[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
                       LICENSING AND REGISTRATION
                        IN THE MORTGAGE INDUSTRY

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 29, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-58


                    U.S. GOVERNMENT PRINTING OFFICE
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  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           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          HAROLD E. FORD, Jr., Tennessee
    Carolina                         RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
VITO FOSSELLA, New York              STEVE ISRAEL, New York
GARY G. MILLER, California           CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio              JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
TOM FEENEY, Florida                  STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   AL GREEN, Texas
KATHERINE HARRIS, Florida            EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania            DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas               
TOM PRICE, Georgia                   BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina

                 Robert U. Foster, III, Staff Director
           Subcommittee on Housing and Community Opportunity

                     ROBERT W. NEY, Ohio, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California
    Chairman                         NYDIA M. VELAZQUEZ, New York
RICHARD H. BAKER, Louisiana          JULIA CARSON, Indiana
PETER T. KING, New York              BARBARA LEE, California
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         BERNARD SANDERS, Vermont
CHRISTOPHER SHAYS, Connecticut       STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
KATHERINE HARRIS, Florida            ARTUR DAVIS, Alabama
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
STEVAN, PEARCE, New Mexico           AL GREEN, Texas
RANDY NEUGEBAUER, Texas              BARNEY FRANK, Massachusetts
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
MICHAEL G. OXLEY, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 29, 2005...........................................     1
Appendix:
    September 29, 2005...........................................    37

                               WITNESSES
                      Thursday, September 29, 2005

Bryce, Teresa A., Senior Vice President and Director of Legal and 
  Corporate Affairs, Nexstar Financial Corporation, St. Louis, 
  MO, testifying on behalf of the Mortgage Bankers Association...     6
Falk, Joseph L., President, Irian Mortgage Services, Miami, FL, 
  testifying on behalf of the National Association of Mortgage 
  Brokers........................................................     8
Hailer, Stephen D., President and CEO, North Akron Savings Bank, 
  Akron, OH, testifying on behalf of the American Bankers 
  Association....................................................    10
Hedges, Daniel F., Director, Mountain State Justice, Inc., 
  Charleston, WV.................................................    11
Rodriguez, Eric, Director, PolicY Analysis Center, National 
  Council of La Raza.............................................    12
Smith, Joseph A. Jr., North Carolina Commissioner of Banks, 
  testifying on behalf of the Conference of State Bank 
  Supervisors....................................................     5

                                APPENDIX

Prepared statements:
    Ney, Hon. Robert W...........................................    38
    Cleaver, Hon. Emanuel........................................    40
    Bryce, Teresa A..............................................    41
    Falk, Joseph L...............................................    50
    Hailer, Stephen D............................................    71
    Hedges, Daniel F.............................................    80
    Rodriguez, Eric..............................................    90
    Smith, Joseph A. Jr. (with attachment).......................    96


                       LICENSING AND REGISTRATION
                        IN THE MORTGAGE INDUSTRY

                              ----------                              


                      Thursday, September 29, 2005

             U.S. House of Representatives,
                            Subcommittee on Housing
                         and Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 10:08 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Robert Ney 
[chairman of the subcommittee] presiding.
    Present: Representatives Ney, Miller of California, Jones 
of North Carolina, Waters, Carson, Lynch, Miller of North 
Carolina, Scott, Davis of Alabama, Cleaver, Green, Watt, Jones 
of Ohio, and Kanjorski.
    Chairman Ney. [Presiding.] Good morning, and welcome to the 
hearing of the Housing Subcommittee on the topic of licensing 
and registration in the mortgage industry.
    This is a topic that Congressman Kanjorski and I have 
addressed in our anti-predatory lending legislation, H.R. 1295, 
the Responsible Lending Act, also known as the Ney-Kanjorski 
bill.
    However, in the discussions surrounding this proposed 
legislation, this issue has not garnered a great deal of public 
attention and comment. Most of the debate has centered on which 
potentially abusive lending practices should be curtailed or 
prohibited in an effort to protect borrowers from unscrupulous 
lenders.
    Equally, if not more, important is the issue of regulating 
the people who provide or facilitate mortgage loans. After all, 
it only takes a few bad apples to give the entire industry a 
bad name. So that is what we are here basically to discuss.
    In an industry in which some say that opportunities exist 
for the potential to exploit and take advantage of both 
sophisticated and unsophisticated consumers alike, how could 
access to that industry be regulated to help insulate consumers 
from the practices I think is one of the subjects.
    Should all those who originate mortgages be required to 
obtain a license and register individually? Or are there 
reasons why access to the mortgage lending industry should be 
regulated differently for certain participants due to their 
unique attributes or because of their current regulatory 
requirements?
    In addition, there are currently a number of State laws and 
legislative movements on the State level that address this very 
topic. The question would be, are those sufficient to address 
the topic or would some degree of minimum uniformity be helpful 
nationally?
    Hopefully, these questions will be answered today so we can 
continue to find ways to protect consumers from both predatory 
lending practices and from those bad actors who would take 
advantage of the borrowers. The Ney-Kanjorski Responsible 
Lending Act attempts to do just that, to protect consumers from 
bad practices as well as from bad actors.
    This is why Congressman Kanjorski and I believe that H.R. 
1295 is the most comprehensive piece of Federal anti-predatory 
legislation ever to be introduced. The central goal of the Ney-
Kanjorski bill has been to provide consumers with the best 
possible protections from abusive lending without unduly and 
unnecessarily raising the costs of borrowing. Thus, we must try 
to keep in balance the cost to borrowers of licensing 
registration requirements and the benefits the borrower would 
receive from those requirements.
    While the current version of the bill contains provisions 
to establish uniform minimum standards for the licensing and 
registration of mortgage brokers, I recognize some within the 
mortgage broker industry would like to see those standards 
apply more broadly than others in the loan origination 
business. I also recognize that others in the loan origination 
industry do not believe these standards should be applied any 
more broadly.
    This is why basically we are here today, to basically flesh 
out and understand those positions, as well as to hear from 
others outside of the industry regarding what type of Federal 
regulation, if any, would be helpful.
    I looked at all the witnesses' statements submitted and the 
testimony. I look forward to hearing from each of you today.
    I must say, however, that I am perplexed by the testimony 
submitted by Mr. Hedges, which seems to suffer from the 
misconception that the licensing and education requirements of 
Title V of H.R. 1295 are intended to be preemptive in nature. 
The faulty premise of the testimony seems to be that the 
description of the standards in Title V as uniform can only 
result in preemption of State laws.
    However, I believe a more accurate reading of Title V in 
its entirety leads to the conclusion that the uniform standards 
Congressman Kanjorski and I have set out are uniform minimum 
standards intended to set a baseline of uniformity for State 
mortgage broker licensing education requirements, and do not in 
any way limit the ability of States to go beyond those 
requirements for stricter standards.
    In case others are suffering from any similar 
misconceptions to the intent of Congressman Kanjorski and I, 
let me be clear that the current provisions of Title V of H.R. 
1295 as drafted are intended as minimum standards. In other 
words, they are meant to be set as a floor for State standards, 
but not the ceiling. So I hope this clarification will prevent 
us from being diverted by any misconceptions and will allow us 
to remain properly focused on the intent of this hearing.
    So I look forward to hearing from all of the witnesses.
    At this time, I would like to recognize Mr. Scott.
    Mr. Scott. Thank you very much, Mr. Chairman. It is indeed 
a pleasure to be with you on this hearing. I just want to 
``amen'' what you have said about the Ney-Kanjorski-Scott bill.
    I say that with great affection, knowing that the major 
part of that bill is my own bill which deals with financial 
literacy and education, which in the final analysis is truly 
the centerpiece or the answer to much of the financial abuse, 
which is to certainly provide vulnerable people with access to 
information and a help-line with our toll-free number, and also 
to provide resources and grants down to the local level so that 
we can truly deal with the real problem in this issue, which is 
a lack of folks being financially literate, educated, and make 
sure that they call somebody before they sign on the dotted 
line.
    Again, I am particularly involved in this issue because 
reports continue to show that my district in the metro Atlanta 
area, which I represent 13 counties in and around the Atlanta 
metro area, leads the nation in mortgage fraud in America. That 
is another reason why I believe that the Ney-Kanjorski-Scott 
bill is a true panacea for much of our problem.
    In August, Georgia ranked fourth in the number of 
foreclosed properties. The combination of a good local economy, 
relatively low housing prices, and favorable loan rates have 
fueled record home sales and mortgage refinancings. 
Unfortunately, the high volume of home sales has allowed 
unscrupulous lenders to commit fraud on unsuspecting consumers.
    Now, let me state from the outset that most mortgage 
brokers are good people. They are good actors. They are good 
business people. However, we know that bad actors continue to 
stay in this business. We have to find a way to feeder them 
out. While more Americans have access to credit than ever 
before, more fraud has also occurred than ever before. 
Therefore, it is important to create additional national 
regulations for the mortgage industry. Congress should also 
heed the warning from Fed Chairman Greenspan that creative 
financing of mortgages could backfire if the economy dips and 
interest rates increase.
    Some questions to consider today include how mortgage 
brokers should be regulated in comparison to mortgage bankers. 
Also, we should ask if there are incentives for mortgage 
brokers to unnecessarily steer poor and minority consumers into 
high-cost loans. What incentives to mortgage brokers have to 
sell a good loan? Once that loan is brokered and passed on to a 
lender, does that end the involvement of the mortgage broker?
    We have to have a better explanation of the use of yield 
spread premiums by mortgage brokers. Some consumer groups 
complain that these premiums provide incentives to sell 
unnecessary high-cost loans to consumers. How do you respond to 
these accusations? What steps can the lending industry take to 
be vigilant in stopping mortgage fraud in the Gulf as a result 
of Hurricanes Katrina and Rita before it actually happens? 
These are pressing questions that we certainly need to grapple 
with this morning.
    And finally, is it important that Congress consider the 
urgent need to act on mortgage fraud? Given the explosion of 
lending activity that will be needed to rebuild the Gulf 
region, mortgage crooks will certainly see this climate as an 
opportunity for theft. There is no question about it. Urgency 
must be the order of the day. The timing of this hearing is so 
significant. We must be proactive. We must not allow further 
atrocities to befall the Gulf residents as they rebuild.
    Thank you, Mr. Chairman. I yield back my time.
    Chairman Ney. I want to thank the gentleman. I want to also 
apologize to the gentleman for not making a statement, because 
your input has been so valuable, especially on the counseling. 
I appreciate your support of the Scott-Kanjorski-Ney bill that 
we have there.
    Also, I wanted to note without objection the gentlelady 
from Cleveland will be participating in the hearing today 
without objection.
    Mrs. Jones of Ohio. Thank you, Mr. Chairman.
    Chairman Ney. Thank you.
    And who was also a member of this subcommittee, and I would 
note had probably a perfect attendance record.
    Mrs. Jones of Ohio. Oh, I am loving it. Keep talking.
    Chairman Ney. That is an Ohio thing. Go Bucks.
    [Laughter.]
    Mr. Jones of North Carolina?
    Mr. Jones of North Carolina. I will waive opening.
    Chairman Ney. Ms. Tubbs-Jones?
    Mrs. Jones of Ohio. My good colleague from Indiana, I just 
want to thank the chairman for giving me the opportunity to 
participate.
    I am here because this is an issue that is very important 
for my particular community in the State of Ohio, Cuyahoga 
County; we are battling with huge mortgage difficulties and 
foreclosures, probably one of the highest foreclosure rates 
that exist in the country.
    I just come here because of my interest and also because I 
have introduced a piece of legislation that would require 
mortgage brokers to be involved in a certification program. It 
is H.R. 1994.
    I look forward to the testimony and participating. I want 
to thank the chairman and the ranking member for doing such a 
great job on housing issues. It is the basis of wealth for most 
low-income and middle-income people. If we cannot hold onto 
that wealth in our communities, we have a real problem.
    So thanks, Mr. Chairman, very, very much.
    Chairman Ney. I thank the gentlelady and the members for 
being here today.
    The witnesses are Mr. Joseph A. Smith, Jr., North Carolina 
commissioner of banks, testifying on behalf of the Conference 
of State Bank Supervisors; Ms. Teresa A. Bryce, senior vice 
president and director of legal and corporate affairs, Nexstar 
Financial Corporation, St. Louis, Missouri, testifying on 
behalf of the Mortgage Bankers Association; Mr. Joseph L. Falk, 
president, Irian Mortgage Services, Miami, Florida, testifying 
on behalf of the National Association of Mortgage Brokers; Mr. 
Stephen D. Hailer, president and CEO, North Akron Savings Bank, 
Akron, Ohio, testifying on behalf of the American Bankers 
Association; Mr. Daniel F. Hedges, director of Mountain State 
Justice, Incorporated, Charleston, West Virginia; and Mr. Eric 
Rodriguez, director, Policy Analysis Center, National Council 
of La Raza.
    Thank you.
    We will start with Mr. Smith.

STATEMENT OF JOSEPH A. SMITH, JR., NORTH CAROLINA COMMISSIONER 
OF BANKS, TESTIFYING ON BEHALF OF THE CONFERENCE OF STATE BANK 
                          SUPERVISORS

    Mr. Smith. Thank you, sir.
    Good morning, Chairman Ney and members of the subcommittee. 
I am Joseph A. Smith, Jr., North Carolina commissioner of 
banks. I am here on behalf today, as you have said, of the 
Conference of State Bank Supervisors, or CSBS.
    I have provided a full written statement and respectfully 
request that it be included in the record of the hearing.
    Chairman Ney. Without objection.
    Mr. Smith. Thank you, sir.
    Thank you for giving CSBS an opportunity to update the 
subcommittee on the CSBS-AARMR residential mortgage lending 
project. This is a proactive effort by the States to reduce 
regulatory burden on the mortgage industry by creating uniform 
applications and an online registration system. This system 
will also increase accountability in the industry and help 
fight predatory lending and mortgage fraud by identifying bad 
actors and eliminating their ability to move from State to 
State.
    Residential mortgage lending is a local activity, but 
changes in technology and deregulation make financing these 
loans a global industry. The damage done by predatory lending 
and mortgage fraud, however, is still very much local. States 
may choose to regulate mortgage lenders, mortgage brokers, 
mortgage servicers, individual mortgage originators, or some 
combination of these. North Carolina has chosen to license 
lenders, brokers, and originators. Other States have chosen 
differently by adopting registration statutes, for example, or 
in the case of two States by taking no action at all.
    Licensing protects the public by allowing the Government to 
ensure that all businesses and professionals offering a 
particular service, in this case mortgage lending, to the 
public are operating honestly and within the requirements of 
applicable law. Licensing sets minimum standards for entry into 
particular businesses, protecting both the public and 
legitimate business from fraudulent operators.
    The Government's ability to rescind or limit a license 
creates a powerful incentive for businesses and professionals 
to comply with the law and conduct their practices in a 
responsible manner. Registries serve the public and the 
industry by offering a single source of information about 
businesses and professionals offering a service. Registries 
alone, however, do not indicate that any registered business or 
individual meets a particular standard of competence or ethics. 
Registries serve the public interest best when registration 
requires that listed companies or professionals meet 
substantive legal and regulatory requirements.
    We understand that the largest financial services providers 
run a more coordinated regulation for their national activity. 
The State of North Carolina and CSBS support coordinated 
regulation in order to promote the modernization of financial 
services, healthy competition among providers, and greater 
availability of financial services. The CSBS-AARMR residential 
mortgage lending project is an opportunity both to reduce 
burdens on the industry and to help create more uniform 
nationwide markets, while increasing our citizens' protection 
from mortgage fraud and predatory lending.
    The CSBS Board of Directors has established regulatory and 
legislative task forces to examine and improve the efficiency 
and effectiveness of licensing and supervision of the nation's 
State-regulated mortgage lending industry. This task force 
intends to provide a uniform mortgage application, develop a 
comprehensive mortgage licensing and supervisory database, and 
adopt a coordinated examination agreement. The task force has 
nearly finalized the uniform mortgage applications for lenders 
and brokers, broker companies, and individual loan originators. 
Over 20 State mortgage regulators have agreed to beta test 
these forms. Work is still in process on a renewal application 
and on branch applications.
    With the information from these forms, CSBS intends to 
create a Web-based database containing information about the 
criminal history, credit history, consumer complaints, and 
enforcement actions for mortgage companies and professionals to 
be used by State regulatory agencies. This would allow States 
to identify fraudulent and abusive lenders and professionals 
when they leave one State and seek licenses in another.
    Identifying and removing these professionals and firms 
benefits consumers. Delivering such comprehensive supervision 
also benefits the vast majority of mortgage lenders and brokers 
by removing bad actors whose conduct harms the market generally 
and honest competent lenders and brokers in particular. The 
national registry will include all professionals and companies 
currently required to be licensed or registered under State 
law.
    Over time, we believe that the advantages of being listed 
on a national registry will encourage most legitimate industry 
participants to submit their information to the registry 
voluntarily, even if State law does not require them to do so. 
CSBS is committed to the overall goal of enhancing a State 
regulatory system that works efficiently and effectively for 
borrowers, the industry and regulators. CSBS is equally 
committed to a dialogue with Federal and State policymakers and 
the mortgage lending and brokerage industries to address issues 
of applicable law and law enforcement aimed at ending abusive 
lending practices.
    Chairman Ney, we commend you, Representative Waters, 
Representative Kanjorski, Representative Scott and all the 
members of the subcommittee for considering this very important 
issue. I thank you for your time and would be happy to answer 
any questions.
    [The prepared statement of Joseph A. Smith Jr. can be found 
on page 96 in the appendix.]
    Chairman Ney. Thank you.
    Ms. Bryce?

    STATEMENT OF TERESA A. BRYCE, SENIOR VICE PRESIDENT AND 
  DIRECTOR OF LEGAL AND CORPORATE AFFAIRS, NEXSTAR FINANCIAL 
    CORPORATION, ST. LOUIS, MO, TESTIFYING ON BEHALF OF THE 
                  MORTGAGE BANKERS ASSOCIATION

    Ms. Bryce. Good morning, and thank you, Mr. Chairman, for 
inviting the Mortgage Bankers Association to testify on Title V 
of the Responsible Lending Act of 2005.
    My name is Teresa Bryce, and I am senior vice president and 
director of legal and corporate affairs for Nexstar Financial 
Corporation in St. Louis, Missouri. I am also co-chair of the 
MBA State Licensing Task Force.
    MBA supports Title V because we believe it will elevate the 
standard of professionalism within the mortgage broker 
industry. Title V will also result in greater accountability 
among mortgage brokers and increase uniformity in the State 
laws to which they are subject. It is important to understand 
the difference between mortgage brokers and mortgage bankers. 
Mortgage bankers underwrite applicants and actually fund the 
loan in a mortgage transaction.
    From the moment a loan has closed, mortgage bankers assume 
the credit, interest rate, compliance, and fraud risk 
associated with the loan. Mortgage banking companies are 
corporately responsible for every loan originated by any of 
their employees. Even if the lender sells the loan to an 
investor, the lender remains financially liable for certain 
risks associated with the loan. If an investor finds quality, 
compliance, or fraud problems with the loan, they can and do 
force the lender to repurchase.
    This economic regulation by the marketplace extends far 
beyond the loan closing. For this reason, mortgage bankers 
typically have extensive employee training and monitoring 
policies. Mortgage brokers, on the other hand, do not fund, 
underwrite, or service mortgage loans. Mortgage brokers are 
commissioned sales people independent of the mortgage banker 
who typically work with a number of mortgage bankers at any one 
time, matching homebuyers with lenders. Mortgage brokers do not 
have capital at risk in a transaction and their responsibility 
for a loan typically ends when a loan closes and they receive 
their payment. This is a key difference.
    At some point in the transaction, mortgage bankers have 
funds at risk and must continually maintain a significant 
amount of financial capital to back up the loans they sell. 
Currently, 49 States and the District of Columbia require 
mortgage bankers to be corporately licensed before lending in 
their States. MBA supports State-level corporate licensing of 
mortgage banking companies. We believe that States should be 
able to approve and monitor the companies that make loans to 
citizens within their States.
    Unfortunately, however, some States are placing 
particularly burdensome licensing requirements on mortgage 
banking companies and in some cases are even moving beyond 
corporate licensing and requiring the licensure of individual 
loan officers and support staff working within a licensed 
mortgage banking company. Collectively, these new State 
requirements raise the cost of mortgage originations and 
threaten to dampen competition and innovation of mortgage 
markets within States.
    Further exacerbating the collective impact of these various 
State laws is the fact that the vast majority lack reciprocity 
provisions. MBA believes mortgage bankers are different than 
mortgage brokers and these differences underscore the need for 
mortgage bankers and mortgage brokers to be subject to 
different oversight regimes. Unfortunately, MBA does not see 
this difference being reflected in State licensing laws 
affecting mortgage bankers.
    While States have a relatively long history of requiring 
licensure of mortgage banking companies, the same is not true 
for the mortgage brokerage industry. This industry is in great 
need of licensure standards and Title V offers an opportunity 
to do this in a reasonable manner.
    Furthermore, the database created by Title V has the 
potential to be a great resource to regulators, mortgage 
bankers, and the public. Currently, there is no Federal 
oversight of mortgage brokers, nor does there exist a single 
database of mortgage brokers. MBA is aware that some are 
concerned that the exemptions in Title V are too broad and MBA 
supports tightening these exemptions as necessary. MBA supports 
the licensing provisions under Title V as we believe they will 
elevate and standardize mortgage brokerage licensing 
requirements. MBA encourages the committee to study possible 
Federal initiatives that will assist mortgage bankers when 
dealing with corporate licensing laws at the State level.
    Thank you for the opportunity to testify today. I look 
forward to answering your questions.
    [The prepared statement of Teresa A. Bryce can be found on 
page 41 in the appendix.]
    Chairman Ney. Thank you.
    Mr. Falk?

    STATEMENT OF JOSEPH L. FALK, PRESIDENT, IRIAN MORTGAGE 
   SERVICES, MIAMI, FL, TESTIFYING ON BEHALF OF THE NATIONAL 
                 ASSOCIATION OF MORGAGE BROKERS

    Mr. Falk. Good morning, Chairman and members of the 
subcommittee. My name is Joseph Falk, and I am legislative 
chairman of the National Association of Mortgage Brokers and a 
past president. Thank you for inviting NAMB to testify here 
today.
    We appreciate the opportunity to address the role of the 
originator as part of a package of consumer protections to 
address the issue of predatory lending. As the voice of 
mortgage brokers, NAMB speaks on behalf of more than 27,000 
members in all 50 States. I commend the committee for its 
leadership on this issue. NAMB first introduced our model State 
statute initiative in 2002, and many of the elements that are 
included in this legislation are contained in our model 
initiative.
    NAMB implores Congress to embrace the concepts contained in 
our initiative and create a national minimum standard that will 
ensure that all originators, regardless of employer, are 
licensed and properly educated. NAMB opposes the efforts of 
those bad actors in our industry that create, promote, or fund 
predatory loans. But while we may originate the majority of 
mortgage loans, we do not originate all of them. Regulation 
that seeks to protect the public should include all 
originators.
    We refer to the term ``all originators'' because there is 
no functional difference between being a broker, a banker, or a 
lender when taking a mortgage application with a consumer. We 
urge the committee to drop all of the exemptions under 
501(b)(2), with the exception of the Federal depositories, with 
conditions.
    There are five critical elements that we see in licensing 
and registration. One, it should include everyone who takes a 
mortgage application from a consumer. Two, there should be pre-
license education; three, continuing education requirements; 
four, before an originator deals with a consumer, the criminal 
background check of that individual should be obtained and any 
originator who have been convicted of a financial crime should 
be barred from our industry, no entry in our industry. There 
should be a national database of all originators so that bad 
actors caught in one State cannot easily go to another State.
    Let's talk about all originators for a moment. We 
respectfully disagree with our friends at the MBA. Any proposal 
to increase professionalism must include everyone. All loan 
officers should be knowledgeable about the loan options 
available and be able to answer consumer questions. It is all 
about the consumer questioning. Leaving any channel of 
distribution out of this equation eviscerates effective policy 
to ensure expertise.
    Education requirements. All originators should be schooled 
in the basics of our industry. They should be able to answer 
basic questions about underwriting, servicing, escrows, and 
origination. We do not want mortgage brokers or lenders having 
uneducated employees dealing with consumers.
    Continuing education requirements. When I started in the 
business, there was no RESPA. There was no credit scoring. 
There were no automated underwriting systems. And clearly, 
there were no 80-20 no-MI loans. The marketplace is dynamic, of 
course, and the originator's knowledge should be maintained and 
kept current.
    Criminal background checks are an important concept to the 
mortgage broker community. The consumer is required to divulge 
their personal financial records to a loan officer no matter 
who they work for. The data is the keystone for identity theft. 
Do we want that person, regardless of their employer, to be 
someone convicted of financial fraud? If a consumer shops, they 
give this information out multiple times. We believe that 
convicted felons should not have unfettered access to private 
consumer records. It is good public policy to protect all 
consumers, regardless of where they choose to get their 
mortgage loan. It does not matter who you work for. It is the 
originator and the consumer sitting at the table discussing 
that mortgage loan.
    A national database. We support a national database, but 
only if it includes all industry participants. Current language 
in Title V applies only to brokers, and to be effective it 
should apply to anyone who takes a consumer mortgage 
application. The purpose of the database is to track State 
licensing information across State lines so that bad actors, 
once caught, cannot move State to State, community to 
community, and continue with those bad acts. Leaving out 
employees of depositories, banks, consumer finance companies, 
lenders, originators, leaves gaps in this vital consumer 
protection.
    We look forward to working with the committee to address 
these important issues. Our written testimony expands upon our 
views and includes a copy of our model State statute 
initiative. Please include our submission in the record for 
further information.
    Thank you for your consideration. I am happy to answer any 
questions you may have.
    [The prepared statement of Joseph L. Falk can be found on 
page 50 in the appendix.]
    Chairman Ney. Thank you.
    Mr. Hailer?

STATEMENT OF STEPHEN D. HAILER, PRESIDENT AND CEO, NORTH AKRON 
 SAVINGS BANK, AKRON, OH, TESTIFYING ON BEHALF OF THE AMERICAN 
                      BANKERS ASSOCIATION

    Mr. Hailer. My name is Steve Hailer. I am president and CEO 
of North Akron Savings Bank in Akron, Ohio. I am also the vice 
chairman of the American Bankers Association Housing and 
Federal Home Loan Bank Committee.
    ABA, on behalf of the more than 2 million men and women who 
work at the nation's banks, brings together all categories of 
banking institutions to best represent the interests of a 
rapidly changing industry. Its membership includes community, 
regional, money-center banks and holding companies, as well as 
savings associations, trust companies, and savings banks. This 
makes ABA the largest bank trade association in the country.
    I am pleased to be here today to present the views of ABA 
on Title V in H.R. 1295, the Responsible Lending Act. Title V 
would establish licensing requirements and minimal Federal 
standards for independent mortgage brokers. Among the other 
things Title V would require is background checks and 
continuing education of independent brokers. Title V would not 
apply to brokers who perform work for banks or an affiliate of 
a bank, including those who fund, underwrite, service, or sell 
mortgage loans.
    In my testimony, I would like to make three main points. 
First of all, ABA believes that practices that deceive, defraud 
and otherwise take advantage of consumers are predatory and 
have no place in our financial system. Existing laws against 
these practices should be rigorously enforced. Mortgage lending 
is a vast enterprise which requires the coordination of several 
layers of professionals throughout the process of issuing a 
home loan.
    The damage caused by deceptive and unscrupulous sales 
practices extends well beyond the consumer who is targeted. 
News and Government reports of these people previously 
described as bad actors hurt everyone and ruin businesses and 
reputations. In contrast, ethical and efficient brokers attract 
more customers and generate more business for themselves and 
lenders. The success or failure of a business depends upon the 
satisfaction of its customers.
    Secondly, banks and the activities of mortgage brokers who 
act on banks' behalf are heavily regulated and thoroughly 
examined for compliance with a whole host of Federal laws and 
regulations. Banks are subject to the Truth in Lending Act, 
Home Mortgage Loan Disclosure Act, Equal Credit Opportunity 
Act, the Real Estate Settlement Procedures Act, the Fair 
Lending Act, and many other laws.
    Independent mortgage brokers are not subject to the same 
breadth of consumer protection laws and regulations with which 
banks must comply. Importantly, a regulatory system does not 
exist to examine independent mortgage brokers for compliance, 
even with those laws that apply to them such as RESPA.
    Third, therefore we believe as an organization and on 
behalf of the industry, that the licensing of independent 
brokers is a rational step towards better consumer protection. 
Title V of H.R. 1295 would address the present regulatory gap 
in current consumer protection law in a minimally intrusive 
manner by requiring independent brokers to comply with minimum 
licensing requirements under either state or federal law.
    It will create a database of licensed brokers that will 
allow consumers to gain useful information on any broker they 
may consider using. The database would also enhance a lender's 
ability to screen brokers, further ensuring that lenders and 
consumers only deal with legitimate brokers.
    Thank you. We will answer any questions when appropriate.
    [The prepared statement of Stephen D. Hailer can be found 
on page 71 in the appendix.]
    Chairman Ney. Thank you, Mr. Hailer.
    Next, Mr. Hedges?

    STATEMENT OF DANIEL F. HEDGES, DIRECTOR, MOUNTAIN STATE 
                 JUSTICE, INC., CHARLESTON, WV

    Mr. Hedges. Chairman Ney, members of the committee, thank 
you for inviting me here to testify regarding mortgage brokers, 
predatory lending, and appropriate Federal and State 
regulations. I am the director of Mountain State Justice, a 
nonprofit legal services program in Charleston, West Virginia, 
which exclusively represents low-income people affected by 
these practices.
    My primary purpose in coming here today is to convince you 
to pass only legislation which makes clear that the safeguards 
in existing law currently employed to save homes from 
foreclosure remain in place.
    I appreciate the chairman's statement that this is intended 
only as a minimum and that present parts of State law are 
intended to be safeguarded. I encourage the Congress to include 
language that would make that clear because, as I was confused, 
I am sure others will be confused too.
    Moreover, the exemptions are very broad for who is defined 
as a mortgage broker. If those exemptions are carried through 
to the substantive provisions, if the uniform requirements of 
licensing are carried through to the substantive provisions and 
all brokers are exempted from the substantive provisions as a 
result of the uniform provisions being enacted as to licensing, 
then there would be broad-based exemption from State law.
    In my practice, we currently represent more than 600 
homeowners in 60 predatory lending cases. Our cases give 
homeowners a protection from predatory mortgage brokers. There 
are a number of significant protections applicable to mortgage 
loans originated by brokers. In licensing alone, there is a 
bonding requirement. There is a fiscal soundness requirement 
and a creditworthiness requirement. This uniform licensing 
requirement would presumably preempt those provisions and not 
replace them with any requirement other than that they be 
licensed on the Federal level.
    The fiscal soundness and bonding requirement would give 
very significant protections for consumers and lead to the non-
licensure of some brokers who should not be licensed. The 
substantive provisions in our State law which would be avoided 
by the broad licensing, potentially avoided without 
clarification from the broad licensing uniformity, are 
brokering a loan in excess of market value of the home; 
brokering and non-amortizing loan; prohibiting brokers from 
participating in compensation arrangements with appraisers 
which influences independent judgment; brokering a loan without 
economic benefit to an unsophisticated consumer; limitations on 
exorbitant broker fees; brokering a real estate loan which 
includes a security interest in an unattached mobile home; and 
brokering a loan with loan documents that are not filled in.
    These kinds of restrictions are among the limits on broker 
activities which have in the last few years weeded out the most 
exploitive brokers in the State. There is still much work to be 
done, but these enforcement actions are currently available 
only through State law. If the licensing uniformity that is 
required by this act means that the brokers can exempt 
themselves from the substantive provisions as well, then we 
have lost a lot.
    The exemption provisions are very broad and appear similar 
to those definitions in RESPA that provide coverage. The one 
exemption of any person who is a creditor under the Truth in 
Lending Act and makes more than $1 million in loans per year 
covers almost any mortgage broker in my State who might 
otherwise not be exempted. This essentially permits brokers to 
avoid State and Federal regulation, seemingly by table-funding 
a few loans a year that is closing them in their own name, and 
immediately assigning them. That is a very broad exemption and 
it needs to have a hard look by the committee. It is hard to 
imagine any mortgage broker who would not be covered by this 
exemption.
    The lack of meaningful substantive protections is a major 
issue. Even for those few mortgage brokers who might be 
covered, there are no meaningful substantive limitations. I 
would urge the committee to consider those substantive 
limitations that we have and have weeded out a number of 
abusive brokers.
    Chairman Ney. I am sorry to interrupt, but the time has 
expired, if you would like to summarize and the rest will go in 
the record. I just want to make sure we have time.
    Mr. Hedges. The remainder is in my written statement. Thank 
you for the opportunity to appear. I would be glad to answer 
any questions.
    [The prepared statement of Daniel F. Hedges can be found on 
page 80 in the appendix.]
    Chairman Ney. Thank you.
    Mr. Rodriguez?

STATEMENT OF ERIC RODRIGUEZ, DIRECTOR, POLICY ANALYSIS CENTER, 
                  NATIONAL COUNCIL OF LA RAZA

    Mr. Rodriguez. Thank you, Mr. Chairman and members of the 
subcommittee, for inviting me to present today.
    As an advocate for Latinos, I have worked for more than a 
decade on economic employment and financial security policy 
issues. As director of NCLR's policy analysis center, I oversee 
research, policy analysis, and advocacy on a number of specific 
issues, including housing and homeownership.
    As you know, NCLR serves America's 40 million Hispanics of 
all regions of the country. We work through a network of more 
than 300 nonprofit affiliate organizations. This includes 
working with 40 community-based organizations that operate and 
administer pre-purchase homeownership counseling programs. 
Since 1997, NCLR's homeownership network has counseled more 
than 115,000 families and more than 17,000 have become new 
homeowners.
    The issue of mortgage broker licensing and registration is 
important and timely. Today, Latino homeownership lags behind 
that of whites by 28 percentage points. Low homeownership rates 
translate into lower levels of wealth and fewer financial 
ownership opportunities for Hispanics. What is more, 
homeownership is a vital piece of the American story, not to 
mention a central ingredient in the U.S. economy.
    Hard-working Latinos have a deep desire to own their own 
homes. Because of sheer numbers, creating more Latino 
homeowners means greater economic prosperity for the nation. 
Hispanics are now entering the home-buying market in record 
numbers. In fact, the number of Hispanic homeowners grew by 96 
percent between 1993 and 2003.
    Yet at the same time, Latino wealth levels have not grown 
proportionally. Home equity makes up approximately two-thirds 
of the wealth of Hispanic households. In 2002, Latinos 
maintained only 60 percent of the median value of home equity 
as that owned by white households. Owning a home is important 
for Latinos, but that alone does not guarantee sustainable 
financial wealth.
    To understand why, we have to consider that Latinos enter 
the marketplace with limited exposure to and experience with 
financial products. Many face unique challenges to accessing 
the best information and making the most informed choices about 
financial products. For these reasons, intermediaries and 
brokers can and do play a vital role in connecting Latinos to 
valuable and affordable financial products.
    Mortgage brokers and HUD-certified counseling agencies 
specifically play an important role in increasing Hispanic 
homeownership. In fact, these intermediaries offer access to a 
wide range of products, workforce diversity, and many use the 
one-on-one approach that Latino borrowers appreciate.
    Clearly, housing counselors and mortgage brokers work with 
different types of consumers, but as the home-buying market 
grows in size and complexity, the need for intermediaries to 
bridge the gap between creditors and Latino borrowers becomes 
more important. That is why Latinos have a vital stake in this 
debate.
    With respect to mortgage brokers specifically, State and 
Federal oversight structures have not kept up with changing 
market demographics. Stories of Latino homeshoppers being 
victimized by unscrupulous mortgage brokers are not uncommon. 
Many of these families end up in our affiliate housing 
counseling organization seeking assistance. These stories and 
experiences suggest that stronger consumer protection laws are 
needed.
    Based on the collective experience of our housing 
counselors, we have identified three areas in which we have 
particular concerns. First, the accountability standards 
currently in place for mortgage brokers are inadequate. While 
States are tackling these issues, some very effectively, the 
lack of a meaningful Federal law in this area exacerbates the 
problem. Second, some families find themselves having been 
unfairly steered into expensive loans. Market-based broker 
incentives such as yield spread premiums play no small part.
    Finally, many borrowers mistakenly assume their broker has 
the responsibility to find them the best deal. In practice, a 
broker's role, responsibility and fees are not always 
disclosed. Mortgage brokers serve as the main liaison between a 
borrower and their product choices. This relationship demands 
trust and accountability in order to function properly. The 
home-buyer market can only benefit from strong standards that 
maintain and protect its integrity.
    As I mentioned before, NCLR has invested heavily in housing 
counseling. We understand the important role of the broker. 
While the clientele business models are slightly different, 
both industries help Latinos to access home loans. We also 
understand the importance of strong license and registration 
requirements. Housing counselors, for example, must complete 
120 hours of course work and pass an exam to become certified. 
Also, HUD-certified counseling agencies are audited every other 
year and are held to high bookkeeping and reporting standards. 
In this sense, HUD plays a vital role in ensuring standardizing 
and quality in the housing counseling field.
    The Federal role is also prominent in other similar fields. 
For example, like mortgage brokers, stock brokers cultivate a 
trusting relationship with their clients. Their clients rely on 
their advice and expertise regarding significant financial 
purchases. The Securities and Exchange Commission must maintain 
consumer confidence and ensure safe market practices. The SEC 
relies on enforcement and accountability tools, fiduciary 
disclosure, bookkeeping standards, and regular audits. There 
are existing models of how Federal oversight could effectively 
shape the mortgage broker industry and protect more consumers.
    The Responsible Lending Act includes provisions for minimum 
mortgage broker licensing standards and creates a national 
registry. We commend the authors and the members of this 
committee for tackling this issue. Licensing and registration, 
however, do not go far enough. Much more will be needed to 
create a safe and sound market. Better standards are needed for 
the licensing provisions. Also, more oversight and 
accountability and enforcement will be necessary to foster 
genuine consumer confidence. The comprehensive model is not 
represented in any legislation currently before the committee.
    Therefore, NCLR makes the following three recommendations.
    Chairman Ney. I am sorry, Mr. Rodriguez, your time has 
expired. If you would like to sum up and then put the rest in 
for the record.
    Mr. Rodriguez. Sure. Most of that is in the record already, 
so I will cease here and thank you for the opportunity.
    [The prepared statement of Eric Rodriguez can be found on 
page 90 in the appendix.]
    Chairman Ney. Thank you.
    Let me just begin with a question I have. One of the main 
premises of the mortgage brokers' argument against having 
minimum licensing education and registry requirements apply 
only to them and not mortgage bankers is a scheme such as would 
allow a bad actor who practices as a mortgage broker to leave 
that profession and begin practicing as a mortgage banker 
without being detected.
    On that premise, are there safeguards in place in the 
mortgage banking industry that would prevent that type of 
scenario?
    Ms. Bryce. Yes, Chairman, I think there are. For one thing, 
most companies have pretty extensive screening requirement in 
hiring, to start with. The other thing is that there is 
corporate backing, so you have oversight at the State level. I 
know for our own company last year we had 10 State exams during 
the course of the year.
    So as a result, there is a lot of oversight. There is an 
opportunity to examine what individual employees are doing. 
Most mortgage banking companies, if not all, have extensive 
compliance programs, have extensive quality assurance programs. 
So consistently, the individual is being reviewed in terms of 
their practices.
    Chairman Ney. The mortgage brokers could say that same 
thing.
    Ms. Bryce. I think the structure is very different. I think 
for one thing, you have----
    Chairman Ney. Internal structure?
    Ms. Bryce. The internal structure, the size of mortgage 
bankers are usually pretty large, the number of States that are 
already regulating them, almost all States regulate. Frankly, 
the amount of money that is put towards examining mortgage 
bankers is very different. As a result, there is typically a 
lot more focus on examining mortgage bankers in coming in, 
looking at loan files, looking at practices, et cetera. I do 
not think that is typically found on the State level with 
mortgage brokers.
    Chairman Ney. Mr. Falk, do you want to respond?
    Mr. Falk. Respectfully, we would disagree with that. 
Mortgage bankers and mortgage brokers, mortgage lenders all 
have small and large operators. They all have licensees in 
various places. My experience is that many of the mortgage 
broker shops have training and education and compliance 
programs, just as some small mortgage lenders do not have such 
training and compliance programs in place.
    In my State of Florida, a licensed mortgage lender may act 
in one transaction as a mortgage broker, then act as a mortgage 
lender upon getting further information about that consumer, 
and ultimately may fund that loan as a mortgage broker 
transaction with the same consumer. So in our view, it is all 
about the consumer sitting down with the loan officer and all 
of the rules and regulations should apply equally across the 
board.
    Chairman Ney. So we have two different views.
    How about from the regulatory end, Mr. Smith, on my 
original question again?
    Mr. Smith. Yes, if I could comment on that briefly. My 
experience in North Carolina after 3 years of regulating 
lenders and brokers is that there is a sort of free agent 
situation in terms of originators that people commonly go 
between; not only brokers and lenders, but also brokers, 
lenders, and dare I say it, the subsidiaries of depository 
institutions. So there is common movement. It is common to see 
movement among these various types.
    I will say, in our experience the background checks that 
these people go through as they change employment varies 
significantly. Some is good and some is not so good.
    Chairman Ney. Mr. Hailer, does the ABA have a position on 
licensing or not licensing the brokers, or licensing them or 
licensing everybody?
    Mr. Hailer. I think, Mr. Chairman, the position of the ABA 
correctly reflects the fact that we do not feel that those in 
the banking industry and those that work for the banking 
industry need to be licensed. We very specifically feel that 
the regulations that we submit to on a daily basis do not 
warrant registration. And particularly just the whole 
examination and audit process, and then you add Sarbanes-Oxley 
on top of that, we have a lot of people watching what we do. To 
be perfectly frank, the clearing processes of our employees 
would exceed even the minimum standards here far and away.
    So what we are really arguing for here are minimum 
standards. So we, again going back to the testimony, 
wholeheartedly support the minimum registration and the minimum 
database. It will help out the banking industry long term.
    Chairman Ney. My time is about to expire, but Mr. Hedges?
    Mr. Hedges. My observations in working in this area for 35 
years is the compensation system for brokers means that the 
requirements for licensing dealing with brokers is far 
different from that of the banks. Banks do not engage in the 
same types of activities that the brokers do. The licensing 
requirements that we have, bonding, individual broker bonding, 
individual broker creditworthiness, makes a big difference in 
who is allowed into the industry.
    Now, these types of people do not work for banks, and that 
kind of licensing and those kind of requirements are not needed 
because the incentives that are built into the system there do 
not bring the same kind of people into the industry.
    Chairman Ney. Thank you. My time has expired.
    Mr. Scott?
    Mr. Scott. Thank you very much, Mr. Chairman.
    First of all, I would like to get some basic 
differentiation between the mortgage bankers and the mortgage 
brokers. For example, can any of you tell me what percentage of 
subprime loans are handled by the mortgage brokers as compared 
to the mortgage bankers? Does anybody have any idea on that?
    Mr. Falk. Mr. Scott, I do not have exact statistics for 
you, but clearly mortgage brokers do participate in the non-
prime marketplace to a higher percentage than would mortgage 
brokers be involved in the prime marketplace.
    Mr. Scott. Okay. How are the mortgage brokers and the 
mortgage bankers regulated differently under current law?
    Ms. Bryce. I think with respect to the mortgage bankers, 
the mortgage bankers today either are federally regulated as 
being part of Federal institutions or in States, they are 
regulated by the State banking or mortgage banking area of the 
State. Currently, 49 States do have mortgage banking 
regulations or some type of licensing requirement, as well as 
the District of Columbia. There are typically extensive 
auditing requirements.
    If I might add, I think one of the main differences between 
mortgage brokers and bankers is that the whole mortgage broker 
industry started as a result of mortgage bankers essentially 
telling consumers that they would shop for the consumer among 
mortgage bankers. So there was a different proposition. There 
is a lot of focus on the filling out of the 1003, but in fact 
it is the sale of the loan and the services up front that I 
think is the fundamental difference, in addition to the fact 
that whatever loan is originated, the banker ultimately has 
associated risks with.
    So I think there are some fundamental differences on both 
the front end and back end.
    Mr. Scott. It is safe to say also that most of the 
complaints coming in are complaints concerning mortgage 
brokers. Concerns have been raised by consumer advocates that 
brokers, as opposed to bankers, tend to focus more on the 
short-term profitability of the loan origination, rather than 
the longer-term viability of the loan, and that the 
compensation system for mortgage brokers inevitably results in 
higher costs for borrowers than with the bankers; that brokers 
also use push tactics that, particularly with subprime 
refinance loans, are sold to, rather than sought by, lower-
income and elderly homeowners; and that brokers use the yield 
spread premium perhaps in an abusive way.
    So we would safely say, then, that there is a need to take 
a much closer look certainly here, from the standpoint of the 
consumers, with the brokers.
    Now, when we come down to licensing, Mr. Hedges, I believe 
you represent the group that basically represents the interests 
of lower-and moderate-income individuals. Is that correct?
    Mr. Hedges. Yes, sir.
    Mr. Scott. You have some concerns about this licensing 
provision in our bill. Given the fact that the consumer 
complaints are coming about the borrowers, then this approach 
to get a national licensing procedure is sort of a response to 
this problem, and that there are different laws in different 
States. There is a patchwork of different laws, and some States 
do not have any.
    Is your concern with the bill that you are against a 
national standard for licensing? Or are you concerned that your 
State particularly has some, that this threatens your State? 
Can you explain your situation?
    Mr. Hedges. Yes, sir. In licensing itself, we have good 
standards as to bonding and to individual broker 
creditworthiness. Those weed out a lot of bad apples. If the 
uniform requirements replace the licensing provisions that we 
have, those requirements could be gone and open a door to a lot 
more people that should not be in the industry.
    Secondly, the broad exemptions that are in the exemption 
provisions would exempt from coverage of the licensing 
provisions most current brokers because any broker, and we have 
some brokers that do that now, who table-fund the loans, that 
is put the closing documents in their name, receive the check 
from the real lender, put the closing documents in their name, 
and then immediately assign them. So it is really not their 
credit risk, but to the extent that they do that, they are 
exempt from this bill.
    Now, that exemption means, together with the uniform 
licensing requirements, that in our State since these brokers 
are exempt, that would exempt them from the substantive 
revisions of the same licensing law, then it could do those two 
things, not only not weed out the bad apples, which we do with 
bonding and individual creditworthiness, but also it could 
exempt them from the substantive provisions.
    Chairman Ney. The time has expired.
    Mr. Miller?
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Mr. Falk, how are you this morning?
    Mr. Falk. Thank you. Well, sir.
    Mr. Miller of North Carolina. In May, I believe Mr. Nabors 
from your association testified before the committee.
    Mr. Falk. Yes, sir.
    Mr. Miller of North Carolina. I was curious. I wanted to go 
over some of the points of his testimony and see if you agree 
with what he said then.
    I asked him about anti-steering provisions of the Ney-
Kanjorski bill and in the Miller-Watt bill and in the North 
Carolina law that said that any mortgage broker had to make 
reasonable efforts with lenders to secure a loan that is 
reasonably advantageous to the borrower.
    I asked Mr. Nabors, do you think that should be your duty, 
that you should be under a duty to use reasonable efforts to 
get a borrower the best loan. Mr. Nabors said, ``I believe that 
mortgage brokers do use reasonable efforts to get their 
customers the best loan they can.'' I asked, okay, and do you 
think that should be a legal requirements? Mr. Nabors said, ``I 
think, yes, it should.''
    Do you also think that it should be a legal requirement 
that mortgage brokers use reasonable efforts to get their 
customers the best loan they can?
    Mr. Falk. Well, of course you have put me in a position to 
disagree with my president, and I would at this point want to 
comment personally, as opposed to on behalf of the association, 
because I would not want to disagree on the record with my 
president.
    I believe that the current laws are sufficient. There is no 
need for additional anti-steering or other requirements to be 
placed in any kind of Federal legislation.
    Mr. Miller of North Carolina. Even including the anti-
steering provisions of Ney-Kanjorski?
    Mr. Falk. The current act I believe has some good wording, 
but it needs to be worked on.
    Mr. Miller of North Carolina. When you say the ``current 
act,'' do you mean Ney-Kanjorski?
    Mr. Falk. The current existing law. Existing wording in the 
proposed act, we would need to look at that more closely and 
make sure that it would be candidly appropriate. We think that 
because mortgage brokers over the past 20 years have been able 
to generate from 20 percent up to now almost 70 percent of the 
marketplace, the marketplace is working and that pricing, 
generally speaking, and competition is doing most of the work 
for us.
    Mr. Miller of North Carolina. Well, that does not really 
address the question I asked.
    Moving on to Mr. Nabors' other testimony, in response to a 
question from someone else about another topic, I think a 
question from the other side of the aisle, there was a question 
to Mr. Nabors about whether a disclosure should be required on 
certain points. Mr. Nabors said that consumers, borrowers were 
already signing 10 or 15 pieces of paper at a closing that they 
were not reading and he did not see the value of any additional 
disclosure.
    Do you agree with that?
    Mr. Falk. I will support my president, yes, sir.
    Mr. Miller of North Carolina. Okay. If any law we pass can 
be waived by the consumer by signing a written waiver, why 
would the same not be true there, that they are not reading 
that either, if they are not already getting 10 or 15 pieces of 
paper to sign that they are not reading?
    Mr. Falk. From a personal perspective, I disagree with 
waivers, whether they be under Truth in Lending waivers on 
rescissions, or anything else. I think waivers are very 
dangerous for consumers and I would not want to see, 
personally, waiver provisions enhanced.
    Mr. Miller of North Carolina. So the Ney-Kanjorski bill 
does have an anti-steering provision applying to mortgage 
brokers, but provides that it can be waived. You actually 
disagree with both provisions, that there should not be an 
anti-steering provision and there should not be a waiver 
provision? That just should not be in there at all?
    Mr. Falk. At the end of the day, it should apply to all 
creditors, and not single out one distribution channel. There 
should be no channel bias. So whatever applies to mortgage 
brokers should in fact apply to mortgage lenders and creditors 
alike.
    Mr. Miller of North Carolina. Okay. Again, should anyone, 
then, should a mortgage broker be required to use their best 
efforts on behalf of the borrower to try to get the borrower 
the best loan? Should that be a legal requirement?
    Mr. Falk. Respectfully, I think that additional language in 
that area is not necessary.
    Mr. Miller of North Carolina. Okay. One particular exchange 
with Mr. Nabors, I asked specifically about yield spread 
premiums and referred to a rate sheet that appeared to have 
yield spread premiums that go up if the borrower agrees to a 
higher rate of interest than what they qualified for based upon 
their credit score and their loan-to-value.
    I said, if you have a customer who could have gotten a 7 
percent loan on the very same terms, and instead gets a 9 
percent loan, but the broker gets a 1 percent additional yield 
spread premium in addition to whatever up-front commission they 
would have, does that strike you as something the law would 
allow. Mr. Nabors said, ``If that is part of the agreement 
between you as a customer and me as part of my total 
compensation that has been disclosed to you, it would be 
okay.''
    That does not bother you, having a borrower pay more or 
having, rather, the lender pay the broker more if the borrower 
signs a loan with a higher interest rate than what they 
qualified for, or should have qualified for?
    Chairman Ney. The time has expired, but if you would like 
to quickly answer the question.
    Mr. Falk. Thank you, Mr. Chairman.
    I support my president's position, but I will go one 
further. All origination channels earn back-end fees, power-
plus pricing, servicing release premiums or yield spread 
premiums as it relates to mortgage brokers. So the very 
concerns that you have as it relates to mortgage brokers can be 
said for mortgage lenders, mortgage creditors, mortgage 
bankers, and mortgage originators that are with the 
depositories. It is the same issue, sir.
    Mr. Miller of North Carolina. Mr. Chairman, that did not 
really respond to my question.
    Chairman Ney. The problem I have is that we have Mr. 
Miller, but also the gentlelady from Ohio has been yielded time 
ahead of the other members so she can get her question in.
    Mr. Miller?
    Mr. Miller of California. Thank you, Mr. Chairman.
    Mr. Smith, can you offer a brief summary of what States are 
doing to regulate the mortgage banking industry versus mortgage 
brokers?
    Mr. Smith. Yes, and it does vary from State to State. In my 
written testimony, we say North Carolina itself does regulate 
mortgage bankers in roughly the same way it regulates mortgage 
brokers. It varies from State to State beyond that. I think the 
testimony of most people is that there is registration or 
licensing of mortgage bankers. I believe the MBA testimony is 
that there is registration and licensing in most States in the 
United States now, at the firm level, not at the individual 
level. In North Carolina, we also license individual loan 
officers.
    I hope that is responsive.
    Mr. Miller of California. Can you say that mortgage 
originators other than brokers are adequately regulated on a 
broad base?
    Mr. Smith. I do not believe so, no.
    Mr. Miller of California. If we have a minimum standard for 
everyone, would not that assure that consumers are protected 
across the board, rather than pick up different ones?
    Mr. Smith. Yes, that would be very helpful. Yes, it would.
    Mr. Miller of California. How would you go about that?
    Mr. Smith. I can only tell you what we have done, which is 
to have a requirement for training. For a license for an 
individual in North Carolina, for those entities, either 
brokers or lenders, a person has to take training, less by the 
way than the bill requires. That was interesting to me, 8 
hours, and pass an examination has to go through a criminal 
background check, and we also do a financial background check 
on each of them.
    Mr. Miller of California. When you look at mortgage bankers 
and mortgage brokers, they are both doing significant work, 
they are both adequately meeting the demands, I think, that 
need to be met out there.
    But how do we come up with something that applies in a more 
reasonable fashion, let us say, than singling one out over 
another to regulate considering one should do this and one 
should do that? Some can say, well, it is the mortgage brokers 
because they are the first point of contact. Others say, well, 
it is mortgage bankers who are making the loans.
    They are both good guys, as far as I am concerned. There 
are some bad apples out there we are trying to weed out, but 
how do we approach this from a fair approach, basically?
    Mr. Smith. Let me try to answer that as best I can.
    I think at the firm level, I actually do not know that 
there is much disagreement at this table; I could be wrong 
about this, about firms, companies, or individuals that operate 
either a brokerage or a lending business. That is pretty common 
in most States now.
    The issue has been the licensure of individuals. The 
question really is, is it reasonable or necessary to have 
individuals themselves carry a personal license, more or less 
like they do in the securities business. Even though they have 
to be attached to a broker-dealer, you still are licensed as a 
securities sales person yourself, as I think has been mentioned 
previously.
    So I do not know if it is reasonable or unreasonable, but I 
think it's effective to require individual licensure of some 
kind for loan originators because they do not stay employed at 
the same place very long. A good producer goes from one 
employer to another to another.
    Mr. Miller of California. That offer the best deals.
    Mr. Smith. Absolutely. There is nothing wrong with that 
all, quite the opposite. I think that is the argument, sir, for 
originator licensing it allows the free agent market to work, 
for someone to carry business with him or her to various 
employers. In fact, in North Carolina we just revised our law 
to make it easier, frankly, for people to go between firms. Our 
view is like yours, I believe, that competition is good and 
people should be able to move.
    Mr. Miller of California. For the rest of you, do you want 
to comment on the minimum standard for everybody? Yes, please, 
Mr. Falk?
    Mr. Falk. Mr. Miller, we believe that everyone should have 
an individual license because if you are caught doing something 
bad, you should as an individual have something to lose. So if 
you are an originator and you originate predatory loans or are 
convicted or some kind of financial fraud, we want that 
individual weeded out of the industry, not have him go from 
company to company, entity to entity, potentially working as an 
account representative for a large lender.
    We believe that anyone who is involved with the consumer 
should have education standards and a criminal background check 
so that if there is bad behavior, we can find them and rout 
them out of our industry. That only happens with an individual 
license.
    Thank you.
    Mr. Miller of California. Anybody else? Yes?
    Mr. Hedges. I agree with his assessment of that. Consumers 
agree that individual licensing is very important and 
individual responsibility. You need bonding and individual 
creditworthiness to go with that. His earlier suggestions for 
additional requirements to strengthen the licensing also appear 
very constructive.
    Mr. Miller of California. So a minimum standard for 
everybody is what you think is a good approach, too.
    Yes, ma'am?
    Ms. Bryce. On the mortgage banking side, we have seen a 
number of States over the last few years require individual 
licensing. One of the big concerns is there has been no 
reciprocity. So for those of us who operate call centers 
nationally, we have to have people individually licensed in 
duplicate States with duplicate fingerprinting requirements and 
duplicate educational requirements and duplicate testing.
    Chairman Ney. The time has expired.
    Mr. Miller of California. Can the last individual respond?
    Chairman Ney. If we can hold to the time, then we can come 
back.
    Mr. Miller of California. Okay. I will move down a chair 
and take 5 more minutes in a minute.
    Chairman Ney. The gentlelady from Ohio?
    Mrs. Jones of Ohio. Mr. Chairman, Madam Ranking Member, 
thank you for your indulgence, and my colleagues as well for 
allowing me to move forward. I am no longer on the committee, 
but the issue is very important to me.
    My staffer in the back pointed out to me that Ohio has the 
second highest foreclosure rate in the Nation, with 2,482 new 
filings this year. This figure has more than doubled in the 
past year.
    I want to take a moment and not necessarily focus on my 
legislation, but to raise this question. We are trying to split 
hairs here in this room, saying, well we are not a broker, we 
are a banker; we are not a banker, we are a broker. But the 
people out there who are accessing mortgages do not know the 
difference. In fact, part of the problem is they think the 
broker is acting on their behalf and not realizing that the 
broker is acting on his or her own behalf, and there is not an 
agent on behalf of the person purchasing property.
    That is, quite frankly, part of the dilemma we face, 
particularly when we start talking about, and this is nothing 
against traditional banks because I bank with a traditional 
bank, but the reality is the brokers and the predatory lenders, 
and I do not put them in the same box, have made it much more 
convenient for a person who wants to purchase a home to be able 
to get a home. Oh, you cannot come at 9 o'clock in the morning, 
9 o'clock at night; I will be at your home. If you do not have 
a witness, I will bring a witness with me. If you don't have 
this, I will take care of that. And that has made it much 
easier for people who traditionally have not had access to 
financial services to get them.
    So what my question to each of you is--not to each of you. 
I am going to ask one because I do not have but 5 minutes. Let 
me ask Mr. Rodriguez, do you agree basically with what I have 
just said, Mr. Rodriguez? What do you think we ought to do, in 
1 minute?
    Mr. Rodriguez. Thank you.
    In 1 minute, I think that is absolutely right that in 
communities that is their experience. There is a lack of 
information certainly within minority communities, lack of 
experience with products. So a lot needs to take place there 
with respect to education, but there also has to be a vehicle 
for enforcement that goes way beyond what has been proposed 
here and is included certainly in our recommendations.
    At base, the question is, can we go back to communities who 
have had some of these experiences and be able to say, well, 
the answer is a national registry. I think the answer is no. 
There has to be much more. It has to be much more 
comprehensive. There has to be much more enforcement and 
accountability included in this measure for us to be able to go 
back into our communities and tell them we have done something 
about these issues and problems.
    Mrs. Jones of Ohio. It has gotten so bad in Cleveland that 
Fannie Mae, in conjunction with the housing advocates in 
Cleveland and five banking institutions, has created a fund of 
$5 million in order to help people who have been in predatory 
lending situation to come out of it. It is like why don't we 
regulate so that we do not have to spend money to bring people 
out of a predatory lending situation.
    Let me go to you, Ms. Bryce. You were the one who tried to 
distinguish between a banker and a broker. What makes a banker 
better than a broker?
    Ms. Bryce. I think the major distinction is the fact that--
--
    Mrs. Jones of Ohio. No, not the major distinction. What 
makes a banker better than a broker, if there is such a thing.
    Ms. Bryce. The banker is providing the actual funds. There 
was a comment earlier about the whole issue of table-funding. 
The banker who is providing the funds has risks for that loan, 
has interest-rate risk, has compliance risk, has repurchase 
risk.
    Mrs. Jones of Ohio. Does a broker act as your agent?
    Ms. Bryce. I would say not as our agent, no, as an 
independent contractor. There are times when brokers----
    Mrs. Jones of Ohio. Let's go legally.
    Ms. Bryce. I am.
    Mrs. Jones of Ohio. No, no, no. Let's go legally. If in 
fact they secure a loan on your behalf, they are acting as your 
agent.
    Ms. Bryce. I would disagree with that characterization. I 
would say there is an independent contractor. They do business 
with a number of different bankers.
    Mrs. Jones of Ohio. Including you.
    Ms. Bryce. I do not do business with them.
    Mrs. Jones of Ohio. Not you personally, but your 
institution.
    Ms. Bryce. The industry, yes.
    Mrs. Jones of Ohio. So the point is that if you are 
regulated, then your broker who acts on your behalf or as your 
agent ought to be regulated as well.
    Ms. Bryce. I think there is still a disagreement in that 
regard. I would say they are an independent contractor who has 
the right to present a loan.
    Mrs. Jones of Ohio. And if they bring it to you and it is 
good enough for you, you are going to take it, right? So you 
are going to get a benefit from him brokering on your behalf.
    Ms. Bryce. That is correct.
    Mrs. Jones of Ohio. I am done. I am out of time. I thank 
you very much.
    Mr. Miller of California. [Presiding.] I am an older Ney.
    Mrs. Jones of Ohio. Okay, older Ney. Thank you.
    Mr. Miller of California. I would like to continue. Since I 
get the chair, I get another opportunity at this apple, so this 
is good.
    I have been in the development industry for about 35 years. 
It is interesting. Last time we discussed the concept of the 
need of a mortgage broker, bankers are right there saying yes 
absolutely, they work hand-in-hand with us. If they are not 
doing their job, we have to hire somebody and turn to them to 
do that job to meet the need. So I look at both of you as good 
people.
    A lot of times, builders will go out there and they want to 
build a project, and they will go to a mortgage broker. They 
will say, this is the project. The mortgage broker puts the 
information together, then will go out with lenders and shop 
the package to lenders and see who wants the package and who 
wants to give the best terms, offer the best type of conditions 
or whatever, rates, because they want to lend on that project.
    But once that has occurred, then there is a relationship 
between the property owner and the mortgage banker, but they 
are separate, and the same thing with the mortgage broker and 
the mortgage banker. Yes, they are both providing a service, 
but they are separate.
    I know, Mr. Hailer, you were wanting to respond to my 
question last time when we talked about standards for everyone, 
some reasonableness in the industry. Would you like to comment?
    Mr. Hailer. A very brief comment, Congressman. I feel that 
every loan that I make, my reputation is on the line both 
personally and as a bank, particularly because my particular 
bank has sold very few loans in its existence. We have sold a 
total of about $2 million in loans. That means when we generate 
a mortgage, we hold it and we keep it. As was said previously, 
we get the interest rate risk. We get everything that goes with 
it.
    We also provide one benefit for the customer, and that is 
if something goes wrong, whether it is an insurance payment, 
pro-rating of taxes, whatever the case may be, customers know 
where to find us. So consequently, my reputation, the 
reputation of my company is right there. That is not something 
I am willing to give up. I am fine with that.
    Mr. Miller of California. From a mortgage banker, do you 
think it is to the benefit of a mortgage broker to impugn their 
own integrity by doing something to misrepresent a package to 
you? How often are you going to deal with that person in the 
future?
    Mr. Hailer. Are you asking me?
    Mr. Miller of California. Anybody who wants to answer it. 
There is a close relationship, I think, between both of your 
organizations. I think if one does anything that is less than 
honorable and above-board, there is a direct impact on that 
individual or the business for doing that in the future. I 
would like your response on that because I do not think that 
has been addressed. People assume that you can get away with 
scurrilous acts or deeds and you can misrepresent a package or 
a portfolio and everybody is going to say, oh, okay, good, 
bring me another one. That is not how it works.
    Ms. Bryce. I think that certainly mortgage bankers that 
work with mortgage brokers look at the quality of what they are 
getting from those mortgage brokers just like they would look 
at their own portfolio of products.
    Mr. Miller of California. They are underwriters.
    Ms. Bryce. If there are issues with quality, if there are 
issues with compliance, then I think most mortgage bankers 
would either talk to that broker, and if it does not improve, 
cease doing business with them because ultimately the mortgage 
banker then has responsibility for all of those issues with the 
loans.
    I think that what a mortgage banker cannot necessarily tell 
are whether there are issues with how the loan was sold in the 
first place. We cannot know whether or not there was a better 
product at a different lender that that broker does business 
with. We can only know what was submitted to us and whether or 
not it is commensurate with our requirements.
    Mr. Miller of California. I know from the building 
industry, a builder is very much like a mortgage broker would 
be. You might get one loan, but if you prove to be bad, you 
will not get a second loan. We need to do everything we can to 
get the predators out of our industry, but I think you 
internally do a lot of that yourself. We have not acknowledged 
that. Yes, we need to go a step further to make sure the law is 
very clear about what a predator is, what a subprime lender is, 
what a position of a broker is, what a position of a mortgage 
banker might be.
    But the industry does a pretty good job when they can of 
trying to ferret out the bad players out there. I just do not 
want the perception to be created by this hearing that you can 
do something that is wrong, you can do something to impact some 
individual out there who is just trying to get a loan for their 
house, and put a package together, misrepresent it, and get a 
bad loan for him, and that is going to be acceptable in the 
future. I do not believe that is the situation, unless one of 
you would like to say that that might be.
    Mr. Falk. Mr. Miller, we agree with you. As mortgage 
brokers, we came up in 2002 with our model State statute 
initiative. Our chapters around the country have been pushing 
State regulations all across this country, to license all 
originators, to require background checks, to require licensing 
and education. So we have been, with some of our partners, our 
mortgage banker partners, our American Banker partners as you 
say, we are all in this together.
    Mr. Miller of California. I love it.
    Mr. Falk. And so in essence, all of our reputations are 
personally and professionally on the line when a bad loan is 
made. But let's not kid ourselves, it starts when an originator 
sits with a consumer. Those are the people we want to license, 
regulate and keep bad actors out, who are sitting at the table 
with the consumer, talking to the consumer and getting their 
personal information. That is why we say that all originators 
should be licensed and regulated.
    Mr. Miller of California. Thank you for your input.
    Ms. Waters?
    Ms. Waters. Thank you very much.
    I would like to thank Chairman Ney for holding this 
hearing. This particular subject matter has been of interest to 
me for a long time. Let me just say that I recognize that 
mortgage brokers and bankers have made products available in 
areas where many of the majors have not been. Because of that, 
people have been able to purchase homes.
    On the one hand, you can appreciate that. But on the other 
hand, you guys also know that there are some bad actors in your 
industry and that they have created a bad reputation for you. 
It is a combination of high fees, high interest rates, loan 
flipping, you name it. I am concerned that you have not done 
enough to get rid of the bad actors who are giving you a bad 
name.
    I am not so sure that preempting State law is the way to go 
about it. I oftentimes agree with my chairman, even though we 
are from different sides of the aisle, but on this one, I am 
not so sure. Mr. Kanjorski, Mr. Ney believe that by having 
these uniform standards, this may help with what I am trying to 
describe to you, but I do not think so.
    I do think that within the industry you should be more 
aggressive, even if you do not get State laws to do all of what 
you want to do. You guys should rein these people in. You 
should let them know that you are going to help put them out of 
business if in fact they are guilty of many of these practices 
that cause us to have all of these defaults on these loans.
    I am going to mention the name of a mortgage broker in 
South-Central Los Angeles, about a block from my house, Central 
Lending Real Estate. Write that down, Central Lending Real 
Estate on Vermont Avenue. What happens is when people lose 
their homes or when they feel that they are not being fairly 
treated, it ends up in our office. It ends up in our office, 
first, to do something. I have done everything from call 
mortgage brokers, visited them, to literally just having a 
fight with them about some of the practices.
    This one, I went to Central Lending Real Estate. They keep 
the doors locked for the most part because I think they have so 
many people who want to shoot them that they are afraid to let 
anybody in. They have messed over so many people. Of course, 
they did not want to let me in. I just stayed until they did. 
The principal at Central Lending Real Estate went into his 
office, closed his door, locked his door, and he sent some of 
the salesmen out to try and talk with me about this terrible, 
terrible case that I was involved in.
    I have had a lot of complaints about Central Lending Real 
Estate. This is the first opportunity I have had publicly to 
talk about how bad they are and some of the things they are 
doing, but it is a lot of them. Every month or so when I am in 
my district in various areas of my district, I have people 
coming up to me handing me the cards, another new mortgage 
broker, somebody has hung out their shingle on a sign, another 
little storefront business. They are just proliferating all 
over the place. Many of them I do not think are competent to be 
doing this work.
    Now, I do not think that this preemption is going to work 
because there are some States that are better than others in 
the way that they license or the way that they regulate. So my 
question is, what can you do to self-police the industry, to 
identify the bad actors, and to reduce the amount of the yield 
or whatever it is, the yield spread premiums that you collect?
    It is one thing to get a .5 percentage point or so higher 
on a loan because, you know, whatever the reason is, but when 
you start jumping 2 and 3 and 4 percentage points higher, that 
is just worse than predatory. What can you do? Mr. Falk?
    Mr. Falk. Ms. Waters, thank you.
    I would share great concern with you about this Central 
Lending Real Estate. I do not know if they are a broker or a 
lender or a banker or a real estate agent, and their licensing 
under California law. I know there are a number of different 
licenses available under California law. It is regrettable that 
a bad situation clearly appears to have taken place. I do not 
know the specifics.
    We agree with you when it comes to the exemptions under the 
current language under Title V. We believe that all of the 
exemptions under the licensing area should be dropped. The only 
exemption that should remain from the minimum standards should 
be for depository institutions and for employees of depository 
institutions. So any of the other exemptions, we believe are 
inappropriate. We believe that the education requirements and 
criminal background check requirements should be broader.
    The other thing I would comment on is pre-licensure 
education. We agree with you, candidly, that a lot of folks go 
into the mortgage business without any training, without any 
understanding of what is going on in the industry, how to fill 
out forms, how to treat people properly. So we believe that a 
rigorous education requirement should be installed. You should 
not be able to go from different troubled industries into our 
industry, and then jump out again as soon as you are caught.
    Mr. Miller of California. You need to wrap up. The time has 
expired.
    Mr. Falk. Thank you.
    Mr. Miller of California. Mr. Green, you are recognized for 
5 minutes.
    Mr. Green. Thank you, Mr. Chairman. Thank you for hosting 
these hearings. I would like to thank the ranking member as 
well.
    I thank each of you for being here today. You have been 
most enlightening, and I appreciate it greatly.
    The Federal Reserve has released its HMDA data, and that 
data has revealed that even after adjusting for such factors as 
income level, all persons making pretty much the same income, 
loan size, same person acquiring a loan about the same size, 
property location, acquiring a loan in the same neighborhood, 
Federal Reserve has found that African-American and Hispanic 
borrowers are more likely than white borrowers to be given a 
high-cost loan.
    A simple question: I assume that we all agree that this is 
invidious, that it is not the kind of thing that we would want 
to have happen, if all of these factors are the same. We would 
not want people singled out because of their ethnicity or 
because of their race. Now, if I am wrong, maybe I should have 
someone let me know it. Am I wrong? Is there someone who 
differs with me on that?
    Ms. Bryce. I do not differ with you that there should not 
be discrimination in the mortgage market, but I would add that 
the other thing that the Federal Reserve and Chairman Greenspan 
said was that there are a number of factors that are not part 
of the HMDA data, and that they believe that when they include 
those that it would explain some of the differences. Some of 
those differences are credit scores, debt-to-income, loan-to-
value and other issues that impact the pricing of a loan.
    Mr. Green. Well, let me ask you another way, then. Do you 
agree that discrimination exists in this marketplace? Is there 
anybody who thinks that it does not? Okay, we all agree.
    Given that we all agree that it exists, how do you propose 
we deal with it and end it? Because every study, not just this 
one, but every single study gives us the same results and every 
single time we have reasons that we can explain why, if we made 
just a little adjustment here or a little adjustment there, it 
would cause the study to look a little bit better. But no one 
differs; no one says that the discrimination does not exist.
    So now, given that the discrimination exists, and given 
that we have a system that allows people to get paid more for 
steering people to higher-cost loans when they qualify for a 
lower-cost loan, how do we end the discrimination is my 
question.
    Mr. Rodriguez, if you could give me a brief answer?
    Mr. Rodriguez. Sure. I will try to be brief. It is a big 
question.
    I think there are a number of things. We certainly feel 
pretty strongly that much more enforcement of anti-
discrimination laws are needed in that context. And certainly, 
we have to consider that the common response to these issues is 
credit scores. What we seem to overlook pretty consistently is 
that there are a lot of issues with respect to reporting of 
minority credit histories with credit bureaus and credit 
agencies, that has not gotten enough focus and attention over 
time.
    With respect to Latinos and immigrants in particular, for 
example, the issue is not bad credit, but no credit or very 
thin credit files. That in many processing centers 
instantaneously points them in the direction of a high-cost 
loan. It has nothing to do with their credit risk or their risk 
of repayment. So there are structural issues in the credit 
reporting system in addition to the discrimination issues that 
you raise that are steering families and minority families 
toward high-cost loans.
    A big part of the solution also has to be housing 
counseling and homeownership counseling at the local level, 
getting more folks in there talking to Latinos and minorities 
about home-buying and the home-buying experience and bridging 
the gap and helping them navigate through the system to get the 
best and most affordable loans.
    Mr. Green. Let me ask this question, if I may, because my 
time will expire soon. Do you think we ought to fire people who 
discriminate? Mr. Rodriguez?
    Mr. Rodriguez. Yes.
    Mr. Green. Does anybody differ? Could we just fire them?
    Mr. Miller of California. The gentleman's time has expired.
    Mr. Green. Okay. Thank you, Mr. Chairman.
    Mr. Miller of California. A quick question to Mr. Smith. 
The North Carolina Commission of Banks, are they discriminating 
intentionally? Yes or no.
    Mr. Smith. There may be discrimination. It is hard to 
ferret out.
    Mr. Miller of California. Do you try to ferret it out?
    Mr. Smith. Yes, we do.
    Mr. Miller of California. Okay.
    Ms. Bryce, Nexstar Financial Corporation, are you 
intentionally discriminating out there?
    Ms. Bryce. I am sorry. Could you repeat the question?
    Mr. Miller of California. Are you intentionally 
discriminating out there?
    Ms. Bryce. Absolutely not.
    Mr. Miller of California. I have the opinion based on what 
everyone was saying there, everybody was allowing willful 
discrimination to go forward, and that was bothersome to me. If 
that is the case, that is scary.
    Ms. Bryce. I believe that the industry is very intent on 
fair lending and trying to be fair in that regard. The question 
was, is there no discrimination, and I could not say that there 
is never any. But I think that the industry is very focused on 
fair lending and being fair in the issuance of credit.
    Mr. Miller of California. I have had meetings with Bank of 
America, Wells Fargo, and they go out of their way to make sure 
there is no redlining because there is a tremendous consequence 
for that to take place. That is just scary to think that this 
would not be proactive.
    Ms. Waters. Will the gentleman yield?
    Mr. Miller of California. I am going to have to go to Mr. 
Cleaver, and then we will try to come back.
    Mr. Cleaver?
    Mr. Cleaver. I will yield to the ranking member.
    Ms. Waters. Thank you very much.
    I just want to set the record straight. My acting chairman 
here talked about how Bank of America and all of the banks go 
out of their way to make sure there is no redlining. Because 
that is on the record, let me just put my statement on the 
record.
    Predatory lending is rampant, both with the major banks and 
the mortgage bankers and with mortgage brokers. It is a problem 
in America. The HMDA data is not bad data, even though, I guess 
it was Ms. Bryce who had to talk about what was not considered. 
So let us not leave here thinking that everybody is working so 
hard and there is no discrimination. It is and it is a big 
problem that must be dealt with.
    Thank you. I yield back.
    Mr. Cleaver. Thank you, Mr. Chairman and ranking member.
    I was going in a completely different direction, but my 
colleague and your response has generated some continued 
interest in this area. Do any of you know of anyone who has 
been fired in any institution for discrimination?
    Mr. Hailer. May I answer that?
    Mr. Cleaver. Yes, sir.
    Mr. Hailer. Congressman, I am not aware of anybody 
personally. I have no personal knowledge, but I do know 
approximately 120 to 125 CEOs in Ohio in banks, and I know of 
none of them who would ever sanction that practice.
    Again coming back to your question, Mr. Green, I am a 
little intimidated by the circumstances. This is my first time 
testifying, so I apologize.
    Your question was, is there no discrimination. I cannot 
identify whether there is any or not, except for the fact that 
I look at HMDA as a banker and I like HMDA, believe it or not. 
I like HMDA because I think it is a useful tool, just like 
interest rate risk reports are a useful tool, but I do not 
think it is absolute. I think there are some flaws with HMDA, 
and the question is how do we get to more data and those types 
of things without violating privacy and so on and so forth.
    The bottom line is there are reasonable explanations as to 
why the data is the way that it is and how it comes out. But I 
know this; I personally would never stand for any kind of 
discriminatory lending practices in my bank and I believe that 
I am representative of the banking industry and particularly of 
the bankers that I know in Ohio. It is offensive to me.
    As far as predatory lending, it absolutely goes on in the 
marketplace and that is one of the reasons why we are in favor 
of Title V is to go ahead and have a baseline.
    Mr. Cleaver. I yield to my colleague.
    Mr. Green. Would you yield just 1 minute, please?
    Friends, we live in a world where it is not enough for 
things to be right. They must also look right. It does not look 
right for us to consistently have data to indicate that 
minorities are discriminated when it comes to lending 
practices. It may be right, but it does not look right.
    I yield back.
    Mr. Cleaver. The issue is if you do not know of any CEO of 
any bank who tolerates discrimination, and you do not know of 
anyone who has ever been fired for discrimination, that pretty 
much provides empirical evidence, doesn't it, that nobody 
discriminates.
    Mr. Smith. May I respond to your question?
    Mr. Cleaver. This is a great country. God bless everybody. 
Let's eat some apples.
    Go ahead. I am sorry.
    Mr. Smith. May I respond?
    Mr. Cleaver. Yes.
    Mr. Smith. What we have done a lot of recently, and again 
discrimination is one thing. What we have done a lot of is take 
a lot of enforcement actions, not only in North Carolina, but 
around the country, to deal with people who are engaging in 
fraud and in flipping and a whole lot of other bad conduct, 
many in predominantly minority neighborhoods.
    I do not know, again, whether the HMDA data was statistical 
data that deals with disparate impact of loan policies, but to 
say we are not doing it and people do not get fired, people are 
getting put in jail. They are getting unlicensed. We are doing 
a lot of things to protect particularly vulnerable people in 
our State. I mean, the whole thrust of State legislation with 
regard to predatory lending in North Carolina and licensure has 
been focused on the subprime market fundamentally, which in 
many cases regrettably is a predominantly minority market.
    So to say we have done nothing about this problem I think 
is incorrect, or to say no one has ever been fired. People are 
getting put in jail.
    Mr. Cleaver. I do not think anybody said that nothing has 
been done.
    Let me change the line of thinking. I was concerned that 
our country unfortunately has reached a point where we deny 
almost anything that relates to discrimination. Maybe we just 
cannot handle it.
    Who regulates the appraisal industry?
    Mr. Smith. It depends. It is generally done at the State 
level and it varies from State to state. In North Carolina, for 
example, it is a subset of the real eState board, but it may 
vary.
    Mr. Cleaver. I have no more questions, Mr. Chairman.
    Mr. Miller of California. Thank you.
    I have heard a lot of good arguments here that justify 
Chairman Ney's Responsible Lending Act that we are going to 
enact. We need to clearly define what ``predatory'' is and 
clearly understand that subprime is extremely beneficial, but 
there has to be an absolute line drawn between ``predatory'' 
and ``subprime.'' That is what we are going to try to do from a 
Federal perspective so there are not individual laws enacted in 
L.A. and San Francisco and San Diego.
    Mr. Davis, you are recognized for 5 minutes.
    Mr. Davis of Alabama. Thank you, Mr. Chairman.
    Mr. Cleaver, I did not mean by my comment that is the light 
working or that you stop asking questions. I apologize for 
that.
    Let me make an observation at the beginning before I turn 
to my questions. One of the things that I think may explain a 
little bit of a gulf in how we are looking at these issues has 
to do with our word choice. I think when Ms. Waters, Mr. Scott, 
and Mr. Miller, and Mr. Cleaver, and Mr. Green, and myself use 
the word ``discrimination,'' your response to it, or I should 
say more accurately the industry's response to it, is, well, 
you know, we do not think there is discrimination out there 
because we do not think there are people who are sitting there 
saying, gee, I see a black person or a brown person in front of 
me and I do not like them and I do not want to deal with them.
    I would agree with you that that kind of overt 
discrimination is probably a little bit less common today than 
it was 30 or 40 years ago, but I am not sure that is really the 
issue. I do no think the issue is whether or not people look at 
a black or brown or yellow person and say, ``Gee, I don't like 
you.'' The issue is whether when they encounter people who may 
be lower-middle income and who may be of a racial minority, 
that some trigger goes off that this is a less-informed person, 
that some trigger goes off that this may be someone I can take 
advantage of.
    I think those of us on this side of the aisle would be 
inclined to think that that, too, is discrimination. So I make 
that point and then turn to some questions.
    Mr. Miller asked you I think a very interesting line of 
questions about what the standard ought to be for mortgage 
brokers and whether or not the standard of providing favorable 
or the best favorable applicable loan to a consumer ought to be 
codified in some way.
    Let me give you two contrasts. I am a lawyer. A number of 
us on this side of the aisle, including Mr. Miller, are lawyers 
and people on the other side of the aisle are lawyers. We have 
in every State something called a canon of ethics. That canon 
of ethics has the force of law and if you violate it and the 
State bar believes you violated it, you have lost your right to 
practice law. So it has the effect of being a legal instrument 
of the State. A lot of us know doctors. In almost every State, 
there is a canon of ethics for doctors. Once again, if you 
violate it, you lose your license that in effect has the force 
of law.
    There is a requirement in the canon of ethics for doctors 
and lawyers that you have to provide the best service possible 
to the person you contract with, either your client or your 
patient. If you accept a case, you do not get to give them the 
Wal-Mart version or the Super Sam's version. You have to give 
them the best, strongest service that you can provide. The same 
for medicine. You do not get to say, I will give you my A game 
if you are on this list or my B game if you are on this list.
    Mr. Falk, is there any statutory provision or any written 
provision that you know of anywhere in the country that 
codifies that mortgage brokers provide the best reasonable 
service that is applicable to a given consumer? Give me a quick 
answer on that.
    Mr. Falk. I am not aware of any State regulation.
    Mr. Davis of Alabama. Are any of you aware of any written 
statutory instrument that is comparable to the State bar or 
State medical regulations I described? Are any of you aware of 
any?
    Mr. Hailer. The only thing I can offer is every regulation 
that banks are subject to encompasses that, but as far as you 
have described it, no, but I can tell you that it is all-
encompassing in every reg that we comply with.
    Mr. Davis of Alabama. All right. Mr. Rodriguez, let me 
perhaps turn to you to provide a quick answer. Why are mortgage 
brokers so different from doctors and lawyers in that doctors 
and lawyers have to live by these standards and mortgage 
brokers do not, in 30 seconds or less?
    Mr. Rodriguez. I do not know.
    Mr. Davis of Alabama. Do any of you know of any reason why 
mortgage brokers are that different from doctors or lawyers, 
when doctors or lawyers have to live by the standard and 
mortgage brokers do not? Can anybody articulate a difference? 
Yes, sir.
    Mr. Hedges. No, Mr. Davis. I would suggest that a 
substantive requirement on brokers, that each borrower get the 
best loan that their credit entitles them to would make a big 
difference in this problem.
    Mr. Davis of Alabama. I agree with you. Because of time, I 
will stop you with agreement and ask you one final question. 
There is another difference. In my State and I think every 
other State, bad actors who are lawyers and doctors are listed 
in a public filing. If a bar complaint is filed against you and 
resolved in an adverse manner to you, that is published. If a 
doctor is found to be negligent and a doctor is found by the 
medical association to be a non-performing or a bad actor 
doctor, that is published.
    Again, do any of you know of any provision at the State 
level where there is a list of bad actors who are mortgage 
brokers, mortgage brokers who have been caught engaging in 
fraudulent practices? Do any of you know of a database that 
collects and lists bad actors among mortgage brokers?
    Mr. Smith. My Web site. Visit it anytime.
    Mr. Davis of Alabama. All right. And your Web site is what?
    Mr. Smith. NCCOB.org.
    Mr. Davis of Alabama. Okay. And you represent?
    Mr. Smith. I am in the State of North Carolina. I have a 
list. I have published every single order I have issued.
    Mr. Davis of Alabama. Do you know of any States who do what 
North Carolina does?
    Mr. Smith. I do not.
    Mr. Davis of Alabama. Our State requires this information 
to be public. That is the question about what this bill does in 
making that database confidential.
    Mr. Smith. Excuse me, if I may say one other thing. In my 
testimony, which you were not here for, but you did not miss a 
lot, but one thing I did say was that the States are now 
working on a database to do exactly the thing you are talking 
about.
    Mr. Davis of Alabama. And the thing would be listing bad 
actor mortgage brokers?
    Mr. Smith. Yes, nationally.
    Mr. Davis of Alabama. Okay.
    Chairman Ney. [Presiding.] I have to note the time has 
expired and we still have Mr. Kanjorski.
    Mr. Kanjorski?
    Mr. Kanjorski. Listening to the discussion so far, it seems 
to me that we may be searching for the perfect and as a result 
miss achieving the good. In a perfect world, we would like 
every individual to pay the least on their loan or mortgage and 
get paid the highest amount on their savings account or CD.
    But, Mr. Hailer, I will start off with you. It is sometimes 
fun to pick on bankers. Do all banks pay everyone the same rate 
on CDs and savings accounts?
    Mr. Hailer. The answer to that is absolutely no.
    Mr. Kanjorski. That is right. It is a competitive world.
    Mr. Hailer. It is.
    Mr. Kanjorski. Let us reverse it to mortgages. Does 
everyone pay the same amount on every mortgage in the country 
or are there differences?
    Mr. Hailer. There are differences and then there are 
reasons why.
    Mr. Kanjorski. Right. Most often they are subjective 
reasons, really. We try and reduce them to a formula. But in 
reality, even if you look at a credit rating, it is a 
subjective evaluation based on some criteria.
    Mr. Hailer. It depends on what the range is and what the 
credit rating is based on, and how the credit rating is used.
    Mr. Kanjorski. As one of the co-authors of this 
legislation, I guess I want to clear up a few things. One, it 
is our hope, and I think I speak for Mr. Ney, that we have a 
national uniform system to drive down the cost of money instead 
of having to go through the 50 different entities and maybe 
hundreds of others as municipalities get into this ballgame, 
which they have. Overall on that basis, if you make money 
available, whether it is in the subprime market or in 
conventional financing, you are going to drive down the cost of 
money through efficiency. Would anyone at the table disagree 
with that?
    I have come to a conclusion, after listening to my 
colleague Mr. Davis talk about applying a legal standard, a 
fiduciary duty standard, or a professional standard like that 
of a lawyer or a doctor. This industry is a business. I think 
that we should recognize that it is not a profession. I do not 
see how it can be made absolutely uniform in terms of applying 
such a standard.
    If you ever go to the best deal standard for each mortgage 
transaction, I guess I will leave Congress, enter the bar 
again, and just become the greatest trial lawyer that has ever 
existed because there would be an unlimited number of cases. 
Every deal that does not match the lowest deal is not the best 
deal. That is ridiculous.
    What we are trying to do is get the overall national cost 
of money down for mortgages. We are trying to open up and 
protect people in some way and come up with a reasonable 
uniform standard.
    I am convinced that we do need a standard for brokers. I 
think it is essential that we know who the bad actors are. We 
know there are minimal capacities there. Then we have to rely 
in a way on what I always call the ``self-help'' in the 
industry.
    We expect bankers not to turn their eyes when dealing with 
a broker when they obviously see it is a bad deal. However, 
bankers can get away with it because they did not have any 
contact with the consumer, or they did not know what to do with 
it, or they may not have direct liability on it. I would love 
to find a mechanism to go with that.
    Yes?
    Mr. Hailer. Congressman Kanjorski, in Middlefield, Ohio, 
there is a mortgage broker who I heard from a friend of mine 
who is a CEO over there who has been preying upon the Amish 
community. There is a very large Amish community over there. 
How it came to be discovered was he was getting a lot of 
payoffs at his bank from long-time customers. He started 
investigating it. Then he started looking at some of the 
documents. In the documents he found excessive fees up front 
that were of course rolled into the document based upon the 
appraisal, so the people are not only getting whacked with the 
fees up front, they also get the benefit of having the costs of 
carrying those fees over a long period of time. So they are 
getting hit a couple of times.
    I am proud to say that my friend has brought this to his 
attorney's attention. His attorney is getting sued by the 
mortgage broker for bringing up the issue, but nonetheless much 
like in the case that you have given, Congresswoman Waters, the 
marketplace in that case has served as a regulator because the 
word has gotten around and the bishops within the Amish 
community have responded. Even in your own area, you will find 
this to be true.
    The bottom line is that they have closed ranks and have 
rooted that person out. So that is a good story of what is in 
place right now, particularly with regulations working.
    Mr. Kanjorski. Right. In the banking field, do we not have 
a certain type of loan called a ``character'' loan? If you are 
of bad character, you cannot get a loan at some banks.
    Mr. Hailer. If you are a bad character and we know, you 
cannot get a loan.
    Mr. Kanjorski. That is right. On the other hand, if you are 
of good character, sometimes you do not nearly need anywhere 
near the collateral that other people may need because of your 
character.
    Mr. Hailer. My favorite loan that I ever made was to a lady 
whose husband committed suicide. Her children were made fun of 
in school because of it, and she came to us for a loan. She did 
not have the credit score and she marginally had the income. I 
will not take anything in the way of gratuities or anything of 
that nature as a banker. She developed a career as a caterer 
and built a very successful career, and basically came back 
from the dead financially.
    We made her a home loan. The look on her face when she was 
approved for the mortgage stayed with me. She want to give me 
something. She wanted to do something, and I said I cannot take 
anything. So I went out to my car, which I leave unlocked, and 
there was this box of cakes and cookies. It is probably one of 
the most meaningful gifts I have ever gotten in my life. That 
is great stuff and it is very true. I do not think I am alone 
in that.
    Mr. Kanjorski. I have always applied what I call a 5-
percent bastard rule to analyze these issues; there are 3 
percent to 5 percent of people in our society--who no matter 
what laws, rules or what regulations we pass--are going to try 
and find a way to push the edge of the envelope and go over it. 
But 95 percent of almost any participant in any profession, any 
business, any commercial activity in this country, will try and 
do the right thing because they are after establishing good 
character.
    Now, all we are trying to do is find some mechanism to 
reduce that 5 percent, but not to the extent that it becomes 
suffocating on the industry. I heard some of the discussion 
here and I just want to point it out.
    Chairman Ney. I would note that there are 6 1/2 minutes 
left on the vote.
    Mr. Kanjorski. Is there anyone at this table that wants us 
to do nothing, just get out of this field and leave it as it 
is?
    Ms. Bryce. I think it is important for you to continue with 
this bill. We support the bill as it is structured generally. 
One of the concerns is that you are talking about the economic 
marketplace and the importance of preserving that. I think it 
is important to continue to have competition in various markets 
because that gives consumers more opportunity to shop and find 
a better deal.
    I also think that in terms of looking at the marketplace we 
have to protect the liquidity in the marketplace. One of the 
issues is assignee liability. We have seen situations where 
investors have said we are not going to buy these loans. We had 
a situation where a warehouse lender actually said we are not 
going to fund any more loans in the State of Massachusetts 
because we cannot tell which ones are high-cost loans or not, 
so we are not going to fund anything. We do not want to see 
that happen in the marketplace. We want to protect the 
liquidity so that there is an opportunity for competition.
    Mr. Kanjorski. Thank you very much.
    I know we are very close, and I yield back. Thank you, Mr. 
Chairman.
    Chairman Ney. Thank you.
    I want to thank the witnesses and the members today for an 
important hearing.
    I want to note that members may have additional questions 
for this panel and they may want to submit to the panel in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to the 
witnesses and to place their responses in the record.
    I want to thank the panel today. Thank you.
    [Whereupon, at 11:59 a.m., the subcommittee was adjourned.]


                            A P P E N D I X



                           September 29, 2005

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