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

                        LEGISLATIVE PROPOSALS ON 



                               BEFORE THE


                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION


                            OCTOBER 24, 2007


       Printed for the use of the Committee on Financial Services

                           Serial No. 110-74

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                 BARNEY FRANK, Massachusetts, Chairman

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

        Jeanne M. Roslanowick, Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held on:
    October 24, 2007.............................................     1
    October 24, 2007.............................................   125

                      Wednesday, October 24, 2007

Antonakes, Hon. Steven L., Commissioner, Massachusetts Division 
  of Banks, on behalf of the Conference of State Bank Supervisors    29
Bowdler, Janis, Senior Housing Policy Analyst, National Council 
  of La Raza.....................................................    63
Bryant, John Hope, Founder, Chairman, and Chief Executive 
  Officer, Operation HOPE........................................    69
Calhoun, Michael D., President and Chief Operating Officer, 
  Center for Responsible Lending.................................    61
Dugan, Hon. John C., Comptroller, Office of the Comptroller of 
  the Currency...................................................    21
Gruenberg, Hon. Martin J., Vice Chairman, Federal Deposit 
  Insurance Corporation, on behalf of Chairman Sheila C. Bair....    20
Johnson, Hon. JoAnn M., Chairman, National Credit Union 
  Administration.................................................    25
Kroszner, Hon. Randall S., Governor, Board of Governors of the 
  Federal Reserve System.........................................    27
Lackritz, Marc E., President and Chief Executive Officer, 
  Securities Industry and Financial Markets Association..........    99
Lampe, Donald C., Womble, Carlyle, Sandridge and Rice, PLLC......   102
Pfotenhauer, Kurt, Senior Vice President for Government Affairs 
  and Public Policy, Mortgage Bankers Association................    97
Reich, Hon. John M., Director, Office of Thrift Supervision......    23
Rock, Bradley E., Chairman, President, and Chief Executive 
  Officer, Bank of Smithtown, on behalf of The American Bankers 
  Association and America's Community Bankers....................    96
Savitt, Marc, President, The Mortgage Center, and President-
  elect, National Association of Mortgage Brokers................   101
Shelton, Hilary O., Director, NAACP Washington Bureau............    65
Taylor, John, President and Chief Executive Officer, National 
  Community Reinvestment Coalition...............................    67


Prepared statements:
    Marchant, Hon. Kenny.........................................   126
    Antonakes, Hon. Steven L.....................................   128
    Bair, Hon. Sheila C..........................................   143
    Bowdler, Janis...............................................   153
    Bryant, John Hope............................................   159
    Calhoun, Michael D...........................................   167
    Dugan, Hon. John C...........................................   195
    Johnson, Hon. JoAnn M........................................   206
    Kroszner, Hon. Randall S.....................................   226
    Lackritz, Marc E.............................................   236
    Lampe, Donald C..............................................   241
    Pfotenhauer, Kurt............................................   253
    Rock, Bradley E..............................................   270
    Savitt, Marc.................................................   281
    Shelton, Hilary O............................................   292
    Taylor, John.................................................   296

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Joint statement of the Appraisal Institute, the American 
      Society of Appraisers, the American Society of Farm 
      Managers and Rural Appraisers, and the National Association 
      of Independent Fee Appraisers..............................   312
    Statement of Lenders One/National Alliance of Independent 
      Mortgage Bankers...........................................   326
    Statement of Maureen McGrath on behalf of the National 
      Advocacy Against Mortgage Servicing Fraud..................   329
    Statement of the National Association of Realtors............   334
Meeks, Hon. Gregory:
    Letter from Hon. Martin J. Gruenberg containing additional 
      information in response to a question posed at the hearing.   336

                        LEGISLATIVE PROPOSALS ON


                      Wednesday, October 24, 2007

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:06 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Maloney, Gutierrez, Watt, Sherman, Meeks, McCarthy of New York, 
Miller of North Carolina, Green, Cleaver, Bean, Moore of 
Wisconsin, Davis of Tennessee, Perlmutter; Bachus, Baker, 
Pryce, Castle, Royce, Manzullo, Biggert, Shays, Miller of 
California, Capito, Feeney, Hensarling, Garrett, Brown-Waite, 
Barrett, Neugebauer, Price, Davis of Kentucky, McHenry, 
Campbell, Bachmann, Roskam, and McCarthy of California.
    The Chairman. The hearing will come to order. I apologize 
for being late. I had a problem this morning picking up my 
cleaning. And when I complained, the cleaner told me that it 
was the fault of Congress because they couldn't get good 
workers. So, I apologize, and I'm looking for a new cleaner.
    This is a very important hearing, and I am very 
appreciative of all the work that has gone into it. I want to 
thank all of the witnesses. Every one of the witnesses today 
has either in person or through his or her organization been a 
very constructive participant in this discussion about what to 
    And I want to say this: We have, I think, a very important 
piece of legislation, and I believe that it is important for us 
to pass this before we adjourn. And the good news for people 
who worry about hasty legislation, not necessarily good news 
for everybody's family, is that the majority leader has just 
announced that we will be meeting on the 4th, 5th, and 6th of 
December and the 11th, 12th, and 13th of December. So we have 
some time, and we're going to be pushing back some of the 
markup on this.
    I want to say two things: I think it is very--don't look at 
me, Gresham, it's the majority leader's fault. I am very much 
convinced that we will pass a bill out of third party that is 
very much like what has been introduced. I am also convinced 
that it will not be exactly what has been introduced. This is 
not an area where dogmatic certainty behooves anybody. We are 
dealing with some new phenomena. We are dealing with a 
relatively new financial phenomenon, and that's really want I 
want to talk about today. I want to really just set here the 
conceptual framework.
    We have seen in the past 10 years or so, maybe more, great 
changes in the way mortgages are originated. Innovation in the 
financial sector is of course very important, and we should be 
clear. Innovation does not lead to deeply rooted new practices 
unless it's of value. There are innovations that wither and die 
because they don't serve a real function. What we have in the 
mortgage area are a set of innovations--basically origination 
by people outside the banking system--by brokers not working 
for banks, accessing pools of money that are not subject to 
deposit insurance.
    And we then have the phenomenon of the secondary market. I 
want to be very clear. I regard both of those as very good 
things. These are positive and beneficial additions to our 
ability to finance housing. The problem is not within 
innovation, because I think there's a self-correcting here. If 
the innovation doesn't serve a positive function, it does not 
survive in our market economy.
    The problem is that there is an inevitable tendency for 
innovation to outstrip regulation. That's why they call it 
innovation. And our job is to have a regulatory framework that 
keeps up with the innovation in a way that allows the benefit 
and the value of the innovations to flourish while providing 
the safeguards against abuses that it's the job of regulation 
to do. I believe that we have seen much more of a problematic 
level of activity in the unregulated than in the regulated 
sector of mortgage origination.
    It is not because the people doing the origination in the 
unregulated sector are morally inferior to those in the 
regulated sector. I think that morally most people are good, 
but there are some people who are abusive. The problem is that 
we have in place with regard to banks and credit unions a set 
of regulations enforced reasonably by regulators which hold in 
check some of the abusive practices, and we don't have that in 
the unregulated sector.
    And so the first part of our job is to extend in general 
the kind of regulation that has served us well, in my judgment, 
in the regulated sector, to the unregulated sector. And that 
means you allow the process to flourish, but you try to prevent 
    The other area that we deal with here is the secondary 
market. The secondary market has been very important. It has 
clearly provided increased liquidity, and that means more money 
for people to buy homes and live in their homes. But, as with 
any other phenomenon, it has a potential for abuse. And in 
particular, and I quote Ben Bernanke here, what he calls the 
originate-to-distribute model, provides increased liquidity but 
it also diminishes responsibility.
    The regulatory framework provided responsibility. Banks 
that lent money to people when they shouldn't have, and who 
were visited by the representatives of some of the people at 
this table who said that really was not such a good idea; don't 
do it again. And in effect, what we're trying to do is to 
replicate that in the other area.
    But you also have in the secondary market the problem that 
the lack of responsibility that could exist at the origination 
level could then be passed along. And I know there are people 
who have said that if we do anything to the secondary market in 
any way to increase any kind of regulation, we will destroy it. 
The notion that even a reasonable and mild form of regulation 
is somehow fatal to any kind of market activity is a frequent 
    As I said before, people who want to read it and experience 
it at its fullest should go back to the Congressional Record of 
the 1930's and read the debates about the establishment of the 
Securities and Exchange Commission when the country was told 
that sort of regulation would kill the market.
    Indeed, we are now in a situation in which one of the 
problems in the market is a lack of investor confidence. We 
have added overreaction here. People went from being too 
sanguine about some of this paper to being much too negative 
about it. I believe that rules that give the investor some 
better assurance that what they are being offered has a certain 
quality to it that is market enhancing, not market destroying. 
And if we do it right, we can help restore investor confidence 
and that obviously is a very important issue.
    So we have a form of increased responsibility not on the 
ultimate investor, but on the securitizer, the people who 
actively package and sell this, because those are people whom 
we believe can be charged with some additional duty to make 
sure that what they are selling is material that should have 
been done in the first place. And I was pleased to see that 
Chairman Bernanke has agreed that some of this is done.
    Now I understand there are people who say we should do 
nothing. We should be very clear. We are now in the most 
serious financial crisis the world has seen since the late 
1990's. I believe it will be one that we will surmount. I don't 
see terrible disaster looming, but we are in a serious crisis. 
It is inconceivable to me that we, the Congress, and the 
regulators working together, would do nothing to diminish the 
likelihood of a repetition of some of these abuses. The 
innovations in the mortgage market have produced a lot of new 
homeowners, which has led to a degree of financial crisis far 
beyond what anybody expected.
    And I think there was--I didn't see a lot of people 
predicting that the subprime crisis was going to spill over 
into the mortgage market in general, that jumbo mortgages would 
be in trouble. I didn't see many people predicting that the 
mortgage crisis was going to spill over into the financial 
market at large. I know there are people who now say that they 
knew this was coming all along. I am waiting for the e-mails in 
which they made that statement dated sometime ago. Apparently, 
all of those e-mails were purged, because while a lot of people 
now tell me they saw it coming, I don't remember anybody 
telling me they saw it coming when it was coming. And I think 
the very fact that we were taken by surprise, all of us, to the 
extent that we were, is one argument for doing some things and 
putting some things in place that have to be done.
    To summarize, I believe that--and I'm very grateful. We 
have had a very participatory process. We will be marking this 
bill up probably in a couple of weeks. It's an intensive period 
but it is, I think, a high priority for members. I do expect, 
as I said, that the basic outline will be preserved, but we 
have some specifics where people will be discussing things.
    There are additions. The chairman of the Capital Markets 
Subcommittee has some very important additions that he has 
proposed. There are some proposals that were made in the 
testimony that seem to be very important. There are aspects of 
the bill introduced by the ranking member that are important, 
and I should say that 2 years ago at this time, the ranking 
member and I and our two colleagues from North Carolina were 
trying very hard to work out a bill. I wish we had been able 
to--I wish we had been allowed to go ahead. We might have 
avoided some problems.
    But I think there is on both sides here a recognition of a 
problem. There will be some differences about how to resolve 
the problem. But there is and has been for some time a common 
recognition of a problem and the need to try to preserve a flow 
of mortgages while diminishing abuses. That's the job of this 
    I will now recognize the ranking member. We're going to, 
because of the importance of this, take the full 20 minutes on 
each side for opening statements. So there will be 20 minutes 
of opening statements on each side. I plan to be here all day. 
I have cleared my calendar. It will be a long day, but it is 
very important that we do all this, and the other members will 
be free to come and go. Their staff members will be here. I 
believe this is a hearing which will have a major impact on 
what we do.
    The gentleman from Alabama.
    Mr. Bachus. Mr. Chairman, I appreciate you holding this 
hearing. The testimony of the witnesses will be helpful to us 
as we consider measures to curtail predatory practices going 
forward to ensure that mortgage credit remains available for 
those subprime borrowers who are worthy of it and have the 
ability to repay it.
    The committee has a history of coming together in a 
bipartisan way to address serious issues, and I hope that will 
be the case in this regard. I will say that the role of 
Congress is not to either insulate or bail out borrowers or 
investors or lenders when they make bad decisions. And that's 
whether or not you're talking about someone borrowing for a 
home or a large financial institution. I hope that whatever we 
do, we don't end up with a taxpayer-funded bailout or a 
taxpayer guaranteed result.
    There has been some recognition, I think, by all of the 
members for some time that we needed to move and eliminate 
predatory lending. For that reason, last July, several 
committee Republicans and I introduced a subprime lending 
reform bill to combat abusive practices and to encourage 
greater accountability and transparency throughout the mortgage 
    In taking action on this matter, our goal should be to 
correct existing problems if we can, while not creating new 
problems. Let us not forget that subprime lending has made it 
possible for millions of low- and middle-income families to 
purchase homes. Even after the events of the past several 
months, 85 percent of subprime borrowers are making timely 
payments and enjoying significant benefits of homeownership. 
There has been talk about many of them, their mortgages will 
adjust in the future, but the market is already anticipating 
that, and many of the lending institutions are working with the 
borrowers on a one-to-one basis and adjusting the contracts, 
and I applaud that.
    I think that's primarily how we're going to deal with this 
going forward is for borrowers and lenders without the 
interference of the Congress or the government in the process. 
That's always of benefit to everyone, because it's never--we 
have said this in many, many hearings; foreclosure is never in 
the best interests of a lender, a borrower or an investor. And 
that ought to be a strong motivation for all of them to get 
together. When the Congress gets involved, they sometimes only 
complicate things. As I said earlier, when the government gets 
involved, it usually is at taxpayers' expense.
    Preserving the dream of homeownership and access to credit 
makes the dream possible and should be a high priority as we 
work together on legislative responses. And we do need to 
appreciate the fact that when there are foreclosures in 
neighborhoods and communities, it not only hurts the homeowner, 
it not only hurts the lender and the investor, but it also 
hurts those communities. It's essential that we be sensitive to 
the plight of homeowners facing sharply higher payments as 
their adjustable rate mortgages reset. And we should be 
especially mindful that any new limitations we impose on 
mortgage lenders do not make it less likely that families can 
refinance their mortgage loans with more affordable financing. 
I think the action of the House Judiciary Committee and their 
bankruptcy legislation very much is going to threaten the 
availability of lending going forward.
    As we evaluate legislation, we should consider carefully 
how similar legislation on the national and State level in the 
past has affected the availability and affordability of credit 
to those who need it most. We need to determine whether the 
laws on the books today have had their intended effect, or 
whether in some instances they have actually harmed the low- 
and moderate-income families that they're designed to help.
    The data on this subject has been studied and interpreted 
by a number of industry and consumer groups as well as 
academics. Their conclusions vary greatly. Hopefully our 
testimony from the witnesses will bring some clarity to that 
subject. In this regard, I'll mention that North Carolina--and 
we've talked about the North Carolina bill, and Title 3 of this 
legislation adopts the North Carolina model. But I will say 
that in many North Carolina towns, the amount of mortgage 
foreclosures and predatory lending loans is significantly 
higher than other places in the country, and one wonders how a 
law which even I have said has many good provisions, it 
certainly hasn't prevented predatory lending in the past.
    As legislators, while the conclusions we make and the 
actions we take have far greater weight than the reports of 
those who simply analyze the data, we have both the privilege 
and the responsibility of acting in the public's interest. That 
responsibility is particularly great when the things we do 
affect the hopes, dreams, and basic needs of all Americans.
    The legislation before us, like all regulatory 
interventions, requires a balancing of interests. The competing 
values in this case, the availability of credit on one side, 
and protecting borrowers from sharp practices and unethical 
conduct on the other. Our task is to strike an appropriate 
balance between these costs and benefits. The testimony of the 
witnesses will help us judge where that balance lies.
    At this time, Mr. Chairman, I'd like to recognize the 
gentlelady from Illinois for 3 minutes.
    The Chairman. The gentlewoman is recognized.
    Mrs. Biggert. Thank you, Mr. Chairman, and thank you for 
holding today's hearing. I would like to welcome our 
distinguished witnesses. After 9 months and 6 hearings and one 
resolution addressing the subprime and foreclosure issues, I'm 
glad that we have reached this day.
    As we proceed, I'd like to outline a few items that I would 
urge my colleagues to take into consideration, first, do no 
harm. Our committee should aim to preserve access to credit and 
homeownership opportunities for qualified low- and middle-
income borrowers.
    While we work to protect homeowners from unscrupulous 
practices, we should not, for example, characterize all 
subprime loans as predatory. Of the 68 million American 
homeowners, 50 million hold mortgages, and 13 million of them 
are subprime mortgages, and approximately 750,000 homeowners 
with subprime loans are in foreclosure. This number is expected 
to rise to millions next year, but we must keep in mind that 
the majority of homeowners will keep their homes. One or more 
of today's witnesses may utter the phrase, ``Don't throw the 
baby out with the bath water,'' and I couldn't agree more.
    Second, I would like to see as a final product here is one 
that facilitates transparency in the mortgage market, creates a 
level playing field, promotes strong underwriting standards, 
and fosters competition. Achieving these objectives is 
important for both the primary and secondary mortgage market 
participants. It's a win for all consumers, lenders, and 
investors if they more clearly understand the loans. Bad actors 
and bad products are more likely to fall by the wayside. 
Liquidity and credit will expand, and homeownership is sure to 
flourish. I hope we will look at including the issues of 
mortgage fraud and financial counseling in a bill.
    And third, I'd like to thank the chairman for his comments 
today in Politico, in which he was quoted as saying that 
everything is negotiable. And while I must say I have never 
before heard him admit that he is not the emperor, I 
nonetheless appreciate the sentiment behind his quote and look 
forward to working with him. It's important for future American 
homeowners and the economy that we put political agendas aside 
and get this right. Too much action and we worsen the problem. 
Too little action and we allow it to happen again.
    So I look forward to working with my colleagues on both 
sides of the aisle to craft common sense and balanced 
legislation. Thank you, and I yield back.
    The Chairman. Before I recognize the chairwoman of the 
subcommittee, I would just say to my colleague from Illinois 
that if I were the emperor, it is certainly was a good thing 
that I went to the cleaners today.
    Mrs. Biggert. Yes. You must have clothes.
    The Chairman. The gentlewoman from New York is now 
    Mrs. Maloney. Thank you, Mr. Chairman. And I want to 
congratulate you on the introduction of this ambitious and 
comprehensive bill and to welcome the witnesses that will help 
us refine it.
    This bill clearly demonstrates the intent of the chairman 
and Democrats in the House to address the subprime crisis in a 
thorough and effective way. Over the course of this 
congressional session, we have held a number of hearings in my 
subcommittee and in the full committee on the critical problems 
posed by the meltdown of the subprime mortgage market.
    Those hearings made it clear that this is a many-headed 
Hydra of a problem, and that we need to be careful that as we 
chop of one head, a new, more vicious one does not sprout in 
its place. Early in this process, one mortgage banker said to 
me that any solution must change the incentives of all market 
participants. I came to fully appreciate why that is true 
through the testimony I heard and the hearing record that we 
put together.
    This is not a problem that can be blamed on a few rotten 
apples among brokers or mortgage originators. It is not a 
problem that can be laid at the doorstep of any one sector, 
whether it is the securitizers, the secondary market, or the 
primary lenders. Regulators failed to act, but past Congresses 
also failed to pick up on the failure.
    This bill attempts to change the incentives of all 
participants across the board. For that, it is a bill that the 
Democrats can be proud of. Like many bills that attempt to 
tackle so many aspects of one problem, it has many rough edges, 
some of which members have already noted, and we will be 
working on it through the legislative process to smooth that 
out. I, for one, plan to listen carefully to the comments of 
all stakeholders, consumers and to see what tweaks might be 
needed or added.
    This hearing is the first in that process, and I look 
forward to the testimony.
    The Chairman. The gentleman from South Carolina is 
recognized for 2 minutes pursuant to the list I have been given 
by the ranking member.
    Mr. Barrett. Thank you, Mr. Chairman. To our distinguished 
panel, thank you for being here. I think we can agree on a 
couple of basic things. One, that those bad actors who engage 
in illegal acts should be punished, and laws against fraudulent 
activity in the mortgage market should be enforced.
    I think we can also agree that lenders are making loans 
that they should not make, and people are borrowing money that 
they probably can't pay back. I also think that many homeowners 
out there should be afforded the access to credit as long as 
they can pay their loans back.
    However, we may disagree on one basic point. I believe that 
the free market does the best job of providing affordable and 
accessible products. And I do think that includes mortgages. 
Through legitimate innovation in the private mortgage market, 
more people are able to get mortgages at lower rates than ever. 
And I can't deny that there have been some major problems, and 
there's some need for some short-term help. But long term, 
these are better remedied through the natural market actions 
and targeted regulations, both of which we've started to see. I 
think it would be a major mistake to shift this market through 
excessive and rushed regulations which may likely lead to 
unforeseen consequences.
    I wonder if the consequences that the majority party has 
expanded the government's role in the mortgage market, at the 
same time they want to make it exceedingly difficult for the 
private mortgage lenders and brokers to conduct business. While 
we do need to ensure that customers are protected by making 
sure that their mortgage practices are transparent and 
reasonable, and that fraudulent activities are punished, we 
cannot afford to regulate the subprime mortgage market out of 
existence, and make it so that less wealthy borrowers can only 
borrow from one lender--the Federal Government.
    As a former small business owner, I can personally attest 
to the power of relationships when providing credit. I was a 
small furniture dealer. And there's a lot of power--a lot of 
power--in looking somebody in the face and shaking their hand. 
In many cases, that's much stronger than a contract. Something 
tells me our Federal Government won't be able to quite provide 
that same service to our homeowners.
    I look forward to your testimony. I look forward to working 
on a bill that keeps all this in mind, and I yield back.
    The Chairman. The chairman of the Subcommittee on Capital 
Markets is recognized for 3 minutes. Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman. Mr. Chairman, I 
would like to congratulate you and many of the fellow members 
who have taken the time to work on H.R. 3915, the Mortgage 
Reform and Anti-Predatory Lending Act. It contains a number of 
new provisions that I sought to address in the last Congress, 
including broker licensing reforms and anti-steering mandates.
    As we proceed with this consideration, I will be focusing 
most of my attention on the provisions related to assignee 
liability, which is within the jurisdiction of the Capital 
Markets Subcommittee, and the need for these new national 
standards to apply uniformly across the country. I have also 
introduced H.R. 3837, the Escrow Appraisal and Mortgage 
Servicing Improvements Act, to address many issues not outlined 
in H.R. 3915, but which also contribute to problems in the 
mortgage lending marketplace.
    The problem of abusive and deceptive lending is complex, 
and it requires a comprehensive solution. H.R. 3837 should be 
part of any solution that the Congress considers. H.R. 3837 
also has attracted broad support. Some of these parties include 
the Center for Responsible Lending, the National Association of 
Realtors, the National Community Reinvestment Coalition, the 
Appraisal Institute, and the National Alliance of Independent 
Mortgage Bankers, among others. At this time, I ask unanimous 
consent to insert into the record statements from the Realtors, 
the Appraisal Institute, and the National Alliance of 
Independent Mortgage Bankers on these proposals.
    The Chairman. Without objection, it is so ordered.
    Mr. Kanjorski. Mr. Chairman, I have listened to several of 
my colleagues, and I sense a bit of fear, on the one hand that 
we are going to move too excessively with regulatory order, 
trying to create or establish stability out of chaos. And on 
the other hand, a fear that the majority party is going to be 
doing something that has been undone in the past.
    The reality is, this committee and the Congress has been 
struggling for many Congresses to get our hands around 
predatory lending. We have had some good bills. I have had the 
occasion to sponsor those bills with colleagues on the other 
side of the aisle, and I think if in past Congresses we had 
seriously moved on those pieces of legislation, perhaps some of 
the problems we face today would have not have come to 
    However, all that being said, we do have a serious problem. 
It ranges from being a problem that can be solved, to some 
people saying it could be catastrophic in result. In either 
regard, it is essential that we provide the rules, regulations, 
and guidance to the financial services industry of this country 
to be certain that any damage that is already done has an 
opportunity to be corrected, and to prevent future damage.
    I look forward to these hearings, in order to see how we 
can come to a consensus. As our ranking member indicated in his 
opening statement, that is what this committee needs, and that 
is what this Congress needs. This is a problem that faces 
America, not Republicans and Democrats, not working people or 
businesspeople, but all of us, because it is so substantial to 
our very existence as citizens.
    So I congratulate you on these hearings and I yield back 
the balance of my time.
    The Chairman. The gentleman from California, Mr. Campbell, 
is recognized for 2 minutes.
    Mr. Campbell. Thank you, Mr. Chairman. As you indicated 
earlier, the broad problem that we're dealing with here is 
actually a problem of the entire economy. This crisis, this 
lending crisis is clearly bleeding into other parts of the 
economy and has slowed our economic growth and potentially 
threatens a recession. So this is not just about this lending, 
but this is about what we're doing to try and keep the economy 
growing, rather than see the economy falling into shrinking.
    Part of the solution clearly is that people who want to buy 
homes, people who want to restructure their financing, people 
who want to refinance, have the ability to do so, and that the 
credit markets, which are now very, very tight and have 
tremendous risk premiums, become loosened up, and that those 
risk premiums go down. Now this does not clearly mean that we 
want to go back to the bad practices that got us into this 
problem in the first place. But we clearly need to be fostering 
legislation here that restricts those bad practices while 
allowing the vast majority of lending to occur and to actually 
occur more frequently than it is today right now.
    My concern is that this bill could move us farther away 
from that goal rather than closer to that goal. Arguably, the 
people who engaged in the bad practices are already paying a 
pretty high price. There are a lot of people who are now--
companies that are now bankrupt. There are a lot of banks and 
big financial institutions reporting significant losses. But 
still, some regulation in this area, I think, makes sense to 
ensure that we don't do this sort of thing again.
    But provisions out there that would cause lenders not to 
lend, or originators not to originate, or securitizers not to 
securitize, because of potential downstream liability, or 
because of restrictions on legitimate loan packages, would not 
be wise, in my view, and would not move us towards an eventual 
goal of enabling people to borrow money so we can keep houses 
selling and this economy moving.
    I look forward to hearing the testimony of all the 
witnesses and look forward to working together to ensure that 
we have a bill that moves us towards the solution and not away 
from the solution. With that, I yield back.
    The Chairman. The gentlewoman from California, the chair of 
the Housing Subcommittee.
    Ms. Waters. Thank you very much, Mr. Chairman. I, too, 
would like to congratulate you for holding this hearing today, 
and I am very, very pleased to co-sponsor the Mortgage Reform 
and Anti-Predatory Lending Act of 2007, in significant part 
because I know how painstaking and consultative the process was 
that generated it.
    The subprime crisis is large, complex, and far from over. 
Its impact has been felt nationwide, but not equally 
distributed across the country. Simply put, Californians--
California joins the rust and sun belts at the center of the 
foreclosure wave. Foreclosure rates in California rank third in 
the country and are 99 percent higher than the same time last 
year. Meanwhile, as many as 1.5 million subprime adjustable 
rate mortgages carry the potential for serious financial 
distress by 2009. H.R. 3915 is designed to make sure this 
doesn't happen again.
    In that sense, we are here today to talk about prospective 
actions, not necessarily solutions to the current crisis. But 
the two are clearly linked. I'm concerned that as little as 1 
percent of the at-risk subprime loans have been modified by 
services to date, despite highly publicized initiatives. 
Congress is limited in its ability to require the mortgage 
industry to clean up the mess they made in a largely 
unregulated environment, but the industry's track record should 
inform our assessment of any claims they make today and going 
forward to having the ability to prevent and address future 
messes absent significant Federal regulation.
    This said, a delicate balance must be maintained between 
protecting borrowers on one hand and encouraging innovation in 
mortgage lending and sustaining the critical secondary mortgage 
market on the other. H.R. 3915 strikes this balance. Perhaps 
the most important steps the bill takes are to impose a Federal 
duty of care on mortgage originators and minimum standards on 
all mortgages. It is clear to me that we need to prevent the 
now widespread practice of getting people into loans they can't 
afford. To that end, it's reasonable to require licensed 
originators to present consumers with mortgage loan products 
appropriate to their circumstances. Underpinning this must be 
some minimum standard regarding the borrower's ability to 
repay, which H.R. 3915 establishes.
    I believe this is a sound standard to impose universally in 
the mortgage market. Indeed, regulated entities have long faced 
similar standards from their regulators. To prevent mass exodus 
from the mortgage markets, the bill limits damages to 3 times 
the originator's fee plus the consumer's cost. Similarly, 
although the bill for the first time creates securitizer 
liability, such liability is limited to recession--recision of 
the loan and consumer cost. The bill also creates a safe harbor 
for prime loans and private loans that meet reasonable 
documentation and underwriting standards.
    Is this the perfect balance between rights and remedies? I 
don't know that any of us can know for sure at this moment, but 
I look forward to hearing from the witnesses today on that 
    In sum, this bill is about incentives, balancing incentives 
to innovate against incentives to go over the line and 
marketing inappropriate products to borrowers and then whisking 
the risk off to the four corners of the global economy. I'm 
particularly pleased that H.R. 3915 removes the most 
destructive of such incentives, severing the link between the 
compensation of the originator, whether a mortgage broker or 
other entity, and the terms of the loan. Minority borrowers 
have been disproportionately steered to costly loans in part 
because the fees such loans generate for originators are higher 
than more appropriate products. H.R. 3915 correctly prohibits 
this practice.
    I thank you, Mr. Frank, for this hearing today, and I look 
forward to working with you to solve this problem.
    The Chairman. Thank you. Just to let people know, there's a 
great deal of interest in this, and I think it is useful for 
people to know where the members stand, so we're going to 
probably go for another 20 minutes or so on opening statements. 
The gentleman from North Carolina is now recognized for 2 
    Mr. McHenry. Thank you, Mr. Chairman. I thank you for 
holding this hearing. And I agree with the chairman. We need to 
take steps to make sure that both borrowers and lenders who are 
going through this challenge in the mortgage marketplace are 
good actors, and that goes for both sides of the transaction. 
According to the latest economic forecast, the housing market 
is in the process of correcting itself. We're at a mid-market 
correction, which will be going on for, well, some say a year, 
some say more. And it's a question of how Congress should act, 
and the proper actions that Congress should take.
    My concern is that the chairman's bill will harm the 
mortgage marketplace and make it further--increase the level of 
difficulty for those facing default and foreclosure now to 
refinance their way out of this, to actually get in a mortgage 
that they can sustain, and so they can stay in their homes.
    I believe that with the assignment of liability, both in 
the secondary market and the so-called suitability standards, 
which allow trial lawyers to determine whether or not the 
mortgage broker gave them the best, most ``suitable''--a very 
ill-defined term--as heretofore laid out, that those two 
elements will further constrict the marketplace, the lending 
marketplace, which has already been constricted.
    Finally, the third element of the bill takes the North 
Carolina statute and nationalizes it. The North Carolina law 
has not been all good. I'll have some colleagues on the other 
side of the aisle say that it was. But we have not had the 
level of lending in North Carolina because of the law that we 
have in place on mortgages. I believe if the Federal Government 
puts a proscriptive element into what can or cannot be lent in 
the mortgage marketplace, we will be further harming those who 
are trying to get out of dire situations now. So, therefore, if 
this bill is passed, I believe it will deepen the trough of the 
mortgage challenge that we're facing and really potentially 
push us into a housing recession.
    I think we have to have a very balanced view of how we move 
forward. I think we need to focus on relief for those currently 
facing default and foreclosure, and then long-term, better 
disclosure and a better understanding in the marketplace of 
what consumers are actually purchasing.
    And so with that, I thank the chairman for holding this 
hearing, and I thank the ranking member for yielding.
    The Chairman. The gentleman from Illinois, Mr. Gutierrez, 
for 3 minutes.
    Mr. Gutierrez. Well, thank you, Mr. Chairman. I applaud 
your leadership on this issue. I want to declare my support for 
H.R. 3915. I'm proud to be an original co-sponsor of the bill, 
and I want to take a moment to thank Congressman Miller and 
Congressman Watt for their hard work on this issue over the 
    I was going to introduce legislation on this issue, but I 
had confidence that my colleagues and my chairman would bring 
forward a good and comprehensive product, and I was right. They 
have. I'm pleased that H.R. 3915 retains the basic provisions 
of the Miller-Watt bill in the last Congress. I'm also pleased 
that the bill creates a national mortgage originator database 
and establishes a minimum Federal minimum standard for 
originators without including an outright preemption of State 
    Having said that, I'm concerned that the standards required 
for meeting the definition of a qualifying State law lack 
specificity in several vital areas. For example, the bill 
mandates that State laws require mortgage originators to, 
``receive minimum training and undergo a background check 
before becoming licensed.''
    I believe we should specify the minimum number of hours of 
education and training originators must complete before being 
eligible for licensing. We should establish a minimum number of 
hours of ethics training prior to licensing, as well as an 
annual ethics training requirement to maintain a license.
    I believe we should mandate a criminal background check 
with fingerprints prior to licensing similar to the standards 
introduced in legislation sponsored by Ranking Member Bachus. 
This type of background check will substantially increase the 
chances of a national database being an effective tool of 
weeding out bad actors in the industry. I believe the general 
approach to qualifying State law standards in H.R. 3915 invites 
mischief during the rulemaking process, and it leaves the door 
open for some States to even dilute their existing standards 
and still meet the definition of qualifying State law.
    I think the bill states that originators are required to 
make full, complete, and timely disclosure, but fails to offer 
any guidance as to what qualifies as a timely disclosure. Is 2 
hours before closing timely? Two days? We should give 
regulators more guidance in this area.
    Finally, I'm not inherently opposed to capping remedies. 
But the remedies available to consumers must be substantial 
enough to effect behavior change in the marketplace.
    I look forward to hearing from the witnesses, and I thank 
you all for coming this morning and being with us. And, again, 
I thank Congressman Miller and Congressman Watt, and, you, Mr. 
Chairman, for improving this bill as we move forward.
    The Chairman. The gentleman from California, Mr. Royce, for 
2 minutes.
    Mr. Royce. Thank you, Mr. Chairman. On the issue of 
assignee liability, I believe implementing assignee liability 
as is done in this bill would be an egregious mistake. If we 
can learn anything from the market turmoil over the last few 
months, we should understand that the problem in the subprime 
sector has impacted our capital markets and it has the 
potential to spur an economic downturn.
    If assignee liability is improperly applied, players in the 
secondary market will simply reject the purchase of loans that 
expose them to potential liability that cannot be determined or 
quantified. The likely result will prevent many creditworthy 
borrowers from receiving financing, and the credit crunch will 
spread even further.
    Second, as the Wall Street Journal points out today, this 
bailout gives delinquent mortgage borrowers a new trick to 
essentially enjoy free rent for up to 30 years if a borrower 
has to endure the sad experience of foreclosure, they'll have 
the ability to recover all of the principal and interest paid 
over the entire history of the loan as long as they can 
convince a court that they didn't have a reasonable ability to 
pay at the time the loan was originated. It doesn't take too 
much imagination to see how this could be abused.
    The question I hope our witnesses address is, won't lenders 
be forced to raise rates for everyone to price this risk into 
loan products as a consequence of the provisions in this 
    Thank you. I yield back, Mr. Chairman.
    The Chairman. The gentleman from Texas, Mr. Neugebauer.
    [No response]
    The Chairman. The gentlewoman from West Virginia, Mrs. 
Capito, ranking member of the Housing Subcommittee.
    Mrs. Capito. Thank you, Mr. Chairman. I'd like to thank you 
for holding this hearing today on a subject that certainly has 
been at the forefront of our Nation for many months now, the 
subprime and credit crunch crises.
    Every State and congressional district has been affected, 
some to a greater extent than others. States like California--
and I would like to pause and say I know all of us in this room 
are very aware of what's going on in California, and our 
thoughts and prayers are with the citizens of California, and 
we hope that situation resolves itself. But States like 
California, Virginia, Colorado, and Florida have experienced 
significant problems, with many of their citizens utilizing 
alternative mortgages, who are now unable to afford the higher 
    On the other hand, my home State of West Virginia continues 
to lead the Nation in homeownership and has had one of the 
lowest rates of foreclosure. There's no one single entity that 
caused this problem, and responsibility is shared by all 
relevant parties, and I'm sure this hearing will help shed some 
light on that.
    Regulators were slow to understand the impact of designer 
loans. Lenders were overzealous in their lending practices. 
Many consumers were not fully aware of or did not comprehend 
the impact of their mortgage resetting at a higher rate. And 
Congress has been unable to act for fear of impacting a housing 
market that has been fueling our economy.
    Today, despite increasing foreclosure rates and the 
forecast of more difficult time ahead, there are encouraging 
signs that both regulators and industry alike are taking steps 
to handle this crisis. It is my hope that we can work together 
in this committee to produce a prudent response to this 
problem. It is important to remember that while subprime 
lending practices have caused harm to some, they have provided 
many more with the opportunity of homeownership when they 
otherwise would not have had that option.
    We must exert great caution to not over-legislate on this 
issue, and I've heard others express that concern, causing harm 
to those who have benefitted from this tool. This is a 
bipartisan problem that will need a bipartisan solution. And it 
is my hope we can build on the work done by the chairman, 
Chairman Frank, and the proposal that Ranking Member Bachus put 
forward earlier this year.
    I welcome the input of our witnesses today, both on the 
proposals and their thoughts on the best way to address this 
problem. As the ranking member on the Housing Subcommittee, I 
look forward to working with the rest of the members of the 
committee on this important issue. And I want to thank the 
chairman for holding this important hearing.
    I yield back.
    The Chairman. Next, one of the co-authors of the bill, the 
gentleman from North Carolina, Mr. Watt. We are getting towards 
the end here.
    Mr. Watt. Thank you, Mr. Chairman. The introduction of this 
bill a couple of days ago and the three panels that we will 
hear from today converts what has up to this point been largely 
a philosophical discussion to a discussion about a practical 
set of proposed solutions to problems that everybody recognizes 
    In the philosophical discussion, there is broad bipartisan 
agreement. I have not heard anybody who supports predatory 
lending in that discussion. I haven't heard anybody who wants 
to dry up credit or make credit inappropriately more difficult. 
I haven't heard anybody who wants to reduce access to 
appropriate credit or homeownership. I haven't heard anybody 
who opposes financial literacy. I haven't heard anybody who 
opposes steering or who favors steering inappropriately in the 
market, and I haven't heard anybody who supports making loans 
to people who have not the ability to repay those loans.
    That's the philosophical discussion in which we've been 
working, and our challenge has been to take that broad, 
philosophical discussion, those pious statements that we all 
say we believe in, and convert them into some legislative 
language that will accomplish the objectives that we say we 
    I'm hopeful that this legislation will take this 
philosophical discussion and convert it to a practical set of 
solutions, and I hope our witnesses today will really kind of 
get away from the broad, philosophical, pious statements that 
we've been making and really get into the guts of the bill and 
tell us what works and what doesn't work so that we can try to 
address the things that everybody agrees need to be addressed.
    So, I'm looking forward to this. I thank the chairman. I 
thank Representative Miller in particular for being out in the 
front of this a long time ago. And I hope we can see some light 
at the end of this tunnel, and that the light is not a train 
coming toward us, but some real solutions to the problems that 
everybody acknowledges exist.
    I yield back and thank--
    The Chairman. Thank you. And now the other Mr. Miller is 
recognized for 2 minutes.
    Mr. Miller of California. Thank you, Mr. Chairman. I 
appreciate you holding this hearing and Ranking Member Bachus 
for being involved in this, because it's long overdue. We've 
been talking about the problem in the real estate industry, 
subprime versus predatory for years.
    When the marketplace existed as it did between 2000 and 
2006, predatory wasn't a problem. When you have a person's home 
going up 15, 18, or 20 percent in value a year, and they're 
made a loan that they can make the payment because it's 
negative zero at first, and the trigger kicks in, in 5 years, 
and your house is worth $120,000 more than you paid for it, 
it's worth $320,000 rather than $200,000, it's easy to sell the 
home. So the people who were really kind of taken advantage of 
never really were in fact because their house was worth more 
when they sold it as we perceive it to be today.
    The problem is, when you look at the marketplace and it's 
not increasing 15, 18, or 20 percent a year, and when you put 
your home on the market, it doesn't sell in the first 2 days, 
the people who have been taken advantage of are coming to 
light, and that's what we're seeing today. Predatory has been 
existing. It's no different last year than it was 6 years ago. 
The problem was there didn't appear to be a problem because the 
marketplace was continually rising.
    Now we spent a lot of time focusing on GSCs. We were 
concerned about accountability and stability. I think we did a 
very good job. And if you look at the marketplace today, 
there's not a problem in the GSC marketplace. The problem that 
exists today is those people who were taken advantage of. When 
a lender goes out and makes a loan to somebody, that they know 
when the trigger kicks in, they cannot make the payment, 
they're predatory. The problem we have in the marketplace was 
that GSCs were limited in the amount of mortgages they could 
put on the marketplace in mortgage-backed securities, and so 
the private sector came in and bundled loans that looked very 
similar, but they weren't. They couldn't be debundled. When a 
GSC goes in default, they take it back. When the private sector 
did that, the guy who bought the mortgage-backed security is 
    This is long overdue. When you have lenders that don't 
acknowledge basic underwriting criteria when they make a loan, 
they're predators. Yet there's a tremendous amount of 
individuals making loans in the subprime marketplace that we 
have to ensure that are going to be viable and be there 
tomorrow to provide a service to those people who are not prime 
lenders but who need a loan and otherwise could not qualify for 
a loan. If we arbitrarily through legislation impact that 
marketplace, we're going to hurt the very people we're trying 
to help today. And I just urge caution in what we do 
legislatively. Yes, we need to define ``predatory,'' and we 
need to get rid of the predators. But we need not impact those 
people who are trying to help in the subprime marketplace. 
Because if we overlegislate and we impact that marketplace, 
there's no place for them to go.
    I commend you, Mr. Chairman, for this hearing, and I look 
forward to hearing the testimony today. Thank you.
    The Chairman. Thank you. We will go to Representative 
Neugebauer for 2 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. I am glad to hear 
that the chairman said that we were going to probably push the 
market forward. One of the first things I was going to say this 
morning is I have felt like this process was moving too fast 
because it is too important.
    One of the things that makes America probably so 
competitive is the fact that we have one of the most efficient 
capital markets in the world, and it is really one of the 
things that gives us an advantage.
    I notice that the title of this hearing today is 
``Reforming Mortgage Practices.'' Certainly, I hope that is the 
movement that we move in and not overhaul. Really, we have a 
very efficient mortgage system today. It is the envy of the 
world. It has brought record homeownership. A lot of people 
have benefitted from our mortgage industry and the 
sophistication and the creativity that has come from it.
    Yes, there are some folks who unfortunately ended up in 
mortgages maybe that they should not have been in.
    One of the things that concerns me about the tenor of this 
hearing is we have heard people mention a lot of different 
kinds of mortgages, from prime to subprime, and then those 
people who are participating in what all of us think is 
egregious behavior, and that is predatory lending.
    Let's not confuse the three. As we begin to go through this 
process, Mr. Chairman, I think it is important that we separate 
what parts of policy we are trying to address here.
    The marketplace is in the process right now of trying to 
transfigure and try to figure out exactly what happened and how 
to fix this in the future. They are going through some painful 
processes. That is one of the things about a very efficient 
marketplace, that they are efficient but sometimes they are 
    I would say that as we move forward, I think one of the 
things we have to say to the American people is we have 
confidence in them. If given the right information in the form 
of disclosure and transparency, the American public can make 
good decisions.
    That is one of the things that I hope will come from this 
legislation as we move forward is that we figure out a way to 
bring the right amount of information to our consumers so that 
when they make sometimes one of the biggest decisions that they 
will make as a couple or as an individual of purchasing a home, 
that they are doing that with information.
    What we do not want to do if these markets are trying to 
unravel and to bring liquidity back in the market is create 
some uncertainty in the marketplace that would make this 
somewhat of a blip in the marketplace even deeper than it is.
    Mr. Chairman, regardless of how long it takes, let's not 
make political policy here. Let's make good policy.
    I yield back.
    The Chairman. The gentleman from New York, Mr. Meeks, for 2 
    Mr. Meeks. Thank you, Mr. Chairman. I want to thank you and 
Mr. Watt and Mr. Miller for having this hearing and working so 
hard on this bill.
    We have to make sure that the wrong messages do not get out 
to the general public. I have talked to some individuals in my 
district, for example, and they are questioning whether or not 
they should buy a home.
    I think the message still needs to go out there that in 
fact we do need to reverse the paradigm. I tell people in our 
district all the time, no longer should you just own the car 
and rent the house. You should rent the car and own the house, 
because over the long term, homeownership will be an 
appreciating asset and you can bet that car is going to be a 
depreciating asset.
    That is educating individuals so they understand how 
important this is. What we were trying to do and I believe what 
this bill was trying to do is basically give some checks and 
some balances, if you will, so that we could make some of this 
confidence in individuals when they are going in to purchase 
these homes that in fact they can afford it.
    It is very important, I think, for lenders, to also make 
sure that they are doing the right things. If someone cannot 
afford a home of a certain cost, they should not lend. I do not 
see how lenders benefit by foreclosing on someone's home.
    What we have had is a situation whereas, for example, the 
economy heats up. Stocks heated up in the late 1920's, and dot-
com's in the 1990's. Not for the first time, real estate in the 
    Unfortunately, sometimes the commodity gets too heated and 
lenders and borrowers and everyone in between join forces and 
they end up making bad decisions, and eventually the roller 
coaster comes to an end.
    I believe what H.R. 3915 will help to do is provide some of 
those checks and balances. Bill Clinton once said, ``Mend it, 
don't end it.'' We are trying to mend it. That is what this 
    Finally, Mr. Chairman, I would like to add that I am hoping 
that in this legislation we can address a predatory practice 
that has flourished, I know definitely in my district, but I 
believe all across America, as a result of the subprime crisis 
known as equity stripping.
    I am developing some legislation based on the existing 
State law and I hope that I can introduce some of the 
amendments and talk to the authors of the bill so that we can 
address this problem called equity stripping.
    Thank you, Mr. Chairman. I look forward to working with 
    The Chairman. Thank you. We now have Mr. Hensarling for 2 
    Mr. Hensarling. Thank you, Mr. Chairman. As interesting as 
our hearing is, there may be a more interesting one going on 
across the hallway, I note.
    Clearly, the Nation is facing a bad situation. This 
committee has an opportunity to make that bad situation worse. 
I fear that we will embrace that opportunity.
    We know about the threat of home disclosure. We know about 
the threat to the larger economy. We also have to take note 
that although Adam Smith's invisible hand is occasionally 
clumsy, it is certainly far more deft and skilled than the iron 
fist of the congressional mandate.
    We still have to remember that millions of people have 
homeownership opportunities due to a subprime market. I am very 
leery of any legislation that could under cut that market.
    Clearly, I believe that our government has a role to 
prevent force, to prevent fraud, to promote effective 
disclosure, not just voluminous disclosure, to promote 
financial literacy, and also to promote personal 
responsibility, and to remove barriers to market liquidity.
    We should also take note about what is happening in the 
marketplace now. The market has a wonderful ability to correct 
    New subprime originations are down and down significantly. 
Companies like New Century that had bad business practices have 
gone belly up.
    Lenders all across America are reaching out to homeowners 
who may not be current to try to modify their loans and avoid 
disclosure. There is almost no player in the marketplace that 
wins under foreclosure.
    As I look at this bill, although I do see some titles which 
I support, I fear that with a Federal duty of care, I fear that 
with subjective underwriting terms and subjective terms like 
net and tangible benefit to consumers, that at the end of the 
day, we may be replicating what we saw in North Carolina and 
Georgia, and we may have a trial attorney's dream and a 
homeowner's nightmare.
    I yield back.
    The Chairman. The gentleman from New Jersey for 2 minutes.
    Mr. Garrett. I thank the chairman. I thank all the members 
of all three panels for patiently waiting for your testimony 
that is about to come.
    The chairman began his remarks with the investor confidence 
arguments to the need for government regulation and went back 
to the creation of the SEC and suggested that any argument 
therefore that was against it rang hollow then and supposedly 
any arguments against more regulation, I guess, rings hollow in 
the future as well.
    The argument on the other side of that, of course, is 
history, the first we saw with SOX. There was the argument for 
investment confidence, for more regulation, and what did 
Congress do? We used a proverbial sledge hammer to hit 
something that should have just been hit down with a fly 
swatter instead. Same thing here. We see an over reaching 
approach for action by the Government.
    I do not believe anyone is suggesting that we do nothing 
about this crisis. The facts are that things have already been 
done. As Jeb indicated, the private market has already stepped 
in. They have moved very quickly on this area.
    The public sector has also moved and they continue to move 
with the Federal Reserve and they will be moving within the 
next couple of months by the end of the year as well.
    Just on a little side note, I note that the Federal Reserve 
is taken out of this legislation altogether, and I am curious 
about that. I am wondering whether Ron Paul has had some 
influence on the chairman with regard to the Federal Reserve.
    My last comment on this is that no one is suggesting that 
we do nothing. Action has already been taken. We do not want to 
do more harm than good. I think the wisest choice to take here 
is to move very cautiously and to do whatever we do in concert 
with the action that the Fed will take in the nearby future.
    With that, I yield back.
    The Chairman. The gentleman from Florida, our last 2 
    Mr. Feeney. Thank you, Mr. Chairman. I certainly agree with 
my colleagues, Hensarling and Garrett, in their last comments.
    I want to suggest, rather than getting into details, that 
as we deal with this crisis as legislators, we remind ourselves 
of certain truisms in legislative processes.
    Number one, the law's unintended adverse consequences. We 
try to do some good things and we do not think through the 
adverse consequences that may be much more harmful than any 
good we actually do in legislation.
    I hope we do not do that with the crisis in our credit 
markets today. Related to that is Churchill's assessment that 
nobody with a heart was not a socialist when they were 20, and 
nobody with a brain was not a conservative by the time they 
were 40.
    I hope at least part of Congress will act as adults as we 
respond to this crisis because we are very sympathetic indeed 
to the people who are losing their homes.
    Third, I hope we will pay attention to the admonition that 
it is politically expedient but not good policy to concentrate 
the benefits for the few people in this case losing their 
homes, but to disburse the punishment, in this case, to the 
thousands of people who would like to sell homes but will have 
fewer buyers that can get credit, the thousands of people who 
would like to buy homes in the future but cannot get access to 
credit because we are increasing the risk.
    Finally, I will note it is not just what this committee 
does, but I have begged and pleaded that the bankruptcy reform 
proposal which sounds great but could throw havoc into the 
credit markets combined with what we do here if we do not do it 
right could take a bad tumultuous credit situation and make it 
irretrievably worse.
    We could take a recession in the housing markets and make 
it a depression across economic lines if we are not careful, 
because we are trying to do good, but not thinking about the 
real life economic consequences of thinking with our hearts and 
not our brains.
    I hope we use at least part of our brains as well. With 
that, I yield back.
    The Chairman. I thank the gentleman. I did listen closely 
to the gentleman from Florida. I would ask unanimous consent 
that the socialist writings of the gentleman from Florida and 
any other members at the age of 20 be inserted into the record. 
Without objection, we will await those.
    Not hearing any objection, the record will remain open for 
those writings.
    The Chairman. I know we did not have e-mail then, Tom. 
Maybe you wrote a paper.
    I appreciate the people waiting. It did seem to me 
important for the various members' viewpoints to be laid out, 
because we are about to deal with one of the most significant 
pieces of legislation that we will be dealing with this year, 
certainly from this committee.
    We will now begin. Let me begin with Mr. Gruenberg, Martin 
Gruenberg, who is the Vice Chairman of the Federal Deposit 
Insurance Corporation. The Chair of the Corporation, Sheila 
Bair, who has been a very constructive participant with us in a 
lot of ways, unfortunately is ill today, and we are sorry to 
hear she is ill but we are pleased that Mr. Gruenberg on very 
short notice was able to come in her stead.
    Mr. Vice Chairman.

                         SHEILA C. BAIR

    Mr. Gruenberg. Thank you very much, Mr. Chairman. If I may 
also say that Chairman Bair really has provided very strong and 
constructive leadership on this issue. I do not think there is 
any issue that is of greater priority to her. I will try to do 
my best to sit in for her this morning.
    Chairman Frank, Ranking Member Bachus, and members of the 
committee, thank you for this opportunity to testify on behalf 
of the FDIC.
    Let me say at the outset that while the troubles in housing 
and credit markets have yet to fully play out, they underscore 
the FDIC's long-standing view that consumer protection and safe 
and sound lending are really two sides of the same coin.
    Poor lending standards and weak consumer protection are the 
root cause of the current problems resulting in serious 
consequences for consumers, lenders, and the United States' 
    Clear balanced commonsense standards for mortgage lending 
practices will reinforce market discipline and ensure an 
adequate flow of capital to fund responsible lending, including 
for low- and moderate-income consumers with less than perfect 
credit profiles.
    Legislation or regulation to address issues in the mortgage 
market should preserve the elements of the current system that 
have worked well for the economy and require all lenders to 
follow the same rules.
    The Mortgage Reform and Anti-Predatory Lending Act is a 
workable and helpful vehicle for legislative action to 
establish a national standard. The bill would help ensure that 
borrowers receive mortgages that they can ultimately afford to 
repay, and that lenders in turn understand the credit risks 
they are taking.
    Requiring mortgage originators to be licensed and 
registered will improve industry professionalism and prevent 
bad actors from jumping from one jurisdiction to another.
    The minimum standards set by the bill include many criteria 
that have long been used by lenders to evaluate a borrower's 
ability to repay a loan. These include verified and documented 
financial information, taking into account all fees and taxes 
to be paid by the borrower, and underwriting loans based on the 
fully indexed rate, and assuming a fully amortizing repayment 
    A clear bright line standard for determining repayment 
capacity such as the debt to income ratio provision in the 
proposed bill will serve an especially important role by acting 
as a check on the significant portion of mortgage originators 
that are not subject to regular supervision.
    Without a debt to income limitation, lenders could 
underwrite loans to the fully indexed rate, but at such a high 
percentage of a borrower's income, that the loan could not 
realistically be repaid.
    The requirement that loans be fully documented also could 
be under cut without a debt to income standard that ensures a 
borrower's fully documented income can support the loan.
    The provisions of the bill requiring the mortgage 
originator to disclose the comparative costs and benefits of 
mortgage loan products, the nature of the originator's 
relationship to the consumer, and any conflicts of interest 
will empower consumers to make better informed decisions about 
the products and services that are being offered.
    Finally, it is important to address assignee liability as a 
meaningful check on abuse by originators.
    Given the difficulties inherent in enforcing strong 
origination standards, it is appropriate that those funding the 
lending activity bear some responsibility for ensuring that the 
standards are adhered to by mortgage originators.
    To be effective, however, assignee liability must be based 
on bright line standards so that it does not inadvertently dry 
up essential credit.
    In conclusion, Mr. Chairman, the FDIC stands ready to work 
with Congress to ensure that mortgage credit is based on 
standards that achieve a fair result for both the borrower and 
the lender.
    I would be happy to answer any questions the committee may 
have. Thank you, Mr. Chairman.
    [The prepared statement of Chairman Bair can be found on 
page 143 of the appendix.]
    The Chairman. Next, the Comptroller of the Currency--with 
whom we have had a very good and constructive relationship--Mr. 
John Dugan.


    Mr. Dugan. Thank you, Mr. Chairman. Chairman Frank, Ranking 
Member Bachus, and members of the committee, thank you for the 
opportunity to testify on this important legislation.
    The OCC supports the establishment of national standards 
for subprime mortgages, which have been the source of so many 
recent problems in credit markets. We also support the bill's 
goal of enhanced regulation of all mortgage brokers, whether 
used by banks or non-banks.
    In recognition of pervasive problems in the subprime market 
generally, the Federal banking agencies tightened mortgage 
standards by issuing guidance on both subprime lending and non-
traditional mortgages.
    We believe these Federal banking agency standards addressed 
fundamental concerns about underwriting and marketing practices 
for these mortgages, but these standards apply only to 
federally regulated institutions. They do not address similar 
practices at State regulated institutions that are not banks, 
even though by nearly all accounts, such institutions engaged 
in some of the most aggressive mortgage practices.
    As a result, the Federal banking agency standards cannot be 
truly effective unless they extend to non-federally regulated 
institutions as well, to create truly national standards.
    Such national standards could be achieved through State 
action, Federal Reserve Board rulemaking, or Federal 
legislation such as the bill that is the subject of today's 
    Regardless of the path chosen, the OCC supports national 
standards for subprime mortgages similar to the Federal banking 
agency standards. From our initial understanding of the bill, 
which we have only had a limited time to review, it would 
establish national standards for three different categories of 
    For all mortgages, the bill would establish national sales 
practice standards for mortgage originators through licensing 
and registration requirements, a Federal duty of care, and 
anti-steering provisions.
    For subprime mortgages, the bill would through the use of 
safe harbor provisions establish national underwriting 
standards that are more stringent than the underwriting 
provisions in the Federal banking agency standards, and for 
HOEPA mortgages, the bill would lower the APR and fee triggers 
to make less costly mortgages subject to the enhanced HOEPA 
regulatory regime.
    These three categories of changes plainly go beyond the 
Federal banking agency standards. That is some of the new 
national standards apply to mortgages other than subprime 
mortgages and some of the bill's national subprime standards 
are more stringent.
    While we support some of these broader standards, others 
raise significant questions and concerns that we hope will be 
addressed as the process moves forward.
    For example, the application of some of the new and 
extensive national mortgage standards to banks that do not 
provide subprime mortgages raises significant issues of 
regulatory burden and fairness.
    In particular, we question whether the burden of the 
licensing and registration requirements for all bank employees 
involved in any type of mortgage origination is, given existing 
bank regulation, worth the marginal benefit, especially for 
community banks.
    Likewise, the Federal duty of care and anti-steering 
provisions, which include highly subjective requirements that 
mortgages be appropriate and in the consumer's interest, will 
be difficult to enforce and could significantly increase the 
litigation exposure for all banks.
    In addition, the more stringent underwriting standards for 
subprime mortgages would by definition restrict the 
availability of credit to subprime borrowers more than the 
Federal banking agency standards.
    On the positive side, this reduction of credit would help 
ensure that the borrowers who obtain these loans could truly 
afford to repay them. On the negative side, the reduction would 
prevent some creditworthy borrowers from obtaining loans.
    It is impossible to determine ex-anti the extent to which 
creditworthy borrowers would be denied loans due to the new and 
stricter standards. This is clearly a tradeoff in the bill.
    In addition, the stricter standards would also prevent more 
existing subprime borrowers with adjustable loans today from 
refinancing such loans.
    Finally, the OCC believes that there is an important point 
to be made about the bill's enforcement remedies. On their 
face, the remedies appear even handed because they apply 
equally to banks and non-banks, but the reality is quite 
    Because of existing enforcement provisions in Federal 
banking law, application of the same set of bright line 
standards to banks, brokers, and non-banks would in fact expose 
banks and their employees to a much wider range of potential 
enforcement actions than would be the case for brokers and non-
    Put another way, banks and their employees would be subject 
to a stronger enforcement regime than non-bank lenders or 
mortgage brokers for the very same violations of the bill's new 
    We urge attention to the bill's enforcement mechanisms to 
ensure that the bill's standards are as effectively implemented 
and enforced at non-bank lenders and brokers as they would be 
at banks.
    Thank you very much.
    [The prepared statement of Comptroller Dugan can be found 
on page 195 of the appendix.]
    The Chairman. Next, another of the regulators we have been 
working with, John Reich, the Director of the Office of Thrift 
    Mr. Reich.

                       THRIFT SUPERVISION

    Mr. Reich. Thank you. Good morning, Mr. Chairman, Ranking 
Member Bachus, and members of the committee. Thank you for the 
opportunity to provide the views of the Office of Thrift 
Supervision on H.R. 3915.
    I applaud your efforts to address the need for enhanced 
Federal oversight of mortgage origination and funding process. 
I do believe that consistent and fair oversight of all players 
that originate and fund mortgages is overdue. While the 
problems of the current market are complex, the issues that 
created them are not.
    To address these issues, we must adhere to certain key 
principles, including sound underwriting, transparency, strong 
consumer protection, a level playing field, and consistent 
    First and foremost, sound underwriting is fundamental to 
the success of mortgage lending. It protects both lender and 
borrower in the mortgage process. This fact alone highlights 
the importance of the effective oversight of the mortgage 
origination process.
    We support the effort to require national licensing and 
registration of all mortgage originators who are not subject to 
Federal or State banking oversight. We suggest any national 
system should include adequate capitalization standards, 
competency testing requirements, and background checks for all 
principals and staff. Again, for mortgage originators that are 
not subject to State or Federal banking oversight.
    Second, in addition to a Federal duty of care, I encourage 
the committee to consider modifying compensation incentives to 
mortgage originators, to consider a longer term pay out on loan 
origination, to protect the borrower customer's economic best 
interest. The typical compensation structure, for example, for 
life insurance agents might provide a good model.
    Third, transparency is critical to the proper functioning 
of the markets. When market participants lack adequate 
information to evaluate their current positions or potential 
investments, markets break down.
    Fourth, sound consumer protections are integral to 
promoting properly functioning markets. Just as market 
participants need accurate information to evaluate the markets, 
consumers need clear and balanced disclosures to be able to 
understand mortgage products.
    We support the provisions of H.R. 3915 that promote clear 
and balanced disclosures for consumers in the mortgage 
origination process.
    Consumer protections that address unfair and deceptive acts 
and practices in mortgage lending and other lending and 
financial service activities also make our markets stronger. 
This is the premise behind the OTS proposal on unfair and 
deceptive acts and practices that we issued in August.
    For action in this area to be effective, however, it has to 
be applicable to all relevant players. With this in mind, we 
intend to work closely with the other Federal banking agencies 
at this table on how to address these issues following the 
November 5th comment deadline.
    Effective regulation and oversight of the mortgage 
origination and funding process requires a level playing field 
for all market participants. We also appreciate the recognition 
of a safe harbor for certain loan products in this bill.
    Based on our review and experience, these safe harbor loans 
are typically soundly underwritten and enjoy a high level of 
transparency with respect to their terms and occupy the most 
competitive part of the market. Hence, a level playing field.
    A final point for your consideration in evaluating options 
for reform in the mortgage origination and funding process is 
joint State and Federal oversight of mortgage banking 
activities, such as that which currently exists in the 
supervision of State banks.
    Establishing a partnership between the States and a Federal 
overseer to set and enforce minimum mortgage origination 
funding standards would ensure accountability and consistency 
throughout the mortgage lending process.
    It is important to stress that a partnership would not 
necessarily involve establishing a Federal mortgage banking 
charter but rather impose a Federal/State partnership to 
regulate existing mortgage banking entities and ensure 
nationwide uniformity.
    The OTS has extensive experience in overseeing and 
supervising mortgage banking operations, and I believe would 
benefit the current mortgage banking market.
    I would be happy to share my thoughts on an OTS role in 
overseeing such a State/Federal national mortgage banking 
    In closing, I want to mention that mortgage foreclosures 
and possible solutions to the problem will be among the primary 
issues that will be discussed at the OTS' National Housing 
Forum to be held at the National Press Club in Washington, 
D.C., on December 3rd. Of course, you are all invited and we 
would be delighted if your schedules would permit that you 
could attend.
    Thank you, Mr. Chairman. I would be happy to answer 
    The Chairman. Thank you. Having attended last year's Forum, 
I regret that my schedule keeps me from going, but I would 
second your urging of the members. I found that very useful. 
Since the President's White House Ball will be that night, it 
would not be an extra trip to Washington. I would urge members 
to accept that invitation.
    Next we have JoAnn Johnson, the Chairman of the National 
Credit Union Administration, another one of the regulators with 
whom we have had the privilege of working.
    Chairman Johnson, please go ahead.


    Ms. Johnson. Thank you, Chairman Frank, for this 
opportunity to testify regarding proposed mortgage reforms. 
This is a timely and important subject that merits 
congressional oversight, and I commend your interest in helping 
consumers make more informed and beneficial choices surrounding 
what is arguably the most important purchase they ever make, 
their home.
    The credit union industry comprises a relatively small 
slice of the overall mortgage lending pie. Federally insured 
credit unions made about 2 percent of all mortgage loans in the 
first half of 2007 and 9 percent of mortgage loans made by 
depository institutions. Sixty percent of credit unions offer 
mortgage loans. Those that do not are generally smaller 
institutions lacking the infrastructure and expertise to manage 
a significant portfolio.
    Federal credit unions also have a 10 percent loan to one 
borrower limit imposed by statute which makes mortgage lending 
less feasible for smaller credit unions.
    Sixty-three percent of credit unions' mortgage loans are 
fixed rate. In the first half of 2007, fixed rate loans grew 14 
percent while adjustable loans rose only 2 percent, a result of 
consumer reaction to a rising interest rate environment.
    Non-traditional mortgage lending such as interest only or 
payment option loans while offered comprised less than 2 
percent of first mortgage loans.
    Earlier this year, we noted market trends suggesting 
greater prevalence of these products and we amended our call 
reports to specifically collect data and get a more accurate 
picture of the credit union activity. Mid-year results confirm 
NCUA's belief that credit unions have not delved very deeply 
into the kinds of alternative products that have made this 
hearing unfortunately necessary.
    We believe that there are three primary reasons why these 
riskier loans are not widespread in the credit unions. First, 
as noted earlier, many credit unions lack the expertise and 
resources to underwrite these types of loans.
    Second, over 2 years ago, we issued guidance addressing 
problems associated with both credit and interest rate risks in 
non-traditional lending. This translated into more stringent 
    Third, the Federal Credit Union Act prohibits prepayment 
    NCUA has proactively monitored trends and mortgage lending 
over the past decade and has issued guidance to the industry 
accordingly. As far back as 1995, NCUA in a letter to credit 
unions discussed potential pitfalls surrounding risk based and 
subprime lending.
    In addition to our oversight of the financial side of the 
mortgage lending ledger, NCUA also takes a robust approach to 
enforcement of consumer protection laws through our examination 
process. Combined with careful review of member complaints, 
NCUA evaluates each credit union's compliance with the law and 
gains a more complete picture of how a credit union makes 
mortgage loans. We also issue regulatory alerts to ensure 
compliance with a full range of consumer protection laws.
    This all contributes to a credit union industry that is 
enjoying relative stability in the midst of some very real 
dislocations in the mortgage market. While demand for mortgages 
remains high, delinquencies are low.
    This brings me to the recently introduced legislation that 
will hopefully improve the mortgage lending menu by making 
choices more understandable while eliminating the abusive 
practices that have gotten some borrowers in dire financial 
    The Frank/Watt/Miller bill addresses several practices in 
ways that contain very real positives for consumers. For 
example, making all originators subject to the same duty of 
care standards, requiring a determination of suitability, and 
eliminating unfair prepayment penalties, single premium credit 
insurance, and mandatory arbitration are important and sensible 
aspects of the legislation.
    We also support the licensing and registration for mortgage 
originators who are not depository institutions. Further 
enhancements to HOEPA outlined in the legislation particularly 
regarding fees also represent a step forward.
    I want to bring to your attention the omission of NCUA from 
joint rulemaking. There are several provisions in the bill that 
charge Federal financial institution regulators with writing 
regulations for the institutions they regulate.
    Although credit unions are properly subject to this 
legislation, none of my colleagues at this table have 
supervisory or enforcement authority over them. NCUA is 
concerned that important aspects of credit union operations, as 
well as appropriate regulatory distinctions, would not be 
accounted for in the writing of the rules if NCUA is not 
jointly involved.
    I respectfully ask that you consider amending the 
legislation to include NCUA in the process.
    Congressman Kanjorski also has introduced a bill addressing 
other aspects of the home mortgage lending industry. NCUA 
commends that effort as well, particularly the aspects that 
improve consumer disclosures and transparency related to 
mortgage servicing.
    In conclusion, I would like to comment on a fundamental 
element of any discussion on mortgage lending facing consumers, 
the need for increased financial education, and while it is not 
a panacea or substitute for rigorous regulation, I believe that 
all of us have a responsibility to promote a more financially 
aware borrowing public.
    Thank you very much.
    [The prepared statement of Chairman Johnson can be found on 
page 206 of the appendix.]
    The Chairman. Thank you. Next we will hear from Randall 
Kroszner, Governor, Board of Governors of the Federal Reserve 
    Governor Kroszner?


    Mr. Kroszner. Chairman Frank, Ranking Member Bachus, and 
members of the committee, I appreciate the opportunity to 
appear before you today to discuss recent problems in the 
subprime mortgage market.
    The recent increase in foreclosures has created personal 
financial and social distress for many homeowners and 
communities. Congress is appropriately concerned about these 
developments as is the Federal Reserve Board.
    Promoting access to credit and sustainable homeownership 
are important objectives and the Board believes responsible 
subprime mortgage lending can help advance both goals.
    In carrying out its consumer protection responsibilities, 
the Board believes it is extremely important to strike the 
right balance by seeking to protect consumers from predatory 
practices without restricting credit from responsible lenders 
to borrowers with shorter or lower rated credit histories.
    Consumer protection laws take two different but 
complimentary approaches. One focuses on disclosure and the 
other on development and enforcement of substantive protections 
that prohibit particular practices.
    To be effective, disclosures must give consumers the 
information that they can readily understand at a time when the 
information is relevant. To that end, the Federal Reserve will 
propose improvements to the rules governing mortgage disclosure 
and the timing of those disclosures.
    The Federal Reserve is keenly aware, however, that 
disclosure may not be sufficient to combat abusive practices. 
We share the concerns of Congress that certain lending 
practices may have contributed to the problems we are seeing in 
the subprime market today.
    Therefore, the Federal Reserve plans to exercise its 
rulemaking authority under the Home Ownership and Equity 
Protection Act, HOEPA, to address unfair and deceptive mortgage 
    We plan to propose rules by the end of this year that would 
apply to subprime loans offered by all mortgage lenders. We are 
looking closely at practices such as: One, prepayment 
penalties; two, failure to offer escrow accounts for taxes and 
insurance; three, stated income and low documentation lending; 
and four, failure to give adequate consideration to borrowers' 
ability to repay.
    Enforcement of consumer protection measures is also 
critical to protecting consumers from irresponsible or 
predatory lending. The regulatory scheme for the mortgage 
industry has become extremely complex and some mortgage lending 
extends beyond the Federal banking agencies' oversight.
    This underscores the importance of collaborating with the 
State banking agencies and other organizations to address 
concerns in the subprime mortgage lending market.
    To this end, we have launched a cooperative pilot project 
with other Federal and State agencies to conduct reviews of 
non-depository lenders with significant subprime mortgage 
    Congress is appropriately concerned about the problems in 
the mortgage market. As with the regulations, I believe it is 
important that new laws carefully target lending abuses without 
unduly restraining responsible lending. Getting this balance 
right is particularly critical now as many borrowers are facing 
adjustments and may need to refinance into more affordable 
    The bills before this committee would provide for a 
nationwide registration and licensing system for all mortgage 
brokers that would help limit the ability of bad actors to move 
to a new State after having run afoul of regulators in other 
    Legislation would also address concerns about loans made 
without consideration of a borrower's ability to repay. The 
Board firmly believes that lenders should give due 
consideration to the borrower's ability to repay a loan before 
the loan is extended, so long as the rules are flexible enough 
to allow creditors to consider pertinent factors and individual 
circumstances of particular consumers and to innovate prudently 
and fairly.
    The bill would hold securitizers and loan purchasers liable 
for bad actions of mortgage originators. The securitization 
market is critical to increasing the resources available to 
fund home purchases and great care should be taken to ensure 
that investors in securitization markets can quickly and 
accurately assess and mitigate the risks, including compliance 
risks, of mortgages sold in this market.
    Finally, the bill would ban abusive practices for HOEPA 
loans, such as prohibiting the financing of single premium 
credit insurance, an important thing to be done.
    The bill would also extend HOEPA's protections to more 
loans by amending HOEPA's cost triggers. These potential 
actions merit discussion, and we welcome the opportunity to 
continue to work with congressional staff and Members of 
Congress on these and other provisions of the new bill.
    I thank you very much for the opportunity to appear before 
you. I look forward to your questions. Thank you, Mr. Chairman.
    [The prepared statement of Governor Kroszner can be found 
on page 226 of the appendix.]
    The Chairman. Thank you. There are two votes, but we will 
finish the testimony from Commissioner Antonakes, and then we 
will take a break and come back and begin the questioning.
    I am very glad to welcome my State Banking Commissioner, 
Commissioner Antonakes.

                     STATE BANK SUPERVISORS

    Mr. Antonakes. Good morning, Chairman Frank, Ranking Member 
Bachus, and distinguished members of the committee.
    My name is Steven Antonakes and I serve as the Commissioner 
of Banks for the Commonwealth of Massachusetts. I am also the 
State voting member of the FFIEC and a founding board member of 
the State's nationwide mortgage licensing system. It is my 
pleasure to testify today on behalf of the Conference of State 
Bank Supervisors.
    Chairman Frank, we commend you for holding this hearing 
today on these important issues. CSBS supports the direction of 
the Miller/Watt/Frank bill and looks forward to working with 
you and your staff as we move towards mark-up.
    This morning, I would like to leave you with five points 
from my testimony. First, 10 weeks from today, our nationwide 
mortgage licensing system, 4 years in the making, goes live. 
The system seeks to improve the efficiency and the 
effectiveness of the U.S. mortgage market, to fight fraud and 
predatory lending, to increase accountability among mortgage 
professionals, and to unify and streamline State licensing 
    On January 2, 2008, Massachusetts will begin using this 
system to license mortgage lenders and mortgage brokers. To 
date, 40 State mortgage regulators have committed to coming 
onto the system.
    Chairman Frank, Representatives Watt and Miller, CSBS 
appreciates that your bill, H.R. 3915, incorporates our system 
as part of the regulatory infrastructure. I would also like to 
thank Representatives Bachus and Pryce for their support that 
H.R. 3012 gives the State licensing system.
    This State system is more than a database. It is the 
foundation for coordinated multi-State mortgage supervision. 
Included in my testimony is some suggestions for refining H.R. 
3915 to maximize the effectiveness of the system.
    Second, Chairman Frank, we endorse your bill's 
establishment of consistent standards to address responsible 
    Third, CSBS strongly supports the approach of establishing 
these standards as a floor, as opposed to a ceiling. States 
must retain the flexibility to address emerging issues. This 
allows States to establish best practices, which may become the 
foundation for Federal legislation.
    For example, the Truth in Lending Act was originally 
implemented by my home State of Massachusetts in 1966, and the 
first predatory lending law was originally enacted by North 
Carolina in 1999.
    Fourth, States must have clear authority to take 
enforcement actions against violation of these standards for 
the benefits of consumers in our States.
    The residential mortgage market is now global in its scope, 
but the consequences of lending abuses will always be local. 
Given our proximity to the communities we serve, State 
regulators and law enforcement agencies are uniquely posed to 
respond quickly to the needs of our consumers and our 
    Fifth, CSBS commends Congress for facilitating State and 
Federal coordination by giving State authorities a vote on the 
FFIEC. Since the States joined the FFIEC, cooperation between 
the Federal banking agencies and State authorities has improved 
dramatically. However, we encourage Congress to make sure that 
States are included in any new Federal rulemaking processes for 
mortgage providers.
    The FFIEC provides the most appropriate forum for 
developing these new rules. We suggest that this mechanism best 
leverages State experience in developing the rules required to 
implement your legislation.
    Finally, I would only add that I believe I am the only 
person at the table who actually regulates banks, credit 
unions, mortgage lenders, and mortgage brokers, and I do love 
all of my children.
    Mr. Antonakes. There has been a great deal of discussion 
today by the members that no single party or groups of parties 
are responsible for the issues we face today, and I do agree 
with that position.
    We do support stronger safeguards for loan originators and 
we believe that your bill will effectively carry that through. 
However, it is important also to note that it was 
underestimating and misstating of credit risks and the failure 
of internal controls by depository institutions and non-
depository institutions that significantly contributed to the 
problem we face today.
    Thank you for the opportunity to testify. I would be happy 
to take any questions you may have.
    [The prepared statement of Commissioner Antonakes can be 
found on page 128 of the appendix.]
    The Chairman. Thank you. The committee will be in recess. 
We have only two votes, about 8 minutes left on this one, and 
then a quick 5-minute vote. We should be able to be back in 
less than 20 minutes, and we will immediately begin the 
    The Chairman. The hearing will reconvene. We will begin the 
questioning with my two co-authors here, along with the 
gentleman from New York. We will begin with the gentleman from 
North Carolina, who is one of the major authors of this bill, 
Mr. Watt, who is recognized for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman. Let me thank the 
witnesses for being here and particularly thank the FDIC 
representative and the Comptroller of the Currency, and Mr. 
    Measured against the standard that I set in my opening 
statement, which was taking this from a philosophical 
discussion to a practical discussion of the bill that is in 
front of us, I would have to say I was not overwhelmed by the 
testimony of the other witnesses on that criteria.
    I am hopeful that if you have not already done so, maybe 
you have in your written testimony because I confess, I did not 
get a chance to read it all, if you have not already done so, I 
hope you will take a very aggressive look at the bill that is 
now before us because Mr. Reich, Ms. Johnson, and Governor 
Kroszner, your testimony could have been delivered and was 
delivered several weeks ago outside the context of a bill.
    We now have a bill in front of us that we really 
aggressively need your feedback on. If you are not going to 
play that role, then I am not sure that it is going to be that 
helpful to us.
    I appreciate the platitudes and the bragging about what 
your agency has done or what you have done, but at this point, 
we are looking for feedback on a bill that is in front of us.
    It would be helpful to get some feedback on the bill. That 
having been said, Mr. Reich suggested, although there is 
nothing about it in this bill, some things that we ought to, I 
guess, be considering putting in the bill, one of which was to 
allow a longer pay out to brokers. You suggested that, did you 
not, Mr. Reich?
    Mr. Reich. I did.
    Mr. Watt. The question I wanted to ask was whether under 
the mechanism that we have set up that allows rulemaking to 
occur, that would not be able to be accommodated or would it or 
would it not be able to be accommodated under the authority 
that we gave the regulators to write rules for the road going 
forward in this area?
    Mr. Reich. It could be that the Fed may have that authority 
under their rulemaking authority.
    Mr. Watt. My question is on the language in this bill that 
allows more than the Fed to be involved in rulemaking. Have you 
read the bill?
    Mr. Reich. Sir, I have not read the 66 pages in the bill.
    Mr. Watt. No wonder we did not get any comments on the 
bill. Did you understand the hearing today was about the bill?
    Mr. Reich. Absolutely. I have read a summary of the bill 
and was informed that we could submit a more detailed--we just 
received it 2 days ago--that we could submit a more detailed 
statement by Friday of this week, which OTS intends to do.
    Mr. Watt. I will not ask any more questions about the bill. 
There is a provision in there that allows rulemaking to occur. 
It seems to me that if we need to make it clearer that 
rulemaking authority extends to the ability to have a longer 
pay out for brokers, we could make that explicit very easily.
    I am not sure--I do not believe that authority is already 
in the bill. I guess there is no sense in us debating it if you 
have not read the provision.
    My time has expired. I appreciate the constructive comments 
that were made by some of the regulators. I encourage the other 
regulators to please read the bill and give us some feedback. 
Do not just wait until we do something or do not do something 
and then say well, you know, this is my public invitation to 
you all to play a constructive role in this process.
    I think the Chair has already pointed out that we would 
like to get this done some time and move the bill. The quicker 
you all could get back to us, the more I would appreciate it.
    I thank the chairman and yield back.
    The Chairman. I thank the gentleman. I would reinforce 
that. I should acknowledge that we did want to make a 
commitment to having the broadest possible consultations on the 
bill, which meant that we did not introduce it--it is a shorter 
than usual interval between the introduction and the hearing, 
but that is why we agreed that the record will be open for the 
rest of the week.
    The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman. Mr. Dugan, I am going 
to ask you and Mr. Reich, you all have said you do not think 
your member institutions ought to come under the national 
registration and licensing provisions.
    Have you read my bill dealing with national registration 
and licensing?
    Mr. Dugan. I confess I have not.
    Mr. Bachus. Have you, Mr. Reich?
    Mr. Reich. I have not.
    The Chairman. His was introduced earlier.
    The Chairman. My apology does not cover his bill.
    Mr. Bachus. In fact, I read two articles, one in a New York 
publication, a Today Business publication, which obviously had 
not read it either when they talked about the different 
    I separate out registrations and licensing. What we require 
of everyone is that they register. Let me tell you why I did 
that. When you look at the mortgage originators that originated 
some of these fraudulent loans, some of these loans where mis-
information was supplied, some of them were from your member 
institutions. They were not all mortgage brokers.
    In fact, my staff and I--I do not have this statistically, 
but one time, we have used the figure of about 40 percent of 
them were from either federally or State chartered institutions 
that were regulated. Sixty percent of them were mortgage 
    If you only require mortgage brokers to register, which is 
basically what is being said, but you do not require mortgage 
bankers, there is obviously a gap in the system today. We would 
not be proposing that if we didn't have--whether it is 25 
percent, 30 percent or 35 percent--you are dealing with 
hundreds of thousands of these that have been made by 
originators that were working in a bank. I do not know of any 
in a credit union, but I am sure there may be.
    With that in mind, let me tell you what I require of your 
members. The licensing requirements in my bill, because you 
have different requirements to set up, but the registration 
requirements are that they provide contact information.
    The Conference of State Bank Supervisors and the American 
Association of Residential Mortgage Regulators, they maintain 
databases on bad actors. If you do not register, if you are not 
included, your people making loans in your banks are not 
included in that registration, and we have no way of knowing 
they are there.
    Mr. Dugan. Mr. Bachus, let me be clear. We do agree and 
think there are good provisions in the bill that require banks 
to report bad actors to a database and we also agree--
    Mr. Bachus. We are talking about registration. Some on both 
sides have endorsed it. I know the chairman is looking at it. 
It requires them to keep contact information. We want to know 
where they are. That is disclosure.
    We want them to submit to a criminal background check and 
submit fingerprints. That is what a lot of the States require 
now. An applicant has to submit to a credit check, which 
sometimes exposes losses as a result of fraudulent practices. 
That is all it requires them to do. It is very effective when 
it is used.
    If we have a turf fight--the FDIC, we have approached them 
and they have not, at least from our correspondence, and the 
Federal Reserve, in fact, Chairman Bernanke and Secretary 
Paulson both said there is a need for some sort of national 
registration or database.
    I would just like you going forward to take a look at that.
    Mr. Dugan. We certainly will.
    Mr. Bachus. Do not confuse the licensing provisions. You 
have your own. You have your own provisions. You require 
certain educational standards. The State and federally 
chartered institutions are exempt from that for a good reason, 
but not the registration. We would have an incomplete 
    If we are going to fully protect--we cannot ever fully 
protect, but if we are going to at least try to know who these 
people are and where they are, because they move from State to 
State, in fact, 5 percent of mortgage originators did 95 
percent of what I would call the over-the-top bad loans. Most 
of them, their license had been revoked in one State and they 
moved to another State.
    Mr. Dugan. We would be delighted to have a greater dialogue 
on that point. You are absolutely right. We have been sort of 
conflating licensing and registration. It is the licensing part 
that puts more substantive regulatory and compliance 
requirements that would have to be put in place that I think 
raises the bigger questions.
    Mr. Bachus. If you do not know the history before they come 
or if they do something while they are originating loans at 
your institutions, then they leave, and they are not a part of 
    Mr. Dugan. We support that part of it.
    Mr. Bachus. Thank you. The only other question I would ask 
is I would ask the Federal Reserve, I noticed that in the 
rulemaking process under this legislation, they are excluded. 
They have decades of constructive experience in developing 
    I was just wondering, do you have any comment on that, 
    Mr. Kroszner. Thank you very much. If you were to include 
us, exactly as you had said, we would bring years of 
experience, years of expertise, and knowledge to consumer 
protection and community affairs' issues. I think we would have 
something valuable to add to the rule writing process.
    Mr. Bachus. Thank you.
    The Chairman. We will go to the gentleman from 
Pennsylvania, the chairman of the Capital Markets Subcommittee.
    Mr. Kanjorski. Thank you, Mr. Chairman. Chairman Johnson, 
you mentioned the escrow and appraisal bill that I have 
introduced in your opening remarks. I am pleased to see that 
you are favorably disposed to it. Also, I noticed the Federal 
Reserve through rulemaking is considering doing something in 
the escrow area.
    What I appreciate is the fact that Chairman Frank and I 
have agreed to mark up this legislation, H.R. 3837. If your 
agencies could, by next Monday, give us any of your comments on 
this bill, so that it either may be joined with the pending 
bill or stand individually. We think it has an opportunity to 
move, and it could go a long way in helping future problems in 
the system.
    Also, I wanted to say to you, Chairman Johnson, that I 
agree with you, and I note that Chairman Frank stated that NCUA 
was not on the list of agencies involved in writing the rules 
in H.R. 3915. I assure you, this is an oversight and not 
intentional, and we are going to correct that as the bill moves 
    Actually, what we would like to do is have everybody 
participate as much as possible in helping us move this 
    The Chairman. If the gentleman would yield, the gentleman 
has been very much involved in credit union issues, and he is 
absolutely right, that is an omission that we will deal with.
    Mr. Kanjorski. One of the issues I am involved in is 
assigning liability. We are going to be talking a lot about 
this, particularly as we consider this bill.
    If we really go too far, we are going to dry up the 
secondary market. If we do not go far enough, we are not going 
to really gain any positive ground here.
    I think we are somewhat at a loss to know what to do. 
Again, I think we should create a standard, if possible, 
whereby the writers or the assemblers of these packages should 
be responsible for what they can know, should know, or 
reasonably discern.
    On the other hand, we should have a clear bright line 
standard to help assignees know what they need to do to meet 
these tests.
    Do you have any particular views on the assignee liability 
question? Any of you? If you do, over the next several days, I 
think you can submit it, and it would be very, very helpful.
    To the last gentleman, let me bring up the need for a 
national standard. We are struggling with it. Of course, this 
bill does not provide a clear national standard. I think it 
    Rather than have a knock-down, drag-out fight because we 
cannot ever seem to come together as to what that standard 
would be, what I was going to suggest today is that we think 
about how we solved this problem back in 1996 on fair credit 
reporting. We actually committed and created a national 
standard, but we gave it a life expectancy of 7 years, with the 
idea that we would have to come back and have the Congress 
address it and correct it or remove it, or do what was 
necessary to make it more applicable to the problem.
    Do you think this provision, if acted upon by Congress in 
this instance, in creating a national standard but with a time 
frame and a sunset provision, would be a way that we could move 
to find middle ground and make the system work better to have a 
national standard?
    I throw it out at any of the regulators who want to take a 
shot at it. Yes?
    Mr. Reich. I am totally supportive of the notion of 
sunsetting almost every act of Congress, quite frankly, for a 
review on down the road to determine its effectiveness.
    Certainly in this instance, I would be supportive.
    Mr. Kanjorski. I tend to agree with you, I am always 
supporting sunsetting. I do not always get my way, but I like 
to support it, too.
    Do you think if we take this legislation and put a national 
standard into place, is this the time to do it or just leave 
the legislation as it presently is, taking into consideration 
every State has different conditions?
    Mr. Reich. My personal view is that I would like to see a 
national standard with a bar high enough that it would satisfy 
all of the States. I recognize that goal is probably not 
achievable. I think working towards a national standard is the 
right thing to do.
    Mr. Kanjorski. What if we took, say, the North Carolina 
standard and adopted that nationally, but put in the 7-year 
provision that it has to be re-visited and reviewed, would that 
be a way?
    It is going to require an intelligent compromise. We are 
just not all going to agree up here. The House and Senate are 
not going to agree. The Administration is not going to agree. 
Certainly, the industry is not going to agree. We have seen 
that happen for a number of years now.
    How do we get past this stumbling block, when we do come 
very close now because of exiguities in the marketplace, that 
we can move something that otherwise could not be moved as well 
or as quickly and as speedily?
    Should we take a shot at it now or should we pass it by?
    Mr. Reich. I wish I knew the answer to that question.
    Mr. Kanjorski. Cautious.
    Mr. Gruenberg. If I may say, Congressman, I think the 
approach taken in the bill as introduced of setting a floor so 
that we establish a national minimum to assure uniformity but 
then allowing States in their discretion to go beyond that is a 
reasonable approach.
    Mr. Antonakes. Congressman, I would agree. Our preference 
would be to have the floor as high as possible but we would 
also like to have the States have the right to address specific 
issues quickly if they want to go beyond that floor.
    Mr. Kanjorski. You do not see that is going to have an 
effect on securitizing these obligations? If we have States 
that have huge standards as compared to other States, it is not 
going to have an effect on putting these packages together?
    Mr. Antonakes. In my view, at least in Massachusetts, where 
we have a very high standard, it has not impacted the 
availability of credit in the Commonwealth. If laws are crafted 
carefully, we believe there can be higher consumer protections 
without impacting the availability of credit.
    Mr. Kanjorski. Thank you very much.
    The Chairman. Thank you. What duration would you like on 
the sunset legislation for the Office of Thrift Supervision?
    Tell me how many years, and we will be glad to file the 
bill to accommodate that.
    Mr. Dugan. Five.
    The Chairman. When Secretary Paulson proposes his 
reorganization of the bank regulatory agencies next year, that 
might get some action.
    The gentlewoman from Illinois, the chair--the Ranking 
Member of the Capital Markets Subcommittee.
    Mrs. Biggert. Don't I wish I was chairman!
    Mrs. Biggert. Thank you, Mr. Chairman. This is a question 
generally, for whomever would like to answer.
    By restricting which borrower is eligible for loans, do you 
think that H.R. 3915 in its current form will limit access to 
credit to individuals with less than perfect credit, and as a 
result, homeownership would more likely be limited to 
individuals in higher income groups, and can the legislation or 
should it be altered to avoid what I think might be this 
unintended consequence?
    Mr. Dugan. As I testified, I think the purpose of the 
legislation and particularly the safe harbors, which we believe 
is kind of what lenders and originators will gravitate to 
because it will prevent people from being exposed to liability, 
its purpose is to restrict the supply of credit in the sense of 
not providing it to people who cannot afford to pay the loan.
    It is a tradeoff, as I said. I think it will restrict 
credit. You hope that it will only restrict credit so it will 
not go--let's call it bad credit--that would go to people that 
cannot afford it, but there is a risk that there will be 
creditworthy borrowers who could shoulder the loans that a 
willing lender would be willing to make that loan to who will 
be prevented from doing so by the very bright lines that we 
have in it.
    I would note in a few places, those bright lines are 
brighter and stricter than what the Federal banking agencies 
agreed to do in our guidance. I think as I said, it is a 
tradeoff about whether you want to really be sure that people 
can repay and risk that fewer people will get credit and fewer 
people will be able to at least initially purchase a home.
    Mrs. Biggert. Thank you. We have been talking about the 
subprime loans. Does anyone think that the prime loans helped 
to create the current housing finance problem? If not, is there 
any reason to think it was their regulation?
    Mr. Dugan. Most people believe that the current problems 
that we have started in subprime. Certainly right now, we have 
problems in market liquidity for other mortgages. The real 
problems that I think most people have focused most 
dramatically on happened in the subprime area.
    Mrs. Biggert. There should not be any changes in the 
regulation for the traditional prime loan?
    Mr. Reich. I do not believe there should be.
    Mr. Gruenberg. I think, Congresswoman, the general approach 
to this bill in effect is to carve out the prime mortgages and 
focus the attention of the protections on the higher cost 
segment of the market, which really has been the focus of the 
    Mr. Dugan. If I may, that is true for part of the bill, but 
there are other parts of the bill that have standards that 
apply across the board, the Federal duty of care, the anti-
steering provisions, and the like. To that extent, they do go 
beyond the subprime market to the prime market as well.
    Mrs. Biggert. You think those are good?
    Mr. Dugan. I think there is a question about them. As I 
testified, some of the provisions have quite subjective 
language in it that we fear will be difficult to implement, and 
I think more pronounced problems that we are responding to, as 
your question suggests, have been in the subprime area, and I 
guess our guidance has been more focused on that area, and I 
think that makes sense.
    Mrs. Biggert. Vice Chairman Gruenberg, the FDIC has been 
such a good supporter of financial literacy, and I appreciate 
it, and Chairman Johnson, too, and all of you for all that you 
have done to promote the financial literacy and financial 
    Do you think legislation that seeks to combat fraud in the 
mortgage practices should also--would you support counseling 
for borrowers?
    Mr. Gruenberg. I think counseling is a valuable adjunct to 
the protections and can be certainly helpful to borrowers in 
trying to deal with the complex mortgage products; yes.
    Ms. Johnson. I would agree. The focus on financial 
education up front, whether through the counseling, for all 
borrowers to better have more clear and concise disclosures and 
transparency, will aid everyone in the market that is securing 
a loan.
    Mrs. Biggert. It is just the problem has been whether 
mandatory or not, and if mandatory, like what happened in 
Chicago, people not being able to get the counseling in time 
and they lost the mortgage.
    Do you think it should be mandatory or just notice of the 
ability to get counseling?
    Ms. Johnson. I think to continue awareness of this issue, 
and I know through the credit unions that we work with we have 
made financial education a priority, and so it has actually 
been they have taken up the charge without it being mandated by 
a regulator or through a law.
    I think the opportunity is there and hopefully more people 
will grab onto it.
    Mrs. Biggert. Thank you. My time has expired.
    The Chairman. I will take my questions and then we will 
break for the vote. I do want to say to Governor Kroszner, the 
question about the Fed's ability to produce some regulation, 
frankly, from my experience, the Fed has a lot of unused 
regulations stored up. They should be able to dip into a pile 
of unused regulations and maybe come forward.
    The gentleman from Pennsylvania is correct in terms of the 
omission of the NCUA. That is clearly something we should deal 
    Let me ask, Commissioner Antonakes is representing not just 
Massachusetts but the State Bank Supervisors. There are several 
major elements in this bill. One, I think, is generally agreed 
on, that all mortgage originators should be subjected to rules, 
and that the problem has been exactly what the nature of the 
rules are, but we do want all mortgage originators subjected to 
    Then there is the question of securitizing liability and 
how we would do that, if and how we do it. Then there is the 
question of the substance of the rules that are applied.
    I was pleased, Commissioner Antonakes, that you say on page 
10, ``A Federal anti-predatory lending standard should say 
clearly and ambiguously that lenders must consider a borrower's 
ability to repay a loan and include all costs of 
homeownership,'' and you want this to be a Federal floor but 
not a ceiling. Is that correct?
    Mr. Antonakes. Yes.
    The Chairman. You speak for the Conference of State Bank 
Supervisors, and this is one of the more controversial aspects 
of the bill.
    Mr. Antonakes. Yes, that is correct.
    The Chairman. I thought it would be relevant, Commissioner. 
I appreciate your support for the thrust of this degree of 
    When were you appointed Commissioner?
    Mr. Antonakes. December 2003.
    The Chairman. And you were appointed by whom?
    Mr. Antonakes. Governor Mitt Romney.
    The Chairman. Governor Romney. Thank you.
    The question I then have for all the regulators, and I 
understand--this is particularly for the bank regulators but 
also for Commissioner Antonakes, we were of the opinion that 
the regulated entities, credit unions and banks, were clearly 
less of a problem because of the regulation.
    What we were trying to do in some ways was to take the 
regulations you have applied to the institutions under your 
jurisdiction, codify them statutorily, and apply them to 
    I take it some think we may not have done that well enough. 
We would certainly welcome help in doing that. We have this too 
much ambiguity and too much rigidity.
    Let me ask the bank regulators, in terms of the effort we 
have made to articulate the standard, should it be tighter, 
    Let me start with Mr. Gruenberg and go down.
    Mr. Gruenberg. Mr. Chairman, I think as a general matter, 
the standard that you have outlined in the bill has been, as 
you indicated, reflective of the standard generally applied by 
Federal bank regulators. It seemed to us a reasonable approach.
    The Chairman. Yes. Mr. Dugan?
    Mr. Dugan. We did try to point out some areas in the 
testimony where the particular standard--the standard I am 
talking about now is the safe harbor standard. I think that is 
the place that most lenders and originators will gravitate to 
because of the absence of liability.
    There are a number of places in those standards that are 
stricter than what we put in place in the Federal banking 
agencies' standards. For example, the 50 percent debt to income 
ratio, the prohibition on negative amortization.
    The Chairman. We do not want to leave it totally 
    Mr. Dugan. I understand that. You have to have sharp lines 
in order to have a safe harbor. We get that. We would be happy 
to provide more specific comments for the record.
    The Chairman. I appreciate that. Mr. Reich?
    Mr. Reich. I, too, intend to provide a more detailed 
written response.
    The Chairman. I appreciate that.
    Mr. Reich. By the end of this week. I share some of the 
same concerns that Comptroller Dugan just mentioned with the 
    The Chairman. Let me ask you this. We are at an 
experimental stage here. Mr. Dugan reminded me, there are two 
aspects really of this standard. One is the standard that is 
applied in the States to the extent that the States are--by the 
way, I have to say with regard to national uniformity, I assume 
nobody thinks--there will still be State banks and the FDIC 
will be regulating them, but we are not taking away the 
autonomy the States now have. I assume no one is asking us to 
do that.
    It seems to me the standard of care has two aspects. One is 
what the States' jurisdiction allows them to impose and then 
there is also the extent to which that governs the safe harbor.
    Is that intellectually a separable set of concepts? Is it 
conceivable that you would have one rule for the safe harbor 
and then the States would be able from the standpoint of 
securitization--I understand the argument for uniformity in 
securitization rules nationally.
    If you were to deal with that as a safe harbor, what is 
then the argument for diminishing State autonomy in their 
general administrative capacity other than the safe harbor? Is 
that something that makes any logical sense to think about?
    Mr. Dugan?
    Mr. Dugan. I am not sure I am following the question. The 
question is if you had an uniform standard for just the S&E 
liability provision but did not have it--
    The Chairman. But the States could then, if they were 
administering this rule with the people they regulated, whether 
mortgage brokers or State banks, they could impose greater 
standards if they wanted to.
    Mr. Dugan. First of all, a huge part of the market gets 
securitized. It is not now but before August, it was about 75 
percent of the market that was not Fannie Mae and Freddie Mac 
that got securitized, something in those numbers. You are 
talking about a huge part of it.
    Secondly, I think people would gravitate to the safe 
harbors just because they would want to avoid the Federal 
liability, and then if the States wanted to go beyond that, I 
do think it would still create issues about uncertainty for 
people who lend across State lines and do it in different 
States. You are going to have those issues.
    The Chairman. If you want to go across State lines. They 
have it now, do they not? People want to lend across State 
lines, are there not those differences?
    Mr. Dugan. For some lenders.
    The Chairman. Mr. Reich?
    Mr. Reich. I agree with Comptroller Dugan. I do have the 
fear that the safe harbor will result in drying up of 
    The Chairman. That is not the question. I was talking about 
whether you could separate out the standard, whether the 
preemption--whether you need one standard for safe harbor but 
could give the States some autonomy elsewhere.
    Mr. Reich. I said at the outset that I would hope it would 
be possible to have a bar high enough.
    The Chairman. Let me say this. I appreciate your answers. I 
think we ought to be clear. The argument for extinguishing the 
States' ability to go above the floor is not rooted in the safe 
harbor concern but it is a general concern that says you do not 
like the States going off on their own.
    I think you could separate out the safe harbor aspect from 
the broader aspect. I think that is this broader philosophical 
question we are dealing with.
    It would seem to me if we were to do that, we would be not 
preserving the status quo here but diminishing some of the 
autonomy the States now have. I would be very reluctant to see 
that happen.
    We are going to break now; we have some votes. We will come 
back. I apologize again, but that is the world we live in.
    The Chairman. I believe I was the last questioner, so I 
will now call on the gentlewoman from West Virginia.
    Ms. Capito. Thank you, Mr. Chairman.
    I have a question on the lowering of the HOEPA triggers 
concerning whether that would exclude, if you all feel that 
that would exclude some credit-worthy subprime borrowers who 
would otherwise be able to receive loans and how can we guard 
against this unwanted consequence if in fact you believe that 
could be a consequence? Do you have an opinion on that?
    Mr. Dugan. To be honest, we haven't really done any 
empirical look at what loans would then fall under the lower 
triggers. I do think it is fair to say that in the past, HOEPA 
loans were viewed as so extreme that few institutions provided 
HOEPA loans once the definitions--because it was such a 
rigorous and what's the word, a scarlet letter of sorts that 
people wouldn't make the loans. So when you look at our home 
loan registry, for example, you don't find many HOEPA loans 
    That is not to say that there aren't rate-spread loans and 
costly loans and 2/28s and the like. By lowering the triggers, 
you are going to have more loans fall into that category. If 
that is the same effect, it will I think have a chilling effect 
on those loans that fall into that category. How deep that goes 
into the market, we just haven't yet to do the analysis on it.
    Ms. Capito. Another question I have, I mean in front of me 
right now we have the FDIC, the Comptroller of the Currency, 
the Office of Thrift Supervision, the National Credit Union 
Administration, the Federal Reserve, and then our State, 
Massachusetts State Division. Mostly my question is directed to 
the Federal regulators.
    It seems to me that--would this bill be like defusing 
regulation between all of your separate entities? And then what 
kind of mechanisms do you have in place to cross-reference with 
one another as to what's going on?
    It seems to me that if I was a citizen watching this 
hearing, and I hope we have a few watching, I would think to 
myself, ``We're going to have too many hands in the pie here. 
Who is really going to be overseeing this as a Federal 
regulator? And what kind of influence is that going to have? 
Are they going to be talking to one another?''
    Mr. Reich. Well, we have that environment today. Regulation 
is highly defused and the Federal regulators work together 
through the FIAC to establish conformity and consistency and 
policy and policy administration. So this would be another 
layer of regulation on top of that which we deal with every 
    Ms. Capito. So you don't anticipate that this would be a 
problem? It is something you already have the mechanisms in 
place for?
    Mr. Dugan. I know it seems like there are a lot of 
regulators at the table, but that is in fact, as Director Reich 
was suggesting, the normal way for all our regulatory schemes, 
they often involve joint work, rulemaking that's separately. 
And then we separately, once the rules come out, apply it to 
the institutions within our respective jurisdictions. I don't 
think this is much different in that respect.
    Ms. Capito. All right. I have one final question on the--we 
have heard a lot about the floor and the ceiling and the 
modeling after the North Carolina Banking Administration in 
terms of the new legislation. I read some data that said that 
when these new regulations were put into North Carolina it 
resulted in fewer loans going to those low income and minority 
homeowners. I think it was maybe 3 or 4 percent, but it was a 
significant percent. Do you envision that this type of 
regulation could actually result in the folks we really want to 
help the most or we want to protect the most not being able to 
have a share of this market?
    Mr. Gruenberg. Congresswoman, candidly, I don't think that 
would be the case. I think the issue here that's well 
understood is the importance of extending credit to people who 
can afford to repay. That really is the key issue. And what you 
want is a set of standards to assure that outcome.
    And the difficulty really occurs when you extend credit to 
someone and that person cannot pay the loan. So, you know, the 
experience here is a lot of people got loans who in effect 
could not afford to pay them. And that is really the issue we 
are dealing with today.
    And at the end of the day you are not doing anyone a 
favor--in fact, you create a significant problem by doing that. 
So I think what you really want to shoot for is a set of 
standards that will give you some assurance that people are 
getting themselves into situations that they can afford and can 
sustain in the long term.
    Ms. Capito. Thank you. That's a good answer.
    I yield back.
    The Chairman. Thank you. The gentlewoman from California.
    Ms. Waters. Thank you very much. Mr. Chairman, I have a few 
questions that I would like to ask of some of the presenters 
who are here today, particularly the regulators. First, do you 
agree with that portion of the bill that bans yield-spread 
premiums? To our regulators, first, Mr. Gruenberg, FDIC.
    Mr. Gruenberg. Yes, Congresswoman, we do agree that is a 
good provision.
    Ms. Waters. Mr. Dugan?
    Mr. Dugan. As I said in my testimony, it is quite a broad 
provision because it is not directed specifically at yield-
spread premiums, it is at anything that involves any kind of 
differential in compensation and we do point out that that 
could apply to some things that are not based on profit 
margins, but have some beneficial effects.
    Ms. Waters. How would you change it?
    Mr. Dugan. Well, I think that it could be narrowed in some 
ways. That we would like to give some thought to and provide 
some further comments.
    Ms. Waters. But you don't have any problems with the 
concept of reducing the ability for originators to earn money 
based on steering people to higher loans than they can afford?
    Mr. Dugan. I think the biggest abuses of that authority has 
been in the subprime market. This is not limited to subprime. 
It applies across the board.
    Ms. Waters. So you think it should be limited to subprime?
    Mr. Dugan. Maybe. I think that is worth considering.
    Ms. Waters. Okay. Office of Thrift Supervision, Mr. John 
    Mr. Reich. I would not disagree with limiting it to 
subprime. I indicated in my testimony that in order to make 
certain that those who have an interest in the origination 
process have skin in the game so to speak. That any income that 
they receive from a mortgage origination ought to be spread out 
over a longer period of time and suggested using life insurance 
premium income to a life insurance salesman as a possible 
    Ms. Waters. Mr. Antonakes?
    Mr. Antonakes. I think really one of the biggest problems 
that we incurred is the number of people who would have 
qualified for prime lending but were steered towards subprime 
products. So I think anything that can be done to moderate 
compensation so that incentives aren't provided to push people 
into weaker products should be considered.
    Ms. Waters. Okay. Quickly. Do all of you agree that we 
should take a real hard look at no-doc loans? Or should they 
just be outlawed altogether?
    Mr. Dugan. What we did at the Federal Banking Agency 
Standard to say the presumption is that you shouldn't have 
them, but there are some cases in which it may be--
    Ms. Waters. Basically you shouldn't have them.
    Mr. Gruenberg?
    Mr. Gruenberg. I would generally agree with that, 
    Ms. Waters. Office of Thrift Supervision, Mr. Reich?
    Mr. Reich. There are institutions, Congresswoman, that have 
been making these types of loans for 20 years or longer and 
have a successful record.
    Ms. Waters. So you think they should continue no-doc loans?
    Mr. Reich. I personally do not favor either, no-doc loans 
or stated income loans.
    Ms. Waters. Okay. Board of Governors, Federal Reserve, Mr. 
    Mr. Kroszner. As you know, we are looking at exactly this 
issue with respect to our HOEPA regulations and we are taking a 
very hard look at where, if at all, they would be appropriate.
    Ms. Waters. All right. Let's go to the elimination of 
prepayment penalties. Mr. Gruenberg, do you think we should 
eliminate all prepayment penalties?
    Mr. Gruenberg. Certainly in the subprime--
    Ms. Waters. I cannot hear you.
    Mr. Gruenberg. Certainly for subprime mortgages, which is 
where they predominate, there seems to be no reason to have 
prepayment penalties.
    Ms. Waters. Mr. Dugan?
    Mr. Dugan. As we did in our guidance, I think the focus 
should be you should never have prepayment penalties that 
extend beyond the reset date of an unadjustible rate loan.
    Ms. Waters. Mr. Reich?
    The Chairman. Could I clarify that? Would the gentlewoman 
    Beyond, you mean before the reset?
    Mr. Dugan. Before. Excuse me.
    The Chairman. Before the reset.
    Mr. Dugan. The penalty shouldn't go beyond, right.
    The Chairman. You should not have a prepenalty that would 
lock you into it beyond reset. Thank you.
    Mr. Reich. I agree with that. I also believe that 
prepayment penalties result in a lower interest rate for the 
    Ms. Waters. Ms. Johnson?
    Ms. Johnson. Federal statute prevents credit unions from 
charging prepayment penalties already.
    Ms. Waters. Do you think others should have prepayment 
    Ms. Johnson. Well, I'd leave that judgement to the members, 
but it works for credit unions.
    Ms. Waters. Mr. Antonakes?
    Mr. Antonakes. I think they should be very limited if not 
    Ms. Waters. Do you agree that the standards that are being 
set with this bill would take a look at the teaser rates and 
whether or not you are judging to pay based on the terms that 
the teaser rates or the ability to pay beyond the teaser rates 
when the new rates are triggered?
    Mr. Gruenberg. I believe the basic purpose of the bill is 
to require underwriting to the fully indexed rate and to the 
borrower's ability to pay.
    Ms. Waters. Does everyone agree with that?
    Mr. Dugan. Yes.
    Mr. Reich. Yes.
    Ms. Waters. Okay. I think my time is up. Thank you very 
much, Mr. Chairman.
    The Chairman. You could end on a roll.
    The gentleman from New York, the chairwoman of the 
Financial Institutions Subcommittee.
    Mrs. Maloney. Thank you, Mr. Chairman.
    I would like to ask the Vice Chairman of the FDIC, Mr. 
Gruenberg, to follow up on statement that Sheila Bair made 
recently when she advocated for servicers to restructure 
adjustable rate mortgages, the so-called 2/28s and 3/27s, into 
a fixed rate mortgage at the initial rate saying that only 
about 1 percent of these mortgages have been modified. And how 
would this work given the complicated process of 
    Mr. Gruenberg. I'll take a crack at that although I think 
it would be best obviously to ask Chairman Bair. I don't think 
there is any more urgent issue confronting us in this subprime 
mortgage area than dealing with the subprime mortgages that are 
in the process of resetting and that are going to reset the 
rest of this year and next year.
    You have hundreds of thousands of people who really are 
going to be placed at risk of losing their homes. And this 
whole issue is complicated by the fact that, as you know, most 
of these subprime mortgages are tied up in securitizations 
which significantly complicate the ability to restructure them 
so that the borrower can afford to pay them on a long term 
    I think what Chairman Bair has proposed is a workable way 
for servicers, since most of these mortgages are in 
securitizations, it is the servicer that is really trying to 
work out these mortgages rather than the lender or the 
    What has been proposed is that the servicers simply modify 
these loans to fix their rate for the term of the mortgage at 
the starter rate. The point being that for subprime borrowers 
who have been making their payments at the starter rate, the 
fact is that in many cases, the starter rate is actually higher 
than the prime rate. And for these borrowers to allow them to 
continue to make the payments, to stay in their homes and for 
the investors to avoid the cost of foreclosure is really a far 
more preferable outcome and a very workable one. That is really 
the heart of what has been proposed.
    Mrs. Maloney. She has proposed it, but people are not 
following through. Only 1 percent have responded. This Congress 
has modernized FHA. It has had FASB change modification and 
restructuring rules for the servicers and it is not happening.
    She likewise called for mass restructuring and what did she 
mean there? And how can we get this 1 percent up? Because that 
is really the crux of it. Everybody says they want to help, but 
it is just not happening.
    Mr. Gruenberg. I think that is the critical issue. I think 
this proposal is a workable way for servicers to address this 
issue. There are some servicers that I think are moving forward 
with constructive programs. I think the challenge here is 
really to get the servicers as a group, to adopt a set of 
common approaches that will be effective in modifying these 
mortgages so that the homeowners can stay in them for the long 
    Mrs. Maloney. And following up on that, what do you 
recommend current standards include to prevent this sort of 
widespread problem in the future?
    Mr. Gruenberg. I think the standards going forward--as you 
know, the regulators have issued a set of guidelines relating 
to subprime mortgages, fundamentally requiring underwriting to 
the fully indexed rate and other protections.
    Mrs. Maloney. Do you wish to add anything to that 
    Mr. Gruenberg. I think there are a series of 
recommendations and we have additional protections and most of 
them are embraced in the legislation that has been introduced. 
I think that would be a reasonable way to proceed going 
    Mrs. Maloney. John Dugan. Lehman Brothers and others have 
predicted that the next few years, in the next few years 
literally millions of families will lose their homes. Some 
predict that more people will lose their home than they did 
during the Great Depression.
    What role, if any, do you think the OCC can play to keep as 
many homeowners as possible in their homes?
    Mr. Dugan. Well, first of all, we have already issued 
guidance to our lenders who have made these loans, who are the 
servicers of the loans to work with their borrowers to try to 
find ways to avoid foreclosure because the fact of the matter 
is when you foreclose on a home, just purely from an economic 
point of view on the point of the investor, you lose a 
tremendous amount of value.
    Mrs. Maloney. We are all aware of that, but the action is 
just recommending to borrowers--
    Mr. Dugan. And the alternative of restructuring in ways so 
that we may have to take some loss but not as much loss as you 
would take if you would foreclose should be in the economic 
interest of people to do that.
    And I think encouraging servicers who service those loans 
or lenders who own those loans to be creative, to go out and to 
do the kinds of things you were just referring to earlier, I 
think those are constructive ways to proceed.
    Mrs. Maloney. Thank you, my time is up.
    The Chairman. The gentleman from New York. The gentleman 
from North Carolina began this round of questioning. It was so 
long ago people may have forgotten. It is the gentleman from 
New York's turn now.
    Mr. Meeks. Thank you, Mr. Chairman.
    Let me ask, I guess Mr. Kroszner, or anyone else on the 
panel. In my opening statement I talked about this practice 
known as equity stripping where individuals promised to help 
homeowners avoid foreclosure by buying their home and selling 
it back to them.
    Instead, they strip out all the equity making it nearly 
impossible for the former owners to buy their home back. My 
question to you is are you aware of this practice and from what 
you have seen thus far of H.R. 3915, do you think that it can 
address it?
    Mr. Dugan. If I could begin? We are aware of it. We have 
published guidelines that address it specifically and direct 
our banks not to engage in that activity.
    Mr. Meeks. Let me ask this also. If H.R.--
    Mr. Kroszner. I agree.
    Mr. Meeks. I saw everybody shaking their heads saying they 
agree. Any disagrees?
    If H.R. 3915 was a ceiling, if it was a ceiling and I guess 
I will ask Mr. Dugan this, first, would you have any objection 
to local enforcement by State AGs or the banking regulators?
    Mr. Dugan. Well, I think this is a very good question, 
because as I mentioned in my testimony, you have a situation 
where while you have a nominal consumer litigation, civil 
litigation that applies to everybody, in the case of banks, you 
also have the agencies at this table there that would have the 
ability to impose quite stiff penalties and fines in how they 
do what they are going to do. But for the unregulated sector--
not regulated, Non-federally regulated sector that are not 
banks at the State level, there is a much lower level of 
enforcement that would be provided to them. And the bill does 
not really speak to that.
    What you are talking about would be a suggestion that would 
add additional enforcement authority with respect to that. And 
that would partly level the playing field and provide a more 
even kind of enforcement regime.
    Mr. Meeks. Mr. Steven Antonakes, what do you say?
    Mr. Antonakes. Well, I would beg to differ with my 
colleague with regard to the lack of enforcement actions. With 
3,600 actions taken last year by the States, alone, and 
probably more than that taken this year, you know, is there 
room for improvement and raising the bar in some States? 
Absolutely. We are working hard to do that.
    But, again, a ceiling I think is difficult because then you 
preempt States from the ability to react to local issues and go 
beyond that ceiling and the ceiling becomes static and, you 
know, who knows what the mortgage market is going to look like 
5 or 10 years down the road. So I think a floor is better. I 
think State and local enforcement AGs is very important.
    You know, there have been some landmark cases, very large 
settlements that came from the States. I do not need to name 
them. They are all well known. And I think that is something 
that we will continue to work on.
    Mr. Meeks. Mr. Gruenberg, let me ask you a question on a 
slightly different topic, something I read this morning. I 
think Merrill Lynch reported a write-down of at least $5 
billion. Some outside analysts predicted it would be $7 billion 
for the third quarter of this year due to losses in the 
subprime investments.
    I just want to make sure, if I am understanding it 
correctly, Merrill is an investment bank that does sweeps of 
customer funds into depository accounts which affects the ratio 
of insured deposits. I think that is correct.
    So my question is, will these substantial losses by Merrill 
have any effect on the Insurance Fund?
    Mr. Gruenberg. I suppose, Congressman, you directed that 
question to me. You know, I think we would have to take a look 
at that. I would want to be cautious about responding to it 
until we actually looked at the facts of which you were 
reporting on in regard to the story this morning.
    Mr. Meeks. Well, if you can, I would love you to get back 
to me.
    Mr. Gruenberg. We will do that very promptly.
    Mr. Meeks. Thank you. I yield back.
    The Chairman. The gentlewoman from New York is recognized.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman, and I 
appreciate the panel having patience with us and being here for 
such a long time. I want to go back to something that Mrs. 
Waters was talking about in the beginning, and I know we've 
already heard that some of you haven't had a chance to read the 
bill because it came out actually late Monday afternoon. So if 
you can't answer it, I don't mind, you know, if we get an 
answer back in written form, you know, down the road.
    On Title I on page 12, lines 10 through 15, it talks about 
prohibition of steering incentives. And I guess my question 
would be, would any of you interpret the bill, specifically 
Title I, as prohibiting indirect compensation for originators? 
And, again, I don't mind waiting and getting an answer back, 
because this is the answer that we want from you as we go 
through the bill.
    The second question, did any of you have an inkling that 
this was coming down the road? Because I'll be very honest with 
you, I mean, we on this committee have been talking about 
predatory lending, well, for the last couple of years. There 
has been legislation there. Some of the States--New York, 
Massachusetts--have been looking at how we could stop the 
predatory lending, especially in the minority areas and 
especially towards our senior citizens. I mean, you're 
watching, overwatching, supposedly, that. That's why we have 
this legislation in front of us.
    So nobody had an inkling? And I think this is just the tip 
of the iceberg. I do believe we're in for a rough ride down the 
road. I'm even wondering if this legislation is coming a 
liability too late. With that, I'll ask--yes, ma'am?
    Ms. Johnson. We actually at NCUA issued a supervisory 
letter to our examiners a little over 2 years ago, back in 
2005, specifically addressing the exotic loans and subprime, 
the risk in some of the subprime area. We sent the same 
information then to our credit unions. So they knew what we 
were looking for and what we were, you know, what we would be 
examining. And so we feel that we did have a little bit of an 
early action in this area, and we think that's part of the 
reason that our numbers aren't quite so bad.
    Mrs. McCarthy of New York. I actually had heard that the 
credit unions were not having any problems with these issues, 
but, again, I come back, and even when you heard about it 2 
years ago, and, again, you're all regulators, why didn't you 
come forward to at least this committee? Because we've been 
talking about it. And why didn't we hear from those--
    Mr. Dugan. Well, speaking for the OCC and for national 
banks, we did have some very significant problems in the credit 
card area with subprime lending, abusive subprime lending that 
we did take some quite aggressive action about it and infused 
the agency with that kind of concern.
    I think it's fair to say that a relatively small percentage 
of subprime mortgage lending, and particularly the most 
aggressive of it, was done in national banks or their operating 
subsidiaries. As a result, we did not have as big a percentage 
of those markets. We had about 10 percent of originations last 
year. And of those, the rates of default have been well below 
the national average. So I think we do look hard at it. In 
addition, on predatory lending per se, we have always made it 
clear you can't do that in national banks. We've been quite 
rigorous about that standard.
    Having said all of that, I don't think anybody anticipated 
that the problem could spread like it has from the subprime 
markets to the prime markets to the credit markets more 
generally. I think that was truly something that was not 
    Mrs. McCarthy of New York. Well, one of the things that 
concerned me, and I know Mrs. Biggert had started on it with 
the prime market, the majority of people, especially young 
borrowers, have been taking money in home equity loans 
basically to improve their house and taking a lot of money out, 
and they're going to get hit probably in the next couple of 
months with some--so, even though we're talking about subprime, 
there are going to be a lot of prime owners who are going to be 
hit with this. And I'm just wondering if we shouldn't be 
looking at that a little more closely, too.
    Mr. Dugan. Well, of course, we do examine for credit issues 
and compliance issues in all of our retail lending, including 
home equity lending. It's something we pay very careful 
attention to. As you may have seen, a number of the larger 
institutions have begun setting aside more reserves for losses 
with respect to home equity lending, which we believe is 
prudent, and that is an area which we will be continuing to 
focus on.
    Mrs. McCarthy of New York. Just one final question. 
Yesterday we met, the New York delegation met with the 
Commissioner of Banks for New York State, and they're doing a 
campaign, an advertising campaign, and they've been doing it 
for the last 6 weeks or so, I guess. And out of all the 
information that has been going out there, all the information 
our congressional office has been putting out there for the 
State, or the State of New York, only one person--only one 
person--has actually applied to have it refinanced in one way 
or the other.
    How do you see it out in the other parts of the country 
about people responding to whatever the banks and other 
entities are getting that information out there to the 
    Mr. Dugan. Well, I think it is a kind of very well-
documented problem that on the one hand, studies show 
repeatedly that the sooner a borrower experiences difficulty, 
the sooner they contact their lender--
    Mrs. McCarthy of New York. Right.
    Mr. Dugan. --the much more likely that we'll be able to 
work it out. I think, unfortunately, there is a concern that 
sometimes a borrower thinks of the lender in that circumstance 
as not his or her friend, and so there is an issue about their 
willingness to do it. And try as lenders might, they haven't 
been getting the response rates they need.
    That is, however, why NeighborWorks America, which a number 
of us sit on the board of, have embarked on a very strong 
national campaign with 800 numbers and the like, and have been 
using community groups working with lenders to try to get that 
trust in neighborhoods where there might be people who would be 
suspicious of lenders to increase those rates.
    But it is a problem, and it needs more and constant 
attention to make sure that that communication happens sooner 
rather than later.
    The Chairman. I want to make an announcement, and it may be 
relevant. The Secretary of the Treasury and the Secretary of 
HUD did announce a program that the Administration is doing, I 
think called New Hope, to try and make more of this happen. And 
we will have a hearing a week from Friday in which we will ask 
them to report on their progress. Sometimes we find that 
calling a hearing is more important than having one.
    But we will on a week from Friday be expecting to hear from 
representatives of the Secretaries of Treasury and HUD and 
others in the Administration on how they have succeeded in 
doing exactly what you're talking about. Because a lot of the 
pieces are in place, we are told, and they haven't been 
    And one of the things that we hope to do in this bill, and 
it may not be in here as explicitly as we'd like, is part of 
the problem is at least once a year, it seems to me, people who 
have mortgages ought to be notified who it is they are to call 
if they have a problem. Because with the secondary market and 
the servicers, etc., some people have a hard time figuring out 
who it is they're supposed to call. I think we would all agree 
it would be a good thing in the bill if we were to put some 
kind of, maybe at least an annual notice requirement.
    But we are going to have a hearing a week from Friday in 
which we expect to get reports from the Administration on the 
progress of making that work.
    The gentleman from Louisiana.
    Mr. Baker. Thank you, Mr. Chairman. Mr. Dugan, focusing on 
the operational aspects of the bill if it were to become 
operative, under debt-to-income analysis, is there an 
established regulatory definition of debt for the purposes of 
    Mr. Dugan. There is not an established one. I think the 
bill would have to call for that.
    Mr. Baker. Is there a variance from mortgage originator to 
mortgage originator in how they look at debts in qualifying an 
    Mr. Dugan. Yes.
    Mr. Baker. So that in one institution, if the mortgage 
obligation represented 49 percent of monthly income, that would 
be an acceptable qualified borrower. On the other hand, if the 
same borrower went to another institution and had credit card 
debt, student loans, other monthly obligations of a stipulated 
regular amount, he would therefore not qualify at the second 
    Mr. Dugan. Yes. You definitely can have those variations 
    Mr. Baker. Is there a regulatory definition of what income 
is constituted? For example, are trust fund payments 
necessarily part of the calculus for income?
    Mr. Dugan. We have not established any specified debt-to-
income ratio that's mandatory to begin with, so we haven't 
established it for the components either.
    Mr. Baker. Is it customary know some markets for people who 
are not low income, not average wage earners, but upper income 
individuals who have no record of credit default or other 
impairments to their credit record to have a portion of their 
monthly income in excess of 50 or 60 percent because of the 
high cost real estate markets in which they reside? As, for 
example, in New York, where I'm told about 29 percent of upper 
income wage earners have mortgages which are in excess of 50 
percent of their monthly income?
    Mr. Dugan. Yes, that is correct.
    Mr. Baker. In your view, then, would that market effect be 
to exacerbate the problem that many members of this committee 
have expressed, which you may not be aware of, about the 
difficulty in some individuals getting access to mortgages 
enabling them to acquire a home in high cost real estate 
markets, wouldn't this further aggravate that ability to 
acquire homes if the 50 percent rule becomes operative?
    Mr. Dugan. That is a potential concern.
    Mr. Baker. Do you have a view of how the secondary market 
works today with regard to the HOEPA market loans? Is there a 
broad and deep liquid HOEPA secondary market?
    Mr. Dugan. No there is not, as I mentioned earlier.
    Mr. Baker. And to what do you attribute that?
    Mr. Dugan. Well, I think that because of the--it has become 
something of a scarlet letter, the designation of being a HOEPA 
    Mr. Baker. So that would be related to reputational risk?
    Mr. Dugan. In part.
    Mr. Baker. In that case, were we to be concerned and act 
appropriately to weed out those who took advantage of 
particularly low-income home buyers by licensure of mortgage 
originators, which I believe the bill does provide, by 
standards of suitability which I believe the bill does provide, 
wouldn't those steps necessarily be a better tool, given the 
strength of the regulatory backstop, of course, to enforce the 
matching of customer with financial product than arbitrary 
limits which are not defined relating to debt and income?
    Mr. Dugan. Well, those standards that you've just described 
are not objective standards.
    Mr. Baker. Understood.
    Mr. Dugan. And we have some concern from that standpoint 
about, if you're talking about something that, you know, must 
be in the interest of the consumer--
    Mr. Baker. Well, let me rephrase it. Isn't there a better 
way to describe suitability than necessarily just debt to 
    Mr. Dugan. Well, it sort of--I guess what we had thought on 
the duty, what we did--the federal banking agencies, when we 
did our guidance, questions were raised about suitability, and 
I think based on the comments, we decided the better way to 
address it would be through an ability to repay standard as the 
real focus and the objective focus about underwriting at the 
fully indexed rate. And that would get at the question.
    Mr. Baker. Good. Because I understood it in an earlier 
response, you don't have a definition of debt today. And 
there's no regulatory definition for the purposes of 
    Mr. Dugan. In the guidance that we did on subprime lending, 
we did define.
    Mr. Baker. And how was that defined? In simple terms.
    Mr. Dugan. I'll have to get back to you on the exact 
contours of it, but we did take into account the--in terms of 
what the--I do remember that it included the principal and 
interest payments on the loan as well as taxes and insurance, 
the so-called PITY calculation, was the debt that we were 
talking about.
    Mr. Baker. Well, for the purposes of the committee's work--
since my time has expired, Mr. Chairman, I'll wrap up--I would 
very much appreciate a description of the technicals that go 
into the determination of a person's ability to qualify for a 
mortgage product and what, if anything, relates to the 
suitability of that product to that particular applicant's 
financial circumstance. In other words, help. I don't think the 
consequences of the bill as proposed, although not intended, 
are going to be positive, I think it will restrict the flow of 
capital to low-income individuals, but also to upper income who 
happen to be aberrantly high in mortgage payments in relation 
to income, and there has to be a way to fix this. And so I 
would urge your assistance in seeking that remedy.
    Mr. Dugan. Okay. We would be happy to follow up. Although 
what I would say is that we don't focus so much on suitability 
as ability to repay. That's the standard.
    Mr. Baker. I understand. But that's our problem.
    The Chairman. The gentleman from North Carolina, a co-
author of the bill.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. Mr. 
Chairman, I've served in Congress for almost 5 years now and 
served on this committee for almost 5 years. I've worked on 
this issue for almost 5 years. It is stunning to hear the same 
rote repetition of talking points that we've been hearing for 5 
years. The very same arguments, with little more support than 
they have had all along, and based upon the prepared testimony 
submitted in advance, very little different from industry as 
    According to the New York Times, by the end of President 
Bush's Administration, 700,000 fewer American families will own 
their homes than did at the beginning of his Administration. 
According to Lehman Brothers, 30 percent of the subprime loans 
entered last year will end in foreclosure. Not dip into 
foreclosure, but end in foreclosure.
    The Center for Responsible Lending estimates that 2.2 
million American families will lose their homes to foreclosure 
in the next year or two. We already have the highest 
foreclosure rate that we've had in 25 years, and we will soon 
have the highest foreclosure rate since the Depression.
    It seems like there ought to be some acknowledgement that 
we have a problem. I didn't really expect that there would be 
rending of garments and gnashing of teeth at the hearing today. 
I really didn't think that industry would come forward and 
acknowledge their manifold sins and wickedness, but I expected 
some acknowledgement of a problem and some acknowledgement of 
responsibility for the problem, some acknowledge that it was 
lending practices that put us where we are now, with millions 
of Americans falling out of the middle class into poverty 
because they've lost their homes to foreclosure.
    A couple of the Republicans, including Mrs. Capito, have 
talked about North Carolina's law and said that we don't want 
to repeat the experience of North Carolina. That there had been 
fewer loans in the subprime market after North Carolina passed 
its law. The Commissioner of North Carolina banks, Joe Smith, 
has sat there at that table repeatedly and testified that since 
North Carolina adopted its law in 1999, there has been no 
diminution in the availability of credit in the subprime 
market. None. He can't find anybody who should be able to get a 
loan who can't get a loan.
    The business school at the University of North Carolina has 
done a study and found no diminution of credit in the subprime 
market. An industry publication, Inside B&C Lending, looked at 
lending in North Carolina, subprime lending in North Carolina, 
and subprime lending in other States, and found no difference 
in the availability of credit or the cost of credit. Are you 
aware of any study that finds that credit is less available in 
the subprime market in North Carolina because of the consumer 
protections of North Carolina? Any of you?
    [No response]
    Mr. Miller of North Carolina. Okay. Now there may be fewer 
loans. That's not an unintended consequence. That's an intended 
consequence. One of the characteristics of predatory lending is 
to trap people in a cycle of borrowing so they have to borrow 
again and again, and they can't pay their loan. They have to 
borrow again. They have to pay a prepayment penalty to get out 
of the last one. They have to pay costs and fees to get into 
the new one, and they systematically are stripped of the equity 
they had in their loan. If there are fewer loans being made in 
North Carolina, that's what we intended. That means the law is 
    Mr. Dugan, I was surprised by your concern that some of 
what is in this law is a subjective standard. The law is filled 
with subjective standards, as you must know. There was a great 
old English common law case that fraud can have no all-
embracing definition lest--that the fraud is better left 
undefined lest the craft of men should find a way of committing 
fraud that might escape a rule of definition. That pretty well 
tells you the reason for having some subjective standards, so 
that there's not a way to get around it.
    And now we've heard from industry they want bright line, 
clear rules, but they want to maintain market innovation. 
That's what worries me. They'll innovate their way around 
anything that we do. Mr. Dugan, are you not familiar with the 
idea of the reasonable man rule in law or proximate cause in 
securities laws, suitability standard, know your customer 
requirement, churning, all of those subjective standards? Has 
the securities law not worked because it has subjective 
    Mr. Dugan. I never said that I wasn't aware of subjective 
standards in the law or that all subjective standards were bad. 
What I said was that there has been a huge problem in the 
subprime market. The bill imposes a duty of care that applies 
to all mortgage providers, not just subprime mortgage 
providers, with a subjective standard. And my point was only 
that when you have a subject standard and the penalty is 
litigation, you're going to get a lot more of it.
    Mr. Miller of North Carolina. Well, if it is true that they 
want to make sure that we protect market innovation and they 
continue to innovate, how can we come up with an all 
encompassing objective standard that they can't innovate 
    Mr. Dugan. Well, as I said before, I think to me, the most 
important standard that's being put in the bill that's being 
discussed is the ability to repay, to make sure that these 
loans are underwritten at the ability to repay based on 
verified income, which as we talked about earlier, something 
that we support in our own guidance.
    There are a number of specific standards that are in the 
bill that do those things. And what we were just talking about 
is a subjective standard on top of that that extends well 
beyond subprime lending. And that, I think the former way is in 
my view a better way to get at those issues.
    The Chairman. The gentleman from Georgia.
    Mr. Price. Thank you, Mr. Chairman. I want to thank every 
member of the panel for their perseverance and for their 
patience in both our schedule, and the level of interest in 
this issue is significant, huge issue for so many folks across 
this Nation.
    Coming from Georgia, I would--I don't know exactly what 
happened in North Carolina, but I do know that in Georgia, 
intervention by governmental entities can significantly alter 
the availability of capital and dry up capital for folks who 
are interested in purchasing homes. We saw that 4 or 5 years 
ago with changing assignee liability. And literally overnight, 
the people who wanted to be able to purchase homes were unable 
to find capital to purchase homes.
    So we can go too far. I haven't heard, I don't think, 
enough of that sentiment from folks who just 6 months ago or so 
we heard essentially all that sentiment. Mr. Antonakes, you 
said in our March 27th hearing, ``at this time we don't see the 
need to ask Congress for additional authority or additional 
legislation, regulation appropriately deal with the issues.``
    The Fed reiterated that. The OCC said we agree. We believe 
the nontraditional guidance the agency has issued in October as 
well as the subprime guidance that we now have out for comment 
uniformly implemented by all regulators along with the natural 
operation of the market is all we need right now. We don't 
think we need anything else.
    The Thrift said I've expressed some support to take our 
guidance to subprime lending and make it a standard would apply 
to all institutions.
    So I guess I'm a little surprised by the testimony that I 
heard this morning, and I would ask what happened? How--what's 
the current lovefest now with the Federal Government getting 
involved in the federalization of home mortgages to a greater 
degree? Please?
    Mr. Dugan. Well, I think what at least we at the OCC have 
always testified is that we did and continue to think that the 
guidance that we issued is adequate for the banks that we 
supervise. But what we have always been concerned about is that 
same standard would be applied across the board to the less, 
what we believe is the less-regulated entities at the State 
level. And in my view, and as I said before, that's why you 
need some kind of uniform national standard.
    Now that can be accomplished by States adopting the Federal 
guidance, and many States have been doing that. It could also 
get there through Federal Reserve rulemaking to a large extent 
under their HOEPA authority, or you could get there through 
Federal legislation. Whichever way you choose, we do believe 
that there ought to be an even level playing field, a national 
    Mr. Price. And I appreciate that, Mr. Dugan. In your 
testimony, you said--because I was struck by it, ``some 
creditworthy borrowers would be denied loans.'' I think that's 
a message that hasn't gotten out. Remember, this bill that 
we're looking at doesn't apply to the folks who don't have any 
problem getting credit. It doesn't apply to the folks whose 
income is such that they don't get to that level where they 
have to come under cause for concern by our friends who want 
the government to be able to make their decisions instead of 
    So it applies to those folks who are at the margins and are 
trying their best to get into a home. Yet what you have 
testified to, which I strongly believe would be the case, is 
that some creditworthy borrowers would be likely to be denied 
loans. So where is it that we go too far in making it so that 
those folks who are trying to live the American Dream, who are 
trying their best to work hard, to provide for their families, 
who have the dream of getting into their own home, but we at 
the Federal level say, oh, no, you really don't know. We can 
make a better decision for you. Just trust us. Trust us. We'll 
make a better decision. Where do we step over that line?
    Mr. Dugan. Well, as I testified, I think there are some 
places in the bill that go beyond what the Federal agency 
standards are. But I will say that any time we draw standards 
that are intent to reduce the supply of credit to, in cases 
where there have been abuses or problems, you run the risk of 
also reducing it to some creditors that would be eligible for 
it. And when we enacted our guidance, we believed that the 
situation had gotten problematic enough that it was worth 
taking that risk with respect to certain categories of 
practices. And I think that's the same animus that's driving 
the legislation.
    There are some places where the categories in the safe 
harbor in the bill go beyond what our guidance does. And 
personally and from the OCC, I'd like to--we'd like to see some 
adjustment to some of those things, and we'd be happy to 
provide some of those more detailed comments to the committee, 
as the chairman has invited us to.
    In addition, the bill does provide the regulatory agencies 
the power to make some adjustments to categories over time, 
which I do think, if the committee does go forward with this 
legislation, it's very important to have that authority not 
only put in the legislation but described in a way that makes 
sure that regulators do feel free to make adjustments that they 
believe are appropriate.
    Mr. Price. My time has expired, Mr. Chairman. Thank you.
    Mr. Green. Thank you, Mr. Chairman and I thank you and the 
ranking member for holding this hearing. It is exceedingly 
important that we talk about these issues, and I thank the 
witnesses for appearing today. To provide some additional 
input, permit me to ask, is there anyone among you who believes 
that the subprime market is overregulated. If you think it's 
overregulated and that we are about to do a disservice by 
imposing some, what I call sensibility, kindly raise your hand. 
Anyone think the subprime market is overregulated?
    All right, now, is there anyone who is of the opinion that 
the subprime market--this is by the way, in court called voir 
dire--it's a French term--meaning to speak the truth. So, this 
is a truth-telling portion of this hearing for you. Is there 
anyone here who believes the subprime market is underregulated? 
That we ought to do something about some of the concerns. If 
you think it's under-regulated, I hate to have you do something 
as simple as raise your hands, because it sometimes appears to 
be childish, but would you raise your hand if you think it's 
    The Chairman. The gentleman, help out the recorder, for the 
benefit of the record.
    Mr. Green. Thank you, Mr. Chairman. You were a great trial 
lawyer in a previous life, obviously. Because people who read 
these records have no way of knowing what actually occurred, it 
is incumbent upon me to ask the recorder to note that all 
persons have raised their hands, unless I have missed someone. 
All persons have raised their hands, connoting that the 
subprime market is not under-regulated.
    Now, given that it's not under-regulated, and given that 
Congresswoman Waters went through quite a list of things that 
are of concern, from pre-payment penalties to teaser rates that 
don't properly adjust such that you qualify for a teaser rate, 
but you don't qualify for the adjusted rate--she went through a 
number of things. Congress has to do something about this.
    We really, in my opinion--well, let me just ask. Is there 
anyone who thinks Congress should take, not a laissez faire 
attitude, but a lazy attitude, and do nothing? If you think 
that we should do nothing, raise your hand. All right, looks 
like we opted--there's one person who thinks maybe doing 
nothing is good. Governor?
    Mr. Kroszner. I don't think doing nothing is good and that 
is where the Federal Reserve is going to exercise the power 
that Congress has given it, to write HOPEA rules addressing 
many of the issues that have been raised.
    Mr. Green. Governor, let me be very pointed. Are you of the 
opinion, Governor, that Congress should do nothing about the 
pre-payment penalties, about the teaser rates, and not 
qualifying for the adjusted rate, about the whole notion that 
persons are put into loans and some cases where in persons who 
are making--originating the loans are aware that they cannot 
make the notes at some point where there's an adjusted rate--do 
you think that we should do something about this?
    Mr. Kroszner. These are real challenges and these are 
things that you have given the--
    Mr. Green. Sometimes when folks finish, I don't know if 
they have said, ``yes'' or ``no.'' So I have to ask you, would 
you kindly say yes or no. Should we do something about it?
    Mr. Kroszner. If you can do it in such a way that it 
doesn't restrict responsible lenders from running credit that 
can be used responsibly, then you should do something about it.
    Mr. Green. Okay. All right, everybody can qualify, but we 
all agree that there's a role for this--for Congress in this 
process. And if Congress should do something about it, we have 
to get beyond this notion of, as my grandfather who is a 
Methodist minister would put it, wanting to go to heaven but 
not wanting to die. If you want to get to heaven, the only way 
you can get there--there's one way. Nobody goes without--that's 
the way it happens.
    So, given that we all want to get there, then Congress has 
to do what's known as ``bite the bullet.'' We really do have to 
make the hard decisions about some of the things that everybody 
wants to see regulated or something done about, but few 
people--not enough people have the courage to step forward and 
try to make a difference.
    So, I am just going to beg that persons understand--as my 
time is running out--that we have difficult decisions to make. 
But this is why we get the big bucks, to make the tough 
decisions and go back and face the crowd and say that we did 
what we thought was appropriate under the circumstances 
prevailing at the time. My final question is this--because 
there's some question about people changing their minds.
    My suspicion is that at one point some of you believed in 
the Easter Chicken, also known as the Easter Bunny. And at some 
point, my suspicion is, you changed your minds and you no 
longer believe in the Easter Chicken. If you still believe in 
the Easter Chicken, raise your hand.
    Okay, it's pretty obvious, as we mature and as we receive 
additional empirical evidence, we ought to have the maturity to 
change our minds, and do what is appropriate given the new 
evidence that we have acquired. I thank you, those of you who 
have metamorphosed into better people. God bless you. I yield 
    The Chairman. The gentleman from Connecticut.
    Mr. Shays. I'd like to note for the record that my 
colleague didn't point out to the transcriber how many people 
raised their hands about the Easter Chicken. I think there was 
one and it was a Member of the House. Would the gentleman--I 
don't want to use my time.
    The earthquake hit last year, at the end of last year, 
beginning of this year. When does the tidal wave hit the 
foreclosures? What quarter are we going to see a lot of 
foreclosures? I'd like to ask each of you. Let's go right down. 
Your estimate of when you're going to see the largest number of 
    Mr. Gruenberg. Congressman, I think we're actually entering 
that period now. I think the large volume of the subprime, 
hybrid ARMs, these 2/28s, were made in the last quarter of 
    Mr. Shays. I have 5 minutes, so you think it's--
    Mr. Gruenberg. --started last quarter 2005, 2006.
    Mr. Shays. That was the earthquake. I want to know when the 
tidal wave hits.
    Mr. Gruenberg. This quarter and into next year is probably 
going to be the peak.
    Mr. Dugan. I would agree. I think September had the highest 
monthly volume of resets but that high volume, even though it's 
a little bit large, extends right up through next year. So, 
through next year I think is the--
    Mr. Reich. Second to third quarter of next year.
    Mr. Shays. Thank you.
    Ms. Johnson. We would say through the middle of next year.
    Mr. Kroszner. I'd agree, through the middle of next year.
    Mr. Antonakes. I'd agree as well.
    Mr. Shays. Thank you. If people started to--and banks, with 
their customers, started to renegotiate the terms of the loan, 
could that make a noticeable difference on what happens next 
    Mr. Gruenberg. As you know Congressman, most of these loans 
are held in securitizations, that is the real challenge here, 
and I think what is probably needed is a broad effort by the 
servicers who are responsible, for most of these loans to 
modify as many as possible so that you can have long term 
effects for the homeowners.
    Mr. Shays. Any other comment?
    Mr. Dugan. Yes, modifications could make a very significant 
    Mr. Shays. Okay, but the challenge would be what--getting 
the institutions to identify themselves and identify who their 
customers are?
    Mr. Dugan. No, it's not a question of identifying who the 
customers are, it's often getting the customers to acknowledge 
and to work out a different modification rather than just not 
paying on time, partly. And partly it's a systemic issue. We 
have high volumes of figuring ways to do that that are more 
    Mr. Shays. Let me just, so I am sure I'm understanding what 
you're saying--the institutions themselves would have a lot of 
customers to renegotiate with and maybe not be able to handle 
the volume?
    Mr. Dugan. The servicers.
    Mr. Shays. The servicers. Thank you, okay. Basically, we 
had homeowners--we had renters encouraged to buy and we in 
Congress took great pride that we were seeing minorities have 
ownership that they didn't have before and a good chunk of it 
was with the subprime market. I'm told that people who 
practically couldn't even afford a second month payment in rent 
could end up buying a house under the subprime market.
    If that's true, without sounding insensitive, when there is 
a foreclosure--in a sense did these individuals really ever own 
the home in the first place. And the question is, should our 
effort be to try to help them keep the home or is it in their 
best interest not to own it?
    Mr. Gruenberg. Congressman, I think it's important to keep 
in mind that the majority of the subprime mortgages were 
refinancings by existing homeowners and the issue really is 
that for many of these people, they had mortgages they could 
afford to pay. They were encouraged to refinance into mortgages 
that they cannot. And that's part of why this is such an 
    Mr. Shays. Would you all agree with that? Because that's 
something I think is quite significant.
    Mr. Dugan. I think there is a huge part that is 
refinancing, but getting back to your question, but I do think 
that not every loan should be restructured. Some are going to 
have to be required foreclosure because some people can't 
afford to make the payments on the loan even on a restructured 
basis and foreclosure is the only option. No one wants that, 
but in some circumstances that will be the case, for the very 
reasons you suggest.
    Mr. Shays. Does anyone disagree with that?
    Mr. Reich. I would add that I think--I would perhaps 
oversimplify that there are perhaps three categories of 
borrowers in the subprime arena. One would be investors who had 
no intention of ever occupying the property. The second would 
be people who were misled by the products they got into. They 
thought they could afford it but they didn't fully understand 
the terms and the third category would be those people who 
thought they understood the terms but ultimately did not 
realize that the rate resets would be taking place.
    The Chairman. Thank you, gentlemen. We have heard the 
bells. I'm going to--I think we can get in these two last sets 
of questions and we can dismiss this panel. So, we'll go to the 
gentleman from Missouri first and we can move quickly. We are 
going to have a problem.
    Mr. Green. Mr. Chairman, may I ask for unanimous consent to 
insert into the record a letter from the National Fair Housing 
    The Chairman. Yes, without objection. I also have a letter 
from Countrywide responding to some accusations made about them 
at our last hearing, which will be put in the record, withouot 
    The gentleman from Missouri.
    Mr. Cleaver. Thank you, Mr. Chairman. I'll be very quick. 
There are--I met with some of the people from the financial 
industry in my home district in Kansas City, MO, and they seem 
to believe that if we bring forth some new regulations, that 
somehow the credit crunch will be exacerbated. Do any of you 
agree with that? To bring on some regulations with regard--
similar to that which the Chair and Mr. Miller are proposing, 
that it creates a greater credit crunch?
    Mr. Reich. Well, the devil is in the details, Congressman. 
It depends upon, ultimately, what the legislation looks like.
    Mr. Cleaver. Okay, so, do you think it--would you agree 
with the editorial writer in today's Wall Street Journal, that 
this would give delinquent mortgage borrowers a new trick to 
essentially enjoy free rent for up to 30 years?
    Yes, sir--
    Mr. Gruenberg. I wouldn't agree with that, Congressman.
    Mr. Cleaver. Mr. Comptroller.
    Mr. Dugan. I think the issue with--it goes back to some of 
these questions about suitability and the details of the 
legislation. The concern is, could people avoid making payments 
on loans by inserting defenses that would otherwise not be 
available? I don't think that's the intent of the legislation. 
I think there's an effort to work with the language to prevent 
    Mr. Reich. To be honest with you, I didn't fully understand 
your question. I'm sorry.
    Mr. Cleaver. Okay, because my time is running out. Thank 
you. Ms. Johnson?
    Ms. Johnson. I haven't read the editorial that you're 
speaking to and that line taken out of context so I'm not sure 
that I could provide an answer.
    Mr. Cleaver. Governor?
    Mr. Kroszner. My hunch is that they are engaging in a 
little bit of hyperbole, but I think it's exactly as we said 
before. It really depends on the specifics of the legislation 
and we'll craft it narrowly focused--legislation addresses 
things like, well-crafted--repay that we could do through our 
Hope Regulations could address some of these issues.
    Mr. Cleaver. Commissioner?
    Mr. Antonakes. And given the way the legislations draft and 
with the rulemaking process, I think that unattended 
consequence would be avoided.
    Mr. Cleaver. Thank you.
    The Chairman. I thank you and I just would say that my 
attention was called to the Wall Street Journal editorial and 
the notion that somebody could get a 30-year stay here is, even 
by their standards, extremely bizarre. The gentlelady from 
    Ms. Moore of Wisconsin. Thank you, Mr. Chairman, and I'll 
be brief, given the time. As I listened to the testimony, 
particularly the last comment by Director Reich, I believe it 
was, you talked about people who typically default on these 
loans as investors who never intended to occupy it, people who 
didn't understand the terms and conditions, people who thought 
they understood, and it really doesn't place any liability.
    Those comments are the people who are putting the products 
out, it's just consumers are just too dumb and I'm saying that 
because I am--I believe I'm a cosponsor of the chairman's bill 
and I was--I along with Mr. Hodes, another member of this 
committee. We have put a bill together that we think addresses 
some of the other--another problem with the way these loans are 
written. People in the mortgage broker industry, unlike prime 
loans, are not required to include escrow accounts.
    So, you can write up a loan that people think they can 
afford. You know, they're going to pay $700 a month, but they 
don't have property taxes and escrows and other important 
escrows and at the end of the year suddenly they are hit with a 
huge--$2,000 or $3,000 tax bill and they're being foreclosed 
on. I'm wondering if you think that it would be a sage and wise 
thing to include that in there.
    I'll tell you, I am one of the people who believed in the 
Easter Bunny, sorry. Because I have to boil up several dozen 
eggs every year and I have to believe in the Easter Bunny. But 
there are people who will argue that they don't need the bank 
to handle their money in an escrow. That they can use those 
monies themselves to invest.
    But given the nature of subprime loans, I'm just wondering 
if the panel thinks that it wouldn't be wise, given that there 
will be some sort of legislation to include the requirement: 
number one, that escrow accounts be included in the loan; and 
number two, that a second provision of our bill would be to 
require them to use licensed appraisers and not just mortgage 
bankers who are out there trying to get the value to fit the 
kind of loan they want to make.
    Mr. Reich. I absolutely believe that there are many good 
things in this bill, including the requirement that principal, 
interest, taxes, and insurance be required for loans to 
subprime borrowers.
    Mr. Dugan. I actually don't think that requirement is in 
the bill.
    Ms. Moore of Wisconsin. It is not. That's why I'm saying, 
I'm proposing. I--
    Mr. Dugan. I would agree with that. To be honest, I was a 
little surprised it was not in the bill.
    Ms. Moore of Wisconsin. Right.
    Mr. Dugan. But I think that in the subprime market, 
escrowing for principal and interest, I think would be a 
sensible addition to the bill.
    Ms. Moore of Wisconsin. Did you hear that, Mr. Chairman?
    The Chairman. Well, if the gentlewoman--also in the bill 
that Mr. Kroszner filed and I said earlier that I thought we 
could go ahead with that. So, we did touch on that earlier and 
I think in fact one of the witnesses, Chairman Johnson, did 
also allude to that in her testimony and I plead guilty to the 
charge of under-regulating and I'm prepared to adjust my habits 
and regulate some more. The gentlewoman is recognized.
    Ms. Moore of Wisconsin. Thank you, I think I will yield 
back, given--
    The Chairman. Thank you. We will now go to the gentleman 
from California, and then we will dismiss this panel. As the 
last thoughts of the day, I plan to stay. This is very 
important. Some members will be back, staff will be here. I 
apologize to those who will be testifying later, there will be 
fewer members, but it will have no less impact, I assure you, 
on this important deliberation.
    The gentleman from California.
    Mr. Sherman. Thank you, Mr. Chairman. I commend you for 
stating that the credit union regulators should also have a 
seat at the table in drawing up the regulations. I think the 
bill is something I should commend you for. Particularly the 
concept that we should make sure that the borrower has the 
ability to pay. I commend the gentlewoman from Wisconsin for 
bringing up the idea that property taxes and insurance 
principal and interest need to be factored in in determining 
ability to pay. And I hope that we would specify in the bill, 
when we talk about ability to pay we mean from current income 
and not based on--yes?
    The Chairman. The requirement of all the costs--principal 
and income, etc., is in the bill. What's not in the bill is the 
escrow and the appraiser. Those are the pieces--the full cost 
piece is in the bill, the appraiser and escrow is what would be 
    Mr. Sherman. I thank you for setting me straight. I thought 
it was in and then I heard that it was out and thank you for 
letting me know that at least full costing is in--
    The Chairman. I'm kind of an expert on what's in and what's 
    Mr. Sherman. That may be, but--compared to me, you are. And 
I hope that we would specify in the bill that when we're 
looking to document income, if somebody is a wage earner they 
have to provide that W-2 form or their full tax return. If 
somebody's claiming investment income, that they have to 
provide the 1099s or the full tax return and if somebody's 
claiming self-employment income, they have to provide their 
full tax return.
    I realize that up until this year we might have taken the 
idea--let the regulators just put in all the specifics, but I 
would hope that we would put those specifics in the bill. The 
bill provides a floor, a minimum Federal regulation without a 
ceiling and therefore we don't end up with a national standard. 
And I realize that time is running out, so I may just ask you 
to respond for the record, but if there's one witness who wants 
to respond:
    Do we need, in order to have efficient nationwide capital 
markets, to become the ultimate owners of these mortgages, a 
Federal standard? Perhaps with a few things that some States 
could opt in or out of--opt out of. Or could we really have the 
benefits of a national securitized market and have every city 
and State free to impose its own rules? I don't see anybody 
really anxious to give an oral response. How many more minutes 
until the bell? Why don't we just take a response for the 
    The Chairman. Okay, I thank the panel. This has been very 
useful and and I appreciate the degree of specificity. The 
gentleman from North Carolina asked for that and I think it 
came a little later than he had asked for it, but it came and 
we will be really keeping track of these things. And I think we 
have set a good context in which we can make some movement and 
move some pieces around and come up with a consensus bill. The 
hearing is recessed and we will resume right after the votes 
with a second panel.
    The Chairman. The hearing is reconvened. Under other 
circumstances, I would apologize for the delay, but I do think 
this has been useful. I think it has been very helpful to have 
all of the people who have an interest in this bill spending a 
day thinking about it, and listening to each other.
    We will move more quickly now, obviously, because there 
aren't going to be a lot of members asking questions, so we can 
probably finish this in a couple of hours. The House is 
adjourned for the day, so we won't be bothered either by votes 
or by members who aren't paying serious attention disrupting 
things because they have nothing else to do.
    We will now have a serious conversation with people who 
have a great interest in this bill, and I think that will be 
useful. We will begin with our next set of witnesses. Let me 
get the witness list.
    We will begin with Michael Calhoun. He is the president and 
chief operating officer of the Center for Responsibility 
Lending. Obviously, without objection, all material that 
witnesses want to submit will be put into the record. I will 
say this: There is no need either to thank us for having this 
hearing or to summarize the bill. Just get right to it.
    Mr. Calhoun.


    Mr. Calhoun. Thank you, Mr. Chairman. It may be fitting 
that the three sponsors are the ones here now.
    I am going to address my comments first to talk about the 
assignee liability, which has been one of the key comments. I 
am going to try and follow my Congressman from North Carolina, 
Mr. Watts', admonition to be specific. And then I will address 
the North Carolina experience as it relates to this bill, and 
the specific provisions of this bill, finally.
    First, I think it is very important to set straight for the 
record what this secondary market responsibility or assignee 
liability is and what it is not. First of all, assignee 
liability is a common feature of the law. In contracts in 
general, including in mortgages, presently, under present law, 
the Uniform Commercial Code provides assignee liability for 
holders of mortgages and other negotiable instruments who are 
not so-called holders in due course.
    You also have substantial assignee liability, including for 
mortgages, under the Federal Trade Commission holder rule 
whenever you have a home improvement loan. And you also have 
significant assignee liability for credit transactions, 
including mortgages, presently under Truth in Lending. And the 
market absorbs and deals with that liability well without 
either raising the cost or reducing the accessibility of 
    What assignee liability is not is liability to the 
individual bond holder. No one has proposed that, and that has 
never been a component of assignee liability under any of the 
State laws or the Federal bills.
    Finally, it is important that we are not talking about 
leaving the secondary market out there alone holding all the 
liability for these loans. In every sale of mortgages, the 
purchaser requires the lender, or if it is a later seller, to 
represent and warrant that the loan was made legally, and that 
if there are any violations or liability, the seller of the 
mortgage has to indemnify the secondary market holder for that 
    And so the secondary market not only deals with assignee 
liability today, it is in a position to manage it and to 
recover from those who sell them the loans, and the liability 
goes back down through the chain to the original lender or 
originator who engaged in the illegal conduct.
    Second, I want to address a couple of aspects of the North 
Carolina experience and bill since it is used as a model for 
this. I think it is relevant to a number of the issues here, 
including preemption.
    In 1999, the North Carolina bill was enacted and which 
addressed--it was the higher cost loan sections addressed to 
equity stripping. It initially did not cover open-end loans, 
and so quickly some lenders converted all of their mortgages to 
open-end loans, thus evading the coverage of that bill just as 
they evaded coverage of current HOEPA, which does not cover 
open-end loans. North Carolina came back in 2001, added open-
end loans with the agreement of the industry, and that became a 
model also for other places around the country.
    Five years ago, these so-called 2/28s were not the 
exploding ARMs that they developed into. Originally, the 
payment reset was small because the Federal discount rate was 
so low and rates were derived from that. There was not the 
large payment shock. That really developed starting when the 
Federal Reserve engaged in the quarter point march of interest 
rate bumps.
    And so in 2005/2006, we went to lenders and said, ``Do you 
realize the built-in payment shocks that these loans have, and 
are you truly going to try to underwrite them based only on the 
original payments?'' I think the response carries an important 
message. Several of those lenders said, ``We agree these are 
problematic loans and would prefer not to be buying them.''
    But we cannot unilaterally impose those standards on the 
market because if we do, the originators, typically the 
brokers, will take all the business down the street. Most of 
these lenders got--for example, New Century--90 percent of 
their volume from mortgage brokers. If they said, we are not 
going to take the loan that you want to sell to us; it is most 
profitable to you, New Century loses all their business and it 
goes down the street.
    I think a couple lessons there are this market will evolve. 
You need to leave States the ability to respond. And also, a 
specific provision, Title 1 and Title 2, do not currently cover 
open-end loans, and we would recommend that they do so as the 
North Carolina law does, both the original predatory lending 
law and the additions that were made this last summer, which 
have been incorporated in substantial respect into the bill.
    Finally, I want to say there are very many good provisions 
in this bill. It takes the right approach of trying to 
restructure the market. The real concern we have is that we 
have thrown the baby out with the bath water, and that is the 
baby of effective enforcement.
    In many circumstances in this bill, the only remedy a 
borrower has is a very limited right after the loan goes into 
foreclosure, and they are left effectively with little or no 
remedy until the loan goes into foreclosure. Forcing borrowers 
to that does not seem to be the incentive that we want in the 
    We would urge that the remedies in assignee liability be 
increased but still moderated, moderate with caps both as to 
limitations to individual actions and caps on damages. But in 
many places in the bill currently, there are no effective 
remedies for borrowers, which means that--this market is bigger 
than the stock market. There are hundreds of thousands of 
mortgage brokers. In the last few years, there have been 3 
million subprime loans each year.
    The only way this bill works is with the market self-
policing. And there need to be incentives in the form of 
remedies and secondary market responsibility or you will not 
have that policing. Thank you.
    [The prepared statement of Mr. Calhoun can be found on page 
167 of the appendix.]
    The Chairman. Next we will hear from Janis Bowdler, who is 
a senior housing policy analyst at the National Council of La 


    Ms. Bowdler. Good morning.
    The Chairman. Good morning, we wish. Good morning.
    Ms. Bowdler. Oh, good afternoon. Clearly I didn't have my 
second cup of coffee today. Sorry about that. Janis Bowdler. I 
conduct the research around housing policy issues at the 
National Council of La Raza. And I was going to start by 
thanking everybody here, but since I have been directed to skip 
the formalities, I will do that and get right to it.
    NCLR is happy to be at this table. For years, many of you 
have heard us. We have been to visit you. We have been talking 
about the fact that Latinos are getting bad loans. Even as we 
convene today, thousands of families are faced with the nearly 
insurmountable task of saving their home from a foreclosure 
spurred by a predatory loan.
    What NCLR is trying to do in this debate, and what we 
wanted to accomplish here, is really to level the playing field 
for Latino borrowers. We have conducted research. We have 
listened to the stories of borrowers. And we have even gone out 
and interviewed practicing mortgage professionals. And this 
intelligence is the underpinning of our policy agenda to 
improve the mortgage market for Latino families.
    This bill, H.R. 3915, is the first one we have seen that 
directly addresses several key Latino priorities. And we would 
really like to commend the authors and their staff for their 
hard work and diligence on this bill. In my brief time this 
morning, I would like to highlight a couple of key provisions 
that are important to Latino and immigrant borrowers. And we 
also want to offer some suggestions on how we think it can be 
    But I am going to start where I normally do, which is to 
talk about the borrowers. And I want to tell you a story about 
Mr. and Mrs. Silva, who actually purchased a home in Lawrence, 
Massachusetts. They had solid credit histories and stable 
income, and they purchased a home at the top of their purchase 
    They didn't find out until much later that the appraisal 
was inflated, the title work was incomplete, and much of the 
construction on their new construction home was shoddy. In 
fact, they figured it out about the same time that they 
realized that they had an unaffordable 80/20 loan with a reset 
looming on the first loan in the near future.
    The story is a familiar one by now. Their broker assured 
them they had a fixed rate loan. The inflated appraisal limits 
their refinance options. And no one involved in the transaction 
was willing or able to help them. Nobody is accountable.
    Housing counselors across the country are operating at 
maximum capacity, but we are still swamped with calls. In fact, 
NCLR has been receiving calls directly from consumers, and two 
things are clear: The market isn't correcting in a way that 
helps borrowers; and system-wide protections are necessary to 
prevent predatory behavior. We think that several of these 
protections are in H.R. 3915.
    Briefly, the bill has a strong anti-steering provision. We 
are excited to see that it would eliminate compensation-based 
incentives to steer families to expensive or risky loans, and 
sets the stage for additional prohibition on actual steering 
    The bill also puts forward an aggressive strategy to 
license and regulate originators. This summer, NCLR partnered 
with NAHREP to interview mortgage brokers serving the Latino 
community, and the response was overwhelming. The brokers told 
us that they wanted to be regulated. They were tired of getting 
a bad rap. They were tired of seeing their own customers get 
steered towards bad loans by unethical brokers. And they want 
more accountability.
    H.R. 3915 also lays out a common sense ability to repay 
standard. Lax underwriting standards and unaffordable loans are 
at the heart of predatory lending, and if such a standard had 
been in place, the Silvas likely would have gotten an 
affordable loan in the first place.
    We also want to work with members of this committee to 
continue to strengthen the bill. We are concerned that the 
bill's enforcement standard falls short. Unless we strengthen 
these standards, borrowers may not get the full benefit of the 
other new protections created in the bill.
    And again, I expand on these in our written comments. But 
the first that I want to point out is that the bill does a 
great job of increasing civil penalties under TILA, but caps it 
when it comes to the steering provision. This seems arbitrary, 
and we want to recommend that the statutes stay as is. This 
would mean the full improved liabilities would apply for 
    It also extends the right of rescission to include 
violations of ability to repay and net tangible benefit, and it 
creates a defense to foreclosure which we support. However, 
there is an exception that seems to carve out most of the 
secondary market, and we are concerned that this could have an 
unintended consequence of setting the borrower up as having to 
access foreclosure as a remedy, meaning the only way the 
borrower could access their right to rescind would be in the 
foreclosure process.
    Finally, we believe the rescission right would be stronger 
if it applied to all harms in the legislation.
    Our written statement includes recommendations for 
improving other aspects of the bill, but I promised to be brief 
so I will close here. Again, a sincere thank you, and I would 
be happy to answer any questions.
    [The prepared statement of Ms. Bowdler can be found on page 
153 of the appendix.]
    The Chairman. The next witness is a familiar face for us 
and a collaborator on a lot of stuff, Hilary Shelton, director 
of the Washington bureau of the NAACP.


    Mr. Shelton. Mr. Chairman, I too will avoid the normal 
process of thanking you and Congressman Watt and Congressman 
Miller for the great work you did on producing H.R. 3915, the 
Mortgage Reform and Anti-Predatory Lending Act of 2007, and 
skip right ahead to the issues.
    Predatory lending is unequivocally a major civil rights 
issue for our times. As study after study has conclusively 
shown, predatory lenders consistently target African Americans, 
Latinos, Asians, Pacific Islanders, Native Americans, the 
elderly, and women at such a disproportionately high rate that 
the effect is devastating to not only individuals and families 
but to whole communities as well.
    According to a recent study by the Furman Center in New 
York, between 2002 and 2006, the percentage of subprime loans 
to African American borrowers rose from 13.4 percent in 2002 to 
47.1 percent in 2005. Furthermore, study after study has shown 
that African Americans and other Americans of color are 
targeted by predatory lenders and steered into predatory loans 
at a disproportionate rate regardless of their income or credit 
    These numbers become especially important as subprime 
mortgage loans become foreclosures. The impact these 
foreclosures are having and will have on whole neighborhoods 
and communities, predominately populated by African Americans, 
Latinos, and other racial and ethnic minority Americans, will 
be nothing short of devastating.
    A report issued last year by the Center for Responsible 
Lending estimated that one out of every five mortgages that 
originated during the last 2 years will end in foreclosure. To 
date, the Federal Government has been largely inattentive to 
the problems surrounding predatory lending, and in fact, some 
of the rules and proposals we have seen in the last few years 
appear to go backward and take away some of the few protections 
we have gotten at the State level.
    This flies in the face of the NAACP's belief that the 
primary responsibility of the government is to protect its 
citizens, all of its citizens, not to exploit them or allow 
them to be exploited for financial gain of a few. As our 
democratically elected representatives, the NAACP has 
consistently called on the Congress to enact aggressive and 
effective Federal law to curb predatory lending.
    That is why the legislation we are discussing today, H.R. 
3915, is so important. This legislation aggressively addresses 
problems that the NAACP sees every day, including steering, 
yield spread premiums, high costs and fees, and prepayment 
    The NAACP hears about these abusive tactics all over the 
country every day, and it is our hope that if this legislation 
is enacted, we will not continue to hear stories like the one 
of a woman who called the NAACP national headquarters last 
month to report that she had been convinced to take out a 
$30,000 home equity loan, and that $26,000 of that $30,000 loan 
would go to pay for points and fees. That is absolutely 
    Unfortunately, as the NAACP knows all too well, we must 
have tough enforcement provisions to ensure that these new laws 
are adhered to. We cannot allow skirting the law to be seen as 
merely the cost of doing business. We must make the penalties 
stiff, and we must show the industry as well as the American 
public that we mean business.
    In addition to a strong Federal standard to address 
predatory lending, we also believe that States must retain the 
flexibility to address local and regional issues, and that 
States can and should be able to address new abusive products 
that may arise if and when the current problems are addressed. 
The NAACP believes that any Federal policies that are enacted 
should be treated as a minimum standard, and that States should 
be able to enact even tougher laws tailored to address their 
own unique brand of predatory lending.
    Let me close by saying that while the bill being discussed 
today may not be perfect, we do, however, unequivocally support 
H.R. 3915. And while we look forward to working with the 
chairman and others to perfect it and hopefully make it even 
stronger, we would like to make it clear that we deeply 
appreciate all that you have done, Chairman Frank, to 
aggressively address many of the issues at the heart of the 
predatory lending problem.
    I want to thank you again, and I look forward to your 
    [The prepared statement of Mr. Shelton can be found on page 
292 of the appendix.]
    The Chairman. Next is John Taylor, president and chief 
executive officer of the National Community Reinvestment 
Coalition, who has been a very active participant in the 
discussions getting us here today.
    Mr. Taylor.


    Mr. Taylor. Thank you, Chairman Frank, and Representatives 
Miller and Watt, for your leadership on this issue. I am here 
today to testify on behalf of NCRC, as well as the National 
Consumer Law Center, and the Rainbow/PUSH Coalition. And rather 
than repeat some of the points that some of my colleagues have 
made and that I have made in my written testimony, I would like 
to take us down a different path.
    Two-fifths of the $3 trillion of mortgage loans made in 
2006 were either subprime or Alt A. It is estimated now that 
some 2\1/2\ million loans are in danger of foreclosure over the 
next 2 years. This represents over $300 billion in petition 
losses to the market. By way of perspective, the New York 
Federal Reserve Board moved to delay the collapse of Long Term 
Capital Management because its projected losses were going to 
be about $3 billion, the Fed fearing that this would have had a 
catastrophic effect on Wall Street.
    The mortgage crisis facing us now represents a hundred 
times the projected losses of Long Term Capital Management. We 
are facing a mortgage tsunami unlike any other time in our 
history, and lest you think I am offering a hyperbole by 
calling this a tsunami, consider that the number of 
foreclosures in the next year-and-a-half will equal 10 times 
the number of homes lost in New Orleans due to Hurricane 
    The average number of foreclosures annually used to be 
roughly about 225,000 per year. It is estimated that in January 
of 2008 alone, in that one month, we may equal the number of 
foreclosures that we traditionally experience in a year.
    The contagion effect with these 2 million-plus defaults 
will have--the contagion effect that these defaults will have 
on neighborhoods, bank portfolios, existing housing starts, 
housing prices, the home-building industry, and ultimately Wall 
Street may pave the way for a deep and hurtful recession.
    We find ourselves in this situation for a number of 
reasons. Most importantly, it is due to the lack of needed 
consumer protections and vital regulatory enforcement that 
would have made such practices illegal to begin with. Alan 
Greenspan called this in his book, this kind of lending, 
infectious greed and malfeasance. I am sorry Mr. Hensarling is 
not here because he mentioned Adam Smith in one of his 
explanations as the basis for why he had problems with this 
    And it is interesting that Alan Greenspan talks a lot about 
Adam Smith in his ``Age of Turbulence,'' his new book. Mr. 
Greenspan noted that Adam Smith's answer to what he called the 
most important macroeconomic question was what makes an economy 
grow? Adam Smith said it was four elements: capital 
accumulation; free trade; a role of government; and the rule of 
law. Smith emphasized that what was critical to these four 
elements was that every person must be free to pursue his or 
her own interests, and that this was what in fact would build 
the wealth of a society.
    Men and women are not free to pursue their own interests 
when unfair and deceptive lending practices are free to take 
root and strip wealth from the individual. Predatory and 
usurious lending is the antithesis of capital accumulation. It 
is capital depreciation.
    By free trade, Smith did not mean the freedom to cajole, 
cheat, and rob unsophisticated homeowners. His free market 
assumed that competition was always accompanied by honest and 
ethical dealings. The role of government was to ensure capital 
accumulation of free trade while staying out of the way of 
competition. The wholesale lack of regulatory enforcement, 
coupled with inadequate laws to protect individuals and promote 
capital accumulation of free trade, now challenge our ability 
to grow this economy.
    Finally, Smith and Greenspan's fourth element for growing 
the economy was the need for the rule of law, a catchy phrase 
in recent years in these hallowed halls. In this case, Chairman 
Greenspan was clear about the meaning of the rule of law as it 
relates to these issues. The rule of law, is ``the protection 
of the rights in the individuals and their property.'' The 
protection of the rights in the individuals and their property.
    This bill, H.R. 3915, won't do much for the 2 million homes 
that are now--2 million families, really, that may contribute 
to a major economic downturn. But it does represent a 
substantial and comprehensive return to the economic 
principles, as espoused by Adam Smith and Alan Greenspan, that 
we believe are essential to a vibrant economy.
    This bill supports the belief that anyone who works hard, 
pays their taxes, and acts responsibly will have the freedom to 
pursue wealth for their family and themselves. Removing abusive 
and unfair lending practices and holding all segments of the 
capital accumulation system accountable for these practices is 
simply sound economic policy owed by this government to each of 
our citizens.
    It is imperative that we act now to strengthen H.R. 3915, 
particularly that we need to ensure that the protections in 
this bill are accompanied with strong remedies, with 
substantial and bipartisan support of the Members of Congress 
and this Administration. Failure to embrace this long-overdue 
effort would now be a monumental mistake.
    I can say with a great deal of certainty that given the 
magnitude of this problem and the sheer numbers of innocent 
Americans whose lives and friends' lives have been impacted by 
this infectious greed and malfeasance, that there will be few 
congressional districts where this question will be unimportant 
in the next round of elections.
    It is imperative that you strengthen and pass H.R. 3915 in 
order to return sanity and fairness to our system of home 
financing, and thereby support our Nation's economic promise. 
Mr. Chairman, we look forward to working with you and 
collaborating with you to strengthen this bill and to support 
the passage of a meaningful, strong national anti-predatory 
lending bill. Thank you.
    [The prepared statement of Mr. Taylor can be found on page 
296 of the appendix.]
    The Chairman. Our next witness is Mr. John Hope Bryant, who 
is the founder, chairman, and chief executive officer of 
Operation HOPE.
    I just wanted to explain. We began with a panel, obviously, 
of the regulators, who are sort of neutral. We then have a 
panel of mostly community groups, and then a panel of people 
from the business side. In each case, I just want to be clear 
that it has been a practice to solicit from the Republican side 
a witness. So Mr. Bryant is here in particular at the 
invitation of the Republican side, and similarly with the third 
    But we did feel with the regulators, community groups, and 
the business groups, that we would be getting, with the 
particular group from the Republican side, a very balanced 
discussion here.
    Mr. Bryant.


    Mr. Bryant. First of all, I want to say I didn't know I was 
being asked to submit from any side. So it is nice to be here. 
I am on the American side.
    I wanted to first say thank you for having this hearing, 
and to acknowledge the presence of Congresswoman Maxine Waters 
and Congresswoman Judy Biggert.
    This hearing, focused on reviewing legislative proposals 
for reforming mortgage practices in the light of the subprime 
crisis in America, is a critically important if not a historic 
day. I support the spirit of H.R. 3915 as well as H.R. 1752, 
H.R. 3017, and H.R. 3019, which together create a responsible 
floor for the poor.
    Let me start by saying that this is personal to me. My 
family lost our home in South Central Los Angeles because my 
father did not understand the documents he was signing because, 
unfortunately, he asked the wrong question. Growing up, I 
remember the pride I had every week on Friday nights watching 
my father make a payroll of his cement contracting business 
from the front door of our home. That was powerful for a son to 
    But after a while, the workers I knew so well would leave 
our home, and then a mortgage broker, someone I didn't know at 
all, would show up at the front door, finally convincing my 
otherwise brilliant father that he could somehow have more 
while somehow spending less. The result? My dad was left almost 
completely defenseless in making the most significant financial 
and wealth-building decision of his adult life, and our 
family's, too, a decision that in the end negatively impacted 
my dad and his marriage to my beautiful mom, who genuinely 
loved him. But in the end, their marriage ended over money. The 
number one cause of divorce today for all races is money.
    Ultimately, decisions made on that day in South Central 
L.A. had a negative ripple effect years later on my brother, my 
sister, my mother, and me. You see, my dad ultimately asked 
this person, this mortgage broker who was disconnected from any 
responsibility, the wrong question. He asked what was the 
payment, when he really should have asked what was the interest 
rate. No one should ever ask what the payment is when there is 
an interest rate attached.
    We lost our home not because my father wasn't brilliant, 
because he was and is today at 83 years of age, but because my 
dad was badly represented, he asked the wrong question, and 
then he signed documents he didn't understand. I suggest a 
massive overhaul of the mortgage brokerage industry as it 
relates to mortgage lending, and I would suggest that you 
restrict, if not eliminate, negative amortization loans, where 
every payment you make means the broker you get.
    My mother's story, oddly enough, ended completely 
differently. You see, my mom, who worked a regular 40-hour job, 
was financially literate. My mother worked more than 35 years 
at McDonnell Douglas Aircraft, now Boeing Aircraft, in Long 
Beach, and realized early on that it was not necessarily about 
making more money, but making better decisions with the money 
you make.
    My mom bought and sold five homes, and today is retired and 
financially independent, living in Texas. In contrast, my dad 
today is financially dependent, living in a 4-unit apartment 
building built for him by me and my wife on the very street we 
grew up on.
    Not all children or even most children are financially able 
to build and pay for a home for their father, nor should they. 
Parents should be in a position, if and when they can, to 
accumulate and later, if they like, to pass down assets to 
their children, not the other way around. Some 20 years later, 
Mr. Chairman, this negative legacy impact of the subprime 
mortgage crisis for many Americans, and not just minority 
Americans, are experiencing this today. And this is why I am so 
passionate about financial literacy and economic empowerment.
    We have helped to educate 250,000 children in financial 
literacy, created a thousand low-worth homeowners, and helped 
85,000 victims of Hurricane Katrina. I think this gives us some 
context about how people are managing their affairs in this 
crisis. And I can tell you with confidence they are not doing 
it very well.
    Just one example of this. In L.A., the city of L.A. asked 
Operation HOPE to partner in a mortgage crisis hotline. We did 
that, and when we launched it 3 months ago, we received 3,000 
calls in the first day. By the second day, we had received 
4,000 calls.
    Now, to put this in the context of Hurricane Katrina, in 
our busiest month in our nationwide outreach for Katrina, we 
received 3,000 calls in a month. So we received more calls in 
48 hours from L.A., from Latinos, mostly, than we received in 
an entire month nationwide in responding to Hurricane Katrina. 
I agree that this is an economic tsunami.
    We will soon roll out phase two, and we will have hearings 
in California along the same lines soon. But none of this is 
enough, which is why we need you to act. So here is what I am 
also suggesting. I am proposing today, and have likewise sent a 
letter to all of the Federal regulatory agencies you had here 
today, that the Federal Government establish, possibly through 
the Federal Home Loan Bank system, a $10 billion loan guarantee 
fund, structured in many ways like an SBA loan guarantee. Here 
is how it would be structured.
    Number one, it would carry a standing fixed rate of 3 
percent, allowing private lenders to add a maximum of 2 to 3 
percent at a reasonable fee for administration, overhead, and 
profit margin. There is a precedent here. After the riots of 
1992 in Los Angeles, the Federal Home Loan Bank did something 
similar to this, $3 billion. That was repaid.
    Number two, allow anyone who had paid their loan on time 
and within the terms of their agreement prior to their rate 
reset to be refinanced under this new program, the theory being 
that these individuals were already properly underwritten at 
the original term and rate as their loans were performing.
    Number three, and finally, all new loans would be made at a 
5 to 6 percent fixed rate over a 30-year period, and in some 
unique hardship cases, over a 40-year period. While I am all 
for free enterprise and capitalism, and we work at making 
capitalism work for the poor, I do not believe the poor should 
be subject to interest rate risk, to wild interest rate risk.
    This approach has many benefits, one of which is a 
temporary economic stimulus by adding billions of dollars of 
new money back into the economy when the mortgage economy seems 
to be stalling. Number two, this approach could serve as a 
unique and new opportunity for the credit union industry, as 
credit unions were not substantially involved in the original 
problem, several are large enough to make a difference, and 
because their unique tax structure can afford to make these 
loans at an even lower price point, making it a win/win for all 
    On a separate but related note--
    The Chairman. Mr. Bryant, we are going to have to have you 
sum up fairly quickly, please.
    Mr. Bryant. Sure. On a separate but related note, I would 
encourage you to push to keep subprime lending, responsible 
subprime lending, as part of the mix. Subprime lending was not 
the problem. Irresponsible subprime lending was the problem. 
And we should work hard not to cut off capital flowing to the 
poor. Thank you.
    [The prepared statement of Mr. Bryant can be found on page 
159 of the appendix.]
    The Chairman. Thank you, Mr. Bryant. Let me say first I 
appreciated in particular your reference to negative 
amortization because that is a provision that was put into the 
bill. Our colleague from Illinois and others talked about it. 
It was one that I think one of the witnesses in the first panel 
specifically opposed. So we appreciate your talking about the 
need to deal with negative amortization.
    And let me just ask, the problem when your father was 
misled into signing these documents, when was that?
    Mr. Bryant. That was 20 years ago.
    The Chairman. I think that is important, to show that we 
are not--and I appreciate that because some people said, well, 
this crisis is going to work itself out. Don't over-react. But 
I think you help us understand that we are talking about some 
structural problems in this industry, and simply waiting it out 
for a month or two doesn't resolve it. I appreciate that.
    Let me ask the--Mr. Calhoun, you did address this some, but 
the argument that we have heard from some of my colleagues that 
the North Carolina experience has been kind of a fizzle. Would 
you address that?
    Mr. Calhoun. Two things. One, in terms of the impact on 
credit availability, there have been references to there was a 
slight--it was a range of 3 to 4 percent reduction in lending 
compared to similar States after the enactment of the North 
Carolina law.
    I think it is careful that you drill down in those numbers 
because when you break it out into purchase loans versus 
refinancing, you actually found an increase in purchase loans, 
and the reduction was all in the refinancing. And again, that 
is not a reduction in the amount of credit outstanding. It is a 
slight slowdown in the flipping of these loans, which are 
typically refinanced--
    The Chairman. Yes. Let's address this specifically because 
I was asked this: Are you worried? I was told that this would 
mean fewer loans being made. The answer is, I am not worried. 
That is why we are doing it. If all the loans that were made 
should have been made, we wouldn't have a problem. Let's be 
very clear. The purpose of this is to keep some loans from 
being made that should not have been made in the first place.
    And to the extent that we saw this in the refinance, and 
Mr. Gruenberg, in particular, I know said, and Mr. Dugan kind 
of reinforced this, that many of these--a great majority of 
these loans that went bad were refinancing. Yes, some of these 
people shouldn't have refinanced. And the bill says that people 
should not be induced to refinance if they are going to receive 
no tangible benefit from it.
    So to the extent that there was a reduction in refinancing, 
that is probably a good thing and probably an intended, not an 
unintended, consequence if what were prevented were 
refinancings that benefitted only the financing people.
    Mr. Calhoun. I think one of the key things is the bill has 
now been revisited about 3 times, and every time the amendments 
and the strengthening of the bill has been done with broad 
industry support, including that of, you know, several of the 
major banks in this country. And that applies as well to the 
changes that were done--
    The Chairman. All right. I appreciate it. Let me ask all of 
you because many of you are involved, in some cases directly, 
Mr. Taylor, and in others as advocacy groups, with--this is a 
bill that is going to help going forward. We have people who 
are now trapped in these foreclosure situations.
    One argument is that by cracking down some on credit and 
putting in higher standards, we are going to make it harder for 
people to refinance their way out of trouble. Would you address 
the extent to which that accusation is valid, that this bill 
could hurt people's ability to refinance their way out of 
trouble? Mr. Taylor, let's start with you.
    Mr. Taylor. So in other words, do nothing to the people who 
got injured by the system because they got loans that put them 
under water. And therefore, do nothing because they are going 
to be further hurt by the system.
    I have never heard such ludicrousness in my life. I mean, 
unless we--first off, this bill is going to prevent the kinds 
of activity that put those 2 million families in jeopardy. It 
is not going to do anything to help them get out of jeopardy. 
It is not--yes.
    The Chairman. Let me ask specifically: Does anything in 
this bill prevent a refinancing for someone who ought to be 
able to get access to refinancing if that would help them get 
out from under something?
    Mr. Taylor. No.
    The Chairman. Mr. Calhoun?
    Mr. Calhoun. If I can respond specifically, the crisis in 
today's credit market is--the point that has been made, is due 
to the absence of standards. If you want to increase liquidity, 
a pre-condition is you have to put standards in place that will 
assure the market that these are reasonable loans that will be 
    Second, it is just a matter of--if you are in a hole, the 
first thing to do is stop digging. And refinancing borrowers 
who are in trouble now into a loan with high fees, prepayment 
penalties, and steering just makes it less possible for them to 
have any chance of saving their homes.
    The Chairman. Finally, Mr. Bryant?
    Mr. Bryant. Mr. Chairman, just the opposite is true. First 
of all, it is not 2 million mortgages on the bubble; it is 4 
million because there is another reset coming after this. This 
is--just the opposite is true. First of all, people are already 
having a problem refinancing their loans. So it is not like 
there is a boondoggle of refinancing going on right now.
    Number two, this bill will actually create an environment 
where refinancings can get done because the market does not 
respond well to a pack of clarity. Right now, there is a cloud 
in the market. No one is lending anything. There is a crisis in 
confidence. Everything is locked up. By introducing this bill 
to the marketplace, you create a floor for which people would 
know how to operate and know what is appropriate.
    The Chairman. Thank you, Mr. Bryant. I just have one final 
comment. But I appreciate that point because I think what we 
are trying to do here is market-enhancing. To the extent that 
you provide good standards and people can have more confidence, 
I think it works better.
    Let me just address a comment to Ms. Bowdler and Mr. 
Shelton. One of the things that we are aware of, and Mr. Green 
mentioned this, one of the factors here that should not be 
neglected is that the data that we have gotten from the Home 
Mortgage Disclosure Act, thanks to my former colleague Joe 
Kennedy, who worked very hard sitting here and helped get that 
through--thanks to that, we now know that the chances of your 
being put into a subprime loan, everything else being equal, 
are greater if you are African American or Latino, a condition 
that this country should not tolerate. And that has exacerbated 
    And so we have this legislation. As we go forward, we are 
going to try to work together on subprime, but also on fair 
housing and to deal with the regulators because it is a problem 
and it is compounded by the element of discrimination.
    So I do want to make clear we are very well aware of that. 
The latest data was discouraging. In the City of Boston, the 
data showed that middle income African Americans were more 
likely to be in a subprime mortgage than white people several 
classes lower in the income scale. And we haven't forgotten 
that aspect of it.
    Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman.
    Mr. Shelton, I wanted to ask your view of the performance 
of Fannie and Freddie in their role in the secondary market, 
Fannie Mae and Freddie Mac, and their business function. What 
is your perspective of their role in the market in facilitating 
homeownership, especially in relation to lower income first-
time home buyers? Have they been a positive?
    Mr. Shelton. From my perspective?
    Mr. Baker. Yes.
    Mr. Shelton. They have basically been quite positive. The 
problem has been that they have not been actively engaged in 
helping to make sure that we are protecting consumers along the 
way. They are there, and they are able to provide greater 
market, greater resources to be able to allow poor and moderate 
income Americans to be able to live out the American dream by 
owning their own homes.
    If the question is, can they do more, the answer is, very 
clearly, yes, they can and yes, they should.
    Mr. Baker. My point was or that I was attempting to make 
was that this is a business enterprise that operates for a 
profit that facilitates homeownership and has a cafeteria style 
of products that they have innovated and offer that enables 
people who otherwise might not qualify for a loan from a 
portfolio lender, who is going to keep that asset in its own 
bank walls--you are able to sell it off to Fannie and Freddie 
as long as it meets certain criteria that they must approve. In 
fact, they actually have little boxes that they send out to the 
originators, and if you are the guy taking the application, you 
stick the numbers in and it cranks out a result.
    That process is obviously blind to the nature of the 
applicant. It comes back with statistics on a piece of paper 
that go in and come back. That process, I take it, has worked 
fairly. Would you agree with that?
    Mr. Shelton. You are saying has it worked fairly well?
    Mr. Baker. Fairly well? Fairly? Pretty good?
    Mr. Shelton. It has worked fairly well. We have had 
meetings with Freddie Mac and Fannie Mae to talk about other 
ways we can expand their ability to do a better job of 
protecting consumers as they are going to purchase those 
mortgages. So if the question is, can they do more, the answer 
is yes. If the question is, are they providing a valuable 
service, the answer is yes. If the question is, will this bill 
help along in that process, the answer is yes there as well.
    Mr. Baker. I didn't get to that question yet, but I will in 
a minute. I have also had meetings with Fannie and Freddie and 
discussed ways that they could improve their business, too.
    I would also point out that when you look at the elements 
that Fannie uses to determine if borrower ``X'' should be 
entitled to an extension of credit, one element of that 
calculation is the debt-to-income ratio. It is 65 percent. The 
bill has a 50 percent cap.
    Now, there is no clear definition of what constitutes debt, 
so that is a little bit in the air right now. My point to you--
and let me give you my little diatribe. No one on this 
committee I am aware of has ever expressed defense of those who 
abuse their fiduciary duties. In fact, we all are joined 
together to ferret out those who have abused their privilege--
in my case, I have been sort of suggesting to Fannie and 
Freddie a change in their ways--and we will go after with vigor 
those who abuse this responsibility.
    There can be, however, reasonable differences between 
people as to how we should accomplish this reform. I merely 
point out the DTI issue as one of several steps. The 
consequence of this, although some will argue to the contrary, 
I do not believe can be argued.
    If your debt-to-income ratio is going to be capped or else 
you are outside safe harbor, consequently secondary market 
interests are going to be concerned about acquisition, and 
under the Fannie black box method you would qualify at 61 
percent, there will be people who will be prohibited from 
entering into a homeownership opportunity that would otherwise 
be found to be an appropriate contractual obligation that might 
lead that family to live in that home for many years to come.
    I just don't understand why we can't discuss the regulatory 
environment with an eye toward market operation and toward 
consumer protection. The two are not mutually exclusive. Is it 
your view that every originator of mortgages has violated their 
responsibilities to borrowers? Is it most? Is it some? Is it a 
small percentage? In my view, it is a small percentage, and we 
ought to go get them, and I will hold hands with anybody to go 
do it.
    But we cannot ignore the consequence of policy which will 
ultimately restrict the flow of credit to people who otherwise 
would qualify, given the role of Fannie and Freddie in the 
marketplace. Do you agree with what I have just said?
    Mr. Shelton. Some of it. Let me just say that first, the 
idea here is to make sure that those who are able to take out 
loans for mortgages can sustain those loans, that they very 
well will not end up losing their homes, their life savings, 
and their futures in many cases.
    Very clearly, under today's circumstances, we are very 
clear that the standards are not clearly in place. We are 
seeing now millions of Americans actually jeopardizing the very 
American dream that we all work so hard here in Washington to 
be able to secure.
    Mr. Baker. Well, let me point out that the investor market 
is also tied in parallel with that--
    Mr. Shelton. I understand there is legislation--
    Mr. Baker. If I may, sir, I will tell you that the investor 
end of the world is also tied because they are losing zillions. 
Every time homes go into foreclosure, it is not the way to make 
money. And nobody is interested in seeing failure. And so I 
suggest to you we are seeing this similarly.
    Mr. Shelton. Well, we are seeing this similarly. Perhaps 
the response in how we move from where we are now to a better 
situation for those who are about to lose their homes, and as 
we prepare for those who would like to be able to enter the 
market to experience the American dream by being able to own 
their own homes, is what this discussion is really all about to 
a great extent.
    This legislation that we are talking about is legislation 
that we very strongly believe will move us a long way in 
helping to achieve that process of making sure we can protect 
Americans from these unscrupulous predatory lenders.
    Mr. Baker. So my time is--you have expired my time.
    Mr. Shelton. Sorry about that.
    Mr. Baker. But let me wrap up. So you don't find limiting 
the current Fannie/Freddie practices in their screening 
requirements and making them ratchet back ill-advised in 
consequence of this reform effort?
    Mr. Shelton. Freddie Mac and Fannie Mae have a major role 
to play in this process. I am not as secure in the terminology 
you utilize as being consistent with our vision and our view of 
these problems. But we would be delighted to sit down and talk 
to you about it.
    The Chairman. And if the gentleman would allow me briefly, 
it is refreshing to have him come to the defense of Fannie and 
Freddie's practices in this--
    Mr. Shelton. We are all plowing new ground.
    The Chairman. And fertilizing it.
    The Chairman. The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Mr. Calhoun, you have been here before, and this committee 
and the Congress of the United States have benefitted from the 
work that you have done. You have been one of the leaders in 
dealing with predatory lending. And I want you to help me to 
understand the yield/spread premiums a bit better.
    As you know, this bill would ban the yield/suspend 
premiums. And I want to know whether or not some of our 
financial institutions and banks have encouraged loan 
origination from nonprofits and other groups who are 
benefitting also from the yield/spread premiums. Do you know 
how it all works?
    Mr. Calhoun. Well, the yield/spread premiums, I think, in 
the provision here is one of the most important because I think 
the approach of this bill that is really critical is not that 
it just prohibits the end results that we don't like, such as 
steering, but it addresses the market incentives that have 
produced those bad results. And the yield/spread premium has 
been at the core of that, along with prepayment penalties on 
subprime loans.
    I think you heard support from even many of the regulators 
here because lenders are in a position where they can't correct 
that problem. If they adopt a policy--for example, Option One, 
one of the largest subprime lenders, previously had a policy of 
not paying yield/spread premiums. It even had on their Web site 
a disclosure to borrowers saying, don't get a loan with a 
yield/spread premium. It creates a conflict of interest.
    They found that the brokers simply boycotted them and took 
the loans to other lenders that did pay yield/spread premium. 
And the result was not that borrowers were protected; Option 
One was forced to reverse its policy and start paying the 
yield/spread premiums like everyone else.
    So that provision is one of the--
    Ms. Waters. Aside from brokers, who else was benefitting 
from the yield/spread premiums? Did nonprofits--were they able 
to originate loans and take advantage of earning money that 
    Mr. Calhoun. That has generally not been a widespread 
problem in the market that we have seen, and we work with a 
large number of other nonprofits.
    Ms. Waters. The financial institutions that benefitted from 
having the brokers and others who were out originating loans, 
were these some of the ones that were getting credit for--
getting CRA credit?
    Mr. Calhoun. There has been a problem that CRA credit and 
GSE, Fannie and Freddie, affordable housing credit has in the 
past at times been given for loans that were not constructive, 
that were predatory. And Freddie earlier this year, after we 
met with them, agreed to change practices to that, and Fannie 
has now changed it because OFHEO closed an area there. And so 
we applaud that move.
    One thing that was raised earlier is we need to make sure 
that CRA credit and Fannie and Freddie affordable housing goals 
are used as one of the tools for rescue loans. And for those 
loans to get borrowers out of these exploding 2/28s, those 
should be given the highest credit to both the financial 
institutions who need CRA credit and also to Fannie and 
    Ms. Waters. Thank you. Mr. Taylor, you are from California, 
and we have a big problem.
    Mr. Taylor. I am not from California.
    Ms. Waters. You are not from California?
    Mr. Taylor. No.
    Ms. Waters. Oh, I thought you were.
    Mr. Taylor. I get around a lot, but--
    Ms. Waters. Okay. Let me ask you, because you have been on 
the Hill working on the issue of trying to expand opportunities 
for low- and moderate-income housing for a long time, what 
would you do to strengthen this bill? This seems like a pretty 
strong bill, a pretty good bill. What else would you do?
    Mr. Taylor. Well, I think that one of the most important 
things is how to deal with the securitizes because we all know 
that the pipeline that was built from Wall Street that 
essentially opened up the spigot for this kind of predatory 
capital and predatory loans, if there isn't accountability on 
that end, I think, you know, we are simply not going to deal 
with one of the major sources of the problem.
    And so having accountability on that end, and having 
consumers have the right to be able to pursue remedies that 
really discourage this kind of activity. What we don't want to 
occur is the remedies end up being almost like a cost of doing 
    Now, I am not suggesting that the language can't be 
strengthened or we can't do some things that change things in 
this bill. But I am fearful that the way it is currently 
written, it is very difficult for people to hold people 
accountable, and it is very--on the broker end of things, being 
fined three times your broker's fee, you know, if you are only 
caught occasionally and you are willing to pay that fee, it may 
be just a cost of doing business.
    On the securitizer's side, if you are really insulated 
because you get to sort of determine if you have done due 
diligence, and you have this fairly simple--what we think is a 
simple process to sort of certify that you are in compliance, 
we don't think that you are going to have the impact on that 
body that you need to have because they are critical, critical 
player in this whole process.
    Ms. Waters. Thank you.
    Mr. Taylor. I don't know if one of my colleagues want to 
add to that answer.
    Mr. Watt. [presiding] The gentlelady's time has expired. I 
now recognize the ranking member of the full committee for 5 
    Mr. Bachus. I appreciate that, Congressman Watt.
    Mike Calhoun, I am going to ask you this question. Okay? 
You know the Paulson & Company, the hedge fund, the $20 billion 
hedge fund?
    Mr. Calhoun. Yes.
    Mr. Bachus. You are familiar with them?
    Mr. Calhoun. Yes.
    Mr. Bachus. You know what their investment strategy is?
    Mr. Calhoun. We asked earlier, did anyone see this crisis 
coming. They were one of the people who did, and they purchased 
stock options that were based on their projection that the 
subprime market would perform poorly.
    Mr. Bachus. Yes. You know, they profit from the carnage in 
the mortgage--you know, the meltdown in our mortgage market. I 
mean, you are aware of that. Right?
    Mr. Calhoun. The money that they made came from investors 
who took the opposite side of that projection and who were 
investing thinking that the subprime market would go up. So it 
was a transfer from some stock speculators who were betting the 
market would go up to those who were betting it would go down. 
    Mr. Bachus. And yes, I mean, they have said--and people 
have characterized that. I know the American banker, that they 
were basically betting against the American homeowner, and that 
the more people that lose their homes, the more profit they 
make. I mean, absolute--the more foreclosures, the better off 
they are. I mean, that is true, isn't it?
    Mr. Calhoun. The more that subprime lenders' stocks go 
down, that is what they have bet on and that is what determines 
their profitability.
    Mr. Bachus. But there is a correlation between the number 
of foreclosures and--
    Mr. Calhoun. Certainly.
    Mr. Bachus. You know, knowing that, and it was all in the 
papers that they gave you all, what, a $15 million donation?
    Mr. Calhoun. Yes.
    Mr. Bachus. How do they--how does that square up? I mean, I 
am trying to visualize in my mind. You know, they profit from 
the foreclosures and the carnage in the mortgage market. And as 
things get worse, their profit goes up. But then they turn 
around and then give $15 million to CRL. Is that like their 
conscience is bothering them? What is that all about? How do 
they see you all as an advantage to them?
    Mr. Calhoun. Well, from our perspective, the $15 million is 
provided for foreclosure relief, to provide attorneys--most of 
this money will be granted by CRL to legal aid attorneys and 
other attorneys who represent borrowers who are facing 
    Mr. Bachus. Yes.
    Mr. Calhoun. And there is--and I think this is an important 
point in the larger context of the bill--
    Mr. Bachus. Yes. Let me say this. I am not--you know, you 
take their money and you do something which is constructive, 
and you help people in foreclosure. I am not criticizing you. 
You know, I am not criticizing what you do. I am not 
criticizing your mission of protecting homeowners, trying to 
help them in a foreclosure situation. I am not questioning your 
motives or your mission.
    I am just sort of saying--I mean, these guys are driven by 
the bottom line. I mean, they are hard-nosed businessmen. You 
know, been talking about hedge funds and all, and here is a 
hedge fund that kind of bet against--I mean, profits from the 
misery in the American housing market right now.
    And I just--I am trying to figure out, did they tell you 
why they were giving you all the donation? I mean, did they say 
that they are profiting from this so they want to give the 
money back, or what?
    Mr. Calhoun. I think they recognized that a lot of families 
are losing their home, and wanted to make some effort to do 
something about it. And I think the message in the larger 
context here is, as we talk about the risk of litigation, is we 
have had a lot of bad lending going on and market crashing.
    There has not been a wave of litigation. In fact, it has 
actually been the opposite. There has been a dearth of lawyers 
to represent borrowers who are facing foreclosure even when 
they had very illegal loans. And that is our concern, that this 
bill--if you put it in the context of the bill that is before 
the committee and your bill today, too--is we fear that you go 
too far in insulating the secondary market. We believe it needs 
to be preserved. It is absolutely critical and has to be 
    But if you totally insulate it, you make it even harder 
than it is today for borrowers to get relief, even in 
    Mr. Bachus. Okay. I guess all of a sudden I am realizing 
what--so the increased litigation against these subprime 
companies or, you know, mortgage companies obviously takes 
money off their bottom--you know, their balance sheets and 
their bottom line. And I guess it helps drive that stock down, 
which Paulson & Company would profit from.
    Mr. Calhoun. In most cases now, the loan is owned and the 
credit risk has been passed on to the secondary market.
    Mr. Bachus. When the secondary market melts down, do they 
profit financially? I guess they would, wouldn't they?
    Mr. Calhoun. It depends. Typically, the subprime lender is 
insulated at that point.
    Mr. Bachus. All right. Thank you.
    Mr. Watt. The gentleman's time is expired. I will now 
recognize myself for 5 minutes. Before Mr. Baker walks out, I 
will say something nice about him.
    Mr. Baker. I am not going anywhere.
    Mr. Watt. That will make him sit down. The one thing I have 
found about Mr. Baker is when he says something, I don't always 
agree with it, but it does cause me to look at provisions much, 
much more carefully than I otherwise might. And his questions 
about the debt/equity ratio is one that, before he left, wanted 
to make further inquiry.
    In the bill, there is this final product. It is on page 58 
of the bill. It says, ``A creditor may not extend credit to a 
consumer under a high cost mortgage unless a reasonable 
creditor would believe at the time the loan is closed that the 
consumer or consumers will be able to make the scheduled 
payments associated with the loan.'' That is the general 
statement. And then it creates a presumption of ability to pay 
if the debt-to-equity ratio is 50 percent or less.
    Now, if you read that the way it is written, the 
presumption is independent of the general rule. But as a 
practical matter, I guess the question I am raising and the 
question that Mr. Baker is raising is: Will the 50 percent 
debt-to-equity ratio become the standard as opposed to just 
creating a presumption? And therefore, if somebody is 
creditworthy even though they have a debt-to-equity ratio 
higher than 50 percent, will that make it impossible for them 
to get a loan?
    And so I would just invite you all at some point to look 
more closely--I don't expect you to do it on the fly today--at 
whether it might be more advantageous, as Mr. Baker--I think 
his suggestion--
    Mr. Baker. Would the gentleman yield?
    Mr. Watt. --to end the discussion at the end of line 12, 
where we state the general rule and don't put the presumption 
in there. I am happy to yield to the gentleman. I didn't want 
to dwell on this, but--
    Mr. Baker. No, no. I appreciate the gentleman's courtesy, 
and I will be very brief. First, I want to acknowledge the 
chairman's mark does allow regulators to go beyond the 50 
percent limitation that is the presumptive statement of the 
    But secondly, there--
    Mr. Watt. But if it is a counterproductive--if the market 
is going to read that as if anything that is not fitting in 
that presumption is therefore unallowed--
    Mr. Baker. I think the gentleman's perspective is correct. 
It will create--if you are worried about reputational risk as a 
mortgage originator as the securitizer, you are going to look 
at the statute as evidence of what constitutes expected 
practice, and you will have to explain yourself.
    And one other little quick point and I will quit. The DTI 
ratio is not only a problem for low-income borrowers, who 
generally may have a higher debt load; it is also a significant 
problem in high cost mortgage areas like New York, where you 
typically have someone who has much more than 50 percent of 
income in mortgage payment. And then finally, the debt itself 
is not defined.
    Mr. Watt. I understood that when you made your original 
point. We don't want to unintentionally create a consequence 
that we are not looking for. So I would just ask you all to 
look at that time a little bit more aggressively. I will look 
at it more aggressively also, and ask the staff to look at it.
    The other question that was raised in both Mr. Calhoun and 
Ms. Bowdler's testimony was this question of enforcement. And I 
have been trying to glean my way through this because what you 
all seemed to be saying was that somehow, the anti-steering 
provision would have a lower level of enforcement than other 
Truth in Lending enforcement provisions.
    I don't see that. It may be true; I am not suggesting that 
it is not true. But if I trace--the anti-steering provision 
becomes a part of the Truth in Lending Act. Then we say on page 
19 that there is enforcement of the Truth in Lending Act. And 
then we go back at some point and make it clear--I may have 
lost my place where we do that, but at some point we make it 
clear that nothing anywhere in the bill reduces the rights that 
people have under the Truth in Lending Act.
    So maybe I am missing something here. And if you can 
enlighten me now, do so. If you can't do it right now, I would 
invite you to do it as we move forward in this process.
    Mr. Calhoun. In two respects, the liability for steering is 
greatly restricted. First of all, on page 20, line 4, there is 
a cap for violations of Title 1 of 3 times the originator's 
fee. And this was addressed, I believe, in other testimony, to 
any of the violations of Title 1. And that is where the 
steering prohibition appears.
    And so that would be a cap which typically would be far 
below the typical Truth in Lending damages. And if you have, 
for example--you know, it has been talked about if there was a 
loan with a broker fee of $2,000 or $3,000, 3 times that would 
be the maximum cap even though the steering violation could 
have caused much larger actual damages.
    Equally important, there is no secondary market liability 
for violations of Title 1, which would include the steering 
violation. So you would have no action against the secondary 
market if you have been steered to a more expensive loan.
    Mr. Watt. I like sitting in the chair because the lights 
don't work to cut me off. But I am going to presume, as we do 
in that section that we were talking about on page 58, I am 
going to create a presumption that my time has expired. And 
    The Chairman. You managed to fake out the clock when you 
yielded to Mr. Baker, and they thought that you had given up 
your time. So that worked very well.
    Mr. Watt. My time is expired, and I recognize Mr. McHenry 
for 5 minutes.
    Mr. McHenry. I thank my colleague for yielding.
    Mr. Calhoun, I wanted to follow up on the ranking member's 
questions. Paulson & Company is a hedge fund that is betting on 
the mortgage crisis getting worse. Correct?
    Mr. Calhoun. They are betting on subprime loan company 
stocks declining.
    Mr. McHenry. As you said, the more subprime company stock 
goes down, the better they do, and apparently the better CRL 
does because you got a $15 million contribution from them.
    My question to you is this. There is also the Brad Miller 
bankruptcy bill. Reading from Business Week, you have been 
invited--the Center for Responsible Lending has been invited by 
Secretary Paulson to get in and advocate for this bankruptcy 
bill, which many regard as having the effect of chilling the 
marketplace even more and harming subprime company stocks and 
the mortgage market. Is that correct? Have you joined the 
    Mr. Calhoun. We have not made a decision whether to join 
the coalition. We were one of the--we have advocated for 
bankruptcy reform narrowly targeted to this crisis for a long 
    Mr. McHenry. All right. Well, it seems--it is apparent that 
your funders are also interested in you helping propagate a 
crisis so they can profit.
    Let me talk about the North Carolina law because a lot has 
been made of this North Carolina law, and I know you have 
touted it significantly. A number of different studies have 
come out, and I know you have seen some of them. But I also 
know that CRL is in the mortgage lending business. From your 
disclosure with the NCUA, you had a 191 percent jump in 
delinquent mortgages between 2004 and 2005.
    Is this predatory lending?
    Mr. Calhoun. Our mortgages are fixed rate mortgages, 
typically within 100 to 150 basis points of prime loans. We 
make them in connection with major bank partners, including 
most of the top 10 banks in the country.
    Mr. McHenry. So you had a 191 percent increase in 12 month 
and over delinquent payments. How do you explain this? I mean, 
apparently you have issues in the mortgage marketplace as well.
    Mr. Calhoun. We have enjoyed a foreclosure and loss rate in 
the low single digits. An experience that we have and other 
mortgage lenders have in the subprime market is that these 
loans do have greater delinquency. Overall--
    Mr. McHenry. So you had a 191 percent jump, and that is 
    Mr. Calhoun. Provided--we monitor our loans very closely--
provided that those loans cure and catch up. And that has been 
our experience when--
    Mr. McHenry. And you have had significant write-downs as 
well. In 2006, you had a 163 percent jump in chargeoffs and a 
220 percent increase compared to 2005. That is significant.
    Mr. Calhoun. The percentage increases are, but our 
chargeoffs are still far, far below industry standard.
    Mr. McHenry. Well, I will accept that. That is fine. But 
let's talk about the overall issue in North Carolina--
    Mr. Taylor. Can I ask--
    Mr. McHenry. --because the North Carolina law--I can get to 
you. I only have 5 minutes, sir. But there is a decline, an 
11.4 percent decline, in subprime refinancing in North Carolina 
after the North Carolina law went into effect, compared to a 4 
percent increase in other States.
    As I see it, as I see it, we have an issue right now of 
people who are trying to refinance out of these high rate 
loans, high cost loans. If we put in place the North Carolina 
law at the national level, which is part of the legislation we 
are discussing today, that will further constrict people's 
ability to get another loan and refinance.
    If you look at the North Carolina experience, it is an 11.4 
drop while at the same time other States experience a 4 percent 
rise. It seems to me that what you are advocating is exactly 
what the folks from Paulson & Company in the hedge funds want, 
which is to further spread the pain of these losses in the 
mortgage market and make it more difficult for people to get 
lending to get out of the troubles they are in.
    What do you say to that?
    Mr. Calhoun. North Carolina, like other States, saw an 
explosive boom in subprime lending, including refinancing, 
since the North Carolina law has been in effect.
    Mr. McHenry. That is not true.
    Mr. Calhoun. Our lending--refinancing--
    Mr. McHenry. What are your facts? What is your proof on 
    Mr. Calhoun. I will be happy to submit to you from industry 
sources the exact volumes--
    Mr. McHenry. Because I have three different studies here.
    Mr. Calhoun. It quadrupled our subprime lending--
    Mr. McHenry. Burnett, Finkel, and Kaul in 2004 confirmed 
this notion, finding a 16 percent decline in origination by 
subprime lenders in North Carolina. That is a significant 
    Mr. Calhoun. Subprime lenders or subprime loans?
    Mr. McHenry. Subprime lending.
    Mr. Taylor. There was one study--
    Mr. McHenry. And I am speaking to Mr. Calhoun, sir.
    Mr. Calhoun. I don't know which one you are quoting from 
there, that showed--
    Mr. McHenry. Burnett, Finkel, and Kaul.
    Mr. Calhoun. --that showed a reduction between the time the 
act was enacted but before it went into effect. But subprime 
lending, and the Commissioner of Banks has been here and 
testified several times to this in North Carolina, has grown 
explosively, which is a good thing and which we encourage. We 
are subprime lenders and view that as an important ladder to 
the middle class.
    Mr. McHenry. But just for note--
    Mr. Calhoun. But it has been a trap door with the abusive 
loans that we have had.
    Mr. McHenry. But just for note, there is a--the growth rate 
in subprime lending in North Carolina is 20 percent less than 
the national growth rate. So it has been further restricted.
    My concern here is that we don't hurt the very people that 
all of you espouse to help and we all seek to help, those that 
are in very difficult financial situations. And I believe if we 
put in a government mandate of what mortgages are allowed and 
not allowed, and specify key loan terms that the market can 
only accept or reject, that we are going to hurt the very 
people we are seeking to help to get out of this mortgage 
challenge that we are facing.
    So with that, I would be happy to yield back my time.
    The Chairman. The gentleman from Missouri.
    Mr. Cleaver. Mr. Chairman, in the interests of time and, 
since I agree with and in most cases identify myself with the 
comments of the panelists, I would forgo any questions. I 
appreciate the statements from our panelists and I would hold 
my comments to the next panel. Thank you.
    The Chairman. I thank the gentleman. Mr. Taylor, do you 
wish to respond?
    Mr. Taylor. I am very upset about this last line of 
questioning. Because I didn't realize this was a hearing on CRL 
which, coincidentally, does primarily lending to low-income 
people, which might have something to do with why they have 
high delinquencies. And it is delinquencies, it is not 
    I mean, their record of serving underserved people is 
impeccable and second to none. And the inference, which I see 
as just bullying, that because you receive a contribution to do 
something good--I mean, all of you up there get contributions 
from many of the people that we are talking about. I find it 
deplorable that you would attack the integrity of that 
    Mr. McHenry. If I may respond, Mr. Chairman?
    The Chairman. Let him finish and then, it is not your time, 
but the gentleman's time, but if he finishes, I will call on 
    Mr. Taylor. I just think that it is unfair to look at a 
source of income. I think you need to look at what their 
contribution has done, what they have been trying to do. And 
clearly, for many years, they have done loans to people who are 
underserved. They have been a leader in fighting to try to 
assist the people that you say we are all trying to help, and 
that is underserved people. None of us are trying to constrict 
the market. The only thing we are trying to constrict is bad 
loans that get people into trouble.
    And I just find your line of comment offensive. And I don't 
mean any disrespect for that. I am just sitting here offended 
on behalf of CRL because I don't think it is fair.
    Mr. Bachus. Mr. Chairman?
    The Chairman. Yes, the gentleman from Alabama.
    Mr. Bachus. If I may respond, I would like both--since we 
have gone extra time, I would like--are you talking about the 
gentleman from North Carolina? Are you talking about both of 
    Mr. Taylor. I wasn't referring to you, Mr. Bachus. That 
particularly was bothering me.
    Mr. Bachus. And let me just say this, because I thought 
    The Chairman. I was going to recognize the gentleman from 
North Carolina. If the gentleman from Alabama wants me to 
    Mr. Taylor. I thought you said--your comments were not 
    Mr. Watt. Mr. Chairman, point of order?
    The Chairman. Yes.
    Mr. Watt. I am just wondering, it seems to me we are 
wondering, Mr. McHenry has had his say, Mr. Taylor has had his 
say. This is not about CRL; this is about the bill. And I 
    The Chairman. I appreciate it. I will give Mr. McHenry a 
brief time to respond. He did have his time and Mr. Cleaver's 
time. But I will recognize Mr. McHenry.
    Mr. McHenry. I appreciate it, Mr. Chairman. And I want you 
to know very sincerely, Mr. Taylor, I know you wanted to answer 
some of my questions. But my questioning--I am from North 
Carolina. I served in the legislature. I have a large awareness 
of CRL.
    I know that their studies are vastly different, in many 
cases, from the rest of the industry and the rest of the 
marketplace. I am not questioning Mr. Calhoun's integrity, 
never did I do that. I am offended that you would say that.
    But let me finish by saying this. I think all of you are 
respectable human beings for coming forward and sitting before 
this committee and taking tough questions. This is a real issue 
for America. I am very concerned about it and all my colleagues 
are. It is out of genuine concern that we want to make sure we 
do this correctly and that we don't hurt the marketplace.
    The Chairman. Mr. Cleaver, did you--
    Mr. Cleaver. I just wanted to say, I will never pass again.
    The Chairman. No good deed goes unpunished, Pastor. You 
should have known that.
    Next, the gentlewoman from Florida.
    Ms. Brown-Waite. Thank you. And I apologize for not being 
here this morning. I am the ranking member on Veterans 
Oversight and that is why--
    The Chairman. I would say to the gentlewoman, and I would 
say this in general, as chairman, I have come to the view that 
no member need apologize to me for not being here. Sometimes, I 
wish some members would apologize for being here.
    The Chairman. But I never object when members are not here.
    Ms. Brown-Waite. Thank you, Mr. Chairman, for being so 
understanding. I hope I am not one of those members you would 
rather not have here.
    When I have spoken to constituents who have contacted me 
about problems that they have incurred about having a subprime 
mortgage, it was a combination of issues that they faced. They 
didn't realize or they realized it and just the combination of 
events became overwhelming. But when you buy a piece of 
property, that that property gets reassessed at the sale price, 
the higher price.
    I happen to be from Florida where homeowners insurance is 
overwhelming. And now to add insult to injury, we also are 
redoing the flood maps so people who, when they bought the home 
weren't in a flood area, they now have to buy flood insurance. 
So it is not just the subprime issue that is causing so many 
    I would like to have anyone on the panel comment about 
that. It certainly is a part of the equation, but I don't think 
that it necessarily is the whole equation. And I know that 
insurance rates in North Carolina, for example, have gone up. 
Anywhere along the coast they have gone up. And last time I 
checked, most places reassess the value of a property at or 
shortly after the property is sold. So are we looking at the 
whole shebang here or are we just saying it is the subprime 
that has caused the foreclosure?
    And any one of you on the panel who would care to answer.
    Ms. Bowdler. Sure. Can you hear me? I will go ahead and 
jump in and start but my colleagues, please feel free to jump 
    I think the point you raise is a really excellent one in 
that so much of the dialogue about this bill and about the 
problems in the market have been very global. You know, what is 
going to go on with Wall Street, what are the investors going 
to do? But really, there is also a very transactional nature to 
this business and I think actually it was Mr. Barrett who said 
it in his opening statement, relationships are important.
    And so what we have seen is those folks on the ground who 
are doing the appraisals and the mortgage brokers who are 
actually arranging the transactions, they carry a lot of 
weight. Families trust them the same way they trust their 
doctor or lawyer. So certainly, it is NCLR's position that 
unaffordable loans, which have really festered in the subprime 
market to a large extent are really at the core of the 
predatory lending problem that we have. But the additional 
problems that you are describing really go to ability to repay 
and whether or not that originator that was sitting across from 
that family took into account the actual taxes and insurance 
that that borrower was going to have to repay, and did they 
account for things like in Florida where situations may change?
    And certainly we believe that they have a responsibility to 
do that. They are an advisor to the borrower.
    Ms. Brown-Waite. Well, at closing, there have to be certain 
forms that are filled out, the RESPA form if it went through a 
real estate agent, etc., so that that information is out there, 
and they have to do it to the best of their knowledge.
    Now, rates in Florida, assessment rates, are determined in 
late September for the taxing year. And you can only guess what 
a county commission is going to do, because sometimes it really 
is a guessing game. But they are required to give that 
    Is it that people get so caught up in the oh, good, I 
finally can buy a home, that this euphoria takes over and the 
day of reckoning is kind of put off in the back here? 
Regardless of whether it is a subprime or not. Which I have a 
follow-up question. I don't know how much more time I have.
    But what basis would a lender actually have for determining 
which loan is best for a consumer?
    Mr. Bryant. Before your follow-up question, the issue there 
is financial literacy. I mean, the same issue--my dad is a 
brilliant guy, a great businessman. But he didn't understand 
money. And so if you don't know better, you can't do better.
    If you are signing documents that you don't understand, if 
you are asking what the payment is versus what the interest 
rate is--and this is not a poor people issue; 80 percent of 
Americans, according to the Federal Reserve, are living from 
paycheck to paycheck.
    Financial illiteracy is a universal issue and that has to 
be addressed. Otherwise, you are just rearranging the deck 
chairs on the Titanic. So that is number one.
    Living by the coast--
    Ms. Brown-Waite. But, sir, those figures are in front of 
you at a closing. Those figures are in front of you at a 
closing to the best of the person's--
    Mr. Bryant. But if you don't understand money, if you 
don't--it is what you don't know that you don't know that is 
killing you.
    If you are financially literate, it is hard to understand 
somebody who is financially illiterate. But the issue is here 
that if you do a survey of your staff, you will find that they 
are living from paycheck. This crisis--
    Ms. Brown-Waite. Did they complain to you?
    Mr. Bryant. Excuse me? I will check my e-mail.
    Ms. Bowdler. The fact that the documents and disclosures 
are present at closing is really--is one part of the problem 
that was brought up earlier about the timeliness of the 
information. By the time you sit down at the closing table, 
your bags are packed, your earnest money is in. All of that is 
going on. Everything you sign at that point is to protect 
everybody else; nothing about it is actually to protect the 
borrower or really to even inform the borrower.
    It is like putting in front of you the manual for how to 
conduct your own surgery and then saying, why didn't you know 
how to do your surgery?
    Ms. Brown-Waite. Ma'am, let me just tell you, I have had 
Realtor after Realtor tell me about people who go to the 
closing table and they say, whoa, didn't know my homeowners 
insurance was going to be that much, I didn't know my payment 
was going to be this much.
    They walk away at the closing table because they are 
informed and they are told how much it is going to be. So I 
    Mr. Taylor. If I could respond to that?
    The Chairman. Quickly.
    Mr. Taylor. We actually deal with a lot of consumers who 
find themselves in these problems. And invariably we hear a 
very similar story of people going in and thinking that the--
whether it is the broker or the lender, are really operating in 
their interests. And basically there is a lot of kind of blind 
faith in the process in which they think those people are 
operating in their interests. And a lot of people are kind of 
talked into, you know, you can do this loan, it is not going to 
be a problem, don't worry about it, this is the way everybody 
is doing it. And they really believe these folks.
    And in Florida, the other major problem you have is you 
have massive amounts of appraisal fraud and valuations that are 
very inaccurate that I think are compounding, which gets at the 
first part of your question.
    The Chairman. I think we are going to be dealing with the 
appraisal issue, in fact, in Mr. Kanjorski's appraisal and 
other places.
    The gentlewoman from New York.
    Mrs. Maloney. Thank you. I would like to ask the panelists, 
beginning with Mr. Calhoun, to respond to this statement that I 
hear often from industry representatives. And some industry 
representatives claim that any effort to regulate these 
mortgage products would result in an even greater credit 
crunch, making it difficult for people who should have a home 
and should be able to afford one, that the credit crunch will 
hurt them. So I would like you to respond to that claim, Mr. 
Calhoun, Ms. Bowdler and just down the line, anyone.
    Mr. Calhoun. First, let me say I agree that we need to be 
extremely careful not to restrict credit. And the bill does 
this in one fundamental way, in that it allows very high 
interest rates. You can charge interest rates, for example, 
before you even trigger the high-cost loan threshold, you can 
be charging 13 percent interest on a first mortgage loan.
    Now that is why Joe Smith, the commissioner of banks, comes 
in and says there are not many people being denied credit when 
you can charge them 13 percent on a first mortgage loan. But we 
think that is appropriate because the market works well 
competing over interest rates.
    What the bill we think appropriately does is eliminate some 
of the gimmicks, for example, locking borrowers in with 
prepayment penalties so another lender can't come in and 
refinance them at a much better rate. But we need to be very 
careful not to restrict credit, that we allow it but channel it 
toward the interest rate where competition--and again, it has 
to be competition and self-policing that makes this work. We 
can't look over the shoulder on three million subprime 
mortgages a year, much less the 15 million total mortgages 
being originated each year.
    Mrs. Maloney. Would anyone else like to comment?
    Ms. Bowdler. We agree. And it is really not about cutting 
off credit to the subprime market because we agree that it is 
important and I think there is a viable market out there that 
is demanding to be served. It is about fair and equal access to 
    We actually went out and talked to mortgage brokers and 
interviewed them and we found that they were doing responsible 
business in this area and they were earning a profit. They were 
making a living. It can be done. You can offer fair and safe 
products in this area and make a living. And it sounds like the 
Congresswoman from Florida had access to those kinds of agents 
that said to their borrowers, this isn't for you, and that is 
what you should be doing.
    Mrs. Maloney. Any other comments?
    Mr. Taylor. We have a serious credit constriction now and 
we don't have this law. We have it because we didn't have this 
law. We have the problem because there just wasn't standards 
and accountability that would allow for clean and fair lending 
processes. So we have it. We have this constriction because 
we--and, frankly, I don't know who the folks are who are saying 
we are going to have a credit crunch if we have this bill. But 
we sent a bill in last week to the Chairman, both this 
committee and the Senate Banking committee, signed by NCRC and 
the top 10 banks in the United States calling for national 
anti-predatory lending legislation. So I don't know who those 
folks are, but my suspicion is those are the ones who profit 
from these kind of predatory kind of loans that want to not 
have the law that prohibits that. But I can tell you, the 
mainstream financial institutions who got out of a lot of this 
business a long time ago, yes, sir.
    Mrs. Maloney. Thank you. I would like the panelists to 
comment on some of the statements--
    The Chairman. You had one other--Mr. Bryant wanted to 
    Mrs. Maloney. Excuse me.
    Mr. Bryant. Just building on that, with mortgage brokers 
alone, you have the wild, wild west out there right now. There 
are no rules of engagement. This provides rules of engagement. 
It also provides a floor, not a ceiling. It's very important, 
and I think it will create an environment where more capital 
gets unleashed because people know the rules of engagement.
    Right now there is a credit crunch, right now. So this will 
hopefully free it up by providing clarity.
    Mrs. Maloney. I would like the panelists to comment on 
really the statements by Sheila Bair from the FDIC, which 
called for having mass negotiations to help people stay in 
their homes. And the fact that we have done so much on this 
committee to help people stay in their homes, yet the 
percentage of people who are negotiating and taking advantage 
of these tools is only 1 percent.
    What can we do? Fundamentally, this bill moves forward to 
prevent it, but what can we do to help these people stay in 
their homes? Why is it 1 percent, such a low number, and what 
about her idea of mass negotiations?
    Starting with Mr. Calhoun and down.
    Mr. Calhoun. Congresswoman, there has been a lot of work 
including by members of this committee and organizations 
represented here, to try and untie this Gordian knot of how do 
we make the modifications. And we have knocked down a lot of 
the obstacles.
    At first, there were the pooling and servicing agreements 
and then tax rules. But there are two huge obstacles that 
remain and are blocking modifications and no one has figured 
out how to get around them. And they are the following.
    First, the effect of a foreclosure on security holders 
depends not only on the amount of the loss but when it happens. 
And so if a foreclosure happens under the typical structure, if 
it happens in the first 3 years, it falls to the lowest 
tranches to pay it. But if it happens after that period, other 
tranches pay it.
    And so it has been reported in the financial press that 
this is a major obstacle because the holders of the tranches, 
the securities who get the later foreclosure losses are telling 
the servicers if you modify this loan, and not all 
modifications will be successful, and move the foreclosure to 
my time period, I am going to sue you, because you have 
increased the risk of my security over the original structure.
    The other huge obstacle, structural obstacle, that has and 
will continue to prevent modifications is that data shows that 
somewhere between 40 and 50 percent of these resetting loans 
have piggyback second loans. And that makes it extraordinarily 
difficult to modify the first. Because the first lienholder is 
basically going to say, I'm not going to take any reduction in 
my rights or payments until you wipe out the second. The second 
has no incentive, sometimes it is by another lender, usually is 
in another security.
    That is what led CRL to conclude that there needs to be 
some limited relief in bankruptcy, to create a standard not to 
force people into bankruptcy but to create a legal standard of 
this is what modifications can be done and servicers, you won't 
get sued if you do them.
    The Chairman. The time has expired.
    The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman.
    I guess following your lead, I will not apologize for 
having to miss a fair portion of the hearing due to other 
commitments. But I did understand, Mr. Taylor, that you 
lamented my absence and thought I had a fundamental 
misunderstanding of Adam Smith's philosophy, as I alluded to 
the economist and philosopher in my opening statement.
    Although it has been a number of years ago, I have actually 
plowed through The Wealth of Nations in its 18th century 
English. I have a degree in economics, graduated with honors, 
served on the House Budget Committee, and serve on this 
committee. So, please, I want to give you your opportunity to 
illuminate for me what my fundamental misunderstanding of Adam 
Smith may be.
    Mr. Taylor. I think the fundamental misunderstanding is 
whoever communicated what I said to you. Because actually I was 
agreeing with the use of Adam Smith in this conversation. And 
what I went on to say is I went deeper into Adam Smith's--the 
basis for his defining what makes for a healthy economy and I 
talked about capital accumulation, free trade, the role of 
government, and the rule of law.
    And the things that I emphasized which you didn't talk 
about, it is no slight on you, you just weren't talking about 
it, but is the importance of making sure that the individuals' 
rights and properties are protected. And that was the thing. So 
I mean, you probably do know more about Adam Smith than I do. 
But from what I know, and frankly I am quoting Chairman 
Greenspan, so--
    Mr. Hensarling. Always a good one to quote.
    Mr. Taylor. Exactly.
    Mr. Hensarling. Mr. Calhoun, I did miss your testimony 
although I see a portion of your written testimony.
    On page 10 of your testimony, you say, ``In short, improved 
disclosures are not likely to help borrowers.'' Why is it that 
if a--well, let me ask it this way. Is there just something 
fundamentally wrong with consumers? Are they just incapable of 
understanding financial transactions? Why is it that effective 
informed disclosure seems to be an impossibility in your mind?
    Mr. Calhoun. First of all, we strongly support improved 
disclosures. But it is not just our opinion, but the GAO 
studied the issue and concluded that improved disclosures were 
not likely to significantly reduce predatory lending. And the 
reason is that the market currently rewards unscrupulous 
practices and in fact penalizes lenders who engage in 
responsible practices.
    Mr. Hensarling. Well, let me ask you this question if I 
could. It continues to be an ongoing debate in this committee, 
and I have been on this committee for almost 5 years. I haven't 
exactly heard a consensus on the definition of predatory. But 
if there is effective competition within the marketplace, no 
barriers to entry, if I as a consumer, if I understand the 
financial transaction that I am undertaking and I am over 18 
and I consent to that transaction, how is that a predatory 
    Mr. Calhoun. When borrowers are steered to loans at much 
higher interest rates than they qualify for, when borrowers are 
provided loans and given representations that this loan is 
appropriate for you when in fact they have no possible 
reasonable ability to repay the loan short of winning the 
lottery, and that is what we have seen, not just as the 
exception but widespread throughout the subprime market.
    This is an unprecedented market meltdown in foreclosures. 
And it is not that borrowers suddenly became dumber in the last 
5 years, or that divorce, the economy tanking, or anything else 
has driven it.
    They were marketed very poor products and a lot of people 
made a ton of money doing it. The market said, if you put a 
borrower into a higher interest rate loan, I'll pay you more. 
If you tag on a big prepayment penalty, I will pay you more. If 
you make it a no-doc loan, I will pay more.
    The head of one of the subprime lenders said, Wall Street 
was telling me, I will pay you more for no-doc loans. Well, 
what do you think I am going to send to Wall Street?
    Mr. Hensarling. Mr. Calhoun, does your organization believe 
that the individual borrower has any personal responsibility to 
ensure that he is entering into a financial transaction where 
he can afford to repay? Does your organization admit to the 
possibility of predatory borrowing?
    Mr. Calhoun. There has been fraud by borrowers in the 
market. Although, again, we believe, and I think the numbers 
support, that that is a small part of the problem.
    We strongly believe that borrowers have responsibility. We 
enforce our loans, including in foreclosure, where we are 
unable to mitigate the loss or work out a modification. We 
don't believe that borrowers should be guaranteed the best 
loan. We don't believe that borrowers should be guaranteed a 
successful loan.
    What we do believe is that the market should put in 
protections, have protections and fair rules. We have 
analogized it to this. It is the time of the year, if you had a 
football game and we said we are not going to prohibit holding, 
we are going to tell people maybe they shouldn't hold, but 
there is going to be no prohibition, no penalty if you hold, I 
think our football games would look a little different than 
they do now; everybody would be holding.
    And that is essentially what we have here, a floor of 
reasonable regulation. And that is not an easy balance to 
strike. And we have acknowledged that and I think that is one 
reason it has taken this committee so hard looking for that 
balance. But a reasonable balance of regulation helps 
borrowers, lenders and investors.
    Mr. Hensarling. I see my time is over.
    The Chairman. The gentleman from California.
    I am going to ask the witnesses to try and be a little more 
    Mr. Sherman. I thank the chairman for not applying that to 
the members.
    One comment about the gentleman's comments from Texas. I 
mean, this meltdown did not come about just because we had bad 
loans. We had bad loans 3 years ago. It came about because we 
no longer have a rising market. And a rising market hides all 
the transgressions.
    So you can have lots of bad loans, you have a rising 
market, things look okay. But when the market then levels off, 
the transgressions are exposed, the transgressions are exposed, 
the market then gets even worse and then you have the downturn.
    The chairman in my last comments educated me about what is 
in the bill. And one thing we are concerned about is that 
ability to pay. Now, ability to pay includes ability to pay the 
property taxes. I hope that we specify in the bill that it is 
the ability to pay the property tax you expect to get after you 
buy the house, especially in those States like mine where, 
unless you are a senior citizen, the property is going for sure 
to be reassessed as soon as you buy it.
    And so I hope that we are able to fine tune the language so 
that when we say ability to pay the property taxes, isn't the 
low bill, which in my State can be very low in the hands of the 
prior owner, but instead is the property taxes this consumer is 
going to face.
    Now, one thing we have in the bill is a 50 percent debt 
payments to income ratio. That is to say in determining whether 
somebody can afford to pay, we say we look at their car 
payment, we look at their student loan payment, we look at all 
the payments they have on non-real estate debt, we add in the 
cost of property, principal, interest, taxes, and insurance for 
the home they're buying, and we look at that whole piece and we 
can make sure that it does not exceed 50 percent of their take-
home pay.
    Is 50 percent the right number? By a show of hands, how 
many think that in order to keep things affordable your total 
real estate payments plus your other debt payments need to be 
set at only 40 percent of your take-home pay?
    The record should show no hands went up.
    How many people think we should set that limit at 60 
percent, so if somebody wants to commit 60 percent to their 
real estate payments and their other debt payments, that that 
is an acceptable, reasonable thing for a consumer to do?
    Mr. Taylor. It depends on the terms and conditions. And--
    Mr. Sherman. I am asking you to help us draft just one 
section of the bill. We got a safe harbor, we require a lot of 
things to be in that safe harbor. One of the things we require 
is some debt payments to income ratio. So assuming the rest of 
the bill stays the same, we are not going to let you write the 
whole bill, we are only going to let you write one number in 
the bill and that is that percentage.
    Do you write it at 50, speaking on behalf of your 
organization? Knowing that if we set this number too high, we 
let people get in above their heads. If we set the number too 
low, we turn away from homeownership people who want to own a 
home. We got the number in this bill, say the exact bill just 
as introduced is going to pass. You may or may not like the 
bill. You only get to write one number. You want 50 percent, 
you want another number?
    I see the witness to your left may have a comment?
    Mr. Bryant. You know, it is interesting, most of this bill 
deals with a floor, sort of a floor approach.
    Mr. Sherman. Right, we don't want to write the Federal 
bill. In this bill--
    Mr. Bryant. This is the one aspect that deals with almost a 
ceiling approach. And the paragraph right above it actually 
deals with, basically says you can only write a mortgage the 
person can afford to pay. That may be a more sophisticated, a 
more reasonable approach to this.
    I don't know what the right number is, but here is what I 
do know--
    Mr. Sherman. Let me just--I have a limited amount of time. 
Do I have anybody here who has a right number, who believes 
that any particular number should be in the bill?
    Ms. Bowdler. I can tell you that for the 20,000 families 
who come through our counseling network, most of their 
affordable products that they get connected to, those--
    Mr. Sherman. Excuse me. This is just one of my many 
questions. Does somebody have a percentage number other than 50 
percent that they recommend to the committee.
    Ms. Bowdler. We are okay with 50 percent.
    Mr. Calhoun. Fifty percent, and I think it is key to 
remember that is 50 percent of their gross income before the 
taxes are out. So you are talking about--
    Mr. Sherman. Oh, so you are at 50 percent not of take-home 
pay, but 50 percent of gross pay.
    Mr. Calhoun. And that is how that, I believe, is intended. 
And so it is a much--
    Mr. Sherman. So the way I would--in my world, that is a 60 
or 70 percent number.
    Mr. Calhoun. Exactly. So we think that is plenty high.
    Mr. Sherman. That leaves you with very little take-home pay 
to devote to anything else. So you are for 50 percent if it is 
50 percent of gross pay.
    Mr. Calhoun. That is how it is done in the industry. That 
is our understanding of the intent of this bill.
    Mr. Sherman. Okay, let us move on to another percentage 
type question. Let us say we have stacks each containing 100 
mortgage applications. We have a stack here where I could tell 
you statistically 25 percent are going to default and lose 
their homes. But the other 75 percent are going to be able to 
make it, going to be able to pay the loan. I have a crystal 
ball, I know what economic conditions are going to be; 25 
percent default, 75 percent people are able to move into a 
    Should government come in and say, don't make any of those 
loans? Or should government allow the lender to make all 100 
    Mr. Calhoun. We think the approach in this bill is right, 
is set fair standards, don't guarantee success. People get the 
    Mr. Sherman. Okay. But I mean, we could set the standard 
differently. What I am trying to get at here is, obviously, if 
we could make 100 loans and only one was going to default, we 
would say, hey, that is great, 99 people became homeowners. 
There is always going to be 1 out of 100 that is a problem.
    At the other extreme, we could say, hey, go make 100 loans. 
If 10 people get to stay in their house and 90 percent have to 
move back to an apartment, that is okay.
    Where do you draw the line? What is--
    Mr. Taylor. If the 25 percent is defaulting because of loss 
of job, then that is acceptable. If the 25 percent is 
defaulting because the originator put them in a loan they 
really couldn't afford in a short period of time, it is not 
    Mr. Sherman. Okay.
    Mr. Taylor. And that is what this bill addresses, ability 
to pay, duty of care.
    Mr. Sherman. Okay, that is a fair answer. Anyone else have 
an answer? I yield back.
    Mr. Kanjorski. [presiding] Several of the witnesses have 
expressed support for my legislation, H.R. 3837, which Mr. 
Frank and I have agreed to mark up in the coming weeks. We need 
to fix problems related to escrows, appraisals, and mortgage 
servicing in order to develop a comprehensive solution to the 
complex problem of abusive and deceptive lending.
    To help us establish a better record on the need to enact 
policy reforms in this area, I am hopeful that each of you can 
answer for us how some or all of the following questions are 
understood or relate to your specialties.
    First, why is there a need for mandatory escrowing of 
taxes, insurance, and other periodic payments for consumers 
with high debt and bad credit?
    Mr. Calhoun. It is to set a fair rule for the marketplace 
to compete with. We hear complaints from this as much from 
lenders and brokers as we do from borrowers.
    Brokers come and tell us that they can't escrow because if 
they do, they will get undercut by another broker who will come 
in and offer a loan without escrow that looks cheaper.
    I mean, Fannie and Freddie require this for similar loans 
in the prime market. And we really want to commend both you in 
your bill and also the leadership that Mr. Bachus has shown 
with his bill and also some of the other provisions. We wrote a 
letter supporting those.
    Mr. Kanjorski. It sort of raises the question of financial 
literacy in a way. Is it so often that these buyers are 
unsophisticated and they do not anticipate the need and the 
value of escrowing, what it means, and anticipate the problem 
of not escrowing? Because I think the statistics show that 
about 60 percent of the regular securitized mortgages are 
escrowed, whereas only about 25 percent of the subprime are. 
And it sounds incredible, because I would think it would be the 
complete opposite. Here, the people who need the support system 
the most are getting it the least.
    Mr. Calhoun. Our experience, very quickly, has been that 
most borrowers have assumed that escrow was included, 
particularly when it was included in their previous loan. And 
if you will, the broker has come in and said, I can lower your 
payment by hundreds of dollars a month without, you know, 
explaining. And that they are doing that in large part by not 
escrowing for taxes and insurance.
    Mr. Kanjorski. That certainly answers my question.
    Why should we improve disclosures for all borrowers who opt 
out of escrowing? And is it successful?
    I listened again to some of your discussion before, in 
terms of notice and information at closing. I have to be honest 
with you guys, I probably have closed personally maybe 10 or 15 
mortgages in my lifetime and hundreds of people that I have 
represented in business transactions. I have yet to read all of 
those documents.
    As a matter of fact, I doubt whether I would have enough 
time to read all of those documents. I remember one rather 
sophisticated closing that took us 12 hours in Philadelphia and 
I think it had 158 documents that had to be executed. Certainly 
people would argue that there was notice, real notice, absolute 
notice. It is nonsense. It was legal notice.
    We comply with this policy of providing a paper and giving 
notice, but nobody ever reads it. And to be honest with you, 
the way some of us write those notice documents, even if you 
did read it, it would be highly unlikely that you would 
understand what you were receiving notice on.
    Yes, Mr. Taylor.
    Mr. Taylor. Yes, Mr. Kanjorski. You are actually getting at 
what I think is one of the core fundamental changes in our 
financial services system, our mortgage lending system that has 
occurred. And that is when you went to closing, when the 
average person, not highly educated, blue-collar person went to 
a closing 15, 20, 30, 40, or 50 years ago, when they went in, 
they could rely upon the integrity of the system. You know, we 
just didn't have what we have now.
    This is really lenders gone wild, or brokers gone wild. 
This is a system that really changed under our eyes. It is not 
the same financial system we used to have.
    What is funny, we have more financial literacy, more 
disclosure than we ever had. That is not really solving--it is 
important stuff, but it is not solving it. It has to be solved 
by putting the integrity back in the system and that is going 
to take this kind of bill.
    Mr. Kanjorski. Not unlike other things in our society, 
perhaps, where change has occurred. The reality was, you know, 
in the past, you went to your local bank, you went to your 
local savings and loan, or your local credit union and you did 
a mortgage operation. You knew the people across the table, 
they were going to be your neighbors for life, your friends. 
And everyone looked out for each other.
    The other day I had someone come up to me and say, ``I just 
closed and got this mortgage and I found out that Wells Fargo 
is the bank which loaned me the money; I don't even know who 
Wells Fargo is.''
    And in Pennsylvania, where this transaction took place, 
Wells Fargo is thought of as being way across the country. But 
that is how fast these mortgage transactions are sold. People, 
as a matter of fact this individual told me this because he 
refused to go through with the transaction because he said, ``I 
didn't make the arrangement to borrow from Wells Fargo.'' And 
he did not know who they were, although they are obviously a 
reputable bank. But the transactions are so extreme compared to 
the way they used to be.
    Now, when we had hearings on this issue in Pennsylvania, it 
was peculiar. The people who had moved from New York to 
Pennsylvania were very annoyed with Pennsylvania, because we do 
not require a lawyer at the transaction to represent the buyer, 
where apparently in New York they do. And quite frankly, 
although I am a member of the Bar myself, I am rather 
sympathetic to that idea, that it would not be a bad idea, to 
have somebody knowledgeable in the law or financial 
transactions to protect the consumer.
    I do not think all of the notices that we write or 
everything we do is going to really give people protection. And 
as a matter of fact, sometimes I believe they think we are part 
of the problem.
    Mr. Bachus. Would the gentleman--the last thing about Wells 
Fargo, you know, interestingly enough, you know, Wells Fargo 
told my staff and myself that they always require escrowing, 
just I mean one of the things we're talking about, escrowing. 
In fact they say that loans that aren't escrowed are bad for 
the lender, bad for the borrower. And that the percentage of 
those that default, it is one indication you can look and see, 
it is an indication of default.
    That is why the legislation that I introduced actually, it 
has mandatory escrowing in subprime loans. Not, you know, the 
prime loans but subprime.
    Mr. Kanjorski. I have other questions, Mr. Chairman, but I 
have exceeded my time.
    The Chairman. I thank the panel. This has been a hearing 
that has been very useful for me on a number of points and we 
are going to hear some more, because I think we have a lot of 
general agreement here and a recognition that a number of the 
specifics can be adjusted one way or another.
    So this panel is dismissed with our appreciation and we 
will, with our appreciation for their patience, hear from the 
last panel.
    The gentleman from Alabama.
    Mr. Bachus. Mr. Chairman, I ask unanimous consent to enter 
into the record a statement on H.R. 3915 by the American 
Financial Services Association.
    The Chairman. Without objection, it will be made a part of 
the record.
    The Chairman. Let's leave quickly, people. You can all be 
nice to each other outside. We have to get to dinner.
    All right, we will begin the last panel with my deep 
    We will begin with Mr. Bradley Rock, who is the chairman, 
president, and chief executive officer of the Bank of 
Smithtown. He is testifying on behalf of the American Bankers 
Association and America's Community Bankers.


    Mr. Rock. Thank you, Mr. Chairman.
    Let me start by thanking you and your staff for consulting 
us on aspects of this proposal. While we still have concerns, 
which I will address in my testimony, we appreciate that some 
of our concerns have been addressed in this initial draft and 
we look forward to continuing to work with you as this 
legislation moves forward.
    There is no question that many homeowners are struggling to 
meet their monthly mortgage payments. As home values continue 
to fall and adjustable rate subprime mortgages are reset, the 
situation is not likely to improve in the near future.
    The trouble in the mortgage markets is of great concern to 
the banking industry. Many banks have existed for decades. And 
some, like my bank, have existed for almost 100 years. We know 
that we must be part of the solution and we are pleased to work 
with you to bring mortgage lending back into balance.
    Many banks have already taken actions to help borrowers who 
are in danger of defaulting. The ABA, ACB, lenders, and others 
have formed the HOPE NOW Alliance dedicated to helping people 
stay in their homes.
    A guiding principle for all of us should be steadfast 
adherence to high ethical standards, whether you are a banker, 
mortgage banker, mortgage broker, Realtor, appraiser, 
developer, investor or anyone involved in the real estate 
business and homeownership, high ethical standards should be 
the norm, not the exception.
    The damage caused by unscrupulous sales practices has hurt 
us all. I hold all of my employees to high standards and the 
bank regulators make certain that I do.
    There are several additional principles that should guide 
any legislation on mortgage markets. First, sound underwriting 
standards that are based on the borrower's ability to repay are 
needed in every mortgage loan. Embracing the ability to repay 
concept as the new legislation does is essential to protect 
consumers and assure market stability.
    However, we are concerned that the bill includes very 
subjective criteria, such as offering mortgage loan products 
that are, quote, appropriate to the consumer. Such a vague 
concept will likely lead to litigation, driving up costs for 
both lenders and consumers. While imposing a duty of care 
requirement is reasonable, it must be based on objective 
standards that are centered on the ability to repay the loan.
    Second, consistent standards are needed particularly to 
bring nonbank mortgage originators up to the standards applied 
to bank originators. Independent mortgage brokers are not 
subject to all the consumer protection laws and regulations 
with which banks must comply. And more importantly, a 
regulatory system does not exist to examine them for compliance 
even with those laws such as RESPA which do apply to them.
    The bill seeks to address this inconsistency by requiring 
all mortgage originators to be licensed and registered. While 
we understand the principle here, we are concerned about the 
regulatory burden this will add to banks which already meet 
high regulatory and examination standards. It would be unfair 
to saddle these institutions, which generally had nothing to do 
with the current problems, with more burdens. Doing so would 
inevitably impede all types of lending to our communities.
    Moreover, without supervision of nonbank originators, 
licensing will not be effective and may, in fact, give 
customers the impression that there is an appropriate level of 
oversight when there is not.
    We appreciate the opportunity to share our views on this 
legislation and we look forward to working with you and this 
committee to find workable solutions. Thank you.
    [The prepared statement of Mr. Rock can be found on page 
270 of the appendix.]
    The Chairman. The next witness is a frequent witness and 
attendee at our events here, Mr. Pfotenhauer, who is the senior 
vice president for government affairs and public policy of the 
Mortgage Bankers Association.


    Mr. Pfotenhauer. Thank you, Mr. Chairman.
    On behalf of our 3,000 member companies, thank you for 
making us a part of this process. I would like to start by 
giving some credit where it's due, Mr. Chairman. As per your 
word, the process that brought us to the introduction of your 
bill has been deliberative and open.
    As the markets have become more and more volatile, you and 
your colleagues and your staff have stayed focused. You have 
placed policy making ahead of scoring political points. Your 
staff are knowledgeable and professional. Thank you. Your 
approach is refreshing and it keeps us focused.
    I would like to add one other thing in the general category 
of compliment. This bill is well thought out and if enacted, it 
will be extraordinarily consequential. That comment does not, 
of course, signal agreement. But it is intended to recognize 
the thought and the effort that went into this ambitious 
proposal and to concede up front that your hard work, 
justifiably gives you some insulation from the common industry 
charge that your bill is fraught with the danger of unintended 
    Indeed, I rather suspect that you intend much of the 
consequence that would result from this bill. Which begs the 
question, is your approach the right approach?
    Members of the committee, if they do not understand, need 
to understand that if H.R. 3915 becomes law, some people will 
be locked out of the mortgage market, many of whom would have 
been successful homeowners. Lowering HOEPA triggers, 
establishing the ability to repay and the net tangible benefit 
tests and eliminating some products from the market will have 
this effect. The question for this committee is whether the 
protections this bill provides are worth that price.
    Eighty-five percent of subprime borrowers are paying their 
mortgages on time today. It is an open question how many of 
these 5.3 million homeowners would even qualify for a loan 
under the proposed regulatory construct.
    The alternative to eliminating borrowers from the market is 
to prepare them for the market. In that respect, we urge the 
chairman to tackle the lack of transparency in the origination 
space. Streamlining the mortgage process and improving 
disclosures are essential to helping borrowers help themselves.
    I would like to flag two additional areas of significant 
concern in my remaining time. First, there is what I would call 
a soft suitability standard in evidence in several sections of 
the bill. For example, section 103 dealing with steering asks 
the regulators to, quote, promote the interest of the consumer 
in obtaining the best terms for a mortgage.
    While this is guidance to the regulators and not a direct 
requirement for lenders, we believe that the regulators will 
take this guidance and either attempt to define best product 
for a borrower or force lenders to do so, an impossible task.
    We understand that your goal is to assist consumers in 
identifying the best loan product for themselves. With your 
permission, we will work with your staff to rephrase these 
areas of concern in a way that preserves your intent while 
stopping short of encouraging a suitability standard by 
    Finally, let me state clearly that the mortgage bankers 
association supports legislation to establish a consumer 
protection standard in the mortgage market for any number of 
reasons, one of which is because the patchwork quilt of State 
and local predatory lending laws is an impediment to the smooth 
and efficient operation of a national mortgage market.
    We believe that any bill must include broad preemptions 
that give borrowers a single consumer protection standard and 
give lenders the certainty of a single standard to live up to.
    This bill, as currently drafted, is not preemptive. As the 
committee already knows, this prevents MBA from offering our 
support. Despite this disagreement, we would like to continue 
to work with you in a constructive way to improve this bill. 
And my written testimony suggests a number of fixes we believe 
will make this bill a better product.
    Thank you.
    [The prepared statement of Mr. Pfotenhauer can be found on 
page 253 of the appendix.]
    The Chairman. Next, returning to the committee again to 
share his wisdom with us, Mr. Marc Lackritz, president and 
chief executive officer of the Securities Industry and 
Financial Markets Association.
    Mr. Lackritz.


    Mr. Lackritz. Thank you, Mr. Chairman. First of all, let me 
commend and thank your staff for a fair and participatory 
process in the development of this legislation. I think you and 
the committee have tried to stay true to a simple principle, 
namely that a borrower should not get a loan that he or she 
cannot afford and from which he or she does not benefit. 
Moreover, a borrower should be able to get out of any loan that 
breeches this simple standard. We agree that the system works 
best when we can keep families in their homes.
    Home mortgage credit has been more widely available at a 
lower cost because of securitization and the secondary mortgage 
market. By linking mortgage borrowers to the capital markets, 
the secondary markets enable lenders to provide more credit at 
a lower price than they otherwise could. Today, nearly 70 
percent of American households own their own homes. And the 
beauty of our housing finance system has been its continued 
ability to innovate and develop new techniques to best reach 
and serve all the different market participants.
    Occasionally, some of these techniques do not work as well 
as they are intended. But the abuses that have occurred are in 
a small segment of the lending market and the market has 
already adjusted.
    We urge the committee to bear in mind that there are limits 
to the liability that loan purchasers will accept before 
deciding to invest elsewhere, especially due to increasing 
global capital flows.
    We are concerned that the details of several provisions of 
the bill as introduced, H.R. 3915, could reduce funding from 
the secondary mortgage market and cut off mortgage credit for 
worthy subprime borrowers. We would like to work with you on 
addressing these issues within the scope of what we feel is a 
workable product in titles I and II.
    First, the size of the safe harbor. Our first concern 
relates to the safe harbor provisions for creditors and 
assignees that apply to qualified safe harbor mortgages. Given 
the current state of the mortgage-backed securities credit 
market, we are concerned that only those loans qualifying for 
the safe harbor may be made. We understand that the theory 
underlying the bill is that the market will eventually price 
the non-safe harbor loans. But if that happens, we wonder how 
long it will take and what impact that will have on the 
    Secondly, the securitizer or assignee safe harbor. Although 
we don't think that liability for the secondary market for 
actions of brokers or originators is appropriate, we do 
recognize and appreciate that the bill limits the exposure of 
the secondary market investors and trusts. The bill also limits 
the damages of the securitizer or the trust has should the 
worst case scenario arise. We believe the bill should ensure 
that the cure remedy is made preferable to recision.
    Third, the statute of limitations, Mr. Chairman. The scope 
of application in section 204 should be reduced. The language 
effectively allows almost a perpetual application, because it 
is the later of 6 years or foreclosure acceleration or the mere 
default by a borrower of 60 days or more.
    The bill relies on existing Truth in Lending Law treatment 
as the foundation for the remainder of the recision remedy. As 
such, for consistency sake, the statute of limitations for this 
section should be 3 years, as under existing TILA section 125.
    In preemption and national standards, Mr. Chairman, our 
largest concern is the lack of Federal preemption of State 
laws. We acknowledge that the proposal tries to balance the 
interests of borrowers and lenders on this point. Nevertheless, 
we believe that the approach established by this bill should be 
a single national standard which is not subject to 50 
variations flowing from State legislation.
    And finally, the role of the Federal Reserve and the 
concern with regulators. We have an overarching concern with 
the lack of a role for the Federal Reserve in the rulemaking 
process. The Fed has important expertise with securitization 
and the secondary markets, as well as the administration of 
HOEPA. We believe the Fed should share rulemaking authority 
with the other regulators in the bill.
    Thank you very much, Mr. Chairman, for the opportunity to 
raise these concerns with you. We look forward to working with 
you and the committee to craft legislation that protects 
homeowners while ensuring a vigorous home finance system.
    Thank you.
    [The prepared statement of Mr. Lackritz can be found on 
page 236 of the appendix.]
    The Chairman. Next, Mr. Marc Savitt, who is the president 
of the Mortgage Center, and president-elect of the National 
Association of Mortgage Brokers. We appreciate the cooperation 
that we have had from the mortgage brokers that we have worked 
on legislation that will in fact probably have more of an 
impact on them given the current status of the law than anybody 
else. And we appreciate the spirit with which we have been able 
to work together.
    Mr. Savitt.


    Mr. Savitt. Thank you, Mr. Chairman.
    Good afternoon, Chairman Frank, Ranking Member Bachus, and 
members of the committee. I am Marc Savitt, president-elect of 
the National Association of Mortgage Brokers. Thank you for the 
opportunity to testify here today.
    Like most of my fellow NAM members, I am a small business 
owner, living in the same community where I work. The mortgage 
landscape is much different than when I first started in this 
business 25-plus years ago. Today, we have a deconstructed 
market, origination, funding, selling, servicing and 
securitizing can occur separately or all can fall under one 
entity or be connected through affiliated business 
    This is why we are especially pleased by the all originator 
approach taken by Chairman Frank and Representatives Miller and 
Watt in H.R. 3915 and Ranking Member Bachus in H.R. 3012.
    We commend this committee for leadership on realizing that 
consumer protection should relate to function rather than 
entity structure. All consumers deserve the same level of 
information and protection regardless of where they go for a 
home loan.
    For over 5 years, NAM has been pushing to raise the bar for 
entry to the mortgage profession by establishing uniform 
minimum standards for education, testing, criminal background 
checks, and by urging creation of a national registry for all 
mortgage originators. There are some who will push for 
carveouts, but doing so will dilute consumer protection and 
deny the market reality that all mortgage originators perform 
essentially the same function.
    We sincerely hope that this committee holds steadfast to 
the all-originator construct it has advanced in H.R. 3915. Our 
greatest concern with this bill, however, lies with the 
practical implications and unintended consequences of the anti-
steering provision. We support disconnecting compensation from 
the origination of loan products or programs, but we are 
concerned that current language could be interpreted as banning 
indirect compensation for brokers. Such a measure would destroy 
small business brokers in this country and hurt the consumers 
they serve.
    As the only origination channel that makes full disclosure 
of the YSP on both the good faith estimate and again on the 
closing statement, our indirect compensation has come under 
intense scrutiny. Meanwhile, our originator competitors earn 
the same type of indirect compensation without disclosure and 
seemingly without disclosure and seemingly without criticism. 
We should not preserve the disclosure inequity created by HUD 
in 1992. It confuses consumers and hurts the natural order of 
    We do not believe it is the committee's intent to 
legislatively pick winners or losers or further disadvantage 
small business in the mortgage industry. We look forward to 
continuing to work closely with the committee to clarify the 
intent and impact of this provision.
    We thank Chairman Frank and Ranking Member Bachus for 
requesting a GAO study on the causes of foreclosures. This 
recently released report confirms that problems in the mortgage 
market today cannot be traced to a single source. Everyone 
participated and no one single participant is to blame.
    We also have grave concerns on Title III of H.R. 3915. The 
language essentially prevents all but the perfect borrower from 
being able to obtain affordable financing. We find this 
unfortunate, as a key objective of many fair lending laws is to 
expand access to homeownership for low- to moderate-income and 
minority home buyers. The supply of funds is now very tight. A 
de facto Federal usury ceiling will tighten the market even 
further, denying funding to underserved markets. Tempered 
responses and proposals are critical in the market that is 
already prone to overreaction.
    Although not specifically addressed in H.R. 3915, we 
commend Representatives Kanjorski and Chairman Frank and others 
for proposing the Escrow, Appraisal and Mortgage Servicing 
Improvements Act. NAM supports this effort in this bill.
    In crafting proposals, we must remember that the mortgage 
industry is a business and that the market participants 
compete. NAM looks forward to continuing to work with this 
committee as well as respective regulators on accomplishing 
solutions that are effective in helping consumers without 
hurting small business.
    Thank you, and I'm happy to answer any questions.
    [The prepared statement of Mr. Savitt can be found on page 
281 of the appendix.]
    The Chairman. Thank you, Mr. Savitt.
    Finally, Mr. Don Lampe from Womble Carlyle Sandridge and 
Rice. Mr. Lampe.

                           RICE, PLLC

    Mr. Lampe. Mr. Chairman, thank you for the opportunity to 
be here today. And I will be brief, because it has been a long 
day and everyone here has been very attentive.
    I have been involved on behalf of industry trade 
organizations, mortgage lenders and others, either as a legal 
consultant or registered lobbyist in the enactment of many 
State mortgage laws, recently including laws in Georgia, 
Kentucky, Tennessee, Oklahoma, New Mexico, Ohio, Rhode Island, 
Minnesota, North Carolina, and Montgomery County, Maryland.
    Because much of the legislation, and I'm speaking of course 
of H.R. 3915 that the committee is considering today, is based 
on residential mortgage lending laws in North Carolina, I hope 
to be able to respond to the committee's questions regarding 
our experiences in North Carolina. And, in this regard, North 
Carolinians are proud of the leadership, thought, and passion 
that Congressman Melvin Watt and Congressman Brad Miller of 
this committee have brought to the issue of predatory mortgage 
    As a legislative body, you are faced with tough policy 
choices as to what you should do about what is being described 
as the mortgage mess, the subprime meltdown and the foreclosure 
crisis. As you know, Americans are looking to Congress to lead 
the country on a safe path through the mine field that is 
residential mortgage finance today.
    In the brief time that I do have, I would like to make 
three points that in my view bear additional attention by this 
committee as it considers the legislation. These points are 
built around a central theme. First and foremost, it is 
critically important that any legislation achieve the 
appropriate balance between providing strong and effective 
consumer protections while preserving access for consumers to 
fairly priced, nondiscriminatory, lawful, and appropriate 
mortgage credit.
    The three points are as follows. And, Mr. Chairman, in 
accordance with your opening statements, I offer these comments 
constructively to you and to Congressman Watt, who is also a 
sponsor of this bill and to the committee.
    The first point is, as you have heard today, this 
legislation applies across the board to all residential 
mortgage loans. While there may be agreement that unfair 
mortgage lending practices, particularly when coupled with 
higher priced or risk layered consumer mortgage products cannot 
be condoned and should be legislated out of existence, it is 
far less clear that all borrowers of any loan secured by their 
dwelling need or want additional across-the-board legal and 
regulatory restrictions.
    My second point is that it appears that the design of the 
statute, particularly as to liability, is designed to mitigate 
legal risk to loan originators and loan purchasers. This 
approach assumes that avoidance of litigation risk, rather than 
prudent yet flexible lending standards, is what should drive 
market conduct. Responsible compliance-oriented lenders, the 
likes of which we would like to see more of in the market, find 
litigation to be an anathema and have no desire to build 
compliance policies and procedures simply on choices that 
minimize damages in lawsuits.
    My final point is that we observe in the bill and again, 
trying to comment constructively here, that the bill ironically 
in pointing away from flexibility and innovation in the 
mortgage market, because we think this over-aggressive 
innovation got us into this mess, the legislation may actually 
be at odds with accepted mandates of fair lending and 
nondiscrimination in mortgage lending.
    At one time in our history, too many lenders knowingly 
discriminated based on suitability of particular home mortgage 
borrowers, using factors that at the time seemed, 
``reasonable,'' and ``in good faith.'' Today, such 
rationalizations in the name of discussion are totally 
unacceptable. Yet the legislation appears to mandate credit 
determinations based on a list of factors that must be 
considered to the detriment of other factors that could 
actually benefit a particular borrower.
    In closing, I make one closing comment, and it does appear, 
even though we have not had much time to study the bill, that I 
believe it would make sense for this committee and the Congress 
to consider whether consumers and lenders alike are better off 
and better served by the relative simplicity and uniformity of 
central, unifying Federal standards in any comprehensive 
mortgage lending law reform.
    Again, thank you for having me here today and I am happy to 
answer any questions.
    [The prepared statement of Mr. Lampe can be found on page 
241 of the appendix.]
    The Chairman. Thank you.
    Let me just begin, and this process has been useful. Mr. 
Lackritz, the statute of limitations issue that you raised, our 
colleague from Kansas, Mr. Moore, and I talked about that on 
the floor. And I think he made the point, obviously, he has had 
discussion, I think he makes a very good point, and that is an 
example of something that I think we will be able to 
accommodate and tighten up on the statute of limitations. 
Obviously, uncertainty is a problem.
    There are other areas in terms of the standard, again, I 
think we have an agreement on the goal about what kind of loans 
you don't want. We will work on it.
    I do have to say on preemption, people have said we must 
have a uniform Federal standard. Do we have one today? Do we 
have a uniform Federal standard governing lending?
    Mr. Lampe, you say we don't. Does anybody think we have one 
today? Why didn't you ask us for one last year?
    Mr. Pfotenhauer. We did.
    The Chairman. What, for a uniform Federal standard? In what 
    Mr. Pfotenhauer. We were strong supporters of Mr. 
Kanjorski's bill, Ney-Kanjorski, which put forward a uniform 
consumer credit standard. We have been asking the committee for 
this standard for 6 years.
    The Chairman. And it would be--and I will say I had not 
seen that one in particular. I mean, we have State banks run by 
State bank regulators. I am trying to understand what a uniform 
standard means.
    Does that mean that if we put in a Federal standard, that 
the State bank regulators would then have to administer that 
Federal standard? They would have no flexibility to deviate 
from that? I am talking now about State-chartered banks.
    Mr. Rock. Yes, I think they would have to. That exists 
currently with respect to other Federal standards are 
administered by State bank regulators.
    The Chairman. So what you would like to see is a uniform 
set of standards for mortgages that would apply to every State 
and the State bankers--I guess the question is why? Now here is 
the issue for me. With regard to the securitizer liability, I 
think there is an argument for uniformity because you have one 
national market. And it would be conceptually possible to 
require a uniform standard from which there was no deviation as 
part of the securitizer liability package, namely the safe 
    But what is the harm done if in other areas the State 
decides that it is going to enforce stricter standards? What is 
the public policy argument against that? It wouldn't affect the 
safe harbor, it wouldn't affect securitizer liability. What is 
the public policy argument that says no State should be allowed 
to impose a stricter standard?
    I say that because, as we talk here, I think there is a 
great deal of uncertainty. We have said no one can be dogmatic. 
We are going to define what is suitable and what isn't 
suitable. Why should there not be for the States and their 
residential property mortgages, as long as it doesn't affect 
the securitizers' liability, why shouldn't they have some 
flexibility? What is the harm that is done there?
    Mr. Rock. Well, I think you make a good point. I think it 
would be an overstatement to say that unless we have a uniform 
Federal standard, you know, that will destroy the secondary 
market. I think that would be a gross overstatement. We would 
prefer a uniform standard because we think that that will 
promote a very liquid secondary market.
    The Chairman. Let me say this, Mr. Rock. I want to separate 
    To the extent that it impacts directly on the secondary 
market, I agree. I do think there is an argument for uniformity 
there. So I would say yes, for the safe harbor definition, 
there ought to be uniformity.
    But over and above that, if a State says, and here are the 
standards we are going to put into the mortgages, I don't see 
what Federal imperative says they shouldn't do that.
    Mr. Rock. I think to the extent that you have greater 
deviation from a uniform standard, we risk some damage to the 
secondary market. To the extent we have deviation from that. I 
don't say that it instantly--
    The Chairman. How does that hurt the secondary market? Here 
is the deal. For purposes of qualifying for the safe harbor, 
theoretically, there would be a uniform standard. But not 
involving the safe harbor, just the States could say you can't 
make these--State-chartered banks can't make mortgages that 
don't meet these standards. How does that hurt the secondary 
    Mr. Rock. This would be the impediment. I call to find--
    The Chairman. How does that hurt the secondary market?
    Mr. Rock. This is the way. I call to buy a mortgage-backed 
security. They quote the rate. The yield is pretty high. I say, 
I want to know what the collateral is underlying that. They 
tell me it is a group of mortgages in the State of Michigan. I 
may or may not know what the standards are in Michigan. I may 
inquire and find out they are different from New York. That 
    The Chairman. They would be higher. But we would only allow 
them to be higher. So I don't understand how that would make 
you less likely to buy it. We are talking about higher. We are 
not talking about letting the States go lower.
    Anyone else?
    Mr. Pfotenhauer. You could have a liability associated with 
it that would--
    The Chairman. What is the liability? What do you mean?
    Mr. Pfotenhauer. Whatever a State came up with. There is 
certainly going to be an additional compliance cost associated 
    The Chairman. Yes, if you want to do business in my State, 
you have to comply with my laws. That is not a great evoker of 
    Mr. Pfotenhauer. We are doing it today. It is changing. We 
will do it more this next year if we don't pass a bill in 
Congress, because States are acting. But it is driving up the 
costs of loans.
    The Chairman. Well, that is a distinction States can make. 
And the States can say--and I think, again, we are going to 
compromise at the standard. Everybody--there seems to be broad 
agreement that we should set a standard of what loans should be 
made and what shouldn't be made.
    I don't understand why we have to, approximating that 
standard, which we have to do, then have to say, and no State 
can deviate from that, no State can decide it wants more 
    Whatever happens to federalism in that situation? Mr. 
    Mr. Lackritz. No, I think the distinction you started to 
draw is a worthwhile distinction between the secondary market 
and the origination piece. And I think it is terribly 
important, as you were pointing out, in the secondary market, 
to have uniform standards because you have interlinked global 
financial capital markets basically.
    From the standpoint of origination, it seems to me you can 
provide more flexibility as long as there is--
    The Chairman. Right, and from the standpoint of worrying 
about buying it, it presumably has a higher standard not a 
lower one, so it shouldn't make you all that worried.
    My time has expired.
    The gentlewoman from Ohio.
    Ms. Pryce. Thank you, Mr. Chairman. This has been a very 
long day, but a very productive one. And I appreciate the 
witnesses being so patient and we didn't have that many votes, 
but by the same token, they did interrupt our first panel 
    So I want to go on a completely different tangent. Because 
as I sat here today, and I listened back in the office, it 
occurred to me, you know, we hear all these figures, 34 percent 
of homeowners have no idea what kind of mortgage they have, 
according to some polls. And is there a place, as we examine 
what to put in this bill, for a financial literacy component, 
something similar to you have to go to school to give haircuts, 
you have to go to school to adopt a pet, you have to go to 
school to buy a gun in some States. You know, you have to be 
    This is the biggest financial decision most families make 
in the course of any of their lifetimes, and I don't think that 
most people are prepared. I think that is part of what has 
happened. And so how do we do this?
    You know, Ranking Member Bachus's bill has a suggested 
statement of mortgage facts that have to be on the front page, 
and then it says at the bottom, do not sign unless you 
understand this. Now that maybe is a good first step. But it is 
just one of hundreds of pages that somebody is supposed to 
understand before they sign.
    And how can we, how can you, how can the originators or how 
can the industry help America reach a level of literacy that 
they need in order to complete these complicated transactions? 
And you know, you can lead a horse to water, but you can't make 
him drink. And caveat emptor and all that good stuff. But have 
you given that any thought and is there a way that we can help 
America get to where they need to be?
    Any and all of you can jump right in here.
    Mr. Rock. Well, Congresswoman, we fully support anything 
that can be done to increase financial literacy. In fact, last 
week, the American Bankers Association conducted what we call 
Get Smart about Credit Day. We had more than 3,000 bankers 
across the country trying to help people with these very 
    Having said that, that we support them and that we are open 
to any other ideas, I think that it would be very difficult to 
mandate something in advance of being--you know, your analogy 
to, say, getting a gun license or something, to mandate it, to 
say you must have ``X'' education or go through a course before 
you can get a home mortgage, I think that might put more burden 
on the consumer than the consumers might like.
    Ms. Pryce. Well, they might not like it, but maybe they 
need it.
    Go ahead, Mr. Lackritz.
    Mr. Lackritz. First of all, you have identified a terribly 
important issue and one that, I know, we care a great deal 
about and have worked on for a long time, not just in the home 
finance area, but broadly speaking with respect to economic 
literacy and financial literacy.
    We clearly don't want to license home buyers.
    Ms. Pryce. No, and I agree with that.
    Mr. Lackritz. And we clearly don't want to license 
    So what we do is we look, in the regulatory structure, what 
we try and do is we try and regulate the middle people, the 
intermediaries, basically, because they are the ones who are 
interfacing with the customers and the other side of the 
    And it works more effectively with educated consumers. 
Obviously, the better educated the consumers are, the better 
the whole system works. It's a win/win for everyone.
    We have a program in the schools to educate kids about the 
capital markets and the stock market and it is wildly 
successful. Now, whether or not that translates over time into 
greater financial literacy, I am not sure. But I think those 
kinds of efforts in the schools, requiring economic or 
financial literacy will go a long way toward helping us educate 
consumers, because they are bearing much more responsibility 
for their own financial future.
    Ms. Pryce. But it is a piecemeal, kind of everybody jumps 
in and has their own little program. And it is not, you know, 
uniform. I don't know that it is getting us where we need. We 
have been talking about it.
    Mr. Pfotenhauer. You know, there is a demand for this. We 
had 1.6 million hits on our Web site last month alone, 
homeloanlearningcenter.com. People want to know what goes into 
a home loan.
    There is also an element of the market that will teach 
people. If we can streamline the mortgage process and people go 
through it and they actually compare one product to another, 
and get other lenders to teach them what the guy next door 
isn't telling them or what a better deal is or what a good deal 
is, and you do that a little bit, people learn a lot and you 
get better results.
    Finally, you can look at the schools, and I know that is 
beyond the purview of this committee.
    Ms. Pryce. What about just putting the terms of the loan on 
the monthly statement? You know? Some people just don't even 
know what they are. Would that be burdensome or would that be 
bad in any way to re-inform the consumer each month, you know, 
what the term is, when it is due? Are there prepayment 
penalties? Those type of things. You know, a lot of people, 
obviously 34 percent, don't even know.
    Mr. Savitt. Congresswoman, one thing that we can do is 
clearer disclosure. There should be not only clearer 
disclosure, simpler disclosure and uniform disclosure. This 
will make it easier for the consumer to understand exactly what 
program they are getting into, what type of loan they are 
getting into.
    The problem we have today is, depending upon who the 
originator is that you get your loan from, there are different 
types of disclosure.
    As far as financial literacy goes, I agree with this 
gentleman here, that financial literacy should start in the 
schools. In the school district where my children go, there is 
financial literacy.
    Ms. Pryce. Well, but that is beyond our purview. And it 
should, but it isn't happening. Americans aren't educated to 
the extent they can.
    Does anybody object to requiring the loan terms on the 
monthly statement? Is that--
    Mr. Rock. I think it would depend upon the level of detail 
required. I mean, a lot of those loan statements currently do 
include the things that you have just listed.
    Ms. Pryce. I have four and none of them do.
    Mr. Rock. Well--
    Ms. Pryce. And so I just--
    Mr. Rock. Ours do and many that I have seen from others do. 
But I think it would depend upon the level of detail.
    Would it be onerous not to have maybe the four or five 
things that you have mentioned. But if it went beyond that, it 
could perhaps be onerous.
    Ms. Pryce. Well, my time has expired. And thank you. This 
is a very, very broad bill and we only touched on a very small 
part of it.
    So, thank you, Mr. Chairman.
    Mr. Kanjorski. [presiding] The Chair recognizes himself.
    I ask unanimous consent that the written statement of 
Maureen McGrath on behalf of the National Advocacy Against 
Mortgage Servicing Fraud be admitted into the record.
    Is there any objection?
    Hearing none, it is so ordered.
    I want to compliment everybody, particularly this panel for 
waiting around as long as you did to get here. We appreciate 
    If I had to say anything, having gone through this 
frightful experience in the past, as you all know, I wanted to 
thank and compliment the chairman and two of my colleagues that 
put a lot of effort in to get this far.
    There are a few elements in my estimation that are 
important, one, that I am particularly interested in finding 
some way of getting a standard, a national standard that we can 
rely upon. I think it is important.
    And coming from the other angle of what Mr. Frank asked 
about, first of all when we went into the issue a number of 
years ago, we found that there were a multiplicity of 
municipalities that had exercised their right under their 
individual State laws to pass mortgage rules and regulations. 
These rules and regulations now require the securitizers to 
have counsel go back and examine every municipal code to see 
whether or not they had enacted something that affected the 
value of that mortgage or whether the mortgage complied with 
the local ordinance or statute, which I think is ludicrous.
    Two, the lack of uniformity drove--I think it was New 
Jersey and Georgia--the subprime market to almost collapse, 
because they were just excluded from securitization. Why bother 
to mess with them if they are too expensive and too difficult 
to deal with?
    I think that is where the North Carolina statute came from. 
It finally found the ground on which people felt comfortable in 
    On the other hand, feel that there is another side to that. 
And then when you look at the law of mortgaging, I was just 
telling my good friend, Maxine, here, if I were a banker, I 
would not write a mortgage in California if my life depended on 
it. Because as I understand the law, as compared to 
Pennsylvania, if you are dissatisfied with your mortgage and 
your property, all you have to do is hand in your keys and 
whoever gave you the mortgage gets the property and you are 
    Now, that does not happen in Pennsylvania. In Pennsylvania, 
the property is just a partial support asset for the mortgage. 
You actually have to have a personal judgment note with all 
your assets supporting the property. So, as a result, when you 
look at Pennsylvania borrowers, the property, or the real 
estate is the last asset that they will put at risk, because to 
escape it is practically impossible. It follows you to the 
    On the other hand, in California, when there is a collapse 
of the price of the market, people look across the street and 
see a house selling for $100,000 or $200,000 less than they 
have on their mortgage, they are apt to say, ``Well, I will get 
out of this, turn my mortgage in and go and buy the house 
across the street and I have just made $200,000.'' I see that 
happening in many States in the Union.
    I think what it boils down to is, is securitization good? 
Particularly, is it a useful tool in subprime areas? And I have 
mixed feelings on it. I will tell you some of them.
    I think we, the Government, both the Executive and the 
Legislative Branches, are to a large extent responsible for 
what is going on today. We encouraged, I remember, this magic 
formula--70 percent. We had to get homeownership of over 70 
    Quite frankly, there are a lot of people who are not 
sufficiently trained or financially literate enough to become 
owners of property. And I will give you an example. I held 
hearings in Pennsylvania, and some residents from New York came 
in and bought homes in the Pocono Mountains of Pennsylvania. 
And the one lady at the hearing said, ``Well, I am incensed. 
After I bought my home, the refrigerator broke 18 months after 
I bought it, and I called the Realtor and asked, what are you 
going to do about replacing this refrigerator?'' And he said, 
``Nothing, lady.'' And she said, ``Well, that's just wrong; 
it's his responsibility to replace that refrigerator.''
    And, you know, it is understandable, I guess. If that is 
what--she just did not realize she was in ownership as opposed 
to tenancy. I think that is an unfortunate reflection of what 
we are dealing with.
    But when you are in that margin of the market, the last 2, 
3, or 4 percent of homeownership, they should not be denied 
homes, but we have a greater responsibility to make sure these 
people are not abused or misused. They are certainly subject to 
a lot of abuses out there, and we have seen so many of them.
    Then I think of some of our testimony earlier. If I have to 
condemn anything in this system, there are probably 8 or 10 
steps from the person who originally attracts a buyer for a 
piece of property, either a Realtor or the owner of that 
property, and then going through the financing operation until 
at the bottom some investor buys that bond that is securitized 
by that mortgage.
    If you think about it today, nobody along that line, eight 
or nine people, have any skin in the game. Everybody makes a 
profit if they sell a higher cost mortgage, if they sell 
something overpriced, a bad appraisal, all kinds of things, 
they all gain more. But nobody has any skin in the game to lose 
anything until you get to the last guy on the totem pole, the 
investor. And even he gets skin for the last time. He did not 
buy a bond; some money manager bought it and got a commission 
on sticking him with something that said it is a triple A when 
it was junk.
    And now suddenly, all over the world, these people are 
looking at us here in the States and saying, ``How can you 
trust these people?'' And that is the question. What we do in 
this bill and as we correct the subprime and the whole 
operation of securitization, I really believe is a matter of 
faith in the United States of America. There is an implied 
judgment around this world that if we allow securities to be 
securitized and sold worldwide, somebody is looking over the 
fact that these are not boiler room hot potatoes that have no 
value. And we failed to do that. We failed to do it here, 
gentlemen, your institutions fail, the regulators that were 
here before you, they fail. All of that fault we have endured. 
What do we do about it?
    I would hope that your testimony today will help Chairman 
Frank find some of these important basic areas toward achieving 
a national standard. I think that is important. I think if we 
are going to have a continuation and the use of securitization 
in mortgaging in this country and indeed some day around the 
world, we are going to have to find a better way, more 
transparency, more security, less abusiveness in the system.
    I want to thank you for your testimony. I had a few 
questions but I do not have the time to ask them at this point. 
I just had to blow off my steam. I have been listening to you 
up to this point.
    The Chairman. The gentleman from Louisiana.
    Mr. Baker. Mr. Savitt, I'm an old real estate guy, emphasis 
on old, and I know you mortgage guys well. So you're going to 
have to help me understand what's going on here. Let's zero in 
on DTI and how that calculation works, and going to a mortgage 
broker's web page, I left here a minute ago when Mr. Sherman 
was talking because it triggered something and I had to go look 
it up to make sure I was right. Typical, conventional loan 
criteria for a DTI uses the 28:36 ratio, where 28 percent, 
typically of gross income, is allocated to house note and 
principal. Is that still the case?
    Mr. Savitt. That's the standard rule, but you have to 
remember that every situation is different.
    Mr. Baker. That's okay. Let me keep going, because I'm on a 
    Mr. Savitt. Yes, okay.
    Mr. Baker. The second part of it, the 36 part, goes to the 
cost associated with operation of the household as car payment, 
credit card, child support, any of the obligations that 
typically go with a mortgage.
    Mr. Savitt. It includes not only your monthly payment, but 
again your new mortgage payment as well. That's all included in 
the DTI.
    Mr. Baker. So when they're doing this calculation, I'm 
using now for members a $42,000 annual salary, a gross of 
$3,500 monthly. The calculation they came to was that $980 can 
be applied directly to principal and interest, and $1,260 can 
be applied to recurring housing expense for a gross expenditure 
of $2,240 out of a gross income of $3,500. You have to assume 
15 percent is a minimum, State and Federal tax load; so when 
you crack it back down on a conventional loan, you have a 
household with about $3,000 max coming in a month with an 
ability to have $2,240 in total obligations.
    I took that number and worked it through to get what 
percent of gross income that actually turns out to be. A 
typical, conventional loan at the max is about 64 percent debt 
to income ratio. What was really interesting was I went to my 
old FHA friends, and they have a $2,941 rule, FAS forward, 
that's $2,450 a month, which is a 70 percent debt to income 
    My observation here is is we adopt the underlying bill 
without some modification. FHA loans are outside the safe 
harbor. Now, that's problematic. That has to have a real market 
consequence to people, because when I apply the numbers in the 
bill to the same set of circumstances, that $1,750 a month, 
housing and housing related expense.
    So I merely wanted to bring this up. And, is there anything 
I'm missing, Mr. Savitt, in that descriptive analysis of how 
markets function today? Are the FHA numbers basically still on 
target because programs change?
    Mr. Savitt. They are still on target, but again, you know, 
even though that is a high debt to income ratio, it depends 
upon the borrower's financial circumstances.
    Mr. Baker. Right. They may have $200,000 in the bank from a 
prior home sale. They may have an investment portfolio. They 
may be a Federal employee with a TSP account with several 
hundred thousand dollars.
    Mr. Savitt. Right, there are several compensating factors.
    Mr. Baker. They may have paid a note for 22 years and never 
missed a monthly payment. They may have a sick uncle who has a 
bunch of money and they know they're going to come into good 
fortune here. I mean, there are all sorts of reasons to look at 
each individual's borrower's assets and determine whether in 
this unique set of circumstances, he was appropriately placed 
in a financial obligation which he can meet the terms over the 
long haul.
    I think the rub has been that perhaps that due diligence 
didn't always take place in every case, and I didn't bring them 
with me. I should have, but I went to some of the Web pages 
talking about ``no-doc'' loans, where they take pride in 
announcing they don't verify your income. Now, that to me has 
gotten outside the bounds of propriety, and we really need to 
deal with that. But I think we need to be very careful as we go 
forward in drafting this proposal as to the real market 
consequences to borrowers who otherwise have access to credit 
now, who will not, if we adopt the provisions of the bill as it 
is currently proposed.
    Do you agree, Mr. Savitt?
    Mr. Savitt. Absolutely.
    Mr. Baker. Thank you. You're a great witness.
    I yield back.
    The Chairman. The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    It's been a long day and I thank you for not only holding 
this hearing but for the way that you have entertained all of 
the members who have participated and the patience that you 
have exhibited in trying to help us gain information about how 
to do the best possible job in dealing with not only the 
problem that we are confronted with today for the future, but 
also predatory lending.
    To the panel that's before us, you have a lot at stake 
here. You have a lot at stake here because we are discussing 
banning yield spread premiums. We are discussing no-doc loans, 
pre-payment penalties, teaser rates, securitized liability, on 
and on and on. I want to get right to the part of the bill that 
basically bans yield spread premiums, and I would like to start 
with--is it Mr. Rock? I can't see from here.
    Mr. Rock. Yes, yes.
    Ms. Waters. I don't know if it was you who started to talk 
about how perhaps this is not the right thing to do, that you 
would be placed at great disadvantage. And I want to know is 
that because you think that the requirements that we place on 
the banks for their employees would not match the requirements 
that we place on you relative to, number one, their need to be 
licensed, and number two, how they are paid or not paid for 
their loan originations?
    Mr. Rock. No. I did not make any of those remarks that 
you're referring to, but just to comment on yield spread 
premiums, in most circumstances that I am familiar with where 
they're used, I think it's a bad practice.
    Ms. Waters. I'm sorry. He just reminded me that I'm really 
speaking to the brokers and not the bankers on this. So who 
would like to respond to that? Mr.--
    Mr. Savitt. Savitt.
    Ms. Waters. Okay.
    Mr. Savitt. That's me.
    Ms. Waters. All right, Mr. Savitt.
    Mr. Savitt. Congresswoman, first of all, I think there's a 
great misconception about yield spread premiums. Yield spread 
premiums, and I've been a broker for over 25 years, yield 
spread premiums are a very useful tool in helping its consumer, 
a borrower, get into a property with less money up front, less 
money for closing costs, less money for down payment. And our 
brokers have been accused of using yield spread premiums as an 
incentive to make more money, and I think what people are 
failing to recognize is every time you raise your yield spread 
premium, you're raising your interest rate.
    If you raise your interest rate too high, you're not going 
to get that transaction. Somebody else, another originator, 
will get that transaction. And the fact that brokers do, 
depending on who you talk to, anywhere between 50 and 70 
percent of all the residential loans in this country, that 
tells you that brokers are not doing that. You may have some 
originators, not just brokers. But you may have some 
originators, possibly abusing back-end fees, whether its a YSP 
or, of course, the lenders all get service release fees. We 
disclose this incidentally. Nobody else in the market discloses 
it. We've been required by HUD since 1992 to disclose yield 
spread premiums on the good faith estimate, and also on the HUD 
1 settlement statement.
    So I'm sure you understand how frustrating it is for us 
with all of the news accounts that have come out over the past 
several months that brokers must disclose all of their fees up 
front. There's no mention about lenders doing this, and it's 
kind of ironic, because brokers are the only ones who disclose 
their fees.
    Ms. Waters. So, if lenders had to disclose, would that make 
you feel better?
    Mr. Savitt. If lenders had to disclose, it would make it 
more transparent to the consumer. There would be less 
confusion. There are a couple of FTC studies that came out and 
said because brokers are the only channeled distribution that 
disclose yield spread premiums, the consumer is often confused 
into picking the more expensive transaction. He looks over the 
broker, lists the yield spread premium on the good faith 
estimate. He thinks that as an extra charge. The consumer 
thinks it's an extra charge when in fact it's not.
    When the FTC conducted their study, I forget how many 
people they actually had involved in the testing, but in most 
cases they purposely made the lender good-faith estimate more 
expensive than the broker good-faith estimate, but consumers 
more often than not picked the broker good-faith estimate as 
the more expensive deal because they were confused by the 
    Ms. Waters. Okay, well, let me just say this. And I've been 
one of the supporters wanting to ban it, and I'm still not sure 
why we shouldn't ban the yield spread premiums. I hear what 
you're saying, but you haven't made the case why yield spread 
premiums allow you to assist the borrower more with the 
borrower paying less money. I don't get it.
    Mr. Savitt. Well, Congresswoman, I have a rate-sheet here 
from the West Virginia Housing Development Fund. That's one of 
the States I'm licensed in. This is a first-time home-buyer 
bond program. West Virginia, as Congresswoman Capito mentioned 
before, has the highest rate of homeownership in the country. 
They also have one of the lowest foreclosure rates in this 
country. We're ranked number 47th in a country in which we're 
all very proud of. Of course, even one foreclosure is one too 
many. But this is a government agency paying their lenders and 
brokers either a YSP or an SRP because they understand that 
this helps consumers become homeowners.
    Today, consumers have very little savings. They have very 
little money to get into a house. So by being able to use or 
take the benefits of a yield spread premium, it helps them 
become homeowners with less up-front in cost for their down 
payment in closing cost. And as I mentioned before, lenders get 
the exact same thing, but they do not have the requirement to 
    Mr. Rock. I would just point out with respect to that point 
that the brokers--an essential difference is that the brokers--
hold themselves out as representing the buyer, whereas, the 
lender does not hold themselves out that way.
    Mr. Pfotenhauer. In addition, there's a very different set 
of market disciplines on someone who works for a commission 
versus someone who lends their own money, and that's the key 
difference between.
    The Chairman. Would the gentlewoman yield to me?
    Ms. Waters. Yes, I yield to you.
    The Chairman. Sir, how does that help the consumer? How 
does paying a yield spread premium help the consumer? I guess I 
don't fully understand that.
    Mr. Savitt. First of all, Mr. Chairman, when a consumer 
calls shopping around for an interest rate, what they ask for 
is a zero point rate, whether it's a broker or a lender. That's 
what they ask for. So we receive a yield spread premium for 
that rate as a lender would receive a SRP.
    The Chairman. Well, then a yield spread premium--am I wrong 
that we're talking about your compensation? Who pays you the 
yield spread premium?
    Mr. Savitt. The lender.
    The Chairman. The lender does?
    Mr. Savitt. Correct.
    The Chairman. And what do you do to earn a yield spread 
premium from the lender?
    Mr. Savitt. We originated the loan, we processed the loan. 
We prepared the loan.
    The Chairman. Yes, but that's basically. When does the 
premium come in?
    Mr. Savitt. The premium is the difference between the 
wholesale and the retail rate.
    The Chairman. So that the higher the case, what's the 
relationship between what the lender charges the consumer and 
the yield spread premium?
    Mr. Savitt. I don't understand your question.
    The Chairman. Is there a relationship between the yield 
spread premium and the rate the lender charges a consumer?
    Mr. Savitt. There is, just the same as in an SRP.
    The Chairman. Well the higher the rate the lender charges, 
the higher the yield spread premium?
    Mr. Savitt. The higher the rate, the higher the yield 
    The Chairman. And explain to me how that helps the 
    Mr. Savitt. I'm sorry?
    The Chairman. Explain to me how that helps the consumer.
    Mr. Savitt. Because consumers all want for the most part 
zero points loans, so if you take a lender and you take a 
broker, and let's say the interest rate for a 30-year fixed is 
6\1/2\ percent, they're both making the same amount on that 
loan. They're both being paid for that loan.
    When a lender originates a loan, and it's not just brokers 
that broker loans. When any originator--
    The Chairman. I'm lost. You lost me.
    Tell me how it helps me as a consumer if the person who I'm 
dealing with is going to make more money if I pay a higher 
interest rate?
    Mr. Savitt. Less up-front money; it's less money out of 
their pocket.
    Ms. Waters. How?
    Mr. Savitt. And in some cases, it may pay for their closing 
    The Chairman. Well, that's always the case, that the higher 
interest rate is always off-setting lower closing costs and 
lower up front? Is that always the case? That's a simple 
question. I'm skeptical of that. I'm skeptical that there's 
always that relationship.
    Mr. Savitt. Well, the consumer has the choice of paying 
points too if they want to pay the origination fee.
    The Chairman. I know, but that's not the question.
    Is it never the case that everything else being equal, the 
higher the interest rate I'm charged the more money the yield 
spread premium will be?
    Mr. Savitt. On any YSP or SRP, yes.
    The Chairman. Okay. I don't see how that helps me. I mean, 
if everything else is being equal, say you can say points.
    Mr. Savitt. Mr. Chairman, I can't stress enough, it does 
help consumers.
    The Chairman. How? If everything else being equal the 
higher the interest rate, the higher the yield spread premium, 
how am I helped?
    Mr. Savitt. Because it's still a competitive rate that 
regardless of who the originator is, it's still a competitive 
interest rate. And the benefit is--
    The Chairman. No, you're missing my point. You say it's 
competitive, but it would have been lower. It does not give the 
broker an incentive to find me a loan with a higher interest 
    Mr. Savitt. No. It doesn't, because the consumer always has 
a choice. We put options in front of the consumers. They always 
pick what's best for them.
    The Chairman. And it does not incentivize the broker at 
    Mr. Savitt. No. It's not. It's something that benefits the 
consumer, and, again, we have a State housing agency that 
oversees it.
    The Chairman. Well, the fact that a government agency does 
something does not always immunize it, you know, from the 
charge. I assume you would agree with that.
    Well, I've taken too much time.
    Mr. Savitt. Can I say one more thing?
    The Chairman. Quickly. This is the gentlewoman's time.
    Ms. Waters. Let me just say, because I know that you want 
to move on, that you have not made the case. And this is not 
what we understand as we have dealt with this issue. And so I'm 
looking for ways to really understand whether or not the 
consumer is disadvantaged, whether or not there is steering 
that would cause the originator to be able to make more money 
based on the higher priced product, and you are not helping us 
very much.
    Mr. Savitt. Congresswoman, I think there's a misconception. 
You're talking about the anti-steering provision in the bill.
    We're talking about two different things here. We're 
talking about YSP as indirect compensation and we're talking 
about receiving extra compensation for steering somebody into a 
loan that has no benefit for them.
    The National Association of Mortgage Brokers agrees with 
what you have in the bill as far as banning additional 
compensation, but we want to make sure that it is not being 
construed as our normal indirect compensation. This is 
something that is an additional amount of money, because if 
it's a zero point loan--and this is the easiest way I could 
describe this--if it's a zero point loan, regardless of who the 
originator is, whether it is a mortgage broker, a bank, a 
mortgage banker-lender, whoever it happens to be, everybody 
gets money on the back end of that loan, if it is a zero point 
    That's where they receive their compensation, indirect 
    Ms. Waters. Well, let me just say that under Section 103 
our anti-steering section provides that no mortgage originator 
can receive and no person can pay any incentive compensation, 
including yield spread premiums that is based on or varies with 
the terms of a mortgage loan.
    Mr. Savitt. But that should not be construed as indirect 
compensation for a broker. We're talking about in that 
provision, we're talking about additional compensation for 
steering somebody to a certain type of loan. That's not what 
we're talking about. When brokers are trying to protect the 
yield spread premium, it is indirect compensation. It does 
definitely provide a benefit to the consumer, just like a 
lender receives a service release premium for doing the exact 
same loan. The only difference is we disclose that. The 
consumer has full disclosure at the time of application and 
also at the time of closing.
    The Chairman. The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman.
    As a conservative, I typically prefer non-legislation to 
legislation, however, in this particular situation I think that 
it's the exception and not the rule and that some legislation 
is in order.
    I think I've heard some hopeful comments from the chairman 
that perhaps his bill is a work in progress. I understand that 
much of this legislation appears to be prescriptive, dealing 
and trying to ensure that we don't replicate the situation that 
we see today. Having said that, I continue to be concerned that 
we're not out of this forest yet.
    If we take a snapshot of where we are, it's alarming. I'm 
not sure we'd quite call it a crisis, but when I see $600 
billion in adjustable rate subprime mortgages due to readjust 
in the next 2 years, I'm certainly convinced we're not out of 
the forest. And so I guess my concern here is if we pass this 
bill in its current form, as many folks attempt to refinance 
over the next couple of years, what exactly is going to happen 
to liquidity in both our primary and our secondary markets. And 
I think that Mr. Lampe saw some testimony there where you 
commented on this phenomenon.
    Mr. Lampe. Yes, Congressman, I think when you strip away 
some of the legalities of this and you look at the presumptions 
that could provide a rebuttal to it and the safe harbor, and so 
on, I think the message of this bill is don't make a loan 
unless it is a qualified mortgage or a qualified safe harbor 
mortgage, because the secondary market will not want to absorb 
    And so, the other aspect of this, which I don't think this 
is controversial, if you lower the high cost home loan triggers 
as has been done in provisions of this law, then any loans that 
are above those triggers won't be made. So, I think the bill on 
its face and I think the bill's intent was to restrict loans 
outside of these safe harbors or above these thresholds from 
being made. And then the only question is how big a piece of 
the market is that?
    Mr. Hensarling. Now that is a good question. Does anybody 
else on the panel wish to comment how much a piece is left out 
there for all these people trying to refinance? Any takers? Mr. 
    Mr. Lackritz. Yes, Congressman. I think we just don't know 
that yet. Clearly, the design of a safe harbor acts as a magnet 
for underwriting mortgages and the issue of how many non-safe 
harbor mortgages will get written eventually. Markets react 
over time to external and exogenous events, and so markets will 
obviously react here. It's just a question of how long that 
will take, and whether or not the variety and the availability 
of the credit will continue to be as expansive as it has been. 
Clearly, it's going to restrict. In the short run it's going to 
narrow the availability of credit in those particular areas.
    Mr. Hensarling. Mr. Pfotenhauer?
    Mr. Pfotenhauer. Just to give you one, I'm sorry. It's not 
a definitive answer, but just to give you a little bit of scope 
in what we are dealing with and I would agree that we can't 
quite define the issue today or the impact, but there were, 
according to HMDA data, there were 10 million loans made in 
2006. 3.9 million of those are basically subprime, all-day 
    So, that's the universe; you know, nearly 39 to 40 percent 
where we have a big question mark over whether or not those are 
actually going to get made. And they're going to be cross-
pressured in different ways by this bill going forward. Now, to 
be fair, there isn't a lot of liquidity in the market today in 
the private label, subprime space. And so we are talking about 
what happens going forward.
    The market is already disciplined very severely, the 
players in this area, and has yet itself to come up with the 
mechanisms that allow it to go forward. It will. It will figure 
out a way to make these loans again with or without Congress, 
but how far it goes in that and how far it goes in the future 
is really what this panel is debating.
    Mr. Hensarling. Mr. Pfotenhauer, in speaking of some of 
your concerns with the legislation, I think you used the phrase 
``soft suitability standards.'' Could you elaborate on your 
    Mr. Pfotenhauer. Section 103 and Section 104 contain 
concepts like best loan for a consumer, most appropriate loan 
for a consumer, and pretty much appear to turn that work over 
to a regulator. Having had some former regulators on our staff 
look at that language, they feel that the language might compel 
the regulator to try to come up with some sort of suitability 
    You know, that really gets you down a slippery slope with 
the plaintiff's bar, because what's a suitable loan is really 
something that we think should be determined by borrower, not 
by the lender. And if the lender has anything beyond the duty 
of care, which is a reasonable thing to have provided it's 
structured correctly, then you're really working in reverse of 
your intentions on this and potentially shutting down lending 
to the very people you want to help.
    Mr. Hensarling. Okay. I probably don't have an option, but 
I think I'll go ahead and respect the 5-minute rule anyway.
    The Chairman. I thank the gentleman.
    The gentleman from North Carolina.
    Mr. Watt. I think it was worth sitting here all day just to 
hear Mr. Hensarling say that this is an area that we need to do 
something in. That's a radical statement coming from Mr. 
Hensarling. I don't think I've ever heard that phrase come out 
of his mouth. So it was worth sitting here just to hear that.
    I want to go back to the issue that Chairman Frank raised 
about pre-emption, not that I'm expecting to convince anybody 
on this panel, but just to make sure that we have it on the 
record what my position is on that. I really think that's kind 
of a smoke screen, because to the extent that we set a 
satisfactory Federal floor standard, if States get 
substantially out of line with their requirements, lenders are 
going to leave those States.
    Credit is going to be more expensive in those States and 
those States are going to have to come back to a responsible 
Federal standard, whether we called it a preemptive standard or 
not. That's always been my position. The problem with Federal 
pre-emption from my perspective is that we can't act and our 
regulators, nor certainly our legislative body doesn't react 
quick enough to deal with changes that the market is constantly 
going through; and, so, there has to be for those entities that 
are outside Federal regulators, even if Federal regulators 
could react quick enough or if we could react quick enough at 
the Federal level to change the law, which we never would, 
there will always be somebody out there with a new product, a 
new process, a new something or another that is not regulated 
if we don't leave discretion with the States to address those 
    So, I mean, I've had this discussion with everybody from 
your industry just come through my office and I've said it over 
and over again, but I think for us to spend a lot of time 
arguing about whether we are federally preempting or not, when 
we set a responsible Federal standard, which I think everybody 
has kind of agreed now the North Carolina standard is if other 
States get too far away from that standard, they're going to 
pay a price for it, either in the form of higher interest rates 
or in the form of loss of available money to loan in that 
    So I just don't think that's something I'm going to spend a 
lot of time talking about, and I think there are other ways to 
address the concerns about whether we pre-empt or don't pre-
empt or whether we partially pre-empt. But clearly we have to 
leave the ability of the State to be able to react in areas 
that are not federally regulated. And we have to leave the 
States the ability to react when they can react quicker to 
changes in the market. So those are the two things that I want 
to put down as markers.
    Mr. Rock, you stated and I see you and Mr. Savitt, it's 
going to be hard to reconcile your views, I think, because you 
say you need supervision of the non-regulated entities you all 
have supervised and you have all of these people out there who 
are not supervised. So how would that look, that kind of 
supervision to the non-regulated that you testified? And I 
think that's the phrase you used.
    Mr. Rock. Well, banks are highly regulated and highly 
supervised. I mean, the second half is very important because 
we are being examined all the time to make sure that we are 
complying with the rules and regulations that we must confirm 
with. I think that the segment of the industry, the non-bank 
segment of the originators, should be brought up to that level, 
and I think that's the way to achieve equality.
    Mr. Watt. Okay, so, if we brought brokers up to that 
standard, Mr. Savitt won't be all that happy, but you think 
that would help to solve the problem?
    Mr. Rock. I think it would, given the fact that non-bank 
originators presently originate, we estimate, approximately 58 
percent of all home mortgages, and yet, that segment of the 
industry which initiates a majority of the originations is not 
subject to the kind of regulations.
    Mr. Watt. I have to give him equal time, because I know Mr. 
Savitt wants to respond.
    Mr. Savitt. I think that there are 50 bank supervisors out 
there who would have a difference of opinion with Mr. Rock. 
Mortgage brokers are regulated. We're regulated in all 50 
States. I'll use myself as an example. I am licensed by two 
different States. I have continuing education requirements. I 
have surety bond requirements, and I am examined on a regular 
    Mr. Watt. I'd feel better about that if the person who 
testified for your industry had been able to tell me who he 
worked for. I asked him, I mean, I'll go back and show it to 
you in the record. I can't remember who the guy was. I'm just 
asking do you represent the borrower or do you represent the 
lender and I never could get an answer out of him.
    Mr. Savitt. The problem that we have is--well, not a 
problem--if somebody comes into a mortgage broker's office, the 
individual that they meet with for their loan application is 
regulated by that State.
    If that same individual walks across the street to a bank 
and deals with the individual loan officer in that bank, that 
loan officer is not regulated. The bank may be regulated, and, 
we've heard things recently in the news that you need to deal 
with the institution that has the eagle on the outside of the 
building, because they're FDIC approved.
    That's fine, but we're not talking about the lending side, 
and, on the lending side, they don't go through as much 
scrutiny as mortgage brokers do. Mortgage brokers are under a 
magnifying glass. As I said, we're regulated in every State. We 
are examined in every State, and there are proper safeguards to 
make sure that when somebody comes into a broker's office, they 
are dealing with somebody who is reputable.
    Mr. Watt. Okay, well, my time is up. I just want to be 
clear that if I'm walking into a lender, I at least know that 
they are not currently being hired to represent my interest. 
I'm trying to get a loan from him. When I walk into a broker's 
office, I think 99 percent of the people who walk into the 
broker's office think that broker is working for them.
    Mr. Savitt. Can I just answer?
    The Chairman. Quickly.
    Mr. Savitt. Brokers still have an ethical responsibility 
and we exercise that ethical responsibility every day to our 
customers. That's why we have the amount of business that we 
do, because we live in the communities. We work with these 
people; our children go to the same schools.
    Mr. Watt. I yield back, Mr. Chairman.
    The Chairman. The gentleman from Connecticut.
    Mr. Shays. Thank you, Mr. Chairman. Thank you for holding 
these hearings. I'm not used to seeing you penned-down for a 
whole day. How are you holding up?
    The Chairman. Oh, I'm in a pretty bad mood.
    Mr. Shays. Well, actually, you look like you're in a bad 
mood, but you're a good man.
    I want to say that when I view this I feel like there was a 
noticeable earthquake and then we felt after shocks; and what's 
kind of looming is this tidal wave. And I asked the first panel 
when they thought that title wave of foreclosures happens and 
the panel was basically saying, you know, it started and that 
the second and third quarter of next year. I'd like to ask each 
of you when you see the bulk of foreclosures coming to the 
marketplace, if we just start right down the line.
    Mr. Rock. Well, I would agree with much of what was said 
before. I think a lot of the rate resetting is one of the 
causes in some of these situations. I think a lot of the rate 
resetting has begun now.
    Mr. Shays. I'll ask you by cause. I just want to know what 
happens first.
    Mr. Rock. Now, and I would expect it to continue through 
next year.
    Mr. Shays. I'll come back to you though.
    Mr. Rock. Yes, sir.
    Mr. Pfotenhauer. We at the Mortgage Banker's Association 
think that we will work through this and start to turn around 
by the third quarter of 2008.
    Mr. Shays. But will it be bigger before it gets smaller?
    Mr. Pfotenhauer. No, actually, we are through the biggest 
part. It's not going to drop dramatically. It's going to be 
somewhat high next year as well.
    Mr. Shays. So, basically, you think the tidal wave has hit?
    Mr. Pfotenhauer. Yes.
    Mr. Lackritz. We think it's peaking in this quarter now and 
that it will start to taper off and get better next year.
    Mr. Pfotenhauer. I would agree it's leveling off.
    Mr. Lampe. Yes, we're at the front end of it now and it 
will continue into the first and second quarter next year.
    Mr. Shays. First and second quarter--we were talking about 
the renegotiations of the loans and the explanation to me was 
that since some of these are packaged, that presents a bit of 
an issue in terms of who services the loan. And the question 
I'm asking is would the renegotiation of the loans actively now 
be something that will mitigate the ultimate effect of this?
    Mr. Rock. It's such a multi-party relationship. I think 
that's very difficult. And Mr. Calhoun went through a valiant 
effort before to try to explain some of the difficulties, and I 
think it's extremely difficult, Congressman.
    Mr. Pfotenhauer. I think it can be said that servicers who 
are the ones in the front lines of loan modification have 
incentive and have means to modify loans. What's not clear is 
how many people can be successfully modified into a new loan 
and thereby stay in their home and continue to make payments. 
It's hard to put a number around how many there are that 
actually qualify for that, because the causes of foreclosure 
and delinquency are so varied.
    Mr. Shays. Right, but there is a huge incentive to not have 
the foreclosures.
    Mr. Pfotenhauer. There's an enormous incentive not to have 
a foreclosure today.
    Mr. Shays. Yes, sir?
    Mr. Lackritz. I would agree with that. Obviously, it's not 
in anybody's interest to have increased foreclosures at all. 
The challenge is to find the right balance in there because you 
have investors. You have securitizers. You have originators. 
You have borrowers and you have the taxpayers. And trying to 
balance that system as it's evolved is a complicated exercise.
    So part of the point of, I think, this hearing, is to urge 
you to be very careful as you go through this. Because 
obviously, tilting the system in one way or the other, will 
have ramifications to all the participants in the system and 
may have ended up hurting the very individuals that you want to 
    Mr. Shays. Thank you.
    Mr. Savitt. I would agree with that as well.
    Mr. Shays. Thank you.
    Mr. Lampe. I would agree with Mr. Pfotenhauer's analysis.
    Mr. Shays. Mr. Rock, you wanted to make a point. What was 
the point you wanted to make? I interrupted you.
    Mr. Rock. I was just saying it has a lot to do with rate 
resetting. That was my only point.
    Mr. Shays. With regard to a lot of these, you know, we 
pushed all of you to loan to people of color, minorities and so 
on. And in the process we took great pride that we're seeing 
these loans being made, and, now, we realize that some 
benefitted and some have been hurt badly.
    But is it your view that some of these loans probably will 
be in the best interest for people just simply to walk away 
from the loan?
    Mr. Pfotenhauer. Clearly, people are electing to do that 
    Mr. Shays. Yes.
    Mr. Pfotenhauer. There are many people who got into a loan 
for very little money down. They maybe had a piggy-back second 
and now they own a home whose value has gone down.
    Mr. Shays. But likely while they may lose their home, they 
may not have lost an investment of any. They may not in fact 
have lost anything because they hardly put anything down.
    Mr. Pfotenhauer. They may not have lost any net worth. They 
may be greatly inconvenienced, and it may be hurtful to their 
family to leave.
    Mr. Shays. Judging from the morning of my chairman, I'll 
just close by saying to you, Mr. Savitt, I've depended on 
mortgage brokers for probably ten--refinancing, maybe seven--
with two different homes; and, I always felt well served by the 
individuals who have helped me.
    Mr. Savitt. Mr. Shays, may I say one thing about that? I 
just want to clarify something before to make sure that what I 
was saying was understood, that we support banning the 
incentive compensation. I want to make that very clear. But, we 
don't want to have our ability to earn a living banned. 
Indirect compensation is how mortgage brokers--
    Mr. Shays. I think we understand that.
    How are you doing, Mr. Chairman? Are you okay?
    The Chairman. Yes, one more if you want.
    Mr. Shays. Okay.
    The Chairman. Let me just ask--did you want to say 
    Ms. Waters. If I may.
    The Chairman. Go ahead.
    Ms. Waters. I wanted to clear up something. I know that Mr. 
Shays on two occasions had talked about the mortgages that are 
made available to minorities and others who perhaps, you know, 
could not afford them. Someone said today that most of the 
problem was in refinance and that the people who were 
refinancing had bought homes that they could afford.
    It was not where the problem was that the mortgages were so 
much being extended to folks who had nothing, could not afford 
them, maybe not even deserve them.
    Will someone please clear that up? I don't know who said 
    Mr. Shays. If the gentlelady could just yield. The point I 
had made and I was corrected was that I was making the 
assumption that these subprime loans were for basically new 
buyers. And it was pointed out a lot of these folks were people 
who already had a decent mortgage, but were tempted to get into 
an unstable mortgage. I think that's the point.
    The Chairman. I think Mr. Gruenberg, the Vice Chair of the 
FDIC in fact made that point very strongly, partially 
corroborated by Comptroller Dugan.
    Mr. Shays. Yes, and I appreciate you making that point.
    Ms. Waters. Thank you.
    The Chairman. I just want to close with a couple of points, 
and I appreciate the constructive suggestion.
    Do any of the members of the panel think that we should in 
fact not bother to legislate at all, that we're going to do 
more harm than good. Does anyone think that we should just 
leave the status quo?
    Mr. Lackritz?
    Mr. Lackritz. No, Mr. Chairman. I think the point is just 
to urge you to move carefully in this area.
    The Chairman. As opposed to whether we could move or not.
    Mr. Lackritz. No. I don't mean to make light of that.
    The Chairman. All right, secondly, I want to make a 
statement, because people have said, well, this is going to 
restrict credit. Yes. Let me ask you this. Do you think that 
all of the loans that were made over the last couple of years 
in the subprime area should have been made?
    Mr. Rock?
    Mr. Rock. No.
    The Chairman. Mr. Pfotenhauer?
    Mr. Pfotenhauer. No, sir.
    The Chairman. Mr. Lackritz?
    Mr. Lackritz. No.
    The Chairman. Mr. Savitt?
    Mr. Savitt. No.
    The Chairman. Mr. Lampe?
    Mr. Lampe. Okay, so if you all think that there were loans 
that were made that shouldn't have been made, of course, we're 
going to restrict credit.
    Now the job is to restrict credit in a somewhat precise 
way. You're never going to get to perfection; you're never 
going to ban only bad stuff and leave good stuff. We believe 
that you can move the line closer. You've been helpful with us, 
but please don't tell me that the problems that we're going to 
restrict credit and expect to be credible, because we need to 
restrict credit.
    The problem was credit was improvidently granted to a 
significant number of people on terms or in circumstances in 
which they shouldn't have gotten it. That's what's happened. 
What we need to do is to try to find a way to restrict the 
wrong kinds of credit. But of course it's going to restrict 
credit; if it weren't going to restrict credit, then we would 
sill have the same thing.
    Mr. Savitt, did you want to respond?
    Mr. Savitt. Mr. Chairman, first I want to congratulate you 
for the contents of this bill and also one part in particular, 
which is the registry for all originators.
    The Chairman. Yes, we're going to do that. We're working 
with the minority on this and we will have that registry. I 
also think, by the way, and this goes to the bank situation, 
we're not talking about licensing people. We are talking about 
having--the wording may get cleaned up--but we are talking 
about keeping track of everybody who is doing this.
    Mr. Lackritz, I cut you off before.
    Mr. Lackritz. I think the only point I wanted to make, 
there was credit that was obviously and prudently or 
improvidently granted. But I also think at the same time it's 
important to take a lot of pride in what the committee has 
done, and the industry has done to broaden the circle of 
homeownership. Don't ban that.
    The Chairman. I would also want to know this, and this is 
my more philosophical point, I wish everybody in America earned 
enough money to own a home. I also I wish that I could eat more 
and not gain weight, and that I didn't get as tired today, that 
I had more energy than I had 20 years ago.
    One of the mistakes we made, I think, was to equate a 
decent place to live with homeownership. Homeownership is a 
very good thing. It's good for people. It's good for the 
neighborhoods, but it's not the only form of housing. And there 
will always be millions of people in this country who, because 
of their economic circumstances--leave aside wealthy people who 
did it by choice--won't be able to own a home, particularly in 
certain areas of the country, where the gentleman from 
Connecticut lives, where I live, and where my colleague from 
Los Angeles lives.
    And we make a mistake if we push people into homeownership 
who shouldn't be there, and part of that is, and it's part of 
the agenda of this committee, to create some alternative and 
decent and affordable rental housing, and I think we need to 
have the mix. I would mention one other thing that didn't get 
mentioned today and it's very relative to us. One of the things 
in this bill, which I think is most important, is the provision 
that says that a foreclosure does not extinguish a lease. 
Because of all the people we could say, well, the borrowers 
were imprudent. This one was imprudent.
    The tenants were rarely imprudent, and what we have are 
people who were living in housing and paying their rent on a 
regular basis, and because of a foreclosure, they've been hit 
with evictions. Now, we're going to say going forward that 
shouldn't happen. I would urge all of you to the extent that 
you have any control over the property, please don't kick 
people out just because the landlord foreclosed.
    There's a degree of cruelty that's not personally oriented 
that has been visited on people. So we are saying that we have 
in this bill that foreclosure does not extinguish a lease. And 
I think that's a very important point. And please don't wait 
until the bill comes to act on this. People who are paying 
their rent, I also must say, from the standpoint of the people 
foreclosing continuing to have a tenant makes it a lot less 
likely that all the pipes are going to wind up in China because 
people are stealing all the copper. And it's better for the 
neighborhoods too.
    I would just urge people to take that into consideration. I 
thank everybody. This really has been a hearing that has had a 
very important impact on the specifics of this legislation.
    [Whereupon, at 6:36 p.m., the hearing was adjourned.]

                            A P P E N D I X

                            October 24, 2007