[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]




                         PROTECTING HOMEOWNERS:
                       PREVENTING ABUSIVE LENDING
                   WHILE PRESERVING ACCESS TO CREDIT

=======================================================================

                             JOINT HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
               FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

                                AND THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 5, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-62


92-983              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          CHARLES A. GONZALEZ, Texas
    Carolina                         MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California                 HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin                KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania      JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona             STEVE ISRAEL, New York
VITO FOSSELLA, New York              MIKE ROSS, Arkansas
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania        JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota           ARTUR DAVIS, Alabama
TOM FEENEY, Florida                  RAHM EMANUEL, Illinois
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                   SPENCER BACHUS, Alabama, Chairman

STEVEN C. LaTOURETTE, Ohio, Vice     BERNARD SANDERS, Vermont
    Chairman                         CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska              MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana          GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware          BRAD SHERMAN, California
EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
SUE W. KELLY, New York               DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio                CHARLES A. GONZALEZ, Texas
JIM RYUN, Kansas                     PAUL E. KANJORSKI, Pennsylvania
WALTER B. JONES, Jr, North Carolina  MAXINE WATERS, California
JUDY BIGGERT, Illinois               DARLENE HOOLEY, Oregon
PATRICK J. TOOMEY, Pennsylvania      JULIA CARSON, Indiana
VITO FOSSELLA, New York              HAROLD E. FORD, Jr., Tennessee
MELISSA A. HART, Pennsylvania        RUBEN HINOJOSA, Texas
SHELLEY MOORE CAPITO, West Virginia  KEN LUCAS, Kentucky
PATRICK J. TIBERI, Ohio              JOSEPH CROWLEY, New York
MARK R. KENNEDY, Minnesota           STEVE ISRAEL, New York
TOM FEENEY, Florida                  MIKE ROSS, Arkansas
JEB HENSARLING, Texas                CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
RICK RENZI, Arizona

           Subcommittee on Housing and Community Opportunity

                     ROBERT W. NEY, Ohio, Chairman

MARK GREEN, Wisconsin, Vice          MAXINE WATERS, California
    Chairman                         NYDIA M. VELAZQUEZ, New York
DOUG BEREUTER, Nebraska              JULIA CARSON, Indiana
RICHARD H. BAKER, Louisiana          BARBARA LEE, California
PETER T. KING, New York              MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          BERNARD SANDERS, Vermont
    Carolina                         MELVIN L. WATT, North Carolina
DOUG OSE, California                 WILLIAM LACY CLAY, Missouri
PATRICK J. TOOMEY, Pennsylvania      STEPHEN F. LYNCH, Massachusetts
CHRISTOPHER SHAYS, Connecticut       BRAD MILLER, North Carolina
GARY G. MILLER, California           DAVID SCOTT, Georgia
MELISSA A. HART, Pennsylvania        ARTUR DAVIS, Alabama
PATRICK J. TIBERI, Ohio
KATHERINE HARRIS, Florida
RICK RENZI, Arizona


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 5, 2003.............................................     1
Appendix:
    November 5, 2003.............................................    75

                               WITNESSES
                      Wednesday, November 5, 2003

Brown, George, Senior Vice President, Self Help, on behalf of 
  North Carolina Coalition for Responsible Lending...............    29
Couch, Robert C., President and CEO New South Federal Savings 
  Bank, Chairman, Mortgage Bankers Association...................    23
Cowan, Cameron ``Cam'' L. Esq., Chair, Legislative and Judicial 
  Subcommittee, American Securitization Forum....................    61
Eggert, Kurt, Associate Professor of Law, Chapman University 
  School of Law..................................................    64
Fishbein, Allen J., Director of Housing and Credit Policy, 
  Consumer Federation of America.................................    27
Green, Micah S., President, The Bond Market Association..........    59
Miller, Hon. Thomas J., Attorney General, State of Iowa..........    31
Nadon, Steve, Chief Operating Officer and Executive Vice 
  President, Option One, Chairman, Coalition for Fair and 
  Affordable Lending.............................................    33
Pickel, A.W. III, President, National Association of Mortgage 
  Brokers........................................................    25
Raiter, Frank L., Managing Director, Standard & Poor's Credit 
  Market Services................................................    68
Saunders, Margot, Managing Attorney, National Consumer Law Center    63
Somplatsky-Jarman, Reverend William, Presbyterian USA, on behalf 
  of the Interfaith Center on Corporate Responsibility...........    66

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    76
    Gillmor, Hon. Paul E.........................................    79
    Hinojosa, Hon. Ruben.........................................    81
    Brown, George................................................    83
    Couch, Robert C..............................................   101
    Cowan, Cameron ``Cam'' L. Esq................................   117
    Eggert, Kurt.................................................   126
    Fishbein, Allen J............................................   142
    Green, Micah S...............................................   153
    Miller, Hon. Thomas J........................................   159
    Nadon, Steve.................................................   193
    Pickel, A.W. III.............................................   212
    Raiter, Frank L..............................................   227
    Saunders, Margot.............................................   268
    Somplatsky-Jarman, Reverend William..........................   287

              Additional Material Submitted for the Record

Kelly, Hon. Sue W.:
    Letter to Hon. John D. Hawke, Jr., Comptroller of the 
      Currency...................................................   289
Miller, Hon. Brad:
    The Impact of North Carolina's Anti-Predatory Lending Law: A 
      Descriptive Assessment.....................................   291
America's Community Bankers, prepared statement..................   330
American Land Title Association, prepared statement..............   334
Association of Community Organizations for Reform Now, prepared 
  statement......................................................   336
Consumer Mortgage Coalition, prepared statement..................   392
Credit Union National Association, Inc. prepared statement.......   418
North Carolina's Subprime Home Loan Market After Predatory 
  Lending Reform.................................................   446
Real Estate Services Providers Council, Inc., prepared statement.   453

 
                         PROTECTING HOMEOWNERS:
                       PREVENTING ABUSIVE LENDING
                   WHILE PRESERVING ACCESS TO CREDIT

                              ----------                              


                      Wednesday, November 5, 2003

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                                                and
                            Subcommittee on Housing
                         and Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittees met, pursuant to call, at 10:05 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Robert W. Ney 
[chairman of the Subcommittee on Housing and Community 
Opportunity] presiding.
    Present: Representatives Ney, Bachus, Baker, Royce, Kelly, 
Ose, Shays, Miller of California, Hart, Tiberi, Feeney, 
Hensarling, Garrett of New Jersey, Brown-Waite, Harris, 
Kanjorski, Waters, Sanders, Maloney, Velazquez, Watt, Ackerman, 
Sherman, Meeks, Lee, Moore, Ford, Hinojosa, Lucas, Crowley, 
Clay, Israel, McCarthy, Baca, Miller of North Carolina, Scott, 
and Davis.
    Chairman Ney. The Subcommittee on Housing and Community 
Opportunity will come to order, and it is also the Subcommittee 
on Financial Institutions. We are doing a joint hearing. And I 
want to thank Congressman Bachus. I will begin, and then I will 
be leaving for a while, and Congressman Bachus is going to 
chair this. I appreciate his interest in this issue.
    I also want to say, also off the bat, that there are a lot 
of members on this bill that--Congressman Lucas, my colleague, 
is the primary author of this bill, along with myself and other 
members. And I appreciate his willingness to tackle not only an 
important issue, but also a tough issue.
    Protecting consumers from abusive lending and predatory 
practices is of great importance to everybody in our country. 
We all recognize that some unscrupulous lenders, using unfair 
and deceptive tactics, are costing Americans their homes and 
their livelihoods.
    Because of a combination of misinformation and bad 
practices, some borrowers have been deceived into receiving a 
loan they really can't afford, while having the equity stripped 
out of their homes. This is wrong, and I know we all agree that 
it has to stop.
    As we all know, the problem in stopping these bad practices 
is the difficulty in defining predatory lending. The Financial 
Services Committee is challenged with preventing abusive 
lending without denying consumers access to credit. However, 
what might be good for one consumer might, frankly, be wrong 
for another. That leads us to today's hearing. I think that 
everyone in this room agrees that we must find a way to stop 
the practice of predatory lending.
    For most Americans, much of their wealth is invested in 
their homes. To have this equity stripped out can be 
devastating for homeowners, especially the elderly who are 
relying on that equity for retirement security. However, the 
question before us is, how do you stop that which, frankly, I 
think is undefined.
    Subprime lending is a legitimate and valuable part of our 
Nation's credit markets. Millions of Americans rely on subprime 
lending for everything from their children's education to 
health care. Placing onerous new restrictions on access to 
subprime credit will be devastating for consumers and our 
Nation's economy.
    There are a number of ideas about how we can combat abusive 
lending practices. For example, earlier this year, as I 
mentioned, my good friend and colleague, Ken Lucas, and I 
introduced H.R. 833, which mixes new consumer protections with 
increased disclosure and consumer education initiatives.
    I have also been working with other members, including 
Congressman David Scott, a member of our committee, and 
Congresswoman Nydia Velazquez to craft a homeownership 
counseling bill as a first step to educate consumers, combat 
abusive lending also. These bills are part of an ongoing 
discussion on predatory lending.
    Throughout this year, I have been working on a bipartisan 
basis to foster discussion among the many interested parties 
about how we can balance competing views on the most effective 
solution to predatory lending. With the support of people like 
Chairman Bachus, whom I mentioned earlier, who has been 
instrumental in these efforts, we are trying to find a common 
ground with comprehensive solutions to the problem of abusive 
lending. I also appreciate the input of Chairman Oxley on these 
issues. This hearing is another important step in that process.
    We brought together, I think, a very diverse group of 
people representing consumer groups, industry and academia to 
hear what they see as solutions to the problems of abusive 
lending. I want to have a fair and open dialogue today so that 
members of this committee can continue working towards a 
bipartisan solution that will protect consumers from abusive 
lending, while protecting their access to affordable credit.
    And I think the idea I want to re-stress is a fair and open 
dialogue. A lot of people don't even want to discuss this 
subject, but we know what happened in some of our States, 
including Georgia, where the legislature had to come back and 
go through a lot of things because, frankly, a lot of people 
were shut out of the housing market, which is very unfortunate.
    It is my personal belief that any potential legislation 
addressing the issue of abusive lending must address the 
growing patchwork of State and local predatory lending 
legislation. It must deal with the emerging problems of 
ascertaining liability.
    That concludes my opening statement, and I will yield to 
Mr. Lucas.
    Mr. Lucas. Thank you, Mr. Chairman, Chairman Bachus. I 
appreciate you all holding this hearing today, and I would like 
to associate myself with the remarks that you just made.
    I think the important thing here is that with my background 
prior to coming to Congress in banking and financial planning 
matters, I realized the importance of the issues that are 
facing us. HOEPA in its present form isn't working as well as 
it should.
    And who is suffering from that? I think we are depriving 
people out there, who have less than perfect credit, of owning 
a home; and I look at my role. The reason I was willing to get 
involved in this legislation, which could be contentious, is 
that we need to improve on what we have now; and we need to 
keep the issues that are important with the consumer here, and 
also the people who are lending the money.
    If we work together, we can make this better. And I think 
there is nothing cast in stone in 833; I think we are open and 
willing to listen to both sides as to what we might do to make 
this better.
    And that is my purpose, if you will, to sort of be a 
referee and a person to work out the compromise so we can allow 
more people to have affordable housing at a reasonable price. 
Thank you.
    Chairman Ney. I want to thank the gentleman for his support 
and his opening statement.
    Chairman Ney. Chairman Bachus.
    Chairman Bachus. Thank you, Chairman Ney, for convening 
this joint hearing of our two subcommittees to review issues 
relating to the subprime mortgage lending industry in the 
United States.
    This hearing, which is titled Protecting Homeowners: 
Preventing Abusive Lending While Preserving Access to Credit, 
will focus on ways to eliminate abusive lending practices in 
subprime lending markets, while preserving and promoting 
affordable lending to millions of Americans. This is an issue 
of critical importance to consumers, as well as the financial 
services industry; and I believe this hearing is a timely one.
    Over the last decade or so, with low interest rates, a 
competitive marketplace, and various government policies 
encouraging homeownership, a record number of Americans have 
had the opportunity to purchase homes. A large number of these 
new homeowners have enjoyed one of the many benefits of 
homeownership, using the equity in their homes for home 
improvements, family emergencies, debt consolidation, and other 
reasons. Many of these consumers were able to purchase and use 
the equity in their homes because of the subprime lending 
market, which provides millions of Americans with credit that 
they may not have otherwise been able to obtain.
    Many borrowers are unable to qualify for the lowest 
mortgage rate available in the prime market, also known as the 
conventional or conforming market, because they have less than 
perfect credit or cannot meet some of the tougher underwriting 
requirements of the prime market. These borrowers, who 
generally are considered as posing higher risk, rely on the 
subprime market which offers more customized mortgage 
protection to meet customers' varying credit needs and 
situations. Subprime borrowers pay higher rates and servicing 
costs to offset their greater risk.
    Naturally, subprime mortgage originations have skyrocketed 
since the early 1990s. Financial companies, nonbank mortgage 
companies and, to a lesser extent, commercial banks have become 
active players in the arena. In 1994, just 34 billion in 
subprime mortgages were originated, compared with over 213 
billion in 2002. In about 8 years, we have gone from 34 billion 
to 203 billion.
    The proportion of subprime loans compared to all home loans 
has also risen dramatically. In 1994, subprime mortgages 
represented 5 percent of the overall mortgage originations in 
the United States. By 2002, the share had risen to 8.6 percent. 
Unfortunately, the increase in subprime lending has in some 
instances increased abusive lending practices that have been 
targeted at more vulnerable populations.
    As Mr. Scott has said before this committee before, they 
target the vulnerable; minorities, the elderly are two of these 
targeted populations. These abusive practices have become known 
as predatory lending. Predatory loan features include 
excessively high interest rates and fees, balloon payments, 
high loan-to-value ratios, excessive prepayment penalties, loan 
flipping, loan steering, mandatory arbitration and unnecessary 
credit life insurance. Predatory lending has destroyed the 
dream of homeownership for many families while leaving behind 
devastated communities.
    I hope today that we will move forward in developing ways 
to put an end to these harmful and deceptive practices while 
continuing to preserve and promote access for consumers to 
affordable credit.
    In closing, I want to thank Chairman Ney and Congressman 
Ken Lucas for their tireless efforts on this issue over the 
past year. They are passionate about coming up with solutions 
and deserve a great deal of credit for all of their work. They 
have authored H.R. 833, the Responsible Lending Act.
    I want to also commend Congressman David Scott for his work 
on H.R. 1865, the Prevention of Predatory Lending through 
Education Act. He and I have just come from a forum held at the 
Press Club, that the FDIC sponsored, where we talked about this 
legislation and other legislation promoting financial literacy 
and the importance of that in our overall effort.
    I look forward to working with Chairman Ney, Congressman 
Lucas, Congressman Scott and with all of my other colleagues as 
we continue to examine this complicated issue.
    I have made no decisions as far as particular provisions of 
legislation, what I will be supporting, what I won't be 
supporting. I think the purpose of this hearing is just the 
first step, at least in my mind, of seeing if we can come up 
with a meaningful and balanced bill.
    Thank you, Chairman Ney.
    Chairman Ney. Thank the gentleman.
    [The prepared statement of Hon. Spencer Bachus can be found 
on page 76 in the appendix.]
    Chairman Ney. Mr. Sanders.
    Mr. Sanders. Thank you, Mr. Chairman. And I thank you and 
Mr. Bachus for holding this important hearing. This is an issue 
that I think we are going to see more and more attention paid 
to, because I think all over this country not only in terms of 
home mortgages, but credit cards and other areas, people are 
getting sick and tired of being ripped off by companies and 
paying outrageous interest rates at a time when interest rates 
are historically low.
    According to the Coalition for Responsible Lending, 
predatory lending is costing U.S. families over $9 billion 
every year. And I am pleased that George Brown with the 
Coalition is here today to discuss this national crisis.
    Mr. Chairman, in the richest country on Earth, the record-
breaking number of housing foreclosures in this country is a 
national disgrace. Between 1980 and 1999, both the number and 
the rate of home foreclosures in the U.S. Have skyrocketed by 
277 percent.
    According to an article in the New York Times, over 130,000 
homes have been foreclosed in the spring of 2002 alone, with 
another record-breaking 414,000 foreclosures in the pipeline.
    Many of these foreclosures are a direct result of predatory 
lending practices through a subprime market that must be put to 
an end immediately. In fact, according to the Mortgage Bankers 
Association, while subprime lenders account for 10 percent of 
the mortgage lending market, they account for 60 percent of 
foreclosures.
    Predatory lending is a growing problem across the U.S. 
Desperate for homeownership or home improvements, more and more 
people are being tricked into home loans with high interest 
rates and fees that are impossible to pay, and eventually lead 
to foreclosure.
    Predatory lending is being perpetrated by the likes of 
CitiGroup and Household International. As a result of legal 
actions filed by the Federal Trade Commission, CitiGroup agreed 
in September to reimburse consumers $215 million for predatory 
lending abuses, which represents the largest consumer 
settlement in FTC history.
    Due to the good work of Iowa Attorney General Tom Miller, 
who is with us today--and we welcome you for being here--and 
other State Attorneys General, Household International has 
agreed to pay 484 million to reimburse victims of predatory 
lending, representing the largest direct payment ever in a 
State or Federal consumer case.
    Homeownership is the American dream. It is the opportunity 
for all Americans to put down roots and start creating equity 
for themselves and their families. Homeownership has been the 
path to building wealth for generations of Americans. It has 
been the key to ensuring stable communities, good schools, safe 
streets.
    Predatory lenders play on these hopes and dreams to rip 
people off and rob them of their homes. These lenders target 
lower income, elderly, and often unsophisticated homeowners for 
their abusive practices. What a lovely way to live one's life 
and run a business.
    But let us not forget, when we are talking about predatory 
lending, we are not just talking about mortgage lending, as bad 
as that is. We are talking about auto financing and credit card 
companies as well.
    Mr. Chairman, Mr. Bachus, I appreciate the opportunity to 
work with you against what I think is one of the most egregious 
predatory lending practices, the credit card interest rate 
bait-and-switch in which credit card companies double or triple 
the interest rates because a person is late on a student loan 3 
years ago, or even maybe missed one credit card payment.
    And mark my words, this is an issue that even the United 
States Congress will eventually begin to deal with because 
millions of people are tired of being ripped off not only by 
predatory lenders in mortgages, but by predatory lenders on 
credit cards as well.
    We know of an instance where a person was paying 9 percent 
on their interest rates. Suddenly, they got a payment, and they 
were paying 14 percent. When asked what happened, when they 
made a call and asked what happened, the company said, Oh, you 
called us; we will bring it back to 9 percent, with the 
assumption that people who did not notice would be paying 14 
percent. No reason, no late fees, no nothing.
    So I think, Mr. Chairman, this is an issue in terms of 
mortgage rates which affects lots of people, but it goes beyond 
mortgage rates, and I look forward to working with you.
    But I want to say one point. I am not in agreement that the 
United States Congress should preempt the ability of States to 
go forward. We have examples here in Iowa, North Carolina, and 
my own State of Vermont where governors, State legislatures, 
Attorneys General have stood up for consumers; and I think that 
in a nation which has 50 States we have got to respect the 
rights of those States to go forward. States are laboratories 
of democracy; and I do not agree with the trend that we are 
increasingly seeing from a quote, unquote, ``conservative 
Congress'' about taking away the ability of States to protect 
consumers.
    So I feel strongly about that and look forward to working 
with you on that issue.
    Chairman Ney. Before we proceed on, I would please note to 
members, today I am going to have to be very strict on the 5 
minutes, because if everybody has a 5-minute opening statement, 
which is fine, we have got to get to the witnesses. So I will 
bang the gavel at the 5 minutes. Please try to observe the 
clock.
    We will go on to Chairman Baker.
    Mr. Baker. Thank you very much, Mr. Chairman. I want to 
commend you and Mr. Bachus for your good work on the subject, 
and I commit to support the product that you two develop in 
this area of needed reform.
    I will try to be brief and to the point. The only reason 
for my comment this morning is, having read through some of the 
testimony we are likely to receive here in the course of the 
hearing this morning, I am concerned by some of the 
recommendations that I have read with regard to the appropriate 
remedy.
    Certainly individuals should have access to credit that is 
fair and balanced, priced for the risk that the extension of 
credit requires. Certainly the repayment terms should not be 
those which would lead to confiscatory practices, taking away 
the right to property by unreasonable repayment penalties. 
Certainly, individuals who find themselves affronted have 
access to some appellate process before they are thrown out of 
homeownership.
    Having said all of that, all of us don't have the same 
credit. I find myself probably in the circumstance which a lot 
of people find themselves in, that you don't always get what 
you ask for in the way of extensions of credit. But the remedy 
to pricing risk is not to say that because there have been 
abusive practices, we should simply eliminate extensions of 
credit. Everybody needs access to credit.
    Ultimately, at the end of the process, I hope that we can 
find a way to ferret out the wrongdoers, those who are 
victimizing the innocents who can't make the educated decisions 
they need to make for their own best financial interests; but 
at the same time, not preclude access to credit. If we close 
one lending window, the market is simply going to open another 
one somewhere else, and I suggest that the replacement window 
will be far more costly and bring about far more adverse 
consequences than a properly regulated mortgage industry.
    So I stand in defense of the practice of extension of 
credit, priced on the risk which the lender assumes by making 
the money available in the first place. That is a good system. 
And where we can find wrongdoers that are engaging in practices 
not already in violation or Federal or State law, let's go get 
them. I will join with anyone in that effort and I do believe 
that that is an appropriate direction for us to take.
    I again commend you, Mr. Chairman, for your leadership on 
this important subject, and yield back.
    Chairman Ney. I want to thank the Chairman.
    Chairman Ney. Mr. Scott of Georgia.
    Mr. Scott. Thank you very much, Mr. Chairman. I appreciate 
it very much.
    This is an extraordinary hearing on a monumental problem. 
It is a problem that we in Georgia have been grappling with for 
many years. I was very privileged as a State Senator in the 
Georgia general assembly many years ago, to tackle one of the 
most serious and the very first predatory lending cases to come 
before the Nation. As some of you may remember, it was the 
Fleet Finance situation.
    We had a very broad usury law of 5 percent on the unpaid 
balance per month, which yielded out to 60 percent. And Fleet 
came down and took advantage of that and was charging up to 60 
percent interest rates on second home mortgages. We moved to 
deal with that forthrightly.
    We have wrestled with a lot of things. We have wrestled 
with trying to throw a net around the whole industry to catch 
that predatory lender. I found out some things. I found out, 
one important thing is that you have got to prepare for the 
storm before the hurricane is raging. An ounce of prevention is 
worth a pound of cure.
    Education, I have found out, is the key. Because we--this 
is a targeted effort, the vulnerable among us are targeted, the 
uneducated are targeted, the African Americans are a target, 
Hispanics are a target, language barriers are a target. When we 
are dealing with high finances, just simply with home finances 
especially, it is a very complicated issue no matter what we 
put on the books as laws.
    And we must put strong laws on the books; don't get me 
wrong about that. But I have found that where we are weak in 
this country is not having a strong vision of America that says 
we must have a financially literate nation. We are not there, 
and the pressure is on us to continue.
    We are having a browning of America as I speak. Our growing 
populations are those populations of Hispanics and African 
Americans that are changing the complexion of this country. 
Education is needed here.
    And so with that beginning, coming onto the financial 
services committee, I wanted to bring that kind of experience. 
We put a brokers licensing bill on. We recently in Georgia put 
the Georgia Fair Lending Practices Act on. And we went into an 
area of assigning liability that stretched just so far that we 
have come back in Georgia, we have had to go back and redo that 
because of the bonding requirements. Standard & Poor's would 
not back up those loans.
    So where that brings us is to my initial point, that we 
must now look at financial literacy and financial education as 
a way to not solve all of the problems--I don't prescribe that 
this financial literacy is the panacea or the answer for all of 
the problem, but it is one of the most important components.
    And I am very privileged and very delighted to have joined 
in with Chairman Ney and Chairman Oxley and Ranking Member 
Frank, Mr. Shays, Mr. Watt, Mr. Clay, Mr. Meeks, many of us who 
are very much concerned about arming our folks with the 
education that is needed.
    And so we have put together a bill, which we call the 
Prevention of Predatory Lending Through Education Act. And, of 
course, realizing as a freshman Democrat that if we want to get 
something through, you have to partner, I am very proud to say 
that we have been successful in partnering this bill with 
Chairman Ney's bill, which we, of course, know will get 
through, as the ranking member and the Chairman of the 
subcommittee. It has been incorporated into a part of his 
overall housing counseling bill; I appreciate Chairman Ney for 
doing that.
    Essentially, I would like to end by just telling you 
exactly what this bill would do. It would do four major things. 
One, we would provide grants to States and nonprofit agencies 
for programs that educate consumers, especially low-income 
borrowers and senior citizens about lending laws, counseling 
programs for homeowners and prospective homeowners, regarding 
unscrupulous lending practices and referral services for 
homeowners and prospective homeowners.
    And secondly, which I think is the kernel of this law, it 
would create a nationwide toll-free number to receive consumer 
complaints regarding predatory lending practices, provide 
information about unscrupulous lending practices, refer victims 
to consumer protection agencies and organizations, and create a 
database of information for consumers.
    I think that this 1-800 number is a help line. We can get 
that message out, target it to the most vulnerable groups. And 
one message, if nothing else, will be, Before you sign on the 
dotted line, call this 1-800 number. I think that kind of 
preventive medicine is what is needed.
    Thirdly, it will coordinate government agencies and 
nonprofit organizations that provide education counseling to 
consumers who have been victims of predatory lending and 
practices to get those community organizations--the AARP, the 
NAACP, the grass-root groups who are interfacing on the front 
lines of this battle--to get them some grants to market the 1-
800 number if nothing else.
    And, thirdly, it would establish a predatory lending 
advisory council under the Department of Housing and Urban 
Development, comprised of community-based organizations, 
homeowners and government officials.
    Thank you, Mr. Chairman.
    Chairman Ney. Thank you. I appreciate your statement. In 
fact, the gentleman has pointed out he has been successful as a 
freshman Democrat. In fact, you are successful; I made you 
chairman of a subcommittee when I introduced you.
    Mr. Scott. Thank you very much. I appreciate it.
    Chairman Ney. Thank you. We will talk later.
    And with that, I will move to the Vice Chair of the full 
committee, the Congresswoman from New York, Mrs. Kelly.
    Mrs. Kelly. Thank you, Mr. Chairman. In the interest of 
time and because we have a large panel, I have no statement. 
Thank you for the time.
    Chairman Ney. We will be moving to Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. I certainly 
appreciate you and Chairman Bachus for holding this hearing. As 
I read the title of the hearing, `` Protecting Homeowners, 
Preventing Abusive Lending While Preserving Access to Credit'', 
I certainly hope that we don't lose focus on the second half of 
this phrase, ``while preserving access to credit.'' .
    If I did my homework properly, I believe that we are now in 
America enjoying the highest rate of homeownership in the 
history of the Republic. Those of us who sat through the many, 
many hearings on the Fair Credit Reporting Act heard witness 
after witness, testimony after testimony, testifying to the 
effect that we have the lowest cost of credit and the most 
available credit in the free world. We need to be very, very 
careful that we don't do anything that would harm this 
incredible proconsumer phenomenon or we ourselves may be guilty 
of abusive legislating.
    As I read the staff memo, I also was interested to find out 
that what we call abusive practices, known as ``predatory 
lending,'' we have yet to come to a consensus on exactly what 
that means. So I am looking forward to the testimony to find 
out what are these fraudulent, unfair, deceptive practices and 
what can we do to have a narrow, tailor-made remedy for them.
    What I want to be careful about, though, and I certainly 
will not conclude that simply because one who controls credit 
decides to charge one customer a different interest rate, or 
another, offer him less generous terms, that that somehow is 
equivalent to predatory lending.
    Also, I hope that we don't conclude that it is our mission 
to absolve borrowers of their individual responsibility. There 
is also a phenomenon out there that we should explore known as 
predatory borrowing, people who go out and borrow money and 
have no intention whatsoever of paying it back.
    Those who control our own capital, who make it available 
for home mortgages should and must be able to price the cost of 
their credit based upon their assessment of the credit risk. It 
is called freedom and it leads to free enterprise. It leads to 
effective market competition, and that is indeed the consumer's 
best friend.
    And certainly the mortgage lending business, as I observe 
it, gives all of the appearance of being a competitive 
marketplace. By unnecessarily restricting the terms by which 
legitimate lenders do business, credit lines can dry up. The 
cost of credit could go up 50 basis points, 75 basis points, 
maybe 2 percentage points, all leading to what I hope we want 
to avoid, and that is less credit opportunities, more expensive 
credit, and fewer Americans enjoying the dream of 
homeownership.
    If I remember right, part of the physician's oath is to 
first do no harm. We need to make sure that, again, as we 
address a very serious problem, predatory lending, we come up 
with a very narrow and specifically tailored remedy to whatever 
definition we apply to predatory lending.
    For example, if our Nation wanted to crack down on 
speeders, we could go out and we could confiscate every fourth 
car, put governors on the other engines to make sure that they 
never exceed 20 miles an hour. Unfortunately, that would be an 
affront to personal freedom and effectively outlaw driving as 
we know it.
    By cracking down on predatory lending, which we must do, 
let's be careful that we do not effectively outlaw subprime 
lending and the hope of homeownership for millions of 
Americans.
    I yield back the balance of my time.
    Chairman Ney. I thank the gentleman.
    Chairman Ney. Mr. Watt.
    The gentleman yields to Ms. Velazquez from New York.
    Ms. Velazquez. Thank you, Mr. Chairman.
    First, I want to thank Chairman Bachus and Chairman Ney for 
holding this hearing. The interaction between predatory lending 
and the subprime market is complex, and it is my hope that this 
hearing will help us move forward on this important issue.
    Historically, homeownership has been a path leading to 
wealth and economic security for millions of American families. 
Today in the United States, one-half of all homeowners hold at 
least 50 percent of their net worth in home equity. This rate 
is even higher for minorities and low-income families. By 
building equity in their homes, families are able to send their 
children to college, start new businesses, or endure crises 
like job loss or illness.
    For many Americans, it is sad to say that predatory lending 
is a threat to these possibilities. It forces families to 
declare bankruptcy because they cannot make payments for 
mortgages that shouldn't have been made in the first place. It 
rips them apart and leaves their financial futures and the 
futures of their children in jeopardy.
    As we all know, predatory practices are nothing new, but 
they have become more widespread with the expansion of subprime 
home equity lending. Over the last decade, this market has 
grown dramatically, becoming a major source of revenue for 
lenders and an effective homeownership tool for borrowers.
    This growth has attracted new lenders and mortgage brokers 
to the market. To many borrowers, a subprime loan provides an 
option they might not have had otherwise, because of poor 
credit histories or high existing debt. These loans permit 
these borrowers to refinance their existing loans or to 
consolidate other debts at better rates. As a result, these 
borrowers are able to save more of their money and increase 
their standard of living.
    While subprime lending has been a great option for many 
borrowers, it has also led to more aggressive competition for 
loan volume; that, in turn, has provided greater incentive for 
deceptive lending practices. In recent years, States have moved 
to curb predatory lending by enacting legislation to prevent 
unscrupulous lenders from taking advantage of minorities, 
seniors and other vulnerable homeowners. But it is clear to me 
that we must balance the desire to retain States' and 
localities' rights to enact legislation with the need for an 
efficient Federal banking system that encourages the free flow 
of capital into those communities.
    Beginning today, we will attempt to reduce the prevalence 
of predatory practices without negatively impacting the 
subprime market. I hope this will be the start of a longer 
debate that will lead to positive solutions on how to protect 
vulnerable and unsuspecting borrowers. Congress needs to move 
forward with a solution next year before millions more American 
families are victimized.
    I look forward to continuing our work together on this 
issue. Thank you.
    Chairman Ney. Thank you.
    Chairman Ney. Mr. Garrett of New Jersey.
    Mr. Garrett of New Jersey. I yield back.
    Chairman Ney. Mr. Royce of California.
    Mr. Royce. Thank you, Mr. Chairman. I want to thank you and 
Chairman Bachus for holding this timely hearing on housing 
finance. And I would also like to thank our distinguished 
witnesses for appearing today. We look forward to their 
testimony.
    I am very concerned, Mr. Chairman, that a number of States 
and a number of localities are increasingly creating laws and 
obstacles for firms trying to offer mortgages to customers in 
the nonprime market. And, in reality, these States are driving 
out responsible lenders and are leaving consumers in the 
nonprime market without very many options.
    I am encouraged to see that there is a growing recognition 
by many of my colleagues that nonprime lenders are playing an 
important role in helping millions of Americans achieve the 
dream of homeownership, and I hope a solution can be found that 
enables responsible nonprime lenders to continue operating 
their businesses throughout the Nation. In my view, it is 
crucial that this committee does not place unnecessary burdens 
on responsible nonprime lenders, because in the end, that will 
only restrict consumer access to credit.
    And once again I thank you, Chairman Ney, and I thank 
Chairman Bachus for having this hearing today. I look forward 
to working with my colleagues on this issue, and I yield back.
    Chairman Ney. Thank the gentleman.
    Chairman Ney. Also, a note to members: Without objection, 
all members' opening statements that they would like to make, 
if they want it for the record, will also be submitted for the 
record.
    Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. I want to first thank 
you and Chairman Bachus for convening this important hearing 
and letting us get a start this year on thinking about these 
difficult issues. And they are difficult, especially at the 
center of the debate, around the perimeters of the debate.
    I really don't know anybody, I have never heard anybody say 
that they liked predatory lending. But when you try to find the 
dividing line between prime and subprime and predatory, it can 
get to be a very difficult proposition.
    So, in that sense, my comments are not far from where Mr. 
Baker's comments were, because we have to figure out what 
interest rates are a reflection of increased risk and what 
interest rates represent unfair or illegal opportunism or 
abuse. States and the Federal Government have been kind of 
wrestling with this problem, and I think will continue--some 
challenges that are very important to be worked out.
    Some of the lenders in this area are not--do not have 
Federal regulators, and some of them do have direct Federal 
regulators. Some States have worked hard to address these 
problems in different ways. North Carolina seems to be taking 
the place of California in taking the lead on some of those 
issues and finding the right balance. But I remember that 2 or 
3 or 4 years ago, when the North Carolina law was being 
debated, all of the lenders thought that it was the worst thing 
that could possibly happen to them. They subsequently came to 
realize that it was a pretty darn good balance, once they saw 
what Georgia did.
    So this can be difficult. If we had federalized and 
preempted all State laws back in 1994 when we passed the 
Homeownership and Equity Protection Act, we now would know that 
that was not an appropriate floor, certainly not an appropriate 
ceiling, for every kind of situation.
    So I am a little leery of the notion that we should be 
talking about preempting all State laws in this area, both 
because I think States have--have done a lot of work in this 
area. States regulate directly some of these lenders where 
Federal regulators are not responsible for them, and States, as 
Mr. Scott has said, can back up and go down another path a lot 
quicker than the Federal Government tends to be able to back up 
and go down another path.
    So I think we have got some difficult work ahead trying to 
establish what the appropriate Federal role is, trying to 
establish what the appropriate Federal floor should be, and 
trying to establish that the States should continue to have 
leeway to set their own regulations, because they are closer to 
these lenders than we are.
    Having said that, this hearing, I think, will help to set 
some of that groundwork and get us started thinking about these 
issues, because we have to roll up our sleeves next year and 
really come to grips with these difficult issues, which as I 
said around the edges are very easy if you call somebody a 
``predatory lender,'' but in a more defined context can be very 
difficult to resolve.
    I thank the gentleman, and I yield back.
    Chairman Ney. Thank you.
    Chairman Ney. Mr. Miller of California.
    Mr. Miller of California. Thank you, Chairman Ney. Thank 
you for having this hearing today.
    A lot of times people talk about subprime. When they do, 
they talk about extremely poor people or senior citizens or 
minorities, where in reality the majority of these people are 
40 to 50 years old, incomes from $50- to $75,000 a year, and 
the majority of them are not minority.
    But you have a group in this Nation whose credit rating is 
not what it should be. They have had problems with repayments, 
they have had problems in the past with certain issues, and 
they just don't qualify for the same rates and conditions of a 
person who has good credit and has a reliable source to repay a 
loan.
    My concern is that we may do something to impact this 
subprime market that really hurts people who want to own their 
own home, and if it were not for the subprime market, they 
would not qualify under prime; and then they are forced to go 
into a market where they pay extremely excessive rates, if they 
can even get them, and they generally are put in a situation 
where they are not able to achieve homeownership.
    It is pretty easy to look at the majority of predatory 
practices, excessive prepayment penalties, unfair pricing, 
steering people to higher-priced loans and virtually putting 
their equity in jeopardy, where they can really qualify for 
lower loans, financing points and fees through the loans.
    There are certain things that predatory lenders do that you 
can separate them from a quality lender who is lending to 
subprime. And the last thing I know we want to do is to force 
people out of the marketplace. We are trying right now to get 
people out of government housing, trying to get them out of 
Section 8, trying to do everything we can to achieve the 
American dream, that is, own your home, so as the years grow 
and the time goes past, people have equity, they have wealth in 
their life all of a sudden, where they would not if they are 
renters.
    And I think we need to move very carefully. I am looking at 
what some States have done trying to deal with subprime; they 
deal with mortgage originators and then they pass that same 
liability on to the secondary market for subprime. I think they 
are eliminating the option for people out there, because if 
there is no secondary market, if you don't get in with the 
prime, having to maintain that loan, you are going to deal with 
elimination of options available in the marketplace.
    And so I really anxious to hear the testimony. I am looking 
forward to this hearing. I know the Chairman has a passion for 
this, as I do. Our goal is to make sure that we do everything 
that we can in the marketplace to create opportunity for people 
to become homeowners.
    I yield back the balance of my time.
    Chairman Ney. The gentlelady, Mrs. McCarthy of New York.
    Mrs. McCarthy. Thank you, Mr. Chairman. I will submit my 
opening statement so we can go forward on the testimony. Thank 
you.
    Chairman Ney. I thank the gentlelady.
    Chairman Ney. The gentleman, Mr. Crowley of New York.
    Mr. Crowley. Mr. Chairman, I thank you, Chairman Ney and 
Chairman Bachus, as well as Ranking Members Waters and Sanders 
for holding this joint committee hearing today on lending 
practices.
    I hope that this will be the first of many hearings on 
lending issues, as there are a number of questions, a lot of 
misconceptions on the need for a Federal role to eliminate 
predatory lending as well as foster a climate for growth of 
subprime, or as I call them, ``working family loans.'' .
    Having seen the tripartisan way, Mr. Bachus, Mr. Sanders 
and this whole committee worked on FCRA, I am optimistic that 
this committee can craft a bill that all segments of our 
diverse caucus can rally around. One of the misconceptions out 
there is that this issue is a Republican issue, a rich banker's 
issue that--that to best protect our constituents, that we need 
to kill all lending outside of prime. And I strongly disagree 
with that premise.
    The issue of subprime is a Democratic issue. With all due 
respect to my Republican colleagues, it is our constituents, 
whether they be in Queens, New York, South Central Los Angeles 
or Boston that will benefit by a tough Federal law that takes 
out the predators but encourages subprime lending. Our 
constituents are the working people with little credit history 
and, formerly, low to no availability of capital without 
subprime loans.
    While many people look at some of the high-profile failures 
out there, like the predatory lending practices that no one 
supports--no one supports and should be banned outright, we 
need to refocus the discussion on the problem of the past, that 
of the situation of communities in the days prior to the 
availability of subprime lending. That problem was simple: no 
availability of capital in our communities, zero, none.
    The truth is, subprime loans go to riskier borrowers. But 
if the subprime market dries up or is legislated out, we will 
return to the days of no capital flow in our districts.
    I have talked a number of times with my neighboring Bronx 
colleague, Congressman Serrano, about the increasing 
homeownership rates over the past decade in the South Bronx, a 
community that we now share. You saw people with a work ethic 
and a desire to do better for themselves and their families, 
but with little capital, obtain loans to buy homes for $70,000 
and turn that around into a nice profit in less than a decade, 
a real wealth creation in a very unlikely place. This is the 
success story of subprime.
    For every horror story there are 20 success stories. While 
some would argue that subprime loans are giving money to people 
who cannot handle it, I don't buy that argument. According to 
National Geographic, I represent the most diverse community in 
the world in Elmhurst, Queens. It is bustling with small 
businesses and new homeowners, most of whom have no traditional 
experience with banks, no credit history and have to turn to 
the subprime market for loans. Without subprime, they would 
haven't gotten any capital, they wouldn't have the investments, 
the entrepreneurship, the wealth creation anyone can see on 
74th Street in Jackson Heights and throughout my district.
    This is a core Democratic issue of economic fairness and 
advancing capital to our constituents--Fairfield, Connecticut, 
has all of the capital they want; The Bronx doesn't--and it 
would be so adversely affected without subprime market in 
existence and--as we say, in the days before subprime. Good 
legislation can be crafted that can serve the interests of 
business and the consumers. That legislation will be written by 
Democrats for our constituents, and I hope to work with all 
sides in crafting this bill for our core constituencies.
    Again, I commend you for holding this hearing today and 
yield back the balance of my time.
    Chairman Ney. Thank the gentleman.
    Chairman Ney. The gentlelady from Florida, Ms. Harris.
    Ms. Harris. Thank you, Mr. Chairman. I wish to thank you 
and Chairman Bachus for holding this joint subcommittee meeting 
on this very important topic of subprime lending. I also want 
to thank our distinguished panelists for joining us today and 
for their testimony.
    Consumer protection through disclosure has constituted a 
staple of Chairman Oxley's leadership of the Committee on 
Financial Services. Our discussions regarding this matter 
should remain consistent with this theme, and I believe that 
homeownership provides families and individuals with an 
unprecedented opportunity to create wealth.
    Studies show that the average net worth of income of 
persons who are renting is about $900, yet it skyrockets to 
over $70,000 when they own their own home, thereby creating 
wealth and an asset that they can convey to their children and 
grandchildren. For most Americans, though, the ability to 
secure a mortgage is central to their ability to purchase a 
home, of course, and the damaged credit that has resulted from 
past mistakes or financial reversals can serve as a major 
obstacle thus, the willingness of certain industry institutions 
to underwrite the increased risk associated with the damaged-
credit constituent constitutes an important service that 
provides a second chance for millions of people.
    Regrettably, the abusive practices of bad actors that prey 
upon elderly and minority populations often has resulted in the 
demonization of an entire subprime industry.
    Nevertheless, we can't ignore the effects of predatory 
lending if we truly seek to help nonconventional borrowers to 
overcome substandard credit. While I applaud industry and 
State-level initiatives to address unscrupulous lending 
practices, I contend that we must formulate a national policy 
that supplements and enhances these efforts. I look forward to 
the suggestions that today's panel will present, which I hope 
will provide us with a viable alternative for reforming the 
subprime industry without eliminating the critical borrowing 
opportunities that enable men, women and children to escape the 
grip of poverty.
    Thank you.
    Chairman Ney. The gentleman, Mr. Miller.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. I do 
not have an opening statement, as such, but I ask unanimous 
consent to make part of the record a 2003 study from the Center 
of Community Capitalism at the University of North Carolina, 
Chapel Hill, my alma mater.
    The study is entitled The Impact of North Carolina's 
Antipredatory Lending Law: A Descriptive Analysis.
    Mr. Chairman, Mr. Sanders describes the States as the 
laboratories of democracy. And my State, North Carolina, has 
been the leader on this issue, among the first, if not the 
first, State to pass legislation to address predation in 
lending practices. This study looks at the results of the North 
Carolina legislation.
    It finds, in fact, that there was a decrease in the number 
of loans with predatory or abusive terms. Most of those were in 
not home purchase loans, but in refinancing loans, where the 
loans do not serve the purpose of realizing the dream of 
homeownership, but in fact caused people to lose their homes.
    The result of the study was that there was--as to the 
effect on the cost of subprime credit, there was no increase in 
the cost of subprime credit; and as to the access to credit, 
there was no reduction in access to credit for high-risk 
borrowers. In fact, there was an increase in the number of 
purchase obligations, homeownership obligations.
    So, Mr. Chairman, the result of this study suggests that we 
can do something to protect consumers from predation and not 
choke off any kind of access to credit to realize the dream of 
homeownership.
    [The following information can be found on page 291 in the 
appendix.]
    Chairman Ney. I thank the gentleman.
    And at this point, I am assuming that our ranking member 
has nothing to say about this topic, and we will just move on 
to another member.
    I am going to recognize the ranking member.
    Ms. Waters. Thank you very much, Chairman Ney. I certainly 
appreciate your allowing me to have a word to say about the 
subject.
    Predatory lending involves a number of lending practices 
that target mostly minority communities, such as high interest 
rates and fees, unfair prepayment clauses, frequent 
refinancings that are not advantageous to consumers, and 
mandatory arbitration clauses. These lenders are able to engage 
in predatory activities because credit-starved communities--
unfortunately, usually minorities and elderly persons--have 
little access to traditional sources of credit.
    Of course, I recognize that not all subprime loans are 
predatory loans. However, the problems related to predatory 
lending do occur in the subprime market. These practices are 
prevalent in many areas across the country, and Federal action 
in this area is long overdue.
    Predatory lending is the latest in a long line of practices 
that have targeted minorities and low- and moderate-income 
families, shutting them out of their American dream of 
homeownership. Both the lending terms and the manner in which 
predatory loans are solicited are problematic. Upon finding a 
likely target, oftentimes--for a predatory mortgage loan, the 
lender often resorts to high-pressure tactics to induce the 
homeowner to enter into the contract.
    Contrary to what the industry wants you to believe, this 
problem is getting worse, not better. According to an Acorn 
study, African American homeowners who refinanced in the Los 
Angeles area were 2.5 times more likely to receive a subprime 
loan than white homeowners were, and Latinos were 1.5 times 
more likely to receive a subprime refinance loan.
    Another Acorn study shows that subprime loans represented 
26 percent of home purchase loans received by African 
Americans, and 20 percent of loans to Latinos, compared to only 
7.5 percent of purchase loans to whites.
    These predatory practices do not stop even if a minority is 
in an upper-income bracket. African Americans in upper-income 
neighborhoods are twice as likely to be in the subprime market 
as borrowers in low-income white neighborhoods.
    Congress must be willing to go further and ask ourselves 
what can be done to fight these problems. We must scrutinize 
predatory lending practices and protect consumers who are 
targets for the predatory lending industry.
    Enacting State laws, as California did, is a good start, 
but Congress and Federal agencies must recommit our efforts to 
ensure that greater opportunity to credit access means that all 
Americans will receive the credit opportunities they rightfully 
deserve. To this end, it is important that we not adopt 
national standards that would preempt strong State laws.
    Lenders should not only participate in programs such as 
Fannie Mae's Timely Payment Rewards program, which permits 
subprime borrowers to qualify for interest rates that are lower 
than they would typically be and permits these borrowers to 
reduce their interest rates after timely payments. These 
lenders could be more creative with their own programs and 
reward subprime borrowers with better rates when they 
demonstrate creditworthiness.
    We must continue to scrutinize predatory lending practices 
and protect American consumers who are easy targets for 
unscrupulous people in the subprime lending industry. We, as 
Members of Congress and Federal agencies, must recommit our 
efforts to ensure that greater opportunity to credit access 
means an increase in quality of life, not an increase in 
predatory lending and foreclosure.
    I will certainly continue fighting on the Federal level 
until predatory lending is eliminated.
    We will introduce new predatory lending bills next year 
directed at identifying predatory lenders and preventing them 
from targeting communities such as parts of the one that I 
represent in Los Angeles.
    I encourage my colleagues to stand firm against predatory 
lending and look forward to working with you to eliminate this 
blight from our communities.
    So I would like to thank you, Mr. Chairman, and I yield 
back the balance of my time.
    Chairman Ney. I would like to thank our Ranking Member, the 
gentlelady from California.
    The gentleman, Mr. Moore, of Kansas.
    Mr. Moore. Thank you, Mr. Chairman. I will be brief. I want 
to thank you for having this hearing. And I have listened to 
the other people who have already made an opening statement, 
and, frankly, most of what could be said has already been said.
    And I just want to add that I practiced law for 28 years, 
and I learned a long time ago there are at least two sides to 
every issue and sometimes more. Certainly we are all 
interested, I hope, in protecting people from abusive lending, 
but also at the same time preserving access to credit for 
people, all people in this country.
    And so I am looking forward to working with people who are 
on this panel as well as my colleagues in Congress, and I 
appreciate very much also the remarks made by Congressman 
Scott, and the effort towards financial literacy and protecting 
consumers through education is also very important. I look 
forward to working with all of you to get a good bill here. 
Thank you.
    Chairman Ney. Thank you.
    Chairman Ney. The gentleman, Mr. Clay, from Missouri.
    Mr. Clay. Thank you. Chairman Ney, I also want to thank 
Chairman Bachus for conducting the hearing, and I, too, will be 
brief.
    Predatory lending is an unscrupulous and intolerable 
practice that destroys families and sullies the lending 
industry. The Federal Government has a responsibility both to 
consumers and to the financial institutions that offer 
legitimate subprime loans to enact responsible public policy, 
to put an end to predatory lending, and to ensure that 
households have access to fair subprime loans.
    Too many families, many of which are among the most 
economically vulnerable in our society, have been abused and 
deceived by predatory lending. They have lost their homes and 
they have lost their dreams because they believed that they 
were engaging in sound financial practices.
    There is no dispute that predatory lenders must be put out 
of business. Practices such as lending to borrowers without 
regard for the borrower's ability to repay the loan should be 
banned. Consumers should be provided with their credit scores 
so that they might better understand the risk they are assuming 
and they might make better informed decisions about accepting a 
subprime loan. Borrowers in the subprime market should be 
protected from excessive prepayment penalties that lead to 
unnecessary foreclosures, and lenders should recommend that 
subprime loan applicants seek and receive home mortgage 
counseling.
    Too many victims of predatory lending lack information and 
knowledge about loans and the cost of financing. This 
information must be disclosed in a fair, simple, and uniform 
way in order to discourage and prevent predatory lending 
schemes and to reduce the number of subprime loans that end in 
default.
    Preventing predatory lending should not mean the end of 
subprime loans. Subprime loans should be available to those who 
genuinely understand the risk and responsibilities of these 
mortgage loans.
    And I yield back the balance of my time, Mr. Chairman.
    Chairman Ney. Mr. Hinojosa from Texas.
    Mr. Hinojosa. Thank you, Chairman Ney. I thank you and 
Chairman Bachus, Ranking Members Waters and Sanders for calling 
this joint hearing on the subprime mortgage lending industry in 
the United States. I have waited too long to pass up this 
opportunity to be able to express my thoughts.
    I represent a congressional district in south Texas 
comprised mostly of Hispanic Americans, a district that is one 
of the poorest in the country and that suffers from a 
staggering 13 percent unemployment rate. I hasten to add that 
the unemployment rate was 21 percent when I first took office 
in 1997, and I am proud to have played a role in reducing that 
rate substantially.
    I tell you this because my constituents, based on their 
ethnicity and the poverty rate in my district, statistically 
are the recipients of subprime loans. While they tend to make 
less money annually than most of their fellow citizens around 
this great country, they tend to have to pay more for their 
mortgage rates due to predatory lenders, higher closing fees, 
higher interest rates or closing costs, which in some cases 
include required life insurance to pay off home mortgages.
    So we are here today to discuss possible solutions both in 
the loan origination process and the secondary market for 
subprime mortgage loans to eliminate abusive mortgage lending 
practices. I think that all of us on the committee likely agree 
that loan-flipping rules need to be tightened to ensure that 
mortgages are not refinanced to a point where almost all the 
equity is stripped from the house. And I think that we can also 
agree that assignee liability must be adjusted as necessary.
    One of the most difficult issues that we need to address 
today is the issue of preemption. Should we preempt State laws 
addressing subprime lending? Should we let the Office of the 
Comptroller of the Currency, the Office of Thrift Supervision, 
and the National Credit Union Administration decide this issue, 
or should we let the issue be resolved by the judicial branch?
    I personally want everyone on this Committee and in this 
room to know how important this issue is to me and to my 
community. Let me assure you at this point that I understand 
the difference between a subprime and a predatory lender. The 
Hispanic community has been targeted and significantly wounded 
in the past by predatory lenders. However, some of these 
lenders have paid their fines, and they are trying to make 
amends.
    Chairman Ney and Chairman Bachus, as we move forward on 
this issue of protecting homeowners, preventing abusive lending 
while preserving access to credit, including subprime lending, 
I hope we can continue to work on a bipartisan basis as you 
have allowed us to do today by having an equal number of 
witnesses selected by the Majority and by the Minority on each 
panel. It gives me a great feeling of pride to know that both 
sides of the aisle have been given an equal say on the makeup 
and the direction of this hearing. And with that, I yield back 
the balance of my time.
    Chairman Ney. I thank the gentleman.
    [The prepared statement of Hon. Ruben Hinojosa can be found 
on page 81 in the appendix.]
    Chairman Ney. Mr. Ford.
    Mr. Ford. I will be very brief, Chairman. Thank you. Thank 
you, Mr. Bachus, and to Ms. Waters and Mr. Sanders.
    I join all of my colleagues in wanting to work with both 
Chairman Bachus and Chairman Ney to try to find a bill that in 
a lot of ways reconciles--I have read some of Mr. Brown's 
testimony and even my friend Steve Nadon's testimony and the 
rest of the testimony. I hope that we can work through in a way 
that will help us to actually bring light to the title of 
today's hearing, preventing abusive lending while preserving 
access to credit.
    I was not here--forgive me for not being here, Mr. 
Chairman--when Mr. Watts spoke. I imagine he spoke eloquently 
about the importance of financial literacy. I can only hope at 
some point we here in this Congress will take a serious and 
meaningful look at how we might be able to introduce financial 
literacy classes into our education, particularly at a young 
age, at perhaps even elementary and at the middle school level.
    All has been said that needs to be said on this issue in 
terms of curbing abusive lending practices, and I join my 
colleagues in wanting to do that. I also join those on this 
committee who have an open mind on the issue, who want to work 
through the differences that may exist and find a way to ensure 
that we can end the patchwork of laws, or I should say 
patchwork of issues, that lenders across the country or 
national lenders have to face going State by State.
    With that being said, Mr. Chairman, I am happy to yield 
back the balance of my time.
    Chairman Ney. I thank the gentleman.
    Chairman Ney. Mr. Sherman of California.
    Mr. Sherman. Thank you, Mr. Chairman and Ranking Members, 
for holding these hearings.
    Subprime lenders are naturally the target of bad individual 
instances. After all, they make higher-risk loans on worst 
terms than those available to those with perfect credit. And 
then sometimes they go badly, and you find a need to foreclose.
    What doesn't happen is a focus of congressional hearings on 
the 19 out of 20 or the 95 out of 100 who, in the absence of a 
subprime loan, would not be able to obtain or retain their 
home. Subprime lending is important even if it is hard to 
picture what would happen without it.
    We need to provide, I think, national standards. The 
consumer will benefit from the fairness and protection of good 
protective efforts to prevent predatory lending. And there is a 
tendency for those of us who focus on consumer rights to think 
that every consumer protection, no matter how numerous, no 
matter how intricate, no matter how many different versions in 
the 50 States and one each for the cities of Santa Monica, West 
Hollywood, and Berkeley, not to mention a few other cities, 
should be adopted, and more consumer protection means consumers 
are more protected, when, in fact, that kind of intricate 
consumer protection means that we give up the efficiency and 
the competition that also benefits consumers. The idea that all 
of the industry is all fighting for an opportunity to make 
loans, while annoying to those of us who watch television and 
see your ceaseless commercials, shows that there is competition 
for the opportunity to make these loans even to those without 
perfect credit.
    It was suggested by one of my colleagues that one of the 
possible ways that this gets resolved is in the judicial 
branch. I can't think of a worse thing for either lenders or 
borrowers, although that is what is happening now. That is to 
say, you get a highly complex and unclear series of statutes at 
all the various States and localities, and then trial lawyers 
looking for an opportunity to find either a substantial or an 
almost frivolous violation. And I would hope that, instead, we 
would have clear and strong consumer protections and without 
draconian penalties for the most technical of violations. But 
hopefully with clear standards there won't be any unintentional 
technical violations.
    But in our effort to have national standards, we should not 
sink to the lowest common denominator. I will evaluate bills 
based upon whether the average American is getting more 
protection, and that means that in some areas, some local 
statutes that I like may be preempted, but that will be the 
cost of providing protection to places and communities and 
Americans that are not getting any protection at all.
    I note that Representatives Ney and Lucas have introduced 
the Responsible Lending Act. This is a good step forward. It is 
not a perfect solution. That is why we have a very large 
committee to look at that proposal provision by provision.
    So I look forward to preemption not as a step down, but as 
a step up in the average amount of consumer protection provided 
to Americans, and at the same time enhancing the amount of 
competition and the amount of efficiency that national lenders 
can provide to consumers.
    I yield back.
    Chairman Ney. I thank the gentleman.
    Chairman Ney. Ms. Lee from California.
    Ms. Lee. Thank you, Mr. Chairman. I also want to thank you 
and our Ranking Member Maxine Waters for holding this hearing; 
and also just mention that my community also is faced with the 
issue of predatory lending. In fact, this is one of the most 
important issues in northern California. So I am pleased that 
we are discussing this today. It is really time for this 
committee to turn its attention to this issue and work together 
towards eliminating these very abusive and what really should 
be, I think, illegal practices.
    I also believe that national standards should be the floor, 
not the ceiling, and we should not in any way preempt local 
laws or State laws that really are working.
    Senior citizens, one population of people, are especially 
vulnerable to these what I really call loan sharks. And I think 
it is about time that we make sure that we look at efforts to 
protect our senior citizens and their hard-earned resources 
that they have put into their homes, and not subject them to 
these varied abusive and illegal practices.
    So I thank the Chairman for this hearing. I look forward to 
the testimony, and I yield back the balance of my time.
    Chairman Ney. I thank the gentlelady.
    Chairman Ney. Mr. Baca from California.
    Mr. Baca. Thank you very much, Mr. Chairman, for allowing 
me to say a few words. I know that I am not a member of this 
committee, but I appreciate the joint hearing and your 
leadership and our Ranking Member Maxine Waters, who has always 
been an outstanding spokesperson for minorities and the 
disadvantaged throughout her time.
    First, let me thank all the panelists for appearing here 
today. I look forward to hearing your testimony on issues that 
are very important to the Hispanic community and low-income 
community, and to many of my constituents in San Bernardino 
County, where our Chairman has his mother that lives in that 
area, in Fontana.
    The issue today is predatory lending. Between 1995 and the 
year 2000, Hispanics accounted for about 16.3 percent of new 
owner-occupied homes. Today, there are over 4 million Hispanic 
homeowners throughout the Nation. The subprime market plays an 
important role in increasing the access to home ownership for 
Hispanics, especially for those with inconsistent credit 
history. Hispanic families remain 76 percent more likely to 
receive a subprime mortgage loan than white families. That is 
why predatory lending practices that often occur in subprime 
lending industries are so troubling, as indicated; illegal 
practices.
    Our committees in Congress must look at protecting all 
consumers from such abusive lending practices. That means 
helping consumers learn how to protect themselves through 
effective--and I state through effective financial literacy 
programs and making substantive changes in HOEPA, but we must 
be careful to do so without adversely affecting the ability of 
minorities and others to receive affordable credit.
    Again, I look forward to hearing your testimony and 
learning more about these important issues.
    Thank you very much, Mr. Chairman, for having me join here.
    Chairman Ney. I thank the gentleman.
    Chairman Ney. Are there any other Members who have an 
opening statement?
    I want to thank the panel for your patience and indulgence, 
but I think you can see from the amount of people that showed 
up and the amount of opening statements, that people have a 
passion for this issue, and it is important for all the Members 
to have their say as this opens and begins.
    Again, I want to thank Chairman Bachus for chairing this 
with me. And we will begin with the first witness to be 
introduced by Chairman Bachus.
    Chairman Bachus. I thank the Chairman.
    I would first like to reiterate what you said. The broad 
interest in the subject, I think, tells us we are all concerned 
about predatory lending practices, and we also realize the 
importance of the subprime market.
    We have got an outstanding first panel. Mr. Pickel, welcome 
back. You were here just a few months ago testifying. Welcome, 
all of you.
    It is my privilege to introduce a fellow Alabamian. Rob 
Couch is the Chairman of the Mortgage Bankers Association. 
Before I read his resume, I thought he was just a typical good 
old Alabama good old boy; although he headed up an institution, 
collateral mortgage, which is in New South Federal Savings 
Bank, which is the largest thrift in Alabama, a-billion-and-a-
half-dollar institution. What I did know about Rob is that he 
graduated magna cum laude and summa cum laude from Washington 
and Lee, and that he clerked for Lewis Powell, an associate 
judge of the Supreme Court. So he has both practical and 
intellectual abilities. And I appreciate your testimony before 
the committee, and welcome.
    Mr. Couch. Thank you, Congressman.
    Chairman Ney. If you can yield for a second, we are going 
to introduce the rest of the panel. Also, I have to leave for 
15 or 20 some minutes. So it is not that you are starting and I 
am leaving; I have a meeting that I cannot get out of in the 
Capitol, and Congressman Bachus will chair.
    Let me introduce the rest of the panel, and we will begin.
    Also, A.W. Pickel is the President of the National 
Association of Mortgage Brokers, and the President of Leader 
Mortgage Company and Mortgage Banker Broker Company 
headquartered in Lenexa, Kansas. The Kansas Association 
Mortgage Brokers named Mr. Pickel Broker of the Year in 1999.
    Allen Fishbein is the Director of Housing and Credit Policy 
with the Consumer Federation of America. The federation's 
membership includes more than 285 organizations throughout the 
country with a combined membership exceeding 50 million people. 
Before joining the federation, Mr. Fishbein was the general 
counsel for the Center for Community Change, where he 
specialized in issues pertaining to the expansion of 
responsible lending and banking services for low-income 
households and communities.
    Mr. George Brown is the senior vice President of Self Help, 
a community development financial institution dedicated to 
helping low-income borrowers to buy homes and build businesses. 
Today Mr. Brown is also representing the Coalition for 
Responsible Lending, a group of over 80 organizations and 120 
financial institutions. The coalition was formed in response to 
the large number of abusive home loans that threaten vulnerable 
residents of North Carolina.
    Also, Mr. Thomas Miller is the Attorney General of the 
State of Iowa. He is serving his sixth 4-year term, having been 
elected in 1978. Mr. Miller has served continuously as Attorney 
General for over 25 years except for one 4-year period when he 
was in private practice as a partner of the Des Moines office 
of Fergrey and Benston law firm.
    And the last panelist is Steven Nadon. He is Chief 
Operating Officer for the Irvine, California-based Option One 
Mortgage Corporation, a subsidiary of H&H Block, Incorporated. 
In this role he oversees the company's origination business as 
well as the internal lending operations. He has more than 25 
years of experience in mortgage banking, real estate and 
financial services.
    And, of course, Congressman Bachus introduced Mr. Couch.
    With that, we will begin. Thank you.

   STATEMENT OF ROBERT C. COUCH, CHAIRMAN, MORTGAGE BANKERS 
                          ASSOCIATION

    Mr. Couch. Thank you, Congressman.
    Good morning. Today I speak to you in my capacity as the 
Chairman of the Mortgage Bankers Association. On behalf of our 
2,700 member companies, I want to thank you for giving us the 
opportunity to share our views.
    I first want to applaud your foresight in addressing this 
issue and including us in this discussion. The mortgage banking 
industry is vital to the Nation's economy. We provide the 
capital that makes it possible for families to build, own, or 
rent their homes. Our commitment to creating new financing 
tools has helped to create and sustain the recent historic 
surge in home ownership. Today more than two out of every three 
American families own the homes in which they live. The 
vitality of the housing finance sector has been a critical 
pillar of our economy.
    I also want to make it clear up front that the Mortgage 
Bankers Association denounces abusive lending practices in the 
strongest possible terms. Abusive lenders hurt not only 
borrowers, but also the vast majority of ethical and reputable 
lenders. We believe that to achieve real, long-lasting 
solutions to the predatory lending problem, however, we must 
concentrate on three areas: First, by devoting more resources 
to aggressive enforcement of the existing consumer protection 
laws; second, by expanding consumer education; and finally, by 
simplifying the complex mortgage loan process.
    The best defense against unscrupulous lenders is an 
educated consumer operating in a competitive marketplace. 
Nothing short of that will suffice. I am here today, however, 
to share NBA's concerns with the proliferation of State and 
local laws that are meant to address abusive lending.
    In recent years the mortgage banking industry has greatly 
expanded its efforts to reach families who traditionally lacked 
access to credit. Many innovative credit options have made it 
possible for millions of low- and moderate-income families to 
build their family's wealth through home ownership. In 2001, 
for example, minorities accounted for about 32 percent of 
first-time home buyers, up from only 19 percent as recently as 
1993. The Federal Reserve Board's Governor Gramlich calls this 
a true democratization of credit. These achievements did not 
occur by happenstance, but as the result of many years of 
industry advancement and market innovation.
    As we explore the possible solutions to the problems of 
predatory lending, we need to understand the structure of 
today's mortgage industry. Mr. Chairman and members of the 
committee, it is not your father's credit market anymore. Most 
home buyers don't borrow their mortgage money from the reserves 
and deposits at their local savings and loans. Today we have a 
massive nationwide secondary market that purchases home secured 
loans and provides the capital for the most efficient mortgage 
system with the lowest rates in the entire world.
    By our estimates, in 2002 over 75 percent of all U.S. 
residential mortgages were converted into securities, 
securities that usually find their way into the secondary 
mortgage markets. This is an astounding number. But there is 
one crucial ingredient for this national market to function 
well: Those involved in the market must be able to efficiently 
transfer capital across all regions of the United States.
    Unfortunately, this crucial ingredient is under attack 
today. In their zeal to protect our more vulnerable consumers, 
State and local governments are passing far-reaching laws that 
are creating a confusing and fragmented mortgage market. Over 
the past 3 years, more than 28 States have enacted different 
antipredatory lending laws, and there are a myriad of 
additional bills pending as we speak.
    We have already begun to see examples of how this muddled 
patchwork of laws has scared away reputable lenders, stifling 
the flow of capital to many deserving communities. We must stop 
abusive lending, but we should not throw the baby out with the 
bathwater. We must protect the efficiency of this finely tuned 
enormously productive national system as well.
    Industry participants are in agreement; we need a national 
single standard that will bring order to the bewildering 
fragmentation of our mortgage market.
    I also want to warn against a disturbing trend toward the 
confusion of subprime lending with predatory lending. The so-
called subprime market serves a group of borrowers who would 
otherwise have little or no access to credit. This is a good 
and important service. We can make loans to these consumers 
through innovative financing options that were not available as 
recently as 20 years ago. This is an important point, because 
in the end these laws will hurt those consumers who most need 
the hand up that access to innovative credit can give.
    Thank you for the opportunity to appear before the 
committee. I look forward to answering your questions.
    Chairman Bachus. [Presiding] Thank you.
    [The prepared statement of Robert C. Couch can be found on 
page 101 in the appendix.]
    Chairman Bachus. Mr. Pickel. And what we are going to--and 
Mr. Couch did a good job of it--to actually try to restrict 
yourselves to the 5 minutes. I have been advised that the 
hearing has to wrap up at 1:30, and I think we have a second 
panel, so we are going to try to hurry this along.

STATEMENT OF A.W. PICKEL, III, PRESIDENT, NATIONAL ASSOCIATION 
                      OF MORTGAGE BROKERS

    Mr. Pickel. Good morning, Chairman Bachus and other members 
of the committee. I am A.W. Pickel, as I was introduced, 
President of the National Association of Mortgage Brokers, and 
President of my own company, Leader Mortgage Company in Lenexa, 
Kansas.
    Thank you for inviting NAMB to testify today on issues 
surrounding abusive lending practices and the importance of 
protecting future and current homeowners in America. NAMB is 
the Nation's largest organization exclusively representing the 
interests of the mortgage brokerage industry and has more than 
16,000 members and 46 State affiliates. Mortgage brokers spend 
a significant amount of our time with consumers so that they 
have a better understanding of each step of the home buying 
process.
    I want to commend all of you for your leadership on this 
issue, as NAMB believes that discussing these issues is the key 
to prevention and abusive lending tactics. I also want to thank 
you for including NAMB in the series of predatory lending 
roundtable discussions that you have held over the past few 
months. We appreciate your continued efforts to provide a forum 
in which interested parties can discuss these issues in an 
effort to protect consumers.
    Abusive lending practices strip borrowers of home equity 
and threaten families with foreclosure, therefore, 
destabilizing communities. That is not good. NAMB seeks to rid 
the industry of any unscrupulous actors that prey on vulnerable 
homeowners. We support efforts to expose abusive lending 
practices and combat abusive tactics. These efforts cannot, 
however, cut off consumer credit access or inhibit the mortgage 
finance industry from working with consumers throughout the 
home-buying process.
    NAMB believes that some of the barriers to fair lending 
include addressing the lack of consumer financial education, 
insufficient enforcement of existing laws, and the need for 
industry self-regulation.
    Since mortgage brokers originate more than 65 percent of 
all mortgages in this country, brokers are in a unique position 
to provide education about home ownership to consumers. Earlier 
this year, NAMB introduced a new consumer education program 
called ``Are You Prepared to Head Down the Road to Home 
Ownership?'' This program provides potential home buyers from 
inner city and urban populations with basic information to help 
them make informed choices and to avoid abusive lending tactics 
when buying a home. Our NAMB Web site also provides consumers 
with information on the mortgage process, including completing 
applications, down payments, refinancing, loan programs, and 
many other mortgage-related issues. NAMB also supports the many 
industry efforts and congressional efforts to address financial 
literacy among consumers.
    On the issue of enforcement, State and Federal regulators 
should better enforce existing laws as a way to eliminate a 
great deal of abusive lending practices. The mortgage industry 
is heavily regulated now by Federal fair lending, consumer 
protection, and fraud laws, but the perpetrators often ignore 
these laws and go unpunished for their violations. This current 
lack of enforcement creates an environment that abusive lenders 
continue to cultivate, and therefore victimize consumers. NAMB 
believes that industry self-regulation can play an integral 
role in efforts to combat abusive lending practices. We believe 
residential loan originators who work directly with home buyers 
should be educated, honest, and nothing short of professional.
    In 2002, NAMB introduced its Model State Statute initiative 
on licensing, prelicensure education, and continuing education 
requirements to protect consumers and ensure originator 
competency. Throughout this effort, NAMB seeks to have 
individual State statutes enacted that require prelicensure 
education, background checks, and to mandate continuing 
education requirements for all residential loan originators in 
an effort to protect consumers. NAMB believes that such an 
initiative will serve to help reduce the incidents of abusive 
lending and improve the overall competency of the industry.
    NAMB is also leading an industry effort to create a 
nationwide registry of all mortgage originators and companies. 
NAMB supports a Federal registry of all loan originators. We 
believe a nationwide registry will give mortgage industry 
professionals an avenue to report unscrupulous actions by other 
professionals and help to police itself and eliminate bad 
actors from its ranks. Also, as a requirement of NAMB 
membership, all members--our members subscribe to NAMB's Best 
Lending Practices Guidelines and NAMB's Code of Ethics.
    I would like to briefly touch on the issue of subprime 
lending. There has been widespread confusion as to the term 
``subprime'' and ``predatory,'' as many reports of unfair 
lending are alleged to have come from subprime loans.
    Subprime loans are offered to consumers with a credit 
history that would not permit them to qualify for the 
conventional loan market. The great majority of subprime 
lending today results in benefits to consumers at reasonable, 
appropriate risk-based prices for consumers who may have no 
other option to credit. Efforts to address abusive lending 
tactics must be carefully considered so as not to completely 
restrict these homeowners from getting the loans they want for 
the homes they have or they need.
    In conclusion, I do want to say that NAMB is deeply 
troubled by the continued reports of abusive lending practices 
in the mortgage industry, but combating abuse calls for a 
comprehensive strategy, one that employs the most effective 
tools available to the regulatory, legal, and educational 
communities. All participants in the lending community must 
maintain the integrity of our credit system and thwart 
participants that do not honor these systems.
    Thank you for the opportunity to testify. I will be happy 
to answer any questions that you might have.
    Chairman Bachus. Thank you.
    [The prepared statement of A.W. Pickel III can be found on 
page 212 in the appendix.]
    Chairman Bachus. Mr. Fishbein.

STATEMENT OF ALLEN J. FISHBEIN, DIRECTOR OF HOUSING AND CREDIT 
             POLICY, CONSUMER FEDERATION OF AMERICA

    Mr. Fishbein. Good morning, Chairman Bachus and Chairman 
Ney and Ranking Members Sanders and Waters. It is a pleasure to 
be here, and we appreciate the invitation you extended to 
Consumer Federation to participate in these important hearings.
    As you noted, CFA is a national federation of some 300 
consumer groups that works on behalf of the consumer interest 
and represents over 50 million people.
    Predatory lending, exploitive lending to financially 
unsophisticated borrowers, occurs in all aspects of consumer 
credit, such as auto finance, credit cards, and short-term 
installment debt. However, the explosive growth of predatory 
and abusive practices in mortgage lending has deservedly 
received much attention in recent years. This is 
understandable. Home ownership is the single most important 
instrument used by Americans to build wealth. However, the 
positive contributions of the home mortgage finance market are 
undermined when home owners are lured into loans with terms 
that are not beneficial to them, often as the result of abusive 
practices by so-called predatory lenders.
    Predatory lending has been a disturbing part of the growth 
in the subprime component of the conventional mortgage market 
which has grown substantially over the past decade. It has been 
estimated that borrowers lose about 9.1 billion dollars 
annually to predatory lending practices. And further, while 
home ownership nationwide has reached record levels, research 
indicates that subprime loans--the subprime loan market in 
combination with predatory practices--are contributing to a 
record high home foreclosure rate.
    My testimony focuses on four areas that should be of 
concern to members of both subcommittees, and helps explain why 
predatory lending has become a serious national problem, and I 
will just summarize them here.
    First, there has been a tremendous transformation in the 
structure and operation of mortgage lending; whereas once 
mortgages were mostly made by deposit-taking institutions, 
today most mortgage lending is conducted by nonbank financial 
institutions. Whereas in the past more rigorous regulatory 
oversight and consumer protections were in place for these 
deposit-taking institutions, changes in the law have not kept 
pace with changes in the marketplace. Nonbank institutions are 
less supervised than depository lenders, not subject to regular 
on-site examinations, for example, and as a result the nonbank 
lending oversight is largely complaint-driven. So the burden 
has fallen on the consumer to try to foster compliance.
    This has opened up opportunities for abusive practices to 
occur merely because they are less likely to be detected. This 
is certainly not to suggest that there aren't problems with 
predatory lending with banks and depository institutions, 
because these problems have been documented, and they also 
include problems with the affiliates and subsidiaries of 
banking institutions as well.
    The second key point I make in my testimony is about the 
emergence of a dual mortgage delivery system, one for prime 
borrowers with particular products for them largely focused on 
middle- and upper-income households, and another one 
specializing in subprime, government-insured and manufactured 
housing, which is largely directed to low-income and minority 
communities.
    Third, as a result of these changes in the delivery system, 
subprime lending is disproportionately concentrated to 
minorities and to low-income households and communities. This 
is particularly true for the home refinance market. One study I 
cite in my testimony found that while 25 percent of home 
refinancings were subprime, this figure jumped to 50 percent 
for African American households and over 30 percent for 
Hispanics. The study also found that these disparities 
increased--which is counterintuitive--with income, so that for 
higher-income African Americans and higher-income Hispanics, 
the disparities are actually larger than they are for low-
income segments of the market, resulting in the fact that 
upper-income African Americans are more likely to have a 
subprime loan than lower-income whites.
    The differences in these disparities are not explained by 
risk alone. Certainly the research suggests that. One of the 
key factors is the absence of mainstream lenders in this home 
refinance market in many areas. And as a result, research 
suggests that a significant number of subprime loans are made 
to borrowers who would qualify for cheaper loans. For example, 
Fannie Mae found that up to 50 percent of borrowers in the 
subprime market could qualify for cheaper loans. And other 
research suggests that the subprime market is not as efficient 
as it can be, and some borrowers are paying more than the 
credit profile would otherwise indicate, which is an example of 
opportunistic and inefficient pricing that is existing in the 
subprime market.
    The fourth point is that high rates of subprime 
foreclosures should be of particular concern because they are 
so concentrated, and they can have devastating neighborhood 
effects. High foreclosure rates for subprime loans may also be 
an indication of the ``smoking gun'' of predatory lending. 
Nationally between one out of every five and one out of eight 
subprime loans is seriously delinquent and in foreclosure, and 
in States like Ohio the subprime foreclosure rate could be 12 
times higher than it is for prime lending. This is disturbing 
because in these situations it harms not only the individuals, 
but it can have a destructive effect on whole neighborhoods. 
This subprime foreclosure wave could be very similar to the 
wave of FHA foreclosure we saw in the 1960s, which destroyed 
too many communities.
    The smoking gun----
    Chairman Bachus. Mr. Fishbein, if you could.
    Mr. Fishbein. I will just conclude by saying that subprime 
lending may be the smoking gun of predatory lending. We find 
that subprime loans go into default much more quickly, as 
little as 1-1/2 years after they have been made, suggesting 
that these loans were not affordable at the time they were 
made.
    And I will just conclude by saying that existing law is not 
adequate to correct all these problems, and that we need 
improvements to existing Federal law, not the least of which 
would be tight restrictions on the financing of points and fees 
as well as other improvements to the Home Ownership and Equity 
Protection Act to reflect the conditions that exist in the 
current marketplace.
    Thank you very much.
    Chairman Bachus. Thank you.
    [The prepared statement of Alan Fishbein can be found on 
page 142 in the appendix.]
    Chairman Bachus. Mr. Brown.

STATEMENT OF GEORGE BROWN, SENIOR VICE PRESIDENT, SELF HELP, ON 
   BEHALF OF NORTH CAROLINA COALITION FOR RESPONSIBLE LENDING

    Mr. Brown. Mr. Chairman, Chairman Bachus, Chairman Ney, and 
Ranking Member Waters, it is a pleasure to be here to discuss 
this problem of predatory mortgage lending. And I speak on 
behalf of Self Help and the Coalition for Responsible Lending, 
but I also speak with a deep personal conviction that predatory 
lending devastates communities and with great certainty that 
these organizations that I represent have an approach to the 
problem that is workable and fair.
    As a nonprofit community development lender, Self Help is 
dedicated to helping low-wealth families buy homes, build 
businesses, and strengthen communities. Over the past 20 plus 
years, Self Help has provided over $3 billion in financing for 
some 35,000 families in 48 States. Despite the claims of many 
in the industry that our borrowers are so risky to serve or are 
too risky to serve without practices that are considered 
abusive, our overall loan loss rate is less than 1/2 of 1 
percent per year, and our assets have grown to over $1 billion. 
We know that subprime lending can be done without being 
predatory.
    The Coalition for Responsible Lending represents over 3 
million people through 80 organizations as well as CEOs of 120 
financial institutions formed in response to the large number 
of abusive home loans that threaten the most vulnerable members 
of our North Carolina communities. The coalition spearheaded an 
effort in 1999 to enact market-based--let me repeat--market-
based, common-sense State legislation to protect borrowers from 
predatory lending practices. This legislation passed almost 
unanimously and has been successful in protecting both 
borrowers and the vibrancy of the subprime lending market.
    From the beginning, coalition members and the industry 
trade associations agreed on two fundamental principles: First, 
we would not rely on disclosures. In the blizzard of paper 
involved in home loan closings, even the well-educated borrower 
can fail to understand the fine print in documents they are 
signing. Second, we would not ration credit by attempting to 
cap interest rates. We believe that risk-based pricing--in 
fact, Self Help has done it since we created--since we started 
making subprime loans almost 20 years ago. Loans with higher 
risk should be paid for through higher interest rates, but not 
through exorbitant upfront fees or back-end prepayment 
penalties. With risk captured in the rate, a subsequent lender 
can always refinance a borrower out of a loan that no longer 
reflects that borrower's risk, if it ever did. No one can 
rescue a borrower from a loan that has been inflated through 
financing of exorbitant fees.
    From these two principles came a fairly simple solution: 
Stop exorbitant fees, and encourage lender compensation to be 
reflected in interest rates.
    Recent research clearly shows that North Carolina law is 
having its intended effect. Borrowers continue to have access 
to a wide variety of competitively priced loans from a wide 
variety of lenders. At the same time, creditor lending has 
declined significantly. It looks like the dirty water got out, 
but the baby lived.
    The best research in North Carolina law was recently 
completed by the Center for Capitalism at the University of 
North Carolina in June of this year. Using the largest and most 
comprehensive available database, the UNC study found that 
subprime lending has continued to thrive in North Carolina 
after the passage of the law. In fact, subprime lending to 
borrowers with poor credit actually has increased by 31 
percent, and subprime lending to buy a home increased by 43 
percent. Surely the North Carolina law has not dried up credit.
    The UNC study found that the North Carolina law, in 
addition to protecting access to capital and to credit, also 
protected borrowers from abusive loan terms. Prepayment 
penalties dropped by 72 percent, in stark contrast to nearby 
States. In addition, the research suggested that fewer 
borrowers are being steered to more expensive subprime loans 
when they could qualify for prime loans. Simply, put the North 
Carolina law is weeding out the bad loans while preserving the 
good.
    While North Carolina was the first State in the Nation to 
pass strong antipredatory lending legislation, others have 
followed in the footsteps and have found new ways to address 
upfront fees and other abusive practices. In fact, just this 
year North Carolina learned from these States and amended its 
predatory lending law to include open-ended loans within its 
coverage.
    States are in the best position to respond to the 
challenges presented by predatory lending for at least three 
reasons: First, many of the bad actors involved in predatory 
lending are State-chartered entities. Second, region evaluation 
in real estate markets requires different solutions to 
predatory lending. Loans in North Carolina may need different 
protections from those in Utah. Finally, irresponsible lenders 
can invent new abusive practices virtually overnight, and 
States can react much more quickly than the Federal Government 
to these changes.
    We urge you, however, we urge you to partner with States 
and provide meaningful protection for the Nation's homeowners. 
Congress should make Federal text a floor upon which States can 
build instead of a ceiling beyond which no State can protect 
its own citizens from abuse.
    In opposing a broad preemption, we stand alongside----
    Chairman Bachus. Mr. Brown, if you will wrap up.
    Mr. Brown. Will do--among all 50 States Attorney Generals 
and State bank supervisors. At the end of the day, this is 
federalism at its best. Whether legislature, lender, or 
advocate, we must stay focused on the important goal that we 
all share, creating a safe mortgage market for all American 
families to get to that American dream. Thank you.
    Chairman Bachus. Thank you, Mr. Brown.
    [The prepared statement of George Brown can be found on 
page 83 in the appendix.]
    Chairman Bachus. And, Attorney General Miller, we welcome 
you.

 STATEMENT OF THOMAS J. MILLER, ATTORNEY GENERAL, STATE OF IOWA

    Mr. Miller. Thank you, Mr. Chairman and Congresswoman 
Waters, members of the Committee. Thank you for inviting me on 
behalf of the Attorney Generals of America. This is a subject 
that I feel very strongly about, as do my colleagues, so it is 
a pleasure to be here. It is a special pleasure for me to look 
up to the wall there and see my friend and your former Chair 
Jim Leach looking down at me. In fact, his eyes almost seemed 
to be focused on me. I appreciate that.
    I am going to make five points in my 5 minutes. The first 
one is a fundamental point. As you look at balancing 
availability of credit and prohibiting abusive practices, what 
you need to understand, what we all need to understand, is the 
difference between constructive credit and destructive credit. 
Constructive credit is what we are most familiar with in the 
prime market, and much of the subprime market as well, where 
people borrow money, they pay payments over a period of time, 
and their equity continues to grow. That is the American dream.
    But there is also destructive credit, and that is really 
what we are talking about in major part in predatory lending. 
This is credit that strips the equity from the house. Instead 
of the equity going up, it goes down. And you need to target 
those practices. Some of those practices are balloon payments 
where the person keeps paying, but their equity doesn't go up, 
their net worth doesn't go up. Or, if it does, it is just so 
small that after 15 years they almost owe as much as before. 
Balloon payments. High loans to value loans, where they loan 
out 125 percent of the value of the property. Destructive 
credit. Flipping, where they refinance repeatedly over a short 
period of time and they go through points and charges three, 
four times. Destructive credit. Points that are way too high, 
and other fees, 5, 6, 7 percent. Destructive credit.
    So what you really need to do is target at the margin the 
destructive credit practices and let constructive credit grow. 
Those are the parameters. And that is the lesson from North 
Carolina.
    I want to join the chorus of those singing the praise of 
the North Carolina law. They targeted the practices that dealt 
with destructive credit. So what happened? The study from UNC, 
as Congressman Miller mentioned, demonstrates very well over a 
4-year period purchase money, new purchase of homes, the value 
went up 43 percent over 4 years, which is exactly the same 
increase as the South generally.
    Now, refinancing didn't go up quite as much. This is what 
you would expect if you successfully targeted destructive 
credit.
    Incidentally, I visited with the CEO of Household Finance, 
and he told me initially they opposed the North Carolina law, 
but in reflection they thought it was working, they were 
lending more than before. They thought a few marginal players 
were no longer there, and we said that is the point, they were 
the ones involved in destructive credit.
    My second point is that there is a lot of credit, there is 
a lot of money available in this market, and that is a good 
thing. Through the new way of scoring applicants and 
securitization this industry, including in the subprime market, 
has grown terrifically. So there is at least some margin of 
error as we try and target destructive credit.
    My third point is to talk a little bit about dynamics here. 
This is an industry that has some unusual dynamics, as all 
industries do. First lending is done on a decentralized basis. 
There is loan offices throughout the country. It can't be 
managed from a national office; it is decentralized. Secondly, 
practically all of the people employed are involved in some 
sort of quota system or other incentive system. So they have 
got an incentive. And the third thing is they are dealing with 
a complex transition with a vulnerable population. So think 
about that. Little control from the national office, incentive 
system, a vulnerable population. Those are dynamics that can 
cause some serious problems and in some cases have.
    Another way to look at this is opportunistic pricing. Every 
person that comes into one of those loan offices, they get 
scored at the national office. There is usually some sort of 
pyramid or a matrix that says this person with these 
characteristics qualifies for this loan at this percentage with 
this number of charges. The lender can figure that out. Then 
the question is, do they charge more than that? And if they do 
charge more than that, how much more? And how is it divided 
between the company and the employees of the branch office? 
Those are the dynamics that are being dealt with here.
    My fourth point is that we are making some progress in this 
area. We have done the Household case, FTC has done the 
Associates case. The industry has done some good things. 
Household is reforming their system, and I think in a very 
constructive way. CitiFinancial has done some good things in 
bringing in Associates and cleaning them up. Ameriquest has 
told me recently that they don't charge opportunistic pricing. 
Whatever that person scores, whatever they should have on their 
grid system, that is the price they get charged.
    And, finally, there is more awareness in the whole 
community about this problem, as you can tell that from the 
testimony. So, we are making some progress.
    My final point is this, to you and the other policymakers 
in Washington, and this is my final and heartfelt point: Be 
consistent with the oath of a doctor. Do no harm. Harm is being 
done at the OCC by extensive preemption of State law and State 
law enforcement. And do no harm when you do your legislation in 
terms of preemption. The best thing we have got going now based 
on laboratories of democracy, as Congressman Watt and 
Congressman Miller said, and George Brown, the best thing we 
have going in this area is North Carolina, and that happened 
because the State experimented with it. Don't preempt the North 
Carolina law. Don't preempt other opportunities to solve this 
problem, because it is a complex, in some ways local, problem 
that no matter how brilliant you all are and your staffs and 
how long you sit around and try and figure out what the best 
solution, that can't compare with the experimentation in the 
States. Look at North Carolina. Please do no harm.
    Chairman Bachus. Thank you.
    [The prepared statement of Hon. Thomas J. Miller can be 
found on page 159 in the appendix.]
    Chairman Bachus. Mr. Nadon.

STATEMENT OF STEVE NADON, CHIEF OPERATING OFFICER AND EXECUTIVE 
VICE PRESIDENT, OPTION ONE, ON BEHALF OF COALITION FOR FAIR AND 
                       AFFORDABLE LENDING

    Mr. Nadon. First, I appreciate the opportunity to testify 
today on behalf of the Coalition for Fair and Affordable 
Lending, which I chair. I want to commend Chairman Bachus and 
Chairman Ney and Ranking Member Waters for scheduling this 
hearing today.
    Without question, some lenders and mortgage brokers engage 
in inappropriate lending practices that need to be stopped. 
Many of these abuses are fraudulent, deceptive, and are 
illegal. Enhanced enforcement, together with more consumer 
financial education and counseling opportunities, are needed to 
help prevent them. However, significant new Federal statutory 
requirements are also needed to improve gaps or weaknesses in 
current law.
    CFAL believes that it is imperative that Congress promptly 
pass such new Federal requirements. H.R. 833, the Ney-Lucas 
bill, effectively addresses many of the current law's 
shortcomings. We urge Members to work together after this 
hearing to further refine H.R. 833 as may be needed to address 
any additional concerns and gain broader bipartisan support. We 
want to work constructively with you and other interested 
parties to help craft fair and balanced legislative proposals 
that can be the basis for new Federal law and that the full 
committee can act on it later next year.
    The Home Ownership Equity Protection Act of 1994, as it is 
referred to as HOEPA, was enacted to provide additional 
disclosures and substantive protections for certain of the 
highest-cost mortgage loans. Unfortunately, as I explained in 
detail in my written testimony, HOEPA is seriously flawed. The 
advocates point out that it is inadequate for two reasons 
primarily: It applies to only a relatively small portion of the 
higher-cost loans; and, second, that it fails to mandate any 
substantive protections that are needed to prevent certain 
abusive practices.
    The lenders acknowledge that HOEPA does not contain some 
restrictions that are needed to protect the borrowers from 
abusive practices. We also feel strongly that HOEPA is also 
fundamentally flawed because it includes unclear requirements, 
so lenders may not know what they are supposed to do; fails to 
provide a meaningful right to cure unintentional errors; 
mandates unduly severe penalties; and imposes liability on 
assignees who could not reasonably know of violations.
    HOEPA has the practical effect of prohibiting borrowers 
from being able to obtain legitimate nonprime loans instead of 
simply restricting inappropriate practices. Few lenders make 
loans that are subject to this statute, and there are virtually 
no secondary market purchasers of the relatively few that are 
made. The HOEPA loans that are originated are held by portfolio 
lenders who are likely to charge an even higher price due not 
to the borrower's credit, but due to the higher legal and 
reputational risks and reduced competition caused by the law 
itself.
    Despite its current weaknesses, CFAL believes that these 
problems can be solved. HOEPA can be amended to cover far more 
loans and provide significantly more protections. This can and 
must be done, however, in a reasonable and balanced manner so 
that lenders can continue to make nonprime credit available.
    My written testimony suggests a number of specific 
conceptual suggestions for amendments, which include, one, 
covering more loans by including purchase money and open-end 
loans, otherwise known as home equity lines of credit; two, 
adding restrictions on prepayment penalties; three, further 
limiting balloon payment terms and prohibitions on single-
premium credit life insurance and similar products; four, 
adopting a benefit test to prevent loan flipping; five, provide 
a meaningful right to cure unintentional violations; six is 
very tough language that would go after the bad actors who are 
intentionally violating the law; and, finally, enhancing 
consumer education and counseling, including helping with the 
State enforcement, which we think can be done by charging a fee 
to all lenders on the loans that are originated which can be 
put into some sort of an education or an enforcement fund.
    Congress has failed to update HOEPA over the last several 
years, and not surprisingly, therefore, starting in 1999 with 
North Carolina, many States and localities have enacted or are 
seriously considering enacting on their own prohibitive 
language or laws on predatory lending. However, they are 
developing into an arbitrary and irrational patchwork of laws 
that are in some cases inadequate and in others unduly 
burdensome and costly. Moreover, federally chartered 
depositories as well as some State-chartered entities are being 
exempted from these State and local law requirements. This 
creates not only an unlevel regulatory playing field for 
lenders, but also confusion and inconsistent levels of 
protection for borrowers. Many consumers are not being 
adequately or equally protected by these measures. In addition, 
the national nonprime housing finance market is being 
disrupted.
    As committee members know, housing is critically important 
to our Nation not only as home ownership, the American dream, 
and central to the welfare and stability of families and 
communities, it is vital for our Nation's economy. And nonprime 
mortgage lending is critically important for meeting the 
household housing credit needs of the millions of Americans who 
are unable to qualify for prime mortgage credit. This nonprime 
market last year amounted to approximately $213 billion, or 
about 10 percent of the overall mortgage market. Sixty-five 
percent of those loans were sold into the secondary market and 
ultimately securitized. Today one of the major reasons why the 
availability of nonprime credit has relatively low rates which 
average about 2 percent less than the prime rates is this 
securitization process.
    Securitization has provided capital from the national/
international markets to fund these higher-risk loans. This has 
made mortgage credit much more available and dramatically 
decreased cost to borrowers.
    The developing patchwork of State and local laws is 
seriously hindering lenders' abilities to continue providing 
nonprime mortgage credit that borrowers want and need. We have 
seen the effects of overreaching restrictions earlier after the 
nonprime lending market shut down in Georgia due to excessive 
restrictions in its lending law. We are now starting to see the 
same market disruption in New Jersey, Los Angeles, and Oakland 
for the same reasons.
    We ask that you work on a bipartisan basis to promptly 
develop balanced and workable new Federal responsible lending 
rules and make them apply uniformly so that all mortgage 
lenders are governed by them and that every American borrower 
receives the same effective protections.
    In closing, let me note that I think the American people 
are supportive of Congress acting as we suggested, as evidenced 
by a new poll that CFAL is releasing today. A press release 
describing the poll's findings is attached for your 
information.
    Finally, I want to emphasize that CFAL's members are 
flexible, we are very open to compromise and in developing a 
further refined bipartisan proposal. We really look forward to 
working with everyone on both sides of the aisle and with 
yourselves and the consumer groups to find a final solution on 
this.
    Chairman Bachus. Thank you.
    [The prepared statement of Steve Nadon can be found on page 
193 in the appendix.]
    Chairman Bachus. Let me start out by asking this: We have 
talked about OCC and OTS and preemption and the North Carolina 
law. Does North Carolina law, as I understand it, only apply to 
finance companies? It doesn't apply to national banks or to 
banks? What is it?
    Mr. Brown. Mr. Chairman, the North Carolina law was a law 
that was a consensus document, that was a consensus of all of 
the major banking operations in the State of North Carolina. 
And so the law sought to deal with a lot of the State-chartered 
entities such as the finance companies, but the law is quite 
pervasive. And the individual, both on the finance side as well 
as the lenders, the major depository lenders, have also been a 
part of the regulations of the North Carolina law.
    Chairman Bachus. So the North Carolina law applies to your 
depository institution?
    Mr. Brown. Well, it applies--it is focused principally on 
those State-chartered entities and finance--finance companies, 
but the coalition and the consensus of the local State bankers 
association, the mortgage bankers associations, et cetera, have 
essentially signed on to this legislation, to also follow the 
rules and the guidance and the guideposts of the legislation.
    Mr. Miller. Mr. Chairman, I have just been in court; I hope 
you are not insulted by calling you, Your Honor. I would just 
add that in North Carolina, some of the best things about 
democracy, serious problems addressed in a bipartisan way, 
addressed with the whole industry--practically the whole 
industry, including the banking industry, in and on a solution, 
and agreed to by most everybody, and, as we can tell, is 
working as well or better than anything else in the country.
    Chairman Bachus. Okay.
    Chairman Bachus. You know, you all's testimony has 
mentioned that many of the abusive practices are already 
illegal. What can Congress do, say, to enhance the enforcement 
of the existing law to help stop predatory lending?
    And, Attorney General Miller, you mentioned loan flipping. 
And, in that regard, I understand a lot of unscrupulous brokers 
and lenders, to avoid the flipping restrictions, they simply 
modify the terms. So could we address that problem maybe by 
restricting modifications or either deferral fees on HOEPA 
loans, number one? Is that something that would be helpful?
    And second is that the HOEPA legislation expressly grants 
the Federal Reserve broad authority to issue regulations to 
restrict anything that is unfair, abusive, or a deceptive 
practice. Would using that authority to define loan flipping as 
an unfair, deceptive, abusive practice enhance, say, the 
Board's ability to enforce and regulate the practices of the 
industry?
    Mr. Miller. It may well do that and potentially would be 
very constructive. One of the ways to deal with flipping is the 
net tangible benefit concept, that if there is a refinancing 
done in a relatively short time there would have to be a net 
tangible benefit for the individual as a result of the 
refinancing rather than the opposite, destructive credit, that 
I talked about. That is one concept that has been discussed.
    In terms of enforcement, you know, I think that there is 
room for a lot more enforcement. The problem is resources. One 
thing that was mentioned is a fund where there would be a small 
charge for each loan transaction put into an enforcement fund. 
That can be done perhaps at the State level. There is something 
you can do to provide funds to the States to enforce.
    That would definitely be helpful. I mean, we see the 
benefits of us being on the beat with the Household case, and 
other cases that we are looking at. But it is not strictly an 
enforcement problem. It is a problem that the law can be 
constructive in. The industry can do a lot to clean itself up 
and, as I mentioned, some of those are doing that.
    I do sense sort of an irony of some people calling for 
greater enforcement as they call at the same time for 
preemption that would take away some of the important laws to 
enforce. There is an inconsistency there.
    Chairman Bachus. Thank you. We sometimes on this committee, 
after time has expired, we ask another question. I am not going 
to do that. And we are just--if somebody is answering when the 
5 minutes runs out, that is the 5 minutes. With that, Ms. 
Waters.
    Ms. Waters. Thank very much, Mr. Chairman. There are a 
number of characteristics of predatory lending that are clearly 
identifiable. You were just asking about loan flipping, which 
we think is--some of us believe to be one of the most egregious 
characteristics of predatory lending. But let me just ask about 
a few of these.
    Let me ask the Mortgage Brokers Association representative 
about loan flipping. Do you believe that we should just outlaw 
this practice, or put a limit on the number of times a loan can 
be refinanced? What can you tell us about loan flipping that 
will help to get rid of the abusive practices and the harm to 
consumers that we see with this practice?
    Mr. Pickel. Well, there is a couple of things.
    Ms. Waters. What is our first--Mr. Crouch, is it? Mr. 
Couch.
    Mr. Couch. Yes. First, your question underscores one of the 
really difficult parts of this debate. You have suggested that 
loan flipping is a bad practice, and I would agree with you.
    Then we would immediately have to define loan flipping. For 
instance, personally I refinanced my house twice in 7 months. 
It was not an abusive situation, or I don't think it was an 
abusive situation. My own bank did it. In both cases I lowered 
my interest rate.
    Ms. Waters. May I interrupt you and get to the kind of loan 
flipping that I am talking about? A borrower is in trouble. 
They can't make their payments. They are in danger of 
foreclosure. The lender says, let me refinance this loan for 
you. And in doing that, they have to pay all of the charges 
that are required with refinancing, et cetera. And this is the 
kind of loan where the borrower is not able to really pay, and 
they keep getting deeper and deeper into trouble and maybe 
flipped a couple of times, and still the foreclosure takes 
place. That is what I am trying to get at.
    Mr. Couch. Well, as so often is the case in these debates, 
dealing with hypotheticals makes it very difficult. My bank, we 
would not refinance someone that didn't have a prospect for 
repaying their debt.
    Ms. Waters. Tell me what you think is a bad loan flipping 
practice.
    Mr. Couch. Well, I can describe a number of practices 
that----
    Ms. Waters. Just give me one.
    Mr. Couch. An instance where someone is deceived into 
repetitively refinancing their loan for the purpose of 
stripping out their equity would be a predatory practice. It 
would also be illegal currently. It would be a fraudulent 
instance, and it would be illegal under current law.
    Currently there are 22 Federal statutes that govern the 
application, funding approval and servicing of mortgage loans. 
Those laws, if properly enforced, would in fact take care of 
the vast majority of these situations that are oftentimes 
mentioned as abusive.
    Ms. Waters. Okay. So it is your feeling there are enough 
laws on the books, that we don't need to do anything else, that 
we should just enforce the law?
    Mr. Couch. Well, as I stated in my testimony, the Mortgage 
Bankers Association believes that the most effective tool for 
addressing issues of abusive lending are an educated consumer 
so----
    Ms. Waters. Okay. I have you. I understand you. What about 
balloon payments? Anybody? Should we just outlaw balloon 
payments?
    Mr. Couch. Would you like me to address that as well?
    Ms. Waters. No, you aren't doing too good.
    Mr. Nadon. Maybe I could give a little bit of an answer to 
that, at least from a lender's perspective. There are 
circumstances for some borrowers where in my opinion a balloon 
payment might be reasonable. But for most people I don't think 
that it is, because the amount of money that is required, it is 
very hard for most people to legitimately think that 5 or 6 
years down the road they are going to have enough money to pay 
something. They won't know what the market conditions are going 
to be. They won't know what interest rates are going to be, 
they don't necessarily know a lot of the changes in the economy 
or even their employment.
    So I would think we would want, at least from CFAL's 
perspective, to have very tight controls on when it would be 
appropriate to have a balloon payment. I can say, though, with 
that, that I have had some friends of mine, over time that they 
managed having a balloon payment on a particular property with 
a specific purpose on the property, and they managed it very 
well. But they are more sophisticated, they had a higher income 
level. They really had a better understanding of what they were 
entering into.
    Mr. Miller. And I think that is a very good point, that 
balloon payments make sense very rarely, and when they do make 
sense it is often in the prime market. It is often people that 
are in a very difficult situation. In the subprime market they 
very rarely make sense. They are almost always misleading. 
People don't know that it is a balloon payment, and then when 
they are done making payments they are going to owe a huge 
amount of money. In the subprime market balloons are a very, 
very serious problem and very rarely in the interest of the 
consumer.
    Chairman Bachus. Thank you.
    Mrs. Kelly.
    Mrs. Kelly. Thank you, Mr. Chairman. First of all, Mr. 
Chairman, I would like to enter into the record a letter 
written by myself and several other members of this committee 
to Mr. Hawke at the OCC.
    Chairman Bachus. Thank you. Without objection.
    [The following information can be found on page 289 in the 
appendix.]
    Mrs. Kelly. Thank you. Attorney General Miller, your 
experience with the investigations on these issues qualifies 
you to address the issue of whether or not a State Attorney 
General can protect consumers without the constant--and I am 
using this as a euphemism--help from the Federal Government 
regulators?
    Do you agree that there is a middle ground where local 
perspectives and practices can be respected by banking law, or 
do you feel that the Federal Government needs to get in here 
and adjust what is being done by the States?
    Mr. Miller. I think that the current system, up until now, 
where States and Feds enjoy a concurrent responsibility and 
concurrent authority is the very best one. And a good example 
is in predatory lending, where the States were doing the case 
with Household at the same time the FTC was doing the case with 
Associates, CitiGroup.
    We talked a little bit back and forth as to where we were 
at on the two cases. That is a very, very healthy situation. 
What is being proposed at the OCC to effectively take the 
States out of the joint effort in basic consumer protection 
dealing with national banks is just the wrong step. I think 
that we provide a good service, an effective service.
    I think two viewpoints are better than one on these issues. 
You know, I couldn't agree more with I hope what is in your 
letter, saying that the States should continue to have this 
responsibility that we have had traditionally and I think 
executed very well.
    Mrs. Kelly. Thank you. I hope my letter lives up to what 
your expectation is. But I also want you to know I intend to 
ask Chairman Oxley for a hearing. I chair the Oversight and 
Investigations Subcommittee, and I would like to have a hearing 
on whether or not the OCC is setting a policy that is going to 
preempt State laws. I think we need a clear set of principles 
about what Congressional mandates are all about on this.
    I am just not sure that the OCC has followed our 
Congressional mandates. And I would like to go back to you, 
Attorney General Miller, and ask you, is it your opinion that 
you think that Congress is--that that is a good idea? Do you 
think that Congress ought to have some hearings on the OCC's 
action before the OCC continues on with its intended course, 
apparently?
    Mr. Miller. I couldn't agree more, and please invite me 
back. I would like to come back and testify again. I think it 
is a very, very important issue. And what is being proposed is 
a radical change from what we have known, you know, throughout 
our Republic, this idea that State Attorney Generals and other 
State officials have for a long, long time enforced consumer 
protection laws, State laws, against national banks. And that 
has worked and worked very well. And what the OCC is now 
saying, and just think about this, that they can preempt 
certain State laws. We understand that. We might quarrel about 
which, but we understand they can preempt certain State laws 
that deal with national banks. But then they are saying, what 
State laws remain States can't enforce. We can't enforce even 
State laws relative to national banks, even a consumer credit, 
a routine consumer credit claim like a simple credit card 
issue, that if an Iowan came to me and wanted me to try and 
resolve this basic issue, a simple issue with a national bank, 
we couldn't do it, according to the OCC now.
    This is just a huge change. And what I have argued in 
another context is really a dagger in the heart of Federalism, 
that States cannot even enforce State law. That is wrong and I 
would welcome your hearing and talk more and be more upset even 
in that hearing.
    Mrs. Kelly. Well, sir, I hope that we are able to work with 
you and be able to bring that hearing into reality.
    I want to just go very quickly to Mr. Couch and just thank 
you very much for what I believe the MBA has tackled in terms 
of consumer financial literacy.
    I am wondering if you think we should consider beefing up 
the financial literacy programs for home buyers at HUD?
    Mr. Couch. Well, Congresswoman, thank you for recognizing 
our efforts in this area. We, over 2 years ago, came out with 
our Stop Market Fraud Campaign. This year we translated it into 
Spanish. Tomorrow, I will be in Dearborn, Michigan, to announce 
the translation of the program into Arabic for the Arab 
community there in Dearborn. So thank you for that recognition.
    I will go back to what I said earlier. Consumer education, 
wherever it may come, and I compliment the Congressman for his 
comments earlier about the provisions in his proposed 
legislation in that regard. Consumer education empowers the 
consumer to take advantage of what is already a very 
competitive marketplace.
    Every Sunday morning in Birmingham, Alabama, my prices are 
run in the Sunday newspaper right next to my 30 closest 
competitors along with telephone numbers and ways to shop us 
against each other. So if we can educate the consumer and keep 
the marketplace competitive, we can lick this.
    Mrs. Kelly. Thank you very much.
    Chairman Bachus. Thank you. The order on the Democratic 
side is Mr. Sanders, Mr. Watt, Mr. Lucas, Mr. Scott and Mrs. 
McCarthy, Mr. Crowley. Those are the next ones coming up. I am 
just going down the list that I have gotten.
    Mr. Lucas, Mr. Watt and Mr. Sanders have agreed to let Mr. 
Lucas go in front of them. He has got another engagement.
    Ms. Velazquez. Mr. Chairman, I have been losing weight, but 
I am not invisible, and I have been here, and I was one of the 
first who came here for this hearing.
    Chairman Bachus. What I will do, while he is asking his 
questions, I will give this list to the Democratic side and let 
you all come up with the order.
    Mr. Watt. She actually made her opening statement in front 
of me.
    Chairman Bachus. As I say, I didn't prepare this. But what 
I will do is I will put her ahead. I will do that, because if 
you all just tell me what is accurate, I will change it.
    Mr. Crowley. I was here first.
    Mr. Lucas of Kentucky. Be quiet, Mr. Crowley.
    My first question here is for Attorney General Miller. 
There is a lot of talk about net tangible benefit. How would 
you define net tangible benefit in a minute or less?
    Mr. Miller. Well, it is a somewhat amorphous concept, as 
you suggest, and it is clear at the extremes. It is clear when 
someone refinances and gets a lower interest rate, for 
instance, that obviously there is a net tangible benefit. When 
there is a refinancing at a relatively short time after the 
previous loan, and none of the changes are beneficial to the 
consumer, and he or she ends up paying 5 or more points, 
obviously there is no net tangible benefit.
    But I think the concept is, looking at destructive credit 
and constructive credit, is the consumer better off after 
having made the refinancing looking at the basic terms and the 
purpose of the consumer? Or is the consumer without any real 
advantage going further and further away into destructive debt?
    Mr. Lucas of Kentucky. Thank you. The next question
    is----
    Mr. Brown. If I may just add to that. In North Carolina, we 
looked at that as a broad spectrum. But when we look at a 
situation that we had in North Carolina, where a woman's 
husband died in Vietnam and needed to have some financing and 
went to her lender and got a 13 percent loan at the time, but 
also 10 percent fees tacked on and went into foreclosure and is 
now renting her place, well, is that what is not tangible?
    I think we have to get some of the experience on the lower 
levels and begin to look at the actual effect, as my honorable 
colleague has said.
    Mr. Lucas of Kentucky. Thank you. My next question is for 
Mr. Nadon. Do you think that it is really necessary to have 
extended assignee liability that makes Wall Street investors 
and pension funds liable? Why can't the liability buck stop 
with big lenders like you?
    Mr. Nadon. Well, we don't have a problem with it stopping 
with a big lender like us, because it is the larger lenders 
that are the ones that are doing the securitizations in the 
first place. The smaller players or those sometimes referred to 
as the marginal lenders don't really have the resources, the 
financial strength to go into the market doing the 
securitization themselves. So they ultimately wind up selling 
their product to maybe a company like ours or some of our 
competitors or selling them in small pools to aggregators who 
then take them to the market.
    The problem that we have seen on the assignee liability 
language is that no one has been able to draft something yet in 
the State laws that we have seen, aside from perhaps--the one 
that got the closest to getting it right I think is in North 
Carolina, to doing it in such a way that it does not scare off 
the capital markets.
    The good example that was in Georgia, it was sufficiently 
vague and unclear that the rating agencies, principally S&P, 
was not able to quantify the risk. And if they could not 
quantify the risk, they can't do their job for those people 
that would ultimately be the purchasers of the bonds.
    As a result of that, those of us that are completely 
dependent on the capital markets, Option One Mortgage is one of 
those companies, and one of the larger ones in this country in 
this business, we were just shut off whether we liked the law 
in Georgia or not. We could no longer lend in that State. That 
is the concern that we have with the way that the language is 
crafted. There is probably an answer in there, but it is not 
the one that we have had come out in all of the different 
cities and States so far.
    Mr. Lucas of Kentucky. Another question. We all know that 
mortgage brokers, they originate the majority of these loans. 
Do you think that current State laws are adequate for 
regulating these brokers?
    Mr. Nadon. No, I don't. And that is one of the serious 
problems that we have in this country today, is that if you go 
from State to State the rules on how you can become a broker 
and what kind of requirements you have to have really do vary. 
So it is very hard to get consistency in the quality of the 
brokers in a State-to-State type basis.
    Another serious problem is that there are bad players in 
the broker industry. Unfortunately, some people are more 
interested in making money for themselves and really not caring 
at all what happens to the end borrower. But there isn't a way 
for us right now as lenders to identify who those people are.
    So all that happens now is when we find them we cut them 
off. So we won't do business with them anymore, and in some 
instances our company has actually gotten the FBI and the 
police involved to try to put them completely out of business.
    But when those brokers get suspended or terminated from us, 
then they just submit their application to do business with an 
Ameriquest, a New Century or a host of other lenders out there. 
And they don't have a way that they can identify in the 
approval process that that broker is a bad player.
    And one of the things that is in the Ney-Lucas bill, which 
we like, is trying to create a national database which would 
allow us to do just that and try to create standards across the 
country for how a broker should behave.
    Mr. Lucas of Kentucky. Thank you, Mr. Chairman.
    Chairman Ney. [Presiding] Mr. Miller of California.
    Mr. Miller of California. Thank you, Mr. Chairman. When we 
look at the recent success of the subprime market, and that is 
not talking about predatory lending, but subprime home equity 
loans have grown 66,000 in 1993 to 856,000 in 1999. That is 
huge. And when you look at the other side of the subprime to 
purchase homes, it has grown from 16,000 to 263.
    And these really benefit people who have blemishes on their 
credit rating, who have no place else to go. And this patchwork 
of State and local laws that are being developed and created by 
well-intended individuals is rather scary.
    In Georgia alone, if you look at theirs, 35 companies, huge 
companies, said they would not be able to buy on the secondary 
market. Those include Freddie and Fannie. That is a huge, huge 
impact on the market.
    I talked to one lender in California about the potential 
impact of Los Angeles and their ordinance that is being 
somewhat modified and adjusted at this point in time, and I was 
told that the loan volume in Los Angeles alone will decrease by 
65 percent. This one lender, that is $600 million less 
mortgages for one company in Los Angeles alone.
    And Attorney General Miller, I am kind of partial to that 
name, so I guess I will address this question to you. Can you 
kind of expand on how this patchwork of laws and well-intended 
ideas might impact the overall market for subprime? And do you 
not see some consistency being required from Congress to deal 
with this issue?
    Mr. Miller. First of all, I agree wholeheartedly with you 
that the subprime market has expanded dramatically in the last 
10 years. By and large that has been a very, very good thing. 
And some people, you know, want to point out that subprime and 
predatory are different, and that is clearly right. Predatory 
is only a small piece of the subprime market.
    But you know, I am a believer in democracy, and I am a 
believer that States are the laboratories of democracy, and I 
don't think the Georgia experience was necessarily a bad 
experience in this sense--that they appeared to go too far on 
assignee liability and created some problems of availability, 
so they had to pull back. So, you know, what did we learn from 
that?
    Well, we learned not to go that far. And Georgia citizens 
weren't really impacted terribly because they made the change. 
That is how democracy works, and that is how the laboratories 
of democracy work. We know from the discussion today that North 
Carolina has found a very, very good balance that States should 
look to emulate.
    I think working through the States and working through 
these laboratories of democracy is a very good thing. And as 
George mentioned, they can be self-corrected very easily. It is 
not like having to go through Congress and pass an act. If 
there is a problem, legislatures can move very quickly. They 
did that in Georgia, and I think that is fine.
    I think we are learning more and more about what needs to 
be done and, in the case of Georgia, what shouldn't be done. 
That is healthy. That is not bad. That is our Federal system.
    Mr. Miller of California. Laboratories of democracy is one 
argument. We recently went through the argument with Freddie 
and Fannie as an example of how do you develop programs and, 
under that umbrella, the products that can be immediately put 
into the marketplace. And you are dealing with major lenders 
here who are trying to lend to every State in the Union and 
every community and county within those States.
    And when you have each city coming up, Oakland having their 
own, Los Angeles having their own, Pittsburgh having theirs, 
some other State having theirs, don't you think there is going 
to be a dramatic impact on loan availability to consumers and 
consistency for consumers? Does not that impact those 
individuals who are, you know, having difficulty sometimes 
qualifying for subprime? Doesn't that impact the market 
overall?
    Mr. Miller. If I can respond. I don't think so, because, 
you know, look at the statistics you just cited, this enormous 
growth in the subprime market while all of those things were 
going on. I have less sympathy, and maybe it is because of my 
perspective of localities doing separate statutes.
    Mr. Miller of California. But these changes have been 
recent. Georgia was 2002. A lot of them are this year even. So 
it is not going back 10 years.
    Mr. Miller. North Carolina is 40 months ago, and other 
changes have taken place as well, and it hasn't choked it off, 
and I don't think it will. And the point is where it does the 
market really gets involved and says, okay, we are not going to 
play there. So then the locality or the State has to change the 
law. That is part of the democratic process.
    And with this overwhelming amount of money that I referred 
to in the subprime market, you know, there is some margin for 
error. There is margin for give. I am not concerned that people 
are not going to be able to get loans that should get loans 
because of this experimentation and this give and take.
    Mr. Nadon. If it would be appropriate for me to enhance 
some of the comments, because I actually agree with some of the 
things that Mr. Miller is saying. But the challenge for us is 
that we had the Georgia experience, where we all--all of the 
good lenders had to pull out because of the way that we fell 
into the secondary market. That access got shut off to us.
    That is going to happen again here at the end of this month 
in New Jersey. They have enacted--I think it is November 27th 
that it goes into effect. And under that legislation, the 
rating agencies have a similar issue to the one that they had 
in Georgia.
    Our company alone is lending approximately a billion 
dollars a year in the State of New Jersey. About 60 to 70 
percent of that business is going to go away as soon as that 
law goes into effect. So I would just say that there is 
consequences that we have to think through before we enact such 
legislation.
    Chairman Ney. Thank you. Mr. Sanders, I am going to let you 
advise me who is next.
    Mr. Sanders. You are passing this buck to me?
    Chairman Ney. Yes, sir, officially.
    Mr. Sanders. Thank you, Mr. Chairman. Let me direct my 
remarks, if I might to Mr. Miller, Mr. Brown and Mr. Fishbein.
    The real discussion here is whether or not States and 
cities have the right to protect consumers. My understanding is 
there are about 20 States in this country, and 20 localities 
who have passed strong anti-predatory lending consumer 
legislation.
    My understanding is that in your own State of North 
Carolina, according to the Coalition for Responsible Lending, 
the North Carolina anti-predatory lending law saved homeowners 
$100 million in its first year alone. So my question to you is, 
if the United States Congress takes what seems to be a rather 
Draconian action and says 20 States who elect their own 
Governors and Attorney Generals, who have passed legislation, 
we are wiping you out, 20 cities, we are wiping you out, we 
know better than you, what is the impact on North Carolina and 
in other States? What does this mean for consumers, and who is 
behind this? Who is hurt by this Federal action? Who benefits?
    Why don't we start with the Attorney General? Mr. Miller.
    Mr. Miller. Well, consumers don't benefit in those 20 
States. It would be incredibly sad to have North Carolina 
develop that law, building a consensus within their financial 
community, having it work and work well for 40 months now, 
consumers being saved I think you mentioned a hundred million 
dollars, for Congress to come in and say, well, we know better, 
that is too strong a law. And I think all of the proposals are 
far short of North Carolina, I think it would be wrong for 
Congress to decide that North Carolina law, even though it 
works and we know it works, it is the best in the country, the 
people of North Carolina can't have that, because for some 
reason we want uniform authority throughout the country.
    What Congress should do, if they wanted to act, in my 
opinion, is basically enact the North Carolina statute as the 
national standard and make that a floor. Let the States 
experiment further. If we can find something better than North 
Carolina after a few years, come back and do that. That would 
make the most sense.
    And, as I say, it is not going to impact credit. Where 
credit is impacted, there is a pushback. Where people, where a 
large number of people can't get credit, there is a pushback, 
there is a change in the State law, a change in the ordinance. 
It is self-correcting out there.
    Mr. Sanders. I agree with you, and I think it would be 
outrageous for the United States Congress to take away what so 
many States and municipalities have done. Mr. Brown and Mr. 
Fishbein.
    Mr. Brown, do you want to comment on that?
    Mr. Brown. Yes. I have to echo what Mr. Miller said. In 
North Carolina, if the North Carolina law had not been in 
place, we would have continued to see an erosion of the 
position, the financial wealth and the stripping would have 
continued. So that we have estimated, as we said before, about 
$9.1 billion you have stated that we see lost as a result of 
the predatory practices. That number would continue to 
escalate.
    Mr. Sanders. So you are saying consumers will be 
substantially harmed?
    Mr. Brown. Consumers would be substantially harmed, and all 
levels of consumers. The interesting thing, if I may say that 
we are looking at, sometimes when we are looking at this 
market, the mortgage market as a global marketplace, and that 
we are concerned about its impacts in certain areas of 
secondary markets, et cetera.
    But we have to begin with the homeowner, and we have to 
begin in looking at ways in which we can quickly address the 
issues that arise in our localities. And to take away that, 
this is a laboratory of democracy, this is pure democracy, 
period, which is no laboratory. And we cannot lose that. I 
absolutely agree with Mr. Miller. If there is going to be a 
national law and there is a floor, North Carolina has the 
example what that floor ought to be.
    Mr. Sanders. Congratulations on your work. Let me ask Mr. 
Fishbein.
    Mr. Fishbein. I want to agree with the remarks by Attorney 
General Miller and Mr. Brown. I would just add that some see 
what has happened in the past years with State legislation as 
somehow a negative outcome, when in fact I think it has been a 
very positive one. Because States have been experimenting and 
developing and addressing some very complicated issues, and 
they have the ability to respond and change, and the proper 
balance is emerging.
    What I suspect you will see over time is that when the 
right balance is struck, you will see more and more States 
enacting very similar types of laws, whether it be North 
Carolina or others.
    Secondly, we don't think this is an either/or situation. I 
think it is correct to say that the Federal regulation can be 
improved and establish certain minimum requirements. If those 
are good requirements, that will probably act as a disincentive 
or deterrence from States feeling a need to address the issue. 
But if there are particular issues in their State that are not 
addressed by Federal law, there certainly should be a 
continuing opportunity for States to regulate in that area.
    Mr. Sanders. Thank you very much. Thank you, Mr. Chairman.
    Chairman Ney. Mr. Scott of Georgia.
    Mr. Scott. Yes, sir. Thank you very much, Mr. Chairman. I 
appreciate that. I wanted to add two lines of thought. First 
one is on financial literacy. I certainly appreciate the 
comments that all of you have on both sides of this for the 
need for financial literacy, and, of course as I mentioned 
earlier, we certainly want to thank Chairman Ney for 
incorporating our financial literacy bill in the main bill.
    We have got several components of that, one of which is the 
toll-free number, the grants to the States, setting up the 
local advisory predatory lending committees.
    So far we have about $50 million incorporated through 
Federal funding for our efforts. I wanted each of you to kind 
of respond how you, or what resources that you could bring to 
assist us in that effort. My colleague, Congressman Ford, 
mentioned our effort to expand this financial literacy to our K 
through 12, with an amendment that I offered with Mrs. Biggert, 
Judy Biggert. We did just that, initiating $5 million 
initially, and securing another $80 million through the 
Securities and Exchange Global Research Fund.
    Financial literacy takes money. It takes support, and I 
know that one or two of you mentioned your support for that. 
Could you give us some specific ways which you in the private 
sector could add to assist us in funding these financial 
literacy programs as a joint function with the public and 
private sector?
    And the other question I want to have, because I know I got 
my 5 minutes, is in addition to the financial literacy, once we 
have got that into the bill, there is another contentious issue 
here, which we have touched upon, which is the preemption 
issue. And I come from Georgia. We are the laboratory of 
everything. We have not been as successful as North Carolina, 
but we have been in there punching.
    And as a State Senator, I helped to author the first bill 
in response to Fleet Finance coming in and using our usury 
laws, which we put licensing and that sort of thing on. I was 
very concerned, because I was one of the authors of the Georgia 
Fair Lending Act, in which the Office of the Comptroller of the 
Currency came in and ruled on the assignee liability, and I 
felt at that time that the assignee liability was going to 
bring some serious issues. I think we can learn from the 
Georgia experience and how to craft this legislation to do two 
things, carve out the role for the Federal Government. Instead 
of preemption, which I do not agree with, I think you are 
absolutely right, I think there is a role for the States. I 
think they are unique. Each State has it own characteristics. 
And coming from a State legislature, I know the value of being 
able to be on the ground responding to that.
    But I think through the assignee liability issue that the 
Office of the Controller of Currency brought up comes the role 
of the Federal Government, and that is to set the national 
standard. If we had set a national standard for assignee 
liability, that would have been a guide that we could have used 
in Georgia to avoid the whole thing.
    Perhaps we can come up with a national standard on balloon 
payments, on some of the other definitions that we have. I 
would like to get your take on those two points. One, your 
support in bringing resources to help us with our financial 
literacy program as an ongoing basis.
    And, thirdly, your response to the State preemption issue 
and the necessity of carving out a role on our developing a 
national standard on those issues.
    Mr. Nadon. First, on the educational part, that is 
something that we really believe strongly in, that in the long 
term the real answers to most of these issues rest in 
education, consumer education, improving financial literacy. 
Because we strongly believe that if people really do understand 
the terms of anything they are entering into, if they know what 
questions to ask, and they know when a good answer and a bad 
answer comes out, they are probably not going to get themselves 
in as much trouble.
    So we think that is very important. So there are a number 
of things that we do, and we actually sponsor Jump Start, among 
other things, which is a program that goes through K through 
12, where we are actually giving money and sending people out 
to start educating kids when they are going through that part 
of their life on some of these financial matters that they 
never hear about in high school or in college.
    We have also got an Option One Mortgage University that we 
have got off the ground now that works across the country to 
educate brokers, and we are going to expand it to get out to 
the average consumers. We are now talking with Fannie Mae to 
partner with them to do it across the country and with the MBA 
to help do things across the country on a more national scale 
with all of us contributing dollars to try to make it happen.
    We are working with the Fannie Mae Foundation to try to 
find more ways that we can get better informational tools in 
the hands of the borrowers at the time that they apply with us, 
not before they are ready to sign loan docs, but when they are 
first getting an application in the system, so that they can 
know places that they can go to get better information.
    So we are very focused on the educational part. And if I 
can just take a couple of seconds just to give a different 
point of view on the preemption part or the State versus the 
locality or State versus national.
    One of the concerns that we have if we allow all of the 
States or cities to craft their own legislation is that I will 
have a neighbor some day who lives right down the street from 
me, because we are right on the border between my community, 
Laguna Niguel and Dana Point. And Dana Point may have a law 
that is different from the one Laguna Niguel has. And simply by 
virtue of buying his house four doors farther down the street 
and across the street from us, he may not have as much 
protection as I will have, if Laguna Niguel crafts a better 
law. We have a serious concern about that.
    It is interesting to note that in the North Carolina law, 
which I believe there is a lot of very good qualities in the 
North Carolina law, the people that crafted it, in my opinion, 
I think were very well intended and pretty well educated. 
Martin Eakes is someone I happen to have a lot of respect for. 
I think they did a really nice job.
    But I think they have got preemption in there with 
localities, if I am right. So they are saying to the cities you 
cannot come in and write a new rule in one of our cities in 
North Carolina that is going to supersede what we do in the 
State. And I think the reason behind that is, maybe the same 
reasoning that we are saying on a national scale, we think it 
should be a national law versus every State or city doing 
something.
    Mr. Pickel. Mr. Scott, I can speak for NAMB and tell you 
that because we are so close to the consumer with 16,000 
members, we will do everything we can to take education to the 
streets. We have already done a course called, Are You Prepared 
to Head Down the Road to Home Ownership? It is in English and 
in Spanish. It is designed for that borrower who is a first 
time homeowner or home buyer who really doesn't know where they 
are going.
    So we are committed to helping educate people to know 
really what they are getting into. The other thing I would like 
to comment on, there is another aspect of financial literacy, 
and that is making sure that the people who are there, you know 
whom you are dealing with.
    There was a comment earlier that characterized mortgage 
brokers I believe somewhat unfairly as being the people who are 
getting people into these home loans that are predatory, and I 
don't think that is the case.
    NAMB has worked, I can't tell you in how many States, I 
believe it is 20 States, where we have tried to get the Model 
State Statute initiative in there, where we want licensure, 
education, prelicensure, continuing education, and a 
registration. We believe that there also ought to be a national 
registry for all loan officers, because that guy that I fire 
for doing something wrong, I want to know where he goes, 
whether it is a mortgage banker, a mortgage broker, or a bank, 
or a credit union or wherever he goes.
    So I think the other part of financial literacy is making 
sure that the right people are doing the right things as well 
for our consumers in the United States.
    Chairman Ney. Your time has expired.
    Mr. Scott. Mr. Chairman, I just wanted to make this one 
last point, and I will be through. I should have narrowed and 
focused my point a little further. But I do believe that, as 
one of the panelists had mentioned, the possibility of 
incorporating some fee structure added in that could go to 
assist our efforts in what we are doing in the law itself to 
help us to fund those programs.
    And I think that that--is that true?
    Mr. Nadon. That is true. CFAL believes it is a very 
creative way that the industry might actually be able to 
contribute. And we know that funding for some of these things, 
educational, even enforcement, can be difficult in States or 
cities these days. So we are saying let us pony up some of the 
money for that out of every loan that we fund. We are not sure 
how it is administered, but we know we can bring some money to 
the table to help the process.
    Mr. Scott. That is what I wanted to see if we could not 
explore, Mr. Chairman, as we move forward with our financial 
literacy bill, a way for the private sector to help us. Thank 
you.
    Chairman Ney. Thank you. I would also want to submit for 
the record, several groups have contacted the committee to ask 
their statements be submitted for the record. Therefore, 
without objection, the statements of America's Community 
Bankers, American Land Title Association, Consumer Mortgage 
Coalition, the Credit Union National Association, as well as a 
study by Michael Statton of the Credit Research Center on the 
effects of the North Carolina predatory lending law will be 
entered into the record.
    [The following information can be found on pages 330, 334, 
392, 418 and 446 in the appendix.]
    Chairman Ney. I would also note, and I am going to make my 
questions very brief, and if I can get some brief answers, 
because we have another panel that has yet to come. I think it 
has been a good healthy discussion today.
    Mr. Pickel, I just wanted to focus, with a brief answer if 
I could, what is the critical difference of the State registry 
versus the national registry, in your opinion?
    Mr. Pickel. Well, the reason we would like a national 
registry is we want to track the guy if he goes State to State. 
Several States have a registry. In fact, in Kansas we use the 
Model State Statute initiative. We license both loan officers, 
if they are a mortgage banker or mortgage broker. We require 
continuing Ed.
    We just feel like if we have a national registry similar to 
the one that NASD, our self-regulating organization, we would 
like to follow that model. Currently, we feel like that could 
take the bad actors out of the business, just like on the 
mutual fund situations going on right now. You can find those 
guys and you can get them out.
    Chairman Ney. I know that there was a case of a guy that 
did hideous things, and he went to another State and did them. 
And unless that State had a good registry and you are able to 
catch them right when they came in, if you don't have a 
national registry you are just not going to catch a person that 
keeps going place to place. So I was wondering if you thought 
it was a critical part.
    The other question I have is for the Attorney General. In 
your testimony, Attorney General, you made the point that North 
Carolina law has reduced access to predatory lending, not 
access to appropriate lending. And I wondered if you could talk 
a little bit about how you came to that conclusion, and is 
there any study towards it?
    Mr. Miller. Yes, there are, Mr. Chairman. In fact, I was--
it was previewed by Congressman Miller, who talked about the 
UNC study. The UNC study is, I think, the best study, the most 
comprehensive study of the North Carolina situation.
    Chairman Ney. If I could, Mr. Attorney General, the other 
point I want to make now, in fairness, not to wait for your 
answer, is that there have been arguments because of the law, 
in fact, people have scaled back the amount of credit 
available, therefore there is less credit available to people.
    So that is why I wondered about your conclusion.
    Mr. Miller. Exactly. And the study indicated that as to 
purchase money transactions for homes, buying the home for the 
first time, over a 4-year period North Carolina lending went up 
43 percent, which is at exactly the same as the rest of the 
South.
    On refinancing, they may have dropped off a small amount. 
But we would argue that that would be natural, that at the 
margin if destructive debt is being eliminated, there would be 
somewhat less financing. And that would be a good thing if it 
was the financing that was destructive. There is, I don't 
think, any suggestion by anybody, Congressman Watt and George 
Brown would know better than I, that there is a dearth of 
credit in North Carolina, that there is a problem with subprime 
lending not being available. I don't think there is any 
indication of that.
    And the North Carolina study indicates that probably it was 
targeted to do exactly what it did, not harm constructive 
lending, but to limit, at least at the margin, destructive 
lending.
    Chairman Ney. Do you think it was different than what 
Georgia did, because, as you know, Georgia had to come back and 
undo a few things, especially in assignee liability.
    Mr. Miller. It was different in terms of assignee 
liability. And, you know, I think--I am a great believer in the 
concept of laboratories of democracy. The States are 
laboratories of democracy.
    We learned a lot about what should be done in North 
Carolina. Georgia, you know, probably pushed assignee liability 
too far. We have learned something from that, and we really 
should be indebted to both States, because we learned a lot 
from both States, and that is how our system should work at the 
State level.
    Chairman Ney. I also think really, coming from the State 
house, originally in the State Senate in Ohio, and being
    very--obviously I am for home rule and States rights, but I 
think if you had asked me 15 years ago about standards, I would 
have said we were going after preempting the States. Things 
have changed so much in the United States that now what happens 
in Georgia affects the rest of the country and what happens in 
North Carolina or Ohio.
    That is why I look more towards the discussion, at least, 
of a national standard; whereas things were pretty well set, I 
think technologically in the way we operated in the United 
States 15 some years ago, that, you know, the fact that we 
didn't even have interstate banking in the State of Ohio until 
around 1988 or 1989.
    So I just think a national standard is--more of a national 
standard than a total, you know, preemption of the States, I 
think a lot of things have evolved to at least that is a 
discussion point these days.
    Mr. Miller. That is certainly a worthwhile discussion. What 
I suggest in that regard is that the best system we know is 
North Carolina. If you wanted to have national legislation 
parallel North Carolina, because that has worked best, but 
don't preempt the States. Let the States experiment around the 
edges as well.
    But I think if North Carolina is as good as we think, most 
States wouldn't change it, wouldn't change much. If some State 
found a better way to do it, you could come back in a few years 
and make that part of the national standard. I think that is 
the best way to balance the two realities that you just 
described.
    Chairman Ney. Thank you.
    Mr. Couch. Congressman, I was just going to follow up, with 
all due respect to General Miller. The statistics that he keeps 
talking about on the edges, if you look on page 19 of the UNC 
study, which by the way was funded by Mr. Brown's group, the 
drop in North Carolina in the seven quarters following 
enactment of the statute was 20 percent in subprime refinances 
according to that study.
    Now, there are others that suggest that it was much greater 
than that. We at the Mortgage Bankers have extrapolated that. 
That works out to be about $300 million of loans that weren't 
made to 4,000 borrowers. So it is important to read the entire 
study, I think, and all of the studies that are out there 
regarding North Carolina.
    Mr. Brown. Well, Mr. Chairman, if we really honestly look 
at the study from top to bottom, the reduction of some of the 
refinances, mortgages, I think, again, is not just hitting at 
the perimeter or the fringes, it is hitting at the problem that 
we want to address in America, period. That is to provide that 
the incidents of predator lending practices naturally, when we 
are talking about flipping and other equity stripping features, 
tend to be right at that particular aspect of refinancing.
    And the law, a very balanced law with fundamental, massive, 
unanimous statewide participation said, and it shows from the 
study, that we have gotten rid of situations that could turn up 
like the woman I have talked about before, where we are putting 
at risk homeowners who could, through the added-on fees and 
flipping of mortgages, might wind up in a very serious 
foreclosure situation.
    So we have not dried up credit, it has increased. We have 
reduced by 72 percent prepayment--loans that are being made 
with prepayment penalties. Almost in my view, wiped it out. The 
UNC study, one of the best, has shown us that we have done 
exactly what the law intended to do.
    Chairman Ney. Thank you.
    Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. Mr. Brown, do you 
have any suggestions as to how this committee can resolve the 
issue of assignee liability in a way that protects the 
consumers and allows companies who purchase loans on the 
secondary market the ability to still be successful?
    Mr. Brown. That is a tough question for a newcomer like me. 
However, let me take a crack at it. It is very clear that the 
fundamental issue of assignee liability has to be there to 
protect the homeowner whose mortgage is being purchased and who 
has to be in a position to defend situations in which there 
arose a predator lending practice. We have got to have that.
    The extent to which we can look at other examples in the 
Federal Government, in the consumer lending area, to begin 
with, the SEC's holder, in due course holder provisions, to be 
able to look at things such as safe harbors and how we begin to 
fashion, if we think it is prudent, certain caps or assignee 
liability provisions. These kind of things are not done 
overnight.
    To the extent that we are starting here today, we would 
love to work with you and begin to fashion ways in which we can 
come up with provisions that--Georgia, in their desire to get 
into predatory lending, saw that the road that they took in one 
level was not the right road and came back and changed that, 
through the way in which it ought to be, local, local 
provisions and local government.
    So we think there are some things we can look at. Some 
examples come from this whole issue of assigning liability. It 
is not uncommon, period. And I am sure, as many customers say 
in the mortgage lending business, it is there. We can fashion 
ways to do it that will protect the consumer and will not 
provide an opportunity for raiding agencies to say that it is 
going to impact the liquidity of the secondary market. Done 
every day. We have got to take a look at how we can address it 
in this particular area.
    Ms. Velazquez. Thank you. Attorney General Miller, what are 
the failures in lender due diligence and quality control you 
have seen in the predatory lending cases you pursued, and how 
have they exacerbated the abuses that you prosecuted?
    Mr. Miller. I think the best example and the most 
unfortunate example of assignee responsibility or lack of 
responsibility is the FAMCO case, which was the worst case of 
predatory lending we have seen at the national level. And 
Lehman Brothers did the securitization there and were sued over 
that and held liable, at least in part, for their 
responsibility there.
    It seems to me that on assignee liability you need to avoid 
the extremes. You need to avoid the extreme of making it too 
difficult, too risky, for the investment banking firm. You can 
do things like limit the liability to the amount lent, not have 
them be responsible for concepts like net tangible benefit, 
which I admitted were somewhat amorphous.
    On the other hand, you need to avoid the idea that they 
have no liability at all. They should have to do some due 
diligence. If they know that they are dealing with a crook, or 
a bad operator, and they go ahead and securitize anyway, they 
should have to take responsibility for that because, again, 
FAMCO is the example. They were able to perpetrate their fraud 
and their harm much more dramatically because they could 
securitize.
    Ms. Velazquez. Thank you. Mr. Fishbein, beyond stopping 
predatory lending, could you give us your opinion as to how 
anti-predatory lending laws help responsible lenders better 
serve minority and low income communities?
    Mr. Fishbein. Well, I think the--as I have indicated in my 
testimony, subprime lending is so heavily concentrated in 
minority areas that it can cause particular problems in its own 
right,and what anti-predatory lending laws do, if they have the 
proper standards in place, is that they help to weed out and 
curb the worst practices. They help ensure that borrowers are 
getting into loans that are affordable, and therefore are less 
likely to go into foreclosure, which can have devastating 
effects on those families and their neighborhoods, and good 
protections we think is very helpful to the marketplace, 
results in better subprime lending occurring, and ultimately 
takes out some of the worst abuses that are bringing down the 
very purposes that they are intended to serve.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    Chairman Ney. Thank you.
    Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. I will be quick. I just 
want yes or no answers. Is there general agreement that the 
North Carolina statute is better than the Home Ownership and 
Equity Protection Act of 1994?
    Mr. Miller. Yes.
    Mr. Brown. Yes.
    Mr. Couch. No.
    Mr. Pickel. No.
    Mr. Watt. So we have got two on the end that don't agree.
    Okay. Is there general agreement that if Secretary Hawke's 
regulations go into effect, that the Home Ownership and Equity 
Protection Act would take precedence over the North Carolina 
law insofar as Federal institutions are concerned?
    Mr. Couch. National banks, yes.
    Mr. Watt. National banks.
    Mr. Fishbein. Let me go a little further than that, because 
the Controller has had a very aggressive form of preemption 
that he is proposing that would actually affect State chartered 
operating subsidiaries of national banks, and to that extent it 
would actually preempt State enforcement in that area as well. 
State chartered institutions would be preempted from having 
State laws apply to them.
    Mr. Watt. Okay. Is it true that you all think that we need 
a hearing on that, on the proposal?
    Mr. Fishbein. Yes.
    Mr. Watt. I yield back, Mr. Chairman.
    Chairman Ney. Thank you. And next would be Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman, and let me see if I can 
do this, maybe not as quick as Mr. Watt, but quickly.
    I guess I will just ask this first of Mr. Pickel and Mr. 
Couch. It seems that very few prime lenders charge prepayment 
penalties, but the majority of subprime lenders do.
    My question is if that is the case, doesn't it make it more 
difficult for people to improve their credit rating in a few 
areas to access better rates?
    Mr. Couch. I would probably debate with you the issue of do 
primary lenders ever charge prepayment penalties. We actually 
have products that we offer where if you are willing as a 
consumer to accept a prepayment penalty we will offer you a 
lower interest rate on your loan.
    It is an advantage to consumers. We also, on occasion, will 
allow consumers to finance closing costs at the front end of 
the loan, and pay us back, in essence, through a slightly 
higher interest rate on the loan.
    And the only way that works is if you have some assurance 
that the cash flows are going to continue for long enough to 
repay that loan, if you will, and prepayment penalties are a 
way of doing that.
    It is important to point out we are also a commercial 
lender, and this year we will do a billion and a half dollars 
worth of commercial loans, multifamily, shopping centers, 
office buildings, those sorts of things, in virtually every, I 
can't think of an exception, in every loan, and these are 
sophisticated borrowers that we are lending to. In every loan 
we have a yield maintenance provision. If it is a fixed rate 
loan, we have a yield maintenance provision, in essence, a 
prepayment penalty. So it is not on its face an unconscionable 
term.
    Mr. Pickel. Sir, I think as brokers we sell the products 
that the lenders offer us. The prepayment penalty can always be 
bought out. I can tell you that in my own company a lot of 
times we will buy that out. I think the prepayment penalty can 
help do what Mr. Couch said. It can ensure the lender of a 
certain rate of return over a certain period of time. But our 
goal is to help the consumer, always has been. And what we 
really want to do is--I can tell you a number of instances 
where we have taken people out of subprime loans and put them 
into a conforming loan once they have got their credit back on 
track.
    So if the prepayment penalty helps us to get a lower rate 
at the beginning for that consumer, then we like that. But we 
want the consumer to know what they are getting into. We want 
to tell them what it is, we want to tell them how long it 
lasts. We want to give them an option not to have it if they 
don't want it.
    Mr. Fishbein. Congressman, if I can just comment on that. 
When you consider that a significant part of the subprime 
market is comprised of borrowers who would qualify for cheaper 
loans, so says Freddie Mac and Fannie Mae, then prepayment 
penalties are actually even more pernicious than that.
    They are actually hooking people into paying on top of the 
higher interest rates they are already paying with back-end 
fees that in many cases that they were not aware of when they 
find out that they could qualify for a cheaper loan.
    Mr. Nadon. If I might be allowed to just add one comment to 
that. We do a lot of business with Fannie and Freddie over the 
years. Freddie was one of the biggest buyers of our bonds over 
the last 5 or 6 years, and they have done extensive due 
diligence on the loans that we produce. We are a nonprime 
originator, and their conclusion was that a small percentage of 
the loans, when you looked at the complete file, would have 
actually passed their automated underwriting engine. On a FICO 
score basis only, yeah, but there is a lot of other 
requirements that the prime loans have that are not part of the 
loans that we are originating. And because our borrowers didn't 
have 2 months of cash reserves, they were looking for more cash 
out than the prime lender was willing to do for them, or the 
guidelines would allow.
    It is things like that, that actually took most of those 
loans out of qualifying, and Freddie was able to validate that, 
as has Fannie Mae, by doing personal due diligence on our loan 
originations for the last 6 years.
    Mr. Meeks. And I am just trying to get into how you do 
business. You know, folks are saying in my district how 
nonprime lenders usually charge unreasonably high rates and 
fees, and they don't make loans according to people's credit 
risks.
    I am just asking you, I guess, because of your company and 
your business, can you explain to me how companies like yours 
price on the base of risk?
    Mr. Nadon. I am going to say it is an easy thing. It is 
easy to sort of understand the concept, but it gets more 
complex, obviously, in the doing.
    But there are several layers of risk associated to our 
loans, and unlike the prime world where the rate--you qualify, 
everybody gets that same rate. So whether you had a 780 score, 
685 score, whether it was 80 percent loan-to-value or 60 
percent loan-to-value on a prime loan, you get the same rate.
    Ours are actually priced according to the various layers of 
risk. So our minimum loan rates start in the 5 percent range 
and they work their way up to where our average coupons on our 
loans, the weighted average interest rate charged in our loan 
pools today are mid-7 percent range. We average today roughly 
150 to 175 basis points higher on our average products than 
where the prime world is today. And we look at factors that--
each on their own is a risk factor, things like the loan-to-
value, the credit profile of the borrower, their past payment 
performance on a prior mortgage or mortgages that they have 
had.
    We look at what their income-debt ratios are. We look to 
make sure that they can verify all of their cash flows. For 
some self-employed borrowers--we have a lot of small business 
owners that come to us, and so their cash flows are not 
consistent because they are not getting a regular paycheck 
every week. We look at how the cash flows are coming through.
    We look at--all those various factors in and of themselves 
are credit components to it. And the ones that are on the low 
end of the scale--so loan-to-value is less, their debt-to-
income ratio is lower, their credit performance is better, 
their past mortgage performance, payment performance is 
better--are paying a lower rate than those that may have a 
higher debt ratio. Or where the loan-to-value is higher means 
the risk we are taking is a little bit higher, are where those 
others layers of risk get started adding on. And that is what 
drives the rates up.
    So if you were to look at our credit components, not 
isolated one by one, starting at the best quality and then 
adding those layers of risk, you would see the incremental 
increases in the interest rate charged on the loan based on the 
credit factors.
    Mr. Meeks. Thank you.
    Chairman Ney. Mr. Crowley.
    Mr. Crowley. Thank you, Mr. Chairman. I apparently have 
lost too much weight. So those--you weren't here before, Mr. 
Chairman.
    Let me just ask a question that has been spinning around 
for a couple of days as I focus on this issue a great deal 
more. What product would have been available to individuals who 
have availed themselves of the subprime market had this product 
not expanded, or this market not expanded, over the last 
decade? Where would people who were able to avail themselves of 
getting a mortgage loan or getting a car loan or getting a 
small business loan--where would they have gotten that loan had 
they not had the vehicle of the subprime market to do it in?
    It is for anyone, basically.
    Mr. Nadon. I can tell you from my personal experience--I 
have been in this business for a long time, almost 30 years 
now, and the way that we used to give money to these very same 
borrowers; they literally are the same people that I was 
lending to in 1977, 1978, and 1979, and I was doing it then in 
a finance company. And as recently as probably 10 or 12 years 
ago, the finance company rates could be upwards of 18 percent. 
So on a mortgage loan we had products that were priced at 18 
percent with 10 points, 15-year, fully amortized, and that was 
the deal. You didn't have any negotiation on that.
    That same borrower could come to us today on our various 
loan products and obtain a first mortgage in the 6 or 7 or 8 
percent range, depending on the various credit criteria that 
they have got, and it could be either a 30-year fixed, it could 
be fixed for 2 or 3 years and then convert to an adjustable 
rate mortgage after that. Instead of paying 10 points, our 
weighted average points and fees run around 2-1/2.
    So there has been a significant reduction in the cost of 
credit to these consumers and an increase in the kind of loan 
products that have been available to them, and that is because 
of the capital markets coming in. The securitization process 
has made access to capital for us different than it used to be, 
and it is more plentiful than it used to be. So you would have 
found people either going to a finance company with high rates 
or points, or going to what we used to call hard money lenders; 
those are people that frankly didn't care whether you paid the 
loan back or not because it became a rental access tool for 
them. They would foreclose on your house and use it as a 
rental.
    Mr. Crowley. Would everyone agree on the panel that there 
has been some benefit to the expansion of the subprime market? 
Everyone agrees to that; is that correct?
    Mr. Fishbein. But at the same time, it is important to 
understand that there are components of borrowers in the 
subprime market. And as I point out, some of them would qualify 
for cheaper loans.
    Mr. Crowley. I would like to get to that point, too, 
because my next question is--because you, Mr. Fishbein, you 
point out an important issue that I think needs to be addressed 
as well. And that is an individual who applies for a loan, and 
instead of getting into the prime market, is shuffled into the 
subprime market. And I think that it is important to note, how 
can we--do you have any statistics on that or, for lack of a 
better word, evidence in terms of--a compilation of evidence to 
show that? Because I think it is important.
    If a person could have been in the subprime--could have 
been in the prime and somehow was shuffled into the subprime, 
that is wrong. I mean, if it is racially motivated or if it is 
because of a lack of education, whatever the reason may be, I 
think it is wrong and it needs be addressed; and I think it is 
important to build a case to show that. I know in my district I 
talked about the benefits of subprime lending in terms of what 
it has done in terms of affording people wealth, varying 
degrees of wealth depending on where they live. But it 
certainly has had some positive benefits. And you pointed out 
one that I think is certainly--to me, is a striking one that 
needs to be addressed.
    Mr. Fishbein. Well, my response to that is in two ways. One 
is, there is research. I mentioned before that Freddie Mac has 
conducted, and Fannie Mae has reached similar conclusions, that 
when they run people who have obtained subprime borrowers 
through their automated underwriting systems, that these people 
would qualify for cheaper and in many cases conventional prime 
loans. And we can talk about how large a percentage or how 
small a percentage, but there is some percentage of people that 
either because of lack of knowledge or lack of opportunity, or 
because subprime lending is aggressively sold to them and they 
may not have even been in the market for a loan, get into 
higher-cost loans than they qualify for.
    But, secondly, the real change in the marketplace is, now 
we have subprime lenders that are affiliated with banking 
institutions and prime lenders. I think half of the top 10 
subprime lenders are affiliated with banks. And there is no 
legal requirement that a person who walks into a subprime unit 
of one of these financial institutions gets referred to the 
prime unit because they qualify for cheaper loans. And in fact, 
the profit incentive is very much the opposite of that.
    So, in fact, it is a ``buyers beware'' market out there. 
And I think the plain fact is, a lot of consumers just don't 
understand that, because in the past they felt they had to 
convince a lender to lend them money. Now, the lender is kind 
of peddling money to them, and they haven't made that 
psychological adjustment in some of the actions they have to 
take.
    Mr. Nadon. Although I would say that the evidence, in my 
opinion, would show very clearly that it is a small percentage 
of loans that would actually qualify for the full guidelines. I 
do agree that some of them wind up that way that should not. 
And we think that one of the ways to cure that, to prevent that 
from happening, is to make sure that there is a process to move 
the borrower up.
    So like in our company, as an example, if we have people 
that come in that are qualifying for a prime-type loan, we have 
a company that does prime loans; one of our subsidiaries does 
prime loans.
    So we just think that there should be an incentive built 
into this system, and your rewards systems or compensation 
systems should be such that it incents the right kind of 
behavior which will say, this person qualifies for this product 
rather than this higher product, so I am going to move him into 
this higher product. There are ways that you can actually put 
those kinds of processes in place in companies to ensure that 
things don't happen.
    Mr. Crowley. As long as there is a vehicle to do it.
    Mr. Miller. Congressman, lenders know. I mean, they score 
these people. They know who qualifies for prime.
    Mr. Couch. Congressman, you raise a very good point though. 
At the Mortgage Bankers Association we are concerned that the 
effect of some of these laws is to drive reputable lenders out 
of the marketplace, thus restricting the flow. But nothing is 
done to handle or to satisfy the thirst for capital.
    There is evidence that payday lending, for instance in 
North Carolina, has expanded rapidly since the statute was put 
on the books in 1999 and 2000. That--just as Mr. Nadon says, in 
North Carolina we have seen a growth in unsecured signature 
loans which are at a much higher rate. The effective rate is 
about 370 percent on a payday loan.
    You have to ask the question, is the consumer better off if 
they are driven into one of these other sources for credit.
    Chairman Ney. The time has expired.
    Mr. Crowley, I want to apologize. You must have lost a 
little weight, so I let you go over a little extra.
    Mr. Davis is a new member, and he has gained a few pounds, 
I think.
    Mr. Crowley. It is a compliment. Thank you, Mr. Chairman.
    Chairman Ney. Thank you.
    Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman. I think Mr. Crowley 
still has a little bit of an edge on me, though.
    But let me try to focus on something that a number of the 
members alluded to in their opening statements, but you have 
not been asked about a lot, and that is the prevalence of 
subprime lending in the minority community. On one hand, I 
suppose that disparity is accounted for by the obvious wealth 
gap that exists in the minority and the Caucasian community. 
But in preparing for this hearing, I saw several statistics 
indicating that even in upper-income African American 
neighborhoods, the subprime rate is about double what it is in 
low-income white neighborhoods. Even controlling across class 
lines, in other words, there is a greater prevalence of 
subprime lending in black neighborhoods. And I want to get some 
comment from the panel on that point.
    First of all, what is the reason for that? Give me some 
sense of why there is a higher subprime lending rate in upper-
income black neighborhoods than in low-income white 
neighborhoods. Does anybody want to react to that?
    Mr. Brown. Yes. Let me give my views on that.
    I think clearly one of the--and, Mr. Scott, I didn't have a 
chance to comment on your proposals for financial in-house 
counseling. I think it has been the desire from some of the 
lenders and some of our not so favored lenders to target 
markets in which they believe--in communities in which they 
believe they can, in fact, offer a product with certain yields 
that are higher than they ought to be. And that happens to be a 
lot of the communities that are, regardless of the income 
strata, that happen to be low-income--I said low-income, but 
minority, African American, or Latino communities. So there is 
that.
    There is clearly the issue of the steering of individuals 
from the prime market to the subprime market.
    Now, let me tell you, the marketing--and I have been there, 
and this is not just--this is empirical data here. I have been 
what was called a higher-income individual, and let me tell 
you, I was marketed to by many mortgage bankers who were 
offering products that in my young years didn't realize that I 
could perhaps go to another lender and secure prime. Now, that 
is just me; it means I talked to my neighbors. And so, when you 
look at credit lending, it is not going to just be me, it is 
going to be those impacted, my friends and colleagues in my 
neighborhood.
    So there is--that sort of in my mind would be one of the 
reasons why you will see it in those communities.
    Mr. Davis. Now, let me ask you a follow-up question, or all 
of you a follow-up question based upon that.
    Under the current state of law--and I will direct this 
particularly toward General Miller. Under the current state of 
law in this country, is it illegal, does it violate any Federal 
statute that you know of for that kind of steering to go on?
    Mr. Miller. I think it would. I think it would violate some 
of the basic civil rights statutes.
    Indeed, when we did our case with Household, we had to sort 
of put together an incredible coalition of sort of a consumer 
protection division's work plus civil rights work. Some of the 
issues in Household came out of the civil rights division. And, 
of course, we were partnered, in addition, with the mortgage 
regulators, and developed a wonderful partnership. But some of 
that case came out of the Civil Rights Division, and in 
particular, in Arizona, which was one of the leaders of our 
group.
    Mr. Davis. Let me close on this observation since the time 
is running late.
    One thing that is apparent to me as someone who, before I 
came here, practiced discrimination law on the plaintiff's 
side. There is a relative paucity of laws that deal with 
discrimination that goes on in the mortgage lending market. 
Title VII obviously doesn't cover it because it is not an 
employment decision. Section 1981, I suppose there is a remedy, 
but a lot of litigants and a lot of plaintiffs' attorneys are 
not well educated about Section 1981.
    In my State of Alabama, we do not have any State civil 
rights laws at all.
    So as we look at reframing our regulatory structure, one 
thing that does occur to me is that there is room to have a 
much more direct set of Federal provisions that address racial 
discrimination in the area of market lending.
    And let me close by congratulating my friend, Rob Couch, 
for being here. Rob, I would have been at your event in 
Birmingham yesterday if we didn't have something called votes 
up here. But I want to welcome you to your new position, and 
thank you for the work you do in our community.
    Thank you, Mr. Chairman.
    Chairman Ney. I want to thank you, and I want to thank the 
panel. I think it was extremely informative. I appreciate your 
time and your indulgence on your trip here to the Capitol.
    With that, we will convene the second panel.
    Chairman Ney. Micah S. Green, President of The Bond Market 
Association; Mr. Cameron ``Cam'' Cowan, Chair of Legislative 
and Judicial Subcommittee, American Securitization Forum; Ms. 
Margot Saunders, Managing Attorney, National Consumer Law 
Center; Professor Kurt Eggert, Associate Professor of Law, 
Chapman University School of Law; Reverend William Somplatsky-
Jarman, Presbyterian Church USA, on behalf of the Interfaith 
Center on Corporate Responsibility; and Mr. Frank Raiter, 
Managing Director of Standard & Poor's.
    Thank you for attending, and we will start with Mr. Green.

    STATEMENT OF MICAH S. GREEN, PRESIDENT, THE BOND MARKET 
                          ASSOCIATION

    Mr. Green. Thank you very much, Mr. Chairman. And thank you 
for inviting The Bond Market Association to be a part of this 
hearing.
    The Bond Market Association represents the underwriters and 
dealers of fixed income securities which include the 
securitization process. The mortgage securitization process has 
resulted in a $5 trillion mortgage-backed securities 
marketplace.
    Essentially, the secondary market for any product exists 
after a market develops and matures. Just like in the mortgage 
market, the asset-backed market developed from assets that 
initially were all in the prime market. As the subprime lending 
market grew, a secondary market grew from that, to create 
efficiencies in that market. And as we have heard earlier, it 
also reduced interest rates and increased access to capital for 
many people.
    A friend of mine asked me if it would be tough to testify 
at a hearing with The Bond Market Association having been quite 
outspoken against some of the State initiatives that have come 
up in the past. And I said, first of all, we don't like 
predatory lending.
    As you have heard from many before, The Bond Market 
Association is in the secondary market. We are not lenders. We 
don't like predatory lending. And we happen to believe that it 
is a problem that must be dealt with credibly and responsibly.
    Second, our position on this issue is about preserving 
access to capital for people who need it. I dare say this would 
be a significantly more awkward hearing for me if the title of 
the hearing is, Why Is the Secondary Market Cutting Off the 
Supply of Capital to Your Constituents Who May Simply Not Have 
Stellar Credit? This committee and the work of this committee 
for many, many years has been about ensuring access to capital, 
not limiting that access.
    The predatory lending issue must be dealt with. As you 
heard from the previous panel, originators of loans have and 
must continue to work tirelessly to ensure lending practices 
are appropriate and protect people from predatory practices. 
You will hear from some witnesses today that believe the only 
way to truly inhibit predatory lending practices is to move the 
liability from the predatory culprit to the investor who buys a 
security that among the thousands of loans in that portfolio 
contain such loans that are claimed to have been predatorily 
obtained months or years earlier by the originator.
    I guess I would have to agree that, as proposed by these 
witnesses, there is no question that it would be an effective 
way of limiting predatory lending, much like that of banning 
motor vehicles on roads to reduce speeding and other motor 
vehicle violations. It is a solution, but it carries with it 
unintended consequences, because just as a ban on motor 
vehicles would also make transportation and commerce generally 
much more difficult, the type of assignee liability supported 
by some would go well beyond the target of predatory lending.
    It would make it far riskier for participants in the 
secondary market for all subprime loans. Those risks would not 
be precise or predictable, and would result in increases in the 
cost of subprime loans to borrowers in legitimate need. It 
could even make uneconomic the entire securitization process 
for these loans, given the additional capital that would have 
to be committed in putting those deals together.
    Numerous States have attempted to get it right and have 
been off the mark. My written testimony discusses many of those 
examples, like Georgia, which was discussed earlier.
    In this national marketplace, we need a national policy 
that will truly help address the predatory lending problem and 
do so in a way that minimizes the law of unintended 
consequences. Legislation is needed to provide an important 
balance of tough policy on predatory lending and a clear 
national policy on how the secondary market should play a role 
in that process.
    And, in closing, Mr. Chairman, I would just add to the 
comments that Congressman Scott and others on the panel have 
talked about, financial literacy. The Bond Market Association 
through its foundation, The Bond Market Foundation, is very 
pleased to sponsor a program called tomorrowsmoney.org, which 
is a Web site geared toward basic financial literacy targeted 
to women, young people, and the Hispanic community. It talks 
about savings and investments, but far earlier than savings and 
investment, it talks about the basic building blocks of 
learning how to save and budget and live a normal life with 
financial responsibility. We have geared that program to 
targeted communities, and we would look forward to working with 
this committee in trying to help promote further financial 
literacy in this area.
    Thank you, Mr. Chairman.
    Chairman Ney. Thank you.
    [The prepared statement of Micah S. Green can be found on 
page 153 in the appendix.]
    Chairman Ney. Mr. Cowan.

STATEMENT OF CAMERON ``CAM'' L. COWAN, ESQ., CHAIR, LEGISLATIVE 
    AND JUDICIAL SUBCOMMITTEE, AMERICAN SECURITIZATION FORUM

    Mr. Cowan. Thank you, Chairman Ney, for holding this 
hearing and for the opportunity to testify today on the role 
and importance of securitization.
    I am a partner with the law firm of Orrick, Herrington, and 
Sutcliffe. Within Orrick, I serve as the Managing Director of 
Finance Practices and am a member of the firm's executive 
committee. I am also a member of the American Securitization 
Forum's executive committee, and I chair the American 
Securitization Forum's Legislative and Judicial Subcommittee.
    The ASF, an affiliate of the The Bond Market Association, 
is a broadly based professional forum of participants in the 
U.S. securitization market. ASF members include investors, 
issuers, underwriters, dealers, rating agencies, insurers, 
trustees, servicers, and professional advisors working on 
transactions involving securitizations. For the last 16 years, 
my law practice has focused on structured finance or 
securitization. My knowledge of subprime and predatory lending 
generally comes from the perspective of the secondary market, 
and my testimony today will focus on the securitization 
process, the growth of the industry, and the many benefits 
securitization brings to consumers, issuers, and investors.
    Securitization is the creation and issuance of debt-like 
securities or bonds whose payments of interest and principal 
derive from cash flows generated by separate pools of assets. 
It has grown from a nonexistent industry in 1970 to $6.6 
trillion as of the second quarter of 2003.
    Financial institutions and businesses of all kinds use 
securitization to immediately realize the value of cash-
producing assets. These are typically financial assets, such as 
loans, but can also be trade receivables or leases. In most 
cases, the originator of the assets anticipates a regular 
stream of payments. By pooling the assets together, the payment 
streams can be used to support interest and principal payments 
on debt securities. When assets are securitized, the originator 
receives the payment stream as a lump sum rather than spread 
out over time.
    Securitized mortgages are known as mortgage-backed 
securities, while securitized assets--that is, nonmortgage 
loans, or other assets with expected payment streams--are known 
as asset-backed securities. By making it easier for mortgage 
lenders to sell their loans into the secondary market, 
mortgage-backed securities create efficiencies in the mortgage 
industry that are passed on to borrowers in the form of lower 
interest rates and more readily available credit. Issuers of 
mortgage-backed securities also benefit from a lower cost 
alternative to raising funds in the capital market. Investors 
gain, too, as mortgage-backed securities generally are a low-
risk liquid investment.
    Securitization reflects innovation in the financial markets 
at its best. Pooling assets and using the cash flows to back 
securities, allows originators to unlock the value of the 
liquid assets, and generally provides consumers lower borrowing 
costs at the same time.
    Mortgage-backed securities and asset-backed securities 
offer investors an array of high-quality fixed-income products 
with attractive yields. The popularity of this market among 
issuers and investors has grown dramatically through the last 
30 years. The success of the securitization industry has helped 
many individuals with subprime credit histories obtain credit. 
Securitization allows more subprime loans to be made because it 
provides lenders with access to capital in an efficient way for 
them to manage risk.
    It is possible that the various State and local efforts to 
curb predatory lending could increase the cost to subprime 
borrowers and dramatically reduce the opportunity of local 
subprime markets to access the national capital market. 
Moreover, secondary market purchasers of loans, securitization 
vehicles, financial intermediaries, and investors are not in a 
position to control origination practices, loan by loan. 
Regulation that seeks to make a police force of these secondary 
market participants through unlimited or vague assignee 
liability will only succeed in driving them from investing in 
the subprime market.
    The problem of predatory lending clearly needs to be 
addressed by legislative action, but only after careful 
consideration of the full range of public policy issues. The 
challenge is to curb predatory lending without limiting the 
ability of subprime borrowers to obtain loans.
    The secondary markets are a tremendous success story that 
have helped democratize credit in this country. Well-intended, 
but ill-considered State and local regulation in this area 
could do much harm. For this reason, the American 
Securitization Forum respectfully urges this committee to 
consider Federal legislation in this area and legislation that 
will provide a reasonable safe harbor from assignee liability 
for secondary market participants.
    Thank you again for this opportunity to testify today.
    Chairman Ney. Thank you.
    [The prepared statement of Cameron L. Cowen can be found on 
page 117 in the appendix.]
    Chairman Ney. Ms. Saunders.

   STATEMENT OF MARGOT SAUNDERS, MANAGING ATTORNEY, NATIONAL 
                      CONSUMER LAW CENTER

    Ms. Saunders. Mr. Chairman Ney and Ms. Waters, thank you 
for inviting us to testify today. I am here today on behalf of 
the low-income clients of the National Consumer Law Center, 
Consumers Union, and the National Association of Consumer 
Advocates.
    I have a lot to say that obviously I cannot address in the 
5 minutes that I have, so I would ask you to take a look at our 
written testimony. But I think I want to focus on a few 
specific points.
    One is this--I think someone on the previous panel said it 
specifically. In the year 2003, we are not dealing with the 
same access to credit problems that this Congress dealt with in 
1980. In 1980, when Congress passed the laws that began the 
deregulation of credit, there was an access to credit emergency 
because of high interest rates. Since that time, we have seen a 
continual deregulation of credit and a democratization of 
access to credit which has helped many homeowners to obtain 
homes, which has been very good. However, we have seen--we who 
represent low-income consumers and consumers actually believe 
there is too much credit.
    There is especially too much home credit. This is a push 
market. People are too often being pushed into mortgages or 
actually into refinancing mortgages, not the mortgages used to 
buy the homes, but people are being pushed into refinancing 
their existing mortgages essentially for reasons that do not 
benefit them.
    There is lots of research that I cite in my testimony that 
indicates that the securitization of mortgage credit, while 
good in bringing more money to homeowners, for home-buying 
purposes, has actually created an incentive to originators to 
fill loan securitization pools, which in turn require these 
originators to go out and find borrowers for the loans. These 
loans then are often not really benefiting the consumers, they 
are more benefiting the originators.
    I want to point you to the chart in my testimony which 
shows a huge increase in the foreclosure rate in the last 20 
years with a very small relative increase in the homeownership 
rate between--on page 7. Between the years 1980 and 2001 we 
have seen an increase in homeownership of 3.4 percent. That is 
an important increase. But we have seen an increase in 
foreclosures of 250 percent. This we blame on the subprime 
mortgage market. If you look at the number of prime loans that 
are going to foreclosure, it has remained essentially flat over 
the years. Approximately 1 out of 100 prime mortgage loans are 
foreclosed upon, but 8 percent, or 1 out of 12 subprime loans 
go to foreclosure.
    There has been a lot of discussion about financial 
literacy, and I would ask you, look at almost any other area of 
regulation or lack of regulation in this country. Elizabeth 
Warren, Harvard law professor, pointed out the difference 
between the way we regulate toasters and the way we regulate 
mortgages. If there was a chance that a toaster sold on the 
market would have a 1 in 12 chance of blowing up, do you think 
it would be allowed to be sold? Would we say that it is 
adequate protection against a toaster with a 1 in 12 chance of 
blowing up that we give more toaster literacy training to 
consumers? Is that the appropriate way to protect people?
    Toasters are actually far easier to use than mortgages are 
to understand. The loss that results from a toaster blowing up 
is actually probably less serious than what happens to the 12 
out of 100 Americans who get subprime mortgages that go to 
foreclosure. That is the analogy that I would ask you to 
consider.
    I would like to point out a couple of very important 
points. I don't know who exactly on this panel is pointing--
pushing for unlimited assignee liability. We are not. We are 
pushing for some assignee liability.
    I have gone through in my testimony a full explanation of 
the assignee liability that exists in current law now. There is 
already assignee liability in the secondary market. The idea of 
it is not new. In fact, for a holder of a loan to be able to 
avoid assignee liability, several hoops must be jumped through 
that are not at all automatic. But I researched Standard & 
Poor's and Fitch's statements to see what they would find to be 
adequate assignee liability rules. They have both said in the 
last month that so long as there were capped damages and the 
rules were clear, assignee liability was acceptable.
    That is all we are asking for, capped damages and clear 
rules. We think the clear rules for mortgage regulation as we 
propose here actually would benefit everybody.
    I see I am out of time, but I am happy to answer any 
questions.
    Chairman Ney. Thank you.
    [The prepared statement of Margot Saunders can be found on 
page 268 in the appendix.]
    Chairman Ney. Mr. Eggert.

 STATEMENT OF KURT EGGERT, ASSOCIATE PROFESSOR OF LAW, CHAPMAN 
                    UNIVERSITY SCHOOL OF LAW

    Mr. Eggert. Good afternoon. My name is Kurt Eggert; I am an 
Associate Professor of Law at Chapman University School of Law. 
And Chairman Ney and Ranking Member Waters, I appreciate the 
opportunity to come talk to you about predatory lending, its 
definition, causes, and cures.
    First of all, definition. Some people say that we can't 
even define predatory lending, how can we start addressing it? 
Which I think is just not true. I think we can come up with a 
good, workable definition of predatory lending, and that 
definition should look at both the practices that are used 
against borrowers and also the results.
    The practices are things like prepayment penalties, credit 
packing. The results are the overpriced loans and increased 
risk of foreclosure. So I would define predatory lending as the 
use of manipulative, coercive, or deceptive tactics to get 
borrowers to accept loans that are overpriced, given their risk 
characteristics and their market prices, or that leave 
borrowers worse off than they were before the loan, or both.
    Now, a loan can leave a borrower worse off if it increases 
the risk that they will be foreclosed on or if, for example, a 
lender gets a borrower to refinance a below-market loan. And 
these two things should be balanced against each other so that 
the higher the loan price is, the less you have to see, as far 
as unfair or deceptive practices, to conclude that the loan is 
predatory.
    Now, on to the causation. We have seen a huge spike in the 
amount of predatory lending in the 1990s at the same time that 
we saw the rapid growth of the securitization of subprime 
loans; and I think there is a direct connection between those 
two. If a predatory lender does not have access to the 
secondary markets and if they are forced to hold their own 
loans, it dramatically limits their ability to lend and to 
grow, because as they lend, they are going to have a portfolio 
of borrowers who are angry at them, who are not going to want 
to pay, and who are going to want to sue them.
    If, on the other hand, they have access to the secondary 
markets, what the predatory lender can do is make loans, sell 
it on the secondary market, get the money back, and make new 
loans. They can churn and grow. And we saw that throughout the 
1990s. You would see a new lender come on, there would be 
complaints against it, but it would lend more and more and more 
and grow dramatically, quickly, and then suddenly declare 
bankruptcy or leave the field.
    Securitization has other problems for us, especially for 
subprime borrowers. It causes the most rapid creation of a 
holder in due course. A holder in due course is someone who can 
claim there is no assignee liability to me because I have 
jumped through all the hoops that Ms. Saunders talked about; 
and so most of the defenses that the borrower had to the 
initial lender are cut off. Securitization allows this to 
happen so quickly that often by the time a borrower makes their 
first payment their loan has already been sold, and so if there 
were misrepresentations made to them at the time of the loan, 
by the time they make the first payment they have lost their 
ability to sue the current holder of the note to get out of the 
loan.
    The other thing that securitization does is that it allows 
thinly capitalized organizations to originate loans. You don't 
have to have a lot of money if you can make a loan, sell it, 
get the money, make a loan, sell it; and that way, if somebody 
does sue you, well, you don't have this big portfolio of loans 
that they can go against. So it allows people with not that 
much money who originate loans to sell them to the secondary 
market.
    Now, defenders of securitization will say, well, 
securitization does lower interest and--interest rates and 
mortgage costs. Interestingly, there was a recent analysis by a 
couple of Federal Reserve Board economists that said actually 
the cause and effect are reversed. What they concluded was that 
lowered interest rates increased securitization, not the other 
way around.
    There is even an argument that in some cases securitization 
may increase interest rates or mortgage costs if the 
securitizers aren't confident that what the originators are 
selling them--if they aren't confident about the credit risk of 
what is being sold to them. So I will treat the borrowers as if 
they are potential lemons, and they will demand a higher 
interest rate than their credit risk would require. So I don't 
think it is proved that securitization lowers interest rates.
    So what is a cure for predatory lending? The cure is--we 
can't depend on regulators. By the time they step in, as well-
meaning as they are, it takes them a while to find out about 
predatory lenders; it takes a while to develop a case and to 
bring an action.
    Instead, I think the solution is to get the people who are 
on the ground, the securitizers who see all the loans come in, 
get them to step in and refuse to deal with predatory lenders; 
get the ratings agencies, the underwriters, the Wall Street 
bankers to say we are not going to deal with these scam 
lenders.
    How do you do that? Well--and why would we have them do it? 
Because if we say predatory lending--if one of the central 
bases of predatory lending is overpriced loans, they can detect 
that. They can look at their loan pools and say, examining the 
loan-to-value ratios and the FICO scores, we can tell that this 
is a pool with overpriced loans. They have the ability to 
detect it in a way that the borrowers can't tell if they were 
being charged too much. They can also look at default rates. 
They can track, they can trade information on bad originators.
    How do we make the securitizers do this job? The solution 
is assignee liability; if you say, your investors are going to 
pay the price if you deal in predatory loans, then the ratings 
agencies will make sure that they track it.
    Chairman Ney. Professor, what I want to do, since you have 
run out of time--but it is fascinating and I have some 
questions on--I would like to go on to the other two panelists 
because we are running a little short, and then come back with 
questions that will pertain to assignee liability.
    [The prepared statement of Kurt Eggert can be found on page 
126 in the appendix.]

STATEMENT OF REV. WILLIAM SOMPLATSKY-JARMAN, PRESBYTERIAN USA, 
 ON BEHALF OF THE INTERFAITH CENTER ON CORPORATE RESPONSIBILITY

    Rev. Somplatsky-Jarman. Thank you, Mr. Chairman, 
distinguished members of the committee. I am very pleased to be 
here on behalf of the Presbyterian Church USA and other 
religious investors, part of the Interfaith Center on Corporate 
Responsibility. With me here today is Dr. John Lind of our 
research organization. CANICCOR has provided us with quality 
research into these issues for our advocacy efforts, and I am 
pleased that our remarks and his research will be entered into 
the record for your use in the future.
    Presbyterian Church USA is committed to a consistency 
between our mission goals, our ethical values, and our 
investments. Through our urban and rural church networks, we 
are well aware of the need for access to capital in order to 
revitalize our communities and stabilize our neighborhoods. We 
are also well aware of the stories of the roadblocks and 
abuses, such as redlining and predatory lending. And as 
religious investors, we own stock in every one of the major 
banking and financial institutions of this country that is 
involved in the subprime loan market.
    When CitiFinancial bought Associates First Capital, we 
initiated a series of meetings with CitiGroup and CitiFinancial 
about that acquisition. And after these discussions, along with 
CitiGroup's settlement with the FTC, other regulatory 
investigations, and the pressures from community groups, I can 
say today that I believe that CitiFinancial and CitiGroup has 
incorporated many of the better practices within the subprime 
industry into its regular way of doing business.
    We have also met with a number of subprime lenders, 
Washington Mutual's Long Beach Mortgage, Chase Manhattan 
Mortgage, Wells Fargo, and we anticipate this year our first 
meetings with National City's First Franklin, Key Course, 
Champion Mortgage, and Lehman Brothers. We also met with a 
nondepository lender, Household, but now that it has been 
acquired by HSBC, those discussions are on hold.
    So far, what we have found is that subprime lenders, 
particularly those that are subsidiaries of depository holding 
companies, largely have taken to heart the settlements in 2002 
between the FTC and CitiFinancial and the settlement with 20 
States' Attorneys General with Household, if they already did 
not follow decent practices. And, thus, we are starting to 
focus more on the small lenders, which are often finance 
companies that may be privately held or not widely held public 
firms.
    We find that these small lenders are usually not subject to 
Federal supervision other than complaints filed with the FTC, 
and they probably represent some of the more egregious firms, 
such as First Alliance. Thus, the regulation of these smaller 
firms seems best achieved through secondary market mechanisms.
    The secondary market is the more logical route because 
these small firms are usually not depository affiliates that 
can supply funding to them, and they have to sell off their 
originated loans on a timely basis into the secondary market in 
order to preserve their liquidity.
    Two problems arise in the secondary market we wish to 
address, the issue of issuers and underwriters. First is their 
need to perform adequate due diligence to eliminate their 
liability for handling loans from fraudulent loan originators 
such as First Alliance, or Lehman Brothers now has a court-
ordered liability of $5 million.
    Second, and perhaps a more insidious case, is that of the 
subservicing firms. These firms buy the servicing rights, often 
are the more risky loans; and in buying these rights, they take 
on the job of dealing with loan delinquencies and foreclosures. 
In the case of Fairbanks Capital, the FTC has alleged that they 
counted on-time payments as late and therefore assessed late 
fees, and they started unnecessary foreclosure proceedings in 
order to gain additional fees.
    Based upon our analysis provided by Dr. Lind of CANICCOR, 
we are starting a round of dialogues especially with firms that 
serve as both issuers and underwriters, because these firms 
tend to handle loans from smaller lenders. These smaller 
lenders often use brokers as their primary source of loan 
applications, and since brokers are not employees of the 
lender, the lower level of control over the brokers can permit 
predatory practices by some of them to go undetected.
    In addition, these issuers and underwriters use 
subservicers who have no relation to the lenders, and they may 
then use unethical practices in handling delinquencies and 
foreclosures. We, however, as religious investors, believe in 
what we have been working with, the companies in which we own 
stock, to say that good policies, good practices promote more 
profitable companies in the future.
    Thank you very much.
    Chairman Ney. Thank you.
    [The prepared statement of Rev. William Somplatsky-Jarman 
can be found on page 287 in the appendix.]

  STATEMENT OF FRANK L. RAITER, MANAGING DIRECTOR, STANDARD & 
                             POOR'S

    Mr. Raiter. Good afternoon, Chairman Ney, members of the 
subcommittee. And thank you for this opportunity to testify.
    As an independent and objective commentator on credit risk, 
Standard & Poor's generally does not take a position on 
questions of public policy. Thus, while Standard & Poor's 
strongly supports efforts to combat predatory lending and other 
abusive practices by lenders, it does not take a position on 
what legislative and regulatory actions would best accomplish 
that goal.
    Nevertheless, Standard & Poor's has been closely following 
legislative and regulatory initiatives designed to combat 
predatory lending in order to determine how those laws might 
affect its ability to rate securities backed by residential 
mortgage loans. Standard & Poor's appreciates the opportunity 
to discuss the factors it considers when evaluating the impact 
of antipredatory lending laws on rated transactions.
    Increased access to mortgage loans has led to increased 
homeownership across the United States. While this growth in 
homeownership is positive, it has become evident that some of 
this increase has unfortunately occurred simultaneously with a 
rise in predatory lending practices. Among others, these 
predatory practices include the following: charging excessive 
interest or fees, making a loan to a borrower that is beyond 
the borrower's financial ability to repay, charging excessive 
prepayment penalties, encouraging a borrower to refinance a 
loan notwithstanding the lack of benefits to the borrower, and 
increasing interest rates upon default.
    Antipredatory lending statutes are designed to protect 
borrowers from these unfair, abusive, and deceptive lending 
practices, and Standard & Poor's strongly supports efforts to 
eliminate predatory lending. However, in its role as a provider 
of opinions on credit risk, Standard & Poor's must evaluate the 
impact of these statutes on the return to investors in 
mortgage-backed securities. Indeed, given the expansion of 
individual investment in securities through various retirement 
and pension plans, these investors might actually be the very 
same borrowers the statutes are intended to protect.
    Standard & Poor's has determined that some of these 
statutes may have the negative effect of reducing the 
availability of funds to pay these investors. This reduction 
could occur if an antipredatory lending statute imposes 
liabilities on purchasers or assignees of mortgage loans simply 
because they hold loans that violate a statute even if they did 
not themselves engage in predatory lending practices.
    In performing this evaluation of antipredatory lending 
laws, the two most important factors that Standard & Poor's 
considers are whether an antipredatory lending statute provides 
for this assignee liability, and, if so, what penalties the 
statute imposes on assignees for holding predatory loans.
    If Standard & Poor's determines that no assignee liability 
exists, Standard & Poor's will generally permit loans covered 
by the statute to be included in rated transactions without any 
further consideration or restriction. If, on the other hand, a 
loan does permit assignee liability, Standard & Poor's will 
evaluate the penalties under the statute.
    If damages imposed on purchasers are not limited to a 
determinable dollar amount, that is, the damages are not 
capped, Standard & Poor's will not be able to size the 
potential liability to its credit analysis. Therefore, these 
loans cannot be included in rated transactions. If, on the 
other hand, monetary damages are capped, Standard & Poor's will 
be able to size in its credit analysis the potential monetary 
impact on violations of the statute.
    Standard & Poor's looks to all types of potential monetary 
damages including statutory, actual, and punitive damages. It 
should be noted, however, that even if capped damages can be 
sized, it may not be economical for a lender to make sure 
loans, if the credits support the Standard and Poor's required, 
equals or exceeds the monetary value of the loan. For example, 
if a statute provides for punitive damages, even if these 
damages are capped, the amount of the damages may well exceed 
the loan value.
    In making these determinations, above all, Standard & 
Poor's looks for clarity in a statute. Specifically, Standard & 
Poor's looks for statutory language that clearly sets forth 
what constitutes a violation, which parties may be liable under 
the statute and, as noted, whether any monetary liability is 
limited to a determinable dollar amount. Absent clarity on 
these issues, in order to best protect investors in rated 
securities, Standard & Poor's must adopt a conservative 
interpretation of an antipredatory lending statute, and may in 
instances in which liability is not clearly limited exclude 
mortgages from a transaction that it rates.
    In offering these comments today, Standard & Poor's 
reiterates to the honorable members of the subcommittee that as 
a public policy matter, Standard & Poor's supports legislation 
that attempts to curb predatory and abusive lending practices. 
Standard & Poor's also notes, however, that its role is to 
evaluate the credit risks to investors associated with an 
antipredatory lending legislation and not to recommend public 
policy.
    This concludes my testimony on behalf of Standard & Poor's 
Ratings Services. I will be happy to answer any questions.
    [The prepared statement of Frank L. Raiter can be found on 
page 227 in the appendix.]
    Chairman Ney. I want to thank the panel.
    Before we get to the questions, Congressman Kanjorski has 
joined us and has not had an opportunity to ask questions yet, 
so I will yield to the Congressman.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    I happened to listen to all the testimony, and this is a 
highly emotionally charged issue just by--the nature of the 
language we use sort of poisons the well. Is there anyone here 
at the table that feels that there isn't a need in our society 
to accomplish subprime lending?
    So I gather no one is opposed to subprime lending.
    What we are attempting to get at is how it can be 
facilitated in the most protective way for the consumer, for 
the investor or lender if it is securitized, and to rid the 
marketplace of unscrupulous actors. Is that substantially the 
issue that is before the committee, that you think that 
Congress should move on?
    This is an issue that lends itself to great demagoguery 
from the standpoint that, you know, to scream against predatory 
lenders is always popular with the constituents. The word 
itself is so emotionally charged. However, I have concluded 
that there is a need for national legislation and potentially 
national standards if we are going to move into this field, and 
that the effort has to be made by this committee, not only the 
subcommittee but the committee as a whole and then eventually 
the Congress, to put a framework together that this should be 
done.
    So in that light, Mr. Chairman, I would suggest that we 
take the advantage of some of the statements made by some of 
the members of the committee today, particularly during the 
first panel, to think towards putting together a working group 
to really work through these various identified issues that I 
think can be met to everyone's advantage; that is, remove the 
unscrupulous from the field to make certain that securitization 
can be made to the advantage of reducing interest rates to the 
lender that has to resort to that area of lending, and to meet 
the challenges of good ethics, good morals, as well as good 
law.
    Has anyone worked on their ideal statute or model? Yes.
    Ms. Saunders. Yes, Mr. Kanjorski. I am Margot Saunders with 
the National Consumer Law Center.
    I was very involved in the passage of HOEPA; I was one of 
the authors of the AARP Self-Help NCLC model bill that has been 
passed in some form in a number of States; and I have worked 
with both Senator Sarbanes and Mr. LaFalce on their bills. And 
I propose in this testimony a new way, a streamlined way of 
addressing the problem that I believe, while simpler, would 
reduce many of the problems without much--without causing many 
of the difficulties.
    Mr. Kanjorski. Are you in favor of a national standard?
    Ms. Saunders. I am in favor of a national standard, but not 
one that preempts. I think if you look at all of our consumer 
protection laws, starting with the Truth in Lending Act, the 
Fair Debt Collection Practices Act, the Equal Credit 
Opportunity Act, all of the laws with the single exception of 
the Fair Credit Reporting Act, do preempt inconsistent State 
laws to the extent that the State laws are less protective of 
the consumer. They do not preempt the State's ability to add 
additional protections to that floor, and that is where I would 
advocate that you all start.
    I would point out that most States would not have a need to 
add on additional consumer protections if the floor were 
adequate. Just as very, very few States have come up with their 
own truth in lending acts because the Federal Truth in Lending 
Act is comprehensive, it would be a similar nonquestion if the 
floor that was established by Congress was sufficient, and you 
would end up actually satisfying both sides of this debate. You 
would solve predatory lending and without creating the problem 
caused by a broad preemption of State laws.
    Mr. Kanjorski. Don't we negatively impact on the advantage 
of a national market and national rates if we start to have a 
construct where every State decides to add on their particular 
brand of what should be done?
    And, you know, I am very cognizant of the fact that this is 
an emotionally charged political issue. A State legislator just 
loves to wave his amendment or bill saying, I am saving all you 
poor people out there because I have put something stricter 
than the Federal Government's standard in place.
    Ms. Saunders. But you can do that. You can take the North 
Carolina standard or another State standard that is very good 
and say, This is going to be the Federal floor. Any State that 
has a law that is not as good as this is preemptive.
    Mr. Kanjorski. But you are allowing the States to go 
beyond?
    Ms. Saunders. Yes. But I would point out that if that floor 
is high enough, very, very few States will do that and it won't 
be necessary; just as very, very few States have actually 
passed laws that are more protective than the Truth in Lending 
Act, and it is because it is not necessary.
    Mr. Kanjorski. On the fair credit reporting, wasn't that 
the major issue that we faced, that in order to create a 
national standard we had to preempt State's rights and did so 
because it was determined by the Congress it was more important 
to have a workable statute that provided the best information 
and flow of information than to allow each State to make its 
own formula?
    Ms. Saunders. I am sure that is why you pushed for it, sir, 
but I can say that we were never in favor of it.
    Mr. Kanjorski. Your feeling is, Congress made a fundamental 
error?
    Ms. Saunders. Well, the bill hasn't passed yet, but I think 
that Congress is about to make a fundamental error, yes, sir.
    Mr. Kanjorski. Yes?
    Mr. Green. Congressman, I would just simply agree with what 
you are saying. A floor is not a national standard if it is not 
preemptive. The fact is, we have been working with numerous 
State legislatures and, in fact, even city councils.
    For example, in New York City, when they couldn't really 
amend the actual lending law, they prohibited any firm that was 
involved in securitization from doing municipal bond business 
with the City of New York if these standards weren't met. So 
the fact is, you are going to have numerous pieces of 
legislation coming at it even if you set a floor because of 
that demagoguery that naturally takes place.
    This is a national marketplace. We need a national standard 
to allow the marketplace to grow and to clean it up.
    Mr. Kanjorski. All right.
    Reverend, I was going to make a comment that I didn't know 
whether God was on one side of this issue or not, but that 
wouldn't be the right comment to make, so I won't.
    But you obviously do exercise your influence on lending 
authorities by virtue of your investments, and that is sort of 
a democratic process. You vote with your dollars. There is 
nothing wrong with that.
    But do you feel also that we are capable of having a 
national standard that is fair to everyone and particularly 
protective of the consumer and rids the field of unscrupulous 
actors, but on the other hand urges efficiency and 
effectiveness in subprime lending?
    Chairman Ney. I will caution, we are running out of time, 
because the next hearing has to come in, but if you would like 
to answer.
    Rev. Somplatsky-Jarman. Well, I will defer the sermon and 
try to answer the question.
    Yes, I do believe that there is the capacity to come up 
with standards by which the industry can weed out the predatory 
lenders and still maintain the positive aspects of the subprime 
industry.
    What we have found in working with companies is that, by 
and large, the vast majority want to do the right thing. They 
are ethical people who care about what happens in the 
communities in which they do business. What is necessary to 
happen is to weed out those people who do not share that common 
value, and I believe that there are ways that that can be done.
    And we want to just simply offer the fact that investors 
are also concerned about this, and we can play a role in 
helping to craft it and to see to it that it is followed. Thank 
you.
    Mr. Kanjorski. Thank you.
    Mr. Chairman, may I reiterate again that I think this is a 
very important issue. We should address it. And I will do 
everything I can to assist you and the rest of the committee in 
coming to a positive conclusion.
    Chairman Ney. I appreciate the gentleman's comments, and I 
am very amenable to a working group. And the one thing I want 
to say about that is, this, I know, is a very emotional 
subject. Congressman Lucas knows that; he is on the bill as the 
prime person helping this. But I think it is a subject that 
needs to be discussed, needs to have thorough vetting. And, 
again, I know it is emotional.
    And then some people say, why do you even talk about this? 
Well, you know, it needs to be discussed. I am sorry that we 
are out of time, but I am amenable to a working group.
    And, again, they have got another hearing in here, but I 
think the actual liability--and both Ms. Saunders and Professor 
Eggert, I think that is an area that I would like to follow up 
with you. I mean, we have been on a couple of roundtables that 
we had some discussions, I know, but that is where you look at 
the fact that somebody has to be responsible if something was 
done wrong; and do you go to the source that created it, even 
if it came down the pike, and go to the source that created the 
problem versus, you know, the entity it was passed to, whether 
it was Fannie or Freddie or whoever? I think that is one of the 
issues, because Georgia, according to what I understand, they 
said, Look, if it is all going to be passed to us and we didn't 
have any responsibility in creating that bad situation, we are 
just not going to be here.
    Do you want to comment on that?
    Mr. Eggert. Yes.
    First of all, I think you have two innocent parties, or you 
have the homeowner and the assignee. But between those two, I 
think the assignee--the secondary market is much, much more 
able to stop predatory lending. And so between those two, if 
you have to assign the risk of this harm, I think you have to 
assign it to the secondary market, because they can stop 
predatory lenders or at least slow them down to a great extent.
    But the second thing I would like to point out is, if you 
read the testimony of Mr. Raiter--I hope I am pronouncing your 
name correctly--from Standard & Poor's, what Standard & Poor's 
position is, assignee liability doesn't keep us from 
securitizing loans. As long as it is capped and it is clear, we 
can securitize.
    And so my position is, assignee liability, I think, has to 
be a part of any attack on predatory lending, and it should be 
drafted so it is capped and clear so the ratings agencies know 
what they are dealing with, they can rate it, and they can sell 
it. And if you do that, then the securitizers will be part of 
the effort to stop predatory lending.
    The other interesting thing of this testimony is, it says 
the ratings agency, once they see there is assignee liability, 
the way they will react is, they will have greater scrutiny of 
originators to see if they are engaging in predatory lending 
and to see if they are creditworthy.
    In other words, the ratings agencies are telling us that if 
you include some assignee liability, capped and clear, they 
will do this job of limiting predatory lending and making sure 
that when borrowers do have to sue, there is a lender there 
with significant assets so the borrower can sue the lender, the 
secondary market can force the lender to buy back the loan, we 
don't have to worry about the assignees, and they are dealing 
directly with the person who scammed them.
    Mr. Ney. [Presiding] Are there any additional questions?
    I just wanted to also make one comment because Ms. Saunders 
raises a very interesting statement about the spending. And, 
you know, when I was a kid, if you made a long distance phone 
call, someone had better be passed away, or you might be in 
jeopardy of coming within an inch of your life. You just didn't 
do things that you couldn't pay for if there was no reason for 
it.
    I think even beyond predatory lending--and we have got to 
go after the predatory lenders, but there is a whole barrage in 
this country of buy this, buy that, things that are mailed. In 
a free country, some of those things you can't stop. You have 
got to make sure that they are responsible. But there is a 
whole change in 20 years as a culture, and not just affecting 
poor people. I think that a lot of people climbed up that 
ladder to middle class and went right back down because they 
got in so much debt.
    And this is--it is almost endemic in some ways, and some of 
it may not be illegal at all. It is a way of life now in the 
United States, and it is a visual bombarding.
    But I think, too, and said this a long time ago, that I 
come from an education, teacher background. But I just think 
somewhere along the line, the school systems, too--not to hang 
this on the schools, but you have got to be able to get to 
young people somewhere and tell them how to balance a checkbook 
and warn them, as I have done with my own children.
    So, I mean, there is an endemic problem. I am not sure that 
some of it is completely intentional as much as it is just the 
whole psyche that people are into.
    When I was a kid you couldn't have a credit card. But it is 
a free country, so we are going to have credit cards.
    But you raise an interesting scenario.
    With that, I want to thank everyone. Thank you, gentlemen, 
for your comments. We will work with you. And we need to clear 
the room to prepare for the next hearing. Thank you very much 
to the panel.
    [Whereupon, at 2:09 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                            November 5, 2003


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