[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                       MORTGAGE LENDING REFORM: A 
                      COMPREHENSIVE REVIEW OF THE 
                        AMERICAN MORTGAGE SYSTEM 

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 11, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-11

                               ----------
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             THADDEUS G. McCOTTER, Michigan
RON KLEIN, Florida                   KEVIN McCARTHY, California
CHARLES A. WILSON, Ohio              BILL POSEY, Florida
ED PERLMUTTER, Colorado              LYNN JENKINS, Kansas
JOE DONNELLY, Indiana
BILL FOSTER, Illinois
ANDRE CARSON, Indiana
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

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

                 LUIS V. GUTIERREZ, Illinois, Chairman

CAROLYN B. MALONEY, New York         JEB HENSARLING, Texas
MELVIN L. WATT, North Carolina       J. GRESHAM BARRETT, South Carolina
GARY L. ACKERMAN, New York           MICHAEL N. CASTLE, Delaware
BRAD SHERMAN, California             PETER T. KING, New York
DENNIS MOORE, Kansas                 EDWARD R. ROYCE, California
PAUL E. KANJORSKI, Pennsylvania      WALTER B. JONES, Jr., North 
MAXINE WATERS, California                Carolina
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
CAROLYN McCARTHY, New York               Virginia
JOE BACA, California                 SCOTT GARRETT, New Jersey
AL GREEN, Texas                      JIM GERLACH, Pennsylvania
WM. LACY CLAY, Missouri              RANDY NEUGEBAUER, Texas
BRAD MILLER, North Carolina          TOM PRICE, Georgia
DAVID SCOTT, Georgia                 PATRICK T. McHENRY, North Carolina
EMANUEL CLEAVER, Missouri            JOHN CAMPBELL, California
MELISSA L. BEAN, Illinois            KEVIN McCARTHY, California
PAUL W. HODES, New Hampshire         KENNY MARCHANT, Texas
KEITH ELLISON, Minnesota             CHRISTOPHER LEE, New York
RON KLEIN, Florida                   ERIK PAULSEN, Minnesota
CHARLES A. WILSON, Ohio              LEONARD LANCE, New Jersey
GREGORY W. MEEKS, New York
BILL FOSTER, Illinois
ED PERLMUTTER, Colorado
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho

























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 11, 2009...............................................     1
Appendix:
    March 11, 2009...............................................    69

                               WITNESSES
                       Wednesday, March 11, 2009

Amorin, Jim, President, Appraisal Institute......................    52
Antonakes, Steven L., Commissioner, Massachusetts Division of 
  Banks, on behalf of the Conference of State Bank Supervisors...     7
Aponte, Graciela, Legislative Analyst, Wealth-Building Policy 
  Project, National Council of La Raza (NCLR)....................    36
Berenbaum, David, Executive Vice President, National Community 
  Reinvestment Coalition.........................................    29
Braunstein, Sandra F., Director, Division of Consumer and 
  Community Affairs, Board of Governors of the Federal Reserve 
  System.........................................................     5
Gordon, Julia, Senior Policy Counsel, Center for Responsible 
  Lending........................................................    31
Jones, Stephanie, Executive Director, National Urban League 
  Policy Institute...............................................    34
Kittle, David G., Chairman, Mortgage Bankers Association (MBA)...    47
Lampe, Donald C., Partner, Womble Carlyle Sandridge & Rice, PLLC.    37
McMillan, Charles, President, National Association of Realtors 
  (NAR)..........................................................    51
Middleton, Michael, President and CEO, Community Bank of Tri-
  County, on behalf of the American Bankers Association..........    46
Platt, Laurence E., Partner, K&L Gates, on behalf of the 
  Securities Industry and Financial Markets Association and the 
  American Securitization Forum..................................    56
Robson, Joe R., Chairman of the Board, National Association of 
  Home Builders..................................................    54
Saunders, Margot, Counsel, National Consumer Law Center..........    32
Savitt, Marc S., President, National Association of Mortgage 
  Brokers (NAMB).................................................    49

                                APPENDIX

Prepared statements:
    Amorin, Jim..................................................    70
    Antonakes, Steven L..........................................    85
    Aponte, Graciela.............................................   117
    Berenbaum, David.............................................   124
    Braunstein, Sandra F.........................................   149
    Gordon, Julia................................................   162
    Kittle, David G..............................................   183
    Lampe, Donald C..............................................   186
    McMillan, Charles............................................   193
    Middleton, Michael...........................................   203
    Platt, Laurence E............................................   212
    Robson, Joe R................................................   218
    Saunders, Margot.............................................   228
    Savitt, Marc S...............................................   246

              Additional Material Submitted for the Record

Gutierrez, Hon. Luis:
    Written statement of New York Attorney General Andrew Cuomo..   264
Cleaver, Hon. Emanuel:
    Letter from Sidney L. Willens, Attorney at Law, dated March 
      4, 2009....................................................   265


                       MORTGAGE LENDING REFORM: A
                      COMPREHENSIVE REVIEW OF THE
                        AMERICAN MORTGAGE SYSTEM

                              ----------                              


                       Wednesday, March 11, 2009

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:33 p.m., in 
room 2128, Rayburn House Office Building, Hon. Luis V. 
Gutierrez [chairman of the subcommittee] presiding.
    Members present: Representatives Gutierrez, Maloney, Watt, 
Sherman, Moore of Kansas, Waters, McCarthy of New York, Green, 
Clay, Miller of North Carolina, Scott, Cleaver, Ellison, 
Wilson, Foster, Minnick; Hensarling, Castle, Capito, 
Neugebauer, McHenry, Marchant, Lee, Paulsen, and Lance.
    Also present: Representative Donnelly.
    Chairman Gutierrez. This hearing of the Subcommittee on 
Financial Institutions and Consumer Credit will come to order. 
Good afternoon, and thanks to all of the witnesses for agreeing 
to appear before the subcommittee today.
    Today's hearing will examine the current state of the U.S. 
mortgage system with an eye toward comprehensive mortgage 
lending reform legislation that the Financial Services 
Committee is expected to take up later this month.
    The subcommittee has asked our witnesses to recommend 
changes to H.R. 3915, the Mortgage Reform and Anti-Predatory 
Lending Act of 2007, from the 110th Congress. H.R. 3915, which 
was passed by the Financial Services Committee and approved by 
the House of Representatives in November 2007 will be used as 
the starting point for today, for this year's mortgage lending 
reform.
    We will be limiting opening statements to 10 minutes per 
side, but, without objection, all members' opening statements 
will be made a part of the record.
    I yield myself 5 minutes.
    The last time this committee addressed legislation to 
restrict predatory mortgage lending was in November 2007. The 
world has changed dramatically since then. Mortgage 
delinquencies and foreclosures are now at record levels.
    Since late 2007, my home City of Chicago has seen a 37 
percent increase in new foreclosures, and in 2000 alone, 
Chicago saw 20,000 new foreclosure filings. Some of the areas 
in Chicago have seen more than a 300 percent increase in 
foreclosures since 2006.
    Not unrelated, our communities are suffering from the 
highest unemployment rate since 1982, and those who do have 
jobs are experiencing falling real wages. Tumbling home prices 
have destroyed much of the wealth stored in what is often a 
family's only real investment, their home.
    How did we get here? Some have tried to pin the housing 
crisis on fair lending laws and regulations, but such arguments 
downplay or even ignore the role that derivative instruments 
played in the current crisis by exponentially compounding the 
mortgage losses.
    We do know that, in many cases, greedy, unscrupulous, and 
sometimes illegal subprime mortgage lending practices 
significantly contributed to the problem. These lending 
practices, combined with microeconomic/macroeconomic factors 
that only exacerbated this greed, have combined to create the 
perfect economic storm that now threatens our communities and 
our economy as a whole.
    Cheap credit, derived from overseas foreign currency 
reserves, encouraged many in the banking and finance industry 
to disregard their normally prudent lending standards and 
finance poorly underwritten and often predatory mortgages. 
These subprime mortgages were then securitized into mortgage-
backed securities and the corresponding credit default swaps 
that have caused the crisis that our world economy has been 
dealing with since last March.
    While changes in the system and other aspects of the 
mortgage finance process must and will be addressed, this 
hearing will focus primarily on how to create fair and prudent 
mortgage origination standards to prevent this tragic cycle 
from ever happening again.
    I have called the subcommittee hearing today to return our 
attention to comprehensive mortgage lending reform. In the 
110th Congress, this committee and the House passed H.R. 3915. 
This bill was not signed into law, denying many of our most 
vulnerable communities the protection they needed from 
predatory mortgage lending. Now the fight has turned into one 
of keeping working families in their homes and out of 
foreclosure or bankruptcy court.
    But it is important that we act with a sense of urgency to 
pass comprehensive mortgage lending reform that will keep us 
from repeating the mistakes of the housing boom and bust of the 
last few years.
    I look forward to hearing from our witnesses, and to a 
spirited debate on these issues.
    I yield the ranking member, Mr. Hensarling, 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman, and thank you for 
calling this important hearing. I mean, clearly, we still have 
many of our fellow citizens who are suffering in this economy, 
who are struggling to pay their mortgages, struggling to fill 
up their gas tanks, struggling to send their kids to college, 
and have a high level of anxiety about the future of their 
jobs.
    So, number one, it is a very topical issue for us to 
discuss. It's one, as we well know, in which this subcommittee 
and this committee have been quite active.
    I recall some words that our President shared with us 
during the State of the Union address, and were somewhat 
reflected in the chairman's statement.
    Our President said, ``It is only by understanding how we 
arrived at this moment that we will be able to lift ourselves 
out of this predicament.'' And I agree with our President.
    As we're looking down the road to future and further 
mortgage market reforms, we must understand how we entered into 
this economic turmoil in the first place. I believe there are a 
number of causes.
    I think with the hindsight of 20/20, the easy money 
policies of the Federal Reserve exacerbated a housing bubble 
that otherwise could not exist without them.
    Mortgage fraud ran rampant for a decade, on the lenders' 
side and on the borrowers' side as well.
    But we also have to take a clear look at government 
policies, no matter how noble the intent, that ultimately 
attempted to incent, cajole, or mandate financial institutions 
to lend money to people to buy homes who ultimately could not 
afford to keep those homes. Again, I know the intent was noble, 
but the effect has been devastating.
    One need only look at the Community Reinvestment Act. 
Again, very noble in intent, designed to deal with a very 
serious problem of red-lining at the time, but ultimately, it 
helped put the Federal Government seal of approval not so much 
on helping raise the economic opportunities of the borrower, 
but instead, bringing down the lending standards of the lender.
    We certainly know the infamous role that was played in the 
government-sanctioned duopoly of Fannie Mae and Freddie Mac. 
For years and years and years, Chairman Greenspan, the former 
Chairman of the Federal Reserve, came before this committee and 
said that there was huge systemic risk, and unfortunately, this 
committee did not act; previous Congresses did not act.
    And again, they were given an affordable housing mission, 
I'm sure a most noble intent, but it led to essentially having 
an off-budget HUD where people were incented to lower their 
lending standards, Fannie and Freddie securitized this, and 
what might have been a localized problem in one segment of the 
economy was spread throughout, not only the national economy, 
but the global economy, as well, and we have to take a very 
serious look at those particular policies.
    So as we embark upon this quest again, to look at 
successful mortgage lending reform, I believe I have several 
ideas of what successful mortgage lending reform ought to look 
like.
    Number one, we ought to let competitive markets work. We 
want to ensure that the consumer has effective disclosure, not 
necessarily voluminous disclosure. We need transparency, and we 
need to make sure that we're working to make markets more 
competitive, not less competitive, as was done in the case of 
Fannie and Freddie.
    Again, we do not need laws to incent, mandate, or cajole 
financial institutions to loan money to people who otherwise 
may not be able to afford it. We need to ensure that we do not 
deny an informed consumer's choices that they may need to 
realize their American dream. With full disclosure, let the 
consumer choose, not the all-enlightened Congress.
    And then there is the issue of fairness. We should never 
forget that 95 percent of America rents, owns their home 
outright, or are current in their mortgage.
    Now, there are many people worthy of financial assistance 
who are having mortgage problems, and there are many who 
aren't. We know that mortgage fraud ran rampant, speculation 
ran rampant, many used their homes as an ATM, many lived beyond 
their means. And when families are struggling to pay their 
mortgage, they shouldn't be forced to pay their neighbor's, as 
well.
    So, Mr. Chairman, I appreciate you calling this hearing. I 
look forward to the testimony of all of our witnesses on three 
different panels, and with that, I yield back the balance of my 
time.
    Chairman Gutierrez. Two minutes for Mr. Castle.
    Mr. Castle. I thank the ranking member and the chairman 
very much for this important hearing.
    And I think there is unanimity in this room and in the 
United States at this point that the subprime lending issues 
and the foreclosures that have arisen from that have 
contributed to the economic downturn we currently face.
    In this body we have obviously considered proposals to help 
those facing foreclosures, and to restore the housing market, 
but many of us here are equally concerned with looking more 
precisely at this problem, to prevent it from reoccurring.
    To what extent did lenders convince unknowing borrowers to 
enter into mortgage agreements they couldn't afford; how did 
borrowers lie or tweak their income to qualify for high-cost 
loans; how prevalent were these practices? These questions may 
need to be answered before we can craft effective legislative 
solutions.
    I welcome hearing the testimony of our witnesses, and I'm 
particularly interested in hearing from Ms. Braunstein, not 
only because she is from Delaware, but also because she's an 
expert on consumer financial services issues.
    And I yield back the balance of my time, Mr. Chairman.
    Chairman Gutierrez. I thank the gentleman.
    We'll introduce the panel. Our first panel is--yes? The 
gentleman from Minnesota for 2 minutes.
    Mr. Paulsen. Thank you, Mr. Chairman, for holding this very 
important hearing today.
    You know, both in this Congress and last year in Congress, 
this committee, I know, has been trying to address some of the 
many problems in the mortgage system that have created great 
pain now for many of our constituents. While I think we need to 
remedy the problems caused by the bad actors, we also need to 
acknowledge the fragile condition of our current credit markets 
and make sure we do no harm with future legislation.
    You know, many certainly can argue and say that the 
legislation that was passed in Congress here over the past few 
years has helped put us into this crisis by pushing the concept 
of homeownership onto those who financially and inevitably 
could not sustain that concept of homeownership themselves, and 
so I think we need to get ultimately back to the principles of 
common sense in terms of lending principles, so that we have 
requirements for reasonable downpayments, so that the borrowers 
actually have skin in the game themselves, and that we also 
have traditional gross income to payment percentages that can 
help alleviate some of those changes and problems.
    So I thank the witnesses for being here today and I thank 
you, Mr. Chairman, for holding this hearing.
    Chairman Gutierrez. I thank the gentleman.
    Our first panel consists of Sandra F. Braunstein, the 
Director of the Division of Consumer and Community Affairs at 
the Board of Governors of the Federal Reserve System; and 
Steven Antonakes, the Commissioner of Banks for the 
Commonwealth of Massachusetts, who is speaking on behalf of the 
Conference of State Bank Supervisors.
    Please, you're each recognized for 5 minutes.

   STATEMENT OF SANDRA F. BRAUNSTEIN, DIRECTOR, DIVISION OF 
   CONSUMER AND COMMUNITY AFFAIRS, BOARD OF GOVERNORS OF THE 
                     FEDERAL RESERVE SYSTEM

    Ms. Braunstein. Chairman Gutierrez, Ranking Member 
Hensarling, and members of the subcommittee, I appreciate this 
opportunity to discuss the Federal Reserve's regulatory actions 
to address mortgage problems and potential legislative 
responses to these issues.
    The Federal Reserve is committed to promoting sustainable 
homeownership through responsible mortgage lending. While the 
expansion of the subprime mortgage market over the past decade 
increased consumers' access to credit, too many homeowners and 
communities are suffering today because of lax underwriting 
standards and unfair or deceptive practices that resulted in 
unsustainable loans.
    Last July, the Board issued final rules to establish 
sweeping new regulatory protections for consumers in the 
residential mortgage market. The new rules apply to all 
mortgage lenders, not just depository institutions.
    The Board's rules contain four key protections for a newly 
defined category of higher priced mortgage loans:
    First, lenders are prohibited from making any higher priced 
mortgage loan without regard to the borrower's ability to repay 
the obligation from income and assets other than the home.
    Second, lenders are prohibited from making stated income 
loans and are required to verify the income and assets they 
rely upon to determine the borrower's repayment ability.
    Third, the final rules ban prepayment penalties in cases 
where the borrower faces payment shock.
    And fourth, creditors are required to establish escrow 
accounts for property taxes and homeowners' insurance for all 
first lien mortgage loans.
    In addition to the rules for higher cost loans, the Board 
adopted other protections that apply to all mortgages.
    Currently, the Board is engaged in robust consumer testing 
to improve the content and comprehension of cost disclosures 
for mortgage loans and home equity lines of credit.
    Consumers receive an overwhelming amount of information at 
the time they close a mortgage loan. The truth in lending 
disclosure, however, is a single-page form, and we are hopeful 
that new requirements for providing this form earlier in the 
application process will distinguish the disclosure from the 
many legal documents presented at loan closing.
    However, it is important to note that the effectiveness of 
a disclosure is best judged through the results of consumer 
testing and not by the length of the disclosure alone.
    In 2007, the House of Representatives passed the Mortgage 
Reform and Anti-Predatory Lending Act. We commend Congress' 
work on the bill, which represents a significant contribution 
to the public debate about these issues. Although some of the 
details regarding implementation differ, both the House bill 
and the Board's rules set minimum underwriting standards for 
higher priced loans.
    The bill would also provide consumer remedies for 
violations of the bill's standards and consumers would be able 
to seek remedies against creditors, assignees, and 
securitizers.
    In order for assignee liability to increase market 
discipline, the law must be clear about what acts or practices 
are prohibited so that assignees can detect violations before 
purchasing loans.
    Assignees may have difficulty in determining a creditor's 
compliance with a broad prohibition against making loans that 
do not provide a net tangible benefit unless that term is 
clearly defined in either law or regulation.
    The bill also seeks to establish the Federal duty of care 
that would require loan originators to present a range of loan 
products for which the consumer is likely to qualify and which 
are appropriate for the consumer's circumstances.
    Because these standards are broad and originators would be 
liable for violations, we believe that the establishment of 
clearly defined safe harbors may be appropriate in implementing 
the law and the statute should clarify that.
    I would also like to comment on the bill's delegation of 
rule writing. Several provisions of the bill would be 
implemented by regulations that are promulgated jointly by the 
Federal banking agencies. In our experience, inter-agency 
rulemakings may provide an opportunity for different 
perspectives, but the joint rulemaking process generally is a 
less efficient, more time-consuming way to develop new 
regulations.
    In closing, the Federal Reserve is continuing its efforts 
to enhance consumer protection in the residential mortgage 
market. As we develop more useful consumer disclosures for both 
closed-end loans and home equity lines, we are mindful that 
improved disclosure may not always be sufficient to address 
abuses.
    Accordingly, we will carefully consider whether additional 
substantive protections are needed to prevent unfair or 
deceptive practices. We look forward to working with Congress 
to enhance consumer protections while promoting sustainable 
homeownership and access to responsible credit.
    Thank you.
    [The prepared statement of Ms. Braunstein can be found on 
page 149 of the appendix.]
    Chairman Gutierrez. Thank you.
    Ms. Antonakes.

 STATEMENT OF STEVEN L. ANTONAKES, COMMISSIONER, MASSACHUSETTS 
 DIVISION OF BANKS, ON BEHALF OF THE CONFERENCE OF STATE BANK 
                          SUPERVISORS

    Mr. Antonakes. Good afternoon, Chairman Gutierrez, Ranking 
Member Hensarling, and distinguished members of the 
subcommittee. My name is Steven Antonakes, and I serve as the 
commissioner of banks for the Commonwealth of Massachusetts. It 
is my pleasure to testify today on behalf of the Conference of 
State Bank Supervisors to discuss Federal predatory lending 
legislation, and more broadly, reform of our system of mortgage 
regulation and supervision.
    My written statement provides you with a detailed 
discussion of dramatic regulatory reforms occurring at the 
State level and suggestions for Federal reforms. In my oral 
presentation, I would like to highlight two key points: First, 
an explanation of why federalism matters. And second, how a 
system of cooperative federalism can work and why it is in the 
best interests of the public, the industry, and our economy.
    For the past decade, it has been clear to the States that 
our system of mortgage finance and mortgage regulation was 
flawed and that a destructive and widening chasm had formed 
between the interests of borrowers and of lenders. Over that 
decade, through GAO reports and congressional testimony, one 
can observe an ever-increasing level of State concern over this 
growing chasm and its impact on the State and Federal 
regulatory relationship.
    Chairman Gutierrez, you are clearly one of the leading 
voices in Washington who saw how destructive this break between 
consumer, industry, State, and Federal interests was becoming.
    I would like the committee to consider how the world would 
look today had the OCC and the rating agencies not intervened 
and the ASNI liability and predatory lending provisions of the 
Georgia Fair Lending Act had been applicable to all financial 
institutions.
    I would suggest we would have far fewer foreclosures and 
would have avoided the need to bail out our largest financial 
institutions.
    It is worth noting that the institutions whose names were 
attached to the OCC's preemption--National City, First 
Franklin, and Wachovia--were all brought down by the mortgage 
crisis.
    Regulatory reform must foster a system that incorporates 
the early warning signs that State laws and regulations 
provide, rather than eliminating them. I'm not suggesting a 
status quo solution or a return to a balkanized system of 
regulation. Instead, Congress needs to forge a regulatory 
system of high standards that more successfully coordinates 
among State and Federal regulators.
    A centralized, top-down, or consolidated system will set us 
up for future catastrophic boom or bust cycles similar to the 
ones that we're currently experiencing. The wisdom of our 
forefathers in recognizing the necessity of checks and balances 
and grassroots innovation is timeless, and should be heeded.
    The model for this regulatory system is already in 
development. Thanks to the leadership of Ranking Member Bachus, 
who first introduced legislation, and to Chairman Frank, and 
Senators Feinstein and Martinez, who embraced it and helped it 
become law, a coordinated nationwide mortgage regulatory system 
is taking shape.
    With the passage of a SAFE Act: nearly every State is now 
in the process of raising mortgage originator licensing 
standards; a centralized system of record and enforcement tools 
is up and running; and unprecedented State and Federal 
cooperation is beginning to evolve.
    The work that began at the State level in 2003 to create 
the nationwide mortgage licensing system was empowered and 
enhanced by Federal law in 2008 and has compelled significant 
State to State and State to Federal cooperation. This is how 
the regulatory system should work.
    We believe that H.R. 3915 also provides an example of how 
our system of federalism can work. The Miller-Watt-Frank-Bachus 
bill drew from the State laws and refined them. It does what 
only Congress can, which is ultimately make uniform applicable 
minimum standards.
    We suggest Congress confirm that H.R. 3915 serves as a 
minimum standard for all institutions and that it allow for 
State enforcement of State and Federal law.
    I'm not suggesting a regulatory free-for-all, but rather, a 
more coordinated and cooperative system of applicable law and 
enforcement.
    I must also recognize and thank my fellow witness, Sandy 
Braunstein of the Federal Reserve Board, for the Board's 
leadership in creating a model of cooperative supervision 
through our joint pilot project to examine non-bank mortgage 
lenders. This project is an example of cooperative federalism.
    CSBS looks forward to continuing to work with this 
committee and our Federal counterparts to reform our system of 
mortgage regulation.
    Thank you for the opportunity to testify, and I would be 
glad to answer any questions the committee may have. Thank you.
    [The prepared statement of Mr. Antonakes can be found on 
page 85 of the appendix.]
    Chairman Gutierrez. Thank you, Mr. Antonakes.
    Let me begin with you, Mr. Antonakes. I want to first 
applaud you for recommending in your testimony that we attend 
the National Bank Act to make it clear that State consumer 
protection laws can apply to national banks. As you alluded to, 
I have been fighting for years, and I appreciate you bringing 
it to the forefront today.
    In your testimony, you also advocate for a bifurcated 
supervision system, one for the large systemic institutions, 
and one for community banks. This is intriguing, and this issue 
is front and center, as we're dealing with the fallout from the 
FDIC's premium increases that apply to all banks of all sizes, 
and as we consider a systemic risk regulator.
    Could you expand a little bit on your proposal? For 
example, where would the cutoff be between a systemic bank and 
a regular bank, and how would you make that determination?
    Mr. Antonakes. Well, thank you, Mr. Chairman.
    The point I think we're trying to make here is that the 
diversity of our banking system has always been a strength in 
this country, a system which allows community banks, credit 
unions, also to compete with large money center banks.
    The community bank system has been, and continues to be, a 
strength in the system today, very important, providing credit 
to local communities, to consumers, and small businesses. To 
the extent that they can be allowed to effectively compete with 
these largest institutions that pose systemic risk to the 
system, I believe is no longer a certainty.
    Moreover, I think the concern is, if regulatory reform is 
more beneficial to our largest institutions, then I think 
continued consolidation of our industry will be harmful for our 
consumers ultimately, as well as for our businesses and for our 
local communities.
    The opportunity here I believe is to ensure that we have a 
diverse banking system and one in which our smaller 
institutions that are very heavily invested in the communities 
within which they operate are allowed to effectively compete 
with behemoth institutions that pose less risk.
    That being said, while I don't propose to have all the 
answers for this, or where the direct cutoff can be, I think we 
can determine which institutions pose the greatest risk to our 
country's financial system, those that do not, and determine 
whether or not separate rules in separate areas can be applied.
    Chairman Gutierrez. Thank you.
    Ms. Braunstein, how long have you been at the Federal 
Reserve system?
    Ms. Braunstein. Twenty-one years.
    Chairman Gutierrez. Twenty-one years. Good. I just wanted 
to make sure it was during the last 8 years, and put that into 
the record.
    So one of the arguments is that the government said 
everyone should own a home, and so everyone said, ``Since 
that's what the government wants me to do, since the government 
is encouraging me to do it''--and no one ever has come to me 
and said, ``I bought my house because the government encouraged 
me to buy a house.'' They said, ``I wanted a home,'' for a lot 
of other reasons. But that's one of the arguments, and so, 
therefore, part of the reason we're in the current situation.
    And so if that's true, what policies during, I don't know, 
from, let me see, 2001 to 2008, during the last 8 years, has 
the Federal Government forced on the American people so they 
could buy a home that has caused this problem? Is there such an 
entity that has caused this, such as the Community Reinvestment 
Act?
    Ms. Braunstein. There are obviously a lot of reasons as to 
why we're in the economic crisis we are in. It's a very complex 
situation. But I can state very definitively that from the 
research we have done, the Community Reinvestment Act is not 
one of the causes of the current crisis.
    We have run data on CRA lending, and where loans are 
located, and we found that only 6 percent of all higher-cost 
loans were made by CRA-covered institutions in neighborhoods 
targeted--which would be low- and moderate-income 
neighborhoods--by CRA. So I can tell you, if that's where 
you're going, CRA was not the cause of the subprime crisis.
    Chairman Gutierrez. But it is somewhat because, as I 
remember my stay here, my short stay during the last 17 years 
here in Congress and on this committee, we have attempted to 
expand homeownership to the American public, but every time I 
evaluate the loans that have been given to communities of 
color, African-American and Latino and emerging immigrant 
communities, it hasn't been the CRA-covered institutions. 
Actually, it has been the subprime lending industry bringing 
about those loans.
    I mean, if they were CRA, they might have gotten 5\1/2\ and 
6 percent regular mortgages, but that is not what happened in 
those communities.
    So I look forward--because I want Mr. Hensarling to be able 
to have his 5 minutes, I'm just going to end by saying, look, I 
would like especially Ms. Braunstein to--when we look at 
underwriting, let's set so that we could also go back to some 
sanity in the way we do this.
    When I first bought my home in 1981, it was at 14\1/2\ 
percent. I had to come up with a 20 percent downpayment. I had 
to show my last 2 years of income taxes. I mean, there were 
requirements. I had a stake. Had the home diminished in value, 
I still would have had a stake in it, and I looked at it as a 
home.
    So maybe we could look at some of those underwriting rules, 
so that the purchaser has something there, given that the 
government is many times the guarantor.
    I thank you both.
    Ms. Braunstein. Congressman, just one quick statement to 
that.
    That is what we have attempted to do with our HOEPA rules--
    Chairman Gutierrez. Well, good.
    Ms. Braunstein. --is to afford those protections to 
homeowners.
    Chairman Gutierrez. And now, Mr. Hensarling, my colleague, 
is recognized for 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    In assessing the various contributing and ``but for'' 
causes of our economic turmoil, I understand your opinion on 
CRA. I assume you haven't drawn the same conclusions with 
respect to the GSEs, or do you differ from former Chairman 
Greenspan in that respect?
    Ms. Braunstein. Well, I think that the Federal Reserve 
recognized that there were issues around the GSEs and their 
portfolios. I can't really comment on the impact of what--I 
think what you're talking about were the goals they were given 
for homeownership, and that, I cannot comment on whether that 
was a contributing cause or not.
    Mr. Hensarling. Let me ask you to comment on this.
    In your testimony, you said, we are well aware that 
consumers receive an overwhelming amount of information at the 
time they close a mortgage loan.
    And in trying to, again, provide the consumer with more 
effective disclosure, I understand, and I believe in your 
testimony you talk about more results from consumer testing 
being needed. Just exactly where is the Federal Reserve in this 
process?
    Ms. Braunstein. We actually initiated the consumer testing 
of mortgage disclosures last year. We are currently testing. We 
are redesigning disclosures, and we plan to have a proposal out 
with recommended new disclosures sometime this summer.
    Mr. Hensarling. This has been an ongoing process for a 
number of years; has it not?
    Ms. Braunstein. Well, TILA, the Truth in Lending Act, has 
been an ongoing process, but we first, as I think you know, we 
issued recently comprehensive rules on open-end credit, which 
is credit cards, and that was the first chunk that we tackled, 
and then we went into the HOEPA rules, which we finalized in 
July, and during that process, we also initiated the look at 
the closed-end lending or mortgage loans and home equity lines, 
and that's what we're trying to complete now.
    Mr. Hensarling. On page 10 of your testimony, you speak of 
assignee liability with respect to the earlier version of H.R. 
3915.
    I believe you say that laws must be clear about what acts 
or practices are prohibited, so the assignees can perform due 
diligence and detect violations before purchasing the loans. 
Assignees may have difficulty in determining a creditor's 
compliance with a broad prohibition against making loans that 
do not provide a ``net tangible benefit,'' unless that term is 
capable of being clearly defined in law or regulation.
    Given the problems we have had in the meltdown of our 
secondary mortgage market, given how many people are struggling 
to refinance their homes now, if we went forward with a fairly 
indefinite standard such as ``net tangible benefit,'' do you 
have an observation or impression on what that impact may be on 
the secondary mortgage market?
    Ms. Braunstein. Well, I think that it could be problematic, 
because if the markets cannot determine what would be an 
allowable loan and what loan they would have, especially when 
they're carrying liability for those loans, I think they would 
be very hesitant to participate in the markets.
    So we're saying that it's important to make sure that there 
are some bright lines drawn, that there is a clear definition, 
and whether that's done through statute or regulation, there 
needs to be some way of determining when you're evaluating what 
you're going to buy whether or not you're going to get in 
trouble for those loans.
    Mr. Hensarling. In mentioning the market, what has the 
Federal Reserve observed as far as the lending standards of 
lenders today?
    My point would be this, in speaking your testimony, about 
there having to be a balance in some of the prescriptive acts 
that may come out of Congress or the Federal Reserve, but 
everything I read, see, and hear anecdotally is that already 
the market is adjusting to the excesses of the past, and I 
observe that those who may be accused of being the worst 
players and taking the greatest risk, for example, Countrywide, 
or New Century, they received the ultimate punishment of the 
marketplace; they no longer exist.
    So is the market responding to the excesses of the past?
    Ms. Braunstein. Well, I think it's true that the kinds of 
excesses we saw in the past we're not seeing today, but also, 
we're not seeing, frankly, a whole lot of lending today. So 
this is not what we would call a normal marketplace.
    Our concern in writing the HOEPA rules was that we wanted 
to make sure, because we know the markets will revive at some 
point, and when they do, that there are responsible loans being 
made.
    And so, it is important to put a structure in place that 
will take care of the market when it does revive.
    Chairman Gutierrez. Thank you. We should be back in about--
we have one 15-minute vote, of which we have 5 minutes left, 
and two 5-minute votes, so we will be back in about 20 or 25 
minutes. We will be back as quickly as we can, so we would ask 
the witnesses to stay for questions from other members.
    Thank you so much.
    [recess]
    Chairman Gutierrez. Thank you very much for that short 
recess, and we're going to go to Mr. Moore for 5 minutes.
    Mr. Moore, you are recognized.
    Mr. Moore. Thank you, Mr. Chairman, and I guess Mr. 
Hensarling is not here, but I thank him, too, and I want to 
thank the witnesses for their testimony.
    We all know, and we have talked about this, nobody needs to 
tell you our economy faces some of the biggest challenges we 
have had since the early 1930's, and the crisis in our housing 
sector is certainly part of this problem.
    I'm glad our subcommittee is taking a broad view of the 
U.S. mortgage system, so we can discuss how Congress might 
improve it and curb abusively predatory lending practices.
    The last time the housing market was this bad, Congress set 
up the FHA, or Federal Housing Authority, to insure mortgages 
that lenders wouldn't otherwise make.
    This past decade, however, Americans were drawn to 
aggressive lenders, were seduced by easy credit and loans with 
no upfront costs and a few basic underwriting requirements, 
such as verifying income, but the subprime mortgage market has 
crashed and borrowers are flocking back to the FHA, which has 
become the only option for those who lack large downpayments or 
good credit scores.
    The FHA's historic role in backing mortgages is more 
crucial now than at any time since its founding. With all the 
new FHA-insured loans, we are seeing a sharp increase in quick 
defaults where some borrowers are failing to make more than a 
single payment before defaulting.
    In response to this, HUD's Inspector General, Kenneth 
Donohue, said, ``If a loan is going into default immediately, 
it clearly suggests impropriety and fraudulent activity.'' 
That's a quote.
    What are your thoughts on this matter? Should Congress be 
increasing funding in the Inspector General's office as well as 
the FHA to keep up with demand and ensure that basic FHA 
lending requirements are being met?
    In a Washington Post article, the reporter indicates Wells 
Fargo and Bank of America are increasing their requirements on 
certain FHA loans to ensure homeowners can afford the mortgage.
    Should Congress consider tightening the FHA's standards to 
minimize defaults?
    Either witness. Yes, ma'am?
    Ms. Braunstein. I would just say that I think FHA has a 
very important role to play in the mortgage markets, and maybe 
more so than ever now, given the crisis.
    So, whatever needs to be done in order to make sure that 
credit flows, that it's available to people, and that people 
are getting safe and sound loans, I think it would be important 
to do.
    Mr. Moore. All right. Second question. Second and last 
question. I have concerns with adjustable-rate mortgages, or 
ARMs, as they're called, that start with a low monthly payment 
that rises over time. Personally, I don't have a problem with 
that, but I think some people get into those not understanding 
exactly how they work.
    What role have adjustable-rate mortgages played in the 
current housing crisis? Is there a legitimate purpose for 
allowing these kinds of mortgage products to exist? Should we 
put any kind of controls or limitations or regulations on 
adjustable-rate mortgages?
    Ms. Braunstein. We have done that through the HOEPA rules 
that the Fed issued in July. Adjustable-rate mortgages were a 
big problem in the marketplace. A lot of people did not 
understand the terms, did not understand the payment shock, and 
that their loan would reset, and there was a huge difference, 
oftentimes, between the initial rate and the reset rate.
    A couple of things that we did for the loans we define as 
higher-cost loans, include--the HOEPA rules will require that 
they be underwritten at the ability to repay, which means that 
you look at the highest payment that would be made within the 
first 7 years of the mortgage, whereas we heard before that 
loans were often being underwritten at those teaser rates, and 
people couldn't afford the resets.
    We also put a lot of restrictions on prepayment penalties, 
and basically any loan that resets in the first 4 years is 
banned from having a prepayment penalty attached, which would 
allow people to get out of loans much easier, not having a 
prepayment penalty.
    Mr. Moore. Right. Sir, do you have any comments?
    Mr. Antonakes. Yes, Congressman. I would add that I don't 
think traditional ARM products were the focus of the problem, 
and I would hate to cut those products out of the marketplace: 
3/1 ARMs; and 5/1 ARMs.
    As my colleague indicated, it was the option ARM products, 
no-interest loans, that caused the problems and created 
tremendous payment shocks that weren't properly underwritten.
    In Massachusetts, we actually passed a law as part of a 
foreclosure prevention bill signed by Governor Patrick in 2007 
that, for subprime ARMs, it requires a consumer to actually opt 
out of a subprime fixed-rate product, and then there's 
mandatory counseling if they want to proceed with a subprime 
ARM, to ensure that they truly do understand the terms and 
conditions of that credit.
    Mr. Moore. Thank you. Thank you, Mr. Chairman.
    Chairman Gutierrez. And we have the gentleman from Delaware 
for 5 minutes, Mr. Castle.
    Mr. Castle. Thank you, Mr. Chairman.
    Mr. Antonakes, you heard Ms. Braunstein talk about the 
rules that the Fed has issued, which I guess will go into 
effect in October, or something of that nature. We have passed 
legislation, I think it was 3195, here in the House, that was 
not acted on in the Senate, I don't believe.
    Obviously, you have indicated in your testimony otherwise; 
the States have done a few things.
    Can you either, by the use of data or anecdotally, tell us 
if the lending, mortgage lending habits of our banks have 
changed as a result of that? Obviously, they have changed 
somewhat. But is there any clear evidence that there have been 
very substantial changes in terms of some of both the subprime, 
ALT-A, and other mortgage problems that have existed?
    Mr. Antonakes. I think lending habits have changed 
dramatically, primarily because of the collapse of the mortgage 
market. I think there has been a mortgage correction, and many 
loans aren't being written anymore, be they subprime loans, 
ALT-A loans. But that's not to say they won't be written again 
once the market returns and once housing values improve.
    So I think the real opportunity here, you know, we were 
supportive--I testified in support of the Federal Reserve 
Board's HOEPA regulations. I do think there's a historic 
opportunity here for the Congress to act on predatory lending 
legislation, action that has been taken in 35 States to date, 
plus the District of Columbia, but been blunted by Federal 
preemption. We haven't had the opportunity for those laws to 
apply uniformly across the spectrum.
    I think the opportunity here is that Congress can act to 
set a minimum floor and allow States to continue to experiment 
and create laws that further protect the consumers if they so 
desire, as long as they do in fact apply to all entities within 
the jurisdiction of that State.
    Mr. Castle. Okay. Thank you.
    Ms. Braunstein, you said earlier, and we just heard Mr. 
Antonakes say, that mortgage lending is obviously way down at 
this point.
    Is there any evidence that mortgage lending is beginning to 
recover at all, even talking about the last 2 weeks or 4 weeks, 
or whatever? I mean, I was amazed to see, I think it was 
CitiGroup actually had a profit in the last couple of months, 
or something of that nature. I don't know if that came from 
anything dealing with real estate.
    But my question is, is there any--are you tracking that? Is 
the Fed tracking that? Is there any way of judging that it's 
beginning to actually recover?
    Ms. Braunstein. I'm sure that there are people at the 
Federal Reserve who are watching the markets very closely, but 
actually, I'm not prepared to comment on that.
    Mr. Castle. That's okay.
    Another question to you. You testified in your testimony, 
you spelled out the rules that the Fed is looking at for 
adoption in the fall of this year.
    If we were to pass legislation here with some similarities 
to it--you're familiar, I think, with some of the legislation 
that we have dealt with in the past, in 3195, and some of the 
propositions for that--would this complement the Fed rule or 
would it be helpful or harmful, as far as you can ascertain?
    Ms. Braunstein. Some of the provisions in the legislation 
that was dropped in November last year actually mirror what's 
in our HOEPA rules. There are other things that go further and 
other things that are different. And certainly, if you pass 
legislation, we would have to look at what we already have done 
in the HOEPA rules, and we'll have to reconcile that in some 
form or another.
    But the HOEPA rules are scheduled to go into effect in 
October of 2009, so we're hoping that will move forward.
    Mr. Castle. All right.
    Mr. Antonakes, I wasn't going to ask this, but I will. Do 
you, in your position, have any thoughts or anything that we 
should be looking at or considering that we are not doing here 
at the Federal level, either in direct legislation, the kind of 
things that we do in Congress, beyond anything you may have 
testified to?
    Mr. Antonakes. Congressman, I don't believe so. Again, I 
think the most important thing from my perspective is to ensure 
we truly have a level playing field in terms of what the rules 
are, that all entities, be they State licensed, State 
chartered, or federally chartered, are abiding by those rules, 
and that there's universal enforcement.
    Mr. Castle. Very good. Thank you.
    Ms. Braunstein, we are concerned about the need to 
strengthen loan underwriting criteria and standards, but also 
to ensure that borrowers can afford their homes. We would like 
to get the real estate market moving again, to some degree.
    Are these two items completely, at this point, 
counterproductive, or do you feel that we can blend it together 
so that we can have good lending practices, but we can have the 
markets open up again?
    Ms. Braunstein. Yes, I do think that both are possible. I 
do not think that they're mutually exclusive at all.
    In fact, I think the markets will work even better if there 
is responsible lending in the markets and people are able to 
afford their loans and keep their homes.
    Mr. Castle. Thank you.
    I yield back, Mr. Chairman.
    Chairman Gutierrez. Thank you very much.
    Just for the institutional memory of everyone, the HOEPA 
rules are the same ones that came about as a result of the 1994 
legislation that we passed here in Congress.
    Ms. Braunstein. Correct.
    Chairman Gutierrez. Okay. I just want everybody to know it 
took quite a while; I got here in 1994, and the rules finally 
have come about.
    Mr. Sherman, you are recognized for 5 minutes.
    Mr. Sherman. Thank you, Mr. Chairman, and Mr.--author of 
the 1994 bill. What was the name of that bill again, Mr. 
Chairman?
    [laughter]
    Mr. Sherman. Can you see any reason not to simply ban 
stated income, low doc, and no doc loans?
    Ms. Braunstein. We--the HOEPA rules that we issued in July 
do ban these products for higher-cost mortgages. Are you 
talking about across the entire spectrum?
    Mr. Sherman. Across the board.
    Ms. Braunstein. I think we would have to look at that and 
see if there were unintended consequences
    Mr. Sherman. Is it an important national priority to make 
sure that people can cheat on their taxes and still get good 
home loan financing?
    Ms. Braunstein. No, I don't think it is. I think that 
stated income, my understanding of stated income loans is that 
they were used in a small segment of the market for a number of 
years without any problem. However--
    Mr. Sherman. Except for the fact that people could cheat on 
their taxes and get good home financing, which the home 
financiers didn't regard as a problem.
    Ms. Braunstein. Well, and that the problems in the markets, 
though, the mortgage markets, ensued when they became 
widespread.
    Mr. Sherman. Until then, we just had the problem I--can you 
think of any reason why we shouldn't ban what I call teaser 
rate ARMs? That is to say, where the adjustable-rate mortgage's 
initial payments are below what they would be if the--at 
today's index and today's spread?
    Ms. Braunstein. As with many products, I guess there could 
be a case where these could be helpful to somebody, but if 
you're going to keep these products, there need to be 
protections around them, which we have done with the HOEPA 
rules.
    You need to prevent prepayment penalties, which lock people 
in and make it much more difficult for them to get out of the 
loan before--
    Mr. Sherman. If something has lots of harms, and whether it 
ever serves a good purpose at all is simply conjectural, as a 
matter of fact. We can't even figure out what benefit it would 
have, why wouldn't we ban it?
    Ms. Braunstein. Well, I guess, you can always draft a case 
where somebody actually knows that they have a lower income 
right now, but their income is going to rise in the next couple 
years, and it allows them to buy a home that they ordinarily 
would not be able to buy.
    Mr. Sherman. I think that--
    Ms. Braunstein. So you could always construct that 
argument.
    Mr. Sherman. --an awful lot of people are getting 
foreclosed now because they were sure they were going to get--
    Ms. Braunstein. I agree.
    Mr. Sherman. --a couple of promotions, and I think that we 
ought to qualify people based on their current income, not 
based on, ``Well, I'm going to graduate from school, unless I 
flunk out, and I'm going to get a high-paid job, unless there's 
a recession when I graduate.''
    The chairman of the full committee has suggested that we 
prohibit loan originators, that first lender, from being able 
to fully sell without recourse the loan into the secondary 
market. He has proposed, if I got this right, that they retain 
at least 15 percent ownership of the mortgage or 15 percent, 
the first 15 percent of the risk.
    I would like both witnesses to comment on this. Do we want 
to abolish the business plan where a financial institution with 
limited capital is able to lend money and then sell the entire 
loan--lend money, sell the entire loan, and in that way, with 
limited capital, be able to originate a lot of loans?
    Do we want, instead, only to have a business model where a 
portion of your capital is used up as you originate and sell 
off loans?
    I would like both witnesses to respond.
    Ms. Braunstein. As business models are developed for the 
mortgage market going forward, I think it's going to be 
extremely important to look at the incentive structures, and 
certainly some of the problems that we are seeing in the 
current markets or that we saw in the markets are due to the 
fact that there was not an incentive on the part of brokers and 
others to take due diligence and do good underwriting because 
there was no skin in the game, so to--
    Mr. Sherman. So you are saying not only should the loan 
originator have skin in the game, but the independent mortgage 
broker--
    Ms. Braunstein. Possibly. There needs to be incentives.
    Mr. Sherman. --would have skin in the game? These are small 
businesses. Remember, they have to get audited financial 
statements to prove they have $75,000 in capital.
    Are we basically then going to ban the small mortgage 
broker--
    Ms. Braunstein. Well, I'm not saying it would be easy to 
figure out how to structure it, but certainly the incentive 
structure is going to be important going forward, to make sure 
that people are making responsible decisions.
    Chairman Gutierrez. The time of the gentleman has expired.
    The gentleman from Texas for 5 minutes.
    Mr. Marchant. Ms. Braunstein, my concern is the lender who 
has 100 percent of the skin in the game, and that is a person 
who sells their home and takes the note back, and is the 
lender, and keeps the note, and does not try to securitize it.
    Do the rules sweep this whole class of people who make that 
kind of loan into a regulation scheme that puts them at risk of 
being drawn into court?
    Does it contemplate that a lot of the loans that are made 
in America are made by the sellers, and the loan is--of the 
property, and the loan is actually retained by them and is not 
a conforming loan, and has, you know, the underwriting criteria 
used was the person that sold it found the person that bought 
it to be creditworthy?
    And are we putting a lot--and I think across America, there 
are a lot of transactions like this that take place. Are we 
putting that lender in the same category as a mortgage broker 
at a mortgage company?
    Ms. Braunstein. Well--are you talking about your--the 
legislation that was introduced in the House--
    Mr. Marchant. Yes, the rules or the legislation. I mean--
    Ms. Braunstein. The HOEPA rules do not deal with that 
issue, the new HOEPA rules that we introduced. The legislation 
that was introduced in 2007 by the House deals with assignee 
liability, and in particular, that was to try to close a gap 
and put some responsibility for the products onto the 
securitizers and assignees.
    Mr. Marchant. So as long as a person has no contemplation 
to securitize, then they need not worry about this legislation?
    Ms. Braunstein. Well, if they're holding the note, they're 
holding--they have plenty of skin in the game.
    Mr. Marchant. Yes. My next question has to do with that 
group of--can you make a loan that specifically on its face is 
prohibited by law to be securitized, so that a life insurance 
company that intends to originate mortgages for their own 
portfolio, which used to happen, and banks for their own 
portfolio, can know that, when they originated that loan, that 
it's specifically prohibited being put into a pool and 
securitized and sold in the secondary market, and if that 
happens, are banks and lenders going to be prohibited from 
making loans that they might make just for a business reason, 
for wanting to have a portfolio loan?
    Ms. Braunstein. I have to admit, I'm not sure I understand 
the scenario.
    Mr. Marchant. Well, if you securitize--maybe Mr.--
    Ms. Braunstein. I don't think he does.
    Mr. Marchant. Okay, I'm sorry. Do you have an answer for 
that? No. Okay. I'm not explaining myself properly.
    What I'm concerned about is the small lender that makes 
loans for their own portfolio, and I'm afraid that these small 
lenders will get captured in some of these rules and in future 
legislation, that will basically curtail a great part of real 
estate business out there that never enters into the banking 
scheme and commercial banking. That's my biggest concern.
    Ms. Braunstein. If lenders are doing responsible lending, 
then there should not be a problem. They should not be 
prohibited. There should be nothing in the rules or--either our 
rules or legislation, that would prohibit that.
    I think it is always important to look at any potential 
regulation or statutes to make sure that there are not 
unintended consequences that would inhibit responsible lending.
    Mr. Marchant. And that would be my word of caution, because 
in many instances, the--I have had people call my office and 
say, ``Can I do--under these new rules, will I be able to owner 
finance, under these rules, will I be able to make loans on a 
property that I sell?''
    And I've said, ``I don't think you will be affected.'' But 
it has had kind of had a chilling effect on some of the owner-
sellers.
    Thank you, sir.
    Chairman Gutierrez. The gentlelady from New York, Ms. 
Maloney, is recognized for 5 minutes.
    Mrs. Maloney. I thank the gentleman for yielding and for 
organizing this hearing, and I welcome both panelists.
    Beyond working on mortgage reform, this committee is 
working on regulatory reform, including a discussion of 
creating a systemic risk regulator, and I would like to ask 
each of the witnesses, could you discuss how you see these 
mortgage reforms working in concert with regulatory reforms? 
How do you see a systemic risk regulator overseeing parts of 
the mortgage market?
    Mr. Antonakes. I believe that a systemic risk regulator 
would be complementary to regulatory reform and structure on 
the mortgage side where the States are most closely focussed. 
You know, we are working through a number of initiatives, 
including the nationwide mortgage licensing system, to increase 
transparency and effectiveness for consumers, and increase and 
improve upon a partnership with Federal regulators.
    However, what we're doing is more focused, I believe, on 
the model of institutions that we're supervising. Certainly, I 
believe there are institutions that have either been largely 
Wall Street institutions, that have been largely unregulated, 
and that pose tremendous risk to our financial system, and 
there should be a regulatory structure in place which better 
captures that risk, and is frankly more stringent, given the 
risk to the financial system.
    So I think the system has to be tailored very carefully to 
ensure that the greatest degree of oversight exists for our 
highest-risk institutions, and that there continues to be 
collaborative State and Federal action on those institutions, 
as well as those that frankly pose less risk to the system. And 
the model hopefully is flexible enough to ensure that those 
institutions that have less risk can continue to exist and 
compete well in the marketplace.
    Mrs. Maloney. So you see the systemic risk regulator 
overseeing a level of regulatory relief, say, across the board, 
or regulation, even-playing-field regulation that would protect 
them before getting to systemic risk?
    Mr. Antonakes. I think they would have to work in a 
complementary fashion. I don't think you could remove all the 
risk in an entity and just have it solely based within the 
systemic risk regulatory. I think there would have to be 
coordination between the different agencies to ensure proper 
oversight, and I think that is achievable.
    Mrs. Maloney. And Ms. Braunstein? Nice to see you again.
    Ms. Braunstein. Nice to see you, too.
    I also think a systemic risk regulator would have to be 
cognizant of all the risks in an organization, and that would 
include consumer protection risks.
    As we have certainly seen in the current situation, 
consumer protection was actually somewhat like the canary in 
the coal mine in terms of other things going on, so it would be 
very important that that be a strong component of whatever is 
developed going forward.
    Mrs. Maloney. Some say that maybe we should have a separate 
regulator for consumer, separate from the systemic risk. Do you 
think it should be all together, or do you think it should be 
separate?
    Ms. Braunstein. Well, I don't have an answer to that 
question. I think that, obviously, these are issues that we're 
going to be exploring, all of us, in the agencies and on the 
Hill, going forward.
    I think while there is a certain appeal to having a 
separate agency, I would say that I also think that there is a 
lot to be gained in terms of crafting rules that do not have 
unintended consequences and interrupt the flow of credit; there 
is a lot to be gained from the research analysis and the 
supervision that is done in the banking agencies.
    Mrs. Maloney. A number of States, including my home State 
of New York, have really been at the forefront of State-level 
mortgage reform.
    Which States would you suggest the committee look towards 
for best practices and what advice would you give the committee 
as we discuss enacting nationwide reforms vis-a-vis existing 
State laws?
    Mr. Antonakes. I think there are a number of States you 
could look to for those initiatives. I think certainly New York 
is one. North Carolina is another. I believe my State of 
Massachusetts has been very progressive in this area, as well 
as the Commonwealth of Pennsylvania, and several other States, 
and we would be happy to provide a more exhaustive list, as 
well as a list of initiatives from those States to the 
committee, as well.
    Chairman Gutierrez. I'm sorry. I can't see. It is getting 
to be that time of life.
    Mr. Lance, for 5 minutes, is recognized.
    Mr. Lance. Thank you, Mr. Chairman.
    Good afternoon to you both.
    Regarding the issue of the systemic regulator, to follow up 
on the questions of the gentlelady from New York, it would seem 
to me that I would favor one shop in this regard, and then 
perhaps have within that area several different agencies 
underneath it, and I would ask you to follow up further on 
that.
    Do you have an opinion as to whether it just should be one 
overall, as opposed to having a separate place for consumers in 
our society?
    Ms. Braunstein. As I say, I don't have a specific 
recommendation at this time. I mean, these are issues that we 
are certainly discussing, at the Federal Reserve, you know, 
were certainly being discussed in many venues.
    I would say that there are a number of things that need to 
be looked at, in the benefits of where that is, and there are, 
you know, pros and cons on both sides of the argument.
    Mr. Lance. And from your experience at the State level in 
Massachusetts--and I come from a State legislature in New 
Jersey, where I served for 18 years, and I have great respect 
to what States are doing in this regard--do you have an opinion 
based upon your experience in Massachusetts?
    Mr. Antonakes. Yes, I do, Congressman.
    I don't believe you can divorce the safety and soundness 
and compliance risk. I think they have to be housed in the same 
entity.
    Mr. Lance. That would be my thought process, as well.
    Mr. Antonakes. But also, I believe checks and balances are 
incredibly important, and I would think that one single Federal 
regulator, while perhaps eliminating some redundancy, would 
have enormous power, and that would create risks in its own 
right.
    Mr. Lance. I suppose, but I would not want to see a system 
where we didn't know where to go, and a confusing system, and 
an overlapping system, and from my experience in the State 
capitol, sometimes you don't know where to go, and certainly 
this is an area where there has to be continuity across the 
board, given the fact of what has occurred over the last year.
    Mr. Antonakes. I don't disagree with you. Each agency has 
to have a charge that is well understood by the public, 
certainly, and by consumers.
    I mean specifically that it should be a cooperative effort 
between the State and Federal agencies that share supervision, 
as opposed to just one simple Federal agency that makes the 
final call on all decisions.
    Mr. Lance. And from your perspective, given your expertise 
at the State level, are you concerned regarding a Federal 
system where, if there is not technically preemption, there is 
the view that all is wise that comes from Washington and not 
from the various State capitals?
    Mr. Antonakes. Well, I certainly do have concerns in that 
area. I believe that the advantage of a local regulatory is 
that I am closest to my consumers. If there's an issue 
somewhere in my State, I can have examiners at that facility 
within hours.
    And I think while we have great working relationships, 
generally, with our Federal counterparts, I think an issue that 
occurs in my State probably gets my attention quicker than it's 
going to from a Federal agency in Washington.
    Mr. Lance. Thank you. And of course, because our banking 
system is, to some extent, State regulated and Federal 
regulated, so long as that continues, it seems to me there has 
to be some sort of recognition of your responsibilities and the 
responsibilities of your counterparts across the country.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Chairman Gutierrez. The gentleman yields back.
    The gentleman from Charlotte, North Carolina, Mr. Watt, for 
5 minutes.
    Mr. Watt. Thank you, Mr. Chairman.
    I will start by complimenting Mr. Lance. I thought we had 
lost all of our States' rights advocates, and I'll be looking 
forward to adding him to my States' rights caucus, as one of 
the people who has been trying to convince multiple members on 
your side that we should not set a Federal preemptive standard, 
but set a Federal floor standard that continues to allow State 
attorneys general and State regulators to be involved in 
regulating these loans. So it's wonderful to know that I have 
an ally on that side on that issue.
    I was going to ask about that, but he did a magnificent job 
of fleshing that issue out for me, and so I will let your 
answer, Mr. Antonakes, stand on that point. It's probably 
better made to him than it would have been made to me.
    Ms. Braunstein, there has been a relative sea change in 
this whole area of regulation of mortgage lending since my 
colleague, Brad Miller from North Carolina, and I started this 
discussion about--how many years ago was it, Brad?--6 years 
ago, and we finally got the regulators, after the horse was out 
of the barn, to issue some regulations that move in the 
direction of regulating the players in this industry.
    The one question I want to be clear on is whether you all 
have an opinion as to whether those regulations ought to 
preempt any additional legislation that is being contemplated 
by Congress. Do you think you have exhausted the whole field, 
or is there more to be done, in your estimation?
    Ms. Braunstein. Well, I think that we should constantly be 
vigilant and look for opportunities to improve any law or 
regulation that's out there, so I think that there may be some 
additional things.
    As I said in my testimony, we applaud a number of the 
things you have done in the bill. A lot of it overlaps with 
things that we have done. And we are just saying that if you 
intend to move forward with this, there are some areas of 
clarification that would be needed.
    Mr. Watt. And have we gotten the benefit of your written 
comments about those areas of clarification, rather than just a 
general statement that there are some issues?
    Ms. Braunstein. I know that when the bill was introduced 
back in 2007, we had Fed staff working closely with your staff 
on the Hill, and we are happy to do that again as you move 
forward on reintroducing it.
    Mr. Watt. And there are some things, I take it, that you 
cannot do in a regulatory fashion, such as determining what the 
private rights of action and the penalties and the--
    Ms. Braunstein. --liabilities.
    Mr. Watt. --things of that kind. We have to do that at the 
legislative level; don't we?
    Ms. Braunstein. Yes.
    Mr. Watt. Okay. All right.
    I think that's what I wanted to establish. I didn't want to 
proceed with the assumption that we were doing something that 
was good, that--when other folks were saying we have done 
enough, so we will keep moving, or trying to move in the 
direction of tightening up these regulations, and I would 
welcome, I'm sure, the chairman of the full committee and the 
chairman of the subcommittee and Mr. Miller and I in 
particular, since we have been at this for a long time, would 
welcome those clarifications to which you made reference.
    Thank you. I yield back.
    Chairman Gutierrez. The gentleman yields back.
    Mr. Neugebauer, please, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Ms. Braunstein, recently HUD has gotten a revised 
disclosure statement out. In House Bill 3195, I introduced an 
amendment that basically would bring forward a universal 
disclosure box.
    My opinion is that we don't need longer disclosures, we 
need better disclosures, and somehow somebody got the message 
that a long disclosure was a better disclosure for the 
borrowers.
    And, you know, the other piece of it is, it would help, I 
think, everybody if HUD and the Fed maybe had coffee together 
and sat down and maybe tried to figure out, have a universal 
consumer disclosure so that there's more clarity.
    And what needs to be on the front of that form, you can--if 
the lawyers want to lawyer up, let them lawyer up the back, but 
what we need to do is, while the lawyers are at coffee, we need 
to sit down and let people that are actually in the business, 
get consumers and lenders together, and talk about what are 
really the important things.
    And there are 10 or 12 things that a consumer needs to know 
about, you know, the contract that they're about to sign, and 
it needs to be in big letters, and, you know, what's the actual 
interest rate, what's the payment, you know, some of those 
things, the highest interest rate during this contract can be 
X, if it goes to that, you would not qualify for this--I mean, 
sitting down.
    Why do we need two disclosure statements, and why can't we 
look at thinking outside of the box with a new box?
    Ms. Braunstein. Well, we issued a mortgage reform report 
back in the 1990's that also recommended one joint disclosure, 
so we have been an advocate of that. We have made overtures to 
HUD over the last few years. We have offered to work with them 
on their RESPA reform. And I can just say that we stand ready 
to do so.
    Another comment I would like to make, in terms of us moving 
forward on our TILA disclosure, which we're doing now, another 
important part, I agree with you that more disclosure is not 
necessarily better.
    It is our strong opinion, based on our experiences in 
working on mortgage disclosures, as well as previously working 
on credit card disclosures, that consumer testing is a very 
important part of developing disclosures, because you can't 
really know if consumers are going to understand these and get 
the information they need until you go out and test them, and 
that's what we're doing now.
    The new disclosure we plan to bring forward mid-year is 
going to be consumer tested--will have been consumer tested--
and we will continue to do that with disclosures.
    It's not the length of the disclosure that's as important 
as making sure it's well tested.
    Mr. Neugebauer. Well, then, I would say that what would 
make sense to me is, let's test the disclosure, let's sit down 
with the consumers, let's ask them what is the information that 
they think they need to know in order to make an informed 
decision.
    Ms. Braunstein. That is the first part of the testing 
process, is we do interviews with consumers to ask them, ``When 
you are going to buy a mortgage, or when you are going to get a 
credit card, what are you looking for, what is important to 
you?''
    And from that information is how we then design disclosures 
that we then go in and test again, and make sure the consumers 
are actually getting that information.
    Mr. Neugebauer. And so you said you have made overtures to 
HUD in the past, and you have not gotten a positive response, 
evidently?
    Ms. Braunstein. Well, I think they were on track to get 
RESPA done by the end of last year, and they were moving on 
that track to do so.
    Mr. Neugebauer. Well, this is the change age, and maybe 
what we need to do, Mr. Chairman, is look at seeing if we can 
get some of these agencies to sit down together, because I 
think, you know, a uniform, universal disclosure for consumer 
credit, it almost makes too much sense, and also being able to 
get the people at the table who are borrowing money to find 
out, you know, the things that they need. On the front, you 
know, then you have these 10 boxes or however many boxes that 
is, and then if you need to let the lawyers cover themselves on 
the next 25 or 30 pages, well, let them do that.
    But the borrower doesn't really have a good way to shop 
consumer credit, because these disclosures are so convoluted, 
so long, that you're trying to compare 3 pages of a good faith 
estimate to 3 pages of another lender's good faith estimate, 
really, where if we had the hull of that in a consolidated way 
on the front page, at least, I think it makes sense.
    So I look forward to working with--the chairman left me--
look forward to working with the other side to do that.
    Mr. Clay. [presiding]. I thank the gentleman from Texas.
    I recognize the gentleman from Texas, Mr. Green, for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman.
    And I would like to continue where my colleague from Texas 
left off, because Representative McHenry and I introduced an 
amendment that passed by voice vote out of this committee to 
have a one-page disclosure. It was a part of H.R. 3915.
    H.R. 3915 passed the House of Representatives on November 
15, 2007, but did not pass the Senate.
    So I would look forward to continuing the effort that we 
have put forth to get that one-page disclosure that 
Representative McHenry and I introduced and that passed out of 
committee, was in fact a part of a bill.
    Moving on from disclosure to originator compensation, you 
did not prohibit certain originator compensations, one known as 
the yield spread premium. What you did was move to disclosure 
of originator compensation.
    And in so doing, I am moved to ask, what happens when the 
disclosure requirement is not met?
    Ms. Braunstein. Well, actually, what we did is we proposed, 
when we put out proposed HOEPA rules, in December of 2007, we 
had in there a disclosure provision for the yield spread 
premium for broker compensation.
    We then, between then and when we finalized our rules in 
July of 2008, we consumer tested that idea, and frankly, it did 
not work well, because that is a very complex concept, and we 
found that not only did consumers not understand what a yield 
spread premium was, it not only confused them, it actually 
could hamper them in decision making, so we--
    Mr. Green. Permit me to intercede--
    Ms. Braunstein. Well, I just want to say we withdrew that 
from the final rule, so we did not mandate disclosure of yield 
spread premiums. We are working--
    Mr. Green. Let me do this, if I may, because I'm going to 
lose my time in just a moment.
    Ms. Braunstein. Okay.
    Mr. Green. What I would like to know is this. If you move 
to disclosure, what is the penalty for failure to disclose, if 
there is a penalty?
    Ms. Braunstein. Well, I'm not sure we are moving towards 
disclosure. I mean, that's what I'm saying. We are working on 
that issue now. We are considering other options--
    Mr. Green. What other options are you considering?
    Ms. Braunstein. --including restrictions about having--
    Mr. Green. What other options would you consider, other 
than disclosure or elimination?
    Ms. Braunstein. Restrictions--
    Mr. Green. Say again?
    Ms. Braunstein. Restrictions on yield spread premiums, 
potentially bans on yield spread premiums. We are looking at 
all possibilities--everything is on the table.
    Mr. Green. So right now, it's safe to say that you have not 
come to a conclusion as to how yield spread premiums--
    Ms. Braunstein. No.
    Mr. Green. --should be addressed?
    Ms. Braunstein. That will be addressed in the rules that 
will be coming out this summer.
    Mr. Green. All right. Thank you.
    Let's move next to a provision for people who can pay a 
monthly payment, and who don't have traditional credit.
    We have some people who can afford a mortgage payment, but 
they don't have traditional credit.
    We have had the circumstance wherein persons didn't have to 
reveal what their income was, and they were able to get some 
loans, no doc loans, but we do have a class of people who can 
actually make a monthly payment, but they don't have 
traditional credit.
    Has anything been done to address this class of people?
    Ms. Braunstein. Well, in our HOEPA rules that we just 
issued, in terms of people documenting income, we allow 
flexibility in there that--
    Mr. Green. No, no, no. Excuse me. I need to intercede. And 
I don't want to be rude, crude, and unrefined, but I have to 
use the time efficaciously.
    I'm talking now about people where you can clearly document 
that they can afford the loan, they can make the payment, but 
they don't have traditional credit. They pay light bills, gas 
bills, water bills, and phone bills, but they don't have a car 
note, they don't have a house note, and some other things.
    Ms. Braunstein. And that's what I'm saying. There's 
flexibility in the current HOEPA rules to look at alternative 
means of documentation of credit.
    Mr. Green. So alternative credit scoring is something that 
you're looking at?
    Ms. Braunstein. It is definitely not prohibited. It can be 
looked at by lenders to make their decisions.
    Mr. Green. Okay. And my final comment would be, as you 
embrace yield spread premium, if you move to the concept of 
disclosure, ask yourself what is the penalty for failure to 
disclose. I think that's going to be important, because my 
suspicion is that we'll get a certain amount of failure to 
disclose.
    And I would like for your fellow witness to testify, if you 
would like to give a commentary.
    Mr. Antonakes. Congressman, I would only add that, in our 
examinations, if a disclosure is not provided, then it has been 
the consistent position of our agency that any fee collected 
has to be reimbursed to the consumer in full.
    Mr. Clay. The gentleman from Texas' time has expired, and I 
recognize the gentleman from North Carolina, Mr. Miller, for 5 
minutes.
    Mr. Miller. Thank you.
    Ms. Braunstein, if you--I strongly discourage using 
disclosure as the remedy for yield spread premiums. The 
borrower relies upon the broker to tell them what it is they're 
signing, and I do not think disclosure, having them sign a 
form, is going to work.
    I know after the proposed rules in December, there were 
many commenters who said roughly that. I was one of them. Do 
not remedy the problem with disclosure. It is not going to 
work.
    If you allow a payment at all, at closing, because the 
borrower is paying a higher interest rate than the interest 
rate, the par interest rate, what they qualified for, it should 
be a payment made directly to the borrower and not to anybody 
else.
    You mentioned that the CRA was not the cause of our current 
financial problems. I think there has been a study by the 
Federal Reserve Board that 6 percent of subprime loans in the 
period were by institutions subject to the CRA, the depository 
institutions, banks and thrifts with federally insured 
deposits, in neighborhoods or to borrowers that the CRA 
encouraged lending to.
    Ms. Braunstein. Yes.
    Mr. Miller. Is that correct?
    Ms. Braunstein. That is correct.
    Mr. Miller. Six percent. And how has been the default or 
foreclosure rate among that 6 percent, as opposed to other 
subprime loans?
    Ms. Braunstein. I think that we have found that the 
foreclosure, the delinquency rates in those areas are no 
different or no worse than those that you find in higher-income 
areas that are not CRA targeted areas.
    Mr. Miller. Okay. On assignee liability, I have been 
generally sympathetic with the argument that someone buying a 
loan can't know everything that happened at closing, can't know 
ever oral representation, every discussion between the borrower 
and the lender, and that not all the sins of the originator 
should necessarily be attributed to an assignee.
    But looking at the loans made in 2004 to 2006, there's a 
theory at law of constructive knowledge: if you didn't actually 
know something, you had other facts that should have let you 
know something was going on.
    Ninety percent of the loans made, subprime loans, which 
jumped from 8 percent of all loans to 28 percent, 90 percent of 
them had a reset, a quick adjustment after 2 or 3 years, that 
went up 30 to 50 percent in monthly payments; 43 to 50 percent 
did not have full income documentation; 70 percent had a 
prepayment penalty.
    Do you think the assignees--the people buying those 
mortgages--didn't know something was up at the retail level?
    Ms. Braunstein. Well, obviously, it is hard to speak for 
them, but it is hard to imagine that if due diligence was done, 
that you wouldn't see something amiss.
    Mr. Miller. Thank you. I have no further questions.
    Mr. Clay. The gentleman yields back. I recognize the 
gentleman from Georgia, Mr. Scott, for 5 minutes.
    Mr. Scott. Well, I have a, kind of like a two-pronged 
question that I would like for you to respond to, if you would.
    I'm concerned about this just sort of reviewing this issue 
about the spread and increase of predatory lending practices, 
and I understand that subprime mortgages have allowed for a 
large number of families to purchase homes that they would not 
otherwise have been able to do, which conceivably is a good 
thing.
    However, I'm concerned about the nature and the targets of 
these loans and lending practices. There has been an inordinate 
percentage of minority families who have been tied up in what 
we can affectionately call a mess, and the facts are 
disturbing, at best, as black and Hispanic and individuals have 
been disproportionately borrowing in the higher-cost subprime 
market.
    That has been because there have been certain incentives in 
place that steer people to these subprime lending markets, and 
I think in all of this area, this is sort of the meanest part 
of this predatory lending that, you know, I don't think we're 
really addressing enough; and that is, you have people here who 
don't need to be steered into subprime lending, but are steered 
into subprime lending.
    And I'd like--you know, families with perfectly good 
credit, in some instances, have been swindled, they have been 
blindsided into these less than sound mortgage deals, and I 
want to know what steps are being taken towards stopping this, 
and what your thoughts are on having a mandatory standard for 
mortgage companies, having an increased number of people 
available to help people, and to be able to stop this 
purposeful effort of targeting Hispanic and black families and 
people, and short-circuiting them, and steering them into an 
area where they ought not be.
    I mean, this is a terrible thing to do, and I would like to 
get your thoughts on that, and maybe a mandatory standard would 
work, or just how you feel about that. Are we doing enough 
about it?
    Ms. Braunstein. The HOEPA rules that we issued in July of 
2008 will hopefully address a lot of these problems, because 
the features of these products that people were steered into 
will no longer be allowed to occur in these markets, in the 
higher-cost markets, and the markets where people were steered, 
and that does serve as a floor. It is not a ceiling, so there 
is also room for the States to improvise and to experiment and 
to go further with those rules.
    Mr. Antonakes. Congressman, I would add that, and agree, 
that responsible subprime lending was advantageous to the 
market, but what has occurred over the past few years is hardly 
responsible lending, and yes, folks have been targeted by 
unfair and deceptive acts and practices.
    We continue to examine lenders and brokers now on an only 
surprise basis to try to ferret out fraud. We have taken 
numerous enforcement actions and have numerous criminal actions 
pending with law enforcement agencies.
    Also, I reject the notion that CRA caused this problem. 
Quite to the contrary, in Massachusetts, Governor Patrick 
signed legislation to extend our State CRA law, which already 
exists, and applies to banks and credit unions for the first 
time to non-bank mortgage lenders, so that they do have a 
responsibility to lend on appropriate terms throughout the 
communities within which they do business, including low- or 
moderate-income communities.
    We're starting our CRA exams of non-bank mortgage lenders 
next month.
    Mr. Scott. Okay. Just finally, I know my time is winding 
down, but do you think that as we move to get some reform to 
the mortgage system, that in a way, as we move to correct some 
of these things and address some of these issues, by bringing 
forth some of the reforms that were in our previous legislation 
that did pass the House, did not pass the Senate, Mr. Frank 
provided leadership on that last year--which I thought was 
needed--so that in tightening up in these areas, making people 
more responsible, making sure people can pay back the loan, 
putting these kinds of restraints to prevent the abuses, would 
that in fact, in your mind, lessen the credit availability to 
some of the very people that we're protecting?
    In other words, would we come out of this thing having 
responded by over-responding, and then drying up the credit, 
and then the very people that we're trying to get homes, we've 
tightened it up so that a lender is not going to lend now, 
because they think it's risky, and we--
    Mr. Clay. The gentleman from Georgia's time has expired.
    Mr. Scott. Would you answer that for me--
    Mr. Clay. And I recognize--no--I recognize the gentleman 
from Missouri. We have to respect his time, too. Mr. Cleaver is 
recognized for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Exhaustingly, I have been running from Homeland Security. I 
apologize for not being here.
    I only have one question, maybe two parts to it, which is, 
as we are contemplating legislation, should we consider some 
part of this legislation as a regulatory mandate on brokers and 
appraisers? Should they be regulated?
    Yes?
    Mr. Antonakes. The mortgage broker industry is regulated, 
on a State basis, and we have taken numerous actions to improve 
standards within the mortgage broker business.
    In addition, I would submit that there's something called 
third-party risk, and that is that the lenders or the banks 
that choose to outsource their origination to mortgage brokers 
have a duty to oversee those brokers, and to the extent that 
bad acts or practices are allowed to exist, then I believe 
supervision of those entities doing business should also be 
brought to task, as well.
    Mr. Cleaver. In Missouri, we have a real estate board, but 
I guess the question is, do you believe we need to have a 
national, uniform regulation of mortgage brokers?
    Mr. Antonakes. Well, the SAFE Act, which was part of 3915, 
is what was enacted, creating this uniform platform for 
licensing and supervision of all mortgage originators 
throughout the country.
    We now believe that 40 States will be on the system by the 
end of next year, and I believe the standards are in place and 
the oversight will be in place, as well, to ensure higher 
standards from the mortgage origination side. I think there 
still needs to be work on the funding side, as well as the 
securitization side.
    Mr. Cleaver. What about appraisers?
    Mr. Antonakes. Appraisers, there are a lot of folks who 
were involved in the bad practices that existed, and I wouldn't 
limit it to mortgage brokers or to appraisers. Certainly, there 
were bad acts that existed there, but I would suggest closing 
attorneys, real estate brokers, Wall Street investment firms, 
securitization, and the rating agencies were involved, as well.
    Ms. Braunstein. I would also add, on appraisers, that we 
did, when we enacted the HOEPA rules, we also enacted a general 
prohibition for all mortgages on the coercion of appraisers or 
in any way trying to influence the value that they come to.
    Mr. Cleaver. Is there a penalty provision? I mean, how do 
we--
    Ms. Braunstein. Well, anything under TILA is subject to 
truth in lending penalties, and we would certainly, when we're 
out examining financial institutions, we'll be looking at those 
kinds of issues.
    Mr. Cleaver. Thank you, Mr. Chairman. I yield back the 
balance of my time.
    Mr. Clay. The gentleman from Missouri yields back his time.
    Let me thank the two witnesses for your testimony, as well 
as your responses. This panel is dismissed and now we will take 
a slight break to set up for the second panel.
    [recess]
    Mr. Clay. The committee will come to order.
    On our second panel today, we have David Berenbaum, who is 
the executive vice president for the National Community 
Reinvestment Coalition. Thank you for being here today.
    Julia Gordon is the senior policy counsel for the Center 
for Responsible Lending. So good to see you.
    Margot Saunders is counsel of the National Consumer Law 
Center, and is testifying on behalf of both the National 
Consumer Law Center and the National Association of Consumer 
Advocates. And welcome today.
    Stephanie Jones is the executive director of the National 
Urban League Policy Institute. Welcome to the committee.
    And Gracia Aponte--did I say that right? Okay. 
``Graciela,'' I'm sorry, Aponte is an analyst at the National 
Council of La Raza. Welcome to the committee.
    And our final witness is Donald C. Lampe, who is a partner 
with the firm of Womble Carlyle Sandridge & Rice, PLLC, in 
Charlotte, North Carolina.
    Thank you all for being here today, and we will start with 
Mr. Berenbaum. You may begin. You have 5 minutes.

    STATEMENT OF DAVID BERENBAUM, EXECUTIVE VICE PRESIDENT, 
           NATIONAL COMMUNITY REINVESTMENT COALITION

    Mr. Berenbaum. Thank you, Mr. Chairman, Ranking Member 
Hensarling, and members of the committee. I'm honored to 
testify today on behalf of the members of the National 
Community Reinvestment Coalition on the subject of mortgage 
lending reform, a comprehensive review of the American mortgage 
system.
    Yesterday, Federal Reserve Chairman Ben Bernanke, in his 
remarks before the Council on Foreign Relations, stated that 
the financial system must be regulated, to quote him, ``as a 
whole, in a holistic way,'' and acknowledged that the current 
financial crisis has, ``revealed some shocking gaps in our 
regulatory oversight.''
    To speak candidly, the sharp economic decline and distress 
in the mortgage market resulting from the foreclosure crisis 
can be traced both to out-of-date consumer protection laws and 
failed regulatory oversight.
    Loopholes in the law and inadequate regulatory enforcement 
allowed abusive and problematic lending to flourish. The 
foreclosures that arose from predatory lending have not only 
severely undermined the financial stability of working families 
and communities, but also are now weakening the credit markets 
and diminishing overall activity and performance.
    Massive foreclosures are spurring a self-reinforcing cycle 
of defaults, now compounded by rising unemployment. Multiple 
studies by Credit Suisse and others have documented the impact 
of, in fact, this reality. Over 600,000 jobs were lost last 
month, and in fact now unemployment is at 8.1 percent, the 14th 
consecutive month of job losses in our Nation.
    The foreclosure crisis has destroyed significant amounts of 
national and family wealth, and, since the onset of the crisis, 
home prices have declined by at least 25 percent nationwide.
    We request that you consider four emerging issues at this 
time:
    First, we call for an investigation with regard to spikes 
in foreclosure within the FHA loan program. It is completely 
unacceptable at this time that a number of consumers who are 
simply 1 month into their FHA loan program payments are now 
defaulting. That documents widespread fraud, ongoing fraud, 
regardless of loan product in our system today, and the need 
for anti-predatory lending ordinances.
    Second, since 3915 was originally enacted, there is 
substantial evidence that the rating agencies played a crucial 
role in the entire crisis. NCRC has filed letters of grievance 
to the SEC and three discrimination complaints to the United 
States Department of Housing and Urban Development, documenting 
the impact, the foreclosure impact, in minority, predominantly 
African-American, low- to moderate-income, and Latino 
communities.
    Third, the widespread availability of foreclosure ``scams'' 
represented to be foreclosure assistance programs to consumers. 
Consumers again and again today are going to these for-profit 
con artists and having tens and tens of thousands of dollars in 
communities across the country stolen from them.
    And then the abusive use of broker price opinions. It's a 
race to the bottom right now. In fact, real estate 
professionals are playing a role in managing REO, and also 
selling that property, a clear conflict of interest, 
compounding appraisal valuation issues, originally pushing to 
increase value, now in fact lowering the tax base around the 
Nation.
    We believe that 3915, when it passed the House, was a 
significant step forward. However, we would like you to take a 
serious look at, in fact, the companion bill that, in the 
Senate, though it did not move, was, in fact introduced, that 
looks at some very difficult issues, such as assignee 
liability, looking at servicing, and other areas. We believe 
that that review would be extremely positive, in fact, moving a 
bill ahead.
    I would like to address the issue of the Community 
Reinvestment Act, which also emerged in the first panel. There 
are any number of solutions to where we are in the current 
mortgage crisis.
    CRA was not, I say again not, a factor in the current 
crisis. Multiple studies, not solely out of the Fed, have 
documented that CRA played a positive role in sustainable 
mortgage loans, and in fact, NCRC strongly argues for what 
Massachusetts has done, on a national level, to expand the 
Community Reinvestment Act to reach many in the marketplace: 
investment bankers; large credit unions; financial service 
corporations; Wall Street; and others.
    Last, we also recognize that there's a need for a national 
financial product safety commission to really take a look at 
what is in a consumer's interest. I respectfully submit to you, 
with my 10 seconds of remaining time, that what is in a 
consumer's interest is in corporate America's interest. 
Responsible lending benefits all.
    Thank you.
    [The prepared statement of Mr. Berenbaum can be found on 
page 124 of the appendix.]
    Chairman Gutierrez. Ms. Gordon.

 STATEMENT OF JULIA GORDON, SENIOR POLICY COUNSEL, CENTER FOR 
                      RESPONSIBLE LENDING

    Ms. Gordon. Thank you, Mr. Chairman, Ranking Member 
Hensarling, and members of the committee. Thank you so much for 
inviting me to speak about mortgage lending reform.
    I am senior policy counsel at the Center for Responsible 
Lending, a nonprofit, nonpartisan research and policy 
organization dedicated to protecting homeownership and family 
wealth.
    We're an affiliate of Self-Help, which makes responsible 
home mortgage loans to people who have not been able to access 
mainstream credit.
    Our lending record amply demonstrates that carefully 
underwritten mortgages, with fixed rates and full payments, can 
create sustainable homeownership. Even in the current economic 
climate, our mortgages are still performing far better than the 
dangerous subprime or non-traditional mortgage products.
    I need not belabor the point, but the mortgage market looks 
vastly different today than it looked when this body passed 
H.R. 3915 in November of 2007. That's why we think we need to 
start from scratch, in crafting smart, sensible rules of the 
road for the mortgage market.
    There are several important principles that should underlie 
any new legislation:
    First, the law must be simple and straightforward. Last 
year's law had a structure not unlike one of those Russian 
nesting dolls. Although it established some important 
protections, we feared that it would have been hard for 
consumers to understand, tricky for industry to follow, and all 
but impossible for regulators to enforce.
    Where possible, bright lines and clear rules will benefit 
all market participants, from the consumer through the 
investor.
    Second, the law should ensure that mortgage originators 
serve the best interests of their customers by putting them 
into appropriate products with sound terms and conditions. No 
loans should be made on the basis of stated income. We should 
ban prepayment penalties and yield spread premiums. These fees 
reward lenders and brokers for locking families into loans that 
are bad for them and bad for the economy. And for heaven's 
sake, originators should have to check whether the customer can 
afford a mortgage before giving it to them.
    Third, the secondary market should share responsibility for 
the terms of the loan. A lesson from the recent meltdown is 
that every player in the mortgage chain needs to have skin in 
the game. When Wall Street purchases high-risk mortgages and 
receives the corresponding financial benefits, it also needs to 
accept responsibility for the risk placed on consumers and what 
its purchases will encourage at the origination level. In that 
way, the market can accurately price risk and police itself.
    Fourth, the law should require mortgage servicers to 
attempt to save a family's home before foreclosing. Had this 
requirement been in place 2 years ago, it could have saved 
hundreds of thousands of homes. FHA and VA already require this 
of their servicers, and with the streamlined loan modification 
templates developed recently by the Treasury Department, 
there's no reason why all servicers cannot easily comply with 
such a requirement.
    Fifth, consumers need to be able to assert their rights in 
a timely and meaningful way. While public enforcement is both 
powerful and necessary, there will never be enough public 
resources to take effective action against the whole universe 
of players in the mortgage system.
    Finally, States should be able to protect their residents 
quickly and effectively. While Congress was still discussing 
whether to pass a so-called first generation anti-predatory 
lending law, the market had already moved on to new risky 
practices, which the States quickly recognized.
    Ohio enacted its second generation law in 2006, soon 
followed by Minnesota and approximately 10 other States. As for 
Congress, we are still here 3 years later discussing whether to 
pass a second generation law, despite the fact that the market 
self-destructed in the meantime and the former subprime lenders 
are now moving to trying to push new products and services.
    Despite the current state of the economy, we believe that 
long-term homeownership remains one of the best and most 
reliable ways that families can build a better economic future. 
We urge Congress to strengthen the mortgage system, not by 
creating impediments to sensible home loans, but by focussing 
on market-based solutions that result in profitable mortgage-
backed investments and sustainable homeownership.
    Thank you, and I look forward to your questions.
    [The prepared statement of Ms. Gordon can be found on page 
162 of the appendix.]
    Chairman Gutierrez. Thank you.
    Ms. Saunders, please, for 5 minutes.

 STATEMENT OF MARGOT SAUNDERS, COUNSEL, NATIONAL CONSUMER LAW 
                             CENTER

    Ms. Saunders. Thank you, Chairman Gutierrez, and members of 
the subcommittee. Thank you for inviting me to testify today on 
behalf of the low-income clients of the National Consumer Law 
Center and the National Association of Consumer Advocates.
    We are the attorneys who are representing the homeowners in 
foreclosure proceedings and trying to help maintain homes.
    You asked first that we comment on H.R. 3915. This was an 
aggressive bill, for its time. This bill essentially maintained 
the current complex structure of regulation of mortgage 
origination, while tweaking--sometimes significantly--the law 
to enhance the obligations of the parties. Stronger consumer 
protections, however, were limited by the fear that too much 
regulation would limit access to credit.
    We propose to you today a new approach, with three key 
criteria.
    One, simplicity. The rules should be easy for everybody to 
understand. Multiple categories of creditors, borrowers, and 
types of loans result in confusion, without establishing a 
clear structure designed to facilitate affordable and safe 
mortgage lending.
    Two, transparency. The rules governing the transaction 
should be clearly disclosed and easy to understand.
    Most importantly, appropriate incentives. The current 
system rewards originators for making bad loans, because 
originators are paid, regardless of whether the loan is unfair 
or unaffordable.
    This is how we would do this:
    One, realign the incentives. Pay the originators from the 
payment stream only. Insurance brokers are paid their 
commissions entirely from the stream of payments made by the 
consumer for the insurance product in the first few years. The 
insurance model should be the model for the mortgage industry.
    Require that originators recover their costs associated 
with originating the loan only from the monthly payment stream. 
The homeowner's regular monthly payments are the sign of a 
sustainable mortgage.
    The origination process is the only source of profit for 
the mortgage broker, and this current system encourages loan 
churning. Making new loans is the only way originators make 
money. If instead, the originator received a percentage of each 
payment for the first several years of the loan, the originator 
would have a very strong incentive to make sure that homeowner 
would make the first several years of payments.
    Two, mandate a uniform mortgage offer. Originators should 
be required to offer every homeowner applicant a uniform 
mortgage, which is a 30-year, fully amortizing, fixed rate, no 
prepayment penalty mortgage. Alternatives could be offered as 
well, but they would always have to be compared to this 30-year 
uniform mortgage.
    The mortgage would thus be simple for consumers to 
understand, and the only variable would be the change in rate 
which was based on the consumer's credit risk.
    Three, common-sense rules should be required. Homeowners 
must be underwritten for their ability to repay all payments 
that can be due on the loan. No loan should be made for more 
than the home is worth. Foreclosures should only be permitted 
when the investor makes more money from the foreclosure than an 
affordable loan modification.
    Public and private enforcement is essential. Government 
administrators enforcing the laws simply do not protect 
consumers. If you have private enforcement, it enhances 
compliance. It also allows the individual consumer who has been 
harmed to use those rules to protect themselves.
    Fifth, full responsibility. The rules should be simple. 
There should be no enforcement of a loan made in violation of 
these rules.
    And most importantly, preemption. Please do not preempt the 
State laws. We have seen in the last few years that it's the 
State laws that have been used to protect consumers from 
foreclosure, repeatedly. One of the most serious problems with 
3915 was that it did preempt a series of State laws as they 
were applied to holders, and I would point you to a report that 
we did that detailed how 3915 actually would have cut back 
significantly on consumer protections.
    Thank you. I would be happy to answer any questions.
    [The prepared statement of Ms. Saunders can be found on 
page 228 of the appendix.]
    Chairman Gutierrez. Thank you.
    Ms. Jones, please, for 5 minutes.

  STATEMENT OF STEPHANIE JONES, EXECUTIVE DIRECTOR, NATIONAL 
                 URBAN LEAGUE POLICY INSTITUTE

    Ms. Jones. Thank you, Mr. Chairman, and Ranking Member 
Hensarling. I appreciate the opportunity to testify before you 
today on this critical issue of mortgage lending reform.
    My name is Stephanie Jones. I am an executive director of 
the National Urban League Policy Institute, which is the 
research and policy arm of the National Urban League based here 
in Washington.
    Through our front-line housing counseling services in Urban 
League programs throughout the country, the National Urban 
League received first-hand insight into the brewing mortgage 
housing crisis long before many in the country saw it coming. 
Our findings led the National Urban League president, Marc 
Morial, to release our Home Buyers' Bill of Rights in March of 
2007. I have attached a copy of the Home Buyers' Bill of Rights 
to my testimony for inclusion in the hearing record. At that 
time, unfortunately, policymakers and government officials were 
reluctant to support greater regulation.
    But today, I will focus my testimony on three of the six 
rights in the Home Buyers' Bill of Rights that address problems 
in the lending process and their impact on low- and moderate-
income homeowners and mortgage applicants: One, the right to be 
free from predatory lending; two, the right to fairness in 
lending; and three, the right to fair treatment in case of 
default.
    The National Urban League has long called for the 
elimination of incentives for lenders to make predatory loans, 
a fair competitive market that responsibly provides credit to 
consumers, access to justice for families caught in abusive 
loans, and the preservation of essential Federal and State 
consumer safeguards.
    The National Urban League supports legislation that 
promotes these objectives and that works to better protect the 
consumers, such as the Mortgage Reform and Anti-Predatory 
Lending Act of 2007, H.R. 3915, that was passed by the House in 
2007.
    In fact, we in the nonprofit counseling industry strongly 
feel that we have a fiduciary responsibility to our clients to 
see that this bill is enacted into law.
    We support the measure strongly, but believe that it can 
and should be improved, and so we would like to offer some 
suggestions on how we believe that it can be improved.
    First, we believe that it should protect those States that 
have stronger anti-predatory lending laws. It should hold Wall 
Street accountable for buying abusive loans. And it should 
provide effective remedies for homeowners when brokers and 
lenders break the law.
    Bottom line is, we really do need to get some of these bad 
eggs out of the business, when it comes to lending and mortgage 
brokers, and we find that broker licensing doesn't necessarily 
need to be nationwide, but it should be stricter.
    Currently, as Sy Richardson, the National Urban League's 
vice president for housing, says, in most States, if you can 
fog a mirror, you can get a broker's license.
    But education, qualification, and testing should be 
tougher. Individual mortgage brokers and loan officers must be 
licensed and registered and required to act in the best 
interest of the consumer, under guidelines comparable to those 
that financial advisors are subject to.
    Penalties for bad behavior need to be strong enough to have 
a deterrent effect, and H.R. 3915 should increase enforcement 
capabilities even further.
    The bill should also have stronger compensation disclosure 
requirements.
    And we see that the current housing crisis that is 
threatening our entire economy is proof positive that these 
measures are absolutely necessary.
    In addition, policymakers should pay particular attention 
to communities that have traditionally been underserved or at a 
disadvantage when obtaining credit, including communities of 
color and the elderly, to ensure that they have full access to 
the most appropriate loan products that can help them build and 
maintain wealth.
    Those who are shown to have taken advantage of vulnerable 
populations, by offering inappropriate products or charging 
unjustified fees, should be held fully accountable for their 
actions.
    The National Urban League believes there must be strict 
limits to prepayment penalties.
    We also assert that steering borrowers qualified for prime 
loans into subprime loans is an unfair and deceptive practice. 
Numerous studies have documented that middle- and upper-income 
minorities are significantly more likely than middle- and 
upper-income whites to receive subprime loans, and that a 
significant number of minorities who were steered into subprime 
loans actually qualified for conventional mortgages.
    Lenders must be held liable for deceptive and fraudulent 
practices committed by brokers with whom they do business.
    We're generally pleased that many lenders, as well as the 
big mortgage gatekeepers, such as Freddie Mac, FHA, and the VA, 
have amended their approach to managing delinquencies, having 
fully realized that it's usually more cost-effective to help a 
borrower to stay in his or her home than to pursue foreclosure.
    But in the case of default, the National Urban League 
believes that we must afford some protection to home buyers, 
including the opportunity to restructure the loan if the loan 
is determined to be onerous, and an opportunity, or access to 
the holder of the loan for development of reasonable workout 
plans, where the objective is preservation.
    Chairman Gutierrez. The time of the gentlelady has expired.
    Ms. Jones. Okay. Thank you.
    Chairman Gutierrez. You are welcome.
    Ms. Aponte, for 5 minutes.

   STATEMENT OF GRACIELA APONTE, LEGISLATIVE ANALYST, WEALTH-
  BUILDING POLICY PROJECT, NATIONAL COUNCIL OF LA RAZA (NCLR)

    Ms. Aponte. Thank you. Good afternoon.
    My name is Graciela Aponte. I handle NCLR's legislative and 
advocacy work on issues such as affordable housing and 
foreclosure prevention.
    Prior to joining NCLR, I worked with low-income families, 
constituents, community-based organizations, for congressional 
representatives in Maryland and in New York City, and for 4 
years, I worked as a bilingual housing counselor.
    I would like to thank Chairman Gutierrez and Ranking Member 
Hensarling for inviting NCLR to testify on this important 
issue.
    Forecasters are predicting that 400,000 Latino families 
will be losing their homes in 2009, at the height of the crisis 
for the Latino families during 2009 and 2010 when more loans 
are scheduled to be reset.
    NCLR provides funding to more than 50 housing counseling 
agencies across the country. Despite the counselors' skills and 
the clients' best efforts, many are still losing their homes 
and financial security.
    We are pleased Congress is beginning to turn their 
attention to mortgage reform. However, this effort will have 
limited success unless Congress and the Administration follow 
through on their plans to reduce foreclosures.
    In my brief time today, I will share with you three 
principles on which to organize strategy, a strategy to reform 
and revitalize our mortgage markets: Number one, reforming our 
loan servicing system; number two, reforming the mortgage 
market; and number three, the role of nonprofits.
    Let's start with changes needed to our loan servicing 
system.
    Last week, we gathered the heads of our housing counseling 
agencies and they shared stories about loan modifications that 
are being denied, even when a family can afford to make 
payments, loan modifications that are being approved days after 
the home has gone to foreclosure auction, borrowers that are 
given unaffordable loan modifications that leave them even 
worse off.
    Housing counseling agencies are overburdened and 
underfunded, and foreclosure scam artists have stepped up their 
marketing efforts.
    President Obama's foreclosure plan takes several steps to 
address these issues. However, parts of the plan must be 
strengthened to keep borrowers from falling through the cracks.
    We also need legislation to raise the level of service 
provided to all borrowers.
    Second, I will turn to reforming the mortgage market.
    By now, it's clear that borrower protections are closely 
linked to safety and soundness. Latino families were routinely 
targeted by predatory lenders. They were steered toward 
expensive and risky products, even when they had good credit.
    Take the case of the Rodriguez family, who went to our 
housing counseling agency in Stockton, California. They worked 
with a mortgage broker to help them purchase their first home. 
The broker told them that they qualified for a fixed-rate loan.
    Four years later, their mortgage bills increased, and they 
realized that their broker had sold them an option ARM. Worse, 
even though the Rodriguez family could document all their 
income, the broker used Wite-Out to write in a higher income. 
They had paid a premium to be in a stated income loan, even 
though they had all their documentation.
    We have seen this story repeated across the country. 
Brokers were paid more for risky loans, so it's no surprise 
that they steered families toward these products.
    A reformed market must connect borrowers to products they 
can afford. One step would be to increase accountability 
measures throughout the process.
    And finally, I want to discuss the role of nonprofits.
    Credit unions, CDFIs, and community lenders have been 
providing safe and affordable mortgages to underserved 
communities for years. Housing counselors prepare families for 
homeownership and match them to good loans.
    Another one of our counseling clients is a great example. 
Maria Martinez is a single mother from West Humboldt Park, 
Chicago. Maria came to the Spanish Coalition for Housing 4 
years ago. She was displaced and facing homelessness.
    The counselor was able to find her an apartment. She also 
put her on a plan to build her credit and savings. After years 
of working together, a door opened for Maria when a community 
land trust program offered an affordable homeownership 
opportunity. She went to closing 2 weeks ago.
    The nonprofit lenders and organizations understand how to 
lend to underserved communities. Their work should serve as a 
model of what is possible when considering reform.
    Ultimately, any effective response to our current crisis 
must include reforming the servicing system so that homeowners 
who are struggling to keep up with their mortgage payments can 
secure affordable and sustainable mortgages, reforming the 
mortgage system to protect future home buyers and keeping safe 
and affordable lending products available to underserved and 
vulnerable communities.
    In my written testimony, I provide specific 
recommendations, with special attention to reforming the loan 
servicing system, restoring balance to the mortgage market, and 
promoting positive lending models.
    I will be happy to answer any questions you may have. Thank 
you.
    [The prepared statement of Ms. Aponte can be found on page 
117 of the appendix.]
    Chairman Gutierrez. Thank you, Ms. Aponte.
    Mr. Lampe, for 5 minutes.

STATEMENT OF DONALD C. LAMPE, PARTNER, WOMBLE CARLYLE SANDRIDGE 
                          & RICE, PLLC

    Mr. Lampe. Mr. Chairman, Ranking Member Hensarling, and 
members of the subcommittee, thank you for the opportunity to 
appear today.
    My name is Don Lampe, and I am a partner in the Charlotte, 
North Carolina, office of Womble Carlyle Sandridge & Rice. I 
have been practicing consumer credit law for 25 years, and I 
have been involved on behalf of trade organizations, mortgage 
lenders, and others in the enactment of many significant State 
and local mortgage lending laws and regulations, over the past 
10 years.
    Because the legislation that the committee is reconsidering 
today, H.R. 3915, is based on residential mortgage lending laws 
from various States, I hope to be able to respond to the 
committee's questions regarding our experience with similar 
State laws.
    Obviously, any assertion today that Congress should not act 
to reform the regulation of consumer mortgage lending is 
untenable, but then, what should Congress do to accomplish two 
things: protect consumers now; and make sure that we never have 
to endure this kind of a crisis again?
    In the brief time that I have, I want to make three points. 
These points are built around a central theme.
    First and foremost, it is critically important, as other 
panelists have said, that any legislation provide strong and 
effective consumer protection. That is the beginning point. We 
also must be mindful of preserving access for consumers, future 
consumers, for fairly priced, non-discriminatory, lawful, and 
appropriate mortgage credit.
    The three points are as follows:
    First, the Federal Reserve Board. There have been 
superseding events since the passage of 3915 by the House. One 
of the significant superseding events, which you heard about 
earlier, was the Fed exercised the powers that had been granted 
in 1994, and Chairman Bernanke was praised for that, to enact 
comprehensive unfair and deceptive trade practice laws.
    It's important for Congress to give due regard to these 
groundbreaking rules, to consider carefully whether these rules 
already address fundamental consumer protections, and likewise, 
consider whether the rules should serve as a basis and/or 
complementary to additional consumer protection legislation.
    Second, reform of consumer mortgage lending laws should be 
real reform, and not just the adding of additional layers of 
conduct requirements, disclosures, and liability to existing 
laws.
    There is a real opportunity now, more than ever, for 
Congress to overhaul what many describe as a broken system of 
mortgage regulation, of loan origination.
    Third, and very importantly, it is widely believed that too 
much credit created, if not outright caused, the current 
housing crisis. It's all too easy for all of us to believe 
right now that all you have to do is ban certain products and 
certain features, and make less credit available, and we won't 
have these problems in the future.
    But I urge the subcommittee to give serious, thoughtful, 
and heartfelt consideration to the needs of current homeowners 
who wish to refinance, often out of unfair and potentially 
predatory loans, and also to new homeowners looking for loans.
    Let's not forget that fair lending and anti-discrimination 
is based on credit being available to all Americans on fair 
terms.
    In the moment that I have left, the most resonant point I 
could make has already been touched on by this panel. The 
disclosures now required by Federal law are virtually 
incomprehensible, and this is the case across-the-board. 
Subprime, FHA, confirming, jumbo--what the disclosures have 
brought to mortgage lending is more information, but much less 
understanding.
    It's very difficult, in my mind, to justify more 
disclosures and additional liabilities related to disclosure 
violations. At this time, Congress has an enormously unique 
opportunity to reconsider the overly complex system, where you 
have disclosures that are inconsistent between Federal 
agencies, even.
    If consumers understand a transaction that is put before 
them, are capable of determining that the loan is fair and is 
affordable, and that they can afford to pay it back, if that is 
understood from the beginning, that outcome is the best way for 
us not to repeat the mistakes of the past.
    In short, as has been said many times, sometimes seriously, 
sometimes tongue-in-cheek, that a crisis is a terrible thing to 
waste.
    Thank you.
    [The prepared statement of Mr. Lampe can be found on page 
186 of the appendix.]
    Chairman Gutierrez. Thank you very much, Mr. Lampe.
    HOEPA was passed in 1994. This is my 9th term, so that was 
my first term in Congress. And let me say, there are 38 Members 
I have here--no, 39 Members on my side of the aisle--Frank, 
Kanjorski, Waters, Maloney, Gutierrez, Velazquez, and Watt--
those are the only survivors of this panel, of this committee, 
when we passed--all of us voted to pass that law. Now, we have 
32 new Members.
    In other words, there is no institutional memory, because 
the Federal Reserve, you spoke very eloquently, Mr. Lampe, 
about how great the regulations were that the Federal Reserve--
it took them 14 years.
    Now, if they are so great today, and everybody likes them 
so much, can you imagine what would have happened if we 
actually had that regulation on the books, as they should have 
done?
    But here is what the Chairman of the Fed consistently said 
to us: ``It's ideological.'' Sometimes he was even berated by 
members of this committee on this side of the aisle, asking him 
to please promulgate the rules, the same rules that today we 
thank Mr. Bernanke for. A little late, though.
    So it wasn't as though people didn't see things that could 
come about in a bad fashion for the consumer and for the 
mortgage industry. The fact is that it's very hard, and there 
are some very powerful interests out there that stop us from 
promulgating the rules, until it is actually too late.
    I don't know how many members on the minority side were 
here, but not many. I think that's a very shameful action of 
the way government works.
    So I know that people always complain that government does 
too much, that we should have smaller, less government. But in 
this case, it seems that everybody says, where was the 
government in this certain area, in not promulgating those 
rules?
    Having said that, we have called this hearing so that we 
could hear from people about how it is we take on our anti-
predatory lending bill, which we're going to mark-up from the 
last Congress. We're going to use it as our base bill to see 
how we can improve it.
    We're not simply going to--I hope the ultimate product 
isn't simply the Z regulations. I don't think they go far 
enough. I would like to see other kinds of rules and 
regulations put into place.
    And I won't take my complete 5 minutes, but I do want to 
thank all of the panelists, especially those engaged in helping 
consumers go through the mire. It's overwhelming in 
congressional district offices across this country, people 
losing their homes and filing for bankruptcy, and the dire 
situations that they find themselves in.
    And I know that there are those who want to blame the 
victims, that is, those who took out the mortgages, but I think 
there is a lot greater blame.
    And there are those who want to blame government, and 
specifically the Community Reinvestment Act. And I'm almost--
maybe make an amendment that says to anybody who provides a 
mortgage that not only does the recipient of the mortgage have 
to sign, but those issuing the mortgage: ``The government 
didn't make me do it. I hereby sign that the government didn't 
make me do it,'' so that from here forward, this issue would 
never come up again. And the consumer would sign somewhere on 
these documents, ``The government didn't ask me to take this 
loan, and the mortgager never told me the government made me do 
it.''
    Because I, in my 17 years in Congress and 8 years on the 
Chicago City Council, have never called a financial institution 
and asked them to make a mortgage for any one specific 
individual. We have implored, we have cajoled, begged, used 
every possible manner, to ask them to please make mortgages, 
and they have resisted.
    So given all of that resistance, I just find it a little 
mind-boggling that those who did get a mortgage, all of a 
sudden, it was the government that made them do it.
    I'm going to ask the next panel, which is the industry, I'm 
going to ask them if the government ever made them issue a 
mortgage. I want to know about that mortgage and I want to know 
who called them, because I want an investigation into that 
official who made them issue that mortgage.
    I thank all of the panelists and I yield 5 minutes to the 
ranking member, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Thank you for 
yielding me 5 minutes.
    In 1997, Wall Street firms, the GSEs, and the CRA converged 
in a landmark event, the first securitization of CRA loans, a 
$384 million offering guaranteed by Freddie Mac, which de facto 
encouraged lenders and underwriters to relax their traditional 
underwriting practices, as did later the GSEs.
    We have heard from the Federal Reserve. In 1993, they 
issued guidelines entitled, ``Closing the Gap, a Guide to Equal 
Opportunity Lending,'' that says, in part, ``Lack of credit 
history should not be seen as a negative factor.''
    Furthermore, in May of 1998, Bear Stearns--and we know what 
happened to Bear Stearns--published an article on guidance of 
why and how lenders should package CRA loans into mortgage-
backed securities.
    The document advised lenders that, ``Traditional rating 
agencies view loan to value ratios as the single most 
determinant of default. It is more important at the time of 
origination and less so after the third year.'' ``Explaining 
the credit quality of a portfolio to a rating agency or GSE, it 
is essential to go beyond credit scores.''
    My point is again, regardless of how noble the intent may 
have been in CRA--it has a very proud legacy, I have no doubt--
the question is, has it served us well today?
    Maybe there are different options. One is to try to bring 
down the lending standards of the lender. Another option is to 
attempt to improve the economic opportunities of the borrower.
    Now, clearly, CRA, as far as volume of loans, was low. As 
far as putting the imprimatur, or, if you will, the Good 
Housekeeping Seal of Approval of Uncle Sam, on bringing down 
traditional lending standards, I believe that its impact was 
critical, and did play a role in where we find ourselves today, 
and I'm sure that the chairman and I will have ample 
opportunity to continue this discussion in further hearings.
    Ms. Gordon, I have a question for you. In your testimony, 
on page 5, you state, ``bright lines, such as bans on 
prepayment penalties and yield spread premiums and a 
requirement of income verification and escrow will redound to 
everyone's benefit.''
    Let me ask you specifically about prepayment penalties, 
prepayment fees. And one, it underscores a broader question.
    I have seen a number of studies that have convinced me--
maybe you have seen similar studies, maybe you are 
unconvinced--that the right to prepay, that those who want that 
feature in their mortgage end up paying a higher rate of 
interest than they otherwise would.
    So one, have you seen studies, and if so, do you believe 
that to be true?
    Ms. Gordon. There was a time--there are a number of 
features in the, you know, historic prime market, that you 
could put into a loan to buy down your rate. What we have seen 
happen, though, as the market moved over the past decade or so, 
was that prepayment penalties became almost exclusively a tool 
of the subprime market. Only about 2 percent of prime market 
loans have prepayment penalties.
    And what happened in the subprime market was, they were 
misused. You had subprime borrowers not understanding the terms 
of the mortgages, and they were buying--
    Mr. Hensarling. I'm sorry, I think my time is running out, 
but let me just ask you this one question. If a borrower 
understood the terms of the mortgage product, and if he was 
convinced that he could receive a lower interest rate by 
agreeing to prepayment penalties, would you have Federal law 
preempt his or her decision?
    Ms. Gordon. Now I would, because--
    Mr. Hensarling. Okay. Well, that's--
    Ms. Gordon. --we know that--
    Mr. Hensarling. --that's all--
    Ms. Gordon. --there are anti-competitive practices--
    Mr. Hensarling. I'm about to run out of time.
    Mr. Lampe, real quick, can you state any similarities you 
see in H.R. 3915 to the provisions in North Carolina and 
Georgia?
    Mr. Lampe. The way I have said it concisely is, the 
similarities are the similarities between a zebra and a horse. 
They look very much alike, but they are different animals. And 
I can provide more information on that.
    But the original Miller-Watt proposal, of course, which has 
been on the table for quite some time, is based on North 
Carolina, but not literally North Carolina, and it differs in 
important features, such as the size of loans covered, 
remedies, and the types of loans that are covered.
    So the similarities, again, the analogy I draw is the 
similarity between a zebra and a horse. They are different--
    Mr. Hensarling. I see I am out of time, so perhaps we can 
get those answers in writing at a later time.
    Thank you, Mr. Chairman.
    Chairman Gutierrez. Thank you, Mr. Hensarling.
    The gentleman from Charlotte, North Carolina, Mr. Watt, for 
5 minutes.
    Mr. Watt. I will actually do Mr. Hensarling a favor, 
because one of the questions I had on my list of questions was, 
how did the North Carolina law fail?
    I mean, we have massive foreclosures and the need for 
modifications taking place in North Carolina, too, so maybe 
that's the answer he was trying to get to. I hope that was the 
answer he was trying to get to.
    Mr. Lampe. Yes, sir. I think I can answer that question.
    Number one is, North Carolina does not have one of the 
nation's highest foreclosure rates, and there's not--none of 
the 34 top counties are in North Carolina.
    The genius of regulation in North Carolina was the Mortgage 
Lending Act, which required licensing of all mortgage brokers, 
all loan officers, and anyone who had contact with a borrower 
in connecting with making a loan.
    You cannot consider the North Carolina experience without 
the whole portfolio of consumer protections, and I think our 
banking commissioner and Martin Eakes of the Center for 
Responsible Lending have said that the Mortgage Lending Act did 
more to clean up the market in North Carolina than the 
substantive regulations of credit terms.
    Mr. Watt. So really, what you are saying is North Carolina, 
if we would have had a similar regime at the Federal level as 
we had in North Carolina, not only a predatory lending law but 
the whole regime, we would be a lot better off today than we 
were. Is that what I hear you saying, bottom line?
    Mr. Lampe. I can't say a lot better off, but better off, 
and this Congress did pass a step with the National Mortgage 
Registry and Licensing System that very much emulates North 
Carolina.
    Mr. Watt. All right. Let me get to a couple of other 
questions.
    I hear both Ms. Gordon, Ms. Saunders, and Mr. Lampe 
actually, to some extent, saying that we need a massive 
overhaul, and suggesting possibly that the predatory lending 
bill that we passed before out of this committee may not even 
be an appropriate starting point.
    I'm a little concerned about that, because I know how 
difficult it was to get to that point, and I'm not suggesting 
that the final product was where we ought to end up going 
forward, but to scuttle the whole process and start over again, 
I think, could possibly be counterproductive, if that's what 
you're saying.
    So clarify for me whether that's what you're saying, or 
what are you saying?
    Yes, Ms. Saunders, go first.
    Ms. Saunders. It is what we're saying, for this reason, 
that it was a great bill, for that time, but North Carolina, if 
the North Carolina bill had been passed nationally, we still 
would have had payment option ARM loans, unfortunately. We 
still would have had a lot of the subprime loans.
    What we can't do, what we believe is not possible to do at 
any time, is to capture a certain type of loan and apply 
regulation to that type of loan. That's what HOEPA did in 1994, 
over my--I was there in 1994. I vigorously objected to that. 
And then we tried to--
    Mr. Watt. So basically, what you're saying is we need a 
regime that covers all loans, regardless of the category--
    Ms. Saunders. That's what we all--
    Mr. Watt. --and a set of rules for the road that govern all 
loans, whether they are subprime, prime, whatever?
    Ms. Saunders. Yes, sir. And one other point.
    Mr. Watt. Okay, go ahead.
    Ms. Saunders. Rather than--we, of course, need specific 
rules, ``You shall do this, you shall not do this.'' But we 
should take a moment to think about the incentives. What about 
the marketplace is actually making originators make the bad 
loans? And let's try to address that.
    Mr. Watt. We're going to run out of time, and I do want to 
hear from Ms. Gordon, and I want to at least put one more 
question out there, if I can.
    Ms. Gordon. I'll just make two additional points.
    One is, with respect to 3915, in addition to needing to 
extend protections to all loans, the actual structure of 3915 
was very complex, it was--you know, there was a safe harbor and 
a qualified safe harbor, and a rebuttable presumption, and an 
irrebuttable presumption. And it was so complex that literally, 
if you asked everybody in this room how they understood it, I 
think you would get different answers.
    Structure-wise, we might--not talking about content--
structure-wise, you might look at the bill that was introduced 
in the Senate by Chairman Dodd, which was--again, it may not be 
the same substantive place we want to get to, but it was 
clearer in its structure.
    You know, the other substantive thing I'll say about 3915, 
and this is true of the recently promulgated HOEPA rules, as 
well, that the chairman has noted were 14 years late in coming, 
is both of them ignore the market that contains the payment 
option ARMs, and in fact, 3915 substantively last year would 
have determined, as an irrebuttable presumption, that those 
loans were affordable.
    So that's why we need an approach that's more incentive-
based, rather than picking specific things and saying, ``This 
is good today and this is bad today.''
    Mr. Watt. Can I just ask, Mr. Lampe, not today, but at some 
point, you mentioned that we need to do something different 
with disclosures, and I agree with you. I just don't know what 
we should be doing. So if you can submit some more information 
to us on what you're proposing subsequent to today's hearing.
    I yield back.
    Chairman Gutierrez. Thank you very much. That would be 
useful to all of us.
    Without objection, I would like to enter into the record a 
statement from the Attorney General of New York, Andrew Cuomo, 
which describes the cooperation between the State of New York 
and Fannie and Freddie to preserve appraiser independence 
during the home appraisal process.
    Without objection, it is so ordered.
    I would also like to enter into the record, without 
objection, a letter from the Chairman of the Federal Reserve to 
Senator Bob Menendez, stating that the Federal Reserve found no 
evidence that the Community Reinvestment Act caused high levels 
of default in the subprime mortgage market.
    Without objection, it is so ordered.
    And the gentleman, Mr. Cleaver, is recognized for 5 
minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    I'm curious. The chairman--actually, I was ready to second 
his proposed legislation, but--because I do think that he made 
a point that many of us have been struggling with, which is 
that somehow we have done contortions to come up with the blame 
being laid out over the people who have been wounded.
    I guess what I would like to--Ms. Jones, in your experience 
with the Urban League, are you finding, have you found that 
there are people coming to you to complain that somehow they 
were pushed into signing mortgages, that they actually were 
misrepresented as they sought to make the most significant 
purchase in their financial lives?
    Ms. Jones. Thank you for that question, Mr. Cleaver. That 
is something we definitely have seen on the ground across the 
country.
    One of the things we have found is that a significant 
number of borrowers who actually qualify for conventional loans 
are being steered into and have been steered into subprime 
loans.
    This is something that often isn't talked about, as we hear 
the blame being passed around, and blame put on, particularly, 
low-income and minority borrowers, or blame being placed on the 
Community Reinvestment Act, which was designed to expand 
homeownership opportunities to those borrowers.
    What we found in looking at this is that a substantial 
majority of the subprime loans were made by non-CRA compliant 
companies and lenders, so the--most of this activity was done 
outside of the regulatory scheme, and so it can't be blamed on 
CRA. We took a very close look at it. In fact, we report on it 
in our upcoming State of Black America Report, which will be 
out in a couple of weeks.
    And we have also seen that, even though some of the 
standards were relaxed in order to make it easier for 
creditworthy borrowers to participate in the conventional 
market, we're seeing a lot of blame being passed over onto the 
borrowers and the CRA.
    But to go back to your question, we are seeing a 
significant number of people who are just doing the best they 
can, who have saved their money, who qualify for conventional 
loans, being pushed into loans that they can't afford or loans 
that Marc Morial refers to ``Jack-in-the-Box'' loans, that 
start off okay, and they're told, ``No problem, you can pay 
this,'' and then, later on, the interest rate jumps up.
    Another thing we're seeing also is that people, a large 
number of people qualify for loans, for conventional loans they 
can afford, they can afford those payments, but other things 
intervene, such as loss of a job or health care costs that 
result in their being unable to pay.
    So there are a number of factors that feed into this, but--
and we're very concerned about the blame, the blame game, which 
is something that, again, Marc Morial refers to the ``weapons 
of mass deception.''
    And we have called on Congress, we have called on public 
officials and commentators to help defuse that, because it is 
problematic.
    Mr. Cleaver. Janet Murguia brought before this committee 
several months back actual cases of Ms. Aponte where this had 
happened, but nothing will stop, it seems, people from saying--
I want this to go on the record. There was a story written on 
the front page of my hometown newspaper last Friday, I believe, 
with me dealing with this issue, and I'm not going to read the 
whole story, I don't have the time.
    But it's from a Sidney Willens, an attorney in Kansas City, 
and he tells a story of a Sherrita Richardson, a 37-year-old 
African American mother of 4, who has been a bus driver for 9 
years, and she lives, of course, in my district, and she is 
making just an inch above minimum wage, and in this letter, he 
outlines the fact that she went into a house that was appraised 
at $93,000, requiring a 10 percent downpayment.
    I will quote here, ``A Kansas broker''--I'm from Missouri--
``A Kansas mortgage broker purchased a $9,300 cashier's check 
payable to the seller, made a copy to show that 10 percent 
downpayment was made, then redeemed the $9,300 check 24 hours 
later.'' And he goes on to talk about what the woman's 
condition is. I would like this to go into the record, Mr. 
Chairman. It's a letter that--
    Chairman Gutierrez. Without objection, it is so ordered.
    Mr. Cleaver. --that points very clearly to the point you 
made earlier, and the comments of Ms. Jones. Thank you.
    Chairman Gutierrez. Without objection, the letter will be 
made a part of the record.
    We're going to just want to note a change. In the past, the 
order was always the regulator, the consumer groups, and then 
the industry, so today we changed it a little bit. We had the 
regulator, the consumer groups, and then the industry.
    But I just want to see how this best works, so the next 
time we're not necessarily going to have the regulators first. 
Maybe we'll have the community groups come first, and see how 
we become much more knowledgeable, because many times, by the 
time you guys get here, the room is empty. We want to make sure 
that people had a dialogue and listened to one another.
    I thank you so much for your testimony this afternoon.
    We will now hear from the third panel:
    Mr. Michael Middleton is the president and CEO of Community 
Bank of Tri-County and is testifying on behalf of the American 
Bankers Association. Mr. David G. Kittle is the chairman of the 
Mortgage Bankers Association. Mr. Marc S. Savitt is the 
president of the National Association of Mortgage Brokers. Mr. 
Charles McMillan is the president of the National Association 
of Realtors. Mr. Jim Amorin is the president of the Appraisal 
Institute. Mr. Joe R. Robson is the chairman of the board of 
the National Association of Home Builders. And last but not 
least, Mr. Laurence Platt is a partner at K&L Gates, who is 
testifying on behalf of the Securities Industry and the 
Financial Markets Association.
    Welcome to you all, gentlemen, and Mr. Middleton, please 
proceed for 5 minutes.

 STATEMENT OF MICHAEL MIDDLETON, PRESIDENT AND CEO, COMMUNITY 
     BANK OF TRI-COUNTY, ON BEHALF OF THE AMERICAN BANKERS 
                          ASSOCIATION

    Mr. Middleton. Thank you, Mr. Chairman, Ranking Member 
Hensarling, and members of the subcommittee.
    I'm honored to be here today on behalf of the American 
Bankers Association to testify on possible initiatives to 
improve mortgage lending standards, particularly related to 
subprime mortgages.
    I wish to make it clear from the outset that the Community 
Bank of Tri-County is one of the many banks that has never 
varied from traditional lending standards. We offer both prime 
and affordable-based, affordable housing loan products.
    Our residential owned portfolio is strong, with very low 
delinquencies, especially among our affordable housing 
portfolio. We have a high satisfactory rating for lending for 
CRA purposes. We have a zero default rate on our affordable 
housing portfolio.
    Like other community banks, we work closely with the 
Federal Home Loan banks to acquire grants and affordable 
housing funding.
    Many forces combined to create the problems we face today. 
The greatest was the migration of household sector assets from 
FDIC-insured institutions to Wall Street. This flow of funds to 
the uninsured sector was driven in part by pressure to seek 
ever-increasing returns.
    The scope of the migration was extraordinary. Money market 
mutual funds accounts grew by some $16 trillion from 1990 to 
2008, while FDIC-insured deposits only grew by $2 trillion.
    Much of that money was then directed to the housing sector, 
where securitized credit helped to fuel a boom in home prices. 
The vehicle of choice for this allocation of funds was largely 
State-licensed, non-bank mortgage originators.
    The frenzy that ensued--in the frenzy, sound underwriting 
practices were sacrificed, for the most part, by non-bank 
originators. Because the standards were relaxed, there was no 
regulator to examine them. The result was catastrophic.
    To address the problems in the mortgage markets, the 
Federal Reserve has issued amendments to Regulation Z. The ABA 
supports many of these changes, including regulations to 
strengthen the integrity of appraisals and prohibit deceptive 
advertising, in addition to requirements that mortgage lenders 
properly consider a borrower's ability to repay the mortgage, 
whether it is a fixed or adjustable-rate loan.
    In fact, we believe some of the elements in these rules 
codify the underwriting practices of many of our members.
    The use of these practices throughout the mortgage industry 
will help to ensure that future lending is done in a prudent 
and safe manner. However, the new standards are so stringent 
that some loans that were previously classified as prime will 
now be part of a new category called ``higher-priced mortgage 
loans.''
    This definition in pricing may force State housing 
authorities to change pricing to meet the new standards, which 
could curtail their operations, and further limit the supply of 
credit.
    In the wake of these changes, conservative local banks like 
Community Bank of Tri-County are reevaluating their lending 
policies to assure that we are in compliance, and to consider 
whether or not to exit the residential mortgage product line.
    Because new legislation or regulation could have the 
unintended effect of decreasing credit availability, the ABA 
has formulated principles to keep in mind when considering 
further legislative action on mortgages:
    All new standards should be national standards, preempting 
the myriad of State laws and regulations.
    Terms should be specific and well-defined, limiting the 
potential for unnecessary litigation.
    Any new mortgage standards should give enough guidance to 
regulators to ensure that the standard is both meaningful, as 
well as measurable.
    Prime loans should be given a safe harbor from additional 
requirements, recognizing that the new amendments to Regulation 
Z restrict the definition of prime to a well-defined loan 
unlikely to be problematic for qualified borrowers.
    Basic underwriting standards should be an important element 
of the loan origination process, and at the time in the process 
where the lender would reasonably expect to exercise judgment 
and adhere to the standards.
    While the SAFE Act has embraced the essential components of 
H.R. 3915, we remain concerned that the Act's compliance hurdle 
for non-bank originators is minimal and easily met.
    Thank you, Mr. Chairman. I hope these suggestions will be 
helpful.
    [The prepared statement of Mr. Middleton can be found on 
page 203 of the appendix.]
    Chairman Gutierrez. Thank you, Mr. Middleton.
    Mr. Kittle, please, you are recognized for 5 minutes.

   STATEMENT OF DAVID G. KITTLE, CHAIRMAN, MORTGAGE BANKERS 
                       ASSOCIATION (MBA)

    Mr. Kittle. Thank you, Mr. Chairman.
    I appreciate the opportunity to testify before you today on 
proposals to reform mortgage lending.
    After all that has transpired since the House passed H.R. 
3915, we believe a fundamental reform of mortgage regulation is 
needed. That reform should take into account not only the many 
problems exposed since the end of 2007, but also the many legal 
and regulatory changes that have occurred since then.
    In July of 2008, the Federal Reserve Board undertook a 
review of the mortgage process. The Board then finalized 
comprehensive rules addressing the central issues in H.R. 3915.
    These rules, which go into effect on October 1st, include 
greater protections for subprime borrowers with new 
requirements for underwriting, escrows, and prepayment 
penalties. The rules also address appraiser coercion and abuses 
in mortgage servicing and advertising.
    MBA believes that the Board's rules, coupled with other 
important requirements, should serve as the basis for a single 
consumer protection standard that applies to everyone, 
regardless of where they live.
    As you know, many domestic regulatory agencies, as well as 
the G-20 nations, have been working on regulatory reform 
proposals. MBA has been studying and learning from these 
proposals, and we believe that a comprehensive national package 
would be most effective.
    At the same time, we have been developing our own approach 
to mortgage reform. While the mortgage industry is not the sole 
cause of today's difficulties, we believe that our industry 
must be central to solutions that restore faith in the market 
and protect future borrowers.
    We know that these proposals will constrain some in our 
industry, but they will also help members and their customers 
in the long run.
    MBA is working to complete our comprehensive reform 
proposal, and we plan to announce it shortly. In the meantime, 
we want to share the principles embodied in that proposal.
    Reform proposals directed to the mortgage lending industry 
should be considered in a comprehensive, not piecemeal, manner.
    While consumer protection, systemic risk, and safety and 
soundness all deserve attention, MBA believes that assuring 
sustainable homeownership demands that we pay special attention 
to mortgage lending.
    Reform legislation should provide a rigorous new regulatory 
standard to protect consumers, regardless of where they live. 
Just as emergency efforts to return credit to the market have 
been national in scope, long-term solutions to mortgage lending 
challenges must also be national, with an important role for 
the States.
    A new standard should build on the Fed's HOEPA rules, H.R. 
3915, as well as MBA's initiatives.
    A single set of consumer protection rules should be 
dynamic, and able to quickly respond to new concerns. Federal 
and State officials should work together to revise the national 
standard to address new abuses and concerns.
    Standards, including assignee liability restrictions, must 
be clearly defined to facilitate the flow of affordable capital 
into the mortgage market.
    MBA favors effective regulation and enforcement, and 
believes that regulated entities should pay reasonable costs to 
assure sufficient funding.
    All players in the mortgage industry should be subject to 
consistent Federal regulation, including rigorous licensing, 
education, net worth, bonding requirements, as well as regular 
review and examination.
    Regulatory reform must improve transparency for borrowers, 
including harmonizing the RESPA and TILA disclosures.
    And finally, regulatory reform should assure better 
resources for counseling, financial literacy, and fighting 
mortgage fraud. Should adequate resources become available, MBA 
will even support mandatory counseling for some mortgage 
products.
    We look forward to providing the details of our proposals 
to you shortly, and working with you to achieve efficient and 
effective regulatory reform.
    Thank you.
    [The prepared statement of Mr. Kittle can be found on page 
183 of the appendix.]
    Chairman Gutierrez. Thank you very much.
    Mr. Savitt, please.

STATEMENT OF MARC S. SAVITT, PRESIDENT, NATIONAL ASSOCIATION OF 
                    MORTGAGE BROKERS (NAMB)

    Mr. Savitt. Good afternoon, Chairman Gutierrez, Ranking 
Member Hensarling, and members of the committee. I am Marc 
Savitt, president of the National Association of Mortgage 
Brokers.
    In addition to serving as NAMB president, I am also a 
licensed mortgage broker in two States, and like most of my 
fellow NAMB members, I am also a small business owner.
    Thank you for the opportunity to testify today on 
comprehensive review of the American mortgage system.
    NAMB applauds this committee's response to the current 
problems in our mortgage market. NAMB shares resolute 
commitment to protecting consumers throughout the mortgage 
process.
    I must first address the false allegations targeted at 
mortgage brokers for the past several years.
    Mortgage brokers do not create or develop loan products. 
Brokers do not arrange or control the automated underwriting 
system used to qualify borrowers. Brokers to not underwrite 
loans, brokers do not approve the borrowers, brokers do not 
fund loans.
    NAMB commends this committee for its work on H.R. 3915 in 
the 110th Congress, in particular, on the all originator 
approach it incorporated.
    Now, turning to some of the significant legislative and 
regulatory changes that were enacted in 2008.
    There are many provisions contained in H.R. 3915 that NAMB 
supported, as they provided consumers with needed protections.
    NAMB is very pleased that a major section of 3915 became 
law last year as part of the Housing and Economic Recovery Act 
requiring loan originator standards for licensing and 
registration.
    Under the SAFE Act, all originators will submit to a 
background check and be placed in a national registry.
    In addition, the Act created a floor for pre-licensing and 
continuing education requirements for all State-chartered 
mortgage originators.
    This all originator approach is one that NAMB has advocated 
since 2001, and we applaud Chairman Frank and Ranking Member 
Bachus for their leadership on this issue.
    There have been some implementation issues with regard to 
the Act. Therefore, we recommend that HUD issue regulations 
needed for implementing the Act. With July 31st fast 
approaching, we believe each State should have the right to 
exercise independent judgment in interpreting silent or 
ambiguous provisions of the SAFE Act.
    Turning now to RESPA and HOEPA rules.
    A significant component of the RESPA proposal addresses 
broker compensation, YSP. Since 1992, brokers have been 
required to disclose YSP, or yield spread premium, on the good 
faith estimate in the HUD-1 settlement statement. The proposal, 
however, reclassifies this compensation as a credit to the 
borrower.
    Many studies--two, incidentally, from the FTC--have shown 
HUD's method of disclosure is very confusing to consumers, 
causing them to choose higher-cost loans and put brokers at a 
competitive disadvantage by imposing unequal disclosure 
obligations among originators who receive comparable equal 
compensation.
    YSP or its equivalent is present in every origination 
channel, regardless of whether a broker is involved in the 
transaction or not.
    In fact, with the originate to distribute model, most bank 
and lender originators are brokering loans, yet fail to address 
the converging roles of the mortgage originators in its 
proposal.
    NAMB encourages HUD to work with the Federal Reserve Board 
to product an alternative disclosure proposal. The RESPA rule 
should be withdrawn to allow both agencies to work together to 
harmonize provisions.
    We also urge this committee to examine and pass a Federal 
standard of care based on good faith and fair dealing for all 
originators, as articulated in H.R. 3915. We believe such a 
standard would greatly enhance consumer protections.
    On the issue of appraisals, NAMB commends and appreciates 
the work of Representatives Kanjorski and Biggert for their 
tireless effort to reform and strengthen oversight of our 
appraisal system.
    NAMB supports independent appraisal standards as contained 
in 3915.
    NAMB is not supportive of the Home Valuation Code of 
Conduct, or the HVCC, which created a de facto regulation in 
2008 by the New York attorney general and the GSEs' regulator, 
which prohibits mortgage brokers and real estate agents from 
ordering appraisals and communicating at all with appraisers.
    Finally, NAMB is deeply concerned over recent fee increases 
by the GSEs that are more than doubling consumer costs, based 
on alleged credit risks of credit scoring, property 
demographic, and/or loan to values.
    At a time when consumers are experiencing a severe credit 
crunch, efforts should be made to drive down mortgage costs, 
not increase them.
    These fees imposed on consumers are not what our mortgage 
market needs in these turbulent times, and they fly in the face 
of so many other efforts to help consumers and facilitate an 
economic recovery.
    We urge you to explore this troubling issue and consider 
appropriate action when contemplating legislative reform.
    NAMB appreciates the opportunity to appear before you 
today, and we look forward to continuing to work with you to 
craft solutions that are effective in helping consumers, but 
not disruptive to the mortgage market or competition.
    Thank you, and I'm happy to answer any questions.
    [The prepared statement of Mr. Savitt can be found on page 
246 of the appendix.]
    Chairman Gutierrez. Mr. McMillan, for 5 minutes.

STATEMENT OF CHARLES McMILLAN, PRESIDENT, NATIONAL ASSOCIATION 
                       OF REALTORS (NAR)

    Mr. McMillan. Thank you, Chairman Gutierrez, Ranking Member 
Hensarling, and members of the subcommittee. Thank you so much 
for the opportunity to be invited here today to testify on the 
need for mortgage lending reform.
    I am Charles McMillan, 2009 president of the National 
Association of Realtors, and I am also a practicing Realtor. I 
am here to share the views of more than 1.2 million Realtors 
who are involved in all aspects of the real estate industry 
every day.
    On behalf of all Realtors, I thank the subcommittee for 
holding this hearing on an issue that is paramount to the 
success of the housing market, and indeed, the U.S. economy. 
Realtors have a tremendous stake in protecting consumers from 
unfair lending practices.
    As we have seen recently, abusive lending erodes confidence 
in the Nation's housing system, strips equity from homeowners, 
and damages our local and national economies.
    In May of 2005, NAR adopted a set of responsible lending 
principles. They include steps to ensure affordability, limited 
stated income and assets underwriting, provide flexibility for 
life circumstances, eliminate mortgage flipping, bar prepayment 
penalties, improve the way lenders assess creditworthiness, 
provide mortgage choice, strengthen enforcement, and promote 
appraiser independence.
    My written testimony includes specific details on each of 
those principles, but my oral testimony today will focus on 
just one of those, appraiser independence. Realtors believe 
that a strong and independent appraisal industry is vital to 
restoring faith in the mortgage origination process.
    In November of 2007, the House passed a bill that we 
believe would have struck an appropriate balance of oversight 
and consumer protection. That bill, H.R. 3915, referenced here 
several times today, would have strengthened the independence 
of the appraisal process by ensuring appraisers serve as an 
unbiased arbiter of a property's value.
    More recently, Fannie Mae and Freddie Mac signed an 
agreement with New York Attorney General Andrew Cuomo that 
provides for a home valuation code of conduct, and like H.R. 
3915, this code also attempts to strengthen appraiser 
independence. However, it does have significant flaws.
    We believe primarily that implementing the code on May 1, 
2009, could lead to an over-reliance on automated valuation 
models. Such models do not consider qualitative factors as well 
as professional licensed and certified appraisers.
    Additionally, the code also fails to address the cost of 
the real estate transaction.
    H.R. 3915 and the code also fail to address regulation of 
appraisal management companies. It's an important issue that 
must be addressed to assure that appraisals are based on sound 
and fair appraisal principles and that they are accurate.
    With that in mind, we recommend the following measures:
    First, lenders should be required to inform each borrower 
of the method used to value the property in connection with the 
mortgage application, give the borrower the right to receive a 
copy of each appraisal, and at no additional cost.
    Second, the Federal Government also should provide 
assistance to States to help strengthen regulatory and 
enforcement activities related to the appraisals.
    And third, we support enhanced education and qualifications 
for appraisers.
    Like all our responsible lending principles, we believe 
appraisal independence is absolutely vital to the future 
success of the housing market. However, Realtors also recognize 
the need for the Federal Government to address the current 
operational issues that are impeding the delivery of mortgage 
credit.
    Specifically, we ask that you encourage lenders and private 
mortgage insurers to remove unnecessarily strict underwriting 
standards, and urge consumer reporting agencies to move quickly 
to correct errors in credit reports.
    Realtors are proud to encourage responsible lending, and we 
stand ready to work with you to ensure that the nightmare of 
foreclosure does not overshadow the American dream of 
homeownership.
    I thank you for this opportunity to share our thoughts, Mr. 
Chairman, and I welcome any questions from the subcommittee.
    [The prepared statement of Mr. McMillan can be found on 
page 193 of the appendix.]
    Chairman Gutierrez. Mr. Amorin, please.

    STATEMENT OF JIM AMORIN, PRESIDENT, APPRAISAL INSTITUTE

    Mr. Amorin. Thank you.
    A few years ago, the Appraisal Institute appeared before 
this committee and warned that the lack of oversight and 
enforcement in the mortgage lending industry was a ticking time 
bomb threatening our economy. That was 2005.
    Now that the bomb has exploded, with aftershocks heard 
'round the world, what now?
    Four measures can help us work our way back to the basics 
and restore confidence in America's system of mortgage finance.
    First, refine and reintroduce the concepts of H.R. 3915, 
which emerged from this committee in the last Congress, and was 
passed in the House.
    A revised bill, with enhanced consumer protection, is 
needed to provide additional resources for aggressive oversight 
and enforcement.
    Regrettably, too often, mortgage originators, who are only 
paid if the transaction goes forward, have been in charge of 
ordering appraisals. Such a system is ill-equipped to avoid 
bias and manipulation to the detriment of the consumer, and 
ultimately, the taxpayer.
    As you are aware, the home valuation code of conduct, 
prompted by Attorney General Cuomo, elevated the issue of 
appraiser coercion to the national stage. This heightened 
awareness is further evidence that a system-wide approach to 
mortgage reform is needed.
    Congress needs to look closely at the participation of 
appraisal management companies under the code, as they are 
unregulated entities and must be brought under control and 
fully engrossed in the regulatory process.
    Congress must also ensure that any insertion of middlemen 
in the appraisal process does not come at the expense of 
obtaining competent appraisals.
    Ultimately, this comprehensive legislation is central to 
curing a mortgage industry in distress.
    Second, Congress should empower the oversight agencies for 
appraisal regulation, the Appraisal Subcommittee, to act more 
effectively in performing its functions. Legislation in 
response to our last financial crisis, the savings and loan 
disaster, created a system of licensing and certification for 
appraisers, but the current regulatory structure can only be 
described as feeble.
    We can strengthen oversight by funding improvements for 
State appraisal licensing boards and giving the Federal 
oversight body the necessary authority to issue rules and 
effective guidelines.
    Currently, this oversight agency only has one tool at its 
disposal to compel States to act. It can only decertify a 
State.
    We believe it should have additional and more realistic 
enforcement authorities. Further, State appraisal boards must 
be given additional resources to strengthen enforcement 
activities.
    Third, as indicated in our written testimony, the 
Administration's recently announced loan modification plan 
allows for home values to be determined by broker price 
opinions and automated valuation models. Frankly, we are 
shocked.
    Once again, we are not treating the valuation process 
seriously. Congress must immediately review this policy and 
ensure it is consistent with longstanding bank regulations that 
require or encourage the use of appraisals.
    Our last recommendation is to create an independent 
authority to oversee appraisal issues and keep them from 
getting lost in the shuffle of industry restructuring. This 
should be a high-level, senior position in an agency, such as 
the Treasury Department, where the Office of Chief Appraiser 
can effectively guide valuation policy and criteria across 
agency lines, and ensure consistency in application and 
oversight.
    Members of this committee, just a week ago, the Treasury 
Inspector General released a devastating analysis of what went 
wrong in the Indy Mac mortgage meltdown. That lender shopped 
for appraisers, and ordered multiple appraisals, until it found 
a valuation that hit its desired numbers.
    This is a systematic avoidance of the requirements, much in 
the same way the now-infamous peanut supplier shopped for 
laboratories and lab results until it found one willing to 
endorse its tainted product.
    In one case, Indy Mac picked a $1.5 million valuation, more 
than double the lowest it was given, while regulators were 
asleep at the switch.
    Unfortunately, such an abuse of the system has been 
repeated over and over again throughout the mortgage finance 
industry.
    The corruption of mortgage lending practices helped doom 
Indy Mac to fail, ruining many innocent borrowers as it 
collapsed. Sadly, Indy Mac typifies the abuses in the mortgage 
industry, and ineffectual action by regulators before it was 
too late.
    We need to start today to close the loopholes, to refine 
the regulations, and to empower enforcement that will return 
the industry to solid fundamentals of safe and sound 
underwriting with adequate oversight.
    Thank you for your time today.
    [The prepared statement of Mr. Amorin can be found on page 
70 of the appendix.]
    Chairman Gutierrez. Mr. Robson, for 5 minutes.

  STATEMENT OF JOE R. ROBSON, CHAIRMAN OF THE BOARD, NATIONAL 
                  ASSOCIATION OF HOME BUILDERS

    Mr. Robson. Chairman Gutierrez, Ranking Member Hensarling, 
and members of the subcommittee, I thank you for the 
opportunity to testify today.
    I'm a builder and developer from Tulsa, Oklahoma, and the 
2009 chairman of the board of the National Association of Home 
Builders.
    The housing market, the financial system, and the economy's 
performance continue to reel from the excesses earlier in the 
decade. Soaring mortgage foreclosures and declining home prices 
are interacting in an adverse feedback cycle that shows no 
signs of diminishing.
    While the Nation will continue to suffer these consequences 
in the months ahead, the mortgage system itself has already 
undergone radical changes.
    Federal and State bank regulators have taken significant 
steps to curb risky mortgage lending, strengthening 
underwriting and loan management policies, and improved 
consumer information and safeguards.
    Congress has taken action to improve mortgage lending 
standards and oversight.
    In addition, the private label securities market, which was 
a primary vehicle for exotic mortgages, has shut down, and 
mainstream lenders have become extremely cautious.
    The pendulum, in fact, has swung back well past center, so 
that mortgage credit is currently available primarily to those 
with unblemished credit histories and the resources to make a 
significant downpayment on their home.
    NAHB's members have supported steps to ensure that mortgage 
lending occurs in a manner consistent with sound underwriting, 
prudent risk management, and appropriate consumer safeguards 
and disclosure.
    Home builders and their customers, however, have been 
significantly impacted by the upheaval in the financial 
marketplace, and are highly focussed on what might lie ahead. 
There is a great deal of uncertainty with regard to how the 
mortgage lending system will function when the housing and 
financial markets finally stabilize, and there is a deep 
concern that additional market dislocations will increase the 
depth and length of the current downturn.
    Single family appraisal problems are also an area of 
concern for home builders, and are contributing to the current 
housing and credit crisis.
    Appraisers have often used sales of homes and foreclosures 
or other distressed properties as comparables of new homes, 
without having made the appropriate value adjustments.
    NAHB believes that many appraisers lack the training and 
skills to perform the type of complex appraisals that are 
called for during this economic crisis. NAHB is working with 
the Appraisal Institute to raise the bar of appraiser education 
and performance.
    As Congress considers additional actions to avoid future 
mortgage lending problems, NAHB urges careful evaluation of 
steps already taken, the ongoing market impairments and 
structural shifts in the housing finance system and the 
immediate and longer-term impacts on the cost and availability 
of mortgage credit for qualified borrowers.
    As this subcommittee works to build upon legislation passed 
in Congress in 2007, we offer two specific policy 
recommendations:
    First, NAHB urges Congress to implement a clear national 
framework for mortgage origination standards to replace the 
current--
    Chairman Gutierrez. Excuse me, Mr. Robson. Could we please 
table the conversation--the gentlemen on the right? Just a 
little competition between our witnesses and the staff. I 
apologize, Mr. Robson. We will give you more time.
    Mr. Robson. No, that's fine. Thank you.
    --patchwork of State and local laws, which often lead to 
unnecessary restrictions on mortgage credit.
    Specifically, Congress should establish a Federal 
preemption statute creating central uniformity in the mortgage 
market.
    And second, as H.R. 3915 would have excluded the use of 
arbitration as a means to resolve disputes, NAHB urges the 
committee to refrain from limiting the use of alternative 
dispute resolution techniques, including binding arbitration, 
which we believe is the most rapid, fair, and cost-effective 
means to resolving disputes.
    NAHB opposes any attempt to prohibit the use of pre-dispute 
arbitration in contracts.
    Thank you again for this opportunity to testify, and NAHB 
looks forward to working with Congress and the committee to 
address these issues.
    [The prepared statement of Mr. Robson can be found on page 
218 of the appendix.]
    Chairman Gutierrez. Thank you, Mr. Robson.
    Mr. Platt, for 5 minutes.

 STATEMENT OF LAURENCE E. PLATT, PARTNER, K&L GATES, ON BEHALF 
 OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION 
             AND THE AMERICAN SECURITIZATION FORUM

    Mr. Platt. Chairman Gutierrez, Ranking Member Hensarling, 
and members of the subcommittee, thank you for the privilege of 
testifying here today on behalf of the Securities Industry and 
Financial Markets Association and the American Securitization 
Forum regarding reform of mortgage finance, and in particular, 
certain mortgage origination practices that contributed to the 
housing crisis affecting the Nation today.
    We were pleased to have worked on this issue constructively 
with the committee, as it moved toward the November 2007 
passage of H.R. 3915, the Mortgage Reform and Anti-Predatory 
Lending Act.
    We appreciate the opportunity to highlight the key 
considerations that guided the involvement of SIFMA and ASF in 
the earlier legislative initiative, and that remain important 
to SIFMA and ASF today.
    And let me state the obvious: The market is very different 
today than it was in the fall of 2007. We believe the House at 
that time wisely sought to limit the majority of the bill's 
provisions to subprime loans by focusing on the core practices 
that it believed contributed to the subprime crisis.
    The underlying premise was that every segment of the 
market, from borrower and broker through to the investor, bore 
some responsibility for the breakdown, but that loans to 
subprime borrowers could be made in a responsible way, and that 
the industry could continue to support this segment of the 
mortgage market.
    As such, the committee worked to make the new requirements 
relatively understandable and provide penalties for violations 
that maintained a sense of proportionality.
    Since then, of course, the availability of subprime credit 
has evaporated. This market has not returned. The conforming 
prime market is functioning, but fragile.
    Congress and the Administration have made several attempts 
to address the foreclosure and housing crisis. When the Federal 
Reserve Board adopted its final regulations to the Home 
Ownership Equity Protection Act, it sought to address certain 
of the major underwriting concerns that H.R. 3915 had covered.
    As a result, it appears that this legislative initiative 
will be largely an anticipation of the eventual return of a 
private lending and securitization market, and one of the key 
questions going forward is the extent to which policymakers 
wish to encourage the return of private investment in housing 
finance, particularly for borrowers who may not meet agency 
standards.
    Underlying the debate over H.R. 3915 back in 2007 was one 
basic question. Would the private market make buyers securitize 
subprime loans that were subject to those new restrictions, 
given its reluctance to purchase high-cost loans under HOEPA?
    We believed then, and we still believe today, that there 
are certain principles that guide the willingness of the 
industry to participate in the primary and secondary markets.
    First, lenders, assignees, and securitizers need legal 
certainty before being subject to potential legal liability.
    Second, borrowers and market participants are looking 
primarily for a system that works. That is, one that both 
protects the legitimate interests of innocent consumers from 
inappropriate lending products, and provides incentives for 
investors to invest the funds needed to help get that borrower 
a loan.
    Although we had some concerns, we felt that many of the 
provisions of H.R. 3915 provided a fair balance, and we hope 
that any newly proposed legislation will do the same.
    For the secondary market, H.R. 3915 basically attempted to 
do two things:
    First, it lowered the financial triggers that cause a loan 
to be classified as a high-cost loan. In other words, certain 
subprime loans that previously would not have qualified as 
high-cost loans under HOEPA would so qualify under 3915.
    Second, it created a whole new set of restrictions for 
loans that cost more than prime loans but less than high-cost 
loans. The House used cost as a proxy for borrowers who it was 
perceived needed greater protection.
    Please know that the final version of H.R. 3915 had many 
provisions that we considered extremely helpful.
    It properly differentiated between the new legal 
responsibilities of mortgage brokers and mortgage lenders, 
recognizing the inherent differences in the roles of those two 
types of originators, and the related expectations of 
consumers.
    It limited its applicability, generally, to subprime loans, 
recognizing that the lending abuses that afflicted the subprime 
market were generally absent in the prime market.
    It qualified the responsibilities of creditors to determine 
a borrower's ability to repay and the presence of a net 
tangible benefit in order to lessen the likelihood of 
successful claims for errors in judgment made in good faith by 
lenders.
    And while it increased the monetary damages that would have 
been available for violations, it limited the availability of 
penalty damages to ensure some level of proportionality between 
the violation and the remedy.
    While it increased the availability of the extraordinary 
remedy of recision, at least the bill offered a creditor the 
ability to avoid recision by curing the violation, and the bill 
also properly balanced the interests of assignees.
    Underlying these positive measures was the belief that 
consumers with troubled credit histories may have required 
greater protection--
    Chairman Gutierrez. Your time has expired.
    Mr. Platt. Thank you.
    [The prepared statement of Mr. Platt can be found on page 
212 of the appendix.]
    Chairman Gutierrez. That's quite all right.
    I want to thank all of you, and just to go back to Mr. 
Savitt from the National Association of Mortgage Brokers, and 
just in general to respond to all of you, I personally can't 
think of any one of your industries I haven't dealt with over 
my last 30 years since I have owned a home, and paid for many a 
year of college for the members of the Realtors Association. 
You have done the best, as I look at the books. So I have had 
wonderful experience dealing with members of your association 
through the years.
    That is not to say that there aren't issues within each one 
of your groupings, whether it's bankers, whether it's 
appraisers, whether it's--so I don't want anybody to think that 
is the purpose of this.
    We just want to get your information and want to tell you 
that you're welcome to continue to address the members of this 
committee and the chairmanship, as we go forward on this vote, 
but we will go forward on this vote, and from what I have heard 
from all of you, you think it's a good idea that we move, that 
there are many moving parts of this legislation that are very 
good, and so we're going to take that into consideration and 
move forward with that.
    I have just one question of Mr. Kittle and Mr. Platt, so 
I'll ask both of you to answer just this one question.
    There have been some extensive discussions in this 
committee about the mortgage securitization process, and I 
believe some valid concerns have been raised. Among those 
concerns is the fact that, in the entire loan securitized, the 
risk for the loan is passed on to the buyer, along with the 
profit, leaving little incentive for the originator to make a 
responsible loan.
    Would you be in favor of a rule that requires part of the 
securitized loan to be maintained on the books of the 
originator in order to help keep them with what is called some 
``skin in the game?''
    So why don't you just both respond to that question in 
general? Mr. Kittle first.
    Mr. Kittle. Thank you, Mr. Chairman.
    Well, our members, with the Mortgage Bankers Association, 
most of our members are lenders, and we already have skin in 
the game, so we underwrite the loan, we have to have warehouse 
lines of credit, we have to have substantial net worth, minimum 
net worth at HUD, but many of our lenders are required to have 
a million-plus net worth. So the skin in the game is already 
there.
    We have buyback agreements with the investors. Fannie and 
Freddie are sending loans back to our members right and left, 
right now, for repurchase.
    So the skin in the game for our members, Mr. Chairman, is 
already there.
    Chairman Gutierrez. Mr. Platt.
    Mr. Platt. Thank you. I would like to really second what 
Mr. Kittle said. There is risk retained already.
    Non-depository institutions simply won't have the capital, 
I think, to be able to retain that kind of risk, and there are 
many securitization, asset-backed securitizations that 
presently don't have that kind of risk retention feature and 
work just fine.
    SIFMA is looking at this issue, though, because it has been 
raised more recently, and so I think there's not a formal 
position yet of SIFMA on this.
    Chairman Gutierrez. Thank you. I'm not going to pursue the 
question. I'm going to yield back the time, and yield 5 minutes 
to Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    I actually share a number of the concerns that you 
articulated. Clearly, there were a number of problems and 
shortcomings in the mortgage finance system that helped lead to 
this economic crisis. I'm somewhat fearful, though, that we may 
go from one extreme to the other, as is often the case in 
public policy.
    My fear is particularly, as I looked at the original 
version of H.R. 3915, I'm having a hard time concluding at the 
end of the day that it's not going to make credit more 
expensive and less available precisely at a time when a number 
of people are trying to desperately refinance their homes and 
stay there.
    I'm particularly concerned--I think, Mr. Middleton, you 
used the phrase that you were concerned about unnecessary 
litigation. And I know that you, under the provisions of 3915, 
would be held liable for, ``net tangible benefit.''
    Can you tell me what a net tangible benefit is, to the 
borrower?
    Mr. Middleton. I was struggling with that definition 
myself.
    Mr. Hensarling. Well, I'm concerned, and I know that we 
have a process to work through, but for example, in retrospect, 
there were a number of borrowers who originally were renters, 
and opted to buy a home, ended up they couldn't afford the home 
that they bought, and I suppose one could make the case that 
they didn't have a net tangible benefit, they had a net 
tangible detriment.
    Some people may be financially better off to rent, but it 
could be that they want to have their part of the American 
dream and own a home.
    Might some very creative attorney decide that somebody came 
to you, they want to buy a home, they want to move from rental 
status, and you have to crunch a bunch of numbers and say, 
``You know what? I've decided that you will not receive a net 
tangible benefit from becoming a homeowner, therefore, I have 
to legally deny you credit''?
    I mean, is this off the wall, or might this have--
    Mr. Middleton. No, sir. If you look at the Fair Credit Act, 
the Fair Lending Act, you almost have that condition now.
    If John Doe applies for a fixed-rate mortgage, you must run 
that through and decline and counter-offer. So that's a rule 
we've been living with for all the years, ever since that bill 
has been in effect.
    So the detail of the definition is what bothers me the 
most, because it becomes very subjective, and it really doesn't 
look at the four ``C's'' of credit that one always follows in a 
traditional lending, you know: capacity; character; collateral; 
and credit.
    It just seems to be inconsistent with prudent underwriting. 
Prudent underwriting answers that, when you get into judgments 
about, ``Is this really going to fit your tangible net benefit, 
Mrs. Jones?'' I don't think that's something that we would like 
to see in this bill.
    Mr. Hensarling. Well, again, I think that sometimes we see 
public policy excesses, and I think we've gone from an 
atmosphere where a lot of you people would be brought before 
this committee and publicly slapped around for not making 
credit available to low-income people, and now to some extent, 
you're being slapped around for providing financing to low-
income people.
    I'm also concerned, besides the net tangible benefit--let 
me ask you this question, Mr. Middleton, since I started with 
you. How many of the loans that your bank makes are HOEPA 
loans? Do you have a rough percentage?
    Mr. Middleton. We have never--
    Mr. Hensarling. Never?
    Mr. Middleton. Never, ever.
    Mr. Hensarling. Well, under H.R. 3915, as I understand it, 
we're going to essentially expand the scope of definition of 
HOEPA, and so a much greater universe of loans will now be 
HOEPA loans.
    Representing your organization, should I conclude from that 
that there will be a whole new universe of loans that will not 
be made at a time when many borrowers again are trying to 
refinance?
    Mr. Middleton. At our institution, we would not approach 
that level of pricing, so the HOEPA loan criteria would not 
negatively affect us, because that is not our business model. 
We're not doing high interest rate loans, irrespective of the 
reason.
    Mr. Hensarling. Do you have an approximation of, 
representing your organization, how many of the loans are made 
by your member organizations that might be HOEPA loans?
    Mr. Middleton. By my organization, none.
    Mr. Hensarling. I'm sorry. Referring to the ABA.
    Mr. Middleton. Oh, I'm sorry.
    Mr. Hensarling. Not your individual bank. I'm sorry if I 
was not clear.
    Mr. Middleton. The reputational risk of being a HOEPA loan 
lender would not be in the business model or the interest of 
the member of the ABA. There's so much risk with that.
    Additionally, we live with every loan. Every year, we have 
an examiner onsite going through the entire alphabet of 
compliance laws and safety and soundness laws, so we have no 
interest--and I think I speak for many of the community bank 
members and a large majority of members--we have no interest in 
being known as a HOEPA loan provider.
    Mr. Hensarling. I see I'm out of time. Thank you.
    Mr. Ellison. [presiding] The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman. You look great over 
there in that chair.
    Mr. Ellison. Thank you, sir.
    Mr. Watt. I didn't want to pass up this opportunity to 
compliment you on that.
    We're kind of getting down to serious brass tacks. Brad 
Miller and I have been working on this for years now.
    And while I don't normally do this, I know that you all 
have severe time constraints, and 5 minutes really won't allow 
me to get to all the issues that I would like to raise with 
you.
    So what I think I will do, and this is unusual for me, is 
ask you all to, if you don't mind, give me some written 
responses to some things that are on my mind.
    Mr. Middleton, you say at the bottom of page 6 and the top 
of page 7 of your testimony, ``We also believe that had the 
secondary market provided for some degree of skin in the game 
for all market participants, there would have been far less 
abuse and fewer bad loans.''
    So obviously, Mr. Kittle says he has skin in the game; Mr. 
Platt said everybody has skin in the game.
    Skin in the game, as I understand it, is kind of like a 
proposal that, if you make a loan, whoever makes that loan, got 
to retain 5, 10, 15 percent of it on their books, rather than 
selling it off into a secondary market, so that--so my question 
to you is, and if you can just give me something in writing on 
this, how do you do that, how do you require people to have 
skin in the game without increasing interest rates? Because I 
think that probably will have some impact on interest rates. 
And how do you do it without it just becoming a cost of doing 
business, which I think a lot of credit card companies assume 
that there will be some loss on--so, I mean, you know, they 
just factor it into what they're doing.
    Give me a comment on that in writing.
    Second, you say at the bottom of page 8 of your testimony 
that there should be terms that should be specific and well-
defined, limiting the potential for unnecessary litigation.
    And I know what unnecessary litigation--that's litigation 
that--against whomever--you know.
    So I hope you're not suggesting there not be some means, 
either through attorneys general, regulators, or private 
participants to enforce whatever these specific and well-
defined terms are, and if you are saying that, or if you're not 
saying that, tell me what those enforcement mechanisms should 
be, and if you can, give me something on that in writing, and 
how you both write a safe harbor provision, and not make that a 
hiding place for people to be irresponsible.
    Mr. Savitt, please tell me your reaction in writing to the 
proposal that was made on the last panel for spreading yield 
spread premium or broker fees over a period of time, rather 
than paying them up front, as a means of making brokers more 
responsible in the process.
    If you can tell me your reaction to, and if you are against 
it, tell me why, and what detriment there would be. I would 
like that.
    The reason I'm doing this is because I mean, I think we're 
down--I could sit here and talk to you for 5 minutes about some 
of these issues, but we're down to the end of the road now, and 
I need you all to be constructive with me.
    I'm particularly appreciative for the tone of Mr. Platt's 
testimony, but I hope he will continue to give us some way of 
making the securitization market have some responsibility for 
assuring that lenders don't make irresponsible loans and just 
sell them over and over and over into secondary, tertiary, 
100th markets.
    I know my time has expired, and that is why I did it this 
way, because I knew nobody was going to have time to respond.
    Thank you, sir. Thank you, Mr. Chairman.
    I thought if I called him ``Mr. Chairman,'' he would give 
me more time, but it didn't work.
    Mr. Ellison. You got a little extra.
    The gentleman from New York.
    Mr. Lee. Thank you. Good evening, gentlemen. Thank you for 
coming.
    I don't want to pick on Mr. Savitt, but whether you like it 
or not, I believe the mortgage broker industry is taking 
probably some of the brunt of this, and I'm always for not 
looking backward, I'm for looking forward and finding ways 
that, going forward, we can find a better solution that 
protects taxpayers and keeps a system that gets people back 
into their homes, so I appreciate your comments as we go 
forward.
    I know you're here representing the brokers, and there have 
been some very good actors, but there have also been some bad 
actors in the industry.
    I would be very curious to hear your ideas and thoughts, 
outside of a registration process that has been put in place. 
What else should we be legislating or initiating to help 
eliminate some of these individuals who really shouldn't have 
been representing the industry.
    Mr. Savitt. Well, first of all, when you say registration, 
you're talking about the SAFE Act?
    Mr. Lee. Yes.
    Mr. Savitt. Okay. Mortgage brokers would not be registered 
under the SAFE Act. They would be licensed under the SAFE Act.
    They would go through, as many States now require them to 
do, they would have to pass a test, they would have 20 years of 
pre-education, they would have continuing education, background 
investigations, fingerprinting, both State and Federal.
    They would have to have either a surety bond, a net worth 
requirement, or pay into a recovery fund. And mortgage brokers 
are the only ones that would be licensed that extensively under 
the SAFE Act.
    Many of us now do have those very similar requirements in 
the States. I'm licensed in the State of West Virginia and also 
in the State of Maryland, and I went through those very same 
procedures that I just cited to you.
    I think one of the things that we can do that can really 
help this industry is we have to regulate the practice, not 
regulate the license. We have to treat all originators, 
regardless of how they're licensed, the same, I mean, as far as 
disclosure.
    In other words, on a good faith estimate, mortgage brokers 
have taken quite a hit, as you know, for the yield spread 
premium that they receive. It's an indirect compensation.
    All originators, regardless of how they're licensed, 
receive some type of indirect compensation. The only difference 
is, with mortgage brokers, is that mortgage brokers have been 
required, under HUD regulation, since 1992, to disclose that to 
consumers. It's very confusing. The FTC has come out and said 
it's confusing.
    And I think what we need to do to give a level playing 
field to the consumer, all originators should have to disclose 
all of their indirect compensation.
    All originators should disclose, in the exact same manner, 
on the exact forms, because when you don't--you know, a 
consumer comes to shop, and they do shop. It doesn't matter if 
they're at a broker's office or a bank or a lender. They don't 
understand the difference. What they understand is they're 
applying for a mortgage loan. So we have to level the playing 
field for the consumer.
    Mr. Lee. If I can continue on for one more point.
    You also, I believe, in your testimony, mentioned there 
were some problems with the SAFE Act, and I'd like you to 
expound upon those and where you see that there is a problem.
    Mr. Savitt. Well, as far as the implementation, also the 
SAFE Act is silent as far as things like grandfathering.
    I have been a mortgage broker for a little over 28 years, 
and I would be required to take a test for something that I 
have been doing for 28 years, and have 20 hours of pre-
education, when I have gone through 7 hours of continuing 
education each year for, I think, 10 years.
    I think there needs to be a certain provision spelled out, 
even though it is silent, and my understanding is that it was 
left silent to leave it up to the States, but the States have a 
different interpretation based upon what they have been told by 
CSBS, that there is no provision for grandfathering, and if 
Congress wanted grandfathering, they would have spelled it out.
    I think the stronger argument is, since there is nothing 
spelled out, that again, it's being left up to the States.
    It's--there needs to be a delay in the implementation, I 
believe--first of all, let me just say this. The SAFE Act was 
something that we have been supporting, or what's now the SAFE 
Act, we have been supporting since 2001.
    The brokers were the first ones that came up with the idea 
for a registry. We backed off on that in the beginning, because 
it was only going to be for brokers, it wasn't going to be for 
all originators, which it now is, even federally chartered 
banks, their originators are in the registry.
    Our model State statute from 2002 is almost a mirror image 
of what is in the SAFE Act, so we had a lot of input as to what 
goes into that, but HUD has not even written their regulations 
yet.
    HUD told us it will take them 18 months to write their 
regulations, because they don't have the funds for it right 
now, so I think what we need to do is not rush into this. It 
should be a slow implementation, give the States a chance to 
get a handle on this, and make sure that, you know, if they do 
change their laws in the States, they don't have to go back and 
do it again because the HUD regulations say something 
different.
    Mr. Lee. I'm not sure how much time I have left.
    Mr. Ellison. You're out, but make it quick.
    Mr. Lee. I will make it really quick, because I appreciate 
that.
    The gentleman who just left, from North Carolina, had 
talked about the yield spread premium and the fact of the skin 
in the game concept. You didn't have a chance to reply. But I 
did think that was an idea of trying to spread that.
    I came from the business world, have been in Congress now 
for 2 months, but I worked in the private sector exclusively, 
and our sales people were compensated, but they're always 
compensated.
    Typically, a bonus was paid at the end of the year, so 
there was time to actually evaluate and ensure that the 
products were sold and we were paid, and I like the concept of 
trying to do some form of a holdback or something.
    I would like your comments on what kind of a system would 
work effectively.
    Mr. Savitt. I don't think that would work, for several 
reasons.
    First of all, those who receive their compensation over a 
period of time right now also receive additional fees, 
servicing fees, over the period of time.
    The other thing is that mortgage brokers have absolutely no 
control--let me back up even further. The loans are not our 
products. We have no say in the guidelines of those loans. We 
do not underwrite or approve those loans. That comes from the 
GSEs and also from the lenders. We have no control or say in 
the approval of products.
    So that would be asking us to take a risk on something that 
we have no control or no say over.
    Mr. Lee. My biggest concern was just ensuring that we get 
accurate data that's passed along so that, through an entire 
system, that, at the end of the day, we have qualified loans 
that will be paid.
    Mr. Ellison. The gentleman's time is up.
    Mr. Robson, I was intrigued by your idea of a preemption 
statute that might add uniformity to mortgage law, and I think 
that does have the advantage of lending uniformity, but I 
wonder what your views are about a floor, a basic law that 
could leave room for States to apply their own local standards, 
and also, in order to have, you know, 50 attorneys general 
regulators to keep their eyes on fraud, waste, abuse, and 
things like that.
    Mr. Robson. I think a lot of it has to do with the 
transparency of securities and that sort of thing, as much as 
anything, not necessarily oversight on abuses, but how do you 
analyze a loan from one various State under certain rules and 
regulations versus another, and have some sort of uniformity 
throughout the country.
    So certainly you could have, I guess, every State attorney 
general kind of watching out after that, but I mean, some 
uniformity I think would go a long way in correcting some of 
the problems.
    Mr. Ellison. Also, I like the idea of alternative dispute 
resolution as well, but my problem is that I've received 
reports that in some cases, where there are binding arbitration 
clauses, there are companies that do arbitration, and that's 
their business, and they're paid by the person with the greater 
market power in the transaction, and things always seem to go 
their way.
    I mean, do you see any opening or any flexibility in how, 
between the consumer and the lender, that we might arrive at an 
alternative resolution method that might be amenable to both 
sides?
    Do you have any ideas on how we can make that more 
flexible?
    Mr. Robson. The whole idea of arbitration is having a fair 
game.
    Mr. Ellison. Yes, it is.
    Mr. Robson. And so if there is some need to tweak the 
arbitration rules so that everybody is playing fair, that's 
fine.
    But it's certainly a lot quicker and easier and less 
expensive, if you want expense and that sort of thing to enter 
into it, to go to court.
    Mr. Ellison. Thank you, sir.
    Mr. McMillan, could you share with me whatever ideas you 
may have about initiatives that you could recommend to help 
low-income families rehabilitate their credit score so that 
they don't have to be susceptible to predatory lending in the 
future?
    Mr. McMillan. Certainly, Mr. Chairman.
    A number of those things have been addressed here, but one 
of the things that studies have shown is that most renters, 
which most low-income persons are, pay substantially more 
proportionate toward rent than someone owning a home; 
therefore, the flexibility in underwriting guidelines and being 
able to consider someone who has paid their rent on time for 
years, while that may be 40 percent of their income, to receive 
a conventional type loan and therefore improve their credit by 
having credit in the normal marketplace.
    With your permission, I would like to opine as well, if you 
don't mind, on the arbitration issue, because many of us in 
States have included arbitration provisions which bind the 
parties to arbitration should there be a dispute or any number 
of alternative dispute resolution procedures--
    Mr. Ellison. Reclaiming my time. But, Mr. McMillan, maybe 
in that case, the parties could somehow jointly pick an 
arbitrator. I get concerned when, you know, the lender, the 
person with the greater market power and the more access to 
more information, gets to sort of designate who that person is.
    Any response?
    Mr. McMillan. Absolutely correct, sir.
    What normally happens when someone purchases a home using 
the builder's contract, with the bias that you've just 
addressed, is that they supersede any State-mandated contracts 
and the borrower has those provisions as a take it or leave it 
type of process.
    Mr. Ellison. Reclaiming my time. Thank you, Mr. McMillan.
    Mr. Savitt, could you offer your views on what powers a 
systemic risk regulator might have with respect to mortgage and 
consumer protections, particularly given that the current 
crisis was in many ways fueled in part by weak standards in 
that regard?
    Mr. Savitt. You are talking about an overall regulator? I 
think an overall regulator is a good idea, but something that I 
heard in the second panel I would agree with, also, is that 
there needs to be checks and balances.
    So you may have an overall regulator who supervises other 
regulators, and I think that would be a very appropriate idea.
    Mr. Ellison. Thank you. My time has expired.
    The gentleman from Minnesota.
    Mr. Paulsen. Thank you, Mr. Chairman.
    You know, this committee has heard from the oversight 
authorities as well as representatives of the communities that 
are affected by lending rules, and I'm just wondering, for the 
bankers, you know, Mr. Middleton and Mr. Kittle, can you tell 
us the current lending conditions right now that you are 
facing, given the challenges right now that the markets are 
facing?
    Mr. Middleton. The economic conditions?
    Mr. Paulsen. Correct.
    Mr. Middleton. The borrower, the prospective borrower?
    We're seeing what we would consider a prime-A credit that 
has sufficient downpayment, good credit history, are the ones 
that are venturing back into the market, so that I think we're 
seeing jumbo conforming, but they all have the same 
underwriting criteria, meet the same traditional underwriting 
criteria that we've always had.
    So it's a fairly competent borrower who has the means to 
support the purchase.
    Mr. Paulsen. So in general, are homes being purchased and 
sold and under what conditions in general?
    Mr. Middleton. In southern Maryland, I can tell you that it 
is gradually moving--we feel a bottom has occurred in the 
pricing, and we're getting more seekers. I'm hearing good 
reports about traffic over the weekend, significantly higher 
visits to houses in the southern Maryland region. So that's 
good news.
    Did I answer your question, sir?
    Mr. Paulsen. You did. Please, Mr. Kittle.
    Mr. Kittle. Well, we're finding that lending right now is 
more robust. We're coming into springtime. I agree with what 
Mr. Middleton just said. I mean, our business is cyclic, even 
though it's been tough over the last couple of years.
    The biggest problem our members are facing right now is 
warehouse lines of credit. There are major banks that have 
decided to get out of the space. Chase. The rumor is, the 
announcement since the merger of PNC buying National City, that 
they will exit that space. National City is a huge warehouse 
lender.
    So the small lenders, the independent mortgage bankers who 
take the risk, who have the skin in the game, are not able to 
get lines of credit.
    We have a brand new housing program that the President just 
initiated on the modifications and to help with refinancing. 
There's not going to be the capacity out there to fund these 
loans.
    And the problem is, if I may take just one more moment, 
that when you fund a loan on a warehouse line of credit, it's 
treated as a commercial loan, and it has certain cash 
requirements by that bank that must be set aside for that loan, 
and those cash requirements are restrictive.
    So MBA, we took a group of our lenders to Treasury last 
week, to ask Treasury to help maybe the GSEs to get into 
possibly a participation with them. Fannie and Freddie will 
most likely end up with these loans, anyway. And if they could 
come in and do a participation on those lines of credit, it 
would free that cash up.
    But clearly, our biggest problem facing us right now, other 
than the cramdown legislation, is warehouse lending.
    Mr. Paulsen. Well, that kind of leads into my question; 
have the underwriting rules changed since the credit crisis?
    Mr. Kittle. Well, we're making the best loans we have made 
in 15 years. We have tightened the underwriting. And now, there 
is even some criticism that we're too tight. So the pendulum 
has swung back. We're making good loans, and now we're in some 
cases being criticized because we're not loose enough.
    Mr. Middleton. To respond to that question, as well, we had 
not changed our underwriting criteria when things were loose. 
We're just consistent with the way we always did it. So there 
was really no tightening or loosening of any criteria.
    Mr. Paulsen. And just one more question.
    How are the regulatory requirements of CRA, the Community 
Reinvestment Act, affecting the way that you do business in 
this economic environment right now?
    Mr. Middleton. Like I mentioned, we're a satisfactory CRA 
lender. We really find the CRA as a tool, not an obstacle.
    And I mentioned also that all of our affordable housing 
loans are current, none of them are in default. We work with 
CDCs, and of particular interest to meet the CRA requirements, 
we work with our community development corporations to be a 
partner in the layering of funds with other sectors, HUD and 
various grant folks, and we are finding that to be a very 
effective partnership with a highly productive outcome
    Mr. Paulsen. No other questions, Mr. Chairman. I yield 
back.
    Mr. Ellison. Thank you. The gentleman yields back.
    I would like to enter into the record written testimony by 
Terry Clemmons, executive director of the National Credit 
Reporting Association.
    Without objection, it is so ordered.
    I want to thank the witnesses and the members for their 
participation in this hearing. The Chair notes that some 
members may have additional questions for the witnesses, which 
they may wish to submit in writing.
    Therefore, without objection, the hearing record will 
remain open for 30 days for members to submit written questions 
to the witnesses and to place their responses in the record.
    This subcommittee hearing is now adjourned.
    [Whereupon, at 6:48 p.m., the hearing was adjourned.]


























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                             March 11, 2009

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