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




 
FORECLOSURES AT THE FRONT STEP OF THE FEDERAL RESERVE BANK OF CLEVELAND

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON DOMESTIC POLICY

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 21, 2007

                               __________

                           Serial No. 110-36

                               __________

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


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             COMMITTEE ON OVERSISGHT AND GOVERNMENT REFORM

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

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

                    Subcommittee on Domestic Policy

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


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 21, 2007.....................................     1
Statement of:
    Anderson, Barbara, treasurer, Empowering & Strengthening 
      Ohio's People..............................................    28
    Braunstein, Sandra, Director, Division of Consumer and 
      Community Affairs, Federal Reserve System..................    55
    Bromley, Charles, adjunct faculty, Levin College of Urban 
      Affairs....................................................    38
    Engel, Kathleen, professor, Marshall School of Law...........   190
    McCarty-Collins, Marianne, senior vice president, Insight 
      Bank.......................................................   215
    Pianka, Raymond, judge, Cleveland Municipal Housing Court....    90
    Pollock, Alex, resident fellow, American Enterprise Institute   196
    Rokakis, James, treasurer of Cuyahoga County.................    17
Letters, statements, etc., submitted for the record by:
    Anderson, Barbara, treasurer, Empowering & Strengthening 
      Ohio's People, prepared statement of.......................    30
    Braunstein, Sandra, Director, Division of Consumer and 
      Community Affairs, Federal Reserve System, prepared 
      statement of...............................................    57
    Bromley, Charles, adjunct faculty, Levin College of Urban 
      Affairs, prepared statement of.............................    41
    Engel, Kathleen, professor, Marshall School of Law, prepared 
      statement of...............................................   192
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio:
    Followup questions and responses.............................    86
    Prepared statement of........................................     5
    McCarty-Collins, Marianne, senior vice president, Insight 
      Bank, prepared statement of................................   217
    Pianka, Raymond, judge, Cleveland Municipal Housing Court, 
      prepared statement of......................................    93
    Pollock, Alex, resident fellow, American Enterprise 
      Institute, prepared statement of...........................   198
    Rokakis, James, treasurer of Cuyahoga County, prepared 
      statement of...............................................    20


FORECLOSURES AT THE FRONT STEP OF THE FEDERAL RESERVE BANK OF CLEVELAND

                              ----------                              


                          MONDAY, MAY 21, 2007

                  House of Representatives,
                   Subcommittee on Domestic Policy,
              Committee on Oversight and Government Reform,
                                                     Cleveland, OH.
    The subcommittee met, pursuant to notice, at 10:30 a.m., at 
the Carl B. Stokes Federal Court House, 801 West Superior 
Avenue, Cleveland, OH, Hon. Dennis J. Kucinich (chairman of the 
subcommittee) presiding.
    Present: Representatives Kucinich and Issa.
    Staff present from the Subcommittee on Domestic Policy: 
Jean Gosa, clerk; and Jaron R. Bourke, staff director.
    Present from the Office of Mr. Kucinich: Joseph Benny, 
district director; Marty Gelfand, JD, staff counsel; Marian 
Carey, MBA, deputy district director; Patricia Vecchio, MSN, 
Steve Inchak, MSSA, Luis Gomez, Laurie Rokakis, MSW, Christine 
Miles, Betty Rodes, and Lynn Vittardi, congressional staff; and 
Lisa Casini, scheduler.
    Mr. Kucinich. The committee will come to order.
    Good morning. I'm Dennis Kucinich, chairman of the 
Subcommittee on Domestic Policy of the Committee on Oversight 
and Government Reform, and with me today is the ranking member 
of the committee, Mr. Issa. Mr. Issa, by the way, is a native 
Clevelander, and it's particularly meaningful to have him here 
today to join in co-chairing this committee. I want to say that 
we would be joined by Congresswoman Stephanie Tubbs Jones, but, 
unfortunately, Congresswoman Jones' father passed away. The 
funeral is today. My wife and I just returned from the wake, 
and Congresswoman Tubbs Jones has a representative here, I 
believe, or will have a representative from her office here, 
and she is, therefore, represented. I just want to make that a 
matter on the record.
    I also want to say, before I begin, that we're very pleased 
to have had the cooperation of the chief judge of the Federal 
court here from the Northeastern Ohio District, Judge Carr, and 
creating the opportunity for us to have these facilities. So, I 
just want to express the gratitude of the committee for Judge 
Carr making available what is a beautiful hearing room.
    And in addition to that, for me it's an honor to be here in 
a building that is named after someone who was a very dear 
friend of mine, and someone who gave outstanding service to 
this committee on so many different levels, legislative, 
executive and judicial, Judge Carl Stokes. The memory of Carl 
Stokes, a very powerful force in this community and this 
country, and to be in a Federal court house that's named after 
him is certainly an honor. Today's hearing is going to examine 
the subprime mortgage industry and the problem of foreclosure, 
the pay day lending industry and the enforcement of the 
Community Reinvestment Act. The hearing will also examine 
alternatives to foreclosures and to pay day lending. Now, 
without objection, the chair and the ranking minority member 
will have 5 minutes to make opening statements followed by 
opening statements not to exceed 3 minutes by any other Members 
who may join us. Without objection, Members and witnesses may 
have 5 legislative days to submit a written statement or 
extraneous materials for the record.
    Our first panel today, which we'll get to in a minute, but 
I want to acknowledge their presence, includes Charles Bromley, 
an adjunct faculty member of the Levin College of Urban 
Affairs. Jim Rokakis, the treasurer of Cuyahoga County and 
Barbara Anderson, as a member of the Eastside Organizing 
Project.
    Yesterday my wife and I and Councilman Santiago and other 
members of the community went throughout a neighborhood on the 
southeast side around our Lady of Lourdes Parish, and we went 
up and down streets, and what we saw was something that really 
is heartbreaking because there was street after street, row 
after row of boarded up houses. Many of them representing the 
shattering of a dream. Many people bought these homes with the 
full intention of being able to meet the mortgages but ended up 
in conditions and payments that were onerous and lost the 
house.
    And, of course, the community has lost an opportunity for 
productive citizens to participate in not just home ownership, 
but participate in this process of community.
    It turns out that Cleveland is at the epicenter of the 
Nation's foreclosure problem. Major American cities are bracing 
themselves for a wave of foreclosures. The Center for 
Responsible Lending projects that one out of every five 
subprime mortgages that originated during the past 2 years will 
end in foreclosure. These foreclosures will cost homeowners as 
much as $164 billion, the exact cost of urban America is 
unknown.
    And when you look at this map that we've prepared, and 
Gelfand, our chief counsel, will have the opportunity to, 
perhaps, demonstrate it, you will see a sideways V that is 
highlighted in light green. Let me tell you what the 
geographical area represents. It is the area in the city where 
depository banks made very few prime loans. And if you look at 
the next map highlighted in reds and oranges, if you look at 
the same V in the same place, this geographical area represents 
where the highest number of subprime mortgage loans were made 
during the same year. And if you look at the following map, 
again, the same V pattern and the same place, here the red dots 
indicate the number of foreclosures.
    These maps tell you there is a clear and self-enforcing 
correlation between the low number of prime loans, the high 
number of subprime loans and the high number of foreclosures.
    Now, finally, the last map, again, the familiar sideways 
line V shape. For here, the foreclosures indicated by blue dots 
are superimposed on the neighborhoods, red, indicates 
predominantly African American neighborhoods, again, a perfect 
match. Lack of access to prime loans, high frequency of 
subprime loans and a high rate of foreclosures, are by no means 
specific to any racial group, but the pattern certainly carries 
a whiff of America's dark past.
    Now, how did our city get to this point? The Domestic 
Policy Subcommittee initiated an examination of the predatory 
mortgage and subprime lending industries and the Federal 
regulators overseeing the Nation's banking industry. As part of 
that effort, we held a hearing on March 21, 2007, in which we 
heard from Leading Consumer on academic and industry 
representatives. The very next day the Domestic Policy 
Subcommittee wrote a letter to the Cleveland Fed in reference 
to the proposed merger of Huntington Bank and Sky Financial.
    We asked the Cleveland Fed to extend the public comment 
period and to hold a public hearing. And the public hearing--
and in view of the--to hold a hearing in view of the lack of 
the depository lending and the explosion of subprime lending 
and foreclosures. The Fed wrote back a letter, and I believe we 
have it here, and their response was, no, they will not extend 
the public comment period, and, no, they would not give a 
commitment to holding a public hearing. They only said that 
they would consider doing so.
    Now, I have wondered how serious--and without objection, I 
would like to submit this letter for the record. I wondered how 
serious is the consideration given to holding public hearings. 
According to one of our witnesses today, the last time the 
Cleveland Fed held a public hearing in a bank merger case was 
nearing 30 years ago.
    I will say at the outset that this hearing will not delve 
into the details of the Huntington/Sky merger because it is a 
pending matter before the Fed. And I ask that members of the 
subcommittee understand that we shall not influence any 
particular outcome of the proposed merger, nor will we pursue 
any questioning about it, or the Fed to hold a public hearing 
itself.
    The matter could be fully discussed by all stakeholders. 
However, unless the Cleveland Fed holds a public hearing, that 
conversation will not take place as is beyond the scope of 
today's congressional hearing. The purpose of today's hearing 
is to examine the situation facing Cleveland, specifically 
Cleveland, but Ohio generally, and to hear from the chief 
regulator of banking mergers in this region, Cleveland Fed. 
Ohio leads the Nation in the rate of foreclosures.
    Ohio's foreclosure rate, 3.3 percent, is about three times 
the national rate and has the second highest percentage of 
loans and serious delinquencies according to the Mortgage 
Bankers Association. Cuyahoga County, which includes Cleveland, 
had 11,000 foreclosures in 2005, more than tripled the number a 
decade ago and 13,610 foreclosures in 2006.
    Subprime lending is associated with significantly higher 
levels of foreclosure than prime lending. Foreclosure rates are 
20 to 30 times greater than subprime loans. This finding is 
reflected in Cleveland's experience with a rapid growth in the 
subprime lending market in the rising number of the 
foreclosures.
    In Cleveland, in 1995, the local depositories were about 60 
percent of the market share of mortgages. By 2005 that number 
dropped to 20 percent. The Federal Reserve of Cleveland 
oversees the Fourth Federal Reserve District, which comprises 
Ohio, Kentucky and northern West Virginia and western 
Pennsylvania. It is one of 12 regional reserve banks that, in 
conjunction with the Board of Governors in Washington, DC, make 
up the Federal Reserve System.
    The Fed has the primary responsibility of supervising and 
regulating the activities of State and local banks and bank 
holding companies. In the case of an acquisition, the Fed is 
required to take into account the likely effects of acquisition 
on competition, the convenience and needs of the communities to 
be served, the financial and managerial resources and future 
prospects of the companies and banks involved, and the 
effectiveness of the companies' policies to combat money 
laundering.
    I think one question, the maps I referred to a moment ago, 
raises this: How well have the convenience and the needs of the 
communities been served over the last 30 years, especially in 
the last 10 years as the predatory lending and foreclosure 
problems have exploded? I think one of the few questions raised 
by the magnitude of the foreclosure crisis in Ohio includes: 
What was the Cleveland Fed doing to lessen the problem? What 
enforcement tools were the Cleveland Fed advocating for? Was 
the Cleveland Fed acting proportionately with the foreclosure 
problem? What recognition did the Cleveland Fed show that it 
had a foreclosure crisis at its front step? Did the Fed 
adequately use its considerable power to curve an industry that 
preyed upon borrowers, distort the market and reeked havoc not 
just on borrowers but on their neighborhoods, cities and 
regions. I hope that we may begin to get answers to that and 
other questions today.
    At this point I would like to--at this point I would like 
to recognize the ranking member of the committee, Darrel Issa 
of California. I want to thank Mr. Issa for being with me this 
morning as we conduct this hearing. The chair recognizes Mr. 
Issa.
    [The prepared statement of Hon. Dennis J. Kucinich 
follows:]

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    Mr. Issa. Thank you for holding this very important hearing 
as a followup to what we've already done in Washington.
    I am fortunate to serve. This is the second go-around. In 
the last Congress we did a lot of hearings that we did together 
on a bipartisan basis and are continuing to. And I hope that 
everyone here today understands that's a spirit in which we 
come here, that when you look at the numbers, you look at 
Cuyahoga County, OH as a whole versus the Nation.
    There's clearly a problem in this region, and understanding 
the problem of this region before it spreads or to discover 
whether it will spread to other parts of the country, will 
certainly, for me, be part of the focus here today. As the 
chairman very much said, we're not here to discuss a pending 
merger, but I think we will be listening appropriately to some 
of the concerns that Chairman Kucinich raised about 
competition. I, for one, come from California now, even though 
I'm a native of Cleveland. As a result, I come from an area 
that has almost the reverse of what's going on here in Ohio. 
Unemployment is at a historic low. Home prices have risen more 
than double on the average in California in the same period in 
which they were pretty flat here in Ohio.
    As a result, if you had a subprime loan and still have one 
in California, but you didn't refinance, you probably have 50 
percent plus equity in your home in California. Well, here you 
may have exactly the same equity that you originally bought 
your house with. So, there are things that are different. 
Certainly, I believe that we're going to look at that today.
    We're going to look at whether the Fed exercised what it 
could exercise under the HOEPA, the Home Ownership Protection 
Act, which as I understand and we'll hear more today, gives 
authority, but limited enforcement, and that's something, 
perhaps, that we'll see and hear more when the Fed has their 
chance.
    I must admit, I took a little nostalgic tour of Cleveland, 
Cleveland Heights, Shaker, the whole east side yesterday, and 
perhaps because I haven't been here much longer than the 
chairman, I saw the part of the cup that was half full. I saw 
the areas of Hough and going up Chester and Carnegie. I saw 
brand new homes where I remember only, to be honest, ancient 
homes that were boarded up. I still saw some boarded up homes.
    But I see the promise for Ohio if, in fact, we can keep 
home ownership alive. I think the chairman and I will work 
together in Washington to take what we learn here today and 
make sure that, at a minimum, Congress is doing what it can to 
continue promoting home ownership.
    I also think that we're going to have to look beyond banks, 
and beyond banks, the regulatory authority of banks. As a 
Californian, where California has the right, as Ohio has the 
right to regulate mortgage brokers, I believe that both States 
have done, at best, a limited job of doing so.
    As I'm sure the chairman and those testifying today will 
agree, mortgage brokers are the people that actually talk the 
consumer into making that loan. It is very seldom, if ever, a 
federally regulated bank.
    As Members of Congress, we, in fact, zealously guard our 
oversight ability, and I believe today is just a splendid 
example of good oversight, coming out here and looking beyond 
what we would normally see in Washington and with constituents 
to have an opportunity to see that Washington is not all about 
Washington.
    My hope today is that we cannot only get to the root of 
many of the problems that plague the subprime industry 
nationally, but that we can effectively differentiate what's 
going on nationally from regional and local problems. This is 
particularly important because, we as Federal regulators, have 
limited authority, but we can grant additional authority to 
ourselves as we see fit. But often the thing we need to do most 
is to say, what are we doing? Are we doing enough. Should we do 
more? And if the answer is, we are doing enough, then the next 
question is are the State and local areas empowered to do 
enough?
    Is it clear that, for example, mortgage brokers are the 
responsibility of the States, and if, in fact, they are 
untruthful or predatory in their lending practices, no amount 
of enforcement directly from the Fed is going to have the same 
effect as the State attorney general and the State legislature.
    So, Mr. Chairman, I want to once again thank you for 
holding this important hearing. I think I've contrasted a 
little bit of what I'm hoping to see here today, but I think at 
the end of the day it's what we both want to see that's going 
to make us effective when we return to Washington, and I yield 
back.
    Mr. Kucinich. I thank the gentleman from California. 
Without objection, the members of this committee will have 5 
legislative days to submit a written statement or extraneous 
materials for the record. Without objection, the members of the 
Ohio Delegation who have the desire to submit a written 
statement or extraneous materials for the record, will be able 
to do so.
    Without objection, the public officials who are here today 
who will not be testifying, but, nevertheless, represent 
constituencies such as a Councilman Brancatelli, Councilman 
Santiago and others, will be able to submit written statements 
and extraneous materials. And the community groups, including 
those from Slavic Village who were able to walk with us 
yesterday and from North East Side Community, will be able to 
submit written statements and provide extraneous materials for 
the record, Mr. Issa.
    OK. So, at this point we are now going to be hearing from 
the witnesses, and I want to start by introducing our first 
panel. I'll begin by introducing Mr. Rokakis. Now, Mr. Rokakis 
took office as the Cuyahoga County treasurer in March 1997 
after serving for over 19 years on the Cleveland City Council, 
and I had the honor in serving with Mr. Rokakis.
    Mr. Rokakis brought sweeping reform to the treasurer's 
office. He spearheaded House Bill 294, which streamlines 
foreclosure process for abandoned properties. He was 
instrumental in creating Cuyahoga County's Don't Borrow Trouble 
Prevention Foreclosure Program.
    Mr. Rokakis developed nationally recognized link deposit 
loan programs to help revitalize the county's housing stock.
    Additionally working past Ohio House Bill 293, that allowed 
senior citizens to defer property tax payments.
    Governor Ted Strickland has appointed Mr. Rokakis to Ohio's 
recently formed task force on foreclosures in Ohio. And I just 
wanted said, Mr. Issa, that Mr. Rokakis has really been an 
important leader on this issue, and we're very grateful for his 
presence here today.
    Ms. Barbara Anderson is the treasurer of the Predatory 
Lending Action Committee of ESOP, Empowering and Strengthening 
Ohio's People. ESOP was founded in 1993 to create organized 
leadership around issues that impact neighborhood life in 
Cleveland. Ms. Anderson is a long-time community leader in 
Cleveland's Slavic Village.
    And, finally, the last witness of our first panel will be 
Mr. Charles Bromley, who is an adjunct faculty member at the 
Levin College of Urban Affairs. He is a Presidential scholar in 
the SAGES Program at Case Western Reserve University and chair 
of the Ohio Fair Lending Coalition. He's led the first 
organizations to document the relationship between foreclosures 
and predatory lending and unfair lending practices and their 
impact on Greater Cleveland neighborhoods.
    I want to thank the witnesses for appearing before the 
subcommittee. It is the policy of the committee on Oversight 
and Government Reform to swear in all witnesses before they 
testify. I'm going to ask that the witnesses rise and raise 
your right hands.
    [Witnesses sworn.]
    Mr. Kucinich. Thank you. Let the record reflect that the 
witnesses answered in the affirmative.
    Now, I'm going to ask each of the witnesses to now give a 
brief statement, a brief summary of their testimony and to keep 
this summary under 5 minutes in duration.
    I want you to bear in mind that your complete written 
statement will be included in the hearing record. I'd like to 
begin and have the chair recognize Mr. Rokakis, the treasurer 
of Cuyahoga County. Welcome. Please proceed.

    STATEMENT OF JAMES ROKAKIS, TREASURER OF CUYAHOGA COUNTY

    Mr. Rokakis. Thank you, Chairman Kucinich. And Congressman 
Issa, welcome home. Our baseball team is better than it was 
when you left, but I'm afraid to say that our football team may 
be worse.
    Mr. Issa. But we got rid of Modell, didn't we?
    Mr. Rokakis. Thank you, Mr. Chairman and members of this 
committee for allowing me the opportunity to speak here today. 
The crisis of foreclosures and the meltdown in the subprime 
lending market has dominated the news the past 6 months, but is 
a problem we have been struggling within northeast Ohio and 
Cleveland, in particular, since the mid 1990's when our 
foreclosure rate took off here. From a low of 3,500 private 
mortgage foreclosures in 1995, our foreclosure rate climbed 
steadily in the 90's to over 7,000 foreclosures filed by 2000. 
Undoubtedly, a weak economy played a role in the doubling of 
the foreclosure rate, but other forces were at work. The 
development of the secondary mortgage market and great access 
to capital markets had created an insatiable demand for 
mortgages and an increase in reckless lending practices, local 
governments struggling to deal when this explosion cried out 
for help.
    In March 2001, my office co-hosted, along with CSU School 
of Urban Affairs, a conference at the Cleveland Federal Reserve 
Bank on the topic of foreclosures. In 2002, three Ohio cities, 
Cleveland, Toledo and Dayton, passed anti-predatory lending 
ordinances in an attempt to fill the void created by an 
oblivious State government and a Federal reserve that failed to 
recognize the crisis. These local laws were preempted by State 
laws passed by the Ohio Legislature within 60 days of their 
package.
    An especially bold industry became even greedier and more 
reckless, and our foreclosure rate continued to climb to over 
13,000 private mortgage foreclosures filed last year. And sadly 
we predict, based on first-quarter filings in 2007, to over 
16,000 foreclosures this year, the equivalent of foreclosing on 
every owner-occupied unit in the cities of Garfield Heights, 
Middleburg Heights and Olmsted Falls.
    The Federal Reserve Bank has the authority under the Truth 
in Lending Act and the Home Ownership Protection Act to ban all 
of the practices that have fed this mortgage craze and led to 
this foreclosure frenzy. They can ban no-document loans, but 
have not. They can ban loans that are not fully indexed to a 
borrower's income, but have not.
    They can ban the practice known as risk layering where 
borrowers with the weakest credit are offered multiple gimmicks 
to qualify them for a loan, but they have not. They can require 
that all subprime loans provide for the escrow of taxes and 
insurance in their payments, but they do not.
    They continue to hide behind the need to protect the 
subprime industry, but this argument fails to recognize that 
almost 90 percent of subprime loans are financed and nearly all 
of those are adjustable rate mortgages that will, with a 
considerable degree of certainty, double the payment within 5 
years and cost that borrower their home. I am stunned at the 
number of elderly homeowners who have refinanced their homes 
late in life, stripping their equity out of the property and 
saddling them with a debt level they cannot afford.
    In 1983, the average 65-year-old homeowner had $11,000 in 
debt on their primary residence. By 2004, that number had 
climbed to 47,000. Yesterday's New York Times had an article 
that zeroed in on unscrupulous telemarketers, people who focus 
their efforts on the elderly and target them for products they 
don't need and can ill afford.
    This practice has been going on in the mortgage refinance 
business for years. We see evidence of it on people who have 
been refinanced and promised that their property taxes were 
part of their monthly payment, only to find out they had been 
lied to, and they found their names in the newspaper because 
they had failed to pay their property taxes.
    Last week, Federal Reserve Chairman Ben Bernanke, spoke to 
an audience in Chicago on the topic of the subprime mortgage 
market. He spoke of a foreclosure and/or delinquency rates of 
more than 60 days as approaching 11 percent in the subprime 
market. I wish that were the case in Cleveland.
    In January, Larry Litton, CEO of Litton Loan Servicing, 
shared his Cleveland numbers with me, 11.41 percent already 
foreclosed in their portfolio, 16 percent in foreclosure for a 
total of 27.41 percent. If you add their loans that were 30 
days late, which were another 18.5 percent, a stunning 46 
percent of their loans in Cleveland were underwater or sinking 
fast, 46 percent. Let me read from Chairman Bernanke's 
conclusion in Chicago last week: ``Markets can overshoot, but 
ultimately, market forces also work to rein in excesses. For 
some, the self-correcting pull back may seem too late and too 
severe, but I believe the long-run markets are better than 
regulators at allocating credit. We must be careful not to 
express responsible lending or eliminate refinancing 
opportunities for subprime borrowers.''
    In the mid 1970's, New York City was facing a bankruptcy 
and looked to the Federal Government for a bailout. Gerald Ford 
was President and said no. New York Daily News headline read, 
``Ford to NYC: Drop dead.'' The position of the Fed on this 
issue, their failure to regulate their unwillingness to 
recognize the severity of this crisis should elicit a new 
headline: Fed to Cleveland: Drop dead. Fed to Dayton, Toledo, 
Detroit, Buffalo, Cincinnati: Drop dead.
    Members of this committee, I don't believe the Federal 
Reserve Bank will take the measures they need to take. Frankly, 
you could argue it's too late. Congress must act on the various 
measures under consideration in the house and Cincinnati to 
rein in the excesses of the mortgage industry, because the 
market has proven itself to be greedy and unreliable in 
protecting the assets of its investors and willing to destroy 
cities like Cleveland. Act now.
    [The prepared statement of Mr. Rokakis follows:]

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    Mr. Kucinich. Thank you very much, Mr. Rokakis.
    Next we're going to hear from Ms. Barbara Anderson. You may 
proceed.

    STATEMENT OF BARBARA ANDERSON, TREASURER, EMPOWERING & 
                  STRENGTHENING OHIO'S PEOPLE

    Ms. Anderson. Thank you, Mr. Chairman, and certainly, thank 
you, Mr. Issa, and members and representatives of this 
committee.
    Good morning, my name is Barbara Anderson, and I appear 
before you today as the treasurer and member of the Predatory 
Lending Action Committee of the Empowering and Strengthening 
Ohio's People [ESOP]. ESOP was formerly known as the East Side 
Organizing Project.
    ESOP is a community organization whose roots are in the 
southeast side of Cleveland, OH, but whose growth has been 
fueled by abusive lending and now includes the entire northeast 
Ohio region, as ESOP's work is widely recognized and requested.
    I also serve as the treasurer of the Empowerment Center of 
Greater Cleveland, president of the Bring Back the 70's Street 
Club. I'm the past president of Community Assessment and 
Treatment Services and serve on the boards of the Ohio State 
University Extension Program, Vision Advocacy Council of 
MetroHealth Center for Community Health and Co-chair of 
MetroHealth Center for Community Health and Co-chair of the 
Slavic Village Development Abandoned and Vacant Housing 
Committee.
    I could give you documentation regarding the devastating 
impact of predatory lending and foreclosure, however, that's 
included in my full statement. I'm a survivor of personal 
predatory lending in the past. I am yet a victim of predatory 
lending as is my entire neighborhood.
    I have lived at 3435 East 76th Street for over 25 years. 
That address is in the Slavic Village neighborhood. That is 
today widely seen as the epicenter of the foreclosure crisis 
facing Cleveland and the Nation.
    I want to thank you, Mr. Kucinich, for holding this hearing 
as the city of Cleveland is now experiencing a crisis as a 
result of years of neglect by local banks and regulators. 
Without question, cities like Cleveland were ripe for the 
picking. The steel industry was leaving, their secondary 
industries went belly up and we continue to have brain drain. 
While these facts are staggering, what I see in my neighborhood 
is even more tragic.
    There are ten houses on my street. Five of them are 
currently vacant, and in most cases are owned by a lender who 
made an abusive loan that the homeowner could not afford. My 
street is not unusual. You can walk up and down virtually any 
street in my neighborhood, as you did yesterday, Mr. Kucinich, 
and you will find a similar situation.
    In our street club's targeted area, which includes the 
streets from East 70th to East 78th, south to Edna Avenue and 
north of Morgan, there are over 100 vacant, abandoned or 
condemned homes. Obviously, this scenery has reduced the value 
of my own home. While that is devastating by itself, what is 
most devastating is that I cannot allow my grandchildren to 
play outside because of squatters, usually high on drugs, are 
now occupying some of those houses as they sit wide open.
    Today organizations like ESOP are fighting an uphill battle 
to clean up these costly measures. We have written agreements 
with about a dozen lenders and services that allow us to serve 
as the middle person between the homeowner and lender in order 
to help negotiate a workout to their problem loan.
    This year ESOP is projected to assist about several hundred 
families get out of foreclosure. While we are proud of our 
efforts, Cuyahoga is expected to see upwards of 15,000 
foreclosures in 2001. While some of these foreclosures are due 
to unforeseen, economic hardships, the vast majority are the 
results of abusive lending. I take this personally. 
Irresponsible lenders preying on unsophisticated borrowers is a 
match made in financial hell. It is the residents that are left 
behind that must shoulder the burden of the potential health, 
crime and nuisance of these properties.
    Once left vacant, they become an eyesore. No one comes to 
clean or to maintain the property. It is simply left alone and 
continues its almost certain decline. The banks and the 
lobbiests will tell you that the problem is a lack of financial 
education on the part of the consumer. While, actually, it's a 
lack of accountability by the lender and greed to increase 
revenue on the backs of those that can least afford and have 
very few options.
    ESOP sees this hearing as an important first step to 
changing the job description of the regulators, and I wish to 
conclude by thanking you again, Congressman Kucinich, for your 
leadership on this issue and would be happy to take any 
questions.
    [The prepared statement of Ms. Anderson follows:]

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    Mr. Kucinich. Thank you very much for your testimony, Ms. 
Anderson. Mr. Bromley.

STATEMENT OF CHARLES BROMLEY, ADJUNCT FACULTY, LEVIN COLLEGE OF 
                         URBAN AFFAIRS

    Mr. Bromley. My name is Charles Bromley. I've had an 
extensive, professional career including advocacy, research, 
and organizing on the issue of fair lending, and I'm presently 
serving as adjunct faculty at the Levin College of Urban 
Affairs, and I hope to contribute to the knowledge and academic 
role of regarding urban diversity and creating learning 
opportunities for those of us who seek a stronger and more 
vital community. Several weeks ago, the Ohio Fair Lending 
Coalition brought a challenge regarding the merger of the 
Huntington and Sky Banks, both Ohio lenders. The community 
awaits a response to challenge the Federal Reserve Bank, with a 
significant physical presence in Cleveland, housed on two city 
blocks in the heart of Cleveland's financial district is 
reviewing the challenge. The Federal Reserve Bank, is a 
formidable national historic landmark with an impressive pink 
and sienna marble facade within its hollowed walls has a 100-
ton vault door, the largest in the world, which protects the 
massive bank vault.
    Cleveland is fortunate to have one of the regional Federal 
Reserve Banks. Unfortunately, the political presence of the 
Federal Reserve Bank has not matched its physical presence in 
tackling the persistent problems of discrimination and lending, 
and the most recent crisis is predatory lending that has 
affected every community in Cuyahoga County. The rich history 
of the Federal Reserve Bank and the Renaissance architecture 
remind life-long Clevelanders of one of its many jewels.
    In 1973, having graduated from the Levin College of Urban 
Affairs with a masters degree and working with the Cleveland 
Heights Community Congress, I embarked on a community research 
project with the League of Women Voters Community. We 
documented, by hand, and tracked and compared disparate lending 
patterns that exist between the city of Lakewood and the city 
of Cleveland Heights.
    Our research findings were substantial, and we submitted 
our study results to the Senate Banking Committee chaired by 
William Proxmire. Other researchers and community-minded 
individuals submitted similar study results, which led to the 
passage of the Home Mortgage Disclosure Act of 1975 and 
ultimately the Community Reinvestment Act of 1977.
    The Ohio Fair Lending Coalition filed the action against 
Huntington/Sky Bank's merger and many colleagues said to us, 
why bother? The Federal Reserve Bank will do anything for the 
community. We reminded them that following the passage of the 
14th amendment after the Civil War, it took our country until 
1954, in the Brown decision, to recognize the importance of the 
equal protection clause. Similar issues and obstacles presented 
themselves relative to the Home Mortgage Disclosure Act and the 
Community Reinvestment Act. Now, these acts represent important 
tools for our communities and cannot be dismissed as 
unimportant.
    HMDA data that was once transparent has been transformed 
into an online nightmare that no individual citizen can easily 
comprehend. It's imperative that the Federal Reserve Bank make 
this data transparent and easily available to community groups 
who would use this data.
    The Federal Reserve Bank has only conducted one study in 
1992, conducted by the Federal Reserve Bank of Boston, to 
examine the relationship between race and credit scores. It is 
time for the Federal Reserve Bank of Cleveland to undertake 
such a study and determine what role race plays in the 
declination of prime credit. They have the resources, the 
knowledge and data to carry this out expeditiously.
    It has been over 30 years since the Federal Reserve Bank 
held a public hearing in Cleveland. The wealth-robbing 
activities of lenders has exacerbated predatory lending 
problems in communities, not only in historically underserved 
city neighborhoods, but in encroaching first-ring suburbs, 
which leaves a trail of impoverishment and debt.
    During the years since the last public hearing, Greater 
Cleveland has been devastated by high-cost loans and predatory 
lending. At each hearing on proposed legislation to curb the 
effects of predatory loans at the State level, and the 
multitudes of meetings that occurred in Greater Cleveland, the 
important leadership of the Federal Reserve Bank has been 
missing.
    The President of the Federal Reserve Bank of Cleveland has 
been absent from all public discourse on this issue. At the 
hearings on anti-predatory lending law in Columbus, OH, at the 
countless summits on predatory lending, and the numerous 
meetings leading up to creation of the Cuyahoga County 
Foreclosure Prevention Program, the highest office of the 
Federal Reserve Bank was absent. It is significant that in the 
2006 Annual Report, the current president of the Federal 
Reserve Bank of Cleveland highlighted the immense cost that 
concentrated poverty has placed on this community.
    There is little doubt that predatory lending has put at 
risk billions of dollars of real estate for Greater 
Clevelanders.
    For more than a decade many civil rights advocates pressed 
for changes in lending practices that would have been an 
antidote to the explosion of predatory lending. The 
Metropolitan Strategy Group, a nonprofit which I led, 
documented this and presented this information.
    A proposed statement on subprime lending. For the last 
decade, the Federal Reserve Bank in Cleveland has not been at 
home. The private dining rooms of the Federal Reserve Bank have 
been filled with lenders while the community has been outside, 
looking in, trying to determine if someone will open the door 
to hear from those among us who have been devastated in the 
community. The litany of abuse is well documented.
    First and foremost, there must be a discussion of no 
document loans or liar loans. The Federal Reserve Bank 
regulators had a moral and legal responsibility to stop this 
behavior the second that these indiscretions were documented, 
along with other loan products that damage communities, and 
they should not have waited until, ``a crisis in mortgage 
markets.'' It's well known that the Federal Reserve Bank holds 
the highest regard for its examiners who review safety and 
soundness.
    These values are represented for all to see with two 
larger-than-life statues, one entitled Security and the other 
entitled Integrity. Sculpted in New York City, they guard the 
main entrance of the Federal Reserve Bank on East 6th and 
Superior. These statues are a symbol of trust that the 
community instills in the Federal Reserve Bank.
    One commentator, Eddy Ross, said recently in the Dayton 
Daily News, these agencies, bank regulatory agencies, have 
enormous power, direct and indirect, over the financial 
services market. They could set the tone. By aggressively and 
creatively pushing lending institutions to offer credit in 
lower and middle-income communities--including by enforcing the 
Community Redevelopment Act--they could have given consumers a 
reasonable alternative to the predators by beefing up the Home 
Mortgage Disclosure Act, regulators, could have given 
policymakers and police agencies real-time data about who was 
making predatory loans and where and what actions could be 
taken.
    It's time to revive an honest debate about these issues as 
the Greater Cleveland community attempts to resurrect its 
housing market and its financial institutions. The mighty 
facade of the Federal Reserve Bank needs to be matched with a 
new political will to take on difficult issues related to 
disinvestment and predatory lending in Cuyahoga County. It's 
time to knock on the door and find out that somebody is home 
and that public hearings will occur. Thirty years is too long 
to wait. It is now time to act.
    William Proxmire was fond of saying about lenders, he said, 
the former chairman said, I asked myself how is it that so many 
neighborhoods are continuing to fail while so many lending 
institutions are continuing to pass. I hope that we can move 
ahead and have a hearing in Cleveland and get the truth out 
about lending.
    [The prepared statement of Mr. Bromley follows:]

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    Mr. Kucinich. Thank you very much, Mr. Bromley. We'll be 
moving quickly to questions of the first panel. For those who 
have just joined us, the definition of terms is very important 
here. We're talking about prime loans. We're talking about the 
standard loan given to a borrower with a good to excellent 
credit rating. Subprime loans are higher interest rates often 
with financial penalties and are made for people who are often 
deemed to be higher risk.
    Also, there's evidence that this committee is looking at 
that African Americans are more likely to have subprime loans 
even if their financial information would justify a prime loan. 
These loans are often made by affiliates of banks specializing 
in subprime loans, and there are frequently abusive practices 
associated with these loans and including at the appraisal 
level or no-document loans. I just want to make sure that as we 
proceed here, that everyone understands the terms of the 
discussion.
    Let's begin with questions of the first panel. Would Mr. 
Issa like to ask the questions first.
    Mr. Issa. I'd be glad to.
    Mr. Kucinich. Thank you. Please go ahead.
    Mr. Issa. Thank you, Mr. Chairman. This is sort of--when 
you see bipartisan, this is a great example of it.
    Well, you covered a lot, and I appreciate you doing it. Ms. 
Anderson, you've been nationally--your organization has been 
nationally recognized for intervening in the process in order 
to renegotiate or to save failing loans. Could you tell us, in 
a sense, how many loans that you discover are savable through 
intervention out of the total?
    In other words, we look at the failed rate in Cleveland, 
which you've helped reduce, but when we're looking at 
intervention--and to be honest, grants and funding for 
organizations to help with people who have gotten over their 
head, what percentage can you say in your experience?
    Ms. Anderson. Well, let me answer a couple ways. First of 
all, it's been very successful, and one of the reasons has been 
because of the relationship that develops after the partnership 
is made.
    ESOP has been able to, as I've said before, go into 
partnerships with the ones that we deal with such as a Litton, 
such as an Aquin [phonetic]. Because of that partnership and 
the relationship, they are more willing to negotiate or to 
help, not just predatory loans, but also hardship loans. And, 
so, yes, well over 70 percent are able to be negotiated, some 
kind of negotiation where it is possible to save.
    Mr. Issa. And you brought up a good point that I'd like to 
followup on. Because of Cleveland's economy, when you break 
those down, can you give us a feeling for how many, that you 
may recall, is the direct result of predatory lending and how 
many you would say are hardship? People have lost their jobs or 
they've lost a good-paying job, and now one or both members are 
working for less.
    Ms. Anderson. I would say that the impact of losing jobs 
has had a devastating effect, which you well know. And if 
you're already in a predatory loan, even that predatory loan 
that you may have been able to afford while you had that good 
job by making other sacrifices, that once you get into a 
predatory loan and lose your job, then it becomes even more 
complicated.
    There is--depending on the lender, there is a higher amount 
with some lenders, maybe even of 50 percent, 60 percent, are 
hardship loans. While some lenders, 80 and 90 percent of them 
are predatory lending.
    Mr. Issa. It pretty much depends on how aggressive the 
broker was that sold the packages?
    Ms. Anderson. Yes, it does.
    Mr. Issa. Mr. Bromley, HB185, which has now been signed 
into law, how much of an effect do you believe it will have in 
the future, stemming future incidents the way we're seeing 
here?
    Mr. Bromley. Well, I think all laws--I mean, it's like the 
Community Reinvestment Act. It depends upon how well it's 
enforced, how effectively, how comprehensively. You know, we 
have a State law here to prevent, you know, predatory activity. 
And I have found over the years that when you put a law in a 
book, you better be sure that you're going to enforce the law 
and make sure that it occurs.
    We have had some wonderful things, and we documented early 
on in this crisis that 70 percent of the people going in 
foreclosures had problems with predatory characteristics in 
their mortgages. It was well known, well documented. There are 
an abundance of laws. I mean, it's a question of enforcing 
those laws and speaking out in a way that makes sure that these 
laws are effectively enforced throughout the community.
    Mr. Issa. I guess I'll switch to one of the authors of the 
bill. I was interested because HB185, if enforced, Mr. Rokakis, 
I assume you believe will dramatically reduce this.
    Mr. Rokakis. It will. As you know though, 185 is the lame 
duck session between the election of the new Governor and the 
end of that term was, in my opinion, gutted by 117. But the 
damage provision was limited so substantially, that I really 
feel it took away from the enforceability of the strength that 
185 might have had. Certainly, putting fiduciary duties on 
brokers and licensing, all very important, but what was so 
unsettling to us is that 117, we really feel gutted it, and, of 
course, it's in limbo now because there was that period of time 
this Governor vetoed this. It was a 10-day layover. They've 
sued it for the Ohio Supreme Court. So, it's unclear as to what 
185's standards are, though the attorney general is going 
forward as if it's in full effect.
    Mr. Issa. And the followup, and sometimes we call this the 
punch, assuming that 185, if left ungutted and implemented, 
would have really changed the lay of the land going forward, 
particularly as to enforcement of mortgage brokers, lending 
policies, criminal sanctions and so on, assuming that's all 
true, then when we're weighing--I'll just be a second, Mr. 
Chairman. Thank you.
    If we're weighing the Fed, who will be up here next, and 
what we expect them to do, and Ohio's effective or ineffective, 
but belief that they can respond, they can regulate as Federal 
officers, wouldn't it be reasonable to say that you should send 
185 back through, put the teeth in it, enforce it and clean up 
the act unique to Ohio's problems so that you will not be in a 
catchall of what works in California being what you get told to 
do here in Ohio, which, by the way, as now a Californian, I 
know won't work. The regulatory needs are undoubtedly different 
here in Ohio. I don't believe you have walk-away loans. In 
California you can walk away from your mortgage, not go 
bankrupt and no one chases you. We have non-recourse loans.
    And so as an Ohioan moved to California, I'll close and 
say, in a sense, isn't it the important thing to come out of 
this hearing, that if Ohio can't make 185 a proper enforcement 
reality, that your legislation needs to pick it back up, put 
teeth in it and bring it back through if Ohio's going to have a 
custom solution for themselves?
    Mr. Rokakis. I agree. I think we have to partner in this. 
And as you know, one of the comments made by Chairman Bernanke 
was that unfortunately this is a patchwork quilt. So, we can't 
do this alone. Clearly, we can't expect the Fed to do all of 
this.
    But, unfortunately, and I hate to be such a cynic, I've 
spent many an afternoon traveling to the Ohio Legislature.
    The power of the mortgage broker industry, the power of the 
mortgage bankers, the appraisers, the people that are all 
integral parts of this not so pleasant situation have 
incredible power at that legislature, and I've watched them--
and time after time--2002 is a good example. Cleveland, Dayton 
and Toledo said nobody is going to help us. We'll do it on our 
own. You know, within 60 days they preempted those three 
cities, they promised action, 11 meetings, 63 witnesses, no 
action came until 2006 only because it was an election year, 
then they started to gut it 3 months later. Forgive me for 
being a cynic, but I've spent too much time in Columbus.
    Mr. Issa. Thank you, Mr. Chairman.
    Mr. Kucinich. Thank you very much, Mr. Issa, my colleague 
from California. This discussion that you're having with Mr. 
Rokakis, since we do have a member of the legislature in the 
audience, State Representative Foley, and if there's any other 
members of the legislature in the audience, I would ask that 
you let the staff know, because this is certainly a discussion 
that is relative to your level.
    We've also been joined by Congresswoman Tubbs Jones' 
representative, Mr. Taylor. Would you stand and be recognized. 
Let Congresswoman Tubbs Jones know that she has our love and 
support at this time. We know that she would be here except for 
this tragedy in her family. So, thank you, Michael Taylor, for 
being able to represent Congresswoman Tubbs Jones. And, 
finally, I want to acknowledge the presence of another mayor 
that's in the room, Mayor Thomas O'Grady, of North Olmsted.
    I'd like to move on to questions, and I'd like to go to 
this question of public hearing, Mr. Bromley, that you raised. 
What's your understanding of the purpose of holding public 
hearings? And, generally speaking, I'm not talking about a 
specific case now with respect to merger reviews.
    Mr. Bromley. Well, it's an opportunity. The Community 
Reinvestment Act has a mechanism that allows the public to 
comment on a proposed merger of lenders, and the public hearing 
is part of that process where the public, meaning individuals, 
community groups such as Barbara's, can comment on the impact 
of a merger on a community.
    Mr. Kucinich. And when was the last time a hearing was held 
by the Cleveland Fed.
    Mr. Bromley. 30 years ago.
    Mr. Kucinich. How would you explain that 30 years have 
passed without a public hearing.
    Mr. Bromley. I think that this Federal Reserve Bank decided 
after one hearing that they were never going to have another 
hearing in Greater Cleveland, that it was unfortunate, and that 
the weight, as Jim has indicated, the weight of the lenders 
weighed in and said we are not going to have any more public 
exposure to these kind of issues. And the result has been 30 
years of silence in the public square, and the public square 
needs to have a vigorous dialog in the Democratic institution.
    Mr. Kucinich. Mr. Rokakis, you quoted from Chairman 
Bernanke, and, of course, you're aware that last week he 
promised that the Fed is going to do all, ``We'll do all we can 
to prevent fraud and abusive lending and to ensure that lenders 
employ sound underwriting practices.''
    Now, preventing a reoccurrence of the problem is very 
important, but what efforts should be made and what role will 
the Fed play in solving the problem of foreclosures for 
existing homeowners.
    Mr. Rokakis. Mr. Chairman, I also read their statements 
urging banks and mortgage companies throughout the company to 
cooperate in workout efforts. I'm a part of the Governor's task 
force that's putting together a State-wide network to help try 
to work through this foreclosure morass. As you know, September 
of this year and next year we're going to see an explosion of 
these subprime ARMS resetting, about $20 billion worth in this 
State. So, we're going to see more foreclosures than we've 
already seen, which is hard to believe.
    But I think what's important is that we must find a way, 
the Fed, the Congress, we have to bring these lenders to the 
table early. They say they want to work out these loans, and I 
know they have with ESOP and we have a foreclosure effort here, 
but until, as an industry, they set up practices that offer 
uniform solutions, it's going to be a one by one by one by one 
hand-to-hand combat on renegotiating millions of mortgages.
    Mr. Kucinich. Well, since you're on the Governor's task 
force, of course, you know the stock market has taken a notice 
of the rising in cost in subprime loans has helped to reduce 
the amount of capital available for future predatory lending.
    Of all the conferences and guidance from the Fed, can you 
point to anything that the Fed has done to prevent the bad 
loans from being made? Are you aware of any?
    Mr. Rokakis. No. Other than the statement of those last 
week urging the banks to cooperate on workout efforts, but it 
was nothing more than an invitation to do so.
    Mr. Kucinich. Mr. Bromley, are you aware of any of this.
    Mr. Bromley. I'm not aware of any, and at this level of the 
crisis--that's the point about the Cleveland Fed. The Cleveland 
Fed is very aware of what's been going on in Ohio and 
specifically here in Greater Cleveland. I think they have 
played a very important role in lifting this issue up.
    Mr. Kucinich. Thank you. I'd like to ask Ms. Anderson, 
because you're working at the community level, tell this 
committee about the impact of people in the neighborhood where 
you have all these homes boarded up--and you're still living 
there and you have a home there.
    Ms. Anderson. That's right.
    Mr. Kucinich. I talked to some people yesterday, but I'd 
like you to tell the committee, how does this affect people. 
People put time and effort into their property to try to keep 
it up, and, all of a sudden, a house gets boarded on the 
street.
    Ms. Anderson. It's not just devastating to just the people 
who live there, but especially to the children. I mean, you 
play with these people, you work with people, you talk with 
people. They become your neighbors, and then, all of a sudden, 
in the middle of the night they're gone, and several days later 
the house is boarded up, trash is sitting outside and it's not 
as though it's moved. This is your window every day, is that 
you go out to see these vacant, abandoned, boarded-off homes 
that just devastates the entire community. It's heart breaking. 
It's an uphill battle.
    We have had many community groups go door to door to try to 
make a difference with our painting on the houses, as you saw 
yesterday, Mr. Kucinich. We have people there now who are 
cleaning up the property, who are sweeping. We have people from 
Habitat who volunteered their time today who are doing that. It 
is a never-ending battle. You can only clean up so much. It's 
like trying to clean up America and all you have is a staff of 
four.
    Mr. Kucinich. I want to thank the members of the panel, and 
just ask my colleague, Mr. Issa, when we look at California, 
and your having an understanding of both Cleveland and 
California, is it possible that it's only working in California 
because the housing level right now, and that might also be 
related to the lending practices and also--you know, yesterday 
over on, I think, it was Blanche Avenue I saw a house that was 
appraised for like $68,000, and there's no way that this house 
was worth that much.
    Now, it's boarded up, but when it was first bought, it was 
$68,000. And I'm wondering, you know, when you have an economic 
decline that's undercut, does that have an impact.
    And could it be that there's a housing level in California 
that's not here?.
    Mr. Issa. Mr. Chairman, you're exactly right. Actually, if 
anything, we probably have more predatory loans in California 
because you buy a house, you pay $300,000 for a starter home in 
some California communities, and 2 years later you take another 
$100,000, $150,000 out in a second because the appreciation has 
been that great. A typical capital investment in 2000 in 
California doubled by 2005, doubled.
    So--and when you start with a base of $2, $3, $4, $500,000 
on what we as Clevelanders would call a middle class home, and 
$190 to $200 for that base housing, just for what we would call 
affordable housing, and then it doubles. What happens is the 
mischief that these mortgage brokers--and they sprung up out of 
nowhere unregulated in California--were able to do was amazing. 
The only thing keeping California going is, first of all, you 
can sell your house and get out today because they still 
appreciated it, and, two, to be quite candid, we have an 
incredibly low unemployment rate in most of California that is 
holding it up. It's not that we don't have some cracks in the 
subprime mortgage programs. It's just that it's so much smaller 
because we have full employment.
    Mr. Kucinich. And I suppose it's fair to say that, you 
know, God forbid that there was an economic decline in 
California, but if there was an economic decline, you would 
probably see some problems.
    Mr. Issa. The financial landslide, when you're looking at 
homes that cost so much more, will ripple throughout the 
country. It's one of the reasons that your hearing here is so 
important, is as does Cleveland, maybe not so goes the rest of 
the country. But if what we see here, because of a doubling or 
so of a historically low unemployment were to happen in 
California, the default rate would be in the hundreds of 
billions of dollars, and it clearly would have an effect on the 
national economy.
    Mr. Kucinich. See, I think that having Congressman Issa 
here is so important because we're looking at kind of the 
parentheses of this matter. You know, Cleveland, with a 
tremendous wave of foreclosures, State of Ohio, with the 
economic decline, California with a housing bubble, crisis 
rising, it's really great that we can do this together.
    We want to thank the first panel for testifying. Any 
additional statements that you have or information by the 
unanimous consent of the committee is able to be submitted to 
the record. Thank you for being here, and we're now going to 
move to the second panel, Ms. Sandra Braunstein, who is the 
Director of the Division of Consumer and Community Affairs for 
the Federal Reserve. I want to thank her for being here.
    Ms. Braunstein, good morning.
    Ms. Braunstein. Thank you.
    Mr. Kucinich. I want to thank you very much for being here. 
I want to introduce, to those who are in attendance, Ms. Sandra 
Braunstein. She is the Director of the Division of Consumer and 
Community Affairs at the Board of Governors of the Federal 
Reserve System. She supervises the board's Community 
Reinvestment Act Examination Program and coordinates the 
development of policy recommendations relating to consumer 
protection including the Community Reinvestment Act. She also 
plays a significant role in analysis and merger and acquisition 
applications. She was appointed in March 2004 and joined the 
Federal Reserve Board in 1987.
    Ms. Braunstein, it is the policy of the Committee on 
Oversight and Government Reform to swear in all witnesses 
before they testify, and I would ask you at this moment to rise 
and to raise your right hand.
    [Witness sworn.]
    Mr. Kucinich. Thank you, witness. Let the record reflect 
that the witness answered in the affirmative.
    Now, as panel 1, I'm going to ask Ms. Braunstein to give an 
oral summary of her testimony, to keep this summary under 5 
minutes in duration, and I want you to bear in mind that your 
written statement will be included in the hearing record. So, 
at this point, the floor is yours, and I want to welcome you to 
this subcommittee hearing.

STATEMENT OF SANDRA BRAUNSTEIN, DIRECTOR, DIVISION OF CONSUMER 
         AND COMMUNITY AFFAIRS, FEDERAL RESERVE SYSTEM

    Ms. Braunstein. Thank you. Chairman Kucinich, Ranking 
Member Issa, I appreciate this opportunity to appear in 
Cleveland to address a number of issues that are of interest to 
you and your constituents. My written testimony describes the 
Federal Reserve System's role in evaluating the bank's 
performance under the Community Reinvestment Act, how the 
Federal Reserve analyzes applications from banking 
organizations proposing mergers or acquisition and discusses a 
number of matters relating to subprime mortgage lending.
    I would now like to make a few major points on these 
issues. As you may know, the Federal Reserve has supervisory 
authority for State-chartered banks that are members of the 
Federal Reserve System. These institutions total approximately 
900 banks and represent 12.4 percent of total domestic assets 
of all U.S. banks and thrift. In Ohio, the Federal Reserve has 
supervisory authority, including conducting examinations for 
CRA for 33 banks comprising of only 6 percent of banking assets 
in Ohio.
    The Federal Reserve also has responsibility for expansion 
applications for State-member banks and banking financial 
holding companies. During our analysis, we review the 
competitive effects of the proposal in the relevant markets, 
the financial and managerial resources and future prospects of 
the bank holding company, and its banking subsidiaries, the 
convenience and needs of the communities affected. The public 
is notified when applications are filed and interested parties 
may comment on any of the statutory factors.
    Promoting the availability of credit through the banking 
system and protecting consumers are important roles for the 
Federal Reserve. In regards to these objectives, I will address 
the subprime mortgage lending. The subprime market has grown 
dramatically over the past decade. In 1994, subprime loans 
accounted for fewer than 5 percent of mortgage originations, 
but by 2006 about 20 percent of new mortgage loans were 
subprime.
    While the expansion of the subprime mortgage market over 
the last decade has increased access to credit, the market has 
more recently seen increased delinquencies and foreclosures. 
The board is troubled by these performance issues and 
understands the significance of the matter to regional markets, 
communities and families.
    The board believes that mortgage market problems need to be 
addressed in a matter that curves unfair and abusive practices 
while preserving incentives for responsible subprime lenders.
    Accordingly, it is important that any actions we take are 
well calibrated and do not have the unintended consequences. We 
want to encourage, not limit, mortgage lending to qualified 
borrowers our responsible lenders.
    I will briefly touch on several means we have used and are 
using to address subprime lending issues. First, over the past 
several years the Federal Reserve System has monitored 
development in the subprime lending industry and has taken 
steps to address emerging problems. In response to weaknesses 
in underwriting and risk management at the institutions we 
supervise, we have issued guidance in concert with other 
Federal banking agencies. This includes the recent proposed 
guidance on subprime lending.
    Second, in 2001 the board revised the HOEPA rule in 
response to renewed concerns about predatory lending. In this 
rulemaking, the board utilized its authority to prohibit unfair 
and deceptive practices for high-cost loans. For example, the 
board issued rules that prohibit a HOEPA lender from 
refinancing one of its own loans with another HOEPA loan, or 
flipping, within the first year unless the new loan is within 
the borrower's interest. At the same time the board revised the 
rules implementing the Home Mortgage Disclosure Act to better 
track developments in the higher-priced market.
    The board is currently conducting a major review of 
Regulation Z, which implements the Truth in Lending Act of 
which HOEPA is a part. The board held four public hearings in 
2006 on home equity lending and mortgage markets. On June 14th 
the board will hold a fifth public hearing focussed on how the 
board might use its rulemaking authority to curve abusive 
lending practices in the home mortgage market, including the 
subprime sector.
    Third, the board is actively engaging representatives from 
the mortgage lending, servicing and capitalization arena as 
well as from borrower and community support organizations to 
learn about opportunities for borrower intervention and 
foreclosure mitigation. And, fourth, collaborations to further 
community development. Consumer and financial education have 
long been a part of the Federal Reserve System's approach to 
facilitate solutions to matters that may be most effectively 
addressed in a local or regional level. In my written 
testimony, I discuss some of the efforts of the Federal Bank of 
Cleveland in this regard.
    The impact of mortgage delinquency and foreclosure on 
consumers and communities is of great concern to the Federal 
Reserve, and we have worked to respond to the issue in both the 
national and regional levels. We will continue to pursue 
opportunities to help borrowers and to preserve the access to 
responsible lending.
    [The prepared statement of Ms. Braunstein follows:]

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    Mr. Kucinich. I want to thank you, Ms. Braunstein, for 
being here to represent the Fed.
    Now, in your testimony you cite two public hearings. In 
your prepared testimony you cite two public hearings involving 
Ohio banks in the last 10 years. Now, for the record, will you 
state which Federal Reserve Bank convened those hearings?
    Ms. Braunstein. Those hearings--actually, public hearings 
are convened by the board, and that's one of the things that I 
wanted to correct a bit. There are a number of items you 
discussed in the first panel where the actual decisionmaking is 
in Washington as a board, not in the local Federal Reserve 
Bank.
    Mr. Kucinich. Weren't those hearings held by the Federal 
Reserve Bank that came out of Chicago.
    Ms. Braunstein. Those hearings were held in Chicago, yes.
    Mr. Kucinich. Thank you. Now, for the record, will you 
state the last time the Cleveland Fed held a public hearing 
on----
    Ms. Braunstein. The last time we held a public hearing in 
Cleveland, it was in 1981.
    Mr. Kucinich. Would the staff correct the record? Is it not 
1979 or 1981? OK. Our information shows 1979.
    So, if you could provide this committee with information on 
the year, we would appreciate it.
    Now, can you explain, in any event, why so much time has 
passed without another public hearing?
    Ms. Braunstein. Well, first of all, we make decisions, the 
board makes decisions on public hearings, and there have been--
since 1990, there have been 13 public meetings related to 
applications.
    Mr. Kucinich. Not in the Cleveland area, though, right.
    Ms. Braunstein. Not in the Cleveland area. There's been two 
in the Cleveland area, the one you keep referring to in 1979 
and one in 1981. There have been--when we decide to hold a 
public meeting on an application, the reason we do that is 
because we cannot get sufficient information to make a decision 
on a case without holding the public meeting.
    Every application has a public comment process, and it's 
not unusual for us to receive hundreds of comments.
    Mr. Kucinich. In other words, if you feel you have 
sufficient information, you don't hold a public hearing.
    Ms. Braunstein. Correct. That is correct.
    Mr. Kucinich. So, all of these other mergers have taken 
place over the past 25 or so years, 27 to 30 years. You just 
didn't need the extra information; is that what your position 
is.
    Ms. Braunstein. We did not feel we needed--in order to get 
what information we needed to make a decision, it was not 
necessary to hold a public meeting.
    Mr. Kucinich. Now, we've been hearing that important data 
maintained by the Fed pursuant to the Home Mortgage Disclosure 
Act is not easily useable even by skilled researchers. Is the 
Fed aware of the difficulties experienced by users of the Home 
Mortgage Disclosure Act data, and when can we expect the Fed to 
include the usability of this data.
    Ms. Braunstein. I know that the people who are in charge of 
the HMDA data work with consumers and community groups all the 
time to try to help them with this data. If there are specific 
problems associated with that, we would like to know about 
them, and we will see what we can do to address them. I'm not 
aware of specific problems.
    Mr. Kucinich. Will you explain how such a high percentage 
of banks are receiving passing Community Reinvestment Act 
rates, maybe 97, 99 percent at the same time that one out of 
every five subprime mortgages originated in the past 2 years 
will end up in foreclosure? How can that happen.
    Ms. Braunstein. Well, first of all, over 50 percent of the 
subprime mortgages that are made, and even higher in Ohio, it's 
in the 60 percent range, are made by independent mortgage 
companies that are not federally regulated and, therefore, not 
subject to CRA, so that is one part of it.
    Mr. Kucinich. Have you----
    Ms. Braunstein. And I know for the banks--I can only speak 
to the banks that we supervise. We have, as I mentioned, 33 
banks, and in 2005 HMDA data our State-member banks made 17 
high-cost loans. So, they are not engaged in subprime lending.
    Mr. Kucinich. Now, we know that there are financial 
institutions who have created secondary products in the 
subprime markets, correct.
    Ms. Braunstein. Yes.
    Mr. Kucinich. So, if these financial institutions, you 
know, with whom you have oversight create those products, what 
stops the Fed from being able to monitor the creations of these 
financial institutions? Why would you not be able to do that.
    Ms. Braunstein. Well, it's likely that the secondary market 
products may be created at the cooperate holding company level, 
and our responsibilities with regard to that are to make sure 
that those companies are safe and sound, and that is what we 
do.
    Mr. Kucinich. You don't look at their practices. You don't 
look at whether they're----
    Ms. Braunstein. Well, an affiliate of a holding company 
would not be subject to CRA, just the deposit. CRA applies to 
depository institutions only. And those are State-member banks, 
and, as I said, our State-member banks are not----
    Mr. Kucinich. Here's what I don't get. You at the Fed, 
you've just told me that you don't need to have these community 
hearings as long as you get sufficient information. That's on 
one hand. On the other hand, you see an avalanche of defaults 
in the subprime housing market.
    Are you aware that's happening? Are you aware of the level 
of defaults?
    Ms. Braunstein. We certainly are, and we're taking, as I 
mentioned, a number of steps to address that. Those--our 
applications process is somewhat separate and apart from what 
we're doing in terms of foreclosures.
    Mr. Kucinich. Are you helpless to do anything about this 
avalanche of defaults? Because, see, here's the problem that I 
have--and, Mr. Issa, this is something that motivates the cause 
of this hearing. We have people in the community who are really 
screaming out, crying out for help in getting recognition of 
the problem. If the Fed won't hold hearings--and on the other 
hand you say, well, we have sufficient information. We don't 
have to hold a hearings. If you do not take responsibility for 
monitoring the activities of the subprime one way or another 
and you don't hear from the people, you will not hear from the 
people because you say you have sufficient information, then 
how in the world, other than a hearing like this, would you 
ever get an opportunity? Will the people ever get an 
opportunity to be heard in neighborhoods that are falling apart 
because of this avalanche of foreclosures? Can you help us with 
that?
    Ms. Braunstein. We are monitoring the circumstances of 
foreclosures around the country, and we have taken several 
steps in that regard. We have issued guidance on non-
traditional mortgages. We have issued guidance on subprime 
lending. We have issued guidance to lenders in terms of doing 
workouts. We are heavily engaged in meeting with people both in 
consumer groups and industry people to talk about the problems 
that exist and how workouts can be done and how people can keep 
their homes. We are heavily engaged in a number of activities.
    And here locally the Federal Reserve Bank of Cleveland is 
heavily engaged in the community. They held a foreclosure 
summit in 2005 and 2006 on a local basis, and they're working 
in partnership with a lot of local community organizations on 
foreclosure mitigation and education projects.
    So, we are heavily involved in activities around 
foreclosure, and it is a huge concern for us. We are doing what 
we can.
    We are examining our rulemaking to see if we can do 
something under HOEPA. We have already held four public 
hearings on this matter, and we are holding a fifth one on June 
14th in Washington, as I said, in particular to focus on unfair 
and deceptive borrowing.
    Mr. Kucinich. And are you also looking at these deceptive 
and sharp lending practices in the subprime mortgage industry 
so that neighborhoods, such as in Cleveland, OH, are not going 
to be crushed by these unfair practices? Are you looking at 
that.
    Ms. Braunstein. Yes. We definitely are looking at that, but 
the one thing that we all have to keep in mind is that we can 
write rules that can address some of these practices, but we 
are not the enforcement agency for most of the lenders. In 
fact, we have very little subprime lenders under our direct 
enforcement. That is done by other regulators.
    Mr. Kucinich. I want to go to Mr. Issa after this question. 
One of our witnesses today remarked that one of the failings of 
the Community Reinvestment Act is this, and this is a quote. If 
a bank purchases predatory loans, it may be fulfilling its 
obligation under the lending test. Similarly, a bank that 
purchases securities backed by predatory loans may be able to 
claim credit under the investment test. In other words, the 
quality of a loan is not considered in the Community 
Reinvestment Act examination. Only where the loan was made 
large banks can own subprime lending affiliates to make 
predatory loans in low-income minority areas, and the bank can 
get rewarded under the Community Reinvestment Act.
    And in connection with the statement that you just made, 
how long is the Fed going to allow this twisting of the intent 
of the Community Reinvestment Act, and when is the Fed going to 
issue new regulations denying Community Reinvestment Act 
credits for financing predatory loans and lenders? I would 
appreciate your answer.
    Ms. Braunstein. If we know that a bank is making loans that 
are predatory in nature, there will not be Community 
Reinvestment Act credit for those, and, in fact, we would look 
further into that.
    Mr. Kucinich. Mr. Issa, thank you very much.
    Mr. Issa. Thank, Mr. Chairman. I think you've gotten us off 
to a good start. I want to sort of stay on that same line.
    Let me characterize a little bit of what I'm hearing. 
Basically, you're damned if you do and you're damned if you 
don't. If you, in fact, have to make these loans, but if you 
make these loans and they're high risk and they default, then 
it's your fault. And in your case, if I understand, Ms. 
Braunstein, that banks are not doing it directly. They're doing 
it by impact. As you said, there were only 17 loans made by 
banks in a direct relationship.
    But to the extent that we are holding both of these, I want 
to followup on something the previous panel, Ms. Anderson, said 
when a home is boarded up and the neighborhood goes down and 
there are one after another, these homes are owned by banks, 
and the bank is getting zero on them.
    So, I'm trying to understand, because you oversee banks, 
this is a huge hit to the banks who own these portfolios of 
non-performing purchases of portfolio, and, in fact, can't even 
liquidate the underlying assets in some cases. So, on that 
$68,000 home that wasn't worth $68,000, they get a goose egg, 
isn't that, right?
    Ms. Braunstein. Yes. That would be--absolutely. I mean in 
our safety and sound examinations, if banks have large 
portfolios of loans that are defaulted, that is certainly going 
to impact them.
    Mr. Issa. The earlier panel, one of the things I didn't 
followup with them, but it stuck in my mind, is that the vast 
majority of defaults are refies. So, it's not the original 
mortgage on the home, but, in fact, a refinancing. Is that your 
understanding also?
    Ms. Braunstein. I think it's more than half. My--I think my 
statistics are not quite what the panel had before.
    What we've heard in Ohio, I think from the HMDA data, it's 
more like 60 percent are revised versus about 40 percent are 
purchase money in Ohio.
    Mr. Issa. So, I'm trying to understand this specifically 
for Ohio because, as you know, my heart is here even though my 
car is out in California. Now, it just works that way, everyone 
has to have cars in California.
    I find this interesting because if, in fact, you make these 
loans and then you have refies, then that means there was money 
taken out. Where did the money go?
    In other words, you had a performing loan and a loan that, 
when we're looking back, went to being predatory, to use the 
term. I don't like the term because the truth is some of these 
are high risk and some may be predatory, but when they went 
from being purchase money to being recollateralized as a 
second, is probably when these things tipped over. At least 60 
percent of them might have tipped over being what the consumer 
couldn't afford.
    But my question to you is, where did the money go? Where 
does typically that money go when they take it out? Does it go 
into the stock market? Does it go into other areas or is it a 
result of consumer debt and other signs that when we look at 
the Fed chairman's role, he often speaks on.
    Ms. Braunstein. I don't have statistics on that, but my 
guess would be that often times people are venerable and put 
into a position of refinancing because they have other 
obligations.
    Mr. Issa. So----
    Ms. Braunstein. I doubt that people are doing this to 
invest in the stock market. It would be my gut feelings. I 
think it's more likely that they have other debts that they're 
trying to pay off.
    Mr. Issa. So, the 60 percent would be people who are in 
trouble, and in a sense it's predatory, but it's predatory on 
both sides. They're slipping in toward bankruptcy. A refy lets 
them get some cooling off space for making a whole bunch of 
credit card loans, but, ultimately, they slip right back into 
it.
    Where would we get an understanding of that? Because 
obviously, you know, earlier they talked about liar's loans. 
I've always had a problem with calling liar's loans predatory 
because I'm saying, wait a second. If you lie to get a loan, 
then who's the victim when it goes into default? I've always 
felt that a liar's loan was sort of over here with, wait a 
second, if you lie to get a loan, and then eventually you're 
out of a house, and I've got a house that is upside down, and 
if I were a banker, I'm wondering who's the victim here, and I 
think the bank is the victim in the case of liar's loans.
    Ms. Braunstein. Those can go two ways. I will tell you one 
of the ways we can get information about questions you've asked 
are the four hearings that we held last year in 2006. And one 
of the things that we heard over and over again anecdotally was 
that the stated income loans--they can go two ways. It could be 
that a borrower will overinflate their income. Yeah. They don't 
have to document their income.
    It's also where the broker or the lender may put the wrong 
number in, and so in that case a borrower would be a victim. 
And we have heard anecdotally a lot of stories about the case 
where the borrower did not even realize the number that the 
lender was putting into the application.
    Mr. Issa. I know it may be a lot of work, but to the extent 
that you can, would you provide this committee with information 
you've gotten from those hearings that you think would be 
appropriate for our continued followup and also from your 
public comments? Because as I understand, your public comments 
in a sense are open forum hearings. You can take 200, 300, 400 
comments, where in a hearing like this today as we can all see, 
you're only going to get a few people into a speech into an 
hour or 2-hour period.
    Ms. Braunstein. Absolutely. For each of the four hearings, 
as well as the fifth one on June 14th, there is a public 
comment process attached to that where we encourage people to 
write us and tell us comments on the issues.
    Mr. Issa. Now, I'm going to close out with one that is near 
and dear to my heart. When I came to Congress, I came to one of 
my other committees, the Judiciary Committee, and we worked on 
bankruptcy reform my first, second and third term, and, 
finally, got it passed. And I think all of us know that 
anything that's that hard to get passed, you didn't get it all 
in.
    When it comes to how the Fed--and I realize you probably 
won't be able to give us a full answer today, but I would 
appreciate a supplement from your board and others that may be 
able to comment. In bankruptcy reform we really didn't deal, if 
you will, with home ownership. In California, we call them cram 
downs. When, in fact, in a bankruptcy it is determined that a 
mortgage is not payable, the authority of the bankruptcy judge 
to view that and to view, for example, that a predatory event 
occurred, an event occurred that may have led to the inability 
to pay, etc., we didn't deal with that. We sort of left the 
case law where it was to a great extent.
    Well, at the same time we may be individual if they have 
the ability to pay for future revenues. So, when we looked at 
specifically, bankruptcy, if a bankruptcy event occurs, can you 
give us your comments on things that maybe we should pick up 
legislatively that may empower the courts who ultimately, if 
they give debt relief and someone comes out of a bankruptcy 
still owning their home but at a different mortgage rate, etc., 
it tips the balance as to your institutions, could you give us 
whatever followup comments you feel are appropriate because I 
believe in light of a lot of what we're seeing here, that we 
may be looking on the other comment at a bankruptcy reform 
affecting what happens to somebody that's been a victim of 
predatory lending?
    Ms. Braunstein. We'll have to get back to you on that 
because, frankly, I'm not prepared to discuss that at this 
point in time.
    Mr. Issa. I understand. Thank you, Mr. Chairman. I yield 
back.
    Mr. Kucinich. I want to thank Mr. Issa. You know, in your 
discussion you raised a couple of questions, and what I'd like 
to do is have a very short second round here.
    Mr. Issa. I love second rounds.
    Mr. Kucinich. If we may proceed. Do you think, Ms. 
Braunstein, that the guidance the Fed has issued has been 
adequate to the magnitude of the predatory lending crisis.
    Ms. Braunstein. I think that we still--it is too early. 
First of all, the non-traditional mortgage guidance has only 
been in effect for a few months, and the subprime guidance has 
not been finalized yet, so I think it's too early to make that 
judgment. However, I will say that we have seen signs that even 
without final guidance, the markets are starting to self-
correct in that we hear that underwriting is being tightened.
    Ms. Braunstein. Well, it took a long time in the sense that 
there were a lot of people hurt, but most of the people who are 
having problems now received their loans in, some in 2005 and 
most in 2006.
    Mr. Kucinich. OK.
    Ms. Braunstein. So, if you look at it that way, it's not 
been a problem for years and years and years.
    Mr. Kucinich. Mr. Rokakis said something when he was 
testifying. Did you hear his testimony?
    Ms. Braunstein. Yes, I did.
    Mr. Kucinich. He raised some questions. He said that the 
Fed can ban no-document loans, but they have not. Is that true.
    Ms. Braunstein. I think what Mr. Rokakis was referring to 
was our authority under HOEPA, and that is what we are looking 
at at this hearing.
    Mr. Kucinich. Is that true though, that you can ban no-
document loans? Is that true.
    Ms. Braunstein. I guess technically we could, but I do need 
to qualify that, that in exercising our authority for unfair 
and deceptive or banning practices, we are going to have to do 
some very careful study to look at the wider effects that we 
need to be well calibrated, so that we don't end up in a 
situation where we're restricting or constraining credit.
    Mr. Kucinich. He also said that you can ban loans that are 
not fully indexed to a borrower's income. Is that true.
    Ms. Braunstein. Again, that would probably fall under--if 
it meets the definitions of unfair and deceptive, then that's 
another part of the law that we are doing an analysis of, and 
so I don't know if we could ban that or not.
    Mr. Kucinich. Well, he says that you can ban the practice 
known as risk layering where borrowers with the weakest credit 
are offered gimmicks to qualify them for loans, but you have 
not. Is that true.
    Ms. Braunstein. Again, we are looking at that, and I am not 
sure because in addition to wanting to be careful about how we 
calibrate bans or practices, the way the law is written, they 
need to meet the definition of unfair and deceptive, and these 
may not meet that definition. So, I can't answer that at this 
point. These are things that we are looking at.
    Mr. Kucinich. Well, what I'd like you to do, I mean, in a 
followup, written answers to these questions. If you can't 
answer them and elaborate right now, I can understand that 
because there's a lot of things that are apparently in flux at 
the Fed relative to these questions. But Mr. Rokakis also said 
that you can require that all subprime loans provide for escrow 
taxes and insurance in their payments, but that you don't. Is 
that true.
    Ms. Braunstein. Same answer as----
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    Mr. Kucinich. OK. Well, I think that this is a productive 
hearing if we can open up a discussion here with the Fed about 
the direction that you need to take, because we're not only 
looking at the forensics of this. We're looking at where we are 
headed for the future.
    Ms. Braunstein. And can I say this.
    Mr. Kucinich. Sure.
    Ms. Braunstein. These were already things we are looking at 
under this authority. Some of those things, it may end up are 
better dealt with through guidance, and we have dealt with 
those issues in the subprime guidance that we have now out and 
that we're finalizing. So, there's a big difference between 
dealing with something in guidance and dealing with it in the 
rule.
    Mr. Kucinich. I understand that, and I also ask you to take 
note that while you're calibrating these things, neighborhoods 
are falling apart. We really need your help.
    And the one final question I have before I go back to Mr. 
Issa is this. Again, in your statement about public hearings, 
which, you know, there was an aspect of it that I found very 
troubling, you said, you know, you could get sufficient 
information. Mr. Issa pointed out that you solicit comments. 
That's good. But you still don't have these public hearings for 
people here in the community. My question to you is, do you 
meet with bankers to discuss these issues?
    Ms. Braunstein. Are you talking about applications issues.
    Mr. Kucinich. No. I'm talking about the issues that you 
wouldn't hold in a public hearing to talk to people in the 
community. Do you have meetings with bankers?
    Ms. Braunstein. We meet with a wide range of people. We 
meet with people from the industry. We meet with bankers. We 
meet with community organizations on a regular basis.
    Mr. Kucinich. The obvious reason why I raise that question 
is, I mean, people in the community would feel hurt if they 
felt that you wouldn't meet with them, but you would meet with 
the bankers. And so I just want to appeal to the fairness of 
this process as we move forward.
    I thank you very much, by the way, for your testimony and 
now to Mr. Issa.
    Mr. Issa. Working with the chairman is a great deal of fun, 
and I've always liked his insight. Once in a while he gets mine 
and wonders where it came from. But, you know, the interesting 
thing is that I meet with the NRA and I meet with the Brady 
organization. I don't hold a public hearing to see all the 
gunners come in and anti-gunners come in to tell me what they 
think. And, perhaps, I should, but I've had some pretty lively 
town hall meetings, so I try to stay off of some subjects.
    Mr. Kucinich. Maybe you should have that sign and say that 
you will check your guns at the door.
    Mr. Issa. I once had to have SWAT because I did an 
immigration reform hearing, and I now do those telephonically.
    But I want to close out my questioning for something that I 
hope the Fed can take an active role in, and that is modelling 
the question of the 80 versus the 20. Today in this hearing so 
far what we've seen is that in the worst case, you're going to 
have about 20 percent of these loans go south, at least, based 
on all the worst case problems we've seen so far. That means 80 
percent of the people who take these high-risk or subprime 
loans perform under the--perhaps convert them in time to 
conforming loans. And I'm concerned that 80 percent and, 
perhaps, the others, certainly the 80 percent, might not have 
gotten a loan, might not have owned a home.
    And so as you're doing this, I hope that you're going to be 
able to supply this committee and the public with some 
modelling of the what if. What if we tighten this up a little? 
Do 79 percent of the 80 percent still get their homes? Well, a 
big chunk of the misery factor goes away or is it one of those 
things where half the people who got these loans, and as a 
result, are enjoying home ownership around the country, will be 
denied? And that's going to be very important to me, that as 
much as I don't want to see boarded up homes, I don't want to 
see--quite frankly, I don't want to see banks making loans that 
ultimately lead to defaults.
    At the same time, as Members of Congress, the one thing 
that we've got a very bipartisan basis and President after 
President has stated, is home ownership is a big part of what 
America is all about. And moving that number up as we've done 
as a society over the last few years continues to be important, 
so I'm hoping that you can give us insight on that. Because as 
much as we want you to reduce this pain factor--as a homeowner 
who was lucky enough to get a VA loan the first time, I 
realized I was a bit of a stretch starting a business here in 
Cleveland and getting my VA loan with no qualification 
necessary other than an honorable discharge.
    So, if you would respond to us in writing for that, and 
obviously we're hoping for leadership from the Fed, and I'm 
happy that you were able to be here today. We talk about the 
Federal Reserve Bank of Cleveland, and it is a noble 
institution, but I appreciate the fact that, as I understand, 
you just came from Washington to make this happen for us.
    Ms. Braunstein. Thank you very much, and I agree with you, 
Congressman, and that's what we're trying to do, is achieve the 
right balance, and we would be happy to get to you on that.
    Mr. Issa. Thank you, Mr. Chairman. I yield back.
    Mr. Kucinich. The chair is going to declare a 5-minute 
recess. We'll come back in 5 minutes. We intend to complete 
this hearing by 1. I would ask the next panel to stay close. If 
you're going to leave the room, please know that we're starting 
again in 5 minutes.
    [Recess.]
    Mr. Kucinich. The committee will come to order. The 
committee will come to order. If you have any conversations, 
please take them outside the room.
    I want to make sure that anyone who has participated here 
signs the sign-in list so that as the work of this committee 
continues, we can keep you posted of any further discussions or 
hearings on the subcommittee relative to these questions. We 
now are about to begin the third panel.
    And I would like to make the following introductions: Judge 
Raymond Pianka is presiding as administrative judge in the 
Cleveland Municipal Housing Courts. A division he has served as 
such since his election in 1996.
    Previously, Judge Pianka served on the Cleveland City 
Council where he chaired the Community and Economic Development 
Committee and the legislative committee.
    Judge Pianka received his jurist doctorate from Cleveland 
Marshall College of Law in 1977.
    Professor Kathleen Engel is a professor at the Cleveland 
Marshal College of Law. Her research focuses on predatory 
lending, housing discrimination and the Community Reinvestment 
Act. She's published a long list of law review articles on the 
topic and teaches a seminar at the law school on predatory 
lending.
    A recent article was entitled, ``Do cities have standing? 
Redressing the externalities of predatory lending.'' Professor 
Engel received her AB, cum laude from Smith College and her JD, 
cum laude from the University of Texas School of Law. Mr. Alex 
Pollock has been a resident fellow at the America, Enterprise 
Institute since 2004 focussing on financial policy issues among 
other related issues. Previously he has spent 35 years in 
banking, including 12 years as president chief executive of the 
Federal Home Loan Bank of Ohio. He's director of the Allied 
Capital Corp., the Chicago Mercantile Exchange, the Great Lakes 
Higher Education Corp., the International Union for Housing 
Finance and chairman of the Board of Great Books Foundation.
    Ms. Marianne McCarty-Collins is the senior vice president 
of Insight Bank, past president of both the Columbus and Ohio 
Mortgage Bankers Association. At the Mortgage Bankers 
Association, the National Association for the Industry, she 
serves on the Board of Directors and Board of Governors. She's 
a former trustee for the Columbus Board of Realtors, chairs the 
Government Financing Subcommittee as former affiliate of the 
year for the association.
    She's also a former trustee of the building industry of 
central Ohio. Ms. McCarty-Collins has served on the Fannie Mae 
National Advisory Council in Washington, DC, in 1996 and 1997.
    I want to thank this distinguished panel of witnesses for 
being here. It is the policy of the Committee on Oversight and 
Government Reform to swear in all witnesses before they 
testify. I'm going to ask you now to rise and to raise your 
right hands.
    [Witnesses sworn.]
    Mr. Kucinich. Thank you. Let the record reflect that all of 
the witnesses answered in the affirmative. As with panel 2, I 
ask that each witness give an oral summary of his or her 
testimony, and to keep in mind that you should keep that 
summary under 5 minutes in duration. Your written statement 
will be included in the hearing record.
    I'd like to start with Judge Pianka. Thank you very much 
for being here. Please proceed.

STATEMENT OF RAYMOND PIANKA, JUDGE, CLEVELAND MUNICIPAL HOUSING 
                             COURT

    Judge Pianka. Thank you for the opportunity to be here. The 
Cleveland Housing Court has been described by Chief Justice 
Moyer as emergency room for housing conditions in Cleveland. We 
are a problem solving and therapeutic court.
    As judge of the housing court, the sole judge of the 
housing court, I observe daily in the cases before me the 
impact of the banking industry and the lack of regulation on it 
in our homes and our neighborhoods.
    There are nine points briefly. First of all, the lack of 
regulation has reduced our neighborhoods to financial wild 
wests with homeowners left to fend for themselves with an 
attempt to survive in those neighborhoods. Cleveland is 
experiencing a record number of home mortgage defaults, 
foreclosures, bankruptcies and failed financial deals. The 
primary impact of the financial crisis is, of course, on the 
property owner. The homeowners, however, are not the only ones 
who are suffering as result of the increased number of defaults 
and foreclosures.
    The collateral damage from this financial decline is felt 
worse in our neighborhoods as the committee saw yesterday in 
its tour of the Cleveland neighborhood. Each day I see property 
owners who were told by banks and mortgage companies to vacate 
their properties at the commencement of the foreclosure actions 
leaving the properties empty and unattended. Their 
neighborhoods are forced to live next door to that vacant, 
boarded property with high grass and weeds stripped of siding 
and they contact the court about their options to combat these 
living conditions.
    These homeowners not only suffer the effects of living next 
door to the blight, they suffer financial loss as well as their 
own properties are devalued as a result. The frustrated city 
council representatives contact the court, are concerned about 
the abandoned property that are magnets for criminal activity, 
and they produce a domino effect as poorly maintained 
properties lead to more poorly maintained and properties in 
default. And there are discouraged community groups who are 
trying to help but cannot as they attempt to determine who, if 
anyone, has authority and responsibility for the properties.
    I've been with the housing court for over 10 years, and the 
negative impact of the mortgage defaults, foreclosures, and 
conduct of the banking industry upon our neighborhoods has 
never been greater than it is today.
    Certainly, the banks and other lending institutions have a 
right and even an obligation to initiate foreclosure actions 
when mortgages go unpaid. However, the non-regulation of the 
industry has led to a lack of enforcement of basic fiduciary 
duties of banks and other lending institutions.
    The banks and other lenders must be called on to act 
responsibly in both lending and collection processes to 
minimize the destructive effect on our neighborhoods. Reduced 
lending by the regulated banks has created a vacuum which is 
being filled by less reputable lenders. Lending in Cleveland by 
regulated banks has dropped sharply since 1995. The refusal of 
regulated banks to lend in Cleveland has created a vacuum, 
which is being filled in part by unscrupulous, subprime 
lenders, perpetrators of mortgage fraud and irresponsible 
investors.
    Each day in court I'm told stories by property owners with 
little incomes who have fallen prey to schemes involving 
purchase of multiple properties as investment opportunities. 
The schemes seem to thrive in the current, unregulated lending 
atmosphere of Greater Cleveland. And while there are laws 
against fraudulent applications, waste, false statements of 
income and deceitful appraisals, those laws go largely 
unenforced.
    And I'm heartened to see the current efforts to prosecute 
some of the perpetrators of these schemes, but the prosecutions 
are small in numbers and slow. And because of the time needed 
to investigate and pursue these cases, it's unrealistic to view 
prosecution as a cure. Reputable lenders must encourage and 
encourage to occupy their place to lend money to people who 
purchase homes and refinance homes in Cleveland. Lenders must 
be accessible to borrowers and other interested parties and be 
responsible in their actions toward borrowers. One of the 
primary problems that we face in a housing court is our 
inability to reach someone in the bank or lending institution 
who is able and willing to discuss the property with the 
defaulting property owner or the court. It's difficult to find 
a contact person who can negotiate a deed in lieu of 
foreclosure or short sale that would transfer that property to 
a beneficial loaner.
    And this inability to contact the financial institution 
coupled with a fact that a number of the banks are avoiding 
service of process in the--is that my time.
    Mr. Kucinich. Yeah. What I want you to know, Your Honor, is 
that you have an extensive statement here that is actually 
quite helpful to this committee. Your entire statement will be 
included in the record, and I think that you'll be able to get 
to some of these areas in the question and answer period.
    Judge Pianka. Mr. Chairman----
    Mr. Kucinich. But you may wrap it up.
    Judge Pianka. The court every day has to deal with banks 
who have failed to file the deeds, trying to help people who 
are in default get out of the loans, toxic titles where the 
banks have dropped foreclosures and have left the liens on the 
properties, and it is going to take years for us to dig out 
from underneath these problems in Cleveland. And I found out 
today that these are unattended consequences, but they are 
consequences nonetheless that we face every year in Cleveland.
    [The prepared statement of Judge Pianka follows:]

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    Mr. Kucinich. Thank you, Judge Pianka. And I want to thank 
you for the dedicated service that you've given in the housing 
court. I had the chance to serve with Judge Pianka and you 
really have done an outstanding job. Your entire testimony will 
be included in the record, and at this point we'll go to our 
next witness. Next we're going to hear from Professor Engel, a 
professor from the Marshall School of Law.

 STATEMENT OF KATHLEEN ENGEL, PROFESSOR, MARSHALL SCHOOL OF LAW

    Ms. Engel. Thank you. I think it's an honor and a privilege 
to----
    Mr. Kucinich. Is your mic on, please?.
    Mr. Issa. Little green light.
    Ms. Engel. Can you hear me now?
    It's an honor and a privilege to testify today on this 
critically important issue. My name is Kathleen Engel and 
together with my co-author, Patricia McCoy, I've been engaged 
in extensive research on issues related to predatory lending. I 
was asked today to briefly discuss three issues. First, the 
emergence of predatory lending in underserved neighborhoods.
    Second, the targeting of borrowers of color with abusive 
loans, and, last, the role that CRA can play in enabling and 
curtailing predatory lending.
    I'll turn first to the growth of abusive lending in low and 
moderate income neighborhoods. Historically, people with weak 
or a blemished credit history were ineligible for credit. The 
development of the securitization of home mortgages and the 
deregulation of lenders in the 1990's ushered in a new home-
lending market, making credit available for low and moderate-
income borrowers.
    The same forces led to the appearance of a new breed of 
unregulated lenders offering an array of subprime loan 
products. These lenders market their products in areas with the 
highest levels of pent-up demand for loan. That is 
neighborhoods that have not had access to credit in the past.
    Making credit available to borrowers in these areas is not 
a bad thing. The problem is that some of these lenders are 
making loans on terms that are, per se, harmful. These loan 
terms are harmful not only to the borrowers but to the 
community as you've observed in Slavic Village.
    Too often lenders are making loans knowing that borrowers 
ultimately will not be able to afford the repayments. We would 
expect that banks would enter the subprime loan market and 
undercut the abusive lenders with competitive products that 
don't contain abusive terms, thus, driving the worst lenders 
out of the market.
    This has not happened. There are many explanations for why 
banks might be reluctant to enter the subprime market directly, 
and why banks more generally may choose to leave lower-income 
neighborhoods. Those explanations are beyond the scope of my 
testimony today. What is important is that because banks have 
little or no presence in these communities, abusive lenders can 
proliferate and exploit venerable borrowers.
    This leads me to my second point. The marketing of the most 
abusive loans are to people of color. There is increasing 
evidence that, on the whole, people of color pay more for 
mortgage loans than Whites with similar incomes and credit 
histories. This is adding insult to injury. For centuries, this 
country engaged in de jure discrimination that prevented Blacks 
and Hispanics from owning homes.
    Laws prohibiting discrimination and programs aimed at 
increasing home ownership has changed the tide and led to 
increased rates of home ownership among people of color. Now, 
abusive lenders are taking these homeowners' hard-fought gains 
in equity.
    The impact of lending abuse is not limited to people losing 
their homes. When neighborhoods experience decline because of 
foreclosure and property abandonment, all homeowners, even 
though without mortgages, see declines in their property 
values. Crime rates increase, cities lose tax revenues and 
cities find themselves spending money boarding up houses, money 
that could be used to invest in these very fragile 
neighborhoods. My final point addresses CRA's role in predatory 
lending. This is also the topic of an article that I have 
attached to my testimony. The two important questions on this 
topic are, does CRA credit incentives for predatory lending and 
could CRA serve as a tool to combat predatory lending?
    I contend that the answer to both questions is yes. An 
unintended consequence of CRA is that it permits banks to earn 
CRA credit for financing predatory loans. For example, the bank 
purchases loans, it may be fulfilling its obligations under the 
lending test. Similarly, a bank that purchases securities 
backed by predatory loans may be able to claim credit under the 
investment test if the investments fall within CRA guidelines. 
Banks can also directly finance lenders, predatory lenders, 
through warehouse lines of credit and loan guarantees. In 
thinking about how regulators can employ CRA to combat 
predatory lending, the minimum first step is to increase that 
lenders are not receiving CRA credits for financing predatory 
loans and predatory lenders and sanctioning banks that are 
engaging in such activities.
    In addition, CRA exams should include bank affiliates and 
subsidiaries, which are vehicles through which banks can engage 
in predatory lending without sanction.
    Last, regulators need to actively encourage and reward 
banks that develop loan products designed to compete with 
abusive lenders in underserved neighbors. These loan products 
should include vehicles through which borrowers can refinance 
predatory loans. CRA is a powerful tool that if employed more 
aggressively, could help deter predatory lending and help 
communities like ours recover by infusing neighborhoods with 
good credit products.
    Thank you again for the opportunity to present this 
testimony.
    [The prepared statement of Ms. Engel follows:]

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    Chairman Kucinich. Thank you very much for your testimony. 
And the Chair wishes to acknowledge the presence in the 
audience of Federal Judge Polster. Thank you, Your Honor, for 
being here.
    We're going to move to the next member of the panel, Mr. 
Pollock from the American Enterprise Institute. Thank you so 
much for being here today.

STATEMENT OF ALEX POLLOCK, RESIDENT FELLOW, AMERICAN ENTERPRISE 
                           INSTITUTE

    Mr. Pollock. Mr. Chairman and Ranking Member Issa, thank 
you very much for the chance to be here. We heard some really 
interesting discussion of the difference between Ohio and 
California a little earlier. I'm trying to, in my testimony, to 
set all of these discussions in the national and historical 
context, the written testimony, which I'll say a word or two 
about, covers five issues. The evolution of the American 
banking structure, as we begin, that's talking about the bank 
mergers. The context for the subprime mortgage market, 
delinquencies in Ohio in particular, the general topic of 
information asymmetries and, finally, my proposal for a one-
page mortgage disclosure document, which, I believe, if we 
don't do anything else or even if we do other things, we ought 
to do that.
    First, American banking structure briefly, in 1970 when I 
was new in the banking business, there were about 13\1/2\ 
thousand banks in the United States. Now, there are about half 
that many, so we've had a consolidation. But they, at the same 
time, have about doubled the amount of banking offices. And 
relative of the population, the density, if you want to think 
about it, that way has increased by about 60 percent in 
addition, of course, to building an amazingly, global network, 
ATM network and the provision of debit cards, which are 
checking accounts in your pockets. So, the banking 
consolidation on average has been accompanied by much greater 
convenience and access to the payment systems, the banking 
system.
    On a subprime mortgage market, let me say we all know that 
there was an unsustainable expansion of subprime mortgage 
credit along with an unsustainable house price inflation. 
That's now been reversed. We've had large financial losses 
suffered by lenders of investors, layoffs, bankruptcy and 
subprime lenders. The accelerating delinquencies and 
foreclosures we discussed here this morning, the recession in 
home building, tightening liquidity, recriminations.
    As a student of financial history and one whose lived about 
close to four decades of financial history, this strikes me as 
displaying the classic patterns of credit overexpansions and 
ensuing busts. I will say one point, expansions and busts is 
emergency housing acts. We've had, since 1974, emergency 
housing acts, not counting the one for Katrina, which is an act 
of nature and not an act of finance.
    Subprime mortgages grew from about 2\1/2\ percent to 13\1/
2\ percent of total mortgage loans, but over the last several 
years interestingly prime loans also increased their share. So, 
one might ask how can--these are numbers of the Mortgage 
Bankers Association I'm using here. How can the prime loans 
have the same increase at the same time as subprime? The answer 
is subprime basically misplaced the government programs, the 
FHA and VA programs, which are also non-prime lending programs.
    If you look at the sum of subprime and the non-prime 
government programs at stake, more or less the same. One of the 
things that happened, as Ranking Member Issa pointed out, a lot 
of people experience success. If you took an extremely risky 
loan, and, let's say, 100 percent loan with an adjustable rate, 
you've bought a house that went up a lot and in the house boom, 
you experience success. And it is success always that sets up 
the boom that sets up the bust.
    The question I wish to pose is, should you be able to take 
a chance, as a borrower, if you want to?
    Should you be able to take a chance as a lender, and the 
answer is, yes, you should, but we need to have a reasonability 
of what you're doing.
    On Ohio, just briefly, it's interesting to me, that if we 
look at all the classes of loans in Ohio, Ohio's serious 
delinquency rate, which means loan 90 days in arrears or in 
foreclosure, are roughly twice the national averages in all 
categories. That's true for prime and fixed rate loans or prime 
floating rate loans or FHA loans, and for subprime fixed rate 
loans. So, there's something broader going on in Ohio as we've 
discussed its economic problems, problems like unemployment 
rate, low employment growth, which is equally as important as 
unemployment, and obviously the structural changes that we're 
aware of. I want to say how much I agree with Ranking Member 
Issa's view, that if you buy with the proper income, you get a 
loan, and you don't qualify as a victim. And the liar's loans, 
no-doc loans have a long history of performing poorly in 
credit. We've just reinvented and rediscovered that history, 
and it's a good example of what economists call information 
asymmetry--may I have 30 more seconds, Mr. Chairman?
    Mr. Kucinich. Sure.
    Mr. Pollock. And my view is that the nature of the loan and 
its relationship to the borrower's income, both for the 
borrower and the lender, need to be clearly and easily 
accelerized in a one-page form, which I have designed and 
included in my testimony.
    When we have extremely complex disclosures, which we have, 
they fail. They fail to deliver any meaningful information to 
the borrower in the result of confusion. And as I say, whatever 
else we may do, we ought to insure a really simple, clear 
disclosure to all borrowers, subprime and prime, which includes 
their income so they can really see it, the relationship of the 
payments on this loan to their income.
    The fully indexed payments on this loan, once the rates 
reset and its the relationship to their income, I think if we 
do that, that's one step that will be very good for the country 
and also for Ohio.
    Mr. Kucinich. I certainly appreciate your testimony.
    [The prepared statement of Mr. Pollock follows:]

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    Mr. Kucinich. Ms. McCarty-Collins, please proceed.

 STATEMENT OF MARIANNE MCCARTY-COLLINS, SENIOR VICE PRESIDENT, 
                          INSIGHT BANK

    Ms. McCarty-Collins. Thank you, Chairman Kucinich, Ranking 
Member Issa and members of the subcommittee. Thank you for the 
opportunity to speak about issues that have captured the 
attention of this committee and the financial services 
industry.
    I am Marianne McCarty-Collins, senior vice president for 
Insight Bank of Columbus and here representing the Mortgage 
Bankers Association. I would like to focus my remarks on the 
Association's views on subprime lending and the industry's 
efforts to mitigate the delinquency and foreclosure rates here 
in Cuyahoga County and across the Nation.
    The Association's statistics show delinquencies and 
foreclosures have risen over the past 6 months, particularly in 
the subprime market. In response, regulators have established 
new standards. Investors have punished companies that made bad 
loans, and I'm here to answer your questions about the effect 
it is having on consumers.
    I believe the delinquency and foreclosure data in MBA's 
written statement is both objective and comprehensive, and I am 
confident that it is the most authoritative to date because it 
includes 86 percent of all outstanding mortgages.
    Economics aside, I want to speak as someone with 30 years 
of experience in mortgage lending. What I have seen of late 
troubles me deeply. Responsible lenders only extend credit to 
borrowers who are willing and able to make a mortgage payment. 
They do not trick borrowers into loans that are unsuitable, and 
they do not hold out something that is only a mirage of the 
American dream.
    I have conducted my professional life according to these 
standards and have most members of the Mortgage Bankers 
Association, yet, bad loans were made. They were not made 
responsibly or with the best interest of consumers in mind.
    For the most part, those making those poor loans have been 
punished by Wall Street and restrained by regulators.
    And while we must ask what lessons we should learn from 
these mistakes, it is equally important for those in positions 
of authority to help current homeowners stay in their homes. 
Working together, I suggest that we must accomplish three 
things: Stabilize the subprime mortgage credit system, provide 
assistance for homeowners facing foreclosure, and, finally, 
prevent this from ever occurring again.
    First, reaction from Wall Street has been swift. Already 
nearly three subprime lenders, three dozen subprime lenders 
have closed their doors. As we watch this, we must remind 
people not to confuse subprime with predatory. And we must 
reiterate that while subprime foreclosures are high at 4\1/2\ 
percent, they remain below their historic peek of nearly 10 
percent. Sound perspective and approved regulatory hand will 
soothe investors, calm editorial writers and help consumers.
    Second, the subprime borrowers who are facing foreclosure, 
industry and policymakers must partner to help provide options 
so that as many as possible are able to remain in their homes.
    Further, we at MBA strongly encourage all borrowers that 
find themselves unable to continue making payments, to contact 
their lenders immediately. Lenders lose money in foreclosure 
and have a strong desire to make any number of arrangements 
that will allow a borrower to start making payments again and 
keep his or her home.
    For those who might not be comfortable calling their 
lenders, MBA and many of our members have partnered with 
NeighborWorks America and the Home Ownership Preservation 
Foundation to provide free mortgage counseling via a toll-free 
phone number, 1-888-995-HOPE and a Web site.
    Third, lawmakers, regulators and industry must work to 
insure that this situation does not occur in the future. 
Borrowers are smart. When given good information, they make 
good decisions, but the opposite is also true. An absence of 
pricing transparency coupled with a daunting and complicated 
closing process has permitted certain actors to prey on the 
unsophisticated. But, frankly, every person from the subprime 
to jumbo borrower is susceptible when even the CEO of Fannie 
Mae and the Secretary of HUD, by their own admission, cannot 
understand all the documents on a mortgage closing. The 
mortgage market is desperate for a rewrite of the Nation's 
settlement laws and its strong uniform lending standard to trap 
predators and bring them to justice.
    In conclusion, MBA stands ready to work with members of 
this subcommittee as well as the entire Congress to accomplish 
these goals. Together we can insure that predatory lenders 
don't foreclose on the American dream. Thank you.
    [The prepared statement of Ms. McCarty-Collins follows:]

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    Mr. Kucinich. Thank you very much. I'd like to give--Mr. 
Issa, if you would like to go first with the questions.
    Mr. Issa. Thank you, Mr. Chairman. I'm going to ask some 
hypothetical questions. I think the first couple of panelists 
have done us a lot of good.
    Ms. McCarty-Collins, have you looked at Mr. Pollock's one-
pager?
    Ms. McCarty-Collins. I have not personally. I'm not sure if 
the association has that.
    Mr. Issa. I have, and perhaps you can leave with one today. 
I did find it interesting that I, too, have gone through the 
mortgage process multiple times and you get to where you're 
signing and initialing and signing and initialing so many 
times. And by the way, that's after you did the realtor part of 
it, which seems to grow by several pages a year.
    And I really do think that one of the things that your 
association needs to look at, is you need to look at how to 
meet all legal requirements that people are putting on you, but 
also give somebody something that they can understand that says 
it very clearly.
    But let me ask you the second rhetorical question, and, 
perhaps, since we have two Federal judges in the room, you 
couldn't have a better time. If the Federal Government acted to 
create a tort balance that would say that if a Federal judge 
found, let's say, in the Federal class action or a State, if 
appropriate, that, in fact, the portfolio in the hands of 
whoever had it was tainted by predatory practices, and that 
portfolio's value could represent, if you will, the liquidated 
damages, would that change how the oversight would occur 
without us passing a separate law, but simply shifting the 
financial outcome if, in fact, in a court it was found that 
the, that it was part of a portfolio that had damaged people 
through--and I don't use the word predatory all the time. I 
don't think all subprime, certainly VA, FHA are not predatory. 
But assuming for a moment that there's a finding in court, 
would you think that would change the way that you would 
evaluate portfolios and the way that you would be held to 
deliver them?
    Ms. McCarty-Collins. You're talking basically assigning 
liability.
    Mr. Issa. Yes.
    Ms. McCarty-Collins. OK. I think that's a yes and no 
answer.
    Mr. Issa. I'll just take a yes.
    Ms. McCarty-Collins. Well, the only problem with assigning 
liability is that when the secondary market view that as such 
a--what word do I want to use?
    Mr. Issa. I'm going to assume it would be less assigning.
    Ms. McCarty-Collins. And you have to have it. You have to 
be able to--you have to have a secondary market for those 
mortgages.
    Mr. Issa. I totally agree with you that you would have to, 
but I just want to followup. You know, when those subprime 
companies went out of business, they didn't go out of business 
with portfolios in their hand. They simply closed their doors, 
sold off their desk. For the most part, a lot of them had been 
transactional in nature, and the fact is somebody else is 
holding the portfolio.
    Ms. McCarty-Collins. But as a lender and speaking of--when 
we're talking mortgage bankers, we are the lenders. We are not 
mortgage brokers. We are not a pass through. So, as the 
lenders, these subprime companies had a duty to the secondary 
market in that they had to buy back its mortgages if there was 
fraud, if there was predatory problems.
    So--and we all have those buy-back agreements in the loans 
that we sell in the market. So, what happens is as a result of 
those buy backs, this is what has bankrupted most of those 
companies, not the fact that they made the subprime or 
predatory loans, but the fact that they were found to be 
predatory and/or fraudulent, and they had to buy these loans 
back.
    Mr. Issa. Or close their doors because they had not 
reserved----
    Ms. McCarty-Collins. They did not have the capital to buy 
them back.
    Mr. Issa. So, that was my point in saying that they were 
transactional in nature. They were doing this, but ultimately 
without an underlying separate insurance they were in a 
position to issue dividends or disperse profits in the good 
times and then close their doors in the bad times.
    Ms. McCarty-Collins. That is probably true.
    Mr. Issa. Mr. Pollock, I've teed up the question for you. 
I'm intrigued at the reception you've been getting when you've 
said--you know, because we all grew up with Truth in--well, I'm 
afraid that's us old guys today. I remember when Truth in 
Lending came out, and I remember when we tried to simplify the 
understanding so that you wouldn't think you were paying 6 
percent when the annual rate ended up being 35 or whatever it 
compounded to. Why is it we're back to that exact same point? 
How is it that we lost track of simplicity?
    Mr. Pollock. Thank you, Congressman. One of the fans of 
this who has been helping me, was a staffer on Capitol Hill in 
Truth in Lending was----
    Mr. Issa. Even I get the bell, too.
    Mr. Pollock. And he told me you should call this Truth in 
Mortgage Lending, and I said, no, because I don't want to 
repeat what happened to Truth in Lending, was you started off 
with a simple idea and made it incomprehensible. That's why I 
have this insistence on a one page and regular-sized type. 
That's the another thing. I don't think you should allow little 
type, which confuses people.
    I'm not suggesting that all of the other stack of things 
you get could be taken away or this is just something you get 
on top, but for the first time----
    Mr. Issa. This is like the Ditech commercial though, except 
you're putting one more on and not taking one off.
    Mr. Pollock. That's it.
    Mr. Issa. OK.
    Mr. Pollock. Exactly. I believe it's the first time, I 
believe, that in the American mortgage system we've ever talked 
about disclosures that disclose the relationship of you, the 
borrower, and your income to the loan, as opposed to telling 
you a vast detail about the loan itself and leaving it to you 
to figure out if you can even understand that, how it applies 
to your own personal situation.
    Mr. Issa. OK. I appreciate your indulgence. Professor, I 
was intrigued by the fact that you've studied this both as a 
subprime and looking at conforming loans, as we call them, in 
California. From a practical standpoint, and we've dealt with 
this on the earlier panel, is there sort of the elasticity of 
demand? If we crank down and reduce some of these subprime 
loans, how much are we going to crank down the opportunity for 
home ownership? How elastic is that market, and can we make 
some reforms? At what point do we begin to reverse a trend of 
greater home?
    Ms. Engel. I think this is a fundamental question in any 
type of credit regulation. How do you find that balance between 
making good credit available to people who otherwise wouldn't 
obtain credit, and how do you also protect people from the 
worst abuses in the market?
    One of the really nice things that's happened from a 
research standpoint is that over the last 10 years a number of 
States have passed anti-predatory lending laws, North Carolina 
being at the vanguard and the most well known. And one thing 
that's not on my resume, but it will be shortly is that----
    Mr. Issa. You have an awfully good resume for having 
something left off.
    Ms. Engel. Well, you don't put things on until you know 
they're going to get published.
    Together a group of economists and my co-author, Pat McCoy, 
we've been looking at every State and local effort to regulate 
predatory lending, and we have coded all of those laws and 
looked to see what impact the laws have had on loan 
applications, loan rejections and loan originations. And 
interestingly in the States with the strongest laws, the loan 
applications and originations have gone up.
    And there are many different conclusions you could draw 
from this, but one possible explanation is that the really good 
subprime borrowers were afraid of taking out loans because they 
heard about all the abuses in the market. And when the State 
stepped in and said we're going to regulate the worst abuses, 
they said, I feel safe and I feel protected by the State.
    It's hard--you know, I'm not going to say I know that's the 
causality, but what I do know is that in the States with the 
strongest regulations, we're seeing stable or increased 
subprime lending.
    And the other point, I think, that's very important, is 
this whole issue of assigning liability. And any regulation or 
laws that we have in this country have to be very careful in 
terms of assigning liability. We can't have open-ended 
assigning liability for punitive damages.
    But if it's predictable in assigning liability in a 
liquidated amount, which many of these State laws have, then we 
can hold people to lead to the fire in terms of having a 
secondary market, police, as it were, the lenders without 
drawing on credit.
    Mr. Issa. Mr. Chairman, one thing you have to know in this 
business is when to quit on a high note. Thank you. Great 
answer.
    Mr. Kucinich. I want to say, Mr. Issa, the question that 
Professor Engel acknowledged in terms of what about home 
ownership, how do people who don't have the best of credit get 
home ownership? What happens? That's a key question here. And I 
think that one of the areas that this committee may, in our 
continuing work may inevitably look at, you know, are their 
questions relating to home ownership availability, availability 
to credit and also the underlying monetary process. There's a 
real serious question here about monitoring policy that seldom 
gets looked at, and bringing the Fed into this discussion for 
the first time enables us to move into that question.
    I want to, again, tell Judge Pianka that I looked at your 
whole statement, and it's quite significant, and I want to ask 
you, without significant new regulatory enforcement from the 
Fed and other agencies, what do you predict for cities like 
Cleveland and neighborhoods with significant foreclosure 
problems?
    Judge Pianka. The prediction by Treasurer Rokakis, that 
it's only going to get worse, I think, is absolutely true.
    And, unfortunately, the collateral damage that affects the 
streets and the neighborhoods just compounds.
    In addition, no more--there has never been greater time in 
our history of the city of Cleveland when there have been more 
properties owned by banks and mortgage companies.
    Mr. Kucinich. You know, Mr. Pollock said something, and, 
Mr. Issa, this is something that in your testimony you pointed 
out that this phenomenon that has hit low-income areas now, the 
subprime mortgage is shifting away from lower-income areas and 
going into middle and higher income areas; is that right.
    Mr. Pollock. I pointed out this interesting study by COHHIO 
is the fact that subprime lending is principally a middle and 
higher-income activity.
    Mr. Kucinich. That jumped out at me because what it says is 
that the--it may be that the subprime business has more or less 
maxed out in some of these communities, and now we're seeing 
all the boarded up homes.
    But then, if you have that core, as we have in Cleveland, 
which is already beginning to be hollowed out, and now there's 
a shift to the middle-income and even upper-income areas. It's 
possible we may, absent any kind of new regulatory or 
legislative authority, we may see this spread like a cancer. 
How do you respond to that?
    Judge Pianka. Mr. Chairman, it's spreading out to inner 
ring suburbs and to the outer ring suburbs as well.
    Mr. Kucinich. We have the map here. Did we put the map 
away? We saw them. We saw the kind of spread starting to occur.
    Judge Pianka. Unfortunately, what we've seen in the urban 
areas in Cleveland, many times the financial institution will 
abandon the property but keep a lien on the property and it 
becomes a toxic lien. And that property cannot be transferred, 
and then the cities and the neighbors are held hostage to those 
properties. Every boarded up property in the city of Cleveland 
sends a signal that mortgage amount is greater than what the 
value of that property is, and there are thousands of 
properties.
    Mr. Kucinich. So, judge, you know, can the city make a 
comeback if you, as a housing court judge, cannot properly 
transfer title to the foreclosed houses.
    Judge Pianka. Well, there can't be progress because they 
sit there, and then it has a domino effect on people's decision 
whether they stay in a neighborhood or invest in a 
neighborhood.
    Mr. Kucinich. Thank you, your Honor.
    To Ms. Engel, what specifically should the Fed do to put a 
stop to the coincidence of banks receiving credit for their CRA 
exams for predatory loans made by their affiliates who are 
invested in them for their portfolios, and how should the 
Federal bank regulators assess a value on the quality of loans?
    Ms. Engel. I think that the first thing is that the 
regulators need to start taking into account the activities of 
the affiliates and the subsidiaries, because by limiting the 
exams to just the banks, it is really giving the subsidiaries 
and the affiliates cart blanche to engage in wrongdoing without 
it coming to the attention of the regulators.
    The banks can voluntarily have a more expansive CRA exam, 
but I don't think I know of any situations where a bank has 
said, oh, yes, please come and look at our subsidiaries and our 
affiliates. It's, you know, not likely that they're going to do 
that. So, I think that's a key thing.
    I think that CRA also could take a stronger position in 
terms of what's getting disclosed in the HMDA data. We need to 
have credit score information in the HMDA data. We need 
information about fees. It's just insufficient. Even when the 
Federal Reserve Bank is doing its own HMDA analysis, it's 
finding itself with its hands tied in terms of the ability of 
the data to really generate a meaningful analysis.
    Mr. Kucinich. Thank you. And I just have one more question 
for Ms. McCarty-Collins. For borrowers who contact groups like 
NeighborWorks America or other consumer credit counseling 
groups, does this effect their credit scores just by making a 
contact.
    Ms. McCarty-Collins. No. Not by making a contact. And those 
agencies work with the lenders to try and work out 
modifications and repayment schedules for them. At this point, 
I would say that their credit is probably already harmed by the 
time they call.
    The biggest problem that we find is that people that become 
delinquent on their mortgage are afraid to call their lender, 
and then it really becomes too late, and so we're trying to get 
some early intervention for them.
    Mr. Kucinich. I want to thank the members of the panel. 
This has been a very good panel and just the testimony that 
we've read would be the basis for a lengthy hearing in and of 
itself, but your testimony will be included in the record and 
will be available for review as we continue to move forward 
with this topic. It's very helpful.
    I want to thank Chief Judge Carr for making this facility 
available and all Federal judges for their indulgence for 
having this meeting in this building. I want to thank the 
staff, both of our majority and minority staff, because you 
made it possible for us to come together to have this hearing, 
as well as the court stenographer.
    I want to thank all of the public officials who have 
attended and whose cooperation we will need as we move forward 
on the community groups represented here.
    This has been a hearing of the Domestic Policy Subcommittee 
of the Government Oversight and Reform Committee. The topic of 
the hearing has been Foreclosure and the Federal Reserve Bank 
of Cleveland. I want to thank all of you for attending. This 
committee is in adjournment.
    [Whereupon, the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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