, In addition to we conducted a As a result of these visitations, we issued 16 several 17 shuttering companies found to be overstating income on 18 loan 19 deceptive practices. cease and applications 20 In an or effort desist orders, engaging to in develop essentially other a types of comprehensive 21 strategy to address increasing foreclosure rates in 22 Massachusetts, my office organized a Mortgage Summit 23 this past November, attended by nearly 50 individuals, 24 representing 29 government, industry and non-profit 25 organizations. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 192 1 Following groups, the that we established focused on two 2 working 3 enforcement and the other on consumer education and 4 foreclosure assistance. 5 office for two weeks for three months. 6 one Summit, rules and Each working group met at my Massachusetts Governor Deval Patrick has 7 taken steps to effect both the long-term and short- 8 term goals, to improve supervision over the industry, 9 and protect homeowners. He's directed my office to 10 immediately begin implementing the recommendations of 11 the Mortgage Summit Working Groups, including amending 12 existing regulations and drafting new legislation. 13 Changes in regulations will result in 14 increased 15 requirements 16 increased licensing and examination fees for licensed 17 mortgage lenders and brokers, to support additional 18 examiner hires and the staffing of a mortgage fraud 19 unit. net for worth, bonding licensed lenders and and experience brokers, and 20 Earlier this week, the governor filed a bill 21 to enact the legislative recommendations of the Summit 22 Working 23 criminalize 24 foreclosure 25 making Groups. an The mortgage rescue bill fraud, schemes, adjustable includes rate provisions prohibit prohibit subprime a abusive lender loan to from unless NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com a 193 1 consumer affirmatively 2 product 3 they've received home buyer counseling, and will also 4 establish 5 information at the Division of Banks to enable my 6 office 7 geographic region, originator, broker and lender. and presents a to opts a central track out of a certificate repository foreclosure fixed rate indicating that of data foreclosure by product, 8 In addition, the administration has already 9 testified in favor of bills to license mortgage loan 10 originators and extend provisions of the Massachusetts 11 Community 12 lenders. 13 Reinvestment Act to certain mortgage In order to provide immediate assistance, my 14 office has also, 15 delays in the 16 lenders and mortgage services for any Massachusetts 17 homeowner who files a complaint with my office. on a case-by-case foreclosure process basis, from seeked mortgage 18 The goal is to provide a short amount of 19 time to allow my office to review complaints, refer 20 homeowners 21 firms, and encourage mortgage lenders to utilize this 22 time to work with homeowners who are unable to make 23 their mortgage payments. 24 over 400 calls from Massachusetts residents. 25 to reputable home ownership counseling To date, we have fielded In recent years, state mortgage regulators NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 194 1 have also been 2 supervision 3 Several 4 returned nearly one billion dollars to consumers. of high 5 working the collaboratively residential profile to mortgage nationwide improve industry. settlements have In addition, through the Conference of State 6 Bank Supervisors 7 Residential Mortgage Regulators, three years of work 8 have gone into the development and implementation of a 9 nationwide database of mortgage professionals. 10 This and system American will Association provide a of national 11 repository of licensing and enforcement actions, and 12 is scheduled to be launched on January 1st of 2008. 13 Finally, over 40 state mortgage regulators have either 14 adopted or are in the process of adopting guidance 15 similar 16 traditional 17 expected once the statement on subprime lending is 18 finalized. 19 to federal interagency mortgage Based upon loans. my guidance Similar experience on non- action as a is state 20 regulator, I believe there are areas where the Federal 21 Reserve 22 authority to ensure one set of rules exist throughout 23 the country, relative to subprime mortgage lending. 24 25 Board could Respectfully, use I its would Board consider the following: broad rule-making recommend that the Prepayment penalties NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 195 1 should expire at least 30 days prior to the first 2 adjustment 3 mortgage loans. 4 period The for Board subprime should use adjustable its broad rate authority 5 under HOEPA to ensure that all creditors abide by 6 prepayment 7 regardless of whether they're state or federal laws. penalty limitations applicable to them, 8 The Board should require escrow for taxes 9 and insurance for all subprime mortgage loans, with 10 the ability of the borrower to affirmatively opt out. 11 The Board should consider adopting a rule whereby 12 consumers qualified for subprime credit would normally 13 receive a 30-year fixed rate, fully amortizing, full 14 documentation 15 completion of counseling would be required for the 16 subprime 17 which either features an adjustable rate or a negative 18 amortization 19 income. loan. borrower or to less An apply than affirmative for the full opt-out subprime and loan, documentation of 20 Finally, the Board should require lenders to 21 underwrite all subprime and non-traditional mortgage 22 products based upon the fully-indexed rate, and based 23 upon a fully-amortizing payment schedule. 24 25 I appreciate the opportunity to testify this afternoon, and look forward to your questions. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 196 1 GOVERNOR KROSZNER: Thank you very much, 2 Steve, and also Steve is our representative on the 3 FFIEC, 4 coordinates 5 recent regulatory relief bill included many of the 6 states on there. 7 part of that. 8 9 the regulatory among the body federal or the body regulators and that the We're very pleased to have Steve as We're also very pleased to have Lori Swanson with us back again. She's a part of our Consumer 10 Advisory Council, but I just want to do something. 11 But 12 where she needed to be, and she's now the attorney 13 general of Minnesota. unfortunately, 14 she decided that Minnesota was Lori? MS. SWANSON: Governor Kroszner, Director 15 Braunstein, Board staff, thank you for the opportunity 16 to appear today on this important topic. 17 I think it's important to put into context 18 what we're here about. 19 largest financial transaction for most Americans, and 20 the American dream of home ownership has been the way 21 that most middle income Americans have built a nest 22 egg. 23 Yet today, 24 paycheck to paycheck. 25 less or save any more. You know, mortgage is the many of our neighbors live They can't work harder, spend That makes them particularly NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 197 1 vulnerable to surprises in their mortgage transaction, 2 like 3 penalties our undisclosed payments. exploding 4 It's interest also rates, important hidden to prepayment recognize that 5 there's an unlevel playing field between the borrower 6 and the mortgage lender. 7 a mortgage closing understands the blizzard of paper 8 work put before the borrower. 9 against the home owner and some untrustworthy lenders 10 and brokers use that stacked deck to their fullest 11 advantage. Anybody who's ever attended But that gets stacked 12 Documents uncovered during our investigation 13 of one company describe the sales environment of the 14 lender 15 lending institution told his brokers "We're all here 16 to 17 Nothing else matters." as make 18 a as "boiler much room." money as A manager possible, in another bottom line. Our office, along with Iowa, was one of the 19 lead 20 mortgage lending enforcement actions including FAMCO, 21 Household 22 involved 23 purchasing teaser ARMs with exploding interest rates; 24 forcing borrowers to stay in expensive loans through 25 costly prepayment penalties, and placing borrowers in states and Finance such three and abuses as of the country's AmeriQuest. misleading biggest Those cases borrowers into NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 198 1 stated income loans, in which the lender fabricated 2 borrowers' income or assets. 3 You know, some subprime lenders like to 4 claim that they do these things to help borrowers 5 achieve the American dream of home ownership. 6 however, 7 they're actually refinancing loans where the person 8 already had a mortgage and already had a home, and in 9 fact many of those are sold as cash-out refinancings, that in many of the most I know, abusive loans, 10 where 11 proceeds to pay off things like credit card debt. the 12 borrower is encouraged to use the loan I would urge the Board to adopt substantive 13 regulations 14 lending 15 predatory lending study group comprised of bankers and 16 business people, legal experts and policymakers, to 17 recommend reforms in this area. to crisis. help In address the Minnesota, predatory I put mortgage together a 18 It resulted in state legislation, which was 19 enacted into law this spring, which covers really all 20 of the main topics for today's hearings. 21 the Board to use its regulatory authority under HOEPA 22 to similarly regulate these practices. 23 I caution the Board I would urge that enhanced 24 disclosures to the loan are not enough. 25 easy, given the complexity of a mortgage transaction It's very NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 199 1 as I described it, for a broker or lender who's bent 2 on misleading a borrower to do so, regardless of the 3 disclosures. 4 regulation. 5 I think there is a need for substantive I'd like to briefly touch on some of the 6 main topics for 7 stated 8 around the country serious abuses with stated income 9 loans. income In today's loans, my hearing. we've state, With seen we in see regard Minnesota brokers to and falsify 10 applications to claim that people in the 80's hauled 11 in 12 cleaning homes they didn't clean. 13 in 14 landscape engineer. 15 renting 16 basement that they didn't have. cash his by making early out 17 20's an birdhouses made six they didn't make, We had a gardener grand a month as a That a suburban couple made money apartment in their home of their It's no surprise that borrowers, who are put 18 into 19 default 20 payments. 21 based merely on a statement by the borrower of his 22 income or net worth. products because because 23 they of that can't kind afford of activity, the monthly The Minnesota legislation prohibits loans Borrowers and lenders have to verify 24 borrower's 25 like tax returns, payroll receipts or bank records. income and assets by reliable the documents NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com I 200 1 frankly think it should be a no-brainer for a lender 2 to verify in some way the income and assets on an 3 application, at least by looking at historical tax 4 returns, to make sure that the applicant has in the 5 past earned something in the ballpark of what they put 6 down on the application. 7 8 I'd encourage the Board to similarly look at banning stated income loans in the subprime market. 9 With regard to borrowers' ability to repay, 10 far too many mortgage loans have been sold with little 11 or no regard to the borrowers' ability to repay the 12 loan with little or no underwriting. 13 legislation requires brokers and lenders to verify the 14 borrowers' ability to pay, not just the principal but 15 also the taxes, insurance and the like. 16 must confirm that the borrower can repay not just the 17 initial payments but also the payments when the price 18 spikes occur. 19 similar regulations there. 20 In The Minnesota The lender I would also urge the Board to adopt my state, we have banned prepayment 21 penalties for subprime mortgages, which can oftentimes 22 trap 23 can't afford to pay the prepayment penalty. people into an unsuitable loan, because they 24 The Minnesota legislation is a good step, 25 but we need the Board's help to fully address this NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 201 1 issue. The recent U.S. Supreme Court decision in the 2 Waters case 3 national 4 subsidiaries. restricts banks states' and ability their to regulate direct operating 5 As a result, Minnesota's legislation doesn't 6 extend to national banks or national bank operating 7 subsidiaries. 8 Since the Minnesota legislation passed just 9 this spring, here's a classified ad from the June 10 Star-Tribute, Minneapolis' 11 says hiring 12 incentive bonuses. We're hiring retail mortgage loan 13 consultants. Our federally chartered status allows us 14 to to 15 interest loans," because our law also bans negative 16 amortization loans. "We're continue 17 So aggressive, offer they're largest stated using newspaper, paying income aggressive and essentially that deferred that Waters 18 decision to try to get around what would otherwise be 19 prohibitions. 20 So I think the states have shown leadership 21 in this area. 22 to fully address this issue. 23 I'd 24 Everything 25 prospective The states also need to help the Board like we're in to make talking nature, one about and final today we've got is a point. really lot of NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 202 1 homeowners 2 trouble. 3 has 4 supervision to work with borrowers to reach effective 5 loan restructurings. taken 6 today who are under water, who are in I appreciate and recognize that the Board steps to encourage lenders under your In my office, we're doing the same thing, 7 working with lenders and consumers. We'd just urge 8 the Board to do anything in its power to continue to 9 do that, and take that position. 10 I believe that the financial institutions 11 that helped create this problem, either by writing 12 abusive loans or providing the financing that enabled 13 them to occur, do have the responsibility to work with 14 the borrower to help solve the problem. 15 again for the opportunity. 16 GOVERNOR KROSZNER: Well, I thank you thank you very 17 much again for all the excellent presentations, and 18 for keeping to the time limits, so that we can have a 19 good, robust discussion once again. 20 I think where we want to start off is where 21 we ended in the discussion this morning, in thinking 22 about 23 This is a subject that a number of you had mentioned, 24 and that's one of the things that Lori had concluded 25 with. consideration for borrowers' ability to pay. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 203 1 So I want to explore that a little bit 2 further, both what is being done in the different 3 states, and we would like to see what's being done at 4 the different state levels and what is available under 5 HOEPA. 6 I don't know who wants to sort of start off 7 with that. 8 the states might be -- 9 Probably one of the representatives from MS. BRAUNSTEIN: how you interested 11 statutes, and how you structure it, so that to put 12 some certainty some markets for the industry, so they 13 will know if they're meeting the criteria or not. 14 What are the statutes in this area? 15 to start? MS. SWANSON: define We're particularly 10 16 in Yes. that in your state Lori, do you want Yes, I'd be happy to. In our 17 state, we do have a couple of different ways in the 18 Minnesota legislation. 19 purely stated income loans, no documentation loans. 20 Essentially, 21 going 22 you've got to in some way verify what is put down on 23 the 24 borrower really has the income, really has the assets. to the make and application. 25 state First, as I mentioned, we ban legislation arrange You've a says mortgage got to if you're transaction, verify that the I'll note the argument that folks on the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 204 1 other side will make is well, with regard to stated 2 income loans, that these loans have often been used 3 for people who are self-employed, who maybe don't have 4 the reliable stream of income. 5 We've seen case after case through my office 6 where people are, you know, subprime borrowers who do 7 have a job and put in stated income loans, and it has 8 allowed widespread fraud and abuse. 9 The other point I'd make on that regard is 10 that sometimes that self-employed argument, the real 11 argument that I heard in the Minnesota legislature was 12 well gee, for a self-employed person may really be 13 pulling 14 writeoffs. 15 may only be paying taxes on 50. in 150 grand, but they've got so many The bottom line is their tax return they 16 Well, I don't think the government ought to 17 be in the business of helping people essentially cheat 18 on their taxes. 19 away. 20 We So I think that argument sort of goes also look at ability to repay by 21 basically saying you've got to look at, you know, the 22 ability to pay the fully-indexed rate and a repayment 23 schedule, which is full amortization over the life of 24 the loan. 25 at the initial teaser rate, but can they repay when So it can't just be can they repay the loan NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 205 1 that rate is reset? 2 3 That's really how we address it through the state legislature. 4 MS. BRAUNSTEIN: So you didn't -- Lori, you 5 didn't set thresholds for debt to income ratios or 6 anything like that? 7 MS. SWANSON: We did not. The other 8 standard we put in place in the state law, recognizing 9 that we did have the authority to regulate the broker, 10 a duty of agency on the broker, much like the kind of 11 suitability 12 insurance 13 representative would have. standard agent or fiduciary would have standard or a that an securities 14 That requires that before the broker can put 15 somebody into a loan, they have to do -- ensure the 16 suitableness or there's some tangible benefit to it. 17 But we don't have a bright line standard. 18 GOVERNOR KROSZNER: And what has been the 19 consequence 20 concerns has been, and it was raised in some of the 21 discussion, 22 standards 23 lending, not just irresponsible lending? 24 25 of is this, that potentially MS. SWANSON: because I certainly think can that impinge one these on of kinds the of responsible The law has just now passed this spring, and so it's yet to be implemented. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 206 1 MR. PEARCE: I wanted to say something. 2 GOVERNOR KROSZNER: 3 MR. PEARCE: Go ahead, Mark. North Carolina hasn't enacted 4 any legislation on this yet. I'd just make two quick 5 points. 6 to have a bright line rule, some sort of safe harbor 7 that -- I think DTIs are good and what the number is. The first is for HOEPA, I would encourage you 8 You know, in some ways you all address this 9 in your 2001 revisions to HOEPA, and so in some ways 10 moving that forward or expanding that I think is a 11 good idea. 12 We already have, we've worked together on 13 guidance, that already says that one of the things to 14 be made was the ability to repay. 15 principles-based, and I know you all are working on 16 enforcing that and at the state level, we're working 17 on enforcing that as well. 18 That guidance is So finding opportunities to work together, 19 to 20 something we need to work on outside this meeting. 21 But I think -- so there's room for principles-based, 22 but I think HOEPA needs to be clear. make sure we're enforcing that consistently 23 GOVERNOR KROSZNER: Tom? 24 MR. MILLER: We don't have You know, I think is 25 either. what is legislation obviously the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 207 1 starting point is there has to be something general, 2 at 3 throughout the duration of the loan. least, 4 that says the ability to How that's -- excuse me. pay extends I'm recovering 5 from a little spring cold that extended. 6 actually implemented and whether there's specific hard 7 and fast rules, you know, I guess we haven't as AGs 8 gotten to that point, where we're at is the basic 9 concept that ability to pay has to extend throughout. 10 It has to extend to the How that's whole industry. 11 Whatever we as a group do and you do, it has to extend 12 to the whole industry. 13 GOVERNOR KROSZNER: Well, one part of this 14 important point, which gets to your point also, but is 15 this best done through coordination with the states, 16 through if the federal regulators put up guidance that 17 we then coordinate with you, to try to implement at 18 the state level, or is this something that you think 19 needs to be done through a particular HOEPA rule, that 20 may be more challenging to do in a principles-based 21 way than the guidance would be? 22 MR. PEARCE: 23 I think HOEPA needs For me, it would be the latter. to set out some bright line 24 standards to move the marketplace. 25 federal regulators should work together on enforcing I think state and NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 208 1 the fuzzier principles-based standard, to address, you 2 know, within the boundaries. 3 I think HOEPA's boundary just needs to move, 4 to get -- to make sure that there's some limits that 5 we can say, and I think HOEPA now has a 50 percent 6 number, and I think that's -- I've seen very few loans 7 that I thought had a DTI of 50 percent, that the 8 borrower had actually a meaningful ability to repay 9 the loan. 10 So I think setting the boundary in HOEPA and 11 then using our guidance collectively to address the 12 cases where somewhere less than that is probably the 13 right outcome. 14 GOVERNOR KROSZNER: So I just want to drill 15 down on this a little bit more, and then I can get 16 others. 17 since we have the 50 percent already. 18 need to do? 19 So what specifically more do we need to do, MR. PEARCE: What more do we So I would say the ability to 20 repay needs to be, you know, part of the unfair and 21 deceptive 22 originate a loan without concern for the borrower's 23 ability to repay the loan at a fully-indexed rate, 24 fully amortizing payment schedule. 25 trade practice or unfair practice, to Then you could say if the debt to income NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 209 1 ratio is less than 50 percent, then we'll send you 2 that 3 understand how that operates in the marketplace, and 4 that applies to all institutions across the state, 5 across the country. rule. 6 So that's very clear. GOVERNOR KROSZNER: Everyone Steve, I want to make 7 sure to hear from you on some of these things. 8 want to hear your perspective on this. 9 MR. ANTONAKES: can No, I agree. But I I think it 10 would be better under HOEPA, and would be, you know, 11 addressing 12 frankly in our experience, we have a predatory lending 13 law as well, is that once you pass the threshold, no 14 one makes high cost loans anymore. 15 loans They beyond have high means of cost loans, getting because below those 16 thresholds. 17 fully-indexed rate, a fully amortizing payment, you 18 know. I don't see why it can't be further enhanced by 19 being included 20 guidance, which may be interpreted by some as 21 practices as opposed to a rule to be followed. The ability to repay is, you know, to the in the reg, 22 GOVERNOR KROSZNER: 23 MR. DECKER: 24 think. 25 an as opposed to just best Mike? I'd just make two points, I First, if there was going to be some kind of ability to repay provision implemented through NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 a WASHINGTON, D.C. 20005-3701 www.nealrgross.com 210 1 HOEPA, we'd advocate that it be some kind of a clear 2 bright 3 secondary market participants could easily determine 4 that the loan was in compliance through the kinds of 5 information that generally follows the loan from one 6 owner to the next. 7 line type The to rule, other HOEPA that point both that generally, originators I'd and make with is respect and with 8 respect to 9 implementing regulations through HOEPA, relatively few 10 loan 11 standards are such that if a lender can't structure a 12 loan such that it falls outside of HOEPA, often the 13 loan just doesn't get made. originators actually make HOEPA loans. The 14 So if you restrict the kinds of loans that 15 are defined, if you further restrict the kinds of 16 loans that are defined under HOEPA, and lenders can't 17 find a way to structure loans outside of HOEPA, you'll 18 have some borrowers that simply won't get lending, and 19 that should be a consideration. 20 GOVERNOR KROSZNER: I want to turn to the 21 academics, because I know there's been a lot of study 22 of what different states have adopted and changed some 23 of their regulations, and to get at exactly these 24 kinds of issues. 25 What sorts of provisions seem to have worked NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 211 1 and haven't worked in trying to provide safe harbors 2 and, in some cases, unsafe harbors, which have led to 3 a 4 potentially responsible lending? reduction 5 MR. of both MASON: irresponsible Well, getting lending back but to -- 6 starting with DTI, I want to say I would beware of 7 applying a bright line to a fuzzy concept, because the 8 concept is debt today is what's in question. 9 subprime 10 This thing we have, which doesn't build equity ownership in a house, is something we're calling debt. 11 I would be very wary of the composition of 12 debt in the consumer's portfolio. 13 car and renting furniture, and have a large balance on 14 their 15 hundred dollars a month? credit card, which is Are they leasing a growing a couple of 16 That person is never going to come back from 17 their already high DTI ratio, and they're not a stable 18 borrower. 19 who has a high DTI ratio and is buying their car, has 20 three years left on some student loans, and is just 21 finishing their degree or something like that. 22 So I think that may differ from a person There's a point that you could see this 23 person extinguishing their DTI, going down some time 24 and building into a creditworthy individual. 25 are products designed to build a credit portfolio, to These NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 212 1 recover, to increase your credit rating or recover 2 your credit rating. 3 As such, they're part of a financial plan. 4 I think one of the key safe harbors here is to treat 5 this 6 someone 7 borrower to do that. as a financial like a plan, and financial seek the planner and advice allow of the 8 One of the key ways to do that -- most 9 everybody's touched on this today, so I won't spend a 10 lot of time, is have a commitment period, something 11 like 12 financial planner or at the very least, my brother-in- 13 law who works in a bank, and I can talk it over at the 14 family picnic and be told that this is stupid, and I 15 shouldn't be doing it. 30 16 days prior, where I can run that by a But at the closing table, I want the house. 17 The movers are waiting. 18 up, the kids are excited. I've got everything lined They've got me. 19 GOVERNOR KROSZNER: 20 MS. ESSENE: Ren? I don't know of any specific 21 studies right now. 22 and a series of four authors are currently working on 23 looking 24 state 25 impacted the marketplace. at laws the and I know Aberdeen, Paint and Cross impacts trying of to predatory lending understand how laws, that's NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 213 1 So I think those are forthcoming and I think 2 it will be really interesting to see what the effects 3 are, and if there's going to be some real live data 4 this fall, I know, with our fall credit symposium. 5 What I would say, it's very heartening to 6 hear some of the state players talking about this 7 coordination issue between the federal government and 8 the states, because I think one of the dynamics we 9 need to really be focused on is this issue of high 10 roader and low roader lenders. 11 I think we heard earlier today from many of 12 the high roader lenders, and so we got to hear, you 13 know, some of the efforts that Faith and other folks 14 are putting forward, that are very positive in the 15 marketplace, 16 happening. are good models for what should be 17 Unfortunately, what we know is that there's 18 also low roaders in the marketplace as well, and that 19 it's challenging for the industry to kind of self- 20 regulate. 21 where 22 behavior, 23 industry to sanction that player. you There's really a collective action problem, have and one it's person very hard who's for engaged the rest in bad of the 24 So I think that's the step for regulation to 25 come in, is to try to create this even playing field. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 214 1 I know that we found, you know, that high- priced 2 lending, specifically looking at that three percent 3 above Treasury, that about 12 percent of the industry 4 is really making the lion's share of most of those 5 loans, 6 specialists 7 loans. 8 9 where they that are make specialists, over 50 percent high-priced high-priced So I think we need to be focused then on where that mischief is and create these kind of 10 minimum standards. 11 step in the right direction, and I think the question 12 is how to make that both enforceable and even across 13 the marketplace. 14 I think the guidance is a great GOVERNOR KROSZNER: Great. Does anyone have 15 anything to add on this, because I want to move on to 16 prepayment. 17 MR. CHANIN: Let me raise this one thing. 18 It's clear, to the extent that any rules adopted in 19 this ability to repay, that they have to be specific 20 and very clear, someone knowing in advance whether 21 they've complied or not. 22 23 One of the difficulties is just taking, for example, debt to income ratio. Fifty percent seems 24 to be a pretty clear test. 25 percent or less, then you know when you comply. That is, if it's 50 But NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 215 1 if you dig down to the details, it becomes very, very 2 complicated. You start looking at underwriting. 3 For example, if you have a car loan and yo 4 have two payments left or one payment left, do you 5 consider that in the 50 percent debt to income ratio. 6 Or, if you have a bonus, do you consider that? 7 If a lender is unable to know with some 8 degree of certainty whether those count or don't 9 count, it's going to be very difficult for the market 10 to 11 relish the notion of having a very long list of every 12 different type of debt, income and so forth to address 13 in any rule. function effectively. So I guess I would not 14 So I'd ask for any suggestions or if any 15 states or others have had any experience with that, 16 how they dealt with those types of issues. 17 MR. MILLER: You know, perhaps we could 18 check with our colleagues. 19 important 20 also the banking superintendents, to wrestle with this 21 a little more. 22 question. This is obviously a very Maybe we can survey the AGs and Because I think it is really important that 23 we 24 everybody, and that we all together then to enforce 25 that. have a rule or regulation that applies to NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 216 1 GOVERNOR KROSZNER: Certainly, I think just 2 as a reminder, but the record is open until August 15th 3 for getting comments, and we're always happy to have 4 comments. 5 have something by that August 15th deadline. 6 But it would be particularly valuable to MR. MASON: I'd just like to Yes, Joe. make one 7 comment before we move on, because it seems like we've 8 talked a little bit about stated income mixed in with 9 affordability. So tell me if I'm jumping ahead here. 10 But I wanted to make a note about income. 11 While in our minds it all seems like income definitely 12 correlates with affordability, it does in our minds. 13 But 14 pricing process. our 15 minds aren't running the underwriting and We know that what's received by the broker 16 is an income statement of some sort. I can print out 17 from with 18 income levels on them, and I can sign them and present 19 them as the taxes that I filed this year. TurboTax 20 different tax forms different People do have unstated sources of income. 21 Waiters, bus boys, that kind of thing. So there's a 22 lot of noise in the income that you get. We've talked 23 about that. 24 it plays into the credit scoring model, because the 25 credit scoring model is what's grading the credit and But what we haven't talked about is how NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 217 1 giving out the loans. 2 When we get to that point, the FICO score 3 gives about 80 percent of your predictability. 4 fact, the income is correlated with protected class. 5 So what we've done on the model side is we've had to 6 wash out the statistical predictability of the income, 7 such that it creates just a small, marginal effect. 8 9 So while it makes sense that In income correlates, there's a lot of noise in income and in 10 the models. 11 of fair lending. 12 It cannot be used, because it runs afoul GOVERNOR KROSZNER: Well actually, what we 13 could do is rather than turn to prepayment issues, 14 since you've brought up the income issues, that we 15 might segue into that piece. 16 So as Lori had mentioned, you've gone 17 towards, I guess, an actual prohibition on no doc and 18 stated income loans. 19 little bit better in practice, what kind of standards 20 you either have in mind or have started to see in 21 practice, for providing appropriate documentation? I wanted to understand that a 22 Because that's one of the challenges that we 23 talked about in the earlier panel, with providing -- 24 if we are going to be moving away against low or no 25 doc loans, I want to make sure that people who do have NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 218 1 incomes but not incomes that are documented in the 2 traditional way, still have access to credit. 3 MS. SWANSON: Yes, I think that I can jump 4 start it. 5 lenders 6 situations, recognizing that we're not a homogeneous 7 country and people do make a living in different ways. to 8 9 We allow some flexibility in our law for deal So documentation with although loans or those we kind do stated of ban income individual purely loans, we no do 10 require the lender to look at some documents, again to 11 show that the borrower really does have assets and 12 income in the ballpark of what is represented on the 13 application, 14 documentation. 15 and It that could be can tax be various returns. It types of could be 16 payroll receipts; it could be a bank statement. 17 allow flexibility in individual cases, for the lender 18 to make some determination of what that documentation 19 should 20 reasonable, and it ought to be reasonable for the 21 lender to rely on it. be. 22 The law basically says it has to We be But again, recognizing there are these types 23 of different situations out there. 24 emphasize. 25 to take some action in the stated income arena. But I do want to I think it is very important for the Board NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com I 219 1 just think that the no documentation loans have led to 2 very, very real abuses that we've seen through these 3 three general enforcement actions and other cases that 4 we've taken. 5 I think it's important to act, using the 6 HOEPA authority. 7 the want ads in the Minneapolis paper, people are 8 trying to get around that law. 9 federal action could be very, very helpful in this 10 area. As I also mentioned, if you look at So that's where a Thank you. 11 MR. MILLER: that the I'd just underscore what Lori 12 said, stated 13 companies, 14 companies, has been a national scandal and it has to 15 stop. 16 effectively 17 Minnesota or some variation of that. not There all has stops income practice companies, to it, be but some something for with enough regulation like they some that did in 18 What we saw in our investigation, and Lori, 19 I think, mentioned a couple of the instances, are just 20 chilling. 21 criminal fraud. 22 criminal statutes. 23 power to make sure it doesn't happen in the future. 24 25 You know, looking back, it's really Next time around, we should use the But the better way is to use your MS. BRAUNSTEIN: offer one question. Well Lori, I just want to Do you have liability attached to NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 220 1 your law, banning stated income loans? 2 MS. SWANSON: There is a private right of 3 action that a consumer would have against a broker who 4 violates that law, yes. 5 MS. BRAUNSTEIN: Okay, and the reason I 6 asked this because one of the things we're struggling 7 with is there is the same kind of right in HOEPA. 8 we can't draw the bright lines, there's some concerns 9 about the industry not having certainty. If It sounds 10 like you've got some fuzziness in your law about this 11 reasonable, whatever that means. 12 13 So are you getting pushback from the industry about that or -- 14 MS. SWANSON: You know no, we're not. In 15 fact, we worked in my state -- as I mentioned I put 16 together 17 reforms, and that was bankers and lenders and, you 18 know, consumer advocates and actually worked with the 19 industry. 20 this study group In the end, by the bankers to the try bill to was association, come up supported the with and 21 endorsed mortgage 22 brokers association in my state who worked with us and 23 then supported the legislation. 24 they could live with it. 25 supported it in the end. They certainly felt In my state anyway, they NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 221 1 2 MS. BRAUNSTEIN: Steve, do you ban stated income loans? 3 MR. ANTONAKES: However, We do not ban stated income 4 loans. 5 proliferation, I would say. 6 have to, I think, realize and look at the fact that, 7 you 8 securitization 9 originators know, we're incentives to of trying were these push to their Certainly, I mean, you created higher this restrict through the loans, for including in cost product, 10 numerous instances in which a real need to document 11 income was readily available. 12 I'm just going to give you a couple of the 13 most 14 examinations. 15 us his due diligence program, which involved him going 16 to www.salary.com, plugging in an occupation and a zip 17 code, getting the range of incomes and multiplying the 18 high end by 125 percent. 19 This egregious cases that we've found in our An individual who was pleased to show isn't something that we found by 20 accident. 21 his job, Okay. 22 which had incomes of $30,000, tucked behind the file 23 was a reduced documentation loan, with everything else 24 the same except the income is now $65,000, Okay. 25 This was his way of showing he was doing Cases Other cases. in which 40 Full documentation loans loans in a portfolio NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 222 1 originated in the last year, in which everyone had the 2 same job and the same income, Okay? 3 fraught for abuse, and there has to be a means of 4 limiting, you know. 5 This is an area Stated income loans once upon a time served 6 a purpose. 7 limited purpose, and they should be brought back. 8 9 But they've gone well beyond that original MR. PEARCE: Yes, I mean I can chime in. Again, my own story about the highway patrolman that 10 made $22,000 a month. 11 can get -- It's a pretty good job if you 12 (Laughter.) 13 MS. BRAUNSTEIN: 14 He's getting a cut from the tickets. 15 MR. PEARCE: Or a speed trap. You know, I 16 think 17 income 18 somewhere around 30 percent of the subprime market 19 still were stated income loans. 20 still in loans, I the the don't marketplace, last think that I these something looked are at folks stated it, who was are 21 working second jobs and not reporting incomes. I mean 22 I don't think we should drive our policy based on 23 people who aren't reporting income anyway. 24 But I don't think this is customer choice. 25 They're saying you know, it's too hard for me to get NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 223 1 these -- my tax return together or my W-2 form. 2 seen 3 loans, that had W-2s in the file that did not match 4 the stated income. plenty 5 of loan files that had stated I've income So I don't think this is being driven by 6 borrowers. 7 said, a preference in the securities marketplace for 8 stated income loans. 9 I think it's being driven by, as Steve If you look at a rate sheet for -- I don't know whether this is a high road lender or 10 a low road lender, and you look at stated income. 11 go 12 subprime hybrid loan. through 13 the chart. Stated income loans You for a Borrowers could get a fix rate loan at a 14 lower cost if they brought full documentation. 15 get lower cost than the initial teaser rate of that 16 loan. 17 that said "Oh, if I don't have to bring in my tax 18 forms, give me a loan that's more expensive up front 19 and will go up two years from now." 20 21 I do not think there are very many borrowers And who knows what interest rates might do? I mean you guys probably do, but -- 22 (Laughter.) 23 MR. PEARCE: 24 GOVERNOR KROSZNER: 25 They'd this. So anyway. There are two aspects of Obviously, there's the fraud aspect, which Tom NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 224 1 had mentioned. 2 going 3 clearly 4 you've illustrated with these examples. 5 that 6 fortunately is against the law. on, there cover is 7 So clearly, if there's fraud that's are the anti-fraud type something of that statutes egregious is that very behavior that So obviously unconscionable and So that's why I really want to understand 8 by doing something additional with HOEPA, I guess 9 these things that are clearly fraudulent activities, 10 they could be attacked through those means. 11 understand the interaction between sort of extending 12 HOEPA and the existing fraud statutes, for those types 13 of things. 14 I want to So if anyone wants to comment on that. MR. MILLER: I think that it's acting 15 earlier and being preventative, rather than having the 16 crimes take place and do some criminal prosecution and 17 try and unravel the damage that's done to everybody. 18 The idea is to have a national standard that 19 all lenders have -- are clearly on notice that they 20 have to do, and they have to watch over the people 21 that are working in their office, and to some extent 22 watch over the brokers, to make sure that these things 23 don't happen right from the beginning. 24 25 It's the best chance to stop the problem at the greatest level. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 225 1 GOVERNOR KROSZNER: What about this anti- 2 fraud statute, and if a person is encouraging their 3 loan officers to do the $22,000 a month or do some of 4 the other things that Steve was talking about? 5 how is it any different if we have it in a HOEPA rule 6 than if it's clearly something that is fraudulent, 7 like 8 talking about? it might 9 be in these MR. PEARCE: egregious I mean cases we're Stated income loans are just 10 invitations to fraud, that if you're not even going to 11 verify the income, then it doesn't matter what you put 12 down. 13 stated income means? 14 want to put on the form." I've 15 had brokers tell me "Isn't that what I just state whatever income I That broker's no longer doing business in 16 North Carolina, so that's a different story. 17 certainly, the states, every state I know, I mean 18 we've 19 Carolina, to make it criminal, to try to increase the 20 penalties. got 21 a mortgage fraud bill pending in Well North We're certainly doing all we can to enforce 22 it. 23 examinations to do it. 24 that are offered are invitations to fraud, by saying 25 you don't need to check, then I think it's creating a We've hired more investigators. We're doing more But if the lending products NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 226 1 marketplace that will induce fraudulent behavior. 2 3 4 MR. DECKER: There have been abuses of stated income loans over the last two or three years. That's for sure. But if you look at the performance 5 of stated income loans over the last 10 or 12 years, 6 they've actually performed fairly well. 7 That's I think one of the effects that led 8 to the growth of stated income loans, particularly for 9 subprime borrowers over the last two or three years, 10 combined, of course, with you know, multiple years of 11 double-digit house price increases, where lenders in 12 general, some lenders in general kind of took the 13 attitude that these loans can never default, because 14 as long as the house price keeps going up ten percent 15 a year, nobody's going to be in trouble. 16 17 But I think prohibiting stated income loans takes away from borrowers potentially in several 18 respects. The obvious case is one where a borrower 19 can't or doesn't want to document their income, and 20 if they can't get a stated income loan, they simply 21 can't get a mortgage at all. 22 But consider a hypothetical situation, of 23 somebody who's a taxi driver or a bartender, you know, 24 somebody who receives a lot of cash income and the 25 cash income varies from period to period. Perhaps NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 227 1 they don't 2 documentable. 3 report it all. It's not clearly They have a four percent ARM that's due to 4 spike in a few months to eight percent. They want to 5 be able to refinance -- they're able to refinance into 6 a six percent fixed, but you know, they can only do it 7 as a stated income loan. 8 Well, if you take away their ability to get 9 a fixed rate stated income loan, now they're stuck 10 with their ARM, which is going to boost them up to 11 eight percent, and they're just locked in, locked in 12 for good. 13 wrong, but I think that the Minnesota law against 14 stated income loans applies to both prime and subprime 15 borrowers? I think, correct me Ms. Swanson if I'm 16 MS. SWANSON: 17 MR. DECKER: Correct. Yes. So you know, we certainly 18 wouldn't 19 undertaken on a national basis. want to see that kind 20 (Simultaneous discussion.) 21 MR. MILLER: of an approach Are you sure that there is a 22 safety valve, that really the legitimate stated loan 23 can 24 really has -- you have to be able to show it. 25 have to be able to prove it. be made under the Minnesota statute? But it You NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 228 1 MS. SWANSON: That's right, yes. Allowing 2 the lender to have some discretion, that you can't 3 just have a no documentation loan. 4 the lender have other ways of showing documentation. But it does let 5 Again, the government is not in the business 6 of helping people cheat on their taxes, or somebody's 7 not reporting income or they're hiding assets. 8 really shouldn't be a policy that the government ought 9 to be encouraging, in my opinion. 10 I think Governor, it is the 11 between 12 there are lots of laws that prohibit fraud. prevention and prosecution. That difference You're right, 13 But at the same time, we know these stated 14 income abuses are occurring, and occurring on a really 15 widespread basis, and that the stated income products 16 have 17 borrower, frankly in some cases fraud upon the lender 18 as well, that it does make sense to regulate them as a 19 product which has been one, which has been a risky 20 product and a product that has led to abuses. become 21 a tool GOVERNOR for so much KROSZNER: A abuse point that that the Mike 22 brought up, which with the industry folks I'd like to 23 get some feedback on, is I think perhaps you can draw 24 a 25 loan, because I think there had been some discussion distinction between refinancing and the original NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 229 1 of well, if we have, you know, if we have documented 2 income initially, and then the person has built a very 3 good payment history, in many cases people will -- 4 that 5 indirectly, 6 particularly if it's being refinanced perhaps at a 7 lower rate than it was before. may 8 9 be used but as of a evidence, sufficient not necessarily ability to repay, Would you still want to say that even with the refinancing, you have to go through the 10 redocumentation again, or would you draw a distinction 11 between the initial loan and a refinancing, in terms 12 of the amount of documentation you think is necessary? 13 MR. ANTONAKES: If you've documented income 14 once, then I don't know why you'd want to not document 15 it 16 probably get a higher rate loan. 17 it's counterintuitive in many respects, I believe. the second 18 time. As Mark pointed out, you'll It's just not -- You know, we ran the statistics that stated 19 income 20 granted, a very different market then. 21 know 22 occurred in the past 18 months, how many were stated 23 income? loans of 24 25 the that were earlier performed payment 12 defaults years ago; I'd like to that have I'm willing to guess a fairly substantial number. I don't think restricting it to refinances NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 230 1 versus home purchases necessarily reduces fraud. 2 also spilled out some of the very egregious cases. We 3 Part of the difficulty is many folks are a 4 little smarter about cheating on the income in ways 5 that isn't so obvious to identify necessarily. 6 GOVERNOR KROSZNER: If we were to write a 7 rule that is closer to potentially having a chilling 8 effect on good behavior. 9 right is always very difficult. 10 MR. MILLER: So that trying to get this Yes. I think what we have to 11 keep in mind is that the subprime market is a majority 12 refinancing. 13 home loans as putting people in their homes. 14 subprime, a majority, maybe 60 percent and sometimes 15 maybe higher, is refinancing, and it's primarily a 16 refinance business. 17 So I mean we tend to think of all these I think you have to have But in the same 18 documentation 19 because a lot of them are initiated by contact by the 20 lender. 21 building his credit, is the very unusual situation. 22 The The in the example more refinance that common you for that cited, situation is the reason, person people call 23 them, what about your credit card debt? 24 kind of volume, I think the rule has to be driven 25 towards the full documentation, whatever is arrived So with that NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 231 1 at. 2 Just to end the previous discussion, you 3 know, what we're asking you to do this, even though 4 there's fraud laws, because we have more respect for 5 you. 6 laws, and I think as a practical matter it is. 7 then also it's early, it's prevention, as Lori said. We think your power is greater than these fraud 8 GOVERNOR KROSZNER: And Well certainly not in 9 terms of enforcement at, let's say, the state level. 10 I mean we don't have those enforcement powers at the 11 state level. 12 But you guys might. MR. MILLER: You don't, but your initial 13 rule, 14 accomplish a lot of good. 15 at all. you 16 know, will carry GOVERNOR KROSZNER: a lot of weight, will Do not underestimate that Right. So but I want to 17 hear from you guys, but then I want to move on, to 18 make sure that we get to the other two topics. 19 ahead, please. 20 MS. ESSENE: Very quickly. Go Let me just say 21 this also points to the fact to a lack of transparency 22 in the marketplace, and so maybe the people who going 23 to have stated income loans might not know that that's 24 what 25 discussion of the disclosure conversation as well. they have. So that might be to have that NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 232 1 2 GOVERNOR KROSZNER: Okay, good. Any last comments on this before we move on? 3 MR. DECKER: I'll just make the point that I 4 think maybe others are sort of alluded to already. If 5 a on 6 committing fraud by lying about income, knowing that 7 that's illegal and in some cases criminally illegal 8 under current law, I'm not sure prohibiting stated 9 income 10 borrower or loans a lender under or HOEPA both is are going intent to necessarily All right. Let's move discourage that behavior. 11 GOVERNOR KROSZNER: 12 onto prepayment 13 some discussion that in some of the states, there's 14 been moves against prepayment. 15 very useful to hear about some of those experiences 16 first, 17 consequences of that. 18 their experiences? and 19 penalties, then MR. 20 prepayment 21 time. 22 them. 23 done just fine. we can certainly there was So I think it would be talk about analyzing the If anyone wants to talk about MILLER: penalties, and We I in think, Iowa have since 1978, not had a long You know, we've survived quite well without Our consumers have done Okay. The lenders have 24 Admittedly, I don't feel as strongly about 25 this provision as I do about the other two that we NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 233 1 just talked 2 transparency, 3 empirical information that we received and was talked 4 about this morning, that isn't really a rate reduction 5 as a practical matter for most consumers if there is a 6 prepayment penalty. 7 about. But I it's important. think In in terms terms of of the That all augers for prohibiting them, and as 8 I said, it was safely done in Iowa. 9 in one of our investigations, since there were no 10 prepayment 11 another 12 somewhat. 13 the way we wanted to be functioning. 14 MS. BRAUNSTEIN: 15 penalties abusive in Iowa, category, we the I would add that noticed company that in caught up So maybe that's the market at play, but not Are they banned, Tom, in Iowa for all loans? 16 MR. MILLER: 17 GOVERNOR I believe so, yes. KROSZNER: What was that 18 alternative category, where people substituted in one 19 type of bad behavior? 20 21 MR. MILLER: insurance, I think, when that was still a product. 22 23 GOVERNOR KROSZNER: Other experiences in other states? 24 25 I think it was credit life MR. ANTONAKES: We have a lot of prepayment problems in the duration and the amount. It's a state NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 234 1 law that, in all frankness, is not followed by non- 2 state chartered institutions. 3 banks don't adhere to our prepayment penalties, and we 4 think they should. Federal banks, national 5 But you know, but our law was also written 6 in a period that predated the proliferation of 228 and 7 327 mortgages. 8 they're drafted, they're created primarily to assist a 9 subprime borrower to get credit and then, you know, 10 they should be able to refinance out before the first 11 rate adjustment. 12 If you look at these loans, you know, The reality is many of them carry prepayment 13 penalties 14 adjustment. 15 that extend beyond that first rate That to me is unconscionable. There should be a period -- if the 16 presumption is the borrower probably is told during 17 the 18 refinance you beforehand, there should be written in 19 there, a prepayment penalty if it exists at all, that 20 expires 21 give the borrower time to either refinance with their 22 existing company, or shop the loan with someone else. application 23 24 process, that don't worry, we'll well before that first rate adjustment, to GOVERNOR KROSZNER: And I think you said in your opening remarks, 30 days? 25 MR. ANTONAKES: I would say at least 30 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 235 1 days. I mean but a sufficient period, you know, to 2 complete a refinancing process. 3 MR. PEARCE: So North Carolina addressed 4 prepayment penalties three ways. First, for loans 5 under $150,000, they're banned. 6 cost loan, the state predatory lending law, we include 7 them in the calculation of points and T's, or most of 8 them. Second, in our high 9 We also had in our high cost loan a separate 10 trigger, so if it's a prepayment penalty above two 11 percent for 30 months, then it also triggers the high 12 cost loan protections. 13 doesn't feel quite as strongly, but I feel pretty 14 strongly 15 incentives -- 16 17 about this, MR. MILLER: I feel pretty strongly -- Tom because I think about Sorry to undercut you. the I mean we've got to stick together in -- 18 (Simultaneous discussion; laughter.) 19 MR. PEARCE: The incentives in the 20 marketplace. 21 upselling. 22 the 23 People aren't shopping on rate, for the most part. 24 the broker is the one that's actually setting the 25 rate. Prepayment penalties help fuel So where a broker says hey, you know, in subprime market it's not as price-competitive. So NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 236 1 If lenders will not pay the premium on these 2 loan transactions 3 they're going to get their money back, and they do it 4 through prepayment penalties. 5 and some borrowers don't. 6 unless they can guaranteed Some borrowers pay it So prepayment penalties in subprime loans do 7 create 8 competitive. 9 lot of prepayment penalties. this incentive. The market's So it's a different market between prime and subprime. 11 incentive. 12 prime It's also a place where you don't see a 10 13 be So that's one The second is the thing about borrowers who have good credit, but got into a subprime loan. 14 There are different statistics out there. 15 Freddie Mac have all, at various points, estimated. 16 We know there are some number of people, a significant 17 number of people, who have prime quality credit. 18 They get in subprime loans. Fannie Mae, If they have an 19 opportunity to refinance into a better loan, but yet 20 to do that they have to pay thousands of dollars to 21 get out of it, that -- steering into a bad loan has 22 significant economic consequences for that family. 23 The third incentive I want to talk about, 24 and I'm probably not the expert at the table. 25 going to defer down to the panel on this, is in the I'm NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 237 1 securities market, you know, we've talked some about 2 whether people benefit from foreclosures or not. 3 Well, in the securities market, there are 4 some folks that get the stream of prepayment penalties 5 that are actually paid and collected. 6 investor and I get money if the loan is charged a 7 prepayment 8 pretty difficult, because in loan modification, what 9 you're saying is well, we're not going to charge that 10 penalty, that makes So if I'm an loan modification prepayment penalty. 11 So the to may please, have having masters they're 13 penalties in the subprime marketplace just complicates 14 that picture of working out loans that can be worked 15 out. MR. CHANIN: and many 12 16 trying servicer prepayment Mark, can I follow up on one 17 point. 18 makes a distinction in terms of -- it bans prepayment 19 penalties for, I think you said loan amounts $150,000 20 or less. 21 The North Carolina law, I think you mentioned, I think Minnesota takes a different 22 approach, banning them for subprime but not -- and has 23 different rules for prime. 24 -- well, one Mark, the $150,000? 25 be some sort of proxy for subprime, or what was the Can each of you talk about Was that intended to NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 238 1 rationale for that approach? 2 MR. PEARCE: It used to be $100,000 limit, 3 and it moved up and I can't remember whether it was in 4 1999. 5 revisions. 6 people who -- working families trying to get into home 7 ownership, so they're subprime borrowers. I think it was '99 when we passed our I think it was intended to address the 8 So I do think it's a proxy for subprime or a 9 proxy for people who don't make a lot of money, who 10 are trying to develop home ownership opportunities. 11 12 MS. BRAUNSTEIN: Lori, you've got different stages too, don't you, in your loans? 13 MS. SWANSON: We do, and actually years 14 ago, Minnesota banned prepayment penalties outright, 15 and then we kind of let up on those laws and allowed 16 prepayment penalties to be applied. 17 Then, in the last several years, we've seen 18 some real abuses with regard to prepayment penalties, 19 particularly in the subprime market. 20 once again banned prepayment penalties altogether in 21 the 22 because that's where we were seeing the abuses. subprime market, primarily So this year, we doing the subprime 23 Again, it was situations where people were 24 particularly in the wave of defaults and foreclosures, 25 where people had prepayment penalties and now you see NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 239 1 that they're in trouble. 2 you know, refinance their home, but yet they have 3 these hefty prepayment penalties. 4 And we've They try to refinance or, seen -- we've taken some past 5 enforcement cases where brokers put people into very, 6 very high cost loans and didn't adequately disclose 7 the prepayment penalties, and then the borrower was 8 kind of trapped in that loan or had trouble getting 9 out of that loan, due to the prepayment penalties. 10 That's kind of a history of why we took that 11 action. 12 area, and something that I would certainly encourage 13 the Board to look at. 14 15 MS. BRAUNSTEIN: How are you defining subprime for those? 16 17 I think prepayment penalties are a problem MS. SWANSON: We have a very, very, very long definition of subprime. 18 (Laughter.) 19 MS. SWANSON: I don't have enough time left 20 in the hearing for me to read it to you, but it's 21 based on a percentage above the U.S. Treasury yield, 22 essentially. 23 (Simultaneous discussion.) 24 MS. BRAUNSTEIN: 25 MS. SWANSON: Kind of a -- Kind of yes, it is. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 240 1 (Simultaneous discussion.) 2 MR. CHANIN: Is there, for the prime market 3 though, then, you don't ban them. 4 sense, either from your investigation review of this 5 or discussion with lenders, that there's a tradeoff in 6 terms of the market, i.e., that consumers who get 7 those in the prime market get a lower interest rate or 8 some 9 problems there? other 10 benefit, or MS. SWANSON: you So is it your simply didn't see the My impression, we have some 11 limitations 12 penalties, even in the prime market. 13 even in the prime market, they're banned upon a sale 14 of a home. 15 prepayment 16 months, there can't be a prepayment penalty. on the ability to have prepayment For example, If you sell your home, there can't be a penalty, or if you refinance after 42 17 So we have a number of limitations on it. 18 But my impression is that in the prime market, that 19 there have been less abuses, at least based on the 20 cases that I've been seeing. 21 better disclosure, and then more of a tradeoff than in 22 the subprime market, when they've tended to be put 23 into products without people even necessarily knowing 24 they're there. 25 GOVERNOR KROSZNER: Better transparency, Let's go to -- well, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 241 1 please. 2 MR. DECKER: Well, I'd just make the point 3 that I think, you know, on the question of prepayment 4 penalties, 5 discussing today, the issue boils down at, at least on 6 some level, accessibility and cost of credit versus 7 consumer protection. 8 as So on you many of know, if the you issues ban that the we're prepayment 9 penalties outright, some loans simply won't get made, 10 because the lenders who make those loans need to know 11 that the loan will be on the books for at least some 12 defined period of time, or if not, then the lender 13 will receive some kind of compensation. 14 just won't get made. 15 So some loans Or they'll get made at some substantially 16 higher cost. 17 lender's going to have to require that they get some 18 way of recouping income so the loans will get made at 19 a 20 tradeoff that you have to weigh. higher 21 22 If there's no prepayment penalty, the cost. So I think MS. BRAUNSTEIN: that's ultimately the Tom, did you -- I'm sorry. Can I just follow up on that, because Tom, did you 23 find 24 lending when you ban prepayment penalties? in 25 your MR. experience MILLER: that I the don't costs think go up for there's any NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 242 1 comprehensive study, but the impression is that it did 2 not, or if it did, it just very much at the margin. 3 And, 4 people in Iowa that didn't get loans because we banned 5 prepayment penalties. you 6 7 we're not aware GOVERNOR KROSZNER: of any loans, any Joe or Ren, do you have any -- 8 9 know, MS. ESSENE: Well, I would just add, and I think the earlier panel, Faith and Susan Davis, a 10 couple 11 penalties 12 benefit to the consumer. 13 of folks, are, talked really about should that be tied prepayment to a clear There was a study done in 2005 by Keith 14 Ernst, 15 purchase 16 that actually the value, the benefit of prepayment 17 actually 18 consumer actually did not benefit in a price way, from 19 the prepayment penalty. 20 where he loans went and actually investigated prepayment completely to non-prime penalties, the and broker found and the So I think this really challenges some of 21 our presumptions, that 22 economically efficient and really there's kind of an 23 allocational 24 prepayment penalties. 25 be the focus here, you know, in that it helps lead us efficiency the mortgage problem that market exists is with So I think that should really NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 243 1 to believe that it's really a predatory practice. 2 GOVERNOR KROSZNER: 3 MR. MASON: Joe? I'd like to just point out, Ms. 4 Braunstein, the way that you asked your question of 5 Tom just now, and it was the right economic way to ask 6 the question. 7 What happened to the cost of borrowing? I would argue that's what we really want to 8 provide to the consumer. 9 cost of borrowing. We want to provide a total Whether it's a prepayment fee, 10 origination fee, yield spread premium, any other weird 11 term 12 surprises the borrower. we can think of, because that's what always 13 We give the borrower an APR, and then we 14 tell them the existence of these fees, and we expect 15 them to somehow work it out. 16 capacity to do it. 17 them total cost of borrowing if you stay in this home 18 for 30 years, 20 years, ten, five, three. 19 They don't have the So let's give it to them and tell Then the prepay penalty is going to spill 20 right out. 21 different lenders, and you're going to see it. 22 three year time interval, and remind them, this is 23 going to bite if you refinance or move. 24 25 You can make those comparisons across A So then you're going to see that total cost of borrowing different. I think that's subsumes all NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 244 1 the possible fees that we could see on the horizon, 2 new inventions, new ways to get around it. 3 going to come out in this cost of borrowing. 4 MR. MILLER: They're But the practical world for us, 5 in the study she cited, is that you know, it's all a 6 cost to the borrower, that there's no benefit. 7 MR. MASON: In the reality, and that point's 8 something, I think, has been apparent throughout the 9 day, is that the disparity between some theory and the 10 reality of this, this market. 11 in ways that don't fit the theories. 12 Ren just cited, you know, explains that completely. 13 MR. MILLER: This market functions Well, once need to The study that you provide the 14 disclosure, then 15 competition. What we've said this morning and on this 16 panel is there's no competition at the closing table. 17 you allow room for You have one provider with a monopoly on the deal. 18 So you need to give that competition 30 days 19 ahead of time or something, to allow these offers to 20 be 21 different 22 number." compared 23 across lender, lenders. they'll GOVERNOR KROSZNER: When say "I you can go beat to a that So I want to make sure I 24 understand what you're suggesting. 25 an effective way to deal with this is not necessarily So that you think NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 245 1 to ban 2 formulate a disclosure that is very straightforward, 3 that includes this, and allows for comparisons across 4 -- so it's very much standardized. 5 the It particular allows for practice, but comparisons, to but try would to be 6 provided much earlier in the process to the potential 7 borrower? 8 MR. MILLER: Yes, yes. 9 GOVERNOR KROSZNER: How do you feel about 10 dealing with that, at least obviously we hear a lot 11 about how we have to try to improve disclosures. 12 I think what we learned from credit cards is 13 making things easily comfortable and trying to have 14 both interest rates and fees and numbers, concrete 15 numbers that people see, not an effective rate that's 16 400 percent. 17 That's just outside the realm that people 18 normally operate in. 19 month extra, that seems to be something that, at least 20 the consumer testing that we've done with respect to 21 credit cards, that people can understand that much 22 more readily, and it means something to them and they 23 respond to that. 24 25 Do you But if they see $75 or $750 a think that would be at least something that should be done, perhaps along with what NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 246 1 Steve was suggesting, having something that we -- not 2 necessarily 3 requiring them to expire with a reasonable amount of 4 time before the reset, and improving disclosures? 5 that something that is feasible or reasonable, or is 6 that something that is not going to fly? 7 banning the MR. DECKER: prepayment penalties, but Is You know, the devil's always in 8 the details. 9 providing for a prepayment penalty for some reasonable 10 amount of time over the loan, giving the borrower the 11 opportunity 12 penalty at some point, and generally making disclosure 13 more clear and more understandable, and providing it 14 sooner in the loan closing process, are all worthwhile 15 approaches. 16 But I think that taking the approach of to refinance GOVERNOR out without KROSZNER: In a prepayment practice, is it 17 possible to do what Joe was suggesting, to have the 18 disclosure sufficiently early that people really would 19 be able to do the shopping and do the comparisons? 20 21 MR. MILLER: You want to write a regulation requiring that? 22 GOVERNOR KROSZNER: No. I know you don't. 23 So I don't think it happens short of that. 24 think what's described -- 25 MR. MILLER: I don't It's certainly possible with NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 247 1 respect to disclosure, that we can sit, that certain 2 types 3 process than later in the process. 4 to submit I was proposing that particular regulation. 5 But one of the things that we could think 6 about is changing the timing, because some of the 7 disclosures come very late in the process. 8 Joe was getting at the issue. 9 competition of disclosures to work, have and to come earlier in the So I didn't want I think That's too late for potentially one of the 10 reasons why competition isn't working is because the 11 disclosures are coming too late. 12 As I said in my introductory comments, if 13 you don't have information, market's don't work very 14 well. 15 markets -- I don't want to say by no means would I say 16 that they work perfectly, but that may be a way to try 17 to address, at least partially, some of the issues and 18 concerns. So perhaps we can help the working of the 19 GOVERNOR KROSZNER: 20 MS. ESSENE: Yes. Ren, go ahead. We're studying behavioral 21 economics and trying to understand how consumers act. 22 I think the concern I would have with that is that 23 consumers don't necessarily act rationally and gather 24 all the information and look at all of the choices. 25 One of the things that we know is that NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 248 1 consumers really trust a trusted advisor, right. So 2 they go out, they meet with, you know, whether their 3 realtor who recommends them to a loan officer, or to a 4 mortgage banker. 5 They sit across that table and they build a 6 bond and they trust the person across the table to 7 make a recommendation. 8 dynamic 9 you're really looking for advice. 10 that's I So I think that's a major happening think it's 11 enough information. 12 is 13 directly to that point. 14 So incredible, in hard the to marketplace, counter where that with As you said, information overload and you your know, comments, I I wouldn't think, get throw out 15 disclosures 16 because absolutely information is a good thing. I 17 think the timing is a critical component of this. I 18 don't know that three to seven days before closing, 19 you know, is enough time. 20 and say disclosures aren't important, I know that's been a recommendation that's 21 been put out there. I believe Kathy Cloy's paper 22 talks some about that. 23 process, you know, good faith estimates. 24 way for a good faith estimate to actually be, go hard 25 earlier in the process, so that folks actually have a I think much earlier in the Is there a NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 249 1 chance to shop? 2 If we want consumers to shop and that's what 3 we want to accomplish, then boy, people should really 4 get that early on. 5 it's a computer world. 6 general sense of where the borrower is going to be 7 coming in. I think a loan officer, you know, They know -- they have a 8 I think they'd get much closer to what that 9 end loan product's going to look like a lot sooner. 10 Susan Woodward did a pretty good study, where she 11 actually asked the question "Is information enough?" 12 She 13 presented with a single price, they were much more 14 likely to be able to make a better choice then when 15 there was multiple dynamics. found 16 that when consumers were looking at -- So I think again that complexity is very 17 difficult for consumers. 18 going to give them price points on multiple options, 19 and then have them be able to do an analysis of all 20 that data to make the best choice, again, I think 21 that's probably less likely. 22 So to think that you're So the more that we can make them simple, 23 some 24 Jergen's work has looked at, the more we can simplify 25 that and have it early on, and the best chance we have of things that I believe the Fed, that Tom NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 250 1 is with disclosures. 2 GOVERNOR KROSZNER: that we'd 3 something 4 comfortable, 5 people. 6 of interest could be a very useful number. find like, I think that's certainly out to which make number things is simple, relevant to Sometimes people say well, an effective rate 7 But we found that many people just didn't 8 pay attention to it. But when they saw that it was X 9 number of dollars that month. So maybe one relevant 10 type of disclosure is the payment per month, perhaps 11 along the lines that Joe was suggesting, that we might 12 give them some alternative scenarios of if you leave 13 in two years or five years. 14 Obviously, you don't have the information 15 overload 16 thinking along those kinds of lines, how to thread the 17 needle 18 enough that people can make choices, but not have so 19 much that it just becomes confusing and useless, and 20 it's just ignored. 21 to and get just give enough MS. ESSENE: every possibility. information out there But early One thing I would just follow 22 up to that, just as a suggestion or a thought, is that 23 consumers really respond both the framing but also to 24 the incurring of a cost. 25 So if you could actually -- maybe you have NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 251 1 kind of a simple loan that you would do a comparative 2 to, to say here's what a simple loan product would 3 look like, and we'll compare your offer to what this 4 simple loan looks like. 5 Then they could start to understand and 6 maybe ask questions, because that's how consumers -- 7 they 8 information more easily than one number in a box. understand, 9 they differentiate GOVERNOR KROSZNER: CHARM booklet between Then we have our so- 10 called that has some baseline 11 comparisons that could be used. 12 build off of that to try to make things much more 13 consistent, or have an ideal to make things much more 14 consistent. But I think we can 15 So that people can actually have some sort 16 of base for let's say the CHARM booklet that they are 17 now required to have with the disclosures that they 18 get, and get that in a timely fashion, that can be 19 helpful. 20 21 22 MR. PEARCE: To follow up on something, I agree with everything Ren said, so I'll say it's Tom. But remember, these are folks -- assuming the 23 market's working well, in that people with subprime 24 credit are getting subprime loans. 25 folks that get in the wrong bucket. So take out the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 252 1 If you have subprime -- these are folks who 2 have had trouble managing their finances, and trouble 3 identifying the right credit choices for any number of 4 reasons. 5 early disclosure that's totally clear, that's got one 6 comparison to a simple loan, is going to prevent a bad 7 loan or a bad choice, is -- it's just not -- it's 8 going to work for some, but not others. 9 And to think that a disclosure, even an If you want to change the marketplace, 10 banning prepayment penalties in subprime loans does 11 that, because you won't have lenders who will pay 12 brokers higher yield spread premiums, because they'll 13 know they won't get it back, because the borrower 14 might find out that they got overcharged. 15 They'll go down the street and get a better 16 loan. 17 market, that lenders will compete and if 18 someone a really bad loan, "Hey, I can go down the 19 street. I mean isn't that what we want in a competitive they give I can get a better loan tomorrow." 20 GOVERNOR KROSZNER: 21 right, and that's what we want to do. How do we make 22 the and 23 markets 24 sure, but when markets don't work effectively, then 25 people don't get the products that are best for them, markets work most I think that's exactly effectively, work to weed out abuses. effective Not completely for NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 253 1 because they don't know how to choose them. 2 don't give the right signals to the market. 3 They But I see that we're now getting close to 4 the end. I'm giving a little bit of short shrift to 5 the escrow issues, but since they had little bit of 6 extra shrift in the earlier discussion, I think that 7 should be Okay. 8 So I want to turn to some of the escrow 9 issues, and if you want, we can take the same type of 10 approach 11 they've been regulated in the individual states and 12 share some of those experiences, and think about how 13 we can build on those or if there are alternatives 14 that may be more appropriate. 15 start? 16 of looking at MS. SWANSON: some of the ways in which Lori, you might want to Yes, sure. Well, just seeing 17 abuses 18 marketed on the monthly payment amount, nobody really 19 looking at much else other than how much am I going to 20 have to pay per month, and we've also seen a lack of 21 disclosure of things like taxes and insurance, where 22 particularly a first time borrower, for example, who 23 hasn't had a mortgage before, doesn't understand and 24 appreciate that they have to pay other expenses like 25 taxes and insurance. essentially with mortgage products being NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 254 1 How we dealt with it in the Minnesota 2 legislation is the first time, and then each time 3 thereafter, the broker orally informs the prospective 4 borrower what the monthly payment amount is going to 5 be, how much they owe on the mortgage, that the broker 6 has to, at the same time, orally inform the borrower 7 that 8 insurance. these 9 other I'd amounts just echo are the due last for taxes comments. and When 10 you're dealing with disclosures, it does get to be 11 very, very tricky. 12 read disclosures, but a lot of people we're trying to 13 protect are not the people at this table. 14 tough issue. 15 The All of us here at this table may attorney generals So it is a frequently take 16 enforcement 17 area, where people have disclosed all kinds of things 18 in writing, but what happens is the broker basically 19 lies orally. 20 actions where, including the mortgage That's what the borrower really relies on. 21 What is 22 That's how we've dealt with it on the tax insurance 23 issue in the Minnesota bill. 24 25 the broker orally MR. ANTONAKES: telling the borrower? We've seen, you know, abuse in the refinancing, primarily where a comparison is NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 255 1 made to a loan that includes taxes, insurance, to a 2 new loan that wouldn't, and therefore they provide 3 evidence there will be a smaller payment. 4 We would recommend the Board consider the 5 requirement that taxes and insurance be included, with 6 the opportunity for the consumer to affirmatively opt- 7 out of having their taxes and insurance included. 8 MR. MILLER: We've seen the same issue, the 9 same problems with brokers, the ones that, you know, 10 try and take advantage of anything and everything, all 11 too many of them, at least in the past. 12 In terms of, you know, what you were 13 articulating before, transparency and being able to 14 make a meaningful comparison, having everybody in the 15 subprime area do the escrowing seems to make a lot of 16 sense. 17 MR. PEARCE: I'd agree with Tom. I think 18 apples to apples. 19 and I can take off a portion of the cost and sell you 20 on that and convince you of that, and not include 21 those costs, that's hard to have a competitive offer. 22 If you're marketing loan products I would also think a little bit about the 23 prime market versus the subprime market. 24 think the notion of not having escrows, in the prime 25 markets people might have better use of their money, I mean I NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 256 1 might put it in different places, and they know they 2 will have $2,000 to pay the tax bill when it comes 3 due. 4 I think I have a lot less confidence in the 5 subprime market. 6 I invest my money here, I'll get a higher return and 7 the lender won't be holding it or the servicer won't 8 be holding it. 9 calculation. 10 I don't think folks are making that So another reason to include taxes in escrow. 11 12 People are actually thinking, oh, if GOVERNOR KROSZNER: What's your thoughts on the escrow issue? 13 MR. DECKER: I don't feel so strongly about 14 the question of whether there should be, you know, 15 sort 16 insurance 17 escrow payments. of a leaning or not towards including including taxes and taxes and insurance in 18 But I would argue that, like the gentleman 19 from Massachusetts just said, ultimately the borrower 20 should be able to opt out and it should be, you know, 21 a decision between the borrower and the lender as to 22 what's the best course for that particular borrowing 23 situation. 24 Some borrowers like the idea of being able 25 to pay their taxes and insurance every month, and not NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 257 1 have to worry about a bill when it comes. 2 borrowers, you know. 3 servicer's 4 servicing 5 escrow to pay those bills when they come due. It's a convenience. perspective, more Even prime it valuable, actually knowing that From the makes the there's an 6 But some borrowers feel that, like the point 7 that was just made, they've got better uses of their 8 money. 9 10 MR. ANTONAKES: Mike and I have agreed on something. 11 GOVERNOR KROSZNER: I think we have a lot of 12 agreement on escrows. 13 evidence on the role of escrows? 14 MS. Do you guys have any systematic ESSENE: Well, I think the more 15 systematic evidence 16 options. So 17 behavioralist principles. 18 401(k)s and the uptake of 401(k)s, and that if you 19 promote the good option, more people are going to 20 uptake it. around that's one the of role the of kind default of best So you can see that with 21 For example, someone with a 401(k), if you 22 say when you come into a company, you're automatically 23 enrolled, and if you want to opt out you can. 24 uptake 25 percent, or something right around there. rate is the difference 80 percent and The 30 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 258 1 So it's a substantial difference. 2 know is that it's not necessarily a consumer choice. 3 So I think having the default be to the -- for the 4 social good, you know, for folks to be able to make 5 their payments, that's the right thing to do, and then 6 allowing an opt-out principle. 7 GOVERNOR KROSZNER: 8 MR. MASON: 9 What we Joe? Yes, but I want to follow up. The key to that too is that you're just enrolled. You 10 don't get an opt-out check often when you start the 11 job, but then you have to file form later, which you 12 often don't get around to doing. 13 works, and that's how PMI works, cancelling PMI on the 14 other side, because many people never file that form 15 to cancel PMI. 16 That's how that I do believe in at least disclosing escrows, 17 because 18 insurance and tax information. 19 think 20 knowing that they have to make the tax payment or they 21 lose the property. it's most a matter subprime -- or at least disclosing It's something that I borrowers don't think about, 22 But I would in fact go another step on this, 23 because I think this is where, as Tom mentioned, is 24 where a lot of lenders leave off. 25 payments because they leave off tax and insurance. They beat on NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 259 1 But they're also winning a lot of business 2 from FHA, because they leave off the FHA mortgage 3 insurance premium as well, but they replace that with 4 credit life and disability life. 5 So I think to require them to report all 6 monthly payments associated with that loan, so have 7 tax, insurance and then any associated -- any other 8 fees left with that. 9 apples comparison on the payment. 10 11 So you get a real apples to I think you'll see more FHA loans. Really, I would argue, going where they should. 12 GOVERNOR KROSZNER: Do you guys have 13 anything on this issue? 14 comments that people would like to make, on any of the 15 issues? 16 we've discussed? 17 18 Any questions? Any last Not just escrow, but the whole thing that MR. MILLER: Well Mark has swung me around on the prepayment issue. 19 (Laughter; simultaneous discussion.) 20 MR. MILLER: It went from a small priority 21 to a big priority. 22 did it is the huge use of the brokers to manipulate it 23 to their advantage, and the study that Ren cited to 24 bear that out. 25 I was always on his side, and what Finally, Governor, I'd like to thank you and NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 260 1 the staff for conducting these hearings, and all the 2 work that you're putting into it. 3 very focused, you're very serious about this and we 4 appreciate that. 5 GOVERNOR KROSZNER: Obviously, you're Any other comments? We 6 do take this very, very seriously, and this is why 7 we're 8 audience, to have so many excellent panelists who are 9 willing to come, taking their time, because we don't so pleased 10 munificently 11 panels. 12 to have remunerate so many people to of you come on in the these They pay their own way to get here and so we 13 are 14 panelists, to have had such robust discussions, this 15 afternoon as well as this morning. very, 16 As very pleased I've to mentioned, have we such will be excellent open for 17 comments, formal comments until August 15th, and we 18 look forward to any written comments you may have. 19 Any of the panelists, if they want to supplement what 20 they've said, anyone from the audience and anyone in 21 the public can submit that. 22 As I also said, we're going to have an open 23 mike set of presentations from people who have signed 24 up, and what we will do, since we've been going for 25 about two hours, let's take a very short break and NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 261 1 start at ten minutes after 3:00. 2 We'll have the open mike presentations, 3 where people will have three minutes -- who were not 4 up front in the panels, to make an oral presentation, 5 and then of course they can submit any further written 6 testimony they would want. 7 8 Thank you very much. I really appreciate your coming here. 9 (Whereupon, a short recess was taken.) 10 GOVERNOR KROSZNER: 11 started again. 12 speak, 13 reserve seats for you. if you Great. Let's try to get Those of you who have signed up to could move over to here? We have 14 We have the order that you're in, and if you 15 could sit in those seats, it would be very helpful, to 16 make 17 possible, because I want to use -- make sure that we 18 have the time for people to be able to speak. sure 19 to be able to move as expeditiously as I want to apologize in advance for having 20 this very strict time limit. 21 people who are going to be speaking have faced some 22 personal tragedies for their families, for friends and 23 loved ones. 24 25 I know that many of the We do take this very, very seriously. But just to make sure to be able to get everyone -- make NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 262 1 sure 2 opportunity, we will have to enforce the three minute 3 that everyone does have a chance to have an limit. 4 But of course, you'll be able to submit a 5 statement of any length you wish for the record. 6 just have to do that by the 15th. 7 we're going to begin first with Judith Kennedy. 8 you very much. 9 So let's begin, and Thank Our timekeeper is just right. MS. KENNEDY: of You National Thanks for doing this. Association of Affordable I am 10 CEO Housing 11 Lenders, 50 of the largest banks and 50 of the blue 12 chip non-profit lenders, who are America's leaders in 13 lending and investing in underserved areas. 14 I appreciate the opportunity to talk about 15 how we see the problem, teeing off where you were, the 16 last panel. 17 work effectively, and we're concerned about borrowers 18 walking away from legitimate consumer-friendly loans, 19 down the street to the predatory lender. We're concerned about how to make markets 20 We are in this pickle, we believe, because 21 we have a very un-level playing field, a two-tiered 22 mortgage market in our country, one involving insured, 23 examined 24 government-sponsored enterprises, fair practices and 25 unregulated, unexamined lenders. institutions and the second involving NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 263 1 Essentially, the secondary market is a town 2 with no sheriff. For years, insured institutions have 3 been telling Fannie Mae and Freddie Mac that their 4 fear of buying legitimate low down payment loans, that 5 banks have known for 10 to 20 years are safe and 6 sound, often involving neighborhood housing services, 7 soft seconds and on and on and on. 8 But that fear of buying was causing them to 9 lose customers to the subprime lender down the street, 10 who could assure them that they could have 40 percent 11 of their income paid, the lowest monthly payment, no 12 escrows, etcetera, etcetera. 13 Still today Fannie Mae and Freddie Mac do 14 not buy legitimate CRA mortgages, single family or 15 multi-family. 16 legitimate loans, and just to put it in perspective, 17 $316 billion worth of CRA singe family loans in 2005 18 alone. 19 What So we as they didn't resisted understand buying was what these the 20 bankers were saying, and that is that the Fannie Mae 21 and Freddie Mac involvement with the subprime market 22 was as, what the LA Times call, the chief enabler. 23 They were the primary financiers of mortgage-backed 24 securities backed by subprime loans. 25 So in addition to there being no legitimate NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 264 1 secondary market, 2 benefits for CRA loans, we had the GSEs we now know 3 buying 44 percent of all subprime MBS in 2004, 37 4 percent in '05, and only 25 percent the first half of 5 '06. 6 certainly no government-sponsored This means that at the same time they were 7 ignoring 300 billion of CRA 8 financing 174 billion of subprime. 9 not all. they with terms that they publicly 11 institutions couldn't originate. were All with -- well, We don't know what's behind them. 10 12 mortgages, issued But many and insured You've got to level the playing field. The 13 GSE reform bill or something like it has to cause the 14 secondary market to have a sheriff. 15 be 16 friendly CRA loans. persuaded 17 or told to buy The GSEs have to legitimate consumer- You need to revisit existing filters that 18 failed. How did HUD allow the GSEs to take those 19 subprime MBS 20 affordable 21 mortgage market enhancement and the rating agencies 22 that are working? 23 24 and have housing them goals? use How them did the for their secondary So these are some of the things that I think we need to build on. 25 GOVERNOR KROSZNER: Thank you very much. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 265 1 The next speaker is Samuel Bornstein. 2 DR. BORNSTEIN: Thank you for giving me the 3 opportunity. 4 professor at Kean University. 5 Accounting Taxation. 6 Parallel with that, I'm a CPA and consultant for the 7 same 30 years. 8 9 My name is Samuel Bornstein. I I'm a professor of I've been there for 30 years. viewed perspective. I'm a this from an interesting I also have just recently completed five 10 years of research of small business failure, that has 11 evolved into a discussion now of subprime, because 12 they have something in common. 13 The solution to small business failure and 14 subprime, 15 literacy. 16 supplemental to my original comment made on June 3rd, 17 which is on the website. 18 The the same common solution is financial So basically -- by the way, this is a topic of this comment is "Financial 19 Literacy Implications: 20 Subprime Mortgage Lending Interaction Between Borrower 21 and Lender." 22 accident; let's prevent one." 23 Financial My Suggested Solution to the The sub-topic is "Let's not react to an literacy will enhance an 24 understanding that is necessary to make an informed 25 mortgage loan decision. This applies to all NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 266 1 consumers, especially to the low and moderate income 2 borrower. 3 Any solution to subprime mortgage lending, 4 delinquency, foreclosure phenomena should also address 5 the need for a clear understanding of the various 6 aspects of the subprime mortgage, especially on the 7 part of the borrower and lender. 8 9 Basically, technical tools I to believe help we need to us. Financial learning. The explore literacy 10 involves 11 recent research conducted at Johns Hopkins University 12 could 13 learning. education change 14 the and way we think of results education of and The conclusion was that we learn more by 15 inference rather than 16 learning process is 17 student figures it out himself, rather than by being 18 told what to do. 19 by direct better instruction. accomplished when The the As an educator for the past 30 years, I've 20 learned 21 teacher. 22 past 23 client is also the best client. 30 that the student is the student's best As a practicing CPA and consultant for the years, I also realized that the educated 24 This concept can be applied effectively to 25 the borrower-lender interaction in the mortgage loan NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 267 In decision. 2 referred to a need for a technological tool that can 3 help 4 implications of lending decisions. both 5 the The my comment borrower key submittal and factor is lender to on 3rd, 1 June understand concentrate on I the the 6 borrower's ability to repay the obligation. 7 new and innovative technological tools. 8 tool would be able to accept input of financial data 9 and changes, unique and specific to each individual 10 We need The ideal borrower situation. 11 This would include income, expenses, assets, 12 liabilities, including the various items of principal, 13 interest and insurance, as well as liabilities which 14 include debt, such as credit cards and auto loans. 15 In fact, the technological tool would view 16 the borrower as a business, in order to determine the 17 borrower's 18 There 19 analytics to accomplish this for businesses. 20 capability are to presently However, handle software this what's the mortgage programs is missing now is the that loan. use missing. 21 Unfortunately, missing 22 ingredient of the interpretation of the results in a 23 language that everyone can understand. 24 The technological tool should be in English 25 or in Latino, as to maintain simple and clear language NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 268 1 which the borrower can understand, and accompanied by 2 graphics. 3 understand the implications of the loan decision. This report will help the borrower 4 The borrower can then retain this narrative 5 and bring it over to his counselor for discussion and 6 thought. 7 8 Thank you. GOVERNOR KROSZNER: I'm going to turn to Bill Garber. 9 MR. GARBER: Thank you, Governor. I 10 appreciate the opportunity. 11 Appraisal Institute, which is the largest association 12 of real estate appraisers in the United States. 13 I'm Bill Garber with the I'd like to encourage the Fed to focus on 14 issues 15 particularly 16 estate appraisal process. 17 relating the to real importance estate of an appraisals, independent real Sound real estate lending is based on three 18 C's 19 Collateral is where the appraisals come in, so they 20 serve a very important role in real estate lending, 21 and we feel they serve a role in consumer protection. -- credit, capacity to repay, and collateral. 22 It's true that a good appraisal, an honest 23 appraisal is a lender's best friend, because it helps 24 mitigate losses; it helps ensure that lenders do not 25 overextend credit. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 269 1 They also serve consumers, in a few ways. 2 One is in the sense that consumers oftentimes pay for 3 appraisals. 4 appraisal, 5 steered into a home or have a mortgage that's worth 6 $300,000 or is costing them $300,000, where the house 7 is only worth $200,000. 8 9 So and Also, appraisals to they they to definitely the be deserve existing disclosed have deserve federal to an honest not to rules consumers be require within 30 10 written days, or 30 days upon written notice. 11 many times, when the appraisal comes back, it allows 12 for buyers and sellers to renegotiate prices within 13 the terms of the contract. 14 15 Also, So in this sense, we think that appraisals serve both lenders and borrowers. 16 In 1989, Congress passed FIRREA, which 17 required licensing for real estate appraisers, and it 18 set forth a whole series of events by the federal bank 19 regulators, 20 and guidelines, some of which prohibit borrowers from 21 ordering appraisals. 22 licensed, certified 23 uniform appraisal standards. including implementation They require appraisers in of regulations the use conformance of with 24 Over the last few years, the federal bank 25 regulators, when conducting bank examinations, have NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 270 1 found widespread breakdowns in appraisal independence 2 within examined institutions. 3 are 4 controlling the appraisal process, and then also have 5 the ability to sign off on a final loan decision. individuals 6 within There's 7 pressure, 8 appraiser, 9 obstacle a the great intimidation, because in They found that there institutions deal of coercion the the financing have issued instances is appraisal applied is process. 10 regulators 11 requirements in 2004 and 2005. that seen Now restatements are where on an as an the on bank their 12 Unfortunately, what we see, if the federal 13 bank regulators have the opportunity to examine non- 14 bank mortgage lenders and mortgage brokers, we would 15 see 16 interest in the transaction and those controlling the 17 appraisal process, we find that to be the norm, rather 18 than the exception. that 19 this Too nuance often between those appraisers are with a vested pressured and 20 intimidated to artificially inflate appraisals. 21 seen 22 settlement recently involved inflated appraisals and 23 breakdowns in appraisal independence. these cases come forward. The We've AmeriQuest 24 We're also seeing, as a result of a lack of 25 rules in this unregulated area, new rules coming out NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 271 1 from the states, prohibited practices, requirements 2 for 3 pressure appraisers, and criminal penalties against 4 coercion and intimidation of appraisers. mortgage 5 brokers and mortgage include 7 deceptive practices, 8 appraisal or 9 included under these definitions. in not these discussions the about idea intimidating an abusive that an appraiser and inflated could be We would be happy to assist in those efforts. 11 12 to So I would just like to encourage the Fed to 6 10 lenders GOVERNOR KROSZNER: Thank you very much. Thank you, Lisa Rice. 13 MS. RICE: Good afternoon. 14 Governor. 15 National Fair Housing Alliance. 16 to make. My name is Lisa Rice. I'm with the I have three points 17 The first is that the APR is not a useful 18 tool in this marketplace, and hasn't been for some 19 time. 20 can 21 environments. This is largely because terms and conditions be changed at the closing table in many 22 We informally have polled title companies in 23 Ohio, and ask them in what percentage of the cases did 24 they see terms and conditions changing at the closing 25 table. The responses ranged between 50 percent of the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 272 1 time and 65 percent of the time. 2 Now when I was a member of the CAC, I can't 3 count the number of times that I heard people talk 4 about educating consumers on the effective use of the 5 APR as a shopping tool. 6 people cannot do that in today's environment. The sad reality is that 7 In addition to that, even if people do use 8 the APR as a shopping tool, there's not an apples to 9 apples comparison, because the underlying features and 10 components of the loan obviously may not be the same. 11 The second point is that consumers are often 12 encouraged, even when it's loan terms and conditions, 13 to change at the closing table. 14 go ahead and to close on that loan, because if they 15 pay 16 couple of years into a better loan. their bills on time, They're encouraged to they can refinance in a 17 For the customers that we see coming into 18 our offices across the United States, this is not the 19 case. 20 consumers end up upside down in their loans. 21 second reason is because their credit score actually 22 has not improved to enable them to get into a better 23 product. One of the reasons obviously is because The 24 I think one of the things that a lot of 25 people don't talk about or maybe don't realize is that NEAL R. 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(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 273 1 the credit score is not simply a function of whether 2 or not you pay your bills on time. 3 is 4 algorithms. a major component in many Available credit credit scoring 5 Especially if you're refinancing, if you're 6 refinancing the difference between your credit high 7 balances, your total credit high balances and your 8 total utilized balances, will be very low, resulting 9 ultimately in a lower credit score. 10 The third point is that when you drill down 11 and peel back the layers, what we're really dealing 12 with are systematic fair lending issues and abuses. 13 I'd like to see the Fed hold hearings, comprehensive 14 hearings, on fair lending enforcement and compliance. 15 The Fed and other regulators have to be more 16 diligent about fair lending compliance for banks and 17 bank holding affiliates. 18 should be specific questions about fees, and which 19 fees are to be included in the HOEPA calculation. 20 Included in that discussion Also included in that discussion needs to be 21 a discussion about credit scoring algorithms and 22 models, because one of the things that we're finding 23 out from rating companies is that the credit score may 24 not be the best determinant for determining the rate 25 for a pool of loans. However, we're not seeing that NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 274 1 correlating into the pricing scheme. 2 3 GOVERNOR 6 7 MS. RUSH: consumer here. you very much. Hi. I guess the first I'm I'm a consumer victim turned advocate. I've been helping people all over the country, to hopefully avoid the experience that I had. 8 9 Thank Now we will hear from Paula Rush. 4 5 KROSZNER: Thank you. I did borrower. not My consider credit myself score was a subprime above 620. 10 Nonetheless, I fell victim to a lender and a broker 11 who totally misrepresented a loan to me. 12 option ARM loan, which you haven't talked much about 13 here today. 14 It was a pay But I'm here to tell you that this loan is a 15 HOEPA 16 damaging loan out there in this market. 17 any sense at all in a market that was appreciating, it 18 certainly makes no sense at all in a market when real 19 estate is depreciating. loan 20 on This are steroids. product selling This has an become a is the most If it made product affordability that 21 lenders 22 consumers, who are having trouble with adjustable ARMs 23 adjusting up. 24 temporary 25 lowered, but will increase very rapidly, and massive fix, as loan tool to The problem is it's only going to be a where payments will temporarily be NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 275 1 amounts of negative amortization is taking place. 2 So you're going to have a group of consumers 3 who are going to owe much more on their houses than 4 they're worth when these resets happen. 5 think you have problems now, if you continue to let 6 these loans proliferate, which they are, you're going 7 to have extreme problems in foreclosures going forward 8 when these loans reset. 9 So if you These loans also create phantom profits for 10 the lenders. 11 books, saying that they're getting full payments on 12 these loans, when in fact 70 percent are only making 13 minimum payments. 14 When they're booking profits on their So what is going to happen to the mortgage- 15 backed 16 become due and these people are not going to be able 17 to pay these loans? 18 going to be worth what is owed on these loans. securities 19 on Wall Street when these bills The underlying collateral is not I have to say that today you talked about 20 quite a few things. 21 do think this is trap that lenders use to trap people 22 into bad loans. 23 expensive 24 industry saying that these prepayment penalties are a 25 tool that they need to ensure that they have the loan One is prepayment penalties. I I was trapped into my loan by an prepayment penalty, and I dispute the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 276 1 for a certain amount of time. 2 I have a rate sheet with me today, that says 3 that the broker 4 prepayment penalty. 5 for putting me in this loan. 6 percent fee that he got for giving me a prepayment 7 penalty. 8 9 gets a kickback based on that My broker made $19,794 on a YSP Part of that was a one So these lenders are giving the brokers the money up front. That makes no sense for them to say 10 that they need that money on the back end in case the 11 person gets out of the loan. 12 broker. 13 or two days for doing a loan? Stop giving it to the Does any broker -- do you make $19,794 a day I don't think so. 14 This is the kind of fees these brokers are 15 making, and they're making it under the table, on the 16 back 17 doesn't even know that they're getting these funds. end, 18 in the form of YSPs that I have the rate sheets. 19 lot of other things. 20 this discussion. 21 won't 22 comments in writing. 23 be able appreciate that. 25 Lake. borrower They're based on a I have lots of things to add to I know we have limited time, so I to finish. GOVERNOR KROSZNER: 24 the I'll submit all of my Thank you very much. I We're now going to hear from Sylvia NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 277 1 MS. LAKE: Good afternoon Governor, and 2 thank you for this opportunity to speak. 3 Sylvia 4 Reinvestment Coalition, and NCRC operates a CRF, a 5 community rescue fund, and we have for many years. Lake. 6 We I'm see with the borrowers My name is National every Community day or very 7 regularly, who are on the verge of bankruptcy and 8 foreclosure 9 either mediate with the lenders to modify the loans 10 and terms, or arrange a rescue refinance with our loan 11 partner, which is HSBC. 12 due to abusive lending practices. We Most of the loans in the CRF program are 13 subprime 14 loans. 15 would agree with Congressional testimony, which was 16 offered by Sheila Bair from the FDIC, that in 17 cases these 18 would have 19 fixed rate loans. and non-traditional ARMs or stated income Due to our experience with the CRF program, we 20 borrowers, qualified borrowers for less for exotic expensive many loans, and safer So the devastation this is causing with the 21 predatory lending 22 especially knowing 23 legislation here 24 abusive 25 prime and subprime markets. lending is really that could federal have practices frustrating, because regulation and avoided much of the responsible here in the NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 278 1 NCRC believes very -- in strong limits and 2 prohibitions that could be applied to non-traditional 3 and high cost loans, in order to prevent unfair and 4 deceptive practices, which violate HOEPA. 5 Prepayment penalties. Federal Reserve must NCRC believes that 6 the apply strict limits to 7 prepayment penalties. 8 apply after the expiration of the teaser rate in ARM 9 and subprime loans. Prepayment penalties must not 10 We feel strongly that escrows for taxes and 11 insurance should certainly be included in every loan, 12 both prime and subprime, fixed and adjustable rate, 13 and 14 Comptroller of the Treasury that stated and low doc 15 income loans are prone to abuse by predatory lenders 16 and brokers inflating borrowers' incomes. 17 of abuse should not be allowed. stated 18 and low doc loans, we agree with the This type I'm just going to take a moment to speak 19 from 20 think when we speak of consumers in the abstract, it's 21 easy to distance ourselves from a problem that's very 22 real. personal 23 experience as a borrower, because I The borrower here is quite vulnerable to the 24 recommendation 25 borrower, there's one set of circumstances. of the broker. As a first time You are NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 279 1 clearly reliant on brokers' advisement. I got into a 2 piggyback loan. 3 PMI. 4 it would have seemed like the best option. 5 have seemed like the opportunity for me to get into a 6 home at that time. Fortunately, all it did was save me But if I had been offered an ARM or hybrid loan, 7 It would So I would just encourage you to use your 8 capacities here to enforce stricter regulation. 9 you. 10 11 GOVERNOR KROSZNER: Thank you very Thank much. We're now going to hear from Michael Nelson. 12 MR. NELSON: I'm Michael Nelson and I run 13 the credit ratings business for the U.S. mortgage- 14 backed securities for Dominion Rating Service, which 15 is one of the credit rating agencies. 16 My background is a little unique, because in 17 addition to working for the rating agencies for many 18 years, 19 mortgage-backed securities and actually worked for the 20 largest subprime lender at that time in the country 21 for many years. I 22 worked Just as an investment banker, creating So I have an interesting background. briefly in terms of S&E liability, 23 which 24 liability on some of these laws, HOEPA's been pretty 25 effective in that regard, in terms of creating a limit is the capital markets issue relating to NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 280 1 on the secondary markets and what they could do. 2 The concern with S&E liability, and Michael 3 mentioned it; it was actually an interesting paper 4 here for the American Securitization Forum, is that 5 when it's not exact and when it's not limited, the 6 capital markets shut down. 7 New Jersey and Georgia and some of those instances. We've heard stories about 8 So what we would urge regulators, and we 9 talk with them regularly, is that while it's certainly 10 important that the capital markets be aware that they 11 are 12 precise and exact and limiting in nature as to what 13 the liability is, the market will tend to shut down. funding 14 In all of that these case, loans, that essentially if it's they'll not be no 15 funding for those assets whatsoever. 16 side, having worked at a lender, lenders do find ways 17 to make loans if the market wants it. 18 mean then in some cases they don't make mistakes, and 19 clearly we hear about many of those. From the lender That doesn't 20 But if there's not an opportunity for credit 21 out there, or a need for credit, it wouldn't in fact 22 occur. 23 of these lenders, the large ones, do buy from the 24 brokers that you have been hearing about, and I think 25 it's important to police the brokers, because in many I think that's something to be aware of. Many NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 281 1 cases that's where many of the loans are coming from. 2 From our experience in dealing with some of 3 these predatory lending laws, we've determined that 4 there 5 criminal penalties which are out there, which do cover 6 a variety of items such as a fraud and mortgage fraud, 7 etcetera. 8 can fall under those statutes. is a patchwork of existing, both civil and In many cases, I believe that these items 9 Somebody mentioned before about the Fed, and 10 I think there was a remark about whether they have 11 limited powers or not. 12 powers or not, having the Fed as the centerpiece, in 13 terms 14 figurehead, will make an enormous difference in my 15 opinion. of all the Whether they have limited other regulators, even as a 16 In terms of the specific items that were 17 asked about, I think in some circumstances they're 18 Okay and some are not. 19 prior 20 recently 21 documentation. speaker's and But just to talk about the comments, I'm fairly I took a mortgage comfortable with out the 22 I didn't see any disclosure in there that 23 said if you don't make your payment, your house could 24 be taken away. 25 could go up 50 percent in X amount of time. If you have an adjustable mortgage, it I looked NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 282 1 for that in my mortgage. 2 We need much better disclosure, and we need 3 it in simple language, just like the SEC takes 4 prospectuses and has it in simple English. 5 piece of paper that says "If we're offering you a 6 prepayment penalty, you should ask for a benefit." We need a 7 I think if we do those things and we educate 8 folks, as one of the other speakers said, they will 9 realize that they have options that they never thought 10 they had. 11 So thank you. GOVERNOR 12 We're now 13 Sweringa. 14 going KROSZNER: to hear REV SWERINGA: Thank from the you very Reverend Good afternoon. much. Gloria My name is 15 Reverend Gloria Sweringa. 16 of predatory lending. I'm also chair of Maryland 17 ACORN, County 18 Maryland's anti-predatory lending efforts. Prince 19 I George's really I am a victimized consumer appreciate ACORN, this and head of opportunity to 20 speak to all of you, but the problem is this. All of 21 this, dream. 22 Tweaking, 23 simplifying. 24 henhouse. 25 you know, this tantalizing, The is a rhetorician's changing things just a bit, You've already let the fox into the serpents of predatory lending are NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 283 1 sucking the blood and squeezing to death America's 2 homeowners in record numbers. 3 market behave better? 4 Justice, look the criminal element squarely in the 5 eye, and draw a line that's bright enough for this 6 blind lady to benefit from, that says "Enough. 7 more. How do you make the Take the blindfold off Lady No This far and no farther." 8 You can either decide to really protect the 9 homeowner or continue to abet the enemy, aid and abet 10 and 11 something a little bit about my story. give comfort to the enemy. Let me tell you 12 I paid off a bankruptcy in four months back 13 in '04 that I had to file, because my bottom feeder of 14 a predatory lender was calling in a forbearance that 15 was only in place because of my deadbeat deserting 16 husband's 17 financial responsibility. economically challenged approach to 18 I filed a protective 13, paid -- a bunch of 19 my relatives were obliging enough to die and leave me 20 some assets that I used to pay it off in four months. 21 In September of '05, I went home to a death, came 22 back and everybody's knocking on my door with every 23 scam imaginable. 24 25 I wouldn't have known that were it not for ACORN's training. Thank you, ACORN. I said to one NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 284 1 young man 2 attention?" 3 company has a sell by date on your house." 4 missed a payment. 5 had sent me into foreclosure. 6 "Why the heck am I getting "Reverend, don't you know? all this Your mortgage I had not I had not been notified that they I did not find out until I hired competent 7 representation, 8 They had not only sent me into foreclosure, not once 9 but twice. went It to seems court, to disputed me that the claim. Americans with 10 Disabilities Act, Title 2, Section on Communication, 11 entitles me to access to what goes on in my mortgage 12 banking situation. 13 Even though that bankruptcy judge warned my 14 predatory lender when I prevailed, I just found out 15 the other day the bankruptcy is still in place. 16 Now when the predators have that little 17 respect for all of you people, you're going to have to 18 get around to regulating. 19 20 GOVERNOR 23 KROSZNER: Thank you very much. We're now going to hear from Gilma Merkert. 21 22 Thank you. MS. MERKERT: Good afternoon. Gilma Merkert, and I'm a homeowner. My name is Okay, thank you. My name is Gilma Merkert, and I am a homeowner and I 24 live 25 opportunity to thank you for allowing me to be here, in Pennsylvania. I'd like to take this NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 285 1 and the reason I'm here is because I am a victim of 2 the predatory lending. 3 I am also an ACORN member from Pennsylvania. 4 In the name of all the owners that we're here in the 5 same predicament all over the country, kindly I'd like 6 to request from the federal government or whoever is 7 necessary, 8 immediately 9 possible. 10 to take this care abusing of way this problem, to stop of business, if it's Personally, I'd like to keep my home for my 11 son and my family. 12 much 13 request in my name but in the name of many other 14 people in the same predicament, because this is quite 15 like a nightmare. sacrifice I don't want to lose it. into it, and I'm here not I put only to 16 I haven't been able to sleep really good 17 because I said it's going to be my son's home, my home 18 and we cannot afford to lose it. 19 take 20 hopefully things could be better for all the families 21 in this country, I guess. the 22 right measurement Only if we can just at the right time, My son is in the Army, and he's serving the 23 country. 24 have him in a nice, decent home one day. 25 I have a loan; it was variable, and it did change Certainly, when he comes home, I'd like to Previously, NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 286 1 after three years when they told me. 2 So I went to the same broker, and I 3 requested to give me a similar product or something 4 better. 5 part. 6 thought it would change in five years, as he told me. What happened is he gave me a total different He gave me an ARM, adjustable loan, and I 7 It didn't. It changed immediately the next 8 month, the following month after I took the mortgage. 9 I call him immediately when I saw the options or 10 whatever. 11 and I was disgusted, because it was a nightmare right 12 from the beginning. 13 14 I never had any idea about these options, GOVERNOR Thank you. KROSZNER: Thank you very much. Next is Cheryl Harvey. 15 MS. HARVEY: Hello. I'm Cheryl Harvey. I'm 16 from Philadelphia and I'm a member of ACORN. 17 mother of six and I'm a widow, and I want to say that 18 not 19 predatory 20 neighborhood. just 21 for myself, lending, but because it's I was affecting a I'm the victim the of entire People who had homes who were raising their 22 children are now in shelters. 23 now homeless, and they need somebody to step in to 24 help them, because if you don't help them now, what's 25 going to end up happening is it's going to create a These same people are NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 287 1 catastrophe in the future, not just for them but for 2 their children, for their grandchildren. 3 As Gilma says, she wants to have a place 4 there for her son, for his family one day. 5 you not to just look at it as a case of where people 6 are coming here and you can't see what's happening to 7 them, because it hasn't happened to you. 8 9 I'm asking I want you to feel it as we feel it. you to know that we 10 neighborhoods, 11 country. 12 foreclosures 13 something to that effect. 14 and The it's news there People are happening is talking are. are feeling This hurting all about month, all it I want in our over the how many 116,000 over. So or you're 15 going to have to do something. 16 going 17 lending has went too far, and there are people who 18 aren't making enough money. to have to step in, The government is because this predatory 19 They just raised what was the small amount 20 of money to seven dollars, and the people can hardly 21 afford to pay their bills as it is. 22 they borrow money they can ill afford to pay back. 23 Their mortgages are going up, they're losing these 24 homes. 25 Now with this, They're not going to make a choice of paying NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 288 1 for a loan as in preference of having food on the 2 table, and I don't think anybody expects them to. 3 something has to change. 4 you who are listening here today won't say "Well, 5 Okay. 6 We'll go through a whole lot of rigmarole." 7 I can only pray that all of That won't work. We won't do it this way. I would say all of you come together in 8 agreement and make this change. 9 you. 10 11 So GOVERNOR KROSZNER: Make it today. Thank you Thank very much. Thank you, Governor. I'll Finally, we'll hear from Allen Fishbein. 12 MR. FISHBEIN: 13 quickly sum up the day in three minutes, if I can try 14 to do that. 15 and 16 America. Credit I'm Allen Fishbein, Director of Housing Policy with the Consumer Federation of 17 CFA is a federation of some 300 consumer 18 organizations organized 40 years ago to promote the 19 consumer interest, and home ownership is one of our 20 key concerns. 21 I just want to make four quick points and 22 observations 23 Number one, we believe it's vital that the Fed act 24 swiftly and decisively to use its very broad authority 25 under HOEPA to rein in unfair and deceptive practices that really came from the hearing. NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 289 1 in the marketplace. 2 Mortgage abuses that are resulting in many 3 homeowners being 4 afford, 5 We're 6 substantive provisions that have been discussed here 7 today. and going placed facing to in the submit mortgages prospect written of they cannot foreclosures. comments about the 8 But I want to say the fact that so many 9 homeowners are at risk at this stage is an indication 10 that the current consumer protection laws are largely 11 obsolete and inadequate, which shouldn't come as a 12 surprise, 13 consumer protection in this area has been enacted. 14 The market's changed a lot. 15 not. because it's been over a decade since Consumer protection has 16 The second point is we heard throughout the 17 day, and I think it cannot be emphasized enough, is 18 that the subprime market works differently than other 19 segments of the mortgage market. 20 loans 21 really on monthly mortgage payments. are 22 not sold Consumers based have on It's a push market; rates and fewer choices, are subject terms, almost but by 23 definition 24 vulnerable to be taken advantage of, which was the 25 original rationale behind the enactment of HOEPA back and therefore and more NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 290 1 in 1994. 2 Third, we believe the Fed's in a unique 3 position to level the playing field, that by adopting 4 substantive regulation in this area, it will apply 5 across 6 guidance cannot. the 7 board to Lastly, lenders, enhanced certainly in Disclosure, and which that is necessary but ultimately insufficient to curb a lot of 10 the abuses that are occurring, and that substantive 11 regulation that would prohibit abusive practices will 12 need to be adopted by the Board as well. 13 very much. Thank support, a 9 KROSZNER: with way concept GOVERNOR agree a 8 14 we all is Thank you you very much. 15 I'd like to thank all of the speakers for sharing 16 their views, and their personal histories. 17 very important. 18 not just big concepts and markets, but also about 19 individuals 20 tragedies in their lives. 21 and These are I am well aware that this is about families who are facing potential It's very important that we undertake the 22 right 23 personal tragedies as much as we can, and also make 24 sure to be able to provide credit, on a responsible 25 basis, to people who can handle it and who can make actions, to make sure that we avoid those NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com 291 1 their lives better because of it. 2 I want to thank you very much again for 3 coming 4 incredibly valuable to me and I think to both Sandy 5 and to Leonard, and hopefully it was very valuable to 6 you. sharing this day with us. It's been Thank you very much. 7 8 and (Whereupon, at 3:56 p.m., the hearing was adjourned.) 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com
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