The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
LEGISLATIVE PROPOSALS ON REFORMING MORTGAGE PRACTICES HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS FIRST SESSION OCTOBER 24, 2007 Printed for the use of the Committee on Financial Services Serial No. 110–74 ( VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00001 Fmt 6011 Sfmt 6011 K:\DOCS\39912.TXT HFIN PsN: TERRIE LEGISLATIVE PROPOSALS ON REFORMING MORTGAGE PRACTICES VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00002 Fmt 6019 Sfmt 6019 K:\DOCS\39912.TXT HFIN PsN: TERRIE LEGISLATIVE PROPOSALS ON REFORMING MORTGAGE PRACTICES HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS FIRST SESSION OCTOBER 24, 2007 Printed for the use of the Committee on Financial Services Serial No. 110–74 ( U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 39–912 PDF : 2008 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00003 Fmt 5011 Sfmt 5011 K:\DOCS\39912.TXT HFIN PsN: TERRIE HOUSE COMMITTEE ON FINANCIAL SERVICES BARNEY FRANK, Massachusetts, Chairman PAUL E. KANJORSKI, Pennsylvania MAXINE WATERS, California CAROLYN B. MALONEY, New York LUIS V. GUTIERREZ, Illinois ´ NYDIA M. VELAZQUEZ, New York MELVIN L. WATT, North Carolina GARY L. ACKERMAN, New York JULIA CARSON, Indiana BRAD SHERMAN, California GREGORY W. MEEKS, New York DENNIS MOORE, Kansas MICHAEL E. CAPUANO, Massachusetts ´ RUBEN HINOJOSA, Texas WM. LACY CLAY, Missouri CAROLYN MCCARTHY, New York JOE BACA, California STEPHEN F. LYNCH, Massachusetts BRAD MILLER, North Carolina DAVID SCOTT, Georgia AL GREEN, Texas EMANUEL CLEAVER, Missouri MELISSA L. BEAN, Illinois GWEN MOORE, Wisconsin, LINCOLN DAVIS, Tennessee ALBIO SIRES, New Jersey PAUL W. HODES, New Hampshire KEITH ELLISON, Minnesota RON KLEIN, Florida TIM MAHONEY, Florida CHARLES WILSON, Ohio ED PERLMUTTER, Colorado CHRISTOPHER S. MURPHY, Connecticut JOE DONNELLY, Indiana ROBERT WEXLER, Florida JIM MARSHALL, Georgia DAN BOREN, Oklahoma SPENCER BACHUS, Alabama RICHARD H. BAKER, Louisiana DEBORAH PRYCE, Ohio MICHAEL N. CASTLE, Delaware PETER T. KING, New York EDWARD R. ROYCE, California FRANK D. LUCAS, Oklahoma RON PAUL, Texas STEVEN C. LATOURETTE, Ohio DONALD A. MANZULLO, Illinois WALTER B. JONES, JR., North Carolina JUDY BIGGERT, Illinois CHRISTOPHER SHAYS, Connecticut GARY G. MILLER, California SHELLEY MOORE CAPITO, West Virginia TOM FEENEY, Florida JEB HENSARLING, Texas SCOTT GARRETT, New Jersey GINNY BROWN-WAITE, Florida J. GRESHAM BARRETT, South Carolina JIM GERLACH, Pennsylvania STEVAN PEARCE, New Mexico RANDY NEUGEBAUER, Texas TOM PRICE, Georgia GEOFF DAVIS, Kentucky PATRICK T. MCHENRY, North Carolina JOHN CAMPBELL, California ADAM PUTNAM, Florida MICHELE BACHMANN, Minnesota PETER J. ROSKAM, Illinois KENNY MARCHANT, Texas THADDEUS G. McCOTTER, Michigan KEVIN McCARTHY, California JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel (II) VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\39912.TXT HFIN PsN: TERRIE CONTENTS Page Hearing held on: October 24, 2007 ............................................................................................... Appendix: October 24, 2007 ............................................................................................... 1 125 WITNESSES WEDNESDAY, OCTOBER 24, 2007 Antonakes, Hon. Steven L., Commissioner, Massachusetts Division of Banks, on behalf of the Conference of State Bank Supervisors .................................... Bowdler, Janis, Senior Housing Policy Analyst, National Council of La Raza .. Bryant, John Hope, Founder, Chairman, and Chief Executive Officer, Operation HOPE .......................................................................................................... Calhoun, Michael D., President and Chief Operating Officer, Center for Responsible Lending ................................................................................................. Dugan, Hon. John C., Comptroller, Office of the Comptroller of the Currency . Gruenberg, Hon. Martin J., Vice Chairman, Federal Deposit Insurance Corporation, on behalf of Chairman Sheila C. Bair ................................................ Johnson, Hon. JoAnn M., Chairman, National Credit Union Administration ... Kroszner, Hon. Randall S., Governor, Board of Governors of the Federal Reserve System .................................................................................................... Lackritz, Marc E., President and Chief Executive Officer, Securities Industry and Financial Markets Association .................................................................... Lampe, Donald C., Womble, Carlyle, Sandridge and Rice, PLLC ....................... Pfotenhauer, Kurt, Senior Vice President for Government Affairs and Public Policy, Mortgage Bankers Association ................................................................ Reich, Hon. John M., Director, Office of Thrift Supervision ................................ Rock, Bradley E., Chairman, President, and Chief Executive Officer, Bank of Smithtown, on behalf of The American Bankers Association and America’s Community Bankers .................................................................................... Savitt, Marc, President, The Mortgage Center, and President-elect, National Association of Mortgage Brokers ........................................................................ Shelton, Hilary O., Director, NAACP Washington Bureau .................................. Taylor, John, President and Chief Executive Officer, National Community Reinvestment Coalition ....................................................................................... 29 63 69 61 21 20 25 27 99 102 97 23 96 101 65 67 APPENDIX Prepared statements: Marchant, Hon. Kenny ..................................................................................... Antonakes, Hon. Steven L. .............................................................................. Bair, Hon. Sheila C. ......................................................................................... Bowdler, Janis .................................................................................................. Bryant, John Hope ........................................................................................... Calhoun, Michael D. ......................................................................................... Dugan, Hon. John C. ........................................................................................ Johnson, Hon. JoAnn M. .................................................................................. Kroszner, Hon. Randall S. ............................................................................... Lackritz, Marc E. .............................................................................................. Lampe, Donald C. ............................................................................................. Pfotenhauer, Kurt ............................................................................................. Rock, Bradley E. ............................................................................................... Savitt, Marc ...................................................................................................... Shelton, Hilary O. ............................................................................................. 126 128 143 153 159 167 195 206 226 236 241 253 270 281 292 (III) VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00005 Fmt 5904 Sfmt 5904 K:\DOCS\39912.TXT HFIN PsN: TERRIE IV Page Prepared statements—Continued Taylor, John ...................................................................................................... ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Kanjorski, Hon. Paul E.: Joint statement of the Appraisal Institute, the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers ........... Statement of Lenders One/National Alliance of Independent Mortgage Bankers .......................................................................................................... Statement of Maureen McGrath on behalf of the National Advocacy Against Mortgage Servicing Fraud .............................................................. Statement of the National Association of Realtors ........................................ Meeks, Hon. Gregory: Letter from Hon. Martin J. Gruenberg containing additional information in response to a question posed at the hearing .......................................... VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 296 K:\DOCS\39912.TXT HFIN 312 326 329 334 336 PsN: TERRIE LEGISLATIVE PROPOSALS ON REFORMING MORTGAGE PRACTICES Wednesday, October 24, 2007 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to notice, at 10:06 a.m., in room 2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. Members present: Representatives Frank, Kanjorski, Waters, Maloney, Gutierrez, Watt, Sherman, Meeks, McCarthy of New York, Miller of North Carolina, Green, Cleaver, Bean, Moore of Wisconsin, Davis of Tennessee, Perlmutter; Bachus, Baker, Pryce, Castle, Royce, Manzullo, Biggert, Shays, Miller of California, Capito, Feeney, Hensarling, Garrett, Brown-Waite, Barrett, Neugebauer, Price, Davis of Kentucky, McHenry, Campbell, Bachmann, Roskam, and McCarthy of California. The CHAIRMAN. The hearing will come to order. I apologize for being late. I had a problem this morning picking up my cleaning. And when I complained, the cleaner told me that it was the fault of Congress because they couldn’t get good workers. So, I apologize, and I’m looking for a new cleaner. This is a very important hearing, and I am very appreciative of all the work that has gone into it. I want to thank all of the witnesses. Every one of the witnesses today has either in person or through his or her organization been a very constructive participant in this discussion about what to do. And I want to say this: We have, I think, a very important piece of legislation, and I believe that it is important for us to pass this before we adjourn. And the good news for people who worry about hasty legislation, not necessarily good news for everybody’s family, is that the majority leader has just announced that we will be meeting on the 4th, 5th, and 6th of December and the 11th, 12th, and 13th of December. So we have some time, and we’re going to be pushing back some of the markup on this. I want to say two things: I think it is very—don’t look at me, Gresham, it’s the majority leader’s fault. I am very much convinced that we will pass a bill out of third party that is very much like what has been introduced. I am also convinced that it will not be exactly what has been introduced. This is not an area where dogmatic certainty behooves anybody. We are dealing with some new phenomena. We are dealing with a relatively new financial phenomenon, and that’s really want I want to talk about today. I want to really just set here the conceptual framework. (1) VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 2 We have seen in the past 10 years or so, maybe more, great changes in the way mortgages are originated. Innovation in the financial sector is of course very important, and we should be clear. Innovation does not lead to deeply rooted new practices unless it’s of value. There are innovations that wither and die because they don’t serve a real function. What we have in the mortgage area are a set of innovations—basically origination by people outside the banking system—by brokers not working for banks, accessing pools of money that are not subject to deposit insurance. And we then have the phenomenon of the secondary market. I want to be very clear. I regard both of those as very good things. These are positive and beneficial additions to our ability to finance housing. The problem is not within innovation, because I think there’s a self-correcting here. If the innovation doesn’t serve a positive function, it does not survive in our market economy. The problem is that there is an inevitable tendency for innovation to outstrip regulation. That’s why they call it innovation. And our job is to have a regulatory framework that keeps up with the innovation in a way that allows the benefit and the value of the innovations to flourish while providing the safeguards against abuses that it’s the job of regulation to do. I believe that we have seen much more of a problematic level of activity in the unregulated than in the regulated sector of mortgage origination. It is not because the people doing the origination in the unregulated sector are morally inferior to those in the regulated sector. I think that morally most people are good, but there are some people who are abusive. The problem is that we have in place with regard to banks and credit unions a set of regulations enforced reasonably by regulators which hold in check some of the abusive practices, and we don’t have that in the unregulated sector. And so the first part of our job is to extend in general the kind of regulation that has served us well, in my judgment, in the regulated sector, to the unregulated sector. And that means you allow the process to flourish, but you try to prevent abuses. The other area that we deal with here is the secondary market. The secondary market has been very important. It has clearly provided increased liquidity, and that means more money for people to buy homes and live in their homes. But, as with any other phenomenon, it has a potential for abuse. And in particular, and I quote Ben Bernanke here, what he calls the originate-to-distribute model, provides increased liquidity but it also diminishes responsibility. The regulatory framework provided responsibility. Banks that lent money to people when they shouldn’t have, and who were visited by the representatives of some of the people at this table who said that really was not such a good idea; don’t do it again. And in effect, what we’re trying to do is to replicate that in the other area. But you also have in the secondary market the problem that the lack of responsibility that could exist at the origination level could then be passed along. And I know there are people who have said that if we do anything to the secondary market in any way to increase any kind of regulation, we will destroy it. The notion that VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 3 even a reasonable and mild form of regulation is somehow fatal to any kind of market activity is a frequent argument. As I said before, people who want to read it and experience it at its fullest should go back to the Congressional Record of the 1930’s and read the debates about the establishment of the Securities and Exchange Commission when the country was told that sort of regulation would kill the market. Indeed, we are now in a situation in which one of the problems in the market is a lack of investor confidence. We have added overreaction here. People went from being too sanguine about some of this paper to being much too negative about it. I believe that rules that give the investor some better assurance that what they are being offered has a certain quality to it that is market enhancing, not market destroying. And if we do it right, we can help restore investor confidence and that obviously is a very important issue. So we have a form of increased responsibility not on the ultimate investor, but on the securitizer, the people who actively package and sell this, because those are people whom we believe can be charged with some additional duty to make sure that what they are selling is material that should have been done in the first place. And I was pleased to see that Chairman Bernanke has agreed that some of this is done. Now I understand there are people who say we should do nothing. We should be very clear. We are now in the most serious financial crisis the world has seen since the late 1990’s. I believe it will be one that we will surmount. I don’t see terrible disaster looming, but we are in a serious crisis. It is inconceivable to me that we, the Congress, and the regulators working together, would do nothing to diminish the likelihood of a repetition of some of these abuses. The innovations in the mortgage market have produced a lot of new homeowners, which has led to a degree of financial crisis far beyond what anybody expected. And I think there was—I didn’t see a lot of people predicting that the subprime crisis was going to spill over into the mortgage market in general, that jumbo mortgages would be in trouble. I didn’t see many people predicting that the mortgage crisis was going to spill over into the financial market at large. I know there are people who now say that they knew this was coming all along. I am waiting for the e-mails in which they made that statement dated sometime ago. Apparently, all of those e-mails were purged, because while a lot of people now tell me they saw it coming, I don’t remember anybody telling me they saw it coming when it was coming. And I think the very fact that we were taken by surprise, all of us, to the extent that we were, is one argument for doing some things and putting some things in place that have to be done. To summarize, I believe that—and I’m very grateful. We have had a very participatory process. We will be marking this bill up probably in a couple of weeks. It’s an intensive period but it is, I think, a high priority for members. I do expect, as I said, that the basic outline will be preserved, but we have some specifics where people will be discussing things. There are additions. The chairman of the Capital Markets Subcommittee has some very important additions that he has proposed. There are some proposals that were made in the testimony VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 4 that seem to be very important. There are aspects of the bill introduced by the ranking member that are important, and I should say that 2 years ago at this time, the ranking member and I and our two colleagues from North Carolina were trying very hard to work out a bill. I wish we had been able to—I wish we had been allowed to go ahead. We might have avoided some problems. But I think there is on both sides here a recognition of a problem. There will be some differences about how to resolve the problem. But there is and has been for some time a common recognition of a problem and the need to try to preserve a flow of mortgages while diminishing abuses. That’s the job of this committee. I will now recognize the ranking member. We’re going to, because of the importance of this, take the full 20 minutes on each side for opening statements. So there will be 20 minutes of opening statements on each side. I plan to be here all day. I have cleared my calendar. It will be a long day, but it is very important that we do all this, and the other members will be free to come and go. Their staff members will be here. I believe this is a hearing which will have a major impact on what we do. The gentleman from Alabama. Mr. BACHUS. Mr. Chairman, I appreciate you holding this hearing. The testimony of the witnesses will be helpful to us as we consider measures to curtail predatory practices going forward to ensure that mortgage credit remains available for those subprime borrowers who are worthy of it and have the ability to repay it. The committee has a history of coming together in a bipartisan way to address serious issues, and I hope that will be the case in this regard. I will say that the role of Congress is not to either insulate or bail out borrowers or investors or lenders when they make bad decisions. And that’s whether or not you’re talking about someone borrowing for a home or a large financial institution. I hope that whatever we do, we don’t end up with a taxpayer-funded bailout or a taxpayer guaranteed result. There has been some recognition, I think, by all of the members for some time that we needed to move and eliminate predatory lending. For that reason, last July, several committee Republicans and I introduced a subprime lending reform bill to combat abusive practices and to encourage greater accountability and transparency throughout the mortgage industry. In taking action on this matter, our goal should be to correct existing problems if we can, while not creating new problems. Let us not forget that subprime lending has made it possible for millions of low- and middle-income families to purchase homes. Even after the events of the past several months, 85 percent of subprime borrowers are making timely payments and enjoying significant benefits of homeownership. There has been talk about many of them, their mortgages will adjust in the future, but the market is already anticipating that, and many of the lending institutions are working with the borrowers on a one-to-one basis and adjusting the contracts, and I applaud that. I think that’s primarily how we’re going to deal with this going forward is for borrowers and lenders without the interference of the Congress or the government in the process. That’s always of benefit to everyone, because it’s never—we have said this in many, many VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 5 hearings; foreclosure is never in the best interests of a lender, a borrower or an investor. And that ought to be a strong motivation for all of them to get together. When the Congress gets involved, they sometimes only complicate things. As I said earlier, when the government gets involved, it usually is at taxpayers’ expense. Preserving the dream of homeownership and access to credit makes the dream possible and should be a high priority as we work together on legislative responses. And we do need to appreciate the fact that when there are foreclosures in neighborhoods and communities, it not only hurts the homeowner, it not only hurts the lender and the investor, but it also hurts those communities. It’s essential that we be sensitive to the plight of homeowners facing sharply higher payments as their adjustable rate mortgages reset. And we should be especially mindful that any new limitations we impose on mortgage lenders do not make it less likely that families can refinance their mortgage loans with more affordable financing. I think the action of the House Judiciary Committee and their bankruptcy legislation very much is going to threaten the availability of lending going forward. As we evaluate legislation, we should consider carefully how similar legislation on the national and State level in the past has affected the availability and affordability of credit to those who need it most. We need to determine whether the laws on the books today have had their intended effect, or whether in some instances they have actually harmed the low- and moderate-income families that they’re designed to help. The data on this subject has been studied and interpreted by a number of industry and consumer groups as well as academics. Their conclusions vary greatly. Hopefully our testimony from the witnesses will bring some clarity to that subject. In this regard, I’ll mention that North Carolina—and we’ve talked about the North Carolina bill, and Title 3 of this legislation adopts the North Carolina model. But I will say that in many North Carolina towns, the amount of mortgage foreclosures and predatory lending loans is significantly higher than other places in the country, and one wonders how a law which even I have said has many good provisions, it certainly hasn’t prevented predatory lending in the past. As legislators, while the conclusions we make and the actions we take have far greater weight than the reports of those who simply analyze the data, we have both the privilege and the responsibility of acting in the public’s interest. That responsibility is particularly great when the things we do affect the hopes, dreams, and basic needs of all Americans. The legislation before us, like all regulatory interventions, requires a balancing of interests. The competing values in this case, the availability of credit on one side, and protecting borrowers from sharp practices and unethical conduct on the other. Our task is to strike an appropriate balance between these costs and benefits. The testimony of the witnesses will help us judge where that balance lies. At this time, Mr. Chairman, I’d like to recognize the gentlelady from Illinois for 3 minutes. The CHAIRMAN. The gentlewoman is recognized. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 6 Mrs. BIGGERT. Thank you, Mr. Chairman, and thank you for holding today’s hearing. I would like to welcome our distinguished witnesses. After 9 months and 6 hearings and one resolution addressing the subprime and foreclosure issues, I’m glad that we have reached this day. As we proceed, I’d like to outline a few items that I would urge my colleagues to take into consideration, first, do no harm. Our committee should aim to preserve access to credit and homeownership opportunities for qualified low- and middle-income borrowers. While we work to protect homeowners from unscrupulous practices, we should not, for example, characterize all subprime loans as predatory. Of the 68 million American homeowners, 50 million hold mortgages, and 13 million of them are subprime mortgages, and approximately 750,000 homeowners with subprime loans are in foreclosure. This number is expected to rise to millions next year, but we must keep in mind that the majority of homeowners will keep their homes. One or more of today’s witnesses may utter the phrase, ‘‘Don’t throw the baby out with the bath water,’’ and I couldn’t agree more. Second, I would like to see as a final product here is one that facilitates transparency in the mortgage market, creates a level playing field, promotes strong underwriting standards, and fosters competition. Achieving these objectives is important for both the primary and secondary mortgage market participants. It’s a win for all consumers, lenders, and investors if they more clearly understand the loans. Bad actors and bad products are more likely to fall by the wayside. Liquidity and credit will expand, and homeownership is sure to flourish. I hope we will look at including the issues of mortgage fraud and financial counseling in a bill. And third, I’d like to thank the chairman for his comments today in Politico, in which he was quoted as saying that everything is negotiable. And while I must say I have never before heard him admit that he is not the emperor, I nonetheless appreciate the sentiment behind his quote and look forward to working with him. It’s important for future American homeowners and the economy that we put political agendas aside and get this right. Too much action and we worsen the problem. Too little action and we allow it to happen again. So I look forward to working with my colleagues on both sides of the aisle to craft common sense and balanced legislation. Thank you, and I yield back. The CHAIRMAN. Before I recognize the chairwoman of the subcommittee, I would just say to my colleague from Illinois that if I were the emperor, it is certainly was a good thing that I went to the cleaners today. Mrs. BIGGERT. Yes. You must have clothes. [Laughter] The CHAIRMAN. The gentlewoman from New York is now recognized. Mrs. MALONEY. Thank you, Mr. Chairman. And I want to congratulate you on the introduction of this ambitious and comprehensive bill and to welcome the witnesses that will help us refine it. This bill clearly demonstrates the intent of the chairman and Democrats in the House to address the subprime crisis in a thor- VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 7 ough and effective way. Over the course of this congressional session, we have held a number of hearings in my subcommittee and in the full committee on the critical problems posed by the meltdown of the subprime mortgage market. Those hearings made it clear that this is a many-headed Hydra of a problem, and that we need to be careful that as we chop of one head, a new, more vicious one does not sprout in its place. Early in this process, one mortgage banker said to me that any solution must change the incentives of all market participants. I came to fully appreciate why that is true through the testimony I heard and the hearing record that we put together. This is not a problem that can be blamed on a few rotten apples among brokers or mortgage originators. It is not a problem that can be laid at the doorstep of any one sector, whether it is the securitizers, the secondary market, or the primary lenders. Regulators failed to act, but past Congresses also failed to pick up on the failure. This bill attempts to change the incentives of all participants across the board. For that, it is a bill that the Democrats can be proud of. Like many bills that attempt to tackle so many aspects of one problem, it has many rough edges, some of which members have already noted, and we will be working on it through the legislative process to smooth that out. I, for one, plan to listen carefully to the comments of all stakeholders, consumers and to see what tweaks might be needed or added. This hearing is the first in that process, and I look forward to the testimony. The CHAIRMAN. The gentleman from South Carolina is recognized for 2 minutes pursuant to the list I have been given by the ranking member. Mr. BARRETT. Thank you, Mr. Chairman. To our distinguished panel, thank you for being here. I think we can agree on a couple of basic things. One, that those bad actors who engage in illegal acts should be punished, and laws against fraudulent activity in the mortgage market should be enforced. I think we can also agree that lenders are making loans that they should not make, and people are borrowing money that they probably can’t pay back. I also think that many homeowners out there should be afforded the access to credit as long as they can pay their loans back. However, we may disagree on one basic point. I believe that the free market does the best job of providing affordable and accessible products. And I do think that includes mortgages. Through legitimate innovation in the private mortgage market, more people are able to get mortgages at lower rates than ever. And I can’t deny that there have been some major problems, and there’s some need for some short-term help. But long term, these are better remedied through the natural market actions and targeted regulations, both of which we’ve started to see. I think it would be a major mistake to shift this market through excessive and rushed regulations which may likely lead to unforeseen consequences. I wonder if the consequences that the majority party has expanded the government’s role in the mortgage market, at the same time they want to make it exceedingly difficult for the private VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 8 mortgage lenders and brokers to conduct business. While we do need to ensure that customers are protected by making sure that their mortgage practices are transparent and reasonable, and that fraudulent activities are punished, we cannot afford to regulate the subprime mortgage market out of existence, and make it so that less wealthy borrowers can only borrow from one lender—the Federal Government. As a former small business owner, I can personally attest to the power of relationships when providing credit. I was a small furniture dealer. And there’s a lot of power—a lot of power—in looking somebody in the face and shaking their hand. In many cases, that’s much stronger than a contract. Something tells me our Federal Government won’t be able to quite provide that same service to our homeowners. I look forward to your testimony. I look forward to working on a bill that keeps all this in mind, and I yield back. The CHAIRMAN. The chairman of the Subcommittee on Capital Markets is recognized for 3 minutes. Mr. Kanjorski. Mr. KANJORSKI. Thank you, Mr. Chairman. Mr. Chairman, I would like to congratulate you and many of the fellow members who have taken the time to work on H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act. It contains a number of new provisions that I sought to address in the last Congress, including broker licensing reforms and anti-steering mandates. As we proceed with this consideration, I will be focusing most of my attention on the provisions related to assignee liability, which is within the jurisdiction of the Capital Markets Subcommittee, and the need for these new national standards to apply uniformly across the country. I have also introduced H.R. 3837, the Escrow Appraisal and Mortgage Servicing Improvements Act, to address many issues not outlined in H.R. 3915, but which also contribute to problems in the mortgage lending marketplace. The problem of abusive and deceptive lending is complex, and it requires a comprehensive solution. H.R. 3837 should be part of any solution that the Congress considers. H.R. 3837 also has attracted broad support. Some of these parties include the Center for Responsible Lending, the National Association of Realtors, the National Community Reinvestment Coalition, the Appraisal Institute, and the National Alliance of Independent Mortgage Bankers, among others. At this time, I ask unanimous consent to insert into the record statements from the Realtors, the Appraisal Institute, and the National Alliance of Independent Mortgage Bankers on these proposals. The CHAIRMAN. Without objection, it is so ordered. Mr. KANJORSKI. Mr. Chairman, I have listened to several of my colleagues, and I sense a bit of fear, on the one hand that we are going to move too excessively with regulatory order, trying to create or establish stability out of chaos. And on the other hand, a fear that the majority party is going to be doing something that has been undone in the past. The reality is, this committee and the Congress has been struggling for many Congresses to get our hands around predatory lending. We have had some good bills. I have had the occasion to sponsor those bills with colleagues on the other side of the aisle, and VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 9 I think if in past Congresses we had seriously moved on those pieces of legislation, perhaps some of the problems we face today would have not have come to fruition. However, all that being said, we do have a serious problem. It ranges from being a problem that can be solved, to some people saying it could be catastrophic in result. In either regard, it is essential that we provide the rules, regulations, and guidance to the financial services industry of this country to be certain that any damage that is already done has an opportunity to be corrected, and to prevent future damage. I look forward to these hearings, in order to see how we can come to a consensus. As our ranking member indicated in his opening statement, that is what this committee needs, and that is what this Congress needs. This is a problem that faces America, not Republicans and Democrats, not working people or businesspeople, but all of us, because it is so substantial to our very existence as citizens. So I congratulate you on these hearings and I yield back the balance of my time. The CHAIRMAN. The gentleman from California, Mr. Campbell, is recognized for 2 minutes. Mr. CAMPBELL. Thank you, Mr. Chairman. As you indicated earlier, the broad problem that we’re dealing with here is actually a problem of the entire economy. This crisis, this lending crisis is clearly bleeding into other parts of the economy and has slowed our economic growth and potentially threatens a recession. So this is not just about this lending, but this is about what we’re doing to try and keep the economy growing, rather than see the economy falling into shrinking. Part of the solution clearly is that people who want to buy homes, people who want to restructure their financing, people who want to refinance, have the ability to do so, and that the credit markets, which are now very, very tight and have tremendous risk premiums, become loosened up, and that those risk premiums go down. Now this does not clearly mean that we want to go back to the bad practices that got us into this problem in the first place. But we clearly need to be fostering legislation here that restricts those bad practices while allowing the vast majority of lending to occur and to actually occur more frequently than it is today right now. My concern is that this bill could move us farther away from that goal rather than closer to that goal. Arguably, the people who engaged in the bad practices are already paying a pretty high price. There are a lot of people who are now—companies that are now bankrupt. There are a lot of banks and big financial institutions reporting significant losses. But still, some regulation in this area, I think, makes sense to ensure that we don’t do this sort of thing again. But provisions out there that would cause lenders not to lend, or originators not to originate, or securitizers not to securitize, because of potential downstream liability, or because of restrictions on legitimate loan packages, would not be wise, in my view, and would not move us towards an eventual goal of enabling people to VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 10 borrow money so we can keep houses selling and this economy moving. I look forward to hearing the testimony of all the witnesses and look forward to working together to ensure that we have a bill that moves us towards the solution and not away from the solution. With that, I yield back. The CHAIRMAN. The gentlewoman from California, the chair of the Housing Subcommittee. Ms. WATERS. Thank you very much, Mr. Chairman. I, too, would like to congratulate you for holding this hearing today, and I am very, very pleased to co-sponsor the Mortgage Reform and AntiPredatory Lending Act of 2007, in significant part because I know how painstaking and consultative the process was that generated it. The subprime crisis is large, complex, and far from over. Its impact has been felt nationwide, but not equally distributed across the country. Simply put, Californians—California joins the rust and sun belts at the center of the foreclosure wave. Foreclosure rates in California rank third in the country and are 99 percent higher than the same time last year. Meanwhile, as many as 1.5 million subprime adjustable rate mortgages carry the potential for serious financial distress by 2009. H.R. 3915 is designed to make sure this doesn’t happen again. In that sense, we are here today to talk about prospective actions, not necessarily solutions to the current crisis. But the two are clearly linked. I’m concerned that as little as 1 percent of the at-risk subprime loans have been modified by services to date, despite highly publicized initiatives. Congress is limited in its ability to require the mortgage industry to clean up the mess they made in a largely unregulated environment, but the industry’s track record should inform our assessment of any claims they make today and going forward to having the ability to prevent and address future messes absent significant Federal regulation. This said, a delicate balance must be maintained between protecting borrowers on one hand and encouraging innovation in mortgage lending and sustaining the critical secondary mortgage market on the other. H.R. 3915 strikes this balance. Perhaps the most important steps the bill takes are to impose a Federal duty of care on mortgage originators and minimum standards on all mortgages. It is clear to me that we need to prevent the now widespread practice of getting people into loans they can’t afford. To that end, it’s reasonable to require licensed originators to present consumers with mortgage loan products appropriate to their circumstances. Underpinning this must be some minimum standard regarding the borrower’s ability to repay, which H.R. 3915 establishes. I believe this is a sound standard to impose universally in the mortgage market. Indeed, regulated entities have long faced similar standards from their regulators. To prevent mass exodus from the mortgage markets, the bill limits damages to 3 times the originator’s fee plus the consumer’s cost. Similarly, although the bill for the first time creates securitizer liability, such liability is limited to recession—recision of the loan and consumer cost. The bill also creates a safe harbor for prime loans and private loans that meet reasonable documentation and underwriting standards. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 11 Is this the perfect balance between rights and remedies? I don’t know that any of us can know for sure at this moment, but I look forward to hearing from the witnesses today on that point. In sum, this bill is about incentives, balancing incentives to innovate against incentives to go over the line and marketing inappropriate products to borrowers and then whisking the risk off to the four corners of the global economy. I’m particularly pleased that H.R. 3915 removes the most destructive of such incentives, severing the link between the compensation of the originator, whether a mortgage broker or other entity, and the terms of the loan. Minority borrowers have been disproportionately steered to costly loans in part because the fees such loans generate for originators are higher than more appropriate products. H.R. 3915 correctly prohibits this practice. I thank you, Mr. Frank, for this hearing today, and I look forward to working with you to solve this problem. The CHAIRMAN. Thank you. Just to let people know, there’s a great deal of interest in this, and I think it is useful for people to know where the members stand, so we’re going to probably go for another 20 minutes or so on opening statements. The gentleman from North Carolina is now recognized for 2 minutes. Mr. MCHENRY. Thank you, Mr. Chairman. I thank you for holding this hearing. And I agree with the chairman. We need to take steps to make sure that both borrowers and lenders who are going through this challenge in the mortgage marketplace are good actors, and that goes for both sides of the transaction. According to the latest economic forecast, the housing market is in the process of correcting itself. We’re at a mid-market correction, which will be going on for, well, some say a year, some say more. And it’s a question of how Congress should act, and the proper actions that Congress should take. My concern is that the chairman’s bill will harm the mortgage marketplace and make it further—increase the level of difficulty for those facing default and foreclosure now to refinance their way out of this, to actually get in a mortgage that they can sustain, and so they can stay in their homes. I believe that with the assignment of liability, both in the secondary market and the so-called suitability standards, which allow trial lawyers to determine whether or not the mortgage broker gave them the best, most ‘‘suitable’’—a very ill-defined term—as heretofore laid out, that those two elements will further constrict the marketplace, the lending marketplace, which has already been constricted. Finally, the third element of the bill takes the North Carolina statute and nationalizes it. The North Carolina law has not been all good. I’ll have some colleagues on the other side of the aisle say that it was. But we have not had the level of lending in North Carolina because of the law that we have in place on mortgages. I believe if the Federal Government puts a proscriptive element into what can or cannot be lent in the mortgage marketplace, we will be further harming those who are trying to get out of dire situations now. So, therefore, if this bill is passed, I believe it will deepen the trough of the mortgage challenge that we’re facing and really potentially push us into a housing recession. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 12 I think we have to have a very balanced view of how we move forward. I think we need to focus on relief for those currently facing default and foreclosure, and then long-term, better disclosure and a better understanding in the marketplace of what consumers are actually purchasing. And so with that, I thank the chairman for holding this hearing, and I thank the ranking member for yielding. The CHAIRMAN. The gentleman from Illinois, Mr. Gutierrez, for 3 minutes. Mr. GUTIERREZ. Well, thank you, Mr. Chairman. I applaud your leadership on this issue. I want to declare my support for H.R. 3915. I’m proud to be an original co-sponsor of the bill, and I want to take a moment to thank Congressman Miller and Congressman Watt for their hard work on this issue over the years. I was going to introduce legislation on this issue, but I had confidence that my colleagues and my chairman would bring forward a good and comprehensive product, and I was right. They have. I’m pleased that H.R. 3915 retains the basic provisions of the MillerWatt bill in the last Congress. I’m also pleased that the bill creates a national mortgage originator database and establishes a minimum Federal minimum standard for originators without including an outright preemption of State law. Having said that, I’m concerned that the standards required for meeting the definition of a qualifying State law lack specificity in several vital areas. For example, the bill mandates that State laws require mortgage originators to, ‘‘receive minimum training and undergo a background check before becoming licensed.’’ I believe we should specify the minimum number of hours of education and training originators must complete before being eligible for licensing. We should establish a minimum number of hours of ethics training prior to licensing, as well as an annual ethics training requirement to maintain a license. I believe we should mandate a criminal background check with fingerprints prior to licensing similar to the standards introduced in legislation sponsored by Ranking Member Bachus. This type of background check will substantially increase the chances of a national database being an effective tool of weeding out bad actors in the industry. I believe the general approach to qualifying State law standards in H.R. 3915 invites mischief during the rulemaking process, and it leaves the door open for some States to even dilute their existing standards and still meet the definition of qualifying State law. I think the bill states that originators are required to make full, complete, and timely disclosure, but fails to offer any guidance as to what qualifies as a timely disclosure. Is 2 hours before closing timely? Two days? We should give regulators more guidance in this area. Finally, I’m not inherently opposed to capping remedies. But the remedies available to consumers must be substantial enough to effect behavior change in the marketplace. I look forward to hearing from the witnesses, and I thank you all for coming this morning and being with us. And, again, I thank Congressman Miller and Congressman Watt, and, you, Mr. Chairman, for improving this bill as we move forward. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 13 The CHAIRMAN. The gentleman from California, Mr. Royce, for 2 minutes. Mr. ROYCE. Thank you, Mr. Chairman. On the issue of assignee liability, I believe implementing assignee liability as is done in this bill would be an egregious mistake. If we can learn anything from the market turmoil over the last few months, we should understand that the problem in the subprime sector has impacted our capital markets and it has the potential to spur an economic downturn. If assignee liability is improperly applied, players in the secondary market will simply reject the purchase of loans that expose them to potential liability that cannot be determined or quantified. The likely result will prevent many creditworthy borrowers from receiving financing, and the credit crunch will spread even further. Second, as the Wall Street Journal points out today, this bailout gives delinquent mortgage borrowers a new trick to essentially enjoy free rent for up to 30 years if a borrower has to endure the sad experience of foreclosure, they’ll have the ability to recover all of the principal and interest paid over the entire history of the loan as long as they can convince a court that they didn’t have a reasonable ability to pay at the time the loan was originated. It doesn’t take too much imagination to see how this could be abused. The question I hope our witnesses address is, won’t lenders be forced to raise rates for everyone to price this risk into loan products as a consequence of the provisions in this legislation? Thank you. I yield back, Mr. Chairman. The CHAIRMAN. The gentleman from Texas, Mr. Neugebauer. [No response] The CHAIRMAN. The gentlewoman from West Virginia, Mrs. Capito, ranking member of the Housing Subcommittee. Mrs. CAPITO. Thank you, Mr. Chairman. I’d like to thank you for holding this hearing today on a subject that certainly has been at the forefront of our Nation for many months now, the subprime and credit crunch crises. Every State and congressional district has been affected, some to a greater extent than others. States like California—and I would like to pause and say I know all of us in this room are very aware of what’s going on in California, and our thoughts and prayers are with the citizens of California, and we hope that situation resolves itself. But States like California, Virginia, Colorado, and Florida have experienced significant problems, with many of their citizens utilizing alternative mortgages, who are now unable to afford the higher payments. On the other hand, my home State of West Virginia continues to lead the Nation in homeownership and has had one of the lowest rates of foreclosure. There’s no one single entity that caused this problem, and responsibility is shared by all relevant parties, and I’m sure this hearing will help shed some light on that. Regulators were slow to understand the impact of designer loans. Lenders were overzealous in their lending practices. Many consumers were not fully aware of or did not comprehend the impact of their mortgage resetting at a higher rate. And Congress has been unable to act for fear of impacting a housing market that has been fueling our economy. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 14 Today, despite increasing foreclosure rates and the forecast of more difficult time ahead, there are encouraging signs that both regulators and industry alike are taking steps to handle this crisis. It is my hope that we can work together in this committee to produce a prudent response to this problem. It is important to remember that while subprime lending practices have caused harm to some, they have provided many more with the opportunity of homeownership when they otherwise would not have had that option. We must exert great caution to not over-legislate on this issue, and I’ve heard others express that concern, causing harm to those who have benefitted from this tool. This is a bipartisan problem that will need a bipartisan solution. And it is my hope we can build on the work done by the chairman, Chairman Frank, and the proposal that Ranking Member Bachus put forward earlier this year. I welcome the input of our witnesses today, both on the proposals and their thoughts on the best way to address this problem. As the ranking member on the Housing Subcommittee, I look forward to working with the rest of the members of the committee on this important issue. And I want to thank the chairman for holding this important hearing. I yield back. The CHAIRMAN. Next, one of the co-authors of the bill, the gentleman from North Carolina, Mr. Watt. We are getting towards the end here. Mr. WATT. Thank you, Mr. Chairman. The introduction of this bill a couple of days ago and the three panels that we will hear from today converts what has up to this point been largely a philosophical discussion to a discussion about a practical set of proposed solutions to problems that everybody recognizes exist. In the philosophical discussion, there is broad bipartisan agreement. I have not heard anybody who supports predatory lending in that discussion. I haven’t heard anybody who wants to dry up credit or make credit inappropriately more difficult. I haven’t heard anybody who wants to reduce access to appropriate credit or homeownership. I haven’t heard anybody who opposes financial literacy. I haven’t heard anybody who opposes steering or who favors steering inappropriately in the market, and I haven’t heard anybody who supports making loans to people who have not the ability to repay those loans. That’s the philosophical discussion in which we’ve been working, and our challenge has been to take that broad, philosophical discussion, those pious statements that we all say we believe in, and convert them into some legislative language that will accomplish the objectives that we say we support. I’m hopeful that this legislation will take this philosophical discussion and convert it to a practical set of solutions, and I hope our witnesses today will really kind of get away from the broad, philosophical, pious statements that we’ve been making and really get into the guts of the bill and tell us what works and what doesn’t work so that we can try to address the things that everybody agrees need to be addressed. So, I’m looking forward to this. I thank the chairman. I thank Representative Miller in particular for being out in the front of this VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 15 a long time ago. And I hope we can see some light at the end of this tunnel, and that the light is not a train coming toward us, but some real solutions to the problems that everybody acknowledges exist. I yield back and thank— The CHAIRMAN. Thank you. And now the other Mr. Miller is recognized for 2 minutes. Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. I appreciate you holding this hearing and Ranking Member Bachus for being involved in this, because it’s long overdue. We’ve been talking about the problem in the real estate industry, subprime versus predatory for years. When the marketplace existed as it did between 2000 and 2006, predatory wasn’t a problem. When you have a person’s home going up 15, 18, or 20 percent in value a year, and they’re made a loan that they can make the payment because it’s negative zero at first, and the trigger kicks in, in 5 years, and your house is worth $120,000 more than you paid for it, it’s worth $320,000 rather than $200,000, it’s easy to sell the home. So the people who were really kind of taken advantage of never really were in fact because their house was worth more when they sold it as we perceive it to be today. The problem is, when you look at the marketplace and it’s not increasing 15, 18, or 20 percent a year, and when you put your home on the market, it doesn’t sell in the first 2 days, the people who have been taken advantage of are coming to light, and that’s what we’re seeing today. Predatory has been existing. It’s no different last year than it was 6 years ago. The problem was there didn’t appear to be a problem because the marketplace was continually rising. Now we spent a lot of time focusing on GSCs. We were concerned about accountability and stability. I think we did a very good job. And if you look at the marketplace today, there’s not a problem in the GSC marketplace. The problem that exists today is those people who were taken advantage of. When a lender goes out and makes a loan to somebody, that they know when the trigger kicks in, they cannot make the payment, they’re predatory. The problem we have in the marketplace was that GSCs were limited in the amount of mortgages they could put on the marketplace in mortgage-backed securities, and so the private sector came in and bundled loans that looked very similar, but they weren’t. They couldn’t be debundled. When a GSC goes in default, they take it back. When the private sector did that, the guy who bought the mortgage-backed security is stuck. This is long overdue. When you have lenders that don’t acknowledge basic underwriting criteria when they make a loan, they’re predators. Yet there’s a tremendous amount of individuals making loans in the subprime marketplace that we have to ensure that are going to be viable and be there tomorrow to provide a service to those people who are not prime lenders but who need a loan and otherwise could not qualify for a loan. If we arbitrarily through legislation impact that marketplace, we’re going to hurt the very people we’re trying to help today. And I just urge caution in what we do legislatively. Yes, we need to define ‘‘predatory,’’ and we need VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 16 to get rid of the predators. But we need not impact those people who are trying to help in the subprime marketplace. Because if we overlegislate and we impact that marketplace, there’s no place for them to go. I commend you, Mr. Chairman, for this hearing, and I look forward to hearing the testimony today. Thank you. The CHAIRMAN. Thank you. We will go to Representative Neugebauer for 2 minutes. Mr. NEUGEBAUER. Thank you, Mr. Chairman. I am glad to hear that the chairman said that we were going to probably push the market forward. One of the first things I was going to say this morning is I have felt like this process was moving too fast because it is too important. One of the things that makes America probably so competitive is the fact that we have one of the most efficient capital markets in the world, and it is really one of the things that gives us an advantage. I notice that the title of this hearing today is ‘‘Reforming Mortgage Practices.’’ Certainly, I hope that is the movement that we move in and not overhaul. Really, we have a very efficient mortgage system today. It is the envy of the world. It has brought record homeownership. A lot of people have benefitted from our mortgage industry and the sophistication and the creativity that has come from it. Yes, there are some folks who unfortunately ended up in mortgages maybe that they should not have been in. One of the things that concerns me about the tenor of this hearing is we have heard people mention a lot of different kinds of mortgages, from prime to subprime, and then those people who are participating in what all of us think is egregious behavior, and that is predatory lending. Let’s not confuse the three. As we begin to go through this process, Mr. Chairman, I think it is important that we separate what parts of policy we are trying to address here. The marketplace is in the process right now of trying to transfigure and try to figure out exactly what happened and how to fix this in the future. They are going through some painful processes. That is one of the things about a very efficient marketplace, that they are efficient but sometimes they are painful. I would say that as we move forward, I think one of the things we have to say to the American people is we have confidence in them. If given the right information in the form of disclosure and transparency, the American public can make good decisions. That is one of the things that I hope will come from this legislation as we move forward is that we figure out a way to bring the right amount of information to our consumers so that when they make sometimes one of the biggest decisions that they will make as a couple or as an individual of purchasing a home, that they are doing that with information. What we do not want to do if these markets are trying to unravel and to bring liquidity back in the market is create some uncertainty in the marketplace that would make this somewhat of a blip in the marketplace even deeper than it is. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 17 Mr. Chairman, regardless of how long it takes, let’s not make political policy here. Let’s make good policy. I yield back. The CHAIRMAN. The gentleman from New York, Mr. Meeks, for 2 minutes. Mr. MEEKS. Thank you, Mr. Chairman. I want to thank you and Mr. Watt and Mr. Miller for having this hearing and working so hard on this bill. We have to make sure that the wrong messages do not get out to the general public. I have talked to some individuals in my district, for example, and they are questioning whether or not they should buy a home. I think the message still needs to go out there that in fact we do need to reverse the paradigm. I tell people in our district all the time, no longer should you just own the car and rent the house. You should rent the car and own the house, because over the long term, homeownership will be an appreciating asset and you can bet that car is going to be a depreciating asset. That is educating individuals so they understand how important this is. What we were trying to do and I believe what this bill was trying to do is basically give some checks and some balances, if you will, so that we could make some of this confidence in individuals when they are going in to purchase these homes that in fact they can afford it. It is very important, I think, for lenders, to also make sure that they are doing the right things. If someone cannot afford a home of a certain cost, they should not lend. I do not see how lenders benefit by foreclosing on someone’s home. What we have had is a situation whereas, for example, the economy heats up. Stocks heated up in the late 1920’s, and dot-com’s in the 1990’s. Not for the first time, real estate in the 2000’s. Unfortunately, sometimes the commodity gets too heated and lenders and borrowers and everyone in between join forces and they end up making bad decisions, and eventually the roller coaster comes to an end. I believe what H.R. 3915 will help to do is provide some of those checks and balances. Bill Clinton once said, ‘‘Mend it, don’t end it.’’ We are trying to mend it. That is what this does. Finally, Mr. Chairman, I would like to add that I am hoping that in this legislation we can address a predatory practice that has flourished, I know definitely in my district, but I believe all across America, as a result of the subprime crisis known as equity stripping. I am developing some legislation based on the existing State law and I hope that I can introduce some of the amendments and talk to the authors of the bill so that we can address this problem called equity stripping. Thank you, Mr. Chairman. I look forward to working with you. The CHAIRMAN. Thank you. We now have Mr. Hensarling for 2 minutes. Mr. HENSARLING. Thank you, Mr. Chairman. As interesting as our hearing is, there may be a more interesting one going on across the hallway, I note. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 18 Clearly, the Nation is facing a bad situation. This committee has an opportunity to make that bad situation worse. I fear that we will embrace that opportunity. We know about the threat of home disclosure. We know about the threat to the larger economy. We also have to take note that although Adam Smith’s invisible hand is occasionally clumsy, it is certainly far more deft and skilled than the iron fist of the congressional mandate. We still have to remember that millions of people have homeownership opportunities due to a subprime market. I am very leery of any legislation that could under cut that market. Clearly, I believe that our government has a role to prevent force, to prevent fraud, to promote effective disclosure, not just voluminous disclosure, to promote financial literacy, and also to promote personal responsibility, and to remove barriers to market liquidity. We should also take note about what is happening in the marketplace now. The market has a wonderful ability to correct itself. New subprime originations are down and down significantly. Companies like New Century that had bad business practices have gone belly up. Lenders all across America are reaching out to homeowners who may not be current to try to modify their loans and avoid disclosure. There is almost no player in the marketplace that wins under foreclosure. As I look at this bill, although I do see some titles which I support, I fear that with a Federal duty of care, I fear that with subjective underwriting terms and subjective terms like net and tangible benefit to consumers, that at the end of the day, we may be replicating what we saw in North Carolina and Georgia, and we may have a trial attorney’s dream and a homeowner’s nightmare. I yield back. The CHAIRMAN. The gentleman from New Jersey for 2 minutes. Mr. GARRETT. I thank the chairman. I thank all the members of all three panels for patiently waiting for your testimony that is about to come. The chairman began his remarks with the investor confidence arguments to the need for government regulation and went back to the creation of the SEC and suggested that any argument therefore that was against it rang hollow then and supposedly any arguments against more regulation, I guess, rings hollow in the future as well. The argument on the other side of that, of course, is history, the first we saw with SOX. There was the argument for investment confidence, for more regulation, and what did Congress do? We used a proverbial sledge hammer to hit something that should have just been hit down with a fly swatter instead. Same thing here. We see an over reaching approach for action by the Government. I do not believe anyone is suggesting that we do nothing about this crisis. The facts are that things have already been done. As Jeb indicated, the private market has already stepped in. They have moved very quickly on this area. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 19 The public sector has also moved and they continue to move with the Federal Reserve and they will be moving within the next couple of months by the end of the year as well. Just on a little side note, I note that the Federal Reserve is taken out of this legislation altogether, and I am curious about that. I am wondering whether Ron Paul has had some influence on the chairman with regard to the Federal Reserve. My last comment on this is that no one is suggesting that we do nothing. Action has already been taken. We do not want to do more harm than good. I think the wisest choice to take here is to move very cautiously and to do whatever we do in concert with the action that the Fed will take in the nearby future. With that, I yield back. The CHAIRMAN. The gentleman from Florida, our last 2 minutes. Mr. FEENEY. Thank you, Mr. Chairman. I certainly agree with my colleagues, Hensarling and Garrett, in their last comments. I want to suggest, rather than getting into details, that as we deal with this crisis as legislators, we remind ourselves of certain truisms in legislative processes. Number one, the law’s unintended adverse consequences. We try to do some good things and we do not think through the adverse consequences that may be much more harmful than any good we actually do in legislation. I hope we do not do that with the crisis in our credit markets today. Related to that is Churchill’s assessment that nobody with a heart was not a socialist when they were 20, and nobody with a brain was not a conservative by the time they were 40. I hope at least part of Congress will act as adults as we respond to this crisis because we are very sympathetic indeed to the people who are losing their homes. Third, I hope we will pay attention to the admonition that it is politically expedient but not good policy to concentrate the benefits for the few people in this case losing their homes, but to disburse the punishment, in this case, to the thousands of people who would like to sell homes but will have fewer buyers that can get credit, the thousands of people who would like to buy homes in the future but cannot get access to credit because we are increasing the risk. Finally, I will note it is not just what this committee does, but I have begged and pleaded that the bankruptcy reform proposal which sounds great but could throw havoc into the credit markets combined with what we do here if we do not do it right could take a bad tumultuous credit situation and make it irretrievably worse. We could take a recession in the housing markets and make it a depression across economic lines if we are not careful, because we are trying to do good, but not thinking about the real life economic consequences of thinking with our hearts and not our brains. I hope we use at least part of our brains as well. With that, I yield back. The CHAIRMAN. I thank the gentleman. I did listen closely to the gentleman from Florida. I would ask unanimous consent that the socialist writings of the gentleman from Florida and any other members at the age of 20 be inserted into the record. Without objection, we will await those. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 20 Not hearing any objection, the record will remain open for those writings. [Laughter] The CHAIRMAN. I know we did not have e-mail then, Tom. Maybe you wrote a paper. I appreciate the people waiting. It did seem to me important for the various members’ viewpoints to be laid out, because we are about to deal with one of the most significant pieces of legislation that we will be dealing with this year, certainly from this committee. We will now begin. Let me begin with Mr. Gruenberg, Martin Gruenberg, who is the Vice Chairman of the Federal Deposit Insurance Corporation. The Chair of the Corporation, Sheila Bair, who has been a very constructive participant with us in a lot of ways, unfortunately is ill today, and we are sorry to hear she is ill but we are pleased that Mr. Gruenberg on very short notice was able to come in her stead. Mr. Vice Chairman. STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, VICE CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION, ON BEHALF OF CHAIRMAN SHEILA C. BAIR Mr. GRUENBERG. Thank you very much, Mr. Chairman. If I may also say that Chairman Bair really has provided very strong and constructive leadership on this issue. I do not think there is any issue that is of greater priority to her. I will try to do my best to sit in for her this morning. Chairman Frank, Ranking Member Bachus, and members of the committee, thank you for this opportunity to testify on behalf of the FDIC. Let me say at the outset that while the troubles in housing and credit markets have yet to fully play out, they underscore the FDIC’s long-standing view that consumer protection and safe and sound lending are really two sides of the same coin. Poor lending standards and weak consumer protection are the root cause of the current problems resulting in serious consequences for consumers, lenders, and the United States’ economy. Clear balanced commonsense standards for mortgage lending practices will reinforce market discipline and ensure an adequate flow of capital to fund responsible lending, including for low- and moderate-income consumers with less than perfect credit profiles. Legislation or regulation to address issues in the mortgage market should preserve the elements of the current system that have worked well for the economy and require all lenders to follow the same rules. The Mortgage Reform and Anti-Predatory Lending Act is a workable and helpful vehicle for legislative action to establish a national standard. The bill would help ensure that borrowers receive mortgages that they can ultimately afford to repay, and that lenders in turn understand the credit risks they are taking. Requiring mortgage originators to be licensed and registered will improve industry professionalism and prevent bad actors from jumping from one jurisdiction to another. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 21 The minimum standards set by the bill include many criteria that have long been used by lenders to evaluate a borrower’s ability to repay a loan. These include verified and documented financial information, taking into account all fees and taxes to be paid by the borrower, and underwriting loans based on the fully indexed rate, and assuming a fully amortizing repayment schedule. A clear bright line standard for determining repayment capacity such as the debt to income ratio provision in the proposed bill will serve an especially important role by acting as a check on the significant portion of mortgage originators that are not subject to regular supervision. Without a debt to income limitation, lenders could underwrite loans to the fully indexed rate, but at such a high percentage of a borrower’s income, that the loan could not realistically be repaid. The requirement that loans be fully documented also could be under cut without a debt to income standard that ensures a borrower’s fully documented income can support the loan. The provisions of the bill requiring the mortgage originator to disclose the comparative costs and benefits of mortgage loan products, the nature of the originator’s relationship to the consumer, and any conflicts of interest will empower consumers to make better informed decisions about the products and services that are being offered. Finally, it is important to address assignee liability as a meaningful check on abuse by originators. Given the difficulties inherent in enforcing strong origination standards, it is appropriate that those funding the lending activity bear some responsibility for ensuring that the standards are adhered to by mortgage originators. To be effective, however, assignee liability must be based on bright line standards so that it does not inadvertently dry up essential credit. In conclusion, Mr. Chairman, the FDIC stands ready to work with Congress to ensure that mortgage credit is based on standards that achieve a fair result for both the borrower and the lender. I would be happy to answer any questions the committee may have. Thank you, Mr. Chairman. [The prepared statement of Chairman Bair can be found on page 143 of the appendix.] The CHAIRMAN. Next, the Comptroller of the Currency—with whom we have had a very good and constructive relationship—Mr. John Dugan. STATEMENT OF THE HONORABLE JOHN C. DUGAN, COMPTROLLER, OFFICE OF THE COMPTROLLER OF THE CURRENCY Mr. DUGAN. Thank you, Mr. Chairman. Chairman Frank, Ranking Member Bachus, and members of the committee, thank you for the opportunity to testify on this important legislation. The OCC supports the establishment of national standards for subprime mortgages, which have been the source of so many recent problems in credit markets. We also support the bill’s goal of enhanced regulation of all mortgage brokers, whether used by banks or non-banks. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 22 In recognition of pervasive problems in the subprime market generally, the Federal banking agencies tightened mortgage standards by issuing guidance on both subprime lending and non-traditional mortgages. We believe these Federal banking agency standards addressed fundamental concerns about underwriting and marketing practices for these mortgages, but these standards apply only to federally regulated institutions. They do not address similar practices at State regulated institutions that are not banks, even though by nearly all accounts, such institutions engaged in some of the most aggressive mortgage practices. As a result, the Federal banking agency standards cannot be truly effective unless they extend to non-federally regulated institutions as well, to create truly national standards. Such national standards could be achieved through State action, Federal Reserve Board rulemaking, or Federal legislation such as the bill that is the subject of today’s hearing. Regardless of the path chosen, the OCC supports national standards for subprime mortgages similar to the Federal banking agency standards. From our initial understanding of the bill, which we have only had a limited time to review, it would establish national standards for three different categories of mortgages. For all mortgages, the bill would establish national sales practice standards for mortgage originators through licensing and registration requirements, a Federal duty of care, and anti-steering provisions. For subprime mortgages, the bill would through the use of safe harbor provisions establish national underwriting standards that are more stringent than the underwriting provisions in the Federal banking agency standards, and for HOEPA mortgages, the bill would lower the APR and fee triggers to make less costly mortgages subject to the enhanced HOEPA regulatory regime. These three categories of changes plainly go beyond the Federal banking agency standards. That is some of the new national standards apply to mortgages other than subprime mortgages and some of the bill’s national subprime standards are more stringent. While we support some of these broader standards, others raise significant questions and concerns that we hope will be addressed as the process moves forward. For example, the application of some of the new and extensive national mortgage standards to banks that do not provide subprime mortgages raises significant issues of regulatory burden and fairness. In particular, we question whether the burden of the licensing and registration requirements for all bank employees involved in any type of mortgage origination is, given existing bank regulation, worth the marginal benefit, especially for community banks. Likewise, the Federal duty of care and anti-steering provisions, which include highly subjective requirements that mortgages be appropriate and in the consumer’s interest, will be difficult to enforce and could significantly increase the litigation exposure for all banks. In addition, the more stringent underwriting standards for subprime mortgages would by definition restrict the availability of VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 23 credit to subprime borrowers more than the Federal banking agency standards. On the positive side, this reduction of credit would help ensure that the borrowers who obtain these loans could truly afford to repay them. On the negative side, the reduction would prevent some creditworthy borrowers from obtaining loans. It is impossible to determine ex-anti the extent to which creditworthy borrowers would be denied loans due to the new and stricter standards. This is clearly a tradeoff in the bill. In addition, the stricter standards would also prevent more existing subprime borrowers with adjustable loans today from refinancing such loans. Finally, the OCC believes that there is an important point to be made about the bill’s enforcement remedies. On their face, the remedies appear even handed because they apply equally to banks and non-banks, but the reality is quite different. Because of existing enforcement provisions in Federal banking law, application of the same set of bright line standards to banks, brokers, and non-banks would in fact expose banks and their employees to a much wider range of potential enforcement actions than would be the case for brokers and non-banks. Put another way, banks and their employees would be subject to a stronger enforcement regime than non-bank lenders or mortgage brokers for the very same violations of the bill’s new provisions. We urge attention to the bill’s enforcement mechanisms to ensure that the bill’s standards are as effectively implemented and enforced at non-bank lenders and brokers as they would be at banks. Thank you very much. [The prepared statement of Comptroller Dugan can be found on page 195 of the appendix.] The CHAIRMAN. Next, another of the regulators we have been working with, John Reich, the Director of the Office of Thrift Supervision. Mr. Reich. STATEMENT OF THE HONORABLE JOHN M. REICH, DIRECTOR, OFFICE OF THRIFT SUPERVISION Mr. REICH. Thank you. Good morning, Mr. Chairman, Ranking Member Bachus, and members of the committee. Thank you for the opportunity to provide the views of the Office of Thrift Supervision on H.R. 3915. I applaud your efforts to address the need for enhanced Federal oversight of mortgage origination and funding process. I do believe that consistent and fair oversight of all players that originate and fund mortgages is overdue. While the problems of the current market are complex, the issues that created them are not. To address these issues, we must adhere to certain key principles, including sound underwriting, transparency, strong consumer protection, a level playing field, and consistent supervision. First and foremost, sound underwriting is fundamental to the success of mortgage lending. It protects both lender and borrower in the mortgage process. This fact alone highlights the importance of the effective oversight of the mortgage origination process. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 24 We support the effort to require national licensing and registration of all mortgage originators who are not subject to Federal or State banking oversight. We suggest any national system should include adequate capitalization standards, competency testing requirements, and background checks for all principals and staff. Again, for mortgage originators that are not subject to State or Federal banking oversight. Second, in addition to a Federal duty of care, I encourage the committee to consider modifying compensation incentives to mortgage originators, to consider a longer term pay out on loan origination, to protect the borrower customer’s economic best interest. The typical compensation structure, for example, for life insurance agents might provide a good model. Third, transparency is critical to the proper functioning of the markets. When market participants lack adequate information to evaluate their current positions or potential investments, markets break down. Fourth, sound consumer protections are integral to promoting properly functioning markets. Just as market participants need accurate information to evaluate the markets, consumers need clear and balanced disclosures to be able to understand mortgage products. We support the provisions of H.R. 3915 that promote clear and balanced disclosures for consumers in the mortgage origination process. Consumer protections that address unfair and deceptive acts and practices in mortgage lending and other lending and financial service activities also make our markets stronger. This is the premise behind the OTS proposal on unfair and deceptive acts and practices that we issued in August. For action in this area to be effective, however, it has to be applicable to all relevant players. With this in mind, we intend to work closely with the other Federal banking agencies at this table on how to address these issues following the November 5th comment deadline. Effective regulation and oversight of the mortgage origination and funding process requires a level playing field for all market participants. We also appreciate the recognition of a safe harbor for certain loan products in this bill. Based on our review and experience, these safe harbor loans are typically soundly underwritten and enjoy a high level of transparency with respect to their terms and occupy the most competitive part of the market. Hence, a level playing field. A final point for your consideration in evaluating options for reform in the mortgage origination and funding process is joint State and Federal oversight of mortgage banking activities, such as that which currently exists in the supervision of State banks. Establishing a partnership between the States and a Federal overseer to set and enforce minimum mortgage origination funding standards would ensure accountability and consistency throughout the mortgage lending process. It is important to stress that a partnership would not necessarily involve establishing a Federal mortgage banking charter but rather VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 25 impose a Federal/State partnership to regulate existing mortgage banking entities and ensure nationwide uniformity. The OTS has extensive experience in overseeing and supervising mortgage banking operations, and I believe would benefit the current mortgage banking market. I would be happy to share my thoughts on an OTS role in overseeing such a State/Federal national mortgage banking program. In closing, I want to mention that mortgage foreclosures and possible solutions to the problem will be among the primary issues that will be discussed at the OTS’ National Housing Forum to be held at the National Press Club in Washington, D.C., on December 3rd. Of course, you are all invited and we would be delighted if your schedules would permit that you could attend. Thank you, Mr. Chairman. I would be happy to answer questions. The CHAIRMAN. Thank you. Having attended last year’s Forum, I regret that my schedule keeps me from going, but I would second your urging of the members. I found that very useful. Since the President’s White House Ball will be that night, it would not be an extra trip to Washington. I would urge members to accept that invitation. Next we have JoAnn Johnson, the Chairman of the National Credit Union Administration, another one of the regulators with whom we have had the privilege of working. Chairman Johnson, please go ahead. STATEMENT OF THE HONORABLE JOANN M. JOHNSON, CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION Ms. JOHNSON. Thank you, Chairman Frank, for this opportunity to testify regarding proposed mortgage reforms. This is a timely and important subject that merits congressional oversight, and I commend your interest in helping consumers make more informed and beneficial choices surrounding what is arguably the most important purchase they ever make, their home. The credit union industry comprises a relatively small slice of the overall mortgage lending pie. Federally insured credit unions made about 2 percent of all mortgage loans in the first half of 2007 and 9 percent of mortgage loans made by depository institutions. Sixty percent of credit unions offer mortgage loans. Those that do not are generally smaller institutions lacking the infrastructure and expertise to manage a significant portfolio. Federal credit unions also have a 10 percent loan to one borrower limit imposed by statute which makes mortgage lending less feasible for smaller credit unions. Sixty-three percent of credit unions’ mortgage loans are fixed rate. In the first half of 2007, fixed rate loans grew 14 percent while adjustable loans rose only 2 percent, a result of consumer reaction to a rising interest rate environment. Non-traditional mortgage lending such as interest only or payment option loans while offered comprised less than 2 percent of first mortgage loans. Earlier this year, we noted market trends suggesting greater prevalence of these products and we amended our call reports to specifically collect data and get a more accurate picture of the cred- VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 26 it union activity. Mid-year results confirm NCUA’s belief that credit unions have not delved very deeply into the kinds of alternative products that have made this hearing unfortunately necessary. We believe that there are three primary reasons why these riskier loans are not widespread in the credit unions. First, as noted earlier, many credit unions lack the expertise and resources to underwrite these types of loans. Second, over 2 years ago, we issued guidance addressing problems associated with both credit and interest rate risks in non-traditional lending. This translated into more stringent examinations. Third, the Federal Credit Union Act prohibits prepayment penalties. NCUA has proactively monitored trends and mortgage lending over the past decade and has issued guidance to the industry accordingly. As far back as 1995, NCUA in a letter to credit unions discussed potential pitfalls surrounding risk based and subprime lending. In addition to our oversight of the financial side of the mortgage lending ledger, NCUA also takes a robust approach to enforcement of consumer protection laws through our examination process. Combined with careful review of member complaints, NCUA evaluates each credit union’s compliance with the law and gains a more complete picture of how a credit union makes mortgage loans. We also issue regulatory alerts to ensure compliance with a full range of consumer protection laws. This all contributes to a credit union industry that is enjoying relative stability in the midst of some very real dislocations in the mortgage market. While demand for mortgages remains high, delinquencies are low. This brings me to the recently introduced legislation that will hopefully improve the mortgage lending menu by making choices more understandable while eliminating the abusive practices that have gotten some borrowers in dire financial straits. The Frank/Watt/Miller bill addresses several practices in ways that contain very real positives for consumers. For example, making all originators subject to the same duty of care standards, requiring a determination of suitability, and eliminating unfair prepayment penalties, single premium credit insurance, and mandatory arbitration are important and sensible aspects of the legislation. We also support the licensing and registration for mortgage originators who are not depository institutions. Further enhancements to HOEPA outlined in the legislation particularly regarding fees also represent a step forward. I want to bring to your attention the omission of NCUA from joint rulemaking. There are several provisions in the bill that charge Federal financial institution regulators with writing regulations for the institutions they regulate. Although credit unions are properly subject to this legislation, none of my colleagues at this table have supervisory or enforcement authority over them. NCUA is concerned that important aspects of credit union operations, as well as appropriate regulatory distinctions, would not be accounted for in the writing of the rules if NCUA is not jointly involved. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 27 I respectfully ask that you consider amending the legislation to include NCUA in the process. Congressman Kanjorski also has introduced a bill addressing other aspects of the home mortgage lending industry. NCUA commends that effort as well, particularly the aspects that improve consumer disclosures and transparency related to mortgage servicing. In conclusion, I would like to comment on a fundamental element of any discussion on mortgage lending facing consumers, the need for increased financial education, and while it is not a panacea or substitute for rigorous regulation, I believe that all of us have a responsibility to promote a more financially aware borrowing public. Thank you very much. [The prepared statement of Chairman Johnson can be found on page 206 of the appendix.] The CHAIRMAN. Thank you. Next we will hear from Randall Kroszner, Governor, Board of Governors of the Federal Reserve System. Governor Kroszner? STATEMENT OF THE HONORABLE RANDALL S. KROSZNER, GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. KROSZNER. Chairman Frank, Ranking Member Bachus, and members of the committee, I appreciate the opportunity to appear before you today to discuss recent problems in the subprime mortgage market. The recent increase in foreclosures has created personal financial and social distress for many homeowners and communities. Congress is appropriately concerned about these developments as is the Federal Reserve Board. Promoting access to credit and sustainable homeownership are important objectives and the Board believes responsible subprime mortgage lending can help advance both goals. In carrying out its consumer protection responsibilities, the Board believes it is extremely important to strike the right balance by seeking to protect consumers from predatory practices without restricting credit from responsible lenders to borrowers with shorter or lower rated credit histories. Consumer protection laws take two different but complimentary approaches. One focuses on disclosure and the other on development and enforcement of substantive protections that prohibit particular practices. To be effective, disclosures must give consumers the information that they can readily understand at a time when the information is relevant. To that end, the Federal Reserve will propose improvements to the rules governing mortgage disclosure and the timing of those disclosures. The Federal Reserve is keenly aware, however, that disclosure may not be sufficient to combat abusive practices. We share the concerns of Congress that certain lending practices may have contributed to the problems we are seeing in the subprime market today. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 28 Therefore, the Federal Reserve plans to exercise its rulemaking authority under the Home Ownership and Equity Protection Act, HOEPA, to address unfair and deceptive mortgage practices. We plan to propose rules by the end of this year that would apply to subprime loans offered by all mortgage lenders. We are looking closely at practices such as: One, prepayment penalties; two, failure to offer escrow accounts for taxes and insurance; three, stated income and low documentation lending; and four, failure to give adequate consideration to borrowers’ ability to repay. Enforcement of consumer protection measures is also critical to protecting consumers from irresponsible or predatory lending. The regulatory scheme for the mortgage industry has become extremely complex and some mortgage lending extends beyond the Federal banking agencies’ oversight. This underscores the importance of collaborating with the State banking agencies and other organizations to address concerns in the subprime mortgage lending market. To this end, we have launched a cooperative pilot project with other Federal and State agencies to conduct reviews of non-depository lenders with significant subprime mortgage operations. Congress is appropriately concerned about the problems in the mortgage market. As with the regulations, I believe it is important that new laws carefully target lending abuses without unduly restraining responsible lending. Getting this balance right is particularly critical now as many borrowers are facing adjustments and may need to refinance into more affordable loans. The bills before this committee would provide for a nationwide registration and licensing system for all mortgage brokers that would help limit the ability of bad actors to move to a new State after having run afoul of regulators in other States. Legislation would also address concerns about loans made without consideration of a borrower’s ability to repay. The Board firmly believes that lenders should give due consideration to the borrower’s ability to repay a loan before the loan is extended, so long as the rules are flexible enough to allow creditors to consider pertinent factors and individual circumstances of particular consumers and to innovate prudently and fairly. The bill would hold securitizers and loan purchasers liable for bad actions of mortgage originators. The securitization market is critical to increasing the resources available to fund home purchases and great care should be taken to ensure that investors in securitization markets can quickly and accurately assess and mitigate the risks, including compliance risks, of mortgages sold in this market. Finally, the bill would ban abusive practices for HOEPA loans, such as prohibiting the financing of single premium credit insurance, an important thing to be done. The bill would also extend HOEPA’s protections to more loans by amending HOEPA’s cost triggers. These potential actions merit discussion, and we welcome the opportunity to continue to work with congressional staff and Members of Congress on these and other provisions of the new bill. I thank you very much for the opportunity to appear before you. I look forward to your questions. Thank you, Mr. Chairman. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 29 [The prepared statement of Governor Kroszner can be found on page 226 of the appendix.] The CHAIRMAN. Thank you. There are two votes, but we will finish the testimony from Commissioner Antonakes, and then we will take a break and come back and begin the questioning. I am very glad to welcome my State Banking Commissioner, Commissioner Antonakes. STATEMENT OF THE HONORABLE STEVEN L. ANTONAKES, COMMISSIONER, MASSACHUSETTS DIVISION OF BANKS, ON BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS Mr. ANTONAKES. Good morning, Chairman Frank, Ranking Member Bachus, and distinguished members of the committee. My name is Steven Antonakes and I serve as the Commissioner of Banks for the Commonwealth of Massachusetts. I am also the State voting member of the FFIEC and a founding board member of the State’s nationwide mortgage licensing system. It is my pleasure to testify today on behalf of the Conference of State Bank Supervisors. Chairman Frank, we commend you for holding this hearing today on these important issues. CSBS supports the direction of the Miller/Watt/Frank bill and looks forward to working with you and your staff as we move towards mark-up. This morning, I would like to leave you with five points from my testimony. First, 10 weeks from today, our nationwide mortgage licensing system, 4 years in the making, goes live. The system seeks to improve the efficiency and the effectiveness of the U.S. mortgage market, to fight fraud and predatory lending, to increase accountability among mortgage professionals, and to unify and streamline State licensing safeguards. On January 2, 2008, Massachusetts will begin using this system to license mortgage lenders and mortgage brokers. To date, 40 State mortgage regulators have committed to coming onto the system. Chairman Frank, Representatives Watt and Miller, CSBS appreciates that your bill, H.R. 3915, incorporates our system as part of the regulatory infrastructure. I would also like to thank Representatives Bachus and Pryce for their support that H.R. 3012 gives the State licensing system. This State system is more than a database. It is the foundation for coordinated multi-State mortgage supervision. Included in my testimony is some suggestions for refining H.R. 3915 to maximize the effectiveness of the system. Second, Chairman Frank, we endorse your bill’s establishment of consistent standards to address responsible lending. Third, CSBS strongly supports the approach of establishing these standards as a floor, as opposed to a ceiling. States must retain the flexibility to address emerging issues. This allows States to establish best practices, which may become the foundation for Federal legislation. For example, the Truth in Lending Act was originally implemented by my home State of Massachusetts in 1966, and the first VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 30 predatory lending law was originally enacted by North Carolina in 1999. Fourth, States must have clear authority to take enforcement actions against violation of these standards for the benefits of consumers in our States. The residential mortgage market is now global in its scope, but the consequences of lending abuses will always be local. Given our proximity to the communities we serve, State regulators and law enforcement agencies are uniquely posed to respond quickly to the needs of our consumers and our homeowners. Fifth, CSBS commends Congress for facilitating State and Federal coordination by giving State authorities a vote on the FFIEC. Since the States joined the FFIEC, cooperation between the Federal banking agencies and State authorities has improved dramatically. However, we encourage Congress to make sure that States are included in any new Federal rulemaking processes for mortgage providers. The FFIEC provides the most appropriate forum for developing these new rules. We suggest that this mechanism best leverages State experience in developing the rules required to implement your legislation. Finally, I would only add that I believe I am the only person at the table who actually regulates banks, credit unions, mortgage lenders, and mortgage brokers, and I do love all of my children. [Laughter] Mr. ANTONAKES. There has been a great deal of discussion today by the members that no single party or groups of parties are responsible for the issues we face today, and I do agree with that position. We do support stronger safeguards for loan originators and we believe that your bill will effectively carry that through. However, it is important also to note that it was underestimating and misstating of credit risks and the failure of internal controls by depository institutions and non-depository institutions that significantly contributed to the problem we face today. Thank you for the opportunity to testify. I would be happy to take any questions you may have. [The prepared statement of Commissioner Antonakes can be found on page 128 of the appendix.] The CHAIRMAN. Thank you. The committee will be in recess. We have only two votes, about 8 minutes left on this one, and then a quick 5-minute vote. We should be able to be back in less than 20 minutes, and we will immediately begin the questioning. [Recess] The CHAIRMAN. The hearing will reconvene. We will begin the questioning with my two co-authors here, along with the gentleman from New York. We will begin with the gentleman from North Carolina, who is one of the major authors of this bill, Mr. Watt, who is recognized for 5 minutes. Mr. WATT. Thank you, Mr. Chairman. Let me thank the witnesses for being here and particularly thank the FDIC representative and the Comptroller of the Currency, and Mr. Antonakes. Measured against the standard that I set in my opening statement, which was taking this from a philosophical discussion to a VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 31 practical discussion of the bill that is in front of us, I would have to say I was not overwhelmed by the testimony of the other witnesses on that criteria. I am hopeful that if you have not already done so, maybe you have in your written testimony because I confess, I did not get a chance to read it all, if you have not already done so, I hope you will take a very aggressive look at the bill that is now before us because Mr. Reich, Ms. Johnson, and Governor Kroszner, your testimony could have been delivered and was delivered several weeks ago outside the context of a bill. We now have a bill in front of us that we really aggressively need your feedback on. If you are not going to play that role, then I am not sure that it is going to be that helpful to us. I appreciate the platitudes and the bragging about what your agency has done or what you have done, but at this point, we are looking for feedback on a bill that is in front of us. It would be helpful to get some feedback on the bill. That having been said, Mr. Reich suggested, although there is nothing about it in this bill, some things that we ought to, I guess, be considering putting in the bill, one of which was to allow a longer pay out to brokers. You suggested that, did you not, Mr. Reich? Mr. REICH. I did. Mr. WATT. The question I wanted to ask was whether under the mechanism that we have set up that allows rulemaking to occur, that would not be able to be accommodated or would it or would it not be able to be accommodated under the authority that we gave the regulators to write rules for the road going forward in this area? Mr. REICH. It could be that the Fed may have that authority under their rulemaking authority. Mr. WATT. My question is on the language in this bill that allows more than the Fed to be involved in rulemaking. Have you read the bill? Mr. REICH. Sir, I have not read the 66 pages in the bill. Mr. WATT. No wonder we did not get any comments on the bill. Did you understand the hearing today was about the bill? Mr. REICH. Absolutely. I have read a summary of the bill and was informed that we could submit a more detailed—we just received it 2 days ago—that we could submit a more detailed statement by Friday of this week, which OTS intends to do. Mr. WATT. I will not ask any more questions about the bill. There is a provision in there that allows rulemaking to occur. It seems to me that if we need to make it clearer that rulemaking authority extends to the ability to have a longer pay out for brokers, we could make that explicit very easily. I am not sure—I do not believe that authority is already in the bill. I guess there is no sense in us debating it if you have not read the provision. My time has expired. I appreciate the constructive comments that were made by some of the regulators. I encourage the other regulators to please read the bill and give us some feedback. Do not just wait until we do something or do not do something and then say well, you know, this is my public invitation to you all to play a constructive role in this process. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 32 I think the Chair has already pointed out that we would like to get this done some time and move the bill. The quicker you all could get back to us, the more I would appreciate it. I thank the chairman and yield back. The CHAIRMAN. I thank the gentleman. I would reinforce that. I should acknowledge that we did want to make a commitment to having the broadest possible consultations on the bill, which meant that we did not introduce it—it is a shorter than usual interval between the introduction and the hearing, but that is why we agreed that the record will be open for the rest of the week. The gentleman from Alabama. Mr. BACHUS. Thank you, Mr. Chairman. Mr. Dugan, I am going to ask you and Mr. Reich, you all have said you do not think your member institutions ought to come under the national registration and licensing provisions. Have you read my bill dealing with national registration and licensing? Mr. DUGAN. I confess I have not. Mr. BACHUS. Have you, Mr. Reich? Mr. REICH. I have not. The CHAIRMAN. His was introduced earlier. [Laughter] The CHAIRMAN. My apology does not cover his bill. Mr. BACHUS. In fact, I read two articles, one in a New York publication, a Today Business publication, which obviously had not read it either when they talked about the different proposals. I separate out registrations and licensing. What we require of everyone is that they register. Let me tell you why I did that. When you look at the mortgage originators that originated some of these fraudulent loans, some of these loans where mis-information was supplied, some of them were from your member institutions. They were not all mortgage brokers. In fact, my staff and I—I do not have this statistically, but one time, we have used the figure of about 40 percent of them were from either federally or State chartered institutions that were regulated. Sixty percent of them were mortgage brokers. If you only require mortgage brokers to register, which is basically what is being said, but you do not require mortgage bankers, there is obviously a gap in the system today. We would not be proposing that if we didn’t have—whether it is 25 percent, 30 percent or 35 percent—you are dealing with hundreds of thousands of these that have been made by originators that were working in a bank. I do not know of any in a credit union, but I am sure there may be. With that in mind, let me tell you what I require of your members. The licensing requirements in my bill, because you have different requirements to set up, but the registration requirements are that they provide contact information. The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, they maintain databases on bad actors. If you do not register, if you are not included, your people making loans in your banks are not included in that registration, and we have no way of knowing they are there. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 33 Mr. DUGAN. Mr. Bachus, let me be clear. We do agree and think there are good provisions in the bill that require banks to report bad actors to a database and we also agree— Mr. BACHUS. We are talking about registration. Some on both sides have endorsed it. I know the chairman is looking at it. It requires them to keep contact information. We want to know where they are. That is disclosure. We want them to submit to a criminal background check and submit fingerprints. That is what a lot of the States require now. An applicant has to submit to a credit check, which sometimes exposes losses as a result of fraudulent practices. That is all it requires them to do. It is very effective when it is used. If we have a turf fight—the FDIC, we have approached them and they have not, at least from our correspondence, and the Federal Reserve, in fact, Chairman Bernanke and Secretary Paulson both said there is a need for some sort of national registration or database. I would just like you going forward to take a look at that. Mr. DUGAN. We certainly will. Mr. BACHUS. Do not confuse the licensing provisions. You have your own. You have your own provisions. You require certain educational standards. The State and federally chartered institutions are exempt from that for a good reason, but not the registration. We would have an incomplete registration. If we are going to fully protect—we cannot ever fully protect, but if we are going to at least try to know who these people are and where they are, because they move from State to State, in fact, 5 percent of mortgage originators did 95 percent of what I would call the over-the-top bad loans. Most of them, their license had been revoked in one State and they moved to another State. Mr. DUGAN. We would be delighted to have a greater dialogue on that point. You are absolutely right. We have been sort of conflating licensing and registration. It is the licensing part that puts more substantive regulatory and compliance requirements that would have to be put in place that I think raises the bigger questions. Mr. BACHUS. If you do not know the history before they come or if they do something while they are originating loans at your institutions, then they leave, and they are not a part of it. Mr. DUGAN. We support that part of it. Mr. BACHUS. Thank you. The only other question I would ask is I would ask the Federal Reserve, I noticed that in the rulemaking process under this legislation, they are excluded. They have decades of constructive experience in developing legislation. I was just wondering, do you have any comment on that, Governor? Mr. KROSZNER. Thank you very much. If you were to include us, exactly as you had said, we would bring years of experience, years of expertise, and knowledge to consumer protection and community affairs’ issues. I think we would have something valuable to add to the rule writing process. Mr. BACHUS. Thank you. The CHAIRMAN. We will go to the gentleman from Pennsylvania, the chairman of the Capital Markets Subcommittee. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 34 Mr. KANJORSKI. Thank you, Mr. Chairman. Chairman Johnson, you mentioned the escrow and appraisal bill that I have introduced in your opening remarks. I am pleased to see that you are favorably disposed to it. Also, I noticed the Federal Reserve through rulemaking is considering doing something in the escrow area. What I appreciate is the fact that Chairman Frank and I have agreed to mark up this legislation, H.R. 3837. If your agencies could, by next Monday, give us any of your comments on this bill, so that it either may be joined with the pending bill or stand individually. We think it has an opportunity to move, and it could go a long way in helping future problems in the system. Also, I wanted to say to you, Chairman Johnson, that I agree with you, and I note that Chairman Frank stated that NCUA was not on the list of agencies involved in writing the rules in H.R. 3915. I assure you, this is an oversight and not intentional, and we are going to correct that as the bill moves forward. Actually, what we would like to do is have everybody participate as much as possible in helping us move this through. The CHAIRMAN. If the gentleman would yield, the gentleman has been very much involved in credit union issues, and he is absolutely right, that is an omission that we will deal with. Mr. KANJORSKI. One of the issues I am involved in is assigning liability. We are going to be talking a lot about this, particularly as we consider this bill. If we really go too far, we are going to dry up the secondary market. If we do not go far enough, we are not going to really gain any positive ground here. I think we are somewhat at a loss to know what to do. Again, I think we should create a standard, if possible, whereby the writers or the assemblers of these packages should be responsible for what they can know, should know, or reasonably discern. On the other hand, we should have a clear bright line standard to help assignees know what they need to do to meet these tests. Do you have any particular views on the assignee liability question? Any of you? If you do, over the next several days, I think you can submit it, and it would be very, very helpful. To the last gentleman, let me bring up the need for a national standard. We are struggling with it. Of course, this bill does not provide a clear national standard. I think it should. Rather than have a knock-down, drag-out fight because we cannot ever seem to come together as to what that standard would be, what I was going to suggest today is that we think about how we solved this problem back in 1996 on fair credit reporting. We actually committed and created a national standard, but we gave it a life expectancy of 7 years, with the idea that we would have to come back and have the Congress address it and correct it or remove it, or do what was necessary to make it more applicable to the problem. Do you think this provision, if acted upon by Congress in this instance, in creating a national standard but with a time frame and a sunset provision, would be a way that we could move to find middle ground and make the system work better to have a national standard? VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 35 I throw it out at any of the regulators who want to take a shot at it. Yes? Mr. REICH. I am totally supportive of the notion of sunsetting almost every act of Congress, quite frankly, for a review on down the road to determine its effectiveness. Certainly in this instance, I would be supportive. Mr. KANJORSKI. I tend to agree with you, I am always supporting sunsetting. I do not always get my way, but I like to support it, too. Do you think if we take this legislation and put a national standard into place, is this the time to do it or just leave the legislation as it presently is, taking into consideration every State has different conditions? Mr. REICH. My personal view is that I would like to see a national standard with a bar high enough that it would satisfy all of the States. I recognize that goal is probably not achievable. I think working towards a national standard is the right thing to do. Mr. KANJORSKI. What if we took, say, the North Carolina standard and adopted that nationally, but put in the 7-year provision that it has to be re-visited and reviewed, would that be a way? It is going to require an intelligent compromise. We are just not all going to agree up here. The House and Senate are not going to agree. The Administration is not going to agree. Certainly, the industry is not going to agree. We have seen that happen for a number of years now. How do we get past this stumbling block, when we do come very close now because of exiguities in the marketplace, that we can move something that otherwise could not be moved as well or as quickly and as speedily? Should we take a shot at it now or should we pass it by? Mr. REICH. I wish I knew the answer to that question. Mr. KANJORSKI. Cautious. Mr. GRUENBERG. If I may say, Congressman, I think the approach taken in the bill as introduced of setting a floor so that we establish a national minimum to assure uniformity but then allowing States in their discretion to go beyond that is a reasonable approach. Mr. ANTONAKES. Congressman, I would agree. Our preference would be to have the floor as high as possible but we would also like to have the States have the right to address specific issues quickly if they want to go beyond that floor. Mr. KANJORSKI. You do not see that is going to have an effect on securitizing these obligations? If we have States that have huge standards as compared to other States, it is not going to have an effect on putting these packages together? Mr. ANTONAKES. In my view, at least in Massachusetts, where we have a very high standard, it has not impacted the availability of credit in the Commonwealth. If laws are crafted carefully, we believe there can be higher consumer protections without impacting the availability of credit. Mr. KANJORSKI. Thank you very much. The CHAIRMAN. Thank you. What duration would you like on the sunset legislation for the Office of Thrift Supervision? VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 36 Tell me how many years, and we will be glad to file the bill to accommodate that. Mr. DUGAN. Five. [Laughter] The CHAIRMAN. When Secretary Paulson proposes his reorganization of the bank regulatory agencies next year, that might get some action. The gentlewoman from Illinois, the chair—the Ranking Member of the Capital Markets Subcommittee. Mrs. BIGGERT. Don’t I wish I was chairman! [Laughter] Mrs. BIGGERT. Thank you, Mr. Chairman. This is a question generally, for whomever would like to answer. By restricting which borrower is eligible for loans, do you think that H.R. 3915 in its current form will limit access to credit to individuals with less than perfect credit, and as a result, homeownership would more likely be limited to individuals in higher income groups, and can the legislation or should it be altered to avoid what I think might be this unintended consequence? Mr. DUGAN. As I testified, I think the purpose of the legislation and particularly the safe harbors, which we believe is kind of what lenders and originators will gravitate to because it will prevent people from being exposed to liability, its purpose is to restrict the supply of credit in the sense of not providing it to people who cannot afford to pay the loan. It is a tradeoff, as I said. I think it will restrict credit. You hope that it will only restrict credit so it will not go—let’s call it bad credit—that would go to people that cannot afford it, but there is a risk that there will be creditworthy borrowers who could shoulder the loans that a willing lender would be willing to make that loan to who will be prevented from doing so by the very bright lines that we have in it. I would note in a few places, those bright lines are brighter and stricter than what the Federal banking agencies agreed to do in our guidance. I think as I said, it is a tradeoff about whether you want to really be sure that people can repay and risk that fewer people will get credit and fewer people will be able to at least initially purchase a home. Mrs. BIGGERT. Thank you. We have been talking about the subprime loans. Does anyone think that the prime loans helped to create the current housing finance problem? If not, is there any reason to think it was their regulation? Mr. DUGAN. Most people believe that the current problems that we have started in subprime. Certainly right now, we have problems in market liquidity for other mortgages. The real problems that I think most people have focused most dramatically on happened in the subprime area. Mrs. BIGGERT. There should not be any changes in the regulation for the traditional prime loan? Mr. REICH. I do not believe there should be. Mr. GRUENBERG. I think, Congresswoman, the general approach to this bill in effect is to carve out the prime mortgages and focus the attention of the protections on the higher cost segment of the market, which really has been the focus of the issues. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 37 Mr. DUGAN. If I may, that is true for part of the bill, but there are other parts of the bill that have standards that apply across the board, the Federal duty of care, the anti-steering provisions, and the like. To that extent, they do go beyond the subprime market to the prime market as well. Mrs. BIGGERT. You think those are good? Mr. DUGAN. I think there is a question about them. As I testified, some of the provisions have quite subjective language in it that we fear will be difficult to implement, and I think more pronounced problems that we are responding to, as your question suggests, have been in the subprime area, and I guess our guidance has been more focused on that area, and I think that makes sense. Mrs. BIGGERT. Vice Chairman Gruenberg, the FDIC has been such a good supporter of financial literacy, and I appreciate it, and Chairman Johnson, too, and all of you for all that you have done to promote the financial literacy and financial education. Do you think legislation that seeks to combat fraud in the mortgage practices should also—would you support counseling for borrowers? Mr. GRUENBERG. I think counseling is a valuable adjunct to the protections and can be certainly helpful to borrowers in trying to deal with the complex mortgage products; yes. Ms. JOHNSON. I would agree. The focus on financial education up front, whether through the counseling, for all borrowers to better have more clear and concise disclosures and transparency, will aid everyone in the market that is securing a loan. Mrs. BIGGERT. It is just the problem has been whether mandatory or not, and if mandatory, like what happened in Chicago, people not being able to get the counseling in time and they lost the mortgage. Do you think it should be mandatory or just notice of the ability to get counseling? Ms. JOHNSON. I think to continue awareness of this issue, and I know through the credit unions that we work with we have made financial education a priority, and so it has actually been they have taken up the charge without it being mandated by a regulator or through a law. I think the opportunity is there and hopefully more people will grab onto it. Mrs. BIGGERT. Thank you. My time has expired. The CHAIRMAN. I will take my questions and then we will break for the vote. I do want to say to Governor Kroszner, the question about the Fed’s ability to produce some regulation, frankly, from my experience, the Fed has a lot of unused regulations stored up. They should be able to dip into a pile of unused regulations and maybe come forward. The gentleman from Pennsylvania is correct in terms of the omission of the NCUA. That is clearly something we should deal with. Let me ask, Commissioner Antonakes is representing not just Massachusetts but the State Bank Supervisors. There are several major elements in this bill. One, I think, is generally agreed on, that all mortgage originators should be subjected to rules, and that VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 38 the problem has been exactly what the nature of the rules are, but we do want all mortgage originators subjected to rules. Then there is the question of securitizing liability and how we would do that, if and how we do it. Then there is the question of the substance of the rules that are applied. I was pleased, Commissioner Antonakes, that you say on page 10, ‘‘A Federal anti-predatory lending standard should say clearly and ambiguously that lenders must consider a borrower’s ability to repay a loan and include all costs of homeownership,’’ and you want this to be a Federal floor but not a ceiling. Is that correct? Mr. ANTONAKES. Yes. The CHAIRMAN. You speak for the Conference of State Bank Supervisors, and this is one of the more controversial aspects of the bill. Mr. ANTONAKES. Yes, that is correct. The CHAIRMAN. I thought it would be relevant, Commissioner. I appreciate your support for the thrust of this degree of regulation. When were you appointed Commissioner? Mr. ANTONAKES. December 2003. The CHAIRMAN. And you were appointed by whom? Mr. ANTONAKES. Governor Mitt Romney. The CHAIRMAN. Governor Romney. Thank you. The question I then have for all the regulators, and I understand—this is particularly for the bank regulators but also for Commissioner Antonakes, we were of the opinion that the regulated entities, credit unions and banks, were clearly less of a problem because of the regulation. What we were trying to do in some ways was to take the regulations you have applied to the institutions under your jurisdiction, codify them statutorily, and apply them to others. I take it some think we may not have done that well enough. We would certainly welcome help in doing that. We have this too much ambiguity and too much rigidity. Let me ask the bank regulators, in terms of the effort we have made to articulate the standard, should it be tighter, looser? Let me start with Mr. Gruenberg and go down. Mr. GRUENBERG. Mr. Chairman, I think as a general matter, the standard that you have outlined in the bill has been, as you indicated, reflective of the standard generally applied by Federal bank regulators. It seemed to us a reasonable approach. The CHAIRMAN. Yes. Mr. Dugan? Mr. DUGAN. We did try to point out some areas in the testimony where the particular standard—the standard I am talking about now is the safe harbor standard. I think that is the place that most lenders and originators will gravitate to because of the absence of liability. There are a number of places in those standards that are stricter than what we put in place in the Federal banking agencies’ standards. For example, the 50 percent debt to income ratio, the prohibition on negative amortization. The CHAIRMAN. We do not want to leave it totally subjective. Mr. DUGAN. I understand that. You have to have sharp lines in order to have a safe harbor. We get that. We would be happy to provide more specific comments for the record. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39 The CHAIRMAN. I appreciate that. Mr. Reich? Mr. REICH. I, too, intend to provide a more detailed written response. The CHAIRMAN. I appreciate that. Mr. REICH. By the end of this week. I share some of the same concerns that Comptroller Dugan just mentioned with the specificity— The CHAIRMAN. Let me ask you this. We are at an experimental stage here. Mr. Dugan reminded me, there are two aspects really of this standard. One is the standard that is applied in the States to the extent that the States are—by the way, I have to say with regard to national uniformity, I assume nobody thinks—there will still be State banks and the FDIC will be regulating them, but we are not taking away the autonomy the States now have. I assume no one is asking us to do that. It seems to me the standard of care has two aspects. One is what the States’ jurisdiction allows them to impose and then there is also the extent to which that governs the safe harbor. Is that intellectually a separable set of concepts? Is it conceivable that you would have one rule for the safe harbor and then the States would be able from the standpoint of securitization—I understand the argument for uniformity in securitization rules nationally. If you were to deal with that as a safe harbor, what is then the argument for diminishing State autonomy in their general administrative capacity other than the safe harbor? Is that something that makes any logical sense to think about? Mr. Dugan? Mr. DUGAN. I am not sure I am following the question. The question is if you had an uniform standard for just the S&E liability provision but did not have it— The CHAIRMAN. But the States could then, if they were administering this rule with the people they regulated, whether mortgage brokers or State banks, they could impose greater standards if they wanted to. Mr. DUGAN. First of all, a huge part of the market gets securitized. It is not now but before August, it was about 75 percent of the market that was not Fannie Mae and Freddie Mac that got securitized, something in those numbers. You are talking about a huge part of it. Secondly, I think people would gravitate to the safe harbors just because they would want to avoid the Federal liability, and then if the States wanted to go beyond that, I do think it would still create issues about uncertainty for people who lend across State lines and do it in different States. You are going to have those issues. The CHAIRMAN. If you want to go across State lines. They have it now, do they not? People want to lend across State lines, are there not those differences? Mr. DUGAN. For some lenders. The CHAIRMAN. Mr. Reich? Mr. REICH. I agree with Comptroller Dugan. I do have the fear that the safe harbor will result in drying up of liquidity. The CHAIRMAN. That is not the question. I was talking about whether you could separate out the standard, whether the preemp- VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 40 tion—whether you need one standard for safe harbor but could give the States some autonomy elsewhere. Mr. REICH. I said at the outset that I would hope it would be possible to have a bar high enough. The CHAIRMAN. Let me say this. I appreciate your answers. I think we ought to be clear. The argument for extinguishing the States’ ability to go above the floor is not rooted in the safe harbor concern but it is a general concern that says you do not like the States going off on their own. I think you could separate out the safe harbor aspect from the broader aspect. I think that is this broader philosophical question we are dealing with. It would seem to me if we were to do that, we would be not preserving the status quo here but diminishing some of the autonomy the States now have. I would be very reluctant to see that happen. We are going to break now; we have some votes. We will come back. I apologize again, but that is the world we live in. [Recess] The CHAIRMAN. I believe I was the last questioner, so I will now call on the gentlewoman from West Virginia. Ms. CAPITO. Thank you, Mr. Chairman. I have a question on the lowering of the HOEPA triggers concerning whether that would exclude, if you all feel that that would exclude some credit-worthy subprime borrowers who would otherwise be able to receive loans and how can we guard against this unwanted consequence if in fact you believe that could be a consequence? Do you have an opinion on that? Mr. DUGAN. To be honest, we haven’t really done any empirical look at what loans would then fall under the lower triggers. I do think it is fair to say that in the past, HOEPA loans were viewed as so extreme that few institutions provided HOEPA loans once the definitions—because it was such a rigorous and what’s the word, a scarlet letter of sorts that people wouldn’t make the loans. So when you look at our home loan registry, for example, you don’t find many HOEPA loans anymore. That is not to say that there aren’t rate-spread loans and costly loans and 2/28s and the like. By lowering the triggers, you are going to have more loans fall into that category. If that is the same effect, it will I think have a chilling effect on those loans that fall into that category. How deep that goes into the market, we just haven’t yet to do the analysis on it. Ms. CAPITO. Another question I have, I mean in front of me right now we have the FDIC, the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration, the Federal Reserve, and then our State, Massachusetts State Division. Mostly my question is directed to the Federal regulators. It seems to me that—would this bill be like defusing regulation between all of your separate entities? And then what kind of mechanisms do you have in place to cross-reference with one another as to what’s going on? It seems to me that if I was a citizen watching this hearing, and I hope we have a few watching, I would think to myself, ‘‘We’re going to have too many hands in the pie here. Who is really going to be overseeing this as a Federal regulator? And what kind of in- VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 41 fluence is that going to have? Are they going to be talking to one another?’’ Mr. REICH. Well, we have that environment today. Regulation is highly defused and the Federal regulators work together through the FIAC to establish conformity and consistency and policy and policy administration. So this would be another layer of regulation on top of that which we deal with every day. Ms. CAPITO. So you don’t anticipate that this would be a problem? It is something you already have the mechanisms in place for? Mr. DUGAN. I know it seems like there are a lot of regulators at the table, but that is in fact, as Director Reich was suggesting, the normal way for all our regulatory schemes, they often involve joint work, rulemaking that’s separately. And then we separately, once the rules come out, apply it to the institutions within our respective jurisdictions. I don’t think this is much different in that respect. Ms. CAPITO. All right. I have one final question on the—we have heard a lot about the floor and the ceiling and the modeling after the North Carolina Banking Administration in terms of the new legislation. I read some data that said that when these new regulations were put into North Carolina it resulted in fewer loans going to those low income and minority homeowners. I think it was maybe 3 or 4 percent, but it was a significant percent. Do you envision that this type of regulation could actually result in the folks we really want to help the most or we want to protect the most not being able to have a share of this market? Mr. GRUENBERG. Congresswoman, candidly, I don’t think that would be the case. I think the issue here that’s well understood is the importance of extending credit to people who can afford to repay. That really is the key issue. And what you want is a set of standards to assure that outcome. And the difficulty really occurs when you extend credit to someone and that person cannot pay the loan. So, you know, the experience here is a lot of people got loans who in effect could not afford to pay them. And that is really the issue we are dealing with today. And at the end of the day you are not doing anyone a favor— in fact, you create a significant problem by doing that. So I think what you really want to shoot for is a set of standards that will give you some assurance that people are getting themselves into situations that they can afford and can sustain in the long term. Ms. CAPITO. Thank you. That’s a good answer. I yield back. The CHAIRMAN. Thank you. The gentlewoman from California. Ms. WATERS. Thank you very much. Mr. Chairman, I have a few questions that I would like to ask of some of the presenters who are here today, particularly the regulators. First, do you agree with that portion of the bill that bans yield-spread premiums? To our regulators, first, Mr. Gruenberg, FDIC. Mr. GRUENBERG. Yes, Congresswoman, we do agree that is a good provision. Ms. WATERS. Mr. Dugan? Mr. DUGAN. As I said in my testimony, it is quite a broad provision because it is not directed specifically at yield-spread premiums, it is at anything that involves any kind of differential in VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 42 compensation and we do point out that that could apply to some things that are not based on profit margins, but have some beneficial effects. Ms. WATERS. How would you change it? Mr. DUGAN. Well, I think that it could be narrowed in some ways. That we would like to give some thought to and provide some further comments. Ms. WATERS. But you don’t have any problems with the concept of reducing the ability for originators to earn money based on steering people to higher loans than they can afford? Mr. DUGAN. I think the biggest abuses of that authority has been in the subprime market. This is not limited to subprime. It applies across the board. Ms. WATERS. So you think it should be limited to subprime? Mr. DUGAN. Maybe. I think that is worth considering. Ms. WATERS. Okay. Office of Thrift Supervision, Mr. John Reich? Mr. REICH. I would not disagree with limiting it to subprime. I indicated in my testimony that in order to make certain that those who have an interest in the origination process have skin in the game so to speak. That any income that they receive from a mortgage origination ought to be spread out over a longer period of time and suggested using life insurance premium income to a life insurance salesman as a possible model. Ms. WATERS. Mr. Antonakes? Mr. ANTONAKES. I think really one of the biggest problems that we incurred is the number of people who would have qualified for prime lending but were steered towards subprime products. So I think anything that can be done to moderate compensation so that incentives aren’t provided to push people into weaker products should be considered. Ms. WATERS. Okay. Quickly. Do all of you agree that we should take a real hard look at no-doc loans? Or should they just be outlawed altogether? Mr. DUGAN. What we did at the Federal Banking Agency Standard to say the presumption is that you shouldn’t have them, but there are some cases in which it may be— Ms. WATERS. Basically you shouldn’t have them. Mr. Gruenberg? Mr. GRUENBERG. I would generally agree with that, Congresswoman. Ms. WATERS. Office of Thrift Supervision, Mr. Reich? Mr. REICH. There are institutions, Congresswoman, that have been making these types of loans for 20 years or longer and have a successful record. Ms. WATERS. So you think they should continue no-doc loans? Mr. REICH. I personally do not favor either, no-doc loans or stated income loans. Ms. WATERS. Okay. Board of Governors, Federal Reserve, Mr. Kroszner. Mr. KROSZNER. As you know, we are looking at exactly this issue with respect to our HOEPA regulations and we are taking a very hard look at where, if at all, they would be appropriate. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 43 Ms. WATERS. All right. Let’s go to the elimination of prepayment penalties. Mr. Gruenberg, do you think we should eliminate all prepayment penalties? Mr. GRUENBERG. Certainly in the subprime— Ms. WATERS. I cannot hear you. Mr. GRUENBERG. Certainly for subprime mortgages, which is where they predominate, there seems to be no reason to have prepayment penalties. Ms. WATERS. Mr. Dugan? Mr. DUGAN. As we did in our guidance, I think the focus should be you should never have prepayment penalties that extend beyond the reset date of an unadjustible rate loan. Ms. WATERS. Mr. Reich? The CHAIRMAN. Could I clarify that? Would the gentlewoman yield? Beyond, you mean before the reset? Mr. DUGAN. Before. Excuse me. The CHAIRMAN. Before the reset. Mr. DUGAN. The penalty shouldn’t go beyond, right. The CHAIRMAN. You should not have a prepenalty that would lock you into it beyond reset. Thank you. Mr. REICH. I agree with that. I also believe that prepayment penalties result in a lower interest rate for the borrower. Ms. WATERS. Ms. Johnson? Ms. JOHNSON. Federal statute prevents credit unions from charging prepayment penalties already. Ms. WATERS. Do you think others should have prepayment penalties? Ms. JOHNSON. Well, I’d leave that judgement to the members, but it works for credit unions. Ms. WATERS. Mr. Antonakes? Mr. ANTONAKES. I think they should be very limited if not outlawed. Ms. WATERS. Do you agree that the standards that are being set with this bill would take a look at the teaser rates and whether or not you are judging to pay based on the terms that the teaser rates or the ability to pay beyond the teaser rates when the new rates are triggered? Mr. GRUENBERG. I believe the basic purpose of the bill is to require underwriting to the fully indexed rate and to the borrower’s ability to pay. Ms. WATERS. Does everyone agree with that? Mr. DUGAN. Yes. Mr. REICH. Yes. Ms. WATERS. Okay. I think my time is up. Thank you very much, Mr. Chairman. The CHAIRMAN. You could end on a roll. The gentleman from New York, the chairwoman of the Financial Institutions Subcommittee. Mrs. MALONEY. Thank you, Mr. Chairman. I would like to ask the Vice Chairman of the FDIC, Mr. Gruenberg, to follow up on statement that Sheila Bair made recently when she advocated for servicers to restructure adjustable rate mortgages, the so-called 2/28s and 3/27s, into a fixed rate VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 44 mortgage at the initial rate saying that only about 1 percent of these mortgages have been modified. And how would this work given the complicated process of securitization? Mr. GRUENBERG. I’ll take a crack at that although I think it would be best obviously to ask Chairman Bair. I don’t think there is any more urgent issue confronting us in this subprime mortgage area than dealing with the subprime mortgages that are in the process of resetting and that are going to reset the rest of this year and next year. You have hundreds of thousands of people who really are going to be placed at risk of losing their homes. And this whole issue is complicated by the fact that, as you know, most of these subprime mortgages are tied up in securitizations which significantly complicate the ability to restructure them so that the borrower can afford to pay them on a long term basis. I think what Chairman Bair has proposed is a workable way for servicers, since most of these mortgages are in securitizations, it is the servicer that is really trying to work out these mortgages rather than the lender or the originator. What has been proposed is that the servicers simply modify these loans to fix their rate for the term of the mortgage at the starter rate. The point being that for subprime borrowers who have been making their payments at the starter rate, the fact is that in many cases, the starter rate is actually higher than the prime rate. And for these borrowers to allow them to continue to make the payments, to stay in their homes and for the investors to avoid the cost of foreclosure is really a far more preferable outcome and a very workable one. That is really the heart of what has been proposed. Mrs. MALONEY. She has proposed it, but people are not following through. Only 1 percent have responded. This Congress has modernized FHA. It has had FASB change modification and restructuring rules for the servicers and it is not happening. She likewise called for mass restructuring and what did she mean there? And how can we get this 1 percent up? Because that is really the crux of it. Everybody says they want to help, but it is just not happening. Mr. GRUENBERG. I think that is the critical issue. I think this proposal is a workable way for servicers to address this issue. There are some servicers that I think are moving forward with constructive programs. I think the challenge here is really to get the servicers as a group, to adopt a set of common approaches that will be effective in modifying these mortgages so that the homeowners can stay in them for the long term. Mrs. MALONEY. And following up on that, what do you recommend current standards include to prevent this sort of widespread problem in the future? Mr. GRUENBERG. I think the standards going forward—as you know, the regulators have issued a set of guidelines relating to subprime mortgages, fundamentally requiring underwriting to the fully indexed rate and other protections. Mrs. MALONEY. Do you wish to add anything to that recommendation? VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 45 Mr. GRUENBERG. I think there are a series of recommendations and we have additional protections and most of them are embraced in the legislation that has been introduced. I think that would be a reasonable way to proceed going forward. Mrs. MALONEY. John Dugan. Lehman Brothers and others have predicted that the next few years, in the next few years literally millions of families will lose their homes. Some predict that more people will lose their home than they did during the Great Depression. What role, if any, do you think the OCC can play to keep as many homeowners as possible in their homes? Mr. DUGAN. Well, first of all, we have already issued guidance to our lenders who have made these loans, who are the servicers of the loans to work with their borrowers to try to find ways to avoid foreclosure because the fact of the matter is when you foreclose on a home, just purely from an economic point of view on the point of the investor, you lose a tremendous amount of value. Mrs. MALONEY. We are all aware of that, but the action is just recommending to borrowers— Mr. DUGAN. And the alternative of restructuring in ways so that we may have to take some loss but not as much loss as you would take if you would foreclose should be in the economic interest of people to do that. And I think encouraging servicers who service those loans or lenders who own those loans to be creative, to go out and to do the kinds of things you were just referring to earlier, I think those are constructive ways to proceed. Mrs. MALONEY. Thank you, my time is up. The CHAIRMAN. The gentleman from New York. The gentleman from North Carolina began this round of questioning. It was so long ago people may have forgotten. It is the gentleman from New York’s turn now. Mr. MEEKS. Thank you, Mr. Chairman. Let me ask, I guess Mr. Kroszner, or anyone else on the panel. In my opening statement I talked about this practice known as equity stripping where individuals promised to help homeowners avoid foreclosure by buying their home and selling it back to them. Instead, they strip out all the equity making it nearly impossible for the former owners to buy their home back. My question to you is are you aware of this practice and from what you have seen thus far of H.R. 3915, do you think that it can address it? Mr. DUGAN. If I could begin? We are aware of it. We have published guidelines that address it specifically and direct our banks not to engage in that activity. Mr. MEEKS. Let me ask this also. If H.R.— Mr. KROSZNER. I agree. Mr. MEEKS. I saw everybody shaking their heads saying they agree. Any disagrees? If H.R. 3915 was a ceiling, if it was a ceiling and I guess I will ask Mr. Dugan this, first, would you have any objection to local enforcement by State AGs or the banking regulators? Mr. DUGAN. Well, I think this is a very good question, because as I mentioned in my testimony, you have a situation where while you have a nominal consumer litigation, civil litigation that applies VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 46 to everybody, in the case of banks, you also have the agencies at this table there that would have the ability to impose quite stiff penalties and fines in how they do what they are going to do. But for the unregulated sector—not regulated, Non-federally regulated sector that are not banks at the State level, there is a much lower level of enforcement that would be provided to them. And the bill does not really speak to that. What you are talking about would be a suggestion that would add additional enforcement authority with respect to that. And that would partly level the playing field and provide a more even kind of enforcement regime. Mr. MEEKS. Mr. Steven Antonakes, what do you say? Mr. ANTONAKES. Well, I would beg to differ with my colleague with regard to the lack of enforcement actions. With 3,600 actions taken last year by the States, alone, and probably more than that taken this year, you know, is there room for improvement and raising the bar in some States? Absolutely. We are working hard to do that. But, again, a ceiling I think is difficult because then you preempt States from the ability to react to local issues and go beyond that ceiling and the ceiling becomes static and, you know, who knows what the mortgage market is going to look like 5 or 10 years down the road. So I think a floor is better. I think State and local enforcement AGs is very important. You know, there have been some landmark cases, very large settlements that came from the States. I do not need to name them. They are all well known. And I think that is something that we will continue to work on. Mr. MEEKS. Mr. Gruenberg, let me ask you a question on a slightly different topic, something I read this morning. I think Merrill Lynch reported a write-down of at least $5 billion. Some outside analysts predicted it would be $7 billion for the third quarter of this year due to losses in the subprime investments. I just want to make sure, if I am understanding it correctly, Merrill is an investment bank that does sweeps of customer funds into depository accounts which affects the ratio of insured deposits. I think that is correct. So my question is, will these substantial losses by Merrill have any effect on the Insurance Fund? Mr. GRUENBERG. I suppose, Congressman, you directed that question to me. You know, I think we would have to take a look at that. I would want to be cautious about responding to it until we actually looked at the facts of which you were reporting on in regard to the story this morning. Mr. MEEKS. Well, if you can, I would love you to get back to me. Mr. GRUENBERG. We will do that very promptly. Mr. MEEKS. Thank you. I yield back. The CHAIRMAN. The gentlewoman from New York is recognized. Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman, and I appreciate the panel having patience with us and being here for such a long time. I want to go back to something that Mrs. Waters was talking about in the beginning, and I know we’ve already heard that some of you haven’t had a chance to read the bill because it came out actually late Monday afternoon. So if you can’t VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 47 answer it, I don’t mind, you know, if we get an answer back in written form, you know, down the road. On Title I on page 12, lines 10 through 15, it talks about prohibition of steering incentives. And I guess my question would be, would any of you interpret the bill, specifically Title I, as prohibiting indirect compensation for originators? And, again, I don’t mind waiting and getting an answer back, because this is the answer that we want from you as we go through the bill. The second question, did any of you have an inkling that this was coming down the road? Because I’ll be very honest with you, I mean, we on this committee have been talking about predatory lending, well, for the last couple of years. There has been legislation there. Some of the States—New York, Massachusetts—have been looking at how we could stop the predatory lending, especially in the minority areas and especially towards our senior citizens. I mean, you’re watching, overwatching, supposedly, that. That’s why we have this legislation in front of us. So nobody had an inkling? And I think this is just the tip of the iceberg. I do believe we’re in for a rough ride down the road. I’m even wondering if this legislation is coming a liability too late. With that, I’ll ask—yes, ma’am? Ms. JOHNSON. We actually at NCUA issued a supervisory letter to our examiners a little over 2 years ago, back in 2005, specifically addressing the exotic loans and subprime, the risk in some of the subprime area. We sent the same information then to our credit unions. So they knew what we were looking for and what we were, you know, what we would be examining. And so we feel that we did have a little bit of an early action in this area, and we think that’s part of the reason that our numbers aren’t quite so bad. Mrs. MCCARTHY OF NEW YORK. I actually had heard that the credit unions were not having any problems with these issues, but, again, I come back, and even when you heard about it 2 years ago, and, again, you’re all regulators, why didn’t you come forward to at least this committee? Because we’ve been talking about it. And why didn’t we hear from those— Mr. DUGAN. Well, speaking for the OCC and for national banks, we did have some very significant problems in the credit card area with subprime lending, abusive subprime lending that we did take some quite aggressive action about it and infused the agency with that kind of concern. I think it’s fair to say that a relatively small percentage of subprime mortgage lending, and particularly the most aggressive of it, was done in national banks or their operating subsidiaries. As a result, we did not have as big a percentage of those markets. We had about 10 percent of originations last year. And of those, the rates of default have been well below the national average. So I think we do look hard at it. In addition, on predatory lending per se, we have always made it clear you can’t do that in national banks. We’ve been quite rigorous about that standard. Having said all of that, I don’t think anybody anticipated that the problem could spread like it has from the subprime markets to the prime markets to the credit markets more generally. I think that was truly something that was not anticipated. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 48 Mrs. MCCARTHY OF NEW YORK. Well, one of the things that concerned me, and I know Mrs. Biggert had started on it with the prime market, the majority of people, especially young borrowers, have been taking money in home equity loans basically to improve their house and taking a lot of money out, and they’re going to get hit probably in the next couple of months with some—so, even though we’re talking about subprime, there are going to be a lot of prime owners who are going to be hit with this. And I’m just wondering if we shouldn’t be looking at that a little more closely, too. Mr. DUGAN. Well, of course, we do examine for credit issues and compliance issues in all of our retail lending, including home equity lending. It’s something we pay very careful attention to. As you may have seen, a number of the larger institutions have begun setting aside more reserves for losses with respect to home equity lending, which we believe is prudent, and that is an area which we will be continuing to focus on. Mrs. MCCARTHY OF NEW YORK. Just one final question. Yesterday we met, the New York delegation met with the Commissioner of Banks for New York State, and they’re doing a campaign, an advertising campaign, and they’ve been doing it for the last 6 weeks or so, I guess. And out of all the information that has been going out there, all the information our congressional office has been putting out there for the State, or the State of New York, only one person—only one person—has actually applied to have it refinanced in one way or the other. How do you see it out in the other parts of the country about people responding to whatever the banks and other entities are getting that information out there to the consumer? Mr. DUGAN. Well, I think it is a kind of very well-documented problem that on the one hand, studies show repeatedly that the sooner a borrower experiences difficulty, the sooner they contact their lender— Mrs. MCCARTHY OF NEW YORK. Right. Mr. DUGAN. —the much more likely that we’ll be able to work it out. I think, unfortunately, there is a concern that sometimes a borrower thinks of the lender in that circumstance as not his or her friend, and so there is an issue about their willingness to do it. And try as lenders might, they haven’t been getting the response rates they need. That is, however, why NeighborWorks America, which a number of us sit on the board of, have embarked on a very strong national campaign with 800 numbers and the like, and have been using community groups working with lenders to try to get that trust in neighborhoods where there might be people who would be suspicious of lenders to increase those rates. But it is a problem, and it needs more and constant attention to make sure that that communication happens sooner rather than later. The CHAIRMAN. I want to make an announcement, and it may be relevant. The Secretary of the Treasury and the Secretary of HUD did announce a program that the Administration is doing, I think called New Hope, to try and make more of this happen. And we will have a hearing a week from Friday in which we will ask them VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 49 to report on their progress. Sometimes we find that calling a hearing is more important than having one. But we will on a week from Friday be expecting to hear from representatives of the Secretaries of Treasury and HUD and others in the Administration on how they have succeeded in doing exactly what you’re talking about. Because a lot of the pieces are in place, we are told, and they haven’t been connecting. And one of the things that we hope to do in this bill, and it may not be in here as explicitly as we’d like, is part of the problem is at least once a year, it seems to me, people who have mortgages ought to be notified who it is they are to call if they have a problem. Because with the secondary market and the servicers, etc., some people have a hard time figuring out who it is they’re supposed to call. I think we would all agree it would be a good thing in the bill if we were to put some kind of, maybe at least an annual notice requirement. But we are going to have a hearing a week from Friday in which we expect to get reports from the Administration on the progress of making that work. The gentleman from Louisiana. Mr. BAKER. Thank you, Mr. Chairman. Mr. Dugan, focusing on the operational aspects of the bill if it were to become operative, under debt-to-income analysis, is there an established regulatory definition of debt for the purposes of qualifying? Mr. DUGAN. There is not an established one. I think the bill would have to call for that. Mr. BAKER. Is there a variance from mortgage originator to mortgage originator in how they look at debts in qualifying an applicant? Mr. DUGAN. Yes. Mr. BAKER. So that in one institution, if the mortgage obligation represented 49 percent of monthly income, that would be an acceptable qualified borrower. On the other hand, if the same borrower went to another institution and had credit card debt, student loans, other monthly obligations of a stipulated regular amount, he would therefore not qualify at the second institution? Mr. DUGAN. Yes. You definitely can have those variations among— Mr. BAKER. Is there a regulatory definition of what income is constituted? For example, are trust fund payments necessarily part of the calculus for income? Mr. DUGAN. We have not established any specified debt-to-income ratio that’s mandatory to begin with, so we haven’t established it for the components either. Mr. BAKER. Is it customary know some markets for people who are not low income, not average wage earners, but upper income individuals who have no record of credit default or other impairments to their credit record to have a portion of their monthly income in excess of 50 or 60 percent because of the high cost real estate markets in which they reside? As, for example, in New York, where I’m told about 29 percent of upper income wage earners have mortgages which are in excess of 50 percent of their monthly income? Mr. DUGAN. Yes, that is correct. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 50 Mr. BAKER. In your view, then, would that market effect be to exacerbate the problem that many members of this committee have expressed, which you may not be aware of, about the difficulty in some individuals getting access to mortgages enabling them to acquire a home in high cost real estate markets, wouldn’t this further aggravate that ability to acquire homes if the 50 percent rule becomes operative? Mr. DUGAN. That is a potential concern. Mr. BAKER. Do you have a view of how the secondary market works today with regard to the HOEPA market loans? Is there a broad and deep liquid HOEPA secondary market? Mr. DUGAN. No there is not, as I mentioned earlier. Mr. BAKER. And to what do you attribute that? Mr. DUGAN. Well, I think that because of the—it has become something of a scarlet letter, the designation of being a HOEPA loan. Mr. BAKER. So that would be related to reputational risk? Mr. DUGAN. In part. Mr. BAKER. In that case, were we to be concerned and act appropriately to weed out those who took advantage of particularly lowincome home buyers by licensure of mortgage originators, which I believe the bill does provide, by standards of suitability which I believe the bill does provide, wouldn’t those steps necessarily be a better tool, given the strength of the regulatory backstop, of course, to enforce the matching of customer with financial product than arbitrary limits which are not defined relating to debt and income? Mr. DUGAN. Well, those standards that you’ve just described are not objective standards. Mr. BAKER. Understood. Mr. DUGAN. And we have some concern from that standpoint about, if you’re talking about something that, you know, must be in the interest of the consumer— Mr. BAKER. Well, let me rephrase it. Isn’t there a better way to describe suitability than necessarily just debt to income? Mr. DUGAN. Well, it sort of—I guess what we had thought on the duty, what we did—the federal banking agencies, when we did our guidance, questions were raised about suitability, and I think based on the comments, we decided the better way to address it would be through an ability to repay standard as the real focus and the objective focus about underwriting at the fully indexed rate. And that would get at the question. Mr. BAKER. Good. Because I understood it in an earlier response, you don’t have a definition of debt today. And there’s no regulatory definition for the purposes of qualifying— Mr. DUGAN. In the guidance that we did on subprime lending, we did define. Mr. BAKER. And how was that defined? In simple terms. Mr. DUGAN. I’ll have to get back to you on the exact contours of it, but we did take into account the—in terms of what the—I do remember that it included the principal and interest payments on the loan as well as taxes and insurance, the so-called PITY calculation, was the debt that we were talking about. Mr. BAKER. Well, for the purposes of the committee’s work—since my time has expired, Mr. Chairman, I’ll wrap up—I would very VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 51 much appreciate a description of the technicals that go into the determination of a person’s ability to qualify for a mortgage product and what, if anything, relates to the suitability of that product to that particular applicant’s financial circumstance. In other words, help. I don’t think the consequences of the bill as proposed, although not intended, are going to be positive, I think it will restrict the flow of capital to low-income individuals, but also to upper income who happen to be aberrantly high in mortgage payments in relation to income, and there has to be a way to fix this. And so I would urge your assistance in seeking that remedy. Mr. DUGAN. Okay. We would be happy to follow up. Although what I would say is that we don’t focus so much on suitability as ability to repay. That’s the standard. Mr. BAKER. I understand. But that’s our problem. The CHAIRMAN. The gentleman from North Carolina, a co-author of the bill. Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. Mr. Chairman, I’ve served in Congress for almost 5 years now and served on this committee for almost 5 years. I’ve worked on this issue for almost 5 years. It is stunning to hear the same rote repetition of talking points that we’ve been hearing for 5 years. The very same arguments, with little more support than they have had all along, and based upon the prepared testimony submitted in advance, very little different from industry as well. According to the New York Times, by the end of President Bush’s Administration, 700,000 fewer American families will own their homes than did at the beginning of his Administration. According to Lehman Brothers, 30 percent of the subprime loans entered last year will end in foreclosure. Not dip into foreclosure, but end in foreclosure. The Center for Responsible Lending estimates that 2.2 million American families will lose their homes to foreclosure in the next year or two. We already have the highest foreclosure rate that we’ve had in 25 years, and we will soon have the highest foreclosure rate since the Depression. It seems like there ought to be some acknowledgement that we have a problem. I didn’t really expect that there would be rending of garments and gnashing of teeth at the hearing today. I really didn’t think that industry would come forward and acknowledge their manifold sins and wickedness, but I expected some acknowledgement of a problem and some acknowledgement of responsibility for the problem, some acknowledge that it was lending practices that put us where we are now, with millions of Americans falling out of the middle class into poverty because they’ve lost their homes to foreclosure. A couple of the Republicans, including Mrs. Capito, have talked about North Carolina’s law and said that we don’t want to repeat the experience of North Carolina. That there had been fewer loans in the subprime market after North Carolina passed its law. The Commissioner of North Carolina banks, Joe Smith, has sat there at that table repeatedly and testified that since North Carolina adopted its law in 1999, there has been no diminution in the availability of credit in the subprime market. None. He can’t find anybody who should be able to get a loan who can’t get a loan. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 52 The business school at the University of North Carolina has done a study and found no diminution of credit in the subprime market. An industry publication, Inside B&C Lending, looked at lending in North Carolina, subprime lending in North Carolina, and subprime lending in other States, and found no difference in the availability of credit or the cost of credit. Are you aware of any study that finds that credit is less available in the subprime market in North Carolina because of the consumer protections of North Carolina? Any of you? [No response] Mr. MILLER OF NORTH CAROLINA. Okay. Now there may be fewer loans. That’s not an unintended consequence. That’s an intended consequence. One of the characteristics of predatory lending is to trap people in a cycle of borrowing so they have to borrow again and again, and they can’t pay their loan. They have to borrow again. They have to pay a prepayment penalty to get out of the last one. They have to pay costs and fees to get into the new one, and they systematically are stripped of the equity they had in their loan. If there are fewer loans being made in North Carolina, that’s what we intended. That means the law is working. Mr. Dugan, I was surprised by your concern that some of what is in this law is a subjective standard. The law is filled with subjective standards, as you must know. There was a great old English common law case that fraud can have no all-embracing definition lest—that the fraud is better left undefined lest the craft of men should find a way of committing fraud that might escape a rule of definition. That pretty well tells you the reason for having some subjective standards, so that there’s not a way to get around it. And now we’ve heard from industry they want bright line, clear rules, but they want to maintain market innovation. That’s what worries me. They’ll innovate their way around anything that we do. Mr. Dugan, are you not familiar with the idea of the reasonable man rule in law or proximate cause in securities laws, suitability standard, know your customer requirement, churning, all of those subjective standards? Has the securities law not worked because it has subjective requirements. Mr. DUGAN. I never said that I wasn’t aware of subjective standards in the law or that all subjective standards were bad. What I said was that there has been a huge problem in the subprime market. The bill imposes a duty of care that applies to all mortgage providers, not just subprime mortgage providers, with a subjective standard. And my point was only that when you have a subject standard and the penalty is litigation, you’re going to get a lot more of it. Mr. MILLER OF NORTH CAROLINA. Well, if it is true that they want to make sure that we protect market innovation and they continue to innovate, how can we come up with an all encompassing objective standard that they can’t innovate around? Mr. DUGAN. Well, as I said before, I think to me, the most important standard that’s being put in the bill that’s being discussed is the ability to repay, to make sure that these loans are underwritten at the ability to repay based on verified income, which as we talked about earlier, something that we support in our own guidance. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 53 There are a number of specific standards that are in the bill that do those things. And what we were just talking about is a subjective standard on top of that that extends well beyond subprime lending. And that, I think the former way is in my view a better way to get at those issues. The CHAIRMAN. The gentleman from Georgia. Mr. PRICE. Thank you, Mr. Chairman. I want to thank every member of the panel for their perseverance and for their patience in both our schedule, and the level of interest in this issue is significant, huge issue for so many folks across this Nation. Coming from Georgia, I would—I don’t know exactly what happened in North Carolina, but I do know that in Georgia, intervention by governmental entities can significantly alter the availability of capital and dry up capital for folks who are interested in purchasing homes. We saw that 4 or 5 years ago with changing assignee liability. And literally overnight, the people who wanted to be able to purchase homes were unable to find capital to purchase homes. So we can go too far. I haven’t heard, I don’t think, enough of that sentiment from folks who just 6 months ago or so we heard essentially all that sentiment. Mr. Antonakes, you said in our March 27th hearing, ‘‘at this time we don’t see the need to ask Congress for additional authority or additional legislation, regulation appropriately deal with the issues.‘‘ The Fed reiterated that. The OCC said we agree. We believe the nontraditional guidance the agency has issued in October as well as the subprime guidance that we now have out for comment uniformly implemented by all regulators along with the natural operation of the market is all we need right now. We don’t think we need anything else. The Thrift said I’ve expressed some support to take our guidance to subprime lending and make it a standard would apply to all institutions. So I guess I’m a little surprised by the testimony that I heard this morning, and I would ask what happened? How—what’s the current lovefest now with the Federal Government getting involved in the federalization of home mortgages to a greater degree? Please? Mr. DUGAN. Well, I think what at least we at the OCC have always testified is that we did and continue to think that the guidance that we issued is adequate for the banks that we supervise. But what we have always been concerned about is that same standard would be applied across the board to the less, what we believe is the less-regulated entities at the State level. And in my view, and as I said before, that’s why you need some kind of uniform national standard. Now that can be accomplished by States adopting the Federal guidance, and many States have been doing that. It could also get there through Federal Reserve rulemaking to a large extent under their HOEPA authority, or you could get there through Federal legislation. Whichever way you choose, we do believe that there ought to be an even level playing field, a national standard. Mr. PRICE. And I appreciate that, Mr. Dugan. In your testimony, you said—because I was struck by it, ‘‘some creditworthy borrowers VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 54 would be denied loans.’’ I think that’s a message that hasn’t gotten out. Remember, this bill that we’re looking at doesn’t apply to the folks who don’t have any problem getting credit. It doesn’t apply to the folks whose income is such that they don’t get to that level where they have to come under cause for concern by our friends who want the government to be able to make their decisions instead of themselves. So it applies to those folks who are at the margins and are trying their best to get into a home. Yet what you have testified to, which I strongly believe would be the case, is that some creditworthy borrowers would be likely to be denied loans. So where is it that we go too far in making it so that those folks who are trying to live the American Dream, who are trying their best to work hard, to provide for their families, who have the dream of getting into their own home, but we at the Federal level say, oh, no, you really don’t know. We can make a better decision for you. Just trust us. Trust us. We’ll make a better decision. Where do we step over that line? Mr. DUGAN. Well, as I testified, I think there are some places in the bill that go beyond what the Federal agency standards are. But I will say that any time we draw standards that are intent to reduce the supply of credit to, in cases where there have been abuses or problems, you run the risk of also reducing it to some creditors that would be eligible for it. And when we enacted our guidance, we believed that the situation had gotten problematic enough that it was worth taking that risk with respect to certain categories of practices. And I think that’s the same animus that’s driving the legislation. There are some places where the categories in the safe harbor in the bill go beyond what our guidance does. And personally and from the OCC, I’d like to—we’d like to see some adjustment to some of those things, and we’d be happy to provide some of those more detailed comments to the committee, as the chairman has invited us to. In addition, the bill does provide the regulatory agencies the power to make some adjustments to categories over time, which I do think, if the committee does go forward with this legislation, it’s very important to have that authority not only put in the legislation but described in a way that makes sure that regulators do feel free to make adjustments that they believe are appropriate. Mr. PRICE. My time has expired, Mr. Chairman. Thank you. Mr. GREEN. Thank you, Mr. Chairman and I thank you and the ranking member for holding this hearing. It is exceedingly important that we talk about these issues, and I thank the witnesses for appearing today. To provide some additional input, permit me to ask, is there anyone among you who believes that the subprime market is overregulated. If you think it’s overregulated and that we are about to do a disservice by imposing some, what I call sensibility, kindly raise your hand. Anyone think the subprime market is overregulated? All right, now, is there anyone who is of the opinion that the subprime market—this is by the way, in court called voir dire—it’s a French term—meaning to speak the truth. So, this is a truth-telling portion of this hearing for you. Is there anyone here who believes the subprime market is underregulated? That we ought to do VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 55 something about some of the concerns. If you think it’s under-regulated, I hate to have you do something as simple as raise your hands, because it sometimes appears to be childish, but would you raise your hand if you think it’s under-regulated? The CHAIRMAN. The gentleman, help out the recorder, for the benefit of the record. Mr. GREEN. Thank you, Mr. Chairman. You were a great trial lawyer in a previous life, obviously. Because people who read these records have no way of knowing what actually occurred, it is incumbent upon me to ask the recorder to note that all persons have raised their hands, unless I have missed someone. All persons have raised their hands, connoting that the subprime market is not under-regulated. Now, given that it’s not under-regulated, and given that Congresswoman Waters went through quite a list of things that are of concern, from pre-payment penalties to teaser rates that don’t properly adjust such that you qualify for a teaser rate, but you don’t qualify for the adjusted rate—she went through a number of things. Congress has to do something about this. We really, in my opinion—well, let me just ask. Is there anyone who thinks Congress should take, not a laissez faire attitude, but a lazy attitude, and do nothing? If you think that we should do nothing, raise your hand. All right, looks like we opted—there’s one person who thinks maybe doing nothing is good. Governor? Mr. KROSZNER. I don’t think doing nothing is good and that is where the Federal Reserve is going to exercise the power that Congress has given it, to write HOPEA rules addressing many of the issues that have been raised. Mr. GREEN. Governor, let me be very pointed. Are you of the opinion, Governor, that Congress should do nothing about the prepayment penalties, about the teaser rates, and not qualifying for the adjusted rate, about the whole notion that persons are put into loans and some cases where in persons who are making—originating the loans are aware that they cannot make the notes at some point where there’s an adjusted rate—do you think that we should do something about this? Mr. KROSZNER. These are real challenges and these are things that you have given the— Mr. GREEN. Sometimes when folks finish, I don’t know if they have said, ‘‘yes’’ or ‘‘no.’’ So I have to ask you, would you kindly say yes or no. Should we do something about it? Mr. KROSZNER. If you can do it in such a way that it doesn’t restrict responsible lenders from running credit that can be used responsibly, then you should do something about it. Mr. GREEN. Okay. All right, everybody can qualify, but we all agree that there’s a role for this—for Congress in this process. And if Congress should do something about it, we have to get beyond this notion of, as my grandfather who is a Methodist minister would put it, wanting to go to heaven but not wanting to die. If you want to get to heaven, the only way you can get there—there’s one way. Nobody goes without—that’s the way it happens. So, given that we all want to get there, then Congress has to do what’s known as ‘‘bite the bullet.’’ We really do have to make the hard decisions about some of the things that everybody wants to VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 56 see regulated or something done about, but few people—not enough people have the courage to step forward and try to make a difference. So, I am just going to beg that persons understand—as my time is running out—that we have difficult decisions to make. But this is why we get the big bucks, to make the tough decisions and go back and face the crowd and say that we did what we thought was appropriate under the circumstances prevailing at the time. My final question is this—because there’s some question about people changing their minds. My suspicion is that at one point some of you believed in the Easter Chicken, also known as the Easter Bunny. And at some point, my suspicion is, you changed your minds and you no longer believe in the Easter Chicken. If you still believe in the Easter Chicken, raise your hand. Okay, it’s pretty obvious, as we mature and as we receive additional empirical evidence, we ought to have the maturity to change our minds, and do what is appropriate given the new evidence that we have acquired. I thank you, those of you who have metamorphosed into better people. God bless you. I yield back. The CHAIRMAN. The gentleman from Connecticut. Mr. SHAYS. I’d like to note for the record that my colleague didn’t point out to the transcriber how many people raised their hands about the Easter Chicken. I think there was one and it was a Member of the House. Would the gentleman—I don’t want to use my time. The earthquake hit last year, at the end of last year, beginning of this year. When does the tidal wave hit the foreclosures? What quarter are we going to see a lot of foreclosures? I’d like to ask each of you. Let’s go right down. Your estimate of when you’re going to see the largest number of foreclosures. Mr. GRUENBERG. Congressman, I think we’re actually entering that period now. I think the large volume of the subprime, hybrid ARMs, these 2/28s, were made in the last quarter of 2000— Mr. SHAYS. I have 5 minutes, so you think it’s— Mr. GRUENBERG. —started last quarter 2005, 2006. Mr. SHAYS. That was the earthquake. I want to know when the tidal wave hits. Mr. GRUENBERG. This quarter and into next year is probably going to be the peak. Mr. DUGAN. I would agree. I think September had the highest monthly volume of resets but that high volume, even though it’s a little bit large, extends right up through next year. So, through next year I think is the— Mr. REICH. Second to third quarter of next year. Mr. SHAYS. Thank you. Ms. JOHNSON. We would say through the middle of next year. Mr. KROSZNER. I’d agree, through the middle of next year. Mr. ANTONAKES. I’d agree as well. Mr. SHAYS. Thank you. If people started to—and banks, with their customers, started to renegotiate the terms of the loan, could that make a noticeable difference on what happens next year? Mr. GRUENBERG. As you know Congressman, most of these loans are held in securitizations, that is the real challenge here, and I VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 57 think what is probably needed is a broad effort by the servicers who are responsible, for most of these loans to modify as many as possible so that you can have long term effects for the homeowners. Mr. SHAYS. Any other comment? Mr. DUGAN. Yes, modifications could make a very significant difference. Mr. SHAYS. Okay, but the challenge would be what—getting the institutions to identify themselves and identify who their customers are? Mr. DUGAN. No, it’s not a question of identifying who the customers are, it’s often getting the customers to acknowledge and to work out a different modification rather than just not paying on time, partly. And partly it’s a systemic issue. We have high volumes of figuring ways to do that that are more efficient. Mr. SHAYS. Let me just, so I am sure I’m understanding what you’re saying—the institutions themselves would have a lot of customers to renegotiate with and maybe not be able to handle the volume? Mr. DUGAN. The servicers. Mr. SHAYS. The servicers. Thank you, okay. Basically, we had homeowners—we had renters encouraged to buy and we in Congress took great pride that we were seeing minorities have ownership that they didn’t have before and a good chunk of it was with the subprime market. I’m told that people who practically couldn’t even afford a second month payment in rent could end up buying a house under the subprime market. If that’s true, without sounding insensitive, when there is a foreclosure—in a sense did these individuals really ever own the home in the first place. And the question is, should our effort be to try to help them keep the home or is it in their best interest not to own it? Mr. GRUENBERG. Congressman, I think it’s important to keep in mind that the majority of the subprime mortgages were refinancings by existing homeowners and the issue really is that for many of these people, they had mortgages they could afford to pay. They were encouraged to refinance into mortgages that they cannot. And that’s part of why this is such an urgent— Mr. SHAYS. Would you all agree with that? Because that’s something I think is quite significant. Mr. DUGAN. I think there is a huge part that is refinancing, but getting back to your question, but I do think that not every loan should be restructured. Some are going to have to be required foreclosure because some people can’t afford to make the payments on the loan even on a restructured basis and foreclosure is the only option. No one wants that, but in some circumstances that will be the case, for the very reasons you suggest. Mr. SHAYS. Does anyone disagree with that? Mr. REICH. I would add that I think—I would perhaps oversimplify that there are perhaps three categories of borrowers in the subprime arena. One would be investors who had no intention of ever occupying the property. The second would be people who were misled by the products they got into. They thought they could afford it but they didn’t fully understand the terms and the third category would be those people who thought they understood the VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 58 terms but ultimately did not realize that the rate resets would be taking place. The CHAIRMAN. Thank you, gentlemen. We have heard the bells. I’m going to—I think we can get in these two last sets of questions and we can dismiss this panel. So, we’ll go to the gentleman from Missouri first and we can move quickly. We are going to have a problem. Mr. GREEN. Mr. Chairman, may I ask for unanimous consent to insert into the record a letter from the National Fair Housing Alliance? The CHAIRMAN. Yes, without objection. I also have a letter from Countrywide responding to some accusations made about them at our last hearing, which will be put in the record, withouot objection. The gentleman from Missouri. Mr. CLEAVER. Thank you, Mr. Chairman. I’ll be very quick. There are—I met with some of the people from the financial industry in my home district in Kansas City, MO, and they seem to believe that if we bring forth some new regulations, that somehow the credit crunch will be exacerbated. Do any of you agree with that? To bring on some regulations with regard—similar to that which the Chair and Mr. Miller are proposing, that it creates a greater credit crunch? Mr. REICH. Well, the devil is in the details, Congressman. It depends upon, ultimately, what the legislation looks like. Mr. CLEAVER. Okay, so, do you think it—would you agree with the editorial writer in today’s Wall Street Journal, that this would give delinquent mortgage borrowers a new trick to essentially enjoy free rent for up to 30 years? Yes, sir— Mr. GRUENBERG. I wouldn’t agree with that, Congressman. Mr. CLEAVER. Mr. Comptroller. Mr. DUGAN. I think the issue with—it goes back to some of these questions about suitability and the details of the legislation. The concern is, could people avoid making payments on loans by inserting defenses that would otherwise not be available? I don’t think that’s the intent of the legislation. I think there’s an effort to work with the language to prevent that. Mr. REICH. To be honest with you, I didn’t fully understand your question. I’m sorry. Mr. CLEAVER. Okay, because my time is running out. Thank you. Ms. Johnson? Ms. JOHNSON. I haven’t read the editorial that you’re speaking to and that line taken out of context so I’m not sure that I could provide an answer. Mr. CLEAVER. Governor? Mr. KROSZNER. My hunch is that they are engaging in a little bit of hyperbole, but I think it’s exactly as we said before. It really depends on the specifics of the legislation and we’ll craft it narrowly focused—legislation addresses things like, well-crafted—repay that we could do through our Hope Regulations could address some of these issues. Mr. CLEAVER. Commissioner? VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 59 Mr. ANTONAKES. And given the way the legislations draft and with the rulemaking process, I think that unattended consequence would be avoided. Mr. CLEAVER. Thank you. The CHAIRMAN. I thank you and I just would say that my attention was called to the Wall Street Journal editorial and the notion that somebody could get a 30-year stay here is, even by their standards, extremely bizarre. The gentlelady from Wisconsin. Ms. MOORE OF WISCONSIN. Thank you, Mr. Chairman, and I’ll be brief, given the time. As I listened to the testimony, particularly the last comment by Director Reich, I believe it was, you talked about people who typically default on these loans as investors who never intended to occupy it, people who didn’t understand the terms and conditions, people who thought they understood, and it really doesn’t place any liability. Those comments are the people who are putting the products out, it’s just consumers are just too dumb and I’m saying that because I am—I believe I’m a cosponsor of the chairman’s bill and I was— I along with Mr. Hodes, another member of this committee. We have put a bill together that we think addresses some of the other—another problem with the way these loans are written. People in the mortgage broker industry, unlike prime loans, are not required to include escrow accounts. So, you can write up a loan that people think they can afford. You know, they’re going to pay $700 a month, but they don’t have property taxes and escrows and other important escrows and at the end of the year suddenly they are hit with a huge—$2,000 or $3,000 tax bill and they’re being foreclosed on. I’m wondering if you think that it would be a sage and wise thing to include that in there. I’ll tell you, I am one of the people who believed in the Easter Bunny, sorry. Because I have to boil up several dozen eggs every year and I have to believe in the Easter Bunny. But there are people who will argue that they don’t need the bank to handle their money in an escrow. That they can use those monies themselves to invest. But given the nature of subprime loans, I’m just wondering if the panel thinks that it wouldn’t be wise, given that there will be some sort of legislation to include the requirement: number one, that escrow accounts be included in the loan; and number two, that a second provision of our bill would be to require them to use licensed appraisers and not just mortgage bankers who are out there trying to get the value to fit the kind of loan they want to make. Mr. REICH. I absolutely believe that there are many good things in this bill, including the requirement that principal, interest, taxes, and insurance be required for loans to subprime borrowers. Mr. DUGAN. I actually don’t think that requirement is in the bill. Ms. MOORE OF WISCONSIN. It is not. That’s why I’m saying, I’m proposing. I— Mr. DUGAN. I would agree with that. To be honest, I was a little surprised it was not in the bill. Ms. MOORE OF WISCONSIN. Right. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 60 Mr. DUGAN. But I think that in the subprime market, escrowing for principal and interest, I think would be a sensible addition to the bill. Ms. MOORE OF WISCONSIN. Did you hear that, Mr. Chairman? The CHAIRMAN. Well, if the gentlewoman—also in the bill that Mr. Kroszner filed and I said earlier that I thought we could go ahead with that. So, we did touch on that earlier and I think in fact one of the witnesses, Chairman Johnson, did also allude to that in her testimony and I plead guilty to the charge of under-regulating and I’m prepared to adjust my habits and regulate some more. The gentlewoman is recognized. Ms. MOORE OF WISCONSIN. Thank you, I think I will yield back, given— The CHAIRMAN. Thank you. We will now go to the gentleman from California, and then we will dismiss this panel. As the last thoughts of the day, I plan to stay. This is very important. Some members will be back, staff will be here. I apologize to those who will be testifying later, there will be fewer members, but it will have no less impact, I assure you, on this important deliberation. The gentleman from California. Mr. SHERMAN. Thank you, Mr. Chairman. I commend you for stating that the credit union regulators should also have a seat at the table in drawing up the regulations. I think the bill is something I should commend you for. Particularly the concept that we should make sure that the borrower has the ability to pay. I commend the gentlewoman from Wisconsin for bringing up the idea that property taxes and insurance principal and interest need to be factored in in determining ability to pay. And I hope that we would specify in the bill, when we talk about ability to pay we mean from current income and not based on—yes? The CHAIRMAN. The requirement of all the costs—principal and income, etc., is in the bill. What’s not in the bill is the escrow and the appraiser. Those are the pieces—the full cost piece is in the bill, the appraiser and escrow is what would be added. Mr. SHERMAN. I thank you for setting me straight. I thought it was in and then I heard that it was out and thank you for letting me know that at least full costing is in— The CHAIRMAN. I’m kind of an expert on what’s in and what’s out. Mr. SHERMAN. That may be, but—compared to me, you are. And I hope that we would specify in the bill that when we’re looking to document income, if somebody is a wage earner they have to provide that W–2 form or their full tax return. If somebody’s claiming investment income, that they have to provide the 1099s or the full tax return and if somebody’s claiming self-employment income, they have to provide their full tax return. I realize that up until this year we might have taken the idea— let the regulators just put in all the specifics, but I would hope that we would put those specifics in the bill. The bill provides a floor, a minimum Federal regulation without a ceiling and therefore we don’t end up with a national standard. And I realize that time is running out, so I may just ask you to respond for the record, but if there’s one witness who wants to respond: VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 61 Do we need, in order to have efficient nationwide capital markets, to become the ultimate owners of these mortgages, a Federal standard? Perhaps with a few things that some States could opt in or out of—opt out of. Or could we really have the benefits of a national securitized market and have every city and State free to impose its own rules? I don’t see anybody really anxious to give an oral response. How many more minutes until the bell? Why don’t we just take a response for the record? The CHAIRMAN. Okay, I thank the panel. This has been very useful and and I appreciate the degree of specificity. The gentleman from North Carolina asked for that and I think it came a little later than he had asked for it, but it came and we will be really keeping track of these things. And I think we have set a good context in which we can make some movement and move some pieces around and come up with a consensus bill. The hearing is recessed and we will resume right after the votes with a second panel. [Recess] The CHAIRMAN. The hearing is reconvened. Under other circumstances, I would apologize for the delay, but I do think this has been useful. I think it has been very helpful to have all of the people who have an interest in this bill spending a day thinking about it, and listening to each other. We will move more quickly now, obviously, because there aren’t going to be a lot of members asking questions, so we can probably finish this in a couple of hours. The House is adjourned for the day, so we won’t be bothered either by votes or by members who aren’t paying serious attention disrupting things because they have nothing else to do. We will now have a serious conversation with people who have a great interest in this bill, and I think that will be useful. We will begin with our next set of witnesses. Let me get the witness list. We will begin with Michael Calhoun. He is the president and chief operating officer of the Center for Responsibility Lending. Obviously, without objection, all material that witnesses want to submit will be put into the record. I will say this: There is no need either to thank us for having this hearing or to summarize the bill. Just get right to it. Mr. Calhoun. STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT AND CHIEF OPERATING OFFICER, CENTER FOR RESPONSIBLE LENDING Mr. CALHOUN. Thank you, Mr. Chairman. It may be fitting that the three sponsors are the ones here now. I am going to address my comments first to talk about the assignee liability, which has been one of the key comments. I am going to try and follow my Congressman from North Carolina, Mr. Watts’, admonition to be specific. And then I will address the North Carolina experience as it relates to this bill, and the specific provisions of this bill, finally. First, I think it is very important to set straight for the record what this secondary market responsibility or assignee liability is and what it is not. First of all, assignee liability is a common feature of the law. In contracts in general, including in mortgages, VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00067 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 62 presently, under present law, the Uniform Commercial Code provides assignee liability for holders of mortgages and other negotiable instruments who are not so-called holders in due course. You also have substantial assignee liability, including for mortgages, under the Federal Trade Commission holder rule whenever you have a home improvement loan. And you also have significant assignee liability for credit transactions, including mortgages, presently under Truth in Lending. And the market absorbs and deals with that liability well without either raising the cost or reducing the accessibility of credit. What assignee liability is not is liability to the individual bond holder. No one has proposed that, and that has never been a component of assignee liability under any of the State laws or the Federal bills. Finally, it is important that we are not talking about leaving the secondary market out there alone holding all the liability for these loans. In every sale of mortgages, the purchaser requires the lender, or if it is a later seller, to represent and warrant that the loan was made legally, and that if there are any violations or liability, the seller of the mortgage has to indemnify the secondary market holder for that liability. And so the secondary market not only deals with assignee liability today, it is in a position to manage it and to recover from those who sell them the loans, and the liability goes back down through the chain to the original lender or originator who engaged in the illegal conduct. Second, I want to address a couple of aspects of the North Carolina experience and bill since it is used as a model for this. I think it is relevant to a number of the issues here, including preemption. In 1999, the North Carolina bill was enacted and which addressed—it was the higher cost loan sections addressed to equity stripping. It initially did not cover open-end loans, and so quickly some lenders converted all of their mortgages to open-end loans, thus evading the coverage of that bill just as they evaded coverage of current HOEPA, which does not cover open-end loans. North Carolina came back in 2001, added open-end loans with the agreement of the industry, and that became a model also for other places around the country. Five years ago, these so-called 2/28s were not the exploding ARMs that they developed into. Originally, the payment reset was small because the Federal discount rate was so low and rates were derived from that. There was not the large payment shock. That really developed starting when the Federal Reserve engaged in the quarter point march of interest rate bumps. And so in 2005/2006, we went to lenders and said, ‘‘Do you realize the built-in payment shocks that these loans have, and are you truly going to try to underwrite them based only on the original payments?’’ I think the response carries an important message. Several of those lenders said, ‘‘We agree these are problematic loans and would prefer not to be buying them.’’ But we cannot unilaterally impose those standards on the market because if we do, the originators, typically the brokers, will take all the business down the street. Most of these lenders got— for example, New Century—90 percent of their volume from mort- VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 63 gage brokers. If they said, we are not going to take the loan that you want to sell to us; it is most profitable to you, New Century loses all their business and it goes down the street. I think a couple lessons there are this market will evolve. You need to leave States the ability to respond. And also, a specific provision, Title 1 and Title 2, do not currently cover open-end loans, and we would recommend that they do so as the North Carolina law does, both the original predatory lending law and the additions that were made this last summer, which have been incorporated in substantial respect into the bill. Finally, I want to say there are very many good provisions in this bill. It takes the right approach of trying to restructure the market. The real concern we have is that we have thrown the baby out with the bath water, and that is the baby of effective enforcement. In many circumstances in this bill, the only remedy a borrower has is a very limited right after the loan goes into foreclosure, and they are left effectively with little or no remedy until the loan goes into foreclosure. Forcing borrowers to that does not seem to be the incentive that we want in the bill. We would urge that the remedies in assignee liability be increased but still moderated, moderate with caps both as to limitations to individual actions and caps on damages. But in many places in the bill currently, there are no effective remedies for borrowers, which means that—this market is bigger than the stock market. There are hundreds of thousands of mortgage brokers. In the last few years, there have been 3 million subprime loans each year. The only way this bill works is with the market self-policing. And there need to be incentives in the form of remedies and secondary market responsibility or you will not have that policing. Thank you. [The prepared statement of Mr. Calhoun can be found on page 167 of the appendix.] The CHAIRMAN. Next we will hear from Janis Bowdler, who is a senior housing policy analyst at the National Council of La Raza. STATEMENT OF JANIS BOWDLER, SENIOR HOUSING POLICY ANALYST, NATIONAL COUNCIL OF LA RAZA Ms. BOWDLER. Good morning. The CHAIRMAN. Good morning, we wish. Good morning. Ms. BOWDLER. Oh, good afternoon. Clearly I didn’t have my second cup of coffee today. Sorry about that. Janis Bowdler. I conduct the research around housing policy issues at the National Council of La Raza. And I was going to start by thanking everybody here, but since I have been directed to skip the formalities, I will do that and get right to it. NCLR is happy to be at this table. For years, many of you have heard us. We have been to visit you. We have been talking about the fact that Latinos are getting bad loans. Even as we convene today, thousands of families are faced with the nearly insurmountable task of saving their home from a foreclosure spurred by a predatory loan. What NCLR is trying to do in this debate, and what we wanted to accomplish here, is really to level the playing field for Latino VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00069 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 64 borrowers. We have conducted research. We have listened to the stories of borrowers. And we have even gone out and interviewed practicing mortgage professionals. And this intelligence is the underpinning of our policy agenda to improve the mortgage market for Latino families. This bill, H.R. 3915, is the first one we have seen that directly addresses several key Latino priorities. And we would really like to commend the authors and their staff for their hard work and diligence on this bill. In my brief time this morning, I would like to highlight a couple of key provisions that are important to Latino and immigrant borrowers. And we also want to offer some suggestions on how we think it can be strengthened. But I am going to start where I normally do, which is to talk about the borrowers. And I want to tell you a story about Mr. and Mrs. Silva, who actually purchased a home in Lawrence, Massachusetts. They had solid credit histories and stable income, and they purchased a home at the top of their purchase range. They didn’t find out until much later that the appraisal was inflated, the title work was incomplete, and much of the construction on their new construction home was shoddy. In fact, they figured it out about the same time that they realized that they had an unaffordable 80/20 loan with a reset looming on the first loan in the near future. The story is a familiar one by now. Their broker assured them they had a fixed rate loan. The inflated appraisal limits their refinance options. And no one involved in the transaction was willing or able to help them. Nobody is accountable. Housing counselors across the country are operating at maximum capacity, but we are still swamped with calls. In fact, NCLR has been receiving calls directly from consumers, and two things are clear: The market isn’t correcting in a way that helps borrowers; and system-wide protections are necessary to prevent predatory behavior. We think that several of these protections are in H.R. 3915. Briefly, the bill has a strong anti-steering provision. We are excited to see that it would eliminate compensation-based incentives to steer families to expensive or risky loans, and sets the stage for additional prohibition on actual steering practices. The bill also puts forward an aggressive strategy to license and regulate originators. This summer, NCLR partnered with NAHREP to interview mortgage brokers serving the Latino community, and the response was overwhelming. The brokers told us that they wanted to be regulated. They were tired of getting a bad rap. They were tired of seeing their own customers get steered towards bad loans by unethical brokers. And they want more accountability. H.R. 3915 also lays out a common sense ability to repay standard. Lax underwriting standards and unaffordable loans are at the heart of predatory lending, and if such a standard had been in place, the Silvas likely would have gotten an affordable loan in the first place. We also want to work with members of this committee to continue to strengthen the bill. We are concerned that the bill’s enforcement standard falls short. Unless we strengthen these stand- VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 65 ards, borrowers may not get the full benefit of the other new protections created in the bill. And again, I expand on these in our written comments. But the first that I want to point out is that the bill does a great job of increasing civil penalties under TILA, but caps it when it comes to the steering provision. This seems arbitrary, and we want to recommend that the statutes stay as is. This would mean the full improved liabilities would apply for steering. It also extends the right of rescission to include violations of ability to repay and net tangible benefit, and it creates a defense to foreclosure which we support. However, there is an exception that seems to carve out most of the secondary market, and we are concerned that this could have an unintended consequence of setting the borrower up as having to access foreclosure as a remedy, meaning the only way the borrower could access their right to rescind would be in the foreclosure process. Finally, we believe the rescission right would be stronger if it applied to all harms in the legislation. Our written statement includes recommendations for improving other aspects of the bill, but I promised to be brief so I will close here. Again, a sincere thank you, and I would be happy to answer any questions. [The prepared statement of Ms. Bowdler can be found on page 153 of the appendix.] The CHAIRMAN. The next witness is a familiar face for us and a collaborator on a lot of stuff, Hilary Shelton, director of the Washington bureau of the NAACP. STATEMENT OF HILARY O. SHELTON, DIRECTOR, NAACP WASHINGTON BUREAU Mr. SHELTON. Mr. Chairman, I too will avoid the normal process of thanking you and Congressman Watt and Congressman Miller for the great work you did on producing H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, and skip right ahead to the issues. Predatory lending is unequivocally a major civil rights issue for our times. As study after study has conclusively shown, predatory lenders consistently target African Americans, Latinos, Asians, Pacific Islanders, Native Americans, the elderly, and women at such a disproportionately high rate that the effect is devastating to not only individuals and families but to whole communities as well. According to a recent study by the Furman Center in New York, between 2002 and 2006, the percentage of subprime loans to African American borrowers rose from 13.4 percent in 2002 to 47.1 percent in 2005. Furthermore, study after study has shown that African Americans and other Americans of color are targeted by predatory lenders and steered into predatory loans at a disproportionate rate regardless of their income or credit history. These numbers become especially important as subprime mortgage loans become foreclosures. The impact these foreclosures are having and will have on whole neighborhoods and communities, predominately populated by African Americans, Latinos, and other racial and ethnic minority Americans, will be nothing short of devastating. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00071 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 66 A report issued last year by the Center for Responsible Lending estimated that one out of every five mortgages that originated during the last 2 years will end in foreclosure. To date, the Federal Government has been largely inattentive to the problems surrounding predatory lending, and in fact, some of the rules and proposals we have seen in the last few years appear to go backward and take away some of the few protections we have gotten at the State level. This flies in the face of the NAACP’s belief that the primary responsibility of the government is to protect its citizens, all of its citizens, not to exploit them or allow them to be exploited for financial gain of a few. As our democratically elected representatives, the NAACP has consistently called on the Congress to enact aggressive and effective Federal law to curb predatory lending. That is why the legislation we are discussing today, H.R. 3915, is so important. This legislation aggressively addresses problems that the NAACP sees every day, including steering, yield spread premiums, high costs and fees, and prepayment penalties. The NAACP hears about these abusive tactics all over the country every day, and it is our hope that if this legislation is enacted, we will not continue to hear stories like the one of a woman who called the NAACP national headquarters last month to report that she had been convinced to take out a $30,000 home equity loan, and that $26,000 of that $30,000 loan would go to pay for points and fees. That is absolutely outrageous. Unfortunately, as the NAACP knows all too well, we must have tough enforcement provisions to ensure that these new laws are adhered to. We cannot allow skirting the law to be seen as merely the cost of doing business. We must make the penalties stiff, and we must show the industry as well as the American public that we mean business. In addition to a strong Federal standard to address predatory lending, we also believe that States must retain the flexibility to address local and regional issues, and that States can and should be able to address new abusive products that may arise if and when the current problems are addressed. The NAACP believes that any Federal policies that are enacted should be treated as a minimum standard, and that States should be able to enact even tougher laws tailored to address their own unique brand of predatory lending. Let me close by saying that while the bill being discussed today may not be perfect, we do, however, unequivocally support H.R. 3915. And while we look forward to working with the chairman and others to perfect it and hopefully make it even stronger, we would like to make it clear that we deeply appreciate all that you have done, Chairman Frank, to aggressively address many of the issues at the heart of the predatory lending problem. I want to thank you again, and I look forward to your questions. [The prepared statement of Mr. Shelton can be found on page 292 of the appendix.] The CHAIRMAN. Next is John Taylor, president and chief executive officer of the National Community Reinvestment Coalition, who has been a very active participant in the discussions getting us here today. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00072 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 67 Mr. Taylor. STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL COMMUNITY REINVESTMENT COALITION Mr. TAYLOR. Thank you, Chairman Frank, and Representatives Miller and Watt, for your leadership on this issue. I am here today to testify on behalf of NCRC, as well as the National Consumer Law Center, and the Rainbow/PUSH Coalition. And rather than repeat some of the points that some of my colleagues have made and that I have made in my written testimony, I would like to take us down a different path. Two-fifths of the $3 trillion of mortgage loans made in 2006 were either subprime or Alt A. It is estimated now that some 21⁄2 million loans are in danger of foreclosure over the next 2 years. This represents over $300 billion in petition losses to the market. By way of perspective, the New York Federal Reserve Board moved to delay the collapse of Long Term Capital Management because its projected losses were going to be about $3 billion, the Fed fearing that this would have had a catastrophic effect on Wall Street. The mortgage crisis facing us now represents a hundred times the projected losses of Long Term Capital Management. We are facing a mortgage tsunami unlike any other time in our history, and lest you think I am offering a hyperbole by calling this a tsunami, consider that the number of foreclosures in the next yearand-a-half will equal 10 times the number of homes lost in New Orleans due to Hurricane Katrina. The average number of foreclosures annually used to be roughly about 225,000 per year. It is estimated that in January of 2008 alone, in that one month, we may equal the number of foreclosures that we traditionally experience in a year. The contagion effect with these 2 million-plus defaults will have—the contagion effect that these defaults will have on neighborhoods, bank portfolios, existing housing starts, housing prices, the home-building industry, and ultimately Wall Street may pave the way for a deep and hurtful recession. We find ourselves in this situation for a number of reasons. Most importantly, it is due to the lack of needed consumer protections and vital regulatory enforcement that would have made such practices illegal to begin with. Alan Greenspan called this in his book, this kind of lending, infectious greed and malfeasance. I am sorry Mr. Hensarling is not here because he mentioned Adam Smith in one of his explanations as the basis for why he had problems with this bill. And it is interesting that Alan Greenspan talks a lot about Adam Smith in his ‘‘Age of Turbulence,’’ his new book. Mr. Greenspan noted that Adam Smith’s answer to what he called the most important macroeconomic question was what makes an economy grow? Adam Smith said it was four elements: capital accumulation; free trade; a role of government; and the rule of law. Smith emphasized that what was critical to these four elements was that every person must be free to pursue his or her own interests, and that this was what in fact would build the wealth of a society. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00073 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 68 Men and women are not free to pursue their own interests when unfair and deceptive lending practices are free to take root and strip wealth from the individual. Predatory and usurious lending is the antithesis of capital accumulation. It is capital depreciation. By free trade, Smith did not mean the freedom to cajole, cheat, and rob unsophisticated homeowners. His free market assumed that competition was always accompanied by honest and ethical dealings. The role of government was to ensure capital accumulation of free trade while staying out of the way of competition. The wholesale lack of regulatory enforcement, coupled with inadequate laws to protect individuals and promote capital accumulation of free trade, now challenge our ability to grow this economy. Finally, Smith and Greenspan’s fourth element for growing the economy was the need for the rule of law, a catchy phrase in recent years in these hallowed halls. In this case, Chairman Greenspan was clear about the meaning of the rule of law as it relates to these issues. The rule of law, is ‘‘the protection of the rights in the individuals and their property.’’ The protection of the rights in the individuals and their property. This bill, H.R. 3915, won’t do much for the 2 million homes that are now—2 million families, really, that may contribute to a major economic downturn. But it does represent a substantial and comprehensive return to the economic principles, as espoused by Adam Smith and Alan Greenspan, that we believe are essential to a vibrant economy. This bill supports the belief that anyone who works hard, pays their taxes, and acts responsibly will have the freedom to pursue wealth for their family and themselves. Removing abusive and unfair lending practices and holding all segments of the capital accumulation system accountable for these practices is simply sound economic policy owed by this government to each of our citizens. It is imperative that we act now to strengthen H.R. 3915, particularly that we need to ensure that the protections in this bill are accompanied with strong remedies, with substantial and bipartisan support of the Members of Congress and this Administration. Failure to embrace this long-overdue effort would now be a monumental mistake. I can say with a great deal of certainty that given the magnitude of this problem and the sheer numbers of innocent Americans whose lives and friends’ lives have been impacted by this infectious greed and malfeasance, that there will be few congressional districts where this question will be unimportant in the next round of elections. It is imperative that you strengthen and pass H.R. 3915 in order to return sanity and fairness to our system of home financing, and thereby support our Nation’s economic promise. Mr. Chairman, we look forward to working with you and collaborating with you to strengthen this bill and to support the passage of a meaningful, strong national anti-predatory lending bill. Thank you. [The prepared statement of Mr. Taylor can be found on page 296 of the appendix.] The CHAIRMAN. Our next witness is Mr. John Hope Bryant, who is the founder, chairman, and chief executive officer of Operation HOPE. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00074 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 69 I just wanted to explain. We began with a panel, obviously, of the regulators, who are sort of neutral. We then have a panel of mostly community groups, and then a panel of people from the business side. In each case, I just want to be clear that it has been a practice to solicit from the Republican side a witness. So Mr. Bryant is here in particular at the invitation of the Republican side, and similarly with the third panel. But we did feel with the regulators, community groups, and the business groups, that we would be getting, with the particular group from the Republican side, a very balanced discussion here. Mr. Bryant. STATEMENT OF JOHN HOPE BRYANT, FOUNDER, CHAIRMAN, AND CHIEF EXECUTIVE OFFICER, OPERATION HOPE Mr. BRYANT. First of all, I want to say I didn’t know I was being asked to submit from any side. So it is nice to be here. I am on the American side. I wanted to first say thank you for having this hearing, and to acknowledge the presence of Congresswoman Maxine Waters and Congresswoman Judy Biggert. This hearing, focused on reviewing legislative proposals for reforming mortgage practices in the light of the subprime crisis in America, is a critically important if not a historic day. I support the spirit of H.R. 3915 as well as H.R. 1752, H.R. 3017, and H.R. 3019, which together create a responsible floor for the poor. Let me start by saying that this is personal to me. My family lost our home in South Central Los Angeles because my father did not understand the documents he was signing because, unfortunately, he asked the wrong question. Growing up, I remember the pride I had every week on Friday nights watching my father make a payroll of his cement contracting business from the front door of our home. That was powerful for a son to see. But after a while, the workers I knew so well would leave our home, and then a mortgage broker, someone I didn’t know at all, would show up at the front door, finally convincing my otherwise brilliant father that he could somehow have more while somehow spending less. The result? My dad was left almost completely defenseless in making the most significant financial and wealthbuilding decision of his adult life, and our family’s, too, a decision that in the end negatively impacted my dad and his marriage to my beautiful mom, who genuinely loved him. But in the end, their marriage ended over money. The number one cause of divorce today for all races is money. Ultimately, decisions made on that day in South Central L.A. had a negative ripple effect years later on my brother, my sister, my mother, and me. You see, my dad ultimately asked this person, this mortgage broker who was disconnected from any responsibility, the wrong question. He asked what was the payment, when he really should have asked what was the interest rate. No one should ever ask what the payment is when there is an interest rate attached. We lost our home not because my father wasn’t brilliant, because he was and is today at 83 years of age, but because my dad was badly represented, he asked the wrong question, and then he VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00075 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 70 signed documents he didn’t understand. I suggest a massive overhaul of the mortgage brokerage industry as it relates to mortgage lending, and I would suggest that you restrict, if not eliminate, negative amortization loans, where every payment you make means the broker you get. My mother’s story, oddly enough, ended completely differently. You see, my mom, who worked a regular 40-hour job, was financially literate. My mother worked more than 35 years at McDonnell Douglas Aircraft, now Boeing Aircraft, in Long Beach, and realized early on that it was not necessarily about making more money, but making better decisions with the money you make. My mom bought and sold five homes, and today is retired and financially independent, living in Texas. In contrast, my dad today is financially dependent, living in a 4-unit apartment building built for him by me and my wife on the very street we grew up on. Not all children or even most children are financially able to build and pay for a home for their father, nor should they. Parents should be in a position, if and when they can, to accumulate and later, if they like, to pass down assets to their children, not the other way around. Some 20 years later, Mr. Chairman, this negative legacy impact of the subprime mortgage crisis for many Americans, and not just minority Americans, are experiencing this today. And this is why I am so passionate about financial literacy and economic empowerment. We have helped to educate 250,000 children in financial literacy, created a thousand low-worth homeowners, and helped 85,000 victims of Hurricane Katrina. I think this gives us some context about how people are managing their affairs in this crisis. And I can tell you with confidence they are not doing it very well. Just one example of this. In L.A., the city of L.A. asked Operation HOPE to partner in a mortgage crisis hotline. We did that, and when we launched it 3 months ago, we received 3,000 calls in the first day. By the second day, we had received 4,000 calls. Now, to put this in the context of Hurricane Katrina, in our busiest month in our nationwide outreach for Katrina, we received 3,000 calls in a month. So we received more calls in 48 hours from L.A., from Latinos, mostly, than we received in an entire month nationwide in responding to Hurricane Katrina. I agree that this is an economic tsunami. We will soon roll out phase two, and we will have hearings in California along the same lines soon. But none of this is enough, which is why we need you to act. So here is what I am also suggesting. I am proposing today, and have likewise sent a letter to all of the Federal regulatory agencies you had here today, that the Federal Government establish, possibly through the Federal Home Loan Bank system, a $10 billion loan guarantee fund, structured in many ways like an SBA loan guarantee. Here is how it would be structured. Number one, it would carry a standing fixed rate of 3 percent, allowing private lenders to add a maximum of 2 to 3 percent at a reasonable fee for administration, overhead, and profit margin. There is a precedent here. After the riots of 1992 in Los Angeles, the Federal Home Loan Bank did something similar to this, $3 billion. That was repaid. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 71 Number two, allow anyone who had paid their loan on time and within the terms of their agreement prior to their rate reset to be refinanced under this new program, the theory being that these individuals were already properly underwritten at the original term and rate as their loans were performing. Number three, and finally, all new loans would be made at a 5 to 6 percent fixed rate over a 30-year period, and in some unique hardship cases, over a 40-year period. While I am all for free enterprise and capitalism, and we work at making capitalism work for the poor, I do not believe the poor should be subject to interest rate risk, to wild interest rate risk. This approach has many benefits, one of which is a temporary economic stimulus by adding billions of dollars of new money back into the economy when the mortgage economy seems to be stalling. Number two, this approach could serve as a unique and new opportunity for the credit union industry, as credit unions were not substantially involved in the original problem, several are large enough to make a difference, and because their unique tax structure can afford to make these loans at an even lower price point, making it a win/win for all involved. On a separate but related note— The CHAIRMAN. Mr. Bryant, we are going to have to have you sum up fairly quickly, please. Mr. BRYANT. Sure. On a separate but related note, I would encourage you to push to keep subprime lending, responsible subprime lending, as part of the mix. Subprime lending was not the problem. Irresponsible subprime lending was the problem. And we should work hard not to cut off capital flowing to the poor. Thank you. [The prepared statement of Mr. Bryant can be found on page 159 of the appendix.] The CHAIRMAN. Thank you, Mr. Bryant. Let me say first I appreciated in particular your reference to negative amortization because that is a provision that was put into the bill. Our colleague from Illinois and others talked about it. It was one that I think one of the witnesses in the first panel specifically opposed. So we appreciate your talking about the need to deal with negative amortization. And let me just ask, the problem when your father was misled into signing these documents, when was that? Mr. BRYANT. That was 20 years ago. The CHAIRMAN. I think that is important, to show that we are not—and I appreciate that because some people said, well, this crisis is going to work itself out. Don’t over-react. But I think you help us understand that we are talking about some structural problems in this industry, and simply waiting it out for a month or two doesn’t resolve it. I appreciate that. Let me ask the—Mr. Calhoun, you did address this some, but the argument that we have heard from some of my colleagues that the North Carolina experience has been kind of a fizzle. Would you address that? Mr. CALHOUN. Two things. One, in terms of the impact on credit availability, there have been references to there was a slight—it VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00077 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 72 was a range of 3 to 4 percent reduction in lending compared to similar States after the enactment of the North Carolina law. I think it is careful that you drill down in those numbers because when you break it out into purchase loans versus refinancing, you actually found an increase in purchase loans, and the reduction was all in the refinancing. And again, that is not a reduction in the amount of credit outstanding. It is a slight slowdown in the flipping of these loans, which are typically refinanced— The CHAIRMAN. Yes. Let’s address this specifically because I was asked this: Are you worried? I was told that this would mean fewer loans being made. The answer is, I am not worried. That is why we are doing it. If all the loans that were made should have been made, we wouldn’t have a problem. Let’s be very clear. The purpose of this is to keep some loans from being made that should not have been made in the first place. And to the extent that we saw this in the refinance, and Mr. Gruenberg, in particular, I know said, and Mr. Dugan kind of reinforced this, that many of these—a great majority of these loans that went bad were refinancing. Yes, some of these people shouldn’t have refinanced. And the bill says that people should not be induced to refinance if they are going to receive no tangible benefit from it. So to the extent that there was a reduction in refinancing, that is probably a good thing and probably an intended, not an unintended, consequence if what were prevented were refinancings that benefitted only the financing people. Mr. CALHOUN. I think one of the key things is the bill has now been revisited about 3 times, and every time the amendments and the strengthening of the bill has been done with broad industry support, including that of, you know, several of the major banks in this country. And that applies as well to the changes that were done— The CHAIRMAN. All right. I appreciate it. Let me ask all of you because many of you are involved, in some cases directly, Mr. Taylor, and in others as advocacy groups, with—this is a bill that is going to help going forward. We have people who are now trapped in these foreclosure situations. One argument is that by cracking down some on credit and putting in higher standards, we are going to make it harder for people to refinance their way out of trouble. Would you address the extent to which that accusation is valid, that this bill could hurt people’s ability to refinance their way out of trouble? Mr. Taylor, let’s start with you. Mr. TAYLOR. So in other words, do nothing to the people who got injured by the system because they got loans that put them under water. And therefore, do nothing because they are going to be further hurt by the system. I have never heard such ludicrousness in my life. I mean, unless we—first off, this bill is going to prevent the kinds of activity that put those 2 million families in jeopardy. It is not going to do anything to help them get out of jeopardy. It is not—yes. The CHAIRMAN. Let me ask specifically: Does anything in this bill prevent a refinancing for someone who ought to be able to get ac- VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00078 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 73 cess to refinancing if that would help them get out from under something? Mr. TAYLOR. No. The CHAIRMAN. Mr. Calhoun? Mr. CALHOUN. If I can respond specifically, the crisis in today’s credit market is—the point that has been made, is due to the absence of standards. If you want to increase liquidity, a pre-condition is you have to put standards in place that will assure the market that these are reasonable loans that will be repaid. Second, it is just a matter of—if you are in a hole, the first thing to do is stop digging. And refinancing borrowers who are in trouble now into a loan with high fees, prepayment penalties, and steering just makes it less possible for them to have any chance of saving their homes. The CHAIRMAN. Finally, Mr. Bryant? Mr. BRYANT. Mr. Chairman, just the opposite is true. First of all, it is not 2 million mortgages on the bubble; it is 4 million because there is another reset coming after this. This is—just the opposite is true. First of all, people are already having a problem refinancing their loans. So it is not like there is a boondoggle of refinancing going on right now. Number two, this bill will actually create an environment where refinancings can get done because the market does not respond well to a pack of clarity. Right now, there is a cloud in the market. No one is lending anything. There is a crisis in confidence. Everything is locked up. By introducing this bill to the marketplace, you create a floor for which people would know how to operate and know what is appropriate. The CHAIRMAN. Thank you, Mr. Bryant. I just have one final comment. But I appreciate that point because I think what we are trying to do here is market-enhancing. To the extent that you provide good standards and people can have more confidence, I think it works better. Let me just address a comment to Ms. Bowdler and Mr. Shelton. One of the things that we are aware of, and Mr. Green mentioned this, one of the factors here that should not be neglected is that the data that we have gotten from the Home Mortgage Disclosure Act, thanks to my former colleague Joe Kennedy, who worked very hard sitting here and helped get that through—thanks to that, we now know that the chances of your being put into a subprime loan, everything else being equal, are greater if you are African American or Latino, a condition that this country should not tolerate. And that has exacerbated this. And so we have this legislation. As we go forward, we are going to try to work together on subprime, but also on fair housing and to deal with the regulators because it is a problem and it is compounded by the element of discrimination. So I do want to make clear we are very well aware of that. The latest data was discouraging. In the City of Boston, the data showed that middle income African Americans were more likely to be in a subprime mortgage than white people several classes lower in the income scale. And we haven’t forgotten that aspect of it. Mr. Baker. Mr. BAKER. Thank you, Mr. Chairman. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00079 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 74 Mr. Shelton, I wanted to ask your view of the performance of Fannie and Freddie in their role in the secondary market, Fannie Mae and Freddie Mac, and their business function. What is your perspective of their role in the market in facilitating homeownership, especially in relation to lower income first-time home buyers? Have they been a positive? Mr. SHELTON. From my perspective? Mr. BAKER. Yes. Mr. SHELTON. They have basically been quite positive. The problem has been that they have not been actively engaged in helping to make sure that we are protecting consumers along the way. They are there, and they are able to provide greater market, greater resources to be able to allow poor and moderate income Americans to be able to live out the American dream by owning their own homes. If the question is, can they do more, the answer is, very clearly, yes, they can and yes, they should. Mr. BAKER. My point was or that I was attempting to make was that this is a business enterprise that operates for a profit that facilitates homeownership and has a cafeteria style of products that they have innovated and offer that enables people who otherwise might not qualify for a loan from a portfolio lender, who is going to keep that asset in its own bank walls—you are able to sell it off to Fannie and Freddie as long as it meets certain criteria that they must approve. In fact, they actually have little boxes that they send out to the originators, and if you are the guy taking the application, you stick the numbers in and it cranks out a result. That process is obviously blind to the nature of the applicant. It comes back with statistics on a piece of paper that go in and come back. That process, I take it, has worked fairly. Would you agree with that? Mr. SHELTON. You are saying has it worked fairly well? Mr. BAKER. Fairly well? Fairly? Pretty good? Mr. SHELTON. It has worked fairly well. We have had meetings with Freddie Mac and Fannie Mae to talk about other ways we can expand their ability to do a better job of protecting consumers as they are going to purchase those mortgages. So if the question is, can they do more, the answer is yes. If the question is, are they providing a valuable service, the answer is yes. If the question is, will this bill help along in that process, the answer is yes there as well. Mr. BAKER. I didn’t get to that question yet, but I will in a minute. I have also had meetings with Fannie and Freddie and discussed ways that they could improve their business, too. I would also point out that when you look at the elements that Fannie uses to determine if borrower ‘‘X’’ should be entitled to an extension of credit, one element of that calculation is the debt-toincome ratio. It is 65 percent. The bill has a 50 percent cap. Now, there is no clear definition of what constitutes debt, so that is a little bit in the air right now. My point to you—and let me give you my little diatribe. No one on this committee I am aware of has ever expressed defense of those who abuse their fiduciary duties. In fact, we all are joined together to ferret out those who have abused their privilege—in my case, I have been sort of suggesting VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00080 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 75 to Fannie and Freddie a change in their ways—and we will go after with vigor those who abuse this responsibility. There can be, however, reasonable differences between people as to how we should accomplish this reform. I merely point out the DTI issue as one of several steps. The consequence of this, although some will argue to the contrary, I do not believe can be argued. If your debt-to-income ratio is going to be capped or else you are outside safe harbor, consequently secondary market interests are going to be concerned about acquisition, and under the Fannie black box method you would qualify at 61 percent, there will be people who will be prohibited from entering into a homeownership opportunity that would otherwise be found to be an appropriate contractual obligation that might lead that family to live in that home for many years to come. I just don’t understand why we can’t discuss the regulatory environment with an eye toward market operation and toward consumer protection. The two are not mutually exclusive. Is it your view that every originator of mortgages has violated their responsibilities to borrowers? Is it most? Is it some? Is it a small percentage? In my view, it is a small percentage, and we ought to go get them, and I will hold hands with anybody to go do it. But we cannot ignore the consequence of policy which will ultimately restrict the flow of credit to people who otherwise would qualify, given the role of Fannie and Freddie in the marketplace. Do you agree with what I have just said? Mr. SHELTON. Some of it. Let me just say that first, the idea here is to make sure that those who are able to take out loans for mortgages can sustain those loans, that they very well will not end up losing their homes, their life savings, and their futures in many cases. Very clearly, under today’s circumstances, we are very clear that the standards are not clearly in place. We are seeing now millions of Americans actually jeopardizing the very American dream that we all work so hard here in Washington to be able to secure. Mr. BAKER. Well, let me point out that the investor market is also tied in parallel with that— Mr. SHELTON. I understand there is legislation— Mr. BAKER. If I may, sir, I will tell you that the investor end of the world is also tied because they are losing zillions. Every time homes go into foreclosure, it is not the way to make money. And nobody is interested in seeing failure. And so I suggest to you we are seeing this similarly. Mr. SHELTON. Well, we are seeing this similarly. Perhaps the response in how we move from where we are now to a better situation for those who are about to lose their homes, and as we prepare for those who would like to be able to enter the market to experience the American dream by being able to own their own homes, is what this discussion is really all about to a great extent. This legislation that we are talking about is legislation that we very strongly believe will move us a long way in helping to achieve that process of making sure we can protect Americans from these unscrupulous predatory lenders. Mr. BAKER. So my time is—you have expired my time. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 76 Mr. SHELTON. Sorry about that. Mr. BAKER. But let me wrap up. So you don’t find limiting the current Fannie/Freddie practices in their screening requirements and making them ratchet back ill-advised in consequence of this reform effort? Mr. SHELTON. Freddie Mac and Fannie Mae have a major role to play in this process. I am not as secure in the terminology you utilize as being consistent with our vision and our view of these problems. But we would be delighted to sit down and talk to you about it. The CHAIRMAN. And if the gentleman would allow me briefly, it is refreshing to have him come to the defense of Fannie and Freddie’s practices in this— Mr. SHELTON. We are all plowing new ground. The CHAIRMAN. And fertilizing it. [Laughter] The CHAIRMAN. The gentlewoman from California. Ms. WATERS. Thank you very much, Mr. Chairman. Mr. Calhoun, you have been here before, and this committee and the Congress of the United States have benefitted from the work that you have done. You have been one of the leaders in dealing with predatory lending. And I want you to help me to understand the yield/spread premiums a bit better. As you know, this bill would ban the yield/suspend premiums. And I want to know whether or not some of our financial institutions and banks have encouraged loan origination from nonprofits and other groups who are benefitting also from the yield/spread premiums. Do you know how it all works? Mr. CALHOUN. Well, the yield/spread premiums, I think, in the provision here is one of the most important because I think the approach of this bill that is really critical is not that it just prohibits the end results that we don’t like, such as steering, but it addresses the market incentives that have produced those bad results. And the yield/spread premium has been at the core of that, along with prepayment penalties on subprime loans. I think you heard support from even many of the regulators here because lenders are in a position where they can’t correct that problem. If they adopt a policy—for example, Option One, one of the largest subprime lenders, previously had a policy of not paying yield/spread premiums. It even had on their Web site a disclosure to borrowers saying, don’t get a loan with a yield/spread premium. It creates a conflict of interest. They found that the brokers simply boycotted them and took the loans to other lenders that did pay yield/spread premium. And the result was not that borrowers were protected; Option One was forced to reverse its policy and start paying the yield/spread premiums like everyone else. So that provision is one of the— Ms. WATERS. Aside from brokers, who else was benefitting from the yield/spread premiums? Did nonprofits—were they able to originate loans and take advantage of earning money that way? Mr. CALHOUN. That has generally not been a widespread problem in the market that we have seen, and we work with a large number of other nonprofits. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00082 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 77 Ms. WATERS. The financial institutions that benefitted from having the brokers and others who were out originating loans, were these some of the ones that were getting credit for—getting CRA credit? Mr. CALHOUN. There has been a problem that CRA credit and GSE, Fannie and Freddie, affordable housing credit has in the past at times been given for loans that were not constructive, that were predatory. And Freddie earlier this year, after we met with them, agreed to change practices to that, and Fannie has now changed it because OFHEO closed an area there. And so we applaud that move. One thing that was raised earlier is we need to make sure that CRA credit and Fannie and Freddie affordable housing goals are used as one of the tools for rescue loans. And for those loans to get borrowers out of these exploding 2/28s, those should be given the highest credit to both the financial institutions who need CRA credit and also to Fannie and Freddie. Ms. WATERS. Thank you. Mr. Taylor, you are from California, and we have a big problem. Mr. TAYLOR. I am not from California. Ms. WATERS. You are not from California? Mr. TAYLOR. No. Ms. WATERS. Oh, I thought you were. Mr. TAYLOR. I get around a lot, but— Ms. WATERS. Okay. Let me ask you, because you have been on the Hill working on the issue of trying to expand opportunities for low- and moderate-income housing for a long time, what would you do to strengthen this bill? This seems like a pretty strong bill, a pretty good bill. What else would you do? Mr. TAYLOR. Well, I think that one of the most important things is how to deal with the securitizes because we all know that the pipeline that was built from Wall Street that essentially opened up the spigot for this kind of predatory capital and predatory loans, if there isn’t accountability on that end, I think, you know, we are simply not going to deal with one of the major sources of the problem. And so having accountability on that end, and having consumers have the right to be able to pursue remedies that really discourage this kind of activity. What we don’t want to occur is the remedies end up being almost like a cost of doing business. Now, I am not suggesting that the language can’t be strengthened or we can’t do some things that change things in this bill. But I am fearful that the way it is currently written, it is very difficult for people to hold people accountable, and it is very—on the broker end of things, being fined three times your broker’s fee, you know, if you are only caught occasionally and you are willing to pay that fee, it may be just a cost of doing business. On the securitizer’s side, if you are really insulated because you get to sort of determine if you have done due diligence, and you have this fairly simple—what we think is a simple process to sort of certify that you are in compliance, we don’t think that you are going to have the impact on that body that you need to have because they are critical, critical player in this whole process. Ms. WATERS. Thank you. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00083 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 78 Mr. TAYLOR. I don’t know if one of my colleagues want to add to that answer. Mr. WATT. [presiding] The gentlelady’s time has expired. I now recognize the ranking member of the full committee for 5 minutes. Mr. BACHUS. I appreciate that, Congressman Watt. Mike Calhoun, I am going to ask you this question. Okay? You know the Paulson & Company, the hedge fund, the $20 billion hedge fund? Mr. CALHOUN. Yes. Mr. BACHUS. You are familiar with them? Mr. CALHOUN. Yes. Mr. BACHUS. You know what their investment strategy is? Mr. CALHOUN. We asked earlier, did anyone see this crisis coming. They were one of the people who did, and they purchased stock options that were based on their projection that the subprime market would perform poorly. Mr. BACHUS. Yes. You know, they profit from the carnage in the mortgage—you know, the meltdown in our mortgage market. I mean, you are aware of that. Right? Mr. CALHOUN. The money that they made came from investors who took the opposite side of that projection and who were investing thinking that the subprime market would go up. So it was a transfer from some stock speculators who were betting the market would go up to those who were betting it would go down. Yes. Mr. BACHUS. And yes, I mean, they have said—and people have characterized that. I know the American banker, that they were basically betting against the American homeowner, and that the more people that lose their homes, the more profit they make. I mean, absolute—the more foreclosures, the better off they are. I mean, that is true, isn’t it? Mr. CALHOUN. The more that subprime lenders’ stocks go down, that is what they have bet on and that is what determines their profitability. Mr. BACHUS. But there is a correlation between the number of foreclosures and— Mr. CALHOUN. Certainly. Mr. BACHUS. You know, knowing that, and it was all in the papers that they gave you all, what, a $15 million donation? Mr. CALHOUN. Yes. Mr. BACHUS. How do they—how does that square up? I mean, I am trying to visualize in my mind. You know, they profit from the foreclosures and the carnage in the mortgage market. And as things get worse, their profit goes up. But then they turn around and then give $15 million to CRL. Is that like their conscience is bothering them? What is that all about? How do they see you all as an advantage to them? Mr. CALHOUN. Well, from our perspective, the $15 million is provided for foreclosure relief, to provide attorneys—most of this money will be granted by CRL to legal aid attorneys and other attorneys who represent borrowers who are facing foreclosure. Mr. BACHUS. Yes. Mr. CALHOUN. And there is—and I think this is an important point in the larger context of the bill— VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00084 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 79 Mr. BACHUS. Yes. Let me say this. I am not—you know, you take their money and you do something which is constructive, and you help people in foreclosure. I am not criticizing you. You know, I am not criticizing what you do. I am not criticizing your mission of protecting homeowners, trying to help them in a foreclosure situation. I am not questioning your motives or your mission. I am just sort of saying—I mean, these guys are driven by the bottom line. I mean, they are hard-nosed businessmen. You know, been talking about hedge funds and all, and here is a hedge fund that kind of bet against—I mean, profits from the misery in the American housing market right now. And I just—I am trying to figure out, did they tell you why they were giving you all the donation? I mean, did they say that they are profiting from this so they want to give the money back, or what? Mr. CALHOUN. I think they recognized that a lot of families are losing their home, and wanted to make some effort to do something about it. And I think the message in the larger context here is, as we talk about the risk of litigation, is we have had a lot of bad lending going on and market crashing. There has not been a wave of litigation. In fact, it has actually been the opposite. There has been a dearth of lawyers to represent borrowers who are facing foreclosure even when they had very illegal loans. And that is our concern, that this bill—if you put it in the context of the bill that is before the committee and your bill today, too—is we fear that you go too far in insulating the secondary market. We believe it needs to be preserved. It is absolutely critical and has to be preserved. But if you totally insulate it, you make it even harder than it is today for borrowers to get relief, even in foreclosure. Mr. BACHUS. Okay. I guess all of a sudden I am realizing what— so the increased litigation against these subprime companies or, you know, mortgage companies obviously takes money off their bottom—you know, their balance sheets and their bottom line. And I guess it helps drive that stock down, which Paulson & Company would profit from. Mr. CALHOUN. In most cases now, the loan is owned and the credit risk has been passed on to the secondary market. Mr. BACHUS. When the secondary market melts down, do they profit financially? I guess they would, wouldn’t they? Mr. CALHOUN. It depends. Typically, the subprime lender is insulated at that point. Mr. BACHUS. All right. Thank you. Mr. WATT. The gentleman’s time is expired. I will now recognize myself for 5 minutes. Before Mr. Baker walks out, I will say something nice about him. Mr. BAKER. I am not going anywhere. Mr. WATT. That will make him sit down. The one thing I have found about Mr. Baker is when he says something, I don’t always agree with it, but it does cause me to look at provisions much, much more carefully than I otherwise might. And his questions about the debt/equity ratio is one that, before he left, wanted to make further inquiry. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00085 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 80 In the bill, there is this final product. It is on page 58 of the bill. It says, ‘‘A creditor may not extend credit to a consumer under a high cost mortgage unless a reasonable creditor would believe at the time the loan is closed that the consumer or consumers will be able to make the scheduled payments associated with the loan.’’ That is the general statement. And then it creates a presumption of ability to pay if the debt-to-equity ratio is 50 percent or less. Now, if you read that the way it is written, the presumption is independent of the general rule. But as a practical matter, I guess the question I am raising and the question that Mr. Baker is raising is: Will the 50 percent debt-to-equity ratio become the standard as opposed to just creating a presumption? And therefore, if somebody is creditworthy even though they have a debt-to-equity ratio higher than 50 percent, will that make it impossible for them to get a loan? And so I would just invite you all at some point to look more closely—I don’t expect you to do it on the fly today—at whether it might be more advantageous, as Mr. Baker—I think his suggestion— Mr. BAKER. Would the gentleman yield? Mr. WATT. —to end the discussion at the end of line 12, where we state the general rule and don’t put the presumption in there. I am happy to yield to the gentleman. I didn’t want to dwell on this, but— Mr. BAKER. No, no. I appreciate the gentleman’s courtesy, and I will be very brief. First, I want to acknowledge the chairman’s mark does allow regulators to go beyond the 50 percent limitation that is the presumptive statement of the gentleman. But secondly, there— Mr. WATT. But if it is a counterproductive—if the market is going to read that as if anything that is not fitting in that presumption is therefore unallowed— Mr. BAKER. I think the gentleman’s perspective is correct. It will create—if you are worried about reputational risk as a mortgage originator as the securitizer, you are going to look at the statute as evidence of what constitutes expected practice, and you will have to explain yourself. And one other little quick point and I will quit. The DTI ratio is not only a problem for low-income borrowers, who generally may have a higher debt load; it is also a significant problem in high cost mortgage areas like New York, where you typically have someone who has much more than 50 percent of income in mortgage payment. And then finally, the debt itself is not defined. Mr. WATT. I understood that when you made your original point. We don’t want to unintentionally create a consequence that we are not looking for. So I would just ask you all to look at that time a little bit more aggressively. I will look at it more aggressively also, and ask the staff to look at it. The other question that was raised in both Mr. Calhoun and Ms. Bowdler’s testimony was this question of enforcement. And I have been trying to glean my way through this because what you all seemed to be saying was that somehow, the anti-steering provision would have a lower level of enforcement than other Truth in Lending enforcement provisions. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00086 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 81 I don’t see that. It may be true; I am not suggesting that it is not true. But if I trace—the anti-steering provision becomes a part of the Truth in Lending Act. Then we say on page 19 that there is enforcement of the Truth in Lending Act. And then we go back at some point and make it clear—I may have lost my place where we do that, but at some point we make it clear that nothing anywhere in the bill reduces the rights that people have under the Truth in Lending Act. So maybe I am missing something here. And if you can enlighten me now, do so. If you can’t do it right now, I would invite you to do it as we move forward in this process. Mr. CALHOUN. In two respects, the liability for steering is greatly restricted. First of all, on page 20, line 4, there is a cap for violations of Title 1 of 3 times the originator’s fee. And this was addressed, I believe, in other testimony, to any of the violations of Title 1. And that is where the steering prohibition appears. And so that would be a cap which typically would be far below the typical Truth in Lending damages. And if you have, for example—you know, it has been talked about if there was a loan with a broker fee of $2,000 or $3,000, 3 times that would be the maximum cap even though the steering violation could have caused much larger actual damages. Equally important, there is no secondary market liability for violations of Title 1, which would include the steering violation. So you would have no action against the secondary market if you have been steered to a more expensive loan. Mr. WATT. I like sitting in the chair because the lights don’t work to cut me off. But I am going to presume, as we do in that section that we were talking about on page 58, I am going to create a presumption that my time has expired. And therefore— The CHAIRMAN. You managed to fake out the clock when you yielded to Mr. Baker, and they thought that you had given up your time. So that worked very well. Mr. WATT. My time is expired, and I recognize Mr. McHenry for 5 minutes. Mr. MCHENRY. I thank my colleague for yielding. Mr. Calhoun, I wanted to follow up on the ranking member’s questions. Paulson & Company is a hedge fund that is betting on the mortgage crisis getting worse. Correct? Mr. CALHOUN. They are betting on subprime loan company stocks declining. Mr. MCHENRY. As you said, the more subprime company stock goes down, the better they do, and apparently the better CRL does because you got a $15 million contribution from them. My question to you is this. There is also the Brad Miller bankruptcy bill. Reading from Business Week, you have been invited— the Center for Responsible Lending has been invited by Secretary Paulson to get in and advocate for this bankruptcy bill, which many regard as having the effect of chilling the marketplace even more and harming subprime company stocks and the mortgage market. Is that correct? Have you joined the coalition? Mr. CALHOUN. We have not made a decision whether to join the coalition. We were one of the—we have advocated for bankruptcy reform narrowly targeted to this crisis for a long time. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00087 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 82 Mr. MCHENRY. All right. Well, it seems—it is apparent that your funders are also interested in you helping propagate a crisis so they can profit. Let me talk about the North Carolina law because a lot has been made of this North Carolina law, and I know you have touted it significantly. A number of different studies have come out, and I know you have seen some of them. But I also know that CRL is in the mortgage lending business. From your disclosure with the NCUA, you had a 191 percent jump in delinquent mortgages between 2004 and 2005. Is this predatory lending? Mr. CALHOUN. Our mortgages are fixed rate mortgages, typically within 100 to 150 basis points of prime loans. We make them in connection with major bank partners, including most of the top 10 banks in the country. Mr. MCHENRY. So you had a 191 percent increase in 12 month and over delinquent payments. How do you explain this? I mean, apparently you have issues in the mortgage marketplace as well. Mr. CALHOUN. We have enjoyed a foreclosure and loss rate in the low single digits. An experience that we have and other mortgage lenders have in the subprime market is that these loans do have greater delinquency. Overall— Mr. MCHENRY. So you had a 191 percent jump, and that is acceptable? Mr. CALHOUN. Provided—we monitor our loans very closely—provided that those loans cure and catch up. And that has been our experience when— Mr. MCHENRY. And you have had significant write-downs as well. In 2006, you had a 163 percent jump in chargeoffs and a 220 percent increase compared to 2005. That is significant. Mr. CALHOUN. The percentage increases are, but our chargeoffs are still far, far below industry standard. Mr. MCHENRY. Well, I will accept that. That is fine. But let’s talk about the overall issue in North Carolina— Mr. TAYLOR. Can I ask— Mr. MCHENRY. —because the North Carolina law—I can get to you. I only have 5 minutes, sir. But there is a decline, an 11.4 percent decline, in subprime refinancing in North Carolina after the North Carolina law went into effect, compared to a 4 percent increase in other States. As I see it, as I see it, we have an issue right now of people who are trying to refinance out of these high rate loans, high cost loans. If we put in place the North Carolina law at the national level, which is part of the legislation we are discussing today, that will further constrict people’s ability to get another loan and refinance. If you look at the North Carolina experience, it is an 11.4 drop while at the same time other States experience a 4 percent rise. It seems to me that what you are advocating is exactly what the folks from Paulson & Company in the hedge funds want, which is to further spread the pain of these losses in the mortgage market and make it more difficult for people to get lending to get out of the troubles they are in. What do you say to that? VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 83 Mr. CALHOUN. North Carolina, like other States, saw an explosive boom in subprime lending, including refinancing, since the North Carolina law has been in effect. Mr. MCHENRY. That is not true. Mr. CALHOUN. Our lending—refinancing— Mr. MCHENRY. What are your facts? What is your proof on that? Mr. CALHOUN. I will be happy to submit to you from industry sources the exact volumes— Mr. MCHENRY. Because I have three different studies here. Mr. CALHOUN. It quadrupled our subprime lending— Mr. MCHENRY. Burnett, Finkel, and Kaul in 2004 confirmed this notion, finding a 16 percent decline in origination by subprime lenders in North Carolina. That is a significant difference. Mr. CALHOUN. Subprime lenders or subprime loans? Mr. MCHENRY. Subprime lending. Mr. TAYLOR. There was one study— Mr. MCHENRY. And I am speaking to Mr. Calhoun, sir. Mr. CALHOUN. I don’t know which one you are quoting from there, that showed— Mr. MCHENRY. Burnett, Finkel, and Kaul. Mr. CALHOUN. —that showed a reduction between the time the act was enacted but before it went into effect. But subprime lending, and the Commissioner of Banks has been here and testified several times to this in North Carolina, has grown explosively, which is a good thing and which we encourage. We are subprime lenders and view that as an important ladder to the middle class. Mr. MCHENRY. But just for note— Mr. CALHOUN. But it has been a trap door with the abusive loans that we have had. Mr. MCHENRY. But just for note, there is a—the growth rate in subprime lending in North Carolina is 20 percent less than the national growth rate. So it has been further restricted. My concern here is that we don’t hurt the very people that all of you espouse to help and we all seek to help, those that are in very difficult financial situations. And I believe if we put in a government mandate of what mortgages are allowed and not allowed, and specify key loan terms that the market can only accept or reject, that we are going to hurt the very people we are seeking to help to get out of this mortgage challenge that we are facing. So with that, I would be happy to yield back my time. The CHAIRMAN. The gentleman from Missouri. Mr. CLEAVER. Mr. Chairman, in the interests of time and, since I agree with and in most cases identify myself with the comments of the panelists, I would forgo any questions. I appreciate the statements from our panelists and I would hold my comments to the next panel. Thank you. The CHAIRMAN. I thank the gentleman. Mr. Taylor, do you wish to respond? Mr. TAYLOR. I am very upset about this last line of questioning. Because I didn’t realize this was a hearing on CRL which, coincidentally, does primarily lending to low-income people, which might have something to do with why they have high delinquencies. And it is delinquencies, it is not defaults. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00089 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 84 I mean, their record of serving underserved people is impeccable and second to none. And the inference, which I see as just bullying, that because you receive a contribution to do something good—I mean, all of you up there get contributions from many of the people that we are talking about. I find it deplorable that you would attack the integrity of that organization. Mr. MCHENRY. If I may respond, Mr. Chairman? The CHAIRMAN. Let him finish and then, it is not your time, but the gentleman’s time, but if he finishes, I will call on you. Mr. TAYLOR. I just think that it is unfair to look at a source of income. I think you need to look at what their contribution has done, what they have been trying to do. And clearly, for many years, they have done loans to people who are underserved. They have been a leader in fighting to try to assist the people that you say we are all trying to help, and that is underserved people. None of us are trying to constrict the market. The only thing we are trying to constrict is bad loans that get people into trouble. And I just find your line of comment offensive. And I don’t mean any disrespect for that. I am just sitting here offended on behalf of CRL because I don’t think it is fair. Mr. BACHUS. Mr. Chairman? The CHAIRMAN. Yes, the gentleman from Alabama. Mr. BACHUS. If I may respond, I would like both—since we have gone extra time, I would like—are you talking about the gentleman from North Carolina? Are you talking about both of us? Mr. TAYLOR. I wasn’t referring to you, Mr. Bachus. That particularly was bothering me. Mr. BACHUS. And let me just say this, because I thought you— The CHAIRMAN. I was going to recognize the gentleman from North Carolina. If the gentleman from Alabama wants me to recognize— Mr. TAYLOR. I thought you said—your comments were not designed— Mr. WATT. Mr. Chairman, point of order? The CHAIRMAN. Yes. Mr. WATT. I am just wondering, it seems to me we are wondering, Mr. McHenry has had his say, Mr. Taylor has had his say. This is not about CRL; this is about the bill. And I would— The CHAIRMAN. I appreciate it. I will give Mr. McHenry a brief time to respond. He did have his time and Mr. Cleaver’s time. But I will recognize Mr. McHenry. Mr. MCHENRY. I appreciate it, Mr. Chairman. And I want you to know very sincerely, Mr. Taylor, I know you wanted to answer some of my questions. But my questioning—I am from North Carolina. I served in the legislature. I have a large awareness of CRL. I know that their studies are vastly different, in many cases, from the rest of the industry and the rest of the marketplace. I am not questioning Mr. Calhoun’s integrity, never did I do that. I am offended that you would say that. But let me finish by saying this. I think all of you are respectable human beings for coming forward and sitting before this committee and taking tough questions. This is a real issue for America. I am very concerned about it and all my colleagues are. It is out of gen- VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00090 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 85 uine concern that we want to make sure we do this correctly and that we don’t hurt the marketplace. The CHAIRMAN. Mr. Cleaver, did you— Mr. CLEAVER. I just wanted to say, I will never pass again. [Laughter] The CHAIRMAN. No good deed goes unpunished, Pastor. You should have known that. Next, the gentlewoman from Florida. Ms. BROWN-WAITE. Thank you. And I apologize for not being here this morning. I am the ranking member on Veterans Oversight and that is why— The CHAIRMAN. I would say to the gentlewoman, and I would say this in general, as chairman, I have come to the view that no member need apologize to me for not being here. Sometimes, I wish some members would apologize for being here. [Laughter] The CHAIRMAN. But I never object when members are not here. Ms. BROWN-WAITE. Thank you, Mr. Chairman, for being so understanding. I hope I am not one of those members you would rather not have here. When I have spoken to constituents who have contacted me about problems that they have incurred about having a subprime mortgage, it was a combination of issues that they faced. They didn’t realize or they realized it and just the combination of events became overwhelming. But when you buy a piece of property, that that property gets reassessed at the sale price, the higher price. I happen to be from Florida where homeowners insurance is overwhelming. And now to add insult to injury, we also are redoing the flood maps so people who, when they bought the home weren’t in a flood area, they now have to buy flood insurance. So it is not just the subprime issue that is causing so many foreclosures. I would like to have anyone on the panel comment about that. It certainly is a part of the equation, but I don’t think that it necessarily is the whole equation. And I know that insurance rates in North Carolina, for example, have gone up. Anywhere along the coast they have gone up. And last time I checked, most places reassess the value of a property at or shortly after the property is sold. So are we looking at the whole shebang here or are we just saying it is the subprime that has caused the foreclosure? And any one of you on the panel who would care to answer. Ms. BOWDLER. Sure. Can you hear me? I will go ahead and jump in and start but my colleagues, please feel free to jump in. I think the point you raise is a really excellent one in that so much of the dialogue about this bill and about the problems in the market have been very global. You know, what is going to go on with Wall Street, what are the investors going to do? But really, there is also a very transactional nature to this business and I think actually it was Mr. Barrett who said it in his opening statement, relationships are important. And so what we have seen is those folks on the ground who are doing the appraisals and the mortgage brokers who are actually arranging the transactions, they carry a lot of weight. Families trust them the same way they trust their doctor or lawyer. So certainly, it is NCLR’s position that unaffordable loans, which have really VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 86 festered in the subprime market to a large extent are really at the core of the predatory lending problem that we have. But the additional problems that you are describing really go to ability to repay and whether or not that originator that was sitting across from that family took into account the actual taxes and insurance that that borrower was going to have to repay, and did they account for things like in Florida where situations may change? And certainly we believe that they have a responsibility to do that. They are an advisor to the borrower. Ms. BROWN-WAITE. Well, at closing, there have to be certain forms that are filled out, the RESPA form if it went through a real estate agent, etc., so that that information is out there, and they have to do it to the best of their knowledge. Now, rates in Florida, assessment rates, are determined in late September for the taxing year. And you can only guess what a county commission is going to do, because sometimes it really is a guessing game. But they are required to give that information. Is it that people get so caught up in the oh, good, I finally can buy a home, that this euphoria takes over and the day of reckoning is kind of put off in the back here? Regardless of whether it is a subprime or not. Which I have a follow-up question. I don’t know how much more time I have. But what basis would a lender actually have for determining which loan is best for a consumer? Mr. BRYANT. Before your follow-up question, the issue there is financial literacy. I mean, the same issue—my dad is a brilliant guy, a great businessman. But he didn’t understand money. And so if you don’t know better, you can’t do better. If you are signing documents that you don’t understand, if you are asking what the payment is versus what the interest rate is— and this is not a poor people issue; 80 percent of Americans, according to the Federal Reserve, are living from paycheck to paycheck. Financial illiteracy is a universal issue and that has to be addressed. Otherwise, you are just rearranging the deck chairs on the Titanic. So that is number one. Living by the coast— Ms. BROWN-WAITE. But, sir, those figures are in front of you at a closing. Those figures are in front of you at a closing to the best of the person’s— Mr. BRYANT. But if you don’t understand money, if you don’t— it is what you don’t know that you don’t know that is killing you. If you are financially literate, it is hard to understand somebody who is financially illiterate. But the issue is here that if you do a survey of your staff, you will find that they are living from paycheck. This crisis— Ms. BROWN-WAITE. Did they complain to you? Mr. BRYANT. Excuse me? I will check my e-mail. Ms. BOWDLER. The fact that the documents and disclosures are present at closing is really—is one part of the problem that was brought up earlier about the timeliness of the information. By the time you sit down at the closing table, your bags are packed, your earnest money is in. All of that is going on. Everything you sign VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00092 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 87 at that point is to protect everybody else; nothing about it is actually to protect the borrower or really to even inform the borrower. It is like putting in front of you the manual for how to conduct your own surgery and then saying, why didn’t you know how to do your surgery? Ms. BROWN-WAITE. Ma’am, let me just tell you, I have had Realtor after Realtor tell me about people who go to the closing table and they say, whoa, didn’t know my homeowners insurance was going to be that much, I didn’t know my payment was going to be this much. They walk away at the closing table because they are informed and they are told how much it is going to be. So I am— Mr. TAYLOR. If I could respond to that? The CHAIRMAN. Quickly. Mr. TAYLOR. We actually deal with a lot of consumers who find themselves in these problems. And invariably we hear a very similar story of people going in and thinking that the—whether it is the broker or the lender, are really operating in their interests. And basically there is a lot of kind of blind faith in the process in which they think those people are operating in their interests. And a lot of people are kind of talked into, you know, you can do this loan, it is not going to be a problem, don’t worry about it, this is the way everybody is doing it. And they really believe these folks. And in Florida, the other major problem you have is you have massive amounts of appraisal fraud and valuations that are very inaccurate that I think are compounding, which gets at the first part of your question. The CHAIRMAN. I think we are going to be dealing with the appraisal issue, in fact, in Mr. Kanjorski’s appraisal and other places. The gentlewoman from New York. Mrs. MALONEY. Thank you. I would like to ask the panelists, beginning with Mr. Calhoun, to respond to this statement that I hear often from industry representatives. And some industry representatives claim that any effort to regulate these mortgage products would result in an even greater credit crunch, making it difficult for people who should have a home and should be able to afford one, that the credit crunch will hurt them. So I would like you to respond to that claim, Mr. Calhoun, Ms. Bowdler and just down the line, anyone. Mr. CALHOUN. First, let me say I agree that we need to be extremely careful not to restrict credit. And the bill does this in one fundamental way, in that it allows very high interest rates. You can charge interest rates, for example, before you even trigger the high-cost loan threshold, you can be charging 13 percent interest on a first mortgage loan. Now that is why Joe Smith, the commissioner of banks, comes in and says there are not many people being denied credit when you can charge them 13 percent on a first mortgage loan. But we think that is appropriate because the market works well competing over interest rates. What the bill we think appropriately does is eliminate some of the gimmicks, for example, locking borrowers in with prepayment penalties so another lender can’t come in and refinance them at a much better rate. But we need to be very careful not to restrict VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00093 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 88 credit, that we allow it but channel it toward the interest rate where competition—and again, it has to be competition and self-policing that makes this work. We can’t look over the shoulder on three million subprime mortgages a year, much less the 15 million total mortgages being originated each year. Mrs. MALONEY. Would anyone else like to comment? Ms. BOWDLER. We agree. And it is really not about cutting off credit to the subprime market because we agree that it is important and I think there is a viable market out there that is demanding to be served. It is about fair and equal access to credit. We actually went out and talked to mortgage brokers and interviewed them and we found that they were doing responsible business in this area and they were earning a profit. They were making a living. It can be done. You can offer fair and safe products in this area and make a living. And it sounds like the Congresswoman from Florida had access to those kinds of agents that said to their borrowers, this isn’t for you, and that is what you should be doing. Mrs. MALONEY. Any other comments? Mr. TAYLOR. We have a serious credit constriction now and we don’t have this law. We have it because we didn’t have this law. We have the problem because there just wasn’t standards and accountability that would allow for clean and fair lending processes. So we have it. We have this constriction because we—and, frankly, I don’t know who the folks are who are saying we are going to have a credit crunch if we have this bill. But we sent a bill in last week to the Chairman, both this committee and the Senate Banking committee, signed by NCRC and the top 10 banks in the United States calling for national anti-predatory lending legislation. So I don’t know who those folks are, but my suspicion is those are the ones who profit from these kind of predatory kind of loans that want to not have the law that prohibits that. But I can tell you, the mainstream financial institutions who got out of a lot of this business a long time ago, yes, sir. Mrs. MALONEY. Thank you. I would like the panelists to comment on some of the statements— The CHAIRMAN. You had one other—Mr. Bryant wanted to comment. Mrs. MALONEY. Excuse me. Mr. BRYANT. Just building on that, with mortgage brokers alone, you have the wild, wild west out there right now. There are no rules of engagement. This provides rules of engagement. It also provides a floor, not a ceiling. It’s very important, and I think it will create an environment where more capital gets unleashed because people know the rules of engagement. Right now there is a credit crunch, right now. So this will hopefully free it up by providing clarity. Mrs. MALONEY. I would like the panelists to comment on really the statements by Sheila Bair from the FDIC, which called for having mass negotiations to help people stay in their homes. And the fact that we have done so much on this committee to help people stay in their homes, yet the percentage of people who are negotiating and taking advantage of these tools is only 1 percent. What can we do? Fundamentally, this bill moves forward to prevent it, but what can we do to help these people stay in their VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00094 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 89 homes? Why is it 1 percent, such a low number, and what about her idea of mass negotiations? Starting with Mr. Calhoun and down. Mr. CALHOUN. Congresswoman, there has been a lot of work including by members of this committee and organizations represented here, to try and untie this Gordian knot of how do we make the modifications. And we have knocked down a lot of the obstacles. At first, there were the pooling and servicing agreements and then tax rules. But there are two huge obstacles that remain and are blocking modifications and no one has figured out how to get around them. And they are the following. First, the effect of a foreclosure on security holders depends not only on the amount of the loss but when it happens. And so if a foreclosure happens under the typical structure, if it happens in the first 3 years, it falls to the lowest tranches to pay it. But if it happens after that period, other tranches pay it. And so it has been reported in the financial press that this is a major obstacle because the holders of the tranches, the securities who get the later foreclosure losses are telling the servicers if you modify this loan, and not all modifications will be successful, and move the foreclosure to my time period, I am going to sue you, because you have increased the risk of my security over the original structure. The other huge obstacle, structural obstacle, that has and will continue to prevent modifications is that data shows that somewhere between 40 and 50 percent of these resetting loans have piggyback second loans. And that makes it extraordinarily difficult to modify the first. Because the first lienholder is basically going to say, I’m not going to take any reduction in my rights or payments until you wipe out the second. The second has no incentive, sometimes it is by another lender, usually is in another security. That is what led CRL to conclude that there needs to be some limited relief in bankruptcy, to create a standard not to force people into bankruptcy but to create a legal standard of this is what modifications can be done and servicers, you won’t get sued if you do them. The CHAIRMAN. The time has expired. The gentleman from Texas. Mr. HENSARLING. Thank you, Mr. Chairman. I guess following your lead, I will not apologize for having to miss a fair portion of the hearing due to other commitments. But I did understand, Mr. Taylor, that you lamented my absence and thought I had a fundamental misunderstanding of Adam Smith’s philosophy, as I alluded to the economist and philosopher in my opening statement. Although it has been a number of years ago, I have actually plowed through The Wealth of Nations in its 18th century English. I have a degree in economics, graduated with honors, served on the House Budget Committee, and serve on this committee. So, please, I want to give you your opportunity to illuminate for me what my fundamental misunderstanding of Adam Smith may be. Mr. TAYLOR. I think the fundamental misunderstanding is whoever communicated what I said to you. Because actually I was VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 90 agreeing with the use of Adam Smith in this conversation. And what I went on to say is I went deeper into Adam Smith’s—the basis for his defining what makes for a healthy economy and I talked about capital accumulation, free trade, the role of government, and the rule of law. And the things that I emphasized which you didn’t talk about, it is no slight on you, you just weren’t talking about it, but is the importance of making sure that the individuals’ rights and properties are protected. And that was the thing. So I mean, you probably do know more about Adam Smith than I do. But from what I know, and frankly I am quoting Chairman Greenspan, so— Mr. HENSARLING. Always a good one to quote. Mr. TAYLOR. Exactly. Mr. HENSARLING. Mr. Calhoun, I did miss your testimony although I see a portion of your written testimony. On page 10 of your testimony, you say, ‘‘In short, improved disclosures are not likely to help borrowers.’’ Why is it that if a—well, let me ask it this way. Is there just something fundamentally wrong with consumers? Are they just incapable of understanding financial transactions? Why is it that effective informed disclosure seems to be an impossibility in your mind? Mr. CALHOUN. First of all, we strongly support improved disclosures. But it is not just our opinion, but the GAO studied the issue and concluded that improved disclosures were not likely to significantly reduce predatory lending. And the reason is that the market currently rewards unscrupulous practices and in fact penalizes lenders who engage in responsible practices. Mr. HENSARLING. Well, let me ask you this question if I could. It continues to be an ongoing debate in this committee, and I have been on this committee for almost 5 years. I haven’t exactly heard a consensus on the definition of predatory. But if there is effective competition within the marketplace, no barriers to entry, if I as a consumer, if I understand the financial transaction that I am undertaking and I am over 18 and I consent to that transaction, how is that a predatory loan? Mr. CALHOUN. When borrowers are steered to loans at much higher interest rates than they qualify for, when borrowers are provided loans and given representations that this loan is appropriate for you when in fact they have no possible reasonable ability to repay the loan short of winning the lottery, and that is what we have seen, not just as the exception but widespread throughout the subprime market. This is an unprecedented market meltdown in foreclosures. And it is not that borrowers suddenly became dumber in the last 5 years, or that divorce, the economy tanking, or anything else has driven it. They were marketed very poor products and a lot of people made a ton of money doing it. The market said, if you put a borrower into a higher interest rate loan, I’ll pay you more. If you tag on a big prepayment penalty, I will pay you more. If you make it a nodoc loan, I will pay more. The head of one of the subprime lenders said, Wall Street was telling me, I will pay you more for no-doc loans. Well, what do you think I am going to send to Wall Street? VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00096 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 91 Mr. HENSARLING. Mr. Calhoun, does your organization believe that the individual borrower has any personal responsibility to ensure that he is entering into a financial transaction where he can afford to repay? Does your organization admit to the possibility of predatory borrowing? Mr. CALHOUN. There has been fraud by borrowers in the market. Although, again, we believe, and I think the numbers support, that that is a small part of the problem. We strongly believe that borrowers have responsibility. We enforce our loans, including in foreclosure, where we are unable to mitigate the loss or work out a modification. We don’t believe that borrowers should be guaranteed the best loan. We don’t believe that borrowers should be guaranteed a successful loan. What we do believe is that the market should put in protections, have protections and fair rules. We have analogized it to this. It is the time of the year, if you had a football game and we said we are not going to prohibit holding, we are going to tell people maybe they shouldn’t hold, but there is going to be no prohibition, no penalty if you hold, I think our football games would look a little different than they do now; everybody would be holding. And that is essentially what we have here, a floor of reasonable regulation. And that is not an easy balance to strike. And we have acknowledged that and I think that is one reason it has taken this committee so hard looking for that balance. But a reasonable balance of regulation helps borrowers, lenders and investors. Mr. HENSARLING. I see my time is over. The CHAIRMAN. The gentleman from California. I am going to ask the witnesses to try and be a little more concise. Mr. SHERMAN. I thank the chairman for not applying that to the members. One comment about the gentleman’s comments from Texas. I mean, this meltdown did not come about just because we had bad loans. We had bad loans 3 years ago. It came about because we no longer have a rising market. And a rising market hides all the transgressions. So you can have lots of bad loans, you have a rising market, things look okay. But when the market then levels off, the transgressions are exposed, the transgressions are exposed, the market then gets even worse and then you have the downturn. The chairman in my last comments educated me about what is in the bill. And one thing we are concerned about is that ability to pay. Now, ability to pay includes ability to pay the property taxes. I hope that we specify in the bill that it is the ability to pay the property tax you expect to get after you buy the house, especially in those States like mine where, unless you are a senior citizen, the property is going for sure to be reassessed as soon as you buy it. And so I hope that we are able to fine tune the language so that when we say ability to pay the property taxes, isn’t the low bill, which in my State can be very low in the hands of the prior owner, but instead is the property taxes this consumer is going to face. Now, one thing we have in the bill is a 50 percent debt payments to income ratio. That is to say in determining whether somebody VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00097 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 92 can afford to pay, we say we look at their car payment, we look at their student loan payment, we look at all the payments they have on non-real estate debt, we add in the cost of property, principal, interest, taxes, and insurance for the home they’re buying, and we look at that whole piece and we can make sure that it does not exceed 50 percent of their take-home pay. Is 50 percent the right number? By a show of hands, how many think that in order to keep things affordable your total real estate payments plus your other debt payments need to be set at only 40 percent of your take-home pay? The record should show no hands went up. How many people think we should set that limit at 60 percent, so if somebody wants to commit 60 percent to their real estate payments and their other debt payments, that that is an acceptable, reasonable thing for a consumer to do? Mr. TAYLOR. It depends on the terms and conditions. And— Mr. SHERMAN. I am asking you to help us draft just one section of the bill. We got a safe harbor, we require a lot of things to be in that safe harbor. One of the things we require is some debt payments to income ratio. So assuming the rest of the bill stays the same, we are not going to let you write the whole bill, we are only going to let you write one number in the bill and that is that percentage. Do you write it at 50, speaking on behalf of your organization? Knowing that if we set this number too high, we let people get in above their heads. If we set the number too low, we turn away from homeownership people who want to own a home. We got the number in this bill, say the exact bill just as introduced is going to pass. You may or may not like the bill. You only get to write one number. You want 50 percent, you want another number? I see the witness to your left may have a comment? Mr. BRYANT. You know, it is interesting, most of this bill deals with a floor, sort of a floor approach. Mr. SHERMAN. Right, we don’t want to write the Federal bill. In this bill— Mr. BRYANT. This is the one aspect that deals with almost a ceiling approach. And the paragraph right above it actually deals with, basically says you can only write a mortgage the person can afford to pay. That may be a more sophisticated, a more reasonable approach to this. I don’t know what the right number is, but here is what I do know— Mr. SHERMAN. Let me just—I have a limited amount of time. Do I have anybody here who has a right number, who believes that any particular number should be in the bill? Ms. BOWDLER. I can tell you that for the 20,000 families who come through our counseling network, most of their affordable products that they get connected to, those— Mr. SHERMAN. Excuse me. This is just one of my many questions. Does somebody have a percentage number other than 50 percent that they recommend to the committee. Ms. BOWDLER. We are okay with 50 percent. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00098 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 93 Mr. CALHOUN. Fifty percent, and I think it is key to remember that is 50 percent of their gross income before the taxes are out. So you are talking about— Mr. SHERMAN. Oh, so you are at 50 percent not of take-home pay, but 50 percent of gross pay. Mr. CALHOUN. And that is how that, I believe, is intended. And so it is a much— Mr. SHERMAN. So the way I would—in my world, that is a 60 or 70 percent number. Mr. CALHOUN. Exactly. So we think that is plenty high. Mr. SHERMAN. That leaves you with very little take-home pay to devote to anything else. So you are for 50 percent if it is 50 percent of gross pay. Mr. CALHOUN. That is how it is done in the industry. That is our understanding of the intent of this bill. Mr. SHERMAN. Okay, let us move on to another percentage type question. Let us say we have stacks each containing 100 mortgage applications. We have a stack here where I could tell you statistically 25 percent are going to default and lose their homes. But the other 75 percent are going to be able to make it, going to be able to pay the loan. I have a crystal ball, I know what economic conditions are going to be; 25 percent default, 75 percent people are able to move into a home. Should government come in and say, don’t make any of those loans? Or should government allow the lender to make all 100 loans? Mr. CALHOUN. We think the approach in this bill is right, is set fair standards, don’t guarantee success. People get the opportunity— Mr. SHERMAN. Okay. But I mean, we could set the standard differently. What I am trying to get at here is, obviously, if we could make 100 loans and only one was going to default, we would say, hey, that is great, 99 people became homeowners. There is always going to be 1 out of 100 that is a problem. At the other extreme, we could say, hey, go make 100 loans. If 10 people get to stay in their house and 90 percent have to move back to an apartment, that is okay. Where do you draw the line? What is— Mr. TAYLOR. If the 25 percent is defaulting because of loss of job, then that is acceptable. If the 25 percent is defaulting because the originator put them in a loan they really couldn’t afford in a short period of time, it is not acceptable. Mr. SHERMAN. Okay. Mr. TAYLOR. And that is what this bill addresses, ability to pay, duty of care. Mr. SHERMAN. Okay, that is a fair answer. Anyone else have an answer? I yield back. Mr. KANJORSKI. [presiding] Several of the witnesses have expressed support for my legislation, H.R. 3837, which Mr. Frank and I have agreed to mark up in the coming weeks. We need to fix problems related to escrows, appraisals, and mortgage servicing in order to develop a comprehensive solution to the complex problem of abusive and deceptive lending. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00099 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 94 To help us establish a better record on the need to enact policy reforms in this area, I am hopeful that each of you can answer for us how some or all of the following questions are understood or relate to your specialties. First, why is there a need for mandatory escrowing of taxes, insurance, and other periodic payments for consumers with high debt and bad credit? Mr. CALHOUN. It is to set a fair rule for the marketplace to compete with. We hear complaints from this as much from lenders and brokers as we do from borrowers. Brokers come and tell us that they can’t escrow because if they do, they will get undercut by another broker who will come in and offer a loan without escrow that looks cheaper. I mean, Fannie and Freddie require this for similar loans in the prime market. And we really want to commend both you in your bill and also the leadership that Mr. Bachus has shown with his bill and also some of the other provisions. We wrote a letter supporting those. Mr. KANJORSKI. It sort of raises the question of financial literacy in a way. Is it so often that these buyers are unsophisticated and they do not anticipate the need and the value of escrowing, what it means, and anticipate the problem of not escrowing? Because I think the statistics show that about 60 percent of the regular securitized mortgages are escrowed, whereas only about 25 percent of the subprime are. And it sounds incredible, because I would think it would be the complete opposite. Here, the people who need the support system the most are getting it the least. Mr. CALHOUN. Our experience, very quickly, has been that most borrowers have assumed that escrow was included, particularly when it was included in their previous loan. And if you will, the broker has come in and said, I can lower your payment by hundreds of dollars a month without, you know, explaining. And that they are doing that in large part by not escrowing for taxes and insurance. Mr. KANJORSKI. That certainly answers my question. Why should we improve disclosures for all borrowers who opt out of escrowing? And is it successful? I listened again to some of your discussion before, in terms of notice and information at closing. I have to be honest with you guys, I probably have closed personally maybe 10 or 15 mortgages in my lifetime and hundreds of people that I have represented in business transactions. I have yet to read all of those documents. As a matter of fact, I doubt whether I would have enough time to read all of those documents. I remember one rather sophisticated closing that took us 12 hours in Philadelphia and I think it had 158 documents that had to be executed. Certainly people would argue that there was notice, real notice, absolute notice. It is nonsense. It was legal notice. We comply with this policy of providing a paper and giving notice, but nobody ever reads it. And to be honest with you, the way some of us write those notice documents, even if you did read it, it would be highly unlikely that you would understand what you were receiving notice on. Yes, Mr. Taylor. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00100 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 95 Mr. TAYLOR. Yes, Mr. Kanjorski. You are actually getting at what I think is one of the core fundamental changes in our financial services system, our mortgage lending system that has occurred. And that is when you went to closing, when the average person, not highly educated, blue-collar person went to a closing 15, 20, 30, 40, or 50 years ago, when they went in, they could rely upon the integrity of the system. You know, we just didn’t have what we have now. This is really lenders gone wild, or brokers gone wild. This is a system that really changed under our eyes. It is not the same financial system we used to have. What is funny, we have more financial literacy, more disclosure than we ever had. That is not really solving—it is important stuff, but it is not solving it. It has to be solved by putting the integrity back in the system and that is going to take this kind of bill. Mr. KANJORSKI. Not unlike other things in our society, perhaps, where change has occurred. The reality was, you know, in the past, you went to your local bank, you went to your local savings and loan, or your local credit union and you did a mortgage operation. You knew the people across the table, they were going to be your neighbors for life, your friends. And everyone looked out for each other. The other day I had someone come up to me and say, ‘‘I just closed and got this mortgage and I found out that Wells Fargo is the bank which loaned me the money; I don’t even know who Wells Fargo is.’’ And in Pennsylvania, where this transaction took place, Wells Fargo is thought of as being way across the country. But that is how fast these mortgage transactions are sold. People, as a matter of fact this individual told me this because he refused to go through with the transaction because he said, ‘‘I didn’t make the arrangement to borrow from Wells Fargo.’’ And he did not know who they were, although they are obviously a reputable bank. But the transactions are so extreme compared to the way they used to be. Now, when we had hearings on this issue in Pennsylvania, it was peculiar. The people who had moved from New York to Pennsylvania were very annoyed with Pennsylvania, because we do not require a lawyer at the transaction to represent the buyer, where apparently in New York they do. And quite frankly, although I am a member of the Bar myself, I am rather sympathetic to that idea, that it would not be a bad idea, to have somebody knowledgeable in the law or financial transactions to protect the consumer. I do not think all of the notices that we write or everything we do is going to really give people protection. And as a matter of fact, sometimes I believe they think we are part of the problem. Mr. BACHUS. Would the gentleman—the last thing about Wells Fargo, you know, interestingly enough, you know, Wells Fargo told my staff and myself that they always require escrowing, just I mean one of the things we’re talking about, escrowing. In fact they say that loans that aren’t escrowed are bad for the lender, bad for the borrower. And that the percentage of those that default, it is one indication you can look and see, it is an indication of default. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00101 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 96 That is why the legislation that I introduced actually, it has mandatory escrowing in subprime loans. Not, you know, the prime loans but subprime. Mr. KANJORSKI. I have other questions, Mr. Chairman, but I have exceeded my time. The CHAIRMAN. I thank the panel. This has been a hearing that has been very useful for me on a number of points and we are going to hear some more, because I think we have a lot of general agreement here and a recognition that a number of the specifics can be adjusted one way or another. So this panel is dismissed with our appreciation and we will, with our appreciation for their patience, hear from the last panel. The gentleman from Alabama. Mr. BACHUS. Mr. Chairman, I ask unanimous consent to enter into the record a statement on H.R. 3915 by the American Financial Services Association. The CHAIRMAN. Without objection, it will be made a part of the record. The CHAIRMAN. Let’s leave quickly, people. You can all be nice to each other outside. We have to get to dinner. All right, we will begin the last panel with my deep thanks. We will begin with Mr. Bradley Rock, who is the chairman, president, and chief executive officer of the Bank of Smithtown. He is testifying on behalf of the American Bankers Association and America’s Community Bankers. STATEMENT OF BRADLEY ROCK, CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER, BANK OF SMITHTOWN, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION AND AMERICA’S COMMUNITY BANKERS Mr. ROCK. Thank you, Mr. Chairman. Let me start by thanking you and your staff for consulting us on aspects of this proposal. While we still have concerns, which I will address in my testimony, we appreciate that some of our concerns have been addressed in this initial draft and we look forward to continuing to work with you as this legislation moves forward. There is no question that many homeowners are struggling to meet their monthly mortgage payments. As home values continue to fall and adjustable rate subprime mortgages are reset, the situation is not likely to improve in the near future. The trouble in the mortgage markets is of great concern to the banking industry. Many banks have existed for decades. And some, like my bank, have existed for almost 100 years. We know that we must be part of the solution and we are pleased to work with you to bring mortgage lending back into balance. Many banks have already taken actions to help borrowers who are in danger of defaulting. The ABA, ACB, lenders, and others have formed the HOPE NOW Alliance dedicated to helping people stay in their homes. A guiding principle for all of us should be steadfast adherence to high ethical standards, whether you are a banker, mortgage banker, mortgage broker, Realtor, appraiser, developer, investor or anyone involved in the real estate business and homeownership, high ethical standards should be the norm, not the exception. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00102 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 97 The damage caused by unscrupulous sales practices has hurt us all. I hold all of my employees to high standards and the bank regulators make certain that I do. There are several additional principles that should guide any legislation on mortgage markets. First, sound underwriting standards that are based on the borrower’s ability to repay are needed in every mortgage loan. Embracing the ability to repay concept as the new legislation does is essential to protect consumers and assure market stability. However, we are concerned that the bill includes very subjective criteria, such as offering mortgage loan products that are, quote, appropriate to the consumer. Such a vague concept will likely lead to litigation, driving up costs for both lenders and consumers. While imposing a duty of care requirement is reasonable, it must be based on objective standards that are centered on the ability to repay the loan. Second, consistent standards are needed particularly to bring nonbank mortgage originators up to the standards applied to bank originators. Independent mortgage brokers are not subject to all the consumer protection laws and regulations with which banks must comply. And more importantly, a regulatory system does not exist to examine them for compliance even with those laws such as RESPA which do apply to them. The bill seeks to address this inconsistency by requiring all mortgage originators to be licensed and registered. While we understand the principle here, we are concerned about the regulatory burden this will add to banks which already meet high regulatory and examination standards. It would be unfair to saddle these institutions, which generally had nothing to do with the current problems, with more burdens. Doing so would inevitably impede all types of lending to our communities. Moreover, without supervision of nonbank originators, licensing will not be effective and may, in fact, give customers the impression that there is an appropriate level of oversight when there is not. We appreciate the opportunity to share our views on this legislation and we look forward to working with you and this committee to find workable solutions. Thank you. [The prepared statement of Mr. Rock can be found on page 270 of the appendix.] The CHAIRMAN. The next witness is a frequent witness and attendee at our events here, Mr. Pfotenhauer, who is the senior vice president for government affairs and public policy of the Mortgage Bankers Association. STATEMENT OF KURT PFOTENHAUER, SENIOR VICE PRESIDENT FOR GOVERNMENT AFFAIRS AND PUBLIC POLICY, MORTGAGE BANKERS ASSOCIATION Mr. PFOTENHAUER. Thank you, Mr. Chairman. On behalf of our 3,000 member companies, thank you for making us a part of this process. I would like to start by giving some credit where it’s due, Mr. Chairman. As per your word, the process that brought us to the introduction of your bill has been deliberative and open. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00103 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 98 As the markets have become more and more volatile, you and your colleagues and your staff have stayed focused. You have placed policy making ahead of scoring political points. Your staff are knowledgeable and professional. Thank you. Your approach is refreshing and it keeps us focused. I would like to add one other thing in the general category of compliment. This bill is well thought out and if enacted, it will be extraordinarily consequential. That comment does not, of course, signal agreement. But it is intended to recognize the thought and the effort that went into this ambitious proposal and to concede up front that your hard work, justifiably gives you some insulation from the common industry charge that your bill is fraught with the danger of unintended consequence. Indeed, I rather suspect that you intend much of the consequence that would result from this bill. Which begs the question, is your approach the right approach? Members of the committee, if they do not understand, need to understand that if H.R. 3915 becomes law, some people will be locked out of the mortgage market, many of whom would have been successful homeowners. Lowering HOEPA triggers, establishing the ability to repay and the net tangible benefit tests and eliminating some products from the market will have this effect. The question for this committee is whether the protections this bill provides are worth that price. Eighty-five percent of subprime borrowers are paying their mortgages on time today. It is an open question how many of these 5.3 million homeowners would even qualify for a loan under the proposed regulatory construct. The alternative to eliminating borrowers from the market is to prepare them for the market. In that respect, we urge the chairman to tackle the lack of transparency in the origination space. Streamlining the mortgage process and improving disclosures are essential to helping borrowers help themselves. I would like to flag two additional areas of significant concern in my remaining time. First, there is what I would call a soft suitability standard in evidence in several sections of the bill. For example, section 103 dealing with steering asks the regulators to, quote, promote the interest of the consumer in obtaining the best terms for a mortgage. While this is guidance to the regulators and not a direct requirement for lenders, we believe that the regulators will take this guidance and either attempt to define best product for a borrower or force lenders to do so, an impossible task. We understand that your goal is to assist consumers in identifying the best loan product for themselves. With your permission, we will work with your staff to rephrase these areas of concern in a way that preserves your intent while stopping short of encouraging a suitability standard by regulation. Finally, let me state clearly that the mortgage bankers association supports legislation to establish a consumer protection standard in the mortgage market for any number of reasons, one of which is because the patchwork quilt of State and local predatory lending laws is an impediment to the smooth and efficient operation of a national mortgage market. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00104 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 99 We believe that any bill must include broad preemptions that give borrowers a single consumer protection standard and give lenders the certainty of a single standard to live up to. This bill, as currently drafted, is not preemptive. As the committee already knows, this prevents MBA from offering our support. Despite this disagreement, we would like to continue to work with you in a constructive way to improve this bill. And my written testimony suggests a number of fixes we believe will make this bill a better product. Thank you. [The prepared statement of Mr. Pfotenhauer can be found on page 253 of the appendix.] The CHAIRMAN. Next, returning to the committee again to share his wisdom with us, Mr. Marc Lackritz, president and chief executive officer of the Securities Industry and Financial Markets Association. Mr. Lackritz. STATEMENT OF MARC E. LACKRITZ, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION Mr. LACKRITZ. Thank you, Mr. Chairman. First of all, let me commend and thank your staff for a fair and participatory process in the development of this legislation. I think you and the committee have tried to stay true to a simple principle, namely that a borrower should not get a loan that he or she cannot afford and from which he or she does not benefit. Moreover, a borrower should be able to get out of any loan that breeches this simple standard. We agree that the system works best when we can keep families in their homes. Home mortgage credit has been more widely available at a lower cost because of securitization and the secondary mortgage market. By linking mortgage borrowers to the capital markets, the secondary markets enable lenders to provide more credit at a lower price than they otherwise could. Today, nearly 70 percent of American households own their own homes. And the beauty of our housing finance system has been its continued ability to innovate and develop new techniques to best reach and serve all the different market participants. Occasionally, some of these techniques do not work as well as they are intended. But the abuses that have occurred are in a small segment of the lending market and the market has already adjusted. We urge the committee to bear in mind that there are limits to the liability that loan purchasers will accept before deciding to invest elsewhere, especially due to increasing global capital flows. We are concerned that the details of several provisions of the bill as introduced, H.R. 3915, could reduce funding from the secondary mortgage market and cut off mortgage credit for worthy subprime borrowers. We would like to work with you on addressing these issues within the scope of what we feel is a workable product in titles I and II. First, the size of the safe harbor. Our first concern relates to the safe harbor provisions for creditors and assignees that apply to VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00105 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 100 qualified safe harbor mortgages. Given the current state of the mortgage-backed securities credit market, we are concerned that only those loans qualifying for the safe harbor may be made. We understand that the theory underlying the bill is that the market will eventually price the non-safe harbor loans. But if that happens, we wonder how long it will take and what impact that will have on the economy. Secondly, the securitizer or assignee safe harbor. Although we don’t think that liability for the secondary market for actions of brokers or originators is appropriate, we do recognize and appreciate that the bill limits the exposure of the secondary market investors and trusts. The bill also limits the damages of the securitizer or the trust has should the worst case scenario arise. We believe the bill should ensure that the cure remedy is made preferable to recision. Third, the statute of limitations, Mr. Chairman. The scope of application in section 204 should be reduced. The language effectively allows almost a perpetual application, because it is the later of 6 years or foreclosure acceleration or the mere default by a borrower of 60 days or more. The bill relies on existing Truth in Lending Law treatment as the foundation for the remainder of the recision remedy. As such, for consistency sake, the statute of limitations for this section should be 3 years, as under existing TILA section 125. In preemption and national standards, Mr. Chairman, our largest concern is the lack of Federal preemption of State laws. We acknowledge that the proposal tries to balance the interests of borrowers and lenders on this point. Nevertheless, we believe that the approach established by this bill should be a single national standard which is not subject to 50 variations flowing from State legislation. And finally, the role of the Federal Reserve and the concern with regulators. We have an overarching concern with the lack of a role for the Federal Reserve in the rulemaking process. The Fed has important expertise with securitization and the secondary markets, as well as the administration of HOEPA. We believe the Fed should share rulemaking authority with the other regulators in the bill. Thank you very much, Mr. Chairman, for the opportunity to raise these concerns with you. We look forward to working with you and the committee to craft legislation that protects homeowners while ensuring a vigorous home finance system. Thank you. [The prepared statement of Mr. Lackritz can be found on page 236 of the appendix.] The CHAIRMAN. Next, Mr. Marc Savitt, who is the president of the Mortgage Center, and president-elect of the National Association of Mortgage Brokers. We appreciate the cooperation that we have had from the mortgage brokers that we have worked on legislation that will in fact probably have more of an impact on them given the current status of the law than anybody else. And we appreciate the spirit with which we have been able to work together. Mr. Savitt. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00106 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 101 STATEMENT OF MARC SAVITT, PRESIDENT, THE MORTGAGE CENTER, AND PRESIDENT-ELECT, THE NATIONAL ASSOCIATION OF MORTGAGE BROKERS Mr. SAVITT. Thank you, Mr. Chairman. Good afternoon, Chairman Frank, Ranking Member Bachus, and members of the committee. I am Marc Savitt, president-elect of the National Association of Mortgage Brokers. Thank you for the opportunity to testify here today. Like most of my fellow NAM members, I am a small business owner, living in the same community where I work. The mortgage landscape is much different than when I first started in this business 25-plus years ago. Today, we have a deconstructed market, origination, funding, selling, servicing and securitizing can occur separately or all can fall under one entity or be connected through affiliated business arrangements. This is why we are especially pleased by the all originator approach taken by Chairman Frank and Representatives Miller and Watt in H.R. 3915 and Ranking Member Bachus in H.R. 3012. We commend this committee for leadership on realizing that consumer protection should relate to function rather than entity structure. All consumers deserve the same level of information and protection regardless of where they go for a home loan. For over 5 years, NAM has been pushing to raise the bar for entry to the mortgage profession by establishing uniform minimum standards for education, testing, criminal background checks, and by urging creation of a national registry for all mortgage originators. There are some who will push for carveouts, but doing so will dilute consumer protection and deny the market reality that all mortgage originators perform essentially the same function. We sincerely hope that this committee holds steadfast to the alloriginator construct it has advanced in H.R. 3915. Our greatest concern with this bill, however, lies with the practical implications and unintended consequences of the anti-steering provision. We support disconnecting compensation from the origination of loan products or programs, but we are concerned that current language could be interpreted as banning indirect compensation for brokers. Such a measure would destroy small business brokers in this country and hurt the consumers they serve. As the only origination channel that makes full disclosure of the YSP on both the good faith estimate and again on the closing statement, our indirect compensation has come under intense scrutiny. Meanwhile, our originator competitors earn the same type of indirect compensation without disclosure and seemingly without disclosure and seemingly without criticism. We should not preserve the disclosure inequity created by HUD in 1992. It confuses consumers and hurts the natural order of competition. We do not believe it is the committee’s intent to legislatively pick winners or losers or further disadvantage small business in the mortgage industry. We look forward to continuing to work closely with the committee to clarify the intent and impact of this provision. We thank Chairman Frank and Ranking Member Bachus for requesting a GAO study on the causes of foreclosures. This recently released report confirms that problems in the mortgage market VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00107 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 102 today cannot be traced to a single source. Everyone participated and no one single participant is to blame. We also have grave concerns on Title III of H.R. 3915. The language essentially prevents all but the perfect borrower from being able to obtain affordable financing. We find this unfortunate, as a key objective of many fair lending laws is to expand access to homeownership for low- to moderate-income and minority home buyers. The supply of funds is now very tight. A de facto Federal usury ceiling will tighten the market even further, denying funding to underserved markets. Tempered responses and proposals are critical in the market that is already prone to overreaction. Although not specifically addressed in H.R. 3915, we commend Representatives Kanjorski and Chairman Frank and others for proposing the Escrow, Appraisal and Mortgage Servicing Improvements Act. NAM supports this effort in this bill. In crafting proposals, we must remember that the mortgage industry is a business and that the market participants compete. NAM looks forward to continuing to work with this committee as well as respective regulators on accomplishing solutions that are effective in helping consumers without hurting small business. Thank you, and I’m happy to answer any questions. [The prepared statement of Mr. Savitt can be found on page 281 of the appendix.] The CHAIRMAN. Thank you, Mr. Savitt. Finally, Mr. Don Lampe from Womble Carlyle Sandridge and Rice. Mr. Lampe. STATEMENT OF DONALD C. LAMPE, WOMBLE, CARLYLE, SANDRIDGE AND RICE, PLLC Mr. LAMPE. Mr. Chairman, thank you for the opportunity to be here today. And I will be brief, because it has been a long day and everyone here has been very attentive. I have been involved on behalf of industry trade organizations, mortgage lenders and others, either as a legal consultant or registered lobbyist in the enactment of many State mortgage laws, recently including laws in Georgia, Kentucky, Tennessee, Oklahoma, New Mexico, Ohio, Rhode Island, Minnesota, North Carolina, and Montgomery County, Maryland. Because much of the legislation, and I’m speaking of course of H.R. 3915 that the committee is considering today, is based on residential mortgage lending laws in North Carolina, I hope to be able to respond to the committee’s questions regarding our experiences in North Carolina. And, in this regard, North Carolinians are proud of the leadership, thought, and passion that Congressman Melvin Watt and Congressman Brad Miller of this committee have brought to the issue of predatory mortgage lending. As a legislative body, you are faced with tough policy choices as to what you should do about what is being described as the mortgage mess, the subprime meltdown and the foreclosure crisis. As you know, Americans are looking to Congress to lead the country on a safe path through the mine field that is residential mortgage finance today. In the brief time that I do have, I would like to make three points that in my view bear additional attention by this committee VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00108 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 103 as it considers the legislation. These points are built around a central theme. First and foremost, it is critically important that any legislation achieve the appropriate balance between providing strong and effective consumer protections while preserving access for consumers to fairly priced, nondiscriminatory, lawful, and appropriate mortgage credit. The three points are as follows. And, Mr. Chairman, in accordance with your opening statements, I offer these comments constructively to you and to Congressman Watt, who is also a sponsor of this bill and to the committee. The first point is, as you have heard today, this legislation applies across the board to all residential mortgage loans. While there may be agreement that unfair mortgage lending practices, particularly when coupled with higher priced or risk layered consumer mortgage products cannot be condoned and should be legislated out of existence, it is far less clear that all borrowers of any loan secured by their dwelling need or want additional across-the-board legal and regulatory restrictions. My second point is that it appears that the design of the statute, particularly as to liability, is designed to mitigate legal risk to loan originators and loan purchasers. This approach assumes that avoidance of litigation risk, rather than prudent yet flexible lending standards, is what should drive market conduct. Responsible compliance-oriented lenders, the likes of which we would like to see more of in the market, find litigation to be an anathema and have no desire to build compliance policies and procedures simply on choices that minimize damages in lawsuits. My final point is that we observe in the bill and again, trying to comment constructively here, that the bill ironically in pointing away from flexibility and innovation in the mortgage market, because we think this over-aggressive innovation got us into this mess, the legislation may actually be at odds with accepted mandates of fair lending and nondiscrimination in mortgage lending. At one time in our history, too many lenders knowingly discriminated based on suitability of particular home mortgage borrowers, using factors that at the time seemed, ‘‘reasonable,’’ and ‘‘in good faith.’’ Today, such rationalizations in the name of discussion are totally unacceptable. Yet the legislation appears to mandate credit determinations based on a list of factors that must be considered to the detriment of other factors that could actually benefit a particular borrower. In closing, I make one closing comment, and it does appear, even though we have not had much time to study the bill, that I believe it would make sense for this committee and the Congress to consider whether consumers and lenders alike are better off and better served by the relative simplicity and uniformity of central, unifying Federal standards in any comprehensive mortgage lending law reform. Again, thank you for having me here today and I am happy to answer any questions. [The prepared statement of Mr. Lampe can be found on page 241 of the appendix.] The CHAIRMAN. Thank you. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00109 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 104 Let me just begin, and this process has been useful. Mr. Lackritz, the statute of limitations issue that you raised, our colleague from Kansas, Mr. Moore, and I talked about that on the floor. And I think he made the point, obviously, he has had discussion, I think he makes a very good point, and that is an example of something that I think we will be able to accommodate and tighten up on the statute of limitations. Obviously, uncertainty is a problem. There are other areas in terms of the standard, again, I think we have an agreement on the goal about what kind of loans you don’t want. We will work on it. I do have to say on preemption, people have said we must have a uniform Federal standard. Do we have one today? Do we have a uniform Federal standard governing lending? Mr. Lampe, you say we don’t. Does anybody think we have one today? Why didn’t you ask us for one last year? Mr. PFOTENHAUER. We did. The CHAIRMAN. What, for a uniform Federal standard? In what form? Mr. PFOTENHAUER. We were strong supporters of Mr. Kanjorski’s bill, Ney-Kanjorski, which put forward a uniform consumer credit standard. We have been asking the committee for this standard for 6 years. The CHAIRMAN. And it would be—and I will say I had not seen that one in particular. I mean, we have State banks run by State bank regulators. I am trying to understand what a uniform standard means. Does that mean that if we put in a Federal standard, that the State bank regulators would then have to administer that Federal standard? They would have no flexibility to deviate from that? I am talking now about State-chartered banks. Mr. ROCK. Yes, I think they would have to. That exists currently with respect to other Federal standards are administered by State bank regulators. The CHAIRMAN. So what you would like to see is a uniform set of standards for mortgages that would apply to every State and the State bankers—I guess the question is why? Now here is the issue for me. With regard to the securitizer liability, I think there is an argument for uniformity because you have one national market. And it would be conceptually possible to require a uniform standard from which there was no deviation as part of the securitizer liability package, namely the safe harbor. But what is the harm done if in other areas the State decides that it is going to enforce stricter standards? What is the public policy argument against that? It wouldn’t affect the safe harbor, it wouldn’t affect securitizer liability. What is the public policy argument that says no State should be allowed to impose a stricter standard? I say that because, as we talk here, I think there is a great deal of uncertainty. We have said no one can be dogmatic. We are going to define what is suitable and what isn’t suitable. Why should there not be for the States and their residential property mortgages, as long as it doesn’t affect the securitizers’ liability, why shouldn’t they have some flexibility? What is the harm that is done there? VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00110 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 105 Mr. ROCK. Well, I think you make a good point. I think it would be an overstatement to say that unless we have a uniform Federal standard, you know, that will destroy the secondary market. I think that would be a gross overstatement. We would prefer a uniform standard because we think that that will promote a very liquid secondary market. The CHAIRMAN. Let me say this, Mr. Rock. I want to separate them. To the extent that it impacts directly on the secondary market, I agree. I do think there is an argument for uniformity there. So I would say yes, for the safe harbor definition, there ought to be uniformity. But over and above that, if a State says, and here are the standards we are going to put into the mortgages, I don’t see what Federal imperative says they shouldn’t do that. Mr. ROCK. I think to the extent that you have greater deviation from a uniform standard, we risk some damage to the secondary market. To the extent we have deviation from that. I don’t say that it instantly— The CHAIRMAN. How does that hurt the secondary market? Here is the deal. For purposes of qualifying for the safe harbor, theoretically, there would be a uniform standard. But not involving the safe harbor, just the States could say you can’t make these—Statechartered banks can’t make mortgages that don’t meet these standards. How does that hurt the secondary market? Mr. ROCK. This would be the impediment. I call to find— The CHAIRMAN. How does that hurt the secondary market? Mr. ROCK. This is the way. I call to buy a mortgage-backed security. They quote the rate. The yield is pretty high. I say, I want to know what the collateral is underlying that. They tell me it is a group of mortgages in the State of Michigan. I may or may not know what the standards are in Michigan. I may inquire and find out they are different from New York. That may— The CHAIRMAN. They would be higher. But we would only allow them to be higher. So I don’t understand how that would make you less likely to buy it. We are talking about higher. We are not talking about letting the States go lower. Anyone else? Mr. PFOTENHAUER. You could have a liability associated with it that would— The CHAIRMAN. What is the liability? What do you mean? Mr. PFOTENHAUER. Whatever a State came up with. There is certainly going to be an additional compliance cost associated with— The CHAIRMAN. Yes, if you want to do business in my State, you have to comply with my laws. That is not a great evoker of sympathy. Mr. PFOTENHAUER. We are doing it today. It is changing. We will do it more this next year if we don’t pass a bill in Congress, because States are acting. But it is driving up the costs of loans. The CHAIRMAN. Well, that is a distinction States can make. And the States can say—and I think, again, we are going to compromise at the standard. Everybody—there seems to be broad agreement that we should set a standard of what loans should be made and what shouldn’t be made. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00111 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 106 I don’t understand why we have to, approximating that standard, which we have to do, then have to say, and no State can deviate from that, no State can decide it wants more protection. Whatever happens to federalism in that situation? Mr. Lackritz? Mr. LACKRITZ. No, I think the distinction you started to draw is a worthwhile distinction between the secondary market and the origination piece. And I think it is terribly important, as you were pointing out, in the secondary market, to have uniform standards because you have interlinked global financial capital markets basically. From the standpoint of origination, it seems to me you can provide more flexibility as long as there is— The CHAIRMAN. Right, and from the standpoint of worrying about buying it, it presumably has a higher standard not a lower one, so it shouldn’t make you all that worried. My time has expired. The gentlewoman from Ohio. Ms. PRYCE. Thank you, Mr. Chairman. This has been a very long day, but a very productive one. And I appreciate the witnesses being so patient and we didn’t have that many votes, but by the same token, they did interrupt our first panel twice. So I want to go on a completely different tangent. Because as I sat here today, and I listened back in the office, it occurred to me, you know, we hear all these figures, 34 percent of homeowners have no idea what kind of mortgage they have, according to some polls. And is there a place, as we examine what to put in this bill, for a financial literacy component, something similar to you have to go to school to give haircuts, you have to go to school to adopt a pet, you have to go to school to buy a gun in some States. You know, you have to be prepared. This is the biggest financial decision most families make in the course of any of their lifetimes, and I don’t think that most people are prepared. I think that is part of what has happened. And so how do we do this? You know, Ranking Member Bachus’s bill has a suggested statement of mortgage facts that have to be on the front page, and then it says at the bottom, do not sign unless you understand this. Now that maybe is a good first step. But it is just one of hundreds of pages that somebody is supposed to understand before they sign. And how can we, how can you, how can the originators or how can the industry help America reach a level of literacy that they need in order to complete these complicated transactions? And you know, you can lead a horse to water, but you can’t make him drink. And caveat emptor and all that good stuff. But have you given that any thought and is there a way that we can help America get to where they need to be? Any and all of you can jump right in here. Mr. ROCK. Well, Congresswoman, we fully support anything that can be done to increase financial literacy. In fact, last week, the American Bankers Association conducted what we call Get Smart about Credit Day. We had more than 3,000 bankers across the country trying to help people with these very issues. Having said that, that we support them and that we are open to any other ideas, I think that it would be very difficult to mandate VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00112 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 107 something in advance of being—you know, your analogy to, say, getting a gun license or something, to mandate it, to say you must have ‘‘X’’ education or go through a course before you can get a home mortgage, I think that might put more burden on the consumer than the consumers might like. Ms. PRYCE. Well, they might not like it, but maybe they need it. Go ahead, Mr. Lackritz. Mr. LACKRITZ. First of all, you have identified a terribly important issue and one that, I know, we care a great deal about and have worked on for a long time, not just in the home finance area, but broadly speaking with respect to economic literacy and financial literacy. We clearly don’t want to license home buyers. Ms. PRYCE. No, and I agree with that. Mr. LACKRITZ. And we clearly don’t want to license investors. So what we do is we look, in the regulatory structure, what we try and do is we try and regulate the middle people, the intermediaries, basically, because they are the ones who are interfacing with the customers and the other side of the markets. And it works more effectively with educated consumers. Obviously, the better educated the consumers are, the better the whole system works. It’s a win/win for everyone. We have a program in the schools to educate kids about the capital markets and the stock market and it is wildly successful. Now, whether or not that translates over time into greater financial literacy, I am not sure. But I think those kinds of efforts in the schools, requiring economic or financial literacy will go a long way toward helping us educate consumers, because they are bearing much more responsibility for their own financial future. Ms. PRYCE. But it is a piecemeal, kind of everybody jumps in and has their own little program. And it is not, you know, uniform. I don’t know that it is getting us where we need. We have been talking about it. Kurt? Mr. PFOTENHAUER. You know, there is a demand for this. We had 1.6 million hits on our Web site last month alone, homeloanlearningcenter.com. People want to know what goes into a home loan. There is also an element of the market that will teach people. If we can streamline the mortgage process and people go through it and they actually compare one product to another, and get other lenders to teach them what the guy next door isn’t telling them or what a better deal is or what a good deal is, and you do that a little bit, people learn a lot and you get better results. Finally, you can look at the schools, and I know that is beyond the purview of this committee. Ms. PRYCE. What about just putting the terms of the loan on the monthly statement? You know? Some people just don’t even know what they are. Would that be burdensome or would that be bad in any way to re-inform the consumer each month, you know, what the term is, when it is due? Are there prepayment penalties? Those type of things. You know, a lot of people, obviously 34 percent, don’t even know. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00113 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 108 Mr. SAVITT. Congresswoman, one thing that we can do is clearer disclosure. There should be not only clearer disclosure, simpler disclosure and uniform disclosure. This will make it easier for the consumer to understand exactly what program they are getting into, what type of loan they are getting into. The problem we have today is, depending upon who the originator is that you get your loan from, there are different types of disclosure. As far as financial literacy goes, I agree with this gentleman here, that financial literacy should start in the schools. In the school district where my children go, there is financial literacy. Ms. PRYCE. Well, but that is beyond our purview. And it should, but it isn’t happening. Americans aren’t educated to the extent they can. Does anybody object to requiring the loan terms on the monthly statement? Is that— Mr. ROCK. I think it would depend upon the level of detail required. I mean, a lot of those loan statements currently do include the things that you have just listed. Ms. PRYCE. I have four and none of them do. Mr. ROCK. Well— Ms. PRYCE. And so I just— Mr. ROCK. Ours do and many that I have seen from others do. But I think it would depend upon the level of detail. Would it be onerous not to have maybe the four or five things that you have mentioned. But if it went beyond that, it could perhaps be onerous. Ms. PRYCE. Well, my time has expired. And thank you. This is a very, very broad bill and we only touched on a very small part of it. So, thank you, Mr. Chairman. Mr. KANJORSKI. [presiding] The Chair recognizes himself. I ask unanimous consent that the written statement of Maureen McGrath on behalf of the National Advocacy Against Mortgage Servicing Fraud be admitted into the record. Is there any objection? Hearing none, it is so ordered. I want to compliment everybody, particularly this panel for waiting around as long as you did to get here. We appreciate it. If I had to say anything, having gone through this frightful experience in the past, as you all know, I wanted to thank and compliment the chairman and two of my colleagues that put a lot of effort in to get this far. There are a few elements in my estimation that are important, one, that I am particularly interested in finding some way of getting a standard, a national standard that we can rely upon. I think it is important. And coming from the other angle of what Mr. Frank asked about, first of all when we went into the issue a number of years ago, we found that there were a multiplicity of municipalities that had exercised their right under their individual State laws to pass mortgage rules and regulations. These rules and regulations now require the securitizers to have counsel go back and examine every municipal code to see whether or not they had enacted something VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00114 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 109 that affected the value of that mortgage or whether the mortgage complied with the local ordinance or statute, which I think is ludicrous. Two, the lack of uniformity drove—I think it was New Jersey and Georgia—the subprime market to almost collapse, because they were just excluded from securitization. Why bother to mess with them if they are too expensive and too difficult to deal with? I think that is where the North Carolina statute came from. It finally found the ground on which people felt comfortable in dealing. On the other hand, feel that there is another side to that. And then when you look at the law of mortgaging, I was just telling my good friend, Maxine, here, if I were a banker, I would not write a mortgage in California if my life depended on it. Because as I understand the law, as compared to Pennsylvania, if you are dissatisfied with your mortgage and your property, all you have to do is hand in your keys and whoever gave you the mortgage gets the property and you are excluded. Now, that does not happen in Pennsylvania. In Pennsylvania, the property is just a partial support asset for the mortgage. You actually have to have a personal judgment note with all your assets supporting the property. So, as a result, when you look at Pennsylvania borrowers, the property, or the real estate is the last asset that they will put at risk, because to escape it is practically impossible. It follows you to the grave. On the other hand, in California, when there is a collapse of the price of the market, people look across the street and see a house selling for $100,000 or $200,000 less than they have on their mortgage, they are apt to say, ‘‘Well, I will get out of this, turn my mortgage in and go and buy the house across the street and I have just made $200,000.’’ I see that happening in many States in the Union. I think what it boils down to is, is securitization good? Particularly, is it a useful tool in subprime areas? And I have mixed feelings on it. I will tell you some of them. I think we, the Government, both the Executive and the Legislative Branches, are to a large extent responsible for what is going on today. We encouraged, I remember, this magic formula—70 percent. We had to get homeownership of over 70 percent. Quite frankly, there are a lot of people who are not sufficiently trained or financially literate enough to become owners of property. And I will give you an example. I held hearings in Pennsylvania, and some residents from New York came in and bought homes in the Pocono Mountains of Pennsylvania. And the one lady at the hearing said, ‘‘Well, I am incensed. After I bought my home, the refrigerator broke 18 months after I bought it, and I called the Realtor and asked, what are you going to do about replacing this refrigerator?’’ And he said, ‘‘Nothing, lady.’’ And she said, ‘‘Well, that’s just wrong; it’s his responsibility to replace that refrigerator.’’ And, you know, it is understandable, I guess. If that is what— she just did not realize she was in ownership as opposed to tenancy. I think that is an unfortunate reflection of what we are dealing with. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00115 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 110 But when you are in that margin of the market, the last 2, 3, or 4 percent of homeownership, they should not be denied homes, but we have a greater responsibility to make sure these people are not abused or misused. They are certainly subject to a lot of abuses out there, and we have seen so many of them. Then I think of some of our testimony earlier. If I have to condemn anything in this system, there are probably 8 or 10 steps from the person who originally attracts a buyer for a piece of property, either a Realtor or the owner of that property, and then going through the financing operation until at the bottom some investor buys that bond that is securitized by that mortgage. If you think about it today, nobody along that line, eight or nine people, have any skin in the game. Everybody makes a profit if they sell a higher cost mortgage, if they sell something overpriced, a bad appraisal, all kinds of things, they all gain more. But nobody has any skin in the game to lose anything until you get to the last guy on the totem pole, the investor. And even he gets skin for the last time. He did not buy a bond; some money manager bought it and got a commission on sticking him with something that said it is a triple A when it was junk. And now suddenly, all over the world, these people are looking at us here in the States and saying, ‘‘How can you trust these people?’’ And that is the question. What we do in this bill and as we correct the subprime and the whole operation of securitization, I really believe is a matter of faith in the United States of America. There is an implied judgment around this world that if we allow securities to be securitized and sold worldwide, somebody is looking over the fact that these are not boiler room hot potatoes that have no value. And we failed to do that. We failed to do it here, gentlemen, your institutions fail, the regulators that were here before you, they fail. All of that fault we have endured. What do we do about it? I would hope that your testimony today will help Chairman Frank find some of these important basic areas toward achieving a national standard. I think that is important. I think if we are going to have a continuation and the use of securitization in mortgaging in this country and indeed some day around the world, we are going to have to find a better way, more transparency, more security, less abusiveness in the system. I want to thank you for your testimony. I had a few questions but I do not have the time to ask them at this point. I just had to blow off my steam. I have been listening to you up to this point. The CHAIRMAN. The gentleman from Louisiana. Mr. BAKER. Mr. Savitt, I’m an old real estate guy, emphasis on old, and I know you mortgage guys well. So you’re going to have to help me understand what’s going on here. Let’s zero in on DTI and how that calculation works, and going to a mortgage broker’s web page, I left here a minute ago when Mr. Sherman was talking because it triggered something and I had to go look it up to make sure I was right. Typical, conventional loan criteria for a DTI uses the 28:36 ratio, where 28 percent, typically of gross income, is allocated to house note and principal. Is that still the case? Mr. SAVITT. That’s the standard rule, but you have to remember that every situation is different. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00116 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 111 Mr. BAKER. That’s okay. Let me keep going, because I’m on a roll. Mr. SAVITT. Yes, okay. Mr. BAKER. The second part of it, the 36 part, goes to the cost associated with operation of the household as car payment, credit card, child support, any of the obligations that typically go with a mortgage. Mr. SAVITT. It includes not only your monthly payment, but again your new mortgage payment as well. That’s all included in the DTI. Mr. BAKER. So when they’re doing this calculation, I’m using now for members a $42,000 annual salary, a gross of $3,500 monthly. The calculation they came to was that $980 can be applied directly to principal and interest, and $1,260 can be applied to recurring housing expense for a gross expenditure of $2,240 out of a gross income of $3,500. You have to assume 15 percent is a minimum, State and Federal tax load; so when you crack it back down on a conventional loan, you have a household with about $3,000 max coming in a month with an ability to have $2,240 in total obligations. I took that number and worked it through to get what percent of gross income that actually turns out to be. A typical, conventional loan at the max is about 64 percent debt to income ratio. What was really interesting was I went to my old FHA friends, and they have a $2,941 rule, FAS forward, that’s $2,450 a month, which is a 70 percent debt to income ratio. My observation here is is we adopt the underlying bill without some modification. FHA loans are outside the safe harbor. Now, that’s problematic. That has to have a real market consequence to people, because when I apply the numbers in the bill to the same set of circumstances, that $1,750 a month, housing and housing related expense. So I merely wanted to bring this up. And, is there anything I’m missing, Mr. Savitt, in that descriptive analysis of how markets function today? Are the FHA numbers basically still on target because programs change? Mr. SAVITT. They are still on target, but again, you know, even though that is a high debt to income ratio, it depends upon the borrower’s financial circumstances. Mr. BAKER. Right. They may have $200,000 in the bank from a prior home sale. They may have an investment portfolio. They may be a Federal employee with a TSP account with several hundred thousand dollars. Mr. SAVITT. Right, there are several compensating factors. Mr. BAKER. They may have paid a note for 22 years and never missed a monthly payment. They may have a sick uncle who has a bunch of money and they know they’re going to come into good fortune here. I mean, there are all sorts of reasons to look at each individual’s borrower’s assets and determine whether in this unique set of circumstances, he was appropriately placed in a financial obligation which he can meet the terms over the long haul. I think the rub has been that perhaps that due diligence didn’t always take place in every case, and I didn’t bring them with me. I should have, but I went to some of the Web pages talking about VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00117 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 112 ‘‘no-doc’’ loans, where they take pride in announcing they don’t verify your income. Now, that to me has gotten outside the bounds of propriety, and we really need to deal with that. But I think we need to be very careful as we go forward in drafting this proposal as to the real market consequences to borrowers who otherwise have access to credit now, who will not, if we adopt the provisions of the bill as it is currently proposed. Do you agree, Mr. Savitt? Mr. SAVITT. Absolutely. Mr. BAKER. Thank you. You’re a great witness. I yield back. The CHAIRMAN. The gentlewoman from California. Ms. WATERS. Thank you very much, Mr. Chairman. It’s been a long day and I thank you for not only holding this hearing but for the way that you have entertained all of the members who have participated and the patience that you have exhibited in trying to help us gain information about how to do the best possible job in dealing with not only the problem that we are confronted with today for the future, but also predatory lending. To the panel that’s before us, you have a lot at stake here. You have a lot at stake here because we are discussing banning yield spread premiums. We are discussing no-doc loans, pre-payment penalties, teaser rates, securitized liability, on and on and on. I want to get right to the part of the bill that basically bans yield spread premiums, and I would like to start with—is it Mr. Rock? I can’t see from here. Mr. ROCK. Yes, yes. Ms. WATERS. I don’t know if it was you who started to talk about how perhaps this is not the right thing to do, that you would be placed at great disadvantage. And I want to know is that because you think that the requirements that we place on the banks for their employees would not match the requirements that we place on you relative to, number one, their need to be licensed, and number two, how they are paid or not paid for their loan originations? Mr. ROCK. No. I did not make any of those remarks that you’re referring to, but just to comment on yield spread premiums, in most circumstances that I am familiar with where they’re used, I think it’s a bad practice. Ms. WATERS. I’m sorry. He just reminded me that I’m really speaking to the brokers and not the bankers on this. So who would like to respond to that? Mr.— Mr. SAVITT. Savitt. Ms. WATERS. Okay. Mr. SAVITT. That’s me. [Laughter] Ms. WATERS. All right, Mr. Savitt. Mr. SAVITT. Congresswoman, first of all, I think there’s a great misconception about yield spread premiums. Yield spread premiums, and I’ve been a broker for over 25 years, yield spread premiums are a very useful tool in helping its consumer, a borrower, get into a property with less money up front, less money for closing costs, less money for down payment. And our brokers have been accused of using yield spread premiums as an incentive to make more money, and I think what people are failing to recognize is every VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00118 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 113 time you raise your yield spread premium, you’re raising your interest rate. If you raise your interest rate too high, you’re not going to get that transaction. Somebody else, another originator, will get that transaction. And the fact that brokers do, depending on who you talk to, anywhere between 50 and 70 percent of all the residential loans in this country, that tells you that brokers are not doing that. You may have some originators, not just brokers. But you may have some originators, possibly abusing back-end fees, whether its a YSP or, of course, the lenders all get service release fees. We disclose this incidentally. Nobody else in the market discloses it. We’ve been required by HUD since 1992 to disclose yield spread premiums on the good faith estimate, and also on the HUD 1 settlement statement. So I’m sure you understand how frustrating it is for us with all of the news accounts that have come out over the past several months that brokers must disclose all of their fees up front. There’s no mention about lenders doing this, and it’s kind of ironic, because brokers are the only ones who disclose their fees. Ms. WATERS. So, if lenders had to disclose, would that make you feel better? Mr. SAVITT. If lenders had to disclose, it would make it more transparent to the consumer. There would be less confusion. There are a couple of FTC studies that came out and said because brokers are the only channeled distribution that disclose yield spread premiums, the consumer is often confused into picking the more expensive transaction. He looks over the broker, lists the yield spread premium on the good faith estimate. He thinks that as an extra charge. The consumer thinks it’s an extra charge when in fact it’s not. When the FTC conducted their study, I forget how many people they actually had involved in the testing, but in most cases they purposely made the lender good-faith estimate more expensive than the broker good-faith estimate, but consumers more often than not picked the broker good-faith estimate as the more expensive deal because they were confused by the chart. Ms. WATERS. Okay, well, let me just say this. And I’ve been one of the supporters wanting to ban it, and I’m still not sure why we shouldn’t ban the yield spread premiums. I hear what you’re saying, but you haven’t made the case why yield spread premiums allow you to assist the borrower more with the borrower paying less money. I don’t get it. Mr. SAVITT. Well, Congresswoman, I have a rate-sheet here from the West Virginia Housing Development Fund. That’s one of the States I’m licensed in. This is a first-time home-buyer bond program. West Virginia, as Congresswoman Capito mentioned before, has the highest rate of homeownership in the country. They also have one of the lowest foreclosure rates in this country. We’re ranked number 47th in a country in which we’re all very proud of. Of course, even one foreclosure is one too many. But this is a government agency paying their lenders and brokers either a YSP or an SRP because they understand that this helps consumers become homeowners. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00119 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 114 Today, consumers have very little savings. They have very little money to get into a house. So by being able to use or take the benefits of a yield spread premium, it helps them become homeowners with less up-front in cost for their down payment in closing cost. And as I mentioned before, lenders get the exact same thing, but they do not have the requirement to disclose. Mr. ROCK. I would just point out with respect to that point that the brokers—an essential difference is that the brokers—hold themselves out as representing the buyer, whereas, the lender does not hold themselves out that way. Mr. PFOTENHAUER. In addition, there’s a very different set of market disciplines on someone who works for a commission versus someone who lends their own money, and that’s the key difference between. The CHAIRMAN. Would the gentlewoman yield to me? Ms. WATERS. Yes, I yield to you. The CHAIRMAN. Sir, how does that help the consumer? How does paying a yield spread premium help the consumer? I guess I don’t fully understand that. Mr. SAVITT. First of all, Mr. Chairman, when a consumer calls shopping around for an interest rate, what they ask for is a zero point rate, whether it’s a broker or a lender. That’s what they ask for. So we receive a yield spread premium for that rate as a lender would receive a SRP. The CHAIRMAN. Well, then a yield spread premium—am I wrong that we’re talking about your compensation? Who pays you the yield spread premium? Mr. SAVITT. The lender. The CHAIRMAN. The lender does? Mr. SAVITT. Correct. The CHAIRMAN. And what do you do to earn a yield spread premium from the lender? Mr. SAVITT. We originated the loan, we processed the loan. We prepared the loan. The CHAIRMAN. Yes, but that’s basically. When does the premium come in? Mr. SAVITT. The premium is the difference between the wholesale and the retail rate. The CHAIRMAN. So that the higher the case, what’s the relationship between what the lender charges the consumer and the yield spread premium? Mr. SAVITT. I don’t understand your question. The CHAIRMAN. Is there a relationship between the yield spread premium and the rate the lender charges a consumer? Mr. SAVITT. There is, just the same as in an SRP. The CHAIRMAN. Well the higher the rate the lender charges, the higher the yield spread premium? Mr. SAVITT. The higher the rate, the higher the yield spread. The CHAIRMAN. And explain to me how that helps the consumer. Mr. SAVITT. I’m sorry? The CHAIRMAN. Explain to me how that helps the consumer. Mr. SAVITT. Because consumers all want for the most part zero points loans, so if you take a lender and you take a broker, and let’s say the interest rate for a 30-year fixed is 61⁄2 percent, they’re VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00120 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 115 both making the same amount on that loan. They’re both being paid for that loan. When a lender originates a loan, and it’s not just brokers that broker loans. When any originator— The CHAIRMAN. I’m lost. You lost me. Tell me how it helps me as a consumer if the person who I’m dealing with is going to make more money if I pay a higher interest rate? Mr. SAVITT. Less up-front money; it’s less money out of their pocket. Ms. WATERS. How? Mr. SAVITT. And in some cases, it may pay for their closing cost. The CHAIRMAN. Well, that’s always the case, that the higher interest rate is always off-setting lower closing costs and lower up front? Is that always the case? That’s a simple question. I’m skeptical of that. I’m skeptical that there’s always that relationship. Mr. SAVITT. Well, the consumer has the choice of paying points too if they want to pay the origination fee. The CHAIRMAN. I know, but that’s not the question. Is it never the case that everything else being equal, the higher the interest rate I’m charged the more money the yield spread premium will be? Mr. SAVITT. On any YSP or SRP, yes. The CHAIRMAN. Okay. I don’t see how that helps me. I mean, if everything else is being equal, say you can say points. Mr. SAVITT. Mr. Chairman, I can’t stress enough, it does help consumers. The CHAIRMAN. How? If everything else being equal the higher the interest rate, the higher the yield spread premium, how am I helped? Mr. SAVITT. Because it’s still a competitive rate that regardless of who the originator is, it’s still a competitive interest rate. And the benefit is— The CHAIRMAN. No, you’re missing my point. You say it’s competitive, but it would have been lower. It does not give the broker an incentive to find me a loan with a higher interest rate? Mr. SAVITT. No. It doesn’t, because the consumer always has a choice. We put options in front of the consumers. They always pick what’s best for them. The CHAIRMAN. And it does not incentivize the broker at all? Mr. SAVITT. No. It’s not. It’s something that benefits the consumer, and, again, we have a State housing agency that oversees it. The CHAIRMAN. Well, the fact that a government agency does something does not always immunize it, you know, from the charge. I assume you would agree with that. Well, I’ve taken too much time. Mr. SAVITT. Can I say one more thing? The CHAIRMAN. Quickly. This is the gentlewoman’s time. Ms. WATERS. Let me just say, because I know that you want to move on, that you have not made the case. And this is not what we understand as we have dealt with this issue. And so I’m looking for ways to really understand whether or not the consumer is disadvantaged, whether or not there is steering that would cause the VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00121 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 116 originator to be able to make more money based on the higher priced product, and you are not helping us very much. Mr. SAVITT. Congresswoman, I think there’s a misconception. You’re talking about the anti-steering provision in the bill. We’re talking about two different things here. We’re talking about YSP as indirect compensation and we’re talking about receiving extra compensation for steering somebody into a loan that has no benefit for them. The National Association of Mortgage Brokers agrees with what you have in the bill as far as banning additional compensation, but we want to make sure that it is not being construed as our normal indirect compensation. This is something that is an additional amount of money, because if it’s a zero point loan—and this is the easiest way I could describe this—if it’s a zero point loan, regardless of who the originator is, whether it is a mortgage broker, a bank, a mortgage banker-lender, whoever it happens to be, everybody gets money on the back end of that loan, if it is a zero point loan. That’s where they receive their compensation, indirect compensation. Ms. WATERS. Well, let me just say that under Section 103 our anti-steering section provides that no mortgage originator can receive and no person can pay any incentive compensation, including yield spread premiums that is based on or varies with the terms of a mortgage loan. Mr. SAVITT. But that should not be construed as indirect compensation for a broker. We’re talking about in that provision, we’re talking about additional compensation for steering somebody to a certain type of loan. That’s not what we’re talking about. When brokers are trying to protect the yield spread premium, it is indirect compensation. It does definitely provide a benefit to the consumer, just like a lender receives a service release premium for doing the exact same loan. The only difference is we disclose that. The consumer has full disclosure at the time of application and also at the time of closing. The CHAIRMAN. The gentleman from Texas. Mr. HENSARLING. Thank you, Mr. Chairman. As a conservative, I typically prefer non-legislation to legislation, however, in this particular situation I think that it’s the exception and not the rule and that some legislation is in order. I think I’ve heard some hopeful comments from the chairman that perhaps his bill is a work in progress. I understand that much of this legislation appears to be prescriptive, dealing and trying to ensure that we don’t replicate the situation that we see today. Having said that, I continue to be concerned that we’re not out of this forest yet. If we take a snapshot of where we are, it’s alarming. I’m not sure we’d quite call it a crisis, but when I see $600 billion in adjustable rate subprime mortgages due to readjust in the next 2 years, I’m certainly convinced we’re not out of the forest. And so I guess my concern here is if we pass this bill in its current form, as many folks attempt to refinance over the next couple of years, what exactly is going to happen to liquidity in both our primary and our VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00122 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 117 secondary markets. And I think that Mr. Lampe saw some testimony there where you commented on this phenomenon. Mr. LAMPE. Yes, Congressman, I think when you strip away some of the legalities of this and you look at the presumptions that could provide a rebuttal to it and the safe harbor, and so on, I think the message of this bill is don’t make a loan unless it is a qualified mortgage or a qualified safe harbor mortgage, because the secondary market will not want to absorb it. And so, the other aspect of this, which I don’t think this is controversial, if you lower the high cost home loan triggers as has been done in provisions of this law, then any loans that are above those triggers won’t be made. So, I think the bill on its face and I think the bill’s intent was to restrict loans outside of these safe harbors or above these thresholds from being made. And then the only question is how big a piece of the market is that? Mr. HENSARLING. Now that is a good question. Does anybody else on the panel wish to comment how much a piece is left out there for all these people trying to refinance? Any takers? Mr. Lackritz? Mr. LACKRITZ. Yes, Congressman. I think we just don’t know that yet. Clearly, the design of a safe harbor acts as a magnet for underwriting mortgages and the issue of how many non-safe harbor mortgages will get written eventually. Markets react over time to external and exogenous events, and so markets will obviously react here. It’s just a question of how long that will take, and whether or not the variety and the availability of the credit will continue to be as expansive as it has been. Clearly, it’s going to restrict. In the short run it’s going to narrow the availability of credit in those particular areas. Mr. HENSARLING. Mr. Pfotenhauer? Mr. PFOTENHAUER. Just to give you one, I’m sorry. It’s not a definitive answer, but just to give you a little bit of scope in what we are dealing with and I would agree that we can’t quite define the issue today or the impact, but there were, according to HMDA data, there were 10 million loans made in 2006. 3.9 million of those are basically subprime, all-day loans. So, that’s the universe; you know, nearly 39 to 40 percent where we have a big question mark over whether or not those are actually going to get made. And they’re going to be cross-pressured in different ways by this bill going forward. Now, to be fair, there isn’t a lot of liquidity in the market today in the private label, subprime space. And so we are talking about what happens going forward. The market is already disciplined very severely, the players in this area, and has yet itself to come up with the mechanisms that allow it to go forward. It will. It will figure out a way to make these loans again with or without Congress, but how far it goes in that and how far it goes in the future is really what this panel is debating. Mr. HENSARLING. Mr. Pfotenhauer, in speaking of some of your concerns with the legislation, I think you used the phrase ‘‘soft suitability standards.’’ Could you elaborate on your concerns? Mr. PFOTENHAUER. Section 103 and Section 104 contain concepts like best loan for a consumer, most appropriate loan for a consumer, and pretty much appear to turn that work over to a regulator. Having had some former regulators on our staff look at that VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00123 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 118 language, they feel that the language might compel the regulator to try to come up with some sort of suitability formula. You know, that really gets you down a slippery slope with the plaintiff’s bar, because what’s a suitable loan is really something that we think should be determined by borrower, not by the lender. And if the lender has anything beyond the duty of care, which is a reasonable thing to have provided it’s structured correctly, then you’re really working in reverse of your intentions on this and potentially shutting down lending to the very people you want to help. Mr. HENSARLING. Okay. I probably don’t have an option, but I think I’ll go ahead and respect the 5-minute rule anyway. The CHAIRMAN. I thank the gentleman. The gentleman from North Carolina. Mr. WATT. I think it was worth sitting here all day just to hear Mr. Hensarling say that this is an area that we need to do something in. That’s a radical statement coming from Mr. Hensarling. I don’t think I’ve ever heard that phrase come out of his mouth. So it was worth sitting here just to hear that. I want to go back to the issue that Chairman Frank raised about pre-emption, not that I’m expecting to convince anybody on this panel, but just to make sure that we have it on the record what my position is on that. I really think that’s kind of a smoke screen, because to the extent that we set a satisfactory Federal floor standard, if States get substantially out of line with their requirements, lenders are going to leave those States. Credit is going to be more expensive in those States and those States are going to have to come back to a responsible Federal standard, whether we called it a preemptive standard or not. That’s always been my position. The problem with Federal preemption from my perspective is that we can’t act and our regulators, nor certainly our legislative body doesn’t react quick enough to deal with changes that the market is constantly going through; and, so, there has to be for those entities that are outside Federal regulators, even if Federal regulators could react quick enough or if we could react quick enough at the Federal level to change the law, which we never would, there will always be somebody out there with a new product, a new process, a new something or another that is not regulated if we don’t leave discretion with the States to address those concerns. So, I mean, I’ve had this discussion with everybody from your industry just come through my office and I’ve said it over and over again, but I think for us to spend a lot of time arguing about whether we are federally preempting or not, when we set a responsible Federal standard, which I think everybody has kind of agreed now the North Carolina standard is if other States get too far away from that standard, they’re going to pay a price for it, either in the form of higher interest rates or in the form of loss of available money to loan in that State. So I just don’t think that’s something I’m going to spend a lot of time talking about, and I think there are other ways to address the concerns about whether we pre-empt or don’t pre-empt or whether we partially pre-empt. But clearly we have to leave the ability of the State to be able to react in areas that are not feder- VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00124 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 119 ally regulated. And we have to leave the States the ability to react when they can react quicker to changes in the market. So those are the two things that I want to put down as markers. Mr. Rock, you stated and I see you and Mr. Savitt, it’s going to be hard to reconcile your views, I think, because you say you need supervision of the non-regulated entities you all have supervised and you have all of these people out there who are not supervised. So how would that look, that kind of supervision to the non-regulated that you testified? And I think that’s the phrase you used. Mr. ROCK. Well, banks are highly regulated and highly supervised. I mean, the second half is very important because we are being examined all the time to make sure that we are complying with the rules and regulations that we must confirm with. I think that the segment of the industry, the non-bank segment of the originators, should be brought up to that level, and I think that’s the way to achieve equality. Mr. WATT. Okay, so, if we brought brokers up to that standard, Mr. Savitt won’t be all that happy, but you think that would help to solve the problem? Mr. ROCK. I think it would, given the fact that non-bank originators presently originate, we estimate, approximately 58 percent of all home mortgages, and yet, that segment of the industry which initiates a majority of the originations is not subject to the kind of regulations. Mr. WATT. I have to give him equal time, because I know Mr. Savitt wants to respond. Mr. SAVITT. I think that there are 50 bank supervisors out there who would have a difference of opinion with Mr. Rock. Mortgage brokers are regulated. We’re regulated in all 50 States. I’ll use myself as an example. I am licensed by two different States. I have continuing education requirements. I have surety bond requirements, and I am examined on a regular basis. Mr. WATT. I’d feel better about that if the person who testified for your industry had been able to tell me who he worked for. I asked him, I mean, I’ll go back and show it to you in the record. I can’t remember who the guy was. I’m just asking do you represent the borrower or do you represent the lender and I never could get an answer out of him. Mr. SAVITT. The problem that we have is—well, not a problem— if somebody comes into a mortgage broker’s office, the individual that they meet with for their loan application is regulated by that State. If that same individual walks across the street to a bank and deals with the individual loan officer in that bank, that loan officer is not regulated. The bank may be regulated, and, we’ve heard things recently in the news that you need to deal with the institution that has the eagle on the outside of the building, because they’re FDIC approved. That’s fine, but we’re not talking about the lending side, and, on the lending side, they don’t go through as much scrutiny as mortgage brokers do. Mortgage brokers are under a magnifying glass. As I said, we’re regulated in every State. We are examined in every State, and there are proper safeguards to make sure that when VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00125 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 120 somebody comes into a broker’s office, they are dealing with somebody who is reputable. Mr. WATT. Okay, well, my time is up. I just want to be clear that if I’m walking into a lender, I at least know that they are not currently being hired to represent my interest. I’m trying to get a loan from him. When I walk into a broker’s office, I think 99 percent of the people who walk into the broker’s office think that broker is working for them. Mr. SAVITT. Can I just answer? The CHAIRMAN. Quickly. Mr. SAVITT. Brokers still have an ethical responsibility and we exercise that ethical responsibility every day to our customers. That’s why we have the amount of business that we do, because we live in the communities. We work with these people; our children go to the same schools. Mr. WATT. I yield back, Mr. Chairman. The CHAIRMAN. The gentleman from Connecticut. Mr. SHAYS. Thank you, Mr. Chairman. Thank you for holding these hearings. I’m not used to seeing you penned-down for a whole day. How are you holding up? The CHAIRMAN. Oh, I’m in a pretty bad mood. [Laughter] Mr. SHAYS. Well, actually, you look like you’re in a bad mood, but you’re a good man. I want to say that when I view this I feel like there was a noticeable earthquake and then we felt after shocks; and what’s kind of looming is this tidal wave. And I asked the first panel when they thought that title wave of foreclosures happens and the panel was basically saying, you know, it started and that the second and third quarter of next year. I’d like to ask each of you when you see the bulk of foreclosures coming to the marketplace, if we just start right down the line. Mr. ROCK. Well, I would agree with much of what was said before. I think a lot of the rate resetting is one of the causes in some of these situations. I think a lot of the rate resetting has begun now. Mr. SHAYS. I’ll ask you by cause. I just want to know what happens first. Mr. ROCK. Now, and I would expect it to continue through next year. Mr. SHAYS. I’ll come back to you though. Mr. ROCK. Yes, sir. Mr. PFOTENHAUER. We at the Mortgage Banker’s Association think that we will work through this and start to turn around by the third quarter of 2008. Mr. SHAYS. But will it be bigger before it gets smaller? Mr. PFOTENHAUER. No, actually, we are through the biggest part. It’s not going to drop dramatically. It’s going to be somewhat high next year as well. Mr. SHAYS. So, basically, you think the tidal wave has hit? Mr. PFOTENHAUER. Yes. Mr. LACKRITZ. We think it’s peaking in this quarter now and that it will start to taper off and get better next year. Mr. PFOTENHAUER. I would agree it’s leveling off. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00126 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 121 Mr. LAMPE. Yes, we’re at the front end of it now and it will continue into the first and second quarter next year. Mr. SHAYS. First and second quarter—we were talking about the renegotiations of the loans and the explanation to me was that since some of these are packaged, that presents a bit of an issue in terms of who services the loan. And the question I’m asking is would the renegotiation of the loans actively now be something that will mitigate the ultimate effect of this? Mr. ROCK. It’s such a multi-party relationship. I think that’s very difficult. And Mr. Calhoun went through a valiant effort before to try to explain some of the difficulties, and I think it’s extremely difficult, Congressman. Mr. PFOTENHAUER. I think it can be said that servicers who are the ones in the front lines of loan modification have incentive and have means to modify loans. What’s not clear is how many people can be successfully modified into a new loan and thereby stay in their home and continue to make payments. It’s hard to put a number around how many there are that actually qualify for that, because the causes of foreclosure and delinquency are so varied. Mr. SHAYS. Right, but there is a huge incentive to not have the foreclosures. Mr. PFOTENHAUER. There’s an enormous incentive not to have a foreclosure today. Mr. SHAYS. Yes, sir? Mr. LACKRITZ. I would agree with that. Obviously, it’s not in anybody’s interest to have increased foreclosures at all. The challenge is to find the right balance in there because you have investors. You have securitizers. You have originators. You have borrowers and you have the taxpayers. And trying to balance that system as it’s evolved is a complicated exercise. So part of the point of, I think, this hearing, is to urge you to be very careful as you go through this. Because obviously, tilting the system in one way or the other, will have ramifications to all the participants in the system and may have ended up hurting the very individuals that you want to help. Mr. SHAYS. Thank you. Mr. SAVITT. I would agree with that as well. Mr. SHAYS. Thank you. Mr. LAMPE. I would agree with Mr. Pfotenhauer’s analysis. Mr. SHAYS. Mr. Rock, you wanted to make a point. What was the point you wanted to make? I interrupted you. Mr. ROCK. I was just saying it has a lot to do with rate resetting. That was my only point. Mr. SHAYS. With regard to a lot of these, you know, we pushed all of you to loan to people of color, minorities and so on. And in the process we took great pride that we’re seeing these loans being made, and, now, we realize that some benefitted and some have been hurt badly. But is it your view that some of these loans probably will be in the best interest for people just simply to walk away from the loan? Mr. PFOTENHAUER. Clearly, people are electing to do that today. Mr. SHAYS. Yes. VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00127 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 122 Mr. PFOTENHAUER. There are many people who got into a loan for very little money down. They maybe had a piggy-back second and now they own a home whose value has gone down. Mr. SHAYS. But likely while they may lose their home, they may not have lost an investment of any. They may not in fact have lost anything because they hardly put anything down. Mr. PFOTENHAUER. They may not have lost any net worth. They may be greatly inconvenienced, and it may be hurtful to their family to leave. Mr. SHAYS. Judging from the morning of my chairman, I’ll just close by saying to you, Mr. Savitt, I’ve depended on mortgage brokers for probably ten—refinancing, maybe seven—with two different homes; and, I always felt well served by the individuals who have helped me. Mr. SAVITT. Mr. Shays, may I say one thing about that? I just want to clarify something before to make sure that what I was saying was understood, that we support banning the incentive compensation. I want to make that very clear. But, we don’t want to have our ability to earn a living banned. Indirect compensation is how mortgage brokers— Mr. SHAYS. I think we understand that. How are you doing, Mr. Chairman? Are you okay? The CHAIRMAN. Yes, one more if you want. Mr. SHAYS. Okay. The CHAIRMAN. Let me just ask—did you want to say something? Ms. WATERS. If I may. The CHAIRMAN. Go ahead. Ms. WATERS. I wanted to clear up something. I know that Mr. Shays on two occasions had talked about the mortgages that are made available to minorities and others who perhaps, you know, could not afford them. Someone said today that most of the problem was in refinance and that the people who were refinancing had bought homes that they could afford. It was not where the problem was that the mortgages were so much being extended to folks who had nothing, could not afford them, maybe not even deserve them. Will someone please clear that up? I don’t know who said that. Mr. SHAYS. If the gentlelady could just yield. The point I had made and I was corrected was that I was making the assumption that these subprime loans were for basically new buyers. And it was pointed out a lot of these folks were people who already had a decent mortgage, but were tempted to get into an unstable mortgage. I think that’s the point. The CHAIRMAN. I think Mr. Gruenberg, the Vice Chair of the FDIC in fact made that point very strongly, partially corroborated by Comptroller Dugan. Mr. SHAYS. Yes, and I appreciate you making that point. Ms. WATERS. Thank you. The CHAIRMAN. I just want to close with a couple of points, and I appreciate the constructive suggestion. Do any of the members of the panel think that we should in fact not bother to legislate at all, that we’re going to do more harm than good. Does anyone think that we should just leave the status quo? VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00128 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 123 Mr. Lackritz? Mr. LACKRITZ. No, Mr. Chairman. I think the point is just to urge you to move carefully in this area. The CHAIRMAN. As opposed to whether we could move or not. Mr. LACKRITZ. No. I don’t mean to make light of that. The CHAIRMAN. All right, secondly, I want to make a statement, because people have said, well, this is going to restrict credit. Yes. Let me ask you this. Do you think that all of the loans that were made over the last couple of years in the subprime area should have been made? Mr. Rock? Mr. ROCK. No. The CHAIRMAN. Mr. Pfotenhauer? Mr. PFOTENHAUER. No, sir. The CHAIRMAN. Mr. Lackritz? Mr. LACKRITZ. No. The CHAIRMAN. Mr. Savitt? Mr. SAVITT. No. The CHAIRMAN. Mr. Lampe? Mr. LAMPE. Okay, so if you all think that there were loans that were made that shouldn’t have been made, of course, we’re going to restrict credit. Now the job is to restrict credit in a somewhat precise way. You’re never going to get to perfection; you’re never going to ban only bad stuff and leave good stuff. We believe that you can move the line closer. You’ve been helpful with us, but please don’t tell me that the problems that we’re going to restrict credit and expect to be credible, because we need to restrict credit. The problem was credit was improvidently granted to a significant number of people on terms or in circumstances in which they shouldn’t have gotten it. That’s what’s happened. What we need to do is to try to find a way to restrict the wrong kinds of credit. But of course it’s going to restrict credit; if it weren’t going to restrict credit, then we would sill have the same thing. Mr. Savitt, did you want to respond? Mr. SAVITT. Mr. Chairman, first I want to congratulate you for the contents of this bill and also one part in particular, which is the registry for all originators. The CHAIRMAN. Yes, we’re going to do that. We’re working with the minority on this and we will have that registry. I also think, by the way, and this goes to the bank situation, we’re not talking about licensing people. We are talking about having—the wording may get cleaned up—but we are talking about keeping track of everybody who is doing this. Mr. Lackritz, I cut you off before. Mr. LACKRITZ. I think the only point I wanted to make, there was credit that was obviously and prudently or improvidently granted. But I also think at the same time it’s important to take a lot of pride in what the committee has done, and the industry has done to broaden the circle of homeownership. Don’t ban that. The CHAIRMAN. I would also want to know this, and this is my more philosophical point, I wish everybody in America earned enough money to own a home. I also I wish that I could eat more VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00129 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE 124 and not gain weight, and that I didn’t get as tired today, that I had more energy than I had 20 years ago. One of the mistakes we made, I think, was to equate a decent place to live with homeownership. Homeownership is a very good thing. It’s good for people. It’s good for the neighborhoods, but it’s not the only form of housing. And there will always be millions of people in this country who, because of their economic circumstances—leave aside wealthy people who did it by choice— won’t be able to own a home, particularly in certain areas of the country, where the gentleman from Connecticut lives, where I live, and where my colleague from Los Angeles lives. And we make a mistake if we push people into homeownership who shouldn’t be there, and part of that is, and it’s part of the agenda of this committee, to create some alternative and decent and affordable rental housing, and I think we need to have the mix. I would mention one other thing that didn’t get mentioned today and it’s very relative to us. One of the things in this bill, which I think is most important, is the provision that says that a foreclosure does not extinguish a lease. Because of all the people we could say, well, the borrowers were imprudent. This one was imprudent. The tenants were rarely imprudent, and what we have are people who were living in housing and paying their rent on a regular basis, and because of a foreclosure, they’ve been hit with evictions. Now, we’re going to say going forward that shouldn’t happen. I would urge all of you to the extent that you have any control over the property, please don’t kick people out just because the landlord foreclosed. There’s a degree of cruelty that’s not personally oriented that has been visited on people. So we are saying that we have in this bill that foreclosure does not extinguish a lease. And I think that’s a very important point. And please don’t wait until the bill comes to act on this. People who are paying their rent, I also must say, from the standpoint of the people foreclosing continuing to have a tenant makes it a lot less likely that all the pipes are going to wind up in China because people are stealing all the copper. And it’s better for the neighborhoods too. I would just urge people to take that into consideration. I thank everybody. This really has been a hearing that has had a very important impact on the specifics of this legislation. [Whereupon, at 6:36 p.m., the hearing was adjourned.] VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00130 Fmt 6633 Sfmt 6633 K:\DOCS\39912.TXT HFIN PsN: TERRIE APPENDIX October 24, 2007 (125) VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00131 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00132 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.001 126 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00133 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.002 127 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00134 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.003 128 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00135 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.004 129 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00136 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.005 130 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00137 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.006 131 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00138 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.007 132 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00139 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.008 133 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00140 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.009 134 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00141 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.010 135 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00142 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.011 136 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00143 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.012 137 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00144 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.013 138 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00145 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.014 139 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00146 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.015 140 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00147 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.016 141 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00148 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.017 142 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00149 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.018 143 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00150 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.019 144 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00151 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.020 145 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00152 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.021 146 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00153 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.022 147 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00154 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.023 148 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00155 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.024 149 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00156 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.025 150 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00157 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.026 151 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00158 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.027 152 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00159 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.028 153 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00160 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.029 154 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00161 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.030 155 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00162 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.031 156 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00163 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.032 157 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00164 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.033 158 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00165 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.034 159 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00166 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.035 160 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00167 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.036 161 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00168 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.037 162 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00169 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.038 163 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00170 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.039 164 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00171 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.040 165 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00172 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.041 166 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00173 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.042 167 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00174 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.043 168 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00175 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.044 169 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00176 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.045 170 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00177 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.046 171 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00178 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.047 172 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00179 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.048 173 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00180 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.049 174 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00181 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.050 175 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00182 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.051 176 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00183 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.052 177 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00184 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.053 178 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00185 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.054 179 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00186 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.055 180 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00187 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.056 181 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00188 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.057 182 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00189 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.058 183 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00190 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.059 184 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00191 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.060 185 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00192 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.061 186 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00193 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.062 187 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00194 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.063 188 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00195 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.064 189 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00196 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.065 190 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00197 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.066 191 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00198 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.067 192 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00199 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.068 193 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00200 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.069 194 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00201 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.070 195 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00202 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.071 196 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00203 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.072 197 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00204 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.073 198 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00205 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.074 199 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00206 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.075 200 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00207 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.076 201 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00208 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.077 202 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00209 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.078 203 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00210 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.079 204 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00211 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.080 205 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00212 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.081 206 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00213 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.082 207 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00214 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.083 208 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00215 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.084 209 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00216 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.085 210 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00217 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.086 211 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00218 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.087 212 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00219 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.088 213 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00220 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.089 214 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00221 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.090 215 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00222 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.091 216 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00223 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.092 217 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00224 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.093 218 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00225 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.094 219 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00226 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.095 220 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00227 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.096 221 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00228 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.097 222 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00229 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.098 223 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00230 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.099 224 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00231 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.100 225 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00232 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.101 226 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00233 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.102 227 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00234 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.103 228 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00235 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.104 229 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00236 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.105 230 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00237 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.106 231 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00238 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.107 232 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00239 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.108 233 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00240 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.109 234 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00241 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.110 235 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00242 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.111 236 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00243 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.112 237 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00244 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.113 238 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00245 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.114 239 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00246 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.115 240 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00247 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.116 241 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00248 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.117 242 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00249 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.118 243 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00250 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.119 244 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00251 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.120 245 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00252 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.121 246 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00253 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.122 247 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00254 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.123 248 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00255 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.124 249 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00256 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.125 250 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00257 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.126 251 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00258 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.127 252 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00259 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.128 253 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00260 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.129 254 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00261 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.130 255 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00262 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.131 256 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00263 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.132 257 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00264 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.133 258 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00265 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.134 259 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00266 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.135 260 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00267 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.136 261 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00268 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.137 262 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00269 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.138 263 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00270 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.139 264 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00271 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.140 265 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00272 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.141 266 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00273 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.142 267 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00274 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.143 268 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00275 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.144 269 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00276 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.145 270 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00277 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.146 271 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00278 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.147 272 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00279 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.148 273 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00280 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.149 274 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00281 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.150 275 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00282 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.151 276 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00283 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.152 277 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00284 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.153 278 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00285 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.154 279 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00286 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.155 280 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00287 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.156 281 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00288 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.157 282 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00289 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.158 283 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00290 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.159 284 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00291 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.160 285 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00292 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.161 286 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00293 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.162 287 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00294 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.163 288 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00295 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.164 289 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00296 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.165 290 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00297 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.166 291 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00298 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.167 292 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00299 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.168 293 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00300 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.169 294 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00301 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.170 295 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00302 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.171 296 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00303 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.172 297 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00304 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.173 298 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00305 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.174 299 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00306 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.175 300 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00307 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.176 301 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00308 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.177 302 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00309 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.178 303 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00310 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.179 304 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00311 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.180 305 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00312 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.181 306 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00313 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.182 307 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00314 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.183 308 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00315 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.184 309 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00316 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.185 310 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00317 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.186 311 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00318 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.189 312 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00319 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.190 313 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00320 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.191 314 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00321 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.192 315 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00322 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.193 316 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00323 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.194 317 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00324 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.195 318 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00325 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.196 319 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00326 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.197 320 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00327 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.198 321 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00328 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.199 322 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00329 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.200 323 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00330 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.201 324 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00331 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.202 325 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00332 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.203 326 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00333 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.204 327 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00334 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.205 328 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00335 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.206 329 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00336 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.207 330 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00337 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.208 331 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00338 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.209 332 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00339 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.210 333 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00340 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.211 334 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00341 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.212 335 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00342 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.187 336 VerDate 0ct 09 2002 12:24 Feb 28, 2008 Jkt 039912 PO 00000 Frm 00343 Fmt 6601 Sfmt 6601 K:\DOCS\39912.TXT HFIN PsN: TERRIE 39912.188 337