[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




                               BEFORE THE

                          AND CONSUMER CREDIT

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION


                             MARCH 27, 2007


       Printed for the use of the Committee on Financial Services

                           Serial No. 110-18






                               BEFORE THE


                          AND CONSUMER CREDIT

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION


                             MARCH 27, 2007


       Printed for the use of the Committee on Financial Services

                           Serial No. 110-18


35-410                      WASHINGTON : 2007
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                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio              JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

                CAROLYN B. MALONEY, New York, Chairwoman

MELVIN L. WATT, North Carolina       PAUL E. GILLMOR, Ohio
GARY L. ACKERMAN, New York           TOM PRICE, Georgia
BRAD SHERMAN, California             RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois          DEBORAH PRYCE, Ohio
DENNIS MOORE, Kansas                 MICHAEL N. CASTLE, Delaware
4PAUL E. KANJORSKI, Pennsylvania     PETER T. KING, New York
MAXINE WATERS, California            EDWARD R. ROYCE, California
JULIA CARSON, Indiana                STEVEN C. LaTOURETTE, Ohio
RUBEN HINOJOSA, Texas                WALTER B. JONES, Jr., North 
CAROLYN McCARTHY, New York               Carolina
JOE BACA, California                 JUDY BIGGERT, Illinois
AL GREEN, Texas                      SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
LINCOLN DAVIS, Tennessee             J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire         JIM GERLACH, Pennsylvania
KEITH ELLISON, Minnesota             STEVAN PEARCE, New Mexico
RON KLEIN, Florida                   RANDY NEUGEBAUER, Texas
TIM MAHONEY, Florida                 GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio              PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado              JOHN CAMPBELL, California

                            C O N T E N T S

Hearing held on:
    March 27, 2007...............................................     1
    March 27, 2007...............................................    67

                        Tuesday, March 27, 2007

Antonakes, Steven L., Commissioner of Banks, Massachusetts 
  Division of Banks, on behalf of the Conference of State Banking 
  Supervisors....................................................    15
Bair, Hon. Sheila C., Chairwoman, Federal Deposit Insurance 
  Corporation....................................................     6
Braunstein, Sandra F., Director, Division of Consumer and 
  Community Affairs, Federal Reserve Board.......................    13
Calhoun, Michael D., President, Center for Responsible Lending...    49
Dinham, Harry H., CMC, President, National Association of 
  Mortgage Brokers...............................................    55
Fishbein, Allen, Director of Housing and Credit Policy, Consumer 
  Federation of America..........................................    52
Johnson, Hon. JoAnn, Chairman, National Credit Union 
  Administration.................................................    10
Pollock, Alex J., resident fellow, American Enterprise Institute.    57
Reich, Hon. John M., Director, Office of Thrift Supervision......     8
Robbins, John M., Chairman, Mortgage Bankers Association.........    54
Rushton, Emory W., Senior Deputy Comptroller, Office of the 
  Comptroller of the Currency....................................    12
Silver, Josh, Vice President of Research and Policy, National 
  Community Reinvestment Coalition...............................    51


Prepared statements:
    Antonakes, Steven L..........................................   244
    Bair, Hon. Sheila C..........................................    68
    Braunstein, Sandra F.........................................   217
    Calhoun, Michael D...........................................   288
    Dinham, Harry H..............................................   392
    Fishbein, Allen..............................................   346
    Johnson, Hon. JoAnn..........................................   118
    Pollock, Alex J..............................................   428
    Reich, Hon. John M...........................................    97
    Robbins, John M..............................................   360
    Rushton, Emory W.............................................   183
    Silver, Josh.................................................   315

              Additional Material Submitted for the Record

    Statement of the Consumer Mortgage Coalition.................   440
    Letter to Chairwoman Maloney and Ranking Member Gillmor from 
      the National Association of Federal Credit Unions..........   457
    Statement of the National Association of Realtors............   459
    Series of newspaper articles from the Charlotte Observer.....   467
    Responses from the Comptroller of the Currency to questions 
      submitted by Hon. Brad Miller..............................   483
    Responses from the Federal Deposit Insurance Corporation to 
      questions submitted by Hon. Tom Price......................   490
    Responses from the Board of Governors of the Federal Reserve 
      System to questions submitted by Hon. Tom Price............   494
    Responses from the Center for Responsible Lending to 
      questions submitted by Hon. Tom Price......................   498
    Responses from the Comptroller of the Currency to questions 
      submitted by Hon. Tom Price................................   507



                        Tuesday, March 27, 2007

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                                and Consumer Credit
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2128, Rayburn House Office Building, Hon. Carolyn B. 
Maloney [chairwoman of the subcommittee] presiding.
    Present: Representatives Maloney, Watt, Sherman, Gutierrez, 
Moore of Kansas, Hinojosa, McCarthy, Baca, Green, Clay, Miller 
of North Carolina, Scott, Cleaver, Bean, Davis of Tennessee, 
Ellison, Klein, Perlmutter; Gillmor, Price, Pryce, Castle, 
Biggert, Capito, Hensarling, Neugebauer, McHenry, and Campbell.
    Also present: Representative Bachus.
    Chairwoman Maloney. This hearing of the Subcommittee on 
Financial Institutions and Consumer Credit entitled ``Subprime 
and Predatory Lending: New Regulatory Guidance, Current Market 
Conditions, and Effects on Regulated Institutions'' will come 
to order. Without objection, all members' opening statements 
will be made part of the record. We have two very distinguished 
panels in front of us today and a very key topic to discuss. 
Unfortunately, we must give up this room promptly at 1:45, so 
the ranking member and I have agreed to limit opening 
statements to the Chair and ranking member of the full 
committee and of this subcommittee. And we are going to do 
everything we can do in our power to end the first panel by 
12:30 so that we can hear from the second panel.
    This first hearing of the Financial Institutions and 
Consumer Credit Subcommittee in the 110th Congress addresses a 
critical and escalated issue. We are facing, by all accounts, a 
tsunami of defaults and foreclosures in the primary subprime 
market. In each of our districts, our constituents are 
encountering payment shock as their initial teaser rate ends 
and their loan is reset to a higher rate. This is happening at 
the same time homeowners are having a more difficult time 
refinancing because their homes are no longer increasing in 
value so they are defaulting and going into foreclosure and 
losing their homes. Every analyst says that the third quarter 
of this year and the fourth could be even worse than the rates 
of default and foreclosure that we have seen to date. By some 
estimates, 2.2 million homeowners with subprime loans made 
through 2006 will lose their homes. As this chart shows, rates 
of default and foreclosure, which were decreasing, are now on a 
sharp increase. We also have a dramatic increase in the number 
of subprime loans being packaged into securities from less than 
8 percent of the market in 2001 to 20 percent last year, a more 
than doubling in 5 years. In the last month, a very significant 
downward market correction is taking place in the secondary 
market. Yesterday, for example, Morgan Stanley announced it was 
auctioning off almost $2.5 billion worth of subprime mortgages 
from New Century, one of the largest subprime lenders. At least 
four large subprime lenders are already in bankruptcy. The 
debate has moved on to whether the turmoil in the subprime 
market will infect the larger economy.
    Against that backdrop, this hearing takes on as its 
starting point the proposed guidance on subprime lending issued 
jointly on March 2nd by the five banking Federal regulators, 
all of whom are testifying today. This guidance has been 
endorsed by the Conference of State Bank Regulators. The 
guidance is simple, commonsense: Do not make loans people 
cannot repay. It sets out principles for subprime lending, 
which require lenders to assess a borrowers' ability to pay 
over the whole life of the loan, that is whether the borrower 
can pay the loan at its fully indexed rate, assuming a fully 
amortized payment schedule. The guidance requires proof of 
income and ability to pay, ending no-doc loans or as they are 
called in the business, ``liar loans.'' At the same time, it 
allows for flexibility and underwriting for those who may not 
have the traditional indicators of good credit. This guidance 
tries to strike a balance; we want to maximize the dream of 
homeownership while minimizing foreclosures.
    This is a first in a series of hearings planned for this 
topic. With legislation in mind, I have questions for both 
panels that go beyond the guidance itself to what I consider 
the larger picture. As this chart shows, only about a quarter 
of the primary market in subprime loans is directly regulated 
by the Federal banking regulators. Another quarter, consisting 
of mortgage subsidiaries of bank holding companies, is 
indirectly regulated by the Fed. And about half, consisting of 
State regulated banks and finance companies, is regulated by a 
patchwork of State laws.
    Assuming the proposed guidance goes into effect for the 
federally regulated quarter of the market, how can it reach the 
other three quarters? That is the essential question of this 
hearing. Some suggestions have been made, and I would like the 
witnesses to comment on them. First, as Federal officials have 
said, and as Senator Dodd has pointed out, the Federal Reserve 
has broad powers under HOEPA, the Home Ownership and Equity 
Protection Act, to regulate unfair and deceptive practices for 
all lenders. Should the Fed use those powers to extend this 
guidance to the entire market? I understand that some of the 
regulators support such a move. Secondly, who could enforce 
that for each of the different sectors? Also, what about the 
suggestion of extending the Fed's direct regulatory powers to 
the mortgage subsidiaries of bank holding companies so that 
quarter of the market also has to follow the principles of the 
guidance. And next what about the State banking regulators, can 
they act to promulgate the principles of the guidance 
nationwide or should we have a national subprime standard 
tracking the guidance and, if so, who should enforce that?
    I am interested in knowing how to extend the guidance to 
the secondary market. Lenders will not make these loans if they 
cannot sell them. I believe that the GSEs as leaders in the 
secondary market should stop buying loans that do not conform 
to the guidance, as Freddie Mac has already done. How do you 
think we can best extend the principles of the guidance, not 
only to the GSEs but also to the other secondary market 
participants? Finally, what can we do to help current borrowers 
in a responsible manner? The regulators have encouraged lenders 
to exercise forbearance, but how do they plan to implement that 
policy, and can Congress help support that effort? I know that 
Senator Dodd is calling together many of the participants to 
come forward with a plan.
    These are pressing problems requiring prompt attention. Of 
course, we wish the regulators had acted sooner, but I applaud 
them for having taken this first step, and I look forward to 
their testimony. I now recognize the ranking member, Mr. 
Gillmor, for 10 minutes.
    Mr. Gillmor. I would like to thank the Chair for calling 
what is a very important hearing today and also I am delighted 
to see such a distinguished panel. I look forward to working 
with the Chair and others in Congress on this very important 
public policy concern.
    I think it is prudent that the committee begin its 
investigation into predatory and subprime lending by looking 
into how we got here and what the regulators have done to date. 
The title points it out but I think it is critical that the 
committee distinguish between these two types of lending; 
predatory lending and subprime lending are two different 
animals. Some in Congress and some in the press have blurred 
the line between the issues but they are distinct problems 
requiring distinct solutions. In the subprime area, there is no 
doubt that the past several years have seen a general loosening 
of underwriting standards. America has one of the highest rates 
of homeownership in the world. That is good. And we ought to 
continue to encourage homeownership. However, you are not doing 
anyone a favor by putting them in a house with a type of 
mortgage that when interest rates go up, or when they have an 
economic reverse, they are thrown out of their house.
    During then-Chairman Greenspan's and Chairman Bernanke's 
appearances before the committee previously, I have made it a 
point to repeatedly voice my concern regarding the 
proliferation of interest-only and other alternative mortgage 
products, including those with negative amortization. After 
interest rates began rising and the housing market began 
cooling, mortgage originators were pressured by the market to 
match the volume of the height of the boom. This was too often 
accomplished through a loosening of credit standards and 
clearly consumers were put into homes they could not afford 
just 2 or 3 years down the road. Today, we find ourselves on 
the leading edge of a market correction that has the potential 
to harm many Americans. Some 20 subprime lenders have already 
gone out of business. There will be pressures placed on 
Congress to react swiftly to correct for the problems of 
subprime loans. And while it is a serious problem, I think it 
is important that we take the time to do it right and not be 
too hasty and do it wrong. And I am pleased to yield to the 
distinguished ranking member of the full committee, Mr. Bachus.
    Mr. Bachus. I thank you, Mr. Gillmor, and I also thank 
Chairwoman Maloney for having this hearing and I look forward 
to hearing from our panelists. I think when we talk about 
subprime lending, the first thing we ought to focus on is the 
benefits of homeownership. I quote President Lyndon Johnson, he 
said, ``For many families homeownership is a source of pride 
and satisfaction of commitment to community life.'' The 
benefits of homeownership are profound when it comes to not 
only families but also communities and our Nation as a whole. I 
think that is really why I know regulators, the Administration, 
this Congress, we have all set as a priority homeownership for 
as many Americans who have the ability and the desire to own 
their own home. It improves the educational performances of the 
children whose parents own homes and it reduces crime rates--
the higher homeownership goes, the lower the crime rates go. 
And over the last probably 30 years or 40 years there has been 
a recognition that all of our families, whether they are low 
income or low middle income, should have the opportunity to 
participate, have the opportunity to own their own home. It is 
kind of interesting that one of the origins of subprime lending 
actually was in the Community Reinvestment Act of 1977, as far 
as the statute. The CRA mandates--mandates, not suggests--that 
banks and thrifts meet the credit needs of all communities in 
which they are chartered and from which they take deposits, 
including low- and moderate-income borrowers. And this 
committee in the past has actually had institutions in and 
questioned them on their commitment and their participation in 
extending loans, mortgage loans, to individuals or families 
which had less than stellar credit ratings or who really did 
not have good credit ratings, saying that should not eliminate 
them from being able to purchase a home. So there has actually 
been quite a lot of suggestion as well as statutory mandate in 
that regard.
    As the chairman said, and as the ranking member said, we 
have had a skyrocketing, not only of the number of these loans 
and the percentage of these loans, but we have had so-called 
innovative new loans, the interest-only loan, the adjustable 
rate loan. And I know last September the regulators issued 
guidance and again came back this last month and issued 
additional guidance. I have looked at that guidance, and I 
would say that guidance, had it been followed, would have 
resulted in a reduction in the number of defaults. Last March, 
I drew up legislation, worked with now-Chairman Frank, and he 
and I agreed on about 80 or 90 percent of a subprime lending 
bill. I wish we passed that bill. We had some members who did 
not want any regulation, and we had other members who wanted 
more regulation than what was in the bill, so sadly, we were 
not able to build a consensus. But it is a shame that sometimes 
we cannot come together and solve our differences. It would 
have benefitted a lot of Americans who at least in the past 6 
or 8 months have taken out loans.
    I will say this about the guidance, and the reason that I 
last March urged this committee to pass a subprime lending 
bill, some people said, ``The regulators are taking care of 
that.'' They are not taking care of it in that there are--they 
are taking care of the federally-regulated institutions but 
there are a lot of State institutions, there are States like 
Alabama, my State, unlike Massachusetts, we are going to have 
the commissioner of banks from Massachusetts, you all have 
taken care of a lot of that problem with a strong bill but 
there are about half of the States out there that have no 
legislation. There are others where it is a hodgepodge of 
legislation and it is interfering with people's ability to get 
loans. So we still need, because the Federal regulators, they 
do not include regulation of mortgage brokers. And as we found 
anybody who is listening to the news, studied what has been 
going on, knows that we need some legislation addressing 
mortgage brokers. So I know this committee is going to keep up 
its attempts to at least establish some type of national 
    I was sort of surprised last night, my bill, the bill that 
I introduced, and I have a written statement that talks about 
the different things I did in that bill including look at 
people's ability to pay, but the one thing about that bill, it 
was modeled after North Carolina because everybody said that 
North Carolina was the gold standard. Last night, ABC News had 
a documentary on the subprime lending market and all the people 
who had lost money and the highlight of the thing they 
showcased in that documentary was a community where like 30 or 
40 percent of the people in that community have lost their 
homes. The homebuilder had come in there and he had built these 
homes and a lot of people had come and they bought these homes 
and they were underwater, they were losing their homes. Guess 
where it was? It was in Concord, North Carolina, with a strong 
State regulatory, so I do not know what happened there. So it 
obviously shows that even when you have a strong State bill, 
you have guidance from the Federal Government--I do not know, 
it would be interesting to know how those loans occurred and 
what happened and whether it was just maybe outright fraud.
    But I do look forward to your testimony. The first line of 
defense ought to always be the regulators. You are the 
professionals; we depend on you to address these problems. The 
only time that I like to see this committee legislate is when 
you need statutory authority or where you--and I will say this 
about our bank regulators, I think they have been on top of 
this issue and other issues, at least they are on top of it 
now, I will put it that way. But we still need in my mind 
legislation because we have a lot of State--we have a lot of 
institutions and mortgage brokers who are not regulated, that 
your regulation does not reach.
    So with that, I would yield back the balance of my time.
    Chairwoman Maloney. The gentleman's time has expired. I 
yield 2 minutes to Mr. Miller from the great State of North 
    Mr. Miller of North Carolina. Thank you, Madam Chairwoman. 
In the great bipartisan tradition of this committee, I find 
myself agreeing with much of what my colleagues on the other 
side of the aisle have said. I agree with Mr. Gillmor that we 
do need to be careful in developing legislation in this 
committee, that we not rush into something because subprime 
lending is in the headlines, but we cannot let the need for 
careful legislation become an excuse for inaction. We should 
pass legislation this year, this is something that has been in 
the works for a long time. I also agree with Mr. Bachus, with 
whom I had many discussions last year about this issue, that we 
need to continue to support homeownership by the middle class. 
Homeownership is the single best way that the middle class 
builds wealth, by buying a home, by faithfully paying a 
mortgage month after month, by building equity in a home, the 
equity they build becomes the bulk of their life savings. The 
savings rate for families now is slightly less than zero. We 
cannot take away homeownership as a way for the middle class to 
build wealth. A healthy mortgage market helps middle-class 
families build wealth by owning a home. It also makes it 
possible for them to borrow money against their home when they 
face one of life's rainy days. But we have had in this country 
too much lending that does not help middle-class families build 
wealth but steals wealth from them, predatory loans that strip 
their equity with up-front costs and fees and loans that a 
middle-class family cannot possibly repay, so in 2 or 3 years 
they have to be back borrowing money again, again paying up-
front costs and fees, losing more and more of their life 
savings. We have the example of many States that have provided 
effective consumer protections and have struck a balance that 
middle-class families, they need to borrow money to buy a home 
and need to borrow money against their home to deal with life's 
rainy days. And we should follow and look closely at the 
example of those States and develop a strong national standard 
that protects every American consumer everywhere. Thank you.
    Chairwoman Maloney. Thank you. I would like now to 
introduce the panel. They are all distinguished. They have 
distinguished resumes. We are going to put all of the resumes 
in the record in the interest of time. I would first like to 
introduce the Honorable Sheila Bair, Chairwoman of the Federal 
Deposit Insurance Corporation, for 5 minutes.


    Ms. Bair. Thank you, Madam Chairwoman, Ranking Member 
Gillmor, and members of the subcommittee. Thank you for holding 
this hearing on the important subject of subprime lending and 
predatory practices in the subprime mortgage market. 
Homeownership contributes to neighborhood stability and is an 
important way that many individuals and families build wealth.
    Traditionally, homeownership has been a low-risk, stable 
investment representing the largest asset for the typical 
family. Government policies, ranging from tax incentives to the 
formation of government-sponsored enterprises, have long 
encouraged homeownership in recognition of its important 
individual and societal benefits. Mortgage lending practices 
that build debt, rather than wealth, however, not only harm 
individual homeowners, but also undermine these important 
social benefits.
    The mortgage markets have changed significantly in recent 
years, especially for subprime mortgages. Intense lender 
competition, historically low interest rates, rapid home price 
appreciation and, crucially, investor demand for mortgage paper 
facilitated the dramatic growth in the subprime market between 
2003 and 2005. New mortgage products were specifically designed 
to attract borrowers with low initial rates which would then 
reset to much higher interest rates for the remainder of the 
loan term. These types of loans were simultaneously attractive 
both to borrowers, who could obtain larger loans at lower cost 
for at least a short time, and to investors in mortgage loan 
pools, who were attracted to the above-market yields. 
Particularly pervasive were so-called 2/28 and 3/27 hybrid 
ARMs, which combined a fixed introductory rate for the first 2 
to 3 years followed by significant upward adjustments.
    There is no doubt that many subprime borrowers have 
benefitted from the expansion of mortgage credit. However, 
rather than building wealth, many other borrowers are now 
struggling to keep their homes. Repeat refinancings have taken 
equity from their homes and adjustable rate features have 
challenged their ability to continue making payments. In 
previous years, many of these borrowers could have refinanced 
their mortgages or sold their homes at a profit to repay their 
debt in full. Now, as home prices have stagnated or even 
declined in many areas of the country, more borrowers find 
themselves trapped in mortgages they cannot afford to pay.
    In 2006, almost three quarters of non-agency securitized 
subprime mortgage originations were adjustable rate mortgages, 
primarily 2/28 and 3/27 hybrid ARMs. Estimates are that at 
least 2.1 million subprime hybrid ARMs are outstanding today. 
This means that approximately 1.7 percent of U.S. households 
have 2/28 or 3/27 loans. Subprime borrowers are particularly at 
risk because they already have very little financial cushion. 
Subprime borrowers spend nearly 37 percent of their after-tax 
income on mortgage payments and other costs of housing, roughly 
20 percentage points more than prime borrowers spend. Of ARMs 
originated in 2006, a full 24 percent have negative home 
equity, in other words, borrowers owe more than their homes are 
worth. Financial stress on subprime borrowers with adjustable 
rate mortgages will increase further as rates reset. The FDIC 
is concerned that the subprime borrowers who have taken these 
loans will face an array of serious financial problems.
    In the past year, the FDIC and the other Federal financial 
institution regulatory agencies issued guidance regarding the 
risks of non-traditional mortgages to address concerns about 
interest-only and payment-option ARMs, which are offered 
primarily to prime and Alt-A borrowers. Since adjustable rate 
products in the subprime market raise similar and additional 
concerns, the Federal banking agencies also proposed a 
statement on subprime mortgage lending. Both of these documents 
restate two very fundamental lending principles: A loan should 
be approved based on a borrowers' ability to repay at the fully 
indexed rate; and borrowers should be provided with early 
disclosures to fully understand the costs and terms of the 
loan. In addition, in January, the FDIC issued a supervisory 
policy on predatory lending. This policy describes certain 
characteristics of predatory loans and reaffirms that such 
practices are inconsistent with safe and sound lending, and 
undermine individual, family, and community well-being.
    The FDIC aggressively addresses predatory lending through 
examinations and supervisory actions. When examiners encounter 
loans with predatory characteristics, the FDIC takes whatever 
supervisory actions are necessary to effect correction. Our 
examination process has led to the issuance of more than a 
dozen formal and informal enforcement actions that are 
currently outstanding against FDIC-supervised institutions that 
failed to meet prudent mortgage lending standards.
    Widespread credit distress in the subprime mortgage market, 
with especially pronounced problems among independent mortgage 
lenders, suggests the need for a comprehensive response that 
assures that all lenders are subject to certain baseline 
requirements. Guidelines and other supervisory standards 
promulgated by Federal bank regulators apply to only a portion 
of the market. Moreover, the lack of uniform standards creates 
negative competitive pressures on insured institutions. A 
national anti-predatory lending standard would help assure 
basic uniform protections for all borrowers as well as create a 
more level competitive playing field for regulated entities.
    There are two possible approaches to creating and 
implementing an anti-predatory lending standard that would 
apply across the mortgage lending industry. First, Congress 
could pass a law that establishes a set of anti-predatory 
lending standards. A statutory approach to establishing such 
standards could draw from our current and proposed Federal 
regulatory guidelines, as well as existing State anti-predatory 
lending statutes. It should raise the bar by strengthening 
protections available to borrowers. At its core, it should 
address at least two important areas; one, the ability of the 
borrower to repay the loan; and, two, misleading marketing and 
disclosures that prevent borrowers from fully understanding the 
costs and terms of loan products. Alternatively, or in 
conjunction with the statutory process, the Federal Reserve 
Board could exercise rulemaking authorities it has under the 
Home Ownership and Equity Protection Act to address abusive 
practices by all mortgage lenders for all loans, not just those 
that are high cost. We understand that the Federal Reserve is 
in the midst of reviewing the regulations that implement this 
Act. The FDIC would strongly support them should they decide to 
make greater use of authorities provided by this law.
    Many abuses might be more effectively addressed by 
regulation rather than statute, especially in areas--
    Chairwoman Maloney. The gentlelady's time has expired.
    Ms. Bair. Okay, sorry.
    [The prepared statement of Chairman Bair can be found on 
page 68 of the appendix.]
    Chairwoman Maloney. The Honorable John Reich, Director of 
the Office of Thrift Supervision.

                       THRIFT SUPERVISION

    Mr. Reich. Good morning, Madam Chairwoman, Ranking Member 
Gillmor, and members of the committee, I am delighted to be 
here today to have the opportunity to present to you the views 
of the Office of Thrift Supervision relating to subprime and 
predatory lending. I have been involved in the banking business 
for the past 46 years. During this time, I have witnessed six 
economic cycles characterized by recession, recovery, growth, 
and decline. During one turbulent period back in the 1981/1982 
time period, the prime rate hit 21 percent, perhaps one of the 
most alarming periods of my own career in the banking business. 
These experiences have left me with two steadfast beliefs about 
banking and bank supervision: one, that you cannot have too 
much money in your loan loss reserves; and two, you cannot have 
too much money in your capital account. A further precept that 
I hold is that you also have to protect your customers for 
without them you have nothing.
    Each of these principles is relevant in the context of 
today's discussion. Based on these three guideposts, I believe 
that I can report to you that the vast majority of the 
institutions that we regulate are conducting their banking 
activities in a safe and sound manner, consistent with consumer 
production laws and regulations. However, we are in the midst 
of a transition in the economic cycle that has troubling 
activity, particularly from a consumer's standpoint. The result 
is a difficult correction in response to certain unchecked 
lending practices.
    As Members of Congress, I would expect that you have three 
major concerns: your constituency; the financial industry that 
you oversee; and where do we go from here. In my written 
statement, I detail our oversight of subprime mortgage products 
and OTS' efforts to combat predatory lending and promote 
consumer education and financial literacy. I want to speak to 
the nature of the problem we are facing, the causes of the 
problem, and some thoughts on how it might be fixed.
    First, two issues obviously have been identified, subprime 
lending and predatory lending, but these are not synonymous. 
Certainly not all subprime lending is predatory and not all 
predatory lending is to the subprime market. Appropriately 
underwritten loans to subprime borrowers are in fact important 
and legitimate elements of our financial economy. Timely and 
appropriate regulatory responses can address issues of 
predatory lending in our regulated financial entities without 
restricting credit to worthy borrowers. A significant OTS 
concern, that I believe is shared by all agencies, is striking 
the right balance. We want to promote responsible lending by 
the institutions that we regulate. We do not want to divert 
subprime borrowers to less regulated or unregulated lenders. We 
need to ensure sound underwriting of subprime loan products, 
which will help to weed out predatory lending.
    Next, the problem of where our subprime lending activities 
are concentrated; it is not primarily in the thrift industry. 
Current total national mortgage debt is approximately $10 
trillion. Subprime mortgages account for about 13 percent or 
$1.3 trillion of this amount of the national mortgage debt; 
2006 data show that 19 of our 845 thrifts, about 2.2 percent of 
the total number of thrifts that we supervise, have significant 
subprime lending operations defined as at least 25 percent of 
capital. These institutions hold $35 billion in subprime 
mortgages equal to about 5 percent of total thrift mortgage 
holdings. Nationwide, there are about 125 subprime lenders out 
of the total universe of charters of about 8,700, so about 1.4 
percent of all institutions nationwide have significant 
subprime programs--loans are originated through mortgage 
bankers. While there is not consistent data on the number of 
licensed mortgage brokers in the United States, there are many 
more individuals working as loan originators and brokers 
without any type of license or registration. In addition, 
testing and education requirements are suspect and background 
checks may be--
    Chairwoman Maloney. The gentleman's time has expired.
    [The prepared statement of Director Reich can be found on 
page 97 of the appendix.]
    Chairwoman Maloney. Next, the Honorable JoAnn Johnson, 
Chairwoman of the National Credit Union Administration.


    Ms. Johnson. Thank you, Madam Chairwoman, and members of 
the subcommittee. I am Chairman of the National Credit Union 
Administration, an independent Federal agency that regulates or 
insures over 8,400 credit unions with 87 million members. Home 
mortgage lending has long been a part of the way credit unions 
serve their members. Approximately 68 percent of all federally-
insured credit unions offer mortgage loans. Those that do not 
tend to be small institutions that cannot afford the required 
expertise or infrastructure. Additionally, the statutory 10 
percent loan to one borrower limitation makes it more difficult 
for a small credit union to grant large mortgage loans. Credit 
unions represent 9 percent of all mortgage loans outstanding in 
federally-insured depository institutions. When considering all 
mortgage lending, including that by non-federally-insured 
lenders, credit unions originated 2 percent; 61 percent of 
these credit union mortgage loans are fixed rate, while 39 
percent are adjustable.
    Because mortgage lending has evolved to now include hybrid 
or exotic mortgage products, NCUA has modified the way in which 
we collect information about mortgage lending on our 5300 
Report, which is the agency's quarterly reporting tool. This 
change will enable NCUA to gain more precise information about 
credit union mortgage lending and will enhance our oversight 
    The House Financial Services Committee has properly voiced 
concern about the underwriting standards and quality of 
consumer disclosures regarding hybrid loans, including 2/28 and 
3/27. NCUA shares the committee's concerns about riskier 
hybrids that may be detrimental to consumers, particularly 
borrowers in the subprime market. Fortunately, these hybrid 
loans are not prevalent in credit union portfolios, partially 
because of the statutory provisions that prohibit prepayment 
penalties and establish a limit on interest rates.
    Demand for mortgages by credit union members remains high. 
Mortgage loans led all types of loan growth in 2006 and 
comprise almost half of all credit union loans. Given NCUA's 
emphasis on safety and soundness, we continue to closely 
monitor performance indicators in the mortgage lending area. 
One indicator of a loan's quality, delinquency rates, are 
relatively low. Delinquencies greater than 30 days are at .99 
percent and 60 days stands at .34 percent. Charge-ops, which 
occur when a borrower cannot pay, are at .03 percent. While 
these indicators are good, NCUA is committed to a high degree 
of vigilance in this area.
    NCUA has also issued guidance to credit unions on the topic 
of subprime lending. Beginning in 1995, NCUA recognized the 
emergency of risk-based lending and outlined the advantages and 
disadvantages of such lending to borrowers with subprime 
credit. In 1999 and again in 2004, NCUA reiterated the value of 
family-managed risk-based lending programs as a way to reach 
out to all members, including those in the subprime area. At 
the same time, we reminded credit unions of the importance of 
stringent underwriting and monitoring processes. Recognizing 
potential problems in 2005, NCUA specifically addressed 
emerging risks in exotic mortgage lending by issuing a 
supervisory alert to all examiners and henceforth to all credit 
unions. This served notice that NCUA examiners would be 
monitoring trends in areas of high value appreciation and 
evaluating both interest rate risks and credit risks associated 
with these newer mortgage products.
    In concert with my fellow Federal regulators, non-
traditional mortgage guidance was issued in 2006 and work is 
now underway on proposed subprime lending guidance. As this new 
guidance is developed, NCUA is committed to making certain that 
disclosures are improved and consumer protection strengthened, 
particularly in helping avoid payment shocks and negative 
amortizations. Those consumer protections are a vital part of 
our discussion today. Credit unions must comply with the same 
Federal regulations governing mortgage lending as do other 
federally insured institutions, including Truth in Lending, 
RESPA, OPA, the Federal Disaster Preparedness Act, the Fair 
Housing Act, and OMDA.
    Additionally, NCUA and the credit union industry have 
devoted significant resources to assist members in 
disadvantaged communities. This commitment has manifested 
itself primarily through affordably priced loans and financial 
education. Regarding financial education, I would strongly 
suggest that while it is not a panacea, financially literate 
consumers can be better consumers when it comes to avoiding the 
pitfalls presented by this rapidly changing market. NCUA 
administers the--
    Chairwoman Maloney. The gentlelady has 30 seconds 
    Ms. Johnson.--revolving loan fund, which makes grants to 
low-income credit unions to assist with financial literacy and 
wealth building.
    NCUA has closely monitored recent dislocation in the 
subprime market. NCUA is concerned that predatory lending in 
other areas of the marketplace may increase the debt burden on 
credit union members and negatively affect credit union asset 
quality. Even though it represents a relatively small piece of 
the overall pie, the mortgage lending that credit unions do is 
safe and sound.
    Thank you very much.
    [The prepared statement of Chairman Johnson can be found on 
page 118 of the appendix.]
    Chairwoman Maloney. Thank you. Our next panelist, Mr. Emory 
Rushton, is the Senior Deputy Comptroller from the Office of 
the Comptroller of the Currency.


    Mr. Rushton. Thank you, Chairwoman Maloney, Ranking Member 
Gillmor, and members of the subcommittee. I appreciate this 
opportunity to talk with you about mortgage lending in national 
banks and our supervision of it, especially subprime lending 
that is so much in the news today. I bring the perspective of 
42 years as a national bank examiner--through good times and 
bad. During that time, I have had the opportunity to examine 
banks throughout the country, and I have spent the last decade 
here in Washington working on bank supervision policy.
    We at the OCC are very concerned about the problems in the 
subprime market. Yet, it is easy to forget in this environment 
that these loans have enabled millions of Americans, including 
many low- and moderate-income people, to become homeowners for 
the first time. Most of these folks are paying their loans on 
time, and we expect they will continue to do so. Morever, as 
Ranking Member Gillmor has observed, subprime loans are not 
inherently predatory or abusive. Those that are have no place 
in the banking system. When unfair treatment does occur, we in 
the government have a distinct responsibility to help make it 
right, and we take that responsibility very seriously. However, 
OCC bank supervision is aimed primarily at preventing abuse 
before it occurs, before damage is done.
    OCC became concerned in 2002 about the growth of exotic 
mortgages that carried the potential for a big payment shock, 
and we responded in an escalating fashion, privately and 
publicly. By 2005, we were instructing our examiners to more 
aggressively address the risk of these products during their 
examinations of national banks because we concluded that 
standards had slipped far enough. This was at a time, I might 
add, when home prices were still going up. That intervention is 
one reason that you will find so few payment-option negatively 
amortizing loans in national banks today. Shortly after that, 
we initiated the interagency process that resulted in the non-
traditional mortgage guidance that was issued last fall.
    Our attention today, though, is focused on the subprime 
sector and especially on hybrid ARMs, which now make up the 
bulk of the subprime business. By their very nature, subprime 
borrowers who take out these loans are especially vulnerable to 
payment shock. We have addressed this and other key features of 
these loans in the guidance that is now out for comment.
    The subcommittee's invitation letter specifically asked 
what we expect the results of that guidance to be, both good 
and bad. To be sure, there needs to be a return to more 
realistic underwriting standards, and the guidance should have 
that positive effect. It makes no sense to make loans that 
cannot be repaid. But we cannot ignore the likelihood that 
tighter underwriting will mean fewer and smaller loans.
    I want to emphasize, Madam Chairwoman, that national banks 
are not the dominant players in the subprime market. Last year, 
they produced less than 10 percent of all new subprime 
mortgages, and their delinquency rates on these loans are about 
half the industry average. We know of some institutions that 
have actually abandoned their plans for a national bank charter 
rather than subject their subprime lending to supervision by 
the OCC. But of course these numbers do not matter much to 
somebody who is facing losing their home through foreclosure. 
OCC strongly encourages all national banks to work with 
troubled borrowers to help them resolve their problems.
    It is an unfortunate fact, though, that regulatory 
oversight tends to be less rigorous in precisely those parts of 
the financial system where practices are most problematic. We 
hope the guidance that we have proposed will inspire comparable 
measures by other regulators, as in fact did happen with the 
nontraditional guidance we issued last fall.
    Madam Chairwoman, our capital and credit markets have 
enabled record levels of homeownership. We play an important 
role in overseeing those markets and in taking action when 
necessary to preserve equilibrium and balance. But our 
authority does not extend to important components of that 
market, including many originators, aggregators, securitizers, 
and funding sources.
    In conclusion, let me assure you that my colleagues and I 
intend to preserve bank safety and soundness and fair treatment 
of customers, and we try to do this through supervision that 
stems abuse without thwarting healthy innovation. Consumers 
deserve no less. We look forward to working with the 
subcommittee on these issues.
    [The prepared statement of Comptroller Rushton can be found 
on page 183 of the appendix.]
    Chairwoman Maloney. Ms. Sandra Braunstein, Director of the 
Division of Consumer and Community Affairs of the Federal 
Reserve Bank.


    Ms. Braunstein. Thank you. Chairwoman Maloney, Ranking 
Member Gillmor, and members of the subcommittee, I appreciate 
the opportunity to discuss how current subprime practices and 
products effect homeownership and foreclosure. Subprime lending 
has grown rapidly in recent years. In 1994, less than 5 percent 
of mortgage originations were subprime, but by 2005, about 20 
percent of new mortgage loans were subprime, many of which were 
adjustable rate mortgages. Many of these loans have increased 
homeownership rates. However, the largest recent increase in 
delinquency and foreclosure rates are for subprime borrowers 
with ARMs, especially those loans with risk-layering features, 
such as combining items like low documentation loans with 
simultaneous seconds. There are indications that the market is 
addressing these issues for new borrowers by tightening 
underwriting standards. However, we remain very concerned that 
over the next 1 to 2 years existing subprime borrowers, 
especially those with more recently originated ARMs, and those 
with layered risks, may face more difficulty. As interest rates 
reset for these loans, some consumers may have difficulty with 
the larger monthly payments. Therefore increases in foreclosure 
and delinquency rates are likely to continue.
    The Board has taken several actions to address concerns in 
the subprime market. It is important to remember that overly 
broad actions run the risk of constricting the market and 
returning to a situation where some borrowers have very limited 
access to credit. We want to encourage, not limit, mortgage 
lending by responsible lenders.
    I would like to note several of our activities in this 
regard. First, the Federal Reserve conducts regular 
examinations of its institutions for safety and soundness and 
for compliance with consumer protection laws. When we find 
problems in these institutions, we require corrective action by 
bank management and, if necessary, we use enforcement tools to 
address the problems.
    Second, in response to witnesses in underwriting and risk 
management at the institutions we supervise, we have issued 
guidance in concert with the other Federal banking agencies. 
This includes the recent proposed guidance on subprime 
mortgages. This guidance applies to depository financial 
institutions and the subsidiaries of banks and bank holding 
companies. The guidance discusses prudent underwriting 
practices, including the capacity of the borrower to repay the 
loan at the fully indexed rate. The guidance also reminds 
institutions to clearly communicate the risks and features of 
these products to consumers in a timely manner even before and 
when application is taken.
    Third, in 2001, the Board revised the HOEPA rules in 
response to renewed concerns about predatory lending. In this 
rulemaking, the Board utilized its authority to prohibit unfair 
or deceptive practices. Specifically, the Board issued rules 
that prohibit a HOEPA lender from refinancing one of its own 
loans with another HOEPA loan or flipping within the first 
year. We also adopted a prohibition on demand notes for high 
cost closed-in mortgages. These revisions to HOEPA are cases 
where the Board determined that they could write bright line 
rules prohibiting unfair practices. However, because 
determination of unfairness or deception depends heavily on the 
facts of an individual case, it is very difficult to craft 
rules without unintended consequences. The Board has undertaken 
a major review of Regulation Z which implements the Truth in 
Lending Act of which HOEPA is a part. During this review, the 
Board will determine if there are opportunities to further 
utilize our HOEPA authority.
    Fourth, the Community Affairs offices in the Federal 
Reserve Banks have responded to mortgage delinquency and 
foreclose in ways that are directly responsive to the consumer 
needs in specific markets. Various initiatives conducted in 
concert with local community partners have identified 
responsive strategies and helped troubled borrowers. A list of 
these and other Federal Reserve initiatives are included with 
my written testimony. We will continue to pursue opportunities 
to help borrowers and preserve access to responsible lending.
    [The prepared statement of Ms. Braunstein can be found on 
page 217 of the appendix.]
    Chairwoman Maloney. Thank you. Mr. Steven Antonakes, 
commissioner of the Massachusetts Division of Banks, on behalf 
of the Conference of State Banking Supervisors. Thank you for 
being here.


    Mr. Antonakes. Thank you. Good morning, Madam Chairwoman, 
Ranking Member Gillmor, and distinguished members of the 
subcommittee and staff. My name is Steven Antonakes, and I 
serve as the commissioner of banks for the Commonwealth of 
Massachusetts. I am also the chairman of the State Liaison 
Committee, making me the newest voting member of the FDIC. It 
is my pleasure to testify today on behalf of the Conference of 
State Bank Supervisors.
    The current state of our mortgage market, and the subprime 
market in particular, have been well covered in the media. What 
has received less coverage, and is not as well understood, is 
the interplay between State and Federal mortgage supervision. 
In addition to regulating banks, 49 States plus the District of 
Columbia currently provide regulatory oversight of the 
residential mortgage industry. In recent years, the States have 
been working diligently to improve supervision in this area.
    In addition to the extensive regulatory and legislative 
efforts, State attorneys general and State regulators have 
cooperatively pursued unfair and deceptive practices in the 
mortgage market. Through three nationwide settlements alone, 
State regulators have returned over $800 million to homeowners. 
But successes are sometimes better measured by actions that 
never receive media attention. States routinely examine 
mortgage companies for compliance not only with State law but 
for compliance with Federal laws as well. These examinations 
are an integral part of a balanced regulatory system. Again, in 
2006 alone, States took 3,694 enforcement actions against 
mortgage brokers and mortgage lenders.
    In an effort to further improve State supervision of the 
mortgage industry, significant time and resources have been 
dedicated to the development of a national mortgage licensing 
system. Recognizing gaps in mortgage supervision, the States 
are creating this licensing system to improve the efficiency 
and the effectiveness of the U.S. mortgage market and to fight 
mortgage fraud and predatory lending. Scheduled to go live on 
January 1, 2008, this system will create a single record for 
every State-licensed mortgage company, branch, and individual.
    Despite all the actions taken by the States on an 
individual basis, and on a coordinated nationwide basis, we are 
frustrated in our attempts to protect consumers by the 
preemption of State consumer protection laws. State 
legislatures have the right to expect the laws they pass to be 
followed by companies operating in their States. Thirty-seven 
States have acted by passing predatory lending laws only to 
have them voided by the OCC and OTS rulings.
    In regards to regulatory policy, recent developments have 
been more positive and more productive. Both the State and 
Federal guidance on non-traditional mortgage products provide 
sound underwriting standards and consumer protection 
provisions. As of today, 29 States plus the District of 
Columbia have adopted the parallel guidelines developed by CSBS 
and the American Association of Residential Mortgage Regulators 
or ARMOR. Ultimately, CSBS expects all 50 States to adopt the 
guidance. Moreover, CSBS and ARMOR strongly support the 
recently proposed interagency statement on subprime mortgage 
lending. Personally, I would like to thank FDIC Chairman Bair 
for her leadership on the development of this statement and for 
ensuring an appropriate role for State supervisors. CSBS and 
ARMOR are already working to develop a parallel statement for 
State regulators to use with their supervised entities.
    In my written testimony, I have outlined several 
recommendations for your reference as Congress seeks to improve 
the residential mortgage market. In addition to Congress' 
focus, the current challenges for the mortgage industry have 
drawn State attention as well. As I speak, the Massachusetts 
legislature is holding a hearing discussing the licensing of 
mortgage loan originators and the extension of the 
Massachusetts State Community Investment Act law to non-bank 
mortgage lenders. We recognize that there are regulatory 
weaknesses in our current system of both State and Federal 
supervision. It is important that we debate and discuss these 
weaknesses. However, we need to move towards finding common 
solutions. Ultimately, successful regulation of the mortgage 
industry requires enhanced coordination among the States and 
both State and Federal regulators. Improved coordination and 
communication will increase accountability among mortgage 
brokers and lenders and provide consistency across the industry 
to the benefit of the borrower. For example, CSBS would like to 
work with our Federal counterparts to encourage our supervised 
entities to reach out to those consumers whose adjustable rate 
mortgages are scheduled to reset this year.
    Thank you again for your invitation to testify today and 
for the subcommittee's interest in improving our mortgage 
market system. I look forward to your questions.
    [The prepared statement of Mr. Antonakes can be found on 
page 244 of the appendix.]
    Chairwoman Maloney. Okay, without objection, the written 
statements of all of the witnesses will be made part of the 
record, and I thank all of you for your testimony and insights.
    Chairman Bernanke and Roger Cull have agreed that the 
Federal Reserve has broad powers under HOEPA to regulate unfair 
and deceptive practices for all lenders. I would like to ask 
all of the panelists, should the Fed use those rulemaking 
powers to extend this guidance to the entire market? I know 
that Chairwoman Bair testified in support of such of an action, 
but I would like to hear from each of you for your particular 
view on this question. Would you like to start, Chairman Bair?
    Ms. Bair. Yes, we would defer to the Fed and the decision 
they make, and I understand they have it under review, but we 
would strongly support them if they did decide to use those 
    Chairwoman Maloney. Okay. Director Reich?
    Mr. Reich. I, too, would be supportive of the Fed taking a 
look at HOEPA to determine if it can be expanded in a way that 
would not result in a credit crunch to worthy borrowers.
    Chairwoman Maloney. Chairwoman Johnson?
    Ms. Johnson. Uniformities would certainly have its 
advantages and so it would certainly be something we would 
support. It is not really my area; we regulate in the credit 
union area, but seemingly the uniformity would be beneficial.
    Chairwoman Maloney. Mr. Rushton?
    Mr. Rushton. The OCC would certainly support and contribute 
to the effort by the Fed if they choose to go in that 
direction. I think, as with the guidance that we have issued in 
this area, the tricky part is the writing of rules that weed 
out the predatory and abusive loans without restricting 
legitimate credit to creditworthy borrowers. But we would 
support their efforts.
    Chairwoman Maloney. Okay, Ms. Braunstein?
    Ms. Braunstein. Yes, as I said in my testimony, we do plan 
to look at our authority under that statute and to look for 
opportunities to utilize that authority which would cover all 
lenders. However, as some of the other panelists have alluded 
to, there are some issues, and it is not an easy process. We 
need to make sure that whatever rules are written are well-
calibrated and are very thoughtful and are done in such a way 
to, as Mr. Rushton just said, to take care of the bad acts but 
not overly constrict the markets because we do not want to end 
up with a situation where people cannot get responsible loans.
    There are some dangers under HOEPA, and we are going to 
look at that. I am not saying they would stop us, but there are 
some things to keep in mind. One is that HOEPA does carry with 
it the way for people to file private lawsuits so that dictates 
even more that we have to be careful about what we write 
because it is not a matter of the banks being sued that 
concerns us as much as if there is a threat of lawsuits taking 
place. And HOEPA also carries with it assignee liability, which 
means anybody who touches a loan could potentially be sued, 
that could end up cutting off constraining credit because what 
you may find if there is not a clear, bright line drawn in any 
rule that is written, the lenders may get nervous and decide it 
is not worth doing that kind of credit at all and that would be 
true of secondary market participants, securities, all along 
the line because of the assignee liability.
    So we are going to be looking, as I say, at this authority. 
We think that it is definitely worth looking at, and we will 
try to figure out a way to deal with this but it is not an easy 
    Chairwoman Maloney. But don't you think the guidance 
strikes the right balance now?
    Ms. Braunstein. I think for guidance, the benefits of doing 
guidance is that it is not enforceable, people cannot sue on 
the basis of guidance, and guidance is a tool that can be done 
very flexibly. And the guidance we try to write is principles 
based so that it would apply to more--because the other problem 
is the industry is very innovative and creative, as we have 
seen over the years, and they are constantly coming up with new 
and evolving products. If we craft things that are too narrow 
in scope and apply only to specific products, then the industry 
comes up with something else, so it is a matter of trying to 
craft something that is broad enough to take care of the bad 
actions but not overly constrict credit. We will certainly be 
looking at what is in the guidance to see if some of that can 
be moved into rules, but I think that is going to take some 
analysis and study on our part and a lot of conversations with 
industry and the consumer side and the other regulators.
    Chairwoman Maloney. But don't you think that loans barred 
by the guidance should not be made, simply put it merely says 
people who cannot afford the loan should not take out the loan, 
don't you think that those--
    Ms. Braunstein. Well, I think a basic tenet of lending is 
that borrowers should have the capacity to repay. The problem 
with crafting that into rule, that could end up banning all 
asset-based lending. There are some cases where asset-based 
lending may not be a bad thing for certain income levels.
    Chairwoman Maloney. But then the guidance takes in 
mitigating factors.
    Ms. Braunstein. Yes, that is true and these are the kinds 
of things we will be looking at.
    Chairwoman Maloney. When do you expect to come forward with 
your decision? What is the timetable?
    Ms. Braunstein. We have started our review of Truth in 
Lending. We have held hearings; this summer we held hearings 
all around the country to gather information on this. We are 
going through that information. We are doing a number of other 
things. I do not have an exact timetable to give you. We are 
proceeding and we are being thoughtful about it, and I cannot 
give you an exact end time.
    Chairwoman Maloney. And the guidance requires ability to 
repay at the fully indexed rate, is that not a good principle 
for the entire market?
    Ms. Braunstein. Basically, I think that is true, but again 
we are going to have to look at and study these underwriting 
practices to make sure that--if we codify that in a regulation, 
it is different than putting in guidance, we just want to make 
sure that we do not end up constraining responsible credit.
    Chairwoman Maloney. Commissioner Antonakes, and then my 
time is up.
    Mr. Antonakes. Certainly, I would personally welcome such 
an approach, and we would hope that we could work closely with 
the Fed to best coordinate supervisory as well as enforcement 
    Chairwoman Maloney. Thank you, and I now recognize the 
ranking member, Mr. Gillmor from Ohio.
    Mr. Gillmor. Thank you, Madam Chairwoman. You have all been 
in the industry for a long time, and you have seen the up's and 
down's in the economy. Right now we have, by every objective 
standard, a very good economy. We have had continual expansion, 
and unemployment is low, but these are good times. I want you 
to give me a little projection of what you think will happen if 
we do not have good times? For example, leading indicators 
declined in March, that is the third consecutive month leading 
indicators have gone down, and that is the first time that has 
happened since the recession of 2001. And you also have a lot 
of adjustable rate mortgages that are going to be resetting 
later this year, or resetting next year, so my question is, 
considering the great increase in foreclosures and 
delinquencies we already have, what is your assessment of what 
happens if we do go into a recession? If I could just get a 
quick response from each of you. Chairman Bair?
    Ms. Bair. Well, our economists have done a lot, there is a 
strong correlation between delinquencies and defaults in these 
subprime hybrid ARMs and what is going on with home price 
appreciation or depreciation, as the case may be. Certainly you 
have seen some problems in Ohio, so they are definitely 
connected. At this point, we think the problems in subprime are 
contained to subprime. We do not see a lot of spillover, unless 
something unexpected happens. Obviously, we are monitoring it 
closely, but we do not see any broader implications at this 
    Mr. Reich. I am going to agree with Chairman Bair. I think 
that so far the problems have been limited to the subprime 
market. I was looking at statistics on past dues on various 
types, the prime past dues continue to be very, very low but 
not in the subprime market and the big question is, will there 
be a contagion or spillover effect if the economic situation in 
general deteriorates, if there are losses of jobs throughout 
the economy? But at the moment, we are not expecting a 
contagion effect to spill over into other areas of the economy.
    Mr. Gillmor. Chairman Johnson?
    Ms. Johnson. We believe that our proactive examination 
process and our guidance that was issued early has helped 
prevent a large number of these types of loans in the first 
place. Our delinquency rate is very, very low and our 
foreclosure rate currently is less than one-tenth of a percent 
so that could be a slight increase potentially, but we think it 
is very, very small.
    Mr. Rushton. The OCC agrees entirely with our colleagues.
    Mr. Gillmor. So we are okay, all right.
    Ms. Braunstein. Yes, Congressman, I could attempt to answer 
that question, but I am not an economist, and there are a 
couple of hundred economists back at my organization who would 
probably take my head off if I attempted to answer that, so I 
think I will pass on that. I do know that we are closely 
monitoring the situation and that there is still some 
uncertainty about the wider effects of this, but I am not the 
person to address that.
    Mr. Gillmor. Ms. Braunstein, let me remind you what Harry 
Truman said. Maybe you will give more direct answers to me than 
the economists. He said that he always wanted to have a one-
armed economist because they all said, ``On the other hand.''
    Mr. Antonakes. Congressman, I would only add that our 
concerns have focused on the fact that I believe what you 
alluded to, that the recent foreclosures have not been tied as 
closely to the traditional reasons for foreclosure, job loss, 
death, or illness of a spouse. And certainly it appears to be 
more driven from the current rate market as well as a decline 
in housing values. And if you had additional factors 
challenging homeowners, then I think the situation within the 
subprime market could get worse. So I think that speaks of our 
need to be aggressively addressing these issues now.
    Mr. Gillmor. Thank you very much, Madam Chairman. My time 
has expired. I thank the panel.
    Chairwoman Maloney. The Chair yields 1 minute to Mr. 
Hinojosa for a unanimous consent request.
    Mr. Hinojosa. Thank you, Chairwoman Maloney. I ask 
unanimous consent that a predatory lending financial literacy 
brochure produced by the Center for Responsible Lending and the 
National Association of Realtors, which I hold in my hands, be 
entered into today's hearing record as well as a statement by 
the National Association of Realtors on the same subject, which 
would be very helpful to our hearing today.
    Chairwoman Maloney. I thank the gentleman, and I now yield 
to Mr. Mel Watt from North Carolina, who has been a leader on 
this issue.
    Mr. Watt. Thank you, Madam Chairwoman, and I thank the 
Chair for convening this hearing, which I think is probably the 
first step toward--this term of Congress--toward the 
possibility of a predatory lending bill and it is that 
interplay that I want to explore a little bit because you have 
issued some guidance. I assume that guidance applies to--who 
does the guidance apply to? Does it apply to everybody? Does it 
apply to just the people under the jurisdiction of--
    Ms. Braunstein. It applies to the depository institutions 
that we all supervise plus their subsidiaries and that includes 
the subsidiaries of bank holding companies.
    Mr. Watt. All right, how do we get it applied to State 
regulated institutions?
    Mr. Antonakes. At this point, Congressman, 29 States and 
the District of Columbia have also adopted the guidance as 
well. My office, we actually adopted it as regulation.
    Mr. Watt. If you have adopted--so this guidance now applies 
to everybody, traditional lenders and subprime lenders, right?
    Mr. Antonakes. We have other States that--
    Mr. Watt. Either it does or it does not.
    Mr. Antonakes. In my State, in Massachusetts, it applies to 
every type of lender. We are working with other States to 
ensure that they adopt the guidance, as well. And we expect 
that in the short term all 50 States will adopt the guidance so 
it does apply to everyone.
    Mr. Watt. Okay, and from this step, the guidance, you are 
moving, Ms. Braunstein, towards some regulations, is that where 
you are headed or what are these hearings and things that you 
are--what is it that you are contemplating doing in the future?
    Ms. Braunstein. Yes, it is not really related to the 
guidance per se, but we were undergoing--before the guidance 
issue came up, we were looking at our rules under the Truth in 
Lending Act.
    Mr. Watt. And where is that headed?
    Ms. Braunstein. We are revising that.
    Mr. Watt. That is what I am trying to find out.
    Ms. Braunstein. It is heading for a major revision of those 
rules in regards to closed-end credit, which would include 
mortgages. That includes looking at mortgage disclosures and 
making sure that consumers have the information they need for 
transactions as well as, as I mentioned today, we will be 
looking at our authority under the HOEPA portion of Truth in 
Lending and whether or not there are practices that are unfair 
and deceptive that we can write rules on.
    Mr. Watt. Okay, and those rules would be beyond this 
guidance that you are talking about or would it be guidance--
would it be regulations or guidance?
    Ms. Braunstein. No, those would be regulations.
    Mr. Watt. Okay.
    Ms. Braunstein. And HOEPA and the Truth in Lending Act 
apply to all lenders regardless of whether they are depository 
institutions or not.
    Mr. Watt. The question I am trying to get to is, is any of 
this going to alleviate the necessity of a Federal predatory 
lending law?
    Ms. Braunstein. I think that is a decision that the 
Congress will have to make.
    Mr. Watt. Okay. And one of the impediments to passage of 
any kind of predatory lending legislation last year was the 
debate about whether it ought to be a Federal preemptive 
standard or whether it ought to be a floor, which would leave 
States to innovate and do what they are doing already. I assume 
I know what the State position on that would be, or do I know 
what the State position would be, either you support a Federal 
preemptive standard or you do not?
    Mr. Antonakes. Well, in the case of my State of 
    Mr. Watt. I cannot get a yes or no answer out of you all, 
can I? We have 5 minutes, I am trying to get to--either you 
support a Federal preemptive standard or you don't.
    Mr. Antonakes. I would support one as long as it did not 
water down existing State rules and allow for State 
    Mr. Watt. So you would just wipe out a Federal preemptive 
standard even if it was lower than Massachusetts' standard?
    Mr. Antonakes. No, I would support a Federal law if 
standards were set appropriately high.
    Mr. Watt. What if it lowered California's standard or North 
Carolina's standard but raised everybody else's standard, would 
you support it or not?
    Mr. Antonakes. I am in a position where our standards in 
Massachusetts are fairly high so I would come at it from that 
    Mr. Watt. Are you here speaking on behalf of an 
organization? Would your organization support a Federal 
preemptive standard that lowered any State standard that is 
already in existence?
    Mr. Antonakes. That is something we would have to discuss 
within our organization.
    Mr. Watt. So you do not have a position, that is what you 
are saying?
    Mr. Antonakes. I do not believe we have taken a formal 
position on that issue.
    Mr. Watt. All right, my time is up. You all have rope a 
doped me for 5 minutes now and nobody has given me an answer to 
anything. I do not know why you all come over here to testify 
if you will not take a position on anything. I yield back, 
Madam Chairwoman.
    Chairwoman Maloney. I thank the gentleman, and I yield 5 
minutes to the full committee ranking member, Mr. Bachus from 
    Mr. Bachus. Thank you. Actually, I thought that he did take 
a position, but it may not have been the position that the 
member liked. Let me follow up by saying that--
    Mr. Watt. If you do not have a position, that is a 
position, I guess.
    Mr. Bachus. I hope that is not taking my time. Could my 
time start again?
    Mr. Watt. I ask unanimous consent to give the gentleman 
back whatever time I took from him.
    Mr. Bachus. Thank you. I will say that the gentleman from 
North Carolina and I did work well together last year trying to 
resolve our differences, but the legislation I offered last 
year was the North Carolina legislation, which is considered a 
very strong standard. It also gave the attorneys general of the 
States the right to enforce, which you said was important to 
the State of Massachusetts. It also gave an individual right of 
action. Let me ask this, we have now Federal guidance in place 
and are moving towards regulation. We have 29 States that have 
adopted the Federal guidance. We obviously have 21 States that 
have not--I do not know how many of those States have a tough 
State standard, but I would ask the committee, what are some of 
the gaps in regulation as they exist today? And let me propose 
one of them and maybe just ask you about this one, most 
mortgage brokers are honest people, and I think they do a very 
good job for their clients but we have bad actors and we have 
all heard of cases of one broker who made $2- to $300 bad 
loans, loans that should not have been made, sometimes 
defrauded the institutions, what do you think about national 
licensing and registration? I will just start with Ms. Bair.
    Ms. Bair. Well, I think CSBS and the States are moving 
forward with a State-based national licensing regime which 
would not require Federal intervention. I think a significant 
Federal role in regulating mortgage brokers--
    Mr. Bachus. Do what now?
    Ms. Bair. I think a significant Federal role in supervising 
mortgage brokers, if that is what you are suggesting--
    Mr. Bachus. Yes.
    Ms. Bair.I think that would be difficult and challenging. 
There are State apparatuses in place for regulating the loan 
originators as well as banks whom we all regulate.
    Mr. Bachus. You have the mortgage brokers and then you have 
the loan originators who work for the national institutions.
    Ms. Bair. Right, right.
    Mr. Bachus. And they are regulated.
    Ms. Bair. But you can manage--you can regulate third party 
relationships. For instance, the banks that we regulate, we 
regulate the third party relationships--
    Mr. Bachus. What about a national registration or national 
    Ms. Bair. I would defer to Steve. I think that the States 
are already putting together a national registry and that they 
may be on that track at a State-based level.
    Mr. Bachus. Okay.
    Mr. Antonakes. Yes, we have worked for 3 years on creating 
a national database, ensuring that all entities licensed by the 
States are entered into this database and we have common 
sharing of information. We believe it will significantly 
improve supervision over mortgage brokers. I would also add 
that just as the States have a duty to supervise the conduct of 
the mortgage brokers, the entities doing business, including 
banks that have outsourced their subprime lending to brokers, 
have a duty also to supervise that relationship between the 
banks and the mortgage brokers as well. It seems to me that a 
far better method of coordinated examination would include a 
national bank being supervised by their national bank 
regulator, and also looking at the broker network in tandem 
with States doing simultaneous examinations of those brokers, 
so we could determine from the bank regulator's perspective 
whether the controls are in place and from the State 
perspective, ensuring that appropriate business practices by 
the brokers are being adhered to. I think marshaling our 
resources and working together would provide a far better 
system of supervision.
    Mr. Bachus. My thought is that we do need a national 
licensing or registration of brokers. As to how it is enforced, 
I am not sure. But I would like any proposals that you all have 
because I think that is a gap in the present system because, as 
you said, you have national institutions that are now farming 
out their work to people outside the bank.
    Mr. Antonakes. But, again, we believe our system will 
capture that information and will result in a far better 
supervisory process for the brokers as well as the lenders that 
are supervised--
    Mr. Bachus. Well, it will on institutions but how about 
those States which--now, do you require licensing or 
registration of all brokers?
    Mr. Antonakes. We require licensing of all non-bank 
mortgage lenders and mortgage brokers and the majority of 
States require similar standards and the system we believe will 
substantially improve coordination among the States and 
information sharing for the States, the vast majority of States 
that license lenders and brokers as well.
    Mr. Bachus. How are these brokers getting away with moving 
from State to State and continuing to make--there has been some 
documentation on some of them making as many as a thousand 
fraudulent loans in three or four States?
    Mr. Antonakes. I think the database will resolve that issue 
because of common information sharing, access to Federal 
criminal databases, the form shopping which exists and which a 
company gets into trouble in one jurisdiction, changes the 
name, creates a straw, that type of opportunity is going to be 
gone once the database is up and running in less than 9 months.
    Mr. Bachus. Let me ask one follow-up question.
    Chairwoman Maloney. You have 30 additional seconds.
    Mr. Bachus. We talked about loans and defaulting loans, 
what about lending to homebuilders, is that jeopardized? It is 
a very important industry and obviously as homebuilders 
experience problem--have you seen a pull back in the amounts of 
loans to homebuilders?
    Mr. Reich. I think homebuilders who have built speculative 
homes have certainly curtailed their activities and our re-
trenching in certain parts of the country where supplies of 
homes have built up, so I am aware of and have heard in a 
number of parts of the country that homebuilders are indeed re-
    Mr. Bachus. Are there defaulting loans from the banks, 
institutions--having delinquencies in loans to homebuilders?
    Mr. Reich. With one exception, in the State of Florida 
there was an institution that likely will result in some losses 
to that institution because of an over-build situation and some 
irregularities, which also took place. But on a broader basis, 
I am not aware of losses occurring in institutions because of 
re-trenching among homebuilders.
    Chairwoman Maloney. The gentleman's time has expired. Mr. 
Gutierrez of Illinois.
    Mr. Gutierrez. Thank you so much. I would like to first 
just talk a moment about the overall banking industry and 
financial services industry because it seems to me that a lot 
of this is about credit and who gets credit in the United 
States of America. I am lucky to be 53 years old, so I remember 
when getting a Montgomery Ward's card at 18 percent was hard to 
get, and then getting a J.C. Penney card. When I got my first 
MasterCard, it was like 150 bucks and they really checked to 
make sure. Now my college daughter gets invitations every week 
to get credit.
    So having a conversation about what is happening in the 
subprime without having a conversation about what is happening 
overall in the United States as it refers to how we get credit 
in this country is really doing a disservice to the whole 
issue. And I would like to say that, Madam Chairwoman, I am so 
happy you called this hearing because we have the Comptroller 
of the Currency who does not think that the gentleman from 
Massachusetts should be able to regulate if he makes a decision 
and he makes a ruling at the OCC, he thinks he should preempt 
him. So it is very interesting to watch both of them sit at the 
same table as though they are both friends and allies of the 
same people but I do not believe they are allies and friends of 
the same people.
    I think you should be working together not at cross battle 
from one another. And I think that that is a serious job and so 
as we look at this issue, we should see what the OCC is doing 
in terms of trying to preempt because I believe, as many of my 
colleagues on the other side of the aisle, that many of the 
best things that happen in government happen at the local 
level. But if our State attorneys general cannot take actions, 
and I have spoken to my attorney general, they cannot lock 
anybody up for doing things that are just as fraudulent as the 
guys at Tyco and Enron have done in the subprime industry and 
in the mortgage industry. I have seen examples of it.
    You all in that panel, if you have not seen examples of 
things people should have gone to jail for, then I do not know 
what you have been doing so I am going to assume that you know 
much more than I do and have seen the situations much more than 
I do. So I would just like to say that CitiBank went to 
CitiGroup and CitiFinancial, they are in the subprime industry, 
so as all levels of regulation, you should look at what it is 
they are doing and how it is that they are doing this because 
they are part of the problem.
    I heard some people say we do not want to constrain credit, 
well, if we do not constrain credit to those who are either not 
worthy of the credit because they do not have the ability to 
pay and they know they do not have the ability to pay going in, 
that is why in great measure we have a subprime industry. There 
should be considerations. That is why my earlier statement, 
when I got my first mortgage back in 1981, I remember bringing 
all the documentation to the banker. I knew that banker. He 
knew who I was. He checked me out.
    Now we are issuing loans, I buy a piece of land and I build 
a house, and we speculate on what it is going to be worth later 
on. Somebody is going to pay the consequences of this subprime 
industry, 20 percent of the loans. So I want to thank the 
gentleman, Mr. Watt, for bringing things up.
    I want to read something that was put into the record but I 
want to read it again from the Honorable Sheila Bair. It says, 
``We understand FRB is in the midst of reviewing the 
regulations that implement HOEPA. The FDIC would strongly 
support the FRB should it decide to make greater use of its 
authorities provided by HOEPA to address predatory practices. 
Many abuses might be more effectively addressed by regulation 
rather than statute, especially in the areas as misleading 
marketing in which the manner and types of abuse change.'' I 
suggest you do it and that you work together and that that is 
what you are, you are all in public service as we are and that 
we not have to have a hearing so that you can communicate with 
one another about these issues.
    I would like to ask one question of Ms. Bair following up 
on Mr. Watt. In your testimony, you suggest one option for 
Congress is to articulate a set of anti-predatory lending 
standards through legislation. One of the issues we wrestle 
with up here is preempting the States because, as you 
acknowledge in your testimony, the States have proven to be 
innovators when it comes to consumer protection issues 
regarding Federal legislation. Do you think Congress should 
establish a floor for protections by establishing a set of 
minimum standards or should we just preempt the States and 
implement a national standard?
    Ms. Bair. If you are simply establishing a floor, I do not 
think that you want to preempt additional State protections 
above that, no, I do not think you should do that. There could 
be another approach, you could try a more prescriptive, very 
strong standard and there might be justification for preemption 
if you were sure that you were raising the bar, not lowering 
it. But I think the whole point of this is to increase broad 
protections, not decrease them, so unless you were confident 
you were doing that, I would recommend against preempting.
    Mr. Gutierrez. Thank you.
    Mr. Watt. Madam Chairwoman, could I ask unanimous consent 
to get a response to that question from the other panelists?
    Chairwoman Maloney. So granted.
    Mr. Reich. I would agree with Chairman Bair; I think 
enacting a standard with a low bar would not be a productive 
act for Congress to undertake.
    Ms. Johnson. I would agree that in that setting a low bar 
would be an exercise in futility. It is not going to get to the 
heart of the problem in protecting the consumer.
    Mr. Gutierrez. Madam Chairwoman? Should we set standards?
    Chairwoman Maloney. Let the other witnesses respond. Mr. 
    Mr. Rushton. We would argue against a low bar, as well.
    Mr. Watt. Madam Chairwoman, I hate to interrupt him but 
they are not answering the question that has been asked. The 
question is, should there be a Federal preemptive standard, 
whether it is a low bar or a high bar, should there be a 
Federal preemptive standard? That is the question.
    Chairwoman Maloney. Okay, then let's go back to Ms. 
Johnson, do you think there should be a Federal preemptive 
    Ms. Johnson. I have to be honest with you, it is not an 
issue that we have had a hearty discussion about at the agency. 
We do not have broad preemptive--we do not do a broad 
preemptive power right now and so I would really have to study 
it before giving an answer.
    Chairwoman Maloney. Okay, Mr. Rushton?
    Mr. Rushton. The OCC has a fairly robust anti-predatory 
lending standard now. We would certainly support a Federal 
standard so long as it did not dilute ours. We are hopeful that 
this guidance that we have proposed, along with the natural 
correction that is occurring in the market today, would serve 
the purpose of stemming these abuses. But if it does not, then 
we would certainly support the Congress if it decided to set a 
national standard.
    Chairwoman Maloney. Ms. Braunstein?
    Ms. Braunstein. The Board has not taken a position on a 
Federal preemptive standard at this time.
    Mr. Antonakes. We could support a Federal preemption 
standard again as long as the standard was set high enough and 
allowed for State enforcement.
    Chairwoman Maloney. The Chair recognizes Judy Biggert of 
Illinois for 5 minutes.
    Mrs. Biggert. Thank you, Madam Chairwoman. We are having a 
lot of discussion in Illinois, particularly in the Chicago 
area, about this issue. I think the papers describe one woman 
who received a mortgage for $3,800 a month while she only 
brought in $2,600 a month. So obviously before the mortgage was 
even consummated, she was behind in the payments, on the 
promise by the broker that the payments would be lowered as she 
went along. Obviously, there was a foreclosure.
    One recent law in Illinois was put in that said that in 
certain zip codes in Cook County, there would be mandatory 
counseling on mortgages if your credit score was below a 
certain level. And everything, I think, has unintended 
consequences. What happened there was that in the area they 
were worried about racism, that was something brought up. And 
they were also worried that lenders were leaving those zip 
codes and going other places. So the law is now out for public 
comment in all of Cook County, which surrounds Chicago, there 
would be mandatory counseling for everyone wanted a non-
traditional mortgage, regardless of their credit score, that 
they would have to go to mandatory counseling.
    Now, I believe in financial literacy, but I think that this 
is carrying things to an extreme, for anyone who ever wants a 
non-traditional mortgage. And in the zip codes there had been a 
high percentage of foreclosures and a large percentage of high-
risk mortgages that were applied for. So I would just like to 
ask two questions. One, what would you think of such an idea? 
And, two, what should a lender do when there, when they know 
that there is going to be a foreclosure and somebody is in 
trouble and a lot of these will not refinance? Let's start with 
you, Chairman Bair.
    Ms. Bair. Well, I am not sure, you mean my view on the idea 
regarding counseling for non-traditional mortgages?
    Mrs. Biggert. Yes.
    Ms. Bair. I think that the lender needs to have the 
obligation to make a determination that the borrower has the 
capacity to repay, and I think if you have that kind of good 
underwriting, a lot of these other problems go away and it does 
not sound like that was done in the case of your constituent. I 
think we need to be very careful when we start saying that 
subprime loans will have certain requirements and not prime 
loans because I think you do have a potentially discriminatory 
impact, and I think that is to be avoided. A lot of these 
products are very complex, no matter how much financial 
education, and a lot of typical homeowners are not going to 
understand them. That is why I think the lenders who are 
offering these products need to have the onus on them to 
qualify the buyer so that they have a product that they can 
    Mrs. Biggert. Would anybody else like to address that 
    Mr. Reich. Well, I would certainly say that I think the 
notion of having counseling available is excellent but 
mandating it would be something that I would be uncomfortable 
with. With regard to foreclosures, as you mentioned near the 
end of your remarks, that the impact of foreclosures and what 
can financial institutions do, we have been encouraging our 
institutions, and I think to some extent perhaps all of us at 
the table have been encouraging our institutions to work with 
borrowers to try to prevent the foreclosure process through 
extending payments, re-writing the obligations in a 
satisfactory underwritten matter, similar to as we did 
following Katrina with our institutions in Louisiana and 
Mississippi, we encouraged their institutions to be 
understanding and proactive in trying to help people resolve 
their problems and that is what we are trying to do today.
    Mrs. Biggert. Thank you.
    Ms. Johnson. I would like to add that the counseling is a 
big part of the educational process for many of the credit 
unions. They are working with NeighborWorks America and with 
other organizations and groups out there where counseling 
actually is a part of the process. Understanding that stack of 
paperwork before signing on the dotted line is important and if 
the consumer is educated on the front-end, exactly knowing how 
those payments may have an opportunity should the interest 
rates rise, etc., will make a better consumer and it is good 
for the institution as well. So I do not know as far as 
mandating it, but I would certainly heavily encourage it.
    Mrs. Biggert. Thank you.
    Chairwoman Maloney. Carolyn McCarthy of New York?
    Mrs. McCarthy. I thank you. One of the things that I am 
curious about, I did not hear it in any of the statements, what 
is in place to penalize those who abuse the system and 
basically make these loans to people that they cannot repay? Is 
there anything in place, are they fined? Some of them are not 
licensed so they cannot lose their license. It goes back to the 
other question that one of my colleagues mentioned, that he 
just goes to another State. So I am just curious, what is the 
penalty for making these kind of loans?
    Mr. Antonakes. In the Commonwealth of Massachusetts over 
the summer, we did a sting of approximately 100 mortgage 
brokers that were primarily servicing low- and moderate-income 
areas, and we focused primarily on the issue of stated income 
loans and to the extent that we could document evidence that 
income stated on these loans had been, in fact, inflated. The 
net result of our examinations where we issued cease and desist 
orders, essentially shuttering, I believe, nine brokers, 
putting them out of business, fines were involved, and we have 
made referrals for appropriate criminal action to our State 
attorney general who will be looking to follow up.
    Mrs. McCarthy. What kind of fines?
    Mr. Antonakes. The fines were in the hundreds of thousands 
of dollars. The primary issue for us was--
    Mrs. McCarthy. Did they pay the fines?
    Mr. Antonakes. We have had some pay the fines and others--
    Mrs. McCarthy. Some paid?
    Mr. Antonakes. The ones that we allowed to continue in 
business under very different structures paid the fines, others 
were--and those cases involved only a very individual rogue 
employee versus a systemic issue. The ones with systemic issues 
are concerned with shutting those companies down and not 
allowing them to do business any further in the commonwealth 
and where appropriate we believe we have made referrals to 
again our State attorney general, who we will hope will 
prosecute in what we would believe would be a firmer resolution 
at the end of the day.
    Mrs. McCarthy. So with Massachusetts particularly, there is 
absolutely no reason for these brokers who are out there to 
actually stop, is there? No answers?
    Ms. Bair. We regulate banks but we do have regulations and 
supervisory guidelines pertaining to the relationship of the 
bank to the mortgage broker.
    Mrs. McCarthy. What happens to the big guys?
    Ms. Bair. We bring enforcement actions, we issue cease and 
desist orders. There can be significant financial penalties as 
part of our regulatory authorities but we can only indirectly 
impact mortgage broker activity through the relationship with 
the bank.
    Mrs. McCarthy. Over the last 6 years that we have been 
talking about this issue, would you say that a lot of them have 
been prosecuted or fined? I know I am still seeing it in my 
district. I have a very large minority district. I certainly 
have brought in a lot of the financial institutions to educate 
my constituents and consumers and that is great. A lot of them, 
unfortunately, do not come to the meetings to learn about it 
and to hear about it. I have a group that I work with, the 
Community Development Institute of Long Island, and basically 
they look for people who want to buy a home. Certainly they 
would be those who are not qualified to buy a home but they 
have to go to school. And my colleague, Ms. Biggert, was 
talking about it where it is mandatory; this is not mandatory. 
Well, for them it is mandatory because if you want the loan, 
you have to go through schooling because one of the things no 
one ever talks about, some banks do, a lot of them do not, what 
are the taxes going to be, what are your utilities going to be? 
It is one thing to say you have a mortgage there, what is your 
insurance going to be? You hold those things up and most 
people, a lot of people would not be able to afford that. 
Should that not be into the education of the consumer when they 
are trying to take out a loan?
    Ms. Bair. Well, our guidance specifically requires lenders, 
when they underwrite the loan, to take into account taxes and 
insurance as part of the underwriting process. It is not just 
the principal and interest, it is the taxes and insurance as 
well. And, yes, I have heard anecdotal reports of situations 
where that underwriting does not reflect taxes and insurance 
and you end up with these kind of serial refinancing situations 
where every time the tax and insurance comes due, you have a 
situation where the borrower has to refinance.
    Just getting back to your original question as well, I 
would point out that under Unfair and Deceptive Acts and 
Practices authority under the FTC Act, the FTC can bring 
actions though they obviously have limited resources. State AGs 
as well, under State laws prohibiting unfair or deceptive acts 
or practices, can bring actions addressing the type of conduct 
that you mentioned.
    Mrs. McCarthy. I guess what boggles my mind is that, and 
probably because we sit on this committee, when you look at--on 
TV, they advertise constantly you can refinance your mortgage 
for 4.2 percent. I yield back my time.
    Chairwoman Maloney. Patrick McHenry of North Carolina?
    Mr. McHenry. I thank the chairwoman. I want to thank the 
panel for being here, as well. Ms. Johnson, at NCUA, in your 
testimony you said that--you cited some stats on fixed rate and 
adjustable rate mortgages for credit unions and you said 68 
percent of credit unions are for mortgages of some size or some 
scope. To what extent do credit unions make subprime or non-
prime loans?
    Ms. Johnson. Congressman, thank you, that is a good 
question. Sixty-one percent of the loans are fixed, that leaves 
39 percent adjustable. In our current 5300 Report, we have not 
been separating out the exotics in the subprime. We have 
changed that reporting method and starting with this quarterly 
report, we will now be able to measure that directly.
    Mr. McHenry. So you do not know?
    Ms. Johnson. Our educated guess is that it is less than 1 
percent. It is very low because the overall numbers for credit 
unions are very low.
    Mr. McHenry. But there is no way to know, you do not have 
any data?
    Ms. Johnson. We will shortly.
    Mr. McHenry. But the answer is, no, we have no data. Okay, 
thank you.
    Ms. Johnson. But I think it is important--
    Mr. McHenry. I would suggest to you that perhaps these non-
traditional loans, non-prime loans may help serve your mission 
to help the underserved. Further, Mr. Reich, with OTS, is it 
true that many of the foreclosures and delinquencies we are 
seeing are a result of mortgage fraud?
    Mr. Reich. It is true that mortgage fraud has become a 
significant problem, yes.
    Mr. McHenry. Do you have any statistics?
    Mr. Reich. I do not have data, I will be glad to get back 
to you in writing if we have data available.
    Mr. McHenry. I would certainly appreciate that. That is 
what I am trying to get at is what portion of foreclosures and 
delinquencies are due to actual fraud because that is certainly 
a problem in the marketplace. And rather than simply blaming 
the lender, let's also look at the borrower, perhaps they have 
some burden here as well.
    Additionally, we talked about a number of things here 
today. The OCC, Mr. Rushton, you testified that national banks 
are about 10 percent of the subprime market, is that correct?
    Mr. Rushton. Yes, less than 10 percent of the new 
originations last year came from national banks.
    Mr. McHenry. Is that based on volume or dollar?
    Mr. Rushton. Dollar amount.
    Mr. McHenry. Dollar amount?
    Mr. Rushton. Yes, sir.
    Mr. McHenry. Okay, do you have any statistics on actual 
percentage of originations and numbers?
    Mr. Rushton. The total dollar amount was about $60 billion 
in subprime loans, a little bit less than that in Alt-A loans 
that are below prime but not subprime. Combined, they come out 
to about 16 or 17 percent of all of the below-prime loans that 
were made in the system last year.
    Mr. McHenry. Certainly. Mr. Reich, you also testified that 
you have seen this economic cycle 6 times, I think that is a 
fascinating amount of experience you have. And you said 13 
percent of the national mortgage debt is within subprime?
    Mr. Reich. That is correct.
    Mr. McHenry. Okay, so what I have been hearing today is 
dealing with 13 percent of the mortgage market. What I would 
ask the whole panel, could you say yes or no, is the mortgage 
marketplace working, meaning supply and demand, is that 
functionally in the marketplace? What we have it seems now in 
the mortgage marketplace nationally with record homeownership 
is that there was a large amount of credit that was available 
because people were willing to take higher risks with the 
possibility of return for that risk. And then in reaction to 
that, with the changing economy, the actual mortgage market is 
constricting. So if we could just go quickly, I do not have 
much time left, to simply say whether or not you think it is 
actually functioning, the mortgage marketplace is actually 
functioning, just yes or no or perhaps--with my colleague from 
North Carolina, I realize that many of you will say ``maybe'' 
or something long-winded, if I could just get a ``yes'' or 
``no'' out of you or you could just simply say, ``Pass.''
    Ms. Bair. I would have to say on a macro-level, yes. But on 
a micro-level for individual families, no, for a lot of them it 
has not been working.
    Mr. McHenry. Mel, I think you are right about the panel. 
Number two?
    Mr. Reich. I would say yes. If I had the opportunity to 
clarify it, I would say that maybe for 15 percent of the market 
it is not working as smoothly as it should be.
    Ms. Johnson. I would say yes. In fact, we encourage credit 
unions to try to assist their subprime borrowers and make a 
difference between subprime and predatory lending. A lot of 
subprime borrowers out there need to be in a home as well and 
it can be done with proper due diligence.
    Mr. Rushton. We say yes, and we believe it will correct 
itself as it has in prior cycles.
    Ms. Braunstein. I would say yes, but we do have concerns 
about those areas where it is not working as well as it should 
    Mr. Antonakes. Yes, but it can be improved.
    Chairwoman Maloney. The gentleman's time has expired. Mr. 
Clay of Missouri?
    Mr. Clay. Thank you, Madam Chairwoman. Let me start with 
Ms. Braunstein. In St. Louis, Missouri, it is predicted that 
almost 20 percent of all subprime loans will go into 
foreclosure. This problem that we have in the subprime mortgage 
industry is catastrophic. This did not happen overnight. The 
system has numerous fail-safes to detect such happenings and 
why is it that the Federal Reserve system did not see this 
coming? Why is it that our other agencies that watch or control 
banking and commerce did not see this coming? Was the problem 
one of not seeing a situation or in just not reacting? What 
happened and who dropped the ball?
    Ms. Braunstein. Congressman, actually, we did see that 
there were issues in these markets and we have been issuing 
guidance on real estate and subprime as far back as the 1990's 
to try to address the situations as we saw them. This recent 
phenomena that we are seeing right now, actually the downturn 
did not come until late 2006 so that is a fairly recent 
phenomena and as soon as we saw it, we did issue the new 
proposed guidance for subprime mortgages. So we have been 
taking actions all along and we have done a number of things 
with other guidance and regulations to try to address the 
    Mr. Clay. Let me go to Mr. Rushton, the Comptroller of the 
Currency. Ohio, which had the highest foreclosure rate in the 
Nation at the end of last year, plans to issue $100 million in 
taxable municipal bonds next month to help homeowners refinance 
mortgages. Proceeds from the bond issued by the Ohio Housing 
Financing Agency will finance 1,000 loans with a fixed rate of 
6.75 percent. The loans will be limited to homeowners with 
incomes up to 125 percent of the median income of their county 
and will take them out of their adjustable rate mortgages, 
interest-only mortgages, and avail them the opportunity to move 
into fixed rate mortgages. Is this a solution that can be used 
on the Federal level? What are the pros and cons of this 
solution on a nationwide basis? And can this work as an assist 
with other programs and solutions to avert home foreclosures?
    Mr. Rushton. What you have described sounds like an 
excellent solution in terms of a takeout program that will 
alleviate pressure on the borrowers in trying to find financing 
that is going to be very difficult for them to get. It is 
helpful in another very important way in that it gets around 
all of the restrictions that may apply to some of these loans 
that are now in securitizations or subject to other servicing 
agreements where the holders of the loans have not given any 
flexibility to work with the borrowers to help them out. Your 
program would get around that, and it sounds very good based on 
the parameters you have outlined. In terms of a more omnibus 
application of it on a Federal level, we would be delighted to 
work with the subcommittee in exploring that.
    Mr. Clay. Thank you for that response. Let me share with 
the panel a recent publication from the Sunday St. Louis Post 
Dispatch with the headline, ``Minorities Beware: Home Loans 
Reflect Bias.'' And this is a question for anybody who cares to 
take a stab at it on the panel. A recent study by the Center 
for Responsible Lending concluded that black borrowers are 3.2 
times more likely to receive a higher rate than white borrowers 
and the disparity decreases when adjusted for differences in 
credit scores, income, and other risk factors but significant 
differences remain. After adjusting for such traits, blacks 
were still 1.6 times more likely to get higher rate subprime 
loans than whites when purchasing a home and 1.3 times more 
likely in refinancing, Hispanics too. Tell me how do we address 
that? What do we do? How do we take the race factor out of home 
loans? And I am going to ask the next panel who comes forward 
also, but how would you address the race factor?
    Ms. Braunstein. One of the things that we are doing, and I 
think all the agencies do, is we conduct very robust 
examinations, fair lending examinations, in our institutions. 
We look closely at the data that comes out and when there are 
pricing disparities and we use that as an initial screen to go 
in and gather more information and do very thorough analyses of 
what lenders are doing in terms of pricing and who the loans 
are made to. If we find that they are making pricing decisions 
based on race, we will refer them to the Department of Justice 
and we have done so. And the problem sometimes is not all these 
loans--in the statistics you are reading, not all those loans 
are being made in the depository institutions that are being 
regulated and having robust fair lending examinations.
    Chairwoman Maloney. The gentleman's time has expired. Mr. 
Neugebauer of Texas?
    Mr. Neugebauer. Thank you, Madam Chairwoman. I kind of 
relate to what Mr. Reich said, I have been in the real estate 
business through most of those cycles and have some scars to 
show from it. One of the things I want to go back to is back in 
the 1970's when I was in the banking business and originating 
mortgages, we used--kind of the guidelines were set by the 
marketplace and that was Freddie Mac, Fannie Mae, FHA, and the 
PMI companies. In other words, you used their underwriting 
guidelines and that pretty much set the standard for the 
markets. And if you made a loan that was kind of outside those 
guidelines, and I was in the banking business at that 
particular time, we just knew that we were going to have to 
hold that loan in our portfolio. And so one of the questions 
that I have today is as we move down this road I think it is 
important to make the distinction between subprime lending and 
predatory lending, those are really two different issues, and 
we need to be careful here that we are not trying to fix one 
with the problems that exist in the other. But in your mind 
today with the sophistication of our financial markets, the 
fact that those four entities really do not control as much of 
the flow of the mortgage lending activity today, do you still 
think within the marketplace today there are enough market 
forces that we do not need to really start down the road of 
mandating what the criteria for mortgages are going to be? And 
I will start with you, Ms. Bair, and kind of run across the 
table there.
    Ms. Bair. Well, I think it is a very perceptive question. 
In securitization, most subprime mortgages are purchased by the 
so-called private label, the non-agency investors. There is a 
lot of liquidity these days and there has been an analysis 
suggesting that has played a role in the depressing of lending 
standards. When you were in the business, you held that loan in 
the books, you worried about whether it was going to perform. 
Now all the stuff can be sold off. We are having a 
securitization roundtable with OTS and OCC and the FRB on April 
16th, and one of the issues we are going to look at is the 
impact of securitization on underwriting and also going forward 
how to help people restructure loans so that they can get into 
a product they can repay and how we work with the investor 
community to accomplish that.
    Mr. Neugebauer. Mr. Reich?
    Mr. Reich. I am a little reluctant to see Congress become 
so prescriptive as to proscribe underwriting standards for 
various types of loans. I feel the same way frankly about 
regulatory agencies becoming overly prescriptive. That takes 
away the creativity for bankers to do what they do best in 
devising solutions for particular borrowers.
    Mr. Neugebauer. Thank you. Ms. Johnson?
    Ms. Johnson. Credit unions do use the secondary market, 
however, many of them retain the servicing, etc. However, 
credit unions are restricted in their investment opportunities 
and are restricted to highly rated securities so purchasing 
those is different for credit unions.
    Mr. Neugebauer. Okay, Mr. Rushton?
    Mr. Rushton. We would be a little wary about endorsing 
underwriting standards by the government, frankly, because it 
would be difficult to apply to the entities that have become 
preeminent in recent years. The reason that the GSEs have 
declined in importance is because the investment banks, 
including Wall Street firms, have been able to do this business 
themselves, and they are selling to investors who do not have 
the same interest at heart in terms of consumer protection and 
other risk considerations as banks do. If a standard could be 
written that could be applied to the Wall Street firms and 
other players equally, then we would probably support it, but 
we would be wary of doing that because you are essentially 
substituting Federal judgment for that of the willing borrower 
and lender and funder of the credit.
    Mr. Neugebauer. Ms. Braunstein?
    Ms. Braunstein. Yes, we would also be concerned about 
dictating underwriting standards. As I mentioned even in 
regards to using our HOEPA authority, we want to be very 
careful that whatever is done is not an overreaction to a 
specific situation and that it does not constrain responsible 
lending that is out there in the market.
    Mr. Neugebauer. Mr. Antonakes?
    Mr. Antonakes. Well, the Wall Street firms and 
securitization have resulted in a great deal of additional 
credit being made available but we cannot ignore the fact that 
they have also created the desire for a very high-risk product 
and the market is adjusting, but I would say a little too late 
and I do believe that the guidelines, as issued by the Federal 
regulators and the States, are essential in ensuring that 
tenets of sound underwriting are adhered to at all times.
    Mr. Neugebauer. I want to go back to Ms. Bair just for a 
quick--one of the things I was noticing that as this subprime 
thing started kind of unraveling, a lot of the repurchase 
agreements started being put back, and I guess from a 
regulatory standpoint, have you all been kind of reviewing not 
only the ability of the repurchasing folks, when banks or 
financial institutions are holding those for investment 
    Ms. Bair. There have been a lot of put-backs, and I think 
that is another area of concern. The representations and 
warranties part of these securitization agreements can 
sometimes be quite broad in enabling the securitization program 
to put the loans back and that is obviously a problem for us 
because they have not held capital. We have assumed those 
assets have gone. So, yes, it is another thing that we are 
looking at. We are concerned about it, we are tracking it, but 
at this point, I do not think that it presents a fundamental 
safety and soundness issue for insured institutions. It is 
certainly something we are very aware of and scrutinizing.
    Chairwoman Maloney. The gentleman's time has expired. Brad 
Miller of North Carolina, also a leader on this issue.
    Mr. Miller of North Carolina. Thank you, Madam Chairwoman. 
Mr. Rushton, you testified that the subprime mortgage lending 
market had made homeownership much more available, that many 
people could get into a first home as a result of subprime 
lending, which I do not doubt is correct, but the Mortgage 
Banker's Association's estimate is at 55 percent of subprime 
loans are refinances and only 45 percent are for the money to 
purchase homes with, is that correct?
    Mr. Rushton. I do not have any reason to disagree with the 
MBA's numbers on that.
    Mr. Miller of North Carolina. Okay, and their estimate is 
about one quarter of subprime loans to purchase a home or for 
first time purchases, does that sound correct?
    Mr. Rushton. Yes, sir.
    Mr. Miller of North Carolina. So it is about 11 percent of 
subprime mortgage loans are actually to purchase a first time--
    Mr. Rushton. If that is what the math comes out to.
    Mr. Miller of North Carolina. Okay. Do we have any data on 
the defaults and how much of the defaults are refinances, how 
many that are mortgages to purchase a home with, and 
particularly a first time?
    Mr. Rushton. That data may be available, sir, but I do not 
have it with me today. We would be glad to try to supply that 
to you.
    Mr. Miller of North Carolina. Okay, where is it available?
    Mr. Rushton. Back at our office.
    Mr. Miller of North Carolina. Okay, I would be very 
interested in seeing that.
    Mr. Rushton. Okay.
    Mr. Miller of North Carolina. And there has been a lot of 
assumption in the reporting on this question in the last couple 
of months that the defaults were mainly folks who were just 
spendthrifts who were buying more house than they could afford 
and could not pay their mortgages. Do you know if there was any 
information that shows that is in fact what is happening or 
people who got in trouble, the usual kinds--death, divorce, job 
loss, necessary home repairs?
    Mr. Rushton. The precise reason that a borrower develops 
financial problems is not something that we track, but we can 
try to run that down.
    Mr. Miller of North Carolina. Okay. Just to pick on 
somebody different, Ms. Bair, Mr. Clay asked about the OMDA 
data which shows that about 17 percent of white families who 
are borrowing for mortgages, we are not talking about all 
borrowing, we are talking about mortgage borrowing, which is 
something that is usually more restricted to the middle class 
or in subprime loans but almost half of Latinos and more than 
half of African American families. The Center for Responsible 
Lending has analyzed that further and found that every other 
objective criterion went into value assets, income, credit 
history, everything else, even when that is taken into account, 
there are still substantial disparities, is that consistent 
with your own observation?
    Ms. Bair. Yes, we are very concerned about this and have 
addressed it in the draft subprime guidance that is out for 
comment now. Some of the lending analyses we have been doing on 
subprime mortgages that have been securitized, which is most of 
them, show that there is a big percentage, I think 14 percent, 
where the FICO score was actually over 700.
    Mr. Miller of North Carolina. Right.
    Ms. Bair. Which leads you to wonder, why is this person in 
a subprime loan?
    Mr. Miller of North Carolina. But Freddie Mac, I think, 
estimated a couple of years ago that 25 percent of the subprime 
mortgages they purchased were from borrowers who qualified for 
the bond market.
    Ms. Bair. There is a problem that borrowers are not 
referred up. A lot of lenders just specialize in subprime so if 
they qualify a person, that is the product that they do instead 
of referring him to the prime products.
    Mr. Miller of North Carolina. And that is, in fact, 
something that Ms. Braunstein also raised, so perhaps both of 
you, one thing that I have heard argued is that African 
Americans are simply choosing different mortgage products, and 
I have some difficulty imagining an African American homeowner 
walking into a financial institution, a lender of any kind, and 
saying, ``Can I get a 2/28 mortgage with a teaser rate that I 
can qualify for but an adjusted rate I cannot possibly pay and 
a 4 year prepayment penalty.'' Do you really think that African 
Americans are consciously choosing different mortgage products, 
either or both of you but you can go first, okay?
    Ms. Braunstein. I do not know that it is a conscious 
choice. What we heard, in fact, in the hearings that we did 
over the summer anecdotally and what we have seen in 
conversations is that there is an enormous amount of push 
marketing that goes on in minority neighborhoods where the 
purveyors of these subprime mortgages are very actively 
involved in marketing and that same level of marketing does not 
go on by prime lenders.
    Mr. Miller of North Carolina. Ms. Bair?
    Ms. Bair. I was just going to say I think this is a broader 
problem--minorities more frequently having high-cost products. 
We have created an Advisory Committee on Economic Inclusion and 
we are trying to look at this broader issue. We want to 
understand why banks are not in there more and to what extent 
we can get mainstream prime bank lenders to do more aggressive 
marketing and servicing in these communities. I think a lot of 
this is being driven by the lender, not by the borrower, and we 
would like to see if we can get banks reaching out more to 
these neighborhoods.
    Chairwoman Maloney. The gentleman's time has expired. Mr. 
Price of Georgia.
    Mr. Price. Thank you, Madam Chairwoman, and I want to thank 
you also for holding this hearing. It is an important area, one 
that in my home State of Georgia we have dealt with for a 
number of years, serving in the State legislature we had some 
interesting challenges a number of years back, as some of you 
may recall. I have had some conflicting meetings this morning, 
and I apologize. I want to thank each of you for coming and I 
have read significant portions of your testimony, and I 
appreciate the perspectives that you bring to the table. I do 
not want to repeat specific questions that were asked, and I am 
sure they have been and I will review the record for that. But 
I would like us to step up kind of to the 30,000 foot level, my 
understanding is that each of you have stipulated here today 
that you believe that the mortgage banking system is working in 
our Nation right now and obviously I guess the correlate of 
that is it is accomplishing some good for the majority of folks 
who are accessing that system. I think the big question is 
whether or not the Federal Government has a further role in 
defining what ought to occur or whether the guidelines in the 
regulatory apparatus that we have in place right now are 
capable of correcting whatever ill view we, anybody believes is 
in place or has occurred over the last couple of years. So my 
question, and coming from a firm sense of belief that the 
Federal Government is relatively incapable of being flexible in 
promoting or providing guidelines for any industry, I would ask 
each of you just the general question whether or not you 
believe that the current system we have in place, the 
regulatory system we have in place, is capable and will in fact 
correct the system or correct any ills that have been alleged 
or whether you believe that further action by the Federal 
Government in this specific area is helpful for our overall 
system. And if we could start, Mr. Antonakes, at this end and 
kind of head on down, I would appreciate it.
    Mr. Antonakes. I do believe the constructure of regulation 
will appropriately deal with these issues, and I do believe, 
that being said, that within the States we can coordinate and 
do a better job, and with the States and the Federal Government 
we can coordinate and do a better job. I think that will result 
in even more effective supervision of really every entity 
involved in the transaction, including the broker, the lender, 
the funder, and then the securitization process as well.
    Ms. Braunstein. At this time, we do not see a need to ask 
Congress for additional authority or additional legislation. We 
think that what is there now is appropriate and can deal with 
the situation.
    Mr. Rushton. We agree. We believe the non-traditional 
mortgage guidance the agencies issued in October, as well as 
the subprime guidance that we now have out for comment, 
uniformly implemented by all regulators, along with the natural 
operation of the market, is all we need right now. We do not 
think we need anything else.
    Ms. Johnson. If you believe that consumers are better off 
with traditional mortgage products and traditional type loans, 
there is one area where Congress could facilitate with the 
credit unions when we are talking about the underserved areas 
and the minority population in particular. All credit unions 
are not able to adopt underserved areas, and I think credit 
unions are a traditional federally-regulated institution that 
could reach out to this population in particular and help in 
the subprime are. We encourage with due diligence credit unions 
to make these types of loans to help people get into 
homeownership so that is one thing that needs to be or could be 
changed with the statute.
    Mr. Reich. The market is in the process of correcting 
itself. We have issued guidance for comment, expiring May 7th. 
Many subprime lenders have exited the business. The liquidity 
for subprime lending has essentially dried up and so I think 
largely the market is in the process of correcting itself. 
Having said that, there are a number--there are probably a 
number of borrowers who are going through foreclosure who are 
not going to benefit from the guidance that is proposed.
    Mr. Price. If I may, that skirts the question a little bit 
in that the market is correcting itself, but do you--and I do 
not want to minimize the number of foreclosures out there 
because for each of those families obviously it is a 
significant trial. Do you believe that any changes should be 
put in place to prevent the next cycle that might result?
    Mr. Reich. Well, I have expressed some support for Congress 
to take our guidance on subprime lending and make it a standard 
that would apply to all lenders beyond insured institutions.
    Mr. Price. I appreciate that. Madam Chairwoman, may I get 
one brief comment from Ms. Bair?
    Chairwoman Maloney. The gentleman's time has expired and 
she has spoken on this already several times.
    Mr. Price. Thank you.
    Chairwoman Maloney. David Scott of Georgia?
    Mr. Scott. Thank you very much, Madam Chairwoman. If we 
look at the situation as we have it now and with a lot of the 
testimony that is going forward, with the surveys that have 
come out by Bankrate.com on Monday, and with the fact that I 
represent the State of Georgia, which has the third highest 
foreclosure rate, with the fact that within the next 24 months, 
2.2 million homeowners will go into foreclosure and the fact 
that in addition to that, Mr. Greg McBride, who is the senior 
financial analyst of Bankrate.com in the survey points up this 
salient fact, that the greatest concern that we, and I say 
``we'' in the financial service industry have, of which we in 
the financial service industry are victims of is the 
complexity, the confusion, the culture, and the language of the 
financial services area is so confusing that as Bankrate says 
40 percent of all the homeowners in America, prime and 
subprime, do not even know what they have signed. So it says to 
me with this information that as we move forward on this issue, 
one of the most important parts of our legislation should be 
and must be a major offensive on financial literacy and 
financial education, which to me is the greatest way in which 
to solve this problem because the major concern is how do we 
come up with that delicate balance with which we would be able 
to put forward legislation that is not so overreaching that it 
will dry up the credit for an underserved population which 
basically has been aptly described, African Americans, the 
elderly, the poor, which are targeted. This is a targeted 
phenomena by people who, some legitimate, some bad actors out 
there, but there is a predatory lending class of people who 
target this. So the point I want to say going forward is my 
hope is that we will make sure this legislation going forward 
has a major component piece in it that is a serious financial 
literacy piece that is targeted at African Americans, it is 
targeted at the community that the predators targeted because 
if the financial services industry, and especially those 
dealing with mortgages and real estate, the banking 
communities, if you do not make sure of this, we may very well 
have to revert to an overreaching legislative piece. So I want 
to make this urge that we have it and that we have a toll free 
number in, that we have human beings at the end of the phone, 
that we have it structured as an infrastructure within the 
Treasury Department where we really take it serious, where we 
put money and resources into the grassroots community, into the 
AARPs, into the NAACP, into those groups that have the 
legitimacy, into the church community, where people who are 
being targeted listen to. And if we get nothing out but one 
message, before you sign on the dotted line, call this number, 
talk to somebody because if Bankrate.com is right in its 
survey, we have a major, major problem of a lack of a financial 
education and financial literacy for a hugely growing amount of 
    Now with that said, my commercial for financial literacy 
being said, it concerns me that when Chairman Bernanke, head of 
the Fed, came before this committee a few weeks ago and was 
asked about this question, he used some very rarely used strong 
language from the Fed in regarding any aspect of the economy, 
he used the words ``concern'' and ``unease,'' and ``very 
concerned'' to describe his thoughts on the subprime lending 
situation. Now, as head of the central bank, these are words 
that are used, as I said, sparingly and very often never but do 
his words of concern and urgency create additional concerns 
that this subprime meltdown will create broader credit crunch 
were the subprime problem spread to the prime mortgage industry 
and even further into corporate credit?
    Mr. Hensarling. I thank the Chair. I think I heard 
earlier--say something along the lines that our mortgage 
markets are by and large working today or at least perhaps 
roughly 85 percent of the market. Is that a correct assessment 
of what I heard earlier?
    I think at least I heard you, Mr. Reich, say that at least 
as of now in your opinion with respect to some of the subprime 
foreclosure issues that are the focus of this hearing, that the 
market is essentially correcting itself. Is that correct?
    Mr. Reich. Well, I indicated that as a result perhaps of 
the guidance that the regulators have issued, that liquidity 
has dried up, a number of lenders have exited the business.
    Mr. Hensarling. Which I understand doesn't help you if it's 
your home that is actually on the list to be foreclosed. I am 
constantly reminded of an aspect of the Hippocratic oath, and 
that is, ``First, do no harm.''
    Now for roughly 85 percent of the market it has worked 
well, and in some respects if the market is beginning to 
correct itself, I just want to make sure that as a Congress we 
do no harm, since we all are aware that we have the highest 
rate of homeownership that we've ever enjoyed in the Nation's 
history. And at least some of that, I assume, is attributable 
to subprime lending and creative mortgage products.
    I want to ensure that we protect consumers from fraud. I 
want to ensure that we protect consumers from either misleading 
or ineffective disclosure, but I'm not really sure I want to 
protect consumers, an informed consumer, from making a decision 
that may be a foolish decision because if I circumscribe his 
opportunities then I'm doing it for everybody else in the 
    And I would like to follow up with some comments on the 
line of questioning from the gentleman from Georgia over here, 
Mr. Scott. We haven't agreed a lot recently, but we certainly 
agree on this. And that is a lot of the disclosures that we see 
in these real estate transactions can be highly misleading 
using a jargon that many consumers do not understand.
    And I myself, my wife and I, closed on a condo here in 
Northern Virginia 2 years ago, and I signed a dizzying array of 
disclosure statements, none of which I understood. And believe 
it or not, I'm an informed lawyer, and if I don't understand 
it, I'm not sure how anybody else is going to understand it.
    So my first question is, to whoever wants to take it, what 
can we do to make disclosure more effective, and in some cases 
isn't less more? Whoever would care to take that one, that ball 
is up in the air.
    Ms. Braunstein. I'll take the first shot at that. Since we 
are the rule writers for the Truth in Lending Act, which 
controls the mortgage disclosures, it's not everything--people 
often think that everything you get at settlement comes out of 
Federal disclosure laws, and that's not really true. There are 
really only a few pieces of paper that are involved with the 
Federal laws. The rest of it are other things.
    But we are engaged in an effort to look at all the mortgage 
disclosures that are required by the Truth in Lending Act and 
try to make them more understandable. We agree with you that 
they are not optimum at this time. We are planning to engage in 
consumer testing and focus groups. We have gotten away from the 
idea that used to exist in the olden days which was that 
lawyers sat around in a room and developed consumer disclosures 
which ultimately, at the end of the day, the only people who 
understood them were other lawyers, and obviously not always 
even other lawyers.
    Mr. Hensarling. Well, I commend the effort. I think it is a 
good one, and I think somehow simplicity of disclosure, more 
effective disclosure, what Mr. Scott was speaking of, more 
effective consumer financial literacy is at least part of what 
it's going to take to help remedy this situation.
    And I have another question, and that is listening to some 
people engaged in this debate we seem to be going down--in some 
respects some people seem to be going down what I consider to 
be a slippery slope of only having the lender decide on the 
suitability of a credit product, and that if for some reason 
the lender chooses the wrong credit product then all of a 
sudden liability will attach to the lender.
    It seems to me that a lot of the major players in the 
market if that were true would simply become risk adverse and 
begin to exit this market. And then all of a sudden millions of 
Americans who would have had homeownership opportunities would 
be denied those opportunities. Do you agree with that 
    And once again the ball is up in the air, since I only have 
time for one answer, I assume. Ms. Bair?
    Ms. Bair. Well, I think borrowers should have the ability 
to repay. It's an age old underwriting standard, and banks 
certainly are very familiar with underwriting to make sure that 
when you qualify a borrower for a loan, that borrower should 
have the ability to repay the loan.
    I don't support a suitability standard. I think that's a 
securities concept. I'm not sure it applies. I think it would 
be confusing and could create a lot of uncertaintly. If we're 
talking about ability to repay, I think some people confuse the 
two. I do think we should have an ability to repay standard. 
That's been around a long time. It's just a commonsense 
    Mr. Hensarling. Thank you.
    Chairman Maloney. The gentleman's time has expired. Emanuel 
Cleaver from Missouri.
    Mr. Cleaver. Thank you, Madam Chairwoman. Can I find out 
first of all those of you who agree--I'm following up on the 
questions and comments of my colleagues, Mr. Miller and Mr. 
Scott. So can I find out those of you who agree that there is 
in fact marketing of subprime loans in African-American and 
low-income neighborhoods? Do all of you agree? Is there anyone 
who does not agree?
    What kind of action do you think we should take if we 
discover that there was advertisement going on in a particular 
neighborhood for joggers to start running in a particular area 
of the city and if they were just given an avalanche of 
information, flyers about jogging in this area and when they 
jogged in the area they were mugged. Do you think that the free 
market system should allow us to continue to allow pamphlets to 
be distributed in this neighborhood about coming to another 
area where they would be mugged or whether something should be 
    Actually, we're talking about mugging here anyway, 
financial mugging, so I'm trying to figure out what you think 
should be done. Did you understand the question? Did you 
understand the illustration about passing out leaflets in the 
neighborhood to get people to come jog in an area and they 
would be mugged when they get into the area? Is there anybody 
who doesn't understand it?
    Ms. Johnson. Congressman, we believe that credit unions can 
actually do a very responsible job of subprime lending, 
separating subprime from predatory lending. There's a need for 
subprime lending. And again I would say that something that 
would help would be allowing all credit unions to adopt 
underserved areas so that those consumers would have access to 
another traditional type of financial institution.
    Mr. Cleaver. Okay. Why do you think the marketing is going 
on in African-American and low-income neighborhoods?
    Ms. Braunstein. I think that oftentimes there is a 
perception that borrowers in those neighborhoods are more 
vulnerable and that this obviously was a way of generating 
income on the part of the people doing the marketing--
    Mr. Cleaver. Mugging, mugging.
    Ms. Braunstein. And I think that there are a couple of ways 
that we can address that. It's difficult to stop people from 
marketing in a neighborhood. However I think, as the 
Congressman from Georgia said, financial education is 
incredibly important for consumers, and we have also tried to 
encourage prime lenders to be more assertive in those 
    Mr. Cleaver. Is there anyone who disagrees that there's 
financial mugging going on directed toward particular 
    Mr. Reich. I don't doubt that it may be occurring, and to 
the extent that it is a result of actions by insured 
institutions who are supervised by the regulatory agencies 
sitting at this table it will stop as a result of the proposed 
guidance, which is out, when that guidance becomes effective, 
when institutions are forced to make their loans based upon the 
abilities, the individual's ability to repay the loan.
    Mr. Cleaver. Would that include prepayment penalties that--
    Mr. Reich. We have addressed the subject of prepayment 
penalties in the guidance also.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    Chairman Maloney. Congressman Campbell from California.
    Mr. Campbell. Thank you, Madam Chairwoman. I've listened to 
a lot of discussion about the difference between predatory and 
subprime, but what I wanted to talk about a little bit is the 
differences between predatory and poor predatory practices and 
poor underwriting.
    The conditions which have caused this hearing to occur 
today, my perception is that what has been going on is much 
more attributed to just flat poor underwriting than it is to 
predatory practices. And part of the reason I would say that, 
and then I'll ask you all to comment on whether you agree with 
that or disagree with that, one of the things we've heard a lot 
about is we have a number of these loans out here where the 
first payment hasn't been made.
    Well, if the first payment hasn't been made, that's really 
bad underwriting but almost certainly not predatory. In a lot 
of cases there's bad underwriting but the people have a good 
interest rate and everything else. They just--nobody should 
have made them a loan because they just weren't in a position 
to pay it back. So do you agree that that's really where the 
issues are?
    I'm not suggesting there's no predator. I mean obviously 
I'm not suggesting that. I'm just suggesting that what there's 
been a lot of lately that perhaps has occurred--gotten to the 
problem that we're in.
    Ms. Braunstein. I think it's been a combination of lax 
underwriting, and there also are instances, I'm sure, of 
predatory lending. I think it would be very difficult to 
separate and quantify how much of which was going on.
    Mr. Campbell. But they are very distinctly different 
practices. I mean arguably predatory, the lender is taking 
advantage of a potential borrower and making a lot of money on 
them. With bad underwriting the lender is going to lose money 
because--if they make too many loans that people can't pay 
    Ms. Braunstein. Well, no. I think there's a lot more 
overlap than that because even with lax underwriting if there 
were initial fees up front the lender still is going to make 
something on the front end. So I think there's a lot more 
overlap between predatory and just bad underwriting, and 
there's probably some of both in this market.
    And as I said, I think it would be very difficult to 
separate it.
    Mr. Campbell. Anybody else wish to comment on that? Yes.
    Ms. Bair. You know, I think you're right. There is a 
difference. I think we were focusing on predatory lending 
because it's the subject of the hearing as indicated in the 
invitation letter. Getting back to mortgage fraud, too, another 
area that we address in the draft subprime guidance, these no-
doc loans or low-doc loans which--and we say in the proposed 
guidance--in and of itself is not a mitigating risk factor. I 
think a lot of the early payment defaults, potential mortgage 
fraud, there is a correlation between no-doc, low-doc loans and 
these payment defaults. So that's probably near where we're 
talking more about poor, very poor underwriting versus 
something--there may not be a balloon at the other end that we 
need to be concerned about--but there still is a problem with 
the underwriting.
    Mr. Campbell. Anybody else wish to comment on that? No?
    Okay then one of my concerns on this, Chairman Bernanke of 
the Federal Reserve, when he was here, was indicating that one 
of the--I think he indicated that the greatest risk factor to 
recession this year was if housing were to take a hard fall.
    The object of what we're doing here, I hope, is to solidify 
subprime mortgage lending and not dry it up because if we dry 
it up, I think we could potentially put a bunch of houses on 
the market, take a bunch of buyers out of the market, and 
potentially create something that drastically hurts the 
    Another figure that's been out there lately has been, I 
think, the 13.7 or 13.8 percent, something like that, of 
subprime loans which are currently behind in payments. I 
frankly can't recall whether it's 30 days, 60 days, or 90 days.
    If that's the case though, it does mean that 86 percent of 
these people with--it wouldn't be subprime if the credit 
weren't marginal. So it does mean that 86 percent of these 
people with marginal credit because of the subprime market have 
been able to buy homes whereas without the subprime market they 
wouldn't. Any comments on the loan--because obviously in a 
subprime you're going to have a higher loan default ratio than 
you are in a prime market or in the A-whatever-it-is market 
that's in the middle.
    Any comments on whether that--it's obviously higher than it 
was, but is it way too high on a historic basis?
    Ms. Bair. Well, it is high. Historically, they have been 
higher, but we're seeing a strong correlation between payment 
resets and home price depreciation in areas with these default 
rates. And the adjustable rate products have significantly 
higher delinquency rates than the fixed rate products.
    The problem is to help people restructure into a product 
that they can afford. One thing we've been looking at is 
whether we can transition borrowers into fixed mortgages, and 
that might be the silver lining in all of this. We've been 
doing analysis of the rate sheets of the major subprime 
lenders. The rate for their 30-year fixed is actually only 40 
to 50 basis points higher than the starter rate on the 2/28 
which a lot of these people are in.
    So we're thinking that if you can qualify borrowers for a 
2-year starter rate, you can qualify them for a 30-year fixed. 
And we're hoping that perhaps as these interest rates reset, 
and people have to refinance, we can get more people into 30-
year fixed that would not have the payment shock.
    Chairwoman Maloney. Time has expired. There have been a 
number of issues raised about targeting vulnerable borrowers 
and I wanted to note that the subcommittee will be having 
hearings on this particular subject. The Chair recognizes 
Congressman Ellison of Minnesota.
    Mr. Ellison. Thank you, Madam Chairwoman. I wonder if, Ms. 
Bair, you could comment on how the clustering of a number of 
foreclosures that come about in connection with subprime loans 
impacts a neighborhood.
    Ms. Bair. Well, it could have a very negative impact on 
neighborhoods. I mean this is as I indicated in my statement, 
one of the reasons we support and endorse and promote 
homeownership and welcome it and subsidize it. I support all of 
this is because one of the many social benefits is that it 
stabilizes neighborhoods.
    If you have a series of people in a situation that their 
homes are going to be foreclosed, and they are in danger of 
losing their homes, that's a tremendous stress not only just on 
the family but on the neighborhood as well.
    Mr. Ellison. Does it have any other kind of spillover 
effects beyond just the physical reality of foreclosure? I mean 
what happens to these homes? Are they bought by other 
homeowners? Are they bought up by people who can buy them 
    Ms. Bair. I think the first choice is always to try to keep 
people in their homes, to try to undertake loss mitigation 
techniques to restructure the loan to keep them there.
    Yes, there are adverse economic effects as well. If we have 
a lot of foreclosures and a lot of housing stock going on the 
market, that could further depress a market that's softening in 
a lot of areas already.
    Mr. Ellison. Now what about those--I mean I'm glad that you 
pointed out that you try to get the bank to redo the loan with 
the borrower, but is that always possible? I mean what if the 
bank has sold that loan? Can they go back to the same bank 
where they got it?
    Ms. Bair. That is a problem. We're having a roundtable on 
April 16th with the representatives of firms that securitize 
these loans because there may be some issues about whether the 
terms of the securitization agreements may inhibit the ability 
to restructure. That's a key area that we're going to be 
looking into at this roundtable, so I don't have a good answer 
for you right now.
    Mr. Ellison. So for example if somebody--if a bank were to 
have sold that loan and it got bundled up and packaged with a 
bunch of other loans who then does the borrower go to and try 
to--is it--
    Ms. Bair. They would go to whoever is servicing the loan at 
that point. That would be the firm, the entity that would be 
getting the restructuring. But again, whether the servicer has 
the latitude to restructure the loan under the securitization 
agreement is what we need to deal with and we don't have a good 
answer. We think there is significant latitude, but that's one 
of the things we want to get into at our roundtable.
    Mr. Ellison. Another question I wanted to ask you, and it 
goes back to the gentleman who was asking a few questions 
before, just in terms of how people make money on these loans, 
if it's a broker, isn't it the case that they already have an 
incentive to make sure that the borrower is going to be able to 
pay the loans because once they do the deal they get their 
money and they're out? Is that right?
    So the question of whether it's bad underwriting or good 
underwriting or the quality of the underwriting, from a 
broker's standpoint, once the deal is done and their fees are 
paid it really doesn't matter whether it's a well underwritten 
loan or not. Am I right or wrong?
    Ms. Bair. Well, I think there are a lot of really good 
mortgage brokers out there who don't want to--
    Mr. Ellison. And I'm not trying to disparage mortgage 
    Ms. Bair. And I think the reputable mortgage brokers do 
worry about whether their loans perform in terms of maintaining 
a relationship with lenders. But there are--as Commissioner 
Antonakes has pointed out and others on this subcommittee--
significant problems with the conduct of some mortgage brokers. 
In that case, they are just trying to make a quick buck. You're 
    Mr. Ellison. Yes, and I guess whenever you ask a question 
there are the connotations of the question, and people try to 
control for those so they don't put anybody down, but leaving 
all the nice stuff aside, after the mortgage broker does the 
deal they're going to be the most reputable person on the 
Earth, but they have completed their work--
    Ms. Bair. No, they are not on the hook for that.
    Mr. Ellison. Right. Let's just talk about the loan officer 
a little bit. After the loan officer has--let's say they're the 
one who did the deal. After that loan is sold, they've made the 
money they're going to make out of it and they're done; am I 
    Ms. Bair. Yes.
    Mr. Ellison. So when it comes down to whether or not--so 
there really is a more serious problem than just whether--I 
mean they actually--in some ways there is an incentive to have 
loans underwritten in a way that facilitates the doing of the 
deal but not necessarily the paying of the mortgage.
    Ms. Bair. I hate to qualify, but I really do feel like I 
need to. I think lenders, responsible lenders, do worry about 
their reputations and their relationships with those who 
acquire their mortgages to keep this pipeline open. So I do 
think there's some reputational risk that serves as an 
incentive to have well performing assets.
    That said--
    Mr. Ellison. Ms. Bair, it sounds like you're saying that 
I'm wrong and that--
    Ms. Bair. You're not wrong.
    Mr. Ellison. Okay.
    Ms. Bair. There's no doubt that securitization has had an 
impact on the loosened underwriting standards we've seen by 
lenders. There's no doubt about it.
    Mr. Ellison. Thank you. So the answer is yes. There is an 
    Chairwoman Maloney. The gentleman's time has expired. Thank 
    Mr. Ellison. 30 seconds?
    Chairwoman Maloney. We're running out of time. We have two 
more speakers, Joe Baca of California and Al Green of Texas, 
and then we have to conclude this first panel so that we have 
time for the second panel.
    As I said in my opening remarks, we have a time limit on 
the amount of time we can be in this room and we need to have 
time for our second panel.
    Joe Baca of California.
    Mr. Baca. Thank you very much, Madam Chairwoman. Thank you 
very much for having this hearing. I think it's very important 
to a lot of us, especially what's going on nationwide.
    We realize the impact that it has on the poor and the 
disadvantaged, especially as it pertains to African Americans 
and Hispanics, so we appreciate having the hearing, and I 
appreciate the gentleman's question right now, and I wanted 
just to follow up a little bit with it.
    Is there a list of those who abuse the system right now, 
and maybe when we talk about an educational process that needs 
to be done, whether it's financial institutions, financial 
education? What we need to do though is those mortgage brokers 
that are abusing this system, we need to put out a list of 
those individuals so we can begin to educate our communities--
these are the bad lenders out here that are abusing the system, 
that are taking advantage of the poor, the disadvantaged and 
others who are just out to make a profit and they don't care 
about the individual in terms of the loans. That needs to be 
done, so I appreciate that.
    But I want to get back to a specific question. And I want 
to know the impact of subprime lending on Latino homeowners. 
What control will be put in place to protect consumers from 
predatory practices and especially how will you ensure that the 
exorbitant fees and rates associated with subprime practices 
will not occur with future borrowers?
    That is question number one. Any one of you can answer 
that, or Ms. Braunstein, would you please tackle that?
    Ms. Braunstein. Well, that was one of the reasons that we 
have issued the proposed subprime lending guidance was to 
address some of those issues about borrowers and hopefully--I 
think that guidance is already taking effect in the marketplace 
and will continue to.
    Mr. Baca. But how are we holding them accountable and what 
oversights are we doing on those individuals who continue to 
still give out the loans? So there has to be some 
accountability for those that continue to prey on the poor, the 
disadvantaged, especially when I look at Inland Empire, where I 
come from, there's a high number of foreclosures and defaults 
in my area. So we're not holding those individuals accountable 
yet we have people that are losing their homes. And this is for 
the very first time that they've bought a home, they maintain a 
home but they have some bad advice because someone wanted to 
take advantage.
    Ms. Braunstein. Most of the bad actors to which you refer 
are not in the depository institutions, which is who we 
regulate and supervise. If we find that there are practices 
that are illegal or fraudulent in our institutions we do take 
action, however a number of the actors in the market that we've 
just talked about are not being supervised directly by anybody.
    Mr. Baca. Who's responsible for supervising them?
    Ms. Braunstein. Pretty much the States.
    Mr. Baca. And why aren't they?
    Mr. Antonakes. Well, I beg to differ with my colleague in 
terms of them not being supervised. They are being supervised. 
And our database--
    Mr. Baca. If somebody is making the statement that they're 
not supervised, then there is a concern right here, and that's 
affecting us in our communities. If somebody is saying that the 
State isn't doing it and yet when you look at the foreclosures 
in each of the areas and its impact--and specifically when it 
has--and I'm concerned from the Hispanic perspective, the 
foreclosures and people that are losing their homes right now.
    Something needs to be done. There has to be the 
accountability. There has to be that oversight.
    Mr. Antonakes. I agree completely, Congressman. And I would 
only add that broker supervision largely falls to the States. 
Through our database we will have a collection of public 
enforcement actions against brokers. I would also add however 
that certainly the securitization of loans has created 
incentives for prudent underwriting standards to become lax and 
for brokers to push through loans.
    However those loans can only be pushed through if they're 
funded by someone, if there's a product available. The broker 
can't do that on their own. And that is done through other 
firms, lenders and national institutions and also provided by 
direct financing from companies from Wall Street.
    I would suggest--and we've done it in my State in 
Massachusetts many years ago--that if a bank has lines of 
credit with either a lender that is pushing through predatory 
loans or loans that aren't underwritten appropriately that the 
national regulator through the COA authority has a 
responsibility to take that into account, those practices. If 
they know that they're doing business with inappropriate 
lenders, then they should take action.
    Chairwoman Maloney. The gentleman's time has expired. Mr. 
Green from Texas.
    Mr. Green. Thank you, Madam Chairwoman, and I thank each of 
the witnesses for appearing today. In one of our great 
documents we connote, indicate if you will that all persons are 
created equal. Apparently something happens between creation 
and loan acquisition because for whatever reasons we are 
finding that invidious predatory lending impacts some ethnic 
groups more than others and the question really is what will we 
do about it.
    But before going to the question, let me just mention 
testing. Every time, every single time we have employed testing 
we have found that invidious discrimination exists, every 
single time. Given that we know that it exists, what have we 
been doing to combat it in terms of prosecuting persons? Can 
anyone comment, please?
    Ms. Bair. Again, we only regulate depository institutions, 
state-chartered depository institutions, in the FDIC's case. We 
identify outliers based on the HMDA data. We do very vigorous 
compliance reviews of the banks that are shown to be outliers 
under the HMDA data. We've referred cases already where we've 
identified a pattern or practice of discrimination to the 
Justice Department for prosecution, so we take it very 
seriously and we very vigorously examine for it.
    Mr. Green. How many cases have been prosecuted by the 
Justice Department in the last year?
    Ms. Bair. That I wouldn't know. We could try to find out 
for you.
    Mr. Green. Anyone have any information? Do you know how 
many within the last 5 years?
    Ms. Bair. We could contact the civil rights division of the 
Justice Department. No, we don't. I don't know off the top of 
my head, but we could try to find the information for you.
    You're interested in financial services areas, yes?
    Mr. Green. Yes, I'm interested in knowing what we actually 
are doing, given that we have empirical data to suggest that 
certain things are occurring.
    Ms. Bair. Right.
    Mr. Green. What are we actually doing about it?
    Ms. Bair. Well, the availability of HMDA data, to the level 
of detail we currently have, is relatively recent. We just 
began getting this level of detail last year, so our ability to 
use this as a tool is a fairly recent vintage.
    Mr. Green. Let me move on to something else. We have a 
number of families who will lose their homes and as a result 
they will have credit problems. What are we doing to give them 
an opportunity? Assume that you are foreclosed on, what are we 
doing to give them an opportunity to reenter the credit market 
and have another opportunity to own a home given that we know 
that we have a circumstance with the housing prices falling and 
with a lot of these loans being subprime? What are we doing to 
give them an opportunity to get back into the housing market?
    Mr. Reich. Well, to the extent that these families are in 
homes, the mortgages are held by the depository institutions 
that we regulators regulate, we are encouraging the 
institutions to work with these families prior to the 
foreclosure completion to forestall a foreclosure or to try to 
prevent a foreclosure from taking effect.
    Mr. Green. After foreclosure, what are we doing? We have 
literally, my suspicion is, millions of persons who will find 
themselves losing their homes, and we want to give them an 
opportunity to get back into the market.
    Let me go to the next question. What about the cost of 
this? What is it going to cost in terms of dollars with all of 
the foreclosures? What will be the amount of money that the 
marketplace will lose due to the foreclosures? Anyone know?
    Mr. Reich. It's difficult to project.
    Mr. Green. Is it billions?
    Ms. Bair. I think there is a recent study, it's not a 
government study, that estimated--I think it was about $140 
billion over the next 6 years.
    Mr. Green. $120 billion?
    Ms. Bair. $140 billion.
    Mr. Green. Total?
    Ms. Bair. Over the next 6 years. We can get you a copy of 
the study. I'm going off the top of my head, but I think that 
was the ballpark about what they--that is one private sector 
    Mr. Green. If we bonded many of these persons who are going 
to be foreclosed on, would they--with a better interest rate 
would they be able to stay in the marketplace and maintain 
their homes? Anyone?
    As some States are doing, bonding?
    Ms. Bair. Sir, I'm sorry. I should not have spoken off the 
top of my head. Over 6 or 7 years--would result in loses of 
about $112 billion. It's 143,000 foreclosures every year over 
the next 6 years.
    Mr. Green. Here's my closing comment, Madam Chairwoman, and 
thank you. We are spending about $333 million a day on the war. 
We seem to find the money to cure the ills that we deem to be a 
priority. It seems to me that we ought to do more to find a way 
to help people maintain their homes given that we know that 
some of the circumstances that are causing them to lose their 
homes are somewhat shady, and that's being kind. I think we 
need to do more, and I yield back the balance of my time.
    Chairwoman Maloney. That's a good point to end on, and we 
are out of time. I would like to follow up on the point that 
the gentleman made on enforcement or the lack thereof. And I 
would like to ask a question. My time has expired, so if you 
would, get back to me in writing.
    If the guidance were made for the whole market, who would 
enforce that for each of the different sectors? The Truth In 
Lending enforcement plan would give the FTC enforcement 
authority over a large part of the market, but as several of 
you have testified the examination powers of the Federal 
banking regulators are important. So your comments--if you 
could, get back to us in writing on how we would make the 
enforcement go forward. And I would just like to end with that 
point that many of you made that the bankers will not be 
selling these loans if lenders don't make them.
    And going back to the guidance, which basically says that 
you do not make loans to people who cannot afford it, would in 
many ways adjust and correct this market.
    I would like to say that the Chair notes that some members 
may have additional questions for this panel, which they may 
want to submit in writing. And without objection, the hearing 
record will remain open for 30 days for members to submit 
written questions to these witnesses and to place their 
responses in the record.
    I want to thank you for your testimony today and for your 
attention to this very pressing problem. Thank you very much.
    Chairwoman Maloney. The subcommittee will come to order. We 
have a limited amount of time remaining to us. Our second panel 
this afternoon consists of several distinguished members as 
well. We have: Michael Calhoun, president of the Center for 
Responsible Lending; Josh Silver, vice president of research 
and policy for the National Community Reinvestment Coalition; 
Allen Fishbein, director of housing and credit policy for the 
Consumer Federation of America; John Robbins, chairman of the 
Mortgage Bankers Association; Harry H. Dinham, CMC, president 
of the National Association of Mortgage Brokers; and Mr. Alex 
Pollock, resident fellow, from the American Enterprise 
Institute. And without objection, the witnesses' written 
statements will be made part of the record. You will each be 
recognized for a 5-minute summary of your testimony. The Chair 
now recognizes Mr. Calhoun for 5 minutes.

                      RESPONSIBLE LENDING

    Mr. Calhoun. Thank you Madam Chairwoman, Ranking Member 
Gillmor, and members of the committee, for the opportunity to 
speak to you today about the causes, the impact, and most 
importantly the reforms necessary to address the foreclosure 
crisis seen today in the subprime market. First, I think it's 
important to look at what the typical subprime loan today is 
like, and when you do that, you will quickly see a lot of the 
origins of our problems.
    The typical subprime loan today has a built-in payment 
shock of 40 to 50 percent, even if market rates do not 
increase. For example, a typical subprime loan starts at 7\1/2\ 
to 8 percent, and when it readjusts as you have heard about 
today, it will jump to nearly 12 percent again, even when 
market rates do not change. That same loan typically has no 
escrows for taxes or insurance, making them due in a lump sum, 
which further stresses the borrower. It's based on undocumented 
income and it typically comes with a prepayment penalty that 
most borrowers end up paying. As a result of that, our research 
shows that over 2 million borrowers in the subprime market will 
lose their homes.
    And it is important to put that in context, as people have 
said today. Subprime loans make up less than one-sixth of the 
overall mortgage market, yet they are producing almost two-
thirds of all foreclosures in the entire mortgage market today. 
We have done further research which is set out in detail on 
page 13 of my testimony, that shows the macro impact of this on 
homeownership. Going back over a 9-year period, it shows that 
the net impact is almost a million more families lose their 
homes as a result of subprime lending than are to homes as 
first-time homebuyers.
    That's driven by two pieces of data. As Representative 
Miller noted, a very small percentage of subprime loans are in 
fact first time homebuyer loans. And then second, you have 
these very high levels of foreclosures. You put those together 
and you have the fact that today the subprime market has been a 
destroyer not a creator of homeownership for American families. 
As Chairwoman Bair noted, that's not only tragic, it's 
unnecessary. As she pointed out, a subprime borrower can 
receive a standard 30-year fixed rate mortgage at a lower rate 
and lower monthly payment than they would receive one of these 
2/28 TSR arms with a built-in payment shock. But market 
dynamics make it more profitable for participants in the 
mortgage market to give them that much riskier loan. What 
reforms are needed?
    First of all, of course, the guidance that we talked about 
should be implemented. There are major attempts though of push-
back by some lenders who openly criticize that guidance, and 
that must be fought off. Second, the HOEPA Authority under the 
Fed; the responsibilities of the GSEs to meet the standards 
must be followed. Families in foreclosure also need help with 
workouts. FHA, which I think you will address soon, will play a 
major role.
    There also are two legal impediments for these families now 
that I urge you to investigate. First the tax code often makes 
loan forgiveness taxable to the borrowers, so even if they are 
able to get loan forgiveness, they can still get a notice from 
the IRS saying that they owe tens of thousands of dollars in 
additional taxes. Second, the Bankruptcy Code is presently 
stacked against homeowners, making it almost impossible for 
them to modify and get relief when they are behind on their 
    Finally, there needs to be action on a national bill for 
sustainable home lending. At the top of that list needs to be 
addressed the broker role, which is being addressed today. 
First, under current law, brokers are generally allowed to 
disclaim any duty to the borrower. It needs to be affirmatively 
established that they have a fiduciary duty to the borrower. 
Second, today, brokers are even allowed to receive bonuses for 
putting borrowers in higher interest loans than they qualify 
for. That should stop, most importantly for enforcement. 
Lenders need to be held responsible for the acts of brokers. 
That's the self-enforcing market mechanism that's been needed.
    There's been talk here of education. Let me suggest--we 
don't tell purchaser's of insurance policies to go educate 
themselves by reading insurance books to make sure that their 
insurer doesn't go out of business. It is much the same in the 
mortgage market. There need to be substantive standards. 
Education has a role, but it won't be the only solution.
    Finally, there needs to be flexibility. It was indicated 
today that the 1999 North Carolina Mortgage Predatory Lending 
law did not address a lot of the practices that we see today 
that developed in only the last couple of years. I think you 
will see further action by North Carolina in this legislative 
    Thank you for this opportunity to share our comments.
    [The prepared statement of Mr. Calhoun can be found on page 
288 of the appendix.]
    Chairwoman Maloney. Thank you very much.
    The Chair now recognizes Mr. Silver.


    Mr. Silver. Chairwoman Maloney, Ranking Member Gillmor, it 
is an honor to be here today as a voice for the over 600 
community organizations that comprise the National Community 
Reinvestment Coalition. NCRC is the Nation's economic justice 
trade association dedicated to increasing access to fairly 
priced credit and capital for minority and working class 
families. We stand on the precipice of a mortgage tsunami in 
the United States.
    According to the FDIC, interest rates are due to rise for 
borrowers of one million subprime loans in 2007, and another 
800,000 borrowers in 2008. In numerous cases, unsuspecting 
borrowers discover that the introductory TSR rates on subprime 
ARM loans have expired and are replaced by unaffordable monthly 
payments. More than 14 percent of outstanding subprime loans 
were delinquent by the end of 2006,
    The final regulatory guidance on non-traditional mortgages 
and the proposed guidance or subprime arm loans are necessary 
but not sufficient to save us from hundreds of thousands of 
foreclosures. The guidance requires lending institutions to 
assess borrower capacity to repay at the fully indexed rate, 
not the TSR rate. The sound underwriting in the proposed 
guidance should eliminate many of the abuses in the unsafe and 
interceptive ARM subprime lending. Yet, the guidance does not 
come close to providing comprehensive coverage. It applies to 
about half of the subprime lending, which is conducted by 
banks, thrifts and their affiliates. It does not cover prime 
ARM lending, which can also be problematic when TSR rates are 
low and when the APR is in the upper ranges of prime pricing. 
The guidance also cannot directly cover non-banking 
institutions, including brokers, appraisers, closing agents, 
securitizers, and services, all of whom contain abusive actors 
perpetuating and enabling dangerous lending.
    While the regulatory guidance is a good start, Congress 
needs to pass a comprehensive anti-predatory lending bill. You 
will hear industry representatives insist that policymakers 
should not overreact and, therefore, choke off lending and the 
American dream of homeownership. These assertions, however, 
fail to recognize that lending markets are broken, as 
Representative Ellison was trying to draw out. The problem is 
there is a lack of financial incentives for the actors, 
brokers, and securitizers and several other actors to behave 
    NCRC's experience and research demonstrate that the broken 
marketplace needs a major fix in order to avoid the tsunami. 
NCRC operates a foreclosure prevention program called the 
Consumer Rescue Fund and engages in mystery shopping on a 
national level. In my written testimony, I describe a number of 
Rescue Fund cases in which borrowers of subprime ARM loans 
experience multiple abuses committed by appraisers, brokers, 
loan officers, and servicers. Tragically, NCRC has reaffirmed 
that these overwhelming abuses are disproportionately 
experienced by minorities and hard-working Americans--the very 
same families that industry trade associations want to protect 
from more regulation and consumer protection.
    We conducted national level mystery shopping of subprime 
mortgage companies and brokers in several metropolitan areas. 
We armed our minority mystery shoppers with better 
    Yet, they consistently received less service, higher 
subprime rates, and fewer loan options than white shoppers. 
When we combined credit within this data, it withheld the data. 
We found that the portion of subprime lending was higher as a 
portion of minorities and the elderly was higher enablements in 
several large metropolitan areas. CRL and Federal Reserve 
economists have found the same things. The lending marketplace 
is broken and the victims are disproportionately minorities, 
the working class, and the elderly.
    So, I conclude with three major policy recommendations. 
Congress must swiftly pass a strong comprehensive anti-
predatory lending bill. The abuses are too pervasive and cut 
across too many actors in the industry to be tackled 
successfully by regulatory guidance. Second, Congress must pass 
the CRA Modernization Act of 2007, H.R. 1289. The Federal 
Reserve has found that CRA encourages banks to make more prime 
loans, thus, CRA acts to increase product choice in working 
class and minority neighborhoods.
    CRA also provides fair lending reviews, checking for 
abusive lending. CRA must be applied to all bank affiliates, 
large credit unions, and independent mortgage companies. 
Recently, NCRC called on the Administration and Congress to re-
till the FHA program so they could offer rescue refinance loans 
to victims of predatory lending. In addition, Congress should 
consider a national foreclosure fund to offer remediation for 
families experiencing foreclosure through no fault of their 
    It is time to put American families first. Hundreds of 
families and children are losing their homes every day due to 
predatory lending. That is not a marketplace that is working. 
Haven't we deregulated enough? It is time to end the suffering 
and save the American dream of homeownership by passing a 
strong national anti-predatory lending bill.
    Thank you so much.
    [The prepared statement of Mr. Silver can be found on page 
315 of the appendix.]
    Chairwoman Maloney. Thank you so much.
    Mr. Fishbein?


    Mr. Fishbein. Chairwoman Maloney, Ranking Member Gillmor, 
and members of the subcommittee, it is a pleasure to be here 
today to testify on behalf of the Consumer Federation of 
America. And, we congratulate you for holding these hearings, 
which are coming at the timeliest of times.
    CFA is a national federation of some 300 pro-consumer 
organizations established in 1968 to engage in research, public 
education, and advocacy in support of the interest of 
consumers. The goal of advancing sustainable homeownership is 
an important one for CFA and its members. Homeownership can 
have many benefits, not the least of which is the opportunity 
it provides to build personal wealth. But these advantages are 
being eroded by the mass marketing of high risk non-traditional 
mortgage products to many consumers for whom they are not 
appropriate. What these loan products have in common is that 
they trade lower initial monthly payments for higher payments 
later that can escalate dramatically, making these loans 
unaffordable for unsuspecting borrowers.
    The abandonment in recent years by many lenders of careful 
underwriting based on the borrower's ability to repay without 
refinancing or selling their home has made these loans even 
riskier. Of particular concern are the high adjustable rate 
mortgage products that Mr. Calhoun and others have spoken about 
that became the predominant product in the subprime market. 
Until about a year ago, rising home prices and relatively low 
interest rates made it possible for borrowers to refinance or 
sell their homes after the initial period ended, or if they ran 
into trouble making payments. This masked the fact the fact 
that many lenders were qualifying borrowers based on the loans 
start rate, when home price appreciation leveled off as it did 
last year, delinquencies and defaults took off rising to the 
highest level in a decade.
    Delinquencies usually rise when the housing market slumps 
because borrowers are more likely to encounter difficulties in 
selling their homes. In addition, if the prices fall, borrowers 
may find themselves without the necessary equity to refinance 
it to a more affordable loan. And this is why we are seeing 
this problem mushrooming right in front of our eyes. The 
widespread use of exploding payment ARMs, and other payment 
deferred, non-traditional mortgage products points to a 
fundamental concern about whether consumers really understand 
just how much their monthly payments can jump with these and 
other risky products.
    In my written testimony, we discuss several examples of 
research indicating that many consumers do not understand these 
terms. CFA believes, therefore, that it is an opportune time to 
examine the efficiency of steps that have been taken and 
whether additional action is warranted. We also believe that 
more focus should be directed at financial institutions, 
investors, government, and the nonprofit sector to find 
creative solutions for keeping at-risk families--who have been 
victimized by lax underwriting--in their homes. In my written 
testimony, we summarize three areas of particular attention and 
I would like to just highlight them.
    First, the lack of accountability for key actors in the 
marketplace. Risk to consumers is vastly different today than 
risk to the industry. Lender's today can shield themselves from 
the full potential impact of foreclosures by selling their 
loans to investors through mortgage securities. In effect, 
higher foreclosure rates have become the cost of doing 
business. This presents risk for individual home borrowers who 
cannot insulate themselves the same way against this higher 
    Mortgage brokers who originate the majority of subprime 
loans have an incentive to close as many loans as possible and 
a very good reason not to consider the loan's future 
performance. The lack of effective oversight and consumer 
protections, both the front and back ends of the subprime 
market, are contributors to the problem we are witnessing 
    And we have one suggestion for one of your future hearings 
and that is to invite the Securities and Exchange Commission to 
be here and talk about what they think are the nature of some 
of the problems in the marketplace, and whether current 
regulations that they oversee are adequate.
    Two, the Federal Banking Agency guidance, while it is 
helpful and will help correct some of the abuses in the 
marketplace, is not enough. Additional steps are needed. 
Finalizing the proposed subprime statement that was issued by 
the regulators on March 8th would help to restore sound 
underwriting for subprime loans. We support its quick adoption. 
I would also like to offer a letter from some 70 organizations, 
written to the regulators on February 21st asking for the 
issuance of guidance along these lines.
    At the same time, we recognize that there are important 
limitations to this policy guidance and it will take a long 
time to be fully implemented. Thus, we support the need for a 
comprehensive rewriting of consumer protection laws, which we 
feel need to be updated.
    Thank you.
    [The prepared statement of Mr. Fishbein can be found on 
page 346 of the appendix.]
    Chairwoman Maloney. Thank you so much, and we are 
considering having a hearing along those lines.
    Mr. Robbins.


    Mr. Robbins. Thank you for the opportunity to speak about 
an issue that has captured the attention of this committee and 
the financial services industry. As Mortgage Banker's 
Association statistics show, delinquencies and foreclosures 
have risen over the past 6 months, particularly in the subprime 
market. In response, regulators have established new standards. 
Investors have punished companies that made bad loans, and I am 
here today to answer your questions about the effect it is 
having on consumers.
    I believe MBA's data in a written statement is both 
objective and comprehensive, and I am confident that it is the 
most authoritative in its data because it includes 86 percent 
of all outstanding mortgages. Economics aside, I want to talk 
today from the heart as someone with 36 years of mortgage 
experience, and what I have seen of late troubles me deeply. 
Responsible lenders only extend credit to borrowers who are 
willing and able to make mortgage payments. They do not trick 
borrowers into loans that are unsustainable and they do not 
hold on something that is only a mirage of the American dream.
    I have conducted my professional life according to these 
standards as has nearly every member of the Mortgage Bankers 
Association. Yet, bad loans were made. They were not made 
responsibly or with the best interest of the consumer in mind. 
For the most part, those making these poor loans have been 
punished by Wall Street and restrained by regulators, and while 
we must ask what lessons we should learn from these mistakes, 
it is equally important for those in positions of authority to 
help current homeowners stay in their homes.
    Working together, I suggest that we accomplish three 
things: stabilize the subprime mortgage credit system; provide 
assistance for homeowners facing foreclosure; and, finally, 
prevent this from ever happening again. First, reaction from 
investors has been swift. Already, more than 20 subprime 
lenders have closed their doors. As we watch this, we must 
remind people not to confuse subprime with predatory, and, we 
must reiterate that while subprime foreclosures are high, at 
4\1/2\ percent, currently they remain below their historic peak 
of 10 percent. A sound perspective and a prudent regulatory 
hand will seize investors, calm editorial writers, and most 
importantly, help consumers.
    Second, for subprime borrowers who are facing foreclosure, 
industry and policymakers must partner to help provide options 
so that as many as possible are able to retain their homes. 
Chairman Dodd recently called for a summit of all parties to 
address this problem. MBA embraces that idea. Further, we at 
MBA strongly encourage all borrowers who find themselves unable 
to make payments to contact their lender immediately. Lenders 
lose money on foreclosures--in my company, it was $40,999 for 
each one--and so they have have a strong desire to make any 
number of arrangements that would allow a borrower to start 
making payments again and keep his or her home.
    Third, lawmakers, regulators, and industry must work to 
ensure that this situation does not occur in the future. 
Borrowers are smart. When given good information, they make 
good decisions, but they make poor decisions when they have bad 
information. And, absence of pricing transparency coupled with 
the daunting and complicated closing process has permitted 
certain actors to prey on the unsophisticated. But frankly, 
every person from subprime to jumbo borrower is susceptible 
when even the chief executive officer of FNMA and the Secretary 
of HUD by their own admission cannot understand all the 
documents at a mortgage closing.
    The mortgage market is desperate for a rewrite of the 
Nation's settlement laws and a strong uniform lending standard 
to trap predators and bring them to justice. I stand ready to 
meet with each member of the financial services committees to 
discuss what MBA will do to work to accomplish these goals. 
Together, we can ensure that predatory lenders don't foreclose 
on the American dream.
    [The prepared statement of Mr. Robbins can be found on page 
360 of the appendix.]
    Chairwoman Maloney. Mr. Dinham.


    Mr. Dinham. Good afternoon Chairwoman Maloney, Ranking 
Member Gillmor, and members of the committee. I am Harry 
Dinham, president of the National Association of Mortgage 
Brokers. NAMB is committed to preserving the vitality of our 
cities and the goal of homeownership. We commend the 
subcommittee for holding this hearing. NAMB is the only trade 
association devoted to representing the mortgage broker 
industry. Mortgage brokers must comply with a number of State 
and Federal laws and regulations. We are subject to the 
oversight of not only State agencies, but also HUD, the FTC, 
and to a certain extent, the Federal Reserve Board.
    First, let me say, it is a tragedy for any family to lose 
their home to foreclosure. No one disputes this. Foreclosure 
hurts not only the family, but the neighborhood and surrounding 
communities. As small business brokers, we live, eat, shop, and 
raise our families in these communities. When consumers' 
properties decline, our property values decline. When 
consumers' neighborhoods become unstable and prone to violence, 
our neighborhoods become unstable and prone to violence. More 
than any other channel, brokers live by the motto: Once a 
customer, a customer for life. What happens in our 
neighborhoods and in our communities hurts all of us. Mortgage 
brokers do care. We believe everyone from Wall Street to 
mortgage originators should work together to develop and 
implement appropriate solutions. At the same time, we must 
remember that today America enjoys an all-time record rate of 
homeownership, almost 70 percent.
    The challenge we face now is how do we help people avoid 
foreclosure, and at the same time ensure that they have 
continued access to credit. We realize that a number of recent 
reports have focused on the rise in home foreclosures. The 
truth is that we can only speculate on the causes responsible 
for the rise in home foreclosures. There are a number of 
possible factors: bankruptcy reform, minimum wage gains, credit 
card debt, decreased savings rate, decreasing home values, 
second homes, fraud, illness, and other life events, to name 
just a few.
    Do not rush to judgment before we have all the facts. We 
understand that Congress will be calling for a GAO study on the 
causes of foreclosure. We expect the study to take into account 
a number of possible economic and non-economic factors. We 
should examine the conclusions before implementing any policy 
decisions that could unfairly curtail access to credit. A 
President challenged the industry to increase minority 
homeownership by 5.5 million families by 2010. Wall Street 
investors, securitizers, rating agencies, underwriters, 
realtors, and originators responded in an effort to help 
families own homes.
    The events of the past 2 decades have created a mortgage 
market. Where today Wall Street creates a demand for certain 
mortgages and sets the underwriting criteria for these 
mortgages, it is this criteria and not the mortgage originator 
that decides whether the consumer qualifies for a particular 
loan product. With this said, all of us, industry, government, 
and consumers, have a role in helping these families stay in 
their homes.
    Here is a brief summary of what NAMB is doing to help 
families achieve and maintain responsible homeownership. We 
support the intent behind some of the key principles of the 
proposed guidance, as well as the need to expand this 
application once finalized to all market players to ensure 
uniformity and a level playing field. We continue to advocate 
for affordable housing, including FHA reform, and have pushed 
for increased mortgage broker participation in the program. We 
must make FHA a real choice for non-prime customers.
    We support authorizing VA to provide reverse mortgages and 
expand access to credit, especially for elderly veterans. Since 
2002, we are the only trade association that has advocated for 
education, background checks, and increased professional 
standards for all mortgage originators, not just mortgage 
brokers. We continue to oppose the flawed system proposed by 
CBS Armor, because it is riddled with exemptions, enables bad 
actors to move freely unchecked, and will give consumers a 
false sense of security,. It does not effectively address 
mortgage fraud or accountability.
    We prepared and submitted to HUD a revised good faith 
estimate to help improve comparison shopping. Our code of 
ethics and best business practices prohibit placing pressure 
on, or being pressured by, other professionals and we proposed 
the development of loan specific disclosures to be given to 
consumers at the shopping stage and beginning of funding. This 
would help consumers avoid payment shock.
    Thank you for the opportunity to appear today. I am happy 
to answer any questions.
    [The prepared statement of Mr. Dinham can be found on page 
392 of the appendix.]
    Ms. Maloney. Thank you.
    Mr. Pollock.

                      ENTERPRISE INSTITUTE

    Mr. Pollock. Thank you, Madam Chairwoman, Ranking Member 
Gillmor, and members of the committee, for the opportunity to 
be here today. I will use my 5 minutes--and I noticed that the 
Chair is rigorous in enforcing the 5 minutes--to try to make 
five points: One, the classic credit overextension pattern of 
the subprime mortgage bust; two, the trade-off between risk and 
homeownership as a market experiment; three, fraud; four, the 
proposed regulatory action; and five, my proposal for a one-
page mortgage disclosure document. Congressman Hensarling and 
Congressman Scott both mentioned the difficulty, as have other 
commenters, of understanding what you are getting into with a 
mortgage. I propose this one-page disclosure idea, which I will 
talk about more in a minute.
    First, as we all know, the subprime mortgage boom is over 
and the bust is here. And Ranking Member Gillmor, unlike the 
members of the other panel, I am more pessimistic about where 
busts go, all of the connections that you don't necessarily see 
when you first look at it, when there are serious credit 
    In the mortgage market and in the wider economy, this is 
consistent with the context, which is that all of the elements 
of the current subprime bust display classic errors of credit 
overexpansions, which are very familiar to students of 
financial history, and which many of us have lived through 
before. It is essential to remember that the boom gets going 
because both lenders and borrowers experience success in the 
beginning. As long as the asset price is rising, taking on 
risky debt by a borrower and making risky loans succeed, and 
that success and belief in the continuing asset price rise 
ultimately sets up the bust. That is true whether the asset is 
dot com stocks, oil, commercial real estate, houses or anything 
else. It is first, success which builds up the optimism which 
creates the boom which sets up the bust.
    Second, there is a constant trade-off being made between 
risk and homeownership. The American homeownership rate, as 
many have pointed out, has moved up to 69 percent. On an 
international basis, this is a good but not remarkable ratio. 
The United States ranks tenth, is actually tied for tenth, 
among advanced economies in homeownership ratio. The mortgage 
market is constantly experimenting with how much risk there 
should be, how that risk is distributed, and how it trades off 
with success or failure of lenders and borrowers. If we want 
the long-term growth and innovation that only market 
experimentation can create, then we will have boom and bust 
cycles. In economics, nothing is free. You can move the risks 
around, but you cannot make them disappear.
    Many people have rightly brought up the long-term, fixed 
rate mortgage loan, which is an excellent instrument, but I 
would remind the subcommittee that this form of mortgage caused 
the collapse of the savings and loans in the 1980's. Subsequent 
to that, to preserve the fixed rate mortgage required vastly 
expanded securitization. But securitization, as other people 
have pointed out, breaks the link between the originator of the 
mortgage loan and who actually bears the credit risk. Nothing 
is free; everything is trade-offs.
    Third, fraud. Unfortunately, booms induce fraud. This is 
the testimony of history. This results in scandals on the part 
of both lenders and borrowers in some instances. Thus, we have 
fraud in multiple directions. Consider in this context, so-
called ``stated income'' loans. You would think that the 
disastrous previous experience with this bad idea, then called 
``no doc'' or ``low doc'' loans and now ``liars' loans'' would 
have been remembered, but it seems to have been forgotten by 
the lenders. On the other hand, I would like to point out that 
any borrower who lies about their income in order to get a loan 
hardly qualifies as a victim.
    Fourth, it is late in the cycle, as has been observed. 
Losses are rising; credit is tightening; liquidity is 
disappearing; asset prices are falling; and it is hard to do 
the right thing as a regulator that is both in line with 
prudent standards and doesn't induce further tightness and 
reduction in credit. It seems to me the proposed statement on 
subprime mortgage lending is in general a sober and sensible 
attempt to balance these pressures, although how to set the 
final balance is still open.
    I will mention what hardly anyone has mentioned today: down 
payments and savings. One mortgage lender was quoted as saying 
recently, ``Well, we'll just have to tell some borrowers they 
have to save for a down payment.'' That struck me as quite a 
novel idea. Imagine that. You might have to save.
    Finally, the one-page disclosure: It has been pointed out 
that the complexity and opacity of closing documents, many 
ironically mandated by regulation and law, makes it hard for 
borrowers to understand what they are doing, even for quite 
sophisticated people. I have had, as I am sure we all have, the 
experience of being overwhelmed and befuddled by the huge stack 
of closing documents full of confusing language.
    We could have a one-page disclosure form--my written 
testimony details what it should look like--which would make it 
impossible for borrowers to be unsuspecting or surprised that 
the rate went up. Or, to discover they had a prepayment fee 
after the fact; we have to always know that before the fact.
    Thank you, Madam Chairwoman.
    [The prepared statement of Mr. Pollock can be found on page 
428 of the appendix.]
    Chairwoman Maloney. I thank all of the gentlemen for their 
testimony. I am told we may have a vote at any moment, at which 
point we will not be able to continue with the panel as another 
committee is scheduled to come in.
    But I would like to ask all of the panelists this one 
question. Even as the subprime market was looking more and more 
risky, the incentives for borrowers, lenders, brokers, and 
investors kept expanding the market into riskier and riskier 
    How can we change the incentives at each step of the chain 
so that we encourage sound lending practices? And, I would like 
to start with you, Mr. Calhoun.
    Mr. Calhoun. Thank you, Madam Chairwoman. As I indicated in 
my comments, you can start at the beginning; the majority of 
subprime loans, by a good margin, were originated by mortgage 
brokers. They have in testimony just recently in the Senate 
stated, though, that they believe they have no legal duty to be 
watching out for the best interests of the borrower. And, 
furthermore, they state that they are an independent agent when 
it comes to the lender. And what that means in practical terms 
is that a borrower placed into an abusive and even illegal loan 
that is originated by a broker often has no effective recourse.
    Also, the lender has--rather than an incentive to police 
the broker as has been suggested today--has just the opposite 
in today's market. Because the broker claims they are an 
independent agent, it is the lenders who have managed to turn 
the other way in being knowingly ignorant of what happens with 
an abusive loan. And then they say, if there are problems 
later, don't blame me. I just funded the loan. You go find the 
broker, and, by the way, that isn't going to help you with the 
servicer on Wall Street who is foreclosing on your loan. So, 
there has to be connections of feedback and responsibility in 
the origination chain.
    Mr. Silver. As an economics student at Columbia University, 
we talked about asymmetry of information and when actors don't 
internalize, negative externalities. Those are two fundamental 
flaws; could be two fundamental market failures. And, indeed, 
that is happening, sadly, in the lending marketplace. One way 
to eliminate these violations of classical economic theory is 
to create strong standards that all the actors must adhere to.
    Last session, we had the Miller-Watt-Frank anti-predatory 
lending bill. I think that bill established some excellent 
standards. The proposed subprime guidance also establishes some 
very reasonable standards. To enforce these standards, you have 
to hold the actors financially reliable. For example, if people 
don't get tickets for speeding, you are going to have more 
speeders and more reckless driving. Likewise, if we don't have 
financial liability on all the actors, brokers, lenders, and 
the secondary market and servicers, you are going to have 
continued problems and continued passing of the buck. Thank 
    Chairwoman Maloney. Thank you. Mr. Fishbein?
    Mr. Fishbein. This is an important question and thank you 
for asking it. Basic Federal consumer protection laws were 
written at a time when depository institutions were the prime 
funders of mortgages. I am speaking of the Truth-in-Lending 
Act, HOEPA, and the Real Estate Settlement Procedures Act.
    A lot has changed since those laws were written. Mortgage 
brokers, as has been pointed out, are the channel for 70 
percent or more of subprime loans. The secondary market has 
become much more active in securitizing these loans. But yet, 
the basic consumer protection laws have not been changed to 
reflect the new realities of the marketplace.
    Having a standard that applies to loan originators, whether 
they are mortgage brokers or lenders, one that would require 
them to operate under a duty of good faith and fair treatment 
to borrowers, would help address some of the basic problems 
that you are hearing about today. With regard to the secondary 
market, it would help to extend assignee liability so that the 
purchasers of loans or the investors in these loans have some 
responsibility for loans that are not based on ability to pay 
standards or in fact have predatory characteristics.
    Further, would be to make sure that the banking regulators 
are doing all they can to extend the reach of their authority. 
For example, it is not clear whether the new non-traditional 
mortgage guidance issued last September and the pending 
subprime guidance reaches to warehouse lines of credit, which 
depository institutions are providing to lenders, or, for that 
matter, their investment in securities trusts.
    We think all of these things need to be looked at very 
carefully and we encourage the subcommittee to do that.
    Chairwoman Maloney. Thank you. Mr. Robbins?
    Mr. Robbins. The marketplace is working. Over 20 subprime 
companies have gone out of business. Other companies have been 
substantially punished with repurchases and are showing losses. 
So, to the extent that the market punishes bad players, that 
has occured, is occurring, and will continue to occur. But, 
fundamentally, the system is broken and the system is broken 
because it is not transparent. There is no clarity to this 
    I don't think there is one borrower in a thousand who 
understands the papers that they sign; the number of times they 
sign it. It allows predatory lenders to hide underneath that 
moray and morass of very complicated papers that they see at a 
mortgage closing. We need licensing of mortgage lenders. We 
need education, financial literacy, and we need education at 
all levels, both at consumers and at high schools. We need to 
make the system clear.
    Chairwoman Maloney. My time has expired. I invite the 
panelists to respond in writing if they would like to expand 
further on the question. I believe it is an important one. Mr. 
    Mr. Gillmor. Thank you, Madam Chairwoman. I have a question 
for Mr. Dinham. Let's assume that most mortgage brokers are 
honest. They do a good job. But, as you indicated, there are 
some bad apples. So, my question, is for a borrower under the 
current system, is there any practical way for them to find out 
if the person doing the lending has had any kind of 
disciplinary action, any criminal activity, and if there isn't 
a practical way to do that, should there be?
    Mr. Dinham. Yes, sir. We would agree that feature needs to 
be there. I can just relate back to the State of Texas. They 
have a Web site which has all the occurrences against a 
particular broker. So, all you have to do is have his number, 
which is clearly displayed on his wall. And you can go on the 
Web site and see if there has been any kind of a problem that 
he has been in at that point. So, in other words, a lot of us 
are licensed and we are subject to the laws of our States. And 
those States all have Web sites and they all have the ability. 
And the consumer can go to the regulator and find out whether 
the broker has been in trouble or not.
    Mr. Gillmor. That would not be all States, sir.
    Mr. Dinham. Well it would be Texas, for sure. But, I think 
there are 49 States that have registration or licensing at this 
    Mr. Gillmor. Thank you. I yield the balance of my time to 
Mr. McHenry.
    Mr. McHenry. I'd like to thank the member for the time. To 
Mr. Calhoun, the Center for Responsible Lending, what are the 
total number of residential mortgage loans that you sold into 
the secondary market in 2006? You alone with the self-help 
credit union?
    Mr. Calhoun. I don't have the exact number. I can tell you 
that it is probably in the range of a billion dollars, but I 
would need to get back with you with a specific dollar amount.
    Mr. McHenry. I would certainly appreciate the total number, 
the dollar-value, and what percentage to the marketplace. To 
both CRL and to you, Mr. Silver, you both talk about subprime 
or nonprime hurting the mortgage market and hurting 
homeownership in essence. Mr. Silver went so far to say the 
lending market is broken.
    I reference you both to the previous panel of all the 
regulators that we had before here. I asked a simple question: 
Is the marketplace working? The only thing they said 
unanimously was yes, the marketplace is working. The mortgage 
marketplace is working. And so, it is wonderful rhetoric, but I 
think it is empty based on facts. To you, Mr. Calhoun, you 
referenced that 2 million will lose their homes. Over what 
period is that? Is that your prediction for the next year?
    Mr. Calhoun. We did an exhaustive study: the first to look 
at what happens to loans over the life, not just a snapshot.
    Mr. McHenry. Sir, I have very little time.
    Mr. Calhoun. We looked at the loans originated since at 
least 1999 through 2006, and the projection is that over the 
life of those loans, 2.2 million of them will result in the 
homeowner going bust.
    Mr. McHenry. In roughly 30 years, over the period of a 30-
year mortgage, almost all of these would go into foreclosure. 
How many would go into foreclosure this year? Do you have a 
number on that?
    Mr. Calhoun. I can give you numbers. Yes, sir. In my 
    Mr. McHenry. The 2.4 million you reference in your study 
would say that in essence 30 to 40 percent of subprime loans 
will go into foreclosure, because there are 6 million subprime 
loans. That is an astronomical sum not based on any historical 
data in the last 40 years of lending history in the United 
States. And so, it is rather high and misleading before this 
    Furthermore, you reference, so just to understand that, 
there are 6 million subprime loans in the marketplace right 
now. You are saying that basically a third of them are going to 
going to foreclosure.
    Mr. Calhoun. That's not correct. Those numbers are in 
error. If you look at the data, we say that 19.4 percent; and 
you look at a lot of the rating agencies are 30 percent.
    Mr. McHenry. Which is twice as high than any historical 
high and the losses in subprime, and the high was 10 percent. 
We are under 10 percent and right now the subprime marketplace, 
I think Mr. Robbins references what, 4\1/2\ percent are facing 
    Mr. Calhoun. Those are different numbers. The 10 percent, 
the 4\1/2\ percent he refers to are snapshots. How many are in 
foreclosure right now? Our number is not how many are in 
foreclosure at one particular time. It is if you look at what 
happens to that loan over its life, which is typically a 3- to 
4-year time period. What percentage of those who foreclose and 
lose the home before the loan is paid off or refinanced?
    Chairwoman Maloney. The gentleman's time is up.
    Mr. McHenry. Will you answer my questions for the record?
    Chairwoman Maloney. Certainly, the members can place their 
questions into the record, and I call on Mel Watt from North 
    Mr. Watt. Thank you, Madam Chairwoman. Mr. Dinham, I just 
want to get a little clarification. There are obviously some 
problems with the broker system, disproportionately generating 
issues that need to be addressed. How do you define who a 
broker works for? How does the industry say? If I come to you 
and ask you to get me a loan, who are you working for?
    Mr. Dinham. Well, at this point we have contractual 
obligations to the lenders. Otherwise, we sign a contract with 
    Mr. Watt. So, you are saying your first responsibility is 
to the lender.
    Mr. Dinham. I am saying that we are a loaner store with 
products available to the public; and, in other words, we 
don't. It's like going into another type of store. We are a 
mortgage store. We have different products for the consumers to 
    Mr. Watt. Okay, well that's fine. I guess I have 
misunderstood because most brokers will tell you that they work 
for the borrower. I mean, I am just telling you what my 
experience is. You are saying that your primary responsibility 
is to the lender.
    Mr. Dinham. Yes, sir, because I have a contractual 
obligation with you. In Texas, we have a disclosure that we 
give to the borrower.
    Mr. Watt. Where you have a contractual obligation to the 
    Mr. Dinham. No, sir.
    Mr. Watt. None?
    Mr. Dinham. No, sir. I have a disclosure in which I tell 
him exactly what the relationship is that we are going to have 
together at this point--that we are a contract person and not 
an agent.
    Mr. Watt. So, if a broker in North Carolina, for example, 
that Mr. Bachus used this morning had a mortgage brokerage 
company that was placing loans had a construction company and 
then had a mortgage brokerage company. And they put out a 
brochure that said, ``There are no sales people in this office. 
The people you work with are working for you.'' They put this 
out to the borrower. They are working for you to secure the 
best possible deal on your behalf. Then that would be a 
fraudulent, misleading, dishonest statement, is that what you 
are saying?
    Mr. Dinham. I am just telling you, no. I am not going to 
say that, because I can't unequivocally say that. But I think 
    Mr. Watt. If they were a broker, and they put out a 
statement to me as a borrower, saying that the people you work 
with are working for you to secure the best possible deal on 
your behalf. Would that be a misrepresentation?
    Mr. Dinham. Not if the statement was coming from me. No, 
sir, it would not be a correct statement. I would like to draw 
on what you brought up about North Carolina though, because 
there was an article in the Charlotte Observer which was out, I 
think either on the 17th--
    Mr. Watt. Let's let that speak for itself. I will by 
unanimous consent put the actual series of articles in the 
record. The articles will speak for themselves. And, if you 
want to address the content of the articles, I welcome you to 
do that.
    Mr. Dinham. Okay.
    Mr. Watt. Let me just get one more question in to Mr. 
Calhoun. We are operating now in a little bit of a different 
environment than we were operating over the last couple of 
years when we started this process of trying to produce a 
predatory lending bill that I would liken somewhat to what went 
on at Enron, and a lot of people say we overreacted to the 
Enron situation. I think there was some irrational exuberance 
in the lending and borrowing market and some problems.
    You said that there are a number of things that have come 
on the market since the North Carolina law was introduced that 
were really not addressed in the North Carolina law. Would you 
give us a couple of examples of that and then follow that up 
with written documentation of what you think needs to be added 
to the North Carolina law if we were going to try to use the 
North Carolina law as a Federal standard?
    Mr. Calhoun. Certainly, the primary development has been 
what I would call the abandonment of traditional underwriting 
standards. Ten years ago when we talked about predatory 
lending, the one point of consensus was its so-called asset-
based lending, lending against the equity in the home without 
regard for whether the borrower could actually pay the payments 
on the loan.
    That was the essence of predatory lending is what we have 
seen as the incremental steps. That's what's developed over the 
last 4 years and I think there are two important things here. 
One is that it has been incremental, this payment shock that we 
have talked about today. They didn't just start lending with 
these loans with huge payment shocks. It got worse and worse 
each quarter.
    And the dynamic that's the real concern, when you step back 
to the 30,000-foot level, is we have a situation.
    Mr. Watt. Why don't you address that in writing, because my 
time has expired.
    Chairwoman Maloney. The gentleman's time has expired. That 
was an excellent question. The last question will go to Patrick 
McHenry of North Carolina. And we are called for a vote and 
this will conclude our hearing.
    Mr. McHenry. This is a question for the whole panel, so, be 
prepared. It's going to be very simple and short answers 
because we don't have much time.
    Every three out of four loans in the foreclosure process do 
not wind up in a foreclosure sale. In 2005, FMAC studied this 
issue. It was estimated that the average cost of a single 
foreclosure for the lender averages $58,000. Those are FMAC's 
    Could you expand on why, actually, how about this. Very 
simple, the whole panel will start from left to right here. Yes 
or no: Is it bad for lenders to lend money to people who are 
not capable of paying it back? Yes or no, Mr. Calhoun?
    Mr. Calhoun. On an individual level, no. But it is 
profitable on a macro level, and that's what we have seen here. 
They'll lose money on an individual loan.
    Mr. McHenry. Once more, I don't have time for long-winded 
    Mr. Calhoun. That's my answer that you heard.
    Mr. McHenry. Which is ``kind of.'' Okay? Mr. Silver?
    Mr. Silver. You have to send it back to the lender without 
considering repayment ability. And, if I might, 
    Mr. McHenry. Yes, that is a good answer. Mr. Fishbein?
    Mr. Fishbein. Look at the volume of loans handled by 
consumer rescue funds and you see several examples of failure.
    Mr. McHenry. Thank you. I don't have time. Mr. Silver? 
Thank you.
    Mr. Silver. Yes, on an individual basis I would agree with 
Mr. Calhoun. However, changes in the market allow much higher 
foreclosure rates and still make profits for lenders than 
occurred in the past.
    Mr. McHenry. So, losing money is good? Number four, here. 
Thank you. I appreciate your answer the most. All right, thank 
you. Back to Mr. Calhoun. Do you have a lower cost of funds in 
commercial mortgage subprime mortgage lenders?
    Mr. Calhoun. No, we get most of our funding through Wall 
Street Repurchase Agreements.
    Mr. McHenry. So, you don't use community foundation grants 
or anything like that?
    Mr. Calhoun. We received, as I believe you know, grants to 
set up the original loan loss reserves for the loans. But, for 
example, when we securitize loans we sell them on the market 
and the people who buy them don't care about anything except 
the finances. And that's what they pay.
    Mr. McHenry. The insurance policy for the loan loss is 
based on grants that have been given to your organization?
    Mr. Calhoun. In part, yes.
    Mr. McHenry. So, yes. You have subsidized lending because 
you are able to get money for free?
    Mr. Calhoun. It gave us start-up funds but our 
sustainability has depended upon it being self-sustaining.
    Mr. McHenry. Okay, thank you. Additionally, I want to thank 
Mr. Pollock in particular for his one-page mortgage document. I 
think that's fantastic. I think that this is something the 
committee should have hearings on and we should move forward on 
this. At this point, I would like to yield my remaining time to 
Mr. Price of Georgia.
    Mr. Price. I thank my colleague from North Carolina for 
yielding. I appreciate the testimony of all of you presented. I 
think it points out clearly that we need much greater financial 
literacy. There appears to be some bipartisan agreement on that 
and hopefully we will be able to go forward. I am a little 
troubled by what appears to be a relative disdain for willing 
lenders and willing borrowers. And I wonder what that says 
about our general sense about our markets and about our sense 
of commerce right now in our Nation.
    Mr. Calhoun, I heard you say, you cited all sorts of 
examples about the typical subprime loan and how it leads to 
troubling results in many areas, and you said that one-sixth of 
the market are subprime loans. Yet, they comprise two-thirds of 
the foreclosures in the market. And that implies that there's 
an ideal number for each of those. Do you have a sense about 
where that ideal is?
    Mr. Calhoun. No. I think what it reflects more is what one 
of the members of the previous panels said--when you tease that 
apart, those foreclosure rates vary dramatically depending upon 
the loan features and that subprime loans that don't have these 
abusive features the built-in payment shock have less than half 
of the foreclosure rate of the loans that do have those abusive 
features. That's our big concern: get those features out and 
then let the market decide what's the appropriate balance.
    Mr. Price. I appreciate that. I have about 30 seconds, I 
think. I want to commend Mr. Pollock for your comment and 
perspective that we are late in this cycle and whether or not 
the Federal Government action will result in anything good to 
the entire market, I think, is an apt perspective.
    And I would ask, and I am not going to have any time it 
doesn't look like, but I would ask each of you, and we'll give 
this to you in writing, whether or not you agree that we are 
late in this cycle and whether or not you believe that Federal 
Government intervention at this point in this cycle can have 
any positive result.
    Chairwoman Maloney. The gentleman's time has expired. The 
Chair notes that some members may have additional questions for 
the panel which they may wish to submit in writing. Without 
objection, the hearing record will remain open for 30 days for 
members to submit written questions to these witnesses and to 
place the responses in the record.
    I want to thank all of the panelists for your testimony 
    Mr. Fishbein. Chairwoman Maloney, if I may, I had asked if 
I could have a letter that has been signed by 80 groups to the 
regulators inserted in the record?
    Chairwoman Maloney. Yes.
    The hearing is now adjourned. Thank you.
    [Whereupon, at 1:45 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             March 27, 2007