[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
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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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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