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




                      PROMOTING HOME OWNERSHIP BY
                       ENSURING LIQUIDITY IN THE
                        SUBPRIME MORTGAGE MARKET

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

                             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

                             SECOND SESSION

                               __________

                             JUNE 23, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-97



                    U.S. GOVERNMENT PRINTING OFFICE
95-652                      WASHINGTON : DC
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                 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          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSSELLA, New York              CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
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                PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas                     MAXINE WATERS, California
WALTER B. JONES, Jr, North Carolina  DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania      HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York              RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania        KEN LUCAS, Kentucky
SHELLEY MOORE CAPITO, West Virginia  JOSEPH CROWLEY, New York
PATRICK J. TIBERI, Ohio              STEVE ISRAEL, New York
MARK R. KENNEDY, Minnesota           MIKE ROSS, Arkansas
TOM FEENEY, Florida                  CAROLYN McCARTHY, New York
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey            JOE BACA, California
TIM MURPHY, Pennsylvania             CHRIS BELL, Texas
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                 WM. 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:
    June 23, 2004................................................     1
Appendix:
    June 23, 2004................................................    51

                               WITNESSES
                        Wednesday, June 23, 2004

Calhoun, Michael D., General Counsel, Center for Responsible 
  Lending........................................................    18
DeMong, Richard F., Virginia Bankers Professor of Bank 
  Management, McIntire School of Commerce, University of Virginia    22
Green, Micah S., President, The Bond Market Association..........    14
Kogut, Pamela, Assistant Attorney General, Office of the Attorney 
  General, Commonwealth of Massachusetts.........................    19
Raiter, Frank, Managing Director, Standard & Poor's Credit Market 
  Services.......................................................    16

                                APPENDIX

Prepared statements:
    Ney, Hon. Robert W...........................................    52
    Bachus, Hon. Spencer.........................................    54
    Clay, Hon. Wm. Lacy..........................................    58
    Gillmor, Hon. Paul E.........................................    59
    Hinojosa, Hon. Ruben.........................................    61
    Miller, Hon. Gary G..........................................    63
    Velazquez, Hon. Nydia M......................................    64
    Waters, Hon. Maxine..........................................    65
    Calhoun, Michael D...........................................    67
    DeMong, Richard F............................................    90
    Green, Micah S...............................................    98
    Kogut, Pamela................................................   104
    Raiter, Frank................................................   111

              Additional Material Submitted for the Record

Coalition for Fair and Affordable Lending, prepared statement....   117
Freddie Mac, prepared statement..................................   127
Housing Policy Council of the Financial Services Roundtable, 
  prepared statement.............................................   135

 
                      PROMOTING HOME OWNERSHIP BY
                       ENSURING LIQUIDITY IN THE
                        SUBPRIME MORTGAGE MARKET

                              ----------                              


                        Wednesday, June 23, 2004

             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 10:08 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Robert Ney and 
Hon. Spencer Bachus [chairmen of the subcommittees] presiding.
    Present: Representatives Bachus, Ney, Baker, Royce, Kelly, 
Biggert, Fossella, Gary G. Miller of California, Hart, Capito, 
Tiberi, Hensarling, Garrett, Kanjorski, Waters, Sanders, 
Maloney, Gutierrez, Velazquez, Watt, Ackerman, Sherman, Meeks, 
Lee, Lucas, Crowley, Israel, McCarthy, Miller of North 
Carolina, Scott, and Davis.
    Chairman Ney. [Presiding.] Today, the two subcommittees 
meet to continue our look at the subprime market and its 
importance to consumers. Last year, Chairman Bachus and I began 
holding roundtables to discuss abusive lending practices in 
subprime lending and how we can assure credit availability for 
those who need and want it. We are pleased to also have 
Chairman Baker with us today who has a wealth of knowledge on 
this issue and has spent a long time looking at this issue.
    Last fall, we held our first joint hearing to examine 
abusive lending practices. This spring, we followed that by 
holding a hearing looking at the subprime lending market. For 
the first time in the predatory lending discussion, we looked 
at the growing class of subprime borrowers and their role in 
the mortgage marketplace. Today, we will look at another vital 
piece of the subprime market. The United States mortgage market 
is the deepest and most affordable in the world. Due to the 
evolution of unique funding structures for mortgages, Americans 
pay less for mortgages than almost anywhere else in the world. 
As a result, this country has the world's highest homeownership 
rate, although there is a lot more that can be done, especially 
in areas of minority homeownership.
    However, the unique funding structure that has been long 
established for the prime mortgage market is far less mature 
for the subprime mortgage market. Only recently has it become 
common for a majority of subprime loans to be packaged and sold 
to investors. I believe that this evolution has led to lower 
and more uniform rates for subprime loans, saving consumers 
money while making credit more widely available. However, 
states and cities have begun passing laws that dramatically 
affect the availability of funds for subprime lenders.
    In a well-intentioned attempt to end abuse of lending 
practices, some State and local governments passed laws 
extending liability for fraudulent origination practices to 
those in the secondary market that purchased the loan in a 
pool, but had no hand in actually writing the loan. These 
strict assignee liability laws threaten the availability of 
credit in the subprime market. I think we saw this most evident 
in Georgia at the time when it caused such a problem, people 
said, fine, we are just not going to do business. And of 
course, the legislature came back, there were some editorials, 
and they changed parts of that law. These strict assignee 
liability laws threaten the availability of credit, frankly, in 
the subprime market. Acting as a usury cap on mortgage lending, 
these laws effectively prevent people from receiving mortgages.
    The recent case study on the problems with assignee 
liability, and I mention, of course, recent case studies in 
Georgia, where the State legislature passed an incredibly 
onerous law with strict assignee liability. That law led many 
secondary market players to withdraw from the Georgia market, 
drying up the credit for the borrowers. Of course, I mentioned 
the rest about the editorials that followed, and then the 
Georgia legislature passed a partial fix to the problem that 
provided some lending opportunities, but we still do not know 
what will be the lasting effect of these predatory lending 
statutes on the availability of credit.
    In order to better understand the impact of laws like 
Georgia's, this hearing will give our subcommittees a chance to 
hear from a distinguished group of witnesses on the 
availability of subprime mortgages. I think this hearing is 
timely and important to this committee's duty of ensuring 
access to credit for Americans. I also want to thank 
Congressman Lucas and a wide variety of other members on both 
sides of the aisle, Congressman Sherman and others, who have 
expressed interest in this issue. We appreciate it. I know it 
can be a controversial and tough issue, but I think it has to 
be looked at and dealt with. So I again appreciate members who 
have been willing to look at this.
    With that, I will recognize Congressman Sherman.
    [The prepared statement of Hon. Robert W. Ney can be found 
on page 52 in the appendix.]
    Mr. Sherman. Thank you, Mr. Chairman.
    The recent actions by the OCC have created an absurd 
situation where a certain class of lenders has the lowest 
common denominator of virtually no restrictions, and that will 
eventually lead to some bad actors, if it has not already, that 
will tarnish the image of all lenders and result in a backlash 
that will be harmful even to that subset of lenders, the 
national banks that think they enjoy the OCC's liberation from 
State regulation.
    The answer is that Congress needs to take action. The most 
immediate action we should take is to get rid of what the OCC 
has done, which is to substitute itself for this committee and 
this Congress. It may be necessary for us to do that as part of 
a package where we establish real solid consumer protections, 
not lowest common denominator, and at the same time preempt 
this glowing plethora of state and even local regulation. We 
need good regulation for all Americans, and not a patchwork 
city-by-city, county-by-county, or even state-by-state.
    We need the competition that comes from efficiency, which 
comes from offering a product nationwide. I hope that both 
sides in this debate will not grab onto their own definition of 
nirvana; that consumer groups will not say, well at least in 
Berkeley, we have every regulation we want; God forbid we 
should lose that paradigm. And some national bank should not 
say, well, we have the OCC for now; we do not have to worry 
about anything. And instead unite behind solid consumer 
protections that represent a middle ground.
    I hope these hearings lead to that result, and I yield 
back.
    Chairman Ney. Thank you.
    Mr. Chairman, Mr. Bachus?
    Mr. Bachus. Thank you, Mr. Ney.
    First of all, I want to commend you for having this hearing 
of our two subcommittees. By way of review, this is the third 
hearing we have had on this matter. Our first hearing, we 
addressed ways to combat abusive lending practices in the 
nonprime or subprime area, and to address them without 
jeopardizing the availability of nonprime or subprime loans to 
those with less than perfect credit.
    Our second hearing, we focused on looking at actually who 
the nonprime or subprime borrowers were, their profiles, and 
the advantages that nonprime and subprime mortgages, the 
benefits and advantages to those borrowers, and also some of 
the risks inherent in the nonprime or subprime market, and the 
risks posed by predatory lenders.
    Today's hearing we are going to look at the secondary 
market, the role that it plays in adding liquidity to the 
subprime lending industry, and the benefits it provides of 
expanded homeowner opportunities.
    The nonprime market, I think the most surprising thing to 
me is the explosive growth in nonprime or subprime lending. In 
1994, there were $34 billion in subprime mortgages. By 2002, 
that was $200 billion, so you are talking about a five-fold 
increase in 8 years in nonprime loans. A lot of this increase 
in the number of loans is because of development of the 
secondary market where the originators are selling loans into 
the secondary market, rather than retaining them in their own 
portfolios. When they do this, we found that they create 
mortgage pools and as a result of this there have been assignee 
liability problems, where people who purchase these mortgage 
pools are held liable as assignee's.
    I think maybe that will be part of the focus at this 
hearing today, to determine the fairness of assignee liability 
provisions that require purchasers of mortgage pools to 
determine as part of their due diligence whether the lender or 
mortgage broker involved in originating the individual loans 
that make up the portfolio misrepresented loans terms or 
engaged in other deceptive practices in dealing with the 
borrower.
    There is a question about the fairness of imposing 
liability on secondary market participants for violations, and 
I know we have someone here from Standard & Poor's that is 
going to be a witness. They have simply refused to rate 
mortgage-backed securities if they contained non-prime or 
subprime loans because of what sometimes is described as vague 
or open-ended assignee liability standards that some States 
have imposed. As a result of the assignee liability question, 
Congressman Ney and Congressman Ken Lucas introduced H.R. 833. 
What it does is it contains consumer protections in 
disclosures. It is intended to serve as a uniform national 
standard for combating abusive and predatory lending.
    At the same time, it addresses this assignee liability by 
amending the Homeownership Equity Protection Act. The approach 
that their legislation takes, I am sure the witnesses are 
familiar with that and will address whether they think that is 
the right approach. It at least has the possibility, if it is a 
fair approach, of establishing some legal certainty to the 
secondary market, which is lacking in a lot of State and local 
anti-predatory lending laws.
    With that, I will just close. Thank you for having this 
hearing. I am convinced that nonprime loans allow many people 
to participate in homeownership or to purchase a home that 
would otherwise be unavailable to them. I would like to allow 
us to find a way to preserve this market, preserve this 
opportunity that many middle-and low-income citizens need to 
have homeownership, and at the same time establish some legal 
certainty in a fair way concerning assignee liability, and to 
do it in a way that is fair to all parties.
    I yield back the balance of my time.
    [The prepared statement of Hon. Spencer Bachus can be found 
on page 54 in the appendix.]
    Chairman Ney. I want to thank the gentleman, and I thank 
the gentleman for chairing this hearing today with us.
    The gentlelady from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I have a Statement that I am going to submit. I am here 
today to try and discover what the crisis is as indicated by 
this hearing. I think there is liquidity in the subprime 
market. I want to be clear. I am not opposed to subprime 
lending, and I know the difference between subprime lending and 
predatory lending. It does not have to be one and the same, but 
far too often it is. I am interested in making sure that in the 
subprime lending market, we do not have abusive practices, high 
interest rates and marketing techniques and practices that 
deceive and get people hooked into loans that they do not 
understand and cannot afford.
    So I am very careful about making sure that that is 
understood; that subprime lending can be lending that can be 
helpful, but it is not always helpful and I think we find a 
disproportionate amount of the predatory lending in the 
subprime market. I am opposed to preemption. I do not know if 
you are aware that Los Angeles is one of the cities that has 
passed some local predatory lending laws. I want to be careful 
to do nothing that would preempt the kind of work that they are 
doing and some of the other states. I understand there are 
about 29 states and at least 18 municipalities that have 
enacted laws to address the problem of predatory lending.
    So I am going to listen to the witnesses here today to see 
what they have to say. I do not know what the crisis is. 
Perhaps there will be some information here that can help me to 
understand exactly what is meant by the subject of this 
hearing. So with that, Mr. Chairman, I am just going to yield 
back the balance of my time.
    [The prepared statement of Hon. Maxine Waters can be found 
on page 65 in the appendix.]
    Chairman Ney. I thank the gentlelady.
    Chairman Baker.
    Mr. Baker. Thank you, Mr. Chairman, for your leadership and 
interest in this matter, as well, of course, as Chairman 
Bachus. I know both of you have had longstanding concerns about 
this market issue. I understand the focus of the hearing today 
is the potential causes of liquidity impairment and abusive 
practices that may occur in the subprime mortgage market. I 
certainly agree with your interest in need for review, however 
I just want to make a very narrow observation about a concern I 
have today, which is that mentioned by Mr. Bachus as well, the 
potential imposition of liability on assignee's of mortgage 
loans.
    This imposition would, I think, place a burden on the 
secondary market participants that would affect and have a 
disruptive affect on the flow of legitimate credit to many 
underserved communities. The advent of securitization certainly 
has assisted in the liquidity of mortgage markets, lowered cost 
of credit, significantly increased the availability of subprime 
mortgage credit, and has resulted in benefits, not necessarily 
associated with that described as predatory lending. But the 
consequences of assignee liability would cause potential buyers 
to forego purchasing subprime or high-cost mortgage loans. 
Certainly if this were the case, with fewer buyers and less 
money, legitimate lenders would ultimately impair the ability 
of low-and moderate-income customers to participate in 
homeownership.
    The public policy challenge, I believe, is to strike a 
balance between limiting abusive lending practices, while 
ensuring the flow of credit to borrowers who cannot obtain 
loans in the primary market. Consumers obviously need to be 
protected from unscrupulous lenders, particularly those who are 
financially unsophisticated. I do believe there are 
sufficiently strong standards currently in existence and they 
should continually be reviewed to determine their adequacy of 
protection of the unsophisticated borrower.
    Extension of these sanctions, however, to assignee's risks 
the future of our current market structure. To assure that 
assignee's are not made liable for abuses they cannot 
reasonably discover and correct, I have been at work for some 
time drafting my own approach to a remedy and I will be 
introducing later this week, that would recognize that 
commercially reasonable responsible actions called due 
diligence, which would not enable discovery, ought to be a 
sufficient defense. Sanctions such as class action civil 
liability, loan rescission, are matters which should be 
discussed. Assignees should be allowed to take some time to 
take corrective actions upon appropriate discovery of a 
compliance failure.
    These are I believe important issues deserving of the 
committee's time, and I look forward to working with you, Mr. 
Chairman and Mr. Bachus, over the coming weeks as we move 
forward in trying to provide balance in a very important market 
that provides a service to many underserved consumers, and 
certainly a very important part of our overall economic 
recovery.
    I thank you, Mr. Chairman.
    Chairman Ney. I want to thank the gentleman.
    Mr. Sanders, the gentleman from Vermont.
    Mr. Sanders. Thank you, Mr. Chairman. I thank you and 
Chairman Bachus for holding this important hearing.
    According to the Center for Responsible Lending, predatory 
lending is costing American families $9.1 billion every year. I 
am happy that Michael Calhoun from the Center is here with us 
today to talk about that study.
    Mr. Chairman, in the richest country on earth, there is 
something wrong when so many foreclosures are taking place. 
Between 1980 and 1999, both the number and the rate of home 
foreclosures in the United States have skyrocketed by 277 
percent. According to an article in the New York Times, over 
130,000 homes were foreclosed in the spring of 2002, with 
another 400,000 in the pipeline. Many of these foreclosures are 
a direct result of predatory lending practices in the subprime 
mortgage market that must be put an end to immediately. 
According to the Mortgage Bankers Association, while subprime 
lenders account for 10 percent of the mortgage lending market, 
they account for 60 percent of the foreclosures.
    Mr. Chairman, the title of this hearing is Promoting 
Homeownership by Ensuring Liquidity in the Subprime Mortgage 
Market. That is a very interesting title. The title seems to 
assume that there is a lack of liquidity in the subprime market 
that is somehow depressing homeownership in this country. But 
Mr. Chairman, according to figures compiled by the National 
Mortgage News, new subprime loans totaled $290 billion in 2003, 
more than double the total loan volume for 2000.
    Mr. Chairman, we have a subprime industry which has more 
than doubled their loan volume over the past 3 years, but 
accounts for 60 percent of all foreclosures in this country. I 
have to ask, by providing even more liquidity in the subprime 
market, would we be promoting homeownership or would be 
promoting foreclosures? Everyone wants to promote 
homeownership. Homeownership is the American Dream. But having 
your home taken away from you because you cannot pay the bills 
charged by predatory lenders can quickly turn the American 
Dream in to the American Nightmare.
    Also in this discussion, importantly, let us not forget 
that predatory lending is being perpetrated by the likes of 
just not small-time operators, but by the likes of Citigroup 
and Household International. As a result of legal actions filed 
by the FTC, Citigroup agreed in September to reimburse 
consumers $215 million for predatory lending abuses which 
represents the largest consumer settlement in FTC history. 
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.
    Mr. Chairman, when we are talking about predatory lending, 
we are not just talking about mortgage lending. Let us take 
finally a hard look at the abuse in credit cards, where many 
working people are paying 25, 28 percent a year in interest 
rates on credit cards, and as a result are going even further 
into debt. In my view, that is predatory lending as well.
    Lastly, Mr. Chairman, I know there is an effort to preempt 
states and localities from passing strong anti-predatory 
lending laws. Mr. Chairman, the Republican Party has got to get 
its act right. Either they hate the big bad federal government 
or they love the big bad federal government. You cannot have it 
both ways. You cannot tell us how we love local government and 
State government. The word, Mr. Chairman, is laboratories of 
democracy. That is what it usually is, something like that, and 
then we preempt them every single day. Let's get our act 
together. Either the Republican Party wants to be the spokesman 
for the big strong federal government taking away power from 
local government or not, but let's be a little bit consistent 
in that area.
    I yield.
    Chairman Ney. I want to thank the gentleman for his kind 
comments.
    [Laughter.]
    Mr. Miller?
    Mr. Gary G. Miller of California.Thank you, Mr. Chairman.
    I want to commend you, Chairmen Ney and Bachus, for having 
this hearing. This is an extremely important issue in the 
subprime market out there. This is a very important issue 
particularly in the passage of State and local predatory 
lending laws which have assigned liability to the secondary 
market.
    There is basically a housing crisis in this country, 
particularly in my State of California. The California 
homeownership rate is 56.9 percent in 2000. That lags the rest 
of the nation by over 10 percent. We also have the highest home 
prices in the nation. Housing finance is so vital to Americans 
and the overall health of our economy that the best public 
policy is for Congress to ensure that we have a fair workable 
uniform national lending standard. We must eliminate abusive 
lending practices, while preserving and promoting access to 
affordable housing credit.
    There is no question that in some nonprime borrowers, they 
basically have been abused and we need to deal with abusive 
practices, but we should do everything we can at the same time 
to prevent them. There is also no question of the vast number 
of borrowers who are not victims of such practices can become 
victims by poorly crafted protective legislation that restricts 
nonprime credit availability and basically creates an 
unnecessary situation.
    State and local anti-predatory lending laws are 
inconsistent and sometimes ineffective and nonexistent, and 
often arbitrary and unduly burdensome. This has been an effect 
of limiting nonprime credit availability. These laws have 
forced the mortgage industry to restrict access to credit or 
exit markets entirely. You cannot have a system whereby if you 
go one city, you have one requirement, and another city, you 
have another requirement. There is litigation on many of these 
ordinances that have passed locally that have not been 
implemented.
    From what I am hearing, if they are implemented, that the 
impact is going to be disastrous to local economies. That is 
unfair. You should not be discriminated against because you 
want to buy a home in a certain area. If you are looking at the 
subprime market, if you eliminate that, people are really in 
serious trouble when it comes to financing homes in those 
areas. So you have to be very cautious. You have to understand 
that there is a need for subprime and the predators in that 
marketplace need to be eliminated.
    We need to do everything we can in this nation to give 
people an opportunity to own a home. It is becoming more and 
more difficult to provide housing for people in this nation as 
time goes on. We have to be proactive in this area. Sometimes 
you have to look at what happens at the local level. We do that 
in housing all the time. HUD is looking at eliminating local 
red tape that exists out there that precludes people from being 
able to build homes in certain areas. We have to be proactive 
in doing that. You cannot sit there and ignore local policies 
that are just absolutely abusive towards people wanting to buy 
homes.
    You look at some of these areas, and the assessment against 
builders who want to build homes is so outrageous and generally 
passed on to homebuyers, that the federal government has to say 
this is wrong; that you are abusing people and perhaps federal 
policy has to establish certain guidelines that preclude some 
of these abusive policies. In subprime lending, we need to look 
at predatory. And when it is being abused, we need to move 
proactively
    So Chairmen Ney and Bachus, I applaud both of you for your 
efforts on this and I look forward to hearing the testimony 
from our panel. I yield back.
    [The prepared statement of Hon. Gary G. Miller can be found 
on page 63 in the appendix.]
    Chairman Ney. I thank the gentleman.
    The gentleman, Mr. Miller from North Carolina.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    I agree with those members who have said that it is vital 
that we make credit available for homeownership to those 
borrowers, those consumers who have less than perfect credit. 
It is also vital that they use the equity in their home, their 
life savings to provide against the contingencies of life. That 
is how they have saved for a rainy day.
    But I strongly agree with those members who say that there 
are sufficient consumer protections now for what is happening 
to some of the most vulnerable consumers when they try to 
borrow money against the equity in their home to provide for 
life's rainy days. There is outrageous conduct going on. In the 
words of Woody Guthrie, they are being robbed with a fountain 
pen. There are lenders who steal their life savings, the equity 
in their homes, from the most vulnerable of consumers in the 
most difficult of circumstances. I certainly think that we can 
strike a balance between making credit available to those in 
that subprime market, including a liquid secondary market, and 
providing reasonable protections to those consumers.
    It is true that Standard & Poor's have said that the 
subprime loans coming out of some States require additional 
credit enhancements. North Carolina was the first State, and it 
is not our nature to be first in anything; we were the 12th of 
the 13 states to ratify the Constitution; I think we were among 
the last of the States to join the Confederacy. We did ratify 
the constitutional amendment guaranteeing women the right to 
vote. I think we did that in the 1980s. But we were the first 
with this, and our statute has held up pretty well.
    There is readily available credit for the subprime market. 
Standard & Poor's has said that there is no enhancement 
required for North Carolina's subprime loans. I think it is 
perfectly possible to craft legislation here that will protect 
consumers against those outrageous practices that are 
occurring, and assure the continuous availability of credit.
    I join Mr. Miller, the other Mr. Miller, in his opposition 
to poorly crafted legislation. I strongly oppose poorly crafted 
legislation. I may put that on my campaign literature this 
year. I am strongly opposed to poorly crafted legislation. But 
it is simply the case that we have legislation arising from the 
States that show us what can work.
    Thank you, Mr. Chairman.
    Chairman Ney. Mr. Royce.
    Mr. Royce. Thank you, Chairman Ney. I would like to thank 
you, Mr. Chairman and Chairman Bachus for holding this very 
timely hearing on issues in the secondary mortgage market. I 
would like to also thank our distinguished witnesses for 
appearing today.
    I think it goes without saying that the housing economy has 
been quite resilient for a number of years. I think this 
strength has occurred because of a number of factors, but one 
is asset allocation away from equities. Certainly, friendly 
government policies have helped, and low interest rates.
    What concerns me is that problems in a sector can often be 
hidden or overcome in a boom cycle. All of that being said, I 
think that we need to start thinking about what happens when 
that housing market cools, because today we have Fed funds rate 
at 1 percent, but if we believe Wall Street economists, they 
say that the Fed fund rate will reach 4 percent by the end of 
2005. If these predictions prove true, unless we have a very 
flat or inverted yield curve, mortgage rates are going to be 
much higher in the not too distant future. Higher interest 
rates are going to have a very adverse impact on the housing 
market.
    I do not know how much we can do about that possibility, 
but we can address structural issues that unnecessarily add 
costs to consumer mortgages. In my view, assignee liability is 
one issue that we should address. Congress should encourage 
more investment in the secondary mortgage market. Assignee 
liability provisions do just the opposite. Fixed income 
investors are not excited to become the next target for trial 
lawyers, and that is a big problem here in the United States. 
Until we act, billions of dollars of capital investment will 
likely stay away from the subprime market. That is going to 
harm the very people assignee liability laws are intended to 
help.
    So once again, I thank Chairman Ney and I thank Chairman 
Bachus for having this hearing today, and I look forward to 
working with my colleagues on this very important issue. I 
yield back, Mr. Chairman.
    Chairman Ney. I want to thank the gentleman.
    The gentleman, Mr. Scott.
    Mr. Scott. Thank you very much, Mr. Chairman.
    I, too, am very much looking forward to this hearing. As 
the Congressman from Georgia who was very much involved in the 
predatory lending legislation in the State, going all the way 
back to the beginning with the Fleet Finance fiasco, our State 
has been a major player in this debacle.
    I have heard from some representatives from the mortgage 
industry that subprime lending provides homeowner opportunities 
for many individuals who normally would not qualify for prime 
loans. I have also heard from consumer advocates that subprime 
mortgage lending provides ample opportunity for predatory 
lending practices and gives incentives to liberally approve 
loans to individuals who cannot afford a loan. Advocates from 
consumer advocates and subprime lenders both would like to see 
the creation of a national predatory lending law, and I 
certainly commend the leadership of our financial services 
committee for moving in that direction.
    As a former member of the Georgia General Assembly as a 
State Senator, I can speak of the impact that an overly strong 
regulatory measure can have on a housing market. For a little 
bit of history, the Georgia Fair Lending Act had several 
provisions, including assigning liability to secondary markets, 
which caused financial companies to pull out of our State and 
withdraw some lending products. The Georgia legislature had to 
revisit the law last year to prevent additional companies from 
leaving the State.
    In an effort to stop unscrupulous lending practices, the 
Fair Lending Act caused hardship to legitimate lenders. It 
triggered an immediate reaction from both mortgage lenders and 
secondary market entities. Once that Act extended assignee 
liability to potentially thousands of covered loans, with 
interest rates approximately 4 percentage points below the 
HOEPA interest trigger. Major mortgage lenders announced their 
plans to stop making both the high-cost loans and cover loans 
in Georgia. Standard & Poor's announced it would not rate 
mortgages covered by the law, and both Fannie Mae and Freddie 
Mac indicated they would not purchase mortgages that qualify as 
high-cost loans under the Act.
    Assignee liability, then, presents us with quite a 
challenge. The central question, of course, is what is the 
effect of making assignee liability for the predatory lending 
practice of originators? Should assignee's be required to bear 
the responsibility for the predatory practices of those from 
whom they purchase loans?
    One side of the argument is that it is clear that if the 
liability is broad and does not provide solid safe harbors and 
limits on liabilities, lenders will refrain from purchasing a 
broad category of loans. This is because the risk of acquiring 
the loan has become too great, not because of each of the loans 
in that category may be predatory. This means that many lenders 
will not originate high-cost loans and purchasers will not 
purchase them. They will not be securitized and the secondary 
market will not produce the liquidity that fuels additional 
lending in the high-cost loan market.
    Yet, assignee liability is critical to successful efforts 
to address predatory lending. It helps to protect responsible 
investors from misperceived risk and provides incentives for 
the market to police itself, curbing market inefficiencies. The 
argument is, without assignee liability an unscrupulous lender 
can increase the value of the loans it sells by engaging in 
predatory practices, and packing the loan with unnecessary 
fees, excessive interest rates and large prepayment penalties. 
The lack of assignee liability provides little incentives to 
purchasers of such loans to determine if the loans were 
originated illegally or are so out of line with market norms 
that they present a substantial likelihood of abuse.
    What a dilemma; what an issue. How do we resolve it? How do 
we get an end to predatory lending? That is on our plate today 
and I look forward to an excellent meal.
    Thank you.
    Chairman Ney. I want to thank the gentleman.
    Mr. Hensarling from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman, and thank you and 
Chairman Bachus for holding this hearing.
    Since coming to Congress, I have heard a lot of bad ideas, 
but assigning strict liability to assignee's of mortgages in 
the secondary market--strict liability--strikes me as one of 
the worse. I mean, where those who purchase the mortgage do not 
even have any knowledge of a potential underlying violation 
strikes me as a truly, truly bad idea.
    One thing we have consensus on in this committee is that we 
all believe that predatory lending is a problem. Unfortunately, 
we cannot seem to come to any consensus on what predatory 
lending is or is not. I hope that we as a committee do not 
conclude that predatory lending is tantamount to a commercial 
transaction between consenting adults with full disclosure, but 
because we do not like the terms, we decide in our infinite 
wisdom that we should outlaw these transactions.
    Now, as we debated the Fair Credit Reporting Act, we heard 
testimony after testimony that we in America enjoy the most 
accessible, lowest-cost credit in the world. I think it is 
undisputed we have the highest rate of homeownership in the 
entire history of our nation, and that includes homeownership 
opportunities for low-income individuals and those who have 
either poor credit records or no credit records.
    If we do not legislate properly, we risk all of this. I 
certainly found the comments from my colleague Mr. Scott of 
Georgia very instructional, very enlightening. To some extent, 
it seems to me we have a case study of what happened in Georgia 
and I look forward to hearing some testimony from the witnesses 
on this. But what I saw happen in Georgia was that Ameriquest, 
Chase, City Financial, Fannie Mae, GMAC, National City, Option 
One, Freddie Mac, Wachovia, the list goes on and on and on, all 
pulled out of the market because of uncertainties with respect 
to the liability.
    If we want to be pro-consumer on this committee, I would 
suggest that we work hard to make sure that we increase market 
competitiveness and not sow the seeds of the market's 
destruction. It is critical that we figure out what predatory 
lending is, that we agree on the definition and we isolate it 
from those reasonable players in the commercial market who are 
making homeownership opportunities available to low-income 
Americans.
    I yield back the balance of my time.
    Chairman Ney. The gentlelady from New York, Ms. Velazquez.
    Ms. Velazquez. I ask that my statement be included in the 
record.
    Chairman Ney. The gentlelady asks for unanimous consent. I 
would note for all members, unanimous consent if there is no 
objection for their statements to be entered into the record.
    Mr. Lucas.
    [The prepared statement of Hon. Nydia M. Velazquez can be 
found on page 64 in the appendix.]
    Mr. Lucas. Mr. Chairman, in the interest of time, I would 
like to associate myself with the remarks of my colleagues 
across the aisle, Mr. Miller of California and Mr. Royce, and 
also with Mr. Scott of Georgia. Thank you.
    Chairman Ney. I thank the gentleman.
    The gentleman, Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman.
    Just very briefly, first of all, I thank you for holding 
the hearing today. I think for both sides of the aisle, we are 
concerned about the same thing, and that is the victims, 
whether they be defined as some us are concerned, the victims 
of abusive practices, or also those people who are the victims 
of good intentions.
    I come from the State of New Jersey where the victims in 
that case are the victims of good intentions of the State 
legislature who, as in Georgia as well, had the best of 
intentions, I am sure, to look after those folks who may be 
victims of abusive lending practices. But at the end of it, 
they become victims themselves, whether they are those who no 
longer are able to enter into the subprime market, the families 
involved who are no longer able to get those loans; and finally 
those legitimate lenders who are now precluded from being in 
that marketplace because of the actions that the State 
legislature took.
    I am also mindful of the Ranking Member's comment at the 
outset of these discussions with regard to a Statement saying 
we have to get our act together here. Would that be true, that 
we get there, and make a decision from either side of the aisle 
as to where the appropriate responsibility lies, whether it is 
on these areas of State concern or federal concern.
    I think at the end of the day, the hearings that we hold 
here at the very least should shine the light of day both on 
the abusive practices, but also on the very debilitating effect 
that the State legislative actions in several States have 
already taken, and fortunately they have begun to take remedial 
actions on these various facets.
    Mr. Chairman, again I appreciate your holding these 
hearings and I yield back the balance of my time.
    Chairman Ney. Thank you.
    The gentleman from New York, Mr. Israel.
    Mr. Israel. Thank you, Mr. Chairman.
    I will take less than a minute. There is an old saying here 
in Washington that we cannot define pornography, but we know it 
when we see it. The same rule cannot be applied to predatory 
lending and below-prime lending. It clearly means different 
things to different people. I have a community in my 
congressional district that has been tragically undermined by 
predatory lenders. The fact of the matter is that bad actors in 
predatory lending are negatively defining reputable below-prime 
lenders.
    I have a very simple bottom line, Mr. Chairman, and that is 
that I believe that we need to work on a bipartisan basis to 
create an appropriately regulated federal marketplace that 
allows the subprime industry to give more people access to 
homeownership, while completely shutting down the bad actors. I 
look forward to working with my colleagues towards that end.
    Thank you, Mr. Chairman. I yield back.
    Chairman Ney. Thank you.
    Mr. Davis of Alabama.
    Mr. Davis. Thank you, Mr. Chairman. Let me also thank the 
Ranking Member for her comments at the beginning.
    I will not take anywhere near the full 5 minutes, but I 
want to define the problem from my perspective. On both sides 
of the aisle, we have a very strong commitment to a free market 
in this country. That is a bipartisan commitment that we have. 
The challenge of predatory lending and excessive subprime 
lending is that it distorts the market. I have to consider a 
market to be distorted when upper-income African Americans and 
upper-income Hispanic Americans with good credit are finding 
themselves pushed into the subprime market. That is a 
distortion of the way the market should be working in this 
country. It is a distortion that limits homeownership 
opportunities. It is a distortion that locks people into a vise 
from which they often cannot escape.
    We are struggling for a solution. I think a number of us 
would like to see a national standard, but it has to be a 
national standard that has some teeth to it. It is a reality 
that the efforts of the Department of Treasury, the efforts of 
the Office of Comptroller of the Currency have frankly not made 
any real headway. One of the reasons why some of us on this 
side of the aisle are troubled by the OCC's efforts at 
preemption several months ago is because the efforts of HUD, 
the efforts of OCC in the last several years have not made any 
significant dent, as Chairman Bachus said at the outset, in the 
incidence of subprime lending. I think illegitimate subprime 
lending is only continuing to rise in this country.
    The short of it is that we have to find a strategy to 
address this serious market distortion and we have to rise 
above anecdote. What we often hear is that, well, we have made 
progress in Baltimore; we have made progress in L.A.; we have 
made progress in New York. Nobody ever wants to quantify this 
problem. Nobody wants to find a way to really, number one, 
identify what practices are illegitimate lending and what we 
can do about it.
    So I hope the focus of this hearing will lead us toward 
some consensus on what an across-the-board approach ought to 
look like, but I hope that we do not leave here without a 
genuine recognition that this is a market distortion and it is 
something that ought to concern both sides of the aisle.
    I yield back the balance of my time.
    Chairman Ney. I thank the gentleman.
    With that, I want to thank also the witnesses and the 
members for their opening statements. We will move on to the 
panel. Our first witness is Micah Green, who is president of 
the Bond Market Association, an association representing 
approximately 220 securities firms and banks that underwrite, 
trade and sell debt securities. Mr. Green joined the 
association in 1987, having previously served as the staff 
director and general counsel with the House Subcommittee on 
Human Resources of the Committee on Post Office and Civil 
Service.
    Frank Raiter is a managing director of Standard & Poor's 
Credit Market Services, a division of the McGraw-Hill 
Companies. The company assigns credit ratings to financial 
institutions such as loan guarantees, bank loans and mortgage-
and asset-backed securities.
    I will defer at this point to Mr. Miller of North Carolina 
to introduce the next witness.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. I am 
very pleased to introduce Mike Calhoun to this committee. Mr. 
Calhoun is the general counsel and vice president of the Center 
for Responsible Lending. They are headquartered in Durham, 
which adjoins my district, and I believe Mr. Calhoun lives in 
Durham as well. The Center for Responsible Lending is an 
affiliate of Self-Help, and Mr. Calhoun is also a general 
counsel of Self-Help.
    I am very proud of the work that Self-Help has done in 
making credit available, providing financial services generally 
to low-income consumers, and has done it on reasonable terms. 
Their approach is, how to provide a product at a reasonable 
price, taking risk into account, and make a fair, reasonable 
profit off of the transaction, as opposed to when a consumer 
walks in their offices, taking the approach of just how much 
money can we they make off that consumer. Self-Help has grown 
dramatically and has done great things for folks in North 
Carolina.
    Mr. Calhoun has practiced consumer law for more than 25 
years. He is a graduate of the law school at the University of 
North Carolina at Chapel Hill, an outstanding academic 
institution. I understand that Mr. Calhoun also has a college 
degree.
    Chairman Ney. Thank you.
    The next witness is Pamela Kogut, who is the Assistant 
Attorney General in the Office of Massachusetts Attorney 
General Thomas F. Reilly; and Richard DeMong is the Virginia 
Bankers professor of bank management at the McIntire School of 
Commerce at the University of Virginia, where he taught since 
1977. Dr. DeMong is a registered investment adviser and has 
lectured extensively on issues relating to equity evaluation of 
subprime loans and financial analysis.
    I want to welcome all the witnesses today. We will start 
with Mr. Green.

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

    Mr. Green. Thank you very much, Chairman Ney. I really 
appreciate your kind introduction. I congratulate you and 
Chairman Bachus and Ranking Members Waters and Sanders for your 
leadership and continuing your review of this important issue. 
I also would thank Chairman Baker for his constructive work on 
this issue.
    Let me just say, too, to the entire subcommittees, I know 
typically a hearing is when those of us who are witnesses 
impale ourselves to you about what we think needs to be done. I 
will tell you, I just sat through 20 opening statements of 
people who have thought about this issue, people who understand 
this issue, people who have strong feelings on this issue. We 
have heard from you. I think I can speak for my other 
panelists. We know what we have to do now. We know that we have 
to be responsible on this issue. We cannot understate the 
problem of predatory lending, nor should we overstate the 
market issues.
    We also need to be very careful to be very clear about what 
the problem is with assignee liability, and we need to make 
sure that we fully understand and together define clearly what 
a good subprime marketplace is all about and what bad predatory 
lending is all about, and agree that we have to stop predatory 
lending, but not at the cost of people who need access to 
capital just merely because they have had a tough lot in recent 
years and their credit rating may not be stellar.
    So I will tell you as a witness at this hearing, I have 
heard your Statements and I will take them back to our 
community to make sure that we take the charge very seriously, 
to come together constructively on something that can hopefully 
advance the ball here.
    But there is a problem. There is a problem, and to pick up 
on Congressman Sanders's point about the States being a 
laboratory the States have, in fact, been a laboratory. The 
States have been an excellent laboratory. States have tried to 
deal with this issue in ways they sincerely knew and felt that 
they could best deal with this issue. And they learned that 
there was a problem. There was a problem that if you go too 
far, it can have a cost to people who need legitimate capital 
at the most affordable cost.
    Keep in mind, all these statistics about the growth of the 
subprime market have been at a time when interest rates have 
been very low. The subprime market has grown just as the other 
mortgage market has grown tremendously, both the refinancing 
market and the original issue market for home purchases. We are 
about to enter a period of rising interest rates. We are also 
about to enter a period where people who may have been out of 
work during a recession may be coming back to work. What 
happens when people are out of work? Their credit rating, their 
own personal credit quality could go down during that period of 
stress in their life.
    So they may now be back at work and need to access capital 
for the purchase of a home or for whatever reason, and because 
of a blemish on their record may need to access the subprime 
market at the most affordable level. If a viable secondary 
market is not working well to help reduce the cost of that 
subprime marketplace, real people will be hurt, not by a loss 
of liquidity, which is a favorite term of art in the 
marketplace, but by higher costs. The way liquidity translates 
itself to the average person is a higher cost of that 
borrowing, a higher cost of that mortgage. So we are at a time 
where this issue has grown in importance because of a potential 
rising interest rate environment, as Congressman Royce 
indicated.
    But I will say that the real problem with the laboratory 
experiment in the States has been not only any one particular 
state experience, like what happened in Georgia or New Jersey 
or any one of numerous states, but the fact that we have a 
patchwork quilt of various types of state regulations and state 
requirements. Some of them are clear and objective. Some of 
them are vague and uncertain.
    The marketplace is a national marketplace. In order to 
quantify the risks, you need clarity and objectivity. 
Imprecision and unclearness results in the inability to value 
those risks and quantify those risks. That is why when a very 
objective observer like S&P looks at this issue, they say it is 
difficult for them to quantify the credit-worthiness, as you 
will hear from S&P.
    So we come here today wanting to be a partner. We want to 
work with these committees to try to arrive at a solution. In a 
perfect world, no assignee liability would probably be the 
ideal, but we recognize, as Congressman Scott said, that you 
need some way to enforce these rules in a way that will get at 
the predatory lender. So we would support clear objective 
assignee liability, because at the end of the day if it is 
clear and objective, it can be implemented in a precise and 
less costly way.
    So we would look forward to working with this committee to 
try to figure out where that line is, but clearly the status 
quo, particularly at this stage of the market cycle, is not a 
good place to be.
    So I thank you, Mr. Chairman and members of the committee, 
and I look forward to answering your questions.
    [The prepared statement of Micah S. Green can be found on 
page 98 in the appendix.]
    Chairman Ney. I thank the gentleman.
    Mr. Raiter.

STATEMENT OF FRANK RAITER, MANAGING DIRECTOR, STANDARD & POOR'S 
                     CREDIT MARKET SERVICES

    Mr. Raiter. Good morning, Chairman Ney, Chairman Bachus and 
members of the subcommittees.
    As an independent and objective commentator on credit 
risks, 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 or 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 that it considers when evaluating the 
impact of anti-predatory lending laws on rated transactions and 
in particular the issue of assignee liability.
    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 
the 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 benefit to the borrower; and 
increasing rates upon default.
    Anti-predatory lending laws 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 and Poor's must evaluate 
the impact of these laws 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 same borrowers the laws are 
intended to protect. Standard & Poor's has determined that some 
of these laws may have the negative affect of reducing the 
availability of funds to pay these investors. This reduction 
could occur if an anti-predatory lending law imposes 
liabilities on purchasers or assignee's of mortgage loans 
simply because they hold the loans that violate a law, even if 
they did not themselves engage in predatory lending practices.
    In performing its evaluation of anti-predatory lending 
laws, the two most important factors that Standard & Poor's 
considers are whether an anti-predatory lending law provides 
for this assignee liability, and if so what penalties the law 
imposes on assignee's for holding predatory loans. If Standard 
& Poor's determines that there is no assignee liability, 
Standard & Poor's will generally permit loans covered by the 
law to be included in rated transactions without any further 
considerations or restrictions.
    If on the other hand, a law does permit assignee liability, 
Standard & Poor's will evaluate the penalties under the law. 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 into 
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 of violations of the law. Standard & 
Poor's looks at 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 such loans if the 
credit support that Standard & Poor's would require equals or 
exceeds the monetary value of the loan. For example, if a law 
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 the law. Specifically, Standard & Poor's 
looks for statutory language that clearly sets forth what 
constitutes a violation, which parties may be liable under the 
law, 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 may adopt a conservative interpretation of an 
anti-predatory lending law and may, in instances where 
liability is not clearly limited, exclude mortgage loans from 
transactions 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 risk to investors associated with anti-
predatory lending legislation, and not to recommend public 
policy.
    This concludes my testimony. I will be happy to answer any 
questions. Thank you.
    [The prepared statement of Frank Raiter can be found on 
page 111 in the appendix.]
    Mr. Bachus. [Presiding.] Mr. Calhoun.

 STATEMENT OF MICHAEL D. CALHOUN, GENERAL COUNSEL, CENTER FOR 
                      RESPONSIBLE LENDING

    Mr. Calhoun. Chairmen and members of the committee, I 
appreciate the opportunity to testify today, and I thank 
Congressman Miller for his kind introduction and his respect 
for his college rival, Duke University.
    Self-Help has provided over $3 billion of financing for 
first-time homebuyers across this country. We regularly 
purchase, securitize and hold loans in the secondary market. 
Our mission is to help families create financial net worth. In 
the late 1990s, we found that many of our borrowers that we had 
helped put into homes were being solicited to refinance into 
predatory loans. We also found that many loan applicants had 
already been trapped in predatory loans and were unable to 
qualify for a loan to help them.
    We and other lenders and many other groups worked together 
in 1999 when North Carolina enacted the country's first 
predatory lending law. It has worked very well both protecting 
consumers and maintaining access to credit. I was one of the 
principal drafters of the law and I also serve as general 
counsel for Self-Help in its lending programs, and have 
previously directed Self-Help's secondary market program.
    I will address three points this morning. First, assignee 
liability is presently a part of our national mortgage market 
and a necessary part. It is not something new. Second, the 
North Carolina law which has substantial assignee liability has 
worked very well. And finally, I will address the impact of the 
subprime market on homeownership.
    Today, it is a fact that most home loans are sold. You end 
up making your payments to somebody totally different from 
whomever you took the loan out with. Assignee liability simply 
means if the loan is illegal, can those violations of law be 
enforced against the party collecting or even foreclosing on 
your loan?
    Assignee liability is commonplace in mortgage transactions 
presently under a number of State and federal laws. It is the 
general rule in many consumer transactions, such as car 
purchases, furniture purchases that are regularly securitized, 
that paper is securitized. At the most critical point, with a 
family facing the threat of foreclosure, the absence of 
assignee liability means that the purchaser of the illegal loan 
can foreclose and evict the family and force them to try and 
find the original lender and seek redress against a party that 
may be gone or bankrupt. We will hear examples of that today 
from other witnesses. In short, significant assignee liability 
is central to protect families and protect the integrity of our 
mortgage market.
    The North Carolina law did not contain a separate assignee 
liability provision because assignee liability for certain 
mortgage violations was already part of existing North Carolina 
law. North Carolina's subprime market has remained strong, 
growing more than 50 percent under the law. A UNC Business 
School study of the law's impact found no reduction in subprime 
home purchase loans in North Carolina under the law. It found 
the effect on refinancing loans was overwhelming on those loans 
with predatory features. It concluded the law was having its 
precise purpose and was working well. New Jersey and several 
other States have even more limited assignee liability than 
North Carolina and we expect that there will be positive 
experiences there as well.
    As noted by the Chairman and several other members, the 
subprime market has been exploding in volume. It is important 
to remember, though, the subprime market when we look at its 
impact on homeownership is overwhelmingly a refinance market. 
Over three-fourths of these loans are refinancings of existing 
mortgages where somebody is already in a home, not loans to 
purchase a home. Foreclosure in the subprime market, as noted, 
is exploding at a rate 10 times that of the prime market. As we 
sit here today, fully 5 percent of all subprime loans are in 
foreclosure right now.
    Moreover, these loans tend to refinance repeatedly and have 
an average life of only 3 to 4 years. If a lender charges five 
up-front points or more and/or a 5 percent prepayment penalty, 
with each loan and each refinancing, quickly a family's long-
earned home equity is gone. This has a very disparate impact on 
minority families. While the reasons can be debated, it is a 
fact that minority families are much more likely to have and be 
affected by subprime loans than other families.
    Moreover, the loss of home equity is even more devastating. 
There is a tremendous equity gap in the United States today, 
with African American families having only one-tenth the net 
median wealth of majority families. That is currently about 
$10,000.
    The continuation of unchecked predatory loan practices 
gravely threatens homeownership and equity of families. I urge 
this committee to enact effective federal protections like 
those in North Carolina. These federal protections should be a 
floor, not a ceiling so that the States and Congress can work 
together to protect American families.
    Thank you.
    [The prepared statement of Michael D. Calhoun can be found 
on page 67 in the appendix.]
    Mr. Bachus. I appreciate that.
    Assistant Attorney General Kogut.

 STATEMENT OF PAMELA KOGUT, ASSISTANT ATTORNEY GENERAL, OFFICE 
     OF THE ATTORNEY GENERAL, COMMONWEALTH OF MASSACHUSETTS

    Ms. Kogut. Thank you, Mr. Chairman and members of this 
committee. I am so pleased to be here today to present the 
views of Massachusetts Attorney General Tom Reilly and our 
office's work concerning subprime mortgage lending cases. I 
bring to this hearing the perspective of a law enforcement 
office which has a long history of bringing cases against 
mortgage lenders that have engaged in unlawful practices, 
including cases against subprime mortgage lenders.
    I am going to highlight a recent case which our office 
brought against, First Alliance Mortgage Company. This case 
illustrates that even when we have reasonably strong consumer 
protection laws on the books, in straightforward egregious 
violations of the law, consumers may not be made whole by a 
lawsuit at the end of the day unless the laws are made stronger 
and the secondary market entities are held accountable. If the 
secondary market entities are not held accountable, at the end 
of the day the consumers are going to be left holding the bag, 
and the bag will be empty. That is what our experience has 
shown us.
    So to focus on the First Alliance Mortgage Company case, 
this Irvine, California-based lender obtained a license from 
our Division of Banks to do business in Massachusetts in 1997. 
After a routine examination a year into their license, our 
Division of Banks found that this lender was routinely charging 
borrowers 20 points and more for mortgage loans. Our Division 
of Banks was concerned and referred the matter to our office 
for enforcement. We filed a lawsuit fairly soon after the case 
was referred to us. We filed a lawsuit in October of 1998. We 
focused on a State regulation that prohibits mortgage lenders 
from making mortgage loans with terms which significantly 
deviate from industry-wide standards or which are otherwise 
unconscionable.
    The focus of the lawsuit was intended to focus really 
cleanly and swiftly on the points overcharges which were 
clearly unconscionable by Massachusetts standards. We expected 
that this was a lawsuit that would be wrapped up quickly. This 
turned out not to be the case at all. A little more than a 
year-and-a-half after the case was brought, First Alliance 
Mortgage Company filed for bankruptcy protection in California, 
which extended the litigation in our case by years. The case 
did not end up getting resolved until 2002. At the end of the 
bankruptcy case, the Massachusetts consumer saw only cents on 
the dollar.
    Here is what we learned about First Alliance Mortgage 
Company's practices. During the year when they made loans in 
Massachusetts, and after we filed our lawsuit and obtained a 
preliminary injunction against first alliance which limited 
them to charging no more than five points per loan, they closed 
up shop in Massachusetts and left. So they only did business in 
Massachusetts for one year, making 299 loans. Of these, more 
than 35 percent of the loans contained points charges in excess 
of 20; two of our borrowers paid more than 30 points.
    Although First Alliance characterized itself as a subprime 
lender, of the 299 loans made, 20 percent were made to 
borrowers whose credit ratings were A or A-minus according to 
FAMCO's own standards. What does this mean in practice? This 
means that for example one of our borrowers, a woman aged 61, 
borrowed the sum of $47,000, a little more than that. She had 
an adjustable rate note that had an initial rate of interest of 
9.49 percent, and she paid more than 25 points, or more than 
$11,000 in points for her loan, but she was rated as an A 
borrower, that is, a consumer whose credit history and debt-to-
income ratio should have qualified her for a conventional 
conforming mortgage loan with competitive rates and costs. She 
was a middle-class borrower who lived in a good community 
outside of Boston, and she paid more than 25 points for a 
mortgage loan.
    Twenty-eight of our borrowers had their loans flipped which 
means that within about a year after they obtained their 
original refinanced loan from FAMCO, they got another FAMCO 
loan and paid the same level of points the second time around. 
For example, one couple in their 60s paid more than $15,000 in 
points, or as it turned out, more than 20 points for the first 
loan they got with First Alliance Mortgage Company, and just 14 
months later got a second loan from First Alliance Mortgage 
Company and were required to pay more than $15,000 in points 
the second time around. There is no reason for that level of 
points payment, obviously.
    We learned that FAMCO telemarketers were taught to urge 
consumers to get new FAMCO loans at every opportunity. So if a 
consumer called this mortgage lender to get a loan payoff 
figure, the telemarketers tried to sell them a new loan. If 
they were late making one payment, telemarketers tried to get 
them to get a new FAMCO loan. Our Massachusetts consumers did 
not seek out this lender. They were solicited. They ended up 
with this loan not having needed it or looked for it in the 
first place.
    We also learned that this lender got its loan originators 
to memorize and follow a deceptive sales pitch called the loan 
officer track. Without going into the details, this was 
basically a handbook on deception and specifically taught the 
loan originators to deflect questions about points charges. We 
learned that this lender did not hire experienced mortgage loan 
originators. They drew from car sales people who had proven 
track records in car sales. It is significantly that they were 
not taught about mortgage lending laws when they were trained. 
They were only taught to memorize this deceptive program.
    Ultimately, after First Alliance filed for bankruptcy 
protection, the Massachusetts AG's office was joined by a 
number of other AG offices, Minnesota, Illinois, Florida, 
California and Arizona, and the New York State Banking 
Department, as well as the FTC and private class actions, and 
we worked in a coordinated fashion to get a result in 
bankruptcy court. The result was very good: 18,000 borrowers 
got consumer redress. The consumer redress fund was ultimately 
approximately $85 million, but still this was not enough money 
to go around at the end of the day. Massachusetts at the time 
that this lawsuit was filed did not have assignee liability and 
the First Alliance Mortgage Company entity did not have enough 
money at the end of the day to make our consumers whole.
    One last point is that the coordinated plaintiffs in this 
case did make an important decision to sue Lehman Brothers, the 
investment firm that had securitized FAMCO's loans and a jury 
did fine Lehman Brothers was liable for aiding and abetting 
FAMCO in its fraudulent scheme, and was ordered to pay the sum 
of $5.1 million.
    The point that we come here to make is that this is a 
lender that engaged in egregious violations of law. We had a 
clear law in Massachusetts, but we did not have assignee 
liability. The secondary market entities did not contribute 
sufficiently and consumers were not made whole. Our consumers 
at the end of the day were seriously harmed and there was 
nothing we could do to protect them.
    Thank you.
    [The prepared statement of Pamela Kogut can be found on 
page 104 in the appendix.]
    Mr. Bachus. Thank you.
    Professor DeMong.

 STATEMENT OF RICHARD F. DEMONG, VIRGINIA BANKERS PROFESSOR OF 
  BANK MANAGEMENT, MCINTIRE SCHOOL OF COMMERCE, UNIVERSITY OF 
                            VIRGINIA

    Mr. DeMong. Thank you, Mr. Chairman and members.
    The nonprime mortgage lending has increased dramatically in 
recent years, providing billions of relatively low-cost loans 
to millions of borrowers whose risk profiles prevent them from 
qualifying for so-called ``conventional'' or ``prime'' loans 
that offer somewhat lower rates. Without the availability of 
nonprime loans, most of these borrowers would not be able to 
obtain credit to buy a home or to utilize some of their home 
equity for a variety of important financial needs.
    The continued availability of critically important consumer 
credit is highly dependent on retaining a healthy and efficient 
securitization market for nonprime mortgages. Liquidity can be 
lessened significantly, especially for higher-risk borrowers, 
by unclear, overly restrictive and conflicting laws, 
particularly when purchasers or assignee's of nonprime loans 
are subjected to broad liability for errors that may have been 
made by loan originators While it is now generally recognized 
that additional legislative safeguards are needed to protect 
nonprime borrowers from certain potentially abusive lending 
practices, it is critical that such legislation does not have 
the effect of reducing credit availability.
    This is an extremely important issue for millions of 
Americans, and I therefore commend Chairman Ney and Chairman 
Bachus for their continued leadership in scheduling this 
hearing to help address it. I also commend Representative 
Baker, who has voiced special concerns over preserving nonprime 
lenders's access to the capital markets, and Representatives 
Lucas, Watt, Miller, Kanjorski and others for seeking to 
develop workable legislative proposals.
    The origination of nonprime mortgages in 2003 was estimated 
to be $325 billion, representing about 10.5 percent of all 
mortgage originations. Just as is true with the prime mortgage 
market, the nonprime mortgage market has become national as the 
large national institutional lenders have replaced banks and 
small finance companies as the primary source of funds.
    Loan originators no longer need to hold a mortgage loan 
until maturity or sell whole loans to other financial 
institutions. With the development of the mortgage securities 
and an active secondary markets, lenders can sell entire pools 
of loans to a diverse set of investors such as pension funds, 
mutual funds, life insurance companies or individuals. By 
bringing new investors to the market, securitization has 
dramatically increased funding for housing finance, reduced 
margins, lowered costs and interest rates, and increased access 
to credit across the country. Two-thirds of nonprime mortgage 
loans are now securitized in the secondary market.
    To be most efficient, investors that are the source of 
funding for mortgage debt desire reliable risk analysis of the 
potential borrower, good reputations of all those involved in 
the mortgage lending process, transparency of the process, 
standardization of the process, and clarity in the laws.
    Just as prime mortgage interest rate spreads dropped in the 
1980s after the development of securitization, as well as the 
continued active secondary market, so have nonprime interest 
rate spreads dropped over the last 6 years, especially during 
the last 2 years. I have two exhibits. Exhibit one shows the 
subprime interest rate spread between nonprime loans and the 
10-year constant maturity treasury rate, and you see the 
dramatic drop in the last 2 years. The second chart shows the 
difference between B credit and the 30-year FHA-insured FRM, 
the fixed-rate mortgage. Both of them show the shrinking 
spreads.
    As economic theory suggests, nonprime interest rate margins 
for the lenders have decreased with growing efficiency, which 
partially came from the standardization, and competitiveness in 
the market. Borrowing rates have therefore decreased for 
consumers.
    The investors evaluate all investments on a risk-adjusted 
basis. If an investment becomes uncertain or risky, investors 
will find other more certain and less risky investments. They 
demand a higher return for increased risks. All the financial 
markets crave certainty and similarity. A law that is not clear 
or certain may cause nonprime market liquidity to drop 
dramatically. An example of that is a study that I did in New 
Jersey after it implemented the New Jersey Home Ownership and 
Security Act of 2002, for the 2 months after the implementation 
of the law, as compared to the 2 months prior to it. Lending to 
subprimes dropped by over 60 percent. Any vagueness in the law 
will disrupt funding sources.
    So as Congress evaluates a uniform nonprime lending 
standard, there are lessons from the development of the prime 
mortgage securitizaton market. The success of the conforming 
securitization market depends on standardization of the legal 
framework, including preemption of state usury laws; and 
predictable and limited risks for the ultimate investors in the 
securities, in other words, no broad assignee liability.
    In closing, I urge Congress to pass a well-crafted federal 
law that prevents undesirable lending practices, while at the 
same time preventing disruptions to nonprime lending. That is, 
a law with clear, reasonable, and objective uniform national 
standards to prevent improper lending practices, and one that 
does not impose broad liability on assignee's. Such a federal 
law will not only protect borrowers, but will help promote 
continued liquidity in the nonprime mortgage lending market
    Thank you for this opportunity to testify. I would be 
pleased to respond to any questions members may have.
    [The prepared statement of Richard F. DeMong can be found 
on page 90 in the appendix.]
    Mr. Bachus. I thank the witnesses. For the record, without 
objection your entire written, statement, prepared statement 
will be made a part of the record.
    The committee has established a procedure where members are 
called on to question the witnesses in the order that they 
arrived at the hearing. Therefore, Mr. Garrett is the first 
member to be recognized.
    Mr. Garrett. Thank you, Mr. Chairman.
    Just a couple of questions, first, in line with the most 
recent testimony from the professor, can you delve into a 
little bit more with my home state, New Jersey, your findings 
after the two-month period, and were you able to do anytime 
after that? Because as you have heard testimony here and 
elsewhere, there is no impact, and the impact has only been a 
negligible one or positive as far as the legislative actions in 
New Jersey, but the findings that you have just indicated seem 
to go counter to that.
    Mr. DeMong. Thank you, Mr. Congressman. I have not done a 
follow-up study. I am collecting data to do that right as we 
speak. You are exactly right. The greatest impact is going to 
be immediately after the law is passed until the market sorts 
it out and figures out whether additional costs are necessary 
or additional fees are necessary or interest rates or anything 
else. It will be interesting to see the results.
    However, I should point out that the legislature in New 
Jersey is presently amending the law, which may very well 
change the whole study dramatically. I guess I was trying to 
use the study just to illustrate that a State law could, and 
did in this case, have dramatic effect immediately, and that is 
why I would argue for a very thoughtful national standard which 
would prevent disruptions in the market as investors search for 
more certain and less risky investments.
    Mr. Calhoun. If I may, briefly, there was a special 
circumstance in New Jersey immediately following the passage of 
the act, and that was that the rating agencies had not yet had 
time to evaluate the act. So while they were undertaking that 
evaluation, they announced that they would not rate mortgages 
from New Jersey. They subsequently completed that evaluation 
and decided that for the overwhelming majority of loans, there 
was not a problem and that they would rate those loans. As you 
noted, as to the final category of loans, New Jersey created 
this intermediate threshold of covered loans. As to that final 
category, the legislature is debating now whether it should 
remove that category, as they did in Congressman Scott's State 
of Georgia. They tried that category. It turned out to be a 
major problem and they quickly removed it.
    Mr. Garrett. Yes, but that is exactly the point. The rating 
agency said that for everything outside of what the intention 
of the Act was going to cover, in essence they are still okay. 
It is for exactly what the legislature was aiming at that they 
still had the question as to what should we be doing with that 
area.
    Mr. Calhoun. Under the Homeowners Equity Protection Act, 
HOEPA, there is full assignee liability on high-cost loans and 
the rating agencies for the last 10 years have taken the 
position generally that they do not rate those loans. So that 
is not different from what we have had previously, the New 
Jersey approach.
    Mr. Garrett. Okay. Professor?
    Mr. DeMong. The study that I did was actually after 
Standard & Poor's had decided how to rate the New Jersey paper. 
So the 2 months I did were December 2003 and January 2004, as 
compared to September and October of 2003. So it was after 
Standard & Poor's had decided that it would rate paper from New 
Jersey. The markets were reacting to the implementation of the 
law. A rating agency action is just one more disruption, and 
that is the type of thing that I would urge Congress to look 
for and come up with a national standard so you would not have 
a State-by-state disruption.
    Mr. Garrett. I know Mr. Green wants to answer that, then I 
have a question for the Deputy Attorney General.
    Mr. Green. I was just going to supplement that one of the 
elements in the New Jersey law is that the borrower enjoy a net 
tangible benefit from the transaction, but it is ill-defined. I 
think one of the things that the New Jersey legislature is 
looking at is that area, because again getting back to the need 
for clear and objective standards, an ill-defined or even 
undefined net tangible benefit analysis will be impossible to 
do. It simply increases the risk that the assignee's liability 
will have a real-world effect on the ability to purchase that 
mortgage and make it part of the pool, which has the effect on 
the overall pool.
    Mr. Raiter. If I could just add, having been at Standard & 
Poor's at the time, the reason that upon initial review of the 
New Jersey Act, there were some incredibly vague language that 
implied that any use of proceeds from a refinancing that went 
into home improvement would open up the investor to a liability 
that was undefined or capped. There was no way to in fact 
determine at the time that someone refinanced the house and 
took cash out that they may or may not engage in home 
improvements. Therefore, we could not rate any refinanced loan 
in New Jersey until we got clarity on exactly what the intent 
was.
    Mr. Garrett. I thank you. I did have another question. I 
will not do the questions as my time is allotted. I just will 
say that I have met with used car salesmen over literally the 
last past week and they are looking for some prime lenders to 
come into the industry. I am just kidding.
    [Laughter.]
    Mr. Bachus. I thank the gentleman from New Jersey.
    I have just been informed that Mr. Sanders will not be 
back. I am trying to cope with that loss.
    [Laughter.]
    I am going to recognize the gentleman from Illinois, Mr. 
Gutierrez.
    Mr. Gutierrez. Thank you.
    I guess my first question is to Mr. Raiter. The OCC keeps 
saying that national banks are not predatory lenders. You 
indicate in your testimony that you can easily rate subprime 
loans and make allowances, and that you can do this despite, 
although I just heard you say that you had a little difficulty 
in New Jersey, that you can easily rate these loans despite 
different state laws governing them.
    If you can in your agencies as you have testified, can rate 
these loans and therefore assess risk on these loans, do you 
see a need for the OCC to issue a predatory lending rule at 
all, with the claim that it was crucial to avoid a crisis in 
liquidity? In other words, the OCC came here and said, we are 
going to have a crisis in liquidity if we do not issue these 
preemptive laws on predatory lending. But I read your testimony 
and listened to you, and it sounds like you figured out a way 
to rate those loans, so if you can rate them, then investors 
can know the risk. So what is the issue of liquidity if there 
is one?
    Mr. Raiter. When we analyze a loan and include it in a 
rated security, as I think I indicated in the testimony, in 
some cases the risks to the investor exceeds the value of the 
loan. So if you lend somebody a dollar, but you have to put up 
$1.50 in order to get your dollar back, you are very likely not 
going to be lending a dollar.
    Mr. Gutierrez. I guess, Mr. Raiter, but you have been able 
to figure that out.
    Mr. Raiter. Correct.
    Mr. Gutierrez. My question is not whether there is a lot of 
risk to the loan. You are answering my question. You have been 
able to tell the market, hey, listen, this loan for a dollar 
could cost you $1.25 or $1.50 in the end.
    Mr. Raiter. Right.
    Mr. Gutierrez. I am just trying to see if I understood your 
testimony correctly, and that is you have been able to assess 
risk. If you are able to assess risk, could you tell me how 
that could affect liquidity then because I guess everybody 
knows what the risk is?
    Mr. Raiter. The way it has affected liquidity, if 
``liquidity'' is the term that you all want to use, is those 
loans are not getting made. Those borrowers are not receiving 
the loans under those terms that would put them in a category 
of a high-cost or a covered loan.
    I might just add that we are getting reps and warranties 
from everyone that uses S&P's mortgage ratings desk that 
provides that they are not making high-cost loans under any 
jurisdiction in which they are operating. So the loans that are 
covered by the law are at this point not being financed in the 
secondary market. If they are making the loans, they are 
putting them in a portfolio.
    As to your point on the OCC, and I am not a government 
regulatory expert, but I do believe their issue is with 
leveling the playing field for financial institutions that they 
regulate from one jurisdiction to another, not necessarily 
liquidity.
    Mr. Gutierrez. I am sorry. You were not here, as you state, 
for the hearing and you are not a government official and not a 
member of this committee, so you would not be knowledgeable on 
the point. We are, as they have come to testify before us. So I 
think the record is pretty clear that they said we have a 
crisis of liquidity.
    As a matter of fact, since you are an agency that wants to 
bring clarity, the OCC did not only do that, they did it in a 
rushed manner. They did it in the stealth of night. They did it 
under cover of congressional recess. We asked them, we said, 
OCC, do not issue the rule until Congress comes back to 
session, and 2 weeks before we got here, they issued the rule. 
So you can imagine how we might be suspect after we have 
written them letters. As a matter of fact, this committee, 
Republican and Democrat, passed an amendment on the budget that 
basically is saying that the OCC does not have jurisdiction to 
do this.
    So I understand and maybe I asked the wrong person, but it 
is just that when I read your testimony about being able to 
rate things, I figure, well, people will know what to buy and 
not to buy. From my perspective, that is a good thing. People 
know, a pension fund, do not buy these loans. Maybe they should 
not buy them because they are bad loans, because you at 
Standard & Poor's have assessed such a risk to those loans that 
maybe you have assessed that risk to those loans because they 
should not have been made in the first place.
    I do not think we should get into the kind of argument of, 
well, they did not issue the loans. Well, maybe they should not 
have issued the loans. Maybe they were bad loans and we should 
not just have a system that says, we are going to have rules 
that allow all kinds of loans, and then in the end kind of see 
where those loans fit. Because as I have heard testimony here 
this morning that in the predatory lending, it is 10 times as 
high; the foreclosure rate. That is a lot of people that are 
going to suffer. I mean, it is not like a small mistake. Ten 
times higher than conventional mortgages? That is a lot. That 
is a lot of people that are going to suffer.
    So if it was a small calculation in the market, maybe we 
could take a look at it, but I think that we should really be 
careful when the rate is 10 times as high. I think you have 
answered my question. You can rate these loans. So the 
marketplace has a reliable place they can go to before they buy 
or sell loans, because you can rate them. That basically was my 
question.
    Mr. Bachus. Mr. Gutierrez, you are over 1 minute, but if 
you would like another.
    Mr. Gutierrez. Thank you so much. In the absence of Mr. 
Sanders, I am trying to fill in a little bit for him.
    [Laughter.]
    Mr. Bachus. Okay. I have learned some things. I did not 
realize the OCC issued that thing late at night under the cover 
of darkness.
    [Laughter.]
    Mr. Gutierrez. Maybe you have not read the letters from 
your side of the aisle asking them. And since the gentlelady 
from New York is here on your side of the aisle, and she and 
others wrote them the letter.
    Mr. Bachus. Was it 2 or 3 at night? What time was it? I am 
just kidding with you. Please go ahead.
    Mr. Gutierrez. We can laugh and we can be silly about this 
experience all we want. The fact is that people, we have had 
testimony here today that people are losing their livelihoods, 
and that is a very serious issue. When we have an Assistant 
Attorney General from Massachusetts who says that she is a law 
enforcement officer of the State of Massachusetts, elected 
directly by the people of Massachusetts, and we have a 
philosophy being groomed here in Congress that at the local 
level they do it best, and that Washington, D.C. does not 
necessarily have all the answers.
    And we have had Mr. Green come and testify about how 
wonderful all these laboratories are at the different state 
levels, I just think that it is a serious thing, because if you 
lose your house and you are getting ripped off, it is a crime. 
What we are discussing here are not dollars and cents. We are 
discussing crimes against people, and I think that is a very 
serious thing. So I characterized it that way, and I do not 
know that we should impugn my interpretation in that way, but 
that is the way that I see it. That is what I will submit for 
the record.
    Mr. Bachus. I appreciate your wrapping up. I will say that 
the institutions that the testimony has been about, none of 
them are federally insured under the regulations of OCC, at 
least according to OCC.
    Mr. Gutierrez. Mr. Chairman, if I could ask the Attorney 
General a question, maybe we can clear this up, because we have 
had testimony here that when the New York Attorney General, 
elected by the people of New York, attempted to engage a 
nationally chartered bank, that nationally chartered bank told 
the Attorney General, a law enforcement officer in New York, we 
do not have to deal with you; we are going to talk to the OCC. 
And Mr. Chairman, you know, the OCC is only open from 9 to 4, 
Monday through Thursday.
    Mr. Bachus. Mr. Gutierrez, what I am saying is the 
institution that we have heard testimony about today was not 
regulated by the OCC. Thank you.
    Ms. Capito?
    Mrs. Capito. I do not have any questions. Thank you.
    Mr. Gutierrez. Thank you, Mr. Chairman. I can see this 
committee who it is being run by and for.
    Mr. Bachus. Ms. Kelly?
    Mrs. Kelly. Thank you, Mr. Chairman. I have no questions.
    Mr. Bachus. My first question is for Mr. Green. Mr. Green, 
you have heard testimony from the Assistant Attorney General 
and from Mr. Calhoun and others that there is a situation where 
there is a predatory or abusive practice or tactics employed 
that harms consumers, and the lender or the broker is, as in 
the case of Massachusetts, was bankrupt, so they are not really 
subject to legal recourse. You have a situation where you 
either have a, let's say, innocent assignee or innocent victim. 
At least in the case of predatory lending, wouldn't it be 
better to hold the assignee liable than the innocent victim, in 
that the assignee at least should have been in a position to 
know?
    Mr. Green. I think it is a great question because that is 
precisely why we have come to the conclusion, after looking at 
all of what is going on in the marketplace now, after looking 
at what the various States have done, to that a national 
standard--one that provides clear and objective assignee 
liability that can be identified.
    And picking up on the gentleman from S&P, focusing on the 
damages side, that if you had a national standard that 
accomplished that in an objective and clear way, in fact there 
ought to be assignee liability and that assignee liability 
ought to be enforceable. But when it is not clear, when it is a 
patchwork quilt around the country, it makes it very difficult 
to operate in an efficient, cost-effective, or even just-
effective way.
    Mr. Bachus. I guess what you are saying is as long as they 
are able to price the liability risk?
    Mr. Green. If liability is going to be accepted, you have 
to know what is going to impose it, and that clear and 
objective standard makes that doable.
    Mr. Bachus. And as long as there are clear standards as to 
what the liability would be?
    Mr. Green. Yes, we would support and look forward to 
working with you. I know there are several pieces of 
legislation in the works just among this committee, Congressman 
Ney, Congressman Watt, and Congressman Baker today. We would 
look forward to working with all of you to try and find what 
that right definition is.
    Mr. Bachus. Okay. The GAO found in a study they released 
earlier this year that by separating ownership of a loan from 
its originator, the secondary market for subprime loans may in 
some instances undermine efforts to combat predatory lending. I 
am going to quote from the GAO report, ``The existence of a 
market that allows originating lenders to quickly re-sell 
subprime loans may reduce the incentive these lenders have to 
ensure that borrowers can repay.'' How do you respond to the 
GAO suggestions that the secondary market may, at least in some 
instances, facilitate predatory lending?
    Mr. Green. The analogy that comes to mind, if that was a 
question for me, is a way of reducing car accidents is to 
prohibit driving. The fact is there is a big market for people 
who need credit, who need access to capital, and they may not 
have pristine, clean track records. The subprime markets 
provide them access to credit.
    It should not be surprising to anyone that the foreclosure 
rate is higher in the subprime market. They are riskier loans. 
That is why they are made in the way they are made. That is why 
they do pay a higher interest rate because they are a riskier 
credit, and riskier credits do have a higher risk of failure, 
so the fact is that there is a higher foreclosure in that 
category of loans. But if the foreclosure rate, which I heard 
earlier is 5 percent, that means 95 percent are people who 
needed credit are not facing foreclosure. Without that deep 
liquid secondary market, they may not have the same access to 
credit that they currently have to be able to reach their own 
life's dream.
    So I would say that while the GAO may be technically 
correct, it is losing the forest for the trees. The important 
thing is you want to create access to capital for those who 
want it and deserve it and need it, and you have to deal with 
the problem of predatory lending more straight-on.
    Mr. Bachus. What about the North Carolina law? Do you all 
find that to be a fair law? I would ask you, Mr. Green.
    Mr. Green. I guess we have found that the North Carolina 
law, specifically on predatory lending, has less vagueness in 
the assignee liability and frankly the body of their specific 
predatory lending stays away, as the previous witness said, 
from assignee liability specifically. So it has been a law that 
most of the marketplace has perceived to be a more workable 
standard than what we found in other states.
    Mr. Bachus. So you found that the North Carolina model at 
least does not inhibit the mortgage capital?
    Mr. Green. I never say never.
    Mr. Bachus. It does not appear to be. I mean, we have 
experience with it now.
    Mr. Green. Right. But I think it would be a good standard 
as this committee furthers its look at potential legislation. 
It would be a good standard to look at.
    Mr. Bachus. Okay.
    Mr. Calhoun. Mr. Chairman, may I clarify two things? First 
of all, Mr. Green was referring to the 5 percent foreclosure 
figure. I want to make it clear, that is 5 percent of subprime 
loans which are currently in foreclosure. That is this year. 
Next year, there are going to be more loans. It is not that 95 
percent of these loans are going to stay out of foreclosure. It 
is this year, 5 percent are in foreclosure. Given the average 
span of a foreclosure process, which is in the range of a year, 
next year we are going to get another 5 percent of them. We are 
talking about huge numbers of families losing their homes in 
this market.
    The other one point is, on the North Carolina model, I want 
to be clear. North Carolina was the State that developed the 
prohibition against flipping, that there has to be a net 
tangible benefit. That applies to all loans in North Carolina. 
We also have a couple of safeguards. You have to prove that it 
was an intentional violation by the lender, and some other 
safeguards. We went through a lot of time trying to come up 
with a very specific standard. Both lenders and consumer 
advocates found that all of those standards were over-or under-
inclusive.
    Mr. Bachus. Let me ask you this, my time has run out, I 
think what Mr. Green is saying is that the industry can live 
with the North Carolina law.
    Mr. Green. I am saying it is a good starting place to look 
because their approach----
    Mr. Bachus. Has it limited liquidity to any great extent? I 
am not trying to put you on the spot.
    Mr. Green. You are doing a good job.
    [Laughter.]
    I would say that the North Carolina law has examples in it 
that the industry does feel are more precise and objective than 
what we have experienced in other states.
    Mr. Bachus. Okay.
    Mr. Green. The right place to be on a national standard is 
probably not going to be exactly where the North Carolina law 
is.
    Mr. Bachus. I understand. I am just saying it is workable. 
I think Mr. Calhoun is saying, at least what I hear, is that it 
is protecting consumers.
    Mr. Calhoun. That is correct, Mr. Chairman.
    Mr. Bachus. Maybe I am oversimplifying this process, but 
that is sort of what I am hearing.
    Ms. Waters?
    Ms. Waters. Thank you very much.
    I think it must be understood that those of us who fight so 
hard against preemption appreciate the fact that some States 
work very, very hard to get rid of predatory lending. When we 
move to so-called definitions at the national level, all of 
that is going to be weakened. The whole idea, I have 
discovered, of wanting to preempt state laws not only as it 
relates to predatory lending, but in some other things, is 
basically to weaken the laws of States that have strong laws to 
protect their consumers.
    I want to ask Mr. Calhoun because we keep hearing how much 
folks care about folks with bad credit being able to have 
access to credit and to get these mortgages. I am very grateful 
for that, that people care so much about people being able to 
have access to credit. As I said when I first started to speak, 
I do not mind subprime lending that is fair, but there are some 
other details that we have to look at with this subprime 
lending. I want you to discuss for me two or three other things 
that make subprime loans bad, that turn them into predatory 
lending.
    For example, you talked about loan flipping. I want to tell 
you, we see a lot of loan flipping. I want to hear something 
about late payments. I want to hear about some of the other 
things that turn subprime lending into bad loans. We are not 
opposed to somebody getting a percentage point more for a loan 
because someone has shaky credit.
    Now, if the credit is too bad, then I do not care who it 
is, they should not have a loan because they are not going to 
be able to pay it back. If you know that they do not have the 
income by which to make these payments and they are going to 
get in trouble because they simply cannot afford the loan, then 
it is sinful, it is shameful to advance that loan because you 
are simply going to cause people to lose a lot of money.
    Also, Mr. Calhoun, I have had so many complaints, people 
coming to my office. These loans are sold so many times they do 
not know who they are paying. This is one of the tricks. Folks 
do not know who the payment should go to because it has changed 
hands so many times, and that is how they get caught, getting 
late and getting behind trying to track down who this payment 
is to go to, because the loans has been sold three or four 
times.
    Help me to understand and this committee to understand some 
of the other factors that go into predatory lending, so that 
people do not get the idea that we are just railing against 
subprime lending.
    Mr. Calhoun. I think one of the most important lessons that 
has come from the homeowner protection act that this Congress 
enacted 10 years ago, and the experience in North Carolina, is 
that unscrupulous lenders will simply change tactics unless you 
have comprehensive protections.
    The North Carolina law is actually pretty modest. It sets a 
threshold for high-cost loans at 5 percent lender fees. So we 
are talking a $100,000 loan, $5,000 of lender fees, excluding 
things like appraiser, attorneys fees, et cetera. We want to 
make it clear, that is not a benchmark for a good loan. I do 
not think many of us would be happy with a loan like that or 
happy if our parents or our family received a loan like that.
    It is meant to be a generous threshold so that it does not 
restrict access to credit. But the important thing is that it 
includes all of the fees. We leave the flexibility to the 
lender and the borrower how they want to structure the loan. Do 
they want to have small up-front fees but a big prepayment 
penalty? Do they want to have a large origination fee and then 
not many other fees? If you do not include all the fees, the 
lenders' experience has been under the federal act simply 
change the name of the fees or restructure the loan to evade 
the law's protections.
    We see that under your current federal law, HOEPA, in for 
example prepayment penalties which are perhaps the biggest 
looming problem in the subprime market. There are virtually no 
prepayment penalties in the prime market. They have now 
developed to be on the majority, almost 80 percent of subprime 
loans, and they are often as much as 5 to 10 percent of the 
loan amount. So when you go in to pay off $100,000 loan, they 
take another $5,000 or $10,000 out of the equity.
    Under the federal law, the size and presence of prepayment 
penalties are not considered at all in determining whether it 
is a high-cost loan. Today, a loan with a 20 percent prepayment 
penalty is not a high-cost loan under the federal Act. If you 
leave a fee like that excluded from determining whether it is a 
high-cost loan, then the bill will just simply require people 
to change how they structure the loans, change the names of the 
fees, but will not end up at the end of the day protecting 
borrowers. That is one of the most important lessons.
    The other is that you need a flipping standard applying to 
all loans. As we heard from the Assistant Attorney General, 
virtually all of these lenders make money by refinances. They 
collect a new set of fees and their loan officers are trained 
and pushed to try and get a refinancing at every chance. 
Repeated refinancings are what see currently under HOEPA, where 
a lot of the lenders charge 7.99 points to stay under the 8 
point threshold for high-cost loans under your federal law. If 
you repeatedly refinance at 7.99 points, it does not take very 
long to take away all of the home equity.
    Again, that is totally legal under your current federal 
law, and we have seen examples where people have been 
refinanced three or four times in a year at 7.99 points. That 
is not a high-cost loan. It is not a violation of any of the 
federal protections at this time.
    Ms. Waters. Are those the major kind of items that you have 
covered in your North Carolina laws dealing with predatory 
lending and that you would want to have covered in any federal 
preemption? If there is going to be one, and I hope not, are 
those the major concerns?
    Mr. Calhoun. Yes, Congresswoman. To emphasize, the high-
cost loan threshold does not bar high-cost loans. There are 
HOEPA loans made today by some lenders who specialize in that, 
and there are some high-cost loans being made in North 
Carolina. But again, under current standards for a high-cost 
loan, you are talking about a loan with more than five points 
up front, or interest rates in today's market of more than 13 
percent. We feel like, and the experience in North Carolina has 
been, that credit is readily available for almost all borrowers 
within those constraints.
    Ms. Waters. What about late payments?
    Mr. Calhoun. Most States have some provision to protect 
consumers in both mortgage transactions and other transactions, 
on late payments. There are some lenders who try abusive 
practices where they will extract one late payment and make all 
your subsequent payments declared therefore late. Or they use 
late payments as a wedge to try and force a refinancing and a 
flip. So that is an important area to have protections.
    Ms. Waters. Mr. Chairman, I am going to yield back the 
balance of my time, but I would really like if at all possible 
for Mr. Green to give me his ideal. You know a lot about this 
subject. You have worked it quite some time. If you were going 
to advance a federal law, a change, an improvement to deal with 
predatory lending in the subprime market, what would you advise 
us to do? What is acceptable to you? You kind of nodded your 
head on Mr. Calhoun's North Carolina law, but you did not quite 
say you support it. What do you support?
    Mr. Green. At the end of the day, the specific criteria for 
what is a predatory loan is something that the originators of 
the loans and this committee and others need to figure out, 
what are the best identifying criteria. From the secondary 
market perspective, what criteria are utilized is less 
important than the precision with which those criteria can be 
identified.
    Many of the criteria that are looked at in the North 
Carolina law carry with them objective standards. It is when 
the criteria becomes more vague and esoteric and theoretical 
and less precise that it becomes much more difficult to value 
and to identify a loan in a pool of hundreds, maybe thousands 
of loans as to whether or not it meets that standard. Even if 
you could identify it, you have no way to control whether or 
not you have met that standard.
    So to hold someone liable and assign them liability for 
something they cannot identify and cannot control is where the 
problem in the marketplace arises. If the criteria can be 
identified and is objective, you can begin to implement 
something. That is why we suggest a national standard. I do not 
want to use the ``preemption'' word. I guess there is no way 
around it if you are going to use ``national standard.'' I 
think everyone agrees that this is a national problem. The 
marketplace that you are focusing on is a national market, and 
we have had experiences in the laboratory of state legislatures 
where it has been difficult to establish that enforceable, 
quantifiable objective standard.
    Ms. Waters. I respect that, but let me just tell you, 
bankers know how to count and they know junk when they see it. 
Prior to coming up with ways by which to make money in the 
subprime market and with predatory lending, they use the same 
eye to tell people no, you cannot have credit because you do 
not look like you can pay this back. You look like you are a 
bad risk.
    So they know it. They understand it. And when they are 
protected and they can roll the dice on it and they can make a 
lot of money with high interest rates and other kinds of fees 
et cetera, and they have no liability, they will take a chance. 
So I am not at all impressed with the fact that they just do 
not know bad paper when they see it. They know it quickly and 
surely.
    Chairman Ney. [Presiding.] The time has expired. I would 
note, Mr. Green, I believe, does have to leave, so if you have 
a question.
    Mr. Fossella of New York.
    Mr. Fossella. Yes, to follow-up on that. Thank you, Mr. 
Chairman.
    Mr. Green, you talk about subjective triggers. ``Unintended 
consequences'' is perhaps a phrase that comes to mind in our 
efforts to curtail abusive practices, which I think we all 
agree with, should be curtailed and ultimately eliminated.
    But can you be more specific as to why a national standard 
is necessary by quantifying perhaps how some people are 
ultimately shut out of the market, if that is a conclusion from 
all these nebulous, esoteric standards, as you in your 
testimony call them, subjective triggers to assign liability? 
How are people actually shut out by limiting access to capital 
and the folks who are actually purchasing these loans?
    Mr. Green. At the end of the day, the secondary market 
succeeds because people pay their loans back. It is not in 
anyone's interest to have loans in a portfolio that are not 
going to perform. Now, there is a risk of nonperformance in any 
loan, even the highest-rated credit has a risk of 
nonperformance. But in higher and riskier borrowers, that risk 
is higher.
    In order to make sure that they are in compliance with the 
law of a particular state, they will take certain actions. That 
will have an effect on their ability to accept loans that 
extend credit to that higher-risk category. If they do not 
accept those loans, those loans are never made.
    Now, where the line is between loans that should be made 
and should not be made is a difficult public policy question, 
because you do not want to draw the line so that nobody gets 
loans because there are lots of people that deserve them. But 
the viability of the secondary market ultimately defines the 
extension of credit. If we can come up with tangible, 
identifiable objective standards that can be enforced on a 
national level, you can make the marketplace work much better 
than the current situation allows us to have happen.
    Mr. Fossella. So is it safe to say that ultimately if this 
were to be left unaddressed that there are going to be people 
who fit subprime criteria that would ultimately be shut out of 
the market?
    Mr. Green. I think as Mr. Raiter indicated that the risks 
that are in the marketplace when you can or cannot get a rating 
have an effect on whether or not credit is extended in the 
first place. So the answer is yes. I dare say I think that the 
risk of that is greater in a rising interest rate environment 
when credit itself, by virtue of its cost, is less accessible.
    Mr. Fossella. So to Mr. Raiter, are there situations, and 
you may have said it in your testimony, forgive me because I 
was not here, are there situations in which at the State level 
laws were passed and ultimately you in your testimony indicate 
that you support these measures, but at the same time recognize 
again these unintended consequences that result? Did you notice 
a pushback in some States that are considering legislation that 
would be inconsistent or at odds with the federal standards 
right now?
    Mr. Raiter. At odds with the federal standard?
    Mr. Fossella. Are there laws that have taken root in the 
States where as a result of this liability imposed on the 
purchasers, States have had to modify and change, and what, if 
any, has been the impact in other states that have been 
considering similar legislation?
    Mr. Raiter. I can comment on the changes that were made in 
Georgia.
    Mr. Fossella. Yes, specifically yes.
    Mr. Raiter. And the changes that were contemplated in New 
Jersey, and after the original law was promulgated and enacted, 
there was an Attorney General opinion on how it would be 
interpreted that had an impact on how loans would be treated 
when they came in for ratings out of the New Jersey markets. 
What other jurisdictions may be doing when they see the impact 
of changes in those two jurisdictions, we have not tracked. We 
have looked at the individual laws as they become enacted.
    I think the other answer to the first part of the question 
is the high-cost loan categories in all the jurisdictions that 
have gone into effect are not showing up. If they are being 
made, they are not being financed in the secondary market with 
transactions that are rated by Standard & Poor's, which may be 
exactly the intent of these various laws and statutes, that 
those loans are undesirable. Whether they are predatory or not 
would depend again on whether we could identify exactly what 
the requirements for falling into a violation were under the 
statutes.
    If it was clear and defined and we could size the risk, 
then we would put a number on it. If it was not clear and 
defined and we could not tell whether a loan was or was not 
really predatory, then they would have to be excluded. So if it 
is the intent to basically prevent these types of loans from 
being financed in the secondary, then it would behoove the 
legislators to be as specific as they can in identifying what 
is a violation and what the penalty is, and the loans will not 
make it to the secondary market because it will not be 
economically feasible, as they are not making it now.
    We do not have any issuers that are checking the blocks and 
telling us that they are including high-cost loans. They are 
giving us a warrant that if in fact they inadvertently acquired 
a high-cost loan, they will immediately buy it back.
    Mr. Fossella. This will be my last question. Are you 
prepared to say whether it is a better public policy to ensure 
that as many loans are allowed to flow into the secondary 
market as possible, or are you neutral on that?
    Mr. Raiter. We are neutral on public policy, but you all 
should be quite aware that where you draw the line, it is 
likely that the loans that fall above that line probably will 
not be made.
    Mr. Fossella. All right. Thank you, Mr. Chairman.
    Mr. DeMong. Congressman, can I add to that?
    Mr. Fossella. If you like.
    Mr. DeMong. The study that I did in New Jersey showed an 
absolute drop in certain subprime loans, including cash-out 
refinancing, probably at least a 60 percent drop in the first 2 
months after the Act. But to go directly to your question, can 
you quantify the folks that do not get the loan; you are not 
going to hear from them. It is tough to measure that folks that 
do not get a loan. So we can see a change in lending based on a 
law, and I would argue that we are better off with a national 
standard because it is a nationally funding market.
    But to address the second part of your question, yes it 
does matter if a law affects the secondary market, affects 
securitization, in that there are going to be less funds 
available for potential borrowers in that state or in that 
region. So there will be a direct impact if the secondary 
market securitization market is cut off.
    Mr. Calhoun. If I may add one thing, I think there is a 
very important distinction here. This is a dynamic market. What 
the experience has been under the federal law and under the 
State laws, it is not that people stop making these loans. 
Rather, the loans are restructured so they do not have the 
predatory impact on the borrowers.
    The main predatory feature of loans has been fees that 
strip equity. So simply what a lender can do is structure the 
loan with a higher interest rate, because for example the North 
Carolina law follows the federal interest rate trigger, but 
takes less money out of the fees. It is these high up-front 
fees and high prepayment penalties that have encouraged all of 
the equity stripping, the repeated refinancing.
    It is important. In North Carolina, we advocated strongly, 
do not change the interest rate threshold from the federal 
standard. Allow plenty of room for these loans to be made. 
Remember, for most subprime borrowers, hopefully these are 
bridge loans so that they can improve their credit and move to 
a better or a prime or closer to prime loan. If the loan is 
loaded up with large up-front fees and prepayment penalties, 
the borrower is blocked from doing that, from doing what I 
would hope we would want to encourage these borrowers to do. If 
instead the loan has more in the interest rate, the lender can 
still make a fair profit, which they have to do, but the 
borrower is not trapped long term in a predatory loan.
    Mr. Fossella. Thank you.
    Chairman Ney. Mr. Miller of North Carolina.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Mr. Raiter, Mr. Green I think praised North Carolina's law, 
but I think by faint damnation, and said it was not as 
imprecise; the prohibitions were not as vague; not as 
subjective as some other states. But in rating subprime loans 
coming out of various states, you did not rate North Carolina's 
loans. I do not want to talk you into doing that, but could you 
tell me what was different about North Carolina? Did you do 
that based on the provisions of North Carolina's law? Or did 
you do that based upon the experience under North Carolina's 
law? If it was based upon the provisions, what were those 
provisions? And if it was based on the experience, what has 
been the experience?
    Mr. Raiter. Specifically, it was based on both. The 
provisions of the law incorporated that violations, the 
borrower had to prove that it was knowingly and intentionally 
committed, and that they had a pattern or practice of violating 
the law. At the same time, the North Carolina law had a 
provision that if a plaintiff did not settle a reasonable 
settlement to alleviate the issue, then I believe the plaintiff 
could be charged with the legal expenses.
    So the actual experience in North Carolina is there were no 
actions brought under this law that were going to assignee 
liability payment beyond where the loan was initially made. So 
it was structured in such a way that the problems that did 
arise were being solved and resolved locally, and that the risk 
to the investors in the pool that held those mortgages had been 
successfully mitigated. But there were still the high-cost 
loans. There are still loans that we have not seen. People are 
giving us the rep saying they are not doing loans that exceed 
the thresholds that were incorporated in the North Carolina 
law.
    Mr. Miller of North Carolina. Okay. Mr. Green, I think you 
have spoken of the burden of knowing what loans in a package 
may be illegal under some State's laws. Does any State require 
a duty of inquiry absent actual knowledge? Does any State 
require a duty of inquiry that goes beyond the loan documents?
    Mr. Green. I am not sure. I do not know the answer to that 
question as it relates to states, but I do know there are clear 
due diligence requirements that have to be done before 
packaging the loans into a security. That due diligence is 
really what we are talking about here, and whether or not the 
due diligence can be accomplished in a way that is honestly 
achievable.
    When there is vagueness fulfilling that due diligence by 
looking at the bond documents themselves, will not get you 
there, because you have to look at what the intent of the loan 
was, what the desire was, what the conversation that took place 
between the loan originator and the person, as opposed to 
something that will come through on the face of the bond 
documents.
    With a clear or objective standard, you will have something 
that will come through on the face of the loan documents that 
will allow for a much easier identification. As you said, I 
think the goal here is to keep out of the pools the loans you 
do not want in the pools, but to make sure that that which you 
want to move forward and finance, can.
    Mr. Miller of North Carolina. Which State or which locality 
requires a purchaser of a loan to know about oral dealings 
between a lender and a borrower? Isn't it all based upon the 
written documents? The duty of inquiry under HOEPA is to be 
what can be determined based on the documentation required by 
this chapter. Isn't it all based on the documents?
    Mr. Green. You look at the imposition of a vague, net 
tangible benefit rule to determine whether or not there is a 
net benefit. You have to get to what motivates someone to 
refinance a mortgage. You have to get beyond the bond documents 
because what we are talking about here are things that cannot 
be reduced to words on paper. They get to subjective judgments. 
It is those subjective judgments that are precisely the things 
that we have a concern in certain States that are creating the 
problem. A set of objective standards would be the solution to 
that, because you would have something to look for, something 
to identify and something to act upon.
    I will tell you further that if you had such standards, and 
in those states that do have such standards, if a packager of 
mortgages in the secondary market has done their due diligence 
and still has those loans in their pool, they should be held 
responsible. We would support that. But the fact is, when it is 
a vague standard, how possibly can you ultimately hold them 
responsible for that which they cannot easily identify?
    Mr. Miller of North Carolina. May I continue just a bit?
    Chairman Ney. If we can wrap it up quickly.
    Mr. Miller of North Carolina. I did notice that the light 
was a fairly bright shade of yellow.
    Chairman Ney. A whiter shade of pale. Go ahead.
    Mr. Miller of North Carolina. One last question, and I 
suppose also for Mr. Green, although perhaps Professor DeMong 
as well. Mr. Israel quoted Potter Stewart's opinion earlier, 
saying he did not know how to define pornography, but he knew 
it when he saw it. John Hawke testified before this committee 
earlier. OCC has preempted state predatory lending laws with 
respect to OCC-chartered institutions and their affiliates. In 
a speech to the Federal Society last year, he said his 
definition of predatory lending was making a loan that the 
consumer could not repay. It did not go beyond that definition. 
It was making a loan the consumer could not repay.
    I use an example that Self-Help has given here, and I 
cannot recall all its details, but an elderly school employee, 
probably not a teacher, probably a cafeteria worker in Durham, 
borrowed $99,000 for home repairs that were desperately needed 
to maintain the value of her home. To make that loan, she was 
charged $23,000, I think it was, in up front points and fees. 
She left the loan knowing how much money she was getting at 
closing and knowing what her monthly payments would be. She 
could make the monthly payments, but sometime later when she 
went to Self-Help to refinance the loan, she learned that she 
had lost $23,000 of the equity in her home, her life savings, 
at the moment she signed those loan documents. Is that 
predatory lending?
    Mr. Green. I am not a Justice on the Supreme Court. There 
are lots of scary anecdotal examples of what certainly sounds 
like predatory practices. Frankly, I would hope that the 
originating community would honestly try to define with 
policymakers what a predatory loan is. In the secondary market, 
whatever you decide it is, so long as those standards are 
objective, we will be able to deal with that. But as those who 
are involved in the secondary market, it is hard for us to 
determine specifically what predatory lending is.
    That certainly sounds like a predatory practice. Up-front 
fees and all the criteria that were mentioned, late fees, loan 
flipping, balloon payments, the repayment ability, and you did 
not mention negative amortization, all those things appear 
predatory. They can be predatory. They do not necessarily in 
and of themselves have to be predatory. That is the difficulty, 
but I think we need to come up with that so that we can have 
that objective criteria.
    Mr. Miller of North Carolina. So in the eyes of Mr. Hawke, 
he saw that loan as not predatory. Do you disagree with Mr. 
Hawke?
    Mr. Green. I have not read his entire statement, so it is 
hard for me to know exactly what he said. Having said that, 
predatory practices certainly sound like big up-front fees. I 
think you need to look more deeply to see whether or not that 
made that loan a predatory loan. There are lots of factors that 
take place. So I would not agree or disagree.
    Chairman Ney. The time has expired.
    Mr. Miller of North Carolina. Mr. Chairman, Professor 
DeMong had his finger right on the button. He was just itching.
    Chairman Ney. I am going to take this time off Mr. Scott. 
If you would like to proceed, you can ask him. Mr. Scott, do 
you want to yield some time?
    Mr. Scott. Right now, I have my own fish to fry on this 
issue.
    Chairman Ney. There you go.
    [Laughter.]
    Mr. Scott. If I have a little time, I certainly will. Let 
me get my points out.
    This has been a real fascinating hearing and very 
informative. I am concerned about preemption. I am also 
concerned about making sure that we move forthrightly with the 
strongest efforts to stop predatory lending. Nowhere is it more 
impactful than within minorities, the elderly, African 
Americans, and we are all very much concerned about that.
    I also happen to believe that assignee liability is 
critical in my estimation to preventing predatory lending 
practices. I think that Mr. Green has given us a shot into the 
darkness as a way to kind of begin to move out of this. But I 
believe that we are going to have to come to some illumination 
between Mr. Raiter and Mr. Calhoun. Here is my point.
    In my State of Georgia, we put forward predatory lending, 
and Mr. Raiter came in and kind of negated that with the 
Standard & Poor's rejection of rating these mortgages. Fannie 
Mae, Freddie Mac would not purchase mortgages because we had 
assignee liability. Yet in North Carolina, as Mr. Calhoun said, 
he had assignee liability. These things did not happen. 
Standard & Poor's did not come in and say they would not rate 
these. Fannie Mae, Freddie Mac, they did not say anything at 
all.
    I think it would be interesting for you to just point out 
very clearly, what is it within your application of assignee 
liability did you do, and in your opinion, did Georgia go too 
far in its application of assignee liability, and if so, where 
did it go? First you, Mr. Calhoun.
    Mr. Calhoun. Thank you. I think everyone here should know 
what a critical role you played in making sure that the Georgia 
law worked for both consumers and ultimately for the market. 
For the record, the subprime market in Georgia is thriving even 
with the remaining very strong protections in that law which 
you helped very much shepherd through.
    Shortly after passage of the Georgia law, since we have 
been involved in assisting in that process, we were contacted 
by secondary market players. They said, we have some concerns 
about the assignee liability provisions. I think the real 
message out of that and today is that these issues are largely 
solvable. We reached agreement with those secondary market 
parties.
    And then initially, several of the rating agencies said, we 
do not have a problem with the Georgia law; we are going to 
allow what in the industry are known as reps and warranties. I 
think it is important for everybody to understand that these 
purchasers are not out there holding the bag. Whenever they 
purchase the loans, they make the seller pledge that if this 
loan is illegal and has liability, you have to indemnify me, 
the purchaser.
    So this assignee liability really comes up with the problem 
of what happens when the originator disappears or becomes 
insolvent. But you should know that usually the purchaser is 
protected by these so-called reps and warranties that they 
insist that the sellers of loans provide to them.
    So initially, other rating agencies said, we are going to 
rely on reps and warranties; we are fine with Georgia. S&P had 
concerns in particular about the possibilities of unlimited 
punitive damages, I think that was their major concern. To 
their credit, we worked with S&P as well as Senator Cheek, who 
you know well from Georgia, and S&P quickly reached agreement 
on what were acceptable assignee liability issues, and those 
were resolved.
    The delay in passing those provisions was that it got 
caught up in a bill where there were debates about what were 
substantive triggers, what were the other provisions of the law 
to look like. That is what slowed it down. The assignee 
provisions that were acceptable to S&P are not the ones that 
finally came in there. Those got changed some. But the assignee 
liability issue was resolved relatively easily. The important 
thing is that there be comprehensive standards. I would urge 
you that it is not an either/or on the preemption. If you have 
strong federal standards, you will find the States backing off.
    There have been questions about municipal ordinances. I 
think one of the lessons from North Carolina is, we had no 
proposed municipal ordinances ever in North Carolina. The 
reason is there was not a need for it. There was no void for 
municipalities to mess with. They have plenty of other things 
to do. We had a good state standard. I think you can have the 
same effect at the federal level if you pass a good federal 
standard. The states will have no need to move in here.
    The Truth-in-Lending Act is that way. It does not have 
preemption, but you passed a comprehensive, strong standard, 
and the States, I think there is one state out of the 50 that 
has some mild supplemental provisions, but there is no move and 
there has not been in 30-something years for states to move 
into that area, even though they have the authority to do that. 
Truth-in-Lending is a floor, not a ceiling, but it provides 
comprehensive protections and there is no need for the States 
to move in.
    Mr. Scott. Now, Mr. Raiter, that was your major concern, 
unlimited liability. That was the only difference between 
Georgia's assignee liability and North Carolina's was the 
unlimited liability. That is the reason why you would not rate 
the mortgages.
    Mr. Raiter. That was the most significant issue, the 
punitive multiple damages that were unlimited. There is some 
mitigating language, as I mentioned earlier, in the North 
Carolina law that makes it much more friendly to resolving the 
issues so that the ultimate assignee does not get involved in 
the transaction, but it again goes back and relies on the reps 
and warranties that Mr. Calhoun was just describing.
    Chairman Ney. The time has expired.
    Mr. Scott. Just one final little point, thank you, Mr. 
Chairman, just to get a summation. Is it the consensus of 
everybody on this committee that our Financial Services 
Committee should come up with a uniform federal standard for 
assignee liability?
    Mr. Green. Yes.
    Mr. Scott. Everybody?
    Mr. DeMong. I would support that. Just as it was pointed 
out that it is important to define predatory lending for the 
secondary market, it is also important for the originators. 
Having a clear law serves both purposes well, and will enable 
the credit to flow to those that should have it and deserve to 
have it.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Calhoun. For the record, States have traditionally 
through the Uniform Commercial Code, which is close to uniform 
in the various states, made the decision about assignee 
liability, including in mortgages. There currently is liability 
for assignee's in certain circumstances under the law of almost 
all of the States. We would suggest if you have the uniform 
standard, that that is going to take care of this issue.
    I think the States have learned their lesson. No one will 
be more responsive to an interruption of the credit market than 
State and local officials because they are the first people who 
get called, as you know well, if there is any disruption in the 
market. Local officials have learned from these state 
laboratories. They are not going to disrupt their markets.
    Chairman Ney. I have let things slip a little bit. We are 
going to stay on time so everybody gets their questions in.
    The gentlelady from New York, Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Raiter, Standard & Poor's recently announced that it 
would require credit enhancement for loans governed by anti-
predatory laws in 14 states, including high-cost loans in New 
York State. Can you comment on how the New York anti-predatory 
lending law is affecting the ratings, and consequently the 
purchase of loans in the State?
    Mr. Raiter. In a nutshell, we are not seeing high-cost 
loans from New York State.
    Ms. Velazquez. You are not seeing them.
    Mr. Raiter. No, we are not.
    Ms. Velazquez. What about the New York City ordinance?
    Mr. Raiter. I believe that was overturned. I do not believe 
that is in effect any longer.
    Ms. Velazquez. So is it true that your new credit 
enhancement criteria will affect a very small portion of the 
subprime loans originated in New York and across the nation?
    Mr. Raiter. We have no way of going back in time and 
determining how many loans that would have failed the test 
before the law went into effect. All we know is that the 
lenders that are operating in New York, as has been pointed out 
here, they are either changing the fees or they are changing 
the rates, or they are not granting the loans, but they are 
giving us the rep that they are not engaged in high-cost 
lending in New York State.
    Ms. Velazquez. Thank you.
    Skyrocketing defaults and foreclosures are devastating many 
low-income communities around the nation. In some areas like in 
my district, many of the foreclosures are on subprime loans, 
and we have been hearing about that all morning. Wouldn't you 
agree that requiring that recipients of subprime loans are 
simply made aware of the availability of counseling could go a 
long way in decreasing the number of defaults and foreclosures? 
Please note I am not talking here about mandated counseling, 
but the availability of counseling. Mr. Calhoun, would you like 
to start?
    Mr. Calhoun. I favor the approach that is in the North 
Carolina law that has worked well. That is that the North 
Carolina law requires counseling for high-cost loans only. That 
is the whole philosophy of the law. The high-cost loan is a 
loan that is not always a bad thing, but it is very susceptible 
to abuse. So you should have special protections when somebody 
wants to charge more than five points or more than 13 percent 
interest on a loan secured by a person's home. The truth is in 
most of the foreclosures, these are gold-standard loans. They 
are backed by people's homes, and we know from 20 years of 
lending experience that most people will do about anything to 
keep their home.
    Ms. Velazquez. Would you support legislation that required 
lenders to make subprime borrowers aware of the availability of 
counseling?
    Mr. Calhoun. Yes, but we do think it also needs to require 
counseling on high-cost loans. That is done presently under the 
law in a number of States for reverse mortgages, because again 
they are very susceptible to abuse. In those rare 
circumstances, the counseling should be required.
    Ms. Velazquez. Dr. DeMong, would you like to comment?
    Mr. DeMong. As a professor, I am always in favor of 
education. I have done some work with 401(k) plans, and having 
people know what they are investing in is always better than 
not. So to the extent that you could have education that will 
help people better understand the provisions of the loan, what 
it obligates them to, is always better than not.
    Ms. Velazquez. Would any of the other witnesses like to 
comment?
    Ms. Kogut. Yes, I would just add that in the First Alliance 
Mortgage Company case, we would have loved to have had our 
victims undergo counseling. Sometimes we were the first people 
to tell consumers that they paid points in the amount that they 
had paid. It was painful and horrible to let them know that the 
equity in their house had been lowered as dramatically as it 
had been. We were frankly shocked that we were the people 
breaking that news to them. If they had only taken their loan 
papers and had them reviewed by a third party, a lot of the 
abuses we think could have been avoided. So we it would be very 
useful.
    In Massachusetts right now we have a bill that is working 
its way through our legislature that would incorporate some of 
North Carolina's provisions into it. We would have mandated a 
credit counseling provision for high-cost loans, which we think 
would be a good idea.
    Ms. Velazquez. Thank you. Any other comments?
    Mr. Green. I would only say the Bond Market Association is 
a strong advocate of investor education. In fact, on our own 
Web site, investinginbonds.com, we get over three million hits 
a month about what people should know about bonds. The 
questions you are asking are really in the loan origination 
side. What kind of education is undergoing between the borrower 
and the lender? So I would hope that that level of education 
would increase.
    On the question of whether or not it should be a criteria, 
not to sound overly bureaucratic, but I would come back to how 
objective and clear that criteria can be in determining whether 
or not that criteria was met.
    Chairman Ney. The time has expired.
    Ms. Velazaquez. Thank you, Mr. Chairman.
    The gentlelady from New York, Ms. Maloney.
    Mrs. Maloney. I would like to thank you all for your very 
thoughtful testimony on this important issue. I would like to 
ask Mr. Green, we have a number of laws across the country that 
are different in States. Given the fact that the reports that 
have come back show that the subprime lending is growing, it is 
strong, it is out there helping people, why do we need a 
national standard? We just passed, as you know, the Fair Credit 
Reporting Act, and there was a very clear need for access for 
credit that was really critical. It was a staunch need.
    I do not see a staunch need for a strong federal standard. 
Why is there such a need for a federal standard here? It seems 
like the market is strong and there are many loans being given, 
and it does not seem like it is a big, big problem to the bond 
market or to the industry in a sense. Could you elaborate?
    Mr. Green. I can try. The market has certainly grown over 
the last several years, as has the mortgage market, as has the 
municipal markets. That is in large part because of low 
interest rates, rising home values, the ability for people to 
tap equity. So a rising size of a marketplace does not 
necessarily translate itself into all those who need and want 
access to capital and deserve access to capital can get that 
capital.
    Particularly now that we are on the cusp of a rising 
interest rate environment, when the sheer cost of capital is 
likely to go up, those access questions become even more 
relevant. I think what we are talking about here a national 
standard would ensure that you get it as close to right as 
possible, so that where you draw the line of the loans that you 
want to stop versus the loans that you want to encourage, which 
is really what we are talking about here, is as close to right 
as possible.
    What we have experienced in both the numerous state laws 
and some local laws is that the effects of that being more 
right or wrong is not manifesting itself in nationwide volume 
of subprime lending, but it is manifesting itself in whether or 
not you are getting any high-cost loans in these pools. If you 
are not getting any high-cost loans, you might say, well, that 
is good. Except, what is a high-cost loan? If the standard is 
wrong by how you are identifying what these loans are, you in 
fact may be cutting off capital to those to whom you do not 
want to cut off capital. That is why we believe a national 
standard will set a more consistent national policy, 
particularly since the secondary market is a national market. 
That is where we see the consistency in the argument.
    Mr. DeMong. Congresswoman, can I add to that and support 
Mr. Green's point?
    Mrs. Maloney. Yes.
    Mr. DeMong. I also want to point out that, as Mr. Green 
stated, the market has grown, but has it grown to the point 
that it is satisfying all those who need and deserve credit? 
That is the question. The other reason for a national standard, 
besides making sure that the credit is available to those who 
need and deserve it, is that you end up with a more efficient 
market, and when you have more efficiency you can have lower 
costs, therefore lower interest rates for the borrowers that do 
qualify for loans.
    Mrs. Maloney. But if state standards are unworkable, then a 
State legislature would act to change it. We have seen that 
happen. How would a national standard increase access to 
capital? Would a national standard increase the number of 
people who could get subprime loans? I do not see the 
correlation there. Explain it more clearly. I am for access to 
capital. I believe in homeownership. I want more Americans to 
own their own homes and apartments and so forth, but how does a 
national standard increase that? Maybe Mr. Calhoun would like 
to comment, or maybe others.
    Mr. DeMong. Thank you, Congresswoman.
    Mrs. Maloney. How does it increase it, a national standard?
    Mr. DeMong. It increases it in that investors have a choice 
of investing in all kinds of different investments in the 
United States, stocks, bonds, real estate, you name it. So if 
you have an efficient market for mortgages, then more of those 
funds will flow from one asset to mortgage lending. The more 
efficient the market is, the clearer the risks are, the more 
willingness that investors will have of taking money that they 
could have invested in the stock market or the bond market or 
the international stock and bond market, and put it into 
mortgage markets.
    Mr. Green. Congresswoman, that gets to the contribution of 
the whole mortgage-backed securities market and the 
securitization market generally. By pooling mortgages and by 
selling the mortgages from the originator, you create more 
capital, because they get money for that mortgage and that loan 
and they turn around and loan it out again. The more supply of 
capital, ultimately the lower the cost, but the only way you 
can do that is you have to have someplace to sell that 
mortgage.
    Chairman Ney. The time has expired.
    Mr. Davis of Alabama.
    Mrs. Maloney. Would anyone else like to comment, if we 
could, just for 2 seconds?
    Mr. Calhoun. If I may, very quickly. I think the evidence 
shows that the liquidity is very high in the market and that 
states are very sensitive to cutting off any liquidity. So I 
agree with your premise that a federal standard would not 
change the liquidity. The states will make sure there is 
liquidity. We support strong federal standards that are a 
floor, not a ceiling, to increase protection for consumers 
under the Homeownership and Equity Protection Act because right 
now lenders have learned how to largely evade that act and 
commit predatory lending that does not get caught or protected 
by that act.
    Chairman Ney. Mr. Davis of Alabama.
    Mr. Davis. Thank you, Mr. Chairman. I will try to be brief 
so Mr. Ackerman gets an ample amount of time.
    Let me try to focus with the panel on something that we 
have not talked about at all today. There is a lot of 
agreement, and the statistics are pretty undisputable, that 
there are racial disparities in the incidence of subprime 
lending between blacks and whites and Hispanics. Some of that 
is presumably attributable to a class difference, the fact that 
obviously you may have higher rates of poverty; you may have 
those kinds of issues around the minority community. But I want 
to focus for a moment on the disparity that exists with respect 
to high-income blacks and Hispanics and low-income whites.
    As I understand it, the incidence of subprime lending right 
now is twice as high in the affluent African American community 
or the level is double in the affluent African American 
community than what it is in the low-income white community. 
There is no good statistical evidence I have seen that suggests 
that affluent blacks have worse credit than poor whites, or 
that affluent Hispanics have worse credit than poor whites. So 
again, there is no market basis for that distinction.
    Now, in the field of Title VII law, as Ms. Kogut of 
Massachusetts is aware, in the field of Title VII law there is 
a presumption that if you have a lot of disparate impact 
lurking behind the door, it is some evidence of disparate 
treatment. So can some of you speak for a moment about what it 
is that lenders are doing that is targeting or 
disproportionately affecting high-income blacks or Hispanics?
    Mr. Calhoun. Let me respond. First, there have been, and we 
cite in our written testimony, a study, specifically one by a 
Harvard professor, looking at broker fees paid by borrowers 
after you settle-out credit score, et cetera. It showed that 
African American borrowers tended to pay $500 more in broker 
fees than similarly situated white borrowers; the same for 
Hispanic borrowers, actually I think it had $600 more per fee. 
The same types of results have come up in recent studies and 
litigation concerning car financing, where it has been shown 
that, sorting out for credit characteristics, that minority car 
purchasers are paying more for the financing.
    A lot of it is there has been a change in this market. You 
used to go in for a home loan and the expectation would be that 
you would get the best loan that you could qualify for. That is 
no longer the case in this market because the originator, and 
this is one of the features that has been alluded to about the 
secondary market, is compensated more if they up-sell you to a 
higher interest rate. If you qualify today for a 6 percent loan 
and the loan originator, and this applies unfortunately to most 
banks as well as----
    Mr. Davis. Let me jump in for 1 second, Mr. Calhoun, 
because I agree with everything you are saying, but I want to 
try to drive to a conclusion a little bit. We agree that there 
is a disparity and that it is one that does not have an 
economic basis or a credit basis. What I am trying to get at is 
what we can do about it.
    Maybe I should direct this question to Ms. Kogut, since she 
is the attorney on the panel. If we have a problem with primary 
lenders going out there and steering these products or steering 
excessive lending rates to black or Hispanic Americans, first 
of all, doesn't it seem that we already have something called 
section 1981 that may provide a remedy for that? Is it possible 
that we need to be making more aggressive use of our existing 
civil rights laws, particularly section 1981, to address this 
problem?
    Ms. Kogut. You raise very good questions. In fact, even in 
our own office when we have looked at these cases, our Civil 
Rights Division which is in charge of enforcing our fair 
lending laws, and we look at federal fair lending laws also, 
which do exist to protect in communities in this area, we have 
tried to figure out what is the best approach in terms of 
bringing cases and getting remedies.
    The one thing that I will say, which is just a fact, these 
loans, you said this in your opening statement, there is no 
competition going on. The consumers who end up with these high-
cost loans are not comparing prices with other loans. For 
whatever reason, there is something, there is a problem with a 
fair market in terms of how these loans are given to consumers.
    In Massachusetts, our Mayor in the City of Boston has used 
lots of educational opportunities to try to make members of our 
communities aware that they do not need to be taking loans like 
this and that they should be seeking legal advice when they go 
to get mortgage loans.
    Mr. Davis. Let me stop you for one second because my time 
is running out. Mr. Green, let me specifically point this 
toward you since you are to some extent representing the 
industry here today. What does your industry need to do to deal 
with what in some instances seems to be clear-cut intentional 
discrimination? I am not just talking about disparate impact. 
Doesn't it seem that the industry has a significant 
responsibility, number one, to figure out what your agents and 
what your lenders are doing to obviously target a lot of these 
subprime rates toward high-income blacks or Hispanics? Isn't 
that just a clear-cut instance of plain old discrimination and 
prejudice a lot of the time?
    Mr. Green. Congressman Davis, I will answer your question, 
but I will just clarify that I am here representing the 
secondary market of these mortgage securities, not the 
originators.
    Mr. Davis. I understand that.
    Mr. Green. I think you raise an excellent point. One of the 
things the Bond Market Association has done is we created and 
are very supportive of the Bond Market Foundation, which 
operates a family of Web sites geared toward basic financial 
literacy targeted to women, young people, and the Hispanic 
community. We are working with State Treasurers around the 
country to reach into states. We are also working now with the 
NAACP to set up a program that will reach into other 
communities to educate people about basic finances and where to 
get money, where to borrow money, and what are the proper 
practices that ought to be followed.
    We represent the secondary market side of it. So I cannot 
agree with you more. We are trying to do what we can, and our 
foundation Web site and the work that we are doing is really a 
way of increasing the education base of various communities.
    Mr. DeMong. Congressman, I spent some time last year 
studying this issue and studying some of the studies that have 
been done. They are not as clear-cut as many would expect to 
find. I think it is ripe for another study that really goes 
into some of the issues that you have raised. I would support 
trying to find out if there is discrimination and if so, what 
is causing it so that it can be resolved. But the studies that 
have been done so far have been somewhat contradictory on the 
issue of income, on the issue of net worth, and the issue of 
race.
    Chairman Ney. I thank the gentleman.
    Mr. Ackerman, the gentleman from New York.
    Mr. Ackerman. Thank you very much, Mr. Chairman. I will be 
brief, as I notice that we are about to be outnumbered by the 
witnesses.
    [Laughter.]
    I was listening intently, and Mr. Green made the important 
point that if 5 percent of the mortgages that were written, it 
meant that 95 percent of the people were enabled to become 
homeowners because of the subprime market, which is something 
that is very good.
    Mr. Calhoun then pointed out, without contradiction, that 
that is 5 percent a year. So I went back to thinking, 5 percent 
of what? I did, being a broken down old math teacher, use the 
old math and said if we start with a model of 100 loans made, 5 
percent would mean 95 people were in houses that were supported 
by lenders in the subprime market, and five homes or five 
families were foreclosed upon. That would leave 95 people.
    If you took 5 percent of the 95 the following year, that 
would be 4.75, leaving 90.25 from the first group of numbers. 
And if you took 5 percent of that the next year, 4.56 percent 
would be foreclosed upon, and the next year, 4.28 percent and 
the next 4.07 percent. In the sixth year, it would be 3.38 
percent. So after the end of 6 years, if you add those 
foreclosures, you have 26.53 families or homes, more than one 
in four at the end of 6 years from the original group 
foreclosed upon.
    Is there something wrong with my math? Or was there 
something wrong with the 5 percent, depending on whose 5 
percent it was?
    Mr. Green. Congressman Ackerman, I think your example would 
be correct if only those 100 loans were made and that in each 
succeeding year more loans were not made.
    Mr. Ackerman. That is correct. I would assume out of the 
next 100, the same percentage would apply, more or less, unless 
the statistics changed. Of the next 100, at the end of 6 
years----
    Mr. DeMong. Congressman, I do not have those statistics so 
I cannot speak to them directly. However, I will point out that 
I know the life of the subprime loans tends to be relatively 
short, I do not know whether it is 3 years or 4 years, but if 
the life of the loan goes out only 3 or 4 years, the average 
loan is paid back within that time period and thus the percent 
foreclosed is down.
    Mr. Ackerman. Do you know what percentage of the loans are 
that short? Are there any 15-year loans?
    Mr. DeMong. Again, I do not have that statistic, and I 
would be glad to try to get that for you, but if the average 
subprime loan is refinanced in 3 or 4 years, then that would, 
even at the numbers you are talking about, would not equate to 
the large number that you had calculated by going out 6 years.
    Mr. Ackerman. If I go out 3 years, 14.31 percent.
    Mr. DeMong. Again, I do not have the statistics, but I 
would like to find it for you.
    Mr. Ackerman. If they were all 3-or 4-year loans, at the 
end of 3 years, that 5 percent a year would be 15 percent. The 
5 percent diminishes because you are starting with a smaller 
base than 100.
    Mr. DeMong. I do not have that number. I would like to get 
it for you.
    Mr. Ackerman. So even based on 3 years, 14 percent at the 
end of 3 years of people losing their homes is really a 
staggering number if that number is correct.
    Mr. DeMong. And that is an important point, if that number 
is. Right.
    Mr. Ackerman. It is a big number, whatever it is. So it is 
not really the 5 percent. It is 5 percent a year.
    Mr. Calhoun. To clarify the numbers, first I want to say 
your analysis is essentially appropriate in that even those 
loans that are again pre-paid, they are refinancing. They are 
jumping back in the pool and are at risk again to this 5 
percent foreclosure. But the numbers, to clarify for the 
record, come from the Mortgage Bankers Association's regular 
tracking of foreclosure. The current statistics were that 5 
percent are currently in foreclosure and they track it by 
quarter. For this quarter, the first quarter, an additional 
1.8-plus percent again went into foreclosure during the first 
quarter. At the end of the quarter, you had 5 percent in 
foreclosure process.
    Whatever the precise number is, I think it shows, and we 
cite several other foreclosure studies in our testimony, there 
is an explosion in foreclosures going on across this country 
fueled mainly by subprime loans.
    Mr. Ackerman. At the end of the term, what percentage of 
the people who have loans in the subprime market refinance 
within the same market? Is that a big number? You are shaking 
your head.
    Mr. Calhoun. Yes. I think the data show that most of the 
loans are refinanced back into the subprime market.
    Mr. Ackerman. Are most of them in the subprime until their 
house is paid off? Do we know how many actually get out of the 
subprime market?
    Mr. DeMong. I think that is an excellent question. One of 
the things that I want to do at some point is study that exact 
issue. I understand from some of the lenders that folks do move 
from the subprime to prime, but I do not have a good statistic 
for you.
    Mr. Ackerman. Okay. If you would, professor, I think that 
would be very helpful for us to understand the industry and 
what is going on, which leads me to my second question, similar 
to the question or following up on the question that Mr. Davis 
had raised. People in the subprime market are people with poor 
credit, people in the minority communities and less-educated 
communities tend to have poorer credit. They also have less of 
an education, of which at least several people spoke 
previously.
    I know that I have a fairly good interest rate. I have a 
fairly good credit rating. It is because of that, I presume, 
that I get solicitations because people want my business and 
they keep offering me lower and lower and sometimes free 
mortgage money for a period of time. I take advantage of that. 
Less-educated people do not go out and actively seek and test 
the market for different rates.
    Is there an active program such as the one for people who 
are more economically advantaged, presumably better educated 
and better financial risks, a similar program for people who 
are in the subprime market? Does anybody send them a 
solicitation and say, hey, we reviewed your credit, the way 
they did mine, and you are pre-approved to get such-and-such an 
interest rate, and please fill out the application or call and 
we will do it over the phone in 22 minutes? Does such a program 
exist for those people? Or is it just those of us who are 
fortunate?
    Mr. Calhoun. I think the industry information is clear that 
if anything there is more solicitation of loans in the subprime 
market. It is hard to believe given the volume in the prime 
market.
    Mr. Ackerman. Is that solicitation for another loan or 
solicitation for a lower interest rate?
    Mr. Calhoun. It is solicitation typically for another loan, 
because again in the subprime market, most of these loans are 
originated by brokers.
    Mr. Ackerman. I can appreciate that, because if it is only 
3 years, everybody is looking for that business, because if it 
is being written at 9 percent or whatever, people are going to 
want to write 12 percent or whatever it is, 15 percent, write 
that business.
    But my credit report gets reviewed by people with green 
eyeshades somewhere, and I get all these promotions. I know a 
lot of other people that do as well. It floods our mailboxes, 
and they are offering us a better deal. I am not asking you if 
they are getting another deal, because everybody wants to give 
them another deal if they are paying that rate. Statistically, 
it pays to make the bet.
    But does anybody go to these people and say, hey, based on 
your credit report recently, you are a better risk and 
therefore we are going to offer you four points lower or three 
points lower?
    Mr. Calhoun. The challenge has been that the market has 
shifted and gotten turned on its head so that in these 
situations most of the money for the originator is being made 
in up-front fees. So the incentive, particularly since they 
know somebody else is going to come and try and sell another 
loan a year or 2 later is to try and get as much up-front fees 
and capture profit there, instead of having free market forces 
work that would compete to lower the interest rate. That is one 
of the reasons that we want the market to work better by having 
people compete on interest rates, and let lenders offer a rate 
that reflects the risk.
    Mr. Ackerman. And the current system does not permit that?
    Mr. Calhoun. The current system turns it on its head and 
says the most successful lender is the one who can extract the 
most points at each lending.
    Mr. Ackerman. That system basically locks these people, who 
tend to be more minority and poorly educated, into expending a 
greater portion of their income than anybody else in our 
society on their housing needs, although their housing needs 
might be much more modest. Is that accurate?
    Mr. Calhoun. Yes, Congressman.
    Mr. Ackerman. Should there be something, and I am finishing 
up now, Mr. Chairman, should there be something in the 
counseling process which tells these people that if your credit 
position improves and if you make all your payments on time, 
that there is a reasonable possibility that when your loan 
comes to the end of its term that you will be able to get a 
better rate, and here is what you should do about it, or do we 
just tell them other things?
    Mr. DeMong. Congressman, I have actually seen some ads that 
Fannie Mae has done arguing that people can improve their 
credit if they take the certain steps.
    Mr. Ackerman. Does this go out to those people specifically 
or is it advertising in the papers?
    Mr. DeMong. I have only seen it on television.
    Mr. Ackerman. And that is Fannie Mae.
    Mr. DeMong. I think the point is that that education is 
always more valuable, and helping people better understand 
their own credit and their own abilities to improve their 
credit is very worthwhile. I know some of the industry has done 
that, with such programs as ``BorrowSmart''.
    Mr. Ackerman. Last question, should we be looking at a 
requirement or encouraging the industry to when they make re-
solicitations or initial solicitations of the people who are in 
the subprime market, that if their credit is good from that 
point on, if they are paying their bills, including their 
mortgage, and are not late, specifically to these people during 
the counseling process, and perhaps a written notice be 
required to them towards the end of their term that they should 
investigate that? Would that be helpful?
    Mr. DeMong. Again, as a professional educator, educating 
folks is always important. If it became a written notice, the 
point I would make is make sure it is easy to read and 
understand that it is there to help them.
    Mr. Ackerman. Mr. Calhoun or Mr. Green or anybody?
    Mr. Calhoun. The mortgage process is inherently complex and 
can be easily manipulated. The time you need counseling is at 
or near the time of closing. That is why the North Carolina 
law, one of its most effective provisions has been to say, if 
you are going to get a very high-fee mortgage, that you should 
go to counseling at that point, get a certificate, and then go 
through with the mortgage if you want to. But almost 
invariably, what happens is they are advised they can get a 
better mortgage and they in fact do get a better mortgage 
rather than one of these very high-fee mortgages.
    Mr. Ackerman. Mr. Green, any comment?
    Mr. Green. No. The experience that we have had with 
investor education on the bond market side has been a very 
positive thing. So education is a good thing.
    Mr. Ackerman. Indeed it is. With that, I thank the Chair.
    Chairman Ney. I thank the gentleman, and thank the panel 
for your patience and participation, also our members for 
coming today, and Mr. Ackerman.
    I have for the record some hearing enclosures. I have a 
Statement of the Coalition for Fair and Affordable Lending; a 
Statement of the Housing Policy Council; and a Statement of 
Freddie Mac which I would like to enter for the record, if 
there is no objection. Hearing no objection, I enter it for the 
record.
    [The following information can be found on pages 117, 135 
and 127 in the appendix.]
    I would also like to note that some members may have 
additional questions for this panel which they may wish to 
submit in writing. Without objection, the hearing record will 
remain open for 30 days for members to submit written questions 
to these witnesses and place their responses in the record.
    Again, I want to thank Chairman Bachus and most of all, all 
of you who came here today. Thank you.
    [Whereupon, at 1:05 p.m., the subcommittees adjourned.]

                            A P P E N D I X



                             June 23, 2004


[GRAPHIC] [TIFF OMITTED] T5652.001

[GRAPHIC] [TIFF OMITTED] T5652.097

[GRAPHIC] [TIFF OMITTED] T5652.002

[GRAPHIC] [TIFF OMITTED] T5652.003

[GRAPHIC] [TIFF OMITTED] T5652.004

[GRAPHIC] [TIFF OMITTED] T5652.005

[GRAPHIC] [TIFF OMITTED] T5652.006

[GRAPHIC] [TIFF OMITTED] T5652.007

[GRAPHIC] [TIFF OMITTED] T5652.008

[GRAPHIC] [TIFF OMITTED] T5652.009

[GRAPHIC] [TIFF OMITTED] T5652.010

[GRAPHIC] [TIFF OMITTED] T5652.011

[GRAPHIC] [TIFF OMITTED] T5652.012

[GRAPHIC] [TIFF OMITTED] T5652.013

[GRAPHIC] [TIFF OMITTED] T5652.014

[GRAPHIC] [TIFF OMITTED] T5652.015

[GRAPHIC] [TIFF OMITTED] T5652.016

[GRAPHIC] [TIFF OMITTED] T5652.017

[GRAPHIC] [TIFF OMITTED] T5652.018

[GRAPHIC] [TIFF OMITTED] T5652.019

[GRAPHIC] [TIFF OMITTED] T5652.020

[GRAPHIC] [TIFF OMITTED] T5652.021

[GRAPHIC] [TIFF OMITTED] T5652.022

[GRAPHIC] [TIFF OMITTED] T5652.023

[GRAPHIC] [TIFF OMITTED] T5652.024

[GRAPHIC] [TIFF OMITTED] T5652.025

[GRAPHIC] [TIFF OMITTED] T5652.026

[GRAPHIC] [TIFF OMITTED] T5652.027

[GRAPHIC] [TIFF OMITTED] T5652.028

[GRAPHIC] [TIFF OMITTED] T5652.029

[GRAPHIC] [TIFF OMITTED] T5652.030

[GRAPHIC] [TIFF OMITTED] T5652.031

[GRAPHIC] [TIFF OMITTED] T5652.032

[GRAPHIC] [TIFF OMITTED] T5652.033

[GRAPHIC] [TIFF OMITTED] T5652.034

[GRAPHIC] [TIFF OMITTED] T5652.035

[GRAPHIC] [TIFF OMITTED] T5652.036

[GRAPHIC] [TIFF OMITTED] T5652.037

[GRAPHIC] [TIFF OMITTED] T5652.038

[GRAPHIC] [TIFF OMITTED] T5652.039

[GRAPHIC] [TIFF OMITTED] T5652.040

[GRAPHIC] [TIFF OMITTED] T5652.041

[GRAPHIC] [TIFF OMITTED] T5652.042

[GRAPHIC] [TIFF OMITTED] T5652.043

[GRAPHIC] [TIFF OMITTED] T5652.044

[GRAPHIC] [TIFF OMITTED] T5652.045

[GRAPHIC] [TIFF OMITTED] T5652.046

[GRAPHIC] [TIFF OMITTED] T5652.047

[GRAPHIC] [TIFF OMITTED] T5652.048

[GRAPHIC] [TIFF OMITTED] T5652.049

[GRAPHIC] [TIFF OMITTED] T5652.050

[GRAPHIC] [TIFF OMITTED] T5652.051

[GRAPHIC] [TIFF OMITTED] T5652.052

[GRAPHIC] [TIFF OMITTED] T5652.053

[GRAPHIC] [TIFF OMITTED] T5652.054

[GRAPHIC] [TIFF OMITTED] T5652.055

[GRAPHIC] [TIFF OMITTED] T5652.056

[GRAPHIC] [TIFF OMITTED] T5652.057

[GRAPHIC] [TIFF OMITTED] T5652.058

[GRAPHIC] [TIFF OMITTED] T5652.059

[GRAPHIC] [TIFF OMITTED] T5652.060

[GRAPHIC] [TIFF OMITTED] T5652.061

[GRAPHIC] [TIFF OMITTED] T5652.062

[GRAPHIC] [TIFF OMITTED] T5652.063

[GRAPHIC] [TIFF OMITTED] T5652.064

[GRAPHIC] [TIFF OMITTED] T5652.065

[GRAPHIC] [TIFF OMITTED] T5652.066

[GRAPHIC] [TIFF OMITTED] T5652.067

[GRAPHIC] [TIFF OMITTED] T5652.068

[GRAPHIC] [TIFF OMITTED] T5652.069

[GRAPHIC] [TIFF OMITTED] T5652.070

[GRAPHIC] [TIFF OMITTED] T5652.071

[GRAPHIC] [TIFF OMITTED] T5652.072

[GRAPHIC] [TIFF OMITTED] T5652.073

[GRAPHIC] [TIFF OMITTED] T5652.074

[GRAPHIC] [TIFF OMITTED] T5652.075

[GRAPHIC] [TIFF OMITTED] T5652.076

[GRAPHIC] [TIFF OMITTED] T5652.077

[GRAPHIC] [TIFF OMITTED] T5652.078

[GRAPHIC] [TIFF OMITTED] T5652.079

[GRAPHIC] [TIFF OMITTED] T5652.080

[GRAPHIC] [TIFF OMITTED] T5652.081

[GRAPHIC] [TIFF OMITTED] T5652.082

[GRAPHIC] [TIFF OMITTED] T5652.083

[GRAPHIC] [TIFF OMITTED] T5652.084

[GRAPHIC] [TIFF OMITTED] T5652.085

[GRAPHIC] [TIFF OMITTED] T5652.086

[GRAPHIC] [TIFF OMITTED] T5652.087

[GRAPHIC] [TIFF OMITTED] T5652.088

[GRAPHIC] [TIFF OMITTED] T5652.089

[GRAPHIC] [TIFF OMITTED] T5652.090

[GRAPHIC] [TIFF OMITTED] T5652.091

[GRAPHIC] [TIFF OMITTED] T5652.092

[GRAPHIC] [TIFF OMITTED] T5652.093

[GRAPHIC] [TIFF OMITTED] T5652.094

[GRAPHIC] [TIFF OMITTED] T5652.095

[GRAPHIC] [TIFF OMITTED] T5652.096

