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



 
                    LEGISLATIVE SOLUTIONS TO ABUSIVE

                       MORTGAGE LENDING PRACTICES

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

                             JOINT HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                              HOUSING AND
                         COMMUNITY OPPORTUNITY

                                AND THE

                            SUBCOMMITTEE ON
                         FINANCIAL INSTITUTIONS
                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 24, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-33



                                 _____

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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
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
GARY G. MILLER, California           STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
TOM FEENEY, Florida                  JIM MATHESON, Utah
JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida            AL GREEN, Texas
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
TOM PRICE, Georgia                   BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
JOHN CAMPBELL, California

                 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
WALTER B. JONES, Jr., North          BARBARA LEE, California
    Carolina                         MICHAEL E. CAPUANO, Massachusetts
CHRISTOPHER SHAYS, Connecticut       BERNARD SANDERS, Vermont
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
GINNY BROWN-WAITE, Florida           BRAD MILLER, North Carolina
KATHERINE HARRIS, Florida            DAVID SCOTT, Georgia
RICK RENZI, Arizona                  ARTUR DAVIS, Alabama
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
RANDY NEUGEBAUER, Texas              AL GREEN, Texas
MICHAEL G. FITZPATRICK,              BARNEY FRANK, Massachusetts
    Pennsylvania
GEOFF DAVIS, Kentucky
JOHN CAMPBELL, California
MICHAEL G. OXLEY, Ohio
       Subcommittee on Financial Institutions and Consumer Credit

                   SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, Jr., North          BERNARD SANDERS, Vermont
    Carolina, Vice Chairman          CAROLYN B. MALONEY, New York
RICHARD H. BAKER, Louisiana          MELVIN L. WATT, North Carolina
MICHAEL N. CASTLE, Delaware          GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio                PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas                     MAXINE WATERS, California
STEVEN C. LaTOURETTE, Ohio           DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
VITO FOSSELLA, New York              HAROLD E. FORD, Jr., Tennessee
GARY G. MILLER, California           RUBEN HINOJOSA, Texas
PATRICK J. TIBERI, Ohio              JOSEPH CROWLEY, New York
TOM FEENEY, Florida                  STEVE ISRAEL, New York
JEB HENSARLING, Texas                CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey            JOE BACA, California
GINNY BROWN-WAITE, Florida           AL GREEN, Texas
J. GRESHAM BARRETT, South Carolina   GWEN MOORE, Wisconsin
RICK RENZI, Arizona                  WM. LACY CLAY, Missouri
STEVAN PEARCE, New Mexico            JIM MATHESON, Utah
RANDY NEUGEBAUER, Texas              BARNEY FRANK, Massachusetts
TOM PRICE, Georgia
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 24, 2005.................................................     1
Appendix:
    May 24, 2005.................................................   111

                               WITNESSES
                         Tuesday, May 24, 2005

Adams, Stella J., Board of Directors, National Community 
  Reinvestment Coalition.........................................    23
Bouldin-Carter, Lisa, National Executive Director, BorrowSmart 
  Public Education Foundation....................................    81
Eakes, Martin D., Chief Executive Officer, Center for Community 
  Self Help......................................................    25
Green, Micah S., President, The Bond Market Association..........    28
Guilfoil, Martina, Executive Director, Inglewood Neighborhood 
  Housing Services...............................................    83
Hummel, Alan E., Chief Executive Officer, Iowa Residential 
  Appraisal Company, on behalf of the Appraisal Institute........    86
Lowrie, Regina, President-elect, Mortgage Bankers Association....    30
Nabors, Jim, President-elect, National Association of Mortgage 
  Brokers........................................................    87
Nadon, Steve L., Chief Operating Officer, Option One Mortgage, on 
  behalf of the Coalition for Fair and Affordable Lending........    31
Smith, Joseph A., Jr., North Carolina Commissioner of Banks......    21

                                APPENDIX

Prepared statements:
    Ney, Hon. Robert.............................................   122
    Bachus, Hon. Spencer.........................................   112
    Clay, Hon. Wm. Lacy..........................................   115
    Ford, Hon. Harold............................................   117
    Kanjorski, Hon. Paul E.......................................   118
    Meeks, Hon. Gregory W........................................   119
    Adams, Stella J..............................................   124
    Bouldin-Carter, Lisa.........................................   138
    Eakes, Martin D..............................................   150
    Green, Micah S...............................................   186
    Guilfoil, Martina............................................   180
    Hummel, Alan E...............................................   196
    Lowrie, Regina...............................................   206
    Nabors, Jim..................................................   218
    Nadon, Steve L...............................................   225
    Smith, Joseph A..............................................   355

              Additional Material Submitted for the Record

Oxley, Hon. Michael G.:
    Opposition letter regarding H.R. 1295........................   480
    Opposition letter regarding H.R. 1295 from NCRC..............   483
    2004 NCRC report.............................................   485
    Letter of support............................................   522
Ney, Hon. Robert:
    Letter from RESPRO in support of H.R. 1295...................   358
    List of co-sponsors of H.R. 1295.............................   360
Bachus, Hon. Spencer:
    Discussion transcript........................................   361
    Washington Post article......................................   362
Brown-Waite, Hon. Ginny:
    Inside Mortgage Finance's newsletter.........................   364
    OCWEN Financial rate sheet...................................   368
Carson, Hon. Julia:
    Argent Mortgage Company rate sheet...........................   369
Clay, Hon. Wm. Lacy:
    NCLR statement...............................................   372
    Consumer Mortgage Coalition statement........................   376
McHenry, Hon. Patrick:
    Option One Mortgage paper....................................   474
Appraisal Institute:
    Written responses to questions from Hon. Paul Kanjorski......   460
Martin Eakes:
    Center for Responsible Lending policy brief..................   526
    Center for Responsible Lending bill analysis of H.R. 1295....   527
    Responses to questions from Hon. Patrick McHenry.............   463
Alan Hummel:
    Home Insecurity paper........................................   530


                        LEGISLATIVE SOLUTIONS TO



                   ABUSIVE MORTGAGE LENDING PRACTICES

                              ----------                              


                         Tuesday, May 24, 2005

             U.S. House of Representatives,
                        Subcommittee on Housing and
                          Community Opportunity and
         Subcommittee on Financial Institutions and
                                   Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittees met, pursuant to notice, at 10:03 a.m., 
in Room 2128, Rayburn House Office Building, Hon. Robert Ney 
[chairman of the Housing and Community Opportunity 
subcommittee] presiding.
    Present: Representatives Bachus, Lucas, Ney, Kelly, 
Gillmor, Biggert, Shays, Miller of California, Feeney, 
Hensarling, Brown-Waite, Harris, Pearce, Neugebauer, Price, 
McHenry, Kanjorski, Waters, Sanders, Maloney, Velazquez, Watt, 
Carson, Sherman, Lee, Moore of Kansas, Ford, Crowley, Clay, 
Israel, McCarthy, Baca, Lynch, Miller of North Carolina, Scott, 
Davis of Alabama, Green, and Moore of Wisconsin.
    Chairman Ney. The hearing will come to order.
    Without objection, all members' opening statements will be 
made part of the record.
    Today, we have two subcommittees which are meeting to 
continue to look into the important sub-prime mortgage market 
and its importance to consumers.
    In the past few years, Chairman Bachus--whom we welcome 
today and thank for all his efforts--and I have taken a great 
deal of time to investigate and find solutions to the problems 
of abusive and predatory lending practices, especially in the 
sub-prime market.
    We first began by holding roundtables to discuss these 
practices, sub-prime lending in general, and ways to ensure 
credit availability to those who need and want it. Those 
roundtables I think were very good, very successful. Many 
members on both sides of the aisle attended them. We also 
appreciated Mr. Kanjorski, among others, Ms. Waters and other 
members who are here today, both sides of the aisle that 
attended these roundtables.
    In addition, last Congress we had a number of joint 
hearings to continue to investigate this issue that affects all 
participants in the mortgage market. Today, we will move this 
process forward by examining potential legislative solutions to 
these lending practices.
    In March, I introduced, along with Congressman Paul 
Kanjorski of Pennsylvania--and I want to thank Mr. Kanjorski, 
who has just arrived on cue, for his support of this measure. I 
think he brings a tremendous amount of credibility to the bill 
and put in countless hours, he and his staff, Todd, who is here 
today, and our staff, in drafting this measure, which aims to 
stop abusive lending practices, while allowing the mortgage 
market to continue to offer affordable credit.
    Congressman Kanjorski and I worked long and hard to craft a 
legislative solution that drew from the many hearings this 
committee held last Congress, as well as the thoughts and 
suggestions of all those who will be affected by the bill.
    Congressman Kanjorski and I believe, I think it is safe in 
saying, that we have struck a lot of good compromises in this 
piece of legislation. I believe this bill provides the most 
comprehensive balance and effective set of legislative 
solutions that any Federal or State bill has ever offered for 
protecting mortgage borrowers from abusive, deceptive and 
unfair lending practices.
    We have also come to understand, like all legislation many 
people have ideas about how it can be changed or improved 
further, according to people's points of view. As we stated 
from the beginning, we are willing to continue always to talk 
about the issues and always to look at the piece of 
legislation. That being said, I strongly believe the approach 
and the principles embodied in the Responsible Lending Act are 
the appropriate way to address the problem.
    The United States mortgage market is the deepest and most 
affordable in the world due to the evolution of unique funding 
structures for mortgages. Americans pay less for mortgages than 
almost anyone else in the world. As a result, this country has 
the world's highest homeownership rate. However, many consumers 
have had to pay more for credit than they should because of 
abusive and deceptive lending practices. Many State laws, as 
well as the mortgage lending industry itself, have done a lot 
to stop these practices.
    Unfortunately, the resulting patchwork of State and local 
laws threatens to undermine their intent, which is to provide 
affordable mortgage credit to consumers who need it the most. 
The time has come for a uniform national standard in this area. 
The Ney-Kanjorski Responsible Lending Act recognizes this fact 
and attempts to strike a balance between protecting consumers 
from unscrupulous practices and creating uniform regulations 
that will allow mortgage lenders to offer borrowers affordable 
credit options.
    I look forward to hearing from our witnesses, and again I 
want to thank Chairman Bachus for his support on this issue, 
and again Mr. Kanjorski. For the record, I am going to just 
enter the cosponsors, but we have tremendous members from both 
sides of the aisle who I think bring an amazing amount of 
credibility to the process and also credibility to the issue.
    With that, I want to recognize the gentleman from 
Pennsylvania.
    Thank you.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Chairman, I want to say that it has been a pleasure in 
cooperating with you and coordinating with you on the Ney-
Kanjorski bill. I think we have something here. I think we have 
a process in work and I look forward to that work today.
    I can say I am pleased that you have convened this meeting 
at this stage of the process. I commend you for convening and 
working on this over the last several years with me.
    In recent years, the sub-prime mortgage industry has grown 
dramatically. In 1994, sub-prime lenders underwrote just $34 
billion in mortgages. By 2004, this figure had ballooned to 
more than $600 billion. As the sub-prime industry has matured, 
complaints about abusive lending practices and concerns about 
conflicting State laws have also grown.
    As my colleagues already know, I have spent several years 
studying these matters. As a result, I have come to the 
conclusion that there is a genuine need for a strong, uniform 
national sub-prime lending standard with appropriate 
enforcement mechanisms to protect consumers.
    Because the problem of abusive lending is complex, it also 
deserves a comprehensive solution. Beyond establishing uniform 
national standards, we need to improve housing counseling and 
better mortgage servicing. We also need to enhance appraiser 
independence and oversight, and strengthen mortgage broker 
licensing and supervision.
    H.R. 1295, the bill that I have introduced along with 
Congressman Ney, achieves these five important objectives. 
Several of my colleagues have also introduced their own bills 
to address these issues. As a result, I am hopeful that in the 
coming months we can build on the growing bipartisan consensus 
in Congress about the need to address these matters.
    Because the adoption of a uniform national standard is a 
key issue in these debates, I would like to focus briefly on 
why we need one. Establishing a uniform national standard will 
help us to ensure that consumers receive the same set of 
protections no matter where they live or from whom they borrow. 
A uniform national standard will also ease regulatory burdens, 
level the competitive playing field, and ensure the 
affordability of loans for all consumers.
    We are fortunate to have with us today a diverse group of 
witnesses. I already know that they will speak forcefully and 
candidly about their views in these matters. I also hope that 
they will share with us their ideas for how we can improve H.R. 
1295, the Responsible Lending Act.
    In particular, there are a number of questions that I hope 
these experts will address. How should we refine the bill's 
preemption language? Should we ban mandatory arbitration and 
single-premium credit insurance on all loans? Should we also 
improve upon the bill's appraisal independence standard to 
incorporate a ban on collusion?
    In closing, Mr. Chairman, we need to ensure that all 
homebuyers and homeowners are appropriately protected in 
today's complex mortgage marketplace. Today's hearing will 
further our debates in these matters and hopefully build a 
consensus for enacting a sub-prime lending bill into law later 
in this session.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Kanjorski can be found on 
page 118 of the appendix.]
    Chairman Ney. I thank the gentleman for his comments.
    Chairman Bachus?
    Mr. Bachus. Thank you, Chairman Ney. I thank you for 
convening this fourth joint hearing of our two subcommittees to 
review issues relating to sub-prime mortgage lending.
    As Mr. Kanjorski and others have said, this market in 10 
years has grown from $34 billion to $600 billion; from one out 
of every 20 mortgages to one out of every four mortgages. So it 
has been a dramatic shift in the number of sub-prime mortgages. 
It is time we do take a look at it and see if uniform standards 
would be an appropriate response.
    In November 2003, we held a hearing which examined ways to 
eliminate abusive lending practices in the sub-prime lending 
market, while preserving and promoting affordable lending to 
millions of Americans.
    Our second hearing last March focused on the 
characteristics of sub-prime borrowers and the advantages and 
disadvantages the market poses to the financial security of 
these consumers.
    Our third hearing last June explored the role that the 
secondary market plays in providing liquidity to the sub-prime 
lending industry and creating homeownership opportunities for 
Americans with less than perfect credit records.
    That is what we are dealing with today. We are dealing with 
people who do not have perfect credit scores and their attempts 
to get mortgage financing. Today's hearing will focus on 
legislative proposals to abate and eliminate abusive mortgage 
lending practices.
    Earlier this year, Chairman Ney and Congressman Kanjorski 
introduced H.R. 1295, the Responsible Lending Act, which 
contained a number of new and comprehensive solutions to 
mortgage lending problems and abuses. As I say today, it also 
generated T-shirts, so it is evidently maturing.
    The other major legislative proposal to address this issue 
is H.R. 1182, the Prohibit Predatory Lending Act, which was 
introduced by Congressman Brad Miller and Congressman Melvin 
Watt. I am not sure that you generated any T-shirts or slogans 
yet, Congressman Watt, but I have not seen any.
    Congressman Ney, Congressman Kanjorski, Congressman Watt 
and Congressman Miller all deserve a lot of credit for their 
tireless efforts on this issue over the past year. I look 
forward to working with them and the entire committee to come 
up with some solution to the problem.
    Unfortunately, the increase in sub-prime lending has, in 
some instances, increased abusive lending practices that have 
been targeted at more vulnerable populations. We have heard 
past testimony in this committee about practices toward the 
elderly and minorities.
    An NPR story which ran last week talked about the fact that 
a sub-prime lending market has developed for offering illegal 
immigrants home loans. I do not know if any of you have seen 
those stories. At least according to NPR, these immigrants, 
some of them, do not have green cards. They do not have legal 
identification. They do not have a Social Security number or 
even a bank account.
    One disturbing problem about this is not only I think first 
of all it tells us the fact that a market has developed for 
illegal immigrants for mortgages, it shows that the immigration 
crisis is obviously a large crisis, and an illegal immigrant 
homebuyers market has developed. The other thing that the story 
highlighted is that these illegal immigrants are being taken 
advantage of by predatory home lenders.
    The mortgage companies, again according to NPR, see no 
problem with giving a home loan to illegals, some with no 
credit history or bank account. The approach apparently is even 
if the immigrants default on their loans or are deported, the 
mortgage company still gets the house back. It apparently is a 
win-win situation for the lenders and a no-win situation for 
the illegal immigrants. So this again just highlights the fact 
that in certain cases our illegal immigrant population is being 
abused and taken advantage of in so many ways.
    Predatory loan features include excessive high interest 
rates and fees, balloon payments, high loan-to-value ratios, 
excessive prepayment penalties, loan flippings, loan steerings 
and unnecessary credit life insurance. Predatory lending has 
destroyed the dream of homeownership for many families, while 
leaving behind devastated communities. Hopefully, today's 
hearing will help us come up with solutions to address this 
issue.
    Let me close by saying this--predatory lending is not sub-
prime lending. There is a difference and you should not use 
these terms interchangeably because there are, in fact today we 
are going to have testimony from some sub-prime lenders who do 
not practice these abuses and are not guilty of these abusive 
practices. What they do is they provide people with less than 
perfect credit the opportunity to own a home.
    The testimony before this committee in the last year is we 
have increased homeownership among minorities, from legal 
immigrant families, among the elderly, by the use of sub-prime 
lending. So sub-prime lending market is not a dirty word. 
Predatory lending is a dirty word, and there is a distinction 
between the two. It is one that we should bear in mind and not 
use those terms interchangeably.
    What we are attempting to do by this series of hearings is 
establish some uniformity in the sub-prime lending market and 
keep predatory lending practices out of that market. It is 
something that I think most of the large sub-prime lending 
companies very much want. It is something the consumers would 
welcome. It is a win-win situation for all of us.
    I will close by saying that I am committed to putting an 
end to predatory lending, this committee is, while at the same 
time preserving and promoting access for all homebuyers to 
affordable credit. I again commend Chairman Ney for his 
leadership, both in presiding over these important hearings and 
in advancing creative solutions to the predatory lending 
problem. I think with Congressmen Miller's, Kanjorski's and 
Watt's help and that of others, we can fashion a good piece of 
legislation.
    I look forward to hearing from our witnesses, and I yield 
back the balance of my time.
    Chairman Ney. I thank the gentleman.
    The gentleman, Mr. Watt?
    Mr. Watt. Thank you, Mr. Chairman.
    I thank the Ranking Member for allowing me to go since I 
have to go to another appointment, and because I do kind of 
have a dog in this fight, as Mr. Bachus has indicated.
    There are some things that I think we should focus on first 
that both the Ney-Kanjorski cosponsors and the Miller-Watt 
cosponsors agree on. We agree that there is a problem. There 
certainly is a problem in the predatory lending area. I know we 
agree because we had a discussion when we were doing our 
preliminary views in some document earlier in this term of 
Congress, that all sub-prime loans are not predatory loans. I 
think we agree that we need to find a way to separate the 
legitimate sub-prime and non-sub-prime loans from the predatory 
ones.
    And then we start to ask ourselves some questions about 
which I am not sure whether we agree or disagree. I think I 
have detected in the opening statements perhaps a fairly 
substantial amount of disagreement.
    The first question I would raise is, do we need to preempt 
all State law or do we need to preempt any State law? Are we 
going to be the big brother in this area, or is there going to 
be some semblance of respect for States' rights and federalism? 
Or is this yet another area where we are going to just take 
over the entire field?
    And then, if we do agree that we are going to preempt all 
or some State law, should you adopt a standard that is the 
lowest common denominator, or should you adopt a standard that 
most of the testimony I have heard in all of our hearings 
suggests, that North Carolina has the right balance? Should you 
adopt that as the correct balance?
    It should not go unnoticed that there are at least three 
people on this panel this morning who are from North Carolina 
and I think will have a perspective on that. Or should we be 
trying to adopt a standard, if we are preempting State law that 
is actually the highest common denominator that can be 
achieved?
    I honestly have not spent a lot of time yet trying to 
figure out what the difference between Ney-Kanjorski and 
Miller-Watt, what those differences are. But most of you know 
that when we go out on breaks, I have a tendency to start 
reading this stuff, and I suspect that by the time I get back I 
will know what the differences are pretty substantially.
    Some of the things I have read about Ney-Kanjorski, and 
these are not from my own independent verification, lead me to 
have a fairly substantial amount of heartburn. Despite that, if 
we have agreed that there is a problem and that there needs to 
be some fix of the problem, I hope that we are able to work our 
way to some common ground and try to reach a bill this term 
that will advance the rights of consumers.
    I appreciate the gentleman and I yield back.
    Chairman Ney. I thank the gentleman.
    The gentleman from Texas, Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman.
    As we enter this hearing, I am once again reminded of the 
physician's Hippocratic oath: First, do no harm. I fear that in 
our zeal to protect consumers from certain unfair lending 
practices, we may find that we have in fact protected them from 
any lending whatsoever.
    In the past, we have heard testimony that this may have 
been the case in North Carolina, Georgia, New Mexico and New 
Jersey, all of which passed very restrictive laws aimed at so-
called ``unfair'' lending practices. The practical effect was 
that most legitimate lenders ceased to make high-cost loans. 
Thus, many borrowers who failed to qualify for conventional 
loans ended up with no loans.
    Mr. Chairman, those who fail to learn the lessons of 
history are certainly condemned to repeat them. I need not 
remind my colleagues on the committee that Americans currently 
enjoy the highest rate of homeownership in the history of 
America. The benefits of free enterprise and competition have 
been plentiful. With the advent of sub-prime lending, countless 
families have now had their first opportunity to buy a home or 
perhaps be given a second chance. The American dream should 
never be limited to the well-off or those consumers fortunate 
enough to have access to prime rate loans.
    In addressing the issue of predatory lending, it is 
important that we do not act to tie the hands of mortgage 
lenders with the red tape of excessive regulation. Disclosure 
and transparency of business practices are important for 
consumers, but lenders must not be denied the flexibility to 
protect themselves from risk and to effectively price the 
credit risk of the consumers seeking loans from their 
businesses. A Financial Services Roundtable study has shown 
that origination costs for sub-prime loans are 30 percent 
higher. Servicing costs are more than double, and delinquency 
rates six times higher. Again, lenders must be able to price 
the credit risk if these loans are to be made.
    If we truly want to be pro-consumer on this committee, I 
would suggest we find ways to work hard to make sure that we 
increase market competitiveness and not sow the seeds of the 
market's destruction. It is critical that we agree on what 
constitutes predatory lending and we isolate it from those 
reasonable players in the commercial market who are making 
homeownership opportunities available to low-income Americans.
    Mr. Chairman, after careful consideration, I have chosen to 
cosponsor H.R. 1295, the Responsible Lending Act, which I 
believe represents obviously a compromise and a balanced 
approach. I certainly applaud your leadership and that of Mr. 
Kanjorski. Although I have great concerns over some of the 
provisions in the legislation that I fear may be overly 
burdensome or tantamount to price controls, I do believe the 
legislation does a good job in addressing many true predatory 
lending practices that often involve fraud and coercion, such 
as loan flipping, steering, and home improvement scams.
    Importantly, the legislation would restrict assignee 
liability and create a uniform national standard that I believe 
will strengthen the ability of millions of Americans to access 
mortgage credit for the first time and achieve their American 
dream.
    I thank the Chairman for his leadership and yield back the 
balance of my time.
    Chairman Ney. Mr. Sanders?
    Mr. Sanders. Thank you very much, Mr. Chairman. Let me 
thank you and Chairman Bachus for holding this important 
hearing.
    According to the Center for Responsible Lending, predatory 
lending is costing U.S. families $9.1 billion each and every 
year. Mr. Chairman, in the richest country on earth, the number 
of housing foreclosures in this country is a national disgrace. 
Between 1980 and 1999, both the number and the rate of home 
foreclosures in the United States have skyrocketed by almost 
300 percent. According to a recent article in the New York 
Times, over 130,000 homes were foreclosed in the spring of 
2002, with another 400,000 in the pipeline.
    Many of these foreclosures are a direct result of predatory 
lending practices in the sub-prime mortgage market that must be 
put to an end immediately. According to the Mortgage Bankers 
Association, while sub-prime lenders account for 10 percent of 
the mortgage lending market, they account for 60 percent of 
foreclosures.
    Mr. Chairman, according to figures compiled by National 
Mortgage News, new sub-prime loans totaled $290 billion in 
2003, more than double the total loan volume for the year 2000. 
Homeownership is an American dream. It is the opportunity for 
all Americans to put down roots and start creating equity for 
themselves and their families. Homeownership has been the path 
to building wealth for generations of Americans. It has been 
the key to ensuring stable communities, good schools and safe 
streets.
    Predatory lenders play on these hopes and dreams to rip 
people off and rob them of their homes. These lenders target 
lower-income, elderly and often unsophisticated homeowners for 
their abusive practices. Let us not forget that predatory 
lending is being perpetrated by the likes of Citigroup and 
Household International.
    As a result of legal actions filed by the FTC, Citigroup 
agreed in September to reimburse consumers $215 million for 
predatory lending abuses, which represents the largest consumer 
settlement in FTC history. Household International has agreed 
to pay $484 million to reimburse victims of predatory lending, 
representing the largest direct payment ever in a State or 
Federal consumer case.
    Mr. Chairman, let me be clear. We need to do more than 
simply help homeowners who are ripped off by predatory lenders. 
We need to stop predatory lenders from stealing people's homes 
in the first place. That is why Congress needs to pass anti-
predatory lending legislation. We need strong standards that 
will not allow lenders to use loopholes to escape local and 
State laws. But we also must make sure that we do not prohibit 
State and local governments, the laboratories of democracy, 
from passing stronger consumer protection laws.
    That is why I am a proud cosponsor of H.R. 1182, the 
Prohibit Predatory Lending Act of 2005, introduced by 
Representatives Brad Miller, Mel Watt and Barney Frank. This 
legislation is based on the State of North Carolina's predatory 
lending statute, which is widely considered the model State 
statute for preventing abusive lending, while preserving access 
to credit.
    Mr. Chairman, since the North Carolina law was enacted, the 
State has seen a dramatic reduction in abusive or predatory 
sub-prime lending and refinancing. A recent study conducted at 
the University of North Carolina at Chapel Hill found that 
after the passage of the North Carolina legislation "there was 
a reduction of loans with predatory terms without a restriction 
on access to or increase in the cost of loans to borrowers" 
with imperfect credit.
    Mr. Chairman, I know that this committee will also be 
considering H.R. 1295.
    Chairman Ney. The gentleman's time has expired. Can the 
gentleman summarize?
    Mr. Sanders. Okay. I look forward to hearing what our 
witnesses will say about this legislation, but in my view it 
does not go far enough.
    Thank you, Mr. Chairman.
    Chairman Ney. I thank the gentleman.
    Ms. Kelly of New York?
    Mrs. Kelly. I have no opening statement. I am anxious to 
hear from the witnesses, Mr. Chairman.
    Chairman Ney. Mr. Miller of North Carolina?
    Mr. Miller of North Carolina. Thank you, Mr. Chair.
    I agree with those who today have said that Congress's goal 
should be trying to provide a reasonable set of consumer 
protections, while at the same time assuring that credit 
remains available in the sub-prime market both for home 
purchases, purchase money mortgages, and for those consumers 
who need to borrow money against their home.
    I also extend the invitation to all who are interested to 
discuss the provisions of Ney-Kanjorski and the bill that Mr. 
Watt and I have introduced, or any other proposals. I certainly 
welcome that opportunity to sit down, not just with consumer 
advocates, but with mortgage lenders, with mortgage brokers, 
with the bond market, with all God's children, to talk about 
this bill and these provisions.
    I understand that there perhaps were discussions in the 
last Congress in the last several months over the Ney-Kanjorski 
bill and the provisions of that, but I do not believe that 
consumer advocates, those who are advocating from the consumer 
point of view, were involved in those discussions.
    Although there may be some consensus or some compromise 
within the industry, to those who look at this from the 
consumer point of view, describing Ney-Kanjorski as a 
compromise bill is like the character in the Blues Brothers 
movie who said that he liked both kinds of music, country and 
western. Mr. Chairman, there are other points of view that need 
to be heard.
    Thank you.
    Chairman Ney. Ms. Harris of Florida?
    Ms. Harris. Thank you, Mr. Chairman. I wish to thank you 
for holding this important hearing today, and I also wish to 
thank the distinguished members of the panel for joining us.
    Consumer protection through disclosure is constituted as a 
staple of Chairman Oxley's leadership on the Committee on 
Financial Services, and certainly Chairman Ney's leadership in 
this subcommittee. Our discussions regarding this matter should 
remain consistent with this theme.
    I believe that homeownership provides families and 
individuals with an unparalleled opportunity to generate 
wealth. Studies have shown that when a family of low-income 
persons, their net wealth is about $900 when they rent and it 
skyrockets to over $70,000 once they own their own home. So for 
most Americans, the ability to secure a mortgage is central to 
their ability to purchase that home.
    Damaged credit that has resulted from past mistakes or 
financial reversals can serve as a major obstacle, thus the 
willingness of certain lending institutions to underwrite the 
increased risks associated with damaged credit constitutes an 
important service that provides a second chance for millions of 
people.
    Regrettably, the abusive practices of bad actors which prey 
upon elderly and minority populations throughout my area have 
resulted in the demonization of an entire sub-prime industry. 
Nevertheless, we cannot ignore the effects of predatory lending 
when we truly seek to help the nonconventional borrowers 
overcome substandard credit.
    While I applaud the industry and State-level initiatives to 
address unscrupulous lending practices, I contend that we must 
formulate a national policy that supplements and enhances these 
efforts. I look forward to the suggestions of today's panel 
which I hope will provide us with viable alternatives for 
reforming the sub-prime industry, without eliminating the 
critical borrowing opportunities that enable men, women and 
children to escape the grip of poverty.
    Thank you, Mr. Chairman.
    Chairman Ney. I thank the gentlelady.
    Mr. Moore of Kansas?
    Mr. Moore of Kansas. Thank you, Mr. Chairman. I appreciate 
you and Chairman Bachus and Congressman Kanjorski for holding 
this hearing today.
    Over the last few years, this country has experienced an 
exceptionally strong housing market that has created wealth for 
Americans of all income levels and sustained our generally 
healthy national economy. The new wealth created in our country 
by growth in home equity has accrued not just to wealthy 
homeowners, but also to brand new homeowners who have taken 
advantage of historically low interest rates and a competitive 
lending market to buy a home.
    In fact, much of the growth in our housing market has come 
from individuals and families who have never been able to own a 
home in the past. Many new homeowners have benefited from the 
rapid growth in the sub-prime market. According to the FDIC, in 
2004 approximately 20 percent of all new mortgages were sub-
prime loans, an increase of over 11 percent from 2003, when 
sub-prime loans accounted for approximately 9 percent of all 
loans.
    However, the growth of the sub-prime market has been 
accompanied by an increase in abusive lending practices as some 
lenders have exploited consumers' confusion with the 
complicated process of buying a home, to charge excessive rates 
and fees that far surpass comparable rates. Predatory lending 
is now a national problem, one that I believe requires a 
national solution.
    While approximately half of the States and nearly two dozen 
localities have passed separate anti-predatory lending statutes 
and regulations, the State of Kansas, for example, does not 
have a statute defining ``high-cost'' mortgages and providing 
remedies to consumers who have been the victims of predatory 
lending.
    Ney-Kanjorski would significantly strengthen the 
Homeownership and Equity Protection Act, which currently 
regulates abusive lending practices in Kansas. Ney-Kanjorski 
will strengthen the predatory lending laws that control in 
Kansas, and for that reason I am adding my name as a sponsor of 
H.R. 1295. At the same time, Ney-Kanjorski is not a perfect 
bill and has some room for improvement. While I recognize that 
not everyone will support this bill, I hope that members of the 
committee can work together as we did on the Fair Credit 
Reporting Act and came together with I think a great overall 
piece of legislation.
    Here, we can do something that protects borrowers, and also 
continues to make credit available to potential homeowners and 
preserves lenders' access to the capital markets. While I 
support the uniform national standards in Ney-Kanjorski, I also 
believe that as currently drafted, Section 106 is overly broad 
and should be revised in such a way that Federal regulators, in 
this case the Federal Reserve Board, have the ability to 
identify, define and prohibit new abusive lending practices 
that may arise in the future.
    Additionally, some provisions of the Miller-Watt bill could 
be used to improve Ney-Kanjorski as currently drafted. The 
right-to-cure provision in Miller-Watt, for example, is 
stronger than the similar provision in Ney-Kanjorski and could 
be an area in which H.R. 1295 might be improved. For that 
reason, I am also adding my name as a cosponsor of Miller-Watt 
and look forward to coming up with an overall bill that I think 
will accomplish what our objectives are in this area.
    Thank you again, Mr. Chairman.
    Chairman Ney. Thank you.
    The gentleman from Georgia, Mr. Price?
    Mr. Price. Thank you, Mr. Chairman.
    I, too, want to add my thanks to the Chairman and Chairman 
Bachus for holding this hearing on this remarkably important 
issue. In a former life, I was a member of the Georgia State 
Senate, and we struggled and stumbled and struggled with this 
issue, and ultimately arrived, I believe, at a compromise that 
was really a delicate balance, but it is good for the citizens 
of our State.
    So I look forward to the testimony and I would ask each 
panelist to specifically comment, if you would, on the 
appropriateness of a Federal role in this issue. I look forward 
to your comments.
    Thank you so much.
    Chairman Ney. Thank you.
    The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you very much, Mr. Chairman.
    I, too, want to commend you for having this hearing. I do 
not think we can grapple with a more important issue facing the 
American people than protecting their homes, which is the best 
first foundation of building wealth.
    As my colleague from Georgia mentioned, Mr. Price, I, too, 
am from Georgia and for 10 years served as the Chairman of the 
Senate Rules Committee through which came much of our final 
legislation dealing with this issue. Before that, I was the 
author of the bill to respond to the Fleet financing debacle 
that happened in Georgia. So for many years, I have been 
grappling with this issue.
    I concur with both the Ney-Kanjorski bill and the Watt-
Miller bill, and I am a cosponsor on both of those pieces of 
legislation. But what I would like to do is to appeal to this 
committee, to all interested parties, that we have got to 
ratchet up the issue of financial education. For no matter what 
we do, no matter what laws we put on the books, if we do not 
provide those vulnerable people, those who are targeted, 
predatory lending a targeted, a targeted phenomena. Very few 
people in this room are going to be targeted for predatory 
lending. Predators know where to go. That is why they are 
called predators.
    They go to the African-American community. They go to 
minority communities. They go to low-income communities. They 
go to seniors. They go to those communities that do not have 
the information and do not have access to that information. So 
while we grapple with balloon payments, while we grapple with 
preemption, while we grapple with excessive insurance costs, 
while we grapple with packing and all of these detestable 
things that we do not like, I ask this committee to deal with 
financial education as a part of whatever we come out with.
    A part of what I have talked about, I introduced in a bill 
earlier in my career here, 2 years ago, called the Financial 
Literacy Act. Much of those components have been embraced by 
the Ney-Kanjorski bill. But I want us to ratchet it up so we 
understand that we are not just talking about a program or a 
piece of paper or a booklet. We have to engage. We have to send 
out a direct pipeline to these targeted communities, a toll-
free number that is answerable by human beings at the other 
end, not get a recording, not tell them to go to a computer 
someplace, but somebody there to answer and respond to them. 
These are vulnerable people, not sophisticated, but even myself 
or you, when you pick up that phone and you call for help, you 
want a human being at the other end.
    Also in this measure that we have, we will get grants down 
to the grassroots to groups like ACORN, NAACP; give these 
groups, AARP, with the credibility that is targeting and 
communicating with their constituency, grants to help market 
the toll-free number, to give these people help, so that in 
essence we are sending a message to America's most vulnerable 
about predatory lending, to say before you sign on the bottom 
line, call this number. This toll-free number will also help us 
to be able to catalog the experience, to be able to measure it.
    This phenomenon is not going to end with a bill. It is an 
ongoing process. And very, very critical to the success of 
dealing with predatory lending is to make sure we arm our folks 
who are going to be the most vulnerable, with a help line, with 
that toll-free number.
    Chairman Ney. The time has expired.
    Mr. Scott. And finally, Mr. Chairman, I just want to say 
one thing. I know in the bill, I am mighty afraid that the 
infrastructure for the toll-free number and where we want to 
put this program, I think it has been designated to HUD. I have 
some strong reservations about that, as a result of seeing HUD 
being basically dismantled before our eyes. So I want us to 
look at this information and this financial literacy and the 
education, a toll-free number, lifted up and make sure that we 
put this in the right place in the Federal Government where it 
can do the most good.
    Thank you, Mr. Chairman.
    Chairman Ney. I thank the gentleman.
    Mr. Miller of California?
    Mr. Miller of California. Thank you, Chairman Ney.
    California is experiencing a very strong housing market, 
but nationally there is an affordability crisis we are having 
to deal with. It is significant. In California, our 
homeownership rates lag the rest of the nation by about 10 
percent. We are about 56.9 percent. That is rather scary.
    I praise Chairman Ney and Mr. Kanjorski for the bill they 
are putting out because we need a workable uniform national 
lending standard. We do not have that currently. There is no 
question that some non-prime borrowers are subject to abusive 
practices. We really have to effectively deal with that. There 
is no question that the number of asset borrowers out there are 
victims of practices that become victimized by poorly crafted 
protective languages by States or local municipalities.
    When cities start drafting their own predatory language, 
you oftentimes force sub-prime lenders out of the marketplace 
because it is difficult to keep up with the requirements from 
city to city. So we do need a national standard. We need to 
understand clearly there is a huge difference between predatory 
and sub-prime, and too many people want to sweep both of them 
under the same carpet, saying if you are not prime, you are 
predatory.
    We need to be very, very cautious because if we eliminate 
the sub-prime marketplace, we are going to hurt a lot of people 
whose credit is not necessarily stellar, but they should 
qualify for a sub-prime loan. If we become too dictatorial and 
we put too many requirements on that, you are going to wipe out 
a marketplace.
    That is scary because there are people out there who are 
qualifying for sub-prime. If that market was not available to 
them, they would be paying outrageous rates today, or it just 
would not be available to them at all, and they would be stuck 
renting an apartment somewhere. That is not what we are trying 
to emphasize in this country and this committee. We are trying 
to emphasize homeownership. The legislation we are crafting, 
the bills we are putting out emphasize the need for 
homeownership in this country.
    So yes, predatory lending is atrocious. It needs to be 
absolutely dealt with, but you just cannot necessarily couple 
that with the sub-prime market. There are bad people in every 
sector of society and there are some bad people in sub-prime. 
We are going to have to make sure they are eliminated. We need 
to do everything we can. I believe the Ney-Kanjorski bill goes 
a long way toward doing that.
    I praise you for this hearing today, Mr. Chairman, and I 
look forward to the testimony. Thank you.
    Chairman Ney. The gentlelady from New York, Ms. Velazquez?
    Ms. Velazquez. I have no opening statement, Mr. Chairman.
    Chairman Ney. Ms. Lee of California?
    Ms. Lee. Thank you, Mr. Chairman.
    I want to thank you and Chairman Bachus, our Ranking 
Members, Ms. Waters and Mr. Sanders, for holding this very 
important hearing today.
    Unfortunately, too many of our constituents, mine included, 
know first-hand the devastating impact of predatory lending 
practices by what I call loan sharks. It is downright criminal 
in terms of the type of penalties and practices that are 
targeting hardworking homeowners and stripping them of their 
wealth. These practices, as you know, are particularly a threat 
to the African-American and Latino communities. That is why we 
must have strong anti-predatory lending laws.
    So as we consider the two major bills that address the 
issue of predatory lending, I want to go on record early in 
opposition to the Ney-Kanjorski bill as it is currently 
written. At this point, Mr. Chairman, I would ask unanimous 
consent to include into the record two letters in opposition to 
H.R. 1295. They are from ACORN, AFSCME, the AFL-CIO, AARP, 
Center for Community Change, National Consumer Law Center, the 
NAACP, and the National Council of La Raza, among many, many 
others. So Mr. Chairman, I would like to ask for unanimous 
consent to insert these letters into the record.
    Chairman Ney. Without objection.
    Ms. Lee. And also The Washington Post article from March 25 
entitled, ``Civil Rights Leaders to Fight Lending Bill.'' So I 
think that the advocates have united in opposition to this bill 
and I would ask that my colleagues read these letters and 
consider the issues that they raise.
    H.R. 1295 does not simply fail to protect borrowers from 
predatory lending. It does not simply wipe out strong State 
laws. It actually makes matters worse. So I would encourage my 
colleagues to look at H.R. 1182, the Prohibit Predatory Lending 
Act by Congressmen Miller and Watt, for a bill that would 
actually help to protect homeowners from abusive mortgage 
lending practices.
    We owe it to our communities to empower them to build 
wealth, not to push them into foreclosure and bankruptcy. We 
owe them strong protections. We owe them a bill that will truly 
address abusive practices and not make matters worse.
    Thank you, Mr. Chairman. I look forward to the hearing.
    Chairman Ney. I thank the gentlelady.
    Ms. Brown-Waite of Florida?
    Ms. Brown-Waite. Thank you very much, Mr. Chairman.
    I do not have an opening statement, but rather I look 
forward to hearing from the witnesses and commend you for 
putting together the hearing on legislative solutions to 
abusive mortgage lending practices.
    Thank you.
    Chairman Ney. The gentlelady, Ms. Biggert of Illinois?
    Mr. Bachus. Mr. Chairman, I would like to point out that 
Ms. Biggert, as Mr. Scott, talked about financial literacy, and 
she has been a leader in this field. I would just point out to 
the committee that I think she could be a great help in what 
you mentioned.
    Chairman Ney. Mr. Green of Texas?
    Mr. Green of Texas. Thank you, Mr. Chairman.
    I would like to thank our Ranking Member and also thank the 
members of the panels that will appear today for appearing with 
us.
    Mr. Chairman, I understand that not all sub-prime lenders 
are predatory lenders, but I also understand that most 
predatory lending practices occur in the sub-prime lending 
market. I do believe that this does merit some of our 
considerable attention. We are talking about now the means by 
which most people start their wealth-building process, by 
acquiring a home. If they are stripped of the equity in the 
home, if they have an onerous balloon payment, if they have 
excessive interest rates, it makes it very difficult for that 
wealth-building process to become a reality for them.
    I look forward to hearing from the persons who will 
testify. I do want to make it clear, however, that I am honored 
to support H.R. 1182, and trust that we will have an 
opportunity to strengthen the legislation that will protect 
wealth-building in this country.
    Thank you.
    Chairman Ney. The gentleman from Connecticut, Mr. Shays?
    Mr. Shays. Thank you, Mr. Chairman. Thank you for holding 
this hearing. I look forward to hearing from the witnesses.
    Chairman Ney. Ms. McCarthy?
    Mrs. McCarthy. Thank you, Mr. Chairman, for holding this 
hearing. I am looking forward to hearing from the panel. Thank 
you.
    Chairman Ney. Mr. Neugebauer of Texas?
    Mr. Neugebauer. Thank you, Mr. Chairman. I thank you also 
for holding this hearing.
    I have been in the housing business for over 30 years, and 
actually did some mortgage lending. When we first, in the 1970s 
and 1980s, there was really no sub-prime market. In other 
words, a person either qualified under Fannie Mae or Freddie 
Mac guidelines, and if they fell within those guidelines, they 
got to buy a home. If they did not, they were given no other 
alternative. One of the reasons for that was there was no 
secondary market for ``non-qualifying'' loans.
    So I think we are very fortunate in this country today that 
we have homeownership at the highest rate ever in the history 
of our country. Homeownership among minorities is up also. So I 
think ways that we can continue to encourage lenders to 
participate in this lending to hopefully open up homeownership 
for more Americans is a very positive thing.
    I look forward to looking through and going through the 
process of this legislation and seeing if there are some areas 
where improvement is needed. But certainly, the goal would be 
not to discourage sub-prime lending, but to encourage it and to 
help facilitate that. I look forward to continued discussion.
    Chairman Ney. Mr. Israel from New York?
    Mr. Israel. Thank you, Mr. Chairman. I will be very brief.
    This has been a very good process, I believe, about 3 years 
of consideration on this issue. I think that we have all 
arrived at a general consensus that while we want to do 
everything we can to expand access to credit, we clearly cannot 
abide abusive practices, fraud, discrimination, steering, loan 
packing, unreasonably escalating payments, loan flipping, harsh 
balloon payments, and unreasonably harsh prepayment penalties.
    I believe that Ney-Kanjorski is an imperfect bill, but it 
is a very good start at arriving at a common sense resolution 
that helps protect against these deceptive, misleading, 
coercive practices, while ensuring that access to credit to 
those who would not otherwise qualify is provided. I will 
continue to work closely with both sides of the aisle in the 
hopes that we can arrive at a common sense resolution to this 
issue.
    I thank the Chairman for this hearing and yield back the 
balance of my time.
    Chairman Ney. The gentleman from Massachusetts, Mr. Lynch?
    Mr. Lynch. Thank you, Mr. Chairman, and Chairman Bachus. I 
would like to thank you both, as well as Ranking Member Waters 
and Ranking Member Sanders for holding today's hearing.
    Mr. Chairman, I think that this committee is taking an 
important step with today's hearing to open up the lines of 
communication on this issue surrounding predatory lending. I 
think this aspect of the debate was missing from our recent 
debate around bankruptcy reform, where we took away certain 
protections from folks who got into financial trouble and yet 
we did not address the issue of those who led them there to 
positions of financial infirmity.
    I hope that at the end of this legislative process, a true 
bipartisan solution can be reached that will give consumers the 
protections they need, as well as to facilitate the ability of 
our local lenders to operate effectively in the sub-prime 
market.
    I am sure we all agree that predatory lending is harmful to 
consumers and creates problems in the marketplace. I have 
received calls, as I am sure many of my colleagues have as well 
from constituents who have ended up with bad loans and who are 
now at the risk of losing their homes. I want to welcome a 
constituent of mine here today, Monica Saddler from Hyde Park 
in Massachusetts, who is here to help bring a personal face to 
the real consequences of predatory lending.
    However, despite the mutual concern that we have about the 
issue, there are philosophical differences about how best to 
curb predatory lending practices without shutting down the sub-
prime mortgage market. It is the job of this committee to 
navigate the differences between the legislative proposals to 
develop consensus on this legislation.
    In my home State of Massachusetts, legislators worked 
together to come up with a comprehensive predatory lending 
statute that was passed last year. I am curious to learn from 
today's witnesses their opinion on how the legislative 
proposals reflect a departure from strong consumer State laws 
such as the one in my home State.
    I understand that it can create a difficult marketplace if 
businesses have to play by 50 different sets of rules. That is 
why it is so important that we strike the balance that is 
proper within any Federal legislation. At the end of the day, I 
would like to walk away from this hearing with a better 
understanding of any rights that my constituents would gain or 
any current protections they would be forced to give up if we 
move forward with Federal legislation action on predatory 
lending as proposed.
    I do want to thank the members of this panel and the next 
panel for their willingness to come before the committee and 
help us with our work.
    Thank you. I yield back, Mr. Chairman.
    Chairman Ney. Thank you.
    We have one 15-minute vote. We have three members left. 
When we come back, we will begin, and I appreciate your 
patience with the panel.
    Next is Ms. Carson.
    Ms. Carson. Thank you very much, Mr. Chairman.
    And thank you very much for the panelists who have 
assembled here today. For the sake of my district, 
Indianapolis, Indiana, it is probably one of the most important 
hearings that this subcommittee could have for my district.
    Indiana has the highest foreclosure rate in the nation, 
which I am sure all of you know. There are many factors, of 
course, that perpetuate the foreclosures and the predatory 
lending. I created a 1-800 number for consumers to call before 
they sign their name on the dotted line. It has worked 
extremely well. I have taken the lead in my district to get to 
the bottom of all this. We have had indictments. We have had it 
all in the district.
    So I appreciate very much the time that you have taken to 
come and provide us with your thoughts on this very critical 
issue that affects my district in a very personal way.
    I yield back, Mr. Chairman.
    Chairman Ney. I thank the gentlelady.
    Mr. Sherman?
    Mr. Sherman. Thank you, Mr. Chairman.
    Sub-prime lending is critical to not only our economy, but 
to individual families. You know, there are a lot of developed 
countries in the world where you cannot buy a home unless you 
can put one-third or 40 percent of the money down. I do not 
know many working families in America that could even dream of 
doing that.
    Whereas here in the United States, many times if you have 
less than 10 percent down, and even if you have a flawed credit 
history, you can get a mortgage loan and achieve the dream of 
homeownership. We have to make sure that this access to credit, 
credit of 90 percent or more of the purchase price of a home, 
credit for those with less than perfect credit ratings, is not 
thrown away.
    We have an absurd patchwork of legal restrictions on 
lending, both geographical and as far as legal category. What 
is allowed in one State is not allowed in another. Now we have 
different counties getting involved, cities getting involved. 
And yet we want a situation where lenders compete so consumers 
win. Lenders cannot compete for business and give people the 
benefit of a market economy if we split this country up not 
only into 50 different markets, but into as many markets as we 
have cities.
    We also have an absurd patchwork in that we have one set of 
rules for most lenders, and then national banks have, well, no 
rules at all. We need, of course, to prevent predatory lending. 
We need good national standards that will achieve that. For 
those of my friends who want to see the toughest conceivable 
restrictions, Berkeley, California for example, and somehow 
feel that the Federal Government will take that away through 
congressional action, I can only say it has already been taken 
away by the bank regulators who have exempted a huge class of 
lenders not just from what Berkeley does, not just from what 
California does, but from virtually all rules.
    So we can do a lot more to protect consumers by having 
national standards that apply to everyone, than by bragging 
about how we have achieved some incredibly tight straitjacket 
on some lenders in some municipal jurisdictions.
    I yield back.
    Chairman Ney. Thank you.
    The gentlelady?
    Ms. Waters. Mr. Chairman, I would like to thank you for 
your interest in this subject matter, both predatory lending 
and sub-prime lending. I would like to thank you for giving all 
of our members the opportunity to get involved in this issue 
with your legislation and, of course, the legislation by Mr. 
Watt and Mr. Miller.
    We have been wrestling with the subject of predatory 
lending for so long. I have been involved in this issue since 
my days in the California State legislature, where we were 
basically dealing with redlining at the time. I am opposed, as 
you know, to preemption. I would not mind if we could get 
strong legislation that would take care of all of the 
jurisdictions in this country and not preempt those 
jurisdictions which have good laws on the books.
    Whenever you get national legislation, it is very minimal. 
I do not mind having some minimum legislation that would deal 
with some of these issues. However, I do not want to preempt 
those entities that have stronger legislation to protect the 
citizens of their region.
    This business of sub-prime lending is understood by many of 
us, and we are not opposed categorically to sub-prime lending. 
As a matter of fact, there are some lenders who have products 
that I like very much. For those people who have had some 
problems, who have demonstrated that not only have they taken 
care of those problems, but they have worked very hard to do 
it, I do not mind them getting into products that would cost a 
little bit more, but they have to be able to roll out of those 
products at some point in time.
    If you demonstrate that you can make your mortgage payment, 
that you can make them on time, then I think if you enter with 
a sub-prime loan then you should be able to exit at some 
reasonable point in time and revert to the kind of interest 
rates that would have been given to you had you not had that 
problem.
    It is absolutely unacceptable what many of our lending 
institutions are doing. I just really understood for the first 
time that you can have one of these banks who have offices that 
are for people who are not going to have to worry about being 
given sub-prime loans, and they have branches in mostly 
minority communities where that is all you can get. One bank, 
different treatment for people depending on where you live and 
what your ethnicity is, I suppose. That is absolutely 
unacceptable.
    I think that the housing market has been good to lenders. 
Everybody is making a lot of money. It would seem to me that 
our lenders would be a little bit more charitable. They should 
be coming to us talking about getting rid of prepayment 
penalties. And they should absolutely wipe out this 
discriminatory practice of charging people who live in a 
certain area more for their mortgages, higher interest rates, 
even though the amount of money that those people earn, the way 
that they have paid their bills, match those who come from 
other communities. They are still being ushered into these sub-
prime loans.
    It is wrong. It must stop. I have not really weighed in 100 
percent on all of this legislation, but I am not going to be 
charitable. I am not going to worry as much as some of my 
colleagues about the institutions and the ability for the 
institutions to have their way. I have discovered in this 
business that these banks can take care of themselves. Not only 
can they take care of themselves, they go way beyond what any 
reasonable person would expect in taking advantage of those who 
cannot negotiate these environments and fend off these 
practices because they just do not have the tools to work with 
to do it.
    So I think if this committee wants to do something 
admirable, would like to do something to really help the people 
of this country, we will work very, very hard to see that our 
citizens are not taken advantage of. We continue to talk about 
the American dream, to talk about how wonderful it is in 
America to be able to own a home. Well, let's do something 
about it and help people to own a home, not help people to get 
into these loans that will cause them to have to pay a 
disproportionate amount of their income; loans that are really 
pretty risky and will cause them to default.
    I think we can do better than we have done in the past, and 
I think the legislation that we are proposing now can take care 
of all of these issues now. Let's not delay it any longer.
    Thank you very much. I yield back.
    Chairman Ney. I thank the gentlelady.
    Ms. Waters. Excuse me one moment. I am sorry. If you do not 
mind, Mr. Chairman, I was asked to enter this opening statement 
of Congressman Meeks who could not be here today through no 
fault of his own.
    Chairman Ney. Without objection.
    Ms. Waters. He cares an awful lot about this subject and I 
would like to ask unanimous consent to enter it into the 
record.
    Chairman Ney. Without objection, it will be entered into 
the record.
    Mr. Bachus. I would just like to associate myself with the 
remarks of Mr. Sherman, who I think pretty much distilled my 
reasons for wanting some legislation. I am sorry that I cannot 
agree with my colleague.
    Ms. Waters. I am sorry, too.
    Mr. Bachus. I was very persuaded by his argument.
    Chairman Ney. If you do not mind, we are going to miss a 
vote, and we will come back to the panel.
    Thank you.
    The committee will be in recess.
    [Recess.]
    Chairman Ney. The committee will come to order.
    We have one brief, I am told, opening statement by Mr. 
Davis, and we will start with the panelists.
    Mr. Davis?
    Mr. Davis of Alabama. Thank you, Mr. Chairman. Let me let 
everybody get assembled, if you do not mind.
    Mr. Chairman, first of all, thank you for being gracious 
enough to give me an opening statement. Let me try to be brief 
because I know that we want to move to the testimony.
    I simply want to make three points. Number one, this is an 
enormously important hearing because I think the context around 
this issue has frankly changed since I have been in the House 
of Representatives. I think there was a perception several 
years ago that there was a disparity in sub-prime lending in 
the country. We are seeing more and more evidence of that.
    The concern that some of us have is that we may be entering 
a phase where the disparity in sub-prime lending does have a 
racial characteristic to it, at least descriptively it has a 
racial characteristic. I certainly compliment my friends from 
North Carolina, Mr. Miller and Mr. Watt, for their efforts in 
this area. I do compliment Mr. Ney and Mr. Kanjorski for their 
efforts as well. But the one determination that I have coming 
out of this process is that if we are going to have a new bill, 
if we are going to have a national standard, that, A, it be a 
strong one; and, B, that it be a standard that speaks to this 
emerging disparity.
    Homeowners in this country ought to have an expectation of 
a market that is not racially tinged. They ought to have an 
expectation of a market that reflects the realities of the 
marketplace, and not one that reflects any other hidden biases 
in our society. So I would just simply say that I thank again 
both the Chairs of this committee for calling this hearing and 
I am hopeful that we will adopt an effective standard and one 
that does address this emerging problem in our economy.
    Mr. Chairman, thank you for being indulgent with me today.
    Chairman Ney. I thank the gentleman.
    The gentleman from North Carolina is going to introduce the 
first witness.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    There are actually three witnesses from North Carolina on 
this panel, which is impressive. Two are fairly familiar, I 
think, to members of this committee, or at least to those who 
do follow the committee's work. Stella Adams and Martin Eakes 
are well known nationally as consumer advocates. The witness 
that the Chair graciously allowed me to invite was Joseph 
Smith, the Commissioner of Banks of North Carolina. Mr. Smith 
is a graduate of Davidson and the University of Virginia law 
school.
    He practiced law at a variety of corporate law firms. He 
was the General Counsel of RBC Centura, a large North Carolina-
based bank, before becoming Commissioner of Banks approximately 
3 years ago, where he has both regulatory and rulemaking 
authority over the mortgage industry. He has licensed 1,500 
mortgage firms and 15,000 individual mortgage brokers.
    Ms. Adams and Mr. Eakes bring to this panel the perspective 
of a consumer advocate, which as I said before, is an important 
perspective to have added to this debate. But Mr. Smith's 
perspective is that of a corporate lawyer, and a banking 
lawyer, and his experience in applying and construing North 
Carolina's law from that perspective.
    Thank you, Mr. Chairman.
    Chairman Ney. I thank the gentleman.
    Welcome to Mr. Smith.
    Stella Adams is the executive director of the North 
Carolina Fair Housing Center, a nonprofit organization seeking 
to create equal housing opportunity and equal access to all 
citizens. Ms. Adams is testifying today on behalf of the 
National Community Reinvestment Coalition. The coalition seeks 
to increase the flow of private capital into traditionally 
underserved communities. Its members include community 
development corporations, civil rights groups, community 
reinvestment advocates, local and State government agencies and 
churches.
    Martin Eakes is the chief executive officer of the 
nonprofit Center for Community Self Help in Durham, North 
Carolina. The center, with its two financing affiliate Self 
Help Credit Union and Self Help Ventures Fund, seeks to create 
ownership and economic opportunities for minorities, women, 
rural residents and low-wealth families.
    Micah Green is president of the Bond Market Association. 
The association represents the largest securities markets in 
the world, the estimated $44 trillion debt markets. Its 
membership accounts for about 95 percent of the nation's 
municipal securities underwriting and trading activity, and 
includes all primary dealers in the United States Government 
securities, all major dealings in United States agency 
securities and mortgage-and asset-backed securities and 
corporate bonds.
    Regina Lowrie is from Mr. Fitzpatrick's district, he wanted 
me to note, and is president of the Gateway Funding Diversified 
Mortgage Services in Horsham, Pennsylvania. She is also 
testifying on behalf of the Mortgage Bankers Association, a 
national association representing the real estate finance 
industry. Its members comprise more than 70 percent of the 
single-family mortgage market and more than 50 percent of the 
commercial multi-family market.
    Steve Nadon is the chief operating officer of Option One 
Mortgage Corporation, a subsidiary of H&R Block Incorporated, 
located in Irvine, California. He oversees the company's Option 
One and H&R Block mortgage origination business, as well as the 
internal lending operations. Mr. Nadon is testifying on behalf 
of the Coalition for Fair and Affordable Lending, the coalition 
which represents over one-third of the non-prime mortgage 
lending industry, advocates for national and fair legislative 
standards for non-prime mortgage lending.
    I want to welcome all the panelists.
    We will begin with Mr. Smith. Thank you.

     STATEMENT OF MR. JOSEPH A. SMITH, JR., NORTH CAROLINA 
                     COMMISSIONER OF BANKS

    Mr. Smith. Thank you, sir.
    Representative Ney, Representative Bachus, Representative 
Kanjorski, my friend Representative Miller and Representative 
McHenry, all Tarheels, and I will say, Mr. Chairman, your 
counsel is also a Tarheel, so I feel very at home with this 
committee.
    Thank you very much for inviting me to participate in this 
hearing.
    Chairman Ney. Maybe he has been in Washington too long and 
he forgot that. Thank you for reminding me.
    [Laughter.]
    Mr. Smith. He admitted it to me.
    Thank you very much for inviting me to testify. I filed 
written testimony and in the interest of time I will try to 
pull out a few salient points that I hope you will find of 
interest.
    First, I cannot resist beginning with a glaring generality, 
which is that home mortgage lending in the United States today 
is a local transaction that is funded globally. That is the 
issue that confronts policymakers at the State level and here 
at the national level.
    There has been a revolution in mortgage finance, as I am 
sure you all aware, over the last 25 years. I can remember my 
first mortgage, barely, with a thrift institution in 
Connecticut, of all places, years ago and it is not the same 
world at all now. The mortgage business has been deconstructed. 
Funding, origination and servicing are done by different firms, 
many of whom never have contact with the consumer or the 
community in which the consumer resides.
    The results have been what I call the good, the bad and the 
ugly. The good is increased access, as you have discussed, to 
mortgage capital. The bad has been increased foreclosures. And 
the ugly has been predatory lending and its ugly twin, fraud, 
and I think they are related.
    The States have taken action. North Carolina was the first 
to adopt an anti-predatory lending law because, let it be 
remembered, Federal standards at the time were insufficient to 
stop predatory conduct. That is why this whole business got 
started.
    So what has been the result? I am not a statistician, and I 
know there are various studies about the impact of North 
Carolina's law, but I understand you are interested in that. I 
will say I sit regularly at an office in Raleigh, North 
Carolina and travel around North Carolina and hear from people 
who have problems in North Carolina. My office gets about 1,500 
formal consumer complaints a year. We get about five times that 
many informal ones. Two-thirds of those are about mortgages.
    I have been in this office 3 years. I have never heard a 
single example of a single person who has ever come to me, to 
anyone I know in government, to anyone I know or have heard 
from in our General Assembly, claiming they were denied 
mortgage credit because of our laws, ever. I understand there 
are other studies that say different things, but I must tell 
you, so far I have yet to meet the flesh-and-blood example for 
this issue.
    Further, it appears to me fundamentally that the law has 
not driven people from the market. Among our top 15 sub-prime 
lenders in 2003, 7 of the top 15 were among the top 15 
nationally. Option One, by the way, was our leading lender in 
North Carolina in sub-prime during that year. And they have 
roughly the same market share in North Carolina that they have 
elsewhere.
    So I think the case has yet to be made, to be frank, that 
North Carolina's law has driven people out of the mortgage 
market, driven lenders away who really wanted to be there, or 
driven people away, or had the effect--direct or indirect--of 
denying people mortgage credit.
    What do I think are the lessons that may be drawn from our 
experience and the experience of other States around the 
country? By the way, if we are crazy, if this is some sort of 
insanity on our part, it is shared by a number of other States 
who seem to have the same problems in the real flesh and blood 
world. Let me suggest to you five or so items that I would 
appreciate it, and I think you might well consider in looking 
at Federal legislation.
    This first one I am doing with trepidation because I know I 
am going to get stoned over it by some, but the first question 
is whether there is a Federal standard required at all. I 
understand the issue about separate State laws, but to be 
frank, the bond market and the secondary market in mortgage 
securities does not seem to be suffering greatly. They have 
made a boatload of money and it is hard for me to see that they 
are sort of at death's door, but I am sure they can defend 
themselves on that. They may be. They may just look better than 
they feel.
    Secondly, if you must have Federal standards, look to the 
standards that worked in the States. I would say that North 
Carolina's standard is a standard that you ought to look at.
    Thirdly, and this is very important, if you adopt Federal 
legislation, please give the States coordinated enforcement 
authority of Federal standards in your law. It is wrong to 
think that a law, however good it may be, adopted by you can be 
enforced centrally.
    Finally, we should also be included in mortgage oversight. 
I will say I am pleased to see and I hope you will continue to 
incorporate the efforts that are going on with the Conference 
of State Bank Supervisors pulling together a unified national 
application system and database in the mortgage industry.
    I appreciate very much the time allotted to me and would be 
happy to answer any questions. Thank you very much for inviting 
me, sir.
    [The prepared statement of Mr. Smith can be found on page 
355 of the appendix.]
    Chairman Ney. Thank you for coming here.
    Ms. Adams?

  MS. STELLA J. ADAMS, BOARD OF DIRECTORS, NATIONAL COMMUNITY 
                     REINVESTMENT COALITION

    Ms. Adams. Thank you, Chairmen Ney and Bachus, and Ranking 
Members, Representative Miller, Representative McHenry. It is 
an honor to be here today as the voice of over 600 community 
organizations from across the country that comprise the 
National Community Reinvestment Coalition.
    NCRC is the Nation's economic justice trade association 
dedicated to increasing access to capital and credit for 
minority and working-class families. Our member organizations 
represent communities from your congressional districts, 
organizations such as the Coalition of Neighborhoods in Ohio; 
the Community Action Partnership of Northern Alabama; the 
Community Action Committee of Lehigh Valley in Pennsylvania; 
and finally, the North Carolina Fair Housing Center where I am 
the Executive Director.
    We appreciate your convening today's hearing on an issue 
that all of our members have been addressing for the last 10 
years. In North Carolina, my organization worked tirelessly in 
coalition with the Community Reinvestment Association of North 
Carolina, Self Help, and other grassroots community 
organizations and industry to craft, promote and help secure 
the passage of North Carolina's anti-predatory lending bill.
    Although North Carolinians enjoy some protection from 
predatory lending, there are still many States where consumers 
have little or no protection at all, and we believe that should 
change. Congress must ensure that any national bill related to 
predatory lending has at its core the need to provide consumers 
relief from abusive lending practices that steal homeowner 
equity, which is the primary and often the only form of wealth-
building for most Americans.
    I am reminded today of the words of the prophet Jeremiah: 
``Thus said the Lord, do justice and righteousness and deliver 
from the hand of the oppressor him who has been robbed.''
    Not all sub-prime loans are predatory, but predatory 
lending is a subset of sub-prime loans that takes advantage of 
borrowers not familiar with the lending process. The new 2004 
HMDA data allows us to identify which communities receive the 
most sub-prime loans and are therefore most prone to predatory 
lending. For the first time, it includes pricing data for sub-
prime lending. We found that minorities and women receive a 
disproportionate amount of sub-prime loans.
    Last month, NCRC released a report that was one of the 
first studies to examine the new HMDA data. The written 
testimony talks about this study and other NCRC studies. These 
studies reveal that pricing disparities remain consistent over 
the years. One of the studies controls for credit-worthiness 
and still finds large disparities.
    In the written testimony, we discuss the NCRC fair lending 
test report. This nationwide testing project examined large 
sub-prime lenders and revealed substantial differences in 
pricing and treatment based on race and gender. The testing 
project looked at pre-application stage. In addition, NCRC's 
consumer rescue fund reveals alarming and distressing real-life 
stories of what happens to people throughout the application 
process and the long-term effects of unsafe and unaffordable 
loans.
    Mr. Ney, in the State of Ohio, NCRC is working with over 
100 consumers, most of them elderly minority people, who are 
being uprooted from the homes they have lived in for over 40 
years. These unsuspecting consumers fell victim to a home 
improvement scam and are now facing foreclosure. In Staten 
Island and Long Island, NCRC is assisting over 100 New York 
City policemen and firefighters who purchased homes from an 
unscrupulous housing developer and mortgage broker. For these 
9-11 heroes, the American dream of owning a home has now become 
their nightmare.
    In my home State, we have seen numerous victims of 
predatory practice, none worse than what happened to the folks 
in Vance County. The center investigated over 165 complaints 
against Donald Gupton and his many businesses. We filed 
complaints with the North Carolina Attorney General. He sold 
mobile homes to consumers whom the company knew could not keep 
up with the payments. He lied to customers about the price of 
homes, about their ability to refinance at a lower rate; 
falsified loan applications; misrepresented the value of the 
property by encouraging inflated appraisals of the homes and 
land sold to consumers.
    A consent decree was entered, but it has had little impact 
on the over 200 victimized families. Because there is no 
assignee liability, most of these victims of appraisal fraud 
and predatory lending abuses face foreclosure or are stuck 
making payments on homes that are not worth one-third of what 
they owe.
    In High Point, North Carolina, 11 mortgage brokers were 
indicted for faking downpayments and submitting inflated 
appraisals for loans they brokered, practices that allowed them 
to pocket the difference when the inflated loan came in. Again, 
there was no recourse available for the victims of homeowners 
who are stuck in these loans. Property flipping and inflated 
appraisals resulted in $23 million worth of fraudulent laws and 
50-plus home foreclosures in rural Johnson County.
    We believe there is a need for a strong comprehensive 
national bill. We believe that State anti-predatory lending 
laws have not choked off access to credit. While we believe 
that lenders can operate in the current regime of Federal and 
State legislation, we would favor a national law if it is 
comprehensive and builds on the best State laws such as North 
Carolina's, New Mexico's, New Jersey's and New York's. It is 
remarkable that about half the States in this country have 
passed anti-predatory laws, but that still leaves citizens in 
half the other States unprotected from predators.
    Thus, a strong comprehensive national law is needed that 
expands upon the best State laws and existing Federal law and 
builds upon the best practices established by industry.
    I would like to highlight a couple of key provisions that 
must be included in any national bill. H.R. 1295 contains a 
provision that strives to outlaw steering or making a high-cost 
loan to a borrower who can qualify for a prime loan.
    Chairman Ney. I am sorry to interrupt you, Ms. Adams. The 
time has run over, but if you would like to summarize and 
submit for the record?
    Ms. Adams. Yes, sir, I would.
    Chairman Ney. I am sorry.
    Ms. Adams. If you would allow, I would like to also 
introduce into the record a letter from the membership of NCRC.
    Chairman Ney. Without objection.
    Ms. Adams. And also our studies that I talked about in my 
written text.
    Chairman Ney. Without objection.
    Ms. Adams. Thank you so much.
    [The prepared statement of Ms. Adams can be found on page 
124 of the appendix:]
    Chairman Ney. Thank you.
    Mr. Eakes?

  STATEMENT OF MR. MARTIN D. EAKES, CHIEF EXECUTIVE OFFICER, 
                 CENTER FOR COMMUNITY SELF HELP

    Mr. Eakes. Good morning. Chairman Bachus, Chairman Ney, 
Ranking Member Sanders, Ranking Member Waters, my fearless 
leaders from North Carolina, Representatives Miller, Watt and 
McHenry, thank you for holding this hearing today and thank you 
for letting me come to testify.
    I am the CEO of Self Help and the Center for Responsible 
Lending. Representative Miller introduced me as a consumer 
advocate, but that is not the way I think of myself. I think of 
myself as a lender first. Self Help is a community development 
lender, the largest nonprofit community development lender in 
the country. In the last 21 years, we have provided financing 
of almost $4 billion to 40,000 families who were underserved 
and unable to get homeownership financing.
    I will also tell you that Self Help is one of the oldest 
sub-prime lenders. We were doing sub-prime before anyone called 
it that. We were doing loans to people who were credit-
impaired, but really good people who deserved to be able to own 
a home. For 21 years I have been making these loans and I have 
had virtually no defaults. So any sub-prime lender that has a 
large number of foreclosures, it means they are doing something 
wrong. It does not have to be done that way.
    Five years ago, 6 years ago, in response to borrowers who 
came to us and said, we are about to lose our homes; could you 
look at our financing papers? I started looking at individual 
borrowers and found that the first one that came to me a 
borrower who had a $29,000 loan that he had refinanced and was 
charged $15,000 in up-front fees. When he walked out of that 
office, he was doomed to lose that home one way or another. 
When I called the lender to contest, the person said to me, 
well, you are just a competitor trying to steal my loan and I 
will not even tell you what the payoff balance is for this 
borrower.
    That really infuriated me. And we set up an affiliate 
called the Center for Responsible Lending, a nonprofit, 
nonpartisan research and policy organization dedicated to 
protecting homeownership and family wealth by working to 
eliminate abusive financial practices.
    I want to tell you a little bit about how the North 
Carolina bill came about. I was the person who helped put 
together the leadership group that ultimately passed the North 
Carolina bill. Here is what we did that was quite unique. We 
brought together a group that included all of the mid-size 
banks in North Carolina, all the large banks, all the credit 
unions, the mortgage brokers, the mortgage bankers, the 
realtors, the civil rights groups, the housing groups, the 
community groups, the elder groups, AARP, everyone at one table 
to negotiate a bill.
    We ended up with a bill that no one particularly loved 
because it was a compromise. No one got exactly what they 
wanted, but those of you who have been in Congress for any time 
at all know that when you have the credit unions and the banks 
together saying pass a law that will regulate each of us, so 
that we can get rid of the bad lenders in our marketplace, you 
know something unique has happened and a problem that is very 
pervasive is being addressed.
    What North Carolina did, and it was very bipartisan, passed 
legislation that out of 170 legislators had only three 
dissenters. It was totally bipartisan in every regard. North 
Carolina started with two principles. The first was that we 
would not impose any more disclosures on borrowers or lenders. 
With 30 forms at a homeownership closing now, there is so much 
paperwork that adding one more would do more harm than good.
    The second piece that we did that was quite controversial 
is we said, but it was what brought all of us together in the 
industry and the wealth-advocate community, is we said we are 
not going to put a cap on the interest rate that can be charged 
to homeowners. Instead, what we are going to do is gradually 
get rid of the hidden fees that borrowers do not know they are 
getting and allow that to be translated into the interest rate 
on the mortgages.
    The truth is, it did not happen. That was the theory, but 
when we passed the four restrictions in the North Carolina 
bill, all of which went away, interest rates did not go up at 
all. So what this tells us is that in a competitive 
marketplace, these fees were really unnecessary.
    Here is what the North Carolina bill did in four ways. It 
did four things. The first thing is it prohibited the practice 
of flipping. ``Flipping'' is something that is done as an 
alternative to a high-cost loan. Someone finds the measure, 
whether it is 5 percent fees or 8 percent fees, and offers a 
loan that is just below that, but does it repeatedly so that 
they eventually strip the wealth out of a person's home.
    The problem with the Ney-Kanjorski bill is in its details. 
It prohibits flipping only for high-cost loans, so either it 
does not understand that flipping is an alternative to high-
cost loans, but it means that it will have absolutely no effect 
in this bill. That was one of the most significant pieces in 
the North Carolina law.
    The second thing the North Carolina law did is it 
prohibited prepayment penalties. What it was basically saying, 
a large consensus of all the legislators in North Carolina, is 
that we do not want people who get into a bad loan to be 
trapped in it forever. Let's let people get out so that they do 
not have $5,000 or $10,000 fees preventing them from being able 
to get from a bad loan to a good loan.
    The third thing we did was prohibit single-premium credit 
insurance altogether. Now, I think this is an unintended defect 
in the language of the Ney-Kanjorski bill now, but it actually 
would reauthorize single-premium credit insurance in this bill. 
It defines the prohibition against single-premium credit 
insurance only for high-cost loans, but it does not include 
single-premium in the definition of points and fees to trigger 
the high cost.
    Chairman Ney. Sorry to interrupt you, but if you could wrap 
it up because the time has expired.
    Mr. Eakes. Okay. The final thing that the North Carolina 
bill did was to put a limit on loans that had greater than 5 
percent fees. In this regard, many of the bills are similar.
    But those are the only four things that the North Carolina 
bill did. Unfortunately, in the Ney-Kanjorski bill currently 
before us, three of the four things are applied only to high-
cost loans and the exceptions in the definition of a high-cost 
loan means that they will never apply.
    So thank you for letting me come today. I am a real 
technician. I hope you will ask me questions and let me be the 
geek that I am.
    [The prepared statement of Mr. Eakes can be found on page 
150 of the appendix:]
    Chairman Ney. Thank you.
    Mr. Green?

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

    Mr. Green. Thank you, Mr. Chairman. I thank you for the 
opportunity to testify today at this important hearing on 
predatory lending.
    I am Micah Green, as the Chairman said, president of the 
Bond Market Association. I am also representing the views of 
the American Securitization Forum, which is an adjunct forum of 
the Bond Market Association. It is a broadly based professional 
forum of participants in the U.S. securitization markets.
    At the outset, I would like to acknowledge the tremendous 
efforts of you, Chairman Ney, and your coauthor Congressman 
Kanjorski, for introducing the Responsible Lending Act and the 
many cosponsors who are both on this committee and in the House 
generally.
    This is a clear-headed piece of legislation that to your 
credit reflects years of discussion and consultation with many 
and varied stakeholder groups with an interest in the very 
difficult public policy question of how to best curb predatory 
lending and ensure sub-prime borrowers have access to mortgage 
credit. Members of the BMA and the American Securitization 
Forum commend you for your efforts. We support the Responsible 
Lending Act and the clarity it would bring to the secondary 
market for sub-prime mortgages.
    The secondary market, more broadly securitization, plays an 
important role in our lives, not just for sub-prime mortgage 
borrowers, but all consumers. Besides mortgages, car loans, 
student loans, credit card loans and others, are repackaged by 
the secondary market as marketable securities. The process 
links the needs of borrowers to the broader capital markets, 
not just a single bank or credit card company. Credit for home 
mortgages and other credit needs as a result has become more 
broadly available and less costly.
    Why do financial market participants engage in 
securitization? Because issuers of these securities have a need 
for more capital to make new loans, which ultimately benefits 
consumers. Investors in the United States and the world have 
come to realize that asset-and mortgage-backed securities 
provide attractive and reliable returns. Investors are buying 
the rights to loan payments. The secondary market knows that in 
order to please its customers, investors, the pool of loans 
backing these securities needs to be reliable. Loans with 
predatory characteristics add uncertainty and risk to 
securitizations for which investors must be compensated.
    These loans are more likely to default or repay early, 
which strikes at the heart of predictability and reliability 
sought by investors. They are also more likely to carry the 
risk of liability under one of dozens of anti-predatory lending 
laws at the State and local levels. Loans with predatory 
characteristics are obviously not in the best interest of 
borrowers, but they are also not in the best interest of the 
members of the Bond Market Association and the American 
Securitization Forum, who structure mortgage-and asset-backed 
securities because they are not in the best interest of the 
investors who buy those securities.
    For these reasons, secondary market participants employ 
rigorous due diligence, policies and procedures to screen for 
predatory loans. Mr. Chairman, let me state the obvious. No one 
testifying today favors predatory lending. It is a blight on an 
otherwise thriving home mortgage industry. It benefits no one 
except for the rare bad actors who typically take advantage of 
the most vulnerable borrowers.
    We believe that the Responsible Lending Act is the best 
chance yet to combat in a comprehensive manner predatory 
lending. It achieves the twin goals of borrower protection and 
the preservation of the benefits of securitization for those 
same borrowers. In several critical areas, the bill brings 
clarity to what are currently areas of uncertainty for 
participants in the secondary market for sub-prime loans. The 
bill clarifies what is a broad assignee liability standard in 
the Home Equity Protection Act to specify where secondary 
market participants would face liability for bad loans and when 
they would not.
    Under this legislation, borrowers facing foreclosure could 
bring claims against assignees under the appropriate 
circumstances. And regardless of their credit standing, 
borrowers could also bring affirmative claims against assignees 
that act with reckless indifference toward the terms of the 
Responsible Lending Act. Borrowers are protected and have 
avenues for relief. The secondary market is preserved.
    The Responsible Lending Act limits the damages of an 
assignee it could face under the liability provision to the 
actual economic loss experienced by the borrower. This is fair 
compensation for borrowers and a fair cost to assignees. 
Providing borrowers with an opportunity to recover an amount in 
excess of what an abusive lending term has cost them would not 
be equitable for the assignee that did not participate in the 
lending process. As with assignee liability in general, the 
exception to this rule is the instance when assignees exhibit 
reckless indifference, and there they have affirmative claims 
of action.
    The bill would also introduce the concept of a right to 
cure and preemption directly into the Federal mortgage lending 
regulation. The right to cure grants an assignee up to 60 days 
after the discovery to correct a lending violation and fully 
compensate the borrower for losses incurred. By establishing a 
uniform national standard for sub-prime lending, the 
Responsible Lending Act eliminates the confusion and 
inefficiency created by 47 varied and sometimes conflicting 
State statutes.
    In conclusion, Mr. Chairman and members of the committee, 
any public policy solution to the problem of predatory lending 
is unlikely to leave all borrowers and all lenders satisfied 
that enough has been done or enough has been averted. I think 
we would all agree that there is a need to fight the scourge of 
predatory lending in a balanced way that protects borrowers 
before the loan is made, provides the same borrowers an avenue 
for fair relief, and does so in a way that preserves the 
secondary market as a legitimate source of capital for sub-
prime mortgages.
    We believe the Ney-Kanjorski bill does that.
    And I thank you for the opportunity to testify.
    [The prepared statement of Mr. Green can be found on page 
186 of the appendix:]
    Chairman Ney. Thank you.
    Ms. Lowrie?

   STATEMENT OF MS. REGINA LOWRIE, PRESIDENT-ELECT, MORTGAGE 
                      BANKERS ASSOCIATION

    Ms. Lowrie. Good afternoon, Mr. Chairman and members of the 
committee. My name is Regina Lowrie, and I am president of 
Gateway Funding Diversified Mortgage Services in Horsham, 
Pennsylvania. I am also chairman-elect of the Mortgage Bankers 
Association and appear before you today on behalf of MBA. Thank 
you for giving us the opportunity to express and share our 
views with you today.
    Mr. Chairman, let me begin by stating that MBA detests 
predatory and abusive lending. Such practices, however rare, 
are a stain on our industry and undermine the trust that 
consumers put in us. I believe that everyone in this room today 
shares the same ultimate goal, to end abusive practices in the 
mortgage market. It is imperative that in doing so we exercise 
wisdom and foresight.
    Over the last decade, the creation of a national non-prime 
mortgage market has made mortgage credit available to thousands 
of families for whom homeownership was previously out of reach. 
Non-prime borrowers commonly have low-to-moderate income, less 
cash for a downpayment, and credit histories that range from 
less than perfect to none at all, borrowers whose credit has 
been damaged by divorce or illness, single moms and dads, 
teachers and firefighters who have gone through difficult 
times, but still aspire to the dream of homeownership.
    A number of States and localities have passed a wide range 
of intention laws to combat abusive lending. Unfortunately, 
these laws often include subjective standards and create an 
immense compliance burden and higher costs for consumers. In 
the worst case, these laws have chased legitimate lenders out 
of certain jurisdictions altogether, reducing credit options 
for consumers. These consequences are inconsistent with the 
goal of maintaining access to affordable credit, while ending 
abusive lending practices.
    While H.R. 1295 creates a tough standard for the industry 
to operate under, MBA believes it is a big step toward creating 
a uniform national standard. In general, it strikes the proper 
balance by providing strong consumer protections and clear, 
objective compliance standards that will help facilitate market 
competition. Regulators, think about this, regulators would 
have one standard to enforce. Consumers would have one standard 
to understand and lenders would have one standard to obey.
    MBA supports a number of specific provisions included in 
H.R. 1295. Under H.R. 1295, more loans would be subject to the 
Homeownership Equity Protection Act, bringing greater 
protection to high-cost borrowers. The bill would extend HOEPA 
coverage to home equity lines of credit, purchase loans, and 
also lower the points and fees triggers from 8 percent down to 
5 percent.
    The bill also includes an opportunity for industry to 
promptly cure errors for consumers, as well as reasonable 
assignee liability standards. It is also important to preserve 
borrowers' options by excluding yields per premiums and 
prepayment penalties from the points and fees calculation.
    In summary, Mr. Chairman and members of the committee, MBA, 
like all of you, detests abusive lending and is committed to 
eliminating it. We believe strongly that the appropriate 
response to the problem of abusive lending is a clear, 
consistent, reasonable national standard for a national 
mortgage market.
    Once again, Mr. Chairman, I thank you for allowing me the 
opportunity to appear before you today. I look forward to 
answering the committee's questions. Thank you.
    [The prepared statement of Ms. Lowrie can be found on page 
206 of the appendix:]
    Chairman Ney. Thank you.
    Mr. Nadon?

   STATEMENT OF MR. STEVE L. NADON, CHIEF OPERATING OFFICER, 
 OPTION ONE MORTGAGE, ON BEHALF OF THE COALITION FOR FAIR AND 
                       AFFORDABLE LENDING

    Mr. Nadon. The Coalition for Fair and Affordable Lending 
appreciates the opportunity for me to testify on its behalf 
today. I am Steve Nadon, CFAL's chairman and chief operating 
officer of Option One Mortgage, which is a subsidiary of H&R 
Block and which is one of the Nation's largest non-prime 
mortgage lenders.
    CFAL commends the lead sponsors of H.R. 1295 and H.R. 1182 
and their staffs for the thought and hard work that they have 
put into these bills. Both bills are well-intended and have a 
number of good concepts, but both have some problematic 
provisions. Having reviewed both bills, CFAL favors H.R. 1295, 
but believes that the committee should further refine it, 
including, where appropriate, incorporating certain of the 
Miller-Watt bill's concepts.
    The Ney-Kanjorski bill significantly enhances current 
Federal law, covering more loans, improving the existing 
provisions and adding effective and workable new safeguards on 
other specific lending practices. Most of these provisions 
equal or exceed those of most State laws. Quite importantly, 
its provisions are designed to prevent abusive lending 
practices without limiting borrowers' access to affordable 
mortgage credit and their ability to choose flexible mortgage 
financing options.
    Ney-Kanjorski provides for uniform national mortgage 
lending standards which CFAL strongly supports. Current State 
regulations provide very unequal levels of protection for 
borrowers. Uniform national standards can ensure that all 
borrowers in this country wherever they live and whatever 
lender they choose, enjoy a high level of protection, and that 
all communities have mortgage capital available on fair and 
affordable terms. CFAL believes that both Federal and State 
regulators should actively enforce these nationwide standards.
    H.R. 1295 also has very important additional provisions to 
greatly enhance financial counseling and education programs 
that are based on legislation developed earlier under 
Representative David Scott's leadership. We share 
Representative Scott's confidence that provisions in the bill 
that mandate establishing and widely publicizing the existence 
of both a toll-free telephone number and an Internet site that 
the public can use for information about reputable credit 
counselors to assist them in making mortgage decisions will be 
practical important tools for helping consumers navigate the 
mortgage process intelligently.
    We think the committee also should consider having lenders 
pay a modest fee, perhaps $2, when loans are recorded after 
closing to help support State-and community-based education and 
counseling programs. A portion of this fee also could be used 
as a funding mechanism for enhanced State enforcement efforts.
    H.R. 1295, however, is not perfect and it needs a number of 
further technical and substantive refinements. For example, 
while we strongly support preemption, the provisions in Ney-
Kanjorski need to be scaled back so that they do not sweep in 
almost all mortgage-related activities, for example, closure 
laws, and are instead targeted primarily at State and local 
laws aimed at regulating mortgage lending practices, whether 
based on a loan trigger rate or some other mechanism.
    We believe that the Ney-Kanjorski bill for the most part 
strikes a good balance between adding protections against abuse 
of these financing options and allowing lenders to continue 
offering these choices to borrowers so they can make their 
loans more affordable. However, the Miller-Watt bill takes a 
fundamentally different approach on each of these issues, which 
have substantially negative impacts on loan affordability for 
all non-prime borrowers, not just high-cost borrowers. Let me 
explain this problem.
    Both Ney-Kanjorski and Miller-Watt lower the 8 percent 
trigger to 5 percent, but they take very different approaches 
in dealing with prepayment penalties, yield-spread premiums, 
and discount points. As noted above, Miller-Watt includes both 
yield spread and the potential maximum prepayment penalty in 
the calculation of points and fees, and the exclusion of 
discount points essentially does not apply with most non-prime 
loans.
    The result of this is that in real terms the 5 percent 
trigger is more like 2 percent or less. This forces the lender 
to put more costs into the rate, significantly raising the rate 
and therefore raising the borrower's monthly payment. Under 
Miller-Watt, the borrower also is generally no longer able to 
use discount points to buy down his or her rate, or to accept a 
prepayment penalty to lower the rate, and the de facto 
prohibition on the use of prepayment penalties would further 
cause all non-prime loans to go up by 1 percent.
    The bottom line here is unmistakable and inescapable. Most 
non-prime borrowers would have no flexible loan financing 
options that are so essential to meeting their needs and 
circumstances, and would find that loans would be much less 
affordable. Moreover, many borrowers who want to purchase homes 
would find that with the much higher rates and monthly 
payments, they could no longer qualify for a large enough loan 
so they would have to shift to a less expensive home and a 
smaller loan.
    Please look at the chart on page five of my oral statement 
or page 10 of my written statement which we handed out this 
morning. As you will readily see in the example provided, the 
Miller-Watt bill would result in monthly payments being 
increased by 25 percent or more because it effectively 
prohibits non-prime borrowers from using flexible financing 
options. Mr. Chairman, I suspect this is a classic case of 
unintended consequences and I do not believe that the Miller-
Watt bill sponsors ever intended such adverse consequences for 
borrowers.
    In any case, I sincerely hope that the committee will not 
adopt the overly restrictive approach on these flexible loan-
financing options that are proposed in the Miller-Watt bill. 
CFAL believes that the Ney-Kanjorski provisions here generally 
provide reasonable protections that preserve borrowers' choices 
and their options for making their loans much more affordable 
than under the Miller-Watt bill. As I noted earlier, some of 
these Ney-Kanjorski provisions can be tweaked or tightened 
somewhat, but they are basically sound and should be retained.
    CFAL is confident that the Financial Services Committee can 
work together on a bipartisan basis to fairly resolve the 
various issues addressed in these legislative proposals and can 
report out a balanced bill that provides effective national 
standards for fair lending and that protects all non-prime 
borrowers in every State without unduly limiting their 
financing options and access to affordable mortgage credit.
    We appreciate your allowing us the time.
    [The prepared statement of Mr. Nadon can be found on page 
225 of the appendix:]
    Chairman Ney. Thank you.
    I am going to yield at this time to Chairman Bachus.
    Mr. Bachus. I thank the Chairman.
    Ms. Adams, I think your testimony is you think we need a 
national standard. Is that correct?
    Ms. Adams. Yes, sir. We need a strong national standard.
    Mr. Bachus. Okay. And I would say, I am from a State that 
has no law, no regulation and that is also the case with 
Kansas, Mr. Moore's State and others.
    Let me ask all the panelists, and I would say, Mr. Smith, 
one thing that you said I sort of question. You said all 
lending is local. Is that right?
    Mr. Smith. I said that the mortgage itself is a local 
transaction, but it is funded globally. That has changed from 
the old days.
    Mr. Bachus. But securitization, there is the secondary 
market. It is a national market.
    Mr. Smith. Okay. But I mean ultimately, what I meant by 
``globalization'' frankly was national and international 
markets.
    Mr. Bachus. But you understand now securitization is 
actually a national market. To finance loans locally, you go 
nationally.
    Mr. Smith. I understand.
    Mr. Bachus. Okay. I think we are all seeking the same 
thing, and that is a national law that will work, will allow 
people to get good loans, will basically weed out and prevent 
bad loans or punish those if they are made. We have talked 
about different States. One State that has not been mentioned, 
and I am curious to know why because the law has been on the 
books for some time, and I have not seen any criticism of it, 
and I am not seeing any. I know loans are still available and 
it does not seem to have driven up the cost of loans in 
California. Ms. Adams, the California law, is that a good law? 
You did not mention it in your list.
    Ms. Adams. No, sir, I did not mention it in my list. To be 
quite honest, I personally am not familiar enough with the 
California law and how it works to be able to respond to that. 
But being from North Carolina, I know we have a really good 
law.
    Mr. Bachus. In some States like North Carolina, a lot of 
the loans, you cannot finance them on the national market, in 
the secondary market.
    Ms. Adams. I have not found that to be true, sir. Almost 
all of the loans that we work with, there is national service 
involved with that.
    Mr. Bachus. What about, and I would just ask any of the 
panelists, what about the testimony about the studies that say 
it drives up the cost of loans and it affects loan 
availability? Anybody want to respond to that?
    Mr. Green. I would.
    Mr. Bachus. Let's let Ms. Lowrie and then Mr. Green.
    Ms. Lowrie. Mr. Chairman, I would like to speak to that. I 
think sometimes true stories really speak volumes to it. We can 
run a lot of reports and gather a lot of statistics, and we do 
operate in a national mortgage market. Before I tell you my 
little story, I want us to just step back for a second and 
think about where the mortgage industry was in the early 
1980's, when consumers went to banks and through deposits banks 
lent out money. There was no diversity on a national level, and 
if there was a credit crisis like when there was the oil patch 
crisis in Texas, liquidity in that market raced right up.
    The sheer fact that we have been operating in a national 
mortgage market is evidenced by the fact that we have two 
government-sponsored enterprises that have standardized 
underwriting guidelines, borrowers' profiles, credit profiles, 
and all of you I applaud for having validated that by passing 
the Fair Credit Reporting Act, which creates a uniform credit 
standard.
    Mr. Bachus. My time is kind of low, but have you seen any 
lack of loan affordability or credit availability?
    Ms. Lowrie. Actually, there is a situation in the State of 
New Jersey that happened right after the New Jersey predatory 
lending law was passed. We had a customer who had come to 
Gateway Funding to apply for a cash-out refinance, debt 
consolidation, less than perfect credit. Most of it was due to 
medical bills and medical expenses that he had incurred. The 
gentleman was on disability and was blind. He wanted to do a 
debt consolidation to avoid losing his home. He came to us. We 
processed the loan, verified all of his information, and 
approved the loan with a commitment to sell it to an investor.
    There were conditions to satisfy on that loan that 
unfortunately did not get satisfied prior to the effective date 
of the New Jersey predatory lending law.
    Mr. Bachus. So he was denied a loan?
    Ms. Lowrie. And subsequent to that law passing, his loan 
could not be closed.
    Mr. Bachus. Okay. I will come back.
    Chairman Ney. I thank the gentleman.
    The gentlelady from California?
    Ms. Waters. I have a few questions I want to try and get 
in. And even though this is a little bit off of the subject for 
today, for H&R Block, I believe you are the one that is 
involved in doing tax returns that help people get their earned 
income tax credit. You do a lot of that work. Is that right?
    Mr. Nadon. Option One Mortgage is not involved in that, but 
our parent company, H&R Block, does that.
    Ms. Waters. And H&R Block basically lends money to these 
people whose tax returns they prepare in advance of the money 
that they would be getting back from the government, and they 
charge an amount of money, interest, to do that. Is that 
correct?
    Mr. Nadon. I am not an expert on it. I think the way that 
the actual laws are written is H&R Block cannot be the lender 
on those, but I could certainly get you in touch with someone 
at H&R Block.
    Ms. Waters. So H&R Block does it and they have a partner 
who does the loans?
    Mr. Nadon. I do not work at H&R Block, ma'am, so I cannot 
really tell you. That is our parent company. I could get you a 
contact point within H&R Block to answer a question like that.
    Ms. Waters. I think I will find out about it. I guess the 
reason it is on my mind is poor people are disadvantaged in so 
many ways, and the earned income tax credit is one that I am 
looking at because I think what I am seeing is the tax 
preparers are helping them to get their money early and they 
are charging exorbitant rates on it.
    So we are fighting not just on predatory lending. Payday 
loans, tax returns, tax preparation with advance amounts being 
given to people for exorbitant rates, it is just a mess in 
these poor communities, with all of these people descending on 
the poorest of the poor to exact from them every penny that 
they can get.
    Having said that, I would like Mr. Eakes to explain to me 
what you referenced in your testimony about the bill and the 
definition of ``high-cost loans'' and why some of what is 
supposedly advocated in this bill would not apply because they 
will never meet that definition. What were you talking about?
    Mr. Eakes. Thank you, Congresswoman Waters.
    In the definition of ``points and fees'' under the current 
Ney-Kanjorski bill, there is an exclusion for any fees paid to 
an affiliate. Okay? So if you simply structure your 
origination, and this is something that has been raised by 
CountryWide a lot over the years. You structure it so you have 
an affiliate that does your settlement services or an affiliate 
that does mortgage insurance or an affiliate that does 
anything. And basically you split the fee off.
    So the appearance of a 5 percent fee in the details of this 
bill, it is just an appearance. So really, you can do an 
unlimited amount of fees that you could not do even under 
existing HOEPA law at 8 percent.
    Ms. Waters. Thank you very much.
    You heard a description from Mr. Eakes. I know that you 
said you are very much against predatory lending. Would you be 
willing to fix that in this bill? Do you agree with him? Would 
you be able to eliminate that from the bill that would allow 
these unlimited fees to be charged based on this definition?
    Ms. Lowrie. Congresswoman, MBA absolutely detests abusive 
lending and has been working--
    Ms. Waters. No, no. I just want to go to the specifics of 
what Mr. Eakes has just described. I know you are against 
predatory lending. It is a terrible thing. You would never do 
it. But I want to know about the specific language.
    Ms. Lowrie. The specific language in the bill takes the 
points from 8 percent to 5 percent. Sitting down and going 
through what is included in those points and fees triggers I 
think is part of the discussion over the next weeks and 
hopefully not months.
    Ms. Waters. Do you agree with his definition of what high-
costs loans are and what he just described?
    Ms. Lowrie. No, I do not.
    Ms. Waters. Okay. So based on what you understand and know 
about it now, you would keep it just the way it is. Is that 
right?
    Ms. Lowrie. No. What I said was that MBA would like to sit 
down and work to modify those areas of the bill that may not 
provide strong protections to the consumer. At the end of the 
day, Congresswoman--
    Ms. Waters. You said you came to tell us that you supported 
this bill. You support this legislation. I am asking you about 
a specific aspect of it because while we work every day with 
our friends and our colleagues, we see things differently 
sometimes. And while you are adamantly opposed to predatory 
lending, we just got a description of what we consider is 
predatory lending. Now, maybe it is a mistake, but you support 
the bill and do not know about it. I did not know about it. So 
did you not know about it, or are you opposed to that language?
    Ms. Lowrie. We are not opposed to that language.
    Ms. Waters. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Ney. I thank the gentlelady.
    Mr. Eakes. Could I add, there were two other pieces of the 
definition of points and fees in New Jersey, New York, Georgia. 
They include prepayment penalties and yield spread premiums, 
which are basically an incentive to up-sell to higher rates. If 
you do not include those in the definition, you will not be 
able to address those two problems. They are generally viewed 
as fees that substitute for origination fees, so they should be 
included in that definition.
    Ms. Waters. Thank you very much. I appreciate that.
    Chairman Ney. Mr. Miller?
    Mr. Miller of California. Thank you, Chairman Ney.
    I have been in the real estate and building business for 
over 30 years. I have worked with a lot of lenders and I 
understand that. I am looking at California, and there is a 
patchwork of local laws being passed, beginning with the non-
prime mortgage market, and it is scary watching what is 
happening.
    I am really concerned because I have met with several 
reputable lenders who operate in all 50 States, and these are 
lenders with huge loan originations and securitizations. I am 
concerned that their ability to continue doing business under 
the trigger of the Miller-Watt bill would be greatly impacted. 
To be fair regarding both bills, would any of you on the panel 
care to comment on the impact of the points and fees triggers 
in both bills?
    Mr. Nadon. The concern that we have with including 
financing options, these are just not non-prime financing 
options. These are used in the prime world every day. So the 
impact that it has on affordability is when you write 
legislation like they have in the Miller-Watt bill, part of the 
design I think is to try to drive more of the costs into an 
interest rate. The downside to that is that interest rate is 
what people's monthly payment is based on.
    Mr. Miller of California. They cannot make their payment if 
you drive it up.
    Mr. Nadon. It drives up the monthly payment, so we have 
fortunately right now rates seem to be stabilizing a little 
bit, but certainly in a rising rate environment--
    Mr. Miller of California. The 1 percentage point increase 
that you might experience, what percentage of the people does 
that put out of the marketplace by increasing interest rates by 
1 percent? What would your guess be?
    Mr. Nadon. I would hesitate to take a guess on that, but I 
can certainly run the math on it, but 1 percent has a fairly 
dramatic impact on the average consumer. It could be $300-and-
some a month on our average loan just for an average consumer. 
When you talk about taking $3,000 or $4,000 out of their 
paychecks during the course of the year, that gets to be a 
fairly significant amount of money.
    Mr. Miller of California. So in effect appearing to do what 
seems good in effect is going to have a major impact on people 
who do not have the earnings to basically pay the additional 1 
percent.
    Mr. Nadon. It just reduces their purchasing power and so 
they either cannot buy at all or they have to scale down what 
kind of a home they are going to buy.
    Ms. Adams. Mr. Miller, may I share with you what the 
downside of not including yield-spread premiums and prepayment 
penalties into the trigger is. I once saw a loan where there 
were 10 points on the loan that was the yield-spread premium. 
That would not be counted in the trigger. That is enormous. It 
was a loan where the principal balance on that loan was 
$10,000. With all the fees that were attached--
    Mr. Miller of California. Is that on a home loan, a $10,000 
home loan?
    Ms. Adams. It was a cash-out refinance. It was a $10,000 
loan.
    Mr. Miller of California. With 10 points.
    Ms. Adams. And they had a total of $11,000 fees on it. And 
this was one that was filed with the Banking Commission. When 
the Banking Commissioner challenged the lender about where was 
the benefit to the borrower in this, and this was an 
associate's loan, the lender said they got a 1 percent 
reduction in their interest rate. Under Ney-Kanjorski as it is 
currently written, that tangible benefit would be enough for 
that to be a legitimate loan. And I know that that is 
unconscionable to this Congress, that $11,000 worth of fees--
    Mr. Miller of California. Ten points is outrageous. I would 
agree with that, but the question as it applies in a broad base 
to everybody, do you believe that most people are so 
unsophisticated that they should not have an opportunity to 
decide what they want?
    Ms. Adams. The yield spread does not even show up. POC, 
most borrowers do not know what POC means. They do not see it. 
They do not know it. They do not understand it. When I am 
sitting down and going over their loan to them when they come 
to me, they are going, what is a yield-spread premium? What is 
POC? They have no idea.
    Mr. Miller of California. In fairness, would anybody else 
like to respond?
    Mr. Nadon. If I can, I have within our written testimony 
for all of you. We have an example of what our disclosure is on 
a yield-spread premium. It makes it very, very clear to the 
borrower what is taking place.
    Mr. Miller of California. That is what we are trying to 
deal with. Disclosure, that is the key.
    Yes, ma'am?
    Ms. Lowrie. And I agree with that, disclosure is key and 
consumer education, which is part of the Ney-Kanjorski bill is 
key. But let's think about for a second all of the studies that 
have shown that those who are underserved in the marketplace, 
one of the biggest challenges to achieving homeownership is the 
ability to make the downpayment and pay the closing costs.
    If it were not for yield-spread premiums to give the 
borrower the choice of paying closing costs through the 
interest rate, and not putting those in points and fees, both 
the Fed and MBA agree that it would be double counting. Yield-
spread premiums, I believe, can be a benefit to the consumer.
    I think through all of this, we have to keep one thing in 
mind, not only that we have the best housing finance system in 
the world, the highest homeownership rate, but I would like to 
talk a little bit about the question on foreclosures. We talked 
about the fact that foreclosures are so high. And yet, from the 
third quarter of 2002 until the fourth quarter of 2004, we saw 
foreclosures decrease in sub-prime loans from 8.5 percent to 4 
percent. That means 4 percent of the loans that may be going 
into foreclosure, out of 100, means 96 consumers received loans 
that may otherwise not have had the opportunity to do that. In 
a lot of cases, it is because of yield-spread premiums.
    Chairman Ney. The time has expired.
    Mr. Miller of California. Thank you, Chairman Ney.
    Chairman Ney. Would you like to wrap up?
    Ms. Lowrie. No, that is fine.
    Mr. Miller of California. Thank you, Chairman Ney.
    Chairman Ney. Thank you.
    The gentleman from Pennsylvania, Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Mr. Chairman.
    In listening to the testimony of the present panel, is it 
reasonable for me to assume that you do recognize that there 
would be a strong reason to have a national standard? Or are 
there members of the panel that really do not want to move to 
the national standard at all? I guess I am directing this to 
really Mr. Green and Mr. Eakes. I think everyone else has 
conceded the fact that a national standard is worthwhile.
    Mr. Smith. Do you want me to throw up the white flag?
    Mr. Kanjorski. No, no, no.
    Mr. Smith. I think what my testimony suggests, sir, is that 
whether there is an actual need for a national standard ought 
to be considered. But if there is to be a national standard, 
there needs to one, as Ms. Adams said, that is appropriate and 
that reflects the experience of the States.
    Mr. Kanjorski. Right.
    Mr. Eakes?
    Mr. Eakes. I would say that it depends on what the national 
standard is. If the national standard does more harm than good, 
we are better off without it. In the last 5 years, we have 
basically eliminated the Associates, United Companies, FAMCO, 
Greentree, IMC Mortgage, the worst players we have now 
eliminated without having a Federal standard. If you put a 
Federal standard in place that actually reauthorizes some of 
the practices like arbitration that the industry has now done 
away with, then it will do more harm than good.
    Mr. Kanjorski. All right. So it strikes me, then, that we 
almost have consensus on the panel that a national standard may 
be worthwhile, particularly considering 26 States in the Union 
have no standard, have no laws to protect consumers. Of course, 
the national legislature has to look at half the country being 
undressed.
    I would concede that North Carolina has made excellent 
strides, but we also have to be practical. The likelihood that 
the North Carolina law would become the national law is highly 
unlikely, or Mr. Ney and I would not have had to try and find 
consensus on something that would meet the ability to pass. We 
can have the ideal, and we are never going to have legislation.
    What I am hearing from both Mr. Green and Mr. Eakes, and I 
really welcome you, I am directing my attention to you, is the 
whole purpose for this hearing. I readily concede, and I think 
Mr. Ney would join me in this, that we do not have a perfect 
bill. Probably, we will never have a perfect bill. But you have 
brought up some suggestions that we can tweak things to make it 
more acceptable to you. I think, Mr. Eakes, I will talk to you, 
on this idea of the affiliate. It is a tough call.
    We did not want to encourage activity by lenders to try and 
extract more monies from people. That is not our intent. What 
our intent is is that we want to encourage those institutions 
that outsource certain services that they can continue to do 
that. That means a large number of the community banks, a large 
number of the smaller mortgage makers. If we structure 
everything has to be done in-house, what we are doing is taking 
a large part of this market away that they cannot provide these 
services in-house. They just do not have the capital. They do 
not have the capacity to do it, so they are out of the mortgage 
business.
    Now, on the other hand, we probably can find some language. 
What I am asking you do to is to work with us to avoid misuse 
and abuse of the affiliate charges, but yet still allow our 
ability to have the less than the largest in the mortgage 
business, so that we can keep this large segment of business 
activity, which I happen to think is much more competitive and 
will ultimately drive the rate down in sub-prime lending.
    Now, I could be wrong, but I think that is where it goes. 
The indications to me are that this is now becoming a 
relatively mature market, and probably there will be a 
narrowing of people that are involved in the market just by 
virtue of the fact that it would be so price-competitive. What 
we want to make sure is it is consumer protective in that 
happening, and you could be of great assistance. Maybe you 
ought to make an offer to the Chairman that formed this 
advisory committee and have all the parties of interest, as you 
did in North Carolina, come together. And it is not necessarily 
the Ney-Kanjorski bill that we want you to look at, but look at 
Mr. Miller's bill and Mr. Watt's bill, and any other additions 
that we may have mentioned, to make a better bill.
    Now, I will concede we cannot get a perfect bill. I think 
you agree with that, too. Regardless of what we do, we are 
probably going to lessen the protections of North Carolina, but 
we are certainly going to increase the protections of Kansas 
and Alabama and Pennsylvania.
    Ms. Adams. Mr. Kanjorski, I am so sorry. I did not mean to 
give any indication that the provisions in our State law, our 
State law is a strong sub-floor, but if we weaken it, we will 
fall right through. I did not mean to give the impression that 
I thought a national bill that would be less than what we have 
in North Carolina is a bill. I think it is a strong sub-floor. 
I am willing to put up with parquet, rather than hard oak 
floor, on the covering of it. But the North Carolina law in our 
State is working. Foreclosures in North Carolina are half of 
what they are in other States that have no laws.
    While I am willing to work to help cover the 26 States that 
do not have coverage, I think there is a place between what 
North Carolina has and what ideally Ney-Kanjorski can be.
    Mr. Kanjorski. Right. And that is what I am inviting all of 
you to do; make sure that we are aware of what changes can be 
made, and that we have to argue them out because there will 
have to be compromise in how it applies.
    Let me end up, Mr. Chairman, I am taking a little more time 
than I really should. You know, when you really think of it in 
all these areas, I come to a conclusion, and I have always 
lived by sort of a principle, and I call it my ``5 percent 
bastard'' rule.
    When you really think of all the laws and all the rules and 
regulations we have on the books, 95 percent of the people that 
are in these businesses are in it to do standard business 
operations, get people in houses, provide consumer protections, 
and are not out there to steal money from them or be predatory. 
But regardless of what we write, there will be the ``5 percent 
bastards'' out there. We should try and tighten it up, but 
fully recognize that we are not going to remove them to zero.
    What we are trying to do is come a long way to take care of 
the Kansases, the Alabamas, the Pennsylvanias. Until last year, 
it is just now that Pennsylvania is coming forth with an 
effective piece of legislation toward predatory lending. I have 
had the personal experience in my district, in the Pocono 
Mountains. I have seen how disastrous it can be. I do not know 
what we could do.
    As a matter of fact when I talk with the Secretary of 
Banking in Pennsylvania, it sounds like I am self-serving 
because I happen to be a lawyer by profession, but I cannot 
understand people that go into transactions to buy real estate 
that do not get a lawyer. And 50 percent or 75 percent of the 
abuses in Pennsylvania, if they had had any kind of a lawyer at 
all, would not have happened.
    Ms. Adams. Well, Mr. Kanjorski, to address that, in North 
Carolina we had a law that said that all closings had to be 
done by attorneys so that there would be somebody there to help 
protect the consumer. The Federal Trade Commission said that 
that was a monopoly.
    Mr. Kanjorski. Anticompetitive.
    Ms. Adams. Anticompetitive, and so now a person can go and 
close a loan with no safeguards.
    Mr. Kanjorski. It is a real problem. I think Mr. Scott's 
provisions were so compelling and that is why we took his 
provisions and put it in. I think it is going to go a long way 
for education, for counseling, but it is not going to solve all 
the problems. Sometimes these folks are so anxious to get a 
chance to get a home and want to believe everything that is 
attractive about the transaction, even though it is a fair 
transaction, but they may not be able to afford it; they may 
not in the long run be able to keep it.
    But if you are living in an apartment in New York and you 
get a chance to move to the Poconos and get your kids out of a 
school system and into another, where your income will go a lot 
further in the Poconos than it will in New York, it is an awful 
driving force. We are not going to cure all of those problems, 
but I am hopeful that at least out of those of you that feel 
that we have not quite come the proper distance yet, you will 
help us close those holes, or at least elucidate the problems.
    Chairman Ney. The time has expired.
    The gentleman from Texas, Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman.
    I will beg the pardon of many of the panelists. I was out 
of the hearing room for much of the testimony, so some of this 
may be redundant. We have just heard several comments from Ms. 
Adams regarding the North Carolina experience.
    Dealing with assignee liability, Mr. Green, I guess I would 
like to get your opinion on it since I think you may have a 
slightly different opinion, but what do you see happening in 
States like North Carolina and Georgia that have passed strict 
assignee liability provisions that ostensibly are very pro-
consumer? What is your observation of what happens in the 
marketplace?
    Mr. Green. Well, it is fundamentally an arithmetic 
equation. Either they continue doing high-cost or other 
similarly situated sub-prime loans at a higher cost, or, 
because of the vagueness of the liability that they may have to 
take, they just do not participate in those loans. I do not 
want to say the sky is falling. I cannot sit here and say that 
because of the North Carolina law in the last 3 years X number 
of loans have exited the market.
    Keep in mind, we have been in an incredibly attractive 
interest rate environment right now. What happens when credit 
as a matter of market gets tougher to come by for every 
participant in the marketplace, and the issues of vagueness in 
liability come front and center? So we believe as a matter of 
principle you need more clarity and frankly from the assignees' 
perspective, you need to make sure that it is very clear what 
the assignee's role is and what the assignee's liability is. We 
believe the Ney-Kanjorski bill provides a clearer standard and 
a more appropriate standard.
    Mr. Hensarling. So in your opinion, the bill gets it right.
    Mr. Green. In our opinion, the Ney-Kanjorski bill does get 
it right.
    Mr. Smith. If I may respond to that also. I do think that 
the evidence in North Carolina is, and again in 2003, and this 
is the mortgage bankers' statistics, out of our top 15 sub-
prime lenders, 7 were in the top 15 nationally. They accounted 
for 33 percent of the dollar volume of sub-prime loans 
originated in North Carolina.
    So I will defer to my friend Mr. Eakes. He knows more about 
assignee liability than I, but, A, I think we do not have a 
very strong assignee liability provision in our law, and B, 
whatever provision we do have has not kept national lenders who 
are national market players from participating profitably in 
our market.
    Mr. Nadon. If I can just add a comment, because I am a 
national lender, that much of the lending that we have done in 
North Carolina, it has been in just the last few years. We did 
not have a presence there 10 years ago. So we have opened up a 
branch there, as I know some of our competitors have. We now 
have a lot more sales people working there than we did. There 
is a growth that is there, just the natural organic growth that 
comes from growing a business.
    We were not living in a static environment in North 
Carolina. We had a very mature business in that State at Option 
One before the law passed, and then subsequent to that law you 
can look at it and say, well, we did not seem to get affected. 
We charge people a higher rate for the exact same loan in 
adjoining States and other States in the market than in North 
Carolina because of the law that they passed. So there is a 
higher cost.
    I do believe that the Banking Commissioner has even 
commented, I am not sure how recently it was, but on the fact 
that credit is more expensive; non-prime credit is more 
expensive in that State.
    Mr. Hensarling. Mr. Nadon, since you spoke up, let me ask 
you another question. We need to go on please.
    I believe, and I actually did catch part of your testimony. 
I think I heard you say that costs of a loan can increase 1 
percent if you have a de facto prohibition on prepayment 
penalties. Did I hear you correctly there?
    Mr. Nadon. Yes, that was the outcome of a study done by an 
outside group, the Pentalpha Group consulting firm did that 
study. That was a conclusion they came to. It is fairly 
consistent. Right now, if you opt for one of our loans with a 
prepayment penalty, we take 100 basis points off your rate.
    Mr. Hensarling. Ms. Adams, unfortunately I missed some of 
your testimony, but I caught a little bit of it in the question 
and answer session. Assuming that there is actual full 
disclosure, is your organization against consumers having that 
option to actually sign up for a prepayment penalty and perhaps 
enjoy the benefits of a 1 percent reduction in their interest 
rates?
    Ms. Adams. On sub-prime loans, yes, sir, and I will tell 
you why. The purpose of the sub-prime market is to give people 
a second chance to rehabilitate their credit so that they can 
go back into the prime market. So it is quite possible that 
without a prepayment penalty, that person would make on-time 
payments of that loan for 3 years, prove their credit-
worthiness, improve their credit score, and then qualify for a 
prime loan--
    Mr. Hensarling. But if there is full disclosure, aren't you 
supplanting your decision with their decision?
    Ms. Adams. --that benefits them. I am saying that if we are 
going to look at what is in the long-term best interest of the 
consumer, locking them into the sub-prime market is not helping 
them to build wealth. Whereas if they had the opportunity to 
move into the prime market with full knowledge that if they 
make their payments on time, full disclosure means telling them 
if you do not take it and you pay your payments on time for 3 
years, you may be entitled to a 3-point reduction when you 
refinance into the prime market.
    So with full disclosure, sure, if a consumer makes that 
choice, that would be their choice, but that is not what kind 
of disclosure consumers are getting.
    Mr. Hensarling. My time has expired, but I would offer the 
opinion that the consumer is probably the best judge of what is 
in the consumer's best interest.
    I yield back, Mr. Chairman.
    Chairman Ney. Mr. Miller?
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Mr. Nadon, I look forward to working with you as we 
continue to discuss the various bills. I did have a couple of 
questions from your testimony.
    In the appendix, you have your best lending practices, or 
what is it called, fair lending practices set out. However, on 
your Web site, I printed it out this morning, it appears to be 
a different version or was perhaps an earlier version. It is on 
the PDF format as it appears on your Web site. Apparently, the 
HTML format does have it the way it appears in the appendix. 
But there are some changes, and I am curious.
    On page 35 of your current best practices, on the appendix 
pages 35 and 36, it no longer says, to make certain there is no 
personal financial benefit for someone to charge you a higher 
rate, we do not pay yield-spread premiums to brokers, which 
means the broker does not receive a financial incentive to 
charge a higher interest rate than our published rate.
    Mr. Nadon, when did you change, when did Option One change 
your position on yield-spread premium from the view that it 
created a conflict of interest between the broker and the 
borrower, and now view it as a wholesome practice that should 
be protected under law?
    Mr. Nadon. Our challenge on the yield spread all along was 
the clarity of the disclosure that was done within the 
industry, as I think someone on the panel commented. What was 
most frequently found was lenders were, particularly going back 
several years ago, would have a reference on a closing 
statement of POC or something like that. We did not think that 
was sufficient. We did not think that told a borrower what they 
really needed to know.
    So we found a way to put a very, very clear disclosure out 
there that I would be happy to provide all the members a copy 
of.
    Mr. Miller of North Carolina. It is in your testimony.
    Mr. Nadon. It is on page 39 of the testimony.
    Mr. Miller of North Carolina. Okay. And that has changed 
your view that a yield-spread premium creates a personal 
financial benefit for someone to charge you a higher interest 
rate.
    Mr. Nadon. Yes, because what we are doing is we are 
actually lowering their rate for some things, and we are using 
these as a tool now to say that one of the challenges for a lot 
of non-prime borrowers, one of the reasons they actually wind 
up being in the non-prime category is a lack of financial 
reserves; their ability to have the cash needed to close on a 
transaction.
    This actually, if done right, can allow people when they do 
not have cash or when they want to reserve some of their cash 
in savings for after the time the loan is closed, it still 
allows them to buy the home. So there is a clear benefit in 
there.
    Mr. Miller of North Carolina. Mr. Nadon, you heard Mr. 
Eakes earlier testify on why he thought additional, and the 
view in North Carolina was that additional disclosures were 
futile given how much was already being disclosed. It was just 
more paper. You disagree with that. You think the additional 
disclosure, one-page disclosure on this is not just one more 
form a consumer signs?
    Mr. Nadon. I think this one is a good disclosure.
    Mr. Miller of North Carolina. This one they read closely, 
word for word.
    Mr. Nadon. Yes.
    Mr. Miller of North Carolina. Okay. There are a couple of 
other points that are no longer in your fair lending practices, 
negative amortization loans and single-premium credit life or 
disability insurance, or any other types of credit or 
disability insurance when your loan is made. You no longer view 
those as unwholesome practices.
    Mr. Nadon. We have never offered any product like that.
    Mr. Miller of North Carolina. Okay. That is no longer in 
your fair lending practices.
    Mr. Nadon. That might just be an oversight when they did a 
revision of the document, because we have never offered, as Mr. 
Eakes knows, we have never offered any credit life insurance 
products.
    Mr. Miller of North Carolina. Okay. What was fairly 
striking in your testimony, and you have come back to it in the 
questions and answers as well, the assertion that you give a 1 
percent discount when someone does not have, or you charge 1 
percent more when someone does have a prepayment penalty.
    Mr. Nadon. We charge less when there is a prepayment 
option.
    Mr. Miller of North Carolina. I was struck by the lack of 
authority, the lack of citation of a study or an industry 
publication or anything, or even your own rates from State to 
State. An industry publication, Inside B&C Lending in 2001 said 
that the industry was setting out to study to try to document 
that North Carolina rates were in fact higher as a result of 
North Carolina's law. You have heard Mr. Eakes say that they 
were no higher.
    Four years later, there still does not appear to be a study 
that documents that. In fact, B&C Lending said that they 
examined the rate cards for various sub-prime lenders for North 
Carolina versus other States and said they could not see any 
difference in the products that were available or in the rates.
    Can you at least provide various rate cards? Can we see 
that for the different States?
    Mr. Nadon. Yes, our rate sheets are available on our Web 
site, and I certainly can have someone in our secondary 
marketing put it together for you in such a way to show the 
clear distinction on like loans. The importance is taking a 
like loan, the same loan amount, same LTV, same debt ratio, the 
same characteristics of a loan in that market versus another 
market, and just taking those two rate sheets in those two 
different markets, what do we charge. We can show that for you.
    Mr. Miller of North Carolina. Ms. Lowrie?
    Actually, I am out of time and I had one more question for 
the folks, if I could, Mr. Chairman.
    A couple of the members have noted that there now seems to 
be no disagreement about the need for a national standard. Mr. 
Eakes, Ms. Adams, do you think there should be a preemptive 
national standard? Do you think the standard should be both a 
floor and a ceiling? Or do you think it is sufficient? When you 
say that you want a national standard, do you mean that there 
should be a floor only?
    Mr. Eakes. If I could take one step back on the pricing. If 
you look at page 22 of my testimony, I have the raw data 
looking at all the sub-prime loans in North Carolina and 
adjacent States, on page 22. It basically shows that the 
pricing across the industry in North Carolina for every year is 
no different than adjacent States, the interest rate. So 
regardless of what people theoretically think might happen, it 
has not happened, even though prepayment penalties have largely 
been eliminated in North Carolina. It is just a fact.
    A preemptive standard I think will not work. Uniformity is 
overrated. When you have an entity that is a local finance 
company that has no national regulator, you have to have some 
sort of State standards that can enforce. You have to have the 
ability to adapt. My belief is what we need is a strong Federal 
floor standard. If it is a floor, you will not have any new 
State legislation being passed because it is too much work.
    But if you put it as the maximum and say this is preempting 
any and all changes, then what you find is you cannot deal with 
the problems as they evolve. If North Carolina had been adopted 
by Congress in 2000, and said this is the end of the game, 
there is no more discussion, the elimination of single-premium 
credit insurance immediately morphed into something called debt 
cancellation contracts which were not insurance.
    Chairman Ney. The time has expired.
    Mr. Eakes. Okay. So the simple answer is you need a Federal 
floor. If it is high enough, there will not be any 
proliferation of State laws, but you should not preempt.
    Mr. Miller of North Carolina. Mr. Chairman, I would just 
ask to make part of the record today the fair lending practices 
that I printed off Option One's Web site this morning.
    Chairman Ney. Without objection.
    Mr. Miller of North Carolina. As well as the March 5, 2001, 
copy of Inside B&C Lending.
    Chairman Ney. Without objection. Thank you.
    We now go to Mr. Feeney.
    Mr. Feeney. Thank you, Mr. Chairman.
    Thank you to the gentleman from North Carolina as well.
    Mr. Green, I was interested perhaps in your opinion of the 
tangible net benefit analysis under loan flipping. I was not 
able to be here for much of the hearing, but that looks like an 
awful subjective standard to me.
    I am a cosponsor of the bill, but what regulatory 
guidelines do we have in place now to lenders and borrowers? 
And which ones would need to be developed so that what looks 
like a subjective standard can be turned into more of an 
objective and ascertainable standard before we enter loan 
criteria as opposed to afterwards?
    Mr. Green. I think you raise an excellent point. The fact 
is that the goal here is to provide clear, objective standards 
by which lenders can be guided and that secondary market 
participants can flag readily and easily. Frankly, it goes to 
the issue of the need for a national standard. We believe very 
strongly that while there are many local elements to the 
mortgage market, it is now a national--and dare I say 
international--capital marketplace, and that a floor that does 
not provide preemptive strength will not provide a standard 
whatsoever.
    There will be a cost to that uncertainty. The flipping and 
other standards that will be a part of the discussion that will 
ensue during the coming weeks and hopefully short months with 
this subcommittee and other market participants will hopefully 
provide better clarity for that and can provide that national 
standard that all can feel comfortable--be they borrower, 
lender, or secondary market participant. More importantly, you 
the Congress can have faith that predatory lending can be 
stopped with the implementation of these standards and that 
sub-prime lending can continue. But the point you raise is one 
of those exact points that we need to clarify.
    Mr. Feeney. Mr. Smith, I appreciate your defense of 
federalism. I came from the State legislature and appreciate 
the State prerogatives. But it does seem taken to its extreme 
that we have 5,000 to 10,000 jurisdictions if you include 
townships and cities and counties and the 50 States. Just the 
compliance costs for people who want to engage in not just 
national lending, but also the ultimate, I do not know of 
anything more liquid than capital other than perhaps water. 
Capital will chase places where there is certainty, where the 
risk is minimal and where the return is greatest.
    One of the burdens is compliance costs. If I have a lot of 
capital, which I do not, but if I want to put it in the 
mortgage market as opposed to a myriad number of other 
investments, the last thing I want to do is to have 5,000, or 
for that matter 50 sets of regulations to worry about.
    Mr. Smith. Well, let me answer a bit of that, respond to it 
anyway. First, the fluidity of capital is the reason I said 
that mortgages are financed globally, because global capital 
markets allocate capital around the world and our national 
market is a piece of that. That was an attempt at 
sophistication. I will never try it again.
    In the United States, there are multiple jurisdictions that 
have adopted these regulations. I will say I think the State 
level is an appropriate level to do it, not for the least of 
the reasons that State real estate law is still one of the 
last, I think, remaining I should say redoubts of State 
jurisdiction. Who knows? That may get preempted, too, but if 
you do loans in North Carolina, the deed of trust loans and the 
means of conveying are different.
    So there are compliance or documentation issues in the real 
estate finance business that are inherent, setting aside for a 
moment predatory lending laws. It seems to me that a State 
jurisdiction is an appropriate jurisdiction in our Federal 
system to regulate loan content and lender conduct.
    As to the issue of cost, it seems to me that by and large, 
and I know that some provisions of our laws deal with all 
loans, but by and large the protections we are talking about 
are for a subcategory of a subcategory. The sub-prime market 
is, I believe, its high point is--
    Mr. Feeney. I understand that, and I am about to run out of 
time. I will let you finish on that.
    Mr. Smith. I apologize.
    Mr. Feeney. That is okay. I will let you finish on that, 
Mr. Smith.
    Mr. Nadon, whether your stats are right or his are right, 
we live in a very easy credit market. I was General Counsel to 
a real estate developer with a third-grade education, but boy 
he made millions in real estate. What he taught me was, not 
that he was a fool, any fool can make money in an up-market in 
real estate. At a time when we have 25 percent increases in 
values in residential homes in Florida, nobody who is lending 
is losing. But that is not always true, because we see the 
downsides also.
    We have easy credit out there. Nobody is losing money by 
lending money in real estate today, but there will come a time 
when lenders will not be so easy. My view is you will be 
punishing borrowers, that are prepared to be flexible, if you 
are too rigid. It seems to me that at least theoretically, if 
not North Carolina, some of these local or State regulations 
are too rigid and you are going to ultimately punish the 
borrowers in tight money markets.
    Mr. Smith. Thank you.
    Chairman Ney. The gentleman, Mr. Watt.
    Mr. Feeney. Mr. Chairman, if he could just have a moment to 
respond, I would be grateful.
    Mr. Smith. I agree very much with your concern about the 
future. I share it. In fact, it is one thing that keeps me up 
nights regularly. I do not think the restrictions on borrowing 
or lending are going to make a problem. I disagree respectfully 
that restrictions of the kind we are talking about on a small 
portion of the market are going to have a huge influence on the 
tide. I agree with you in part, and respectfully disagree on 
the second half, which is that the restrictions themselves 
would make a bad situation worse.
    Chairman Ney. Thank you.
    Mr. Watt?
    Mr. Watt. Thank you, Mr. Chairman.
    Let me do two or three things here. First of all, I 
apologize to the first three witnesses, the ones from my own 
State whose testimony I missed completely, and extend a half-
apology to Mr. Green, because I missed half of his testimony 
also. I had to go out and give a speech this morning, so I had 
to miss your testimony.
    Second, let me say how valuable I think this discussion has 
been because at some level we are talking about potentially the 
difference between simplifying things by making it easier for 
borrowers to understand and compare loans, which is if you put 
everything into the interest rates, people understand interest 
rates and at least they can compare. If you allow other options 
that may lower the interest rate and people do not understand 
them, it can be really a confusing market situation for 
consumers.
    More education favors people who can understand and who 
have time to understand and who have options. Simplicity favors 
people who, even though they may end up with a marginally 
higher interest rate, can understand how to compare and shop. I 
do not know that there is a right or wrong answer to a lot of 
these things, but this discussion I think has helped.
    Mr. Nadon, I know that you speak for your organization and 
you also have an individual business hat, so it is not 
necessarily so that the organizational position would be 
consistent with your own business's position because you are 
talking for a more global group of people who may be doing 
different things. The one thing that Mr. Miller did not ask you 
about, I do not think, unless I missed it, apparently Option 
One does not offer mandatory arbitration. Is that right?
    Mr. Nadon. It is not part of our contracts.
    Mr. Watt. Okay. Yet I guess what you are advocating, the 
Ney-Kanjorski bill would allow mandatory arbitration, you are 
saying that that is something that should be done in the 
industry even though your company itself does not do it.
    Mr. Nadon. I think the view there is that, I will give you 
my own personal view, as well as what I think where the 
industry is. My personal view is that there is actually a right 
place for arbitration. I think there is a way that it can--
    Mr. Watt. That brings me to actually the final point I want 
to make, because your view is that if the yield-spread premium 
is appropriately disclosed, as you do in your disclosure, 
although you can argue about whether disclosure is effective or 
not.
    I practiced law for 22 years and did a lot of real estate. 
I never went away from a real estate closing thinking that 
anybody in the real estate closing, including a lot of times 
the lawyers, knew what was going on by the end of the closing, 
despite all of the disclosures. So I am not a big disclosure 
fan, but people can disagree about that.
    What you are saying is that if the yield-spread premium is 
appropriately disclosed, as you do in your company, then you 
think it is appropriate, but Ney-Kanjorski does not necessarily 
mandate what you do in your company in terms of disclosure. 
They just say we are not going to count yield-spread premiums 
in our calculation of fees.
    So what about the companies that do not do that kind of 
disclosure? I mean, we are not mandating the kind of disclosure 
that your company uses in this legislation. And yet before you 
had the disclosure, your company's position was that yield-
spread premiums, I mean, it was not a good thing.
    Mr. Nadon. We used borrower credit, which effectively got 
to the exact same place and disclosed it in a very clear and 
transparent manner.
    Mr. Watt. All right. But what about the places where it is 
not disclosed clearly?
    Mr. Nadon. I think that there should be a lot of discussion 
on how do we make sure that everyone in this industry is 
disclosing in a very clear, simple language, transparent manner 
so that any consumer when they walk away from the table, there 
are some things they should know.
    They are not going to know all of everything that is in a 
contract, and most of it frankly is written for attorneys, in 
my opinion. I am not an attorney so I do not understand it. But 
there are some critical components that should be just very, 
very plain and simple that says this is what is happening.
    Mr. Watt. Okay. My time is up, but I would just say, I have 
looked at appendix D and after 22 years, I am not sure it would 
be all that helpful to somebody to have even your disclosure. I 
am not questioning the intent. I guess this just goes back to 
my belief that disclosures do not effectively do it. You are 
closing a transaction. You are doing a loan transaction and you 
usually just do not have time to be studying disclosures. I 
just do not think they are that effective, but I am not saying 
that the motives are not good.
    Mr. Nadon. And the benefits are clear, from our 
perspective, of having that tool there.
    Chairman Ney. I thank the gentleman.
    Mr. McHenry?
    Mr. McHenry. Thank you, Mr. Chairman.
    Thank you all on the panel for being here today. I 
certainly appreciate it. I appreciate half the panel, Mr. 
Chairman, being North Carolinians. It means a lot to me, being 
a Tarheel myself.
    Mr. Eakes, you reference the fact that Self Help has given 
some $4 billion in loans over the last 20-some years; over 
40,000 families. What percentage of those loans, how many have 
been sub-prime?
    Mr. Eakes. I would say all of them have been to credit-
impaired individuals. That is my definition of ``sub-prime.''
    Mr. McHenry. How would you define ``sub-prime'' for someone 
else? Is that your normal definition? So all of these have been 
sub-prime.
    Mr. Eakes. They have all had credit blemishes that did not 
make them qualify for the traditional conventional loan.
    Mr. McHenry. But in terms of family homeownership, so all 
$4 billion has been for homeownership.
    Mr. Eakes. That are unconventional, yes.
    Mr. McHenry. Unconventional. Okay.
    Well, you said in a press release and in your written 
testimony that sub-prime loans go to foreclosure 10 times more 
than prime mortgages, and one in five ends in foreclosure. What 
are your statistics for your organization?
    Mr. Eakes. Were you here for my testimony?
    Mr. McHenry. Actually, I was.
    Mr. Eakes. You were.
    Mr. McHenry. I was. I left right after it. So my apologies 
to the half of the panel that my colleague from North Carolina 
saw.
    Mr. Eakes. We went our first 11 years and had not a single 
foreclosure. We have had a total now, it is less than one-tenth 
of 1 percent cumulative. It is a very, very small number of 
foreclosures.
    Mr. McHenry. So on what do you base your 10 times more 
likely?
    Mr. Eakes. We have a database that looks at all sub-prime 
loans and has the terms and disclosure of the interest rates, 
all those terms. We paid $250,000 for a database to be able to 
analyze that. So in my analysis, and the Mortgage Bankers 
Association produces data annually as well, that in States like 
Ohio, Ohio has the highest foreclosure rate in sub-prime loans 
of any State in the nation, and it is public data.
    Mr. McHenry. So you have maybe less than 1 percent that 
have been foreclosed?
    Mr. Eakes. My original point was that having been an 
experienced sub-prime lender before it was even called that, 
that if you have really high foreclosures, one of two things 
are happening: you are making loans to people who really should 
not have been approved for a loan; or number two, there are 
features in the loan that have stripped the wealth and made it 
unaffordable and unable for the borrower to succeed.
    The most catastrophic thing we are facing right now is that 
the studies that have been done in Chicago and Pennsylvania and 
other places suggests that anywhere from 20 percent to 30 
percent of sub-prime loans given in a certain year will 
eventually foreclose. So the 10 percent number that I 
mentioned, that is how many were in foreclosure at one point in 
time.
    But if we had 20 percent of sub-prime loans in total that 
were foreclosed, and that is a very conservative estimate for 
right now, based on these databases. What is happening in the 
industry, the reason Joe Smith was so worried, is increasingly 
we are now seeing interest-only loans and hybrid ARM loans, 
your exotic products. We are going to have 40 percent to 50 
percent of those loans eventually foreclosing.
    Mr. McHenry. Let me also go to another person who is in 
this marketplace. Mr. Nadon, could you address those questions?
    Mr. Nadon. Yes, our volume members are a lot different from 
Self Help's. I am not familiar with their statistics at all. I 
can just tell you that yesterday I went back to the people in 
our organization in Irvine, California and asked them the 
question: What percentage of our loans life to date have ever 
ended in foreclosure? And the number is 3.72 percent on close 
to $100 billion worth of volume.
    Mr. McHenry. So less than 4 percent.
    Mr. Nadon. It is not 20 percent.
    Mr. McHenry. It is not 20 percent.
    Mr. Nadon. That has not been our experience.
    Mr. Eakes. Let me explain the difference there. If you take 
a year's loans in 1998, that cohort, and say let's take it 
throughout time, and say how many of those eventually will 
default, the number will be 20-plus percent.
    Mr. McHenry. Well, 100 percent of us in this room are going 
to die, so therefore by your statistics we are all dead. Was 
that surprising to anyone?
    Okay.
    Mr. Smith. You are going to reduce that to present value, 
aren't you?
    Mr. McHenry. Banking jokes.
    All right. But in 2004, Self Help had some $45 million in 
loans you made, and $8 million of those have been delinquent 
real estate, or delinquent.
    Mr. Eakes. I am sorry. Say your number again.
    Mr. McHenry. In 2004, Self Help made about $45 million in 
loans. Is that correct?
    Mr. Eakes. Are you talking about Self Help Credit Union or 
all of Self Help?
    Mr. McHenry. Self Help Credit Union.
    Mr. Eakes. That sounds like it might be right.
    Mr. McHenry. Sounds like it might be right. Well, you had 
over $8 million in delinquencies in real estate. So that is 
pretty close to your stats.
    Mr. Eakes. Yes, and that is exactly my point. With low-
wealth families, which is what we focus on, people who do not 
have a large downpayment, the thing I will tell you right up 
front is those families will have more delinquency, but they do 
not default. They cure it. So yes, people who do not have cash 
reserves, they get behind, but they catch the loan back up. And 
that is a good thing. That is what I think the sub-prime market 
has helped do.
    But those loans do not default and ultimately produce 
losses for the lender. That is what I am telling you. A low-
wealth family will have a crisis, just like other families. 
They will have death, illness. They will all have death, 
illness, divorce, job loss. If you have a cash cushion, a 
middle-class family that has $10,000 of cash, you will deplete 
that cash and then you will catch it back up when you get on 
your feet.
    Chairman Ney. Speaking of death, the time of the gentleman 
has expired.
    Mr. McHenry. If I may say one final thing. That is close to 
your 20 percent statistics you are giving for other people, 
that you have 20 percent delinquency yourself. So it is an 
interesting finger you are pointing at other segments of the 
industry, but you are not realizing what you are doing 
yourself.
    Mr. Eakes. Do you understand my distinction between 
delinquency, which means that you are 30 days behind in your 
payment at a various point, versus default, where you have been 
foreclosed on at 90 to 120 days past due. And the number you 
are citing is the 30-day figure, not the ultimate default and 
foreclosure.
    Mr. McHenry. Mr. Chairman, I have two follow-up questions 
if I may submit them for the record.
    Chairman Ney. Without objection for the record.
    Mr. McHenry. And if Self Help will be so kind as to answer 
them.
    Chairman Ney. The gentleman, Mr. Scott?
    It will be submitted for the record, then you can respond. 
Thank you.
    Mr. Scott?
    Mr. Scott. Thank you very much, Mr. Chairman.
    Let me ask the panelists to examine very carefully in this 
legislation the financial education component, the toll-free 
number component, specifically because you all are the ones out 
there that can help us to make sure that we got it constructed 
right; to make sure we got the level of funding in it that 
needs to be. At this point, it is $58 million.
    Is that adequate--and I know, Mr. Nadon, that you had 
mentioned that an interesting proposal, within your own 
industry and others, that could contribute in.
    It is one thing to say in a bill, ``We are going to get a 
financial education program, we are going to set up a toll-free 
number, we are going to get money down to the grassroots, we 
are going to get them into the communities, we are going to set 
all of this up.'' But do we have the right amount in there to 
do the job?
    Mr. Nadon, in your opinion, do you think $58 million is 
enough to do all that we are doing in addition to staffing 
around the clock a 1-800 number?
    Mr. Nadon. I am not sure that it is.
    The thing to go into my mind, just as a business guy, is 
that we do not know how many phone calls will come in. We do 
not know how long our customer service reps, if you will, will 
have to be on each one of those phone calls. We do not know how 
long it will take to get all those people up to speed so they 
can do their job right. We do not know what kind of telecom 
system we need, what kind of I.T. infrastructure we need.
    So it is very hard to come up with a business plan--or a 
number for that, rather, without a business plan that, kind of, 
shows you what kind of dollars you have to invest.
    Mr. Scott. Well, Mr. Nadon--because I have a couple of 
other questions for the others--because you are out on the 
street, you are there, and others as well could do this as 
well, this is a hearing, and the purpose of this hearing is to 
obtain information and assistance from you all that is very 
valuable in helping us.
    I would like to ask each of you, and especially Mr. Nadon, 
if you could submit to us, in preparation for the markup of 
this bill, to make sure we have it worded right, to make sure 
we have the amount of money in, to make sure we have an 
effective business plan with who, what, where and how, as we go 
forward.
    And as you look at the education component in this bill, 
help us and advise us as to what we need to add to it--in an 
amendment form or as we mark it up in this committee--because 
everybody on this committee concurs. Education is a critical 
part of helping and getting the help to the people in the first 
place. It is not all that needs to be done.
    We need to put most of what is in the Ney-Kanjorski bill 
and the Watt bill as well. But certainly, we all concur that 
education is a vital component and certainly have to do that.
    So if you could, I would appreciate that. Yes, I think you 
want to respond to that. And please be brief, because he is 
going to bug me and I have three more questions I want to ask.
    Ms. Adams. I just want to say no, that is not enough money, 
for those of us who are on the street, doing the education and 
the counseling. In North Carolina, our law provided for pre-
counseling education for people in high-cost loans.
    Our legislature forgot to fund that. Those of us who are 
trained--and North Carolina provides training through the 
Housing Finance Agency for counselors to provide that 
education. Those of us who do it, it costs about $250 to really 
educate and help a consumer understand the complicated process 
and their options and choices.
    And $58,000--
    Mr. Scott. Million.
    Ms. Adams. $58 million is a million for each State. We have 
100 counties in our State. And it is $8 million to pass out to 
major metropolitan areas. You need to double that, just to 
start with.
    Mr. Scott. Very good, thank you.
    Yes, sir?
    Mr. Green. Congressman, I just want to point out that we, 
the Bond Market Association, spent a lot of our own money on 
investor education and financial literacy Web sites. But as 
part of the major settlements that occurred a couple of years 
ago, the State securities regulators--the NASD and the SEC--
have significant funds set up to allocate and award grants for 
financial education and investor education.
    This committee has clear, broad jurisdiction over that end 
of the marketplace. You might let those regulators know that 
financial literacy should be part of that equation.
    Mr. Scott. Excellent. Thank you very much.
    Ms. Lowrie. Congressman, I agree with what all the 
panelists have said. I think the industry, the various industry 
associations, in addition to whatever comes out in a uniform 
national standard or legislation, should step up to the plate.
    I mean, in addition to what the Bond Association has done, 
the Mortgage Bankers Association has put out on its Web site a 
home loan learning center for consumers to go and ask 
questions, go through the education process. We have also 
supported the uniform real estate settlement procedures, 
simplifying the mortgage process.
    Mr. Scott. Thank you all very much.
    I have to get to my final question, and that is to the two 
issues, it seems to me, that we really have to resolve is the 
question of a national standard for assignee liability and the 
issue of preemption because we have to have some agreement on 
that.
    Coming out of Georgia, of course, as you know--and I point 
to the gentleman from North Carolina because we called upon one 
of yours, Michael Calhoun, whom you may know, with the Center 
for Responsible Lending. There he is, back there.
    Well, Michael knows we called upon him in Georgia. That was 
before I got to Congress. That was my last bill we worked on 
back 3 years ago.
    The assignee liability issue, we need to have a national 
standard by that. Now we have what is called limited liability, 
assignee liability. We have strict assignee liability. We have 
liability in which you have some shelters in there from 
lawsuits.
    I mean, where do we get the standard for assignee 
liability? And is it North Carolina's motto? And could you wrap 
that in, for me, with a clearer understanding of your 
requirements for preemption?
    I think you mentioned a floor, as opposed to a ceiling. But 
I think you went through that pretty fast.
    But please give us your feelings on what should be in the 
national standard for assignee liability.
    Mr. Eakes. You are asking me, right?
    Mr. Scott. Yes, if you would, Mr. Eakes.
    And then you, Mr. Green.
    Mr. Eakes. The issue around assignee liability is the 
following. If you have an innocent borrower and an innocent 
investor--assignee--with a loan that had a problem made by the 
lender or the broker, and it comes to foreclosure--so it was an 
abusive loan, made by someone who is no longer there; that is 
the primary issue--who bears the loss because the broker or the 
lender is no longer there?
    Who bears the loss? Should it be the individual homeowner 
who is now in foreclosure, who was abused? Or should it be the 
investor pool?
    And that is the challenge of assignee liability. I have now 
personally negotiated with Standard & Poor's, Moody's, Fitch's, 
Fannie Mae, Freddie Mac--virtually all the major companies in 
America who do sub-prime loans.
    And at least for those first groups, we came to a standard 
that basically said: only for high-cost loans would there be 
assignee liability. So it is very limited to begin with.
    There is a standard that was passed in New Jersey and New 
Mexico that all those other--not the major industry groups, but 
the ratings groups and Fannie and Freddie, the guardians of the 
secondary market, have all signed off on it. So we have a 
standard.
    The standard that is in this bill will simply not work. It 
is worse than what we currently have.
    Mr. Scott. That was my other question on that. This 
assignee liability in the Ney bill--
    Mr. Bachus. [Presiding.] I hate to bug you, but I think 
your time has expired.
    Mr. Scott. All right. I will yield back, Mr. Chairman. 
Thank you.
    Mr. Bachus. I have great respect for you.
    Mr. Pearce, do you have a question?
    Mr. Pearce. Sure, Mr. Chairman. Thank you. I was fascinated 
by my colleague from Georgia's questions.
    Mr. Smith, if you were going to guess at the number of 
problem loans in the sub-prime market in North Carolina right 
now, what would you guess? And I am talking about the ones that 
Ms. Adams described. And those are just horrendous examples.
    Mr. Smith. The best proxy I have to answer your question is 
that the rate of foreclosures in the State have gone up--
doubled--in the last 5 years. Now we have had a little bit of a 
remission in the last year, which is a blessing, so let's hope 
that continues.
    I think if it were looked through, I believe a fair bit of 
those would be in the sub-prime market. What is ironic is that 
it is even higher in metro areas, which have not had the 
industrial problems we have had and the loss of jobs and the 
like, so it has less to do with economic conditions than it has 
to do with something else.
    But that is my best proxy.
    Mr. Pearce. So your guess is that a high percent?
    Mr. Smith. Yes.
    Mr. Pearce. Would you guess about 50 percent of the sub-
prime loans?
    Mr. Smith. Well, no. I would say that the rate of 
foreclosure has gone up. And I do not know whether my friend 
Mr. Eakes's 20 percent idea is correct or not.
    Mr. Pearce. Okay.
    Mr. Smith. But the events in our State suggest that it is a 
high rate. And it is probably in sub-prime.
    Mr. Pearce. The other 80 percent then, it is people trying 
to live within the letter of the law. They provide a product at 
a little bit higher price or something?
    Mr. Eakes, you said that you all have been working in that 
market for 20 years. How much escalation do you give the sub-
prime loans that you all work? In other words, if you were 
taking a look at a mortgage in a prime lender status and then 
you looked at sub-prime, how much do you all escalate it? Or do 
you at all?
    Mr. Eakes. Escalate the interest rate?
    Mr. Pearce. Or whatever, points or whatever. In other 
words, what do you all do? What is the range of options that 
you have?
    Mr. Eakes. On the loans that Self Help makes, we charge no 
points at all. We charge a 1 percent origination fee.
    Mr. Pearce. No points, but 1 percent, so if a loan for a 
house is at 7 percent nationwide, you would charge 8 percent.
    Mr. Eakes. No, no, we charge a 1 percent origination fee, 
the fee for making the loan. Our interest is probably one-half 
of 1 percent higher than a Fannie Mae loan.
    Mr. Pearce. So you charge a 1 percent origination fee and 
then another half above.
    Mr. Eakes. Interest rate.
    Mr. Pearce. Mr. Nadon, what would your industry, for 
instance, do in the same situation?
    Mr. Nadon. It depends on the risk category that the 
borrower was in.
    Mr. Pearce. Just give us the range.
    Mr. Nadon. Like a double A to a double C. But they really 
would be someplace between 50 to 75 basis points over a 
conventional rate on most of our business. But we do have 
products that can go as high as maybe 300 basis points above.
    Mr. Pearce. Okay, so anywhere from a one-half of 1 percent 
to 3.
    Mr. Nadon. Probably. I mean, right now, our current score, 
our waived coupons are around 7.3, 7.35 percent.
    Mr. Pearce. Mr. Eakes, these are somewhat different 
measuring sticks, so you have basis points versus loans. Would 
you feel like that, at your level at lending, that you leave 
any of the market on the table? In other words, are there 
people who come to you that could pay that do not have such 
good credit rating and they would be willing to, for a fee, 
have access? And that is simply what we are talking about here.
    Do you leave any of the market on the table? That is, I 
think, my question.
    At your rate of interest and your performance, do you leave 
market on the table, unserved people who would come in and 
would pay a little bit more?
    Mr. Eakes. There are parts of the sub-prime market, 
probably the bottom 10 to 15 percent, that we would not make a 
loan to.
    Mr. Pearce. But those loans might function?
    Mr. Eakes. We would not make those loans at any rate.
    Mr. Pearce. Those loans might function and they might be 
valid and good and not fall into the category--I think we 
universally would decry the problem loans that Ms. Adams talked 
about, but that lower 10 percent that you all will not touch, 
would they be performing loans?
    Mr. Eakes. To me?
    Mr. Pearce. Yes, yes.
    Mr. Eakes. I think, of the question you asked Commissioner 
Smith, there is 10 to 15 percent of the loans that should not 
be made at all.
    Mr. Pearce. Okay, I understand that. But I am asking about, 
you all are charging a little bit less for some of the sub-
prime loans. And I am saying: do you leave anything on the 
table when you reach your--
    Mr. Eakes. No, we have no limit on credit--
    Mr. Pearce. Mr. Nadon, would you want to comment on that? 
What does the sub-prime market, what is the value nationwide?
    Mr. Nadon. It is a little over $600 billion last year.
    Mr. Pearce. So you have $600 million. And those are people 
that you--
    Mr. Nadon. Billion.
    Mr. Pearce. Billion. Those are people that you are saying 
probably might not fall into the categories that the prime 
lenders or even Mr. Eakes might be willing to lend to. But 
these are performing loans.
    Do you find 20 percent non-performance in your loans?
    Mr. Nadon. No, as I mentioned earlier, when we look at life 
to date, our loans that ended up in foreclosure, on close to 
$100 billion worth of originations, it is 3.72 percent.
    Mr. Pearce. Okay.
    Mr. Chairman, I know my time is up.
    Mr. Bachus. Thank you.
    Mr. Pearce. I would just like to wrap it up by saying this 
is probably as difficult an unraveling circumstance because I 
do not believe we can just go in and say that these loans 
should not exist. When we first talked about non-prime lending 
into Mexico, I had people come to me that knew me personally, 
that fell into the category that Ms. Adams was talking about, 
who were saying, ``I live paycheck to paycheck. And if you 
close these down, you are going to close the door to me. And 
so, yes, regulate them. Do what you have to do. But please do 
not close the door to me being able to hang on to my house 
because I occasionally go in and I cash my paycheck early and I 
get the funds to go and pay my bills.''
    And so this is a very difficult balancing situation for me. 
And I would just appreciate the input from each of the 
panelists on my questions.
    Thank you.
    Ms. Adams. If I could just respond really shortly to that?
    Mr. Bachus. Thank you, Mr. Pearce.
    Actually, Ms. Velazquez was next and she has been waiting. 
Maybe she will ask you a question.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Chairman, before I proceed with my questions, I would 
like to ask unanimous consent to submit for the record 
testimony submitted by the National Council of--
    Mr. Bachus. Without objection.
    Ms. Velazquez. Thank you.
    Mr. Green, the reach and negative effect of abusive 
predatory lending practices have increased along with the 
dramatic growth of the sub-prime industry. Freddie Mac and 
Fannie Mae today buy a relatively small, but increasing share 
of sub-prime loans. And some analysts expect their share of the 
sub-prime market to jump to approximately 50 percent within the 
next few years.
    Do you think the GSEs could play a role in helping to curb 
predatory lending through their own decisions on which loans 
they choose to buy?
    Mr. Green. I know that is a big issue for this committee 
this week, so not to enter that debate.
    Ms. Velazquez. And I also would like to hear from Mr. Nadon 
and Ms. Lowrie, if you have any opinion on that.
    Mr. Green. As I understand it, Freddie and Fannie's charter 
is not crystal clear, to answer your question directly. But I 
would say that what we are talking about here comes back to the 
creation of a clear and objective national standard that all 
market participants--wherever they are in the continuum of 
borrower, lender, secondary market, assignee or investor--can 
understand what their responsibilities are.
    And each one has a different responsibility and a different 
role. And just to get back to Mr. Scott's question of assignee 
liability, we believe that assignees have a role and a 
responsibility that is clearly defined in the Ney-Kanjorski 
bill. And it is not the same as the lender's responsibility.
    And that is clearly defined. So I think there is a role for 
every market participant, whether or not--
    Ms. Velazquez. Including Freddie Mac and Fannie Mae?
    Mr. Green. Whether or not their charter allows it, I do not 
know that to be the case. But clearly, every market participant 
wants clear and objective standards that they can count on.
    Ms. Lowrie. Congresswoman, MBA believes that, along with 
the Bond Association, that the real key here is a strong, 
uniform national standard. I think we have seen both the GSEs 
enter into what we would call the alternate A, A-minus, in 
their mission to expand homeownership.
    And I think as we see more and more, in an industry, risk-
based pricing, we move more away from looking at just the 
conforming market, the A-minus market and the non-prime market. 
The risk-based pricing environment is really kind of creating 
synergies between all three of those markets.
    So there will be opportunities where both the GSEs and even 
the Federal Home Loan Bank can enter into that in an effort to 
expand homeownership. But the real key to the success in any of 
that, whether it is the lenders, the broker community or the 
investor community, is going to be a strong, uniform national 
standard.
    Ms. Velazquez. Mr. Nadon?
    Mr. Nadon. I cannot really comment too much about what 
their charter is and what they are or are not allowed to do. 
But I do think that they can have a pretty important role in 
the process.
    We have had very good relationships with both for them for 
years. Freddie was one of the largest buyers of our bonds, 
actually, for a number of years.
    So anything that they can do that would just add another 
place, another outlet for loans, for more capital being 
available in the marketplace, I just have to believe is a 
positive for consumers.
    Ms. Velazquez. But would you support uniform standards for 
predatory lending for the GSEs, if they help define the 
standard?
    Mr. Nadon. Oh, I think there should be uniform standards 
for everyone then.
    Ms. Velazquez. Okay.
    Mr. Green, can you briefly describe the process that a 
securitizer will go through to weed out predatory loans from 
its pool, addressing whether or not the process includes such 
actions as providing the loan originator name and address to 
local and State authorities or notifying the lender that it no 
longer will do business with it?
    Mr. Green. On the specific question about giving names and 
addresses, I will have to get back to you on that. But the 
process--the policy and procedures that are set up, the sample, 
the pool of mortgages, which can include hundreds if not 
thousands of mortgages--is pretty sophisticated, but it is only 
as good as the standard you are looking for. And that gets to 
the clear and objective standard issue because if an objective 
lacks clarity and lacks objectivity and a judgment has to be 
made, you can see how that can slow up the entire process.
    So trying to get behind someone's intent or the style in 
which they gave the loan, as opposed to clear, objective 
standards, really makes those policies and procedures make 
sense. And frankly, the standard laid out in the Ney-Kanjorski 
bill, which requires such policy and procedures, requires such 
due diligence and also requires representation by the lenders 
themselves to the secondary market, the assignee, of this 
diligence that they undertook, is what the crux of those 
procedures are.
    Ms. Velazquez. Do you feel that there is adequate support 
for assignees to share information with one another about 
unscrupulous lenders? Or do you have suggestions for things 
that would help them to better ensure that they do not purchase 
a predatory loan?
    Mr. Green. We would have to look further into that, 
particularly as it relates to antitrust issues and those sorts 
of things. As to market chatter branding someone ``bad,'' I am 
not sure that is a particular market participant's role.
    It is one reason why government enforcement and government 
laws here are appropriate and necessary and, again, why we 
support a national standard. But I think it could run into some 
real problems on the antitrust side if there were to be that 
kind of chatter between market participants.
    Mr. Bachus. Thank you.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Bachus. First of all, I am going to go from side to 
side. I will try to be brief.
    Ms. Adams, you had something you wanted to tell Mr. Pearce 
last time, I know--Congressman Pearce? I will give you part of 
my 5 minutes.
    Ms. Adams. Thank you, Mr. Bachus. I promise not to abuse 
it.
    The purpose of the stories was to, one, put a human face on 
it, but also to tie it to the provisions of the act. And the 
story of Vance County is a story of the failure of having 
assignee liability.
    We were able to prosecute the bad guy. We were able to get 
funds from him. They were not enough funds to help the 
families.
    The court ruled that there was no assignee liability and 
all of the people who held the mortgages are out. And so now 
they are foreclosing on these families.
    These families are in homes that they have $90,000 
mortgages on, but they are only worth $45,000. We want to work 
with the lenders to try to get them into a loan that they can 
afford, but there is nothing that makes the lenders want to 
work with us. There is no reason they have to work with us.
    And so these people are in foreclosure. We need something 
to hold the assignee liable.
    And that is why we have prepayment penalties, because they 
factor in the bad loans in the pool. They factor in the abuse 
of yield spread premium by the brokers. And that is the 
rationale behind the prepayment penalty, to protect the 
investor.
    But no one is there to protect the victim.
    Mr. Bachus. Mr. Green?
    Ms. Adams. Thank you, Mr. Chairman.
    Mr. Green. I would just say very quickly, Mr. Chairman, 
that the Ney-Kanjorski bill does have a right to cure 
provision, so that if an assignee learns of a problem loan, 
they can make it right. And it does provide courses of action 
for the borrowers to take, particularly if there is reckless 
indifference.
    So I do believe the Ney-Kanjorski bill provides such 
relief.
    Mr. Bachus. And actually, the North Carolina bill kind of 
cuts that off, as I understand it. Is that correct?
    Mr. Eakes. Cuts off what?
    Mr. Bachus. It kind of cuts off the right to cure?
    Mr. Eakes. The right to cure in most all consumer 
legislations says that you have 60 days; you have a period 
after the loan is made.
    Mr. Bachus. Which is a pretty short period of time.
    Mr. Eakes. A short period that lets the lender use their 
own due diligence.
    Mr. Bachus. I am a former attorney, but when you get 
lawyers involved--
    Mr. Eakes. But if you allow--
    Mr. Bachus. If you could have a little longer time, I think 
it benefits the consumer.
    Mr. Eakes. If you allow--
    Mr. Bachus. Let me go on. Do you want part of my 5 minutes?
    Mr. Pearce. Let me say to Ms. Adams that I do not disagree 
with you at all. I agree that the people who are unscrupulous, 
we ought to be tearing them up.
    But beyond that point, we have to figure out where to draw 
the line so that we do not close the door to people who would 
fit there.
    Mr. Bachus. All right.
    Let me ask, real quick, Ms. Adams, you mentioned--it is 
Commissioner Smith, right?
    Mr. Smith. That is fine, yes.
    Mr. Bachus. You had mentioned coordinated enforcement 
authority?
    Mr. Smith. Right.
    Mr. Bachus. Do these bills, do they both provide for that?
    Mr. Smith. I am embarrassed to say I do not know. I think 
it is crucial though.
    Mr. Bachus. Okay.
    Mr. Smith. Particularly--and I am sorry he is not here, but 
to address the 5 percent problem because there are--well, as a 
lawyer, you will know, but in dealing with any kind of law 
enforcement, there is a materiality standard every law enforcer 
has to go through.
    And having more people on the beat, rather than less, would 
be--
    Mr. Bachus. Now for the federally insured institutions, is 
that coordinated?
    Mr. Smith. Oh, yes. We coordinate all the time, yes.
    Mr. Bachus. Okay. Let me just close by saying this.
    Mr. Green and Mr. Nadon--and I commend Option One for your 
best practices--but both of you all have testified previously--
in November 2003 in Mr. Nadon's case and I think last March in 
your case, Mr. Green--that the North Carolina statute actually 
gave the clearest guidance for assignee liability of any of the 
State laws.
    Is that not true? I mean, you did say you were not totally 
satisfied with it. But I have your testimony here. You actually 
referred me to the North Carolina law as a good law, I thought.
    Mr. Green. I would have to review exactly what I said last 
March. Having said that though, that was at a time where there 
were many States that were coming up with far more extreme 
measures. And North Carolina was, in fact, attempting to try to 
make positive moves in the right direction.
    Having said that, upon reflection of the entire development 
of a national standard, we believe that the assignee liability 
direction that the North Carolina bill takes does not provide 
the clarity because it just continues to--
    Mr. Bachus. You did say that, but I guess last year, we 
have been looking for that clarity. And we cannot seem to find 
it. And we have to find it if we are going to--
    Mr. Green. Well, we do believe very strongly that the many 
months of drafting that I know Mr. Ney and Mr. Kanjorski and 
many members of this subcommittee and the House have in putting 
the Ney-Kanjorski bill together, have found that balance.
    Mr. Bachus. And Mr. Nadon, in November of 2003, you 
actually on assignee liability said--and I do not want to put 
words in your mouth, but I thought you said it is workable and 
you could do it.
    And actually, I think, Mr. Green, you said it does not 
inhibit market capital.
    Mr. Green. I think what I said precisely then, I think that 
was part of the oral testimony and in question and answer, was 
to properly define assignee liability because one of the 
panelists at the time said without assignee liability, there is 
no teeth in the enforcement of the law. And frankly, we do not 
disagree with that.
    And I think the Ney-Kanjorski bill provides such clarity to 
acceptable and appropriate levels of assignee liability, keeps 
the entire marketplace on notice, whether you are a lender or a 
secondary market provider.
    Mr. Bachus. Mr. Nadon, let me just ask you to go ahead.
    Mr. Nadon. Yeah, I am not an attorney so the assignee 
liability is a little bit outside of my realm. I am just a 
mortgage guy.
    Mr. Bachus. Okay.
    Mr. Nadon. But I will say this, that we have seen differing 
opinions on North Carolina about the extent of the assignee 
liability. And from my vantage point as a lender, our position 
has always been that we follow what the Bond Market Association 
says is acceptable and what the rating agencies tell us that 
they can quantify.
    And when they get very comfortable, as a lender then we 
become very comfortable.
    Mr. Bachus. Standard & Poor's testified at that same 
hearing you did. And they said they were comfortable with it, I 
thought.
    And this is actually legislation that has been on the books 
for several years. So we have a history with it. I mean, I just 
want to point that out. I am going to introduce that just into 
the record. And this is not a ``gotcha.''
    In my mind, you all are pretty comfortable with North 
Carolina on assignee liability. You said it was actually better 
than most other States. And maybe you were talking about New 
Mexico and New Jersey, comparing it.
    Mr. Green. I mean, keep in mind, again, back at the time, 
there were several State laws that had standards different than 
HOEPA that were far worse than HOEPA. We believe Ney-Kanjorski 
is--
    Mr. Bachus. What about the existing assignee liability 
provisions under HOEPA? Are they good? Could we go with those?
    Mr. Green. We do not believe they provide the clarity, the 
distinguishing nature.
    Mr. Bachus. So the Federal statute does not and none of the 
State statutes do?
    Mr. Green. Again, one reason why Federal legislation is 
needed is that there is not a Federal statute that gets to 
where we need to get to stop predatory lending and preserve the 
secondary market. And the State statutes are all over the lot.
    Mr. Bachus. Okay. Could you take North Carolina, since 
maybe it was one of the closest to what you wanted, and tell me 
what is wrong with it? I am not talking about here. I am 
talking about just send it in.
    Mr. Green. Be happy to.
    Mr. Bachus. Okay.
    Mr. Green?
    Mr. Green of Texas. Thank you, Mr. Chairman.
    Mr. Bachus. Without objection, I would like to introduce 
this.
    Mr. Green of Texas. Mr. Chairman, I would like to thank you 
for your evenhanded approach to this. You get high marks in my 
book.
    And thank you, the members of the panel, for the 
information that you have imparted today.
    With reference to the prepayment penalty, we seem to base 
the notion that consumers can make mistakes that are to their 
detriment by having an invidious prepayment penalty, in the 
sense that it is invidious in its effect, upon the premise that 
if a consumer wants to do it and makes a mistake, then the 
consumer has a right to make that mistake. I am not sure that 
we do that in all cases in society, that we allow consumers to 
make mistakes.
    I will use an extreme example first. With reference to drug 
abuse, we do not let people consume crack cocaine. We have just 
decided that that is not good for them and it is not good for 
society to allow that to occur. So we have a law that prohibits 
it.
    And by the way, the person who engages in the consumption 
is indeed a consumer, in a literal sense. But to make this 
point transpicuously clear, let's talk about securities and 
securities transactions.
    There is something called a sophisticated investor. If you 
are not a sophisticated investor, when you want to engage in 
certain securities transactions, we will not allow it.
    Having money is not enough because you are not a 
sophisticated investor. When I purchased my first home, right 
out of law school, I would have signed anything they put before 
me because I wanted the home. And quite candidly, I was not a 
sophisticated investor as it related to prepayment penalties 
and some other things.
    So I say to you respectfully that I do not agree with the 
notion that we can just allow people who can buy down a half 
point or so the opportunity to make a mistake that will haunt 
them the rest of their lives. I am not sure that I have the 
solution, but I do know that in other areas of business 
transactions, we have considered the sophistication of the 
person who is engaging in the transaction.
    Now with that said, I want to go back to Mr. Eakes, sir. 
You talked a bit about these prepayment penalties. Can you 
explain to me why it is necessary to have the penalties, given 
the circumstances that have developed in your State?
    Mr. Eakes. In my State, the prepayment penalties have been 
prohibited, so only 1 percent of sub-prime loans have an 
override where they have prepayment penalties. I do not believe 
they are necessary at all for sub-prime loans.
    Mr. Green of Texas. Have you found that people who buy down 
these loans to get the better interest rate, that they truly 
have the sophistication to understand the long-term 
implications of the prepayment penalty?
    Mr. Eakes. No, they do not. There was a study that Freddie 
Mac did with focus groups and they concluded somewhere more 
than 50 percent of the borrowers who had prepayment penalties 
did not even know they had them.
    Mr. Green of Texas. Are you familiar with the term 
``sophisticated investor?''
    Mr. Eakes. Yes, I am, in the securities context.
    Mr. Green of Texas. Yes, sir.
    Do you believe that that is a good thing to have in the 
securities market, the sophisticated investor requirement?
    Mr. Eakes. I think it is, yes.
    Mr. Green of Texas. Let me ask my namesake.
    Mr. Green, you and I share the same last name. Wonderful 
last name. The color green symbolizes life.
    Mr. Green, do you think that we are dealing with, in many 
circumstances, persons who are sophisticated enough to 
understand the implications of their actions?
    Mr. Green. Well, as you correctly state, in the securities 
industry, there are suitability requirements. And frankly, even 
with suitability requirements, there is still a big gap between 
what investors ought to know and what they do know, which is 
why investor education has become so crucially important.
    Financial literacy is an extension of that. And I think the 
provisions of the Ney-Kanjorski bill which will expand that 
education is very important.
    But I would actually defer to the originators of mortgages, 
the lenders who deal directly with the borrowers, in terms of 
the education levels that exist between them.
    Mr. Green of Texas. Yes, sir? I will yield to you for a 
quick response.
    Mr. Smith. I would just like to respond to that briefly, if 
I could, because it seems to me that the issue really is: what 
does it take to make someone--to make the market work properly; 
in other words, to have parties involved who have relatively 
equal knowledge, relatively equal bargaining power and the 
ability to negotiate based on the knowledge of what is going on 
in the universe?
    I think the problem that there is in the sub-prime market 
and the tragedy, in some ways in my mind, about the preemption 
actions frankly that the OCC has taken with regard to Georgia's 
law is, for example, the OCC explicitly preempted a requirement 
in that law that people have direct personal counseling to 
ensure that they were at least getting closer to parity with 
lenders, so they would in fact understand the terms of the 
transactions and the like.
    I do think a policy problem that relates to the sub-prime 
market is the cost--and it is costly--of providing an 
appropriate level of consumer education so that people do 
approach that ability to bargain. I will say Freddie Mac has 
done a study that shows--Freddie Mac is being mentioned a lot 
today--but there is a Freddie Mac study on, I think it is 
housing, gold housing or housing gold or something that shows a 
direct and very helpful positive correlation between 
homeownership purchase counseling and success in loans.
    But that, again, is a fairly extensive program. And there 
is an incentive for people to pay attention.
    Mr. Bachus. All right, thank you.
    Mr. Sherman?
    Mr. Sherman. Thank you, Mr. Chairman.
    Mr. Bachus. And after Mr. Sherman, the order is Mr. Davis, 
Mr. Cleaver, Mr. Clay, Mr. Ford.
    Mr. Sherman. This panel brings to us consumer protection 
expertise, business expertise. We up here have a little 
political expertise.
    And let me tell you that if a bill is written that does not 
have preemption, in effect is not both the ceiling and the 
floor, it does not have a chance of passing. So we can attack 
the concept of having national preemption and not pass any bill 
at all. The effect will be, in many States, no consumer 
protection at all and, for many lenders, those that are 
national banks, no restrictions at all.
    So I hope that we get some consumer protection. I can 
understand how those of you from North Carolina prefer the 
North Carolina bill.
    I am from California. And the bill that I have cosponsored 
is modeled after California law.
    Mr. Nadon, you say you charge more in North Carolina than 
for identically situated loans in adjoining States or perhaps 
in California where the law is different. Can you quantify how 
much more a sub-prime borrower is going to pay?
    Mr. Nadon. Yes.
    Mr. Sherman. Is it 50 basis points? 100 basis points?
    Mr. Nadon. Yes, when I asked our secondary marketing 
department, which does our pricing for us, that question and I 
gave them the loan parameters--$150,000 loan, single-family, 
owner-occupied, 80 percent LTV, 45 percent debt ratio--and gave 
them some basic credit risk parameters and said, ``Take that 
loan in California, put it in Pennsylvania, put it in North 
Carolina. Tell me what the differences are.''
    And North Carolina was the highest priced loan.
    Mr. Sherman. By how many basis points?
    Mr. Nadon. It is 55 basis points higher.
    Mr. Sherman. Fifty-five basis points higher than what?
    Mr. Nadon. Than California. And I believe it was 50 higher 
than Pennsylvania.
    Mr. Sherman. Gotcha.
    Regina, is that your experience as well?
    Ms. Lowrie. Yes, Congressman, that has been our experience. 
And an interesting point to note, when you talk about 
prepayment penalties and the value that they bring to the 
consumer in lowering rate and giving them the choice.
    And I have heard a couple times here today that we have not 
seen that hurt consumers or raise interest rates in North 
Carolina. But the one thing we have to remember is that when 
you single out one State out of a national mortgage market, 
that State is being subsidized by all of the other States' 
loans that are in the securities.
    So if we are looking at billions of dollars of securities 
on Wall Street--and you can speak to this, Congressman.
    Mr. Sherman. I have limited time. I mean, there are two 
different approaches. One could say, hey, it does not really 
raise costs. The other could say it raises costs for North 
Carolina borrowers. And the third approach is it raises costs 
for all borrowers.
    But the next issue is: what are the default rates in sub-
prime loans? We have heard everything from 20 percent to 3 
percent.
    And when I say default, I do not mean somebody is 30 days 
late. I mean the loan goes to foreclosure.
    Mr. Green, would the bond market be interested in buying a 
portfolio of loans if they thought one in five of those loans 
would go to foreclosure and they as lenders were going to end 
up owning the property as a result? Using the definition of you 
having to take the property back, what kind of foreclosure rate 
would be acceptable to the bond market?
    Mr. Green. And I sit between 1 in 5 here and 4 in 100, 
which are the Mortgage Bankers Association statistics. But the 
bond markets, if they can reasonably predict with reliability a 
foreclosure rate, can price it. The question is at what price?
    Remember, the only portfolio that has zero foreclosure risk 
is the portfolio of Treasury securities.
    Mr. Sherman. But what I am asking is, I mean, certain 
borrowing is just such junk that the bond market does not want 
to deal with it. I mean, there are junk bonds and there is 
really junk.
    At what point does an expected foreclosure rate of even 5 
percent or 10 percent cause that portfolio to be such junk that 
your members do not want to deal with it?
    Mr. Green. The question is, are there investors that want 
to take those risks? And can it be reasonably priced? And is 
there adequate information to price it reasonably?
    And if there is, which comes to clarity and reliability of 
the information, it can be priced.
    Mr. Sherman. I was hoping that you could resolve the 
conflict between those sitting on your right and left. And you 
really cannot.
    Mr. Green. I think it is impossible to. But I think we feel 
comfortable with the statistics that we seem to come out of.
    Mr. Sherman. Yes, and it is also tough to predict because 
we are talking about sub-prime loans being made, say, in the 
1990's, predicting what portion of them will default and go 
into foreclosure in 2012. Who knows?
    It has been said that we are all dead in the long run. 
These loans only have to live 30 years. And so the question is 
how many of them die of unnatural causes, namely foreclosure?
    Mr. Bachus. Thank you.
    Mr. Sherman. Have I used up all my time? I guess I have.
    Mr. Bachus. But you have established we all die, I think. 
No, I am just joking.
    Mr. Sherman. If I can just go to this prepayment penalty 
issue, some would paint the picture that a prepayment penalty 
is something that only a poor or uneducated borrower would 
tolerate.
    I would ask Mr. Green, aren't there a lot of very 
sophisticated corporations that sell bonds with call premiums, 
that in effect go to the market and say we want to get a good, 
low interest rate on our bonds and we will agree to a 
prepayment penalty?
    Mr. Green. Well, yes. In fact, most municipalities, when 
they issue bonds, they are typically 10-year call bonds. And by 
virtue of that, they lock in a very favorable rate.
    Mr. Sherman. So if we were to go to municipalities, 
corporations and say, ``You are not allowed to issue a bond 
with a call premium,'' then all those very sophisticated 
borrowers would be upset because they would have to offer 
higher interest rates.
    Mr. Green. Well, that would be a factor that the investment 
community would price into it. And I think that would be a 
limitation.
    Mr. Bachus. Thank you. I think you have established that, 
in sophisticated situations, sophisticated investors do agree 
to prepayment penalties.
    Mr. Davis?
    Mr. Davis of Alabama. Mr. Chairman, we have established--
    Mr. Bachus. You can pursue this line of questioning.
    Mr. Davis of Alabama. Mr. Chairman, we have established 
that everything dies except for 5 minutes in committee 
hearings. That goes on and on.
    Let me direct this first question, Mr. Smith, to you 
because I suspect you might be the most knowledgeable person in 
the committee to answer it. Some of us on this side of the 
aisle were critical of the OCC preemption, not because we 
opposed the idea of a national standard, but because we think 
that we are the ones who ought to be doing it.
    We think the Congress ought to be doing it, as opposed to 
the OCC doing it, without Congress's consent or even knowledge 
in this instance. One of the things that is unclear to me about 
the Ney-Kanjorski legislation is the degree to which it widens 
the scope, narrows the scope or matches the scope of OCC 
preemption.
    I do not want to spend my whole 5 minutes on this, but can 
you quickly give an answer as to the degree to which Ney-
Kanjorski matches OCC preemption?
    Mr. Smith. Well, what I have suggested is that Ney-
Kanjorski should not preempt the ability of States to enforce 
national standards.
    Mr. Davis of Alabama. I understand that and I agree with 
you. But I am asking in terms of--
    Mr. Smith. I think what Ney-Kanjorski would do, to the 
regard that it deals with normative provisions and loan terms, 
the kind of stuff that has been debated already, it would 
virtually totally preempt or come close to totally preempting 
State laws.
    Mr. Davis of Alabama. So your opinion is--
    Mr. Smith. And I think that is what the proponents expect. 
It is what they want to do.
    Mr. Davis of Alabama. All right.
    Does anyone on the panel disagree with that proposition, 
that Ney-Kanjorski would be just as preemptive as the OCC 
regulations that were announced a year ago? You are all nodding 
your head in agreement.
    Does anybody think, per chance, that Ney-Kanjorski would go 
even further than the OCC has gone with respect to preemption?
    And she needs to take it down, so let me just go person by 
person.
    Ms. Adams, you are nodding your head that you think Ney-
Kanjorski is even more preemptive than OCC? Just a quick yes or 
no?
    Ms. Adams. Yes.
    Mr. Davis of Alabama. All right.
    Mr. Eakes?
    Mr. Eakes. Yes.
    Mr. Davis of Alabama. All right.
    Mr. Green?
    Mr. Green. Technically, yes, but it creates a better 
national standard.
    Mr. Davis of Alabama. Okay.
    Ms. Lowrie?
    Ms. Lowrie. Yes. And MBA wants to actually look at maybe 
some areas where it may go a little too far.
    Mr. Davis of Alabama. Okay.
    Mr. Nadon?
    Mr. Nadon. Yes. I think yes, and it creates a better 
standard.
    Mr. Davis of Alabama. Okay, because this has been a subject 
of some confusion in meetings I have had. So it seems we have 
established that Ney-Kanjorski goes even further than OCC.
    Let me ask another broad set of questions. I have been 
asking this for 1.5 years and I have yet to get an answer, so I 
am going to take one last crack with this panel.
    We know that the HMDA data is coming out. We know that 
there is going to be, we have reason to believe, indications 
that sub-prime lending is far higher in the African-American 
and Latino community than the Caucasian community.
    And the first line of defense to those statistics is that 
well, you may have higher levels of poverty, for example. You 
may have lower incomes in the black and Latino community, so 
that could make some higher credit risk and could account for a 
disparity.
    But then we also see data that says the amount of sub-prime 
lending is twice as great in the affluent African-American 
community as in the low-income white community. So I want to 
ask the same question of each member on the panel.
    Do any of you believe that the disparity in sub-prime 
lending between blacks and whites is purely a function of the 
market?
    Mr. Smith, yes or no? And I rush simply to give everybody a 
chance to answer that?
    Mr. Smith. No.
    Mr. Davis of Alabama. All right.
    Ms. Adams?
    Ms. Adams. Absolutely no.
    Mr. Davis of Alabama. Mr. Eakes?
    Mr. Eakes. No.
    Mr. Davis of Alabama. Mr. Green? Did not get an answer from 
you, just a head shake.
    Mr. Green. I would say no.
    Mr. Davis of Alabama. Ms. Lowrie?
    Ms. Lowrie. No.
    Mr. Davis of Alabama. All right.
    Mr. Nadon?
    Mr. Nadon. No.
    Mr. Davis of Alabama. Okay. Now that is striking to me. And 
I compliment you on your candor. So I want to turn to this 
question: given that you all believe that this disparity is not 
just based on the market, what is the industry doing right now, 
without waiting for Congress, without waiting for us to wave 
our magic wand, if we had one, what is the industry doing right 
now to address what you all just acknowledged is a problem that 
is not market-based?
    Ms. Lowrie, do you want to take a crack at that?
    Ms. Lowrie. Thank you, Congressman.
    Well, first of all, the Mortgage Bankers Association, as 
the trade association representing our members, has really made 
a concerted effort through our Web site to go out, through the 
Home Loan Learning Center, to try and educate consumers because 
I think it gets back to education. It also gets back to 
diversity in our industry.
    We are serving a much more diverse market today than we 
were serving 10 years ago. And if we look at demographics 
across the entire country and the percentage of immigrants, 
minorities and low-and moderate-income borrowers that have come 
into the market and now there are innovative products and 
solutions, this is a whole new segment of the market that we 
need to be able to support, educate.
    We need a more diverse workforce population that speaks the 
various languages of these different segments of the 
marketplace. So the industry has a big responsibility and has 
already started efforts in those areas in addition to working--
    Mr. Davis of Alabama. Last quick question.
    Mr. Nadon. If I could just expand on that? Just real 
quickly?
    Mr. Davis of Alabama. As long as it does not come out of my 
time. Go ahead, please.
    Mr. Nadon. One of the very practical things that we have 
done in our organization is for the last year, we have had the 
National Fair Housing Alliance working side by side with our 
associates to make sure that just even in the wording of a 
policy or procedure, that we do not have words or phrasing that 
might get in the way of our doing the right thing for our 
customers.
    Mr. Davis of Alabama. Last 30-second point because I am a 
little bit past my time limit.
    Ms. Adams. But please let me address that.
    Mr. Davis of Alabama. As long as I get my last 30 seconds, 
sure.
    Mr. Bachus. You are already 40 seconds over, but I am going 
to give you that last 30 seconds.
    Mr. Davis of Alabama. Thank you. Thank you, Mr. Chairman.
    Go ahead, Ms. Adams.
    Mr. Bachus. Is this an Alabama thing?
    Ms. Adams. NCRC conducted testing of 12 sub-prime lenders 
with retail outlets. And in our testing, which is in the 
written record, we uncovered a 45 percent rate of disparate 
treatment based on race. We also found that when we test, 
people are not given the same information. The white tester was 
given different rates than the black tester when they walked in 
the door.
    When we did testing on upper-income African Americans--the 
North Carolina Fair Housing Center did testing on upper-income 
African Americans to kind of find out why that 2-to-1 disparity 
existed, we found that they were not getting the same 
information. They were given different loan products with 
different rates and different terms.
    And there is still difference in treatment. So I refer you 
to our written response because we do have an answer to your 
question.
    Mr. Davis of Alabama. And let me sneak this in, as I think 
you would agree this is an important question.
    Ms. Adams, you have explained what the industry is doing to 
address this problem.
    Recognizing that my time is out, so if you would be 
extremely brief, Ms. Lowrie, could you or Mr. Nadon or Mr. 
Green take a crack at the following question: what tools does 
this institution, the House of Representatives, need to give 
you to combat what you have acknowledged is a problem of actual 
discrimination in some instances? What can Congress do 
legislatively and statutorily to better arm the industry to 
deal with this problem?
    Thank you, Mr. Chairman.
    Ms. Lowrie. Very quickly, first of all, a strong, uniform 
national standard, strong consumer protections, objective 
compliance standards and I think the funding to support the 
consumer education and counseling, not just before application, 
before the borrower commits to the obligation of paying that 
loan back, but also to help those that do get in trouble on the 
back end with possible foreclosures, counseling to work them 
through so they can keep their home and not lose it through 
foreclosure.
    Mr. Bachus. Thank you. We appreciate that 9 minutes of 
questioning.
    Mr. Cleaver?
    Mr. Cleaver. Thank you, Mr. Chairman. I will reduce my 
number to accommodate the 9 minutes from my colleague, Mr. 
Davis.
    In part because my questions are along the same lines that 
he was raising, would any of you or all of you agree that sub-
prime lending has been highly profitable?
    Mr. Nadon. I can tell you from personal experience that the 
margins in our business have been cut in half in the last 18 
months. In an industry that was working historically for 200 to 
225 basis point pre-tax margins for years, we are now operating 
at about a 100 to 110 basis point margin.
    And we think that is going to be the way the future is, 
which I think is a positive because I see that as just one more 
sign of our industry truly maturing. This is the normal process 
that goes through any maturing business and we are seeing a lot 
of that.
    And so now it becomes very important for us to emphasize a 
lot of our effort on cost control. One of the reasons why we 
are advocating getting a national standard for every lender in 
this country to follow and for regulators to have to pay 
attention to is because our IT costs, our training costs, our 
staffing costs, compliance costs, all of those are things that 
consumers have to pay.
    Mr. Cleaver. If we did away with prepayment penalties--
Congress--is there any prediction on how the market would 
react?
    Ms. Lowrie. There have been studies done by some of our 
members within our organization that would show that rates 
would increase by about 100 basis points. And there are studies 
out there that we could share with the committee, to have you 
review.
    Mr. Cleaver. Anyone with a different?
    Mr. Eakes. We believe, based on the data in North Carolina 
and other States that do not have prepayment penalties, that 
there is no premium in the interest rate now. So in fact, while 
people's rate sheets may show that they get a half a point 
lower, in reality, it does not work that way.
    You do not pay a higher interest rate, in reality. And 
there is a Harvard study that has done that. We have done that 
study in North Carolina.
    And I can explain why, but I have already gotten the hook a 
couple of times, so I will be quiet.
    Mr. Green. Except that, in the secondary market, the risk 
of prepayment and the identification of that risk is part of 
the pricing. And a prepayment penalty is clear, identifiable. 
And if someone has agreed to it and it has been properly 
disclosed and educated and they have agreed to it and it makes 
sense from the total transaction, that does give a degree of 
certainty that gets priced into the deal, which also reduces 
the interest rate.
    Mr. Cleaver. Okay. I am working fast, Mr. Chairman.
    Mr. Bachus. You have all sorts of time. I mean, you really 
do.
    Mr. Cleaver. If a sight-challenged person was in need of a 
seeing-eye dog and they need this in order to make it, to get 
around, and someone provided the seeing-eye dog, who also had 
schizophrenia and would bite the person periodically, he would 
help the person but, you know, every four or five blocks, he 
would bite him.
    And if the sight-challenged person were your cousin, what 
would you do for your cousin?
    Ms. Adams. Sir, that is exactly what is going on in the 
marketplace right now.
    Mr. Cleaver. Absolutely.
    Ms. Adams. But the cure exists within these two bills. The 
reason the prepayment penalty works is because--Mr. Green says 
it--they will market anything if you are willing to bear the 
risk.
    Mr. Cleaver. No, no, no.
    Ms. Adams. So if the dog bites, okay, one, you do not get 
that dog; you get a dog that is properly trained.
    Mr. Cleaver. No, all the dogs bite.
    Ms. Adams. But if you have that dog, you muzzle it. You 
train it and you restrict it so it does not have the ability to 
bite that person.
    Mr. Green. But you do not kill the dog.
    Ms. Adams. We have not killed the dog. You factor into your 
risk on the assignee liability. You factor in the prepayment 
penalty that lowers the rate. You factor in the fraud that 
increases the rate that you charge.
    If we put those things in the fees, if we take out yield 
spread premium, if we take out the incentives for fraud that 
the mortgage brokers do, then you would have lower costs on the 
investment. And I will tell you that having the term--what is 
it?--reckless indifference is not a standard on assignee 
liability that makes any kind of sense because where is the 
recklessness when you have factored in all the fraud, all the 
predatory practices?
    And the investor is protected. But the blind man is running 
around being chomped to death.
    Mr. Eakes. We have a system right now that provides an 
incentive for people to take advantage of the unsophisticated. 
That is the problem is we have financial incentives for the 
originators of loans to put people into higher interest rate 
and into prepayment penalties that they may or may not require.
    There are incentives built into the marketplace to take 
advantage of the unsophisticated.
    Ms. Lowrie. And that speaks volumes to why we need a 
strong, uniform national standard. If we think of the laws that 
are out there now on a State-by-State basis and just think of 
the thousands of municipalities that could pass laws over the 
next 12 to 24 months and we are sitting here saying we know the 
consumer needs to be better educated, we need to disclose 
better to them, they need to understand, we need to simplify 
the entire process with a strong, uniform national standard to 
make it easier for the consumer to understand, so that that 
consumer does not get abused.
    And then, furthermore, laying it out with one standard that 
needs to be enforced across this country by the States and the 
departments of banking in each of the States to enforce a 
strong, uniform national standard.
    Mr. Eakes. I mean, let's be honest here, when the North 
Carolina bill passed, I went to the Mortgage Bankers 
Association and to industry leaders and said to them, at this 
point in time, I could help deliver a uniform standard based on 
the North Carolina bill. The response I got was, "No, we think 
we can stop it at the borders of North Carolina."
    It was not that folks wanted a strong, national standard. 
They wanted a weak national standard or no national standard. 
That is the truth. That is the truth.
    Ms. Adams. I was there. I witnessed it.
    Mr. Bachus. All right.
    Thank you.
    Mr. Cleaver. Thanks, Mr. Chairman.
    Mr. Bachus. I think for the record, for the panelists, 
would each of you all indicate whether it was the blind man or 
the seeing-eye dog that was schizophrenic?
    Mr. Cleaver. It is important.
    Mr. Bachus. Mr. Clay?
    Mr. Clay. Thank you, Mr. Chairman.
    I thank the entire panel for your participation today.
    Let me start with Mr. Eakes. Last week, Citigroup announced 
that it would not make home loans with mandatory arbitration 
clauses, joining a growing list of lenders that do not use 
them. What are your views on the legislation before this 
committee and how it deals with mandatory arbitration? Can you 
explain your concerns with mandatory arbitration clauses?
    Mr. Eakes. I am glad you pointed out Citibank. I have been 
negotiating with Citibank for 6 years. And the announcement 
last Thursday was the culmination of 6 years of conversation 
and negotiation.
    And what they did was prohibit arbitration clauses on any 
of their home loans. There are virtually no sub-prime or prime 
mortgage lenders left who offer arbitration clauses.
    Wells Fargo is one and Household Finance. They are the only 
two I know of in the entire industry.
    So arbitration clauses are basically a moot point now with 
Citibank's announcement. They also put a limit on all of their 
prepayment penalties of no more than 3 percent in the first 
year, 2 percent in the second year and 1 percent in the third 
year.
    So what has happened in the last 5 years is the industry 
has adopted best practices and we really do have a better, 
cleaner industry now than we had 5 years ago. There is no 
question about that.
    Mr. Clay. Let me ask Mr. Nadon about that. I noticed that 
you offer brokers a signed commitment between brokers. And 
Option One to include a lot of issues, but one is that you will 
not knowingly submit an application for a non-prime loan for a 
borrower who is eligible for and whose needs are best met by a 
prime loan, along with Option One, reports all fraud to 
licensing and/or criminal authorities and may civilly sue 
brokers and agents.
    If some version of this bill passes, do you anticipate the 
industry will experience a void or lose quite a few companies 
or just the bad ones?
    Mr. Nadon. I think it is just hopefully the few remaining 
bad players out there. I agree with Mr. Eakes.
    I think there has been tremendous improvement over the last 
5 to 10 years in the way that the industry behaves, all of 
which has been of benefit to the ultimate consumer. Is it where 
we all want it to be at this point? No. that is why we are all 
here today.
    We think there is more that we could do, certainly within 
the confines of a national standard, to hold everyone 
accountable and try to set real best practices on fraud 
prevention, on points and fees, on all kinds of things, in the 
way that we are supposed to behave in this industry.
    Mr. Clay. And you are confident that, along with 
legislation, that the industry has already started by policing 
itself?
    Mr. Nadon. Oh, absolutely, because we really have to take a 
much more aggressive stance on that. And so we have been doing 
things in our own organization for the last 5 years, with 
quarterly educational notices on fair lending and 
antidiscrimination and things like that just for our brokers.
    We do things for our associates every time we hire one and 
all the time that they are working for us. But we are extending 
that out now to the people that are touching the borrowers 
directly to try to educate them on things that they should be 
doing every day to make sure we treat people fairly.
    Mr. Clay. Thank you for that response.
    Ms. Adams, let me ask you, Representative Davis posed a 
question and you did not get to answer it. Ms. Lowrie answered 
it. But he talked about racism and how disproportionately 
minorities are steered into sub-prime loans and worse and 
predatory loans.
    How do we address that through legislation? Can you give me 
some examples of how maybe other States have tried to attack 
and fight racism through the lending industry?
    Ms. Adams. I think one of the key things that we have to do 
is the Congress can--one, we have the Fair Housing Act and the 
Equal Credit Opportunity Act. We need more money for 
enforcement. In fact, there were major cuts to fair housing 
enforcement in the HUD bill this last time.
    We need money for enforcement. But we also need the ability 
for State regulators and Federal regulators to monitor and look 
at the pools and portfolios of the lenders and to test them, to 
have the authority to go in and look at their practices more 
aggressively around these lending.
    We also need Congress to, when these lenders come before 
you, to challenge them about their numbers and to ask them 
specifically what is the cause of the disparities within their 
ranks. If they say that it is credit score, then have them put 
the proof in front of you because I do not believe--all we are 
asking for is for people to be treated the same who have earned 
the same level of credit.
    And I do not believe that that has panned out. The 2004 
HMDA data has some really disturbing numbers in terms of the 
disparities that we found amongst the 15 lenders in the five 
million loans that were looked at.
    They cannot be explained away simply by differences in 
credit. But I tell you that if you build upon discrimination by 
one, taking A-prime borrowers from African-American 
neighborhoods and putting them and locking them in the sub-
prime market or worse, in a predatory loan, then they get 
behind and then you create a negative situation for that 
borrower that took a good A-credit customer and made them a C-
credit borrower.
    Mr. Clay. I am bumping into Mr. Ford's time now, but who 
should enforce the antidiscrimination provisions of law? Should 
it be the State attorney generals or the Federal Government?
    Ms. Adams. I believe that we need as much enforcement as 
possible. We do not have enough regulators at all. We need 
every regulator with the authority to bring these bad actors to 
justice swiftly.
    The problem is that a law that does not have an enforcement 
mechanism is worthless to the victim. If they cannot find 
someone who will defend them and protect them, it is worthless. 
So we need as many cops on the beat as possible.
    Mr. Bachus. Mr. Ford?
    Mr. Ford. Mr. Chairman, thank you.
    I agree. There needs to be some kind of national umbrella. 
But I, like many on the panel, am concerned about what it looks 
like.
    Ms. Adams or Ms. Lowrie, you were making the point when the 
question was asked about comparing the OCC preemption to Ney-
Kanjorski and whether or not it went further, to my colleague, 
Mr. Davis's question. You were beginning to say that there were 
parts of it you thought that overstepped. And you talked a 
little bit about it in your testimony.
    Do you want to clarify for 30 seconds?
    Ms. Lowrie. Not in relation to the OCC or the OTS 
exemptions, but just the exemptions within Ney-Kanjorski.
    Mr. Ford. That is what I am talking about. I am sorry. I 
assumed that is the point you were making.
    Ms. Lowrie. What MBA supports and has supported for a long 
time is the strong protections and objective standards as it 
relates to loan origination. And there are some other broad 
exemptions within Ney-Kanjorski as it relates to foreclosures 
that would impact the States in some other areas.
    We could submit that information to the committee. MBA 
staff could submit it. But we hope to work through some of 
those questions that have come in from our members, basically, 
that have said, you know, beyond the origination fee.
    Mr. Ford. I would appreciate it if you would follow up on 
that.
    Mr. Green, you have a good man sitting behind you. But let 
me ask you this question. And you make the point about not 
killing the dog, but in relation to Ms. Adams, I mean, I am 
struggling here. And Nadon there is my friend too.
    I am struggling to figure out how do you reconcile the two? 
Because I think what was said by Ms. Adams is right. There has 
to be somewhere in between that we can land here that will help 
us.
    How do we get close to training the dog, but not killing 
it? I mean, I read your testimony and I am glad you answered 
the question for Mr. Bachus because I had some questions about 
the testimony a little bit as well.
    But how do we reach that kind of middle ground, if I can be 
so bold as to take Ms. Adams comment and use it as kind of a 
rubric?
    Mr. Green. Well, we strongly believe that the sub-prime 
market is the way to ensure that all blind people have access 
to a dog. It may not be the very best dog.
    And not to extend this analogy too far, but the point being 
that if the sub-prime market creates access to capital and 
people are educated and they have rights of action, that there 
are clear standards that every participant in the marketplace 
understands what is expected of them, including the lender, 
including the borrower, but particularly the lender and the 
assignee, and the roles of each are well-defined and the 
liabilities are defined and relevance to the role that they 
play in the transaction, I think you will create an environment 
where you will be able to root out even more predatory lending.
    And I think I agree with everything that has been said here 
about the progress that has been made. You will root out more 
predatory lending and you will still preserve the ability of 
that sub-prime market to provide dogs of different varieties.
    Mr. Ford. I hear you. And I do not know how we do that 
exactly.
    I remember when I was in school and I was not very good at 
any sports, but they put me on most of the teams. And whenever 
one person in any drill that we were participating in did not 
meet the standard, we all were punished.
    And although I had very little to do with why this guy 
behind me was too slow to actually finish the doggone thing in 
the right thing, if he did not finish, we all had to do it 
over. So we encouraged him to find a way to do it right.
    I have to think there is a way to do that. And I understand 
there are real concerns about what North Carolina has done. I 
certainly do not want to do anything to squeeze people out of 
this business or hurt people who want to access capital.
    But it just seems to me that there has to be a way. I mean, 
you all do not do this, but people who you--a lot of folks you 
know--we find kids in school who do not have jobs and we give 
them credit. We have to figure out a way to do this better than 
we are doing.
    But the bad actors out there, I know you want them out of 
the business as much as I want them out of the business. And we 
have to be able to--I do not mean--I want to attribute that to 
everybody on the panel. But there has to be a way to find to do 
this.
    I will close on this. I want to close with Steve.
    This question of financial literacy--and I know your 
commitment. Ms. Adams laid out pretty clearly that $80 million 
is insufficient.
    What could we do? What could this committee do to help?
    Because I trust everybody on the panel. But I trust the way 
you kind of put these things together with the big South 
Carolinian you have behind you there, but figure out how we can 
get together and figure out how can we put a business model 
together for this, to figure out what it would cost nationally 
to do this?
    Because we have a pretty sad state of affairs in my 
district in Memphis. And we have the highest bankruptcy rate in 
the country in my State and the second highest in the country 
in my city--something we are not proud of.
    How can we help come to better understand that? And I would 
ask the chairman and even the ranking member of the committee, 
who I know are as committed to this as any on this committee, 
to figure out how--can we figure out some model that will give 
us a cost to do something at this level?
    Mr. Nadon. I think it is possible to put something together 
that we could submit. And I think Mr. Scott's recommendations 
are a great first step.
    But I would take it to another level. If there is something 
that Members of Congress could be able to do somehow, if they 
could influence this, this is what I would ask.
    Mr. Ford. Thank you, Mr. Chairman, for letting me go over 
time for a little bit. I apologize.
    Mr. Nadon. For most people in this country, the single 
largest financial transaction they will ever go through is 
either the purchase or the refinance of the mortgage of a 
house. It is complicated, a lot of things going on, a lot of 
information to know about, a lot of questions they should be 
able to ask. And they should be able to understand what kind of 
answers they are getting and whether they are good or bad 
answers.
    Interestingly enough, there is nothing that I am aware of 
in our school systems today that teaches someone, going through 
grade school or high school or even into college that I am 
aware of, that teaches people the value of having a checking 
account, why that matters, to be banked, that teaches them what 
a credit score is and why it matters to pay their bills on time 
and how that will influence their ability to accumulate wealth 
in the future, that teaches them what a real estate transaction 
is all about so they would be able to get into the marketplace 
more educated than they start out, the way we are doing things 
today.
    So somewhere between an educational financial literacy 
component within Ney-Kanjorski bill, but somehow the next 
generation and the generation after that, I think we all owe 
them something better than we have given them so far.
    Ms. Adams. NCRC and its 600 members would love to work with 
Congress in developing a model that can be effective 
nationwide.
    Mr. Ford. Yes, sir?
    Mr. Bachus. Quickly.
    Mr. Ford. I am acting like I am the chairman.
    Yes, sir, Mr. Green. Go right ahead.
    Mr. Green. The Bond Market Association and its foundation, 
the Bond Market Foundation, would love to work with all of you. 
We have actually invested a great deal of time and money in 
this, doing quite a bit of case studies.
    And targeted audiences like women, young people, the 
Hispanic community are the most underserved. And we have 
created a family of Web sites under tomorrowsmoney.org to help 
provide very basic fundamental building blocks of financial 
literacy that get people from knowing nothing to ultimately be 
planning for retirement and home purchases and things like 
that.
    But it starts at targeting to the audiences you need to 
target because otherwise, you do not get through. Otherwise, it 
is too generic.
    Mr. Ford. And I tell you, there is a hunger for it. Because 
we have been approached by the National Association of Hispanic 
Real Estate Professionals that are trying to find from us, is 
there some way you can help us serve our marketplace, our 
constituents better than we do today?
    And it includes information. It includes literacy. It 
includes financial information.
    But some of it is just getting good products out there and 
getting good services out there in a way that that clientele is 
going to be able to understand and feel good about.
    Mr. Bachus. Time has expired.
    Mr. Ford. As the chairman knows, for every dollar an 
American earns today, he or she spends, on average, $1.22. All 
that financial literacy you are talking about, we could 
probably use a little of that help here in the Congress too 
with all the spending we do, so we look forward to whatever you 
all put together.
    Mr. Bachus. Thank the gentleman. Time has expired.
    Mr. Baca, from California?
    Mr. Baca. Thank you very much, Mr. Chairman. I know that 
most of the questions have been asked. But I want to ask the 
following question. And any one of you can respond to it.
    I understand from reviewing your testimony that your 
organizations associated with credit unions offer lending 
services to underserved--and again talking about the 
underserved--and of course needing the education and the 
outreach.
    Can you comment on how the two major proposals before 
Congress--the Ney-Kanjorski and the Miller-Watt-Frank bills--
would affect your standing in the marketplace with respect to 
your competitors, as well as your ability to serve minorities--
and this is the area that we are talking about--serve 
minorities and the underserved, which are two areas, which is 
question number one?
    And do you feel that sometimes doing the right thing puts 
you at a competitive disadvantage and that putting additional 
restrictions on sub-prime lenders could level the playing 
field?
    Mr. Nadon. Well, I can take maybe the first shot at that. 
And I will tell you a compliment that we are paid by our sales 
force. This has been consistent for the last 13 years since we 
opened up Option One Mortgage.
    They think that we are just awesome at responding to and 
complying with any law change. They think we are terrible at 
new products or competitive pricing, things like that. But they 
just know we are totally on it when it comes to compliance.
    And it does put us at a competitive disadvantage. That is a 
position that our organization has been willing to accept 
because our view of it was--
    Mr. Baca. Is that positive or negative?
    Mr. Nadon. We think it is positive in the long run. We 
think it is positive for our associates. We think it is 
positive for people to go home at the end of the day and 
actually feel good about what they have accomplished. That is 
the environment we are trying to create in our workplace.
    And we think that if we can have our associates feel that 
way about their job, that will transfer over to the way that 
they deal with our customers. And we measure, through an 
outside source, customer engagement scores.
    We have very high customer engagement scores, which means 
our customers are pretty happy doing business with us. And they 
refer people to us.
    But that comes at a price. And the price is that we are not 
the biggest. We could be doing a lot more volume than we do 
today. But our wanting to do the right thing and make sure that 
we are complying with the rules the right way slows us down a 
little bit.
    Mr. Baca. And the first portion, between the Ney-Kanjorski 
and Miller-Watt-Frank, anyone want to tackle that question?
    Ms. Lowrie. I will. The Mortgage Bankers Association feels 
very strongly that by creating a uniform national standard that 
has strong protections and has clear, objective standards for 
lenders to follow and for consumers to understand, that there 
will be less chance of discrimination. And you are going to 
have less chance of access to capital being removed from a 
marketplace, so all consumers will have equal access once there 
is a uniform national standard that exists throughout this 
country.
    And I think we have a fiduciary responsibility to make sure 
that that standard is such that it not only protects the 
consumer, but it also gives them access to the capital within 
their marketplace and not be deprived.
    Mr. Baca. How would you be able to determine, if you are 
looking at a uniform standard right now, less discrimination? 
How would you be able to detect that there is discrimination? 
And how is that discrimination applied?
    Ms. Lowrie. Well, I think it was mentioned earlier about 
the HMDA data. And all lenders are required to report under the 
Home Mortgage Disclosure Act. And I know that there have been 
some comments that initial reviews of the HMDA data is 
evidencing discrimination.
    I would say though, I would submit to you and to the 
committee, that a big part of that is due to the fact that we 
have reached out to so many more borrowers through the alt-A 
and the non-prime market in a risk-based pricing environment. 
And when you look on the surface at the HMDA data, you do not 
see credit score; you do not see a lot of the information that 
causes that borrower to be a higher risk to the investor and 
ultimately to cause that consumer to pay a higher rate.
    So in answer to your question, that is how we will have to 
look at it. And there will have to be in-depth studies, but not 
just initial reviews of the HMDA data, detailed studies looking 
at all of the data, including the credit score.
    Mr. Baca. Mr. Eakes?
    Mr. Eakes. I wanted to introduce to the record a table 
comparing the Miller-Watt-Frank bill and the Ney-Kanjorski bill 
and a summary that describes the weaknesses we see in the Ney-
Kanjorski bill.
    Mr. Bachus. Without objection, part of the record.
    Mr. Eakes. The problem really is in the details. The 
problem I have with the existing Ney-Kanjorski bill is that it 
does not work for the flipping standard; it does not work for 
the definition of fees. It reauthorizes single premium credit 
insurance and mandatory arbitration, where the industry has 
largely done away with it.
    So it is not the intent of that bill that I am faulting at 
all; it is that the details of implementation in almost all of 
the sections in Title I, they do not work. And I think I will 
leave my written table to go into that in much more detail.
    But that is my basic problem, is that the intent is good. 
But as of right now, the Ney-Kanjorski bill is an industry 
bill. It does not have a single civil rights group or wealth 
advocate group, community or consumer group that has sat at the 
table to help draft and fix the language.
    I spent the last 6 years of my life working in 20 different 
State legislatures the details of these standards all across 
the country. And it is just that it is an industry bill at this 
point.
    Eventually, we will all have to sit down and figure out how 
to make it, like we did in North Carolina.
    Mr. Nadon. If I could just add, as a spokesman for 
industry, we agree that there are pieces of the Ney-Kanjorski 
bill which I truly believe is the right long-term solution. But 
it is not perfect yet. There is tweaking that has to be done, 
tightening up, things that have to be modified to make it, I 
think, the kind of bill that we would be, at the end of the 
day, comfortable with.
    Mr. Baca. So then it would be very harmful. I do not know 
if it would be, but would it be harmful in terms of passing 
legislation that does not really have the details of 
implementation or to fix the kind of language that would be 
inclusive of everything?
    Mr. Eakes. If we could fix it and have, I think, 
particularly a non-preemptive bill, a bill that sets the floor, 
then I think it would do a lot of good. And the notion that 
having a non-preemptive bill would not do anything is just 
wrong.
    HOEPA now is a non-preemptive bill. It was so weak that it 
did not do the job. But passing the Ney-Kanjorski bill in the 
form it is in now and preempting the right of States to enforce 
and to deal with the problems that arise newly in each State 
would be more harm than good.
    It would create, I would predict, somewhere between 50,000 
and 100,000 new foreclosures per year based on passing the bill 
in its current form.
    Mr. Baca. I know that my time has run out, but you have 
indicated that apparently it would be very difficult on the 
States to enforce that law then?
    Mr. Eakes. To enforce the Ney-Kanjorski? The provisions in 
the bill as it is currently written do not have any meaning. 
They do not constrain the bad practices that we have been 
working with the last 6 years.
    So it is easy to enforce because there is nothing that it 
really is prohibiting.
    Mr. Baca. Okay, thank you.
    Chairman Ney. [Presiding.] I did not actually ask a 
question before. I yielded to everybody so they could get the 
questions in. And I do not want to hold up the next panel.
    But just following the line for a second, I would be 
curious how it creates foreclosures, how the bill creates it.
    Mr. Eakes. The two places I just mentioned. It reauthorizes 
mandatory arbitration, which has been pretty much abandoned by 
all of the players in the sub-prime marketplace. There are only 
one or two that are left.
    So the bill, the Ney-Kanjorski bill now prohibits mandatory 
arbitration only on high-cost loans. So the rest of the sub-
prime market, no one could prohibit it. And it would basically, 
with impunity, be able to come back.
    On single premium credit insurance, I mentioned that 
earlier, essentially the bill as currently written allows 
single premium back into the marketplace. And no one could stop 
it.
    Chairman Ney. How does it reauthorize it? It just does not 
ban it. But how does it reauthorize it?
    Mr. Eakes. On which one?
    Chairman Ney. How does it reauthorize mandatory 
arbitration?
    Mr. Eakes. It says that no other State, no jurisdiction 
anywhere, can deal with it; that you have, by definition in 
this bill prohibited arbitration only on high-cost loans.
    Mr. Nadon. And Mr. Chairman, if it is worth maybe noting 
this for people's files, to my understanding, there is not one 
State law with an outright ban on mandatory arbitration.
    Mr. Eakes. Well, the reason for that--
    Chairman Ney. I think your terminology of reauthorization 
may not be technically accurate, reauthorizing.
    Mr. Nadon. And I do not think there has been the 
commensurate impact on foreclosures as a result of not one 
State law having an outright ban on mandatory arbitration.
    Mr. Eakes. Well, States cannot ban arbitration. It is a 
Federal law. So the reason in North Carolina, we looked at it 
and we would have banned it.
    But there is a Federal law dealing with arbitration.
    Chairman Ney. I want to wrap up because I want to move on 
to the next panel. But looking at North Carolina, we have heard 
about obviously legislation, which goes beyond the minimum 
protection of HOEPA.
    Other States are lagging behind, frankly, if you compare. 
If we do not do the national standard here, which would bring 
probably 25, 28, I am guessing, I think it is 30-some States 
almost up at the standards they do not have, how do you suggest 
those other States, if we do not do a national standard, come 
up to better standards, one? And in what period of time will it 
take to do that?
    Mr. Eakes. Number one, I am all for a national standard, so 
long as it is the floor and that would cover all the States. 
Number two, the States that have not passed bills have still 
benefited from the battles that have taken place in the States 
that do.
    The fact that Citigroup has just announced that they are 
reducing their prepayment penalties and having no mandatory 
arbitration benefits not just borrowers in North Carolina, 
which is where I was primarily focused for the last 6 years, 
but it would benefit borrowers in Ohio and Tennessee and 
everywhere else.
    Chairman Ney. Oh, so one State does affect another State?
    Mr. Eakes. It does.
    Chairman Ney. So we are not in the areas where we used to 
be, where a State was isolated and what happened there did not 
affect the Nation?
    Mr. Eakes. The lending that takes place in Ohio now is 
better because of the work that was brought to lenders in North 
Carolina 5 years ago. If you pass a weak standard, a standard 
that says for prepayment penalties, we are going to set it at 3 
years.
    Chairman Ney. But you are not against national standards, 
per se?
    Mr. Eakes. National standard that sets a floor is a 
wonderful thing.
    Chairman Ney. But I am just saying, you are not against 
national standards.
    Mr. Eakes. I have spent the last 6 years of my life trying 
to get national standards, with no help from Congress, by 
working directly with lenders and industry groups. These guys 
are to be commended.
    Option One is a great lender. They have, in fact, prospered 
in North Carolina and in the States that have put rules for the 
good guys to prosper.
    Chairman Ney. I want to thank you for your time and 
patience. Thank you.
    Move on to the second panel.
    We will move on to panel two.
    Our first witness is Lisa Bouldin-Carter, the national 
executive director of the BorrowSmart Public Education 
Foundation located in Cincinnati, Ohio. BorrowSmart educates 
homeowners about the home equity borrowing process and ways to 
avoid abusive lending practices and borrowers' rights and 
responsibilities. The foundation works with credit and housing 
counselors to get needed information and educational materials 
to the consumers.
    And for the next witness, we turn to our gentlelady from 
California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    The next witness is Ms. Martina Guilfoil, from my district, 
Inglewood Neighborhood Counseling Services, where she is 
executive director.
    She received her BA in community development from the 
Evergreen State College, her masters degree from the University 
of California, Los Angeles and has taken any number of courses 
in her own professional development that include: Achieving 
Excellence in Community Development from Harvard University; 
Leadership Development in Inter-Ethnic Relations, Asian-
American Legal Center; Community Scholars Program, University 
of California at Los Angeles.
    Inglewood Neighborhood Housing Services are responsible for 
any number of programs, including the development and 
implementation of high-impact community development strategies, 
such as rehab loans, homeownership education, leadership 
training. And I know a little bit about Neighborhood Paint Out. 
I visited them on a Saturday in a paint out.
    And I would like to welcome her to our committee and to 
Washington, D.C., Ms. Martina S. Guilfoil.
    Chairman Ney. Thank you.
    Next is Alan Hummel. He is the chief executive officer for 
the Iowa Residential Company in West Des Moines, Iowa. He is a 
licensed real estate broker and certified general real property 
appraiser in the State of Iowa.
    Mr. Hummel is testifying today on behalf of the Appraisal 
Institut, Association of Professional Real Estate Appraisers, 
with 18,000 members throughout the world. The organization 
promotes professional credentialing, standards of professional 
practice and ethics.
    Welcome.
    And last is Jim Nabors from our State of Ohio, actually 
from Congressman Gillmor's district, although we like to claim, 
I think, Jim in Cleveland too and other parts of Ohio. He is 
president of Mister Money Mortgage of Sandusky, Ohio, is a 
founding member of the Ohio Association of Mortgage Brokers.
    Jim has worked closely with many State legislators. And I 
was in the Senate and I saw firsthand how he helped pass Ohio's 
first State licensing bill and three other important regulatory 
bills.
    Jim is the president-elect of the National Association of 
Mortgage Brokers. The association's members originate more than 
two-thirds of all residential loans in the United States.
    Welcome, Jim.
    And with that, we will start with Ms. Carter. Thanks.

   STATEMENT OF MS. LISA BOULDIN-CARTER, NATIONAL EXECUTIVE 
       DIRECTOR, BORROWSMART PUBLIC EDUCATION FOUNDATION

    Ms. Bouldin-Carter. Good afternoon. My name is Lisa 
Bouldin-Carter and I am the national executive director of 
BorrowSmart Public Education Foundation, a non-profit based in 
Cincinnati, Ohio, which is a national organization.
    Thank you, my fellow Ohioan, Chairman Ney and to the 
committee, for having me here today to share with you how 
BorrowSmart is educating homeowners to on how to wisely manage 
the investment in their most important asset--their home.
    I hope to explain to you why financial education helps 
families to build personal wealth, but also serves as one 
deterrent to protect borrowers from abusive lending practices.
    We also need a strong Federal law to provide consumer 
protections everywhere.
    Consumers, especially those with less-than-perfect credit, 
often lack the knowledge to understand their mortgage options, 
whether they are buying a home or refinancing a mortgage. Many 
programs provide financial education of first-time homebuyers, 
but until the National Home Equity Mortgage Association, NHEMA, 
established BorrowSmart in 2002, none focused on educating the 
homeowner seeking to tap into their home equity.
    BorrowSmart has created unique financial education programs 
that help both consumers and credit counselors understand the 
risks, rights and responsibilities involved in borrowing 
against equity in one home. To help as many consumers as 
possible, we distribute our program in two ways: one is to 
teach the consumer directly and the other is to train 
practitioners who work with consumers.
    This is a national effort. And we have reached communities 
across the Nation.
    This year, we plan to take it from Birmingham, Alabama, to 
Cleveland, Ohio, as well as many other communities. Our 
training focuses on money management development, making good 
budgeting decisions, how to work with lenders and spotting red 
flags for possible fraud or inappropriate loan practices or 
terms.
    We also counsel on foreclosure prevention. All of our 
programs, services and materials are provided at no charge to 
help current and prospective home equity borrowers.
    We partner with responsible mortgage lenders and community-
or faith-based housing organizations to reach deep into the 
grass roots level. For example, BorrowSmart premiered its 
foreclosure training for housing counselors and homeowners in 
collaboration with SCANPH of Los Angeles, California and the 
First African Methodist Episcopal Church of Los Angeles, which 
is known as FAME Renaissance.
    We are also working with the Urban League in the City of 
Orlando to offer foreclosure prevention, homeownership training 
to housing professionals and financial institutions in the 
greater Orlando-Tampa area. Part of the problem is that, too 
often, uneducated borrowers focus on the size of their monthly 
payment and fail to take into account the risks associated with 
borrowing against equity.
    For an example, an adjustable rate new mortgage note might 
offer an initially low monthly payment, but will the homeowner 
be in the financial position to pay the mortgage when the rate 
adjusts? This is not to say that a borrower should not take an 
adjustable rate mortgage any more than one with early 
prepayment or discount points.
    Such features can provide a borrower with a significantly 
more affordable monthly payment, but they must be considered in 
the context of the borrower's particular circumstances and 
goals. Each participant in a BorrowSmart program uses financial 
planning sheets and enables families to compare loans and to 
measure what they can afford.
    We teach financial counselors to encourage consumers to 
consider at least three lenders and compare products to assure 
a loan fits into their budget and needs. Based on the goal a 
consumer is seeking, they learn to determine what type of loan 
is best for their financial situation and how to shop for it.
    Based on my firsthand experience counseling consumers, I 
believe that borrowers, regardless of the reason they are 
seeking a loan, will make a wiser decision if they choose to 
participate in financial literacy classes, rather than if they 
are forced to attend. While BorrowSmart and other financial 
literacy programs are helping thousands of people, more needs 
to be done.
    I commend Chairman Ney and Representative Kanjorski for 
incorporating Representative Scott's recommendations and 
including a housing counseling title in their bill, H.R. 1295, 
the Responsible Lending Act of 2005. A well-funded Office of 
Housing Counseling would strengthen the Federal Government's 
role in promoting financial literacy and make resources more 
available for housing counseling assistance.
    In closing, let me emphasize that financial literacy is a 
tool that strengthens families. Children who connect to 
communities because they are in a home are more likely to stay 
in school.
    Homeownership creates stronger tax bases to support 
hospitals, schools and other community services that are 
important in connecting and sustaining neighborhoods. They are 
the very basis of our society to achieve the American dream of 
homeownership and become involved citizens and community 
participants.
    By housing counseling and financial literacy programs like 
those provided by BorrowSmart, we can reduce the amount of 
foreclosures, community decay and blighted neighborhoods. And, 
just as importantly, homeownership enables individuals to 
create, preserve and increase wealth for themselves and their 
families.
    With financial literacy, we can change lives.
    BorrowSmart commends the committee for focusing attention 
on the need for financial literacy education and creating 
solutions to eliminate abusive lending practices. We are 
passionate in our commitment to provide financial literacy 
education nationally and help consumers make better informed 
home purchasing and ownership decisions.
    We hope to have the opportunity to work with you to further 
financial literacy for all Americans, regardless of social or 
economic status. I thank you for the opportunity this 
afternoon.
    [The prepared statement of Ms. Bouldin-Carter can be found 
on page 138 of the appendix:]
    Chairman Ney. Thank you for your testimony.
    And we will move on to Ms. Guilfoil.

    STATEMENT OF MS. MARTINA GUILFOIL, EXECUTIVE DIRECTOR, 
            INGLEWOOD NEIGHBORHOOD HOUSING SERVICES

    Ms. Guilfoil. Thank you.
    Good afternoon, Chairman Ney, Ranking Member Waters and 
committee members. It is my pleasure to appear before you today 
to present testimony regarding predatory and abusive lending 
practices and offer my perspective on necessary legislative 
remedies.
    My name is Martina Guilfoil and I am the executive director 
of the Inglewood Neighborhood Housing Services, as well as the 
president of the National NeighborWorks Association. NNA is the 
national membership association of the 230 NeighborWorks 
Organizations working to revitalize nearly 3,000 communities 
throughout the country.
    NeighborWorks organizations create and sustain economic 
wealth in low-and moderate-income communities by creating 
first-time homebuyers, providing pre-and post-purchasing 
counseling, financial literacy training and affordable home-
improvement loans.
    NeighborWorks organizations leverage funding they receive 
by the congressionally chartered Neighborhood Reinvestment 
Corporation now doing business as NeighborWorks America. Since 
1993, NeighborWorks organizations have assisted over 88,000 
households to become homeowners and have counseled nearly 
524,000 people about the homebuying process.
    Our members across the nation work tirelessly to educate 
potential homebuyers not only on how to purchase a home, but 
how to keep their home once they achieve ownership. 
Unfortunately, we are no match for the aggressive and 
relentless marketing efforts of the predatory lenders working 
in our communities.
    Education is a tool that can prevent predatory abuse from 
taking place. But NeighborWorks organizations and other 
community counseling agencies do not have the resources to 
reach out to all of those who are being preyed upon.
    For this reason, legislation that protects the consumer is 
needed.
    In my written testimony, I outline several stories of 
families. And I do not want to belabor those today, especially 
since the hour is late.
    But there are similar characteristics. Each loan is a bit 
different. But there is a common theme, and that is that the 
borrowers were unable to understand the complexity of the loans 
that they were being given; they were unsuspecting that they 
were being taken advantage of. And none of them could afford 
the loan payments, putting them in jeopardy of losing their 
homes without the intervention of the NeighborWorks 
organizations to prevent an inevitable foreclosure.
    If we are to make any impact preventing unsuspecting 
Americans from falling prey to predatory lenders, any Federal 
legislation enacted must protect people of being stripped from 
their biggest asset, their home.
    NNA and INHS vigorously support a national anti-predatory 
lending law that does not preempt existing State law. Any 
Federal law enacted must address these critical areas: 
education and disclosure, transparency, reasonableness and 
fairness.
    NNA strongly encourages Federal legislation to err on the 
side of the consumer, as the consumer is the party left worse 
off by these loan transactions. Some of the following 
provisions we support in Federal legislation include, first and 
foremost, required counseling for high-cost loans. This is not 
unprecedented, as counseling is required in order to obtain a 
fully federally insured reverse mortgage loan.
    Educational standards should be clearly spelled out, to 
ensure that the counseling being provided meets quality 
standards. Counselors should be HUD-certified, which would 
demonstrate a certain competency level; $58 is not enough 
money. A national hotline would act as a good clearinghouse, 
but would not substitute for having a counselor review the good 
faith estimate or closing statement.
    Loan fees and terms should be fully disclosed. Assignee 
liability protections need to be in place.
    We do not ask you to enact burdensome legislation that 
extinguishes firms' profitable niches; we simply advise you to 
construct thoughtful and articulate legislation that serves a 
practical purpose, helping individuals purchase or refinance a 
home using clear and fair lending products.
    NeighborWorks organizations have been making home 
improvement loans to low-income and credit-challenged borrowers 
for over 27 years. The majority of people we assist fit the 
same profile that are targeted by predatory lenders.
    However, our loan performance is far superior to that of 
predatory lenders. Nationally, the NeighborWorks loan portfolio 
has only a slightly higher 90-day delinquency rate than 
conventional loans and performed better than FHA and VA loans.
    Few of these loans ever go into foreclosure. This 
experience indicates that, given the right product, one 
designed for success rather than loaded with excessive fees and 
interest rates, that borrowers can achieve and sustain 
ownership.
    I would just like to address a couple of questions that 
came up previously that I do not think were adequately 
answered. One had to do with the foreclosure rates and the 
quote that foreclosure rates right now have gone down. However, 
if you look in high-cost markets, as in Congresswoman Waters's 
district and the one that I serve, where housing prices have 
increased over 200 percent since 2000, anybody who got a sub-
prime loan or a predatory loan back then would have enough 
value in their property now to sell, so it would not show as a 
foreclosure loan.
    But if you look at the HMDA data and you look at the sub-
prime lenders that are infiltrating our neighborhoods, they are 
doing more lending than conventional lenders. So we cannot look 
at the foreclosure rate; we need to actually look at the HMDA 
data because in the high-cost markets, it will not show up.
    And then another question was: what tools can Congress 
enact that can end the lending disparity that we are seeing? 
And nobody talked about the Community Reinvestment Act.
    We can strengthen the lending being done in our 
neighborhoods by banks. I have had a lot of meetings with banks 
and they are receiving outstanding ratings on their CRA 
requirements, but yet, they are not lending in our communities.
    They have ceded these neighborhoods to the sub-prime 
lenders because they are already receiving outstanding ratings 
on their CRA either lending or investment tests. And they are 
not in our neighborhoods. And they have decided that they do 
not want to go in there and they are willing to let sub-prime 
lenders take that market.
    So I am thankful that you invited me here today and for 
sharing my thoughts on behalf of NeighborWorks Association and 
Inglewood NHS. I thank you for your leadership in addressing 
these critical issues.
    [The prepared statement of Ms. Guilfoil can be found on 
page 180 of the appendix:]
    Chairman Ney. Thank you for your testimony.
    Mr. Hummel?

STATEMENT OF MR. ALAN E. HUMMEL, CHIEF EXECUTIVE OFFICER, IOWA 
   RESIDENTIAL APPRAISAL COMPANY, ON BEHALF OF THE APPRAISAL 
                           INSTITUTE

    Mr. Hummel. Thank you, Mr. Chairman.
    Much of the testimony and discussion today has centered on 
the credit services side of the issues, which is appropriate. 
But collateral valuation is a large part of the lending 
equation and, if not properly addressed, could render otherwise 
meaningful legislation lacking.
    Appraiser independence is crucial to advancing confidently 
toward the American dream of homeownership and financial 
security that goes with it. Sadly, your constituents are paying 
the price for the absence of such appraiser independence, 
bearing the heavy costs of investigations and massive financial 
failures.
    Here is how the system fails consumers committing to the 
largest investment of their lives. A bloated appraisal is a 
time bomb.
    If I buy a house with an inflated appraisal, I may not 
learn the consequences until years later. When the time comes 
to move, to refinance, to use my house as collateral, I may 
learn that it was never worth what I thought it was.
    Nobody will buy the place and my credit is threatened. The 
security of my American dream has turned into a nightmare. And 
I am not alone.
    Last year, Congress heard impassioned testimony from 
Americans ruined by predatory mortgage transactions, compounded 
by bad appraisals. There have been 6,000 mortgage defaults in 
Monroe County, Pennsylvania, alone. Now even more have lost 
their homes. And the human toll does not even show up on a 
spreadsheet.
    Unfortunately, America has been to a school of hard knocks 
since Congress passed the savings and loan bailout in the 
1980's. Faulty appraisals are still dictated by interested 
parties, the schoolyard bullies of real estate.
    It is common knowledge that if an appraiser does not play 
the game and come in at whatever value is needed to close the 
deal, these bullies will take their lunch money. I do not 
exaggerate. A Michigan appraiser told a mortgage firm that a 
property was undergoing major renovations, only to be asked, 
``What is it going to take to have this home appraise?'' 
ignoring the partially completed construction.
    When an Arizona appraiser refused to come in right, the 
mortgage broker informed him that, ``I will let the 170 loan 
officers that operate out of this branch know that you are by 
the book and lack the intelligence to effectively get around 
the law.''
    These abuses are not supposed to happen. But feeble 
oversight and underfunded State authorities are ill-equipped to 
stop them. It is as if the truant officer is tossing 
delinquents the car keys.
    It is bizarre that a current Federal law is distorted to 
favor those with lower educational achievements over appraisers 
who have pursued their professional studies at the highest 
levels. Yet that is how a critical clause in the S&L reform 
continues to be misread. Fortunately, Title IV of H.R. 1295 
addresses this issue.
    It is encouraging that 40 percent of appraisers continue to 
support their professional organizations, refusing to drop out 
and leave the field to less qualified licensees, who may be 
more vulnerable to inappropriate pressure. Still, tired of the 
hassle, many ethical appraisers are abandoning the mortgage 
markets for more professional endeavors, leaving less 
accomplished appraisers to serve the homebuyers.
    Both bills before the committee offer better ways of doing 
things. We believe that appraiser reform is a necessary part of 
any solution combat mortgage fraud and predatory lending.
    We support Title IV of H.R. 1295 because it bans 
inappropriate pressure on appraisers, increases accountability 
of government regulators, and promotes professional standards. 
We believe that concerns about State legislation can be 
harmonized with our goal of open, even and fair property 
valuations throughout America.
    Thank you.
    [The prepared statement of Mr. Hummel can be found on page 
196 of the appendix:]
    Chairman Ney. Thank you for your testimony.
    Mr. Nabors?

    STATEMENT OF MR. JIM NABORS, PRESIDENT-ELECT, NATIONAL 
                ASSOCIATION OF MORTGAGE BROKERS

    Mr. Nabors. Good afternoon, Chairman Ney.
    Chairman Ney. Do you want to put your microphone on there? 
Thank you.
    Mr. Nabors. Good afternoon, Chairman Ney and members of the 
subcommittee.
    I am Jim Nabors, president-elect of the National 
Association of Mortgage Brokers. I want to thank you for 
inviting me and NAMB to testify today on solutions to predatory 
lending.
    As the voice of mortgage brokers, NAMB has more than 26,000 
members in all 50 States and the District of Columbia. I want 
to first commend the committee for its leadership on this 
issue. Mortgage brokers are proud of our contribution to the 
record rate of homeownership.
    We spend a significant amount of time with our customers 
and have a strong understanding of each part of the homebuying 
process. Predatory lending practices strip borrowers of home 
equity and threaten families with foreclosure, therefore 
destabilizing families and communities.
    NAMB seeks to rid the industry of any unscrupulous actors 
that prey on the vulnerable homeowners.
    NAMB believes there are three critical components to 
curbing predatory lending practices successfully: one, 
preventing predatory tactics without unduly restricting equal 
access to affordable credit for borrowers; two, promoting 
industry self-regulation and strengthening industry 
professional standards and relieving the regulatory burden 
imposed by the current patchwork of State and local laws; and 
three, providing and enhancing consumer education because an 
informed consumer is less likely to fall prey to predatory 
lending.
    But first, I would like to discuss the issue of yield 
spread premiums. We take this opportunity to discuss the 
benefits that YSPs provide to consumers and clarify the 
misconceptions that many hold about them.
    Yield spread premiums can be defined as compensation 
received from an originator in the form of a payment that 
represents the difference between the mortgage interest rate 
and the lender's wholesale cost to fund. All originators, 
whether a bank, lender or mortgage broker, receive compensation 
upon the sale of a mortgage in terms of the spread above the 
wholesale cost of funds.
    The yield spread premium represents a component of the 
broker's or lender's compensation that is either not included, 
part of or all of the compensation received. Many lenders act 
as if they are brokers and that prior to mortgage loan 
closings, the lender has, in essence, pre-sold the loan to an 
investor.
    As a result, most banks and other lenders not only receive 
compensation that is tantamount to yield spread premiums, but 
also receive service release premiums, or SRPs, upon the sale 
of the loan into the secondary market. The key difference is 
that mortgage broker yield spread premium compensation is 
disclosed to the consumer, but for similar yield spread 
compensation, whether it is yield spread or service release 
premiums from the lenders, is not.
    A YSP is a tool that allows a consumer with little or no 
cash and impaired credit the option of a low-cost or no-cost 
home loan because the closing costs and broker and lender 
compensation are included in the interest rate, which is paid 
by the consumer over time. Without low-cost or no-cost home 
loans, many consumers, many of them first-time homeowners, 
would be unable to purchase a home because of insufficient cash 
reserves to cover upfront closing costs.
    An issue that has surfaced when discussing proposals to 
address predatory lending is whether YSPs should be included in 
the points and fees threshold under HOEPA. NAMB believes it is 
imperative that any legislation exclude YSPs from the 
calculation of points and fees.
    The YSP is already captured in the APR threshold and 
provides consumers the protections intended and outlined in 
HOEPA. Including the YSPs in the points and fees threshold will 
artificially cause loans originated by mortgage brokers to be 
considered high-cost, while excluding other identical loans 
originated by lenders that cost consumers the same in terms of 
points and fees and payments.
    NAMB believes that all distribution channels should be 
treated in a uniform manner and that the option of a no-cost or 
low-cost loan be preserved for the consumer.
    In addition, NAMB seeks legislation which will implement 
uniform national lending standards to address predatory lending 
practices effectively, preserve access to affordable credit and 
improve the overall expertise of the mortgage origination 
industry. NAMB supports measures that seek to protect consumers 
from predatory lending practices, including formal licensing, 
pre-licensure education and continuing education requirements.
    However, we believe to be truly effective, such measures 
should not just apply to mortgage brokers, but to all mortgage 
originators. NAMB also supports a nationwide registry of all 
mortgage loan originators.
    Such a registry should include verified information 
concerning the originator, adjudicated infractions and prior 
licensing information. Without detailed information about the 
individuals, such a registry will not be useful to State 
regulators, enforcement entities and potential employers.
    I appreciate the opportunity to offer NAMB's views on 
predatory lending reform. I will be happy to answer any 
questions this committee may ask.
    [The prepared statement of Mr. Nabors can be found on page 
218 of the appendix:]
    Chairman Ney. I want to thank you.
    I wanted to point out, I think the point you made--there 
are a lot of points--but the national registry is critical 
because that will help to catch people. We have used the 
example before of if somebody goes to another State and you 
cannot catch them and they are doing the same violations.
    But if they are in that registry, you have a better chance, 
I think, of being caught.
    Mr. Nabors. Absolutely.
    Chairman Ney. Mr. Hummel, I wanted to really give you a lot 
of credit for, I think, being horrifically candid with the 
Congress. It is not every group that will come and say, you 
know, this is--here it is, laying yourselves open out there.
    I think it is a huge problem. And your willingness to work 
within the bill, I think, will be a very good thing.
    Mr. Hummel. Mr. Chairman, I thank you. And I also thank you 
for the language in the bill, particularly Title IV and the 
three points that it addresses. Prohibition against 
inappropriate pressure on the appraiser, when we are in sub-
prime or non-prime situations, when individuals unknowingly get 
upside down before they have made their first payment because 
appraisers have not acted appropriately because of 
inappropriate pressure, that is obviously a problem.
    The provisions for oversight and enforcement of all the 
mortgage professionals, not just the appraisers, but also the 
unregulated mortgage brokers, many of which have no sanctions 
should they give inappropriate pressure on appraisers. And 
obviously, an increase in appraisal quality through 
professionalism that your language would instill.
    Chairman Ney. And in the small communities--I mean, I am 
going to be frank with you--I have done it myself, where in a 
small community, somebody will say, ``Well, this is the 
appraiser we are going to use.'' And I will say, ``No, that is 
not the one I want.''
    ``Well, this is the one we use.'' ``Well, it is not who I 
want.'' Because in a small community, you know not to take that 
person. I am not saying that they have done something illegal, 
but you sure do not want them appraising your house because it 
may be up here and then you move in and you are already going 
to be losing, like driving a car off a parking lot.
    Mr. Hummel. That is exactly the problem that we encounter 
when the correct qualified professional is not used.
    Chairman Ney. And in urban areas, it is harder because not 
everybody knows everybody, so it is even harder. And in rural 
areas, it is tough too because people do not know certain 
things. And how do you get them up to educational levels?
    So I think internally, to try to correct this dilemma, is 
the best way how we are trying to craft changes. And I just 
appreciate your help on that.
    Mr. Hummel. Thank you.
    Chairman Ney. I wanted to ask Ms. Bouldin-Carter about, in 
trying to help people and to help them understand, do you think 
it is a matter of more regulation or is it a matter of more 
education?
    Ms. Bouldin-Carter. I think it is a combination of both. 
With financial literacy--
    Chairman Ney. I mean, to stop predatory lending.
    Ms. Bouldin-Carter. Absolutely. With financial literacy 
families begin to understand the documents that they are 
signing. They start to recognize what the terms are of the 
loan. And they are better able to make a decision that is going 
to suit their individual family needs.
    With regulation, we will have the necessary oversight to 
make sure that things are put into place, where we are 
regulating what is wrong and that we are supporting all the 
things that are good.
    Chairman Ney. With your organization down in Cincinnati, I 
mean, do you utilize also attorneys or can people be directed 
to Legal Aid? Or how do you do that?
    Ms. Bouldin-Carter. What we do, we are a national 
organization. We just happen to be located in Cincinnati. But 
we look at it holistically.
    When we are doing a training for practitioners, we include 
everyone. We include the consumer. We include lenders. We 
include practitioners and everyone that is involved in the 
process.
    We have also done training with realtors. We have done 
training with appraisers. We look at everyone because everyone 
needs to be on the same page. And the ultimate goal is to have 
an informed consumer.
    So we look at this process as a holistic process that has 
to incorporate everyone that is on the equity or the new 
homeownership team.
    Chairman Ney. Thank you.
    My time is going to be out in a minute, but Ms. Guilfoil, I 
had asked earlier, what about the fact that 25-some States or 
26 States will be brought up to, I think, better standards 
under this bill? I guess what I am trying to get to is: are 
there parts of the bill you think that are effective in the 
legislation we have?
    Ms. Guilfoil. The Ney bill? Well, let me look here. I think 
that creating a floor, although certainly for some States where 
there is no floor, that would be helpful. However, there are 
definitely States where the existing legislation is stronger, 
in which case I think that there is a problem to have 
preemption.
    Chairman Ney. Okay.
    Well, I want to thank you, all the panelists.
    The gentlelady from California?
    Ms. Waters. Thank you very much, Mr. Chairman.
    I would like to ask Mr. Nabors: is there a standard fee for 
brokers for originating? And if not, if it differs from lender 
to lender, how do you make a decision about whom you refer to?
    Mr. Nabors. I do not think there is a standard fee that 
mortgage brokers use across the country because of the 
difference in prices of the loans. For example, homes in 
California sell for a lot more than they do in Ohio. So the 
amount of the fee, the percentage of the fee, could be expected 
to be different.
    But there is no standardization there.
    Ms. Waters. You are from Ohio, are you?
    Mr. Nabors. I am from Ohio.
    Ms. Waters. What is it like in Ohio?
    Mr. Nabors. Well, I am out in Sandusky, which is a really 
small town outside. But--
    Ms. Waters. What is it like in Sandusky?
    Mr. Nabors. Well, the average house sells for between 
$80,000 and $120,000 or $130,000.
    Ms. Waters. There is someplace left like that in America?
    Mr. Nabors. Absolutely. It is a wonderful place. You should 
come visit it.
    But consequently, the cost of business is still the same, 
whether the house is located in Sandusky, Ohio, or anywhere in 
California. You still have to do the appraisal. And as an 
employer, as a mortgage broker, you have to pay rent and you 
have to pay your employees.
    And so there are a lot of fixed costs.
    Ms. Waters. But there must be a difference between 
originating a loan for a house that you just described in 
Sandusky and a $1 million house in LA.
    Mr. Nabors. Well, I would say one, I do not specialize in 
$1 million houses, but I think they ought to require an 
additional appraisal. But appraisals cost the same. I do not 
want to speak for Mr. Hummel.
    An appraisal costs the same whether the house is worth 
$80,000 or $400,000.
    Ms. Waters. No, they do not. I just had this experience. 
And this is what I discovered.
    I discovered that some lenders have in-house appraisers and 
they charge you one thing. Other lenders contract with 
appraisal firms and they charge something else. And I also 
understand there are mortgage bankers who are doing some loan 
originations and they mark up the appraisal fees from the 
people that they contract with.
    People they contract with charge you $500; then the 
mortgage banker marks it up another $200. So it is not the 
same. I know that.
    I have had a great learning experience recently in trying 
to negotiate a jumbo loan. And I will tell you, I learned a 
lot.
    So it is different. I mean, I was so amazed at the 
difference between the appraisal price of one lender and a 
mortgage banker that I thought, ``How do they do this?'' They 
do what they want to do.
    Mr. Nabors. Well, the in-house appraiser is a salaried 
employee of the bank. The outsourced appraiser is, for the most 
part, being paid as-is.
    In Ohio, it is against the law to mark up third party fees. 
So if the appraiser charges us $250, which is the going rate 
right now in Ohio, we can only charge the customer $250. It is 
against the law in Ohio to mark up.
    Ms. Waters. Ms. Guilfoil, is that true in California?
    Ms. Guilfoil. Actually, I was just thinking about this. The 
appraisal fee that we charge for our loans has stayed the same 
from when the houses cost $120,000 and now they are going for 
$400,000; it is still the same appraisal fee. The fee has not 
been--
    Ms. Waters. What is it in California that would allow a 
mortgage banker to mark up the fee? I mean, is that not against 
the law?
    Ms. Guilfoil. It is not against the law. It is basically 
what the market will bear, which is partly why these--the APR 
and you need to know how to aggressively shop to know what it 
is that you are paying for these loans.
    Ms. Waters. Well, the average person does not know what a 
good appraisal fee cost is. I mean, I had no idea until I saw 
the difference. But I decided that I did not like kind of the 
overall attitude at one lender. And I said, ``Well, let me 
check around and see.'' And I saw this great difference.
    You know, literally what I think the average consumer is 
confronted with are a lot of fees that they have no idea what 
the standard is. You just have no way of knowing.
    And in one sale of a piece of property I had, this little 
house I had for years I decided to sell, there was something in 
there, a $2,000 fee in Los Angeles, something about a county 
transfer fee. And I called the county to find out what this 
was.
    And they said, ``Hey, we do not have anything to do with 
that.'' And then when I talked to the real estate person, they 
said, ``You can get rid of it.''
    I mean, it was not even real. So how is the average 
consumer supposed to know all this stuff?
    Ms. Bouldin-Carter. Financial literacy.
    Ms. Waters. No.
    Mr. Hummel. And through disclosure. One of the things that 
we have been big advocates of is on that disclosure, it should 
state what the appraiser was paid, not what is being collected 
for appraisal services because I know for a fact that services 
I provide for different lenders, dependent on the complexity of 
the assignment, they may order a different type of appraisal, 
which will cost more.
    And it is possible that they do not have any appraisal.
    Ms. Waters. Oh no, they have drive-bys.
    Mr. Hummel. They use a valuation model and they still call 
it an appraisal when a true appraisal has not been done.
    Ms. Waters. Yes, that is right.
    Mr. Hummel. So that consumer is being misled into believing 
that they are getting professional services.
    Ms. Waters. But I learned about that. I learned about the 
drive-by appraisal.
    Ms. Guilfoil. Congresswoman, I think this is exactly why 
legislation is needed because you cannot expect the consumer to 
possibly understand all of these nuances. And I am a firm 
believer in financial education.
    But we can only serve a very small percentage of people 
that are out there getting loans. And they are being taken 
advantage of.
    The world of mortgage lending has become so complex over 
the last 10 years or so and the burden of responsibility is 
placed solely on the shoulders of the consumer. And that is an 
unfair position to place consumers and expect them to become 
fully educated without Federal relief.
    Ms. Waters. You are absolutely right. And while I have a 
great respect for financial literacy and all of that, I 
literally needed to take the deal to a friend who is in the 
business to take over this with me and help me to understand 
what I am getting into and how it all works.
    And I want to tell you, I was embarrassed, sitting on this 
committee, when people think I know something about all of 
this, only to discover I knew very little. And I would not have 
been able to finalize this package in any reasonable way 
without the assistance of my friend, who is an expert.
    And most people do not have that. So thank you very much.
    Chairman Ney. Thank you.
    Mr. Miller?
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Mr. Nabors, I have already spoken to mortgage brokers from 
North Carolina. And I certainly welcome that you need to talk 
with mortgage brokers and include them in any discussions on 
what Congress should do about this topic.
    I have some questions based on your testimony and other 
testimony earlier today about yield spread premiums. I 
understand that yield spread premiums are paid by the lender 
rather than by the consumer.
    And so it would be instead of the commission paid by the 
consumer upfront?
    Mr. Nabors. Well, our customer would have multiple options. 
They could choose to pay whatever our fee is all upfront.
    Mr. Miller of North Carolina. Right.
    Mr. Nabors. They could choose to pay part of it upfront and 
have the other part paid by a yield spread premium. Or they 
could choose to have it completely paid by a yield spread 
premium.
    Mr. Miller of North Carolina. Okay. So there would be some 
instances when a consumer would pay both a commission and a 
yield spread premium?
    Mr. Nabors. Yes. And that would be fully disclosed to them.
    Mr. Miller of North Carolina. Okay. Well, would the yield 
spread premium then, the combination depend upon what the 
consumer was paying in interest?
    Mr. Nabors. It would determine what the interest rate would 
be to the consumer. And it would also depend on what the 
consumer felt was the best way they wanted to handle that 
transaction, whether they wanted a no-cost loan and they 
wanted--
    Mr. Miller of North Carolina. You agree that an upfront 
commission should be included in the fees and points trigger 
under any statute Congress passes?
    Mr. Nabors. Yes.
    Mr. Miller of North Carolina. But yield spread premium, you 
think should not?
    Mr. Nabors. Yield spread premium, we feel, is already 
captured.
    Mr. Miller of North Carolina. Well, if they are doing the 
same thing, if you shift it from one to the other, why 
shouldn't both be included in the points and fees?
    Mr. Nabors. The problem is that the only ones required to 
disclose yield spread premiums are mortgage brokers. The rest 
of the industry that is getting yield spread premium is not 
required to.
    So if you were to force mortgage brokers to include it in 
its calculations, it would--
    Mr. Miller of North Carolina. Right, but if it serves the 
same function as the commission upfront, if you shift it to the 
back end to a yield spread premium, shouldn't you therefore 
have some room left in the points and fees trigger to reflect 
it there without any effect?
    Mr. Nabors. Well, I guess. As I said, our concern at NAMB 
is the fact that yield spread premium, mortgage brokers are the 
only ones that have to report it, so that other people would--
other lenders and bankers who are charging the exact same fee 
because the payment is the same and the rate is the same would 
not fall into the HOEPA trigger.
    Mr. Miller of North Carolina. I have a couple of documents 
here that are apparently from public sources: one from the 
MBA's--Mortgage Bankers Association--sub-prime handbook and the 
other is apparently just off the Internet. And both, although 
they are both public documents, both do say that these say that 
these are not for distribution to the general public, but are 
for mortgage professionals only.
    They both list their wholesale mortgage rate sheet. They 
both list credit scores down one side, maximum loans on the 
other and interest rates for people with different scores.
    And then this one was from Argent Mortgage Company. It 
appears to say that any mortgage as much as one point higher 
than what would be here, based on the FICA score, would result 
in a payment rebate of .5. Is that a yield spread premium?
    Mr. Nabors. I am sorry, could you say that again?
    Mr. Miller of North Carolina. Sure. Do we have a copy I can 
give you? I am not sure we do.
    This is from Argent Mortgage Company. It has down one side 
the credit score. Across it, it is the amount that it will 
finance. And then, within that grid--it shows the loan to 
equity at the top.
    And then within that grid, it shows an interest rate.
    Mr. Nabors. Right.
    Mr. Miller of North Carolina. At the bottom, it appears to 
say that if the interest rate is 1 percent higher, that there 
is a bonus to be paid of .5, if it is one point higher. If it 
is two points higher, the bonus to be paid is .75.
    Is that a yield spread premium?
    Mr. Nabors. You know, I do not do business with Argent.
    Mr. Miller of North Carolina. But you do business. I mean, 
you do business with other lenders.
    Mr. Nabors. Right.
    Mr. Miller of North Carolina. Is that the way yield spread 
premium rates works?
    Mr. Nabors. I understand the tiered pricing. But I have 
never dealt with someone that had anything like that on the 
bottom.
    Mr. Miller of North Carolina. Okay.
    North Carolina's law does not include yield spread premiums 
in the calculation of points and fees. But it does have a 
steering provision in law requiring a mortgage broker to make 
reasonable efforts with lenders with whom the broker regularly 
does business to secure a loan that is reasonably advantageous 
to the borrower, considering all the circumstances, including 
the rates, charges and repayment fees, terms of the loan and 
the loan options for which the borrower qualifies with such 
lenders.
    There is no exception to that. That is a blanket 
requirement.
    Why should there not be such a blanket requirement in the 
law? I believe that the Ney-Kanjorski draft--and we all can see 
that these are works in progress--provides an exception that if 
a borrower signs something saying they waive that duty not to 
be steered--not to have been steered--then there is no such 
requirement.
    Why should there not be a provision like North Carolina's 
provision in Federal law? Why should there be an exception to 
that?
    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. I believe that mortgage brokers do use 
reasonable efforts to get their customers the best loan they 
can.
    Mr. Miller of North Carolina. Okay. And do you think that 
should be a legal requirement?
    Mr. Nabors. I think yes, it should.
    Mr. Miller of North Carolina. Okay. And do you think there 
should be any exception to that? Do you think that consumers 
should be able to sign a one-page document, like this one here 
from the earlier testimony, saying that they waive that?
    Mr. Nabors. Well, the question is what is in the best 
interest of the customer?
    Mr. Miller of North Carolina. Right.
    Mr. Nabors. Okay. Different circumstances. In some cases, 
what is really best for the customer may seem more expensive, 
right?
    For example, if I can use an example, if you are applying 
for--for the most cases, we are talking about money purchase 
mortgages here, but we should also be talking about refinances 
and--
    Mr. Miller of North Carolina. I think we are talking about 
refinances here. When you look at loan to value and these loans 
are only being made where there is a whole lot of equity in the 
house.
    Mr. Nabors. Right.
    Mr. Miller of North Carolina. I think we can assume that 
those are refinances.
    Mr. Nabors. Right. But they could also be home equity 
loans, where someone just wants to draw the equity in their 
home out.
    If you come to me and say, ``Look, I need to borrow 
$20,000. My daughter is getting married in 2 weeks.''
    Mr. Miller of North Carolina. Right.
    Mr. Nabors. I can come up with two options. I can come up 
with a lower case option that gives you the best rate at the 
lowest cost and you can have it in 60 days. Or I can come up 
with, through another lender, a higher rate with some higher 
fees and you can have the money in 10 days. That is your 
choice.
    Now if the customer does not have the option of exiting 
out, we would pretty much have to tell them, ``You have to take 
the 60-day option.'' That is truly the best rate.
    Mr. Miller of North Carolina. Let me give you another 
example. Based on what this appears to say, and that is that a 
consumer wants to borrow $100,000, and they have an 80 percent 
loan to equity rate, their credit score is 620, according to 
the wholesale mortgage rate sheet, they should get a 7 percent 
interest rate.
    Instead, they get a 9 percent interest rate. And the broker 
receives a rebate--a bonus, a yield spread premium, perhaps, of 
$75, $100; well, 75 percent would be, what, $750?
    Chairman Ney. Mr. Nabors, the time is way over, but if you 
would like to answer that?
    Mr. Nabors. Are you using the MBA sheet or are you using 
the Argent sheet?
    Mr. Miller of North Carolina. The Argent sheet. They are 
the same effect.
    Mr. Nabors. As I said, I am not familiar with the Argent.
    Mr. Miller of North Carolina. I am not asking about this. I 
am not asking you about this. I am giving you the example, 
using this as an example. If that has happened, if a loan is 
simply 2 percent higher interest rate, no other difference, but 
as a result of that, the lender is paying .75 points or I think 
actually one point would be more the normal going rate, to the 
broker, would that appear to be a violation of a steering 
prohibition? And why would it not be?
    Mr. Nabors. Well, one, I think it would be yield spread 
premium and have to be disclosed to the borrower. I have never 
seen one where it was a 1 percent markup paid you one point.
    Mr. Miller of North Carolina. It is usually two. I said two 
instead of--and that would give you one point. Should the law 
allow that?
    Mr. Nabors. Well, if you are going to make 2 percent on a 
loan, okay? I can say there are many places that you can get a 
customer a better deal--and they are in a 2 percent premium or 
a 2 percent yield spread premium--than you can at 9 percent on 
a 620 borrower.
    Mr. Miller of North Carolina. Okay. But unless there is 
some difference like that, that does not appear on this sheet, 
if you just have a consumer who could have gotten a 7 percent 
loan on the very same terms, instead gets a 9 percent loan but 
the broker gets a 1 percent additional yield spread premium in 
addition to whatever upfront commission they would have, does 
that strike you as something the law should allow?
    Mr. Nabors. 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. But if this is a bonus 
that is played outside the plan, if it is not disclosed on a 
good faith estimate or anything else--
    Mr. Miller of North Carolina. So if a consumer signs a 
piece of paper--
    Chairman Ney. I have to note, we are so far over.
    But, you know, if you would like to follow up with the 
question in writing though, Mr. Miller, and have it answered, 
without objection, we could do that.
    Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Mr. Chairman.
    I guess I want to take a point of special privilege. I 
heard Ms. Waters conceding that congressmen do not know 
everything. And you do not want to tell the general public 
that, do you?
    This is a very complicated field. And while some of the 
questioning was going on, we had to concede, as writers of one 
of the bills here, that we started out trying to define what a 
sub-prime loan was, then conceded we did not have the capacity 
to put a definition in the legislation of what is a sub-prime 
loan.
    So we started to go at just characteristics that were 
common in loans that are considered ``sub-prime.'' But one of 
the points Ms. Waters, in her conversation with me, pointed out 
that we have to protect people. And indeed, we do.
    We used to rely on the small communities where everybody 
had a lawyer or a priest or a minister, a mentor or a friend 
and that the mortgage market was relatively regional or small 
around that small town. Now we are into a global market.
    Now a lot of us move on a constant basis. Some of us end up 
in California, God forbid.
    But no, but as a result, we do not have someone to go to 
that is knowledgeable. And we basically rely on professionals.
    And for better or for worse, realtors, builders, mortgage 
bankers are considered professionals. And yet, they are in a 
competitive world where they are really trying to make 
transactions and not necessarily charged legally with the 
responsibility of representing the best interests of the 
borrower. And we run into great conflict there.
    And I wish that we could almost require all borrowers to 
take a financial literacy course to understand how to negotiate 
and what questions to ask. And I think that is what you offer 
some people.
    But I am impressed with so many people that do not seek 
this out, do not understand it and do not care and are still 
rather blind in going into these transactions and, only after 
the fact, discover what has been disclosed to them in that 
stack of documents that every time I have ever entered into a 
mortgage, I have signed, but I could not tell you what is in 
them because I do not read them.
    And I confess to that. And I know Ms. Waters sits home and 
reads every document in her closing and knows thoroughly what 
it means.
    Ms. Waters. Every line. Every line. Every letter.
    Mr. Kanjorski. But what we have to find is some common bond 
here, as to what we cover.
    One of the questions, Mr. Hummel, I wanted to ask you in 
this area on appraisal: we did not include collusion, but we 
should, I think. And what are your thoughts on that, from the 
appraisal perspective?
    Mr. Hummel. I wholeheartedly agree. And in our testimony, I 
believe we indicate that collusion should be included as one of 
the prohibited acts.
    We have talked about extortion, coercion and bribery. But 
it is, in fact, you know, an ``it takes two to tango'' 
operation. The appraisers themselves are not going to be able 
to perpetrate the fraud themselves so collusion is a 
necessary--
    Mr. Kanjorski. I am sympathetic to that, but as a lawyer, I 
am thinking about: how do you prove collusion?
    Mr. Hummel. There are standards in place already, the 
Uniform Standards of Professional Appraisal Practice, that 
allow other appraiser professionals to be able to review a 
document and state whether or not that is independent judgment.
    Mr. Kanjorski. Okay.
    Mr. Hummel. Or whether or not that appraiser has acted in a 
manner that is not what his peers would have done; therefore, 
it would be in collusion with someone else.
    Mr. Kanjorski. And so I take it your testimony would be 
that we should certainly include collusion into the package?
    Mr. Hummel. Certainly.
    Mr. Kanjorski. The other question on enforcement, what we 
tried to do with the Ney-Kanjorski bill was maintain State 
enforcement and not create a Federal bureaucracy. And 
particularly with the nuances of real estate law and financing 
law in the various States being as different as they are, we 
felt that the closer we could keep it to home, particularly at 
the State level, at the attorney general level, that would be 
the best thing to do.
    What are your thoughts on enforcement?
    Mr. Hummel. I am in agreement with using that methodology. 
And what does not exist now but would exist under Title IV of 
1295 is the authority of such entities such as the appraisal 
subcommittees, who have funds available to them, but they do 
not have the Federal ability to make grants to States for 
enforcement.
    States right now--the State appraisal licensing agencies--
are in a predicament. They really would like to do what is 
right, many of them.
    But their funds are restricted. Many of the funds colleted 
through appraised licensing fees go into the general fund and 
leaves them short of funds able to provide enforcement.
    The legislation under Title IV of 1295 would allow Federal 
fund grants to go to the States for further enforcement. That 
way, we are keeping the enforcement within the State, where the 
appraisers are, where the attorney generals are, and given the 
resources available for that.
    Mr. Kanjorski. And you are saying we should add that 
provision? Or that provision being there covers that problem?
    Mr. Hummel. I believe that that provision is covered within 
Title IV.
    Mr. Kanjorski. Okay, okay.
    Now I if could, Mr. Nabors, the yield spread premiums, some 
testimony on the earlier panel said that they go as high as 10 
percent. Is that your experience?
    Mr. Nabors. I have never seen a loan that had 10 percent 
yield spread premium paid on it. And I have been in the 
business for almost 29 years.
    Mr. Kanjorski. What would your experience say the 
percentage would be?
    Mr. Nabors. I would say the average fee a broker earns 
somewhere now is between 1 and 3.3 percent, depending on the 
amount of the loan. And I think that a 10 percent yield premium 
already had to throw that loan into HOEPA under the existing 
conditions.
    But I have never seen that in my career.
    Mr. Kanjorski. Do you think we ought to do any requirement 
of not just disclosure forms, but a face-to-face language 
disclosure? That when certain categories of people come in for 
borrowing and they are going to be put in what we consider sub-
prime lending rates, that they be told that this is not a 
premium rate; this is a sub-prime rate? And make that a 
requirement of the law? Would that make a difference?
    Mr. Nabors. Well, one, I think another form for a customer 
to sign, I mean, they already are signing like 80 to 90 forms, 
that most part overwhelm them.
    I think that the ability to us to go through financial 
literacy and do more education and to give them the ability to 
shop rates is going to be the safeguard against that problem. 
They are going to get--the way they are going to get the loan 
that they are entitled to is to shop more than one place, to 
call around and find out what program best fits their needs.
    Mr. Kanjorski. I understand that.
    Ms. Guilfoil. If I may? I just wanted to tell you that the 
reverse mortgage, which is very popular for seniors right now 
and it is very complicated to understand and it is not for 
everybody. There is a provision in the regulation that if it is 
a federally insured reverse mortgage, you have to obtain 
counseling and there has to be a firewall.
    So the counseling, the person giving the mortgage--and in 
our market, Wells Fargo is a big provider of reverse 
mortgages--they cannot do the counseling. And you have to go to 
an approved, HUD-certified counselor to get the counseling, 
which we do.
    And in many cases, we advise the people that, for what they 
are looking for, the reverse mortgage does not make sense, that 
they need a home improvement loan or an equity line or 
something. So it is not unprecedented to require a firewall of 
education on the kinds of loans that can strip people from 
their equity in their property.
    Mr. Kanjorski. And one side of a category because remember 
what you are doing here is you are limiting people's freedom to 
go out and buy a home in their timeframe, the type and under 
the conditions they decide to do. Suddenly, to some people, you 
would be saying, "Well, you have to go through some sort of 
process before you can have the same access to that home, as 
compared to most of us."
    That is quite a constriction of freedom there. And how do 
we balance that out?
    Mr. Nabors. Congressman Kanjorski, right now, any HOEPA 
loan under Section 32 provides additional disclosures, as well 
as an additional waiting period to close. So any loan that is 
under the new HOEPA triggers as proposed, again not all sub-
prime loans, but those that would fall under the new HOEPA 
triggers, would include that.
    Mr. Kanjorski. That is the very highest category.
    Mr. Nabors. Would already include that additional 
disclosure, as well as that additional waiting period.
    Mr. Kanjorski. What is that timeframe?
    Mr. Nabors. Three days after the initial disclosure before 
they can actually close the loan.
    Chairman Ney. Time has expired.
    Ms. Bouldin-Carter. Can I just?
    Chairman Ney. Yes.
    Ms. Bouldin-Carter. I just wanted to say that one of the 
things about the financial literacy program that BorrowSmart 
offers is we do have a loan comparison chart where, in our 
classes, be it that we are talking to the consumer or the 
practitioner, we educate that you need to send your clients out 
to talk to three lenders; ask each and every lender apples to 
apples questions.
    You then fill in the chart and return it back to the 
counseling agency. You are then sitting with an uninterested 
party who is going to help you look at the form and decide what 
is the best product for you, what are the costs of that product 
and what you can afford to pay.
    Mr. Kanjorski. That is great advice, but a lot of people do 
not take it. And the question is: should we enforce it by law 
or regulation? That is the question.
    Ms. Bouldin-Carter. If you enforce it by law, people are 
going to go to the classes, but they may not necessarily get 
what is being delivered. If you make it available and make sure 
that we do something in terms of PSAs, 1-800 telephone numbers, 
as Congressman Scott has spoken about; we put it out there so 
that people know that they have an option.
    Homeownership is about options, about education and about 
financial literacy. And we have to make sure that families 
understand it, because when they understand it, we do not have 
neighborhood decay and individuals take that house and continue 
to have a home.
    Chairman Ney. Thank you. Just a point of clarification 
before we move to Mr. Scott, do the people take that checklist 
and take it to the lender and check it off, ask them the 
questions?
    Ms. Bouldin-Carter. Absolutely.
    Chairman Ney. Thank you.
    Mr. Scott?
    Mr. Scott. Thank you very much, Mr. Chairman. And I was 
able to catch some of the testimony, as I was in the process of 
another meeting back in my office, so I did not miss it all 
entirely.
    Ms. Carter, first of all, let me thank you for your 
recognition of the value and importance of financial literacy 
and financial education and thank you for the kind words you 
had to say about this committee's efforts and our willingness 
to include financial education, a toll-free number and 
resources to help get financial literacy into the hands of our 
targeted group.
    Because information is the key. He who has information is 
powerful. He who is not is a victim of predatory lending. That 
certainly has been the case.
    Let me ask you, Ms. Carter, how can we keep track of 
unsavory lenders who target vulnerable populations, earlier 
rather than later, after the damage has been done?
    Ms. Bouldin-Carter. I really believe that what happens is 
the counseling agencies in the individual communities are the 
best recordkeepers. These are the individuals that actually 
work with the consumers in their neighborhood. They know who 
are the lenders who are preying upon their families that they 
are working with.
    When you were talking about families that are being offered 
these deals that are too good to be true, they just are not 
true. And as we train nationally, one of the things that we 
find out is the counselors that we are training or the 
practitioners that we are training, they can name names.
    They can tell you who are the individuals that are in these 
urban communities, that are in these low-to moderate-income 
communities. One of the options that we would be able to--that 
I believe could be enforced would be the 1-800 number would be 
taken a step further so that practitioners would have an avenue 
to report who is doing the unscrupulous lending in their 
individual communities.
    Mr. Scott. Yes, and that is exactly why we feel that the 1-
800 number is so vital to any effort, because it is two-way. It 
gives us an opportunity to measure the size and scope of the 
problem. It allows us to be able to get that kind of 
information. If we can get individuals to call in and when they 
ask for assistance, we will be able to also ask them back a 
question or two.
    That is what is critical. Education is not a one-way 
street. It is a two-way street.
    A one-way street for information is called propaganda. A 
two-way street is education, give and take and back and 
forward. And that is why we feel an important ingredient in 
this process is that we have a fully staffed individual on each 
end of the conversation.
    Mr. Hummel. Congressman Scott, if I may? You were asking 
how do you find about this unscrupulous lender before it is too 
late? I would like to tell you that the appraisers and 
appraisals are normally on the front end. And I can tell many 
times, prior to being engaged for that appraisal, what the 
intent of that particular lender is and whether or not they are 
trying to buy an appraisal or trying to understand the risks of 
their collateral.
    And if we had available to us, being one of the 
practitioners, that ability not just to call an 800 number and 
say, ``Hey, there is someone out here that is using 
inappropriate pressure and fraudulent practices,'' and not only 
give a call to that 800 number, but to have a mechanism in 
place, that if that was a currently unregulated broker, that 
that person be regulated.
    And that is part of what we are trying to accomplish here, 
I believe, is a more regulation of the unregulated individual 
so when they pull those stunts, we have the ability to provide 
enforcement.
    Mr. Scott. And when you have that 1-800 number out there, 
those who have a desire to engage in that activity will know 
that there is something out there that could report them.
    I am also concerned that many predatory loans are targeted 
to homeowners for second mortgages or home improvement loans. 
Can any of you provide recommendations for how financial 
literacy, financial education can be provided to families after 
they have purchased their house?
    We are going to take this in steps. We know that the whole 
home purchase entity is a step-by-step process. It is the most 
fundamental activity we can do to start on a road of productive 
wealth, earnings, tax revenue for a community. It is the 
cornerstone of our community.
    So not only do we want the literacy and education out there 
to, as we start the process, but also how you keep that home. 
What are the financial decisions that have to be made?
    So I just wanted to get recommendations from you all that 
we might look at, that would help us with that.
    Ms. Bouldin-Carter. Part of the training and the major 
focus of BorrowSmart is to educate the equity borrower. And the 
forms that we have available to the borrower, on one side of 
the form, as I have already spoke about, is the comparison 
shopping.
    On the other form is a very simple, your monthly budget. 
What can I afford to borrow? What am I looking at? What type of 
interest rate would best fit me at this point in my life?
    What do I want to do with that money? How am I going to 
continue to create wealth with homeownership if I take my 
dollars out of there? What is a good reason for me to take my 
dollars out of there?
    This is exactly what BorrowSmart training does for the 
practitioner and for the consumer.
    And quite frankly, Congressman Scott, we will be in Atlanta 
doing this training with HUD on June 8th. And we have already 
left notification for your staff in Atlanta.
    Mr. Scott. Oh, great.
    Ms. Bouldin-Carter. They are signed up to attend the 
training.
    Mr. Scott. Wonderful. Wonderful. My crackerjack staff is on 
the ball. Wonderful.
    Ms. Carter, in your testimony, you detail the important 
work that grass roots organizations are doing to promote 
homeownership. How can we supplement their efforts without 
recreating the wheel, so to speak?
    Ms. Bouldin-Carter. I do not think we need to recreate the 
wheel; I agree with you very much. The problems with grass 
roots efforts are dollars, dollars, dollars.
    There is so much to be out there and there are so many 
individuals that need to understand what homeownership means to 
themselves, to their communities and to the school districts. 
There are not enough dollars that are going into first-time 
homeownership counseling. And there certainly are not enough 
dollars that are going into equity counseling.
    We need to have dollars so that when individuals go, there 
is someone there to open the door. We need to have enough non-
profit counseling agencies so that individuals that have a 
question do not have to seek; they know that they can go to a 
local urban league, a HUD-based counseling agency, to a church, 
to United Way, that those agencies are there and that the 
necessary questions can be answered.
    With financial literacy, you empower families. And those 
families are able to hold onto the wealth that you just spoke 
about.
    Mr. Scott. Now you have examined the language in our bill 
on financial education and financial literacy.
    Ms. Bouldin-Carter. Yes.
    Mr. Scott. Various components of it; the 1-800 number, 
which we have had pretty good discussions on and everybody sees 
the value of that with the two-way fully staffed. Another part 
of that is to make grants available to grass roots 
organizations, to like the Urban League, like AARP, ACORN, 
NAACP, church groups, that have the credibility with the 
targeted groups.
    Are you satisfied with where we are with the language in 
that bill? Do you see where we might need to add something to 
it?
    Ms. Bouldin-Carter. My thoughts on that language--
    Chairman Ney. Just to note, the time has expired. But if 
you would like to answer?
    Ms. Bouldin-Carter. Okay. The only comment I would have on 
that--and I would be happy to talk with you later about it--is 
that we have to recognize that not all organizations are HUD-
approved. And because they are HUD-approved, that does not mean 
that they are not a good counseling avenue.
    So the only thing that I would like to say is that we need 
to look holistically to individuals that are out there, in the 
community, that are doing the grass roots counseling. Whether 
they be HUD-approved or not, they are value-added.
    Mr. Scott. Yes, one final little point. I was just 
wondering: do you have any apprehensions or concerns about the 
effectiveness of this program if it is placed in HUD, 
especially in view of some of the latest evidence of 
dismantling of HUD and a lack of housing programs going in 
there, but being dispersed out to Commerce and out to Treasury?
    Perhaps we may need to ask the question: is HUD the right 
place to put this program for it to be most successful, in an 
agency that would care about it and make it work? Is HUD that 
place?
    Chairman Ney. We need a quick wrap up because we are way 
over.
    Ms. Bouldin-Carter. And I am just not sure if HUD is the 
right place because of all of the areas that you mentioned and 
all of the things that are going on. And my final comment would 
be: if it is placed with HUD, HUD generally only funds HUD-
approved agencies. So that would leave out a lot of community-
based agencies and faith-based agencies.
    Chairman Ney. Mr. Sherman?
    Mr. Sherman. Thank you. Perhaps our two business witnesses 
could try to clarify, at least from their own experience, what 
kind of default rates sub-prime loans tend to have? We have had 
wildly different estimations on that.
    And I realize you folks are at the originating side. But do 
you have any comment on this great dispute of whether the 
average sub-prime loan is 2 out of 100 or 20 out of 100 that go 
into foreclosure?
    Yes? From the Appraisal Institute or the mortgage brokers?
    Look, if this is outside our expertise, I realize it.
    Mr. Nabors. It is definitely outside my expertise.
    Mr. Sherman. Okay. Let me ask a question that is closer to 
your expertise. What is the average YSP that a sub-prime 
borrower is paying?
    Mr. Nabors. Again, it can vary from area to area and how 
they want to be compensated. I can only speak for the knowledge 
I have in Ohio. It is usually about a 1 percent yield spread 
premium.
    I would point out, there was just a Georgetown study that 
was given at the Federal Reserve that found that people that 
use mortgage brokers, on average, pay a 1 percent lower rate 
than if they go directly to a lender and pay 1 percent less in 
closing costs and fees than if they go directly to a lender.
    Mr. Sherman. So you save 1 percent? You save money, even 
though you are paying the yield spread premium, you are paying 
less?
    Mr. Nabors. Even with it included.
    Mr. Sherman. Should there be a new disclosure requirement 
to simply tell the borrower exactly what the mortgage broker is 
receiving?
    Mr. Nabors. Currently, there is. It is both on the good 
faith estimate and on the HUD-1 settlement statement.
    Mr. Hummel. Congressman?
    Mr. Sherman. Yes?
    Mr. Hummel. I am sorry, but I now have an answer to your 
last question.
    Mr. Sherman. Right.
    Mr. Hummel. And the answer is actually coming out of a 
paper which I would respectfully ask be submitted within the 
testimony.
    Mr. Sherman. I would hope the chairman would allow that 
document to be added to the record.
    Mr. Hummel. And what is that indicating, from their 
studies--
    Mr. Sherman. I ask unanimous consent that that be made part 
of the record.
    Chairman Ney. Without objection.
    Mr. Sherman. Thank you.
    Mr. Hummel. And within that document, it indicates a wide 
range that you have been hearing, but anywhere from 10 to 34 
percent, from the study that they have conducted.
    Mr. Sherman. Ten to 34 percent go into what? I mean, 
because there are so many definitions of default. You can be 
late; you can be in default; you can be ``in foreclosure'' or 
you can be to the point where you lose the home. Do you know 
what they are defining here?
    Mr. Hummel. With all due respect, I am only quoting what 
they indicated. And you can read the report from there.
    Mr. Sherman. Okay, well, it will be part of the record. And 
we will all enjoy reading it.
    Now you talk about inappropriate pressure on appraisers. It 
occurs to me that appraisers work for those placing the loan--
you know, for the lender or the mortgage broker. And certainly, 
the people involved want the loan to close. Many of them are on 
commission.
    And the appraiser wants to be selected for the next 
appraisal. I mean, I can see inappropriate pressure. If 
somebody pulls a gun on one of your guys, that is a problem.
    But there is always the implication that the next job will 
go to the appraiser that helped this loan close. And it also 
occurs to me that a lender or mortgage broker who is paying 
your member double or triple the regular rate would be a 
particularly coveted assignment.
    What do we do to prevent appraisers from being overpaid and 
selected on a made-as-instructed basis?
    Mr. Hummel. That is the essence of what Title IV under 1295 
attempts to do, and that is providing the oversight for those 
scoundrels that call themselves appraisers that do exactly what 
you are talking about. Now within my professional organization, 
it is very close to what 1295 suggests, is put in place an 
enforcement procedure so when this is brought to the attention 
of officials, that this person is not acting properly--that 
being the appraiser--they can have enforcement procedures.
    Mr. Sherman. Who would bring this to the attention of the 
regulators? You have a borrower who is getting a loan and 
thinks he is buying a home that is worth $300,000 and is 
getting to move into a home and thinks he has a good deal.
    You have people in the lending professions who are closing 
the loan. You have an appraiser who, in my example, is being 
paid double the regular rate.
    Now who is going to drop a dime on this transaction, at the 
beginning? Now 5 years later, when you cannot pay and you 
cannot sell the home for the amount of the mortgage, I could 
see somebody being upset.
    Mr. Hummel. Right, exactly. And that is the unfortunate 
situation is that they always find out after the time bomb has 
already exploded. And so what we are looking for, within this 
Responsible Lending Act, is provisions that, number one, put 
that appraiser on notice that we are going to come back, even 
if it is 5 years later.
    Now unfortunately, that has already hurt someone. Number 
two, put into place the educational requirements at a level, 
instead of the minimum requirements we have now, educational 
requirements that it have the lenders going to the highest 
level, the qualified professional designated appraiser, rather 
than the State mandated minimum.
    The type of legislation like that would encourage the use 
of these individuals. The types of environments that would 
allow appraisers--
    Mr. Sherman. Well, let me propose one idea. I do not think 
it will catch on. What if all certified appraisers were simply 
selected by lot to do an appraisal so that it doesn't matter 
how high you came in on the last appraisal, for a particular 
lender has nothing to do with whether you get the next job?
    Mr. Hummel. That is a system that is used well within the 
Veterans Administration. And it is a system that FHA had used 
in the past. And I find that to work very well.
    Mr. Sherman. Turning to the other two witnesses, first, I 
have a new homebuyers fair in my district next week and I do 
not know if the gentlelady from Inglewood would want to come up 
or could recommend anybody else?
    Ms. Guilfoil. No, that is too far away.
    It is the valley. Just kidding.
    Mr. Sherman. And they ask us why we want to secede.
    Ms. Bouldin-Carter. We will certainly send you some 
budgeting forms and some cost comparison forms and we will get 
them to you by the end of this week. We will be happy to do 
that.
    Mr. Sherman. Why thank you.
    Ms. Guilfoil. Do you have a question? I mean, if you were 
serious, we do do homebuyer education.
    Mr. Sherman. Yes, basically if you want to come, we have a 
table for you. And it is in the valley, which just makes it so 
wonderful.
    Mr. Nabors. Congressman, our California affiliate would be 
happy to attend.
    Mr. Sherman. Oh, absolutely. I think you folks may already 
be involved. But let's close the loop here. And I should be 
inviting all four of you.
    So let me know.
    The question I have for the first two witnesses are: do we 
need more uniform standards for certified housing counselors?
    Chairman Ney. I would note we are out of time. But if you 
would like to conclude answers to that.
    Ms. Guilfoil. I think it is a simple answer. Yes, I think 
it is critical.
    Ms. Bouldin-Carter. I think it establishes a baseline for 
everybody.
    Mr. Sherman. Well, I look forward to seeing you all in the 
valley. And I know that Maxine is going to be our keynote 
speaker, opening the housing fair.
    Ms. Waters. I turn down all requests from the valley.
    Chairman Ney. And we are going to hold very strict to 5 
minutes for Mr. Davis.
    Mr. Davis of Alabama. Mr. Chairman, it has been 25, not 5, 
I thought this afternoon.
    Let me kind of conceptually ask you all a little bit about 
the preemption debate because we have had a lot of questions 
about the specifics of what should be regulated, what should 
not be regulated. But I want to ask you kind of a broader set 
of questions.
    Obviously, I think there is a pretty strong sentiment among 
not everyone, but most people on both sides of the aisle of 
this committee that there should be some kind of national 
standard. The debate arises over whether that standard should 
be a floor, with the States being able to ratchet above that 
standard, or whether that standard should be preemptive, which 
is what Ney-Kanjorski seeks to put in effect.
    Now in most areas of civil law in this country, from 
products liability to medical malpractice to non-mortgage-based 
areas of consumer finance to the level of discrimination 
protection that is provided, to the extent of family and 
medical leave benefits that are extended, in most areas of 
civil regulation in this country, the States have a broad 
amount of ability to essentially do what they want to do, 
depending on the political climate in their States and the 
public policy sentiments in their States.
    It is unclear to me, frankly, why mortgage lending should 
be treated differently from the way that we conceive of public 
policy in this country. It is unclear to me why there is 
something unique about the mortgage industry that makes it 
vulnerable to what you all describe as a patchwork of 50 
States, when obviously that level of vulnerability exists in 
virtually every other aspect of American society.
    Mr. Nabors, what is your response to that? What is it that 
is so unique about mortgage lending that makes you cry out for 
preemption?
    Mr. Nabors. Well, I think that buying a home is the 
American dream. And keeping that home is a continuation of the 
American dream.
    And so I think housing has always been treated differently 
than buying a car or anything else and needs to be. We need 
Federal preemption because of not only the differences in the 
States, but the localities.
    It is causing tremendous problems with lenders who do not 
understand which area they are allowed to go into and which 
area they cannot. And it has caused, in many cases, 
discrimination.
    Let's use the City of Cleveland as an example, as compared 
to the City of Dayton in Ohio. Ohio passed a law that says Ohio 
will regulate the mortgage industry. The City of Cleveland and 
the City of Dayton both determined that they wanted to go 
higher than those thresholds.
    In the case of Dayton, the Dayton ordinance was ruled 
illegal. But in the case of Cleveland, it was ruled legal. So 
we have a conflicting law.
    And another part of the problem is that the way a lender 
cannot tell, okay, can I do business in Cleveland? How am I 
going to determine, because they are on a national basis, that 
property is located in Cleveland per se?
    Mr. Davis of Alabama. Well, let me ask you a question about 
that proposition because I understand your argument, that the 
more regulations, the more regulatory frameworks there somehow 
would shield or a deterrent because people simply do not want 
to deal with such a wide variety of laws. Let me ask you this.
    California, for example, has what I think is regarded as a 
pretty strong statute, a pretty strong regulatory environment. 
Is there any particular indication that the number of people 
getting mortgages has diminished in California since this 
statute was enacted? Anybody have an answer to that?
    North Carolina. North Carolina has what is viewed as being 
a pretty far-reaching statute. Any indication that the number 
of mortgages extended in North Carolina has diminished since 
the statute was enacted?
    Mr. Nabors. Well, you could say, okay, the number of 
mortgages have not diminished. But have they kept pace with the 
percentages of the increased volume of mortgages in other 
areas--for example, Ohio or Pennsylvania?
    And I do not think North Carolina has kept pace with the 
other States, as far as new mortgages being generated.
    Mr. Davis of Alabama. Well, what about New York? New York 
City has a municipal ordinance. The State has a fairly 
comprehensive State ordinance. Any indication that New York is 
not a fairly robust market for people who want to participate 
in the mortgage industry?
    You ladies are shaking your heads ``no'' at that.
    Ms. Bouldin-Carter. No.
    Mr. Davis of Alabama. The point that I am making, Mr. 
Nabors, is I understand conceptually that obviously the 
industry wants as little regulation as possible. I understand 
that. And I understand that the industry wants to respond to as 
few regulators as possible.
    But that would also be the wish of the automobile industry; 
that would be the wish of every industry that I know of in 
America. And the only reason to honor that, it would seem, 
would be if we somehow thought that there would be a 
deleterious impact on consumers.
    If there would be an adverse impact on consumers, then we 
would actually constrain the availability of credit. Now what I 
am hearing is that, in the places that have a strong regulatory 
environment, there is no reason to think that credit has been 
unfairly constrained. There is no reason to think that credit 
is less available.
    Do you ladies agree with that?
    Ms. Bouldin-Carter. I mean, I think that what it does in 
all of the States--and I am from Ohio as well--I think that it 
does when we have regulations in place, it is a protection 
mechanism for those that are preyed upon the most. And if we 
have regulations that are going to be enacted by the Federal 
Government, then we have a standard.
    If you want to go past that standard, that is fine.
    Mr. Davis of Alabama. Mr. Nabors, I would pose this 
question to you. Obviously, there is also wide agreement--
certainly there was from the last panel--that the incidence of 
sub-prime lending in minority communities is not entirely 
market-based, that there may be an element of what we think of 
as actual discrimination in place.
    We all agree that there is sub-prime lending to all kinds 
of families, older people, all kinds of people who do not 
necessarily economically fit in the category that would make 
them prone for sub-prime. In other words, what we have right 
now is not working.
    So to some of us, that suggests that we do need a national 
standard. But it also may suggest that we need to allow the 
States to keep innovating.
    And what I am trying to pinpoint is: what is the adversity 
to the industry, as opposed to just not wanting it? What is the 
genuine adversity to the industry if the States are allowed to 
regulate until somebody, somewhere gets it right? Because what 
we have right now is obviously not working.
    Mr. Nabors. Well, we feel we need a national standard for 
two reasons. I mean, there are a lot of States out there that 
still do not have any regulations.
    Mr. Davis of Alabama. Now everybody agrees there needs to 
be a baseline, minimum national standard.
    Mr. Nabors. There needs to be a base.
    Mr. Davis of Alabama. Nobody questions that.
    Mr. Nabors. But in many cases, States have gone too far. 
Georgia would be a fine example. They needed to roll back what 
they had put in because it was actually hurting the consumer.
    So we feel that the best approach is a national platform.
    Mr. Davis of Alabama. The last point I will make, because 
my time is out too, everyone cites the Georgia example, Mr. 
Nabors, but it strikes me that the Georgia example frankly is 
the lesser of the opposite proposition. Georgia enacted a law 
that went too far; the market responded. The legislature 
corrected that and now we are back to another baseline. That is 
kind of how the process works.
    And frankly, out of 50 States, Georgia is the only example 
that I ever hear of an excessive law that was passed. And it 
was corrected.
    So my sense, when I hear the Georgia example, is the 
overwhelming majority of the time, these States have not passed 
laws that have been excessive. And when they do it, the 
political process corrects that. That is kind of how our life 
works.
    Mr. Nabors. Congressman, New Jersey would be another 
example.
    Mr. Davis of Alabama. Well, okay, let's take New Jersey. 
Has the level of lending in New Jersey gone down in the last 
several years? Has the availability of lending for people who 
need it diminished or dried up in New Jersey?
    Mr. Nabors. I believe it has. Yes, sir.
    Mr. Davis of Alabama. You believe it has.
    Mr. Nabors. I can get you statistics on that. I do not have 
the exact statistics. But yes, it has.
    Mr. Davis of Alabama. All right.
    Thank you, Mr. Chairman.
    Chairman Ney. I want to thank the members of the panel and 
thank the members of the committee here today, everybody for 
their patience and what was a long, but I think very important 
hearing. And without objection, the written statements will be 
made a part of the record for any follow-up.
    The chair notes that some members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to the 
witnesses and to place the response in the record.
    With that, the hearing is adjourned.
    Thank you.
    [Whereupon, at 4:18 p.m., the subcommittee was adjourned.]


                            A P P E N D I X




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