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



 
 FORECLOSURE, PREDATORY MORTGAGE AND PAYDAY LENDING IN AMERICA'S CITIES

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


                                HEARING

                               before the

                    SUBCOMMITTEE ON DOMESTIC POLICY

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 21, 2007

                               __________

                           Serial No. 110-22

                               __________

Printed for the use of the Committee on Oversight and Government Reform 


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             COMMITTEE ON OVERSISGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
TOM LANTOS, California               TOM DAVIS, Virginia
EDOLPHUS TOWNS, New York             DAN BURTON, Indiana
PAUL E. KANJORSKI, Pennsylvania      CHRISTOPHER SHAYS, Connecticut
CAROLYN B. MALONEY, New York         JOHN M. McHUGH, New York
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois             TODD RUSSELL PLATTS, Pennsylvania
JOHN F. TIERNEY, Massachusetts       CHRIS CANNON, Utah
WM. LACY CLAY, Missouri              JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California          MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts      DARRELL E. ISSA, California
BRIAN HIGGINS, New York              KENNY MARCHANT, Texas
JOHN A. YARMUTH, Kentucky            LYNN A. WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa                PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of   VIRGINIA FOXX, North Carolina
    Columbia                         BRIAN P. BILBRAY, California
BETTY McCOLLUM, Minnesota            BILL SALI, Idaho
JIM COOPER, Tennessee                ------ ------
CHRIS VAN HOLLEN, Maryland
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
                  David Marin, Minority Staff Director

                    Subcommittee on Domestic Policy

                   DENNIS J. KUCINICH, Ohio, Chairman
TOM LANTOS, California               DARRELL E. ISSA, California
ELIJAH E. CUMMINGS, Maryland         DAN BURTON, Indiana
DIANE E. WATSON, California          CHRISTOPHER SHAYS, Connecticut
CHRISTOPHER S. MURPHY, Connecticut   JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       CHRIS CANNON, Utah
BRIAN HIGGINS, New York              BRIAN P. BILBRAY, California
BRUCE L. BRALEY, Iowa
                    Jaron R. Bourke, Staff Director

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 21, 2007...................................     1
Statement of:
    Bradford, Calvin, National Training and Information Center, 
      Chicago, IL; and Michael T. Maloney, Department of 
      Economics, Clemson, South Carolina.........................   263
        Bradford, Calvin.........................................   263
        Maloney, Michael T.......................................   287
    Fitzgibbon, Thomas, Jr., MB Financial Bank, Rosemount, IL....   210
    Fox, Jean Ann, Consumer Federation of America, Washington, 
      DC; Rita L. Haynes, CEO, Faith Community United Credit 
      Union, Cleveland, OH; Ed Jacob, Northside Community Federal 
      Credit Union, Chicago, IL; David Rothstein, Policy Matters 
      Ohio, Cleveland, OH; Fran Grossman, Shorebank Corp., 
      Chicago, IL; Jim McCarthy, president, Miami Fair Housing, 
      Dayton, OH.................................................   155
        Fox, Jean Ann............................................  0155
        Grossman, Fran...........................................   245
        Haynes, Rita L...........................................   200
        Jacob, Ed................................................   204
        McCarthy, Jim............................................   177
        Rothstein, David.........................................   216
    Rokakis, James, Cuyahoga County treasurer, Cleveland, OH; 
      Inez Killingsworth, president, East Side Organizing 
      Project, Cleveland, OH; Bill Rinehart, vice president and 
      chief risk officer, Ocwen Financial Corp., West Palm Beach, 
      FL; Josh Nassar, vice president, Center for Responsible 
      Lending, Washington, DC; Dan Immergluck, Georgia Institute 
      of Technology, Atlanta, GA; and Harry Dinham, president, 
      National Association of Mortgage Brokers, McLean, VA.......    14
        Dinham, Harry............................................    85
        Immergluck, Dan..........................................    67
        Killingsworth, Inez......................................    22
        Nassar, Josh.............................................    40
        Rinehart, Bill...........................................    32
        Rokakis, James...........................................    14
Letters, statements, etc., submitted for the record by:
    Bradford, Calvin, National Training and Information Center, 
      Chicago, IL, prepared statement of.........................   266
    Braley, Hon. Bruce L., a Representative in Congress from the 
      State of Iowa, prepared statement of.......................   313
    Cummings, Hon. Elijah E., a Representative in Congress from 
      the State of Maryland, prepared statement of...............     9
    Dinham, Harry, president, National Association of Mortgage 
      Brokers, McLean, VA, prepared statement of.................    87
    Fitzgibbon, Thomas, Jr., MB Financial Bank, Rosemount, IL, 
      prepared statement of......................................   211
    Fox, Jean Ann, Consumer Federation of America, Washington, 
      DC, prepared statement of..................................   158
    Grossman, Fran, Shorebank Corp., Chicago, IL, prepared 
      statement of...............................................   250
    Haynes, Rita L., CEO, Faith Community United Credit Union, 
      Cleveland, OH, prepared statement of.......................   202
    Immergluck, Dan, Georgia Institute of Technology, Atlanta, 
      GA, prepared statement of..................................    69
    Jacob, Ed, Northside Community Federal Credit Union, Chicago, 
      IL, prepared statement of..................................   206
    Killingsworth, Inez, president, East Side Organizing Project, 
      Cleveland, OH, prepared statement of.......................    24
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio:
        Information cocerning Policy Matters Ohio................   131
        Urban Revitalization Agreement...........................   309
    Maloney, Michael T., Department of Economics, Clemson, South 
      Carolina, prepared statement of............................   289
    McCarthy, Jim, president, Miami Fair Housing, Dayton, OH, 
      prepared statement of......................................   180
    Nassar, Josh, vice president, Center for Responsible Lending, 
      Washington, DC, prepared statement of......................    42
    Rinehart, Bill, vice president and chief risk officer, Ocwen 
      Financial Corp., West Palm Beach, FL, prepared statement of    34
    Rokakis, James, Cuyahoga County treasurer, Cleveland, OH, 
      prepared statement of......................................    17
    Rothstein, David, Policy Matters Ohio, Cleveland, OH, 
      prepared statement of......................................   219


 FORECLOSURE, PREDATORY MORTGAGE AND PAYDAY LENDING IN AMERICA'S CITIES

                              ----------                              


                       WEDNESDAY, MARCH 21, 2007

                  House of Representatives,
                   Subcommittee on Domestic Policy,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 3 p.m. in room 
2154, Rayburn House Office Building, Hon. Dennis J. Kucinich 
(chairman of the subcommittee) presiding.
    Present: Representatives Kucinich, Cummings, Watson, Davis 
of Illinois, Tierney, and Issa.
    Also present: Representative Turner.
    Staff present: Jaron Bourke, staff director; Jean Gosa, 
clerk; Nidia Salazar, staff assistant; Natalie Laber, press 
secretary, Office of Congressman Dennis J. Kucinich; Alissa 
Bonner, professional staff member, Information Policy 
Subcommittee; Leneal Scott, information systems manager; Erin 
Holloway, Office of Congressman Dennis J. Kucinich; Cate Veith, 
Office of Congressman Dennis J. Kucinich; Jay O'Callaghan and 
Kristina Husar, minority professional staff members; John 
Cuaderes, minority senior investigator and policy advisor; and 
Benjamin Chance, minority clerk.
    Mr. Kucinich. The Subcommittee on Domestic Policy of the 
Committee on Oversight and Government Reform will now come to 
order.
    I first want to begin by thanking all of you for being here 
and to let you know that we have spent the last hour in a 
series of votes, and when there is action and votes on the 
floor that is our first responsibility. So I am sorry that we 
are starting an hour late, but I am very grateful for the 
presence of each and every one of the witnesses here.
    Today's hearing will examine the subprime mortgage industry 
and the problem of foreclosure, payday lending industry, and 
the enforcement of the Community Reinvestment Act. The hearing 
will also examine alternatives to foreclosure and to payday 
lending.
    Now, without objection the Chair and the ranking minority 
member will have 5 minutes to make opening statements, followed 
by opening statements not to exceed 3 minutes by any other 
Member who seeks recognition.
    Without objection, the Members and witnesses may have 5 
legislative days to submit a written statement or extraneous 
materials for the record.
    Without objection, the subcommittee is going to recognize 
and welcome Mr. Turner, who is a member of the full committee, 
to sit for the purposes of hearing and questioning witnesses' 
testimony during the subcommittee's series of hearings on the 
state of urban America.
    Again, I bid you good afternoon and welcome. This 
Subcommittee on Domestic Policy of the Committee on Oversight 
and Government Reform will come to order for its first meeting. 
This is the first hearing of the subcommittee, and it is also 
the first hearing in a series of hearings on the state of urban 
America. This series intends to take a closer look at American 
cities, their progress, their problems, and their future. This 
series is important, not only for the problems it seeks to 
rectify, but also because I think the last time the U.S. 
Government took a comprehensive look at American cities was 
nearly 40 years ago when the Kerner Commission concluded ``Our 
Nation is moving toward two societies, one black, one white, 
separate and unequal.'' Today's hearing will examine the 
subprime mortgage industry and the problem of foreclosure, the 
payday lending industry, and the enforcement of the Community 
Reinvestment Act. The hearing will also examine alternatives to 
foreclosure and to payday lending.
    Next Thursday, March 29th, we will look at urban economic 
development strategies, and particularly whether taxpayer-
financed stadiums and large convention centers fulfill the 
economic promises made about them. In the coming weeks we will 
also take a look at the retail and grocery store industries, as 
well as access to health care in the heart of urban America.
    Today we are examining the impact of foreclosures, 
predatory mortgage, and payday lending in America's cities 
against the backdrop of a series plunge in the stock market 
last week. On March 13th the Dow Jones Industrials dropped more 
than 240 points, its second biggest drop in nearly 4 years, 
primarily due to the subprime mortgage industry. All three 
major stock indexes dropped by about 2 percent. The stock 
market erased $406 billion in wealth. By the end of the week 
nervous creditors forced New Century Financial Corp., the 
Nation's second-largest subprime mortgage lender, to stop 
making new loans.
    As the stock market recovers from a bruising week and the 
anxiety about what is to come, major American cities are 
bracing themselves. The Center for Responsible Lending projects 
that one out of five subprime mortgages originated during the 
past 2 years will end in foreclosure. These foreclosures will 
cost homeowners as much as $164 billion. The exact cost it will 
have on urban America is unknown.
    I wonder if any of us in Government has a proper 
understanding of the dimensions of the forthcoming foreclosure 
crisis and the impact it will have on American cities. It will 
be severe, it will be prolonged, and it will be very serious.
    Today's hearing is meant to examine what has brought us 
here. What are the motivations and practices of the lending 
industry that brought them to the verge of a financial crisis 
and brought American cities to the edge of downfall?
    For the record, I have invited leading trade associations 
for mortgage brokers, payday lenders, and the American Bankers 
Association to help us answer this question. We thought they 
were all going to be with us here. I am disappointed to learn 
that two out of three associations invited reconsidered their 
participation in the hearing. Now, Cleveland, my home town, is 
at the epicenter of this national problem.
    I want to point to some maps here with the help of staff. 
If you look at this map you see the sideways line V highlighted 
in light green. Let me tell you what that geographical area 
represents. It is the area in the city where depository banks 
made very few prime loans.
    Now this map highlighted in red and orange, look at the 
same V and the same place. This geographical area represents 
where the highest number of subprime mortgage loans were made 
during the same year.
    Now, this next map, again, the same V in the same place. 
Here, the red dots indicate the number of foreclosures.
    These maps tell you there is a clear and self-reinforcing 
correlation between the low number of prime loans, the high 
number of subprime loans, and the high number of foreclosures.
    Finally, the final map, again, the familiar sideways lying 
``V'' shape, but here the foreclosures indicated by blue dots 
are superimposed on the neighborhoods. Red indicates 
predominately African American neighborhoods. Again, they 
match.
    Lack of access to prime loans, a high frequency of subprime 
loans, and a high rate of foreclosures are by no means specific 
to any racial group, but this pattern certainly carries a whiff 
of America's dark past.
    I started my political career as a representative on the 
Cleveland City Council. Later I was clerk of courts, and then 
mayor of the city of Cleveland. During my tenure as mayor, 
Cleveland became the first city to sign a Community 
Reinvestment Act agreement pursuant to the then newly enacted 
Community Reinvestment Act of 1977. But what has happened to my 
city in the past decade is a story that is reflected 
nationwide.
    Consider a recently published report on seven of the 
Nation's largest financial institutions, entitled, Paying More 
for the American Dream. The report found that CitiGroup, 
Countrywide, GMAC, HSBC, J.P. Morgan, Washington Mutual, and 
Wells Fargo all originated a substantial volume of both higher-
cost subprime and lower-cost prime loans.
    The report also found the following: for these seven 
lenders, the percentage of total home purchase loans to African 
Americans that were higher cost was six times greater than the 
percentage of higher-cost home purchase loans to whites. Let me 
go over that one more time. These seven lenders, the percentage 
of total home purchase loans to African Americans that were 
higher cost was six times greater than the percentage of 
higher-cost home purchase loans to whites. Those percentages 
were actually 41.1 percent to 6.9 percent.
    Next point, the percentage of total home purchase loans to 
Latinos that were higher-cost loans was 4.8 times greater than 
the percentage of higher-cost home purchase loans to white, 
32.8 percent to 6.9 percent.
    In each of the cities examined, the seven lenders combined 
showed larger African American/white and Latino/white 
disparities than those exhibited in the overall lending market.
    Foreclosure and discrimination in lending practices, these 
are serious problems for America's cities, but in almost every 
major city there are significant numbers of hard-working 
Americans who are working to reverse these problems. Among our 
distinguished witnesses today are some of those Americans. 
These are individuals and organizations who have created viable 
alternatives to payday lenders and the foreclosure and subprime 
mortgages. These alternatives are the link between where we are 
now, at the brink of a massive wave of foreclosures, to where 
we want to be, on the road to the Nation's recovery where 
American families can live in: security physically, 
emotionally, and financially.
    But even with these alternatives, even if these hard-
working Americans worked every second of the day, the tide will 
not be turned, because the magnitude of the problem outstrips 
even the best of their abilities and efforts. To turn the tide 
of foreclosures in America's cities, leadership at the Federal 
Government level is necessary.
    Today we will have the opportunity to examine what the 
problem is and the steps that can be taken before it becomes 
bigger and beyond our capacity to resolve.
    With that, I would like to recognize the distinguished 
ranking member of the committee, my friend from California, Mr. 
Issa, for his presentation.
    Mr. Issa. Thank you, Mr. Chairman. I couldn't help, when 
you were speaking about being from Cleveland, to want to reach 
over and remind you that you not only represent most of my 
family in Cleveland, but I was born and raised there, so it was 
very insightful to look at the map of Cuyahoga County as we 
went through this. I appreciate the fact that today we have a 
number of experts from our hometown--not the town I represent, 
but our hometown.
    Mr. Chairman, I want to thank you again not just for 
holding this hearing but for allowing Congressman Michael 
Turner to sit in and participate. For those who don't know, I 
am sandwiched between two large city mayors from Ohio, and 
particularly Congressman Turner, who is recently a two-term 
mayor of Dayton before coming here and who has, since he 
arrived, concentrated on areas of urban America.
    Today's hearing is twofold, though. Today's hearing not 
only deals with the crisis, if we will, of subprime loans, but 
it is also dealing with something that affects my Congressional 
District, payday lending. Payday lending is a major and 
constant problem for the U.S. military. With over 44,000 
Marines and Navy corpsmen who operate from Camp Pendleton 
within my District, we are constantly dealing with bailouts 
coming through the USA, the Naval Relief, and so on to try to 
deal with Marines and Sailors who get behind by utilizing 
payday programs. These programs have an incredibly high rate, 
and if not for congressional action would have been completely 
unchecked. But we may need to do more.
    Today I look forward to hearing on both of these subjects, 
one which is in the news every day and one which is on Camp 
Pendleton and around military bases every day, including in my 
District.
    I will put the rest in for the record and yield back.
    Mr. Kucinich. I thank Mr. Issa for his participation and 
also note that we both share a strong interest in each other's 
communities. I am always grateful for the knowledge that you 
have about our hometown, so thank you.
    Mr. Issa. My brother is always calling to tell me, too, 
he's your constituent.
    Mr. Kucinich. Well, thank you very much.
    I would now like to yield to the gentleman from Chicago, 
Congressman Davis, for a statement.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
    First of all I want to thank you and the ranking member for 
holding this hearing. I am so pleased and delighted that it is 
taking place today because it was 30 years ago that the 
Community Reinvestment Act was born in my District, pushed by 
an organization called the Organization for a Better Austin, of 
which a woman named Gail Sincata was the leader, and I was, 
indeed, a member of that organization. I am very pleased to 
associate myself with Gail's name and with the tremendous work 
that she did.
    Chicago helped to lead the effort that heightened the 
obligation of the financial industry to reinvest in their 
communities. I am, indeed, disappointed that decades worth of 
efforts are threatened now by the suspect practices of various 
institutions. This hearing offers a wonderful opportunity to 
shine light on the problem and discuss specific potential 
solutions to support our citizens.
    The issue of predatory lending is a serious problem 
throughout the country and, indeed, in Chicago. In 2003-2004 
the number of foreclosures in Chicago failed, for the first 
time in over a decade, particularly on high-cost loans that had 
been regulated by the city and State after, I might add, a 
tremendous amount of community pressure.
    Many of the communities in my District are communities 
where, if economically other neighborhoods sneeze, they get 
pneumonia. Unfortunately, due to the predatory lending 
practices of various institutions, the rate of foreclosure on 
subprime loans is 19.2 percent. This is up 37 percent from 
approximately 5 years ago. In the North Londale community, 
foreclosures are up 247 percent since 1993, in West Garfield 
Park they are up 256 percent, and in the Near West Side they 
have gone up 440 percent--all of which are in the Congressional 
District which I represent.
    These foreclosures have dramatic effects on the surrounding 
communities. Foreclosures are associated with increases in 
abandoned properties and decreased property values. Indeed, for 
every one abandoned home, I understand that the property value 
of a surrounding home is devalued by $30,000. These effects are 
particularly harmful to those with the fewest assets. They see 
the equity that they have worked so hard to put into their 
homes shrivel up, and they often lack the resources to offset 
this negative spiral.
    Although the number of foreclosures in Chicago increased in 
both white and non-white neighborhoods, the vast majority of 
foreclosures on non-Federal Housing Administration loans were 
in neighborhoods in which 80 percent or more of the citizens 
were minority. In fact, data from the NCRC shows that African 
American borrowers in the Chicago area were 2.5 times more 
likely than whites to receive a subprime loan in 2005, with 
Latino borrowers being 1.82 times more likely to receive a 
subprime loan.
    These practices have made some obviously wealthy and others 
obviously poor. Obviously, today provides an opportunity--and I 
want to add my thanks to all of those who have come to witness, 
not only for your presence but also for your patience.
    Mr. Chairman, I would ask permission to submit for the 
record documents from the National Community Reinvestment 
Coalition and the National Training and Information Center that 
describe some of the problems with banking services and 
foreclosures in the Chicago area.
    Mr. Kucinich. Without objection, so ordered.
    I thank the gentleman from Chicago, and now would like to 
recognize for the purpose of his statement our colleague from 
the full committee, Congressman Turner, who is a former mayor 
of the city of Dayton, OH. Congressman, thank you very much.
    Mr. Turner. Mr. Chairman, I want to thank you for holding 
this important hearing. Your background as both a mayor and a 
leading advocate for individuals is very important for this 
process. You are taking up issues of urban and economic 
development but also issues that are important to families and 
individuals, and in that you can make a difference, so thank 
you very much for that.
    I also would like to thank you and Ranking Member Issa for 
including me in this hearing. I appreciate being included. As 
you know, I served as the chairman of the Federalism and Census 
Subcommittee in the last Congress, and we had taken up urban 
issues that included CDBG, the public housing issues, historic 
preservation, and brownfields. I am very appreciative of the 
fact that the chairman and I are working together on the issue 
of brownfields. It helps to be able to make a difference to 
neighborhoods that are plagued by abandoned factory sites and 
environmental conditions.
    Today we have before us the incredibly important issue of 
home foreclosures, predatory lending, payday lending practices. 
The latest figures from the Mortgage Bankers Association show 
that home foreclosures are a record high. You can certainly see 
that both, Mr. Chairman, in what you are experiencing in 
Cleveland, Cuyahoga County, and what we are experiencing in 
Montgomery County and in Dayton. These record foreclosures are 
linked to the mortgage lending practices in the subprime 
market.
    Rising interest rates and weak home prices have made it 
increasingly difficult for borrowers, especially those that 
took out subprime loans to meet their obligations. Owning and 
maintaining a home is a challenge, even under the best of 
financial circumstances. Owning a home when money is tight or 
non-existent is virtually impossible. I believe that home 
ownership is a privilege that everyone should enjoy, but we 
must not allow for the dream of home ownership to be shattered 
because of questionable and less than honest mortgage practices 
that can steal individuals' futures.
    Mr. Chairman, I would like to recognize one of our 
witnesses, Mr. Jim McCarthy, who is the president of the Miami 
Valley Fair Housing Center of Dayton, OH.
    Thank you, Jim.
    Jim is going to tell us about how his organization works to 
combat predatory lending, and I urge the members of this 
subcommittee to listen closely to his testimony, especially as 
it relates to how we might be able to address predatory lending 
at the local level. His organization has taken an effort to 
educate homeowners and to also assist those who have gotten 
into trouble.
    Mr. Chairman, one other thing I would like to add is that, 
as I served as mayor and as we were facing the issue of 
predatory lending and we would see the individual crises and 
the price that this would have for homeowners, my community 
continued to wonder how the financial markets could sustain 
these types of losses that would be inevitable, because even 
though individual's lives were being impacted, actual capital 
was being lost in the market that cumulative one would expect 
would have an impact. Today we are now seeing the results of 
that as the headlines are beginning to show concerns in the 
financial markets over these practices having happened that 
have impacted industry lives.
    So, Mr. Chairman, I thank you for holding this hearing.
    Mr. Kucinich. I thank the gentleman from Ohio.
    Mr. Cummings from Maryland will speak next. Thank you, Mr. 
Cummings.
    Mr. Cummings. Thank you very much, Mr. Chairman. I cannot 
even begin to thank you enough for holding this hearing today.
    Mr. Chairman, as I go into my statement, I hope that these 
hearings will yield some results. I think that so often we hold 
hearings--and I have said this on other committees that I sit 
on--but when it comes to results sometimes something happens 
and we don't get there. I have looked at some of the testimony 
here today and I know that a lot of the people here will talk 
about things that they are trying to do to prevent foreclosures 
and things that stem from predatory lending and trying to 
address to whole payday loan situation. We in Baltimore have 
done quite a bit in those areas, too.
    So I appreciate your efforts to examine the challenges 
facing America's cities, and I think the timely issue of 
predatory lending is an excellent place to start.
    News reports surrounding the recent subprime mortgage 
industry's crisis have shone a national spotlight on a problem 
that was already known to those of us familiar with our cities. 
Low and moderate-income communities are being targeted by 
lenders whose singular concern is making money at the expense 
of others. For example, subprime loans trapped individuals with 
poor credit by offering a low introductory interest rate that 
is followed by dramatic rate increase. This year, mortgage 
payments on 41 percent of all subprime loans will increase. 
Additionally, these loans frequently have an interest-only, no 
principal balloon structure and prepayment penalties. These 
practices discourage borrowers from paying down their debt and 
create a series of scenarios that could easily spiral out of 
control.
    To be sure, roughly one in five subprime loans go into 
foreclosure at least once. This is bad news for individual 
borrowers, and it is bad news for entire communities, as well. 
Foreclosures have a domino effect in the community. They 
depress nearby property values, leading to additional 
foreclosures. This cycle has devastated far too many low and 
moderate-income communities in America's cities.
    I am disappointed that the problem had to affect the stock 
market before it really garnered the national attention that it 
deserved, but I appreciate the opportunity to investigate the 
larger issue of predatory lending with this one high-profile 
example as a backdrop.
    Today we will also look into the practice of payday 
lending, which targets low and moderate-income individuals who 
are strapped for cash. Payday loans offer short-term loans 
payable in full after 30 days or less with interest and a fee. 
The typical payday loan borrower is not as financially unstable 
as you might expect. He or she is likely to have steady 
employment, a relationship with a bank, and the ability to 
transfer funds electronically.
    As I close, unfortunately the same circumstances that 
caused the borrower to seek a payday loan in the first place 
are likely to prevent him or her from paying it off within the 
allotted time. For this reason, borrowers become trapped in a 
long-term debt making high interest-only payments. Payday loans 
can include interest rates higher than 300 percent.
    I am seriously concerned that companies are profiting by 
trapping vulnerable low and moderate-income individuals in 
cycles of debt.
    In 1997 Congress passed the Community Reinvestment Act to 
prevent this injustice. I am interested to learn what we can do 
to better protect our low and moderate-income communities, and 
I appreciate the chairman's attention to this critical issue.
    As I close again, Mr. Chairman, there is one interest 
thing. I don't know whether it happens in Cleveland, but in my 
community--I live in the inner city of Baltimore--you can go 
miles and not find a bank in the African American community and 
poor communities. So I am hoping that we will look into these 
matters and go beyond the hearing, Mr. Chairman, and try to 
come up with some results.
    [The prepared statement of Hon. Elijah E. Cummings 
follows:]
[GRAPHIC] [TIFF OMITTED] 37416.004

[GRAPHIC] [TIFF OMITTED] 37416.005

[GRAPHIC] [TIFF OMITTED] 37416.006

    Mr. Kucinich. I thank the gentleman from Maryland.
    The gentleman from Massachusetts, Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman. I add my comments to 
the others in thanking you for having this important hearing, 
and thank all of the witnesses for their testimony, both the 
written testimony, as well as what you will give verbally here 
today. This is proposed to be a long hearing, and I know some 
of us have to apologize in advance for being in and out of the 
room for other commitments, but it doesn't mean that we haven't 
had an opportunity to read thoroughly what has been provided by 
this panel, as well as the next panels, and appreciate it.
    In my District, in Essex County I note on the chart here 
from 1998 to 2001, that period up to 2006 has seen an increase 
in foreclosures of 289.1 percent. It is a huge issue in my 
community, as well as others on the panel that have spoken 
here. I look forward to your proposed solutions, because I 
think we have identified the problem pretty well. I am looking 
forward to hearing your comments on how we might be of 
assistance to people to stop this from snowballing out of 
control worse than it has now.
    Again, thank you, Mr. Chairman, for attending to this 
matter.
    Mr. Kucinich. I thank the gentleman from Massachusetts.
    If there are no other additional statements, this 
subcommittee will now receive testimony from the witnesses 
before us today.
    I would like to begin by introducing our first panel.
    From my left, Mr. Jim Rokakis. Jim Rokakis took office as 
Cuyahoga County treasurer--that is in Cleveland, OH--in March 
1997, after serving for over 19 years on the Cleveland City 
Council. Mr. Rokakis has brought sweeping reform to the 
treasurer's office. He overhauled the Cuyahoga County's 
property tax collection system and significantly improved 
Cuyahoga County's investment function. Mr. Rokakis 
revolutionized the way Ohio counties collect delinquent 
property taxes by working successful to pass Ohio House Bill 
371 that allows county treasurers in Ohio's largest counties to 
sell their property tax liens to private entities. Mr. Rokakis 
spearheaded House Bill 294, which streamlines the foreclosure 
process for abandoned properties, and was instrumental in 
creating Cuyahoga County's don't borrow trouble foreclosure 
prevention program. Mr. Rokakis developed nationally recognized 
link deposit loan programs that have helped revitalize the 
county's housing stock and reduced urban sprawl. Additionally, 
he worked to pass Ohio House Bill 293 that allows senior 
citizens to defer property tax payments. Our new Governor and 
former colleague Ted Strickland has appointed Mr. Rokakis to 
Ohio's recently formed Task Force on Foreclosures in Ohio.
    The next witness will be Ms. Inez Killingsworth, who is the 
president of the East Side Organizing project, as well as co-
chairperson of the National People's Action, which is a 
coalition of hundreds of grassroots organizations. She is a 
national leader in the fight for reform of the Federal Housing 
Administration, predatory lending, and advocating neighborhood 
safety. The East Side Organizing Project was founded in 1993 to 
create organized leadership around issues that impact 
neighborhood life in Cleveland. ESOP works with community 
residents, schools, businesses, churches, and other 
neighborhood institutions to identify issues and take actions 
that create safe, economically strong, and stable communities 
for our residents. Decisions about strategy and organizational 
direction are made by ESOP members. Since 1998, much of ESOP's 
work has focused on predatory lending, divestment of capital, 
and quality loan services for low income and minority 
communities, and the foreclosure explosion in Cuyahoga County 
and the city of Cleveland. ESOP's aggressive approach toward 
predatory lending has been nationally recognized for its 
effectiveness in fighting loan industry abuses and setting up 
better loan services in low income communities.
    We will hear from Mr. William Rinehart, who has served as 
vice president and chief risk officer of Ocwen since April 
1999, where he is responsible for internal audit, information 
security, quality assurance, Sarbanes-Oxley compliance, credit 
policy and administration, community relations, regulatory 
compliance, and Six Sigma. He joined Ocwen in 1998 as director 
of Credit Policy. Ocwen Financial Corp. formed in 1988 as a 
public company--it is on the New York Stock Exchange--
headquartered in West Palm Beach. Ocwen derives the majority of 
its revenues from the servicing of residential mortgage loans 
for third party institutional investors. Ocwen currently 
services approximately 480,000 mortgage loans with unpaid 
principal totaling $55 billion.
    The next witness will be Mr. Josh Nassar, vice president of 
Federal affairs for the Center for Responsible Lending [CRL]. 
CRL is a nonprofit, nonpartisan research and policy 
organization that promotes responsible lending practices and 
access to fair terms of credit for low wealth families. CRL is 
dedicated to protecting home ownership and family wealth by 
working to eliminate abusive financial practices. CRL has 
conducted or commissioned landmark studies on predatory lending 
practices and impact of State laws that protect borrowers. CRL 
has also supported State efforts to combat predatory lending 
and worked for regulatory changes to require responsible 
practices among lenders nationwide.
    The next witness is Professor Dan Immergluck. Professor 
Immergluck teaches courses, including real estate finance, 
housing policy, research methods at Georgia Technology. He has 
also taught courses in policy analysis, urbanization, and 
nonprofits and public policy. He conducts research on real 
estate and housing markets, economic development, community 
development, community reinvestment, fair housing, and urban 
and regional planning and policy. Professor Immergluck 
previously taught at Grand Valley State University in Grand 
Rapids, MI, and was for almost a decade a senior researcher 
with the Woodstock Institute in Chicago, which is a nonprofit 
research organization focused on community and economic 
development. At the institute he served as the primary deputy 
to the president, authored dozens of reports, advised Federal, 
State, and local government, as well as nonprofit agencies. The 
professor has also worked as an economic development planner 
for an industrial development organization in Cleveland and for 
the State of Ohio. His most recent book, Credit to the 
Community, examines the history of lending discrimination and 
red-lining, fair lending policy, and the Community Reinvestment 
Act.
    Finally, Mr. Harry Dinham, president of the National 
Association of Mortgage Brokers, has served in leadership roles 
for both the Texas Association of Mortgage Brokers and the 
National Association of Mortgage Brokers. Established in 1973, 
the National NAMB is the only national trade organization 
representing the mortgage broker industry. Fifty State 
affiliates, more than 27,000 members, the NAMB promotes the 
industry through programs and services such as education, 
professional certification, and government affairs 
representation.
    I want to thank each and every one of the witnesses for 
appearing before the subcommittee today.
    It is the policy of the Committee on Oversight and 
Government Reform to swear in all witnesses before they 
testify.
    [Witnesses sworn.]
    Mr. Kucinich. The record will reflect that the witnesses 
answered in the affirmative.
    I will ask that each of the witnesses, beginning with Mr. 
Rokakis, now give a brief summary of their testimony, and to 
keep this summary within 5 minutes duration. I want you to bear 
in mind that the complete written statement that you present 
will be included in the hearing record.
    Mr. Rokakis, you are our first witness. I welcome you as 
not simply as the distinguished treasurer of Cuyahoga County, 
but as someone who I have served with in public life for 
decades. You have been an exemplary public servant and you 
honor us with your work and your presence. Thank you very much 
for being here. Please proceed.

    STATEMENTS OF JAMES ROKAKIS, CUYAHOGA COUNTY TREASURER, 
    CLEVELAND, OH; INEZ KILLINGSWORTH, PRESIDENT, EAST SIDE 
    ORGANIZING PROJECT, CLEVELAND, OH; BILL RINEHART, VICE 
 PRESIDENT AND CHIEF RISK OFFICER, OCWEN FINANCIAL CORP., WEST 
    PALM BEACH, FL; JOSH NASSAR, VICE PRESIDENT, CENTER FOR 
 RESPONSIBLE LENDING, WASHINGTON, DC; DAN IMMERGLUCK, GEORGIA 
    INSTITUTE OF TECHNOLOGY, ATLANTA, GA; AND HARRY DINHAM, 
PRESIDENT, NATIONAL ASSOCIATION OF MORTGAGE BROKERS, MCLEAN, VA

                   STATEMENT OF JAMES ROKAKIS

    Mr. Rokakis. Thank you, Mr. Chairman. Thank you, Chairman 
Kucinich and Ranking Member Issa, for allowing me to speak 
today on the topic of subprime lending and the harm that it has 
caused to so many communities all over America, particularly 
communities in Ohio. The damage to the Buckeye State has been 
enormous, but, sadly, the news of the past few months convinces 
me that the worst is yet to come.
    My name is Jim Rokakis. I am the county treasurer for 
Cuyahoga County, OH, a county of over 1.3 million people that 
includes Cleveland and 59 suburban communities.
    For at least the past 7 years, urban leaders in cities like 
Cleveland, Dayton, Toledo, and other older, more mature cities 
throughout America have been decrying the explosion in 
foreclosure filings in their communities. They have complained 
of abandonment, of property flipping, and of a lending industry 
that we thought was behaving so irresponsibly we were convinced 
that some day a segment of that industry, the subprime sector, 
would implode.
    We complained of no document loans and of adjustable rate 
mortgages that would reset at a rate higher, that would be well 
beyond the means of the borrower. We complained of borrowers 
known as NINJAS, no income no jobs no assets, who were often 
buying multiple properties, very often with no down payments. 
We complained of fraud on an unprecedented scale that involved 
buyers, sellers, brokers, bankers, and appraisers.
    Mr. Chairman and members of the committee, these tactics 
have devastated Cleveland and its neighborhoods. The most 
obvious example, Chairman Kucinich, is a neighborhood in 
Cleveland that you once represented, known as Slavic Village, 
where 900 homes have been abandoned in just the past several 
years.
    We pleaded for help at the State level, but we were no 
match for the lobbying team assembled by the mortgage brokers, 
the bankers, and financial services industries that have come 
to view securitization and the use of collateralized debt 
obligations as a foolproof way to finance mortgages in this 
country, not just for people with good credit but for people 
with bad credit or no credit at all.
    You have heard this before, but it bears worth repeating. 
The American dream of home ownership has become, for the 
hundreds of thousands of Americans who have been foreclosed or 
who are being foreclosed or who will be foreclosed this year, 
for those Americans it has become a nightmare. For older, 
struggling American cities like Cleveland this promise of the 
American dream has become a nightmare, burdening these 
communities with vacant properties and maintenance costs these 
cities cannot afford.
    For the millions of Americans who live next to one of these 
properties or on a street with a vacant home or many vacant 
homes, who have witnessed a precipitous decline in the value of 
the most valuable asset, their home, this foreclosure disaster 
has become a nightmare for them, too.
    Last March we began a foreclosure prevention program in our 
county that asked our residents who were facing foreclosure to 
call 211-hotline where operators referred them to foreclosure 
counseling specialists. The director of that program, Mark 
Wiseman, is seated behind me. I am proud to say we saved 
approximately 600 homeowners from foreclosure during that 
period, but I am sobered by the fact that for every mortgage we 
saved, 20 more foreclosures are filed with our clerk of courts. 
We have gone from 3,500 private mortgage foreclosures in 1995 
to 7,500 private mortgage foreclosures in 2000, to over 13,000 
in 2006, with no end in sight. These increases coincide 
perfectly with the growth of the subprime lending industry.
    What are we asking for this Congress to do? Don't fall for 
the argument that some on Wall Street are starting to voice, 
that this is a market problem that the market will correct, 
that the market is already doing so by tightening credit 
standards. Mr. Chairman, we have already talked about it, but I 
have read various reports that estimate anywhere from 1.4 to 
2.4 million mortgages will go into default. The losses suffered 
as a result of these defaults will run into the hundreds of 
billions of dollars. On a daily basis we read reports of 
mortgage banks that are filing bankruptcy or are facing 
bankruptcy. Does anybody really believe this is all caused by a 
little hiccough in the market, one that we should trust the 
market to correct?
    There are two areas where this Congress can be of great 
help. Certain loan products must be abolished and loan officers 
must be held to fiduciary duty. No document loans have no place 
in the home mortgage industry. These loans, which are 
unapologetically referred to as liar's loans among brokers, are 
an invitation to fraud and should be outlawed. If your borrower 
can't prove beyond doubt what their income is, why are you 
lending them money in the first place?
    As far as loan officers are concerned, Mr. Chairman, the 
loan officer knows with a considerable degree of certainty 
whether the borrower he is working with will be able to repay 
that loan, yet they reject the notion that they should be 
required to have that borrower's best financial interest at 
heart when driving the decisionmaking. This is the most 
important financial decision these borrowers will ever make, 
and it is critical that these mortgage brokers be held to the 
highest fiduciary standards.
    There has been talk in this Congress of a suitability 
standard. Does the borrower have the income to make a monthly 
loan payment, not only next month's payment but the payment 
when the loan rate resets? Selling somebody a loan they don't 
need or can't afford should cost that mortgage broker his or 
her license.
    When the industry testifies before this panel, please ask 
yourself one question: why are we here to address what has 
become a national crisis? They will blame the foreclosure 
disasters on a slow economy and rising unemployment, on rogue 
brokers and bankers who have misbehaved.
    I am going to tell you we have enough laws and regulations. 
We just need to do a better job of enforcing the ones we have. 
Ask them if lax or non-existent underwriting standards haven't 
played a role in this disaster, or if high fees and bonuses 
totaling billions of dollars to brokers who are ordered to 
write mortgages with higher interest rates and excessive fees 
haven't contributed to this foreclosure tsunami.
    Mr. Chairman, you will never be able to put a dollar amount 
on the heartbreak, the pain, and the distress caused to these 
families. Never. Please reject the argument that if Congress 
reigns in the abuses of the subprime industry, that it will dry 
up credit for the millions of Americans with less than perfect 
credit.
    There is unquestionably a place for subprime lending in 
this country. Subprime loans can provide opportunity for people 
to own a home who might not otherwise have that chance. But, 
Mr. Chairman and members of the committee, to say that you must 
accept these abusive practices as part of the solution, well, 
that is just plain wrong.
    Thank you for this opportunity.
    [The prepared statement of Mr. Rokakis follows:]
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    Mr. Kucinich. Thank you very much, Mr. Rokakis.
    Now the Chair will recognize Inez Killingsworth, the 
president of East Side Organizing Project. Thank you very much, 
Ms. Killingsworth. You may proceed.

                STATEMENT OF INEZ KILLINGSWORTH

    Ms. Killingsworth. Thank you, Mr. Chairman, and to the 
subcommittee. I am especially honored today to tell you that I 
was beside Gail Sincata, known as the mother of CRA, during the 
fight over a decade ago on CRA, that law that allowed banks and 
confined banks that they must be accountable to all people. 
When Gail passed, I kind of stepped up to the plate, not to 
fill Gail's shoes, but to challenge people to get the crooks. I 
am national co-chairperson of the National People's Action. 
Again, I would like to thank you for convening this meeting and 
allowing ESOP to be a part of this.
    What I like to call is the Perfect Storm of how it 
happened. I live in a community that has been destroyed by all 
levels of government, with the exception of our county 
treasurer, who you just heard from today. Without question, 
cities in Cleveland were ripe for the picking. The steel 
industry was leaving. The secondary industries went belly up. 
And we continue to have what I call a brain drain. Indeed, the 
banking industry would like you to believe that they pulled out 
of Cleveland because of the economy. Well, I would like to say 
that is not true. They pulled out because they could get more 
money in the subprime with their subprime affiliates than they 
could with their regular loans. They did not pull out. That was 
no mistake. They did not do what they were supposed to do in 
terms of the CRA.
    Consider National City Bank, whose headquarters is in 
Cleveland. Until very recently, National City owned First 
Federal Finance. I encourage you to read the Plain Dealer 
article of March 15, 2007 where National City Bank has put $50 
million in reserve because it foolishly invested in First 
Franklin Financial, but now has to foot the bill for that 
company's abusive practices as they are stuck with all of those 
loans.
    National City is not alone. Consider Key Bank, who also 
learned the parting of their ways when they decided to sell 
their subprime affiliate, Champion Mortgage, late last year. 
Had National City Bank, Key Bank, and other banks not chosen to 
cut their lending practices in the low and moderate-income 
communities over the last 10 years, we would not be here today. 
We would have better service in our community. Of course, had 
the banking regulators did their job, also, we would not be 
here.
    I live in the Union Miles community. I have lived in there 
for more than 30 years. I remember when we had banks in our 
neighborhood, but one by one they all disappeared. The subprime 
industry will tell you that they acted based on the economics 
of supply and demand. That is probably one of the things that I 
kind of agree with them on, but the fact is, as the banks 
abandoned low and moderate-income neighborhoods, the subprime 
industry moved in, and moved in fast.
    For example, in 2002 Argent Mortgage Co., the wholesale 
lending arm of ACC Holding, which also owns Ameriquest 
Mortgage, had no presence in the city of Cleveland, but since 
2003, however, despite only offering a subprime loan product, 
they have been the largest lender in the Cleveland area. I 
guess you can figure out why.
    I would suggest to you that Argent's surge in Cleveland is 
the result of years of local banks turning their banks on low 
and moderate income.
    I would like to spend a minute and give you some sense of 
how devastating this has been in Cleveland. Ohio foreclosure 
rate is three times the national average, and the highest in 
all of the States. This data says that 12 out of 13 largest 
Ohio counties indicate that 2003 foreclosure filings increased 
by an estimate of 25 percent over 2005 in the year of 2005. 
Despite representing less than 5 outstanding mortgages, 
subprime loans account for 70 percent of all the foreclosures.
    In the Cleveland community where I live, I remember going 
past houses that were very vital, having barbecue meals in the 
back yard. This one particular lady, Mrs. McCoy--I bring her 
name up because she was very dear to me, and she was always 
talking about the subprime lender and how they were taking 
advantage of our neighborhood. Well, today Mrs. McCoy is no 
longer with us, but before she passed on she lost her home.
    ESOP has a model that we work with in terms of our hot spot 
cards and how we approach that in terms of trying to help 
people to save their home and not be homeless. We worked along 
with National People's Action NTIC a few years ago, to get an 
agreement with CitiFinancial. CitiFinancial, as you know, is a 
part of the CitiGroup, the largest bank in the world. 
CitiFinancial acquired the associates a few years ago, and we 
were going after them because in our community we were hearing 
complaints of people about their loans.
    We finally got an agreement with CitiFinancial after years 
of wrangling over what it was. We developed out of that 
agreement what we call our hot spot card. Our hot spot card 
allows us to gather information that we may be able to use to 
help people to refinance or get a forbearance or even a 
resolution to that loan. That is one of the things that has 
gone national with ESOP is our hot spot cards, and we work very 
closely with the county.
    We also have an agreement with Select Portfolio, better 
known as Fairbanks. We also have an agreement with Ocwen. Mr. 
Rinehart is to my left here today to talk about how we work 
together to save people's homes in Cleveland.
    I could go on and on and on, but I see my time is up. I 
thank you very much.
    [The prepared statement of Ms. Killingsworth follows:]
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    Mr. Kucinich. I want to note that all witnesses' testimony 
will be included in the record. If you would like to confine 
your remarks to 5 minutes I can assure you that the record of 
the committee will reflect your full remarks, but I can 
understand, in reading the full text of all of your 
presentations, and notably Ms. Killingsworth and Mr. Rokakis 
who have just testified, you know, it is good for us to hear 
this, and I am so grateful that you are here to make the 
presentation.
    I want to note that we have been joined by Mr. Murphy of 
Connecticut and Ms. Watson of California. Thank you for being 
here.
    The next witness, Mr. Rinehart. Mr. Rinehart is vice 
president and chief risk officer of the Ocwen Financial Corp. 
Thank you for being here. Please proceed.

                 STATEMENT OF WILLIAM RINEHART

    Mr. Rinehart. Thank you, Mr. Kucinich, Ranking Member Issa, 
and members of the committee, for giving me and Ocwen Financial 
Corp. the opportunity to share our thoughts with you today.
    We--and I mean that in the broadest sense to include the 
mortgage industry, Congress, regulators, consumer advocates, 
and State officials--have two issues to address. The first is 
what changes are needed to ensure that all participants in the 
origination of subprime mortgages act responsibly. The second, 
what do we do to assist borrowers who are already facing 
difficulty.
    Insofar as Ocwen is a loan servicer and not an originator 
or broker, my remarks today will focus primarily on the second 
point; that is, what Ocwen is doing to help our servicing 
customers who are currently having trouble repaying their loans 
to stay in their homes.
    As I indicated in my written statement provided to you, 
foreclosure is a lose/lose/lose proposition for the homeowner, 
for Ocwen as servicer, and for the investor who owns the loan. 
Foreclosure should be pursued only when all other options have 
failed.
    Regardless of the type of loan the borrower has or how it 
was underwritten, subprime borrowers often have little 
financial cushion to withstand any financial shocks. Any change 
in their income level through job loss, reduction in hours, 
death or disability of a wage earner, or unexpected expenses. A 
leaky roof, broken hot water heater or furnace, new 
transmission for their car, or medical expenses can cause an 
immediate crisis for these homeowners.
    Borrowers already facing difficulty in repaying their 
mortgage who are then impacted by an interest rate increase 
because they have an adjustable rate mortgage have a high 
likelihood of experiencing financial default. Because 
foreclosure is a bad economic proposition for all parties, 
Ocwen has worked hard to develop processes to help defaulting 
customers find alternatives to foreclosure. Ocwen is proud of 
our industry-leading loss mitigation programs that avoid 
foreclosure for more than 80 percent of our customers who 
become 90 days or more past due. In the small percentage of 
cases that do go to foreclosure, the primary root cause is our 
inability to open a line of communication with our customer.
    Despite our repeated attempts to reach out to our customers 
through telephone calls and letters, some customers, due to 
shame, fear, and a lack of knowledge, tune us out. We also make 
available to borrowers an instructional DVD that explains the 
various solutions available to them. If the committee would 
like a copy, I would be happy to provide one.
    Mr. Kucinich. We would.
    Mr. Rinehart. OK.
    Mr. Kucinich. Thank you.
    Mr. Rinehart. But, again, if the customer won't talk to us, 
we can't help them.
    To close the communication gap, Ocwen has partnered with 
nonprofit housing advocacy groups, including the National 
Training and Information Center in Chicago and their affiliate, 
the East Side Organizing Project in Cleveland, to reach out to 
Ocwen customers to try to find alternatives to foreclosure. We 
provide lists of our customers who we have been unable to 
contact to these housing advocacy groups. Receiving contact 
from a local trusted community group such as ESOP may spur the 
Ocwen customer to make a call and take that critical first step 
to avoiding foreclosure.
    Through these partnerships, we have helped many Ocwen 
customers stay in their homes. Substantial changes in how 
subprime mortgages are granted have already occurred, and more 
are likely to occur. These changes have resulted from market 
factors--that is, investors and investment banks are requiring 
product and underwriting changes--and from recent regulatory 
guidance. These changes will reduce the number of new borrowers 
finding themselves in trouble only months after receiving their 
loan. These changes, however, will make it more difficult for 
borrowers already in a loan to fix their current problems.
    Ocwen and other servicers, groups like NTIC and ESOP, 
investors, and investment banks must work together to help 
these homeowners already facing difficulties.
    Thank you.
    [The prepared statement Mr. Rinehart follows:]
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    Mr. Kucinich. I thank the gentleman.
    We will next hear from Josh Nassar, who is with the Center 
for Responsible Lending.
    Please proceed.

                    STATEMENT OF JOSH NASSAR

    Mr. Nassar. Thank you, Chairman Kucinich, Ranking Member 
Issa, and members of the committee for having this important 
hearing today, and thank you for inviting me to testify on this 
important topic.
    As has been mentioned, we estimate that, of the subprime 
mortgages made in the past 2 years, 20 percent will fail, not 
just enter foreclosure, but the person will actually lose their 
home. The impact on urban communities is absolutely profound. 
Keep in mind that over half of African American homeowners have 
subprime mortgages and 40 percent of Latino homeowners.
    When looking at the practices in the subprime industry, it 
really should come as no surprise that we are seeing such high 
rates of foreclosures. The dominant loan product in the 
subprime market that most homeowners in subprime market have is 
called a 2/28 or a 3/27 hybrid ARM. That simply means that for 
the first 2 or 3 years the person has a fixed-rate loan. Then 
it enters an adjustable period.
    But here's the problem: these loans have a built-in payment 
shock of at least 30 percent, meaning that if you have a $2,000 
monthly payment, it is going to jump to $2,600, at least. 
Generally these loans are only underwritten. The lender is only 
providing a loan based on the person's ability to afford the 
loan for the fixed rate period, not for the adjustment period, 
so it really shouldn't come as a surprise that we are seeing 
these problems.
    The other thing is that many times, as has been mentioned, 
people are receiving no-doc and low doc note loans, which make 
it extremely difficult for someone to actually afford the cost 
of the loan and generally costs more money.
    Lenders also frequently do not escrow for taxes and 
insurance, meaning that a person has a major bill due in 
addition to the payment shock. And most subprime homeowners 
have a prepayment penalty. Over 70 percent of subprime 
homeowners have prepayment penalties on their loans. Less than 
5 percent of prime borrowers have prepayment penalties. This 
means that most homeowners have a terrible choice. They get hit 
with the prepayment penalty, or they have to pay the adjusted 
rate. It is a lose/lose situation. They are between a rock and 
a hard place.
    Another thing that should be taken into account is that 
many people in the subprime market actually qualify for prime 
loans. It has been estimated by Freddie Mac that at least 20 
percent of people in the subprime market who receive subprime 
loans could qualify for a prime loan, and the reason why is 
because there is massive steering going on in the subprime 
industry.
    We have shown in our research, which I attached to the 
testimony, that African American and Latino homeowners are 30 
percent more likely to have a subprime loan, even when they 
have the same credit score as their white counterparts. So it 
is not just about credit risk. There is a lot more going on 
here.
    So what should be done? That is the natural question. Well, 
first of all Congress should pass a comprehensive anti-
predatory lending law that not only holds lenders and brokers 
accountable but also allows States and localities to add 
additional protections down the road.
    We should also have a return to sound underwriting where a 
person is qualified for a loan not just for the initial period 
but also when the loan adjusts upward. Without that, it is 
going to be ineffective.
    In addition, brokers really need to have more duties, a 
fiduciary duty to homeowners. Over 70 percent of subprime loans 
are made by mortgage brokers, and so if we are going to attack 
this problem we have to deal with the role of mortgage brokers 
who have a financial incentive to put people in a higher rate 
loan than what they qualify for through the payment of yield 
spread premiums.
    In addition, the Federal regulators, bank regulators, have 
proposed new guidance which calls on institutions to underwrite 
loans to the adjusted rate. We hope that those regulations are, 
in fact, finalized, and then the Federal reserve makes sure 
that it is applied to the entire market, not just to national 
banks and to federally regulated banking institutions.
    And we encourage lenders and servicers to reach out to 
homeowners now to try to avoid what we will perceive is a much 
bigger problem as far as people entering foreclosures.
    Finally, we call on the GSEs to play an increased role. 
Recently Freddie Mac announced that they were going to require 
from the loans they buy that lenders are actually going to 
underwrite to the adjusted rate, to after the teaser rate. 
Fannie Mae, unfortunately, has not followed their lead and has 
not taken the same action. We would hope that Fannie Mae would 
take the same action.
    The impact of these issues on communities and wealth, it is 
difficult to overstate. I would just say to keep in mind that 
African American and Latino households have only 17 percent of 
the wealth of white households, so the impact and abuses in 
subprime industry are just absolutely devastating.
    Thank you. I would be happy to answer your questions.
    [The prepared statement of Mr. Nassar follows:]
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    Mr. Kucinich. I thank the gentleman.
    Next we will hear from Dan Immergluck, Ph.D, associate 
professor, City and Regional Planning Program, Georgia Tech. 
Thank you.

                  STATEMENT OF DAN IMMERGLUCK

    Mr. Immergluck. Good afternoon and thank you, Chairman 
Kucinich, and members of the subcommittee.
    It is clear to me that the subprime mortgage market and 
some parts of the prime market are in many respects 
fundamentally dysfunctional. We have had a flood of poorly 
structured mortgage credit, much of it which works to the 
detriment of the borrower and to the benefit of brokers, 
lenders, and some investors. The phenomenon is distorting 
housing markets and harming neighborhoods and communities.
    One major problem which is being amplified nationally now 
as housing appreciation stalls in many more places is that 
subprime foreclosure rates are routinely running at more than 
10 to 15 times those of prime mortgages. In some localities 
this is more than 30 times difference. The greatest increases 
in foreclosures in the late 1990's were generally confined to 
central city neighborhoods with high proportions of lower 
income and minority residents. These areas continue to be hit 
very hard, but now, as the subprime industry has grown so much 
in recent years, its appetite for pushing product to a wider 
and increasingly suburban market has swelled and foreclosures 
are now following.
    In the five-county Atlanta market, for example, really a 
region that hasn't suffered from weak economy of any kind, 
foreclosures increased over 180 percent from 2000 to 2006, and 
the county with the highest rate of increase was Gwinnett 
County, a predominantly middle-income suburban county.
    Overly aggressive lending, especially in the subprime 
market, hurts housings by encouraging speculation, driving up 
property values to unsustainable levels, and creating 
essentially bubble neighborhoods. Faculty at the Wharton 
Business School recently found that aggressive adjustable rate 
lending pushes up neighborhood housing values at first and then 
pushes them down much farther when the inevitable market 
decline occurs.
    Property appreciation that is built upon financing gimmicks 
and short-term teaser rates is not real, sustainable 
appreciation, and in the long run discourages the smooth 
functioning of housing markets and neighborhood economies. Many 
neighborhoods subject to high levels of aggressive lending end 
up suffering from high foreclosure rates, which my own research 
has shown depressed values of surrounding properties.
    So the true complete cost of foreclosures are borne more by 
the borrowers and the communities in which they live than by 
the lenders and investors supplying the credit. Cities, 
counties, and school districts lose tax revenue and have to 
control the abandoned properties that fall out.
    Therefore, irresponsible, overly aggressive lending hurts 
neighborhoods and neighbors who had no role in the credit 
decision. Even if one does not believe it is the Government's 
role to protect vulnerable homeowners--and I should add that I 
do believe that it is--it is hard to argue there is no role for 
Government in regulating practices and products that harm 
entire communities. Given that some cities have not 
experienced, at least until recently, the high levels of 
foreclosures that cities like Cleveland, Detroit, Baltimore, 
and Atlanta have, and the fact that many of these markets are 
now cooling, we can be very sure that the foreclosure problems 
will be getting far worse at a national level before they get 
better.
    Some have portrayed the increases in subprime and exotic 
mortgages as merely responding to demand as housing prices have 
risen in some markets. However, when such products allow buyers 
to stretch much farther, farther than they should, they can 
become as much a cause as an effect of higher home prices.
    I would like to mention just a few quick policy 
recommendations.
    First, regulators and Congress should issue regulations 
that return the mortgage market to a predominant reliance on an 
ability to pay rationale in all underwriting. Congress, the 
Federal Reserve, and other regulators should do whatever is 
necessary to extend such regulations to State-regulated 
mortgage lenders and not just depository institutions.
    Second, there is an urgent need for making all actors in 
the mortgage supply chain accountable for their role in the 
mortgage process. Liability for reckless lending needs to 
follow from the broker to the lender to the investor. Nothing 
will create more accurate information and reduced fraud better 
than exposing investors to the downside risk of providing 
capital to irresponsible lenders.
    Third, Federal preemption of stronger State laws is not an 
appropriate quid pro quo for better Federal regulation. The 
research shows that mortgage markets are not significantly 
impeded by different State regulatory regimes. We have had 
different regimes in foreclosure for many years, and I haven't 
seen a significant problem. Federal law should be strengthened 
to provide a structurally sound floor of basic mortgage 
regulation, not one based solely on a confusing battle of 
dozens of disclosure documents.
    Thank you.
    [The prepared statement of Mr. Immergluck follows:]
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    Mr. Kucinich. Thank you very much.
    We will now hear from Harry Dinham, who is the NAMB 
president, National Association of Mortgage Brokers.
    Thank you, sir. Welcome. Please proceed.

                   STATEMENT OF HARRY DINHAM

    Mr. Dinham. Good afternoon, Chairman Kucinich and members 
of the subcommittee. I am Harry Dinham, president of the 
National Association of Mortgage Brokers. NAMB is committed to 
preserving the vitality of our cities and the dream of 
homeownership. We commend this committee for holding this 
hearing.
    NAMB is the only trade association devoted to representing 
the mortgage broker industry. We speak on behalf of more than 
25,000 members in all 50 States and the District of Columbia. 
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 that it is a tragedy for any family to 
lose their home. 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' 
property values 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 that 
everyone from Wall Street to mortgage originators has a role to 
play when a consumer is in trouble and facing foreclosure.
    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 while at the same time ensure 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 we can only 
speculate on the causes responsible for any 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 is 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 
such as product pricing, seasonal and market changes. We should 
examine the conclusions before implementing any policy 
decisions that could unfairly curtail access to credit.
    In 2002, our President challenged the industry to increase 
minority homeownership by 5.5 million families by 2010. 
Mortgage originators, realtors, lenders, underwriters, and the 
mortgage securitizers and investors on Wall Street responded 
and helped families in urban America own homes. With this said, 
all of us--industry, government, and consumers--have a role in 
helping these families stay in their homes.
    Let me close with a brief summary of what NAMB is doing to 
help families achieve and maintain responsible homeownership.
    We continue to advocate for affordable housing, including 
FHA reform, and have pushed for increased mortgage 
participation in the program. We must make FHA a real choice 
for nonprime customers. We support authorizing VA to provide 
reverse mortgages and expand access to credit, especially for 
elderly veterans.
    Since 2002, NAMB is the only trade association that has 
advocated for education, criminal background checks, and 
increased professional standards for all mortgage originators, 
not just mortgage brokers.
    We have prepared and submitted a revised HUD statement, 
good faith estimate, to help provide comparison shopping.
    Our Code of Ethics and best business practices prohibit 
placing pressure on or being pressured by other professionals, 
and we propose the development of a loan specific payment 
disclosure to be given to consumers at the shopping stage and 
again at funding. This will help consumers avoid payment shock.
    Thank you for the opportunity to appear before you today. I 
am happy to answer any questions.
    [The prepared statement of Mr. Dinham follows:]
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    Mr. Kucinich. Thank you very much, Mr. Dinham.
    We are now going to go to questions for the witnesses. The 
round of questions will be proceeding under the 5-minute rule, 
and I will ask the first set of questions and then recognize 
the Members after I complete my questioning.
    To Mr. Rokakis, one of the things that you made clear in 
your testimony and what was made clear in testimony of a number 
of individuals here is that foreclosure is, in and of itself, a 
significant contributor to stress on a city. Do you feel that 
you and all the forces you can marshall are keeping up with the 
demand for foreclosure prevention services?
    Mr. Rokakis. Mr. Chairman, Congressman Kucinich, members of 
the committee, no, we are not. I don't like to admit this. We 
really are losing. As I said, for every mortgage we are able to 
save, 20 more are filed. There is an effort underway at the 
State level, but we really need help at this level. We can 
respond quickly at a local level, but the reality is our 
resources are limited. We have tried to partner with local 
banks, local financial institutions. Some joined in our 
efforts, some did not.
    So we are doing the best we can, but this really is a 
problem that goes far beyond the power of the Cuyahoga County 
government. Really, we needed help at the State level. We have 
not really gotten it. You know, there has been a raging battle 
in State government over some legislation that was passed and 
then repealed. Ultimately, I think the best help can come from 
the Federal level and it can come from this Congress.
    Mr. Kucinich. So you have done so much work on mortgage 
foreclosure prevention. What do you think the consequence will 
be for Cleveland, for example, and Ohio and the Nation if the 
supply of foreclosure prevention help does not keep up with the 
demand?
    Mr. Rokakis. Well, we already know that it has been 
devastating to neighborhoods. As we said, some entire 
neighborhoods have emptied out. Cuyahoga County has lost 50,000 
people in the past 5 years. I think that a significant 
percentage of that loss is attributable to these practices and 
these houses going vacant.
    I think that beyond that we really need other tools. I know 
the industry would bristle at this, but whether you want to 
call it a moratorium or a forbearance period, we know that many 
of these ARM resets--which, by the way, are known by some in 
the industry as explosive ARMs--we know that many of these ARM 
resets are going to push people over the edge, and the industry 
needs to really consider whether they want these resets to go 
forward, given the fact that so many of these people will go 
into foreclosure, or, if they are not better, entering into a 
cooling off period or a forbearance period. I know they don't 
like the word moratorium.
    They are better off having somebody in that home making a 
payment that individual can afford than watching one additional 
property enter the foreclosure and sheriff's list.
    Mr. Kucinich. Thank you, Mr. Rokakis.
    Ms. Killingsworth, I noted your statement and I heard the 
comments of my colleague, Mr. Cummings, how he said that you 
can go for miles and not see a bank. What are your opinions 
about why this absence of banks, particularly in inner cities, 
has occurred? Why do you think that has happened?
    Ms. Killingsworth. Mr. Chairman, I think, and in fact I 
believe that the reason my community is like I like to say 
debanked, because the banks wanted to find a way around CRA and 
they found it, as I like to call it, back door redlining by 
having financial institutions that they could use to avoid 
doing a prime loan to the individual and go to the subprime 
factor. They found it profitable there. That is why I believe 
that they left.
    Mr. Kucinich. And this debanking, as you call it, what are 
the practical implications for people in the neighborhoods when 
they don't have a bank to go to?
    Ms. Killingsworth. When people don't have a bank to go to--
and in my community banks are not known to be very friendly, so 
they turn to the payday lenders that you heard about today, and 
the payday lenders are going up all over the city. They are 
almost on every corner. I just recently heard that you can 
count more payday lending institutions in our community than 
you can count McDonald's, Wendy's, or Burger Kings put 
together. So the lack of banks causes people to look for other 
alternatives to cash their checks or to pay their utilities, so 
they go to the payday lender to get that exotic loan.
    Mr. Kucinich. Just one last question. It is my 
understanding the last time the Federal Reserve Bank of 
Cleveland held a public hearing to consider a proposed bank 
merger affecting Cleveland was 30 years ago. In your 
experience, what does that say about the robustness, if you can 
call it that, of Federal regulation, and what would you say 
about how regulators are doing their job, seeing the conditions 
that are existing right now in your neighborhood?
    Ms. Killingsworth. I think the regulators need to do a 
better job of monitoring what banks do. They don't do that, 
because if they were doing that I believe that we would not see 
as many payday loans. We wouldn't see all these financial 
institutions that are up there. The regulators are allowing the 
banks to use something other than what they should be using as 
a measuring stick for how they perform in the community. They 
go around that by developing community development banks, and 
they invest their resources in those development banks, thereby 
allowing them to get credit for CRA.
    Mr. Kucinich. I thank the gentlelady.
    Now let's go to Mr. Turner. Do you want to participate?
    Mr. Turner. Sure.
    Mr. Kucinich. Thank you, Mr. Turner.
    Mr. Turner. Thank you, Mr. Chairman. I apologize that I am 
popping in and out. Luckily, in the room we have your continued 
testimony, so I am able to hear the comments. I greatly 
appreciate both the dedication that each of you have to this 
issue, but also your ability to communicate how this relates to 
the average American, how it relates to their neighborhood, how 
this relates to what we look at even as the most basic issue of 
fairness.
    As I have heard your discussions of neighborhoods and the 
impacts on individuals--Ms. Killingsworth, you were talking 
about a home that you had been at that ultimately had been lost 
to predatory lending--one of the things that I do think that 
gets lost is it is not just the individuals that in predatory 
lending have their homes at risk, but it really is the whole 
neighborhood. When you live next to a house that becomes 
abandoned, it takes down the neighborhood, it takes down your 
housing value, it is a blighting influence, it attracts crime 
and other impacts. As you have a whole neighborhood where this 
happens, you have then the repetition of this occurring as 
housing values begin to drop because of the incidence of 
blighting, of abandoned houses. Their resale goes down, 
resulting in even more capital being lost for those individuals 
that are in a foreclosure situation.
    Then the resulting abandonment of these properties 
represents a title block on future redevelopment. Once a house 
becomes abandoned, has been through sheriff's sale, if no one 
has purchased it, the number of liens that are there, the tax 
liens that are there, the community, the city, the 
neighborhood, even those interested to bring the capital in to 
reinvest in that abandoned property have difficulty in doing 
the transaction because it is not readily available on the 
market. There are so many impediments that are in the way to 
clean it up. It has, in fact, left behind not only just a 
broken family and a broken, abandoned house; it has left behind 
a title problem so that future investors cannot resurrect this 
building and it begins to decay further.
    I was wondering if each of you might speak of, in that 
context, those that aren't even subject to predatory lending 
but are the neighbors. Even those that are not subject to 
predatory lenders, let's say I live next to a house and I have 
not been a victim of predatory lending but my neighbor has, 
what is the impact on me?
    Mr. Rokakis. Mr. Chairman and Congressman Turner, in my 
role as county treasurer I serve on something called Board of 
Revision. It is a three-member board comprised of an auditor, a 
member of the County Commission, and my office. I chair the 
committee. I have been asking my board members, this is a year, 
because of reappraisals, that tens of thousands of filings are 
occurring where people are arguing or contesting the value of 
their property. At least at this point one of three people who 
are applying for property tax appeals in Cuyahoga County are 
citing the fact they live next to or on a street with abandoned 
properties. I can tell you, knowing what I know and knowing of 
the work of Professor Immergluck and others, knowing what I 
know I would be hard pressed to not consider that request for 
reduced property value because both what I have read and both 
what I see, talking to realtors, I know the property is 
worthless because it is next to.
    Can you imagine, Congressman, if you are on a street state 
7, 8, 9, 10 of these homes, as we have in some communities in 
Cleveland?
    Mr. Turner. It would translate, also, that the impact of 
that, I mean, the reason why they are going to you to ask for 
lowered values is so that they can pay lower taxes.
    Mr. Rokakis. Absolutely.
    Mr. Turner. And what that does to the community then of the 
lower revenues.
    Mr. Rokakis. Well, it obviously lowers the revenue base, 
and because of the way something called 920 works, which you 
know in Ohio, it increases property values within that 
category--I am talking about residential--so when people vote 
for higher taxes, they would like to see those taxes eventually 
come down over time, but it doesn't work. In fact, in cases 
where property values decrease on a really substantial basis, 
there can be an increase in property taxes for those people who 
are left. It is kind of an arcane, complex topic, but it is 
significant and it is devastating, especially to schools that 
rely upon this funding.
    Mr. Turner. Others who want to comment on that topic?
    Mr. Immergluck. I think the literature is pretty clear that 
there is a big impact. Congressman Davis talked about the 
$30,000. There are also effects on crime that have been 
associated, as you suggested. That is not just kind of 
anecdotal; that has been shown in the literature that vacant 
houses to increase neighborhood crime levels. Foreclosures 
related to vacant houses increase neighborhood crime levels. It 
is also true that in lower-income neighborhoods the effect on 
property values is actually greater for a foreclosure than in a 
middle-or upper-income neighborhood.
    Mr. Turner. Mr. Chairman, I just want to say that, 
throughout the country, as people are faced with this, not only 
those who have been victims but those we were just talking 
about that live next to houses that have been impacted, they 
want to know whether or not anybody cares with what they are 
living with and what they are facing. I appreciate, Mr. 
Chairman, you being one of those individuals that cares enough 
to have this hearing to bring to light the challenge.
    Mr. Kucinich. Thank you, Mr. Turner. I think that is a very 
important point that you just made, because, indeed, the entire 
community is affected.
    Thank you, again. Mr. Davis of Chicago, you may proceed 
with your questioning.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
    Ms. Killingsworth, you mentioned the failure of different 
levels of government to do something about the problem and the 
issues. Could you think of something that, say, a local 
government or a State government or perhaps the Federal 
Government, where would you put the pressure point as being in 
terms of ability to impact the situation?
    Ms. Killingsworth. Congressman Davis, I would put the 
impact on the State level, because that is what we try to do. 
We try to work on the State level with our Governor. Their 
response to us was we need to study it. We were saying to them, 
while you are studying we are dying. Our neighborhood is 
becoming a ghost town. One of the things that you said, maybe, 
well, why don't you get out. You can't get out because you 
can't sell the property because the devalue. The property keeps 
decreasing.
    So I think from a State level, the States should to more to 
regulate the subprime lenders, and in particular the brokers. 
In Cleveland that I didn't get to in my written statement, 
Argent, part of Ameriquest, didn't have a presence in the city 
of Cleveland in 2002, but in 2003 they had 1,600 loans. Of 
those 1,600 loans, in 2004 half of them were on default, in 
foreclosure. So if the State of Ohio was regulating those 
brokers in a proper manner, I think that is one of the things 
that could happen.
    As I mentioned, the only relief that we had was through our 
county treasurer and the efforts that he put.
    Mr. Davis of Illinois. Thank you very much. Mr. Nassar, I 
was going to ask you if you felt that there was a great deal of 
potential for the industry, for example, to regulate itself and 
incorporate some best practices without the intervention of 
government.
    Mr. Nassar. Well, unfortunately, I think the track record 
shows the best practices have had really minimal effect in the 
fact that the dominant subprime loans have these enormous 
payment shocks. This has been known for some time.
    To the question of who has responded and done a good job, I 
would say that States have led the way, including North 
Carolina, in combatting predatory lending, but when Congress 
passed HOPE in the mid 1990's it gave the Federal Reserve the 
authority to regulate the entire mortgage industry when it 
comes to abusive practices for all lenders. They have never 
used that authority. They have never used that authority. So 
there is no question that the Federal Reserve could do a lot 
more.
    Mr. Davis of Illinois. Professor Immergluck, I have been so 
accustomed to calling you Dan, because we have interacted so 
much when you were at the Woodstock Institute and we pestered 
you all the time, and this is perhaps a great opportunity for 
me to just express some serious appreciation for all of the 
help that you have given to me personally over the years as we 
have called you for information for studies, for direction, and 
approaches, and you escaped us and went to Georgia.
    What do you see the role of the Federal Government trying 
to seriously impact now the situations that we have described?
    Mr. Immergluck. It is a big question. I definitely would 
agree with Mr. Nassar that the Federal Reserve can do a lot 
more. They made a few moves in 2001, only on refinanced loans 
and only on kind of high-cost refinanced loans, and that takes 
up such a small part of the market it has had very minimal 
effect, although it did have some effect, so it proves that the 
Federal Government can do something.
    The action on refinances I think actually shifted a lot of 
subprime activity into the home purchase market, because they 
were totally unregulated there.
    I think the Federal Reserve can do a lot more by using that 
other authority to work on home purchase and all types of 
refinance loans and home equity loans.
    I also think that, although some States have done a good 
job, the Federal Government at least has to get out of the way 
and quit preempting States when they do take action. To me that 
has been just a travesty of Federal policy for Federal 
regulators to allow banks to export regulations from easy 
States into States that want to do something to protect their 
consumers.
    Finally, I think, yes, Congress can do something to bring 
back the discipline in the industry. I think securitization has 
just really taken the industry out of regulatory control.
    One other thing. We have a dual regulatory market. Most 
subprime lenders are not essentially regulated by the Federal 
Government and we don't have the capacity at the State level to 
regulate them.
    Mr. Davis of Illinois. Thank you also very much. And thank 
you, Mr. Chairman.
    Mr. Kucinich. You know, Mr. Davis, what is interesting, 
from what Professor Immergluck said, is the lack of regulation 
of subprimes. When we see that hedge funds are included as one 
of the principal capital formations now and we know that they 
are not regulated, so this is an area that we are starting to 
move into that raises questions about the Government's 
responsibility for the regulation of capital and for massive 
movement of that. So I appreciate Professor bringing that up, 
and thank you, Mr. Davis.
    We will ask Congresswoman Watson to participate. Thank you 
very much for being here. You may proceed with your round of 
questioning.
    Ms. Watson. I appreciate that. Almost a decade ago the 
subprime market lending business exploded in America, 
increasing the availability of credit to portions of the 
population that do not qualify for loans based on their credit 
and income and saving profiles. I look at a chart that was 
compiled by the Center for Responsible Lending and it appears 
that my District in Los Angeles--and I guess it covers Long 
Beach and Glendale in California--Riverside, San Bernadino 
County, has the highest rate of foreclosures. Now, that is very 
disturbing. These areas that I just pointed out, certain areas 
in my District, the 33rd District, certain areas of Long Beach, 
certain areas of Riverside and San Bernadino County, are now 
minority neighborhoods. Most of the minorities in those 
neighborhoods are African Americans.
    I am very disturbed that the unfair practices, these 
detrimental practices, kind of center in on neighborhoods that 
are poor and minority with aging homes. They lend this money at 
high rates knowing the credit backgrounds of these people.
    This goes to Mr. Nassar. Can you explain what you found 
when you put this chart together? Can you give us some idea of 
why they locate and target these communities? What did you 
find?
    Mr. Nassar. Sure. Yes, well, a few things. One is that we 
used economic forecasting from Moody's and others to talk about 
assumptions about what has already been going on as far as 
foreclosures and the mortgage market but what will happen. What 
we have seen is that really the explosion of these 
unsustainable loans with huge built-in payment shocks, which 
become the dominant loan in the subprime market, have had a 
devastating impact. It doesn't need to be that way. Subprime 
homeowners make great homeowners, and there is no need for 
loans to be made in this way.
    The other thing I would just like to point out is that, 
when looking for solutions here, disclosures will not solve 
this problem. Anyone who has been through closing knows about 
the kind of paperwork you have to go through, and the thought 
and the suggestion that one little line about what could happen 
to your mortgage will actually stop these abusive practices is 
not credible. Disclosures will not work here.
    The other thing is that we do know something about the type 
of loan and whether someone is likely to enter foreclosure. 
Based on loans made in 2000 and based on our research, if 
someone has a prepayment penalty, which most subprime 
homeowners have, they are 52 percent more likely to enter 
foreclosure. If someone is an ARM, they are 72 percent more 
likely to enter foreclosure. That is keeping other factors 
constant.
    So the quality and the type of loan does, in fact, have a 
huge impact here, and the impact on family wealth is just 
difficult to overstate.
    Ms. Watson. Our committee, Mr. Chairman, if I may, is 
focusing on domestic policy. I think this is one of our first 
hearings, because this is a scourge in my District but it is 
only in certain parts of my District. If you know the Los 
Angeles area, I have Hollywood and I have places where the land 
value is at the top of the chart, but when you go south in my 
District it is just the reverse, so I am quite concerned about 
this.
    I was very impressed with Mr. Rokakis' testimony and Ms. 
Killingsworth's testimony, because we are facing that problem, 
too.
    Let me ask Mr. Immergluck what would you suggest that we do 
at the Federal level that might assist these neighborhoods that 
are collapsing, being abandoned, and really producing very 
little to the economy because there are very few people that 
stay behind once they lose their homes. What would you suggest 
that we can do here at the Federal level?
    Mr. Immergluck. The first thing I would suggest, which is 
to be, I understand, the subject of a later panel, is tell 
regulators to enforce the Community Reinvestment Act again. I 
think since the late 1990's but especially in the last----
    Ms. Watson. Let me just interrupt you.
    Mr. Immergluck. Sure.
    Ms. Watson. Are you saying it is an enforcement issue?
    Mr. Immergluck. I am not saying it is only enforcement 
issue. I am saying the first thing that could be done that I 
think was done in the late 1980's and early 1990's is enforce 
the Community Reinvestment Act and the fair lending laws under 
the Fair Housing Act.
    We saw a large increase in financing for minority 
homeownership and small business lending and lots of other good 
things from about 1989 to 1996, 1997, because of a couple of 
things. One, the savings and loan bailout, which improved CRA 
and HMDA, made CRA regulations public, made HMDA--Home Mortgage 
Disclosure Act--include race and gender, and made CRA 
evaluations public. That really boosted the impact of CRA. CRA 
has not been effectively enforced since the late 1990's.
    Ms. Watson. That is very good to know. I think we can use 
that information, Mr. Chairman, to maybe fashion some language 
that would enforce what we already have on the books.
    Mr. Kucinich. If the gentlelady would yield?
    Ms. Watson. Yes.
    Mr. Kucinich. I would respond that this committee, the 
Subcommittee on Domestic Policy, is going to be the vehicle to 
not only gather information about what is happening with the 
economy of cities, but to propose specific legislative remedies 
to respond. That response to what Mr. Cummings raised at the 
onset of the hearing, response to what Mr. Davis has commented 
on based on his long history of involvement on these issues at 
a community level, going back to Gail Sincata, who I also had 
the chance to work with many years ago, and response to your 
concern that, you know, it is one thing to get this 
information. You know, it is another thing to recommend a path 
of action to do something about it.
    Mr. Rokakis and Ms. Killingsworth, who are really on the 
front lines of dealing with this on a regular, daily basis, 
your coming here matters greatly, and all the others who have 
dedicated their careers to this. Your coming here matters 
greatly, because we are going to take this information and put 
it together with some solid legislative recommendations and 
present it to the Congress, so thank you.
    Mr. Cummings, did you have any additional questions?
    Mr. Cummings. Yes, I do.
    Mr. Kucinich. Wait. Excuse me, I moved too quickly here. 
Did you have any final questions, Ms. Watson?
    Ms. Watson. I yield back the balance of my time, Mr. 
Chairman.
    Mr. Kucinich. I want to thank the gentlelady from 
California for bringing up that central issue of what do we do.
    Mr. Cummings.
    Mr. Cummings. Yes, Mr. Chairman, I just have one or two 
questions.
    I can't remember who said it, but somebody talked about how 
these loans are given, and they qualify them for the first few 
years and then it balloons, and then they are not qualified 
actually for the balloon. To me there is something awfully 
wrong about that, because it seems like a setup for failure. It 
is blatant. Then I hear my good friend, Mr. Dinham. I listened 
to what you said, but it seems as if one of the things that is 
so hard, Mr. Chairman, to deal with is when you have things 
that are controlled by money and money is the incentive for 
doing them, it is hard to get a hold of your hands around it 
and try to stop it.
    In my former life as a practicing lawyer, and I saw what my 
clients went through to qualify for loans, then I hear stuff 
like this, how do you get to that? I know the opposite, then 
you hear on the other hand the mortgage industry saying people 
are not going to be able to get loans, but yet still I think it 
was you who said that it becomes a nightmare. I guess in the 
end what happens is the person would have been far better off 
if they had never even gotten the house.
    As I have said many times, we have one life to live. This 
is no dress rehearsal. This is the life. Well, we just 
destroyed just about somebody's life for maybe 20 years if they 
ever get back to a point where they can even buy a house.
    The reason why I say it is hard to get your hands around 
something when it is motivated by money is because I think 
coming up with the strategies to deal with it are going to be 
hard because you are going to have so much opposition going in 
another direction.
    One of you also said something that I found very 
interesting. You said that it is beginning to spread to 
neighborhoods. There was a time when these issues were just in 
the African American community where, you know, no big deal. 
Now it is spreading beyond those communities, and, sadly, it is 
sad, but in a way it may allow folks to have more umph when 
more communities begin to join in, and then these other 
communities that you all talked about, the ones where they are 
the adjacent communities who are finding that their property 
values are being affected, and maybe, just maybe, we will have 
enough power with all of this going forward to do something 
about it.
    But what I fear is that I don't want to be sitting here 
saying these same things 5, 10 years from now, because you know 
what that means? That means that a whole lot of people have 
lost their houses. And we don't think about the children in 
these situations. The children have seen their mothers and 
fathers excited about a dream, walk in the house, excited, and 
the next thing you know they see that dream plummet. I don't 
know what effect. I know it has a detrimental effect on them in 
the moment, but it also has an effect of it puts a damper on 
any dreaming that they might do. I don't even know how you put 
a value on that.
    So I just think that is why I was so glad, Mr. Chairman, 
that you did this. I am just amazed at how this thing has a 
rippling effect. We see in Baltimore where, when we have the 
foreclosures, you know, folks come in like vultures, so the 
next thing you know neighborhoods are changing, and a lot of 
the very people who gave their blood, their sweat, their tears 
for 30 years or so, stayed in the city when they didn't have 
to, and now they find they have nowhere to go.
    Anybody want to comment? I still have a minute or two on my 
time?
    Mr. Rokakis. Mr. Chairman, as you know, I came to city 
government back in the late 1970's, and we dealt with redlining 
issues. I will tell you this has a far more negative impact on 
urban neighborhoods than redlining. I never thought I would say 
I miss the days of redlining. Too much credit is far worse, and 
it has emptied these neighborhoods out far faster. In a very 
strange way, redlining locked people into place. This has 
opened the doors and basically emptied entire neighborhoods out 
past the point--and I have said it before--there is a tipping 
point. There is a point at which urban communities like 
Cleveland and Baltimore and Dayton can no longer afford the 
cost associated with trying to bring a neighborhood back. You 
hate to tell the person living in that community it is beyond 
our means, but it is happening, and the tipping point has been 
reached in neighborhoods all over this country. This process, 
as I have said, has helped to accelerate it in a way that I 
never thought I would see possible.
    Mr. Cummings. What is the easiest thing you all think we 
can do? I know you all mentioned recommendations, but what is 
the easiest thing? We need to start with those things first. 
This place is a hard place to get stuff done.
    Mr. Nassar. I don't know about easy as far as the political 
reality, but as far as talking about what is just sound 
practice, that is bring back decent underwriting, where 
basically a person is qualified to afford the payment increase, 
where they don't have to refinance, at best, or foreclose once 
the adjustment hits. That is just straightforward.
    But it is also important to point out that steering has a 
huge role here. You have a situation where so many people who 
receive subprime loans should be getting prime loans, and most 
of the subprime market is still a refinance market, and so that 
should be kept in mind. A lot of people already have equity, 
then they are losing that equity. That is just another point I 
want to raise.
    Mr. Cummings. Who does all the steering? The broker? I 
mean, is it several people down the line and all of them get a 
little piece of the change?
    Mr. Nassar. Yes. I mean, the broker has a financial 
incentive to put someone in a higher-priced loan than what they 
qualify for. It is just plain and simple, and they get paid at 
closing. Those are just the facts. I am not smirching 
particular brokers.
    Mr. Cummings. I understand.
    Mr. Nassar. But those are the financial incentives.
    Mr. Cummings. I see the chairman looking at me. I have a 
yellow light, so I will stop.
    Mr. Kucinich. That is fine. You may proceed. We will give 
you a few extra minutes.
    Mr. Cummings. No.
    Mr. Kucinich. Short clock.
    Mr. Cummings. No, I am fine. But I want to thank you all 
very much. We are going to do everything that we can, and we do 
appreciate you for being here.
    Thank you, Mr. Chairman.
    Mr. Kucinich. Actually, when we started these hearings and 
came up with the idea for this hearing, Mr. Cummings and Mr. 
Davis and other members of the committee thought that this was 
so critical to proceed, based on their own experience. This is 
what we are talking about. So I thank Mr. Cummings for his 
participation.
    What I would like to do is followup on a question that you 
asked. We are calling votes, but we are going to get in a few 
more questions. We are going to proceed until the end of this 
panel, or 10 minutes.
    I am going to ask a question, and I am going to go down the 
line, starting with Mr. Rokakis. This picks up on a question 
that Mr. Cummings raised. To what do you attribute the 
explosion of predatory mortgage loans, just in a very short 
answer. If you can say it in two words, that would be great.
    Mr. Rokakis. How about unbridled greed.
    Mr. Kucinich. That is two words. OK.
    Ms. Killingsworth. He stole my comment. Greed.
    Mr. Kucinich. Mr. Rinehart.
    Mr. Rinehart. I have to agree.
    Mr. Kucinich. Mr. Nassar.
    Mr. Nassar. Lenders and brokers have managed ways to avoid 
the repercussions and risks for bad loans and they have placed 
it all on the homeowners, and there is a real breakdown in the 
market.
    Mr. Kucinich. All right. Mr. Immergluck.
    Mr. Immergluck. Yes. De-localization of risk, the spreading 
of risk to too many parties on the mortgage supply side.
    Mr. Kucinich. And Mr. Dinham?
    Mr. Dinham. I guess my opinion is a little different. I 
think it is because of the effort to try to bring homeownership 
to more people at this point is the reason you have seen the 
subprime industry become so large at this point, because there 
is only so many people that you can deal with.
    I think, to answer your question, if we were to go back to 
the days of the 1970's and 1980's where we only had fixed-rate 
loans, you would understand the fact that every time you raise 
the interest rate by a quarter percent you take a certain part 
of the market out who cannot qualify for those loans after that 
point. This has been an effort overall to bring homeownership 
or give people the chance to do that. That is where we are on 
this issue.
    Mr. Kucinich. It is important that we hear your 
perspective.
    Mr. Dinham. Yes, sir.
    Mr. Kucinich. One of the things that I am interested in, 
and maybe you could give your perspective on this, in Cuyahoga 
County, OH, foreclosures topped 1,000 a month in 2006, and they 
are on a pace to top 1,200 a month in 2007. What would you say 
are the major causes of this epidemic?
    Mr. Dinham. That is the reason we asked for an independent 
Government study. We don't know the causes at this point, but I 
can tell you the traditional causes of foreclosure have always 
been job loss, economy, and health and divorce is No. 3.
    Mr. Kucinich. Let me ask you this.
    Mr. Dinham. Yes, sir.
    Mr. Kucinich. Would you agree for the committee that some 
of the foreclosure epidemic is the result of borrowers being 
allowed into loans that they cannot afford?
    Mr. Dinham. Well, at this point, without some kind of 
definition or some kind of evidence to that fact, it is hard 
for me to make that claim. I mean, I cannot make that claim 
that is part of the problem. That is the claim of a lot of 
people on this panel, but I don't know that for sure.
    Mr. Kucinich. But we are seeing a rising level of defaults, 
rising level of foreclosures.
    Mr. Dinham. Yes, sir, but we don't----
    Mr. Kucinich. Does that tell you anything?
    Mr. Dinham. That tells me that there is a problem out 
there, but it doesn't tell me what the problem is.
    Mr. Kucinich. But you are saying that you really can't say 
that this is the result of borrowers being allowed in loans 
they can't afford?
    Mr. Dinham. What I can say is that there are some borrowers 
that may have a problem because of that, but I can't say the 
majority of your problem is caused by bad products.
    Mr. Kucinich. Again, I need your perspective. Let's take 
Argent, for example.
    Mr. Dinham. OK.
    Mr. Kucinich. They are the top lender in Cleveland for the 
last 3 years. Every single loan underwritten by Argent is 
originated by an independent mortgage broker. Now, this is 
strictly broker-run business.
    Mr. Dinham. Right.
    Mr. Kucinich. Now, would you agree that Argent's 
independent mortgage brokers are the only people from the 
lender's side of the table that actually meet the borrower?
    Mr. Dinham. Yes, sir.
    Mr. Kucinich. Are the parties most likely to know if the 
borrower can afford the loan?
    Mr. Dinham. No, sir. I would say that Argent is the person 
that is most likely to know, because they do all the 
underwriting. The mortgage broker gets them into the house, 
gets them into their shop and processes the paper and sends it 
to Argent to be underwritten. Argent would be the one making 
the final decision.
    Mr. Kucinich. Well, isn't the independent mortgage broker 
the one who sells the loan?
    Mr. Dinham. The independent mortgage broker does get them 
in there and gives them options, gives them options on what 
they want at that point, and then the customer, the consumer 
makes the choice of which loan product they want to go with.
    Mr. Kucinich. What I would like to do is we now have a 
requirement for a recess. If the panel would be so kind as to 
wait for a third round of questioning, myself and other members 
are certainly going to return, and I would ask if we could pick 
up at this point because, again, I want to tell you that we are 
grateful for the presence of everyone here, and, Mr. Dinham, 
you are giving us a chance for a perspective that we often do 
not hear.
    Mr. Dinham. OK.
    Mr. Kucinich. So we are going to recess until 5:30, and we 
will come back at 5:30 with the question. I want to thank you. 
We will see you at 5:30.
    [Recess.]
    Mr. Kucinich. The hearing will come to order.
    When we recessed we were talking to Mr. Dinham, and I would 
like to continue.
    Mr. Dinham, you said that you don't know why so many of the 
loans originated by independent mortgage brokers go to 
foreclosure. Now, does anybody on the panel know? Mr. Rokakis, 
do you know?
    Mr. Rokakis. Mr. Chairman, there was a study done by a 
group called Policy Matters Ohio on foreclosures. They have 
actually done a few of them. They have been tracking 
foreclosures in Ohio. They went out and surveyed all 88 county 
sheriffs in the State of Ohio. Especially in smaller counties, 
nobody knows better the cause of a foreclosure than the county 
sheriff. Now, it may not be an issue in Montgomery, where 
sheriffs are far removed from the process. They have bailiffs 
and other people implementing the foreclosure, the eviction 
actions. But of the sheriffs they interviewed in Ohio, the 
overwhelming majority of sheriffs said that they thought the 
cause, or they observed that the cause of the foreclosures in 
the counties in Ohio were predatory loans. It was not illness, 
it was not job loss, it was not divorce, it was subprime and 
predatory lending, and it is in the Policy Matters Ohio study, 
which we will make available to the committee.
    Mr. Kucinich. Without objection, I would like staff to 
contact Mr. Rokakis' office and get the Policy Matters study 
and have it included in the record of this hearing, without 
objection.
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    Mr. Kucinich. Well, Mr. Dinham, let's go back to the 
question just before the recess. Would you agree that Argent's 
independent mortgage brokers, who are the only people from the 
lender's side of the table to actually meet the borrower, the 
parties most likely to know if the borrower can afford the 
loan, the independent mortgage brokers, do they know if the 
borrower can or can't afford the loan?
    Mr. Dinham. Would I agree to that? The only thing I am 
going to agree to on that is they do not make the ultimate 
decision on whether the loan is approved or not.
    Mr. Kucinich. Do you know anything about that process, how 
it is approved?
    Mr. Dinham. I know exactly how the process works. The 
customer comes in, you take an application from the customer, 
you get all the information and documentation you have to do, 
and then you submit that information to the lender for 
approval, underwriting approval, and then they send it back 
normally with some additional conditions or they can't make a 
decision right off the bat, and then you send those additional 
conditions in and they give you what I always call a firm 
commitment that says they are willing to make that loan.
    Mr. Kucinich. So you are saying the independent mortgage 
brokers don't make a decision?
    Mr. Dinham. I am saying they do not make the decision on 
whether the loan is approved.
    Mr. Kucinich. So they are like salesmen?
    Mr. Dinham. But it goes deeper than that.
    Mr. Kucinich. Yes.
    Mr. Dinham. The people that have put these products out are 
the people on Wall Street. Wall Street is the one that has 
these products out here. Argent really is passing these 
products along to Wall Street, and the people at Wall Street 
are the people making the rules on what the rules are to get 
that loan approved.
    Mr. Kucinich. So these subprime loans which are very risky 
for those that are engaging in them, you are saying that you 
have to follow the system----
    Mr. Dinham. Yes.
    Mr. Kucinich [continuing]. From the borrower to the agent, 
independent broker----
    Mr. Dinham. Right.
    Mr. Kucinich [continuing]. To the company?
    Mr. Dinham. Right.
    Mr. Kucinich. And then you have to go back to Wall Street?
    Mr. Dinham. Yes, because Wall Street is where it all 
starts, and we all know that Wall Street is not used to losing 
money on things, so they are making money on what is going on 
at this point, and they still are. So even while the consumer 
is suffering maybe because of some of these foreclosures they 
are doing on this, they are still not losing their money at 
that point, and that is part of the reason that you are seeing 
these lenders, mortgage bankers, whatever you want to call 
them, closing their doors today, is because Wall Street is 
coming back to them telling them they need to repurchase these 
loans.
    But the mortgage broker is not out there----
    Mr. Kucinich. At a higher rate of interest?
    Mr. Dinham. At a higher interest rate?
    Mr. Kucinich. They need to repurchase the loans?
    Mr. Dinham. No, they just buy them back. In other words, 
what happens is they put them in a pool, they go up there, and 
they are part of a million dollar pool.
    Mr. Kucinich. Would you say there is any fraud that is 
involved here in origination so you have so many bad loans? Is 
there incompetence or something else? What do you think it is?
    Mr. Dinham. Well, I think I have testified that I don't 
know what it is at this point that is causing the problems in 
Cuyahoga County. I don't know.
    Mr. Kucinich. In 2005 the No. 1 lender of foreclosed 
properties up for sheriff's auction in Cleveland was Argent. I 
am talking about Argent because I know what is happening in 
Cleveland. So in Ohio it takes about 18 months to 2 years for a 
foreclosure to go to sheriff's sale. Argent only entered the 
market in 2003. This means that a lot of Argent's loans 
immediately went to foreclosure. They were bad loans the day 
they were written, and independent mortgage brokers wrote every 
one of them. So how could you explain that?
    Mr. Dinham. I can't explain that particular question, but I 
will tell you, if you are having loans that are defaulting in 
the first month, 90 days, or 6 months, there is fraud involved 
in the deal or poor underwriting. That is the only reason.
    I don't disagree with what you are saying. I cannot tell 
you what the exact reason is it is going on and how----
    Mr. Kucinich. Is there a permanent record of the identity 
of independent mortgage brokers on each loan that he or she 
originates?
    Mr. Dinham. Not in Texas. No, sir, I don't believe. I don't 
know what the rules are in Ohio.
    Mr. Kucinich. Do these independent mortgage brokers' name 
or address even appear on the loan?
    Mr. Dinham. Yes, sir.
    Mr. Kucinich. Now, how can a borrower and a lender or the 
investor, if a loan has been pulled, with thousands of other 
mortgages securitized and held by a large investor, how can 
they know whose bad judgment resulted in a bad loan?
    Mr. Dinham. That is a very hard question to answer, because 
the person that made the rules were the people on Wall Street, 
which were given to the people that purchased it from the 
broker. That was Argent in this case you are talking about. So 
Argent is the one that made the decision to make that loan.
    Mr. Kucinich. You know, staff just pointed out something 
that I think is worth mentioning, and that is that stock 
brokers, for example, have a fiduciary responsibility.
    Mr. Dinham. Yes.
    Mr. Kucinich. Trustees for estates have a fiduciary 
responsibility. Professional financial advisors have a 
fiduciary responsibility. Guardians have a fiduciary 
responsibility. Do you think if independent mortgage brokers 
had some kind of a fiduciary responsibility here this could 
tighten this up a little bit?
    Mr. Dinham. No, sir.
    Mr. Kucinich. Why not?
    Mr. Dinham. Because I think it is awfully hard for a 
mortgage broker, as an independent contractor dealing with 
several lenders, to have a fiduciary responsibility or a 
responsibility because they are under contract with lenders 
also at this point, so it is hard to serve two masters. In 
other words, in Texas we are required to tell the borrower at 
the time of application what our relationship is going to be to 
the borrower. They are told at the very beginning that we are 
not agents of the borrower at this point. I don't think that is 
going to solve your problem by making everybody a fiduciary. 
And if you do that, then you need to add everybody, all 
mortgage originators, not just brokers. You add the whole group 
in there.
    Mr. Kucinich. I mean, that seems like a good 
recommendation.
    Mr. Dinham. Because we are for all mortgage originators 
being licensed. We are for all of them having background 
checks. We are for all of them having education, continuing 
education, including the banks at this point. so we would 
really like to see that.
    Mr. Kucinich. Given that, as you put it, that borrowers or 
that brokers do not have a fiduciary responsibility at this 
point, do you think that borrowers should be able to trust 
brokers to bring them the best loan?
    Mr. Dinham. Well, the facts speak for themselves. Depending 
on who you talk to, they say that we do over 50 percent of the 
business on a regular basis. Do you think that the consumers 
would continue to come back to us if--in other words, we have 
to live on referrals. In other words, you don't go out and 
solicit new business every time, so you are living on referrals 
at this point. I really think that without those we wouldn't be 
doing as much business as we are. So the consumer believes that 
we are giving him a good deal.
    Mr. Kucinich. But do they have a choice, though? Do these 
consumers have a choice?
    Mr. Dinham. Sure they have a choice. That is one of the 
things we really like to see them do is to shop. That is one of 
the problems. They mentioned steering on here before.
    Mr. Kucinich. Yes.
    Mr. Dinham. Steering people into a particular loan? The 
fact of that is if they had gone out and shopped at two or 
three different places, they couldn't have been steered into 
anything.
    Mr. Kucinich. OK, but let me ask you this: do consumers 
have a choice, let's say, that vary in price, or does the 
broker present the consumer with one loan which the broker 
tells the consumer is the best for him? How does the broker----
    Mr. Dinham. I can't speak for every broker. I can tell you 
what I do. I normally give them three choices of what they 
would like to do. What normally will happen is you will have 
somebody call you up on the phone and say would you send me a 
good faith estimate with your cost on a particular loan 
product.
    Mr. Kucinich. Is a fee a percentage of a loan?
    Mr. Dinham. Sir?
    Mr. Kucinich. Is the fee----
    Mr. Dinham. Yes, sir.
    Mr. Kucinich [continuing]. Based on a percentage of the 
value of the loan?
    Mr. Dinham. Right. Yes, sir.
    Mr. Kucinich. So if the value of the loan is a function of 
appraised property, what efforts do independent brokers make to 
make sure that an appraiser has made a correct appraisal, 
rather than an inflated price to justify a loan?
    Mr. Dinham. That is another function of underwriting. 
Underwriters make the determination based on the comparables 
and the information provided on the appraisal whether the 
appraisal is accurate. If they don't like it, they also have 
the option to go out and get an independent application at that 
time. So the underwriter is the actual person that makes those 
decisions.
    Mr. Kucinich. Have you ever heard of any brokers who would 
choose appraisers who would inflate house values?
    Mr. Dinham. Only if they wanted to commit fraud.
    Mr. Kucinich. Does it happen?
    Mr. Dinham. Yes, it does. I am sure it does, because there 
have been court cases where it has happened. But I will say 
this, too, that any industry has some bad actors in it, and at 
least these are being caught. In fact, in Texas we are working 
on a fraud bill which will go a little further to stop these 
things.
    Mr. Kucinich. How long have you been doing this?
    Mr. Dinham. Since 1967.
    Mr. Kucinich. Let me ask you something. I imagine after a 
while you know the business so well that you can go and you can 
be talking to someone and kind of guess if they are going to be 
able to make this financial deal happen. Have you ever had a 
case where you told someone I can't do this, I can't loan you 
the money?
    Mr. Dinham. Yes, I have.
    Mr. Kucinich. What are the circumstances under which that 
happens?
    Mr. Dinham. Well, they don't qualify for the loan. They 
don't meet the guidelines at that point. In other words, you 
turn them down if they don't qualify.
    Mr. Kucinich. How do you suppose, then, if that is the 
way----
    Mr. Dinham. It is a lot easier today than it used to be. 
There was a time before the invention of the automated 
underwriting system where I could just take an application and 
tell you whether somebody would be approved or not at that 
point.
    Mr. Kucinich. Right.
    Mr. Dinham. Today, with automated underwriting, you don't 
dare do that because we have computers out there that are 
making some of the decisions, and after those decisions are 
made you have to get the requirements along with that and send 
them to the investor for the final approval.
    Mr. Kucinich. Do mortgage brokers write no-doc loans?
    Mr. Dinham. I am sure they do. Yes, sir.
    Mr. Kucinich. OK. Again, you are very helpful in describing 
how it works, and I think that as we work to develop some 
alternatives and some legislative remedies, I think it will be 
very important to hear from the mortgage brokers to make sure 
that, as you put it, everyone ought to be covered.
    Mr. Dinham. That is correct.
    Mr. Kucinich. If someone is going to try to put some 
guidelines into law, then it ought to be expanded so that you 
are not the only one that is covered.
    Mr. Dinham. That is correct.
    Mr. Kucinich. Because, as you pointed out, this goes all 
the way to Wall Street.
    Mr. Dinham. Yes it does.
    Mr. Kucinich. It is very important for you to be here to 
say that.
    Mr. Turner, do you have any questions you want to ask?
    Mr. Turner. Not at this time.
    Mr. Kucinich. We are going to go to that second panel 
momentarily.
    Mr. Davis, do you have any questions you want to ask?
    Mr. Davis of Illinois. Mr. Chairman, I have no further 
questions.
    Mr. Kucinich. I want to thank all of you for participating 
in what has been one of the most comprehensive discussions we 
have had on this subject of foreclosures, subprime loans, the 
industry, how this all fits together. Each one of you has made 
a contribution to this discussion, and your very presence here 
and your testimony will enable this committee to make 
recommendations to the Congress about the direction that we can 
take to remedy some of the abuses that are present. I want to 
thank each of you for your participation.
    The first panel has now been completed, and we will ask the 
second panel to prepare to testify.
    Thank you.
    At the request of Congressman Turner, we have added Mr. 
McCarthy to the panel. Welcome.
    I would like to thank all of the members of the second 
panel for coming forward. This next panel concerns payday 
lending and alternatives to payday loans.
    Before we begin, I would like to ask that we watch a video, 
a short video, about one woman's experience with payday lenders 
and how she broke the cycle with the help of an alternative 
created by one of our witnesses.
    [Videotape presentation.]
    Mr. Kucinich. Thank you very much.
    I would like to take the liberty of further introducing a 
member of the panel who was part of this solution, and that was 
Mr. Ed Jacob, who is the manager of the Northside Community 
Federal Credit Union, a 33-year-old community development 
credit union with assets of $8 million. The credit union is a 
certified CDFI. It has a low income service designation from 
the National Credit Union Administration.
    Northside offers checking and savings accounts, ATM cards, 
small consumer loans, Visa credit cards, new and used auto 
loans, as well as home equity and home mortgage loans. It 
provides an alternative to the payday and predatory lenders who 
take advantage of low income people to its 4,000 members. Prior 
to leading the credit union, Mr. Jacob was a vice president of 
the Community Reinvestment Department for Bank One Corp. and 
its predecessor banks, First Chicago and First Chicago NBD, 
where he was responsible for Illinois programs.
    Rita Haynes is joining us. Rita Haynes is the CEO of the 
Faith Community United Credit Union in Cleveland, OH, and 
chairwoman of the Board of National Federation of Community 
Development Credit Unions. Faith is a community development 
credit union established in 1952. Ms. Haynes also served as the 
chairwoman of the National Federation of Credit Unions. Faith 
is based on the faith and vision of the members of the Mt. 
Sinai Baptist Church. Ms. Haynes is a recipient of the Peak 
Career Lifetime Achievement Award of the African American 
Credit Union Coalition. Welcome.
    David Rothstein is a researcher at Policy Matters Ohio. Mr. 
Rothstein researches tax, wage, and consumer policy, including 
the earned income tax credit, the living wage, and predatory 
lending. Policy Matters Ohio is a nonprofit policy research 
organization founded in January 2000, to broaden the debate 
about economic policy in Ohio. Policy Matters Ohio provides 
analyses focused on issues pertaining to low and middle-income 
workers in Ohio. It makes its findings accessible to the 
public, the media, and to policymakers.
    Ms. Fran Grossman is the executive vice president of 
ShoreBank Corp. ShoreBank is a community development and 
environmental bank serving Chicago, Cleveland, and Detroit. 
Established in 1973, ShoreBank has been a pioneer of economic 
equity. ShoreBank was created to demonstrate that a regulated 
bank could be instrumental in revitalizing the communities 
being avoided by other financial institutions based on racial 
and economic discrimination. In 2000, ShoreBank expanded its 
focus to include environmental issues, believing that 
communities cannot achieve true prosperity without also 
attaining environmental well-being.
    Jean Ann Fox serves as a director of consumer protection 
for the Consumer Federation of America and leads the 
organization's efforts to assure that the privacy rights of 
American consumers are protected, whether it is in the 
traditional or the electronic marketplace. She has extensive 
experience in representing consumer interests in privacy-
related policy issues.
    The Consumer Federation of America [CFA], is an advocacy, 
research, education, and service organization. As a matter of 
fact, I believe my good friend, Senator Metzenbaum, has had a 
long association with the Consumer Federation of America. The 
CFA has provided consumers a voice in decisions that affect 
their lives. The CFA's professional staff gathers facts, 
analyzes issues, and disseminates information to the public, 
policymakers, and the rest of the consumer movement.
    I want to thank all of you for being here. Also, I am going 
to introduce Mr. McCarthy, who is part of this panel.
    Mr. Jim McCarthy is the president and CEO of the Miami 
Valley Fair Housing Project, which seeks to eliminate housing 
discrimination. In furthering this goal, the Miami Valley Fair 
Housing Project engages in activities designed to encourage 
fair housing practices through educational efforts, assists 
persons who believe they may have been victims of housing 
discrimination, identifies barriers to fair housing in order to 
help counteract and eliminate discriminatory housing practices, 
works with elected and governmental officials to protect and 
improve fair housing laws, and takes all appropriate actions 
necessary to ensure that fair housing laws are properly and 
fairly enforced through the Miami Valley. Mr. McCarthy is one 
of the architects of the Predatory Lending Solutions Project, a 
project that addresses the epidemic problem of predatory 
mortgage lending in Montgomery County, OH.
    Thank you to all members of the panel.
    Mr. Turner. Mr. Chairman, if I might, I just want to thank 
you. As you know, Mr. McCarthy was on your third panel, and I 
appreciate you putting him on the second. His topic is not 
payday lending, but is predatory lending. They are an 
organization that has been instrumental in trying to address 
both education on predatory lending and assist those who have 
been victims, so thank you for including him.
    Mr. Kucinich. And also, in deference to Mr. Turner, Mr. 
Turner wants very much to be here while the gentleman who he 
has worked with testifies, so in deference to my colleague what 
I am going to do is just announce the order of speakers. All of 
this will go into the record. I just want to facilitate Mr. 
Turner's schedule here. Jean Ann Fox will go first, then Mr. 
McCarthy, Ms. Haynes, Mr. Jacob, Mr. Rothstein, and Ms. 
Grossman. That will be the order.
    Mr. Turner. Thank you.
    Mr. Kucinich. OK. Thank you.
    As with panel one, I am going to ask that all the witnesses 
rise and raise your right hands.
    [Witnesses sworn.]
    Mr. Kucinich. Thank you. Let the record reflect that all of 
the witnesses answered in the affirmative.
    As with panel one, I am going to ask that each witness give 
an oral summary of his or her testimony and to try to keep the 
summary within our 5-minute time period. I want you to bear in 
mind that your complete written statement will be included in 
the hearing record.
    Let's start with Jean Ann Fox. Again, thank you. Please 
proceed.

  STATEMENTS OF JEAN ANN FOX, CONSUMER FEDERATION OF AMERICA, 
  WASHINGTON, DC; RITA L. HAYNES, CEO, FAITH COMMUNITY UNITED 
  CREDIT UNION, CLEVELAND, OH; ED JACOB, NORTHSIDE COMMUNITY 
  FEDERAL CREDIT UNION, CHICAGO, IL; DAVID ROTHSTEIN, POLICY 
 MATTERS OHIO, CLEVELAND, OH; FRAN GROSSMAN, SHOREBANK CORP., 
   CHICAGO, IL; JIM MCCARTHY, PRESIDENT, MIAMI FAIR HOUSING, 
                           DAYTON, OH

                   STATEMENT OF JEAN ANN FOX

    Ms. Fox. Thank you, Chairman Kucinich and members of the 
committee. I represent Consumer Federation of America, but I am 
also testifying today on behalf of Consumers Union, publisher 
of Consumer Reports, and the National Consumer Law Centers on 
behalf of their low income clients.
    I have worked on studying the high cost small loan market 
now for my 10-year career at CFA, and we have published 
numerous studies and reports about payday lending. I can assure 
you that this is a national predatory lending problem for 
consumers. Payday lending is legal in 39 of the 50 States, and 
it is a $5 billion cost to American consumers for about $28 
billion worth of very small loans every year. This is based on 
a study done by the Center for Responsible Lending, which sets 
a more conservative figure on this industry than industry 
investment advisors do.
    Academics tell us about 5 percent of the population uses 
payday loans which are made through about 25,000 storefront 
outlets around the country and are available online, as well.
    These are small cash loans that you take out by writing a 
personal check on your own bank account or signing over 
electronic access to your bank account for the amount you want 
to borrow. It tends to be $300, $500, certainly less than 
$1,000.
    The cost of the loans is expressed by the industry as 
dollars per hundred, so they will say they charge $15 per $100 
or $20 of $25 or $30. The annual percentage rate for a 2-week 
loan runs at 390 percent and up. These are balloon payment 
loans. They are due in full on your next payday or the check 
that you wrote and left behind with the lender will be 
deposited in the bank. It is likely to bounce, because a family 
that can't make it to payday without borrowing a few hundred 
dollars at 400 percent interest is hard pressed to have enough 
money in the bank to cover the check on payday, and then the 
payday lender will charge you a bounced check fee, as well as 
your bank, each time that transaction is presented.
    These loans are made without asking the kinds of questions 
that let you determine ability to repay. Just as you heard with 
the mortgage issue, payday loans are made without pulling a 
credit report, without asking who else you owe or how much you 
owe. All you have to have is an open bank account, a source of 
income, and a form of ID. Every payday loan is based on a 
prospective bad check, so these loans put bank account 
ownership at risk. And they function as the modern day 
equivalent of wage assignments, and that form of lending was 
ruled years ago by the Federal Trade Commission as an unfair 
trade practice. Our modern equivalent today is you write a 
check on your account that you expect to have covered by the 
deposit of your next pay check in order to repay the loan.
    We view these loans as predatory. As we have mentioned, 
they are made without regard to the leader of pay. They are 
exorbitantly expensive. They are too big to be repaid in one 
balloon payment. A $500 cap is typical for State payday loan 
laws, and the average customer makes about $24,000 a year, so 
these are low to moderate-income borrowers.
    So if you are borrowing $500 plus the $75 to $150 finance 
charge that has to be repaid on your next payday, if you are in 
that average income range you are agreeing to pay 75 percent of 
your take-home pay to keep that check from bouncing to get that 
loan paid. Not very many middle class people pay a lot more 
than the minimum payment on their credit card, but we expect 
payday loan borrowers to pay it all back on their next payday.
    If this is an electronically processed loan, we have heard 
testimony that the debt is presented over and over, each time 
triggering a bounced check fee. There was testimony before the 
Senate Banking Committee last fall of a service member whose 
Internet lender bounced electronic payday loan 11 times in 1 
day.
    Given these loan terms and the lack of underwriting, it is 
no surprise that these loans create a debt trap for cash-
strapped families. This data on what is going on in this 
industry comes from regulators. The Colorado Attorney General's 
office has been collecting data for years from loan 
applications. They tell us that 60 percent of the borrowers 
come from the lowest three income brackets, that they make 
around $25,000 a year. Other States have even lower incomes. 
These are minority borrowers, as well.
    A North Carolina academic study found that African American 
consumers are twice as likely to use them. A study in Texas of 
145,000 customers showed that, although African American 
consumers make up 11 percent of the adult population in Texas, 
33 percent of the payday loan borrowers are African American 
consumers. As Representative Issa pointed out, they cluster 
around military bases. They also cluster in minority 
neighborhoods and low to moderate-income high traffic 
commercial areas.
    The proof of the debt trap is that the average borrower has 
8 to 13 loans per year. These are not one-time emergency loans 
when your car breaks down. This is perpetual debt.
    We think that Congress needs to step in here, because the 
States have failed to protect consumers. We would urge you to 
enact legislation to prohibit basing loans on a personal check 
written on a federally insured depository account or mandatory 
electronic access to the account, and to amend the Electronic 
Funds Transfer Act to extend the prohibition against 
conditioning credit on electronic payment to the single payment 
loan. Lenders can't make you pay it back electronically if it 
is a periodic payment loan. We need the same protection for the 
single payment loans.
    And, of course, we need for you to close once and for all 
the rent-a-bank tactic that has been used in the past by 
lenders to evade State law by partnering with a bank. It has 
been stopped by the bank regulatory agencies for now, but we 
need to have that as a matter of law.
    I would be glad to answer any questions. Thank you.
    [The prepared statement of Ms. Fox follows:]
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    Mr. Kucinich. Thank you very much for your testimony.
    Mr. McCarthy.

                   STATEMENT OF JIM MCCARTHY

    Mr. McCarthy. Thank you.
    Mr. Chairman, Congressman Turner, and members of the 
subcommittee, I appreciate this opportunity to discuss the 
subprime lending problem as faced by borrowers and ways in 
which the cities are affected by the rise in foreclosures.
    My name is Jim McCarthy and I am president and CEO of the 
Miami Valley Fair Housing Center. I also currently serve as the 
Chair of the Board of Directors of the National Fair Housing 
Alliance, which is based here in Washington, DC, and is a 
consortium of more than 200 private, nonprofit fair housing 
organizations, State and local civil rights agencies, and 
individuals from throughout the country.
    Since 2001, my agency has been implementing the Predatory 
Lending Solutions Project in Montgomery County, OH. Through the 
PLS Project, we assist residents of Montgomery County by 
providing outreach and education on the dangers of predatory 
mortgage lending and providing intervention and rescue services 
to the victims of predatory mortgage lending.
    Fair housing enforcement is the most important fair housing 
issue facing our Nation; however, there is no strong commitment 
by the Federal Government to enforce the fair housing laws that 
we have. Fair lending, which is covered by the Fair Housing 
Act, is a key part of ensuring equal housing opportunity in our 
communities.
    While the subprime lending market offers credit to high-
risk borrowers at higher interest rates and fees, some lenders 
have capitalized on this extension of credit by steering 
vulnerable individuals, often on the basis of the borrower's 
race, ethnicity, age, or gender, to take loans whose terms they 
cannot possibly repay, and thus are not suitable to the 
borrower.
    This practice of predatory lending is a serious fair 
housing concern. Our work suggests that homeowners were 
targeted by subprime lenders because they had significant 
equity in their homes, and their credit needs have been ignored 
by depository lending institutions. So the same neighborhoods 
that have been subjected to years of homeowner insurance 
redlining and mortgage lending redlining have now also been 
targeted as vineyards ripe for harvesting of the hard-earned 
equity in their homes.
    This is having a devastating effect on our cities and our 
counties. In the past 6 years, the number of mortgage 
foreclosure filings in Montgomery County has more than doubled. 
In 2006, we had in excess of 5,075 mortgage foreclosure 
filings, which accounted for approximately 50 percent of all of 
the civil actions filed in Montgomery County Common Pleas 
Court.
    Fair housing and consumer advocates have been sounding 
warnings regarding Ohio's subprime lending and foreclosure 
problems for years. In Ohio, foreclosed-upon homes often sit 
vacant for months or years, and once they are abandoned by 
their homeowners they become a huge cost to society.
    The costs of abandonment are enormous. Even one or two 
abandoned properties force neighbors to tolerate eyesores that 
attract crime, arson, vermin, and dumping. Derelict buildings 
present safety and fire hazards, reduce property values, and 
degrade community quality of life. But perhaps most importantly 
it erodes the tax base and it inhibits the municipalities from 
providing basic services that we all expect, like police, fire, 
and schools.
    Since the launch of our project, the need for our services 
has far exceeded our capacity to provide the services with the 
limited resources available. For those clients that we are able 
to assist, given our resources, we have been exceedingly 
successful in keeping them in their homes and getting them into 
appropriate loan products.
    I would like to share with you just a few of those real 
quickly.
    In one case we had a caucasian American married couple with 
adult children who were living outside of the home. When they 
came to us, their original loan amount was for $144,500. The 
value of their home, according to the Montgomery County 
auditor, was $97,470. Their interest rate on their original 
loan was 10 percent. We negotiated a short payoff to the 
offending lender for $89,600 and secured refinancing for the 
clients on a loan amount of $92,600 at a 6.375 fixed interest 
rate for 30 years. What is important to know is that in order 
to accomplish that it took us 113.5 staff hours.
    One more example is an African American single female with 
three children who we assisted. Her original loan amount was 
$80,992.80, with an 11.051 percent interest rate and a monthly 
payment of $796.84. Her monthly payment did not include escrow 
or taxes and insurance. We negotiated a short payoff with the 
offending lender and secured refinancing for the client on a 
loan amount of $53,300, which is what the house was valued at, 
with a 6.5 percent interest rate fixed for 30 years and a 
monthly payment of $336.89, which included an escrow for her 
insurance and taxes. The staff time required to resolve this 
case was 124.5 hours.
    As the work of our project clearly demonstrates, when 
consumers have effective advocates who are armed with the 
appropriate time and resources, intervention that keeps the 
homeowners in their homes and paying their mortgages is 
possible. Our clients are not deadbeat mortgage borrowers. They 
are hard-working individuals and families who are chasing the 
American dream of homeownership as it has been marketed by some 
of the largest and most wealthy residential mortgage lenders 
and brokers in the United States.
    No matter what regulatory or legislative steps are taken to 
address the problem of predatory mortgage lending and its 
subsequent foreclosures, there absolutely must be resources 
designated to provide for legal and advocacy assistance to 
those individuals and families who have already fallen victim 
to some of the most pernicious practices ever seen in the 
residential lending market.
    There is one other thing I wanted to say about legal 
representation, and that is our legal aid society can't help 
these folks. These are not folks who qualify at 100 percent of 
poverty, 200 percent of poverty, or 300 percent of poverty. 
These are folks who own their home, usually outright, and are 
working people who are just trying to improve their standard of 
living and make sure they have something to pass on to their 
children.
    Legal Services Corp. is a great function, but they can't 
help these folks because of the constraints on who they are 
able to assist.
    I would like to end by saying there are a couple of 
recommendations that Congress should implement and/or oversee. 
Congress should allocate at least $26 million to HUD's fair 
housing initiatives program in order to increase the education 
and enforcement efforts on the part of local fair housing 
organizations. Fair housing organizations, when properly 
funded, can serve as the infrastructure through which a lot of 
this could be addressed.
    Congress should support and pass anti-predatory lending 
legislation that contains the following provisions: effective 
rights and remedies, prohibitions against steering, a 
suitability standard, designating high cost as including all 
the loan fees, no Federal preemption, and an advanced 
disclosure of all the costs and fees.
    Congress needs to create a rescue fund to help people who 
have received discriminatory loans, predatory loans, or loans 
that were not suitable for their situations to convert those 
problematic loans into appropriate loan products.
    And Congress should require Federal Government agencies, 
including HUD, the Department of Justice, and the Federal Trade 
Commission to undertake more aggressive, effective, and 
expansive fair lending enforcement activities. These agencies 
should consult with experts in fair housing enforcement and the 
organizations who provide it so that the Federal examination 
and enforcement programs best reflect the practices and state-
of-the-art investigation techniques and litigation strategies 
that are being realized in private lawsuits that are being 
brought by fair housing agencies.
    Thanks again for the opportunity. I am ready for any 
questions.
    [The prepared statement of Mr. McCarthy follows:]
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    Mr. Kucinich. Thank you very much.
    Ms. Haynes.

                    STATEMENT OF RITA HAYNES

    Ms. Haynes. Thank you, Mr. Chairman and to the committee. 
My name is Rita Haynes, and I am the manager/CEO of Faith 
Community United Credit Union in Cleveland, OH, and I am past 
chair of the National Federation of Community Development 
Credit Unions.
    Faith Community Development Credit Union, popularly known 
as Faith, is a community development credit union with 6,000 
members and approximately $10 million in assets. We are a 
certified CDFI, chartered in the State of Ohio to serve anyone 
who lives, worships, or works in Cuyahoga County.
    In the credit union's 55 years of operation, Faith has been 
in the forefront of creating and implementing financial 
products and programs that assist lower-income residents in 
building wealth. One of our more successful products is the 
Faith-developed Grace loan. The Grace loan is an alternative to 
the predatory payday loan initiated in 1999 to combat the flow 
of our membership to predatory payday lenders who moved into 
our area when most banks vacated the inner city.
    In our research, we found that our members needed a product 
that was fast, simple, and a convenient way to obtain cash when 
an emergency arose. We named our product the Grace loan because 
it is based on unmerited favor, and therefore no credit report 
was required.
    The payday lenders require a pay stub and a post-dated 
check. We disagree with this. In our financial literacy 
training, we have taught against using an instrument that was 
basically no good.
    Since our electronic records detailed the information that 
we received from the member's application, no check is required 
for the Grace loan. This shortens the time and simplifies the 
process.
    The Grace loan requires that a resident have a share 
account of at least $50 and an electronic deposit to their 
transactions or savings account for 3 months before they can 
apply for a Grace loan.
    Whereas the payday lenders charge an application fee of 
$17.50 to $22 per hundred, we charge a flat $15 application fee 
for up to $500, which must be paid in advance. By not financing 
the application fee, the member receives the full amount that 
they borrowed.
    After explaining to them that they are saving $72.50 to 
$95.00 in fees, we get their commitment to save at least $10 
with the repayment of their loan, that they must leave in a 
savings account for at least a year. The Grace loan must be 
repaid in full with a 17 percent interest rate, which averages 
around $7 for 30 days on a $500 loan. Payments can be paid in 
one or four payments within a month, depending on their pay 
cycle.
    We will allow up to 12 loans a year, but we try to wean 
them off of this product by lowering the amount they get 
monthly or skipping a month to only use this product when it is 
truly an emergency.
    After a year of positive history, members can apply for a 
regular loan at a lower interest rate or an amazing Grace line 
of credit, which requires less paperwork. The member's credit 
history is reported to the credit bureau in either case.
    In 2006 we made 2,023 Grace loans totaling $697,755, and we 
only charged off seven loans totaling $1,922.53.
    Here is what some of our members have said about our 
program: ``I have saved money without even using checks, and I 
have also improved my credit history with Faith.''
    ``When it came to repairing my car to get to work, I had no 
choice but to borrow before payday. I am so glad the Grace loan 
was available.''
    ``It was worth using my Grace line of credit when I ran 
short to pay my mortgage on time, avoiding the $55 late charge 
and damaging my credit.''
    I thank this committee for this opportunity to testify, and 
I would be happy to answer any questions that you might have.
    [The prepared statement of Ms. Haynes follows:]
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    Mr. Kucinich. Thank you very much. I would like to say that 
we are in the middle of another vote. We are going to recess 
until 7. I would appreciate it if you can remain.
    Is there any witness here who has to catch a plane right 
now? Sir, what time is your flight?
    Mr. Jacob. It is at 7:55.
    Mr. Kucinich. I am going to ask Mr. Jacob, why don't you 
testify right now? Why don't you testify, and then you can go. 
I am going to ask Mr. Jacob if he could testify briefly, and I 
am going to invite the gentleman from the other panel to come 
forward and we will swear you in. This has been an 
extraordinarily long day. Some of you came in around noon. I 
don't want you to miss your flight, so let's see if we can all 
accommodate each other here, and then I will dash. Congressman 
Davis, I will be shortly behind you.
    If you could proceed, Mr. Jacob, and if you could keep your 
testimony a little bit limited we will get it on the record. We 
will put your full statement in.

                     STATEMENT OF ED JACOB

    Mr. Jacob. Thank you, Chairman.
    Chairman Kucinich, members of the subcommittee, I 
appreciate the opportunity to testify today. You will hear from 
others about the payday lending industry. I would like to focus 
in on our product, our payday alternative loan [PAL].
    We developed this loan in mid-2002, and we did that as a 
result of the story that you saw in the video with one of our 
members. We received support for this product from the National 
Credit Union Administration. They were very supportive, both on 
the regulatory and examination side, and also from the CDFI 
fund of the U.S. Department of Treasury.
    We structured our loan as a $500 loan, 16.5 percent, 
payable over 6 months. The reason we structured it as a term 
loan is, as Congressman Cummings noted earlier, the payday 
lending industry really structures their loan in a way to 
encourage rollovers, in a way that is really not able to be 
repaid in 2 weeks or in 1 month. The goal is to bring new 
members into the credit union.
    We have made over 4,200 of these loans over the last few 
years, totaling over $2 million. To date we have had to charge 
off about $140,000, or about 6 percent of these loans, and our 
60-day delinquencies are about 5 percent. While this is higher 
than the rest of our portfolio, it is manageable for us and 
sustainable in that way.
    There are other financial institutions that are offering 
alternatives to payday loans, to which I say the more the 
merrier. I don't want to corner this market. The more banks, 
the more credit unions that are involved in this, certainly the 
better, including Southside Community Federal Credit Union in 
Congressman Davis' District is offering an alternative product.
    We have learned three lessons from our work in this area. 
First, in general, the product is not used for one-time 
emergencies. You will often hear the stories from the payday 
lenders about somebody's car breaking down and they need to fix 
their car to get to work. Our experience is that these are 
people who are living paycheck-to-paycheck, week-to-week, 
really in some cases living a week-before-paycheck-to-week-
before-paycheck. That is why the traditional payday loan is so 
destructive. There is no way for them to get out of that cycle 
of debt, and so they continue to roll it over.
    The second thing that we have learned is an issue of 
profitability. We structure this product to be sustainable, not 
a profitable product but a sustainable product, and we have 
gotten to the case where that is the case for us now. One way 
to certainly increase the sustainability is to reduce the 
transaction cost, and there are banks that are larger than I am 
and credit unions that are larger than I am that can use 
technology and other ways to cut the transaction cost.
    The second thing is to view profitability on a relationship 
basis. The individual who comes in and joins the credit union 
to take out a payday alternative loan will later be with us 
when they need an auto loan or when they need the mortgage 
loan, and we need to view profitability on a longer timeframe 
than just that one initial loan.
    So far we have made over 150 loans totaling over $600,000 
to what we call PAL graduates, people who started out with a 
payday alternative loan and graduated to larger loans with us.
    I don't want to be the cheapest payday lender. That is not 
why I am in business. In some ways the most important 
difference between the work we do and Ms. Haynes does and a 
payday lender is that we want to move people out of these 
products. We don't want them stuck in an endless cycle of debt 
with us, and that is the important thing.
    You saw the story of the woman who is a member of ours who 
paid $3,000 to borrow $3,000. Every dollar that she paid to a 
payday lender is a dollar that was drained from our community. 
For the 4,200 payday alternative loans we have funded so far, 
our members have saved over $3 million compared to traditional 
payday loans.
    I am a small $8 million credit union sitting on the north 
side of the city of Chicago, and I have saved my community $3 
million. If I can do that from my 2,500 square foot location on 
the north side, think what other larger banks with better 
technology, better knowledge, better expertise can do. I 
encourage other traditional financial institutions, good 
financial institutions to get into this marketplace.
    Thank you very much.
    [The prepared statement of Mr. Jacob follows:]
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    Mr. Kucinich. Thank you very much, Mr. Jacob. Your full 
statement will be in the record, as well as a transcript of the 
video. We are very grateful. If you wish to leave right now so 
you can get your flight, you certainly have permission of the 
Chair.
    I want to ask Mr. FitzGibbon to come forward.
    [Witness sworn.]
    Mr. Kucinich. Let the record reflect that the witness 
answered in the affirmative. You may proceed.

    STATEMENT OF THOMAS FITZGIBBON, JR., MB FINANCIAL BANK, 
                         ROSEMOUNT, IL

    Mr. FitzGibbon. Thank you very much.
    Just a quick briefing. I am the executive vice president of 
a commercial bank that is traded on the NASDAQ Stock Exchange. 
We are an $8.3 billion bank. But my love is in community 
development. I head up the Community Development Corp. for the 
bank and am very active in community development activities, 
including being chairman of the NHS of Chicago and several 
other nonprofit organizations.
    With that as a background, with my testimony in writing in 
place here, you asked about and Congressman Davis asked about 
resolutions. I think there are some things.
    I served for 3 years on the Consumer Advisory Council to 
the Board of Governors to the Federal Reserve during the time 
up until 2004, when they were exploring ways in which they 
could change, amend the rules for CRA. Out of that came a lot 
of controversy with the OTS going off on its own to come up 
with its own rules, and several other controversial things that 
went on for years after that.
    The real challenge here is that we have a dual financial 
system here. We have financial feed, if you will, in this 
country, with the wholesale or limited purposes banks that are 
allowed to do certain things that suck deposits out of markets 
where those deposits are needed by the regulated depositories 
to put into work in our communities. That needs to be changed. 
We need to work on that.
    That discussion and debate went on for 3 years while I was 
there, and no real resolution came out of it. We need to get 
back to that CAC and tell them they need to come back with some 
more look at that wholesale unlimited purpose charter that is 
out there.
    I have not seen one single community development investment 
or deal that has been done by ING Direct in Chicago while we 
hear the sucking sound of deposits going out of that market.
    [The prepared statement of Mr. FitzGibbon follows:]
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    Mr. Kucinich. What I would like to do is to ask staff if 
you would be in touch with the witness so that we can get these 
observations, Mr. FitzGibbon, because it is very valuable to 
hear that because of the position you are holding in the 
industry.
    I would like to say this. I must leave immediately to get 
to vote.
    Mr. FitzGibbon. No problem.
    Mr. Kucinich. There are votes on the floor. I am going to 
declare the committee in recess until 7:05, at which time we 
will continue with the testimony. I am very grateful.
    Mr. FitzGibbon. That is OK. Let me ask one more thing. The 
Alternative Mortgage Instrument Parity Act, you need to look at 
that. That is another instrument and a congressional act that 
in the 1970's, which supersedes State law and allowed these 
alternative mortgage instruments to be done. That is another 
way in which you can deal with it. OK?
    Mr. Kucinich. Thank you very much. We are in recess until 
about 7:05. Thank you.
    [Recess.]
    Mr. Kucinich. The committee will resume.
    We will pick up with Mr. Rothstein. I want to thank all the 
witnesses for their patience in remaining through these series 
of votes and say that after this panel and a period of 
questioning we will go to the other representatives who are 
here. Thank you so much for participating in this discussion 
and being willing to wait through this very long day here.
    Mr. Rothstein, please proceed.

                  STATEMENT OF DAVID ROTHSTEIN

    Mr. Rothstein. Thank you.
    Chairman Kucinich, distinguished members of the 
subcommittee, thank you very much for the opportunity to appear 
before you today. I am David Rothstein, a researcher with 
Policy Matters Ohio. We are a nonprofit, nonpartisan 
organization that provides research on economic issues that 
matter to low and moderate income working families in Ohio.
    We appreciate your invitation today to discuss our recent 
research on payday lending in Ohio. The economic situation for 
many of Ohio's workers is very difficult. Policy Matters 
research has shown that Ohio wages have been stagnant, 
employment has not recovered from the last recession, and those 
who do work are often without health care or retirement 
benefits.
    This troubling economic climate is worsened by predatory 
lending from companies who sell loans to working families at 
egregious rates, often 391 percent for a 2-week payday loan.
    In a recent report, Policy Matters found that payday 
lending locations in Ohio had increased dramatically from 107 
in 1996 to 1,562 in 2006. For those 11 years, there was a 1,400 
percent increase in lending locations across Ohio. What's more, 
our analysis found that, while payday lenders were concentrated 
in mostly urban areas in 1996 in the early part of our study, 
by 2006 they were in urban, suburban, and rural neighborhoods, 
alike.
    Mr. Kucinich. If I could interrupt your testimony just for 
a minute, you know, one of the things that you have in your 
prepared executive summary, which I think is worth everyone in 
this room hearing, is that Ohio has more payday lending 
locations than McDonald's, Burger King, and Wendy's restaurants 
combined.
    Mr. Rothstein. That is correct, sir.
    Mr. Kucinich. That is an image worth recalling. Please 
continue.
    Mr. Rothstein. Sure. I suppose I can take that sentence out 
of my testimony then.
    Mr. Kucinich. Actually, it bears repeating. Go ahead.
    Mr. Rothstein. The report, Trapped in Debt, maps the growth 
of lending locations from a small number of scattered locations 
in 1996 to 86 of Ohio's 88 counties in 2006. That means that 
there were only two counties in Ohio without payday lenders.
    Large urban counties had the most payday lenders in 
absolute terms, but less-populated counties had a greater 
number of lenders per capita.
    Our report found that, as Chairman Kucinich stated, they 
are so common throughout Ohio that by 2006 there were more 
payday lending locations than McDonald's, Burger King, and 
Wendy's restaurants combined.
    The sheer volume of payday lenders in Ohio is problematic 
because of the weak regulation of the industry. Ohio has a 
maximum limit of $800 per loan, with a maximum allotted charge 
of $15 for every $100 borrowed. As the Center for Responsible 
Lending estimates, most borrowers are repeat borrowers, taking 
out loans between 7 and 14 times per year.
    In Ohio, borrowers cannot roll over their loans but can do 
back-to-back transactions, where after a 24-hour cooling off 
period they can take out a loan to repay the previous loan.
    Payday lending affects various demographic groups. Our 
analysis, surprisingly, found little relationship between 
lending locations and areas of low and moderate-income housing 
where African American census tracks.
    A recent study found that lenders who cultivate more repeat 
business from existing customers will fare better financially 
than those who do not. I am going to repeat that. A recent 
study found that lenders who cultivate more repeat business 
from existing customers will fare better financially than those 
who do not, so they have an incentive to get repeat borrowers.
    In the business of payday lending, all workers in Ohio and 
other States are potential clients, regardless of race, income, 
or living area.
    Lenders in Ohio are mostly chains or franchises. The two 
most common locations are Advance America and Cashland 
Financial Services, with more than 100 locations each. In fact, 
the top 10 lending companies in Ohio account for more than 55 
percent of all payday lenders in Ohio. One lender in Ohio, 
Buckeye Check Cashing, receives substantial financing in grants 
and loans from the State of Ohio to expand operations in Ohio.
    The lending industry in Ohio is extremely volatile, as 
well, with lending locations opening and closing frequently 
within a given year. For instance, in 2005 a total of 113 
payday lending locations closed, but 357 new locations opened. 
That same year, 12 locations opened and then subsequently 
closed in that year.
    A $500 loan in Ohio can carry an origination fee of $50 and 
interest charges of $25, for an effective APR of, again, 391 
percent for the 2-week loan.
    Borrowers face an even more difficult situation when the 
loan comes due because their economic situation is often the 
same or worse than before, meaning they either need another 
loan to repay the first loan or they default on the post-dated 
check. Thus, the cycle of borrowing keeps borrowers trapped in 
a constant state of debt.
    In our report we recommend the protections extended to 
service members and veterans in the Talent-Nelson Amendment be 
extended to all working families. Capping lending rates at 36 
percent, while still a high effective APR compared to other 
loans and forms of borrowing, is a vast improvement over loans 
made in the 300 percent range.
    Additionally, credit unions and banks should be offering 
competitive, fair, and responsible loan products to working 
families in their communities. We have heard testimony from 
people at this table who are doing just that.
    Fair and responsible lending is an economic and social 
benefit to the entire community. Members of Congress can play a 
pivotal role in implementing these policy recommendations, 
which again benefit the entire community.
    Mr. Chairman, distinguished members of the subcommittee, we 
thank you again for the opportunity to present our findings on 
the dangerous expansion of payday lending in Ohio. We strongly 
believe these policy recommendations will lead to a better 
economic situation for everyone involved. We look forward to 
working with the subcommittee and to Members of Congress on 
issues of payday lending and other economic issues.
    I look forward to any questions you may have. Thank you.
    [The prepared statement of Mr. Rothstein follows:]
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    Mr. Kucinich. And thank you, Mr. Rothstein. I appreciate 
the exceptional and thorough report which Policy Matters has 
submitted to this committee.
    Now we will hear from Ms. Grossman. Thank you very much for 
being here.

                   STATEMENT OF FRAN GROSSMAN

    Mr. Grossman. Thank you. I am Fran Grossman. I am an 
executive vice president at ShoreBank. I am a grandmother, and 
actually I did miss my flight, so my grandchildren----
    Mr. Kucinich. Did you say something about it?
    Mr. Grossman. I missed my flight.
    Mr. Kucinich. But when I asked does anyone here have a 
flight----
    Mr. Grossman. No, no. There was no way I was going to make 
it.
    Mr. Kucinich. I just wanted to make sure I didn't----
    Mr. Grossman. When I was going like this, that is what I 
was doing.
    Mr. Kucinich. I am sensitive to people missing flights, so 
when I asked witnesses to raise their hand----
    Mr. Grossman. You were wonderful. I just wanted credit for 
staying.
    Mr. Kucinich. Well, thank you.
    Mr. Grossman. I wasn't subtle enough.
    Mr. Kucinich. The Chair will duly credit the gentlelady 
from ShoreBank here. Thank you for being here.
    Mr. Grossman. I started out as I taught school as a 
librarian, as a social worker. I worked at Continental Bank and 
Bank of America running small business real estate lending, 
starting the CDC, raising capital for ShoreBank. I wound up at 
ShoreBank. I also got my start with Gail Sincata. I care a lot 
about the subject.
    I would like to use, though, my 5 minutes to give you a 
glimpse of the payday lending industry from our vantage in 
Chicago. I am sorry that Congressman Davis is not here, but I 
will send it to him, and we speak, anyway.
    What I am going to posit is a way that community 
development banks like ShoreBank can help meet the complicated 
needs of our customers and members of our neighborhoods who use 
payday loans.
    As I said on the phone when we talked about this with your 
terrific staff person, there are no easy answers. There are no 
silver bullets. I think I am not going to go into the horrors 
of payday lending. I think you have heard enough from others. 
What has happened in Illinois--and Ms. Fox has this in her 
prepared testimony--is we have developed regulations that have 
changed but not eliminated payday lending. These guys are 
smart, and every time you make a new rule they are going to 
figure it out, because there is a lot of money involved. As we 
always say, nature abhors a vacuum, and they do find the 
loopholes.
    A number of things have taken place in Illinois, including 
an industry-wide cap limiting payday loan principal to 25 
percent of somebody's income, only 345 days of continual 
indebtedness before a mandatory debt recovery period, special 
protection which I think we are all interested in for military 
personnel, including a limit on wage garnishments. And we do 
have a Statewide reporting system and we do have fines. It is 
not perfect, but it is a start and it is an acknowledgement.
    But it is also important to remember that payday lending 
fits into a broader set of businesses that provide alternative 
financial services, and usually they all charge high rates for 
basic services such as check cashing, bill paying, and the 
like.
    ShoreBank is a $2 billion mainstream financial institution 
that is also a community development bank. We have 39,000 
checking accounts. Our largest service area is the Chicago 
area. We also have branches in Cleveland. We did $7 million in 
single family mortgages in Cleveland last year. We have lost 
market share because we have a fixed rate product, which means 
that none of the fancy stuff. We underwrite them ourselves. 
What you see is what you get.
    But the consumer is bombarded with probably over 300 types 
of mortgage products today. When you were mayor of Cleveland, 
everyone you knew got a mortgage at a bank. Now everyone you 
know doesn't get a mortgage at a bank.
    I think what Tommy FitzGibbon was talking about was very 
interesting. We also have a 600,000 deposit from the Cuyahoga 
County Link Deposit Program, and we are going to talk about 
doing more business, but that is not in my speech.
    Our communities have a median income of just over $30,000. 
We offer a wide range of products, from loans to rehab mortgage 
loans for walk-up rental apartment buildings. These are 
affordable rental apartment buildings and they are not 
subsidized. This is not FHA. This is not section 8. Well, it 
could be. It is not section 8 project based. It is not low 
income housing tax credits. These are Ma and Pa developers who 
buy a building. We help them get a rehab mortgage, and they 
charge micro-market rents.
    We make loans to small businesses. We do a lot of lending 
to churches and nonprofits, as well as we do many kinds of 
accounts for individual customers.
    We are a community development bank and we meet the strict 
criteria as a community development bank, which means that we 
have to make 60 percent of our loans in low and moderate-income 
communities. But, interestingly enough, there are only 52 
community development banks nationwide. Some of you may know 
that the community development financial institution is a part 
of Treasury, and it certifies banks, credit unions, venture 
funds, and nonprofit loan funds. They do the 60 percent.
    Our banks are located in many of the same areas where 
payday lenders, check cashers, money transmission shops, and 
those are the remittance shops, and pawn shops--don't forget 
about pawn shops. There is a whole array of people out there 
who are in what we would call the quick cash business.
    Payday loan customers care about their customers and they 
are often customers of our banks and banks like ours. They care 
because they are a constant source of income.
    We provide many services that these same customers want, 
and remember that people who use paydays have to have a 
checking account, so we do share many of our customers, but we 
cannot, though we know, we cannot provide for these small, 
unsecured credit, these loans of $500 to $1,000 with no credit, 
no unsecured. We cannot make them at this point. We don't have 
the ability.
    There are some programs, and the reasons are some have to 
do with issues of pricing and prudent risk management. Others 
have to do with the banking culture and regulatory system. And 
still others with all of our full understanding of how to 
effectively and responsibly meet the needs of many community 
residents.
    The consultants who work with retail banks tell us that, in 
order for a checking account to be profitable--and that means 
that it would earn $136 a year for the bank--it has to have 
approximately $2,000 in it and only one NSF. Now, you can make 
a lot of money off of NSF, but that is an equally ugly way to 
make a living, so that is why I use that number.
    I think community bankers and community development bankers 
can help. We are intensely local and truly relationship 
focused. We are small organizations with limited resources, as 
well as limited resources for error. We are regulated.
    Some CDFI banks have been able to engage in some 
alternative developments to payday loans; however, we have not 
as a group or individually cracked the code that enables us to 
not only do more, but ideally to move residents of our 
communities and all of our customers away from paydays into 
savings accounts and things that really are building assets. 
And we have certainly not figured out how to do it profitably.
    What I also want to make sure, that we don't wind up having 
programs that are not sustainable over the long haul, are 
simply a reaction to political and public pressure, and/or are 
charitable act, because those are not going to be sustainable.
    Community development banks could be well positioned to 
meet the particular needs of these customers. Not only are we 
relationship driven, we are embedded in the community. We know 
our Congresspeople. We know our church leaders. they know us. 
This is our turf and our neighborhoods. Decisions are made 
locally. You have access to the highest people in the 
institutions. You call up and you want the president or the 
chairman of the board and you get him because he is there, or 
her. You want to know where a credit decision is being made? It 
is being made there. It is not being made in a far-away State. 
It is not only formatted lending.
    But there are things that we would need as community 
development banks to do more.
    Actually, before that let me give you two examples of what 
the Central Bank of Kansas does, which is not really an 
antidote to payday lending but is an attempt to try and get 
customers of theirs into what they would call savings and we 
would call savings. They offer a certificate of deposit loan 
that they feel competes with payday lending products. The 
customer takes out a loan and immediately receives a 
certificate of deposit which serves as collateral for the loan, 
and when the borrower pays the loan back they have established 
credit and now are bankable.
    There is a wonderful bank in Milwaukee, Legacy Bank--
actually, it was started by women--and they connect checking 
account customers with bad credit to financial management 
classes, and they are able to borrow an emergency loan from the 
organization that sets it and the bank gets paid back. Legacy's 
whole focus is on making low income customers good, solid, 
profitable customers.
    One of the problems with the CDFI banks is that the CDFI 
banks have to declare, in order to be certified by the 
Treasury, that you are mission oriented, which means that most 
community bankers who really do all this are not going to say 
that. They see themselves as bankers and profit people. The 
fact that 60 percent of their loans and everything they 
actually do fits into what we would call a CDFI doesn't matter.
    One of the reasons then we have over 7,000 community banks 
nationwide, and it is interesting to note that only 8 percent 
of those certified are banks, 67 percent are nonprofit loan 
funds, 19 percent are credit unions, 3 percent are venture loan 
funds, and another 3 percent are depository holding companies.
    The CDFI fund has been helpful with the grant programs to 
banks, as well as helping many banks get established in areas 
that would not otherwise be banks. ShoreBank had a community 
development bank in Cleveland which is now a branch of our 
bank.
    But other things that would be helpful are CDFI banks 
should receive favorable consideration for receiving Government 
deposits and loan participations. This came out quite clearly 
when we talked to people in the Katrina area. What they really 
needed was not deposits but they needed loans. They had a lot 
of money, but there was no way to help those banks in an 
organized fashion, whereas you could have identified them as 
CDFI banks, certified them, and taken a class of those who 
passed the 60 percent test.
    We need to deal with loan loss reserves if we are going to 
expect and task community development financial institutes, 
banks, to support these specialized lending programs.
    We need encouragement from bank regulators, the others as 
well as the FDIC, in the form of examiners who understand and 
support banks' roles in providing alternatives to payday loans.
    The easy money is for financial education. I guess I pray 
that we don't wind up recommending financial education. Of 
course it is needed, but everybody would like to send you to a 
class instead of really doing the hard thing.
    Regulating away payday lending will not eliminate the 
unique financial needs of individuals with low assets and poor 
credit, needs that high-interest, short-term check cashers 
offer easily, and it is at a cost, and people do know that. 
They just can't deal with it because they need the money or we 
do live in a society of wants. Wherever you go, if you can't 
afford the plasma TV I will help you get one. If you can't 
afford the house, I will help you get one. If you want a new 
fur coat, I will help you get one. Whatever it is, we live in 
that kind of world and we have to acknowledge that.
    What must be part of a regulatory package to limit payday 
lending are incentives to help mainstream financial 
institutions and credit unions. Community development banks are 
mainstream, and they do offer products to these customers and 
they need to be tasked to offer more.
    Bottom line: it is not easy. There are no simple answers. 
It will take the will of Government to encourage, incentivize, 
because money does talk. If these banks are able to achieve 
profitability through loans, deposits, and other ways that the 
government helps, through the regulators, everyone has to be 
involved. We do not want to look back a few years from now and 
see another mess like we now have with some of the subprime 
lenders and the institutions that funded them.
    A way was figured out because we all promoted 
homeownership. Homeownership was going to be the answer to 
everything. We wanted minorities to own homes. We wanted poor 
people to have homes. Whether it was the Democrats, the 
Republicans, the Governors, the States, we all believed in 
homeownership. Now we have a pretty mess and a lot of people 
who thought that they were getting the American dream and now 
realize that it was a sham. We can't do that on quick loans. We 
have to figure out how to look at the source. We understand the 
problem.
    [The prepared statement of Ms. Grossman follows:]
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    Mr. Kucinich. Thank you very much for your testimony, Ms. 
Grossman.
    I am going to now go into the questions for the second 
panel. I would like to ask Mr. Davis if he would like to start, 
or if you want me to start.
    Mr. Davis of Illinois. You can go ahead.
    Mr. Kucinich. OK. To Ms. Haynes, thank you again for being 
here and thank you for the work that Faith Community United 
Credit Union does for people.
    Ms. Haynes. Thank you, Mr. Chairman.
    Mr. Kucinich. One of the things that is important to 
realize, I think, about the payday lending industry is that 
payday loans are made only to people who, one, are employed 
and, two, have checking accounts. Customers are working people, 
have a relationship with the bank.
    Ms. Haynes. Right.
    Mr. Kucinich. Nonetheless, they go to payday lenders and 
not to their banks. Why do you think that is? Why don't they go 
to the bank?
    Ms. Haynes. The payday lenders make them feel wanted, which 
banks don't. They are quick. At times when they get off work, 
they are open and available. They are even open on Sundays. 
They are on every corner. That is why people go to them rather 
than to a bank, and sometimes to a credit union that has hours 
that don't always apply to what they need.
    Mr. Kucinich. Since you offer a competing product to payday 
lenders, what is most important to the borrower? Is it the cost 
of the loan, the speed with which they get the loan, the 
location, accessibility? What do you feel are the factors?
    Ms. Haynes. I think the simplicity to make it quick and 
easy and convenient for them. And the cost is not the primary 
thing that they are looking at. They need the money. They need 
it then, and they want the solution to this problem right then.
    Mr. Kucinich. I am sure you have given this some thought in 
terms of loans. In your opinion, the payday lenders, they are 
charging these high fees and these big interest rates. Do you 
think that is necessary for them to do that, to charge such 
high interest rates and big fees to make these kind of loans?
    Ms. Haynes. No, I definitely do not. I think that those 
rates are unnecessary for them to charge; however, they are 
taking a niche that banks and credit unions should be filling, 
and they are simply over-charging people for the service that 
they are giving them. But the people in a depressed market need 
the funds so bad that they will pay whatever, and then they get 
trapped into that. And it is very difficult for a credit union 
like us to get them out of that habit of getting the money 
immediately and using those post-dated checks.
    Mr. Kucinich. Right. What, if anything, about the Federal 
or State governments do you think that could be done to change 
the laws to protect people you describe as being trapped?
    Ms. Haynes. Well, I think laws should be made to regulate 
them just as credit unions are regulated. We are regulated as 
to how much interest we can charge and all of that. I think 
there should be regulation to regulate those payday outfits, as 
I call them.
    Mr. Kucinich. And the people who use the payday outfits, 
you talk about being trapped. What do you think is the biggest 
trap they get into, just in your experience with people who use 
that model? What is the trap? What is going on in their minds 
when they are using it?
    Ms. Haynes. The only thing going on in their minds is they 
need the money, they need it right then, and they are not 
looking down the road to having credit. They don't ask them 
things that we would ask in a credit union about building 
credit, saving for the future, those kinds of things. They see 
them as being friendly because they don't ask the most meager 
questions about what are you doing, how are you going to send 
your children off to college if you don't have a good credit 
rating or savings account. So in the credit unions we try to 
build that into pulling them or weaning them, as we call it, 
from the payday lenders.
    Mr. Kucinich. You know, it would be interesting to do some 
historical research, because I remember in growing up in the 
inner city that there were always people out there on the 
corner you could borrow money from.
    Ms. Haynes. Right.
    Mr. Kucinich. But they would charge you a lot of money to 
loan you money.
    Ms. Haynes. Yes.
    Mr. Kucinich. And these people were sometimes called loan 
sharks.
    Ms. Haynes. Yes.
    Mr. Kucinich. And there was a point at which if you charged 
a certain percentage it was made illegal.
    Ms. Haynes. Yes, that is true.
    Mr. Kucinich. And we are in a situation today where there 
is a lack of regulation here. You know, when you look at 
annualized percentage rates, it would be interesting to see if 
that in any way falls into the same kind of category, because 
these percentage rates are so high that it does raise questions 
about matters of fairness and simple justice.
    Thank you very much.
    Ms. Haynes. Thank you.
    Mr. Kucinich. I have a minute left just to ask a question 
of Mr. Rothstein, and then I will come back to you.
    You noted in your testimony that one payday lender, Buckeye 
Check Cashing, receiving taxpayer financed grants and loans 
from the State of Ohio to finance their operation. As a matter 
of fact, I made a note on the chart there. Can you tell us more 
about this? How did that happen?
    Mr. Rothstein. Sure. Thank you for the question, Chairman 
Kucinich. What happened is they received several loans and 
grants. The first is they received $100,000 business 
development grant through the Ohio Department of Development 
which was approved by the Ohio Controlling Board.
    Mr. Kucinich. What was the interest rate?
    Mr. Rothstein. I don't actually know that offhand.
    Mr. Kucinich. It would be good to find that out, wouldn't 
it?
    Mr. Rothstein. That is a good question. I don't know it 
offhand, though.
    Mr. Kucinich. I am sure it wasn't 391 percent.
    Mr. Rothstein. The vote from the Controlling Board was six 
to one, with only one member dissenting saying that he doesn't 
think that public dollars should go to financing this type of 
business.
    They also received a 60 percent, 9-year job creation tax 
credit in 2004 from paying the corporate franchise tax in Ohio.
    The city of Dublin, which, for those of you who aren't 
familiar with Ohio, is a very wealthy, affluent suburb located 
right near Columbus, offered them a 25 percent, 5-year payroll 
performance incentive and a $150,000 relocation grant.
    I should note that they declined a $7 million Ohio 
enterprise bond fund loan as specifically citing Federal tax 
reasons.
    Those are list of credits that I have noted for them.
    Mr. Kucinich. OK. I would like to come back to you, but at 
this point I would like to yield time to my friend and 
colleague, Mr. Davis.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
    First of all let me again thank you for the patience and 
the fact that you are still here. I mean, that is an indication 
to me that we are what we call in the community real troopers, 
you know, that you are actually people who care a great deal 
about what you are doing, what we are talking about, and 
seriously seeking solutions or direction or something that is 
going to help alleviate the problem.
    But, Ms. Grossman, you indicated that people are really 
looking for money. I mean, they are not looking for financial 
education, and yet, as I listen to the discussion, it appears 
to me that a great deal of what they actually need is 
education.
    Mr. Grossman. Maybe I wasn't clear. It is not that people 
do not need financial education and that financial literacy is 
important, but it becomes like homeownership. It becomes the 
large banks, the large institutions, the large insurance 
companies. It is an easy fix. Of course, it is a part of it, 
but if we stop at financial literacy and we put it in the high 
schools and we put it in after school and we put it here and we 
don't do anything else, we will not have solved anywhere near.
    One of the issues I guess I am looking for is trying to 
figure out. We know there is a terrible problem. We might be 
able, through regulatory issues and legislation, to begin to 
control the rate, but the problem will still exist, and that is 
why I began to talk about the CDFIs and community development 
banks. We have to begin to think about ways to acknowledge the 
need, provide education, but also help people so that they can 
go and borrow money, that they can develop credit, because if 
we stop this we will go back to loan sharks, we will go back to 
contract buyers. I mean, you and I remember the contract buyers 
leagues. I mean, these people are always going to be with us.
    Mr. Davis of Illinois. It is kind of like my father would 
say: pray for a good harvest, but keep on hoeing. I mean, that 
is, provide alternatives at the moment, while at the same time 
try and wean people away.
    Mr. Grossman. Yes.
    Mr. Davis of Illinois. I mean, I was thinking of I used to 
work in health care, and how we would see a brand new health 
center down the street, and there were more people going to the 
Medicaid mill up on the corner. When we would ask them why, 
they would come back and say they really know what we want, and 
they give us the pills that we like or they give us the pills 
that we ask for. So it seems like a combination of both things.
    Let me ask, we talk about usury. We talk about the high 
fees. Would we be treading on sacred ground if we were to 
regulate those entities and say you can only charge 10 percent?
    Mr. Grossman. That is what leaders are for.
    Mr. Davis of Illinois. Or 12 percent.
    Mr. Grossman. That is what leaders are for. Of course it is 
sacred ground to somebody, but that is what leadership is 
about. That is why some of us, including you, are still here, 
because it is wrong and we know it is wrong and we have to not 
only stop it but we have to move on and think of other ways.
    Ms. Fox. There are 11 States that still have their usury 
and small loan laws that apply to small loan companies. You 
would violate criminal law in New Jersey if you charge more 
than 30 percent APR, and 25 percent in New York. In Georgia it 
is a RICO violation to do payday lending at over 60 percent 
APR. North Carolina tried it and found it was such a debt trap 
that they reimposed their 36 percent small loan rate cap if 
payday lenders want to get a regular small loan license.
    Congress said the way to protect military borrowers was to 
cap interest rates at 36 percent, including all of the extra 
fees, and to prohibit check holding and electronic access to 
the bank account.
    We are starting to move back to thinking about how to 
protect borrowers in this market, and there are States that 
still do it through rate caps.
    On your question about loan sharks, a paper in Salt Lake 
City did a big story that talked about payday lenders and title 
lenders, rate lenders, and what we call loan sharks today were 
charging. That was less.
    Mr. Davis of Illinois. Finally, is there anything that 
would, from a market vantage point--for example, if we were to 
talk about a national cap, are there things that are taking 
place in one market that would suggest that there is something 
or some reason why the rate couldn't be the same in New York as 
it is in Illinois as it is in Indiana as it is in Texas as it 
is in Missouri?
    Ms. Fox. Traditionally, the small loan industry has been 
regulated at the State level, and interest rate caps have been 
a function of State law. The Federal Government does cap credit 
unions at 18 percent APR for federally chartered credit unions.
    Mr. Davis of Illinois. So it would just be new territory.
    Ms. Fox. It would.
    Mr. Davis of Illinois. Or new ground that was being looked 
at.
    Ms. Fox. For civilian. Congress last year enacted a 
national rate cap for loans to the military at 36 percent APR. 
A lot of folks said wow, that is really high, and we said well, 
it is a lot less than 390 percent for a payday loan or 300 
percent for a car title loan or, you know, a couple hundred 
percent for refund anticipation loan, or other forms of high-
cost credit.
    But the other thing we really need you to do besides 
looking at the cost is to take the features of payday loans off 
the table that trap people in repeat borrowing, and that is 
their ability to get you to write them a check when they know 
you do not have money in the bank, and hopes that on your 
payday you will. That is an unsafe banking practice, and that 
is something that Congress could do.
    Mr. Davis of Illinois. Thank you very much. And thank you, 
Mr. Chairman.
    Mr. Kucinich. Thank you, Mr. Davis.
    Mr. Cummings.
    Mr. Cummings. Just one question.
    Mr. Kucinich. Take your time.
    Mr. Cummings. The credit unions have always seemed to 
provide services and have been able to target populations that 
the bank seems to skip over, and I think the credit unions give 
people a sense of ease, as far as getting into them. You know, 
you have several people on the job and somebody says, Girl, did 
you join a credit union? How did you get your car? You say I 
got it through the credit union. So the next thing you know 
they feel comfortable.
    I am just wondering, I see that some of you are from credit 
unions and you may have testified to this, but how can credit 
unions help to address these kinds of issues? Is there 
something that you all have and are there things that you are 
able to do that the banks are not able to do? Do you follow me?
    Mr. Grossman. Can I just say I think it is important to 
know that you are talking about low income credit unions.
    Mr. Cummings. Right.
    Mr. Grossman. We are involved on the banking side. You now 
have very, very large credit unions who act much more like 
large banks, whereas Faith--and I think she can respond much 
better--I mean, these are small credit unions, North Side 
Credit Union, South Side Credit Union, they are very different 
than the Credit Union of New York, which encompasses the whole 
State.
    I just wanted to make sure that we understood the 
difference between those credit unions.
    Mr. Cummings. I have you. I still want to know.
    Ms. Haynes. Yes, Representative Cummings, one of the 
reasons that we can't really compete as a credit union--we are 
a low income community development credit union, CDFI--we are 
only $10 million in assets. We cannot compete with payday 
lenders on every corner----
    Mr. Cummings. Right.
    Ms. Haynes [continuing]. That are open all day, evenings, 
and Sundays.
    Mr. Cummings. Right.
    Ms. Haynes. So that is why credit unions can't compete as 
totally as the payday lenders. And, of course, the transactions 
are costly, you know. They are a costly kind of loan to make.
    Mr. Cummings. Sure.
    Ms. Haynes. So, consequently, we are regulated and our 
interest rate is capped, so theirs needs to be capped.
    Mr. Cummings. Yes, ma'am.
    Ms. Fox. The bank's equivalent of a payday loan is the cash 
advance on a credit card or an overdraft line of credit at 18 
percent APR. The FDIC has proposed guidelines for banks for 
responsible small loan products. We have congratulated the FDIC 
for taking the leadership on that. Hopefully those will be 
issued and they will be an encouragement to banks to look at 
the small loan needs of their own customers in a responsible 
way.
    Credit unions are also looking at ways that they can make 
small loans to their members. I understand that at the recent 
CUNA conference that session was standing room only to talk 
about how to compete with payday loans for your own members.
    So there is work going on in this area, but that fact isn't 
reason to not address the consumer protection issues. I agree 
we need both effective regulation, small loan market, and good 
alternatives for consumers. And the third thing that we really 
need is emergency savings accounts for people.
    We have done some research. We have looked at research. For 
families making $25,000 a year, if they have over $500 in 
emergency savings they are much less likely to take out a 
payday loan than a consumer making $25,000 with no savings. The 
difference is you are eight times as likely to have a payday 
loan in your portfolio if you have no emergency savings than 
you would be if you have a least $500 in the bank. Savings are 
really important.
    Mr. Cummings. That is interesting you said that, because 
one of the things that I talk about quite a bit in my District 
is what I call bridges. So often what happens to people is that 
$500 you just talked about, if that bridge, that $500 can 
bridge them from one thing to another--now, it is only $500, 
but without it they are doomed. I think that is where the 
payday loan folk come in. They are looking at it from the 
standpoint, the borrower is looking at it from the standpoint. 
Let's say, for example, I got all of the money for my 
daughter's tuition but I need $500, and so they go to the 
payday loan person, get the money knowing that it is going to 
cost them a lot, but they look at it from the standpoint that 
this is the bridge to get me from one point to the other.
    I have heard people talk about this kind of stuff. While 
this $500 is only $500, for that situation it is like a million 
dollars because they are looking at it that this is what is 
going to allow my kid to be able to afford the tuition to go on 
to become the doctor, or whatever.
    So I think companies do take advantage of that, and I guess 
people get hooked on those payday loans, and then it is just 
rolling down a hill of ice. So I was just amazed as I listened 
to the various testimony that has been presented here, Mr. 
Chairman. I look at the neighborhood that I live in. I live in 
the inner city of Baltimore. I see people who are paying the 
highest prices for everything. They pay the highest prices at 
the grocery store, because there are no stores. They do the 
payday loan thing. They get cabs because they don't have a car.
    I mean, you go on and on. If they have a car, they pay the 
highest insurance. It is amazing that people who are poor ever 
get out of the hole. And when you go to the grocery store, when 
I shop in the grocery store in my neighborhood--and I know Mr. 
Chairman is going to have some hearings on grocery stores--I go 
to the grocery store in my neighborhood, you know, to buy a can 
of shaving cream, there may be a 50 cent difference. In my 
neighborhood it may cost me $3. I go to a neighborhood about 
may be 5 miles away and it is 50 cents less. They add up and 
they add up, so people just go down and down and down.
    Then folks say why can't they ever get up and get on their 
feet. And even when it comes time to get their taxes, you have 
folks saying come to me, I will give you your money right away. 
Even then they are finding themselves in difficult 
circumstances.
    That is why I asked the question about the credit unions, 
because I am trying to figure out, you know, this is a multi-
faceted problem that perhaps needs multi-faceted solutions.
    I want to thank you all for staying around here. I know we 
have another panel. I just wanted to thank you.
    Mr. Kucinich. And I want to thank Mr. Cummings and Mr. 
Davis for staying with us, because we all represent 
constituencies which include solid inner city constituents, and 
our experience is that people are always broke, and that if 
they don't have a job and they need money they borrow money, 
they get into debt. People are maxing out. If they don't have 
the kind of traditional paths to credit that some people have, 
they get into these traps and it becomes a nightmare. It is 
absolutely a nightmare, and people never get out of it. They 
never get their head above the water. That is why we are here.
    I appreciate Mr. Cummings and Mr. Davis staying with us on 
this.
    I think that what we will do, there are numerous questions 
that we have for the witnesses, and what I would like staff to 
do is to followup and submit these questions to the witnesses 
so that perhaps in some followup discussion with our committee 
you can give us some written responses, because you are such 
valuable resources on this important economic issue for people 
in the cities.
    What I would like to do right now is to thank the second 
panel and thank you for the cooperation you have given us and 
will continue to give us. Good evening.
    We will now call those hearty souls who have been here all 
day waiting for a chance to testify to the committee. Please 
come forward. Thank you.
    We are, indeed, fortunate to have an outstanding group of 
witnesses on our third panel. Actually it is a couple at this 
point. Mr. FitzGibbon had testified earlier.
    I want to welcome Mr. Calvin Bradford. Mr. Bradford is the 
president of Calvin Bradford and Associations, a consulting 
firm that engages in research, policy evaluation, general 
consulting, and expert witness services in the fields of fair 
housing and community development. Mr. Bradford is also a board 
member of the National Training and Information Center, which 
was founded in 1973 as a research and technical support 
provider to National People's Action and other community 
organizations that first initiated the movement against 
redlining and disinvestment.
    Through issue-based community organizing, NTIC helped 
spearhead the Community Reinvestment Act. Since its passage, 
the NTIC's efforts on the Community Reinvestment Act have 
resulted in over $1.1 trillion to low and moderate-income 
families across the United States. NTIC has been involved in 
more CRA agreements than any other organization, which is a 
tremendous testimony to your work.
    Next we welcome Professor Michael T. Maloney. Professor 
Maloney is a professor of economics in the John E. Walker 
Department of Economics at Clemson. Mr. Maloney received his 
Ph.D in economics from Louisiana State University and started 
at Clemson in 1974. He has taught at Emory University, as well. 
He was a senior financial economist at the U.S. Securities and 
Exchange Commission in 1990. Mr. Maloney is an associate editor 
of the Journal of Corporate Finance and is widely published on 
a variety of topics, including research and development in the 
drug industry, nuclear power and nonproliferation, and the 
complexity of financial markets.
    Welcome, gentlemen. I would ask you if you would stand.
    [Witnesses sworn.]
    Mr. Kucinich. The record will show that the witnesses 
responded in the affirmative.
    Mr. Bradford, you may proceed.

     STATEMENTS OF CALVIN BRADFORD, NATIONAL TRAINING AND 
   INFORMATION CENTER, CHICAGO, IL; AND MICHAEL T. MALONEY, 
        DEPARTMENT OF ECONOMICS, CLEMSON, SOUTH CAROLINA

                  STATEMENT OF CALVIN BRADFORD

    Mr. Bradford. Thank you, Chairman Kucinich and members of 
this committee. My name is Calvin Bradford, and I am a board 
member representing the National Training and Information 
Center. I want to convey to this committee NTIC's assessment of 
CRA enforcement after our 35 years of providing training and 
assistance to community-based organizations who are responsible 
for both the Home Mortgage Disclosure Act and the Community 
Reinvestment Act.
    We have not forgotten your role, Mr. Chairman. I have a 
copy of your agreement from May 1979. And we also point out 
that we know, as Congressman Davis pointed out, the CRA in many 
respects started in his neighborhood with Gail Sincata and the 
organizing there. In light of your hearings, it is important, I 
think, to say that its purpose was to pump prime lending money 
back into neighborhoods that at that time in Cleveland and 
Baltimore and Chicago and Detroit and other cities were 
devastated by the predatory abuses of FHA lending. So in some 
ways we are in a similar situation today.
    Our overall assessment of the Community Reinvestment Act is 
that many of the community groups and some lenders deserve 
outstanding ratings, while the Government regulatory agencies 
typically deserve substantial noncompliance ratings.
    The details of our recommendations are contained in our 
written statement. In summary, we find that the CRA needs a 
formal written fair lending test with a public disclosure, 
which it doesn't have, a requirement that all communities and 
all service areas be given a full evaluation. There should be 
no CRA-free zones, as the regulators now permit. There should 
be a requirement that all the lending affiliates and 
subsidiaries of a lender should be included in the lending test 
so that lenders can't, as they can today, pick and choose which 
affiliates to use and cherry pick their performance. But the 
CRA regulations, exam process, and examiner training need to be 
revised to eliminate grade inflation and ensure accurate 
ratings of real performance.
    We also recommend some changes in the Home Mortgage 
Disclosure Act and in the release of CRA and HMDA data to make 
it more usable by the public.
    I would like to summarize just a few examples that are more 
fully defined in our written statement. We provided three 
examples of cases where the Federal CRA regulators consistently 
gave satisfactory and even outstanding ratings to three major 
regional lenders and found no violations of the fair lending 
laws, while at the same time the U.S. Department of Justice 
under this administration filed race discrimination cases 
against these very lenders and claimed blatant racial redlining 
and violations with the Fair Housing Act, the Equal Credit 
Opportunity Act, and the CRA by systematically excluding the 
minority neighborhoods in the metropolitan areas that these 
lenders served.
    Mid-America in Chicago, Old Kent in Detroit, and Centier in 
Gary, IN, are all major metropolitan-wide lenders. All define 
their metropolitan service areas in ways to exclude the 
minority areas, in some cases excluding the entire central 
city.
    Over many years and several CRA evaluations, the OTS, the 
Fed, and the FDIC ignored this blatant form of discrimination 
and rewarded these lenders with satisfactory and outstanding 
evaluations, allowing them to engage in substantial expansions 
into other White neighborhoods by granting additional branches 
and expansions and approvals of mergers.
    Then consider finally the case of Flagstar Bank. It was 
twice found liable for race discrimination in Federal courts, 
first in an individual case in Detroit and then in Indianapolis 
for a nationwide written policy that set fees explicitly based 
on race. This case was so blatant that the court ruled against 
Flagstar in summary judgment. Yet, the OTS actually raised its 
rating from satisfactory to outstanding after this decision. 
Moreover, this written racial pricing policy was developed and 
implemented while the OTS was examining Flagstar for 
compliance. Flagstar literally violated its way to an 
outstanding rating.
    The Sunflower Community Organization in Wichita, KS, had a 
significant concern about lending practices of a Bank of 
America. The Wichita MSA has a large African American 
population, and the largest Hispanic, Native American, and 
Asian population in the entire State of Kansas, yet the 
Comptroller of the Currency did not consider Wichita large 
enough for a full CRA evaluation, so its rating of the Bank of 
America was based on performance in other communities. It took 
years of research and organization and negotiations with the 
help of NTIC to get the Comptroller to add a more in-depth 
evaluation of this one lender in just this one metropolitan 
area.
    Finally, the recent actions by Countrywide lending 
illustrate our concern that lenders will hide behind the 
protection of banking regulators. In the past, Countrywide has 
been one of those lenders that has shown huge disparities in 
FHA lending that are racially based. We have submitted with our 
testimony examples of that for Baltimore, Washington, Chicago, 
and Orange County, CA.
    Last fall the Attorney General of New York charged 
Countrywide with racial bias in subprime lending. When Elliot 
Spitzer announced the settlement with Countrywide last 
November, he lamented that the Federal regulatory agencies were 
protecting depository institutions by refusing to allow State 
agencies to investigate them for fair lending violations. At 
that time, Countrywide was the Nation's largest independent 
lender, not regulated. But just this month on March 12th the 
parent company of Countrywide became a savings and loan holding 
company and changed its full regulation to the Office of Thrift 
Supervision, clearly the regulator with the worst fair lending 
record.
    These are the kinds of examples we have come against year 
after year in the past 28 years of CRA enforcement.
    I would be glad to respond to any questions you may have.
    [The prepared statement of Mr. Bradford follows:]
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    Mr. Kucinich. I thank the gentleman.
    Professor Maloney, you may proceed. Thank you.

                  STATEMENT OF MICHAEL MALONEY

    Mr. Maloney. Thank you, Chairman Kucinich, for asking me to 
be here today, and honorable members of the committee. It is an 
honor to be here. I am going to talk about payday lending, and 
I am going to talk about it from a slightly different tack than 
the other people on the former panel.
    My interest in this topic is 5 or 6 years old and purely 
academic. From that perspective, I have done some research that 
I will report today.
    As you pointed out, I am a professor of economics at 
Clemson. I have been on the staff of the Securities and 
Exchange Commission. But my main love is teaching, and 
especially graduate students.
    At Clemson we are interested in the short-term credit 
market, and, in particular, whether consumers are better off 
having access to such credit. As part of our research, we have 
examined payday lending and its impact on consumers, and our 
research has found that payday lending has increased access to 
short-term credit without harming consumers.
    A couple of things that need to be pointed out, I believe, 
in the context of the short-term credit industry, the industry, 
itself, generates more than $95 billion in fees annually. These 
are not interest charges; these are fees.
    Some of those fees may shock you. The fees charged for 
insufficient funds amount to $30 billion. More than $50 billion 
is generated by credit card companies for late fees or over-
the-limit fees. So these are fees that are being charged by 
other credit providers. The payday lending industry generates 
$6 billion in fees.
    I think that credit card thing is the one that is kind of 
shocking, because you think about somebody that has a credit 
card and they are just paying some fairly high interest rate, 
but where they really get ding'ed is where they don't make that 
payment or they go over the limit.
    One of my graduate students had this exact thing happen to 
her. I was just shocked by the number.
    Some critics of payday lending have proposed limiting 
interest rates or eliminating these loans altogether. In fact, 
the interest rate cap of 36 percent will end the industry, 
because they can't make any money at 36 percent. They can't 
cover their cost. I don't think that is the right tack to take.
    All forms of legal credit are vast improvements over loan 
sharks and wholly unregulated forms of credit that dominated 
the credit market prior to the 20th century, and I think that 
we would return to that again if people are denied access to 
legal forms of short-term credit.
    The access to credit is best conducted in the open and 
competitive market. Although likely to be always relatively 
high cost, short-term credit has high cost because of its fixed 
cost and in the cost of doing business. Its fees are still 
competitively determined, and there is a lot of competition in 
the industry. Hence, we have to believe that is the cost of 
doing business.
    Research by Dr. Donald Morgan at the Federal Reserve Bank 
of New York has confirmed previously published research that 
consumers of payday loans shop for best prices and have 
benefited from increased competition.
    Another thing to recognize about payday loans is, as Ms. 
Grossman pointed out, consumers want these loans and they 
recognize the value of the loan because of its ease of access. 
They also enjoy its convenience in terms of location and its 
privacy.
    As I mentioned before, for many it is a choice of taking 
out a payday loan or confronting more expensive alternatives. A 
2005 study by Professor Tom Lehman confirms that payday loan 
fees offer a cost advantage to consumers over non-sufficient 
fees at banks, and are understood by consumers to be that.
    But what I really want to talk to you about today is the 
new research we have done at Clemson.
    My position on this payday loan industry has always been 
that it could be good or it could be bad. It seemed to me that 
the questions that should be answered are whether communities 
are worse because of payday loans or better off. Are there more 
homeless people because of payday loans, or are there less 
homeless people because of payday loans. That is a scientific 
question, and a scientific question that I think we have some 
answers to, though not complete.
    We looked at bankruptcies nationwide, State-by-State. We 
compared bankruptcies State-by-State over the years 1990 to 
2004 to the number of payday stores in each State over that 
period. What we found was that, instead of payday loans causing 
bankruptcies, payday loans reduced bankruptcies in a 
statistical test of causality. We also found, as you might 
expect, bankruptcies caused payday loans. When bankruptcies go 
up, payday loan stores go up, responding to the demands for 
short-term credit by those consumers.
    Now, as I say, a lot more research needs to be done on this 
topic. We are pursuing it, and I hope a lot of academics in the 
marketplace are pursuing it and the answers will come forth.
    I think our results on bankruptcy is especially important 
in the light of the other issues that were being considered 
today, particularly important in the light of the focus on 
mortgages and foreclosures. Having access to emergency cash 
that is not tied to a credit rating, home equity, or assets is 
particularly important for consumers who are seeking to 
maintain their homes.
    In conclusion, Mr. Chairman, payday lending is one of many 
options available to consumers of short-term credit. it appears 
to offer advantages of convenience, privacy, and cost that make 
it welfare-enhancing to consumers. No data exists to show that 
payday lending is inherently a poor choice for consumers as a 
whole, relative to the other options that they have.
    Demand for short-term credit will always exist as long as 
cash reserves for consumers are less than the emergency cost 
they are likely to face, and efforts to constrain the market 
forces are more likely to harm rather than benefit consumers 
with short-term credit needs.
    Thank you.
    [The prepared statement of Mr. Maloney follows:]
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    Mr. Kucinich. Thank you very much, Professor Maloney.
    I would like to just ask you a question about that study 
that you talked about that is being done that shows that the 
more bankruptcies there are the more payday loans there are.
    Mr. Maloney. Yes. If you just kind of think about it in 
terms of time, going through time, as bankruptcies go up in, 
say, year one, the number of payday stores will increase in 
year two.
    Mr. Kucinich. Yes.
    Mr. Maloney. Now, if the number of payday stores increases 
in year two, the number of bankruptcies in year three will go 
down. That is the kind of sequencing of causality that we are 
finding.
    Mr. Kucinich. You are not really trying to establish, 
though, that payday loans are the answer to holding the limit 
on bankruptcies, are you?
    Mr. Maloney. What we are finding is that payday loans 
reduce the number of bankruptcies, that the ability--to use Mr. 
Cummings' idea, the ability to bridge certain bad events with a 
payday loan may make people better off in terms of avoiding 
bankruptcy.
    Now, the effect is very small. I mean, it is not a huge 
thing. You wouldn't expect it to be.
    Mr. Kucinich. What you are saying is that some people will 
take out a payday loan, and that may help them avoid 
bankruptcy, but you are not trying to establish an axiom here?
    Mr. Maloney. I don't think that payday loans are going to 
stop bankruptcy. No.
    Mr. Kucinich. Right. I just wanted to make sure that, you 
know, in some cases--Mr. Bradford, would you like to respond to 
that?
    Mr. Bradford. I guess what I would like to say is if you 
look at the population, say, that are affected by payday loans, 
which tend to be more rental people, people who haven't had a 
lot of established credit, as opposed to the predatory lenders 
we talked about who are dealing with people who own homes or 
are in a position to own a home or have credit, you are dealing 
with different populations.
    To some extent the renter population has less incentive to 
ever file bankruptcy anyway because they haven't got debts to 
protect themselves from, other than maybe the payday loans.
    Also, I guess I would just say, since my own Ph.D 
dissertation was in statistical analysis, that I think you have 
to be careful in making assumptions about aggregate sets of 
relationships without actually doing time sequence studies that 
track individual people over time to see what the sequence of 
their behavior is. We oftentimes get correlations between 
events at an aggregate level that don't actually represent the 
actual behavior underneath those, so I think you would need 
more study.
    Mr. Kucinich. In fairness, I think Professor Maloney a 
moment ago asserted that, you know, maybe in some cases. He 
wasn't trying to establish any real, but your point is well 
taken.
    Let me ask you a question, Mr. Bradford. Your testimony 
discusses the apparent paradox that most banks are passing 
their CRA compliance tests while African Americans and Latinos 
specifically are receiving higher-priced subprime loans. We 
used to call that redlining.
    Mr. Bradford. Yes.
    Mr. Kucinich. In your opinion, is race still a factor in 
banking?
    Mr. Bradford. I think it is a serious factor in banking. 
Yes. I think you can see it from these examples. What I am more 
concerned about is that the existence of race in banking seems 
to be something that the Federal regulators just ignore. They 
don't take it into account. It used to be an actual factor in a 
CRA evaluation that you had to, as a rating factor, explain how 
you defined your area and your area couldn't have been defined 
by any discriminatory processes. There is still part of that in 
the regulation, but there is no assessment factor any more for 
that.
    Also, for your first part of your question about making 
subprime loans, when you look at the way they analyze loans for 
CRA, they lump all the loans together. What you really end up 
with is a situation where subprime lenders who target minority 
neighborhoods are going to get outstanding ratings on the 
lending performance because they have lots of loans in those 
neighborhoods because the agencies aren't taking account of the 
effect of different types of loans or whether various types of 
loans are appropriate.
    The same thing happened early on with FHA loans, where they 
inundated the east side of Cleveland or the west side of 
Chicago with FHA loans. Those banks who did those loans would 
get very high ratings because they had high penetration in 
those markets, without taking into account whether that led to 
high foreclosure rates or whether those loans were unsound.
    Mr. Kucinich. Well, you make a good point, and that is in a 
followup we really do need to take that into account. We need 
to take into account, OK, you are giving these loans, but what 
is happening, because it could be the height of cynicism for an 
institution to say all of a sudden, OK, you want loans, we will 
give you loans, but then either the terms are close to usurious 
or they know full well that they are going to be putting 
somebody in a position where they can't pay it back anyway.
    Mr. Bradford. Well, the other thing that they can do under 
the present rules is, if you have several loan companies--and 
that has become very common with the large banking 
institutions--you have several subsidiaries and they specialize 
in different types of loans. But it is more likely that the 
bank, itself, through direct lending will make CRA loans. So if 
you just look at the bank's loans, they will have a fairly good 
number of loans in minority and low and moderate-income 
neighborhoods. And then if they say they don't want their 
subsidiaries counted, then you get this great CRA performance, 
where they might have one of the largest subprime lenders as a 
subsidiary, and if you counted them the loan pattern would look 
quite different.
    Mr. Kucinich. I think it would be helpful to do a case-by-
case analysis in selected urban areas to be able to demonstrate 
how that actually works.
    Mr. Bradford. Yes.
    Mr. Kucinich. We will discuss that with staff as a 
followup.
    I am going to go to my colleague, Mr. Davis, right now for 
the next 5 minutes. We will come back to Mr. Bradford in a 
second and closing round.
    Thank you.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
    Mr. Maloney, would you suggest that one could view payday 
loan establishments the same way that you would view a 
convenience store? I am saying that people are simply willing 
to pay for the convenience of getting whatever it is that they 
are looking for whenever it is that they need it or want it, 
and therefore they just simply pay for it?
    Mr. Maloney. I definitely think that is the truth. I mean, 
I think that all of the studies suggest that the consumers are 
really, really interested in that convenience, and, as the lady 
with the Faith Credit Union pointed out, I mean, consumers of 
payday loans like the smiling faces they get when they walk in 
the store. These stores charge a lot of money, but they also 
charge a lot of money for milk at the Quick Way relative to the 
grocery store, so you are getting a similar phenomenon.
    Mr. Davis of Illinois. And so would you be suggesting also 
that the market sort of dictates the action?
    Mr. Maloney. Yes.
    Mr. Davis of Illinois. As well as the behavior of the 
institution?
    Mr. Maloney. Well, I think I am not exactly sure what you 
mean, but----
    Mr. Davis of Illinois. Well, what I mean is that whatever 
the market will bear, I mean, that is what people charge.
    Mr. Maloney. Well, there is a lot of competition in the 
industry, and I believe competition lowers prices to the bare 
minimum cost, and my reading of the data is that the profit 
rates are just not that high in the industry. If you look at 
the profit for an average transaction, it is about 2.5 percent. 
That is about the same as the grocery store industry. If you 
think about an average transaction of, say, $300--I think the 
average for Advance America is about $340--you look at that 
average, that $340 would be like a basket of groceries. The 
vendor is making about $7 on it, so you have 2.5 percent. It is 
about the same as a grocery store.
    Mr. Davis of Illinois. I would ask either one of you or 
both of you and Mr. Bradford, of course, payday loans is a 
fairly new phenomenon. I am saying I don't remember any of them 
when I was a kid. There may have been some, but I didn't come 
in contact with them or I didn't hear about them.
    Is there any evidence that the advent of these on the scene 
has reduced loan sharking, or have you come into contact with 
any evidence that would suggest that there aren't as many loan 
sharks around, and part of the result may very well be because 
of the payday loans?
    Mr. Bradford. I just don't know. Sorry. It seems very 
likely, but I don't have any data on that.
    Mr. Davis of Illinois. I am trying to firm up in my mind 
the moral value of these, as well as the economic utility, and 
you indicated that they might go out of business if there was a 
cap at a certain level, and I am trying to see whether or not I 
think if they went out of business that wouldn't be a good 
thing.
    Mr. Bradford. Both of us are.
    Mr. Davis of Illinois. Yes.
    Mr. Bradford. I am very interested in that question.
    Mr. Davis of Illinois. Yes.
    Mr. Bradford. By the way, I have some vague recollection of 
a study about Europe, looking at the difference between England 
and France, and it was in reference to loan sharking. The 
evidence there, and my recollection is very vague on this, but 
my recollection is there was some evidence that loan sharking 
went down. Loan sharking was negatively related to payday 
lending. I will get you a reference on that if you would like 
it.
    Mr. Davis of Illinois. Well, thank you both very much. It 
has been a very interesting discussion.
    Thank you, Mr. Chairman.
    Mr. Kucinich. Thank you.
    Mr. Cummings.
    Mr. Cummings. First of all, thank you both for your 
testimony.
    Dr. Maloney, I was very intrigued by almost everything you 
said. I just wanted to ask you, I was just reading your written 
statement, and I guess you read that. Is that what you read 
from?
    Mr. Maloney. More or less, yes. The first part of my 
written statement, yes.
    Mr. Cummings. It says ``our research has found that payday 
lending has increased access to short-term credit without 
harming consumer welfare.'' What does that mean?
    Mr. Maloney. Well, that was just a summary statement of 
this bankruptcy finding that we have.
    Mr. Cummings. Yes.
    Mr. Maloney. But, in general, what I think we should be 
looking at is consumer welfare measured a whole bunch of 
different ways, like crime, domestic abuse, child abuse, 
homelessness. But the one thing we have data on right now is 
bankruptcy, and so what we have found is that payday lending 
does not increase bankruptcy and, in fact, arguably it 
decreases it.
    Mr. Cummings. I am a lawyer, but I never did any of this 
kind of stuff you talked about, you doctors, the kind of 
research you do. I am just trying to hook up this causal thing, 
because it seems like there is a gap here. On the one hand, I 
am just trying to figure out how do you go into an area and 
figure that payday loans have reduced bankruptcies? I don't 
understand how you do that. How is that done? You just don't 
look at the blanket numbers, do you? I mean, it seems like you 
have to go a little deeper than that.
    Do you follow what I am saying?
    Mr. Maloney. I do. I do, very much so. The whole issue of 
correlation versus causation is one that plagues all scientific 
analyses. But the technique that we used is called the Granger 
causality test. It is based on the timing of events. So we look 
at States across time and we look at how much did the 
bankruptcy rate change between time period one and time period 
two.
    Better put, more to the point, we look at how the number of 
payday stores changed from period one to period two, and then 
we look at how the bankruptcies changed from period two to 
period three, under the argument that if the payday stores 
increased in the prior period, that couldn't be caused by 
bankruptcies going up in a later period, and hence the 
causation has to run that way.
    Mr. Cummings. Professor Bradford said something that I 
found very interesting when he talked about so often these 
payday loan folks are based in areas that have a large 
percentage of renters. Did you factor that into your research?
    Mr. Maloney. No.
    Mr. Cummings. Because you saw that as irrelevant?
    Mr. Maloney. No. I mean, we haven't collected all the data 
in the world. What we did have was we had a lot of control 
variables for bankruptcy, and in the literature the one that 
tends to be the most important is the number of people that 
don't have health insurance. You know, when you get sick, if 
you don't have health insurance it is going to put a drain on 
your financial resources, and that is a big predictor. 
Unemployment rate, income, we looked at those kinds of things. 
Income would surely pick up rental versus homeownership as a 
proxy.
    We looked at a lot of that stuff, but, again, this Granger 
causality thing really takes account of everything that could 
be going on to change payday stores back here is in the past, 
and bankruptcies in the future can't be causing the payday 
stores in the past.
    Mr. Cummings. Hang with me, because I have to get these 
questions in and I am running out of time.
    Mr. Kucinich. You can have whatever time you need.
    Mr. Cummings. Thank you.
    I guess what I am trying to get at is we have 44 million 
people in America, 40 to 44 million without health insurance, 
and a whole lot of them are in my neighborhood.
    Mr. Maloney. Yes. Serious concern for you.
    Mr. Cummings. That is serious now. You made some statements 
here that really do concern me, because I feel like I am 
putting together a puzzle and there are some pieces missing. 
When was this research done?
    Mr. Maloney. It is preliminary. We are still working on it.
    Mr. Cummings. So this research isn't complete?
    Mr. Maloney. No, no. No. Not even close. We will probably 
have a research document, a research paper done, submitted to a 
journal by the middle of the summer. It is very preliminary 
research.
    Mr. Cummings. I see. So really the information that you are 
giving us is preliminary. And is it possible or probable that 
your findings might change when you come to the end of your 
research?
    Mr. Maloney. It is entirely possible.
    Mr. Cummings. All right.
    Mr. Maloney. But I wouldn't come here and tell you stuff 
that I didn't think was going to be true in the long run. I 
mean, I am just a scientist.
    Mr. Cummings. I understand that. I understand. I am just 
trying to figure out. I believe in research, so I am just 
trying to figure out whether this is rolling research or 
whether this is done research or what it is.
    Mr. Maloney. Yes.
    Mr. Cummings. The thing that I guess I found very 
interesting is that you have said that in paragraph four of 
your statement, ``nevertheless, the number of payday loan 
offices nationwide has increased from approximately--'' and 
this is deep--``from approximately 300 in 1992 to more than 
20,000 today.'' Is that accurate?
    Mr. Maloney. I think so, yes.
    Mr. Cummings. What do you mean you think so?
    Mr. Maloney. Well, I mean, the numbers are----
    Mr. Cummings. Where did you get those numbers from? This is 
your statement. I am just reading what you gave us.
    Mr. Maloney. I know. I know. It is over 20,000, but the 
numbers on that come from various sources. I don't exactly know 
what the number is.
    Mr. Cummings. Do you know what the sources are they cited 
here?
    Mr. Maloney. Some of the sources are industry sources. The 
trade organization, Community Financial Services Association, 
has members that are payday, and they report their members, and 
then they estimate how many other stores are not members, and 
they probably do Yellow Pages counts, but our research on the 
Yellow Pages counts is that they are not always accurate.
    Mr. Cummings. I see. What did you get your doctorate in? I 
am just curious.
    Mr. Maloney. Economics.
    Mr. Cummings. Economics. I just have a few more questions. 
I am going now to the second page of your statement, and you 
said about 10 percent--no, let me go back to something else 
that I found very interesting. You said in paragraph three on 
the second page, ``Access to credit is best conducted in the 
open and competitive marketplace.'' This is what I want to know 
about. ``Although likely always to be relatively costly due to 
the risk profile of the borrowers it serves and the fixed cost 
of delivery and collection, the payday loan industry is 
increasingly competitive, and fees and profit margins for 
providers of payday loans have been reduced in recent years.'' 
I want you to just tell me what you mean by the risk of the 
borrowers. What does that refer to, and how does that relate to 
your research?
    Mr. Maloney. Well, the riskiness of the borrowers is that 
they obviously are not good credit risks or they would have 
access to lower-cost credit alternatives. But the fact of the 
matter is they are not all that risky in terms of their 
default. They are risky to the lender because the lender does 
not have very much recourse. The lender can't do much except 
not give them another loan, and so that is really what the 
riskiness is.
    Mr. Cummings. Is this an assumption on your part, or is 
this that they are bad credit risks because they use the payday 
loan system? Is that an assumption, or is that based on some 
research? Have you looked at any credit ratings on these 
people? Because, you know, there are a whole lot of people who 
are the working poor, and they work hard. Even you, in your 
statement you talk about how 10 percent chose payday loans 
because they were located at a convenient place.
    A lot of these people have not even had access to banks. 
Banks are not in their neighborhoods. A lot of them, maybe 
their education, maybe they have limited education and they are 
trying to figure out the best way, trying to deal with things 
the easiest way. It doesn't mean that they are necessarily a 
bad credit risk. As a matter of fact, many of them are probably 
paying their rent every week. Did you take any of that into 
consideration?
    Mr. Maloney. Let me just go back a step and say what is 
really the riskiness of the borrower from the lender's 
perspective is that the lender does not have much recourse to 
collecting the debt. There is no real assets at risk. It is not 
like a car title loan where the lender can go repossess the 
car. So that is a riskiness to the lender.
    Mr. Cummings. OK. Let me just ask you this one last 
question, because I want to give the weight of your testimony 
the weight that it deserves, and you told me that this is 
basically what I would call a rolling piece of research, 
document, because you said that it is not complete. Am I right?
    Mr. Maloney. You are right.
    Mr. Cummings. And I am just wondering, do you do work for 
the payday loan people? Do you do any research for them?
    Mr. Maloney. This study, the payday loan industry has made 
grants to Clemson University to fund graduate student research.
    Mr. Cummings. All right. Thank you.
    Mr. Kucinich. I thank Mr. Cummings.
    I just have a couple of final questions, and I would invite 
Mr. Davis and Mr. Cummings, if you can just hang in there for a 
few minutes then if you would like to ask any final questions.
    I want to go back to Mr. Bradford. Your testimony discusses 
the coincidence of a few cases where Federal bank regulators 
passed banks for outstanding or satisfactory compliance with 
the Federal law preventing redlining and discrimination, while 
at the same time the Department of Justice is prosecuting these 
same banks for discrimination. How do you explain this 
coincidence? How can a bank fulfill the purpose of the CRA, on 
the one hand, and at the same time be guilty of discrimination?
    Mr. Bradford. Well, Mr. Chairman, that is a question I 
would sure like to see the regulators have to come up and 
answer some time in specific to these cases.
    There is an interesting quirk of language that the OTS and 
the FDIC used for these same lenders after they were found to 
violate these laws. In the CRA reports they usually say ``we 
found no violations of fair lending,'' and now they say ``we 
were not able to find no violations of fair lending,'' whatever 
that means. I mean, even when someone has been essentially 
found liable twice in a Federal court, they can't bring 
themselves to say there has been a fair lending violation.
    I think that is why we recommend that there has to be a 
publicly disclosed fair lending exam as part of this process, 
because the law was created to stop discrimination in lending, 
and if the regulatory agencies can't find it when the Justice 
Department finds it over and over again and private individuals 
find it over and over again, then there is no point in issuing 
these exams and giving them the right to branch.
    Mr. Kucinich. You raise a very interesting point, and that 
is that if there has been a finding by the Justice Department, 
why wouldn't we amend the law if we need to on CRA to say that 
has to be taken into account as to whether or not they are in 
compliance? Would that----
    Mr. Bradford. Well, I think as a practical matter, the 
problem is, you know, that your regulatory agencies in a 
certain sense are competing with each other, because 
institutions change their charter from one place to another for 
particular reasons to protect themselves, and so in a way the 
financial regulators have been in the business of protecting 
their industry. I think they are also concerned about what 
liability it creates if they say that they found a violation of 
fair lending, because then they are basically exposing that 
lender to lawsuits that other people might file.
    I think those are issues that they have to face. After all, 
they refer cases to the Justice Department when they think 
there are violations, and there is no reason why they can't 
produce that in their public reports.
    But the examples we gave you couldn't be more blatant. I 
mean, you know, Centier eliminated the entire city of Gary, IN. 
Old Kent eliminated the entire city of Detroit, which is the 
largest African American city in the United States. In the 
Chicago market Mid-America eliminated all the Black 
neighborhoods. It is the largest African American home buying 
market in the United States.
    I mean, if you are the largest lender, which they were at 1 
year, in the largest African American market, and you eliminate 
them, you certainly expect a regulatory agency to figure that 
out. I just think they are so fundamentally incapable of doing 
exams they have to start again. They have to rewrite their 
regulations. They have to start the exam trainer all over 
again. They are really going to have to go back to square one, 
or all the effort that you and other people put into this right 
from the beginning seemed lost.
    Mr. Kucinich. Mr. Davis, Mr. Cummings, do you have anything 
else?
    [No response.]
    Mr. Kucinich. I want to say to Mr. Bradford, it was 
interesting that you produced that document from May 1979, 
because it was an institution on, I believe, Kingsman Avenue, 
which is in the African American community in Cleveland----
    Mr. Bradford. Right.
    Mr. Kucinich [continuing]. Where we were experiencing that 
people were not getting the benefits that they were putting 
money into the bank, but the bank wasn't loaning money back to 
the community in a way that was equitable, and that was what 
the CRA was designed to do to begin with, to make sure there is 
some relationship between people helping to assure the 
financial integrity of an institution, putting their deposits 
in, and then when they need help to grow a community, you know, 
for their homes or whatever reason, they would be able to have 
access. CRA was passed to make that mandatory. That was 1979. 
Here we are.
    I would be happy, by the way, to make sure that is included 
in the record.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] 37416.232
    
    [GRAPHIC] [TIFF OMITTED] 37416.233
    
    [GRAPHIC] [TIFF OMITTED] 37416.234
    
    Mr. Kucinich. This is the Domestic Policy Subcommittee, 
which has held a hearing on foreclosure, predatory mortgage, 
and payday lending in America's cities. We have had 15 
witnesses today on three panels, and we are pleased to have 
with us, after almost 6 hours of work here, Mr. Davis and Mr. 
Cummings.
    We will continue our inquiry into this economic challenge 
that is causing so many people in the inner cities to look for 
alternative ways of surviving financially and finding 
themselves sometimes in a greater bind than they were before 
they started.
    This committee will stand adjourned. I thank the witnesses 
and everyone for participating and hanging in there with us, 
including our staff. Thank you.
    [Whereupon, at 8:55 p.m., the subcommittee was adjourned.]
    [The prepared statement of Hon. Bruce Braley follows:]
    [GRAPHIC] [TIFF OMITTED] 37416.235
    
    [GRAPHIC] [TIFF OMITTED] 37416.236
    
                                 
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