[Senate Hearing 110-906]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-906
 
  PRESERVING THE AMERICAN DREAM: PREDATORY LENDING PRACTICES AND HOME 
                              FORECLOSURES 

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

  THE IMPACT OF EXOTIC MORTGAGE PRODUCTS ON HOMEBUYERS AND HOMEOWNERS


                               __________

                      WEDNESDAY, FEBRUARY 7, 2007

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania        ELIZABETH DOLE, North Carolina
JON TESTER, Montana                  MEL MARTINEZ, Florida

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
                 Johnathan Miller,  Professional Staff
     Mark A. Calabria, Republican Senior Professional Staff Member
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                         George Whittle, Editor
















                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, FEBRUARY 7, 2007

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     5
    Senator Reed.................................................     6
    Senator Tester...............................................     6
    Senator Carper...............................................     7
    Senator Casey................................................     8
    Senator Brown................................................     9

                               WITNESSES

Reverend Jesse Jackson, President and Founder, Rainbow/Push 
  Coalition......................................................    10
    Prepared Statement...........................................    48
Delores King, Consumer, Chicago, Illinois........................    14
    Prepared Statement...........................................    52
Amy Womble, Consumer, Pittsboro, North Carolina..................    15
    Prepared Statement...........................................    56
Harry H. Dinham, President, National Association of Mortgage 
  Brokers........................................................    17
    Prepared Statement...........................................    60
Jean Constantine-Davis, Senior Attorney, American Association of 
  Retired Persons (AARP).........................................    18
    Prepared Statement...........................................    90
Hilary Shelton, Executive Director, National Association for the 
  Advancement of Colored People..................................    20
    Prepared Statement...........................................   100
Douglas G. Duncan, Senior Vice President of Research and Business 
  Development, and Chief Economist, Mortgage Bankers Association.    23
    Prepared Statement...........................................   117
Martin Eakes, Chief Executive Officer, Self-Help Credit Union and 
  the Center for Responsible Lending.............................    25
    Prepared Statement...........................................   181

             Additional Material Supplied for the Record *

Statement from the National Association of REALTORS.............   219
Statement from the Center for Responsible Lending................   227
Statement from the Consumer Mortgage Coalition...................   232
Statement from the American Financial Services Association.......   255
Statement from Lenders One/National Alliance of Independent 
  Mortgage Bankers...............................................   260

* Mortgage Broker and Loan Originator Licensing material submitted by 
the National Association of Mortgage Brokers has been retained in 
Committee files.


  PRESERVING THE AMERICAN DREAM: PREDATORY LENDING PRACTICES AND HOME 
                              FORECLOSURES

                              ----------                              


                      WEDNESDAY, FEBRUARY 7, 2007

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:03 a.m., in room SH-216, Hart 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order. We welcome 
all of you this morning.
    Let me just announced for purposes of how we will proceed 
here, we will begin the hearing this morning, and at the point 
we arrive and have a quorum here, I will interrupt the hearing, 
hopefully for a very brief amount of time, for us to consider 
the markup of the Public Transportation Terrorism Prevention 
Act, which is a matter this Committee had dealt with in the 
past in the previous Congress under the leadership of Senator 
Shelby. Basically it is the same bill that we passed out of 
this Committee in the previous Congress, but there is an effort 
to have this bill become part of a larger bill dealing with 
homeland security issues, and so we need to get it done in a 
timely fashion. So as soon as we have a working quorum here, I 
will interrupt, go into executive session, and then we will 
deal with that matter. And I will apologize in advance to the 
witnesses that if you are in the middle of your testimony here, 
we will take a break and move to that item and then come right 
back to the subject matter of today's hearing.
    I have some opening comments I want to make. I am going to 
turn then to my colleague and friend, Senator Shelby, for any 
opening comments he may have. I will ask other colleagues who 
are here if they have some short opening comments, and then we 
will turn to our witnesses.
    Let me welcome all of you here today for the hearing 
entitled ``Preserving the American Dream: Predatory Lending 
Practices and Home Foreclosures.'' This hearing is particularly 
timely in light of the news that has been coming out in recent 
days about the wave of delinquencies and foreclosures facing 
American homeowners.
    Let me start by recognizing the work of Senators Allard, 
Bunning, Reed, Schumer, Senator Shelby as well, who held joint 
Subcommittee hearings last year to examine the impact of exotic 
mortgages on homebuyers and homeowners. They deserve a great 
deal of credit, in my view, for raising the awareness of many 
of us to the risks of these products. I consider today's 
hearing a continuation of the work that these members started 
in the previous Congress.
    Today, the Committee will focus its attention more 
specifically on predatory lending practices that are found 
primarily in the subprime market and how these practices may be 
eroding the foundations of homeownership for millions of 
American families. Let me make myself very clear at the outset 
on one important point. I do not believe that all subprime or 
exotic lending is a predatory or abusive practice. To the 
contrary, subprime credit can be and many times is a valuable 
tool in helping people become homeowners and in unlocking the 
equity in their homes. For many years, the battle so many of us 
have fought was to make credit available to neighborhoods that 
had been redlined, or to people, particularly minorities, who 
felt the sting of rejection, regardless of their 
creditworthiness.
    In response to this injustice and after years of hard work 
by people like Reverend Jackson, Hilary Shelton, and many 
others, we passed the Community Reinvestment Act and the Fair 
Housing Act so that credit to buy a home or build a business 
would be available to all Americans. As a result, we have seen 
homeownership grow. Every one of us has spoken about 
homeownership, how it provides stability and a chance to build 
wealth for the vast majority of Americans. It is the most 
valuable asset that most of us will ever own. Our homes provide 
us with a financial cushion on which we can draw to send our 
children to college, pay for unexpected health expenses, or 
finance a secure retirement.
    To the extent that the creation of the subprime market has 
added to this flow of credit in a positive and constructive 
way, in a way that helps build wealth, I welcome that 
development, and I encourage it. However, it is not enough to 
simply create homeownership. We must sustain, preserve, and 
protect it as well. Yet today we are seeing increasing evidence 
that this important source of wealth for so many of our fellow 
citizens is under grave threat from predatory, abusive, and 
irresponsible lending practices undertaken by too many subprime 
lenders. The borrowers who are too frequently targeted for 
these loans are minorities, immigrants, the elderly, and the 
totally unsophisticated. For these families, failure means the 
loss of a home, the loss of wealth, the loss of middle-class 
status, and the loss of the opportunity for financial security.
    The growth of the subprime market has been incredible. The 
amount of subprime lending more than tripled from the year 2000 
to the end of 2005, from $150 billion to nearly $650 billion. 
It is now over 20 percent of the entire market. But this 
incredible growth has come at what the FHA Commissioner Brian 
Montgomery has called, and I quote him, ``a tremendous cost, a 
cost that often outweighs the benefits of homeownership.''
    Today, there are too many incentives in the subprime market 
to make loans that put borrowers at too great a risk of 
failure. For example, over half of subprime mortgages are 
stated income loans--loans which the industry often refers to 
as ``liar's loans.'' The question is: Who is lying? According 
to a survey of over 2,000 mortgage brokers, 43 percent of the 
brokers who make these loans do so because they know that their 
borrowers do not have the income to qualify for the loan in the 
first place. Why do they make these loans? Because they are 
paid more to do so. Brokers up-sell borrowers; that is, they 
put borrowers in loans with higher interest rates than they 
would otherwise qualify for because the brokers make greater 
commissions, called ``yield spread premiums.'' By so doing, 
these yield spread premiums are a perfectly legitimate tool to 
provide borrowers with no-closing-cost loans. But HUD has told 
us that half of these loans paid, about $7.5 billion, do not go 
to closing costs but go simply to increase broker profits.
    Minority borrowers are being targeted for higher-cost, 
subprime mortgages, regardless of their financial health. The 
2005 Home Mortgage Disclosure Act data show that over half of 
African American borrowers and 46 percent of Hispanic borrowers 
were given high-cost, subprime loans. By comparison, only 17 
percent of whites took out such loans. Yet, according to the 
Federal Reserve, borrower-related characteristics such as 
income could explain only about 20 percent of this disturbing 
difference. That is from the Federal Reserve, by the way. About 
70 percent of subprime loans have costly prepayment penalties 
that trap borrowers in high-cost mortgages, mortgages that 
strip wealth rather than build it, and these penalties keep 
borrowers from shopping for a better deal.
    Unfortunately, living in a minority neighborhood puts a 
homeowner at significantly higher risk of having a prepayment 
penalty. Approximately eight in ten subprime loans today are 2/
28 adjustable rate mortgages--mortgages whose monthly payments 
will spike up by as much as 30 to 50 percent or more. Many of 
the borrowers who take these loans, unaware of the payment 
shocks that await them, have no prospects of being able to make 
the higher payments and are forced to refinance the loan if 
they have sufficient equity to do so. Each refinance generates 
new fees for the lenders and brokers and strips more equity 
from the homeowner. One lender in a discussion with my office 
called subprime 2/28 loans ``foreclosure loans.'' Those were 
his words, not mine.
    Late in 2006, Federal financial regulators issued guidance 
to require the lenders to underwrite borrowers for certain non-
traditional mortgages so that even after the payment shock 
hits, the lender can be reasonably certain that the borrowers 
will be able to continue to make the mortgage payments.
    Last year, I wrote, along with five of my colleagues on 
this Committee--Senators Allard, Bunning, Reed, Schumer, and 
former Senator Sarbanes--asking the regulators to extend these 
same protections to borrowers who were given these subprime 2/
28 ARMs, borrowers that are disproportionately black and 
Hispanic. That was over 2 months ago we wrote the letter. We 
have not received an answer yet. My hope is today that as a 
result of this hearing and referencing to it here this morning, 
we will get a response from the various Federal agencies that 
we have written to asking them to respond to our concerns about 
these practices. I believe these borrowers deserve every bit as 
much protection as the homeowners who take out interest-only 
and option ARM loans. And I want to urge the regulators to more 
expeditiously provide the same protections to these 
particularly vulnerable borrowers.
    The results of these aggressive and abusive practices are 
becoming clear. The Center for Responsible Lending, whose CEO, 
Martin Eakes, will testify this morning, released a study 
saying that nearly one in five subprime loans made in 2005 and 
2006 will end in foreclosure, in large part because of the 
abusive loan terms with which many low-income borrowers are 
saddled. According to this study, up to 2.2 million families 
will lose their homes at a cost of $164 billion in lost home 
equity. Other reports confirm the trend. RealtyTrac announced 
that there were more than 1.2 million foreclosure filings in 
2006, up 42 percent from 2005, blaming the increase on higher 
payments generated by the resets on option and subprime ARMs.
    Today's edition of the American Banker has a story entitled 
``Subprime Defaults at Recession Level.'' The article focuses 
on a study conducted by Friedman, Billings, Ramsey, an 
investment banking firm specializing in mortgages, which says 
that over 10 percent of securitized subprime loans are 
seriously delinquent, over 90 days late, in foreclosure, or 
already turned into seized properties. This is nearly double 
the rate from May of 2005 and higher than at any time since the 
recession of 2001.
    I understand that many argue that the impact of the economy 
and other life events, as they are called, such as illness, job 
loss, divorce, and the like, are key variables in determining 
mortgage delinquencies and foreclosures. No doubt this is true. 
I do not question that. But these economic and personal factors 
do not fully explain, in my view, the precipitous rise in 
defaults and foreclosures. It is time for Congress, the 
administration, and the lending industry to face up to the fact 
that predatory and irresponsible lending practices are creating 
a crisis for millions of American homeowners at a time when 
general economic trends are good. Indeed, Mark Zandi, chief 
economist at moodysconomist.com, notes that, ``The current high 
delinquency rates are unusual because the economy is relatively 
strong.'' I am quoting him there. Zandi attributes the 
increasing delinquencies in part to the resetting of subprime 
and other ARMs at higher rates. This is particularly worrisome 
given the fact about $600 billion in ARMs were reset this year. 
The problem is most of these loans are perfectly legal, even as 
they do real harm to borrowers and neighborhoods. In short, the 
system is out of balance. There is a chain of responsibility 
that makes these abusive loans possible. I look forward to 
working with each link in that chain--the brokers, the bankers, 
Wall Street, the regulators, my colleagues on this Committee, 
and the Congress and the administration--to help restore this 
balance for the sake of the safety and soundness of the banking 
system, for the sake of homeowners who are being victimized, 
and to make sure that subprime credit can once again play a 
very constructive role in the marketplace and make 
homeownership the dream that it ought to be.
    At any rate, here now this morning let me, if I can, note 
that Reverend Jackson is here and will be our lead-off 
witnesses, but before I turn to him, I want to turn to Senator 
Shelby for some opening comments and then any other Members of 
the Committee for any opening comments they may have, and then 
we will turn to our witnesses.
    Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Chairman Dodd.
    The last 10 years have witnessed a dramatic increase in 
homeownership, particularly among low-income and minority 
families. One of the primary reasons for this increase has been 
the advent of risk-based pricing in the mortgage market. The 
resulting expansion of mortgage credit has opened the dream of 
homeownership to millions of Americans who previously would not 
have qualified. We in the Congress have a responsibility to 
ensure that this upward trend continues.
    The market now provides a wide array of mortgage products 
to meet the needs of a diverse consumer base. Unfortunately, 
more choices mean greater complexity, which can put some 
borrowers at a disadvantage. Therefore, it is incumbent upon 
consumers not only to educate themselves, but to shop around 
before they sign on the dotted line. Due diligence alone, 
however, Mr. Chairman, cannot protect the consumer from fraud 
and other unscrupulous practices.
    The financial regulators possess a number of tools to 
eliminate discriminatory, unfair, fraudulent, and deceptive 
practices. In fact, the bank regulators recently issued final 
guidance on non-traditional mortgage products. I believe this 
guidance will help further reduce abusive and irresponsible 
lending.
    We also have a responsibility, Chairman Dodd, to ensure 
that this downward trend also continues. This Committee has 
highlighted and will continue to highlight both the good and 
the bad in the mortgage marketplace in hopes of facilitating 
the former and eliminating the latter.
    I look forward to working with Chairman Dodd as we monitor 
the performance of the regulators and determine what, if 
anything, Congress can do to further reduce abuse and fraud 
while ensuring the continued expansion of homeownership.
    While we seek to protect the few who have fallen prey to 
either bad actors or their own choices, we must be careful not 
to inadvertently harm the many who have benefited or will 
benefit from expanding homeownership.
    As Reverend Jackson has observed in the Chicago area, it is 
possible to throw the baby out with the bath water when we seek 
to legislate in this area. We have got to strike a balance to 
get it right.
    Mr. Chairman, I want to commend you for your efforts and 
the efforts of our former Chairman, Senator Sarbanes, in making 
financial literacy a top priority of this Committee. An 
informed consumer is a powerful deterrent to those who seek to 
defraud or deceive potential borrowers. More importantly, an 
informed consumer is in a much better position to choose the 
most appropriate loan for their specific economic 
circumstances.
    Mr. Chairman, I also want to thank today's witnesses for 
their willingness to appear before this Committee, and I look 
forward to hearing from them. Thank you.
    Chairman Dodd. Thank you very much, Senator Shelby.
    Let me turn to my colleagues for any opening statements. 
Senator Reed, any opening comments?

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman. I want to 
thank you and Senator Shelby for this hearing on the important 
topic of ipredatory lending.
    In the third quarter of 2006, in Rhode Island more than 
5,600 home loans were delinquent, and for a small State like 
Rhode Island, that is a significant number. More than 600 
mortgages fell into foreclosure proceedings. That is up 41 
percent since 2005. Those are startling numbers. But what is 
happening, obviously, is that increased housing prices and flat 
wages have put a lot of families in a very difficult 
predicament. And according to statistics, in 2006 nearly 16 
percent of the loans in Rhode Island were interest-only. Those 
are just the type of loans that could lead to the situation we 
talked about today. As interest rates accelerate, families find 
themselves caught between stagnant wages and family crises like 
health care and other problems, and that is where we have to, I 
think, do something much more.
    I am interested particularly today in what the Federal 
Government might be able to do to provide some type of relief 
for homeowners, provide them a lifeline. One of the greatest 
challenges facing policymakers, nonprofit housing support 
entities, and responsible lenders appears to be reaching 
borrowers in trouble. As a result, I have been working on 
legislation which I plan to introduce soon that would improve 
and expand upon existing Federal efforts to reach borrowers in 
trouble. Federal sponsorship of post-purchase assistance 
activities would help ensure that Federal dollars invested in 
homeownership programs, including purchase assistance programs 
and the FHA, are not wasted, while also providing benefits to 
buyers and lenders. I think we can do much more to help those 
people facing foreclosure, and we should do it.
    I look forward to the hearing to learn more about this 
particular issue, and I thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    Senator Tester, any comments?

                STATEMENT OF SENATOR JON TESTER

    Senator Tester. Thank you, Mr. Chairman and Ranking Member 
Shelby. Thanks for holding this hearing on an issue that has 
adversely affecting more and more Americans every day: 
predatory lending.
    Hard-working Americans think they are finally achieving 
part of the American dream--homeownership--and they find 
themselves in a financial tailspin because they were loaned 
more than they could afford, with hidden fees and interest 
rates that explode after a few years.
    Now, Mr. Chairman, you remember a couple weeks ago we had a 
hearing here on credit cards. This type of lending where we 
have exploding fees--I mean hidden fees and exploding interest 
rates is becoming far, far, far too common. You spoke of one in 
five subprime borrowers that could lose their homes. These are 
statistics that, quite frankly, are very troubling because 
behind these statistics are young families, minorities, people 
that are going to suffer greatly. Clearly, more needs to be 
done to protect consumers from these predatory lending 
practices, and I look forward to hearing the testimony and the 
panel on this subject.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator.
    Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thanks, Mr. Chairman. To Reverend Jackson 
and other witnesses, welcome. We are delighted that you have 
joined us today.
    Long before I came to the Senate, homeownership was a top 
priority for me. As Governor of Delaware, we sought to make--we 
literally took our Housing Authority Director and put her on 
our Cabinet. Then we worked hard to raise our homeownership 
rate. Our homeownership rate in Delaware is about 75 percent, 
among the highest in the country. I think all kinds of good 
things flow out of homeownership in terms of a source of 
savings for us to send our kids to school, start small 
businesses, live on at the end of our lives with reverse 
mortgages. We know kids do better in school when they live in a 
home that their family owns. People take ownership of their 
community. Just all kinds of good things flow from 
homeownership.
    So I have been anxious to and still do a lot in my little 
State to promote homeownership. And while I am encouraged by 
increased homeownership rates, I want to ensure that financing 
options that get people into a home are not subsequently 
counterproductive. And I want to see more Americans own their 
own homes, but I also want to make sure that they can actually 
stay in their homes and realize the American dream, not just 
for a couple of months or a couple of years, but for the rest 
of their lives.
    However, the process of buying a home can be daunting, as 
we know. Obtaining a loan can be an intimidating and confusing 
process for the vast majority of people who participate in it. 
Today there are many financing options for potential homebuyers 
as we know. I would just ask a rhetorical question: What makes 
a loan predatory? And, unfortunately, we have no clear 
definition. We have lists of examples, but does one practice in 
isolation by default become predatory? Or do there have to be 
two or three practices in one transaction in order for it to be 
predatory? How we craft a definition of ``predatory'' and 
define restrictions will have important consequences for the 
future of homeownership in America.
    For some, the subprime market is appropriate. You have 
spoken to that, Mr. Chairman, just as long as it is fair and 
clear. Because of the subprime market, we actually have the 
opportunity for a lot of people to have access to credit who 
would not otherwise have it. But if restrictions on such 
practices go too far, there is a risk that subprime lending 
will be too high for lenders and they will not make loans to 
people who need it and who have earned it. On the other hand, 
if the restrictions are too loose, then many Americans may lose 
the equity they have built up in their homes, they may lose 
their life savings, they may lose their family's home.
    An important component of increased American homeownership 
is financial literacy. We have had hearings on that, as you 
will recall, and we must do our best to impart consumers with 
the knowledge that they need to successfully purchase a home. 
The state of financial literacy in our country, despite our 
efforts, is abysmally low, and we need to educate our children 
and continue to educate our children, our young adults, and, 
frankly, our older adults on the basic skills such as personal 
budgeting, balancing a checkbook, checking their credit scores, 
and so forth. Increasing financial literacy will go a long way 
to protecting Americans from finding themselves in financial 
situations they cannot afford.
    In closing, Mr. Chairman and colleagues, obviously I 
greatly appreciate that we are holding this hearing today. I 
hope that our Committee will continue to examine this and other 
homeownership issues to find ways to address these issues, not 
only these issues but financial literacy as well, and my old 
favorite, a strong, independent regulator for those Government-
sponsored enterprises.
    Thank you.
    Chairman Dodd. Thank you very much, Senator Carper.
    Senator Casey.

              STATEMENT OF SENATOR ROBERT P. CASEY

    Senator Casey. Mr. Chairman, thank you for bringing us 
together for this important hearing, and I want to thank all 
the witnesses who will appear, and especially Reverend Jackson 
for your testimony that we will hear today and your leadership.
    This is an issue much like the minimum wage. We debated 
that recently, and it was 10 years long overdue before we acted 
in the Senate to raise the minimum wage. At the time I said 
that that was an issue of economic justice, and I believe this 
issue as well is an issue of basic economic justice, because I 
believe when you go down--and I am glad that Chairman Dodd went 
through the practices, whether they are financing high points 
and fees or whether it is loan flipping or aggressive marketing 
and all of that, all of those pernicious and offensive 
practices constitute an effort to not only deceive and not only 
rob people of their financial resources and make it harder for 
them to make ends meet, it robs them of their dignity, and that 
is especially offensive when people are in many cases working, 
they are low-income workers, and they are struggling every day 
just to bring the ends of their family budget together and all 
of the pressures that others have mentioned today--health care 
and education, all the other financial pressures.
    But this is something that robs people of their basic 
dignity, and it is particularly offensive. And I think that one 
of the results of this hearing has to be--maybe not today, 
maybe not tomorrow, but soon--to develop a set of changes and 
practices, policy changes really, that will help to restore 
some of that dignity that has been lost and prevent others from 
being the victims of that kind of outrageous conduct.
    So, Mr. Chairman, I appreciate your work and your 
leadership on this, and Senator Shelby and Members of this 
Committee who have been working on these issues for many years, 
and we are grateful for this opportunity.
    Chairman Dodd. Thanks very much.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Chairman Dodd, and thank you for 
conducting this hearing.
    Just last week, Secretary Paulson testified to this 
Committee and repeatedly told us that in the last quarter we 
saw 3.5 percent economic growth in this country as if that were 
the whole story. But my State and Pennsylvania and so many 
other States are faced with some of the highest foreclosure 
rates in the country. Cities like Cleveland are being 
particularly hit hard. There is no question that some of this 
problem stems from the loss of jobs or other reasons external 
to the home lending industry, but in far too many cases 
homeowners have been lured into loans they had no business 
taking out.
    Over the past decade, foreclosure filings have increased 
fourfold in Ohio. In one Ohio survey, two-thirds of county 
sheriffs' departments cited predatory lending as a top 
contributor to foreclosures. The result is that in 2005 there 
was one foreclosure filing for every 71 households in Ohio. It 
is not hard to see how this happens. A homeowner might take out 
only one or two mortgages in her whole life or in his whole 
life. Doing so is unfamiliar. It is daunting, as Senator Carper 
said. It is only natural to rely on somebody who deals with 
mortgage products every day and seems to have the borrowers' 
interests at heart.
    But unscrupulous actors have their own interests at heart. 
We need to provide greater protections for consumers who may 
not be sophisticated about the proliferation of mortgage 
products and the many tricks that can be used to disguise the 
true cost of a mortgage. We need to act to ensure not just full 
disclosure but ethical behavior on the part of all the 
participants in the lending process.
    I would close, Mr. Chairman, by asking unanimous consent to 
enter into the record a statement from the National Association 
of Realtors, who have, obviously, interest in this, not a 
direct stake, perhaps, in the hearing today.
    Chairman Dodd. Without objection, so ordered.
    With that, let's turn to our first witness. Reverend 
Jackson, we thank you immensely for being here, if you would 
please join us at the table.
    As I think most of the audience is aware, Reverend Jackson 
is the founder and President of Rainbow/PUSH Coalition, one of 
America's foremost civil rights, religious, and political 
figures. Over the past 40 years, Reverend Jackson has played a 
major role in every movement of empowerment, peace, civil 
rights, gender equity, and economic and social justice, also 
broke new ground in U.S. politics with his two runs for the 
Presidency back in the 1980's.
    Reverend Jackson has received numerous honors for his work 
in human and civil rights, nonviolent social change, and he has 
received the prestigious NAACP Spingarn Award in recognition of 
his honors from hundreds of grass-roots civic and community 
organizations from coast to coast. On August 9, 2000, President 
Bill Clinton awarded Reverend Jackson the Presidential Medal of 
Freedom, the Nation's highest civilian honor.
    Reverend Jackson, it is a pleasure and honor to have you 
before this Committee. We thank you for being with us.

  STATEMENT OF REVEREND JESSE JACKSON, PRESIDENT AND FOUNDER, 
                     RAINBOW/PUSH COALITION

    Reverend Jackson. Thank you, Senator Dodd. Mr. Chairman, 
Senator Shelby, other distinguished Members who are here today, 
I want to thank you for your vision in calling today's hearing 
as well as your insightful comments at the tenth anniversary of 
the Rainbow/PUSH-Wall Street Economic Project Summit, 
established to democratize capital in the financial services 
industry and remove the walls on Wall Street for people of 
color and women and seniors. We look forward to joining with 
you in a working group on the issue of predatory lending and 
other issues which will form the basis of a new national urban 
policy for America.
    On Thursday, January 25th, this same Committee held 
hearings on the practice of the credit card industry. What we 
will see here today is that several of the issues prevalent in 
the credit card industry apply to the issue of predatory 
lending as well. I would like to thank Senators Allard and 
Bunning, who held hearings last year on interest-only 
mortgages. After all, in a true democracy, money is not red or 
blue or white. It should be green for all citizens.
    As we gather for this hearing in the month of the year 
designated for the commemoration of Black History, we do so 
through two lenses of history: triumph and tragedy. NFL coaches 
who are black are recent triumphs in breaking down walls of 
exclusion in athletics, and that is a triumph, and the tragedy 
of the financial services industry's targeting of people of 
color for high-rate mortgage continues.
    What is the American creed? The American creed promises 
equal opportunity, equal access, equal protection under the 
law, and a fair share for all. Forty years after the passage of 
the Civil Rights Act of 1964 and the Voting Rights Act of 1965, 
we must level the playing field for all citizens, identify 
incentives for our financial institutions to invest, not 
exploit and oppress, hard-working Americans. Far beyond our 
idea of freedom is the reality of equity and parity. We must 
break the syndrome where the poor pay more for automobiles and 
housing financing to insurance.
    Today's terms of credit for African American and Latino 
borrowers and seniors are un-American. The cost of money for 
black and brown people is not based on equal opportunity, equal 
access, or equal protection under the law. In the home mortgage 
industry, like other industries, people of color are 
economically exploited, resulting in a home-owning rate of 
fewer than 50 percent.
    For example, in 2005, 52 percent of mortgage loans to 
blacks were high rate, 40 percent of mortgage loans to Latinos 
were high rate. By contrast, in the same year, only 19 percent 
of mortgage loans to whites were high rate.
    In Chicago alone, foreclosures for black and brown 
borrowers exceed $598 million annually. In Boston, 70 percent 
of middle-class--not the poor--home loans were high rate. 
Nevada has the second highest foreclosure rate in the Nation. 
When the Ford Motor Company dismisses 55,000 workers, and Honda 
and Toyota can build plants here and Ford cannot build a plant 
there, we also need not only literacy but a fair trade policy. 
Or if you have another hearing in the field, please have it 
just outside of a military base where underpaid soldiers are 
just victimized by vultures of whatever race all over our 
Nation.
    So when you lose 3 million manufacturing jobs, you don't 
just need literacy. You need a job that can pay your mortgage. 
The ghetto barrio established as an enclave or institution 
built on race, exclusion and exploitation. It required open 
housing laws to relieve pressure on the overcrowding and create 
housing options.
    There remains a zone of high taxes and low services, 
second-class schools and first-class jails, zip codes that are 
unprotected by law. It is a fertile land for predators, 
financed by banks. Banks lock you out based on credit score and 
zip code, and market exploiters, payday lenders, swoop in like 
vultures. We need Federal protection. The help of CRA on the 
front side is a good thing. But then when banks finance 
predators on the back side, they offset CRA.
    Many players in the home mortgage industry are given a 
green light to engage in predatory schemes to redline against 
the poor and people of color. Predatory lending practices such 
as subprime loans are the largest threat to wealth 
accumulation. Practices include steering, placing borrowers 
into higher-priced loans than those for which they qualify; 
steering of prime, placing black and brown borrowers into high-
cost subprime loans; prepayment penalties, fees incurred by 
borrowers for paying a loan off early; yield spread premium, 
broker kickbacks for steering borrowers into high-priced loans; 
no-fault repayment ability, failure to escrow for property 
taxes, low documentation loans.
    Today, I pray the Senate Banking Committee does not, A, 
blame the victims who work harder and make less, pay more for 
less, live under stress, and don't live as long, or suggest a 
mere increase in disclosure forms. I respectfully suggest, one, 
the industry is not functioning properly nor fairly. Lenders 
and brokers have financial incentives to place borrowers in 
more expensive loans. It puts responsible lenders at a 
competitive disadvantage with the irresponsible lenders, 
allowing unscrupulous predatory lenders to control the market. 
Currently, brokers get paid more by putting borrowers in more 
expensive loans for which they qualify, and lenders have 
incentives to place borrowers in loans that are unsustainable 
for more than a year or two. This must change.
    The GSEs, the Government-sponsored enterprises, lenders 
worked with these organizations in Fannie Mae to develop 
predatory lending practice guidelines which have been adopted. 
What we find these basic banking services for whites, full-
service bank branches. For Blacks and Latinos, pawnshops, 
check-cashers, and payday lenders.
    Current evidence reveals that Fannie Mae is purchasing 
securities that include the very loans that are stripping 
working-class people of their precious home equity. The Federal 
Government subsidizes Fannie Mae to increase homeownership, 
opportunities for working people. In purchasing such securities 
and profiting from predatory loans, Fannie Mae is violating its 
public mission and the ability-to-repay standard. I have also 
learned that Fannie Mae has received HUD Goals Credit for 
investing in high-rate loans that produce massive foreclosures. 
In short, Fannie Mae and other GSEs are doing through the back 
door what the law prohibits through the front door. This must 
change.
    Last, borrower should not shoulder the blame. I am very 
discouraged by the industry response to necessary change when I 
heard from industry, ``Educate the borrower and increase 
disclosure.'' I would rather be an ignorant borrower with a job 
than an enlightened one without a job. The loss of jobs is a 
big factor in inability to pay.
    Rainbow/PUSH, through our Thousand Churches Program, 
teaches financial literacy through member churches across the 
Nation, and there are other organizations doing the same to 
provide borrowers with information to make good financial 
choices. To think that more forums and more 1-800 numbers is 
the remedy is to view the issue through a keyhole and not the 
entire. Duty-to-Read standards for the public must be matched 
by a duty to behave for predatory lenders.
    In closing, Federal law requires banking regulators to 
protect citizens regardless of race. We need a domestic OPIC--
long-term, low-interest, flexible loans. We need a development 
bank, as we build for allies, as we seek to be sensitive and 
helpful, expand markets abroad, the ghetto, the barrio is 
likened unto a Third World country except it is closer, more 
secure, and more lucrative. The ghetto is an underserved 
market, underutilized talent, untapped capital, and thus, 
growth potential.
    We must enforce laws against racial discrimination. We must 
greenline the redline zones and zip coded zones and use 
Government-private partnerships to break this pattern. We must 
see the underserved markets as an opportunity for growth and 
development rather than exploitation and unscrupulous 
profiteering.
    What we fight for is one set of rules, evenly applied to 
all Americans, whether Native Americans, African Americans, 
Latino Americans, Asian, or European.
    Last, we just saw the Super Bowl game this past Sunday. The 
reason why so many people could see it and accept the victory 
with grace and the loss with some degree of sorrow, but say 
next year, and no uproar--why have we done so well on the 
athletic field? Why do we accept black coaches and blacks and 
whites in combat, and at the end of the day leave with a sense 
of everybody won? Because whenever the playing field is even 
and the rules are public and the goals are clear, we can all 
play--win, lose--and have our dignity. In this industry, the 
playing field is not even, the rules are not public, the goals 
are not clear, and exploiters abound.
    Thank you very much.
    Chairman Dodd. Thank you very much, Reverend Jackson. We 
appreciate your testimony.
    What I am going to ask if we can make a little room for 
other witnesses coming up with your aides there. Let me 
introduce our other witnesses, and then they will make some 
opening statements. I want to ask our witnesses to try and keep 
their remarks to about 5 minutes so we can get to the Q&A 
period, if we can.
    Let me welcome Ms. Delores King of Chicago, Illinois, and 
Ms. Amy Womble, if I have pronounced that correctly, and you 
correct me if I am wrong in that pronunciation--Womble, I guess 
it is. Let me just say to both of our witnesses here, these are 
not witnesses that normally appear before congressional 
hearings, and we are very honored that both of you are here and 
are willing to share your stories with us. You put a face on 
all of this. We talk in these details and numbers, about the 
impact of these decisions, and yet sometimes we lose sight of 
the fact that there are very real people who are affected by 
these decisions. So we are very grateful to you, Ms. King, for 
being here this morning to join us, and you, Ms. Womble--did I 
pronounce that correctly? How do you pronounce your----
    Ms. Womble. Womble.
    Chairman Dodd. Womble. We thank you as well for coming here 
this morning.
    Our next witness will be Harry Dinham, who has worked in 
the mortgage industry for 38 years. Harry, we thank you for 
joining us here this morning. Join us at the table. Mr. Dinham 
is President and owner of the Dinham Companies, including the 
Dinham Mortgage Company in Plano, Texas. He is here in his 
capacity as President of the National Association of Mortgage 
Brokers. He has been a long-time and very active member of that 
association. He has served as the Treasurer, the Vice 
President, and President-Elect before taking the office of the 
President on June 25th. And, Mr. Dinham, we thank you for 
joining us here as well and for your testimony this morning.
    Jean Constantine-Davis is an attorney with AARP since 1985, 
currently working in the Foundation Litigation Group on issues 
involving fraudulent and predatory mortgage lending practices 
targeted at elderly homeowners. She was awarded the Jerrold 
Scoutt Prize for her work on behalf of low-income, vulnerable 
elderly here in the District of Columbia. We thank you for 
joining us, Ms. Davis.
    Mr. Hilary Shelton is the Director of the NAACP's 
Washington Bureau, the Federal legislative and national public 
policy division of the over 500,000-member, 2,200-membership 
unit, national civil rights organization. He is responsible for 
advocating the Federal public policy issue agenda for the 
oldest, largest, and most widely recognized civil rights 
organization in the United States. Hilary, thank you for 
joining us here this morning as well.
    Following Hilary Shelton, we will hear from Dr. Douglas 
Duncan, who is the Chief Economist and Senior Vice President at 
the Mortgage Bankers Association. As leader of MBA's Research 
and Business Development Group, Mr. Duncan is responsible for 
providing economic and policy analysis services in the areas of 
real estate, finance, legislative, and regulatory proposals, 
and industry trends for MBA and its members. Mr. Duncan, thank 
you very, very much for joining us this morning.
    And, last, we will hear from Martin--and I am going to 
mispronounce this.
    Mr. Eakes. Eakes.
    Chairman Dodd. Eakes. Martin Eakes, who is the Chief 
Executive Officer of the Center for Responsible Lending and the 
Center for Community Self-Help, which is a community 
development leader that has provided over $4.5 billion in 
financing to more than 50,000 homebuyers, small businesses, and 
nonprofits nationwide. Self-Help reaches persons who are 
underserved by conventional lenders, particularly minorities, 
women, rural residents, and low-wealth families. Mr. Eakes has 
been a leading voice nationwide in the fight to end predatory 
lending. I have already quoted you this morning in my opening 
statement, and we thank you as well.
    We have got a very distinguished group of panelists here, 
very knowledgeable people. We are going to begin in the order 
that I have introduced you. Again, if you would try to limit 
your comments to about 5 or 6 minutes, I am not going to hold 
you to that rigidly, but it would help us get to the question-
and-answer period.
    Ms. King, thank you. And if you want to pull that 
microphone up close so you can be heard, and again, I am very 
grateful to you for coming this morning. It means a lot to have 
you here. We thank you.

             STATEMENT OF DELORES KING, CONSUMER, 
                       CHICAGO, ILLINOIS

    Ms. King. Thank you for the opportunity to testify here 
today about my mortgage. My name is Delores King, and I live on 
the South Side of Chicago in a home I have owned for 36 years. 
It will be 36 years in August. I am a retired office 
administrator after 28 years on the job in the offices of the 
Illinois College of Optometry.
    Over the years, I have refinanced several mortgages on my 
property in order to make repairs and various improvements. In 
2004, my mortgage balance was $140,000, and I was paying $798 
per month on my mortgage. In 2004, unfortunately, I was a 
victim of identity theft, a phony check scam that cost me about 
$3,000. I decided to refinance my mortgage in order to borrow 
the money I owed as a result of the scam. What happened next is 
that I was defrauded into a horrible mortgage that is so bad, I 
could lose my home.
    Around February 2005, I received a telemarketing call from 
Chad, a mortgage broker with a company called Advantage 
Mortgage Consulting. Chad told me that he could get a loan for 
me approved fast. He said he would get me a good loan for my 
situation. So I applied for the loan with Chad. I told Chad 
that my monthly income was about $950 per month from Social 
Security. My only other income is a one-time-a-year retirement 
payment from the Teachers Pension from the Optometry School in 
the amount $2,657 once a year. This pension will actually stop 
in a few more years. Currently, I have a part-time job as a 
foster grandparent at a grade school, where I make $2.65 an 
hour. Chad took my copies of my Social Security card and 
pension benefit statements, and a few weeks later he told me I 
was approved. He brought the loan papers to my house, and he 
asked me to sign many, many pages of documents. He rushed me 
through the signing and did not really explain anything. He 
certainly did not say this was an exotic loan or unusual in any 
way. He did not even give me a copy of the papers I signed. I 
had to call and get them from the title company much later.
    When I agreed to the loan, Chad said it was adjustable 
rate, but the starting interest rate was only 1.45 percent. He 
said the regular rate would be around 6 percent and the 
payments would be around $800 per month. I believed that the 
starting rate would last at least 6 months or a year before 
adjusting. I have heard about mortgages that adjust once a 
year. I knew that the payment could go up little by little, but 
I had no idea it would explode the way it has in just 2 years. 
I also did not know that $800 per month was less than all of 
the interest due and that my balance would go up and up with 
unpaid interest. So now I have a mortgage that is thousands of 
dollars more than I started with, and my payments have nearly 
doubled in 2 years. I have refined before, but I have never 
seen anything like this. The payments started with $832 a 
month, including taxes and insurance. The monthly payment as of 
now is $1,488 per month. This is more than my entire monthly 
income. I have to scrape by with the help of my family members 
and friends to get my mortgage paid every month, but now I am 
at the point where it is just impossible to continue. Last 
month, I could only send $1,200. I will end up on the street if 
something doesn't change soon.
    I had never heard of a no-doc loan or an option loan before 
all this happened. I never knew you could get a mortgage and 
pay interest only or even less than all the interest owed each 
month. I surely did not know that a bank would make a loan to 
someone without checking to see if the person could afford the 
loan. This loan is just not right for somebody like me. If the 
bank had looked at my information, my income, they knew I could 
never afford this loan. The bank knew, but I did not know that 
the monthly payments could go higher than my entire monthly 
income, my fixed income.
    It should be against the law for a bank to make a loan 
knowing that it will be impossible for people to pay it back 
and they will lose their home.
    Chairman Dodd. Ms. King, thank you very, very much. There 
is someone sitting down a couple of seats away from you who 
lives around Chicago. Maybe you can talk to him before we leave 
here.
    Reverend Jackson. To be sure.
    Chairman Dodd. Ms. Womble, thank you for coming. Pull that 
microphone down so we can hear you, too.

              STATEMENT OF AMY WOMBLE, CONSUMER, 
                   PITTSBORO, NORTH CAROLINA

    Ms. Womble. Thank you for inviting me today.
    Chairman Dodd. You have got to pull it even closer. I am 
sorry. Get right up close to it.
    Ms. Womble. Thank you for inviting me today. My name is Amy 
Womble, and I live in Pittsboro, North Carolina. I have two 
sons. Joshua is 18 and Jeremy is 16. My husband, Dale, died 
unexpectedly in October of 2000 at the age of 37. At that time 
I had excellent credit, as he did. We built a house on five 
acres. We had a mortgage we could afford. We ran a small 
construction company together. And after Dale died, I struggled 
with my boys alone without the business income. I was still 
personally liable for a lot of the company debt. Even though we 
were a S Corporation, the company debts that I could not pay 
were tacked on to my credit report. And then I found out last 
year a $10,000 judgment had been filed against me personally 
for an old business debt. And at the time I was worried about 
how I would repay it. And then one evening while I was on the 
computer, a pop-up ad came up on the screen that caught my 
attention: bad credit, no credit, you know, we will refinance 
you.
    So it was for debt consolidation with low interest rates, 
so I contacted--I sent an e-mail, and then right away they 
contacted me back, and it was a mortgage broker from 
California. So he arranged to refinance my home with a mortgage 
company, Saxon Mortgage. He sent me a good-faith estimate 
showing the new monthly payment would be $927; my closing costs 
would be about $8,000; and at closing, I would receive about 
$26,000 in cash to consolidate the other bills.
    All this sounded great to me, so I said let's go ahead and 
do it. Well, my closing, for one reason after another, kept 
getting delayed. The loan officer told me not to make my 
mortgage payment that month because we were going to close any 
day and I did not need to make that payment. So when the 
mortgage finally took place--I had spent the mortgage money on 
medical bills that I needed to pay because I did not have 
medical insurance. And at that time I felt pressure that I had 
to close the loan, there was no choice, because I had not made 
the payment.
    Then when I saw the new good-faith estimate at the closing 
table last June, the monthly payment had jumped from $927 with 
escrow for taxes and insurance to over $2,100 a month without 
escrow. The closing costs had jumped from $8,000 to over 
$12,000. I did not want to sign the papers, but at the time it 
was the end of the month, and I had no choice. But the broker 
told me that I would only have to make one payment at that 
higher level. He had a credit specialist who he was setting me 
up with who was going to help get all the negative things 
removed from my credit report and get my credit score cleaned 
up so that he could then turn around and refinance me and get 
me the $927 monthly payment. He promised that that would take 
place within just a couple of months. He was very nice, very 
concerned. I felt he was sincere. And then since I got closed, 
we got the loan closed, I started calling him. He never 
returned my calls. He would not answer the phone. I left 
messages for over 5 months. So I did not get the credit 
repaired that he had promised or help with the low monthly 
payment that he had promised. I was truthful in everything I 
told him, but he doubled my household income on the loan 
application from documented Social Security income of $2,751 a 
month to over $5,000. I did not know that he had misrepresented 
my income until well after the closing.
    Now I know the worst of it all involves the terms of the 
loan itself. My loan is an adjustable rate mortgage with a 
current interest rate of 10.4 percent with an APR of 12.5, and 
the interest rate can go as high as 16.4 percent. Then after 30 
years, I still owe a final balloon payment of $176,000. I had 
no idea this loan even had a balloon payment until last week. I 
thought I was getting a fixed payment of $927 with taxes and 
insurance, and I got a starting payment of $2,147, and it only 
goes up from there and does not include my taxes and insurance.
    I thought I would pay this loan off in 30 years. Instead, I 
have a huge balloon. I gave up a fixed-rate note with a lower 
monthly payment for this adjustable rate balloon note with a 
higher payment--a payment that takes up 78 percent of my 
monthly income. And when you add taxes and insurance, I am 
paying 86 percent of my monthly income. This leaves $388 a 
month for my family to live on.
    Since I took this loan out, I have had to access equity in 
my home to meet the monthly payment and to pay other bills. At 
times there is barely enough money to buy groceries.
    I cannot afford this loan, and I am very worried that I am 
going to lose this home, the home that my children have lived 
in almost half their lives, and the only constant that has been 
in their lives for the past 6 years since the death of their 
father. I thought I was making a smart decision, but this loan 
has turned into a nightmare.
    Chairman Dodd. Thank you very much, Ms. Womble.
    Ms. Womble. Thank you.
    Chairman Dodd. Mr. Dinham.

 STATEMENT OF HARRY H. DINHAM, PRESIDENT, NATIONAL ASSOCIATION 
                      OF MORTGAGE BROKERS

    Mr. Dinham. Good morning, Chairman Dodd, Ranking Member 
Shelby, and Members of the Committee. I am Harry Dinham, 
President of the National Association of Mortgage Brokers. NAMB 
is committed to preserving the American dream of homeownership.
    Chairman Dodd. Mr. Dinham, can I tell you, and I want to--I 
have read your testimony. It is long testimony. We are going to 
include all of it in the record. I want you to know that.
    Mr. Dinham. This is just 5 minutes.
    Chairman Dodd. Oh, there is an abbreviated one? Thank you 
very much. I wanted you to know I had read it. It took me a lot 
longer than 5 minutes to read it.
    [Laughter.]
    Mr. Dinham. I will not read the whole thing.
    Chairman Dodd. I apologize. But I wanted you to know all of 
it will be in the record.
    Mr. Dinham. I understand. NAMB is the only trade 
association devoted to representing the mortgage broker 
industry. We speak on behalf of more than 25,000 members in all 
50 States and the District of Columbia. Mortgage brokers must 
comply with a number of State and Federal laws and regulations. 
We are subject to the oversight of not only State agencies but 
also HUD, the FTC, and to a certain extent the Federal Reserve 
Board. I have this chart with me today which outlines State 
regulations for all mortgage brokers.
    First let me say that it is a tragedy for any consumer to 
lose their home to foreclosure. No one disputes this. At the 
same time, today America enjoys an all-time record rate of 
homeownership, almost 70 percent. The challenge we face now is 
how do we help people avoid foreclosure while at the same time 
ensure they have continued access to credit.
    A number of recent reports have focused on the rise in home 
foreclosures. Some claim foreclosure rates are approaching 20 
percent. Based on their definitions and sampling, NAMB 
questions the accuracy and narrow focus of these reports. The 
truth is we can only speculate on the causes responsible for 
any rise in home foreclosures. There are a number of possible 
factors: bankruptcy reform, minimal wage gains, credit card 
debt, decreased savings rate, decreasing home values, second 
homes, fraud, illness, and other life events, to name just a 
few.
    Do not rush to judgment before we have all the facts. We 
urge this Committee to request a study of the reasons for 
foreclosure. It should take into account a number of possible 
and non-economic factors. The study should account for product, 
pricing, seasonal, and market changes. We should examine the 
conclusion before implementing any policy decisions that could 
unfairly curtail access to credit.
    In the mid-1980's, Congress asked this industry why there 
was a credit crunch. Many underserved communities had no access 
to credit. Over the years, industry has increased access to 
credit with the help of Fannie Mae, Freddie Mac, and the 
secondary market.
    In 2002, our President challenged industry to increase 
minority homeownership by 5.5 million families by 2010. 
Mortgage originators, realtors, lenders, underwriters, and the 
mortgage securitizers and investors on Wall Street responded. 
We have helped families by expanding access to credit, lowering 
downpayment requirements, and reducing cash needed at closing. 
The market is robust--more products, more choices, and more 
consumer shopping than ever before. More people own their 
homes. With this said, all of us--industry, Government, and 
consumers--have a role to play in preventing foreclosures and 
predatory practices.
    Here is some of what NAMB is doing: We have pushed for 
education and criminal background checks for all mortgage 
originators since 2002. We have prepared and submitted to HUD a 
revised good-faith estimate to help improve comparison 
shopping. We have amended our Code of Ethics and best business 
practices to prohibit placing pressure on or being pressured by 
other professionals. We have educated and urged both HUD and 
the FTC to take action against abusive use of affiliated 
business arrangements that trap consumers into high-cost 
mortgage contracts. And we support FHA mortgage reform and 
authorizing VA to provide reverse mortgages to further expand 
access to credit.
    Today, NAMB is proposing the development of a loan-specific 
payment disclosure to be given to consumers at the shopping 
stage and again at funding. This will help consumers avoid 
payment shock.
    Thank you for the opportunity to appear here before you 
today. I am happy to answer any questions.
    Chairman Dodd. Thank you very much, Mr. Dinham, and, again, 
thank you for your full testimony, and we look forward to your 
responses to questions.
    Ms. Davis, thank you for being here.

STATEMENT OF JEAN CONSTANTINE-DAVIS, SENIOR ATTORNEY, AMERICAN 
             ASSOCIATION OF RETIRED PERSONS (AARP)

    Ms. Constantine-Davis. Chairman Dodd, Ranking Member 
Shelby, Members of the Committee, thank you for the opportunity 
to share our experiences and concerns about the problem of 
mortgage foreclosure in this country.
    AARP attorneys have represented older homeowners in 
foreclosures on abusive mortgages for over 15 years. The 
accumulated home equity and limited incomes of older homeowners 
have made them a primary target for these abuses. We are very 
concerned now that the current combination of minimal 
underwriting standards and exotic mortgage products has created 
a perfect storm that is driving homeowners into foreclosure. 
Allow me to give you three examples.
    In 1992, we represented Paul Pitman, an 82-year-old retiree 
whose incompetence in later years made him easy prey. His home 
was debt free when he was manipulated into a $60,000 
refinancing with 16 points at a 17-percent interest rate. His 
mortgage payment was $800 a month. So was his income. The 
mortgage was starkly unaffordable and was typical of the 
subprime mortgages at that time.
    After 1994, HOEPA had its intended effect and drove these 
products out of the market. But HOEPA did not end predatory 
lending. In 1999, we represented ten elderly and 
unsophisticated homeowners in a case against a single lender. 
While a few had HOEPA loans, most squeaked just under HOEPA 
thresholds. All had one thing in common: None could afford 
their mortgages. They had worked all their lives--in the 
kitchen at NIH, in the Library of Congress as a housekeeper. 
Each had struggled to buy a house. Most had raised children in 
them and were now retired on Social Security and small 
pensions. So you can imagine our surprise when we discovered 
tax returns in their files that identified them as self-
employed bookkeepers, accountants, seamstresses, and in the 
case of an 84-year-old stroke victim in a wheelchair, a 
computer programmer earning $30,000 a year. We discovered 
evidence that the broker and lender fabricated these tax 
returns.
    We wrestled with these practices, thinking that if the 
large banks that bought the mortgages had followed their 
underwriting guidelines, these loans would never have happened. 
Recent developments, unfortunately, have forced us to revisit 
that conclusion. Historically, mortgage applicants have been 
required to verify ability to repay. I have vivid memories 
myself of our first mortgage and worrying about whether we 
would qualify to meet the 28-percent mortgage debt-to-income 
ratio that was the industry standard at that time. I am dating 
myself. All of that has changed dramatically.
    The secondary market, which now controls mortgage products 
offered and underwriting standards applicable, has made stated 
income and low- or no-doc mortgages widely available. The most 
recent innovation is the no-income, no-asset loan, where the 
income and the asset sections of the loan application are 
simply left blank. NINAs may be useful to sophisticated 
investors, but are costly and inappropriate for most borrowers. 
Research conducted for the Mortgage Bankers Association 
described stated-income loans as open invitations to 
fraudsters. These loans simply cannot be used for a homeowner 
on Social Security or for salaried workers whose income is 
readily established. They are directly contributing to 
foreclosures, as my last example shows.
    We have a case in Brooklyn, New York, which alleges a 
property flipping conspiracy of real estate speculators, 
lenders, and appraisers and attorneys who sold our clients, all 
first-time homebuyers, damaged homes they had bought cheaply, 
cosmetically repaired, and rapidly resold at inflated prices. 
Our clients' six homes were overappraised by a total of 
$825,000.
    How could low- to moderate-income homebuyers qualify for 
homes costing $300,000 to $400,000? Two were qualified using 
the NINA guidelines and a third using stated income that was 
inflated by the lender. As salaried employees and Social 
Security retirees, all had verifiable income, but the income 
was too modest to afford these loans. The homes would not have 
been sold nor would the mortgage origination and other fees 
have been generated if the verifiable income had been 
considered.
    Piling on the risks, the lender put these folks into not 
one but two mortgages, which is commonly called ``piggyback 
lending.'' The first mortgage provided 80 percent of the 
purchase price, and the second, a very high-rate mortgage, made 
up the balance. Again, while piggyback lending may make sense 
for some up-and-coming young lawyer, for our clients these 
piggyback NINA mortgages were a recipe for disaster.
    Inability to repay is the hallmark of predatory lending. 
New and complex adjustable rate mortgages--the 2/28s, the 3/
27s, the interest-only, option ARMs--all present their own 
affordability issues. Borrowers just do not understand them. 
They do not understand that they adjust up and never down, that 
if the borrower pays diligently each month, the mortgage 
balance will still go up because the payment is not even 
covering the accrued interest. Prepayment penalties of up to 5 
years are the norm. Option ARMs are often promoted with 1-
percent teaser rates that only apply to the first month of the 
loan. If lenders consider income at all, they typically 
underwrite at the initial teaser rate, not on the payments that 
will be charged once the loan fully amortizes, and certainly 
not on the maximum payment that might be charged.
    These loans are a trap from which many homeowners never 
escape. Prepayment penalties make it impossible to refinance to 
avoid the payment shocks that are built into these loans. The 
trap has been fortified lately by the downturn in the housing 
prices. Homeowners who escaped foreclosure up to this point by 
refinancing will have no further recourse. When the equity is 
gone, the foreclosures will be inevitable.
    While HOEPA drove out certain market abuses, others 
emerged. Our goal is to get ahead of this curve. Homeowners 
should not be caught in an endless game of Whack-A-Mole with 
the law constantly lagging behind the next wave of abuses. Our 
challenge is to address not only today's abuses, but to think 
comprehensively about how to make home mortgages safe and 
homeownership sustainable for decades to come.
    AARP appreciates the Committee's work on this issue and 
looks forward to working with you.
    Chairman Dodd. Thank you very much, Ms. Davis.
    Mr. Shelton.

   STATEMENT OF HILARY SHELTON, EXECUTIVE DIRECTOR, NATIONAL 
       ASSOCIATION FOR THE ADVANCEMENT OF COLORED PEOPLE

    Mr. Shelton. Thank you very much and good morning. I should 
mention my name is Hilary Shelton. I am Director of the NAACP's 
Washington Bureau. The Washington Bureau is the Federal 
legislative and national public policy arm of the Nation's 
oldest and largest grass-roots-based civil rights organization.
    I would like to begin by first thanking my good friend, 
Chairman Dodd, and Ranking Member Shelby and the other Members 
of the Committee for holding this very crucial hearing. By 
holding the predatory lending subject as one of the first 
hearings held by this Committee in the 110th Congress, you are 
giving the attention to where it is well deserved. We look 
forward to working diligently with you until this issue is 
clearly addressed fully.
    I am here today because predatory lending is unequivocally 
a major civil rights issue. As study after study have 
conclusively shown, predatory lenders target African Americans, 
Latinos, Asian and Pacific Islanders, Native Americans, the 
elderly, and women at such a disproportionate rate that the 
effects are devastating to not only individuals and families 
but whole communities as well.
    Predatory lending stymies families' attempts at wealth 
building, ruins people's lives, and given the disproportionate 
number of minority homeowners who are targeted by predatory 
lenders, decimates whole communities. Traditional credit, high 
concentrations of subprime lending in predominantly racial and 
ethnic minority neighborhoods, and racial disparities in 
subprime lending exist in all regions of the Nation. And while 
not all subprime loans are predatory--indeed, the NAACP 
recognizes the benefits of the subprime market to a 
constituency which includes many without a strong traditional 
credit history--it is estimated that the vast majority of 
predatory loans are those with onerous fees and/or conditions 
exist in a subprime market.
    A study put out last year by the Center for Responsible 
Lending demonstrated that for most types of subprime home 
loans, African Americans and Latino borrowers are more than 30 
percent more likely to have higher-rate loans than Caucasian 
borrowers, even after accounting for differences in risk. 
Moreover, a study released just last month showed that high-
income African American and Latino borrowers in the Boston area 
were 6 to 7 times more likely to have an expensive mortgage 
that Caucasians in the same income bracket in 2005. Given that 
Boston is most likely indicative of the rest of the Nation, 
this study clearly refutes arguments that subprime lending and 
predatory features are introduced solely across economic lines 
to mitigate risk.
    It is important to recognize that almost 7 years ago, a 
study by the U.S. Department of Housing and Urban Development 
clearly demonstrated that many people of color could qualify 
for more affordable loans than they were receiving, which in 
turn would enable them to maintain and build additional wealth. 
In 1996, a study by Fannie Mae and Freddie Mac reported that as 
many as a third of the families who received subprime loans 
actually qualify for prime loans. Unfortunately, prime lending 
institutions continue to underserve people of color and whole 
communities occupied predominantly by racial and ethnic 
minorities.
    Perhaps even more problematic is that, despite the fact 
that blatant racial bias and its debilitating effects have been 
clearly demonstrated and well documented, little has been done. 
The disparities continue. In fact, according to the most recent 
data available, in 2005 African Americans were 3.2 times more 
likely to receive a higher-cost subprime loan than our 
Caucasian counterparts, and Latinos were 2.7 times more likely 
to receive a higher-rate loan than white borrowers.
    The bottom line is that predatory lending is making 
homeownership more costly for African Americans and other 
racial and ethnic minorities, as well as women and seniors, 
than whites and middle-class families. Given that homeownership 
is one of the most reliable ways for economically disadvantaged 
populations to close the wealth gap, one direct result of this 
unfair and immoral discriminatory practice is that it is harder 
for African Americans and other racial and ethnic minorities to 
build wealth or pass any material possessions on to their 
heirs.
    Predatory lending is a direct attack on our financial 
security and economic future--an attack that is targeted at 
individuals and communities because of the color of our skin. I 
would like to take a moment to discuss with the Committee one 
type of predatory loan that has become increasingly worrisome 
as of late. Specifically, over 80 percent of the home loans 
made in subprime markets today are adjustable rate mortgages, 
ARMs loans, and the so-called 2/28s or 3/27 mortgages are the 
dominant product. This is important since over half the loans 
made by African Americans in 2005 and four out of ten made by 
Latino homeowners were subprime loans. Geographic 
concentrations of 2/28s in certain neighborhoods and 
communities of color have led to a spike in foreclosure and 
attendant community disinvestment.
    Unlike most ARMs in the prime market, the short-term fixed 
rate on 2/28s and other similar loans is typically artificially 
low. When the loan adjusts after the initial 2-year period, 
subprime borrowers face enormous payment shock. Mortgage 
payment increases in typical 2/28 loans are up to over 50 
percent monthly. Combined with other features of typical 2/28s 
such as prepayment penalties and the lack of escrows, 2/28S 
have the very real potential to place home borrowers in 
financial peril. Over the next 2 years, an estimated $600 
billion in subprime mortgages will reset from the 2-year teaser 
rate. Too many borrowers, including an overrepresentation of 
African Americans and Latinos, will face a significant increase 
in their monthly payments. The impact this will have on whole 
neighborhoods and communities predominantly populated by 
African Americans, Latinos, and other racial and ethnic 
minority Americans will be nothing short of devastating.
    A report issued last year by the Center for Responsible 
Lending estimated that one out of every five mortgages that 
originated during the last 2 years will end in foreclosure. To 
date, the Federal Government has been largely unattentive to 
the problems surrounding predatory lending, and, in fact, some 
of the rules and proposals we have seen in the last few years 
appear to go backward and take away some of the few protections 
we have gotten at the State level. This flies in the face of 
the NAACP's belief that the primary responsibility of 
Government, to protect its citizens, all of its citizens, not 
to exploit them or allow them to be exploited at the gains of 
just a few.
    As our elected representatives, the NAACP calls on Congress 
to enact an aggressive and effective Federal law and to soundly 
reject attempts at addressing predatory lending that will not 
resolve the underlying problem and will, in fact, roll back the 
few protections that a few States have put in place.
    Because I have been asked to speak today on behalf of the 
national civil rights community, I would like permission to 
include in the record three documents which are attached to my 
written testimony. The first two are both prepared by the Fair 
Housing Subcommittee of the Leadership Conference on Civil 
Rights, of which the NAACP is a proud member and a founder. The 
first article outlines our position on Federal predatory 
lending legislation and outlines some elements that we consider 
to be essential in any effective proposal. The second paper 
expands on our concerns about 2/28s and other exploding ARMs. 
The last attachment is a letter that was sent just this morning 
to Chairman Dodd and Ranking Member Shelby, as well as the 
Chairman and Ranking Member of the House Banking Committee. 
This letter was signed by approximately 200 national, State, 
civil rights, and consumer and housing rights groups, including 
the NAACP, and it lays out some of our primary goals in any 
anti-predatory lending legislation.
    I want to thank you again, Chairman Dodd and Members of the 
Committee, for holding this hearing and taking the time today 
to take a serious look at a very real problem associated with 
predatory lending. As I mentioned earlier, the NAACP stands 
ready to work with you on aggressive, comprehensive legislation 
to address this very real civil rights scourge in our Nation.
    Chairman Dodd. Thank you very, very much, and those 
documents will be included in the record.
    Mr. Duncan, thank you for being here. Doctor, we appreciate 
your presence.

   STATEMENT OF DOUGLAS G. DUNCAN, SENIOR VICE PRESIDENT OF 
    RESEARCH AND BUSINESS DEVELOPMENT, AND CHIEF ECONOMIST, 
                  MORTGAGE BANKERS ASSOCIATION

    Mr. Duncan. Chairman Dodd, Ranking Member Shelby, and 
Members of the Committee, my name is Doug Duncan. I am the 
Mortgage Bankers Association's chief economist and Senior Vice 
President of Research and Business Development. Thank you for 
the opportunity to testify here today as you review and 
consider the issues of predatory lending and foreclosure.
    The real estate finance industry is proud of its record of 
providing homeownership opportunities. MBA's members have been 
a driving force in establishing communities, creating financial 
stability and wealth for consumers, and fueling the overall 
economy. Our industry has played a major role in facilitating a 
near-70-percent homeownership rate, a benefit to all of us. 
However, we understand some are concerned about several of the 
newer mortgage products, and recent increases in delinquency 
and foreclosure rates.
    MBA believes that there are three things the Government can 
do to help protect consumers:
    First, make financial education a priority, empowering 
consumers with knowledge and giving them the tools they need to 
make good decisions and protect themselves.
    Second, simplify and make more transparent the mortgage 
process so consumers may better understand the details of what 
can be a complicated transaction and facilitate shopping more 
efficiently from lender to lender.
    Third, enact a strong and balanced uniform national 
standard for mortgage lending within increased consumer 
protections.
    The mortgage industry has been extremely innovative in 
developing products and financing tools to create homeownership 
opportunities, expand affordability, and facilitate greater 
consumer choice. These have been especially important as 
housing costs have risen over the past several years.
    The industry's record over the last decade is one of 
particular pride. We have helped bring enormous financial sums 
to bear to expand liquidity and invest in communities. 
Recently, however, there have been claims that these very 
products and financing tools are themselves bad for consumers 
and have driven foreclosure rates to a state of crisis.
    MBA does not accept the suggestion that foreclosure rates 
are at crisis levels or that lenders or loan products are 
driving foreclosures. To the contrary, MBA's well-respected 
data on foreclosure rates show that they are well below the 
levels of their post-recession peaks. Further, we believe that 
these very products and financing tools have helped our 
neediest borrowers. If policies were adopted to limit or 
eliminate these financing tools, it could be detrimental to 
those underserved borrowers who now have access to affordable 
mortgage credit.
    Research from MBA and others consistently finds that 
foreclosures today occur for the same reasons that they have 
always occurred, namely, unexpected shocks to a family's 
finances: job loss, divorce, and illness, which continue to be 
the main reasons for defaults and foreclosures. The data do not 
support assertions that products have created a foreclosure 
crisis.
    In order to address the problem that some families may not 
completely understand all the details of the mortgage products 
they receive, some seek new rigid underwriting standards and 
the imposition of suitability requirements. MBA strongly 
believes these approaches, which may look reasonable at first, 
will simply stifle innovation and rob consumers of affordable 
financing options, thereby severely limiting consumer choice. 
Proposals that would reinject subjectivity into an objective 
underwriting process we have worked so hard to develop risk 
turning back the clock on impressive homeownership and fair 
lending gains. Before we pursue any of these proposals, we must 
be sure that they do not undermine our mutual goal of putting 
Americans in homes and keeping them there.
    We do not agree with those who would stem innovation by 
removing products from the market because they do not think 
they are good for borrowers. The plain facts are that these 
products have brought homeownership to many borrowers who 
probably could not have achieved it otherwise. And as a 
corollary, we wholeheartedly reject the notion that some 
borrowers should not have these affordability options to become 
homeowners and build the wealth that homeownership brings.
    Instead of limiting choices, I repeat what I said earlier. 
MBA believes efforts should be directed toward new and 
increased efforts to provide national financial literacy 
training, make the process more transparent, and establish a 
uniform national standard to protect consumers and provide 
certainty to financial institutions. It is too easy to blame 
lenders or loan products. The harder work is to solve these 
complex issue. MBA is committed to working together with you 
and other organizations in this important effort.
    Thank you, and we look forward to your questions.
    Chairman Dodd. Thank you, Doctor.
    Mr. Eakes, thank you for being here.

 STATEMENT OF MARTIN EAKES, CHIEF EXECUTIVE OFFICER, SELF-HELP 
      CREDIT UNION AND THE CENTER FOR RESPONSIBLE LENDING

    Mr. Eakes. Good morning. Chairman Dodd, Ranking Member 
Shelby, and Members of the Committee, thank you for holding 
this hearing. I really appreciate it.
    I head an organization called Self-Help that is a community 
development lender based in North Carolina. I also head the 
Center for Responsible Lending, a nonprofit, nonpartisan 
research and policy organization dedicated to protecting 
homeownership.
    Self-Help, with about $1 billion in assets, is one of the 
largest nonprofit homeownership lenders in the Nation, which 
makes us about the size of one Bank of America branch, to give 
you some perspective. We are a lender. We have been a subprime 
lender since 1984, over 20 years. In the beginning, we made 
thousands of loans to mostly African American, single mothers. 
In our first 10 years, we had not one single foreclosure or 
loss.
    In the last 20 years, we have provided close to $4.5 
billion to 45,000 homeowners across the country in 48 States. 
We have had very few foreclosures and losses during that time. 
I can say as a matter of experience that if a lender has very 
high foreclosures and loss, they are doing something wrong. The 
lender is doing something wrong. It is not the borrower to 
blame.
    Home lending, however, has changed a lot in the last 20 
years since I have been active. It used to be that a local bank 
or savings and loan would make a home loan to a borrower, and 
they would hold that loan on their books until it was paid off. 
If the lender made a bad loan, the loss would be suffered by 
both the lender and by the borrower. In essence, they were both 
in the same boat together.
    Today, 70 percent of subprime loans are made by mortgage 
brokers who never own the loan and who place the loan with a 
lender who holds it for 1 to 2 months before it is then 
transferred to a securitization vehicle, and then sold to 
investors worldwide. So long as the loans do not default 
immediately, within the first 3 months, the broker and the 
lender do not have any financial responsibility for the loan if 
it goes bad down the road.
    Brokers and subprime lenders are not bad people, but their 
financial incentives are different than what we saw just 20 
years ago. Now their financial incentives are to close as many 
loans as possible, as fast as possible, regardless of risk. 
Whether the borrower can repay the loan, so long as it lasts 
for at least 3 months, is really not of their financial 
concern.
    We really do have a foreclosure crisis in the subprime 
mortgage marketplace today. I will not repeat the studies that 
were cited earlier by Friedman Billings, USB, Bloomberg, 
Moody's, everyone who says that the subprime loans made in 2006 
will have a foreclosure rate higher than any other mortgage 
cohort of loans in history.
    In December of 2006, my organization, the Center for 
Responsible Lending, issued one of the most comprehensive 
foreclosure studies ever. We looked at 6 million subprime loans 
at the loan level where we had fees and data--foreclosure, FICO 
scores, all of the data around 6 million subprime loans made 
between 1998 and 2004. The conclusion that one out of five 
loans made in the subprime marketplace in 2005 and 2006 will 
end in foreclosure or the loss of a home has generated a lot of 
controversy, but I will tell you I am 100 percent certain that 
that number is understated for the following reasons:
    No. 1, it does not include the loans that have what I call 
a distressed prepayment, loans that were already delinquent by 
30 days or more that then paid off. They did not go to a prime 
mortgage if they were already delinquent. That is another 11 
percent of this group, so it goes from 20 to 30.
    The second thing it does not do is we looked solely at a 
cohort of loans in a given year, and most of the borrowers in 
the subprime arena get refinanced. unnecessarily in many cases, 
every 18 months. So that if you look at this from a borrower's 
point of view, they had a one in five chance of being 
foreclosed in their original loan. They have a one in five 
chance of being foreclosed in the second loan that they got 
into 18 months later. And it ends up, if you carry that cycle 
of repeated refinancings, that the foreclosure rate of 
borrowers, not of the loans in a particular year, can be as 
much as 30 or 40 percent of the total.
    I will not repeat all the same numbers, but let me give you 
a new one. The subprime outstanding mortgage loans today 
represent about 13 percent of total outstanding mortgage loans 
in the United States. That 13 percent represent, as of the end 
of 2006, 60 percent of all foreclosures started in this Nation. 
So think about that: 13 percent of the loans represent 60 
percent, and the remaining 87 percent of prime loans represent 
the remaining 40 percent. So this small segment--it is not that 
those families have more death, divorce, illness, and job loss. 
That is just not the factor. The factor is that the product 
itself is dangerous.
    I did not choose to get into this work. I am a lender. I 
would like to be helping people own homes. That is what I do 
best. But I grew up in an all-black community as a child. My 
friends were destroyed growing up. My best friend was killed on 
a playground behind my house. And I pretty much promised at 
that time that I would do in the future what my young friend 
did at that time. And I feel like right now the crisis that we 
face, particularly in African American communities, is 
unbelievable.
    You may not know this fact, but the 50 percent of families, 
African American families that do not own homes, do not have 
any net positive wealth at all. Their wealth in the household 
is either zero or negative. So the wealth that black families 
have is in the 49 percent that own their homes. Fifty-two 
percent of all African American mortgage loans in the last 
year--in the last 2 years were subprime mortgages that are, by 
structure, impossible to succeed in. So I look at it and I say 
the families--the African American families that have the 
wealth in this country, half of them are in danger of losing 
their homes. Subprime foreclosures threaten to displace more 
African American families than did Katrina. But it will be a 
silent and invisible storm that hits this time--one family at a 
time, one neighborhood after another, all across America. We 
have the greatest threat to minority wealth, family wealth that 
we have ever had in the history of the Nation.
    The citation comes up of saying, well, if one in five 
foreclose, that means the other 80 percent succeeded, right? 
Aren't we really helping through this product more families, 
particularly families distressed and of color, become 
homeowners? And, sadly, the answer is no to that.
    The first fact, which, again, is not always featured. 
Eleven percent of the subprime loans are to first-time 
homeowners. Eleven percent. This is in Mr. Duncan's testimony. 
What that means is the remaining 89 percent already have a home 
that they are either refinancing or they are moving and by 
getting a subprime loan are putting that home in danger.
    So just do the numbers a little bit. If we say for 11 
percent--let's be generous and say 9 percent of those got home 
loans that they could not have gotten anywhere else and that 
they will succeed with them, what that means is then the 
foreclosures that happen on the remaining 87 percent, 20 
percent of them will far outweigh the potential gain from the 
small number that get their first-time home there.
    So let me be clear. I am not seeking to abolish the 
subprime mortgage market. I am part of it, have been for 20 
years. What I am requesting is that this Committee take five 
steps.
    First, impose an ability-to-repay standard for all subprime 
loans. The trap that people are caught in now where they have a 
loan--and 70 percent of subprime loans are 2/28s. You have a 2-
year fixed-rate period. The remaining 28 years are adjustable 
rate every 6 months. A typical loan will have a very high 
margin so that the adjustment will jump to as high as 11 or 12 
percent during the third year of the loan. So here is the 
dilemma that a borrower faces. Either they pay off the loan 
before the 2 years--in which case they pay a prepayment penalty 
in virtually every case which is equal to 3 percent of the loan 
amount; 3 percent of a $200,000 average subprime loan would be 
$6,000. That is more than the average African American wealth 
in the last census period. So either you pay off early and you 
lose your downpayment and the equity that you have built up, or 
you wait until the 25th month, and all of a sudden your payment 
has jumped by 30 to 50 percent, and you cannot make the 
payment, you are foreclosed, or you are refinanced into another 
loan with another set of fees. It is a devil's choice, and it 
is one that is set up that will create foreclosure.
    The second thing is require mortgage brokers to have a 
fiduciary duty to the borrower they represent, just like 
doctors, lawyers, stockbrokers, and realtors have a fiduciary 
duty of loyalty and care to their customers. It is just early 
in the process.
    Third, require the regulators to clean up these abuses, and 
particularly I want to focus on the Federal Reserve for a 
moment. In my testimony, I cite on page 19 a section of HOEPA 
in 1994, which reads as follows--I am going to read it because 
it is that important. It says, ``The Board, by regulation or 
order, shall prohibit acts or practices in connection with 
mortgage loans that the Board finds to be unfair, deceptive, or 
designed to evade the provisions of this Section.'' It does not 
say just high-cost loans. It says any practice in the mortgage 
marketplace that the Board finds to be unfair or deceptive, 
that the Federal Reserve Board shall prohibit acts or 
practices. Since 1994, the Federal Reserve Board has not used 
this authority a single time, even though we have had rampant 
abuses during this time period.
    As Chairman Leach said in a 2001 hearing, we wouldn't have 
these problems if the Federal Reserve had simply done its job. 
But it has not done its duty under this statute. There are 
actions that can be taken.
    No. 4, as mentioned before, we should prohibit Fannie Mae 
and Freddie Mac from getting homeownership goals credit for 
buying securities that have loans that do not meet an ability-
to-repay standard. They should not be getting credit for loans 
that come through the back door where they did not do any of 
the work to produce the loans. They take no risk in them 
because these are AAA securities. And it is furthering and 
financing the sector that is causing such distress in African 
American and Latino neighborhoods.
    Finally, No. 5, please pass a strong national anti-
predatory lending law that establishes a minimum floor for what 
it means to have responsible lending.
    Thank you very much.
    Chairman Dodd. Thank you, Mr. Eakes, very, very much. Very 
compelling testimony, and we thank you for your work. And I 
think all of us here agree with the underlying point. There is 
a danger in conversations like this that people will use the 
word ``subprime'' and ``predatory'' as synonyms, 
interchangeable words, and they are not at all. And I hope it 
is clear to everyone here. Certainly those who are 
knowledgeable about this understand this already, but for those 
who are hearing about these issues for the first time, there is 
a danger that those of us who are interested in the subject 
matter would confuse the word ``predatory'' with ``subprime.'' 
And you have made it very clear, Mr. Eakes, and certainly 
Reverend Jackson has and others. And I believe that very 
strongly as well. This has been a tremendously valuable 
vehicle, the subprime process for people who want to have 
homeownership, want to own their own home.
    I want to begin my questions by emphasizing that point and 
the value of homeownership and what it means for our economy. 
So we begin the discussion there.
    We have been joined by our colleague from Florida, Senator 
Martinez, and you were not here earlier, but, in fact, Hilary 
Shelton mentioned 7 years ago something that HUD did, and I 
know that the person who was responsible for taking a hard look 
at this issue was the Secretary of HUD at the time, our 
colleague from Florida, Mel Martinez, who deserves a great deal 
of credit as HUD Secretary for looking at these issues. And he 
brings real knowledge to these issues given his previous life 
at the Housing and Urban Development agency. So we are pleased 
to have you with us this morning, Mel.
    Senator Martinez. Mr. Chairman, thank you very much. Sorry 
I could not be here at the beginning of the hearing, but I 
appreciate the mention. I have developed a great interest in 
this topic when I was at HUD. Anyway, I will wait my turn, but 
I appreciate your mention.
    Chairman Dodd. Let me begin with you, Reverend Jackson, and 
thank you immensely again for joining us here today. You have 
traveled throughout the country. You have seen the results of 
where discrimination can occur. You have listened to the 
testimony here this morning. Give us a sense of what it means 
in a community when you have long-time homeowners who are 
forced into foreclosure. I tried to say it, but I am not sure I 
did it very eloquently, the idea of this ripple effect. Just as 
homeownership in a neighborhood and community has the positive 
effect of creating stability, increasing home values, all of 
the proper things we like to see associated with homeownership, 
when that begins to collapse, what are the effects as well? I 
wonder if you might speak to that.
    Reverend Jackson. Well, first, this is targeted economic 
exploitation. This is not accidental nor incidental. This is 
targeted. And it is not only racial targeting, though that is 
very well documented. In the end, the vultures go after whoever 
is the most vulnerable, and it may be a black person or a brown 
person or a senior or a soldier. Ultimately, they do not stop 
unless protected by law.
    One place I find to be a painful sight to see, the lenders, 
the cashiers, lining up outside the military bases. The 
soldiers that have to go to war and leave their families in a 
financial trap, and some of the most exploited people in the 
whole process are the spouses of soldiers in Iraq and 
Afghanistan. Or take a trip down to Appalachia, if you will. 
And so while there is this racial disparity dimension, the 
greedy ultimately go blind in their pursuit of exploiting 
whoever is vulnerable.
    Second is that the bank is the first line of defense, and 
if the bank drops their line of defense, the quarterback then 
cannot function. And when the banks finance the predators, you 
go to the front door of the bank, and they say you are not 
eligible because your record has not been expunged, you are not 
eligible because you have a low credit score, and so you cannot 
get 7 percent, they go to the predator, who we finance at 25 
percent.
    So the bank is making money off of both ends, and whatever 
they do on the good side, on the CRA, they more than offset it 
with their back-door bank, which is, in fact, the predator. And 
to me, nothing short of the Senate passing strong laws to 
protect the vulnerable. And I have people say you learn how to 
read--you cannot learn how to read these slick people. I do not 
care how literate you are. You cannot think through this. My 
grandmother used to borrow $11 and pay back $33. She could not 
read. She was not expert in them. She could not read. She could 
not write. She was not very smart. She was trying to take care 
of her children. She was taken advantage of by pawnshops and by 
these lenders. And so without the protection of law, the people 
cannot protect themselves. And right now I am not convinced 
that that law is there.
    And I would like to make the last point that at some point 
the Department of Justice has a role in this. People's basic 
civil rights--I was in Louisiana and watched them sell a blind 
woman a bigger TV screen. I mean, they are ruthless in the 
exploitation, and since this document, the question after we 
testify today then for Mrs. King, what can happen to her in 
Chicago when they can profit $600 million off of home 
foreclosures.
    I guess the point that strikes me the most, Mr. Martinez, 
is that I was in Detroit about 2 months ago, and Ford announced 
they were laying off or dismissing 55,000 workers. And for 
Detroit and Dearborn, what does that mean? It is going to be a 
payout, they called it, or a put-out.
    When Honda and Toyota can build in our country and Ford 
cannot build in Japan and South Korea, what does the unfair 
trade deal mean: Fifty-five thousand people whose homes are 
going to go up for grabs, who cannot pay their house note, 
whose children will come out of college, who cannot pay the 
drycleaners, who cannot pay the local hotels built around the 
Ford plant. The spinning impact of--I mean, you talk about a 
tsunami, a bomb dropping on Dearborn, Detroit, and Youngstown, 
you lose 55,000 jobs in the industry and the spinoffs, and it 
seemed to me to be, Senator Shelby, no safety net for those 
workers who, through no fault of their own, lost their jobs to 
trade policies far beyond them.
    There must be some--and for our allies abroad, we have 
safety nets. That is what OPIC--Overseas Private Investment 
Corporation, Government-private partnerships. Or we have for 
them a Marshall Plan with long-term, low-interest loans on 
behalf of the soldier after World War II, some call it GI Bill. 
They get some differential and, you know, $51 billion will be 
spent. The biggest boost to homeownership was the GI Bill, 
which, by the way, was an affirmative action program for 
soldiers.
    But it seems I am asking you to think of something outside 
of the present box, the OPIC, the GI Bill differential. 
Something outside of the present box must be devised because 
the conventional lender will not loan, the predator will cost 
too much, and there must be something in the middle, some kind 
of development bank that takes into account these new 
realities. We are going to have the reality of exporting jobs 
and importing product. We were exporting product and importing 
job. That dynamic shift has left a whole lot of American people 
of whatever race trapped in the cross fire.
    Chairman Dodd. Well, thank you very much, Reverend, for 
that. Let me ask one more question, if I may, and I would like 
to raise this with Mr. Dinham, if I can, and Mr. Duncan.
    Mr. Dinham, I was struck that in your testimony, Appendix 
A, you talk about an issue that was raised by Mr. Eakes, and 
that is the relationship between the mortgage broker and the 
borrower and that this is an independent contractor with really 
no fiduciary responsibility to the borrower. In fact, you speak 
about it here, the language in your testimony here. You make 
exactly that point, that they are independent contractors not 
responsible to the borrower.
    Yet in advertising materials and reports that we get from 
consumers, news reports, brokers often seem to market 
themselves to borrowers on the basis that they will shop for 
the borrower in many ways, and that is, the broker leads the 
client to believe that he or she acts on behalf of the 
borrower. You heard that, I think, in the testimony both of Ms. 
King and Ms. Womble, that that person on the other end of the 
phone you were dealing with here was really your advisor in a 
sense, and certainly creating that sense that I am in this with 
you, I am here to help you to work through your difficulties.
    And, again, I am not suggesting that anyone there is not 
going to necessarily be so objective that they would not try to 
appeal to someone they are trying to do business with, but that 
clear impression, particularly for people--and I listened to 
two people here who are rather sophisticated--homeowners, in 
business. We are not talking about people here who were not 
knowledgeable about finance and so forth being victimized by 
this. So we have a tendency to talk about the unsophisticated. 
These were fairly sophisticated people, I might add, who have 
been pretty careful about their lives, have been productive 
citizens, contributed significantly to their communities, and 
yet were dealing on the phone with someone who made them feel 
clearly that they were acting in an advisory capacity. In fact, 
observers credit the success of the mortgage brokers industry 
to the ability to convince people. I was looking--let me quote 
from a newsletter called Inside B&C Lending, and hardly a 
liberal mouthpiece here. But in an article from June 9th of 
last year called ``Brokers''--and I am quoting, ``Brokers still 
the main engine for origination of subprime loans.'' The author 
writes, and I quote him, ``Brokers have proven adept at 
marketing their services to borrowers, often playing the role 
of trusted advisor.''
    So even if not the intent, the clear marketing, at least in 
that publication, suggests that, in fact, that is how the 
broker ought to hold themselves out, as the trusted advisor.
    So my question is: Do you believe that brokers either are 
or market themselves as trusted advisors of the borrower in 
your experience?
    Mr. Dinham. In my experience, no, we actually don't as a 
trusted advisor. What we do is we have a--the thing we offer is 
the consumer choice along with several different types of 
products, and the normal procedure would be that we would come 
up with like three products and saying this product is good for 
this, this product is good for that, this policy is good for 
that.
    So what we are is a funnel which we are able to offer the 
consumer a lot of choices as to which way he wants to go at 
that point. And we are real big on trying to help him pick the 
loan that he thinks is best for him.
    Chairman Dodd. But not as the trusted advisor?
    Mr. Dinham. No, sir, not in a fiduciary capacity because we 
do not have every product that is in the marketplace. So we 
could not absolutely offer him the best deal that was in the 
market at that point. We can offer him the products that we 
have, but not the best deal in the market.
    Chairman Dodd. Let me ask you, because I appreciate your 
answer to that, but we went and looked on the website of the 
National Association of Mortgage Brokers under the ``Frequently 
Asked Questions'' section of the website. The very first 
question is: ``Why choose a mortgage broker?''
    The answer given on the website is as follows, and let me 
quote it to you: ``The consumer receives an expert mentor 
through the complex mortgage lending process.'' Now, if you 
look up the word ``mentor,'' and anyplace I looked it up 
before, a mentor is oftentimes described as a ``wise and 
trusted counselor or teacher.''
    So even on the website of the National Association in the 
most frequently asked questions, the advice to the mortgage 
broker is hold yourself out as a mentor in a sense. So you are 
holding yourself out--how can you be a mentor, an advisor, and 
at the same time be that independent contractor? It seems to me 
you have got a conflict here in promoting this.
    Mr. Dinham. Well, I think that maybe we do have a conflict 
there ta this point, but I think what we are trying to say 
there is that we offer a lot of--we offer the consumer a lot of 
choice at that point, and that is what we are doing. We can put 
a deal together for him that he cannot get normally somewhere 
else at some other point.
    Chairman Dodd. How do you answer the question here? What 
happened in the case of these two women? What would your 
response be if they were to ask you, how did it end up that 
someone could give loans under these circumstances to these two 
women? You have heard their testimony, what circumstances they 
are in, the incomes that were coming in. How could that 
possibly happen that someone would extend the kind of loans to 
these two individuals given their fixed income in the case of 
Ms. King and the circumstance that Ms. Womble was under? How 
does that happen?
    Mr. Dinham. Well, in listening to Mrs. King's story, I got 
the impression that she wasn't fully disclosed on the front end 
of the loan, what the loan would do in the beginning at that 
point.
    Chairman Dodd. She should have been, shouldn't she?
    Mr. Dinham. She should have been. And, you know, we are 
trying to get to that point. You know, one of the biggest 
problems we have today is the truth in lending process and the 
good-faith estimate process, because there is no correlation or 
no required correlation between the good-faith estimate that 
you give at application and what you get at closing. It has 
been a big problem for a long time. It needs to be fixed.
    We would also like to see that on these types of loans--and 
on every type of loan--that we get to a disclosure on the truth 
in lending. The truth in lending is woefully inadequate also 
because it only goes to the first 3 years of an adjustable rate 
mortgage.
    So from my perspective, we need to fix the truth in lending 
process so that the consumer has a full understanding in the 
beginning of the loan they are getting.
    Chairman Dodd. Senator Shelby.
    Senator Shelby. Thank you.
    Ms. King, Ms. Womble, Ms. Davis, you have given us examples 
of some tough, disastrous situations, and I believe you are 
only touching the tip of the iceberg here. In our marketplace, 
there should not be any place for fraud and exploitation. It 
sounds to me like some of your situations with the facts you 
have told are probably fraud, civil and perhaps criminal.
    Risk-based pricing has, as we all know, brought a lot of 
good things to the marketplace. It has brought credit, but it 
has also brought problems. We need to eradicate that the best 
we can.
    Mr. Chairman, I hope that under your leadership we can get 
the regulators up here following this hearing today.
    Chairman Dodd. We will.
    Senator Shelby. And see what the Federal Reserve and others 
are doing in this area, because I think it is very, very 
important, whether it is in Illinois, North Carolina, my State 
of Alabama, Oregon, or wherever. These kinds of situations will 
destroy our risk-based credit system, and we do not want to do 
that.
    Reverend Jackson and Ms. Davis, I want to get into a 
question. Fannie Mae and Freddie Mac remain the largest 
purchasers of subprime, private-label, mortgage-backed 
securities. A lot of these securities are AAA grade, yet the 
foreclosures are there, the risk is there. And we know that. We 
have dealt with the GSEs up here before, and I am sure, Mr. 
Chairman, we will deal with them again.
    What extent do you believe, Reverend Jackson, that the 
secondary market, Freddie Mac and Fannie Mae, are providing 
funding for some like the subprime and predatory mortgage 
lending, what is their role here? It seems to me like that is 
not always a good role.
    Reverend Jackson. Well, for the most part it is, except----
    Senator Shelby. I know it is, but not always.
    Reverend Jackson. Of course, not always. I think they must 
be challenged to honor the ability-to-repay standard. Maybe 
second only to banks is that they are under a kind of 
oversight, unlike the other predators--other predators, should 
I say, maybe the subprimes are under less oversight.
    What protects the people ultimately is enforced law, 
adequate and enforced law. And much of what is happening to Ms. 
Womble and Ms. King is unenforced law. And, again, the point I 
made was that for many whites, for example, they have banks and 
they have access to neighborhood banks or branch banks. We are 
almost sent off immediately to the wolves, the unprotected. The 
big finance, you know, they get CRA, so that can be some better 
lending. But we are quick to be turned down at the front door, 
from expunging of records to credit score, and then sent to the 
economic wolves.
    Our appeal to you is I think Ms. Womble and Ms. King give 
you examples, and Ms. Davis, of what is happening in the 
marketplace. What can we get from you to protect us from this 
kind of exploitation?
    Senator Shelby. Ms. Davis, the ability to pay seems just to 
make a lot of sense on any loan anybody makes. And like Ms. 
King was talking about, and Ms. Womble, it was taking just 
about every cent they had to make a payment.
    Now, one loan characteristic that has been talked about 
that is described as predatory is the practice of making a loan 
without regard, it seems, to the borrower's ability to repay 
the loan. That has not always been the case.
    Ms. Constantine-Davis. No. That is right.
    Senator Shelby. Now, do you want to comment on that? Is 
that troubling to you?
    Ms. Constantine-Davis. Frankly, in the course of preparing 
to be here today and in conversations with other consumer 
advocates, I could not help but, you know, think to myself how 
far we have come if we are talking about passing a law that 
says that lenders cannot make loans to people that they cannot 
afford. This used to be second nature. It was something we all 
took for granted, that this was the only responsible way for 
both parties to proceed. And at this point that is just not the 
case.
    Reverend Jackson. Mr. Shelby, what I was also trying to say 
is that when you go to the bank, the bank is held to a higher 
standard to do what Ms. Davis is saying. When the bank 
immediately kicks us out the back door to the wolves, it is the 
unprotected area that runs amok.
    Senator Shelby. Sure.
    Reverend Jackson. And where the banks cannot get off is 
that they finance the wolves. They are partners in the process. 
The banker still maintains his blue-striped suit up front, but 
he is financing the wolves that live back here and has dirty 
clothes. But the dirty-clothes guy is funded by, you know, the 
striped-suit guy. And, therefore, the oversight protection 
cannot stop just at the bank and CRA and the securitizer.
    Senator Shelby. Well, if the wolves originate, for example, 
some of these predatory loans, some of the loans that are 
fraught with fraud or close to it, if not that, exploitation, 
and they dress them up and they put a little coat on them, and 
then they----
    Reverend Jackson. A wolf in sheep's clothing.
    Senator Shelby [continuing]. Sell it in the secondary 
market and so forth, and they say, by gosh, this is a triple-A 
grade security. Is that right, Mr. Eakes?
    Mr. Eakes. Right.
    Senator Shelby. Is that what happens?
    Mr. Eakes. Yes. I mean, Fannie Mae and Freddie Mac in 2001 
were enormously helpful to all of us on some of the--on first 
wave of predatory lending standards, like prepayment penalties, 
limiting, getting rid of single-premium credit insurance. And 
now really what I feel like is a failure of moral leadership, 
that they need to be stepping out in this area that is causing 
so much danger. The truth is that if they stop investing, the 
25 percent of subprime securities that Fannie and Freddie buy, 
perhaps $150 billion a year, that is a big number. But the 
marketplace would step in for them. The problem from my 
viewpoint is that if they would step out and help--you know, 
just implement the ability-to-repay standards, the limits on 
prepayment penalties, the limits that they have in the normal 
course of business--
    Senator Shelby. They could do a lot more than they are 
doing, couldn't they?
    Mr. Eakes. They could. They should.
    Senator Shelby. And at the end of the day we all know they 
are a Government-sponsored enterprise, GSE, with the implicit 
guarantee of the taxpayer when they sell those securities. Is 
that correct?
    Mr. Eakes. Yes.
    Reverend Jackson. Senator, our interest is not in trying to 
destroy Freddie Mac and Fannie Mae or the banks.
    Senator Shelby. Me either.
    Reverend Jackson. But maybe all the forces involved should 
be around a common table. Let Freddie Mac and Fannie Mae make 
their best case and the bank make their best case and the 
mortgage lenders. It seems that when they resolve this in 
sessions where each group is arguing ``it ain't me, it's 
them,'' arguing for advantage, because on the best day the 
banks and Freddie Mac and Fannie Mae work. But in the last 
several years, it is beginning to unravel, and there needs to 
be some mediation or some reconciliation. I don't think--some 
of this is intentional, but I think some of this broker 
business is just absolutely exploiting the gap.
    Senator Shelby. I agree with you. We have a good financial 
availability of credit system in the U.S., but it is kind of 
like a hamper of beautiful apples that comes in, and there is a 
rotten one there, and it will contaminate the whole bucket or 
bushel of apples if we do not do something about it. Don't you 
agree?
    Reverend Jackson. Yes, I agree, except it is more than one 
apple.
    [Laughter.]
    Senator Shelby. Well, it is already spreading. More than 
one rotten apple, but the idea of at least one, maybe more 
rotten apples in the bushel is there. But a lot of good stuff 
is there, you point out, too.
    Reverend Jackson. In our neighborhood, when the banks come 
with the branch banking and do their job, people are protected. 
And Freddie Mac and Fannie Mae do theirs. But now what we see 
coming, as the jobs leave, taxes go up, services go down, and 
in come payday lenders and cashiers. It is like they sense 
that, they smell blood. And as the taxes go up and the jobs 
leave and the foreclosure comes in, they seize the market. And 
we need you to help take away the incentive for the banks to 
leave and for the predators to come.
    Chairman Dodd. It is a lack of balance, is what you are 
talking about here.
    Reverend Jackson. No balance.
    Senator Shelby. We do not need the wolves running in our 
neighborhood, do we?
    Reverend Jackson. Right.
    Chairman Dodd. We could probably pick out another fruit at 
some point, too.
    [Laughter.]
    Senator Shelby. No, I think the apple----
    Chairman Dodd. The apple industry is----
    Senator Shelby. I said one apple, and he says more than 
one, and we do not have a big disagreement there.
    Chairman Dodd. Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman.
    Mr. Dinham, I want to direct my first question to you. I do 
not think anybody can disagree with the fact that, as we listen 
to the stories that people like Ms. King and Ms. Womble bring 
to us, we ask ourselves: How could that happen? How could we 
have a system of credit in this country in which this kind of 
abuse occurs legally?
    The question I have for you is: What kind of market 
discipline is there in the subprime lending market today? We 
are talking here, I assume, in this hearing and in further 
deliberations about what we may need to do to add some market 
discipline. What do we have today? And how do these kinds of 
things happen?
    Mr. Dinham. All I can do, I can relate back to in the 
middle 1980's in Houston, Texas, when they had the oil bust 
down there. During that period of time, there had been a lot of 
95-percent loans made in certain subdivisions down there. These 
were not subprime loans, but this was--the market had just gone 
sour.
    What happened was that they came back--the MI companies 
that were insuring their proportion of those loans came back 
and told them that they were not going to make any more 95-
percent loans and they probably would not make any more 90's in 
those areas until the market straightened out.
    So, you know, I have always been a market philosopher type 
at that point, and I really believe that if these loans 
continue to create too many foreclosures or defaults, they will 
go away. Since 1980, we have had all sorts of products come 
through, adjustable rates. We had no adjustable rates before 
1980. But ever since then, they have come through, and they 
have come and gone, depending on whether they were not liked, 
whether they cost too much for the lender, because every time 
that we--not we, but the lenders foreclosed on a loan, it is 
going to cost them some money at that point. So they do not 
want them either at that point. They do not want the loans 
back.
    So to me, the market will correct in the end.
    Senator Crapo. You have raised a very interesting point 
here. Let's take the case of a circumstance like Ms. King 
described to us. If her loan goes into default, has the 
mortgage broker profited regardless? Or has the lender profited 
regardless of what happens to her?
    Mr. Dinham. Not in all cases, because it depends on how 
your contract reads with whoever the lender is in that 
particular case. If there was a profit involved in that 
particular thing, they would probably charge you back that 
profit if it was in a certain period of time. It just depends. 
Different lenders have different requirements on what they will 
do at this point.
    Mr. Eakes. But 99 percent of the loans, the broker or the 
originator who did not hold the loan have gotten their profit 
and do not get put back. So only if it defaults within the 
first 3 to 6 months is there, by the investors, a liability put 
back on the lender. And after that time, it is very, very rare 
for any kind of liability to be put back on----
    Senator Crapo. So if I understand you correctly, there is a 
profit incentive to make a bad loan like this if the loan can 
survive for a period of months.
    Mr. Eakes. Three months.
    Senator Crapo. Mr. Duncan, do you want to comment on that?
    Mr. Duncan. Yes, I would. I would like to differentiate a 
little bit between terms and then describe recent events which 
give evidence of the disciplines that are in the marketplace.
    First of all, the lender is the company that comes to the 
table with funding. Typically, large lenders will have several 
different channels of production, one of those being through 
brokers who bring them loan applications, which they can either 
agree or not agree to fund.
    To the extent that those loans are securitized, they are 
packaged, held for a period, and then sold into the secondary 
market. And the investors to whom they sell them establish a 
contractual agreement with them about the period of time in 
which early payment defaults, which, if they occur outside of 
the investor's tolerance, will be put back for purchase. That 
is typically longer than 3 months. It is more in the 6- to 12-
month timeframe, so that you can see that the borrower has 
established the repayment capability that was anticipated in 
the application.
    Recently, you have seen three or four subprime lenders who 
put loans to Wall Street which did not meet those criteria have 
to buy back sufficient loans that they were put out of 
business. So the market does have a mechanism for disciplining 
lenders who make loans that are not sustainable by borrowers. 
In fact, it puts them out of business. Ownit, Mortgage Lenders 
Network, Sebring Capital--these are all firms that have failed 
in the last 6 months because of required buybacks.
    In addition, you recently saw Frema Mortgage terminate 
relationships with over 8,000 brokers who they believed to be 
delivering to them loans which did not meet the criteria that 
they would have to continue to support to provide collateral 
for asset-backed securities.
    Typically, what lenders do is they will run a scorecard on 
each broker, and that scorecard contains a series of measures 
about the quality of loans that are brought in for ultimate 
delivery to investors. If they do not meet the scorecard 
minimums, they are terminated from the system
    One of the problems is when you identify bad actors, there 
is not a national registry that allows for cataloguing of bad 
actors, no matter who they are, that you can prevent them from 
going from one market to another, and that----
    Senator Crapo. When you say one market to another, you mean 
one lender to another?
    Mr. Duncan. Certainly, they can do that, too. They can move 
it--they may be headquartered in Phoenix and move to Arkansas, 
and you would not know that because there is not a registry 
that would identify them.
    Reverend Jackson. We chase down sex predators. Sex 
predators, we chase them State to State.
    Can I just add one thing? When Ms. Womble and Ms. King go 
home today, they are facing foreclosure. Is the problem that 
there is something wrong with them or did somebody violate a 
law? Did somebody break the law on them?
    Mr. Duncan. We would be happy to--particularly in Ms. 
Womble's case, it sounds to use, from what we have heard here 
this morning, that fraud has been committed both against her 
and against the lender, and laws exist to prosecute that fraud. 
And we would fully support funding to enable the appropriate 
regulators to prosecute that.
    Mr. Eakes. The problem with waiting for the market to 
correct--and it is correcting right now. There is no question 
that the investors are now on guard, having the same interest 
that borrowers now have, saying we do not want to take losses 
in this environment where property prices are not appreciating.
    The problem with that is that the market correction has a 
lag of several years, and so when Ownit, the company just 
mentioned, went out of business, it was in no way able to 
reimburse the tens of thousands of borrowers who go into loans 
that were foreclosed. It just went out of existence. And so, 
yes, the business is gone, but the 2 million families that are 
in loans that will be foreclosed upon get no relief from that 
market correction. And that is the severe danger of thinking 
that the market by itself will be sufficient.
    Senator Crapo. Mr. Chairman, if I could just follow this up 
with one more question.
    Chairman Dodd. Sure.
    Senator Crapo. It seems to me from what we are hearing in 
this line of questioning is that there is a market discipline 
in place, it is working, but there is a question raised as to 
whether it works fast enough to not leave too much damage in 
its wake.
    Chairman Dodd. People like these two women here.
    Senator Crapo. As the market operates, and we have examples 
here of Ms. King and Ms. Womble.
    I guess I would just like to ask you, Mr. Duncan, if you 
could comment on that point that was made by Mr. Eakes, that 
the market corrections--or the market discipline that we 
already have in place is not working fast enough.
    Chairman Dodd. Can I add on to the question as well? These 
numbers we have been talking about, I mentioned them in the 
opening statement, 1.2 million, 2.2 million foreclosures in the 
next year or so here. I would like to give you a chance to 
comment on those numbers as well.
    Mr. Duncan. Certainly.
    Chairman Dodd. That is the number that is estimated.
    Mr. Duncan. Certainly. We have a broadly available public 
data set on delinquencies, which we have--delinquencies and 
foreclosures, which we have published since 1972 on a quarterly 
basis. It contains about 43 million loans out of the estimated 
50 million loans that are outstanding in the U.S., of which 
within those 42 or 43 million loans are about 6 million 
subprime loans.
    At present, the foreclosure percentage--that is, the 
percent of all those loans that are somewhere in the process of 
foreclosure--is 1.05 percent. So that means if you extrapolate 
to 50 million loans, that would be about 500,000 borrowers who 
are in the process of foreclosure today.
    Now, of those, three and four will not go to sale at the 
sheriff's steps or the courthouse steps. They may be solved by 
a restructuring of the loan; they may be solved in a deed-in-
lieu transfer; there are about five or six loss mitigation 
processes that are undertaken. So there is a significant 
difference between the projections of foreclosures and the 
actual magnitude of foreclosures in process today. I can talk 
about that as a separate issue.
    To address your question on the timing, it is certainly not 
several years ago that the loans that brought down the recent 
subprime companies were made. That was--and I would agree with 
Mr. Eakes that the 2006 book of subprime loans, which is the 
smallest of the recent cohorts of subprime loans, has performed 
at a worse delinquency and foreclosure pace than previous loans 
early in their life. And that was, by and large, the loans that 
were the difficulty for those firms that closed.
    Mr. Eakes. Ten percent of the loans made in 2006 were 
already in foreclosure in the first--already in foreclosure, 10 
percent.
    Mr. Duncan. To the point of Ms. Womble where there was 
fraud committed, one of the big things that has been going on 
in the mortgage industry is the representation of loans in that 
foreclosure category which were fraudulent loans to begin with.
    Mr. Eakes. One of the problems----
    Chairman Dodd. You don't disagree with Mr. Eakes on his 
number there, do you?
    Mr. Duncan. I am sorry?
    Chairman Dodd. You do not disagree with Mr. Eakes on that 
number, do you?
    Mr. Duncan. On which number?
    Chairman Dodd. On the 10 percent.
    Mr. Duncan. I am sorry. Could you restate the----
    Mr. Eakes. Ten percent of the 2006 book of business, 
according to Friedman, Billings, and Ramsey, is already in 
default.
    Mr. Duncan. Is delinquent, yes. I believe those are 
publicly----
    Mr. Eakes. Ninety days or more.
    Mr. Duncan. On the securitized portion of those loans. Mind 
you that much of this data is only representing the securitized 
market----
    Senator Shelby. And are those securities still rated 
triple-A grade, or whatever?
    Mr. Eakes. Moody's and others are starting to evaluate 
whether to downgrade.
    Senator Shelby. That is right.
    Mr. Eakes. But here is the problem. What I think is very 
confusing, when you say, for instance, in the fourth quarter of 
2006 that 1.8 percent of subprime loans went into foreclosure, 
what it is saying is they are looking at a snapshot in time. If 
you look at what are the loans that are currently right at this 
moment in time in foreclosure, and you say it is 1 percent or 
1.8 percent, the problem is that every quarter you get new 
loans. There are new loans that go into foreclosure, that get 
sold off, the people have lost their homes. And if you just 
took that 1.8 percent and multiplied it times 12 quarters, 
which is the number--average life of 3 years for subprime 
loans, you would get back to this 20-percent foreclosure rate.
    So there is a lot of gnashing of teeth about can it really 
be 20 percent, but if you track the borrowers, it will be 
substantially higher than 20 percent in this 2005-2006. And we 
are talking about millions of families who will not ever get 
compensated. They may not ever get a chance to own a home 
again.
    Chairman Dodd. Senator Crapo, one more question, and then 
Senator Martinez.
    Senator Crapo. Mr. Chairman, thank you. Just one more 
question. Just to help me understand the entire picture here, 
Mr. Duncan or Mr. Eakes, could you give us a comparison between 
the serious delinquency rates on subprime loans that we are 
talking about in comparison with, say, FHA loans or other prime 
loan markets? Do we a very significant differential there?
    Mr. Duncan. In our data base, the delinquency rate for 
subprime loans is roughly 12 percent--that is almost the same 
as FHA--and prime loans are about 4.7 percent. In terms of 
foreclosure, the prime loans are at about one-half of 1 
percent, and the subprime loans are at about 4.5 percent. The 
exact numbers I believe are in our testimony.
    Mr. Eakes. But even that number tells you that the subprime 
ARMs are 9 times more likely to foreclose than an ARM loan in 
the prime sector, so that you get this huge impact--the amount 
of foreclosures in subprime as a whole compared to FHA is 
double. So it is similar customers, but with a product that 
does not have layering of all of these risk factors--the 
prepayment penalties, the failure to escrow for taxes and 
insurance, which is an amazing thing. By not having escrows, 
when the good lenders, the responsible lenders try to compete 
against a 2/28 mortgage, they start out with a loan payment per 
month that is 20 percent higher than what their competitor has. 
Guess how many loans they will get in a marketplace that is 
dominated by borrowers who are cash-strapped trying to look 
solely at the monthly payment? They will not get any loans.
    So the general rule, of which that is an example, is that 
if you do not require escrow for high-risk loans, the good 
lenders, the good money loses out to the bad money.
    Ms. Constantine-Davis. Could I just jump in here real 
briefly?
    Chairman Dodd. Ms. Davis, you wanted to comment on this.
    Ms. Constantine-Davis. The word ``fraud'' has been used 
several times, and I guess being the lawyer geek on the panel 
here, I just want--we use ``fraud,'' you know, in a colloquial 
way that says it is deception, it is a very broad range of 
things. But when you get down to trying to do a case and having 
to prove fraud, you have elements in the law that are very 
difficult. You have to have a higher standard of proof. You 
have to prove a material misrepresentation to the borrower. If 
you think about the inflated income cases, it is not a 
misrepresentation to the borrower. And you have to prove 
reliance, that the borrower relied on this. The borrower is not 
relying on it. They had no idea it happened. So in many ways, 
while in common parlance these are fraudulent transactions, 
they are not ones that you can necessarily prove as fraud cases 
in court.
    Chairman Dodd. Very good point. Very good point.
    Senator Martinez, welcome.
    Senator Martinez. Mr. Chairman, thank you very much, and 
what an important hearing you have brought before us. I 
appreciate the panel and all the members being here.
    I would not know how to begin because there are so many of 
these issues that I have dealt with and feel quite strongly 
about many of them. I believe that credit counseling is so very 
important, so important that consumers be better informed, and 
we need to continue to do what we can to encourage credit 
counseling, to encourage people to be informed and become 
better consumers themselves. But at the same time, there are 
market forces that absolutely, without a doubt, in my view, 
prey upon the innocent and unsuspecting.
    One of the issues that I attempted to tackle was RESPA 
reform, and I know it did not always make me popular with some 
of the people in the room. But I must say I thought it was a 
good thing. And one of the issues that I was trying to tackle 
in that is what I saw in Mrs. Womble's testimony where she 
said, ``The closing costs had jumped from $8,000 to over 
$12,000. I did not want to sign the papers, but I felt I had 
to.''
    At that point it is too late to help the consumer. They 
have really got to have a good-faith estimate that is going to 
be in good faith within a very small digression from that, the 
same good-faith estimate that they are going to see at the 
closing statement. There ought to be room for there to be 
change, but it cannot be dramatic change. And there ought to be 
change in some areas but not in others.
    I believe that the fiduciary duty of brokers is also very 
important. Yield spread premium--and I guess I am not just on a 
diatribe here. I need to ask a question or two. But yield 
spread premium, I mean, how do you have a broker who is, in 
fact, arguably in a fiduciary relationship, although I know 
they would say not, but who is, in fact, attempting to get the 
borrower into a higher interest rate so they get a larger 
commission? In other words, they are working at counter 
purposes to the borrower. And obviously the issue of loan 
flipping also creates a lot of problems. But I think yield 
spread premium, I think that the good-faith estimate, I think 
these are things that we can do through regulatory reform and 
whatever statutory changes are necessary to protect the 
vulnerable borrowers that are so unsuspecting in the 
marketplace.
    And I would say while there are small percentages of people 
who get hurt, for Ms. King or Ms. Womble it is 100 percent. And 
so we have got to really look out for the most vulnerable.
    I am not sure I have too many questions. I know the 
subject, and I appreciate the testimony of so many of you here 
today. I just believe that it is time that we try to do 
something to tackle some of these practices. And, you know, I 
believe there needs to be subprime lending. There needs to be a 
mortgage market available to those who do not have perfect 
credit so they can, too, get into homeownership. I believe 
homeownership is a way to open the future to so many 
financially by building equity, but with a fair loan. There are 
some of these lending practices that do not give people a 
chance, and then the most tragic of all is to already see 
someone that is in a home and then end up losing the home.
    I am concerned about reverse mortgages for the elderly as 
well. That is another area where I think there could be an 
awful lot of abuse.
    So, anyway, thank you all for coming, and I do not have a 
question. I am just with you.
    Chairman Dodd. Thank you very much, Senator Martinez.
    Reverend Jackson. Senator Dodd, could I add one more point?
    Chairman Dodd. Certainly.
    Reverend Jackson. You know, when we were fighting for 
voting rights, we were told that our problem was lack of 
literacy. You know, how many bubbles in a bar of soap and all 
kind of stuff, literacy, literacy. The problem was we did not 
have a law to protect us. So even the illiterate can be 
protected from bad law.
    And so when I hear literacy, we should teach that through 
churches and our homes and the YMCA and all that. But these 
persons needed protection from bad law. We need law protection 
from you. We can work on financial literacy, and we do, in 
schools, in churches, and all of that. But somehow somebody 
violated these two women, and they are not going to face the 
weight of law. They need legal protection.
    Chairman Dodd. I do not disagree with that, and, in fact, 
Senator Martinez, could be a tremendous help to us here as 
someone who in his private life was in this business and in his 
public life. He was in the housing business in Florida, I know, 
from my conversations with him over the years, and, of course, 
at HUD, and did some great work back 7 years ago, as Hilary 
Shelton pointed out. So I think the point that Reverend Jackson 
makes is a very strong one.
    Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman. I 
want to thank all the panelists, and I particularly want to 
thank Reverend Jackson for being here and being active in many 
quarters over many years that have made the country a better 
place.
    I know you responded to the Chairman, Reverend Jackson, 
with respect to community impacts of these types of practices, 
but I wonder if you might have additional thoughts, having 
listened to the other panelists, about the impact on 
communities, not just individuals.
    Reverend Jackson. A study came out of Harvard not long ago. 
Usually when one house goes down, the houses next door are 
affected, and then the riot sets in. So in some sense, using 
the rotten apple situation, it is that when one house goes 
down, the very neighborhood starts dropping, unless there is 
something to offset that drop. And, again, we often think of 
just the poor or the black. I am very concerned about its 
impact upon black and brown people, the racial exploitation. 
But Appalachia--the same law must protect--a safety net must 
protect all of us from violation, the black, the brown. Yes, we 
are targeted. No question about that. The military bases, they 
know those are basically young people who got sent to war, who 
are over their head in debt. They had a job and now the 
military pays less than the job. So they go to the military. 
They are sitting outside the gates. Every time I go to a 
military base to speak to soldiers' spouses, you have got to go 
through a long line of predators to get into the gate.
    And so it seems to me that we need to have a broader safety 
net, whether it is the military base people or whether it is 
when Ford takes away 55,000 jobs, what it does to Detroit and 
Dearborn and Youngstown or Akron, Ohio, what it does. The 
issue, it seems to me, there must be a safety net to protect 
people and a law to protect us from unscrupulous crooks. Both 
the law and the safety net.
    Senator Reed. Thank you.
    Mr. Eakes. Senator Reed, there was a study in Chicago in 
2004 that said that for every foreclosure within a one-eighth 
mile radius, it would reduce the value of every home by $2,800 
to $3,000, for every foreclosure. So if you are in a 
neighborhood that is getting ten foreclosures, you could 
literally have the value of all the surrounding housing--
because who wants to move into a neighborhood that has boarded-
up houses. You could get to a point where the families that are 
there no longer have enough value in their home to even met the 
level of their debt and they are trapped. So there is very 
significant spillover effects from foreclosure.
    Senator Reed. Thank you very much.
    Mr. Duncan. The mortgage lenders would agree with that, 
Senator. If you look for the alignment of interests between the 
borrower, the investor, and the mortgage lender, that 
clustering of foreclosures goes right to the heart of one of 
the products that the mortgage industry believes will be a 
valuable product for households where the bulk of their wealth 
is tied up in their house, and that will provide for them some 
assistance in retirement.
    What I am speaking of is reverse mortgages. To the extent 
that you see the decline in the value of collateral, that is 
going to affect the economics of that household being able to 
access that.
    Senator Reed. Let me ask a question, D. Duncan. Is it your 
view that a lender should approve a person on a fixed income 
with a very modest savings for a mortgage policy like a 
subprime, 2/28 ARM, with the potential of very serious spikes 
in monthly payments? If that potential is real, it would seem 
that the person starts out already behind the eight ball?
    Mr. Duncan. Well, it is our belief that the consumer should 
be informed about the performance of that mortgage should they 
choose that mortgage product or investigate that as one of 
their options. They should have full and clear information 
about the terms of the mortgage, how it functions in from 
economic environments, as opposed to other mortgage options. 
And if the consumer chooses that option, it should be with that 
full information. That is one of the reasons one of our 
principles is clear financial education and another one is 
clear information.
    Senator Reed. You know, I had the privilege of going off to 
a good law school and doing a lot of other things, and I was 
closing on my----
    Chairman Dodd. Harvard, I want to say. A good law school he 
is talking about here.
    Senator Reed. Couldn't get into UConn.
    [Laughter.]
    Chairman Dodd. He was too short. He couldn't play 
basketball.
    Senator Reed. No athletic scholarship. And, you know, I was 
at the closing, and I was signing papers, like I think Ms. King 
and Ms. Womble, signing papers and signing papers. I am sure 
there was a disclosure. I could not really--that is our 
problem. We have to work on something that is vivid, and, you 
know, I am thinking maybe you would have to have a chart that 
shows the interest rate spiking in a year from now, and someone 
looks at it and says, ``Oh, my God, next year I will be paying 
twice as much as I am paying now.''
    These calculations of, well, if this happens, it is now 
plus 25 basis points--frankly, you know, I did not know what a 
basis point was until I was about 30 years old and I was 
practicing law. Oh, that is a tenth of a percent. I think.
    Mr. Duncan. We absolutely agree.
    [Laughter.]
    Mr. Duncan. First, I am sorry for your law school 
situation. I have the liability of being an economist.
    We absolutely agree with you that consumers need some 
straightforward, clear tool to help them judge the relative 
risks of different loan products, and we have put together a 
task force of members under a title called ``Project Clarity'' 
to see if there is a way that the industry can offer up with 
consultation from the regulators and community groups something 
that paints the relative risk of different loan products, 
accounting for the potential changes.
    Before I forget, if I may, we wanted to introduce into the 
record, given that there was some discussion about the 
differences in number, a critique that we have done of some of 
the CRL studies, if we can introduce that, without objection.
    Senator Reed. You have been a very good panel. It has been 
a long morning. I am concerned, Ms. King and Ms. Womble, who is 
helping you now? I mean, you are in a difficult situation. Is 
there anyone----
    Chairman Dodd. Reverend Jackson is going to help the one--
--
    Senator Reed. Well, good. Is there anyone--I mean, you are 
in a difficult position with your mortgage. How are you going 
to find your way out of it? Not just you in particular, but 
other people like yourselves, what should be done to help you? 
Better coordination with the lenders? Better community support 
in terms of helping, counseling? What do you think? You are the 
experts. Unfortunately, you have had a tough education, but you 
are the experts. Ms. Womble?
    Ms. Womble. At this point I am just sort of in limbo. I do 
not know what my next steps are. I know that one thing I would 
like to see is that consumers--that lenders do not just look at 
a number when it comes to the decision whether or not they want 
to make you a loan. Do not look at that number and judge you by 
that and say, well, you are subprime lending, you are not prime 
lending. Look at the whole situation, what happened.
    You know, when I went from a 780 credit score 6 years ago 
to a 549 now, it is not that I just chose not to pay my bills.
    Senator Reed. Right.
    Ms. Womble. You know, it was circumstances. After 21 years 
of mortgage payments, I had never been late, never missed a 
mortgage payment. So it was just the circumstances that 
surrounded that. You know, I am a good credit risk. If you give 
me a mortgage payment I can afford, you are not going to lose 
money on me. Don't punish me for what happened in my credit 
situation when, you know, I am a good risk. You know, you give 
me that $900-a-month payment and I will not be here having to 
sit through these things and worry where my kids are going to 
get their next meal from, you know, if they have to go to the 
doctor. I have got, you know, coming up to go to college. How 
am I going to do that?
    So that is what I would like to see, that they do not just 
look at that one number and say, well, you are below a 680 so 
we are going to send you down there.
    Senator Reed. Thank you.
    Ms. King, any comments?
    Ms. King. Right now I am in a quandary----
    Chairman Dodd. A little closer, Ms. King, to that 
microphone. I am sorry.
    Ms. King. I am in a quandary because I am retired, and I 
never anticipated me being in a situation like this. What I 
would like to see is more clarity. If we are going to have 
brokers, be honest and aboveboard about it. If you can handle 
it, tell me now. I don't want like later I am sitting here 
testifying, not just for myself, for others that it concerns. 
And I really would like to see the law--because it seems like 
they are just getting away with murder. I really do feel that 
way.
    Senator Reed. Well, thank you both for your testimony, but 
also I think it underscores a point that several have made, and 
Reverend Jackson and others, that this is an issue that affects 
a wide range of Americans, people who have worked for years, 
have run their small businesses successfully, and then have a 
life-changing event. It does not affect their character or 
their diligence, their ability to work hard, but it makes it 
difficult for them to keep up, at least temporarily. And we 
have to be responsive to that in a decent way. And I hope we 
can work--I know the Chairman is very committed to this work to 
make things a little better.
    Thank you.
    Reverend Jackson. Mr. Chairman, John Taylor from NCRSC 
wants to help Ms. Womble and Ms. King through some kind of 
consumer rescuethon. So when I said safety net, people who are 
seniors must know that safety net is not a predator, where they 
are being led to the slaughter. We just formed a village in 
Illinois called 40-50, where they decided to fight predators 
and took 10 zip codes, majority black and brown, a lot of 
predatory practices going on. You pay $300 for a counselor who 
helps talk you through your situation. Ms. King cannot be 
talked through. She needs some money. She needs to be offset 
from having--she has been violated.
    And so our legislature voted for 40-50, but the counselors 
are working for the bank. The counselors are working for the 
subprimers and working for the bank. It is like a whole 
conspiracy, because we knew that in those zones where you have 
the most industrial jobs leaving and the highest taxes, and you 
just have block after block of foreclosures. And there needs to 
be some kind of money--I am back to if we can spend $9 billion 
a month on that situation in Iraq, we need some money. When 
people lose their jobs at Ford, when people lose--and seniors 
are trapped on fixed incomes, they need some bail-out, not just 
some counseling and some literacy.
    Chairman Dodd. Thank you very much, Reverend.
    It has been a long morning for all of you, but tremendously 
valuable, and I just was looking over the numbers here again on 
this. You have Mrs. King who went from an $832-a-month mortgage 
to $1,500 a month, as I see it, roughly $1,500. That is an 80-
percent increase. A woman on a fixed income. I think you said 
to me in your testimony you had an income of around $950 a 
month, you got another couple grand you got once a year, but 
that was going to terminate pretty quick as a pension. It came 
out of being a teacher over the years.
    And in the case of Ms. Womble, you went from $927 to 
$2,000. That is over a 100-percent increase, and you had your 
insurance and other issues, taxes, that were now outside of 
that, no longer in escrow.
    I think people need to remember this well. Ms. King was 
acting responsibly. She had a $3,000 debt she thought she owed, 
and she wanted to take care of her debts. You had a $10,000 
judgment that you felt you had to meet an obligation. These are 
two citizens acting very responsibly -in fact, arguably, maybe 
too responsibly, to go through and refinance your home for 
$3,000 and $10,000. Someone should have given you some advice 
along the way that you did not need to do this, there was a way 
of dealing with those debts short of the avenue you chose.
    But here are two very responsible citizens doing exactly 
what responsibility requires. Where is the responsibility, Mr. 
Dinham, I would say. Mr. Duncan, on the other side of the 
equation here, in the industry you are representing that would 
take advantage of two people who spent all their lives doing 
everything they should have been doing, hard-working, raising 
families, building private companies, a small business in this 
case, and then find themselves being victimized by a system 
here. That has just got to stop.
    Now, you know, we can talk about the regulators, and we are 
going to bring them in here, because, frankly, I am annoyed 
that 2 months have gone by and no answer from these Federal 
agencies that can respond to this. So if you are listening to 
me, plan on being at this table in the next few weeks to 
respond to some questions.
    Second, the industry had got to respond. Look, I am not 
crazy about writing laws here. I want to be careful that we do 
not do damage to the very industry that is critical for wealth 
creation. And I realize that by writing laws, you can 
unintentionally do some of this. So the industry has got to 
step up. That website, yes, change that, or step up to the 
plate and admit that you do have a fiduciary responsibility to 
these people. But you cannot have it both ways. You cannot 
advertise as being a mentor and advisor, and then turn around 
and watch these people get into the kind of holes they have 
gotten into. That is just outrageous, to put it mildly.
    Also to my colleagues here, we need to look at the laws 
themselves, the statutory underpinnings of all of this.
    So I am very grateful to all of you, and I am grateful to 
the industry, too. I appreciate, Mr. Duncan, you are very 
knowledgeable about this. I am very impressed how much you 
know. And, Mr. Dinham, your honest answer, I appreciate that. 
We do not always get honest answers, and I confronted you with 
the website. You said, ``Yes, that is wrong.'' And I want you 
to know I appreciate that kind of answer. We do not always get 
those kinds of answers from people here. So I am grateful to 
you.
    And, Hilary and Ms. Davis, your work, and Reverend Jackson, 
for your work here. But we are going to follow up on this. This 
is not just a one-time event here today to gather some 
information, but now to step up and see if we cannot stop this. 
Homeownership is really important. Subprime lending is a 
critical component for making people have an advantage of 
getting into the business of owning their own home. And I want 
to make sure it is going to work right and they can stay in 
that home for as long as they possibly can.
    So we will be back at this, and I am very grateful to all 
of you for your testimony today.
    The Committee stands adjourned. Thank you all.
    [Whereupon, at 12:31 p.m., the hearing was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]

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